10-Q 1 ambc-20150331x10q.htm 10-Q THREE MONTHS EDED MARCH 31, 2015
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
| OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2015

¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
| OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-10777

Ambac Financial Group, Inc.
(Exact name of Registrant as specified in its charter)

Delaware |  | 13-3621676
(State of incorporation) |  | (I.R.S. employer identification no.)
One State Street Plaza, New York, New York |  | 10004
(Address of principal executive offices) |  | (Zip code)

212-658-7470
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act): (Check one):

Large accelerated filer | x | Accelerated filer | ¨ | Non-accelerated filer | ¨ | Smaller reporting company | ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of May 7, 2015, 45,003,680 shares of common stock, par value $0.01 per share, of the Registrant were outstanding.

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS

|  | PAGE
PART I. | FINANCIAL INFORMATION |  |
Item 1. | Unaudited Consolidated Financial Statements of Ambac Financial Group, Inc. and Subsidiaries |  |
| Consolidated Balance Sheet (Unaudited) | 1 |
| Consolidated Statements of Total Comprehensive Income (Unaudited) | 2 |
| Consolidated Statements of Stockholders' Equity (Unaudited) | 3 |
| Consolidated Statements of Cash Flows (Unaudited) | 4 |
| Notes to Unaudited Consolidated Financial Statements | 5 |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 43 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 68 |
Item 4. | Controls and Procedures | 70 |
PART II. | OTHER INFORMATION |  |
Item 1. | Legal Proceedings | 70 |
Item 1A. | Risk Factors | 70 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 70 |
Item 3. | Defaults Upon Senior Securities |  |
Item 4. | Mine Safety Disclosures | 71 |
Item 5. | Other Information | 71 |
Item 6. | Exhibits | 71 |
SIGNATURES | 71 |

Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements of Ambac Financial Group, Inc. and Subsidiaries
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

| March 31, |  | December 31,
(Dollars in thousands, except share data) | 2015 |  | 2014
| (Unaudited) |  |
Assets: |  |  |
Investments: |  |  |
Fixed income securities, at fair value (amortized cost: 2015—$4,672,886 and 2014—$4,514,878) | $ | 4,865,750 |  |  | $ | 4,725,686 |
Fixed income securities pledged as collateral, at fair value (amortized cost: 2015—$64,432 and 2014—$64,378) | 64,813 |  |  | 64,267 |
Short-term investments, at fair value (amortized cost: 2015—$220,980 and 2014—$360,069) | 220,980 |  |  | 360,065 |
Other investments (includes 2015—$310,578 and 2014—$336,013 at fair value) | 332,609 |  |  | 357,016 |
Total investments | 5,484,152 |  |  | 5,507,034 |
Cash and cash equivalents | 26,641 |  |  | 73,903 |
Receivable for securities | 8,779 |  |  | 23,660 |
Investment income due and accrued | 24,994 |  |  | 25,015 |
Premium receivables | 951,999 |  |  | 1,000,607 |
Reinsurance recoverable on paid and unpaid losses | 79,308 |  |  | 99,838 |
Deferred ceded premium | 117,688 |  |  | 123,276 |
Subrogation recoverable | 984,129 |  |  | 953,274 |
Loans | 5,494 |  |  | 5,714 |
Derivative assets | 113,622 |  |  | 109,017 |
Insurance intangible asset | 1,347,295 |  |  | 1,410,920 |
Goodwill | 514,511 |  |  | 514,511 |
Other assets | 221,252 |  |  | 186,985 |
Variable interest entity assets: |  |  |
Fixed income securities, at fair value | 2,704,657 |  |  | 2,743,050 |
Restricted cash | 6,219 |  |  | 7,708 |
Investment income due and accrued | 3,783 |  |  | 1,284 |
Loans, at fair value | 12,789,201 |  |  | 12,371,177 |
Other assets | 2,886 |  |  | 2,891 |
Total assets | $ | 25,386,610 |  |  | $ | 25,159,864 |

AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets

| March 31, |  | December 31,
(Dollars in thousands, except share data) | 2015 |  | 2014
| (Unaudited) |  |
Liabilities and Stockholders’ Equity: |  |  |
Liabilities: |  |  |
Unearned premiums | $ | 1,583,615 |  |  | $ | 1,673,785 |
Loss and loss expense reserves | 4,475,991 |  |  | 4,752,007 |
Ceded premiums payable | 59,268 |  |  | 60,436 |
Obligations under investment agreements | 111,967 |  |  | 160,079 |
Deferred taxes | 1,905 |  |  | 2,079 |
Current taxes | 2,333 |  |  | 5,701 |
Long-term debt | 979,001 |  |  | 971,116 |
Accrued interest payable | 322,408 |  |  | 304,139 |
Derivative liabilities | 447,356 |  |  | 406,944 |
Other liabilities | 56,914 |  |  | 63,396 |
Payable for securities purchased | 34,559 |  |  | 762 |
Variable interest entity liabilities: |  |  |
Accrued interest payable | 5,768 |  |  | 3,268 |
Long-term debt, at fair value | 13,341,902 |  |  | 12,882,076 |
Derivative liabilities | 2,125,713 |  |  | 2,200,163 |
Other liabilities | 189 |  |  | 178 |
Total liabilities | 23,548,889 |  |  | 23,486,129 |
Commitments and contingencies (see Note 11) |  |  |
Stockholders’ equity: |  |  |
Preferred stock, par value $0.01 per share; 20,000,000 shares authorized; issued and outstanding shares—none | — |  |  | — |
Common stock, par value $0.01 per share; 130,000,000 shares authorized; issued and outstanding shares: 2015—45,006,057; 2014—45,005,932 | 450 |  |  | 450 |
Additional paid-in capital | 189,533 |  |  | 189,138 |
Accumulated other comprehensive income | 169,329 |  |  | 220,283 |
Accumulated earnings | 1,204,001 |  |  | 989,290 |
Treasury stock, shares at cost: 2015—2,459; 2014—2,459 | (56 | ) |  | (56 | )
Total Ambac Financial Group, Inc. stockholders’ equity | 1,563,257 |  |  | 1,399,105 |
Noncontrolling interest | 274,464 |  |  | 274,630 |
Total stockholders’ equity | 1,837,721 |  |  | 1,673,735 |
Total liabilities and stockholders’ equity | $ | 25,386,610 |  |  | $ | 25,159,864 |

See accompanying Notes to Unaudited Consolidated Financial Statements
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Table of Contents
AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Total Comprehensive Income (Unaudited)

| Three Months Ended March 31,
(Dollars in thousands, except share data) | 2015 |  | 2014
Revenues: |  |  |
Net premiums earned | $ | 65,718 |  |  | $ | 82,547 |
Net investment income: |  |  |
Securities available-for-sale and short-term | 63,332 |  |  | 68,807 |
Other investments | 9,651 |  |  | 1,994 |
Total net investment income | 72,983 |  |  | 70,801 |
Other-than-temporary impairment losses: |  |  |
Total other-than-temporary impairment losses | (10,361 | ) |  | (10,392 | )
Portion of other-than-temporary impairment recognized in other comprehensive income | 7,242 |  |  | — |
Net other-than-temporary impairment losses recognized in earnings | (3,119 | ) |  | (10,392 | )
Net realized investment gains | 54,101 |  |  | 16,289 |
Change in fair value of credit derivatives: |  |  |
Realized gains and other settlements | 419 |  |  | 775 |
Unrealized gains (losses) | (2,918 | ) |  | 6,607 |
Net change in fair value of credit derivatives | (2,499 | ) |  | 7,382 |
Derivative products | (37,774 | ) |  | (53,841 | )
Net realized losses on extinguishment of debt | (93 | ) |  | — |
Other income (expense) | (788 | ) |  | 1,894 |
Income (loss) on variable interest entities | 6,962 |  |  | (5,542 | )
Total revenues | 155,491 |  |  | 109,138 |
Expenses: |  |  |
Losses and loss (benefit) | (150,952 | ) |  | (140,011 | )
Insurance intangible amortization | 37,432 |  |  | 31,714 |
Underwriting and operating expenses | 24,523 |  |  | 25,786 |
Interest expense | 27,908 |  |  | 32,328 |
Total expenses (benefit) | (61,089 | ) |  | (50,183 | )
Pre-tax income before reorganization items | 216,580 |  |  | 159,321 |
Reorganization items | — |  |  | 23 |
Pre-tax income | 216,580 |  |  | 159,298 |
Provision for income taxes | 1,709 |  |  | 3,249 |
Net income | 214,871 |  |  | 156,049 |
Less: net (gain) loss attributable to noncontrolling interest | 160 |  |  | 107 |
Net income attributable to common shareholders | $ | 214,711 |  |  | $ | 155,942 |
Other comprehensive income (loss), after tax: |  |  |
Net income | $ | 214,871 |  |  | $ | 156,049 |
Unrealized gains (losses) on securities, net of deferred income taxes of $0 | (17,448 | ) |  | 88,722 |
Gains (losses) on foreign currency translation, net of deferred income taxes of $0 | (33,805 | ) |  | 4,284 |
Changes to postretirement benefit, net of tax of $0 | (27 | ) |  | (204 | )
Total other comprehensive income (loss), net of tax | (51,280 | ) |  | 92,802 |
Total comprehensive income | 163,591 |  |  | 248,851 |
Less: comprehensive (loss) gain attributable to the noncontrolling interest: |  |  |
Net (gain) loss | 160 |  |  | 107 |
Currency translation adjustments | (326 | ) |  | 46 |
Total comprehensive income attributable to Ambac Financial Group, Inc. | $ | 163,757 |  |  | $ | 248,698 |
Net income per share attributable to Ambac Financial Group, Inc. common shareholders: |  |  |
Basic | $ | 4.75 |  |  | $ | 3.46 |
Diluted | $ | 4.57 |  |  | $ | 3.31 |

See accompanying Notes to Unaudited Consolidated Financial Statements
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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity (Unaudited)

|  |  | Ambac Financial Group, Inc. |  |
(Dollars in thousands) | Total |  | Retained Earnings |  | Accumulated Other Comprehensive Income |  | Preferred Stock |  | Common Stock |  | Additional Paid-in Capital |  | Common Stock Held in Treasury, at Cost |  | Noncontrolling Interest
Balance at January 1, 2015 | $ | 1,673,735 |  |  | $ | 989,290 |  |  | $ | 220,283 |  |  | $ | — |  |  | $ | 450 |  |  | $ | 189,138 |  |  | $ | (56 | ) |  | $ | 274,630 |
Total comprehensive income | 163,591 |  |  | 214,711 |  |  | (50,954 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | (166 | )
Stock-based compensation | 393 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 393 |  |  | — |  |  | — |
Warrants exercised | 2 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 2 |  |  | — |  |  | — |
Balance at March 31, 2015 | $ | 1,837,721 |  |  | $ | 1,204,001 |  |  | $ | 169,329 |  |  | $ | — |  |  | $ | 450 |  |  | $ | 189,533 |  |  | $ | (56 | ) |  | $ | 274,464 |
Balance at January 1, 2014 | 978,422 |  |  | 505,219 |  |  | 11,661 |  |  | — |  |  | 450 |  |  | 185,672 |  |  | (19 | ) |  | 275,439 |
Total comprehensive income | 248,851 |  |  | 155,942 |  |  | 92,756 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 153 |
Stock-based compensation | 1,537 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 1,537 |  |  | — |  |  | — |
Warrants exercised | 1 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 1 |  |  | — |  |  | — |
Balance at March 31, 2014 | $ | 1,228,811 |  |  | $ | 661,161 |  |  | $ | 104,417 |  |  | $ | — |  |  | $ | 450 |  |  | $ | 187,210 |  |  | $ | (19 | ) |  | $ | 275,592 |

See accompanying Notes to Unaudited Consolidated Financial Statements
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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)

| Three Months Ended March 31,
(Dollars in thousands) | 2015 |  | 2014
Cash flows from operating activities: |  |  |
Net income (loss) attributable to common shareholders | $ | 214,711 |  |  | $ | 155,942 |
Noncontrolling interest in subsidiaries’ earnings | 160 |  |  | 107 |
Net income (loss) | 214,871 |  |  | 156,049 |
Adjustments to reconcile net income to net cash used in operating activities: |  |  |
Depreciation and amortization | 791 |  |  | 748 |
Amortization of bond premium and discount | (31,477 | ) |  | (27,940 | )
Reorganization items | — |  |  | 23 |
Share-based compensation | 393 |  |  | 1,537 |
Deferred income taxes | (174 | ) |  | 3 |
Current income taxes | (3,368 | ) |  | 3,023 |
Unearned premiums, net | (84,582 | ) |  | (84,667 | )
Losses and loss expenses, net | (197,332 | ) |  | (146,494 | )
Ceded premiums payable | (1,168 | ) |  | (1,070 | )
Investment income due and accrued | 21 |  |  | 3,022 |
Premium receivables | 48,608 |  |  | 34,907 |
Accrued interest payable | 18,269 |  |  | 22,235 |
Amortization of insurance intangible assets | 37,432 |  |  | 31,714 |
Net mark-to-market (gains) losses | 2,918 |  |  | (6,607 | )
Net realized investment gains | (54,101 | ) |  | (16,289 | )
Other-than-temporary impairment charges | 3,119 |  |  | 10,392 |
Losses on extinguishment of debt | 93 |  |  | — |
Variable interest entity activities | (6,962 | ) |  | 5,542 |
Other, net | 58,229 |  |  | 52,397 |
Net cash provided by operating activities | 5,580 |  |  | 38,525 |
Cash flows from investing activities: |  |  |
Proceeds from sales of bonds | 487,462 |  |  | 276,555 |
Proceeds from matured bonds | 299,715 |  |  | 230,290 |
Purchases of bonds | (919,361 | ) |  | (625,507 | )
Proceeds from sales of other invested assets | 36,543 |  |  | 36,894 |
Purchases of other invested assets | (10,176 | ) |  | (20,611 | )
Change in short-term investments | 139,085 |  |  | 56,016 |
Loans, net | 220 |  |  | (71 | )
Change in swap collateral receivable | (37,239 | ) |  | (35,410 | )
Other, net | 779 |  |  | (2,352 | )
Net cash (used in) investing activities | (2,972 | ) |  | (84,196 | )
Cash flows from financing activities: |  |  |
Proceeds from warrant exercise | 2 |  |  | 1 |
Payments for investment agreement draws | (49,872 | ) |  | — |
Net cash provided by (used in) financing activities | (49,870 | ) |  | 1 |
Net cash flow | (47,262 | ) |  | (45,670 | )
Cash and cash equivalents at beginning of period | 73,903 |  |  | 77,370 |
Cash and cash equivalents end of period | $ | 26,641 |  |  | $ | 31,700 |
Supplemental disclosure of cash flow information: |  |  |
Cash paid during the period for: |  |  |
Income taxes | $ | 4,933 |  |  | $ | — |
Interest on investment agreements | 88 |  |  | 202 |
Cash payments related to reorganization items: |  |  |
Professional fees paid for services rendered in connection with the Chapter 11 proceeding | — |  |  | 81 |

See accompanying Notes to Unaudited Consolidated Financial Statements
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AMBAC FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
(Dollar Amounts in Thousands, Except Share Amounts)
1. BACKGROUND AND BUSINESS DESCRIPTION
Ambac Financial Group, Inc. (“Ambac” or the “Company”), headquartered in New York City, is a financial services holding company incorporated in the state of Delaware on April 29, 1991.
Ambac has two reportable business segments: Financial Guarantee and Financial Services.
Ambac’s financial guarantee business segment is conducted through its primary operating subsidiary, Ambac Assurance Corporation (“Ambac Assurance”), and its wholly owned subsidiary, Ambac Assurance UK Limited (“Ambac UK”). Insurance policies issued by Ambac Assurance and Ambac UK generally guarantee payment when due of the principal and interest on the obligations guaranteed. Ambac Assurance also has another wholly-owned financial guarantee subsidiary, Everspan Financial Guarantee Corp. (“Everspan”), which has been in runoff since its acquisition in 1997. The deterioration of Ambac Assurance’s financial condition resulting from losses in its insured portfolio since 2007 has prevented Ambac Assurance from being able to write new business. An inability to write new business has and will continue to negatively impact Ambac’s future operations and financial results. Ambac Assurance’s ability to pay dividends and, as a result, Ambac’s liquidity, have been significantly restricted by the deterioration of Ambac Assurance’s financial condition, by the rehabilitation of the Segregated Account (as defined below) and by the terms of the Settlement Agreement, dated as of June 7, 2010 (the "Settlement Agreement"), by and among Ambac Assurance, Ambac Credit Products LLC (“ACP”), Ambac and certain counterparties to credit default swaps with ACP that were guaranteed by Ambac Assurance. Ambac Assurance is also restricted in its ability to pay dividends pursuant to regulatory restrictions, the terms of its Auction Market Preferred Shares, and the terms of agreements entered into with the Segregated Account. It is highly unlikely that Ambac Assurance will be able to make dividend payments to Ambac for the foreseeable future.
Ambac’s financial services business segment is conducted through subsidiaries of Ambac Assurance, which provide financial and investment products, including investment agreements, funding conduits and interest rate swaps, principally to the clients of its financial guarantee business. Ambac Assurance insured all of the obligations of its financial services subsidiaries. These businesses are in active runoff, which is being effectuated by transaction terminations, settlements, and scheduled amortization of contracts. The Financial Services business also maintains interest rate derivatives to mitigate exposure to floating rate insured obligations in the Financial Guarantee segment.
Ambac’s primary goal is to maximize shareholder value through executing the following key strategies:

• | Increasing the value of its investment in Ambac Assurance by actively managing its assets and liabilities with a focus on maximizing risk-adjusted investment portfolio returns and mitigating or remediating losses on poorly performing insured transactions through executing policy commutations, pursuing recoveries of losses through litigation and the exercise of contractual and legal rights, restructuring transactions, and other means; and

• | Selectively exploring opportunities to grow and diversify Ambac, which may include the development or acquisition of financial services businesses such as advisory, asset servicing, asset management and/or insurance.

As part of its asset/liability management strategy, Ambac Assurance is considering the possibility of entering into transactions whereby it would monetize certain assets and/or restructure or exchange its outstanding debt and insurance obligations with the objective of ending the Segregated Account Rehabilitation Proceedings (as defined below).
Although we are exploring new business opportunities for Ambac, no assurance can be given that we will be able to identify or execute the acquisition or development of any new business. In addition, there can be no assurance that we will be able to obtain the financial and other resources that may be required to finance the acquisition or development of any new business. Due to these factors, as well as uncertainties relating to the ability of Ambac Assurance to deliver value to Ambac, the value of our securities is speculative.
The execution of Ambac’s strategy to increase the value of its investment in Ambac Assurance is subject to the authority of the Rehabilitator (as defined below) to control the management of the Segregated Account (as defined below). In exercising such authority, the Rehabilitator will act for the benefit of policyholders, and will not take into account the interests of Ambac. Similarly, by operation of the contracts executed in connection with the establishment, and subsequent rehabilitation, of the Segregated Account, the Rehabilitator retains rights to oversee and approve certain actions taken by or in respect of Ambac Assurance. This oversight by the Rehabilitator could impair Ambac’s ability to execute certain of its strategies. Ambac Assurance's ability to commute policies or purchase certain investments may also be limited by available liquidity.
As a result of uncertainties associated with the aforementioned oversight by the Rehabilitator of the Segregated Account, management has concluded that there is substantial doubt about Ambac's ability to continue as a going concern. Ambac’s financial statements as of and for the and three and twelve months ending March 31, 2015 and December 31, 2014, respectively, are prepared assuming Ambac continues as a going concern and do not include any adjustment that might result from its inability to continue as a going concern.
5

In March 2010, Ambac Assurance established a Segregated Account pursuant to Wisc. Stat. §611.24 (2) (the “Segregated Account”) to segregate certain segments of Ambac Assurance’s liabilities, and the Office of the Commissioner of Insurance for the State of Wisconsin (“OCI” (which term shall be understood to refer to such office as regulator of Ambac Assurance and to refer to the Commissioner of Insurance for the State of Wisconsin as rehabilitator of the Segregated Account (the “Rehabilitator”), as the context requires)) commenced rehabilitation proceedings in the Dane County, Wisconsin Circuit Court (the “Rehabilitation Court”) with respect to the Segregated Account (the “Segregated Account Rehabilitation Proceedings”) in order to permit OCI to facilitate an orderly run-off and/or settlement of the liabilities allocated to the Segregated Account pursuant to the provisions of the Wisconsin Insurers Rehabilitation and Liquidation Act. On October 8, 2010, OCI filed a plan of rehabilitation for the Segregated Account (the “Segregated Account Rehabilitation Plan”) in the Rehabilitation Court. On June 11, 2014, the Rehabilitation Court approved amendments to the Segregated Account Rehabilitation Plan that had been proposed by the Rehabilitator, and the Segregated Account Rehabilitation Plan, as amended, became effective on June 12, 2014. Under the amended Segregated Account Rehabilitation Plan holders of permitted policy claims have received and will receive an initial interim cash payment for a portion of each policy claim (“Interim Payment”), together with the right to receive a deferred payment equal to the balance of the unpaid policy claim, as may be adjusted from time to time pursuant to the terms of the amended Segregated Account Rehabilitation Plan (“Deferred Amount”). Net par exposure as of March 31, 2015 for policies allocated to the Segregated Account was $18,052,539. Policy obligations not allocated to the Segregated Account remain in the General Account, and such policies in the General Account are not subject to and, therefore, will not be directly impacted by the Segregated Account Rehabilitation Plan.
To pay claims and other liabilities, the Segregated Account has the ability to demand payment from time to time under an aggregate excess of loss reinsurance agreement provided by Ambac Assurance (the “Reinsurance Agreement”). In addition, certain operating and administrative costs and expenses of the Segregated Account are reimbursable by Ambac Assurance pursuant to the Cooperation Agreement, dated as of March 24, 2010, by and between the Segregated Account and Ambac Assurance, as amended (the “Cooperation Agreement”). Ambac Assurance is not obligated to make payments under the Reinsurance Agreement or Cooperation Agreement if its surplus as regards to policyholders is less than $100,000 (the “Minimum Surplus Amount”). As long as the surplus as regards to policyholders is not less than the Minimum Surplus Amount, payments by Ambac Assurance to the Segregated Account under the Reinsurance Agreement and Cooperation Agreement are not capped. At March 31, 2015, Ambac Assurance’s surplus as regards to policyholders is at the Minimum Surplus Amount and therefore $26,169 of the Segregated Account’s insurance liabilities were not assumed by Ambac Assurance under the Reinsurance Agreement. In the event that Ambac Assurance does not generate future surplus in the amount of insurance liabilities not assumed under the Reinsurance Agreement, the Segregated Account would experience a shortfall in funds available to pay its liabilities. Any such shortfall would be a consideration for the Rehabilitator in the determination of whether any changes to the Segregated Account Rehabilitation Plan (as defined below) and/or the amount of partial policy claim payments are necessary or appropriate or whether to institute general rehabilitation proceedings against Ambac Assurance.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The Company has disclosed its significant accounting policies in Note 2. Significant Accounting Policies in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The following significant accounting policies provide an update to those included in the Company’s Annual Report on Form 10-K.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for annual periods. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2014. The accompanying consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with the standards of the Public Company Accounting Oversight Board (U.S.), but in the opinion of management such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for the fair statement of the Company’s consolidated financial position and results of operations. All material intercompany balances and transactions have been eliminated. The results of operations for the three months ended March 31, 2015 may not be indicative of the results that may be expected for the year ending December 31, 2015. The December 31, 2014 consolidated balance sheet was derived from audited financial statements.
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. As additional information becomes available or actual amounts become determinable, the recorded estimates are revised and reflected in operating results.
Reclassifications
Certain reclassifications have been made to prior years' amounts to conform to the current year's presentation.
Recently Adopted and Recently Issued Accounting Standards
Adopted:
Effective January 1, 2015, Ambac adopted ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The objective of this ASU is to limit discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity's operations and financial results. Under previous U.S. GAAP, many disposals, some of which may be routine in nature and
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not a change in an entity's strategy, were reported in discontinued operations. The ASU also requires certain expanded disclosures for discontinued operations and disclosure of the pre-tax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. The adoption of this ASU did not have a material effect on Ambac's financial statements.
Issued:
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30). This ASU simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is also permitted for financial statements that have not been previously issued. Upon adoption, the ASU must be retrospectively applied to all prior periods presented. Ambac will adopt ASU 2015-02 on January 1, 2016. The adoption of this ASU is not expected to have a material impact on Ambac's financial statements.
In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820) - Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). Reporting entities are permitted to use net asset value ("NAV") as a practical expedient to measure the fair value of certain investments. Under current U.S. GAAP, investments that use the NAV practical expedient to measure fair value are categorized within the fair value hierarchy as level 2 or level 3 investments depending on their redemption attributes, which has led to diversity in practice. This ASU will remove the requirement to categorize within the fair value hierarchy all investments that use the NAV practical expedient for fair value measurement purposes. Furthermore, the ASU will remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the NAV practical expedient. The ASU is effective for fiscal years beginning after December 15, 2015 and interim periods with those fiscal years. The ASU must be applied retrospectively to all prior periods presented. Ambac will adopt ASU 2015-07 on January 1, 2016. The adoption of this ASU is not expected to have a material impact on Ambac's financial statements.
3. SPECIAL PURPOSE ENTITIES, INCLUDING VARIABLE INTEREST ENTITIES ("VIEs")
Ambac, with its subsidiaries, has engaged in transactions with special purpose entities, including VIEs, in various capacities. Ambac most commonly provides financial guarantees, including credit derivative contracts, for various debt obligations issued by special purpose entities, including VIEs. Ambac has also sponsored special purpose entities that issued medium-term notes to fund the purchase of certain financial assets. Ambac is also an investor in collateralized debt obligations, mortgage-backed and other asset-backed securities issued by VIEs and its ownership interest is generally insignificant to the VIE and/or Ambac does not have rights that direct the activities that are most significant to such VIE. As further described in Note 1. Background and Business Description in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, on August 28, 2014, Ambac monetized its ownership of the junior surplus note issued to it by the Segregated Account by depositing the junior surplus note into a newly formed VIE trust in exchange for cash and an owner trust certificate, which represents Ambac's right to residual cash flows from the junior surplus note. Ambac does not consolidate the VIE. Ambac reports its interest in the VIE as an equity investment within Other investments on the Consolidated Balance Sheets with associated results from operations included within Net investment income: Other investments on the Consolidated Statements of Total Comprehensive Income (Loss).
Financial Guarantees:
Ambac’s subsidiaries provide financial guarantees in respect of assets held or debt obligations of special purpose entities, including VIEs. Ambac’s primary variable interest exists through this financial guarantee insurance or credit derivative contract. The transaction structures provide certain financial protection to Ambac. This financial protection can take several forms; however, the most common are over-collateralization, first loss and excess spread. In the case of over-collateralization (i.e., the principal amount of the securitized assets exceeds the principal amount of the debt obligations guaranteed), the structure allows the transaction to experience defaults among the securitized assets before a default is experienced on the debt obligations that have been guaranteed by Ambac’s subsidiaries. In the case of first loss, the financial guarantee insurance policy or credit derivative contract only covers a senior layer of losses on assets held or debt issued by special purpose entities, including VIEs. The first loss with respect to the assets is either retained by the asset seller or sold off in the form of equity or mezzanine debt to other investors. In the case of excess spread, the securitized assets contributed to special purpose entities, including VIEs, generate interest cash flows that are in excess of the interest payments on the related debt; such excess cash flow is applied to redeem debt, thus creating over-collateralization. Generally, upon deterioration in the performance of a transaction or upon an event of default as specified in the transaction legal documents, Ambac will obtain certain loss remediation rights. These rights may enable Ambac to direct the activities of the entity that most significantly impact the entity’s economic performance.
We determined that Ambac’s subsidiaries generally have the obligation to absorb a VIE's expected losses given that they have issued financial guarantees supporting the liabilities (and in certain cases assets). As further described below, we consolidated certain VIEs because: (i) we determined for certain transactions that experienced the aforementioned performance deterioration, that Ambac’s subsidiaries had the power, through voting rights or similar rights, to direct the activities of certain VIEs that most significantly impact the VIE’s economic performance because certain triggers had been breached in these transactions resulting in their ability to exercise certain loss remediation activities, or (ii) due to the passive nature of the VIEs’ activities, Ambac’s subsidiaries’ contingent loss remediation rights upon a breach of certain triggers in the future is considered to be the power to direct the activities that most significantly impact the VIEs’ economic performance. With respect to existing VIEs involving Ambac financial guarantees, Ambac is required to consolidate a VIE in the period that applicable triggers result in Ambac having control over the VIE’s most significant economic activities. A VIE is deconsolidated in the period that Ambac no longer has such control,
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which could occur in connection with insurance policies that are allocated to the Segregated Account, execution of remediation activities on the transaction or amortization of insured exposure, any of which may reduce the degree of Ambac’s control over a VIE.
Ambac Sponsored VIEs:
A subsidiary of Ambac transferred financial assets to two special purpose entities. The business purpose of these entities was to provide certain financial guarantee clients with funding for their debt obligations. These special purpose entities were established as separate legal entities, demonstrably distinct from Ambac and that Ambac, its affiliates or its agents could not unilaterally dissolve. The permitted activities of these entities were contractually limited to purchasing assets from Ambac, issuing MTNs to fund such purchase, executing derivative hedges and obtaining financial guarantee policies with respect to indebtedness incurred. Effective February 17, 2015, one of the special purpose entities was liquidated as it no longer had any outstanding liabilities. Ambac has not consolidated these entities because Ambac Assurance’s policies issued to these entities were allocated to the Segregated Account, thereby limiting Ambac’s control over the entities’ most significant economic activities. Ambac elected to account for its equity interest in these entities at fair value under the fair value option in accordance with the Financial Instruments Topic of the ASC. We believe that the fair value of the investments in these entities provides for greater transparency for recording profit or loss as compared to the equity method under the Investments – Equity Method and Joint Ventures Topic of the ASC. Refer to Note 7. Fair Value Measurements for further information on the valuation technique and inputs used to measure the fair value of Ambac’s equity interest in these entities. At March 31, 2015 and December 31, 2014 the fair value of these entities are $10,036 and $12,036, respectively, and is reported within Other assets on the Consolidated Balance Sheets.
Since their inception, there have been 15 individual transactions with these entities, of which 3 transactions remain outstanding as of March 31, 2015. Total principal amount of debt outstanding was $457,960 and $457,960 at March 31, 2015 and December 31, 2014, respectively. In each case, Ambac sold assets to these entities. The assets are composed of utility obligations with a weighted average rating of BBB at March 31, 2015 and weighted average life of 6.8 years. The purchase by these entities of financial assets was financed through the issuance of medium-term notes (“MTNs”), which are cross-collateralized by the purchased assets. The MTNs have the same expected weighted average life as the purchased assets. Derivative contracts (interest rate swaps) are used within the entities for economic hedging purposes only. Derivative positions were established at the time MTNs were issued to purchase financial assets. As of March 31, 2015 Ambac Assurance had financial guarantee insurance policies issued for all assets, MTNs and derivative contracts owned and outstanding by the entities.
Insurance premiums paid to Ambac Assurance by these entities are earned in a manner consistent with other insurance policies, over the risk period. Additionally, any losses incurred on such insurance policies are included in Ambac’s Consolidated Statements of Total Comprehensive Income (Loss). Under the terms of an Administrative Agency Agreement, Ambac provides certain administrative duties, primarily collecting amounts due on the obligations and making interest payments on the MTNs.
Consolidation of VIEs:
Upon initial consolidation of a VIE, we recognize a gain or loss in earnings for the difference between: (i) the fair value of the consideration paid, the fair value of any non-controlling interests and the reported amount of any previously held interests and (ii) the net amount, as measured on a fair value basis, of the assets and liabilities consolidated. Upon deconsolidation of a VIE, we recognize a gain or loss for the difference between: (i) the fair value of any consideration received, the fair value of any retained non-controlling investment in the VIE and the carrying amount of any non-controlling interest in the VIE and (ii) the carrying amount of the VIE’s assets and liabilities. Gains or losses from consolidation and deconsolidation that are reported in earnings are reported within Income (loss) on variable interest entities on the Consolidated Statements of Total Comprehensive Income (Loss).
The variable interest in a VIE generally involves one or more of the following: a financial guarantee policy issued to the VIE, a written credit derivative contract that references liabilities of the VIE or an investment in securities issued by the VIE. The impact of consolidating such VIEs on Ambac’s balance sheet is the elimination of transactions between the consolidated VIEs and Ambac’s operating subsidiaries and the inclusion of the VIE’s third party assets and liabilities. For a financial guarantee insurance policy issued to a consolidated VIE, Ambac does not reflect the financial guarantee insurance policy in accordance with the related insurance accounting rules under the Financial Services – Insurance Topic of the ASC. Consequently, upon consolidation, Ambac eliminates the insurance assets and liabilities associated with the policy from the Consolidated Balance Sheets. Such insurance assets and liabilities may include premium receivables, reinsurance recoverable, deferred ceded premium, subrogation recoverable, unearned premiums, loss and loss expense reserves, ceded premiums payable and insurance intangible assets. For investment securities owned by Ambac that are debt instruments issued by the VIE, the investment securities balance is eliminated upon consolidation. Ambac did not consolidate any VIEs solely as a result of purchases of the VIE’s debt instruments.
As of March 31, 2015 consolidated VIE assets and liabilities relating to 14 consolidated entities were $15,506,746 and $15,473,572, respectively. As of December 31, 2014, consolidated VIE assets and liabilities relating to 15 consolidated entities were $15,126,110 and $15,085,685, respectively. Ambac is not primarily liable for, and does not guarantee all of the debt obligations issued by the VIEs. Ambac would only be required to make payments on the VIE debt obligations in the event that the issuer of such debt obligations defaults on any principal or interest due and such obligation is guaranteed by Ambac. Additionally, Ambac’s creditors do not have rights with regard to the assets of the VIEs. Ambac evaluates the net income effects and earnings per share effects to determine attributions between Ambac and non-controlling interests as a result of consolidating a VIE. Ambac has determined that the net changes in fair value of most consolidated VIE assets and liabilities are attributable to Ambac due to Ambac’s interest through financial guarantee premium and loss payments with the VIE.
The financial reports of certain VIEs are prepared by outside trustees and are not available within the time constraints Ambac requires to ensure the financial accuracy of the operating results. As such, the financial results of certain VIEs are consolidated on a time lag that is no longer than 90 days.
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The table below provides the fair value of fixed income securities, by asset-type, held by consolidated VIEs as of March 31, 2015 and December 31, 2014:

| March 31, 2015 |  | December 31, 2014
Investments: |  |  |
Corporate obligations | $ | 2,704,657 |  |  | $ | 2,743,050 |
Total variable interest entity assets: fixed income securities | $ | 2,704,657 |  |  | $ | 2,743,050 |

The following table provides supplemental information about the loans held as assets and long-term debt associated with the VIEs for which the fair value option has been elected as of March 31, 2015 and December 31, 2014:

| Estimated fair value |  | Unpaid principal balance
March 31, 2015 |  |  |
Loans | $ | 12,789,201 |  |  | $ | 9,675,140 |
Long-term debt | 13,341,902 |  |  | 11,299,861 |
December 31, 2014 |  |  |
Loans | 12,371,177 |  |  | 10,236,695 |
Long-term debt | $ | 12,882,076 |  |  | $ | 11,925,499 |

For the three months ended March 31, 2015, Ambac deconsolidated one VIE when the associated financial guarantee exposure matured. There was no gain or loss resulting from this deconsolidation.
Variable Interests in Non-Consolidated VIEs
The following table displays the carrying amount of the assets, liabilities and maximum exposure to loss of Ambac’s variable interests in non-consolidated VIEs resulting from financial guarantee and derivative contracts by major underlying asset classes, as of March 31, 2015 and December 31, 2014:

| Carrying Value of Assets and Liabilities
| Maximum Exposure To Loss (1) |  | Insurance Assets (2) |  | Insurance Liabilities (3) |  | Net Derivative Assets (Liabilities) (4)
March 31, 2015: |  |  |  |  |  |  |
Global structured finance: |  |  |  |  |  |  |
Collateralized debt obligations | $ | 1,297,393 |  |  | $ | 303 |  |  | $ | 3,889 |  |  | $ | (155,357 | )
Mortgage-backed—residential | 18,837,405 |  |  | 1,037,566 |  |  | 2,879,199 |  |  | — |
Other consumer asset-backed | 4,460,126 |  |  | 55,219 |  |  | 671,303 |  |  | (35,558 | )
Other commercial asset-backed | 2,943,920 |  |  | 129,218 |  |  | 124,124 |  |  | — |
Other | 3,546,270 |  |  | 94,529 |  |  | 565,657 |  |  | 16,766 |
Total global structured finance | 31,085,114 |  |  | 1,316,835 |  |  | 4,244,172 |  |  | (174,149 | )
Global public finance | 30,674,652 |  |  | 438,852 |  |  | 513,664 |  |  | (29,891 | )
Total | $ | 61,759,766 |  |  | $ | 1,755,687 |  |  | $ | 4,757,836 |  |  | $ | (204,040 | )
December 31, 2014: |  |  |  |  |  |  |
Global structured finance: |  |  |  |  |  |  |
Collateralized debt obligations | $ | 1,386,100 |  |  | $ | 345 |  |  | $ | 4,000 |  |  | $ | (145,565 | )
Mortgage-backed—residential | 19,464,549 |  |  | 1,011,888 |  |  | 2,924,987 |  |  | — |
Other consumer asset-backed | 5,109,776 |  |  | 65,204 |  |  | 885,572 |  |  | (36,877 | )
Other commercial asset-backed | 3,119,891 |  |  | 135,215 |  |  | 128,988 |  |  | — |
Other | 3,801,382 |  |  | 97,345 |  |  | 599,915 |  |  | 18,176 |
Total global structured finance | 32,881,698 |  |  | 1,309,997 |  |  | 4,543,462 |  |  | (164,266 | )
Global public finance | 31,639,004 |  |  | 457,774 |  |  | 533,192 |  |  | (22,135 | )
Total | $ | 64,520,702 |  |  | $ | 1,767,771 |  |  | $ | 5,076,654 |  |  | $ | (186,401 | )

(1) | Maximum exposure to loss represents the maximum future payments of principal and interest on insured obligations and derivative contracts plus Deferred Amounts and accrued and unpaid interest thereon. Ambac’s maximum exposure to loss does not include the benefit of any financial instruments (such as reinsurance or hedge contracts) that Ambac may utilize to mitigate the risks associated with these variable interests.

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(2) | Insurance assets represent the amount recorded in “Premium receivables” and “Subrogation recoverable” for financial guarantee contracts on Ambac’s Consolidated Balance Sheets.

(3) | Insurance liabilities represent the amount recorded in “Loss and loss expense reserves” and “Unearned premiums” for financial guarantee contracts on Ambac’s Consolidated Balance Sheets.

(4) | Net derivative assets (liabilities) represent the fair value recognized on credit derivative contracts and interest rate swaps on Ambac’s Consolidated Balance Sheets.

4. COMPREHENSIVE INCOME
The following tables detail the changes in the balances of each component of accumulated other comprehensive income for the affected periods:

| Unrealized Gains (Losses) on Available- for Sale Securities (1) |  | Amortization of Postretirement Benefit (1) |  | Gain (Loss) on Foreign Currency Translation (1) |  | Total
Three Months Ended March 31, 2015 |  |  |  |  |  |  |
Beginning Balance | $ | 210,693 |  |  | $ | 10,031 |  |  | $ | (441 | ) |  | $ | 220,283 |
Other comprehensive income before reclassifications | 33,554 |  |  | — |  |  | (33,479 | ) |  | 75 |
Amounts reclassified from accumulated other comprehensive income | (51,002 | ) |  | (27 | ) |  | — |  |  | (51,029 | )
Net current period other comprehensive income (loss) | (17,448 | ) |  | (27 | ) |  | (33,479 | ) |  | (50,954 | )
Balance at March 31, 2015 | $ | 193,245 |  |  | $ | 10,004 |  |  | $ | (33,920 | ) |  | $ | 169,329 |
Three Months Ended March 31, 2014 |  |  |  |  |  |  |
Beginning Balance | $ | (41,910 | ) |  | $ | 10,847 |  |  | $ | 42,724 |  |  | $ | 11,661 |
Other comprehensive income before reclassifications | 94,622 |  |  | — |  |  | 4,238 |  |  | 98,860 |
Amounts reclassified from accumulated other comprehensive income | (5,900 | ) |  | (204 | ) |  | — |  |  | (6,104 | )
Net current period other comprehensive income (loss) | 88,722 |  |  | (204 | ) |  | 4,238 |  |  | 92,756 |
Balance at March 31, 2014 | $ | 46,812 |  |  | $ | 10,643 |  |  | $ | 46,962 |  |  | $ | 104,417 |

(1) All amounts are net of tax and noncontrolling interest. Amounts in parentheses indicate debits.
The following table details the significant amounts reclassified from each component of accumulated other comprehensive income for the affected periods:

|  | Amount Reclassified from Accumulated Other Comprehensive Income (1) |  | Affected Line Item in the
Details about Accumulated Other |  | Three Months Ended March 31, |  | Consolidated Statement of
Comprehensive Income Components |  | 2015 |  | 2014 |  | Total Comprehensive Income
Unrealized Gains (Losses) on Available-for-Sale Securities |  |  |  |  |  |
|  | $ | (51,002 | ) |  | $ | (5,900 | ) |  | Net realized investment gains
|  | — |  |  | — |  |  | Tax (expense) benefit
|  | $ | (51,002 | ) |  | $ | (5,900 | ) |  | Net of tax and noncontrolling interest (3)
Amortization of Postretirement Benefit |  |  |  |  |  |
Prior service cost |  | $ | (166 | ) |  | $ | (166 | ) |  | Underwriting and operating expenses (2)
Actuarial gains (losses) |  | 139 |  |  | (38 | ) |  | Underwriting and operating expenses (2)
|  | (27 | ) |  | (204 | ) |  | Total before tax
|  | — |  |  | — |  |  | Tax (expense) benefit
|  | $ | (27 | ) |  | $ | (204 | ) |  | Net of tax and noncontrolling interest (3)
Total reclassifications for the period |  | $ | (51,029 | ) |  | $ | (6,104 | ) |  | Net of tax and noncontrolling interest (3)

(1) | Amounts in parentheses indicate debits to the Consolidated Statement of Comprehensive Income.

(2) | These accumulated other comprehensive income components are included in the computation of net periodic benefit cost.

(3) | Amount agrees w ith amount reported as reclassifications from AOCI in the disclosure about changes in AOCI balances.

5. NET INCOME PER SHARE
Pursuant to the Second Modified Fifth Amended Plan of Reorganization of Ambac Financial Group, Inc. (the "Reorganization Plan"), 45,000,000 shares of new common stock at par value of $0.01 per share and 5,047,138 warrants were issued. Warrants entitle such holders to acquire up to 5,047,138 shares of new common stock at an exercise price of $16.67 per share at any time on or prior to April 30, 2023. For the three months
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ended March 31, 2015 and 2014, 125 and 51 warrants were exercised, respectively, resulting in an issuance of 125 and 51 shares of common stock, respectively. As of March 31, 2015, Ambac had 5,039,752 warrants outstanding.
Basic net income per share is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding and vested restricted stock units. Diluted net income per share is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares used for basic earnings per share plus all potential dilutive common shares outstanding during the period. All potential dilutive common shares outstanding consider common stock deliverable pursuant to warrants issued under the Reorganization Plan and unvested options, restricted stock units and performance stock units granted under employee and director compensation plans.
The following table provides a reconciliation of the common shares used for basic net income per share to the diluted shares used for diluted net income per share:

| Three Months Ended March 31,
| 2015 |  | 2014
Weighted average number of common shares used for basic earnings per share | 45,156,202 |  |  | 45,042,823 |
Effect of potential dilutive shares: |  |  |
Warrants | 1,751,798 |  |  | 1,998,028 |
Stock options | 12,841 |  |  | 4,891 |
Restricted stock units | 25,013 |  |  | — |
Performance stock units | 3,145 |  |  | — |
Weighted average number of common shares and potential dilutive shares used for diluted earnings per share | 46,948,999 |  |  | 47,045,742 |

Stock options to purchase 110,000 shares of common stock were outstanding but not included in the computation of diluted earnings per share because they were antidilutive under the treasury stock method for the three months ended March 31, 2015.
6. FINANCIAL GUARANTEE INSURANCE CONTRACTS
Amounts presented in this Note relate only to Ambac’s non-derivative insurance business for insurance policies issued to beneficiaries, including VIEs, for which we do not consolidate the VIE.
Net Premiums Earned:
Gross premiums are received either upfront (typical of public finance obligations) or in installments (typical of structured finance obligations). For premiums received upfront, an unearned premium revenue (“UPR”) liability is established, which is initially recorded as the cash amount received. For installment premium transactions, a premium receivable asset and offsetting UPR liability is initially established in an amount equal to: (i) the present value of future contractual premiums due (the “contractual” method) or (ii) if the underlying insured obligation is a homogenous pool of assets which are contractually prepayable, the present value of premiums to be collected over the expected life of the transaction (the “expected” method). An appropriate risk-free rate corresponding to the weighted average life of each policy and currency is used to discount the future premiums contractually due or expected to be collected. For example, U.S. dollar exposures are discounted using U.S. Treasury rates while exposures denominated in a foreign currency are discounted using the appropriate risk-free rate for the respective currency. The weighted average risk-free rate at March 31, 2015 and December 31, 2014, was 2.5% and 2.7%, respectively, and the weighted average period of future premiums used to estimate the premium receivable at March 31, 2015 and December 31, 2014, was 9.6 years and 10.1 years, respectively.
Insured obligations consisting of homogeneous pools for which Ambac uses expected future premiums to estimate the premium receivable and UPR include residential mortgage-backed securities. As prepayment assumptions change for homogenous pool transactions, or if there is an actual prepayment for a “contractual” method installment transaction, the related premium receivable and UPR are adjusted in equal and offsetting amounts with no immediate effect on earnings using new premium cash flows and the then current risk-free rate.
Generally, the priority for the payment of financial guarantee premiums to Ambac, as required by the bond indentures of the insured obligations, is very senior in the waterfall. Additionally, in connection with the allocation of certain liabilities to the Segregated Account, trustees and other parties are required under the Segregated Account Rehabilitation Plan and related court orders to continue to pay installment premiums, notwithstanding the Segregated Account Rehabilitation Proceedings. In evaluating the credit quality of the premium receivables, management evaluates the transaction waterfall structures and the internal ratings of the transactions underlying the premium receivables. Uncollectable premiums are determined on a policy basis and utilize a combination of historical premium collection data in addition to cash flow analysis to determine if an impairment in the related policy's premium receivables exist. As of March 31, 2015 and December 31, 2014, approximately 32% and 32% of the premium receivables related to transactions with non-investment grade internal ratings, comprised mainly of non-investment grade RMBS and student loan transactions, which comprised 7% and 7%, of the total premium receivables at March 31, 2015 and 7% and 8%, of the total premium receivables at December 31, 2014, respectively. At March 31, 2015 and December 31, 2014, $17,082 and $17,780 respectively, of premium receivables were deemed uncollectable. Past due premiums on policies insuring non-investment grade obligations amounted to less than $500 at March 31, 2015.
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Below is the gross premium receivable roll-forward (direct and assumed contracts) for the affected periods:

| Three Months Ended March 31,
| 2015 |  | 2014
Beginning premium receivable | $ | 1,000,607 |  |  | $ | 1,453,021 |
Premium receipts | (27,453 | ) |  | (33,128 | )
Adjustments for changes in expected and contractual cash flows | (5,918 | ) |  | (15,062 | )
Accretion of premium receivable discount | 6,282 |  |  | 10,370 |
Uncollectable premiums | 698 |  |  | (1,074 | )
Other adjustments (including foreign exchange) | (22,217 | ) |  | 3,987 |
Ending premium receivable | $ | 951,999 |  |  | $ | 1,418,114 |

Similar to gross premiums, premiums ceded to reinsurers are paid either upfront or in installments. Premiums ceded to reinsurers reduce the amount of premiums earned by Ambac from its financial guarantee insurance policies.
When a bond issue insured by Ambac Assurance has been retired, including those retirements due to refundings or calls, any remaining UPR is recognized at that time to the extent the financial guarantee contract is legally extinguished, causing accelerated premium revenue. For installment premium paying transactions, the recognition of any remaining UPR is offset by the reduction of the related premium receivable to zero (as it will not be collected as a result of the retirement), which may cause negative accelerated premium revenue. Ambac’s accelerated premium revenue for retired obligations for the three months ended March 31, 2015 and 2014 was $22,852 and $25,114, respectively. Certain obligations insured by Ambac have been legally defeased whereby government securities are purchased by the issuer with the proceeds of a new bond issuance, or less frequently with other funds of the issuer, and held in escrow (a pre-refunding). The principal and interest received from the escrowed securities are then used to retire the Ambac-insured obligations at a future date either to their maturity date or a specified call date. Ambac has evaluated the provisions in certain financial guarantee insurance policies issued on legally defeased obligations and determined those insurance policies have not been legally extinguished and, therefore, premium revenue recognition has not been accelerated.
The effect of reinsurance on premiums written and earned was as follows:

| Three months ended March 31, 2015 |  |  | Three months ended March 31, 2014
| Written |  | Earned |  |  | Written |  | Earned
Direct | $ | 1,062 |  |  | $ | 71,649 |  |  |  | $ | (5,766 | ) |  | $ | 86,183 |
Assumed | — |  |  | 22 |  |  |  | — |  |  | 68 |
Ceded | 365 |  |  | 5,953 |  |  |  | 456 |  |  | 3,704 |
Net premiums | $ | 697 |  |  | $ | 65,718 |  |  |  | $ | (6,222 | ) |  | $ | 82,547 |

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The table below summarizes the future gross undiscounted premiums to be collected and future premiums earned, net of reinsurance at March 31, 2015:

| Future premiums to be collected (1) |  | Future premiums to be earned net of reinsurance (1)
Three months ended: |  |  |
June 30, 2015 | $ | 22,082 |  |  | $ | 38,127 |
September 30, 2015 | 22,103 |  |  | 35,798 |
December 31, 2015 | 21,686 |  |  | 33,635 |
Twelve months ended: |  |  |
December 31, 2016 | 83,054 |  |  | 123,206 |
December 31, 2017 | 76,968 |  |  | 110,175 |
December 31, 2018 | 72,261 |  |  | 101,113 |
December 31, 2019 | 68,564 |  |  | 94,047 |
Five years ended: |  |  |
December 31, 2024 | 304,049 |  |  | 385,547 |
December 31, 2029 | 254,696 |  |  | 272,177 |
December 31, 2034 | 179,393 |  |  | 169,638 |
December 31, 2039 | 65,595 |  |  | 67,126 |
December 31, 2044 | 25,189 |  |  | 23,328 |
December 31, 2049 | 9,831 |  |  | 9,824 |
December 31, 2054 | 1,244 |  |  | 2,183 |
December 31, 2059 | 5 |  |  | 3 |
Total | $ | 1,206,720 |  |  | $ | 1,465,927 |

(1) | Future premiums to be collected is undiscounted and relates to the discounted premium receivable asset recorded on Ambac's balance sheet. Future premiums to be earned, net of reinsurance relate to the unearned premium liability and deferred ceded premium asset recorded on Ambac’s balance sheet. The use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral is required in the calculation of the premium receivable, as described in Note 2. Basis of Presentation and Significant Accounting Principles in the Notes to Consolidated Financial Statements included in Ambac's Annual Report on Form 10-K for the year ended December 31, 2014. This results in a different premium receivable balance than if expected lives were considered. If installment paying policies are retired or prepay early, premiums reflected in the premium receivable asset and amounts reported in the above table for such policies may not be collected in the future. Future premiums to be earned also considers the use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral, which results in higher unearned premium than if expected lives were considered. If those bonds types are retired early, premium earnings may be negative in the period of call or refinancing.

Loss and Loss Expense Reserves:
Below are the components of the Loss and loss expense reserves liability and the Subrogation recoverable asset at March 31, 2015 and December 31, 2014:

| Unpaid Claims |  | Present Value of Expected Net Cash Flows |  |  |  |
Balance Sheet Line Item | Claims |  | Accrued Interest |  | Claims and Loss Expenses |  | Recoveries |  | Unearned Premium Revenue |  | Gross Loss and Loss Expense Reserves
March 31, 2015: |  |  |  |  |  |  |  |  |  |  |
Loss and loss expense reserves | $ | 2,158,007 |  |  | $ | 265,708 |  |  | $ | 3,579,957 |  |  | $ | (1,268,916 | ) |  | $ | (258,765 | ) |  | $ | 4,475,991 |
Subrogation recoverable | 774,960 |  |  | 103,429 |  |  | 175,415 |  |  | (2,037,933 | ) |  | — |  |  | (984,129 | )
Totals | $ | 2,932,967 |  |  | $ | 369,137 |  |  | $ | 3,755,372 |  |  | $ | (3,306,849 | ) |  | $ | (258,765 | ) |  | $ | 3,491,862 |
December 31, 2014: |  |  |  |  |  |  |  |  |  |  |
Loss and loss expense reserves | $ | 2,172,041 |  |  | $ | 234,802 |  |  | $ | 3,792,133 |  |  | $ | (1,205,621 | ) |  | $ | (241,348 | ) |  | $ | 4,752,007 |
Subrogation recoverable | 772,948 |  |  | 94,425 |  |  | 197,751 |  |  | (2,018,398 | ) |  | — |  |  | (953,274 | )
Totals | $ | 2,944,989 |  |  | $ | 329,227 |  |  | $ | 3,989,884 |  |  | $ | (3,224,019 | ) |  | $ | (241,348 | ) |  | $ | 3,798,733 |

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Below is the loss and loss expense reserve roll-forward, net of subrogation recoverable and reinsurance, for the affected periods:

| Three Months Ended March 31,
| 2015 |  | 2014
Beginning gross loss and loss expense reserves | $ | 3,798,733 |  |  | $ | 5,470,234 |
Less reinsurance on loss and loss expense reserves | 100,355 |  |  | 122,357 |
Beginning balance of net loss and loss expense reserves | $ | 3,698,378 |  |  | $ | 5,347,877 |
Changes in the loss and loss expense reserves due to: |  |  |
Current year: |  |  |
Establishment of new loss and loss expense reserves, gross of RMBS subrogation and net of reinsurance | 1 |  |  | 151 |
Total current year | 1 |  |  | 151 |
Prior years: |  |  |
Change in previously established loss and loss expense reserves, gross of RMBS subrogation and net of reinsurance | (132,639 | ) |  | (117,692 | )
Claim and loss expense (payments) recoveries, net of subrogation and reinsurance | (104,202 | ) |  | (9,375 | )
(Increase) decrease in previously established RMBS subrogation recoveries, net of reinsurance | (44,195 | ) |  | (18,331 | )
Total prior years | (281,036 | ) |  | (145,398 | )
Net change in net loss and loss expense reserves | (281,035 | ) |  | (145,247 | )
Ending net loss and loss expense reserves | $ | 3,417,343 |  |  | $ | 5,202,630 |
Add reinsurance on loss and loss expense reserves (1) | 74,519 |  |  | 111,303 |
Ending gross loss and loss expense reserves | $ | 3,491,862 |  |  | $ | 5,313,933 |

(1) | Reinsurance recoverable reported on the Balance Sheet also includes reinsurance recoverables of previously presented loss and loss expenses of $4,789 and $139 as of March 31, 2015 and 2014, respectively.

The positive development in loss and loss expense reserves established in prior years for the three months ended March 31, 2015 was primarily due to improved performance and lower interest rates in the RMBS portfolio and the impact of commutations and lower interest rates in the student loan portfolio. The positive development in loss and loss expense reserves established in prior years for the three months ended March 31, 2014 was primarily due to improved performance of the RMBS portfolio and higher commutation probabilities for student loan exposures.
The net change in net loss and loss expense reserves are included in losses and loss expenses in the Consolidated Statement of Total Comprehensive Income. Reinsurance recoveries of losses included in losses and loss expenses in the Consolidated Statements of Total Comprehensive Income (Loss) were an expense of $20,601 and $10,559 for the three months ended March 31, 2015 and 2014, respectively.
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The tables below summarize information related to policies currently included in Ambac’s loss and loss expense reserves or subrogation recoverable at March 31, 2015 and December 31, 2014. Net par exposures include capital appreciation bonds which are reported at the par amount at the time of issuance of the insurance policy. The weighted average risk-free rate used to discount loss reserves at March 31, 2015 and December 31, 2014 was 2.1% and 2.3%, respectively.

Surveillance Categories as of March 31, 2015
| I/SL |  | IA |  | II |  | III |  | IV |  | V |  | Total
Number of policies | 34 |  |  | 21 |  |  | 43 |  |  | 66 |  |  | 163 |  |  | 3 |  |  | 330 |
Remaining weighted-average contract period (in years) | 7 |  |  | 16 |  |  | 17 |  |  | 21 |  |  | 13 |  |  | 6 |  |  | 15 |
Gross insured contractual payments outstanding: |  |  |  |  |  |  |  |  |  |  |  |  |
Principal | $ | 910,033 |  |  | $ | 399,516 |  |  | $ | 4,186,210 |  |  | $ | 3,550,121 |  |  | $ | 9,376,691 |  |  | $ | 59,712 |  |  | $ | 18,482,283 |
Interest | 339,721 |  |  | 159,138 |  |  | 8,484,779 |  |  | 2,286,780 |  |  | 1,928,647 |  |  | 19,651 |  |  | 13,218,716 |
Total | $ | 1,249,754 |  |  | $ | 558,654 |  |  | $ | 12,670,989 |  |  | $ | 5,836,901 |  |  | $ | 11,305,338 |  |  | $ | 79,363 |  |  | $ | 31,700,999 |
Gross undiscounted claim liability (1) | $ | 12,901 |  |  | $ | 6,344 |  |  | $ | 239,113 |  |  | $ | 1,596,918 |  |  | $ | 6,297,440 |  |  | $ | 79,357 |  |  | $ | 8,232,073 |
Discount, gross claim liability | (644 | ) |  | (605 | ) |  | (18,502 | ) |  | (521,225 | ) |  | (712,562 | ) |  | (6,592 | ) |  | (1,260,130 | )
Gross claim liability before all subrogation and before reinsurance | $ | 12,257 |  |  | $ | 5,739 |  |  | $ | 220,611 |  |  | $ | 1,075,693 |  |  | $ | 5,584,878 |  |  | $ | 72,765 |  |  | $ | 6,971,943 |
Less: |  |  |  |  |  |  |  |  |  |  |  |  |
Gross RMBS subrogation (2) | — |  |  | — |  |  | — |  |  | — |  |  | (2,579,450 | ) |  | — |  |  | (2,579,450 | )
Discount, RMBS subrogation | — |  |  | — |  |  | — |  |  | — |  |  | 11,097 |  |  | — |  |  | 11,097 |
Discounted RMBS subrogation, before reinsurance | — |  |  | — |  |  | — |  |  | — |  |  | (2,568,353 | ) |  | — |  |  | (2,568,353 | )
Less: |  |  |  |  |  |  |  |  |  |  |  |  |
Gross other subrogation (3) | — |  |  | — |  |  | (12,388 | ) |  | (142,548 | ) |  | (646,741 | ) |  | (13,356 | ) |  | (815,033 | )
Discount, other subrogation | — |  |  | — |  |  | 3,474 |  |  | 35,608 |  |  | 33,795 |  |  | 3,660 |  |  | 76,537 |
Discounted other subrogation, before reinsurance | — |  |  | — |  |  | (8,914 | ) |  | (106,940 | ) |  | (612,946 | ) |  | (9,696 | ) |  | (738,496 | )
Gross claim liability, net of all subrogation and discounts, before reinsurance | $ | 12,257 |  |  | $ | 5,739 |  |  | $ | 211,697 |  |  | $ | 968,753 |  |  | $ | 2,403,579 |  |  | $ | 63,069 |  |  | $ | 3,665,094 |
Less: Unearned premium revenue | (8,812 | ) |  | (2,175 | ) |  | (107,836 | ) |  | (76,061 | ) |  | (63,368 | ) |  | (513 | ) |  | (258,765 | )
Plus: Loss expense reserves | — |  |  | 16 |  |  | 2,185 |  |  | 7,465 |  |  | 75,825 |  |  | 42 |  |  | 85,533 |
Gross loss and loss expense reserves | $ | 3,445 |  |  | $ | 3,580 |  |  | $ | 106,046 |  |  | $ | 900,157 |  |  | $ | 2,416,036 |  |  | $ | 62,598 |  |  | $ | 3,491,862 |
Reinsurance recoverable reported on Balance Sheet (4) | $ | 1 |  |  | $ | 910 |  |  | $ | 2,331 |  |  | $ | 85,082 |  |  | $ | (9,016 | ) |  | $ | — |  |  | $ | 79,308 |

(1) | Gross undiscounted claim liability includes unpaid claims, including accrued interest on Deferred Amounts, on policies allocated to the Segregated Account and Ambac's estimate of expected future claims.

(2) | RMBS subrogation represents Ambac’s probability-weighted estimate of subrogation recoveries from RMBS transaction sponsors for representation and warranty ("R&W") breaches.

(3) | Other subrogation primarily represents subrogation related to excess spread or other contractual cash flows on public finance and structured finance transactions, including RMBS.

(4) | Reinsurance recoverable reported on Balance Sheet includes reinsurance recoverables of $74,519 related to future loss and loss expenses and $4,789 related to previously presented loss and loss expenses.

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Surveillance Categories as of December 31, 2014
| I/SL |  | IA |  | II |  | III |  | IV |  | V |  | Total
Number of policies | 36 |  |  | 26 |  |  | 33 |  |  | 69 |  |  | 160 |  |  | 1 |  |  | 325 |
Remaining weighted-average contract period (in years) | 8 |  |  | 12 |  |  | 15 |  |  | 21 |  |  | 12 |  |  | 6 |  |  | 16 |
Gross insured contractual payments outstanding: |  |  |  |  |  |  |  |  |  |  |  |  |
Principal | $ | 1,026,513 |  |  | $ | 519,291 |  |  | $ | 3,091,744 |  |  | $ | 3,792,559 |  |  | $ | 9,892,760 |  |  | $ | 47 |  |  | $ | 18,322,914 |
Interest | 418,746 |  |  | 212,296 |  |  | 1,878,770 |  |  | 2,765,537 |  |  | 1,979,627 |  |  | 19 |  |  | 7,254,995 |
Total | $ | 1,445,259 |  |  | $ | 731,587 |  |  | $ | 4,970,514 |  |  | $ | 6,558,096 |  |  | $ | 11,872,387 |  |  | $ | 66 |  |  | $ | 25,577,909 |
Gross undiscounted claim liability (1) | $ | 16,360 |  |  | $ | 11,525 |  |  | $ | 155,488 |  |  | $ | 2,040,402 |  |  | $ | 6,456,139 |  |  | $ | 60 |  |  | $ | 8,679,974 |
Discount, gross claim liability | (1,147 | ) |  | (937 | ) |  | (16,438 | ) |  | (716,812 | ) |  | (774,611 | ) |  | (3 | ) |  | (1,509,948 | )
Gross claim liability before all subrogation and before reinsurance | $ | 15,213 |  |  | $ | 10,588 |  |  | $ | 139,050 |  |  | $ | 1,323,590 |  |  | $ | 5,681,528 |  |  | $ | 57 |  |  | $ | 7,170,026 |
Less: |  |  |  |  |  |  |  |  |  |  |  |  |
Gross RMBS subrogation (2) | — |  |  | — |  |  | — |  |  | — |  |  | (2,541,219 | ) |  | — |  |  | (2,541,219 | )
Discount, RMBS subrogation | — |  |  | — |  |  | — |  |  | — |  |  | 17,679 |  |  | — |  |  | 17,679 |
Discounted RMBS subrogation, before reinsurance | — |  |  | — |  |  | — |  |  | — |  |  | (2,523,540 | ) |  | — |  |  | (2,523,540 | )
Less: |  |  |  |  |  |  |  |  |  |  |  |  |
Gross other subrogation (3) | — |  |  | — |  |  | (18,034 | ) |  | (127,143 | ) |  | (647,110 | ) |  | — |  |  | (792,287 | )
Discount, other subrogation | — |  |  | — |  |  | 6,069 |  |  | 36,779 |  |  | 48,960 |  |  | — |  |  | 91,808 |
Discounted other subrogation, before reinsurance | — |  |  | — |  |  | (11,965 | ) |  | (90,364 | ) |  | (598,150 | ) |  | — |  |  | (700,479 | )
Gross claim liability, net of all subrogation and discounts, before reinsurance | $ | 15,213 |  |  | $ | 10,588 |  |  | $ | 127,085 |  |  | $ | 1,233,226 |  |  | $ | 2,559,838 |  |  | $ | 57 |  |  | $ | 3,946,007 |
Less: Unearned premium revenue | (10,945 | ) |  | (3,432 | ) |  | (73,749 | ) |  | (88,332 | ) |  | (64,890 | ) |  | — |  |  | (241,348 | )
Plus: Loss expense reserves | 3 |  |  | 1,303 |  |  | 1,968 |  |  | 6,470 |  |  | 84,330 |  |  | — |  |  | 94,074 |
Gross loss and loss expense reserves | $ | 4,271 |  |  | $ | 8,459 |  |  | $ | 55,304 |  |  | $ | 1,151,364 |  |  | $ | 2,579,278 |  |  | $ | 57 |  |  | $ | 3,798,733 |
Reinsurance recoverable reported on Balance Sheet (4) | $ | 73 |  |  | $ | 890 |  |  | $ | 1,355 |  |  | $ | 110,957 |  |  | $ | (13,437 | ) |  | $ | — |  |  | $ | 99,838 |

(1) | Gross undiscounted claim liability includes unpaid claims, including accrued interest on Deferred Amounts, on policies allocated to the Segregated Account and Ambac's estimate of expected future claims.

(2) | RMBS subrogation represents Ambac’s probability-weighted estimate of subrogation recoveries from RMBS transaction sponsors for representation and warranty ("R&W") breaches.

(3) | Other subrogation primarily represents subrogation related to excess spread or other contractual cash flows on public finance and structured finance transactions, including RMBS.

(4) | Reinsurance recoverable reported on Balance Sheet includes reinsurance recoverables of $100,355 related to future loss and loss expenses and $(517) related to previously presented loss and loss expenses.

Ambac records estimated subrogation recoveries for breaches of representations and warranties (R&W) by sponsors of certain RMBS transactions. Prior to the June 30, 2014 reporting period, Ambac utilized the Adverse and Random Sample approaches to estimate R&W subrogation recoveries for certain RMBS transactions. For a discussion of these subrogation recovery approaches, see Note 2. Basis Of Presentation And Significant Accounting Policies in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. Beginning with the June 30, 2014 reporting period, as a result of gaining further access to loan files, the Random Sample approach has been utilized for all transactions which were previously evaluated using the Adverse Sample approach.
Ambac has recorded RMBS subrogation recoveries of $2,568,353, ($2,540,710 net of reinsurance) and $2,523,540, ($2,496,515 net of reinsurance) at March 31, 2015 and December 31, 2014, respectively. The balance of RMBS subrogation recoveries and the related claim liabilities, by estimation approach, at March 31, 2015 and December 31, 2014, are as follows:

Approach | Gross loss reserves before subrogation recoveries (1) |  | Subrogation recoveries (2)(3) |  | Gross loss reserves after subrogation recoveries
March 31, 2015: |  |  |  |  |
Random samples (4) | $ | 1,899,087 |  |  | $ | (2,568,353 | ) |  | $ | (669,266 | )
December 31, 2014: |  |  |  |  |
Random samples (4) | $ | 1,897,426 |  |  | $ | (2,523,540 | ) |  | $ | (626,114 | )

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(1) | Includes unpaid RMBS claims, including accrued interest on Deferred Amounts, on policies allocated to the Segregated Account.

(2) | The amount of recorded subrogation recoveries related to each securitization is limited to ever-to-date paid and unpaid losses plus the present value of expected cash flows for each policy. To the extent losses have been paid but not yet fully recovered, the recorded amount of RMBS subrogation recoveries may exceed the sum of the unpaid claims and the present value of expected cash flows for a given policy. The net cash inflow for these policies is recorded as a “Subrogation recoverable” asset. For those transactions where the subrogation recovery is less than the sum of unpaid claims and the present value of expected cash flows, the net cash outflow for these policies is recorded as a “Loss and loss expense reserves” liability.

(3) | The sponsor’s repurchase obligation may differ depending on the terms of the particular transaction and the status of the specific loan, such as whether it is performing or has been liquidated or charged off. The estimated subrogation recovery for these transactions is based primarily on loan level data provided through trustee reports received in the normal course of our surveillance activities or provided by the sponsor. While this data may not include all the components of the sponsor’s contractual repurchase obligation we believe it is the best information available to estimate the subrogation recovery.

(4) | From time to time R&W subrogation may include estimates of potential sponsor settlements that are currently in negotiation, but have not been subject to a sampling approach. However, such estimates are not material to Ambac’s financial results and therefore are included in the Random Sample section of this table.

Below is the rollforward of RMBS subrogation, by estimation approach, for the affected periods:

| Random sample |  | Adverse sample |  | Total
Discounted RMBS subrogation (gross of reinsurance) at January 1, 2015 | $ | 2,523,540 |  |  | $ | — |  |  | $ | 2,523,540 |
Changes recognized in 2015: |  |  |  |  |
Changes in estimation approach | — |  |  | — |  |  | — |
Impact of sponsor actions (1) | — |  |  | — |  |  | — |
All other changes (2) | 44,813 |  |  | — |  |  | 44,813 |
Discounted RMBS subrogation (gross of reinsurance) at March 31, 2015 | $ | 2,568,353 |  |  | $ | — |  |  | $ | 2,568,353 |
Discounted RMBS subrogation (gross of reinsurance) at January 1, 2014 | $ | 953,825 |  |  | $ | 1,252,773 |  |  | $ | 2,206,598 |
Changes recognized in 2014: |  |  |  |  |
Changes in estimation approach | — |  |  | — |  |  | — |
Impact of sponsor actions (1) | — |  |  | — |  |  | — |
All other changes (2) | 51,789 |  |  | (34,092 | ) |  | 17,697 |
Discounted RMBS subrogation (gross of reinsurance) at March 31, 2014 | $ | 1,005,614 |  |  | $ | 1,218,681 |  |  | $ | 2,224,295 |

(1) | Sponsor actions include loan repurchases, direct payments to Ambac and other contributions.

(2) | All other changes which may impact RMBS subrogation recoveries include changes in actual or projected collateral performance, changes in the creditworthiness of a sponsor, and/or the projected timing of recoveries. All other changes may also include estimates of potential sponsor settlements that are currently in negotiation but have not been subject to a sampling approach. However, such estimates are not material to Ambac’s financial results and therefore are included in the Random Sample column of this table.

Insurance intangible asset:
The insurance intangible amortization expense is included in insurance intangible amortization on the Consolidated Statements of Total Comprehensive Income (Loss). For the three months ended March 31, 2015 and 2014, the insurance intangible amortization expense was $37,432 and $31,714, respectively. As of March 31, 2015 and December 31, 2014, the gross carrying value of the insurance intangible asset was $1,631,068 and $1,660,125, respectively. Accumulated amortization of the insurance intangible asset was $283,773 and $249,205, as of March 31, 2015 and December 31, 2014, respectively, resulting in a net insurance intangible asset of $1,347,295 and $1,410,920, respectively.
The estimated future amortization expense for the net insurance intangible asset is as follows:

|  | 2015 |  | 2016 |  | 2017 |  | 2018 |  | 2019 |  | Thereafter
Amortization expense |  | $ | 90,801 |  |  | $ | 107,443 |  |  | $ | 97,726 |  |  | $ | 90,095 |  |  | $ | 83,380 |  |  | $ | 877,850 |

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7. FAIR VALUE MEASUREMENTS
The Fair Value Measurement Topic of the ASC establishes a framework for measuring fair value and disclosures about fair value measurements.
Fair Value Hierarchy:
The Fair Value Measurement Topic of the ASC specifies a fair value hierarchy based on whether the inputs to valuation techniques used to measure fair value are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Company-based assumptions. The fair value hierarchy prioritizes model inputs into three broad levels as follows:

Ÿ Level 1 |  | Quoted prices for identical instruments in active markets. Assets and liabilities classified as Level 1 include US Treasury securities, exchange traded futures contracts, variable rate demand obligations, money market funds and mutual funds.
Ÿ Level 2 |  | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Assets and liabilities classified as Level 2 generally include investments in fixed income securities representing municipal, asset-backed and corporate obligations, most financial services derivatives and most long-term debt of variable interest entities consolidated under the Consolidation Topic of the ASC. Also included are equity interests in pooled investment funds measured at fair value where the investment can be redeemed in the near term at a value based on the net asset value.
Ÿ Level 3 |  | Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. This hierarchy requires the use of observable market data when available. Assets and liabilities classified as Level 3 include credit derivative contracts written as part of the financial guarantee business, certain financial services interest rate swap contracts, equity interests in Ambac sponsored special purpose entities and certain investments in fixed income securities. Additionally, Level 3 assets and liabilities generally include fixed income securities, loan receivables, and certain long-term debt of variable interest entities consolidated under the Consolidation Topic of the ASC.

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The following table sets forth the carrying amount and fair value of Ambac’s financial assets and liabilities as of March 31, 2015 and December 31, 2014, including the level within the fair value hierarchy at which fair value measurements are categorized. As required by the Fair Value Measurement Topic of the ASC financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

| Carrying Amount |  | Total Fair Value |  | Fair Value Measurements Categorized as:
Level 1 |  | Level 2 |  | Level 3
March 31, 2015: |  |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |
Municipal obligations | $ | 525,188 |  |  | $ | 525,188 |  |  | $ | — |  |  | $ | 525,188 |  |  | $ | — |
Corporate obligations | 1,609,769 |  |  | 1,609,769 |  |  | — |  |  | 1,609,769 |  |  | — |
Foreign obligations | 125,164 |  |  | 125,164 |  |  | — |  |  | 125,164 |  |  | — |
U.S. government obligations | 30,297 |  |  | 30,297 |  |  | 30,297 |  |  | — |  |  | — |
U.S. agency obligations | 4,427 |  |  | 4,427 |  |  | — |  |  | 4,427 |  |  | — |
Residential mortgage-backed securities | 1,846,477 |  |  | 1,846,477 |  |  | — |  |  | 1,583,745 |  |  | 262,732 |
Collateralized debt obligations | 88,238 |  |  | 88,238 |  |  | — |  |  | 88,238 |  |  | — |
Other asset-backed securities | 636,190 |  |  | 636,190 |  |  | — |  |  | 636,190 |  |  | — |
Fixed income securities, pledged as collateral: |  |  |  |  |  |  |  |  |
U.S. government obligations | 64,813 |  |  | 64,813 |  |  | 64,813 |  |  | — |  |  | — |
Short term investments | 220,980 |  |  | 220,980 |  |  | 215,207 |  |  | 5,773 |  |  | — |
Other investments | 332,609 |  |  | 328,187 |  |  | — |  |  | 310,578 |  |  | 17,609 |
Cash and cash equivalents | 26,641 |  |  | 26,641 |  |  | 26,641 |  |  | — |  |  | — |
Loans | 5,494 |  |  | 5,476 |  |  | — |  |  | — |  |  | 5,476 |
Derivative assets: |  |  |  |  |  |  |  |  |
Credit derivatives | — |  |  | — |  |  | — |  |  | — |  |  | — |
Interest rate swaps—asset position | 113,622 |  |  | 113,622 |  |  | — |  |  | 113,622 |  |  | — |
Interest rate swaps—liability position | — |  |  | — |  |  | — |  |  | — |  |  | — |
Other assets | 10,036 |  |  | 10,036 |  |  | — |  |  | — |  |  | 10,036 |
Variable interest entity assets: |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |
Corporate obligations | 2,704,657 |  |  | 2,704,657 |  |  | — |  |  | — |  |  | 2,704,657 |
Restricted cash | 6,219 |  |  | 6,219 |  |  | 6,219 |  |  | — |  |  | — |
Loans | 12,789,201 |  |  | 12,789,201 |  |  | — |  |  | — |  |  | 12,789,201 |
Total financial assets | $ | 21,140,022 |  |  | $ | 21,135,582 |  |  | $ | 343,177 |  |  | $ | 5,002,694 |  |  | $ | 15,789,711 |
Financial liabilities: |  |  |  |  |  |  |  |  |
Obligations under investment agreements | $ | 111,967 |  |  | $ | 114,438 |  |  | $ | — |  |  | $ | — |  |  | $ | 114,438 |
Long term debt, including accrued interest | 1,301,390 |  |  | 1,381,938 |  |  | — |  |  | — |  |  | 1,381,938 |
Derivative liabilities: |  |  |  |  |  |  |  |  |
Credit derivatives | 76,377 |  |  | 76,377 |  |  | — |  |  | — |  |  | 76,377 |
Interest rate swaps—asset position | (68,481 | ) |  | (68,481 | ) |  | — |  |  | (68,481 | ) |  | — |
Interest rate swaps—liability position | 438,518 |  |  | 438,518 |  |  | — |  |  | 284,694 |  |  | 153,824 |
Futures contracts | 942 |  |  | 942 |  |  | 942 |  |  | — |  |  | — |
Liabilities for net financial guarantees written (1) | 2,662,701 |  |  | 4,152,094 |  |  | — |  |  | — |  |  | 4,152,094 |
Variable interest entity liabilities: |  |  |  |  |  |  |  |  |
Long-term debt | 13,341,902 |  |  | 13,341,902 |  |  | — |  |  | 11,309,803 |  |  | 2,032,099 |
Derivative liabilities: |  |  |  |  |  |  |  |  |
Interest rate swaps—liability position | 2,081,082 |  |  | 2,081,082 |  |  | — |  |  | 2,081,082 |  |  | — |
Currency swaps—liability position | 44,631 |  |  | 44,631 |  |  | — |  |  | 44,631 |  |  | — |
Total financial liabilities | $ | 19,991,029 |  |  | $ | 21,563,441 |  |  | $ | 942 |  |  | $ | 13,651,729 |  |  | $ | 7,910,770 |

(1) | The carrying value of net financial guarantees written includes the following balance sheet items: Premium receivables; Reinsurance recoverable on paid and unpaid losses; Deferred ceded premium; Subrogation recoverable; Insurance intangible asset; Unearned premiums; Loss and loss expense reserves; Ceded premiums payable, premiums taxes payable and other deferred fees recorded in Other liabilities.

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| Carrying Amount |  | Total Fair Value |  | Fair Value Measurements Categorized as:
Level 1 |  | Level 2 |  | Level 3
December 31, 2014: |  |  |  |  |  |  |  |  |
Financial assets: |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |
Municipal obligations | $ | 525,792 |  |  | $ | 525,792 |  |  | $ | — |  |  | $ | 525,792 |  |  | $ | — |
Corporate obligations | 1,385,594 |  |  | 1,385,594 |  |  | — |  |  | 1,381,786 |  |  | 3,808 |
Foreign obligations | 127,757 |  |  | 127,757 |  |  | — |  |  | 127,757 |  |  | — |
U.S. government obligations | 42,979 |  |  | 42,979 |  |  | 42,979 |  |  | — |  |  | — |
U.S. agency obligations | 29,486 |  |  | 29,486 |  |  | — |  |  | 29,486 |  |  | — |
Residential mortgage-backed securities | 1,710,955 |  |  | 1,710,955 |  |  | — |  |  | 1,516,562 |  |  | 194,393 |
Collateralized debt obligations | 21,122 |  |  | 21,122 |  |  | — |  |  | 21,122 |  |  | — |
Other asset-backed securities | 882,001 |  |  | 882,001 |  |  | — |  |  | 882,001 |  |  | — |
Fixed income securities, pledged as collateral: |  |  |  |  |  |  |  |  |
U.S. government obligations | 64,267 |  |  | 64,267 |  |  | 64,267 |  |  | — |  |  | — |
Short term investments | 360,065 |  |  | 360,065 |  |  | 358,190 |  |  | 1,875 |  |  | — |
Other investments | 357,016 |  |  | 349,468 |  |  | — |  |  | 336,013 |  |  | 13,455 |
Cash and cash equivalents | 73,903 |  |  | 73,903 |  |  | 73,903 |  |  | — |  |  | — |
Loans | 5,714 |  |  | 5,634 |  |  | — |  |  | — |  |  | 5,634 |
Derivative assets: |  |  |  |  |  |  |  |  |
Credit derivatives | 2,043 |  |  | 2,043 |  |  | — |  |  | — |  |  | 2,043 |
Interest rate swaps—asset position | 106,974 |  |  | 106,974 |  |  | — |  |  | 106,974 |  |  | — |
Interest rate swaps—liability position | — |  |  | — |  |  | — |  |  | — |  |  | — |
Futures contracts | — |  |  | — |  |  | — |  |  | — |  |  | — |
Other assets | 12,036 |  |  | 12,036 |  |  | — |  |  | — |  |  | 12,036 |
Variable interest entity assets: |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |
Corporate obligations | 2,743,050 |  |  | 2,743,050 |  |  | — |  |  | — |  |  | 2,743,050 |
Restricted cash | 7,708 |  |  | 7,708 |  |  | 7,708 |  |  | — |  |  | — |
Loans | 12,371,177 |  |  | 12,371,177 |  |  | — |  |  | — |  |  | 12,371,177 |
Total financial assets | $ | 20,829,639 |  |  | $ | 20,822,011 |  |  | $ | 547,047 |  |  | $ | 4,929,368 |  |  | $ | 15,345,596 |
Financial liabilities: |  |  |  |  |  |  |  |  |
Obligations under investment agreements | $ | 160,079 |  |  | $ | 161,821 |  |  | $ | — |  |  | $ | — |  |  | $ | 161,821 |
Long term debt, including accrued interest | 1,273,805 |  |  | 1,379,864 |  |  | — |  |  | — |  |  | 1,379,864 |
Derivative liabilities: |  |  |  |  |  |  |  |  |
Credit derivatives | 75,502 |  |  | 75,502 |  |  | — |  |  | — |  |  | 75,502 |
Interest rate swaps—asset position | (54,666 | ) |  | (54,666 | ) |  | — |  |  | (54,666 | ) |  | — |
Interest rate swaps—liability position | 385,546 |  |  | 385,546 |  |  | — |  |  | 243,659 |  |  | 141,887 |
Futures contracts | 562 |  |  | 562 |  |  | 562 |  |  | — |  |  | — |
Other contracts | — |  |  | — |  |  | — |  |  | — |  |  | — |
Liabilities for net financial guarantees written (1) | 2,923,652 |  |  | 4,539,000 |  |  | — |  |  | — |  |  | 4,539,000 |
Variable interest entity liabilities: |  |  |  |  |  |  |  |  |
Long-term debt | 12,882,076 |  |  | 12,882,076 |  |  | — |  |  | 11,618,412 |  |  | 1,263,664 |
Derivative liabilities: |  |  |  |  |  |  |  |  |
Interest rate swaps—liability position | 2,133,268 |  |  | 2,133,268 |  |  | — |  |  | 2,133,268 |  |  | — |
Currency swaps—liability position | 66,895 |  |  | 66,895 |  |  | — |  |  | 66,895 |  |  | — |
Total financial liabilities | $ | 19,846,719 |  |  | $ | 21,569,868 |  |  | $ | 562 |  |  | $ | 14,007,568 |  |  | $ | 7,561,738 |

(1) | The carrying value of net financial guarantees written includes the following balance sheet items: Premium receivables; Reinsurance recoverable on paid and unpaid losses; Deferred ceded premium; Subrogation recoverable; Insurance intangible asset; Unearned premiums; Loss and loss expense reserves; Ceded premiums payable, premiums taxes payable and other deferred fees recorded in Other liabilities.

Determination of Fair Value:
When available, Ambac uses quoted active market prices specific to the financial instrument to determine fair value, and classifies such items within Level 1. Because many fixed income securities do not trade on a daily basis, pricing sources apply available information through processes such as matrix pricing to calculate fair value. In those cases, the items are classified within Level 2. If quoted market prices are not available,
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fair value is based upon models that use, where possible, current market-based or independently-sourced market parameters. Items valued using valuation models are classified according to the lowest level input or value driver that is significant to the valuation. Thus, an item may be classified in Level 3 even though there may be significant inputs that are readily observable.
The determination of fair value for financial instruments categorized in Level 2 or 3 involves significant judgment due to the complexity of factors contributing to the valuation. Third-party sources from which we obtain independent market quotes also use assumptions, judgments and estimates in determining financial instrument values and different third parties may use different methodologies or provide different prices for securities. In addition, the use of internal valuation models may require assumptions about hypothetical or inactive markets. As a result of these factors, the actual trade value of a financial instrument in the market, or exit value of a financial instrument position by Ambac, may be significantly different from its recorded fair value.
Ambac’s financial instruments carried at fair value are mainly comprised of investments in fixed income securities, equity interests in pooled investment funds, derivative instruments, variable interest entity assets and liabilities and equity interests in Ambac sponsored special purpose entities. Valuation of financial instruments is performed by Ambac’s finance group using methods approved by senior financial management with consultation from risk management and portfolio managers as appropriate. Preliminary valuation results are discussed with portfolio managers quarterly to assess consistency with market transactions and trends as applicable. Market transactions such as trades or negotiated settlements of similar positions, if any, are reviewed quarterly to validate fair value model results. However many of the financial instruments valued using significant unobservable inputs have very little or no observable market activity. Methods and significant inputs and assumptions used to determine fair values across portfolios are reviewed quarterly by senior financial management. Other valuation control procedures specific to particular portfolios are described further below.
We reflect Ambac’s own creditworthiness in the fair value of financial liabilities by including a credit valuation adjustment (“CVA”) in the determination of fair value. A decline (increase) in Ambac’s creditworthiness as perceived by market participants will generally result in a higher (lower) CVA, thereby lowering (increasing) the fair value of Ambac’s financial liabilities as reported.
Fixed Income Securities:
The fair values of fixed income investment securities are based primarily on market prices received from dealer quotes or alternative pricing sources with reasonable levels of price transparency. Such quotes generally consider a variety of factors, including recent trades of the same and similar securities. For those fixed income investments where quotes were not available or cannot be reasonably corroborated, fair values are based on internal valuation models. Key inputs to the internal valuation models generally include maturity date, coupon and yield curves for asset-type and credit rating characteristics that closely match those characteristics of the specific investment securities being valued. Longer (shorter) expected maturities or higher (lower) yields used in the valuation model will, in isolation, result in decreases (increases) in fair value. Generally, lower credit ratings or longer expected maturities will be accompanied by higher yields used to value a security. Certain investments in Ambac-wrapped securities for which projected cash flows consist solely of Deferred Amounts and interest thereon, are internally valued based upon the valuation of surplus notes. At March 31, 2015, approximately 6%, 89%, and 5% of the investment portfolio (excluding variable interest entity investments) was valued using dealer quotes, alternative pricing sources with reasonable levels of price transparency and internal valuation models, respectively. At December 31, 2014, approximately 10%, 86%, and 4% of the investment portfolio (excluding variable interest entity investments) was valued using dealer quotes, alternative pricing sources with reasonable levels of price transparency and internal valuation models, respectively.
Ambac performs various review and validation procedures to quoted and modeled prices for fixed income securities, including price variance analysis, missing and static price reviews, overall valuation analysis by senior traders and finance managers and reviews associated with our ongoing impairment analysis. Unusual prices identified through these procedures will be evaluated further against alternative third party quotes (if available) and/or internally modeled prices, and the pricing source values will be challenged as necessary. Price challenges generally result in the use of the pricing source’s quote as originally provided or as revised by the source following their internal diligence process. A price challenge may result in a determination by either the pricing source or Ambac management that the pricing source cannot provide a reasonable value for a security or cannot adequately support a quote, in which case Ambac would resort to using either other quotes or internal models. Results of price challenges are reviewed by senior traders and finance managers.
Information about the valuation inputs for fixed income securities classified as Level 3 is included below:
Corporate obligations: These securities represent interest only strips of investment grade corporate obligations. The fair value of such securities classified as Level 3 was $0 and $3,808 at March 31, 2015 and December 31, 2014, respectively. Fair value was calculated using a discounted cash flow approach with the discount rate determined from the yields of corporate bonds from the same issuers. Significant inputs for the interest only strips valuation at December 31, 2014 include the following weighted averages:

a. Coupon rate: | 0.345% |  |  |
b. Maturity: | 19.14 years |  |  |
c. Yield: | 4.93% |  |  |

Residential mortgage-backed securities: These securities are guaranteed under policies that are subject to the Segregated Account Rehabilitation Plan and have projected future cash flows consisting solely of Deferred Amounts under such policies including interest thereon. The fair value of such securities classified as Level 3 was $262,732 and $194,393 at March 31, 2015 and December 31, 2014, respectively. Fair value was
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calculated based on the valuation of Ambac Assurance surplus notes which, under the terms of the Segregated Account Rehabilitation Plan, are to be redeemed in proportion with the payment of Deferred Amounts on or about the dates when such payments are made. Refer to Note 1.Background and Business Description and to Note 1. Background and Business Description in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for further description of the Segregated Account Rehabilitation Plan and its impact on the payment of Segregated Account policy claims and surplus note redemptions.
Other Investments:
Other investments primarily relate to investments in pooled investment funds, which are valued using the net asset value (“NAV”) per share, calculated on at least a monthly basis where NAV is the basis for determining the redemption value of the investment. These investments are classified as Level 2 as redemptions may be made in the near term (within 90 days) without significant impediments or restrictions. Ambac assesses impediments to redemption and other factors that may restrict the ability to redeem investments in the near term or at values approximating the NAV and may classify the investments as Level 3 if such factors exist. Other investments also includes Ambac's interest in a non-consolidated VIE, which is carried under the equity method. Valuation of this equity interest is internally calculated using a discounted cash flow approach and is classified as Level 3.
Derivative Instruments:
Ambac’s derivative instruments primarily comprise interest rate and credit default swaps and exchange traded futures contracts. Fair value is determined based upon market quotes from independent sources, when available. When independent quotes are not available, fair value is determined using valuation models. These valuation models require market-driven inputs, including contractual terms, credit spreads and ratings on underlying referenced obligations, yield curves and tax-exempt interest ratios. The valuation of certain interest rate as well as all credit derivative contracts also require the use of data inputs and assumptions that are determined by management and are not readily observable in the market. Under the Fair Value Measurement Topic of the ASC, Ambac is required to consider its own credit risk when measuring the fair value of derivative and other liabilities. The fair value of credit derivative liabilities was reduced by $18,020 and $15,910 at March 31, 2015 and December 31, 2014, as a result of incorporating a CVA into the valuation model for these transactions. Interest rate swaps and other derivative liabilities may also require an adjustment to fair value to reflect Ambac’s credit risk. Derivative liabilities were reduced by $77,191 and $64,547 at March 31, 2015 and December 31, 2014, as a result of Ambac CVA adjustments to derivative contracts other than credit derivatives. Additional factors considered in estimating the amount of any Ambac CVA on such contracts include collateral posting provisions, right of set-off with the counterparty, the period of time remaining on the derivatives and the pricing of recent terminations.
As described further below, certain valuation models require other inputs that are not readily observable in the market. The selection of a model to value a derivative depends on the contractual terms of, and specific risks inherent in the instrument as well as the availability of pricing information in the market.
For derivatives that are less complex and trade in liquid markets or may be valued primarily by reference to interest rates and yield curves that are observable and regularly quoted, such as interest rate swaps, we utilize vendor-developed models. These models provide the net present value of the derivatives based on contractual terms and observable market data. Downgrades of Ambac Assurance, as guarantor of the financial services derivatives, have increased collateral requirements and triggered termination provisions in certain interest rate swaps. Termination activity since the initial rating downgrades of Ambac Assurance provided additional information about the replacement and/or exit value of certain financial services derivatives, which has been incorporated into the fair value of these derivatives as appropriate. Generally, the need for counterparty (or Ambac) CVAs is mitigated by the existence of collateral posting agreements under which adequate collateral has been posted. Derivative contracts entered into with financial guarantee customers are not subject to collateral posting agreements. Counterparty credit risk related to such customer derivative assets is included in our fair value adjustments.
For derivatives that do not trade, or trade in less liquid markets such as credit derivatives, an internal model is used because such instruments tend to be unique, contain complex or heavily modified and negotiated terms, and pricing information is not readily available in the market. Derivative fair value models and the related assumptions are continuously re-evaluated by management and enhanced, as appropriate, based on improvements in modeling techniques. Ambac has not made any significant changes to its modeling techniques or related model inputs for the periods presented.
Credit Derivatives (“CDS”):
Fair value of Ambac’s CDS is determined using internal valuation models and represents the net present value of the difference between the fees Ambac originally charged for the credit protection and our estimate of what a financial guarantor of comparable credit quality would hypothetically charge to provide the same protection at the balance sheet date. Ambac competed in the financial guarantee market, which differs from the credit markets where Ambac-insured obligations may trade. As a financial guarantor, Ambac assumes only credit risk; we do not assume other risks and costs inherent in direct ownership of the underlying reference securities. Additionally, as a result of having the ability to influence our CDS counterparty in certain investor decisions, financial guarantors generally have the ability to actively remediate the credit, potentially reducing the loss given a default. Financial guarantee contracts, including CDS, issued by Ambac and its competitors are typically priced to capture some portion of the spread that would be observed in the capital markets for the underlying (insured) obligation. Such pricing was well established by historical financial guarantee fees relative to capital market spreads as observed and executed in competitive markets, including in financial guarantee reinsurance and secondary market transactions. Because of this relationship and in the absence of severe credit deterioration, changes in the fair value of our credit default swaps will generally be less than changes in the fair value of the underlying reference obligations.
Key variables used in our valuation of substantially all of our credit derivatives include the balance of unpaid notional, expected term, fair values of the underlying reference obligations, reference obligation credit ratings, assumptions about current financial guarantee CDS fee levels relative
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to reference obligation spreads and the CVA applied against Ambac Assurance liabilities by market participants. Notional balances, expected remaining term and reference obligation credit ratings are monitored and determined by Ambac’s portfolio risk management group. Fair values of the underlying reference obligations are obtained from broker quotes when available, or are estimated internally. Implicit in the fair values we obtain on the underlying reference obligations are the market’s assumptions about default probabilities, default timing, correlation, recovery rates and collateral values.
Broker quotes on the reference obligations named in our CDS contracts represent an input to determine the estimated fair value of the CDS contract. Broker quotes are indicative values for the reference obligation and generally do not represent a bid for the reference instrument. Such quotes follow methodologies that are generally consistent with those used to value similar assets on the quote providers’ own books. Methodologies may differ among brokers but are understood to reflect observable trading activity (when available) and modeling that relies on empirical data and reasonable assumptions. For certain CDS contracts referencing unsecuritized pools of assets, we will obtain counterparty quotes on the credit derivative itself. Such quotes are adjusted to reflect Ambac’s own credit risk when determining the fair value of credit derivative liabilities. Third party reference obligation values or specific credit derivative quotes were used in the determination of CDS fair values related to transactions representing 86% of CDS gross par outstanding and 65% of the CDS derivative liability as of March 31, 2015.
When broker quotes for reference obligations are not available, reference obligation prices used in the valuation model are estimated internally based on available market prices or spreads for securities or indices with similar characteristics such as underlying collateral, credit rating and expected life. Internal estimates may also consider historical quotes on the reference obligation, updated for changes in market factors and security specific developments such as credit rating changes. Reference obligation prices derived internally as described above were used in the determination of CDS fair values related to transactions representing 14% of CDS gross par outstanding and 35% of the CDS derivative liability as of March 31, 2015.
Ambac’s CDS fair value calculations are adjusted for changes in our estimates of expected loss on the reference obligations and observable changes in financial guarantee market pricing. If no adjustment is considered necessary, Ambac maintains the same percentage of the credit spread (over LIBOR) demanded in the market for the reference obligation as existed at the inception of the CDS. Therefore, absent changes in expected loss on the reference obligations or financial guarantee CDS market pricing, the financial guarantee CDS fee used for a particular contract in Ambac’s fair value calculations represent a consistent percentage, period to period, of the credit spread determinable from the reference obligation value at the balance sheet date. This results in a CDS fair value balance that fluctuates in proportion with the reference obligation value.
The amount of expected loss on a reference obligation is a function of the probability that the obligation will default and severity of loss in the event of default. Ambac’s CDS transactions were all originally underwritten with extremely low expected losses. Both the reference obligation spreads and Ambac’s CDS fees at the inception of these transactions reflected these low expected losses. When reference obligations experience credit deterioration, there is an increase in the probability of default on the obligation and, therefore, an increase in expected loss. Ambac reflects the effects of changes in expected loss on the fair value of its CDS contracts by increasing the percentage of the reference obligation spread (over LIBOR) which would be captured as a CDS fee (“relative change ratio”) at the valuation date, resulting in a higher mark-to-market loss on our CDS relative to any price decline on the reference obligation. The fundamental assumption is that financial guarantee CDS fees will increase relative to reference obligation spreads as the underlying credit quality of the reference obligation deteriorates and approaches payment default. For example, if the credit spread of an underlying reference obligation was 80 basis points at the inception of a transaction and Ambac received a 20 basis point fee for issuing a CDS on that obligation, the relative change ratio, which represents the CDS fee to cash market spread Ambac would utilize in its valuation calculation, would be 25%. If the reference obligation spread increased to 100 basis points in the current reporting period, absent any observable changes in financial guarantee CDS market pricing or credit deterioration, Ambac’s current period CDS fee would be computed by multiplying the current reference obligation spread of 100 basis points by the relative change ratio of 25%, resulting in a 25 basis point fee. Thus, the model indicates we would need to receive an additional 5 basis points (25 basis points currently less the 20 basis points contractually received) for issuing a CDS in the current reporting period for this reference obligation. We would then discount the product of the notional amount of the CDS and the 5 basis point hypothetical CDS fee increase, over the weighted average life of the reference obligation to compute the current period mark-to-market loss. Using the same example, if the reference obligation spread increased to 100 basis points and there was credit deterioration as evidenced by an internal rating downgrade which increased the relative change ratio from 25% to 35%, we would estimate a 15 basis point CDS fee increase in our model (35% of 100 basis points reference obligation spread, or 35 basis points currently, less the 20 basis points contractually received). Therefore, we would record a higher mark-to-market loss based on the computations described above absent any observable changes in financial guarantee CDS market pricing.
We do not adjust the relative change ratio until an actual internal rating downgrade has occurred unless we observe new pricing on financial guarantee CDS contracts. However, because we have active surveillance procedures in place for our entire CDS portfolio, particularly for transactions at or near a below investment grade threshold, we believe it is unlikely that an internal downgrade would lag the actual credit deterioration of a transaction for any meaningful time period. The factors used to increase the relative change ratio are based on rating agency probability of default percentages determined by management to be appropriate for the relevant bond type. That is, the probability of default associated with the respective tenor and internal rating of each CDS transaction is utilized in the computation of the relative change ratio in our CDS valuation model. The new relative change ratio in the event of an internal downgrade of the reference obligation is calculated as the weighted average of: (i) a given transaction’s inception relative change ratio and (ii) a ratio of 100%. The weight given to the inception relative change ratio is 100% minus the current probability of default (the probability of non-default) and the weight given to using a 100% relative change ratio is the probability of default. For example, assume a transaction having an inception relative change ratio of 33% is downgraded to B-during the period, at which time it has an estimated remaining life of 8 years. If the estimated probability of default for an 8 year, B-rated credit of this type is 60% then the revised relative change ratio will be 73.2%. The revised relative change ratio can be calculated as 33% x (100% - 60%) + 100% x 60% = 73.2%.
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As noted above, reference obligation spreads incorporate market perceptions of default probability and loss severity, as well as liquidity risk and other factors. By increasing the relative change ratio in our calculations proportionally to default probabilities, Ambac incorporates into its CDS fair value the higher expected loss on the reference obligation (probability of default x loss severity), by increasing the portion of reference obligation spread that should be paid to the CDS provider.
Ambac incorporates its own credit risk into the valuation of its CDS liabilities by applying a CVA to the calculations described above. Under our methodology, determination of the CDS fair value requires estimating hypothetical financial guarantee CDS fees for a given credit at the valuation date and estimating the present value of those fees. Our approach begins with pricing in the risk of default of the reference obligation using that obligation’s credit spread. The widening of the reference obligation spread results in a mark-to-market loss to Ambac, as the credit protection seller, and a gain to the credit protection buyer because the current cost of credit protection on the reference obligation (ignoring CDS counterparty credit risk) will be greater than the amount of the actual contractual CDS fees. The Ambac CVA represents the difference between the present value of the hypothetical fees discounted at LIBOR compared to rates that incorporate Ambac credit risk. The discount rates used to determine the Ambac CVA are estimated using relevant data points, including quoted prices of securities guaranteed by Ambac Assurance which indicate the value placed by market participants on Ambac Assurance’s insurance obligations and the fair value of Ambac Assurance surplus notes. The resulting Ambac CVA, as a percentage of the CDS mark-to-market liability determined by discounting at LIBOR, was 19.1% and 17.8% as of March 31, 2015 and December 31, 2014, respectively. In instances where narrower reference obligation spreads result in a CDS asset to Ambac, those hypothetical future CDS fees are discounted at a rate which incorporates our counterparty’s credit spread (i.e. the discount rate used is LIBOR plus the current credit spread of the counterparty).
In addition, when there are sufficient numbers of new observable transactions, negotiated settlements or other market indications of a general change in market pricing trends for CDS on a given bond type, management will adjust its assumptions about the percentage of reference obligation spreads captured as CDS fees to match the current market. No such adjustments were made during the periods presented. Ambac is not transacting CDS business currently and other guarantors have stated they have exited this product. Additionally, there have been no negotiated settlements of CDS contracts during the periods presented.
Key variables which impact the “Realized gains and losses and other settlements” component of “Net change in fair value of credit derivatives” in the Consolidated Statements of Total Comprehensive Income (Loss) are the most readily observable variables since they are based solely on the CDS contractual terms and cash settlements. Those variables include premiums received and accrued and losses paid and payable on written credit derivative contracts for the appropriate accounting period. Losses paid and payable reported in “Realized gains and losses and other settlements” include those arising after a credit event that requires a payment under the contract terms has occurred or in connection with a negotiated termination of a contract. The remaining key variables described above impact the “Unrealized gains (losses)” component of “Net change in fair value of credit derivatives.”
The net notional outstanding of Ambac’s CDS contracts were $1,594,571 and $1,529,759 at March 31, 2015 and December 31, 2014, respectively. Credit derivative liabilities at March 31, 2015 and December 31, 2014 had a combined net fair value of $76,377 and $73,459, respectively, and related to underlying reference obligations that are classified as either collateralized loan obligations (“CLOs”) or Other. Information about the above described model inputs used to determine the fair value of each class of credit derivatives, including the CVA as a percentage of the gross mark-to-market liability before considering Ambac credit risk (“CVA percentage”), as of March 31, 2015 and December 31, 2014 is summarized below:

| CLOs |  | Other (1)
March 31, 2015: |  |  |
Notional outstanding | $ | 466,453 |  |  | $ | 1,069,317 |
Weighted average reference obligation price | 99.1 |  |  | 86.8 |
Weighted average life (WAL) in years | 1.5 |  |  | 5.8 |
Weighted average credit rating | AA |  |  | BBB |
Weighted average relative change ratio | 36.2 | % |  | 44.8 | %
CVA percentage | 5.21 | % |  | 19.34 | %
Fair value of derivative liabilities | $ | 1,533 |  |  | $ | 74,794 |
December 31, 2014: |  |  |
Notional outstanding | $ | 549,923 |  |  | $ | 921,036 |
Weighted average reference obligation price | 98.9 |  |  | 86.8 |
Weighted average life (WAL) in years | 1.8 |  |  | 5.7 |
Weighted average credit rating | AA |  |  | BBB- |
Weighted average relative change ratio | 35.9 | % |  | 49.0 | %
CVA percentage | 5.40 | % |  | 15.82 | %
Fair value of derivative liabilities | $ | 2,027 |  |  | $ | 71,104 |

(1) | Excludes contracts for which fair values are based on credit derivative quotes rather than reference obligation quotes. Such contracts have a combined notional outstanding of $58,801, WAL of 0.9 years and liability fair value of $50 as of March 31, 2015. Other inputs to the valuation of these transactions at March 31, 2015 include weighted average quotes of less than 1% of notional, weighted average rating of A and Ambac CVA percentage of 2.02% . As

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of December 31, 2014, these contracts had a combined notional outstanding of $58,800, WAL of 1.2 years and liability fair value of $328. Other inputs to the valuation of these transactions at December 31, 2014 include weighted average quotes of 1% of notional, weighted average rating of A and Ambac CVA percentage of 2.21% .
Significant unobservable inputs for credit derivatives include WAL, internal credit rating, relative change ratio and CVA percentage. A longer (shorter) WAL, lower (higher) reference obligation credit rating, higher (lower) relative change ratio or lower (higher) CVA, in isolation, would result in an increase (decrease) in the fair value liability measurement. A change in an internal credit rating of a reference obligation in our model will generally result in a directionally opposite change in the relative change ratio. Also, a shorter (longer) WAL will generally correspond with a lower (higher) CVA percentage.
Financial Guarantees:
Fair value of net financial guarantees written represents our estimate of the cost to Ambac to completely transfer its insurance obligation to another market participant of comparable credit worthiness. In theory, this amount should be the same amount that another market participant of comparable credit worthiness would hypothetically charge in the market place, on a present value basis, to provide the same protection as of the balance sheet date. This fair value estimate of financial guarantees is presented on a net basis and includes direct and assumed contracts written, net of ceded reinsurance contracts.
The fair value estimate of financial guarantees is computed by utilizing cash flows calculated at the policy level. For direct and assumed contracts, net cash flows for each policy included: (i) installment premium receipts, (ii) estimated future gross claim payments, (iii) subrogation receipts, and (iv) unpaid claims on claims presented and not yet paid for policies allocated to the Segregated Account, including Deferred Amounts including interest thereon. For ceded reinsurance contracts, net cash flows for each policy included: (i) installment ceded premium payments, (ii) ceding commission receipts, (iii) ceded claim receipts, and (iv) ceded subrogation payments. For each assumed or ceded reinsurance contract, the respective undiscounted cash flow components are aggregated to determine if we are in a net asset or net liability position. U.S. GAAP requires that the nonperformance risk of a financial liability be included in the estimation of fair value, which includes considering Ambac Assurance’s own credit risk. Accordingly, for each contract in a net liability position, we estimate the fair value using internally developed discount rates and market pricing that incorporate Ambac’s own credit risk and subsequently apply a profit margin. This profit margin represents what another market participant would require to assume the financial guarantee contracts. Given the unique nature of financial guarantees there is a lack of observable market information to make this estimate. A profit margin was developed based on discussions with the third-party institutions with valuation expertise, discussions with industry participants and yields on Ambac Assurance surplus notes. The profit margin was 17% and 17% as of March 31, 2015 and December 31, 2014, respectively and is applied to the present value of contracts in a net liability position. The discount rates used for contracts in a net liability position are derived from the rates implicit in the fair value of surplus notes and guaranteed securities with future cash flows that are highly dependent upon Ambac financial guarantee payments. For each contract in a net asset position, we estimate the fair value using a discount rate that is commensurate with a hypothetical buyer’s cost of capital.
This methodology is based on management’s expectations of how a market participant would estimate net cash flows. We are aware of a number of factors that may cause such fair or exit value to differ, perhaps materially. For example, (i) since no financial guarantor with Ambac’s credit quality is writing new financial guarantee business, we do not have access to observable pricing data points; (ii) although the fair value accounting guidance for liabilities requires a company to consider the cost to completely transfer its obligation to another party of comparable credit worthiness, our primary insurance obligation is irrevocable and thus there is no established active market for transferring such obligations; and (iii) certain segments of Ambac's financial guarantees have been allocated to the Segregated Account and timing of the payments of such liabilities are at the sole discretion of the Rehabilitator.
Long-term Debt:
The fair value of surplus notes issued by Ambac Assurance and the Segregated Account and classified as long-term debt is internally estimated considering market transactions when available and internally developed discounted cash flow models.
Other Financial Assets and Liabilities:
The fair values of Ambac’s equity interest in Ambac sponsored special purpose entities (included in Other assets), Loans, and Obligations under investment agreements are estimated based upon internal valuation models that discount expected cash flows using discount rates consistent with the credit quality of the obligor after considering collateralization.
Variable Interest Entity Assets and Liabilities:
The financial assets and liabilities of VIEs consolidated under the Consolidation Topic of the ASC consist primarily of fixed income securities, loans, derivative and debt instruments and are generally carried at fair value. These consolidated VIEs are securitization entities which have liabilities and/or assets guaranteed by Ambac Assurance. The fair values of VIE debt instruments are determined using the same methodologies used to value Ambac’s fixed income securities in its investment portfolio as described above. VIE debt fair value is based on market prices received from dealer quotes or alternative pricing sources with reasonable levels of price transparency. Such quotes are considered Level 2 and generally consider a variety of factors, including recent trades of the same and similar securities. For those VIE debt instruments where quotes were not available, the debt instrument fair values are considered Level 3 and are based on internal discounted cash flow models. Comparable to the sensitivities of investments in fixed income securities described above, longer (shorter) expected maturities or higher (lower) yields used in the valuation model will, in isolation, result in decreases (increases) in fair value liability measurement for VIE debt. VIE debt instruments considered Level 3 include fixed rate, floating rate and zero coupon notes secured by various asset types, primarily European ABS. Information about the valuation inputs for the various VIE debt categories classified as Level 3 is as follows:
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European ABS transactions: The fair value of such obligations classified as Level 3 was $1,841,412 and $1,070,439 at March 31, 2015 and December 31, 2014, respectively. Fair values were calculated by using a discounted cash flow approach. The discount rates used were based on the rates implied from the third party quoted values (Level 2) for comparable notes from the same securitization entity. Significant inputs for the valuation at March 31, 2015 and December 31, 2014 include the following weighted averages:

March 31, 2015: |  | December 31, 2014:
a. Coupon rate: | 0.57% |  | a. Coupon rate: | 0.30%
b. Maturity: | 17.92 years |  | b. Maturity: | 21.25 years
c. Yield: | 7.30% |  | c. Yield: | 9.52%

US Commercial ABS transaction: The fair value of such obligations classified as Level 3 was $190,687 and $193,225 at March 31, 2015 and December 31, 2014, respectively. Fair values were calculated as the sum of the present value of expected future cash flows from the underlying VIE assets plus the present value of the related Ambac financial guarantee cash flows. The discount rates applied to cash flows sourced from VIE assets were based on interest rates for similar obligations. The fair value of financial guarantee cash flows include internal estimates of future loss payments by Ambac discounted at a rate that incorporates Ambac’s own credit risk. Significant inputs for the valuation at March 31, 2015 and December 31, 2014, include the following weighted averages:

March 31, 2015: |  | December 31, 2014:
a. Coupon rate: | 5.88% |  | a. Coupon rate: | 5.88%
b. Maturity: | 15.72 years |  | b. Maturity: | 15.84 years
c. Yield: | 7.50% |  | c. Yield: | 7.37%

VIE derivative asset and liability fair values are determined using valuation models. When specific derivative contractual terms are available and may be valued primarily by reference to interest rates, foreign exchange rates and yield curves that are observable and regularly quoted, the derivatives are valued using vendor-developed models. Other derivatives within the VIEs that include significant unobservable valuation inputs are valued using internally developed models. VIE derivative fair value balances at March 31, 2015 and December 31, 2014 were developed using vendor-developed models and do not use significant unobservable inputs.
The fair value of VIE assets are obtained from market quotes when available. Typically the asset fair values are not readily available from market quotes and are estimated internally. The consolidated VIEs are securitization entities in which net cash flows from assets and derivatives (after adjusting for financial guarantor cash flows and other expenses) will be paid out to note holders or equity interests. Our valuation of VIE assets (fixed income securities or loans), therefore, are derived from the fair value of notes and derivatives, as described above, adjusted for the fair value of cash flows from Ambac’s financial guarantee. The fair value of financial guarantee cash flows include: (i) estimated future premiums discounted at a rate consistent with that implicit in the fair value of the VIE’s liabilities and (ii) internal estimates of future loss payments by Ambac discounted at a rate that includes Ambac’s own credit risk. Estimated future premium payments to be paid by the VIEs were discounted at a weighted average rate of 3.5% and 4.1% at March 31, 2015 and December 31, 2014, respectively. The value of future loss payments to be paid by Ambac to the VIEs was adjusted to include an Ambac CVA appropriate for the term of expected Ambac claim payments.
Additional Fair Value Information:
The following tables present the changes in the Level 3 fair value category for the periods presented in 2015 and 2014. Ambac classifies financial instruments in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Thus, the gains and losses presented below include changes in the fair value related to both observable and unobservable inputs.
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Level 3 - Financial Assets and Liabilities Accounted for at Fair Value |  |  |  |  |  |  |  |
|  |  |  |  |  |  |  | VIE Assets and Liabilities |  |
|  | Investments |  | Other assets |  | Derivatives |  | Investments |  | Loans |  | Long-term debt |  | Total
Three Months Ended March 31, 2015: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance, beginning of period |  | $ | 198,201 |  |  | $ | 12,036 |  |  | $ | (215,346 | ) |  | $ | 2,743,050 |  |  | $ | 12,371,177 |  |  | $ | (1,263,664 | ) |  | $ | 13,845,454 |
Total gains/(losses) realized and unrealized: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings |  | 5,729 |  |  | (295 | ) |  | (13,921 | ) |  | 92,120 |  |  | 1,110,927 |  |  | (839,998 | ) |  | 354,562 |
Included in other comprehensive income |  | (5,706 | ) |  | — |  |  | — |  |  | (130,513 | ) |  | (562,621 | ) |  | 67,625 |  |  | (631,215 | )
Purchases |  | 84,504 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 84,504 |
Issuances |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Sales |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Settlements |  | (19,996 | ) |  | (1,705 | ) |  | (934 | ) |  | — |  |  | (130,282 | ) |  | 3,938 |  |  | (148,979 | )
Transfers into Level 3 |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Transfers out of Level 3 |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Balance, end of period |  | $ | 262,732 |  |  | $ | 10,036 |  |  | $ | (230,201 | ) |  | $ | 2,704,657 |  |  | $ | 12,789,201 |  |  | $ | (2,032,099 | ) |  | $ | 13,504,326 |
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date |  | $ | — |  |  | $ | (295 | ) |  | $ | (14,364 | ) |  | $ | 92,120 |  |  | $ | 1,110,927 |  |  | $ | (839,998 | ) |  | $ | 348,390 |
Three Months Ended March 31, 2014: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Balance, beginning of period |  | $ | 67,783 |  |  | $ | 13,384 |  |  | $ | (186,934 | ) |  | $ | 2,475,182 |  |  | $ | 13,398,895 |  |  | $ | (1,514,605 | ) |  | $ | 14,253,705 |
Total gains/(losses) realized and unrealized: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings |  | 419 |  |  | (262 | ) |  | (14,249 | ) |  | 55,745 |  |  | 321,847 |  |  | (190,962 | ) |  | 172,538 |
Included in other comprehensive income |  | (217 | ) |  | — |  |  | — |  |  | 15,835 |  |  | 79,802 |  |  | (8,621 | ) |  | 86,799 |
Purchases |  | — |  |  | — |  |  | — |  |  | — |  |  | 70,000 |  |  | — |  |  | 70,000 |
Issuances |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Sales |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Settlements |  | (854 | ) |  | — |  |  | (1,299 | ) |  | — |  |  | (601,092 | ) |  | 429,794 |  |  | (173,451 | )
Transfers into Level 3 |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Transfers out of Level 3 |  | (208 | ) |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | (208 | )
Balance, end of period |  | $ | 66,923 |  |  | $ | 13,122 |  |  | $ | (202,482 | ) |  | $ | 2,546,762 |  |  | $ | 13,269,452 |  |  | $ | (1,284,394 | ) |  | $ | 14,409,383 |
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date |  | $ | — |  |  | $ | (262 | ) |  | $ | (15,024 | ) |  | $ | 55,745 |  |  | $ | 316,714 |  |  | $ | (187,824 | ) |  | $ | 169,349 |

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The tables below provide roll-forward information by class of investments and derivatives measured using significant unobservable inputs.

Level 3 - Investments by Class: |  |  |  |  |  |  |  |  |  |  |  |
|  | Collateralized Debt Obligations |  | Other Asset Backed Securities |  | Corporate Obligations |  | U.S. Agency Obligations |  | Non-Agency RMBS |  | Total Investments
Three Months Ended March 31, 2015: |  |  |  |  |  |  |  |  |  |  |  |
Balance, beginning of period |  | $ | — |  |  | $ | — |  |  | $ | 3,808 |  |  | $ | — |  |  | $ | 194,393 |  |  | $ | 198,201 |
Total gains/(losses) realized and unrealized: |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings |  | — |  |  | — |  |  | (19 | ) |  | — |  |  | 5,748 |  |  | 5,729 |
Included in other comprehensive income |  | — |  |  | — |  |  | (286 | ) |  | — |  |  | (5,420 | ) |  | (5,706 | )
Purchases |  | — |  |  | — |  |  | — |  |  | — |  |  | 84,504 |  |  | 84,504 |
Issuances |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Sales |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Settlements |  | — |  |  | — |  |  | (3,503 | ) |  | — |  |  | (16,493 | ) |  | (19,996 | )
Transfers into Level 3 |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Transfers out of Level 3 |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Balance, end of period |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 262,732 |  |  | $ | 262,732 |
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Three Months Ended March 31, 2014: |  |  |  |  |  |  |  |  |  |  |  |
Balance, beginning of period |  | $ | — |  |  | $ | 64,073 |  |  | $ | 3,502 |  |  | $ | 208 |  |  | $ | — |  |  | $ | 67,783 |
Total gains/(losses) realized and unrealized: |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings |  | — |  |  | 443 |  |  | (24 | ) |  | — |  |  | — |  |  | 419 |
Included in other comprehensive income |  | — |  |  | (295 | ) |  | 78 |  |  | — |  |  | — |  |  | (217 | )
Purchases |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Issuances |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Sales |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Settlements |  | — |  |  | (854 | ) |  | — |  |  | — |  |  | — |  |  | (854 | )
Transfers into Level 3 |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Transfers out of Level 3 |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (208 | ) |  | $ | — |  |  | $ | (208 | )
Balance, end of period |  | $ | — |  |  | $ | 63,367 |  |  | $ | 3,556 |  |  | $ | — |  |  | $ | — |  |  | $ | 66,923 |
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |

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Level 3 - Derivatives by Class: |  |  |  |  |  |
|  | Interest Rate Swaps |  | Credit Derivatives |  | Total Derivatives
Three Months Ended March 31, 2015: |  |  |  |  |  |
Balance, beginning of period |  | $ | (141,887 | ) |  | $ | (73,459 | ) |  | $ | (215,346 | )
Total gains/(losses) realized and unrealized: |  |  |  |  |  |
Included in earnings |  | (11,422 | ) |  | (2,499 | ) |  | (13,921 | )
Included in other comprehensive income |  | — |  |  | — |  |  | — |
Purchases |  | — |  |  | — |  |  | — |
Issuances |  | — |  |  | — |  |  | — |
Sales |  | — |  |  | — |  |  | — |
Settlements |  | (515 | ) |  | (419 | ) |  | (934 | )
Transfers into Level 3 |  | — |  |  | — |  |  | — |
Transfers out of Level 3 |  | — |  |  | — |  |  | — |
Balance, end of period |  | $ | (153,824 | ) |  | $ | (76,377 | ) |  | $ | (230,201 | )
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date |  | $ | (11,422 | ) |  | $ | (2,942 | ) |  | $ | (14,364 | )
Three Months Ended March 31, 2014: |  |  |  |  |  |
Balance, beginning of period |  | $ | (92,612 | ) |  | $ | (94,322 | ) |  | $ | (186,934 | )
Total gains/(losses) realized and unrealized: |  |  |  |  |  |
Included in earnings |  | (21,631 | ) |  | 7,382 |  |  | (14,249 | )
Included in other comprehensive income |  | — |  |  | — |  |  | — |
Purchases |  | — |  |  | — |  |  | — |
Issuances |  | — |  |  | — |  |  | — |
Sales |  | — |  |  | — |  |  | — |
Settlements |  | (524 | ) |  | (775 | ) |  | (1,299 | )
Transfers into Level 3 |  | — |  |  | — |  |  | — |
Transfers out of Level 3 |  | — |  |  | — |  |  | — |
Balance, end of period |  | $ | (114,767 | ) |  | $ | (87,715 | ) |  | $ | (202,482 | )
The amount of total gains/(losses) included in earnings attributable to the change in unrealized gains or losses relating to assets and liabilities still held at the reporting date |  | $ | (21,631 | ) |  | $ | 6,607 |  |  | $ | (15,024 | )

Invested assets and VIE long-term debt are transferred into Level 3 when internal valuation models that include significant unobservable inputs are used to estimate fair value. All such securities that have internally modeled fair values have been classified as Level 3. Derivative instruments are transferred into Level 3 when the use of unobservable inputs becomes significant to the overall valuation. All transfers out of Level 3 represent transfers between Level 3 and Level 2 for the periods presented. There were no transfers between Level 1 and Level 2 for the periods presented. All transfers between fair value hierarchy Levels 1, 2, and 3 are recognized at the beginning of each accounting period.
Gains and losses (realized and unrealized) relating to Level 3 assets and liabilities included in earnings for the affected periods are reported as follows:

|  | Net investment income |  | Realized gains or (losses) and other settlements on credit derivative contracts |  | Unrealized gains or (losses) on credit derivative contracts |  | Derivative products revenues (interest rate swaps) |  | Income (loss) on variable interest entities |  | Other income or (loss)
Three Months Ended March 31, 2015: |  |  |  |  |  |  |  |  |  |  |  |
Total gains or losses included in earnings for the period |  | $ | 5,729 |  |  | $ | 419 |  |  | $ | (2,918 | ) |  | $ | (11,422 | ) |  | $ | 363,049 |  |  | $ | (295 | )
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date |  | — |  |  | — |  |  | (2,942 | ) |  | (11,422 | ) |  | 363,049 |  |  | (295 | )
Three Months Ended March 31, 2014: |  |  |  |  |  |  |  |  |  |  |  |
Total gains or losses included in earnings for the period |  | $ | 419 |  |  | $ | 775 |  |  | $ | 6,607 |  |  | $ | (21,631 | ) |  | $ | 186,630 |  |  | $ | (262 | )
Changes in unrealized gains or losses relating to the assets and liabilities still held at the reporting date |  | — |  |  | — |  |  | 6,607 |  |  | (21,631 | ) |  | 184,635 |  |  | (262 | )

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8. INVESTMENTS
Ambac’s 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.
The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at March 31, 2015 and December 31, 2014 were as follows:

|  | Amortized Cost |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Estimated Fair Value |  | Non-credit other- than-temporary Impairments (1)
March 31, 2015 |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |
Municipal obligations |  | $ | 517,256 |  |  | $ | 12,136 |  |  | $ | 4,204 |  |  | $ | 525,188 |  |  | $ | — |
Corporate obligations |  | 1,588,962 |  |  | 24,097 |  |  | 3,290 |  |  | 1,609,769 |  |  | — |
Foreign obligations |  | 123,601 |  |  | 4,038 |  |  | 2,475 |  |  | 125,164 |  |  | — |
U.S. government obligations |  | 28,983 |  |  | 1,418 |  |  | 104 |  |  | 30,297 |  |  | — |
U.S. agency obligations |  | 4,438 |  |  | — |  |  | 11 |  |  | 4,427 |  |  | — |
Residential mortgage-backed securities |  | 1,705,246 |  |  | 159,388 |  |  | 18,157 |  |  | 1,846,477 |  |  | 9,844 |
Collateralized debt obligations |  | 88,569 |  |  | 102 |  |  | 433 |  |  | 88,238 |  |  | — |
Other asset-backed securities |  | 615,831 |  |  | 21,048 |  |  | 689 |  |  | 636,190 |  |  | — |
|  | 4,672,886 |  |  | 222,227 |  |  | 29,363 |  |  | 4,865,750 |  |  | 9,844 |
Short-term |  | 220,980 |  |  | — |  |  | — |  |  | 220,980 |  |  | — |
|  | 4,893,866 |  |  | 222,227 |  |  | 29,363 |  |  | 5,086,730 |  |  | 9,844 |
Fixed income securities pledged as collateral: |  |  |  |  |  |  |  |  |  |
U.S. government obligations |  | 64,432 |  |  | 381 |  |  | — |  |  | 64,813 |  |  | — |
Total collateralized investments |  | 64,432 |  |  | 381 |  |  | — |  |  | 64,813 |  |  | — |
Total available-for-sale investments |  | $ | 4,958,298 |  |  | $ | 222,608 |  |  | $ | 29,363 |  |  | $ | 5,151,543 |  |  | $ | 9,844 |
December 31, 2014 |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |
Municipal obligations |  | $ | 523,019 |  |  | $ | 9,769 |  |  | $ | 6,996 |  |  | $ | 525,792 |  |  | $ | — |
Corporate obligations |  | 1,382,195 |  |  | 12,815 |  |  | 9,416 |  |  | 1,385,594 |  |  | — |
Foreign obligations |  | 126,041 |  |  | 3,060 |  |  | 1,344 |  |  | 127,757 |  |  | — |
U.S. government obligations |  | 42,328 |  |  | 1,078 |  |  | 427 |  |  | 42,979 |  |  | — |
U.S. agency obligations |  | 29,524 |  |  | — |  |  | 38 |  |  | 29,486 |  |  | — |
Residential mortgage-backed securities |  | 1,557,059 |  |  | 167,396 |  |  | 13,500 |  |  | 1,710,955 |  |  | 7,773 |
Collateralized debt obligations |  | 21,346 |  |  | 50 |  |  | 274 |  |  | 21,122 |  |  | — |
Other asset-backed securities |  | 833,366 |  |  | 48,794 |  |  | 159 |  |  | 882,001 |  |  | — |
|  | 4,514,878 |  |  | 242,962 |  |  | 32,154 |  |  | 4,725,686 |  |  | 7,773 |
Short-term |  | 360,069 |  |  | — |  |  | 4 |  |  | 360,065 |  |  | — |
|  | 4,874,947 |  |  | 242,962 |  |  | 32,158 |  |  | 5,085,751 |  |  | 7,773 |
Fixed income securities pledged as collateral: |  |  |  |  |  |  |  |  |  |
U.S. government obligations |  | 64,378 |  |  | — |  |  | 111 |  |  | 64,267 |  |  | — |
Total collateralized investments |  | 64,378 |  |  | — |  |  | 111 |  |  | 64,267 |  |  | — |
Total available-for-sale investments |  | $ | 4,939,325 |  |  | $ | 242,962 |  |  | $ | 32,269 |  |  | $ | 5,150,018 |  |  | $ | 7,773 |

(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, 2015 and December 31, 2014.

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The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at March 31, 2015, by contractual maturity, were as follows:

|  | Amortized Cost |  | Estimated Fair Value
Due in one year or less |  | $ | 413,150 |  |  | $ | 413,291 |
Due after one year through five years |  | 927,630 |  |  | 935,442 |
Due after five years through ten years |  | 994,286 |  |  | 1,013,939 |
Due after ten years |  | 213,586 |  |  | 217,966 |
|  | 2,548,652 |  |  | 2,580,638 |
Residential mortgage-backed securities |  | 1,705,246 |  |  | 1,846,477 |
Collateralized debt obligations |  | 88,569 |  |  | 88,238 |
Other asset-backed securities |  | 615,831 |  |  | 636,190 |
Total |  | $ | 4,958,298 |  |  | $ | 5,151,543 |

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:
The following table shows gross unrealized losses and fair values of Ambac’s available-for-sale investments, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at March 31, 2015 and December 31, 2014:

|  | 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, 2015 |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |
Municipal obligations |  | $ | 46,461 |  |  | $ | 412 |  |  | $ | 119,412 |  |  | $ | 3,792 |  |  | $ | 165,873 |  |  | $ | 4,204 |
Corporate obligations |  | 278,044 |  |  | 2,081 |  |  | 81,739 |  |  | 1,209 |  |  | 359,783 |  |  | 3,290 |
Foreign government obligations |  | 32,206 |  |  | 1,864 |  |  | 8,900 |  |  | 611 |  |  | 41,106 |  |  | 2,475 |
U.S. government obligations |  | 1,661 |  |  | 2 |  |  | 10,814 |  |  | 102 |  |  | 12,475 |  |  | 104 |
U.S. agency obligations |  | — |  |  | — |  |  | 4,359 |  |  | 11 |  |  | 4,359 |  |  | 11 |
Residential mortgage-backed securities |  | 547,706 |  |  | 17,336 |  |  | 10,266 |  |  | 821 |  |  | 557,972 |  |  | 18,157 |
Collateralized debt obligations |  | 63,834 |  |  | 289 |  |  | 4,434 |  |  | 144 |  |  | 68,268 |  |  | 433 |
Other asset-backed securities |  | 163,243 |  |  | 687 |  |  | 68 |  |  | 2 |  |  | 163,311 |  |  | 689 |
|  | 1,133,155 |  |  | 22,671 |  |  | 239,992 |  |  | 6,692 |  |  | 1,373,147 |  |  | 29,363 |
Short-term |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
|  | 1,133,155 |  |  | 22,671 |  |  | 239,992 |  |  | 6,692 |  |  | 1,373,147 |  |  | 29,363 |
Fixed income securities, pledged as collateral: |  |  |  |  |  |  |  |  |  |  |  |
U. S. government obligations |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total collateralized investments |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total temporarily impaired securities |  | $ | 1,133,155 |  |  | $ | 22,671 |  |  | $ | 239,992 |  |  | $ | 6,692 |  |  | $ | 1,373,147 |  |  | $ | 29,363 |

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|  | 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, 2014: |  |  |  |  |  |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |  |  |  |  |  |
Municipal obligations |  | $ | 77,788 |  |  | $ | 1,244 |  |  | $ | 135,076 |  |  | $ | 5,752 |  |  | $ | 212,864 |  |  | $ | 6,996 |
Corporate obligations |  | 453,504 |  |  | 4,998 |  |  | 172,045 |  |  | 4,418 |  |  | 625,549 |  |  | 9,416 |
Foreign government obligations |  | 20,827 |  |  | 748 |  |  | 14,277 |  |  | 596 |  |  | 35,104 |  |  | 1,344 |
U.S. government obligations |  | 7,223 |  |  | 154 |  |  | 14,735 |  |  | 273 |  |  | 21,958 |  |  | 427 |
U.S. agency obligations |  | 25,039 |  |  | 2 |  |  | 4,378 |  |  | 36 |  |  | 29,417 |  |  | 38 |
Residential mortgage-backed securities |  | 413,203 |  |  | 12,391 |  |  | 10,076 |  |  | 1,109 |  |  | 423,279 |  |  | 13,500 |
Collateralized debt obligations |  | 5,012 |  |  | 274 |  |  | — |  |  | — |  |  | 5,012 |  |  | 274 |
Other asset-backed securities |  | 248,823 |  |  | 155 |  |  | 68 |  |  | 4 |  |  | 248,891 |  |  | 159 |
|  | 1,251,419 |  |  | 19,966 |  |  | 350,655 |  |  | 12,188 |  |  | 1,602,074 |  |  | 32,154 |
Short-term |  | 8,803 |  |  | 4 |  |  | — |  |  | — |  |  | 8,803 |  |  | 4 |
|  | 1,260,222 |  |  | 19,970 |  |  | 350,655 |  |  | 12,188 |  |  | 1,610,877 |  |  | 32,158 |
Fixed income securities, pledged as collateral: |  |  |  |  |  |  |  |  |  |  |  |
U. S. government obligations |  | 64,267 |  |  | 111 |  |  | — |  |  | — |  |  | 64,267 |  |  | 111 |
Total collateralized investments |  | 64,267 |  |  | 111 |  |  | — |  |  | — |  |  | 64,267 |  |  | 111 |
Total temporarily impaired securities |  | $ | 1,324,489 |  |  | $ | 20,081 |  |  | $ | 350,655 |  |  | $ | 12,188 |  |  | $ | 1,675,144 |  |  | $ | 32,269 |

Management has determined that the unrealized losses reflected in the tables above are temporary in nature as of March 31, 2015 and December 31, 2014 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. 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, 2015, 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, 2015, $613,511 of the total fair value and $20,130 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, 2014, $473,656 of the total fair value and $16,001 of the unrealized loss related to below investment grade securities and non-rated securities. With respect to Ambac-wrapped securities guaranteed under policies that have been allocated to the Segregated Account, future cash flows used to measure credit impairment represents the sum of (i) the bond’s intrinsic cash flows and (ii) the estimated Ambac Assurance claim payments, including interest on Deferred Amounts. Ambac estimates the timing of such claim payment receipts but the actual timing of such amounts are at the sole discretion of the Rehabilitator. Further modifications to the Segregated Account Rehabilitation Plan or to the rules and guidelines promulgated thereunder, orders from the Rehabilitation Court or actions by the Rehabilitator with respect to the form, amount and timing of satisfying permitted policy claims, or making payments on Deferred Amounts or surplus notes, may have a material effect on the fair value of Ambac-wrapped securities and future recognition of other-than-temporary impairments. Refer to Note 1.Background and Business Description and to Note 1. Background and Business Description in the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for information relating to the amended Segregated Account Rehabilitation Plan. Ambac’s assessment about whether a decline in value is other-than-temporary
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reflects management’s current judgment regarding facts and circumstances specific to a security and the factors noted above, including Ambac's intention to sell securities and ability to hold temporarily impaired securities until recovery. If that judgment changes, Ambac may ultimately record a charge for other-than-temporary impairment in future periods.
Municipal and corporate obligations
The gross unrealized losses on municipal and corporate obligations as of March 31, 2015 are primarily the result of the increase in interest rates since the Fresh Start Reporting Date of April 30, 2013. 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.
Residential mortgage-backed securities
Of the $18,157 of unrealized losses on residential mortgage-backed securities, $16,631 is attributable to Ambac-wrapped securities. The unrealized loss on these securities is primarily the result of discount accretion, which has exceeded the increase in fair value since the Fresh Start Reporting Date of April 30, 2013. As part of the quarterly impairment review process, management estimates expected future cash flows from residential mortgage-backed securities. This approach includes the utilization of market accepted software models 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. Additionally, for Ambac-wrapped securities that are allocated to the Segregated Account, expected future cash flows include assumptions about the timing of Ambac Assurance claim payments, including interest on Deferred Amounts, although the actual timing of such payments are at the sole discretion of the Rehabilitator. These assumptions are used to project future cash flows for each security. Management considered this analysis in making our determination that a credit loss has not occurred at March 31, 2015 on these transactions.
Realized Gains and Losses and Other-Than-Temporary Impairments:
The following table details amounts included in net realized gains and other-than-temporary impairments included in earnings for the affected periods:

|  | Three Months Ended March 31,
|  | 2015 |  | 2014
Gross realized gains on securities |  | $ | 50,654 |  |  | $ | 19,576 |
Gross realized losses on securities |  | (3,737 | ) |  | (1,128 | )
Foreign exchange gains (losses) |  | 7,184 |  |  | (2,159 | )
Net realized gains |  | $ | 54,101 |  |  | $ | 16,289 |
Net other-than-temporary impairments (1) |  | $ | (3,119 | ) |  | $ | (10,392 | )

(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.

Since commencement of the Segregated Account Rehabilitation Proceedings, changes in the estimated timing of claim payments have resulted in adverse changes in projected cash flows on certain impaired Ambac-wrapped securities. Such changes in estimated claim payments on Ambac-wrapped securities contributed to net other-than-temporary impairments for the periods presented in the table above. Further changes to the timing of estimated claim payments could result in additional other-than-temporary impairment charges in the future. Ambac’s other-than-temporary impairments for 2014 also relate to the company’s intent to sell certain securities that were in an unrealized loss position as of March 31, 2014. Future changes in our estimated liquidity needs could result in a determination that Ambac no longer has the ability to hold additional securities that are in an unrealized loss position, which could result in additional other-than-temporary impairment charges.
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The following table presents a roll-forward of Ambac’s cumulative credit losses on debt securities held as of March 31, 2015 and 2014 for which a portion of an other-than-temporary impairment was recognized in other comprehensive income:

|  | Credit Impairment
Balance at January 1, 2015 |  | $ | 14,062 |
Additions for credit impairments recognized on: |  |
Securities not previously impaired |  | 1,660 |
Securities previously impaired |  | 1,457 |
Reductions for credit impairments previously recognized on: |  |
Securities that matured or were sold during the period |  | — |
Balance at March 31, 2015 |  | $ | 17,179 |
Balance at January 1, 2014 |  | $ | 1,182 |
Additions for credit impairments recognized on: |  |
Securities not previously impaired |  | 4,767 |
Securities previously impaired |  | — |
Reductions for credit impairments previously recognized on: |  |
Securities that matured or were sold during the period |  | — |
Balance at March 31, 2014 |  | $ | 5,949 |

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 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, these 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 the collateral or collateral held directly in the investment portfolio and (ii) how that collateral was pledged to various investment agreement, derivative and repurchase agreement counterparties at March 31, 2015 and December 31, 2014:

|  | Fair Value of Cash and Underlying Securities |  | Fair Value of Cash and Securities Pledged to Investment Agreement Counterparties |  | Fair Value of Cash and Securities Pledged to Derivative Counterparties
March 31, 2015: |  |  |  |  |  |
Sources of Collateral: |  |  |  |  |  |
Cash and securities pledged directly from the investment portfolio |  | $ | 368,979 |  |  | $ | 108,469 |  |  | $ | 260,510 |
December 31, 2014: |  |  |  |  |  |
Sources of Collateral: |  |  |  |  |  |
Cash and securities pledged directly from the investment portfolio |  | $ | 379,423 |  |  | $ | 156,916 |  |  | $ | 222,507 |

Securities carried at $6,842 and $6,790 at March 31, 2015 and December 31, 2014, respectively, were deposited by Ambac Assurance and Everspan with governmental authorities or designated custodian banks as required by laws affecting insurance companies.
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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. 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, 2015 and December 31, 2014, respectively:

|  | Municipal obligations |  | Corporate obligations |  | Mortgage and asset- backed securities |  | Total |  | Weighted Average Underlying Rating (1)
March 31, 2015: |  |  |  |  |  |  |  |  |  |
Ambac Assurance Corporation (2) |  | $ | 54,124 |  |  | $ | — |  |  | $ | 2,078,084 |  |  | $ | 2,132,208 |  |  | CCC-
Assured Guaranty Municipal Corporation |  | 121,519 |  |  | — |  |  | — |  |  | 121,519 |  |  | A
National Public Finance Guarantee Corporation |  | 64,693 |  |  | — |  |  | — |  |  | 64,693 |  |  | A-
MBIA Insurance Corporation |  | — |  |  | 32,265 |  |  | — |  |  | 32,265 |  |  | A+
Total |  | $ | 240,336 |  |  | $ | 32,265 |  |  | $ | 2,078,084 |  |  | $ | 2,350,685 |  |  | CCC
December 31, 2014: |  |  |  |  |  |  |  |  |  |
Ambac Assurance Corporation (2) |  | $ | 53,164 |  |  | $ | — |  |  | $ | 2,146,555 |  |  | $ | 2,199,719 |  |  | CCC-
Assured Guaranty Municipal Corporation |  | 119,492 |  |  | — |  |  | — |  |  | 119,492 |  |  | A
National Public Finance Guarantee Corporation |  | 67,895 |  |  | — |  |  | — |  |  | 67,895 |  |  | A-
MBIA Insurance Corporation |  | — |  |  | 32,460 |  |  | — |  |  | 32,460 |  |  | A+
Total |  | $ | 240,551 |  |  | $ | 32,460 |  |  | $ | 2,146,555 |  |  | $ | 2,419,566 |  |  | 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 $51,395 at March 31, 2015 and December 31, 2014, insured by Ambac UK.

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

|  | Three Months Ended March 31,
|  | 2015 |  | 2014
Fixed income securities |  | $ | 65,585 |  |  | $ | 71,231 |
Short-term investments |  | 42 |  |  | 57 |
Loans |  | 132 |  |  | 117 |
Investment expense |  | (2,427 | ) |  | (2,598 | )
Securities available-for-sale and short-term |  | 63,332 |  |  | 68,807 |
Other investments |  | 9,651 |  |  | 1,994 |
Total net investment income |  | $ | 72,983 |  |  | $ | 70,801 |

Net investment income from Other investments primarily represents changes in fair value on securities classified as trading or under the fair value option. The portion of net unrealized gains related to such securities still held at the end of each period is as follows:

|  | Three Months Ended March 31,
|  | 2015 |  | 2014
Net gains recognized during the period on trading securities |  | $ | 7,819 |  |  | $ | 1,994 |
Less: net gains (losses) recognized during the reporting period on trading securities sold during the period |  | 1,564 |  |  | (455 | )
Unrealized gains recognized during the reporting period on trading securities still held at the reporting date |  | $ | 6,255 |  |  | $ | 2,449 |

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9. DERIVATIVE INSTRUMENTS
The following tables summarize the gross fair values of individual derivative instruments and the impact of legal rights of offset as reported in the Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014:

| Gross Amounts of Recognized Assets / Liabilities |  | Gross Amounts Offset in the Consolidated Balance Sheet |  | Net Amounts of Assets/ Liabilities Presented in the Consolidated Balance Sheet |  | Gross Amount of Collateral Received / Pledged Not Offset in the Consolidated Balance Sheet |  | Net Amount
March 31, 2015: |  |  |  |  |  |  |  |  |
Derivative Assets: |  |  |  |  |  |  |  |  |
Credit derivatives | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Interest rate swaps | 182,103 |  |  | 68,481 |  |  | 113,622 |  |  | — |  |  | 113,622 |
Total non-VIE derivative assets | $ | 182,103 |  |  | $ | 68,481 |  |  | $ | 113,622 |  |  | $ | — |  |  | $ | 113,622 |
Derivative Liabilities: |  |  |  |  |  |  |  |  |
Credit derivatives | $ | 76,377 |  |  | $ | — |  |  | $ | 76,377 |  |  | $ | — |  |  | $ | 76,377 |
Interest rate swaps | 438,518 |  |  | 68,481 |  |  | 370,037 |  |  | 196,039 |  |  | 173,998 |
Futures contracts | 942 |  |  | — |  |  | 942 |  |  | 942 |  |  | — |
Total non-VIE derivative liabilities | $ | 515,837 |  |  | $ | 68,481 |  |  | $ | 447,356 |  |  | $ | 196,981 |  |  | $ | 250,375 |
Variable Interest Entities: |  |  |  |  |  |  |  |  |
Interest rate swaps | $ | 2,081,082 |  |  | $ | — |  |  | $ | 2,081,082 |  |  | $ | — |  |  | $ | 2,081,082 |
Currency swaps | 44,631 |  |  | — |  |  | 44,631 |  |  | — |  |  | 44,631 |
Total VIE derivative liabilities | $ | 2,125,713 |  |  | $ | — |  |  | $ | 2,125,713 |  |  | $ | — |  |  | $ | 2,125,713 |
December 31, 2014: |  |  |  |  |  |  |  |  |
Derivative Assets: |  |  |  |  |  |  |  |  |
Credit derivatives | $ | 2,043 |  |  | $ | — |  |  | $ | 2,043 |  |  | $ | — |  |  | $ | 2,043 |
Interest rate swaps | 161,640 |  |  | 54,666 |  |  | 106,974 |  |  | — |  |  | 106,974 |
Total non-VIE derivative assets | $ | 163,683 |  |  | $ | 54,666 |  |  | $ | 109,017 |  |  | $ | — |  |  | $ | 109,017 |
Derivative Liabilities: |  |  |  |  |  |  |  |  |
Credit derivatives | $ | 75,502 |  |  | $ | — |  |  | $ | 75,502 |  |  | $ | — |  |  | $ | 75,502 |
Interest rate swaps | 385,546 |  |  | 54,666 |  |  | 330,880 |  |  | 169,573 |  |  | 161,307 |
Futures contracts | 562 |  |  | — |  |  | 562 |  |  | 562 |  |  | — |
Total non-VIE derivative liabilities | $ | 461,610 |  |  | $ | 54,666 |  |  | $ | 406,944 |  |  | $ | 170,135 |  |  | $ | 236,809 |
Variable Interest Entities: |  |  |  |  |  |  |  |  |
Interest rate swaps | $ | 2,133,268 |  |  | $ | — |  |  | $ | 2,133,268 |  |  | $ | — |  |  | $ | 2,133,268 |
Currency swaps | 66,895 |  |  | — |  |  | 66,895 |  |  | — |  |  | 66,895 |
Total VIE derivative liabilities | $ | 2,200,163 |  |  | $ | — |  |  | $ | 2,200,163 |  |  | $ | — |  |  | $ | 2,200,163 |

Amounts recognized for the right to reclaim cash collateral or the obligation to return cash collateral are not offset against fair value amounts recognized for derivative instruments on the Consolidated Balance Sheets. The amounts representing the right to reclaim cash collateral and posted margin, recorded in “Other assets” were $195,697 and $158,240 as of March 31, 2015 and December 31, 2014, respectively. There were no amounts held representing an obligation to return cash collateral as of March 31, 2015 and December 31, 2014.
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The following tables summarize the location and amount of gains and losses of derivative contracts in the Consolidated Statements of Total Comprehensive Income for the three months ended March 31, 2015 and 2014:

| Location of Gain or (Loss) Recognized in Consolidated Statements of Total Comprehensive Income |  | Amount of Gain or (Loss) Recognized in Consolidated Statement of Total Comprehensive Income
|  | Three Months Ended March 31,
|  | 2015 |  | 2014
Financial Guarantee: |  |  |  |  |
Credit derivatives | Net change in fair value of credit derivatives |  | $ | (2,499 | ) |  | $ | 7,382 |
Financial Services derivatives products: |  |  |  |  |
Interest rate swaps | Derivative products |  | (35,547 | ) |  | (51,849 | )
Futures contracts | Derivative products |  | (2,227 | ) |  | (1,992 | )
Total Financial Services derivative products |  |  | (37,774 | ) |  | (53,841 | )
Variable Interest Entities: |  |  |  |  |
Currency swaps | Income (loss) on variable interest entities |  | 22,264 |  |  | 5,408 |
Interest rate swaps | Income (loss) on variable interest entities |  | 52,186 |  |  | (77,792 | )
Total Variable Interest Entities |  |  | 74,450 |  |  | (72,384 | )
Total derivative contracts |  |  | $ | 34,177 |  |  | $ | (118,843 | )

Financial Guarantee Credit Derivatives:
Credit derivatives, which are privately negotiated contracts, provide the counterparty with credit protection against the occurrence of a specific event such as a payment default or bankruptcy relating to an underlying obligation. Upon a credit event, Ambac is generally required to make payments equal to the difference between the scheduled debt service payment and the actual payment made by the issuer. Substantially all of Ambac’s credit derivative contracts relate to structured finance transactions. Credit derivatives issued are insured by Ambac Assurance. None of the outstanding credit derivative transactions at March 31, 2015 include ratings based collateral-posting triggers or otherwise require Ambac to post collateral regardless of Ambac’s ratings or the size of the mark to market exposure to Ambac.
Our remaining outstanding credit derivatives were written on a “pay-as-you-go” basis. Similar to an insurance policy execution, pay-as-you-go provides that Ambac pays interest shortfalls on the referenced transaction as they are incurred on each scheduled payment date, but only pays principal shortfalls upon the earlier of (i) the date on which the assets designated to fund the referenced obligation have been disposed of and (ii) the legal final maturity date of the referenced obligation.
Ambac maintains internal credit ratings on its guaranteed obligations, including credit derivative contracts, solely to indicate management’s view of the underlying credit quality of the guaranteed obligations. Independent rating agencies may have assigned different ratings on the credits in Ambac’s portfolio than Ambac’s internal ratings. The following tables summarize the gross principal notional outstanding for CDS contracts, by Ambac rating, for each major category as of March 31, 2015 and December 31, 2014:

| CLO |  | Other |  | Total
Ambac Rating - March 31, 2015: |  |  |  |  |
AAA | $ | — |  |  | $ | — |  |  | $ | — |
AA | 466,453 |  |  | 303,860 |  |  | 770,313 |
A | — |  |  | 43,160 |  |  | 43,160 |
BBB (1) | — |  |  | 515,578 |  |  | 515,578 |
Below investment grade (2) | — |  |  | 265,520 |  |  | 265,520 |
Total | $ | 466,453 |  |  | $ | 1,128,118 |  |  | $ | 1,594,571 |
Ambac Rating - December 31, 2014: |  |  |  |  |
AAA | $ | — |  |  | $ | — |  |  | $ | — |
AA | 549,923 |  |  | 217,680 |  |  | 767,603 |
A | — |  |  | 43,160 |  |  | 43,160 |
BBB (1) | — |  |  | 448,249 |  |  | 448,249 |
Below investment grade (2) | — |  |  | 270,747 |  |  | 270,747 |
Total | $ | 549,923 |  |  | $ | 979,836 |  |  | $ | 1,529,759 |

(1) | BBB internal ratings reflect bonds which are of medium grade credit quality with adequate capacity to pay interest and repay principal. Certain protective elements and margins may weaken under adverse economic conditions and changing circumstances. These bonds are more likely than higher rated bonds to exhibit unreliable protection levels over all cycles.

(2) | Below investment grade internal ratings reflect bonds which are of speculative grade credit quality with the adequacy of future margin levels for payment of interest and repayment of principal potentially adversely affected by major ongoing uncertainties or exposure to adverse conditions.

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The tables below summarize information by major category as of March 31, 2015 and December 31, 2014:

| CLO |  | Other |  | Total
March 31, 2015: |  |  |  |  |
Number of CDS transactions | 5 |  |  | 10 |  |  | 15 |
Remaining expected weighted-average life of obligations (in years) | 1.5 |  |  | 5.6 |  |  | 4.4 |
Gross principal notional outstanding | $ | 466,453 |  |  | $ | 1,128,118 |  |  | $ | 1,594,571 |
Net derivative liabilities at fair value | $ | 1,533 |  |  | $ | 74,844 |  |  | $ | 76,377 |
December 31, 2014: |  |  |  |  |
Number of CDS transactions | 6 |  |  | 10 |  |  | 16 |
Remaining expected weighted-average life of obligations (in years) | 1.8 |  |  | 5.4 |  |  | 4.1 |
Gross principal notional outstanding | $ | 549,923 |  |  | $ | 979,836 |  |  | $ | 1,529,759 |
Net derivative liabilities at fair value | $ | 2,027 |  |  | $ | 71,432 |  |  | $ | 73,459 |

The maximum potential amount of future payments under Ambac’s credit derivative contracts is generally the gross principal notional outstanding amount included in the above table plus future interest payments payable by the derivative reference obligations. Since Ambac’s credit derivatives typically reference obligations of or assets held by special purpose entities that meet the definition of a VIE, the amount of maximum potential future payments for credit derivatives is included in the table in Note 3. Special Purpose Entities.
Changes in fair value of Ambac’s credit derivative contracts are accounted for at fair value since they do not qualify for the financial guarantee scope exception under the Derivatives and Hedging Topic of the ASC. Changes in fair value are recorded in “Net change in fair value of credit derivatives” on the Consolidated Statements of Total Comprehensive Income (Loss). Although CDS contracts are accounted for at fair value, they are surveilled similar to non-derivative financial guarantee contracts. As with financial guarantee insurance policies, Ambac’s risk group tracks credit migration of CDS contracts’ reference obligations from period to period.
Adversely classified credits are assigned risk classifications by the risk group. As of March 31, 2015, there are four CDS contracts on Ambac’s adversely classified credit listing, with a net derivative liability fair value of $61,338 and gross notional principal outstanding of $265,520. As of December 31, 2014, there were four CDS contracts on Ambac’s adversely classified credit listing, with a net derivative liability fair value of $60,729 and total notional principal outstanding of $270,747.
Financial Services Derivative Products:
Ambac, through its subsidiary Ambac Financial Services (“AFS”), provides interest rate and currency swaps to states, municipalities and their authorities, asset-backed issuers and other entities in connection with their financings. AFS manages its interest rate swaps business with the goal of retaining some basis risk and excess interest rate sensitivity as an economic hedge against the effects of rising interest rates elsewhere in the Company, including on Ambac’s financial guarantee exposures. As of March 31, 2015 and December 31, 2014 the notional amounts of AFS’s trading derivative products are as follows:

| Notional
Type of derivative | March 31, 2015 |  | December 31, 2014
Interest rate swaps—receive-fixed/pay-variable | $ | 760,808 |  |  | $ | 782,904 |
Interest rate swaps—pay-fixed/receive-variable | 1,465,871 |  |  | 1,479,650 |
Interest rate swaps—basis swaps | 55,800 |  |  | 55,800 |
Futures contracts | 60,000 |  |  | 80,000 |

Derivatives of Consolidated Variable Interest Entities
Certain VIEs consolidated under the Consolidation Topic of the ASC entered into derivative contracts to meet specified purposes within the securitization structure. The notional for VIE derivatives outstanding as of March 31, 2015 and December 31, 2014 are as follows:

| Notional
Type of VIE derivative | March 31, 2015 |  | December 31, 2014
Interest rate swaps—receive-fixed/pay-variable | $ | 1,629,458 |  |  | $ | 1,710,344 |
Interest rate swaps—pay-fixed/receive-variable | 3,003,021 |  |  | 3,152,090 |
Currency swaps | 690,386 |  |  | 724,656 |
Credit derivatives | 16,249 |  |  | 18,278 |

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Contingent Features in Derivatives Related to Ambac Credit Risk
Ambac’s interest rate swaps with professional swap-dealer counterparties and certain front-end counterparties are generally executed under standardized derivative documents including collateral support and master netting agreements. Under these agreements, Ambac is required to post collateral in the event net unrealized losses exceed predetermined threshold levels. Additionally, given that Ambac Assurance is no longer rated by an independent rating agency, counterparties have the right to terminate the swap positions.
As of March 31, 2015 and December 31, 2014, the net liability fair value of all derivative instruments with contingent features linked to Ambac’s own credit risk was $107,213 and $92,869, respectively, related to which Ambac had posted assets as collateral with a fair value of $136,810 and $118,844, respectively. All such ratings-based contingent features have been triggered as requiring maximum collateral levels to be posted by Ambac while preserving counterparties’ rights to terminate the contracts. Assuming all contracts terminated on March 31, 2015, settlement of collateral balances and net derivative liabilities would result in a net receipt of cash and/or securities by Ambac. If counterparties elect to exercise their right to terminate, the actual termination payment amounts will be determined in accordance with derivative contract terms, which may result in amounts that differ from market values as reported in Ambac’s financial statements.
10. INCOME TAXES
Ambac files a consolidated Federal income tax return with its subsidiaries. Ambac and its subsidiaries also file separate or combined income tax returns in various states, local and foreign jurisdictions. The following are the major jurisdictions in which Ambac and its affiliates operate and the earliest tax years subject to examination:

Jurisdiction | Tax Year
United States | 2010
New York State | 2011
New York City | 2011
United Kingdom | 2009
Italy | 2009

As of March 31, 2015 Ambac had loss carryforwards totaling $5,225,954. This includes carryforwards of $133,626 relating to U.S. capital losses, $182,059 of Ambac UK loss carryforwards, and an ordinary U. S. federal net operating tax carryforward of approximately $4,910,269, which, if not utilized, will begin expiring in 2029, and will fully expire in 2034.
The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities and deferred tax assets at March 31, 2015 and December 31, 2014 are presented below:

| March 31, 2015 |  | December 31, 2014
Deferred tax liabilities: |  |  |
Insurance intangible | $ | 471,553 |  |  | $ | 493,822 |
Variable interest entities | 11,611 |  |  | 14,149 |
Investments | 141,208 |  |  | 138,072 |
Unearned premiums and credit fees | 101,647 |  |  | 104,589 |
Other | 33,763 |  |  | 33,835 |
Total deferred tax liabilities | 759,782 |  |  | 784,467 |
Deferred tax assets: |  |  |
Net operating loss and capital carryforward | 1,829,084 |  |  | 1,890,551 |
Loss reserves | 146,429 |  |  | 185,881 |
Compensation | 5,469 |  |  | 5,276 |
AMT Credits | 11,899 |  |  | 10,359 |
Other | 9,539 |  |  | 9,539 |
Sub total deferred tax assets | 2,002,420 |  |  | 2,101,606 |
Valuation allowance | 1,244,543 |  |  | 1,319,218 |
Total deferred tax assets | 757,877 |  |  | 782,388 |
Net deferred tax asset (liability) | (1,905 | ) |  | (2,079 | )

In accordance with the Income Tax Topic of the ASC, a valuation allowance is recognized if, based on the weight of available evidence, it is more-likely-than-not that some, or all, of the deferred tax asset will not be realized. As a result of the risks and uncertainties associated with future operating results, management believes it is more likely than not that the Company will not generate sufficient taxable income to recover the deferred tax operating asset and therefore has a full valuation allowance.
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11. COMMITMENTS AND CONTINGENCIES
The following commitments and contingencies provide an update of those discussed in Note 18: Commitments and Contingencies in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, and should be read in conjunction with the complete descriptions provided in the aforementioned Form 10-K.
The Segregated Account and Wisconsin Rehabilitation Proceeding
On March 18, 2015, the Rehabilitator filed a motion to confirm and declare the reimbursement amounts due with respect to cash claim payments made by Ambac Assurance and the Segregated Account on a certain policy. Objections to the motion were due on April 27, 2015, but no objection was filed. On May 1, 2015, the Rehabilitation Court granted the Rehabilitator’s motion.
Litigation Against Ambac
County of Alameda et al. v. Ambac Assurance Corporation et al. (Superior Court of the State of California, County of San Francisco, second amended complaint filed on or about August 23, 2011); Contra Costa County et al. v. Ambac Assurance Corporation et al. (Superior Court of the State of California, County of San Francisco, third amended complaint filed on or about October 21, 2011); The Olympic Club v. Ambac Assurance Corporation et al. (Superior Court of the State of California, County of San Francisco, fourth amended complaint filed on or about October 21, 2011). Ambac Assurance and the other Bond Insurer Defendants filed a demurrer seeking dismissal of the current amended complaints on September 21, 2011, which was denied on October 20, 2011. On December 2, 2011, Ambac Assurance and the other Bond Insurer Defendants filed a special motion to strike the current amended complaints under California’s Anti-SLAPP statute (Calif. Code of Civ. Proc. Section 425.16). A hearing on the motion was held on March 23, 2012. On May 1, 2012, the Court ruled that the complaints were governed by the Anti-SLAPP statute to the extent they alleged conspiracy to influence the rating agencies’ rating methodologies, but not to the extent that the complaints alleged false or misleading statements or nondisclosures. After oral argument on March 21, 2013, the court dismissed claims related to the conspiracy branch of the complaint under the California Antitrust Law (the Cartwright Act) and after oral argument on April 22, 2013 denied defendants’ motion to dismiss claims under the California Unfair Competition Law. The court entered an order to this effect on July 9, 2013. On September 9, 2013, plaintiffs filed a notice of appeal of the July 9th order and on September 30, 2013, Ambac Assurance filed a notice of cross-appeal. On September 9, 2013, the parties filed motions for attorneys’ fees in connection with the portions of the Anti-SLAPP motions on which they were successful. The court denied plaintiffs’ motion for fees from the bench on November 8, 2013. On March 26, 2014, the court granted the defendants’ motions for attorneys’ fees awarding Ambac Assurance approximately $207. On July 7, 2014, plaintiffs filed a notice of appeal from the court’s decision awarding attorneys’ fees to Ambac Assurance and the other defendants. This appeal was dismissed on December 19, 2014. Plaintiffs have filed a motion to reinstate the appeal, stating that it should only have been dismissed as against one defendant with whom plaintiffs settled. Ambac did not oppose that motion, which was granted on January 29, 2015. Also on July 7, 2014, the Bond Insurer Defendants filed their appellate brief appealing the July 9th Order. Plaintiffs’ opposition to the Bond Insurer Defendants’ appellate brief and plaintiffs’ affirmative brief on their cross-motion were filed on November 5, 2014. The defendants’ brief in opposition to plaintiffs’ appeal and in further support of their cross-appeal was filed on February 3, 2015. Plaintiffs’ reply brief in further support of their appeal was filed on April 24, 2015. The appeal is now fully briefed and awaiting scheduling of oral argument.
Ambac Assurance’s estimates of projected losses for RMBS transactions consider, among other things, the RMBS transactions’ payment waterfall structure, including the application of interest and principal payments and recoveries, and depend in part on our interpretations of contracts and other bases of our legal rights. From time to time, bond trustees and other transaction participants have employed different contractual interpretations. Ambac Assurance has been made aware that a transaction participant has directed a bond trustee to employ a different waterfall interpretation in a RMBS transaction, which may lead to the commencement of legal action. It is not possible to predict whether additional disputes will arise, nor the outcomes of any potential litigation. It is possible that there could be unfavorable outcomes in this or other disputes or proceedings and that our interpretations may prove to be incorrect, which could lead to changes to our estimate of loss reserves.
Ambac Assurance has periodically received various regulatory inquiries and requests for information with respect to investigations and inquiries that such regulators are conducting. Ambac Assurance has complied with all such inquiries and requests for information.
It is not reasonably possible to predict whether additional suits will be filed or whether additional inquiries or requests for information will be made, and it is also not possible to predict the outcome of litigation, inquiries or requests for information. It is possible that there could be unfavorable outcomes in these or other proceedings. Legal accruals for litigation against Ambac which are probable and reasonably estimable, and management's estimated range of loss for such matters, are not material to the operating results or financial position of the Company. For the litigation matters Ambac is defending that do not meet the “probable and reasonably estimable” accrual threshold and where no loss estimates have been provided above, management is unable to make a meaningful estimate of the amount or range of loss that could result from unfavorable outcomes but, under some circumstances, adverse results in any such proceedings could be material to our business, operations, financial position, profitability or cash flows. The Company believes that it has substantial defenses to the claims above and, to the extent that these actions proceed, the Company intends to defend itself vigorously; however, the Company is not able to predict the outcomes of these actions.
Litigation Filed by Ambac
In the ordinary course of their businesses, certain of Ambac’s subsidiaries assert claims in legal proceedings against third parties to recover losses already paid and/or mitigate future losses. The amounts recovered and/or losses avoided which may result from these proceedings is uncertain, although recoveries and/or losses avoided in any one or more of these proceedings during any quarter or fiscal year could be material to Ambac’s results of operations in that quarter or fiscal year.
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Ambac Assurance Corporation v. Adelanto Public Utility Authority (United States District Court, Southern District of New York, filed on June 1, 2009). On December 23, 2014, the parties entered into a Judgment Satisfaction and Release Agreement to resolve the matter and in April 2015, when the Agreement became fully effective, the parties dismissed the Authority’s appeal to the Court of Appeals for the Second Circuit and the portion of the action that remained in the District Court and filed instruments of satisfaction of Ambac’s judgment against the Authority in the Southern District of New York and the Central District of California.
Erste Europäische Pfandbriefund Kommunalkreditbank AG In Luxemburg and Ambac Assurance Corporation v. City of San Bernardino, California (United States Bankruptcy Court, Central District of California, Riverside Division, filed on January 7, 2015). On March 13, 2015, the City filed a motion to dismiss the complaint, which Ambac Assurance opposed. A hearing on the motion is currently scheduled for May 11, 2015.
In connection with Ambac Assurance’s efforts to seek redress for breaches of representations and warranties and fraud related to the information provided by both the underwriters and the sponsors of various transactions and for failure to comply with the obligation by the sponsors to repurchase ineligible loans, Ambac Assurance has filed various lawsuits:

• | Ambac Assurance Corporation v. EMC Mortgage LLC (formerly known as EMC Mortgage Corporation), J.P. Morgan Securities, Inc. (formerly known as Bear, Stearns & Co. Inc.), and JP Morgan Chase Bank, N.A. (Supreme Court of the State of New York, County of New York, filed February 17, 2011). On December 18, 2014, defendants filed a motion for partial summary judgment seeking to dismiss the plaintiffs’ claim for fraudulent inducement arguing that as a matter of law, plaintiffs cannot prove justifiable reliance. Ambac Assurance has opposed the motion, which is fully briefed. No decision has been issued.

• | Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v. Countrywide Securities Corp., Countrywide Financial Corp. (a.k.a. Bank of America Home Loans) and Bank of America Corp. (Supreme Court of the State of New York, County of New York, filed on September 28, 2010). On May 1, 2015, Ambac Assurance filed a motion for partial summary judgment. Defendants also each filed motions for summary judgment, which Ambac Assurance intends to oppose.

• | Ambac Assurance Corporation and The Segregated Account of Ambac Assurance Corporation v. Nomura Credit & Capital, Inc. and Nomura Holding America Inc. (Supreme Court of the State of New York, County of New York, filed on April 15, 2013). On September 22, 2014, plaintiffs filed an amended complaint alleging claims for fraudulent inducement, material breach of contract and for the repurchase of loans that breach representations and warranties under the contracts, as well as damages. On October 31, 2014 defendants filed a motion to strike the amended complaint. Ambac Assurance opposed that motion and at the court’s recommendation also filed a cross motion for leave to amend the complaint on November 14, 2014, which the defendants opposed. Defendants also filed a motion to dismiss the fraudulent inducement claim, which Ambac Assurance opposed. All motions are fully briefed. The court heard oral argument on the defendants’ motion to dismiss the fraudulent inducement claim on April 14, 2015. No decision has been issued on any of the outstanding motions.

• | The Segregated Account of Ambac Assurance Corporation and Ambac Assurance Corporation v. Countrywide Home Loans, Inc. (Wisconsin Circuit Court for Dane County, filed on December 30, 2014). Ambac Assurance alleges a claim for fraudulent inducement in connection with Ambac Assurance’s issuance of insurance policies relating to five residential mortgage-backed securitizations that are not the subject of Ambac Assurance’s previously filed lawsuit against the same defendant. Defendant filed a motion to dismiss the complaint on February 20, 2015, which Ambac Assurance opposed. The motion is fully briefed. No decision has been issued.

• | Ambac Assurance Corporation and the Segregated Account of Ambac Assurance Corporation v. Countrywide Home Loans, Inc., Countrywide Securities Corp., Countrywide Financial Corp., and Bank of America Corp. (Supreme Court of the State of New York, County of New York, filed on December 30, 2014). Ambac Assurance alleges a claim for fraudulent inducement in connection with Ambac Assurance’s issuance of insurance policies relating to eight residential mortgage-backed securitizations that are not the subject of Ambac Assurance’s previously filed lawsuits against the same defendants. On February 20, 2015, the Countrywide defendants filed a motion to dismiss the complaint, which Bank of America joined on February 23, 2015. Ambac Assurance opposed the motion. Defendants’ reply is due on May 18, 2015.

12. SEGMENT INFORMATION
Ambac has two reportable business segments, as follows: (i) Financial Guarantee, which provides financial guarantees (including credit derivatives) for public finance, structured finance and international obligations; and (ii) Financial Services, which provides investment agreements, funding conduits, interest rate swaps, principally to clients of the financial guarantee business. Ambac’s reportable business segments are strategic business units that offer different products and services. They are managed separately because each business required different marketing strategies, personnel skill sets and technology.
Ambac Assurance guarantees the swap and investment agreement obligations of its Financial Services subsidiaries. Additionally, Ambac Assurance provides loans to the Financial Services businesses. Inter-segment revenues include the premiums and investment income earned under those agreements. Such premiums are determined as if they were premiums paid by third parties, that is, at current market prices.
Information provided below for unaffiliated “Corporate and Other” primarily relates to investment income on Ambac's investment portfolio. Equity in net income of investees accounted for by the equity method relates to the Owner Trust Certificate received when Ambac deposited its Segregated Account junior surplus note into a Trust (see Note 1. Background and Business Description in the Notes to Consolidated Financial
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Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for further information relating to the sale by Ambac of a junior surplus note issued to it by the Segregated Account). Inter-segment for "Corporate and Other" relates to amounts received by Ambac under the Mediation Agreement dated September 21, 2011 (as more fully described in Note 1. Background and Business Description in the Notes to Consolidated Financial Statements included Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014), including accrual of interest on the junior surplus notes issued by the Segregated Account prior to Ambac's deposit into a Trust.
The following table is a summary of financial information by reportable business segment for the affected periods:

|  | Financial Guarantee |  | Financial Services |  | Corporate and Other |  | Inter-segment Eliminations |  | Consolidated
Three Months Ended March 31, 2015: |  |  |  |  |  |  |  |  |  |
Revenues: |  |  |  |  |  |  |  |  |  |
Unaffiliated customers (1) |  | $ | 191,814 |  |  | $ | (37,708 | ) |  | $ | 357 |  |  | $ | — |  |  | $ | 154,463 |
Equity in net income of investees accounted for by equity method |  | — |  |  | — |  |  | 1,028 |  |  | — |  |  | 1,028 |
Inter-segment |  | 257 |  |  | (230 | ) |  | (27 | ) |  | — |  |  | — |
Total revenues before expenses and reorganization items |  | 192,071 |  |  | (37,938 | ) |  | 1,358 |  |  | — |  |  | 155,491 |
Pre-tax income (loss) from continuing operations: |  |  |  |  |  |  |  |  |  |
Unaffiliated customers (1)(2)(3) |  | 256,005 |  |  | (38,580 | ) |  | (1,873 | ) |  | — |  |  | 215,552 |
Equity in net income of investees accounted for by equity method |  | — |  |  | — |  |  | 1,028 |  |  | — |  |  | 1,028 |
Inter-segment |  | (539 | ) |  | (312 | ) |  | 851 |  |  | — |  |  | — |
Pre-tax income (loss) from continuing operations |  | 255,466 |  |  | (38,892 | ) |  | 6 |  |  | — |  |  | 216,580 |
Total assets as of March 31, 2015 |  | 24,672,977 |  |  | 431,445 |  |  | 282,188 |  |  | — |  |  | 25,386,610 |
Net investment income |  | 71,470 |  |  | 128 |  |  | 1,385 |  |  | — |  |  | 72,983 |
Insurance intangible amortization |  | 37,432 |  |  | — |  |  | — |  |  | — |  |  | 37,432 |
Interest expense |  | 27,585 |  |  | 323 |  |  | — |  |  | — |  |  | 27,908 |
Three Months Ended March 31, 2014: |  |  |  |  |  |  |  |  |  |
Revenues: |  |  |  |  |  |  |  |  |  |
Unaffiliated customers (1) |  | $ | 162,553 |  |  | $ | (53,438 | ) |  | $ | 23 |  |  | $ | — |  |  | $ | 109,138 |
Equity in net income of investees accounted for by equity method |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Inter-segment |  | 375 |  |  | (75 | ) |  | 8,635 |  |  | (8,935 | ) |  | — |
Total revenues before expenses and reorganization items |  | 162,928 |  |  | (53,513 | ) |  | 8,658 |  |  | (8,935 | ) |  | 109,138 |
Pre-tax income (loss) from continuing operations: |  |  |  |  |  |
Unaffiliated customers (1) (2) (3) |  | 217,158 |  |  | (54,450 | ) |  | (3,410 | ) |  | — |  |  | 159,298 |
Equity in net income of investees accounted for by equity method |  | — |  |  | — |  |  | — |  |  | $ | — |  |  | — |
Inter-segment |  | (9,157 | ) |  | (454 | ) |  | 9,611 |  |  | — |  |  | — |
Pre-tax income (loss) from continuing operations |  | 208,001 |  |  | (54,904 | ) |  | 6,201 |  |  | — |  |  | 159,298 |
Total assets as of March 31, 2014 |  | 26,535,119 |  |  | 534,256 |  |  | 44,873 |  |  | — |  |  | 27,114,248 |
Net investment income |  | 70,384 |  |  | 394 |  |  | 23 |  |  | — |  |  | 70,801 |
Insurance intangible amortization |  | 31,714 |  |  | — |  |  | — |  |  | — |  |  | 31,714 |
Interest expense |  | 31,881 |  |  | 447 |  |  | — |  |  | — |  |  | 32,328 |

(1) | Included in both revenues from unaffiliated customers and in pre-tax income (loss) from continuing operations from unaffiliated customers is net investment income.

(2) | Included in pre-tax income (loss) from continuing operations from unaffiliated customers is interest expense.

(3) | Included in pre-tax income (loss) from continuing operations from unaffiliated customers is amortization of intangible asset arising from financial guarantee contracts that were set to fair value upon adoption of Fresh Start on April 30, 2013.

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The following table summarizes gross premiums written, net premiums earned and the net change in fair value of credit derivatives included in the Financial Guarantee segment by location of risk for the affected periods:

|  | Three Months Ended March 31, 2015 |  | Three Months Ended March 31, 2014
|  | Gross Premiums Written |  | Net Premiums Earned |  | Net Change in Fair Value of Credit Derivatives |  | Gross Premiums Written |  | Net Premiums Earned |  | Net Change in Fair Value of Credit Derivatives
United States |  | $ | (2,366 | ) |  | $ | 52,739 |  |  | $ | 3,958 |  |  | $ | (699 | ) |  | $ | 56,758 |  |  | $ | 6,581 |
United Kingdom |  | 9,174 |  |  | 7,582 |  |  | — |  |  | (6,166 | ) |  | 20,635 |  |  | — |
Other international |  | (5,746 | ) |  | 5,397 |  |  | (6,457 | ) |  | 1,099 |  |  | 5,154 |  |  | 801 |
Total |  | $ | 1,062 |  |  | $ | 65,718 |  |  | $ | (2,499 | ) |  | $ | (5,766 | ) |  | $ | 82,547 |  |  | $ | 7,382 |

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Following this summary is a discussion addressing the consolidated results of operations and financial condition of Ambac Financial Group, Inc. (“Ambac” or “the Company”) for the periods indicated. This discussion should be read in conjunction with Ambac’s Annual Report on Form 10-K for the year ended December 31, 2014, the CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 below and Risk Factors set forth in Part II, Item 1A of this Form 10-Q.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains certain financial measures, in particular the presentation of Operating Earnings (Losses) and Adjusted Book Value, which are not presented in accordance with U.S. generally accepted accounting principles (“GAAP”). We are presenting these non-GAAP financial measures because they provide greater transparency and enhanced visibility into the underlying profitability drivers of our business. We do not intend for these non-GAAP financial measures to be a substitute for any GAAP financial measures and they may differ from similar reporting provided by other companies. Readers of this Form 10-Q should use these non-GAAP financial measures only in conjunction with the comparable GAAP financial measures. Operating earnings (losses) and Adjusted book value are non-GAAP financial measures that adjust for the impact of certain non-recurring or non-economic GAAP accounting requirements and include the addition of certain items that the Company has or expects to realize in the future, but that are not reported under GAAP. We also provide reconciliations to the most directly comparable GAAP measures; Operating earnings (losses) to net income (loss) attributable to common stockholders and Adjusted book value to Total Ambac Financial Group, Inc. stockholders’ equity.
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Management has included in Parts I and II of this Quarterly Report on Form 10-Q, including this MD&A, statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as “estimate,” “project,” “plan,” “believe,” “anticipate,” “intend,” “planned,” “potential” and similar expressions, or future or conditional verbs such as “will,” “should,” “would,” “could,” and “may,” or the negative of those expressions or verbs, identify forward-looking statements. We caution readers that these statements are not guarantees of future performance. Forward-looking statements are not historical facts but instead represent only our beliefs regarding future events, which, may by their nature be inherently uncertain and some of which may be outside our control. These statements may relate to plans and objectives with respect to the future, among other things which may change. We are alerting you to the possibility that our actual results may differ, possibly materially, from the expected objectives or anticipated results that may be suggested, expressed or implied by these forward-looking statements. Important factors that could cause our results to differ, possibly materially, from those indicated in the forward-looking statements include, among others, those discussed under “Risk Factors” in Part I, Item 1A of the 2014 Annual Report on Form 10-K and in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Any or all of management’s forward-looking statements here or in other publications may turn out to be incorrect and are based on management’s current belief or opinions. Ambac’s actual results may vary materially, and there are no guarantees about the performance of Ambac’s securities. Among events, risks, uncertainties or factors that could cause actual results to differ materially are: (1) volatility in the price of Ambac’s common stock; (2) uncertainty concerning our ability to achieve value for holders of Ambac securities, whether from Ambac Assurance Corporation (“Ambac Assurance”) or from new business opportunities; (3) dilution of current shareholder value or adverse effects on our share price resulting from the issuance of additional shares of common stock; (4) adverse effects on our share price resulting from future offerings of debt or equity securities that rank senior to our common stock; (5) potential of rehabilitation proceedings against Ambac Assurance; (6) decisions made by the Rehabilitator of the Segregated Account of Ambac Assurance Corporation (the “Segregated Account”) for the benefit of policyholders that may result in material adverse consequences for Ambac’s security holders; (7) our inability to realize the expected recoveries included in our financial statements; (8) intercompany disputes or disputes with the rehabilitator of the Segregated Account; (9) our inability to monetize assets or restructure or exchange outstanding debt and insurance obligations, or the failure of any such monetization, restructuring or exchange to deliver anticipated results; (10) our results of operations may be adversely affected by events or circumstances that result in the accelerated amortization of our insurance intangible asset or impairments to goodwill; (11) increased fiscal stress experienced by issuers of public finance obligations or an increased incidence of Chapter 9 filings by municipal issuers; (12) adverse tax consequences or other costs resulting from the Segregated Account rehabilitation plan, from rules and procedures governing the payment of permitted policy claims, or from the characterization of our surplus notes as equity; (13) credit risk throughout our business, including but not limited to credit risk related to residential mortgage-backed securities, student loan and other asset securitizations, collateralized loan obligations, public finance obligations and exposures to reinsurers; (14) risks attendant to the change in composition of securities in our investment portfolio; (15) inadequacy of reserves established for losses and loss expenses; (16) the risk that our risk management policies and practices do not anticipate certain risks and/or the magnitude of potential for
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loss as a result of unforeseen risks; (17) changes in prevailing interest rates; (18) factors that may influence the amount of installment premiums paid to Ambac, including the Segregated Account rehabilitation proceedings; (19) default by one or more of Ambac Assurance’s portfolio investments, insured issuers or counterparties; (20) market risks impacting assets in our investment portfolio or the value of our assets posted as collateral in respect of investment agreements and interest rate swap transactions; (21) risks relating to determinations of amounts of impairments taken on investments; (22) the risk of litigation and regulatory inquiries or investigations, and the risk of adverse outcomes in connection therewith, which could have a material adverse effect on our business, operations, financial position, profitability or cash flows; (23) our inability to realize value from Ambac Assurance UK Limited; (24) system security risks; (25) market spreads and pricing on derivative products insured or issued by Ambac or its subsidiaries; (26) the risk of volatility in income and earnings, including volatility due to the application of fair value accounting; (27) changes in accounting principles or practices that may impact Ambac’s reported financial results; (28) legislative and regulatory developments; (29) operational risks, including with respect to internal processes, risk models, systems and employees, and failures in services or products provided by third parties; (30) Ambac’s financial position and the Segregated Account rehabilitation proceedings that may prompt departures of key employees and may impact our ability to attract qualified executives and employees; and (31) other risks and uncertainties that have not been identified at this time.
COMPANY OVERVIEW
Ambac Financial Group, Inc. (“Ambac” or the “Company”), headquartered in New York City, is a financial services holding company incorporated in the state of Delaware. Ambac has two reportable business segments: Financial Guarantee and Financial Services.
Ambac’s primary goal is to maximize shareholder value through executing the following key strategies:

• | Increasing the value of its investment in Ambac Assurance Corporation ("Ambac Assurance") by actively managing its assets and liabilities with a focus on maximizing risk-adjusted investment portfolio returns and mitigating or remediating losses on poorly performing insured transactions through executing policy commutations, pursuing recoveries of losses through litigation and the exercise of contractual and legal rights, restructuring transactions, and other means; and

• | Selectively exploring opportunities to grow and diversify Ambac, which may include developing or acquiring financial services businesses such as advisory, asset servicing, asset management, and/or insurance.

As part of its asset/liability management strategy, Ambac Assurance is considering the possibility of entering into transactions whereby it would monetize certain assets and/or restructure or exchange its outstanding debt and insurance obligations with the objective of ending the Segregated Account Rehabilitation Proceedings.
The execution of Ambac’s strategy to increase the value of its investment in Ambac Assurance is subject to the authority of the Rehabilitator to control the management of the Segregated Account. In exercising such authority, the Rehabilitator will act for the benefit of policyholders, and will not take into account the interests of Ambac. Similarly, by operation of the contracts executed in connection with the establishment, and subsequent rehabilitation, of the Segregated Account, the Rehabilitator retains rights to oversee and approve certain actions taken by or in respect of Ambac Assurance. This oversight by the Rehabilitator could impair Ambac’s ability to execute certain of its strategies. Refer to Note 1.Background and Business Description to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q and to Note 1 to the Consolidated Financial Statements located in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for more information on the Segregated Account and the contracts between Ambac Assurance and the Segregated Account.
Although we are exploring new business opportunities for Ambac, no assurance can be given that we will be able to identify or execute the acquisition or development of any new business. In addition, there can be no assurance that we will be able to obtain the financial and other resources that may be required to finance the acquisition or development of any new business. Due to these factors, as well as uncertainties relating to the ability of Ambac Assurance to deliver value to Ambac, the value of our securities is speculative. For additional risks and uncertainties concerning Ambac, please refer to Part I, Item 1A of Ambac’s 2014 Form 10-K and Part II, Item 1A of this Form 10-Q.
There are substantial restrictions on the ability to transfer Ambac’s common stock set forth in Article XII of Ambac’s Amended and Restated Certificate of Incorporation. In order to preserve certain tax benefits, subject to limited exceptions, any attempted transfer of common stock shall be prohibited and void to the extent that, as a result of such transfer (or any series of transfers of which such transfer is a part), either (i) any person or group of persons shall become a holder of 5% or more of the Company’s common stock or (ii) the percentage stock ownership interest in Ambac of any holder of 5% or more of the Company’s common stock shall be increased (a “Prohibited Transfer”). These restrictions shall not apply to an attempted transfer if the transferor or the transferee obtains the written approval of Ambac’s Board of Directors to such transfer. A purported transferee of a Prohibited Transfer shall not be recognized as a stockholder of Ambac for any purpose whatsoever in respect of the securities which are the subject of the Prohibited Transfer (the “Excess Securities”). Until the Excess Securities are acquired by another person in a transfer that is not a Prohibited Transfer, the purported transferee of a Prohibited Transfer shall not be entitled with respect to such Excess Securities to any rights of stockholders of Ambac, including, without limitation, the right to vote such Excess Securities and to receive dividends or distributions, whether liquidating or otherwise, in respect thereof, if any. Once the Excess Securities have been acquired in a transfer that is not a Prohibited Transfer, the securities shall cease to be Excess Securities. If the Board determines that a transfer of securities constitutes a Prohibited Transfer then, upon written demand by Ambac, the purported transferee shall transfer or cause to be transferred any certificate or other evidence of ownership of the Excess Securities within the purported transferee’s possession or control, together with any distributions paid by Ambac with respect to such Excess Securities, to an agent designated by Ambac. Such agent shall thereafter sell such Excess Securities and
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the proceeds of such sale shall be distributed as set forth in the Amended and Restated Certificate of Incorporation. If the purported transferee of a Prohibited Transfer has resold the Excess Securities before receiving such demand, such person shall be deemed to have sold the Excess Securities for Ambac’s agent and shall be required to transfer to such agent the proceeds of such sale, which shall be distributed as set forth in the Amended and Restated Certificate of Incorporation.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Ambac’s Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which require the use of estimates and assumptions. For a discussion of Ambac’s critical accounting policies and estimates, see “Critical Accounting Policies and Estimates” in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Ambac’s Annual Report on Form 10-K for the year ended December 31, 2014.
FINANCIAL GUARANTEES IN FORCE
Financial guarantee products were sold in three principal markets: the U.S. public finance market, the U.S. structured finance and asset-backed market and the international finance market. The following table provides a breakdown of guaranteed net par outstanding by market at March 31, 2015 and December 31, 2014. Net par exposures within the U.S. public finance market include capital appreciation bonds which are reported at the par amount at the time of issuance of the insurance policy. Guaranteed net par outstanding includes the exposures of policies that insure variable interest entities (“VIEs”) consolidated in accordance with the Consolidation Topic of the ASC, Consolidation. Guaranteed net par outstanding excludes the exposures of policies that insure bonds which have been refunded or pre-refunded:

($ in millions) | March 31, 2015 |  | December 31, 2014
Public Finance (1) (2) | $ | 88,059 |  |  | $ | 93,448 |
Structured Finance | 25,281 |  |  | 26,334 |
International Finance | 23,507 |  |  | 24,952 |
Total net par outstanding (3) | $ | 136,847 |  |  | $ | 144,734 |

(1) | Includes $6,060 and $6,089 of Military Housing net par outstanding at March 31, 2015 and December 31, 2014, respectively.

(2) | Includes $2,437 of Puerto Rico net par outstanding at both March 31, 2015 and December 31, 2014. Components of Puerto Rico net par outstanding includes capital appreciation bonds which are reported at the par amount at the time of issuance of the related insurance policy.

(3) | Included in the above net par exposures at March 31, 2015 and December 31, 2014 are $1,595 and $1,530, respectively, of exposures that were executed in credit derivatives form.

Ratings Distribution
The following tables provide a rating distribution of net par outstanding based upon internal Ambac Assurance credit ratings at March 31, 2015 and December 31, 2014 and a distribution by bond type of Ambac Assurance’s below investment grade net par exposures at March 31, 2015 and December 31, 2014. Below investment grade is defined as those exposures with an Ambac internal credit rating below BBB-:
Percentage of Guaranteed Portfolio

Ambac Rating (1) | March 31, 2015 |  | December 31, 2014
AAA | <1% |  |  | <1% |
AA | 18 |  |  | 19 |
A | 42 |  |  | 42 |
BBB | 22 |  |  | 22 |
Below investment grade | 18 |  |  | 17 |
Total | 100 | % |  | 100 | %

(1) | Internal credit ratings are provided solely to indicate the underlying credit quality of guaranteed obligations based on the view of Ambac Assurance, and for Ambac UK related transactions, based on the view of Ambac UK. In cases where Ambac Assurance or Ambac UK has insured multiple tranches of an issue with varying internal ratings, or more than one obligation of an issuer with varying internal ratings, a weighted average rating is used. Ambac Assurance and Ambac UK credit ratings are subject to revision at any time and do not constitute investment advice.

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Summary of Below Investment Grade Exposure

($ in millions) | March 31, 2015 |  | December 31, 2014
Public Finance: |  |  |
Tax-backed (1) | 2,362 |  |  | 2,512 |
Housing (2) | 829 |  |  | 841 |
General obligation (1) | 491 |  |  | 564 |
Transportation | 437 |  |  | 453 |
Health care | 27 |  |  | 27 |
Other | 1,290 |  |  | 1,293 |
Total Public Finance | 5,436 |  |  | 5,690 |
Structured Finance: |  |  |
Residential mortgage-backed and home equity—first lien | 6,744 |  |  | 7,003 |
Residential mortgage-backed and home equity—second lien | 5,215 |  |  | 5,466 |
Student loans | 2,812 |  |  | 3,092 |
Structured Insurance | 1,037 |  |  | 1,037 |
Mortgage-backed and home equity—other | 286 |  |  | 299 |
Other | 536 |  |  | 536 |
Total Structured Finance | 16,630 |  |  | 17,433 |
International Finance: |  |  |
Other | 2,072 |  |  | 2,214 |
Total International Finance | 2,072 |  |  | 2,214 |
Total | 24,138 |  |  | 25,337 |

(1) | Tax-backed includes $2,187 of Puerto Rico net par at March 31, 2015 and December 31, 2014. General obligation includes $250 of Puerto Rico net par at March 31, 2015 and December 31, 2014. Components of Puerto Rico net par outstanding includes capital appreciation bonds which are reported at the par amount at the time of issuance of the related insurance policy.

(2) | Includes $608 and $609 of military housing net par at March 31, 2015 and December 31, 2014, respectively.

The decrease in below investment grade exposures is primarily due to (i) reductions to residential mortgage-backed securities during the year as a result of both prepayments by issuers and claims presented to Ambac Assurance, (ii) commutations of student loan policies and (iii) reductions as a result of the strengthening of the US dollar.
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RESULTS OF OPERATIONS
Net income in the first quarter of 2015 was $214.7 million compared to $155.9 million in the first quarter of 2014. Net income was impacted by higher realized gains from the sale of investment securities, lower derivative product losses, a greater benefit within loss and loss expenses and higher income on variable interest entities partially offset by lower net premiums earned. A summary of our financial results is shown below:

| Three Months Ended March 31,
($ in millions) | 2015 |  | 2014
Revenues: |  |  |
Net premiums earned | $ | 65.7 |  |  | $ | 82.5 |
Net investment income | 73.0 |  |  | 70.8 |
Net other-than-temporary impairment losses | (3.1 | ) |  | (10.4 | )
Net realized investment gains | 54.1 |  |  | 16.3 |
Change in fair value of credit derivatives | (2.5 | ) |  | 7.4 |
Derivative product revenues | (37.8 | ) |  | (53.8 | )
Other income | (0.8 | ) |  | 1.9 |
Income (loss) on variable interest entities | 7.0 |  |  | (5.5 | )
Expenses: |  |  |
Loss and loss expenses (benefit) | (151.0 | ) |  | (140.0 | )
Insurance intangible amortization | 37.4 |  |  | 31.7 |
Underwriting and operating expenses | 24.5 |  |  | 25.8 |
Interest expense | 27.9 |  |  | 32.3 |
Provision for income taxes | 1.7 |  |  | 3.2 |
Less: Net income attributable to the noncontrolling interest | 0.2 |  |  | 0.1 |
Net income attributable to common shareholders | $ | 214.7 |  |  | $ | 155.9 |

The following paragraphs describe the consolidated results of operations of Ambac and subsidiaries for all periods in the three months ended March 31, 2015 and 2014 and its financial condition as of March 31, 2015 and December 31, 2014.
Net Premiums Earned. Net premiums earned primarily represent the amortization into income of collected insurance premiums. We present accelerated premiums, which result from calls and other accelerations of insured obligations separate from normal net premiums earned. When an insured bond has been retired, any remaining unearned premium revenue ("UPR") is recognized at that time to the extent the financial guarantee contract is legally extinguished, causing accelerated premium revenue. For installment premium paying transactions, we offset the recognition of any remaining UPR by the reduction of the related premium receivable to zero (as it will not be collected as a result of the retirement), which may cause negative accelerated premium revenue. Normal net premiums earned have been negatively impacted by the runoff of the insured portfolio occurring through transaction terminations, calls and scheduled maturities.
Net premiums earned for the three months ended March 31, 2015 decreased by $16.8 million or 20.4% as compared to net premiums earned for the year ended March 31, 2014. The decrease in net premiums earned is primarily due to the continued runoff of the insured portfolio, inclusive of lower accelerated premiums. The runoff of the insured portfolio is due to normal paydown activity in addition to maturities, calls and terminations.
Normal net premiums earned and accelerated premiums are reconciled to total net premiums earned in the table below and are included in the Financial Guarantee segment. The following table provides a breakdown of net premiums earned by market:

| Three Months Ended March 31,
($ in millions) | 2015 |  | 2014
Public Finance | $ | 23.9 |  |  | $ | 27.3 |
Structured Finance | 7.6 |  |  | 10.4 |
International Finance | 11.3 |  |  | 19.7 |
Total normal premiums earned | 42.8 |  |  | 57.4 |
Accelerated earnings | 22.9 |  |  | 25.1 |
Total net premiums earned | $ | 65.7 |  |  | $ | 82.5 |

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The following table provides a breakdown of accelerated earnings by market sector:

| Three Months Ended March 31,
($ in millions) | 2015 |  | 2014
Public Finance | $ | 19.7 |  |  | $ | 18.8 |
Structured Finance | 1.8 |  |  | 0.3 |
International Finance | 1.4 |  |  | 6.0 |
Total accelerated earnings | $ | 22.9 |  |  | $ | 25.1 |

Decrease in accelerated earnings is primarily attributed to a termination of an international transportation transaction occurring in the three months ended March 31, 2014 offset by an increase in structured finance accelerations due to a student loan commutation in addition to a slight increase in public finance accelerations in the three months ended March 31, 2015.
Net Investment Income. The following table provides details of net investment income by business segment for the periods presented:

| Three Months Ended March 31,
($ in millions) | 2015 |  | 2014
Financial Guarantee | $ | 71.5 |  |  | $ | 70.4 |
Financial Services | 0.1 |  |  | 0.4 |
Corporate | 1.4 |  |  | — |
Total net investment income | $ | 73.0 |  |  | $ | 70.8 |

Financial Guarantee net investment income was $71.5 million for the three months ended March 31, 2015, an increase of $1.1 million from the three months ended March 31, 2014 reflecting higher rates of return on a smaller invested asset base. Income benefited from higher investment allocations to Ambac-wrapped securities and, in the Ambac UK portfolio, to pooled funds consisting of diversified asset classes including equities, loans and property which are classified as trading securities with changes in market value recognized in earnings. The yield on Ambac-wrapped securities was comparable in both periods, while Ambac UK fund investments experienced stronger performance in the three months ended March 31, 2015 compared to the prior year period. The higher average yields and trading portfolio gains were mostly offset by the impact of lower asset levels resulting from sales and maturities of other asset classes to fund the partial redemption of surplus notes in November 2014 and the equalizing payment of Deferred Amounts of the Segregated Account in December 2014.
Net Other-Than-Temporary Impairment Losses. Net other-than-temporary impairment losses recorded in earnings include only credit related impairment amounts to the extent 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. Non-credit related impairment amounts are recorded in other comprehensive income. Alternatively, non-credit related impairment is reported through earnings as part of net other-than-temporary impairment losses if management intends to sell securities or it is more likely than not that the Company will be required to sell before recovery of amortized cost less any current period credit impairment.
Net other-than-temporary impairments for the three months ended March 31, 2015 relate to credit losses on certain Ambac-wrapped securities stemming primarily from cash flow timing. Net other-than-temporary impairments for the three months ended March 31, 2014 relate to credit losses on certain Ambac-wrapped securities and the company’s intent to sell certain securities that were in an unrealized loss position as of March 31, 2014.
Net Realized Investment Gains. The following table provides a breakdown of net realized gains, by business segment, for the periods presented:

($ in millions) | Financial Guarantee |  | Financial Services |  | Corporate |  | Total
Three months ended March 31, 2015: |  |  |  |  |  |  |
Net gains on securities sold or called | $ | 46.9 |  |  | $ | — |  |  | $ | — |  |  | $ | 46.9 |
Foreign exchange gains | 7.2 |  |  | — |  |  | — |  |  | 7.2 |
Total net realized gains | $ | 54.1 |  |  | $ | — |  |  | $ | — |  |  | $ | 54.1 |
Three months ended March 31, 2014: |  |  |  |  |  |  |
Net gains on securities sold or called | $ | 18.4 |  |  | $ | — |  |  | $ | — |  |  | $ | 18.4 |
Foreign exchange (losses) | (2.1 | ) |  | — |  |  | — |  |  | (2.1 | )
Total net realized gains | $ | 16.3 |  |  | $ | — |  |  | $ | — |  |  | $ | 16.3 |

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Net gains during the three months ended March 31, 2015 arose primarily from the sale of Ambac-wrapped student loan securities in connection with a financial guarantee commutation transaction. Net gains during the three months ended March 31, 2014 related to the sale of assets received pursuant to Ambac's remediation activities and gains on securities sold in connection with an investment portfolio reallocation.
Change in Fair Value of Credit Derivatives. The valuation of credit derivative liabilities is impacted by the market’s view of Ambac Assurance’s credit quality. We reflect Ambac’s own credit quality in the fair value of such liabilities by including a credit valuation adjustment (“CVA”) in the determination of fair value. The loss from change in fair value of credit derivatives for the three months ended March 31, 2015 was $(2.5) million, a decrease of $9.9 million as compared to the gain of $7.4 million reported for the three months ended March 31, 2014. The loss for the three months ended March 31, 2015 is primarily due to the decrease in pricing levels of certain reference obligations, partially offset by gains due to foreign exchange changes and the Ambac CVA. The gain for the three months ended March 31, 2014 was due to improvements in the average pricing level of reference obligations and offsetting losses due to the change in Ambac CVA.
Realized gains and other settlements on credit derivative contracts represent premiums received and accrued on such contracts. Realized gains and other settlements were $0.4 million for the three months ended March 31, 2015, a decrease of $0.4 million from the three months ended March 31, 2014. The declines over time are due to reduced premium receipts resulting from continued runoff of the credit derivative portfolio. Included in realized gains and other settlements on credit derivatives were fees received in connection with transaction terminations of $0.0 million and $0.1 million for the three months ended March 31, 2015 and 2014, respectively. There were no loss or settlement payments in the periods presented.
Unrealized gains (losses) on credit derivative contracts reflect the impact of all other factors on the overall change in fair value of credit derivatives noted above. See Note 7. Fair Value Measurements to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for a further description of Ambac’s methodology for determining the fair value of credit derivatives. The table below indicates the impact of incorporating Ambac’s own credit risk into the fair value of credit derivatives as of March 31, 2015 and December 31, 2014:

($ in millions) | March 31, 2015 |  | December 31, 2014
Mark-to-market liability of credit derivatives, excluding CVA | $ | 94.4 |  |  | $ | 89.4 |
CVA on credit derivatives | (18.0 | ) |  | (15.9 | )
Net credit derivative liability at fair value | $ | 76.4 |  |  | $ | 73.5 |

Derivative Product Revenues. The derivative products portfolio is positioned to benefit from rising rates as an economic hedge against interest rate exposure in the financial guarantee portfolio. Net losses reported in derivative product revenues for the three months ended March 31, 2015 were $37.8 million, reflecting an improvement of $16.0 million as compared to the net losses of $53.8 million for the three months ended March 31, 2014. Results in derivative product revenues were primarily driven by mark-to-market losses in the portfolio caused by declines in interest rates during the periods, net of the impact of the Ambac CVA as discussed below.
The fair value of derivatives includes a valuation adjustment to reflect Ambac’s own credit risk when appropriate. Within the financial services derivatives portfolio, an Ambac CVA is generally applicable for uncollateralized derivative liabilities that may not be offset by derivative assets under a master netting agreement. Inclusion of an Ambac CVA in the valuation of financial services derivatives resulted in gains within derivative products revenues of $12.6 million and $5.4 million for the three months ended March 31, 2015 and 2014, respectively. The impact of changes to the CVA reflects the market’s view of Ambac Assurance’s credit quality as well as the amount of underlying liabilities, which generally decline as interest rates increase. The market's view of Ambac Assurance's credit quality was relatively unchanged for the three months ended March 31, 2015 and improved during the three months ended March 31, 2014. The table below indicates the impact of incorporating Ambac’s own credit risk into the fair value of the derivative products portfolio (excluding credit derivatives) as of March 31, 2015 and December 31, 2014:

($ in millions) | March 31, 2015 |  | December 31, 2014
Derivative products mark-to-market liability, excluding CVA | $ | 334.6 |  |  | $ | 289.0 |
CVA on derivative products portfolio | (77.2 | ) |  | (64.5 | )
Net derivative products portfolio liability at fair value | $ | 257.4 |  |  | $ | 224.5 |

Net Realized Losses on Extinguishment of Debt. Net realized losses on extinguishment of debt included losses from settlement of an investment agreement above its carrying value of $0.1 million for the three months ended March 31, 2015.
Other Income. Other income is primarily comprised of foreign exchange gains and losses unrelated to investments or loss reserves, and deal structuring, commitment, consent and waiver fees. Other income for the three months ended March 31, 2015 was a loss of $0.8 million, a decrease of $2.7 million as compared to the income for the three months ended March 31, 2014, primarily resulting from lower deal-related fees and foreign exchange losses.
Income (loss) on Variable Interest Entities. Included within Income (loss) on variable interest entities are income statement amounts relating to VIEs consolidated under the Consolidation Topic of the ASC, including gains or losses attributable to consolidating or deconsolidating VIEs during the periods reported. Generally, the Company’s consolidated VIEs are entities for which Ambac has provided financial guarantees on its
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assets or liabilities. In consolidation, most assets and liabilities of the VIEs are reported at fair value and the related insurance assets and liabilities are eliminated. However, the amount of VIE net assets (liabilities) that remain in consolidation generally result from the net positive (negative) present value of projected cash flows from (to) the VIEs which are attributable to Ambac’s insurance subsidiaries in the form of financial guarantee insurance premiums, fees and losses. In the case of VIEs with net negative projected cash flows, the net liability is generally to be funded by Ambac’s insurance subsidiaries through insurance claim payments. Differences between the net carrying value of the insurance accounts under the Financial Services—Insurance Topic of the ASC and the carrying value of the consolidated VIE’s net assets or liabilities are recorded through income at the time of consolidation or deconsolidation.
Income (loss) on variable interest entities was $7.0 million and $(5.5) million, for the three months ended March 31, 2015 and 2014, respectively. Income on variable interest entities for the three months ended March 31, 2015 resulted from positive changes to the fair value of net assets primarily attributable to accretion of the present value discount of net VIE assets into income. The loss for the three months ended March 31, 2014 reflected a decrease in the fair value of net assets primarily due to a decrease in the CVA applied to certain VIE note liabilities that included significant projected financial guarantee claims. Refer to Note 3. Special Purpose Entities, including Variable Interest Entities to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for further information on the accounting for VIEs.
Losses and Loss Expenses. Losses and loss expenses are based upon estimates of the aggregate losses inherent in the non-derivative financial guarantee portfolio for insurance policies issued to beneficiaries, including unconsolidated VIEs. Losses and loss expenses include interest on Deferred Amounts pursuant to the amended Segregated Account Rehabilitation Plan, which became effective June 12, 2014.
Ambac records as a component of its loss reserve estimate, subrogation recoveries related to securitized loans in RMBS transactions that breached certain representations and warranties described herein. Ambac does not include potential recoveries attributed solely to fraudulent inducement claims in our litigations in our estimate of representation and warranty subrogation recoveries. Generally, the sponsor of an RMBS transaction provided representations and warranties with respect to the securitized loans, including representations with respect to the loan characteristics, the absence of borrower fraud in the underlying loan pools or other misconduct in the origination process and attesting to the compliance of loans with the prevailing underwriting policies. Ambac has recorded RMBS subrogation recoveries, net of reinsurance, of $2.5 billion and $2.5 billion at March 31, 2015 and December 31, 2014, respectively. Refer to Note 2. Basis of Presentation and Significant Accounting Policies to the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for more information regarding the estimation process for representation and warranty subrogation recoveries.
Losses and loss expenses for the three months ended March 31, 2015 were a benefit of $151.0 million, an increased benefit of $11.0 million compared to the three months ended March 31, 2014. The three months ended March 31, 2015 benefit is primarily the result of lower estimated projected losses in the Student Loan and RMBS portfolios stemming from, in the aggregate, lower interest rates, the impact of commutations, higher estimated representation and warranty subrogation recoveries and improved deal performance.
The following provides details, by bond type, for losses and loss expenses (benefit) incurred for the periods presented:

| Three Months Ended March 31,
($ in millions) | 2015 |  | 2014
RMBS (1) | $ | (101.3 | ) |  | $ | (102.9 | )
Student Loans | (109.4 | ) |  | (82.9 | )
Domestic Public Finance | 27.1 |  |  | 7.0 |
Ambac UK | (9.1 | ) |  | 37.3 |
All other credits | (0.8 | ) |  | 0.6 |
Interest on Deferred Amounts | 39.9 |  |  | — |
Loss expenses | 2.6 |  |  | 0.9 |
Totals | $ | (151.0 | ) |  | $ | (140.0 | )

(1) | Ambac records the impact of estimated recoveries related to securitized loans in RMBS transactions that breached certain representations and warranties within losses and loss expenses (benefit). The losses and loss expense (benefit) for the three months ended March 31, 2015 and 2014 was $44.2 and $18.3, respectively.

The following table provides details of net claims recorded, net of reinsurance for the affected periods:

| Three Months Ended March 31,
($ in millions) | 2015 |  | 2014
Claims recorded (1) | $ | 163.6 |  |  | $ | 124.8 |
Subrogation received | (82.4 | ) |  | (69.7 | )
Net Claims Recorded | $ | 81.2 |  |  | $ | 55.1 |

(1) | Claims recorded include (i) claims paid and (ii) changes to claims presented and not yet presented through the balance sheet date for policies which were allocated to the Segregated Account. Item (ii) includes permitted policy claims for policies allocated to the Segregated Account that were presented and approved by the Rehabilitator of the Segregated Account but not paid through to the balance sheet date in accordance with the amended Segregated Account

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Rehabilitation Plan and associated rules and guidelines. Amounts recorded for claims not yet presented and/or permitted are based on management’s judgment. Claims recorded exclude interest accrued on Deferred Amounts.
Underwriting and Operating Expenses. Underwriting and operating expenses consist of gross operating expenses plus reinsurance commissions. Reinsurance commissions are included in Financial Guarantee segment results. The following table provides details of underwriting and operating expenses for the periods presented:

| Three Months Ended March 31,
($ in millions) | 2015 |  | 2014
Gross operating expenses | $ | 24.6 |  |  | $ | 25.9 |
Reinsurance commissions, net | (0.1 | ) |  | (0.1 | )
Total | $ | 24.5 |  |  | $ | 25.8 |

Gross operating expenses for the three months ended March 31, 2015 are $24.6 million, a decrease of $1.3 million from gross operating expenses for the three months ended March 31, 2014. The decrease was primarily due to lower directors' fees, legal and premium taxes, partially offset by higher compensation and consulting fees. Lower directors' fees are primarily related to the larger expense of equity awards during the three months ended March 31, 2014 than the three months ended March 31, 2015.
As a consequence of the Segregated Account Rehabilitation Proceedings, the Rehabilitator retains operational control and decision-making authority with respect to all matters related to the Segregated Account, including the hiring of advisers. Legal and consulting services provided for the benefit of OCI amounted to $1.4 million during the three months ended March 31, 2015 and 2014.
Interest Expense. Interest expense includes accrued interest on investment agreements and surplus notes issued by Ambac Assurance and the Segregated Account. Additionally, interest expense includes discount accretion on surplus notes as their carrying value is at a discount to par.
The following table provides details by type of obligation for the periods presented:

| Three Months Ended March 31,
($ in millions) | 2015 |  | 2014
Interest expense: |  |  |
Surplus notes | $ | 27.6 |  |  | $ | 31.9 |
Investment agreements | 0.3 |  |  | 0.4 |
Total | $ | 27.9 |  |  | $ | 32.3 |

The decrease in interest expense on surplus notes for the three months ended March 31, 2015 compared to the three months ended March 31, 2014 primarily results from the net reduction to the balance of outstanding notes in the first quarter of 2015 relative to the first quarter of 2014. The lower outstanding surplus note balance reflects the redemption of approximately 26% of surplus notes (other than junior surplus notes) in November 2014. This decline is offset by interest expense relating to the sale of a junior surplus note originally issued to Ambac by the Segregated Account to a third party trust in August 2014 in connection with a secured borrowing transaction. Subsequent to the sale, the junior surplus note is reflected as debt on Ambac's balance sheet along with other surplus notes and junior surplus notes held by third parties.
Surplus note principal and interest payments require the approval of OCI. Annually from 2011 through 2015, OCI issued its disapproval of the requests of Ambac Assurance and the Rehabilitator of the Segregated Account, acting for and on behalf of the Segregated Account, to pay interest on outstanding surplus notes issued by Ambac and the Segregated Account on the annual scheduled interest payment date of June 7th. Neither Ambac Assurance nor the Rehabilitator of the Segregated Account, acting for and on behalf of the Segregated Account, have requested to pay interest on any junior surplus notes since their issuance. The interest of the outstanding surplus notes and junior surplus notes were accrued for and Ambac is accruing interest on the interest amounts following each scheduled interest payment date. Total accrued interest for surplus notes and junior surplus notes outstanding to third parties were $252.3 million and $41.1 million, respectively, at March 31, 2015.
Additionally, if OCI approves interest payments on surplus notes in the future, Ambac Assurance will also be required to pay interest accrued on certain repurchased surplus notes through their call option exercise dates. The amount of such unpaid interest on repurchased surplus notes is $38.5 million at March 31, 2015.
Provision for Income Taxes. The provision for income taxes for the three months ended March 31, 2015 was $1.7 million a decrease of $1.5 million compared to the provision for income taxes reported for three months ended March 31, 2014. The decrease is primarily due to (i) a lower provision for Alternative Minimum Taxes ("AMT") of $1.1 million and (ii) a lower provisions for Ambac UK's Italian branch taxes of $0.5 million. AMT results from the 90% limitation on offsetting Alternative Minimum Taxable Income with AMT NOLs. Italian branch taxes result from pre-tax profits in Ambac UK’s Italian branch, which cannot be offset by losses in other jurisdictions.
At March 31, 2015 the Company had $4.9 billion of U.S. Federal net ordinary operating loss carryforwards, including $1.4 billion at Ambac Financial Group and $3.5 billion at Ambac Assurance.
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LIQUIDITY AND CAPITAL RESOURCES
Ambac Financial Group, Inc. Liquidity. Ambac’s liquidity is dependent on its cash and liquid investments of $220.0 million as of March 31, 2015 and expense sharing and other arrangements with Ambac Assurance. Pursuant to the Mediation Agreement, Amended TSA and Cost Allocation Agreement (as each such term is defined in Note 1. Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in the Company's Annual Report on Form 10-K for the year ended December 31, 2014), Ambac Assurance is required, under certain circumstances, to make payments to Ambac with respect to the utilization of net operating loss carry-forwards (“NOLs”) and to reimburse certain operating costs and expenses. Any expected receipts with regard to the utilization of NOLs will only occur after Ambac Assurance utilizes NOLs generated after September 30, 2011. Ambac Assurance has utilized all of those NOLs through March 31, 2015 and has accrued for $1.3 million of tolling payments under its NOL tolling agreement with Ambac, after certain credits.
On August 28, 2014, Ambac deposited $350.0 million face amount of a junior surplus note issued to it by the Segregated Account, plus accrued but unpaid interest thereon, into a statutory trust (the "Trust") in exchange for net proceeds of $224.3 million and a subordinated owner trust certificate (the “Owner Trust Certificate”) issued by the Trust in the face amount of $74.8 million. Proceeds from the transaction are expected to be used to fund Ambac's growth and diversification initiatives, including potential acquisitions and development opportunities, select Ambac Assurance liability management activities and for general corporate purposes. The Trust funded the cash portion of its purchase of the junior surplus note with proceeds of the private placement of $299.2 million face amount of senior secured notes (the "Notes") to third party investors. The Notes have a final maturity of August 28, 2039. Interest on the Notes accrues at 5.1% per annum and compounds annually on June 7th of each year up to and including the maturity date. Payments on the Notes will be made when and to the extent that the Segregated Account makes payments on the junior surplus note. The Notes must be paid in full before any payments will be made on the Owner Trust Certificate. The Notes and Owner Trust Certificate are non-recourse to Ambac, Ambac Assurance and the Segregated Account, but are collateralized by the junior surplus note. It is uncertain whether and to what extent Ambac will realize value from the Owner Trust Certificate.
It is highly unlikely that Ambac Assurance will be able to make dividend payments to Ambac for the foreseeable future and therefore cash and investments, payments under the Cost Allocation Agreement and potential NOL tolling payments will be Ambac’s principal source of liquidity in the near term. Refer to Part I, Item 1, “Insurance Regulatory Matters - Dividend Restrictions, Including Contractual Restrictions” and Note 9. Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for more information on dividend payment restrictions. The principal use of liquidity is the payment of operating expenses, including costs to explore opportunities to grow and diversify Ambac. Contingencies could cause material liquidity strains.
Ambac Assurance Liquidity. Ambac Assurance’s liquidity is dependent on the balance of liquid investments and, over time, the net impact of sources and uses of funds. The principal sources of Ambac Assurance’s liquidity are gross installment premiums on insurance and credit default swap contracts, principal and interest payments from investments, sales of investments, proceeds from repayment of affiliate loans, recoveries on claim payments and reinsurance recoveries. Termination of installment premium policies on an accelerated basis may adversely impact Ambac Assurance’s future liquidity. The principal uses of Ambac Assurance’s liquidity are the payment of operating expenses, claim and commutation payments on both insurance and credit derivative contracts, ceded reinsurance premiums, surplus note principal and interest payments and additional loans to affiliates. Interest and principal payments on surplus notes are subject to the approval of OCI, which has full discretion over payments regardless of the liquidity position of Ambac Assurance. The level of claims paid by the Segregated Account is subject to the sole discretion of the Rehabilitator, subject to any required approval of the Rehabilitation Court.
Ambac Assurance manages its liquidity risk by maintaining a comprehensive analysis of projected cash flows and maintenance of a specified level of cash and short-term investments at all times.
Pursuant to the injunctions issued by the Rehabilitation Court, claims on policies allocated to the Segregated Account are not permitted to be paid during the Segregated Account Rehabilitation Proceedings until approved by the Rehabilitator. As further described in Note 1. Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, on or about September 20, 2012, the Segregated Account was permitted to pay, and commenced paying, 25% of each permitted policy claim that arose since the commencement of the Segregated Account Rehabilitation Proceedings. As further described in Note 1. Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, the Segregated Account is, and was, obliged to make Interim Payments of 45% of each permitted policy claim to be paid on or after July 21, 2014 in accordance with the amended Segregated Account Rehabilitation Plan and associated rules and guidelines. In addition, as described in Note 1. Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, the Rehabilitator has sought and received approval from the Rehabilitation Court to make Supplemental Payments and Special Policy Payments with respect to certain insured securities. The Segregated Account made Supplemental Payments and Special Policy Payments in respect of permitted policy claims of $50.0 million during the three months ended March 31, 2015 and $43.8 million during the three months ended March 31, 2014. Permitted policy claims, including payments of Deferred Amounts together with interest thereon (which trigger proportionate redemption payments with respect to surplus notes (other than junior surplus notes)), will be material uses of future liquidity.
As described in Note 1. Background and Business Description to the Consolidated Financial Statements included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, under the Segregated Account Rehabilitation Plan. Deferred Amounts will accrue interest (i) in the case of permitted policy claims relating to transactions that pay monthly, from the first distribution date (under the transaction documents for the relevant bond) after the date on which the Interim Payment in respect of such permitted policy claim
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was made until such outstanding policy obligations are paid in full or (ii) for permitted policy claims relating to transactions that do not pay monthly, from the first Payment Date (as defined in the Segregated Account Rehabilitation Plan, as amended) to occur after the date on which the Interim Payment in respect of such permitted policy claim was made until such outstanding policy obligations are paid in full. Interest on Deferred Amounts will accrue generally at an effective rate of 5.1%, compounded annually. The Segregated Account is responsible for Deferred Amounts of $2,933.0 million and unpaid accrued interest of $369.1 million at March 31, 2015. If approved by the Rehabilitator, payment of Deferred Amounts, together with interest thereon, which trigger proportionate redemption payments with respect to surplus notes (other than junior surplus notes), will be a use of future liquidity. Future payments of Deferred Amounts, including interest thereon, or increases to the percentage of Interim Payments as required by the Rehabilitator will have adverse consequences to Ambac's future cash flows.
Ambac Assurance is limited in its ability to pay dividends pursuant to the terms of its Auction Market Preferred Shares (“AMPS”), which state that dividends may not be paid on the common stock of Ambac Assurance unless all accrued and unpaid dividends on the AMPS for the then current dividend period have been paid, provided that dividends on the common stock may be made at all times for the purpose of, and only in such amounts as are necessary for enabling Ambac (i) to service its indebtedness for borrowed money as such payments become due or (ii) to pay its operating expenses. If dividends are paid on the common stock for such purposes, dividends on the AMPS become cumulative until the date that all accumulated and unpaid dividends have been paid on the AMPS. Ambac Assurance has not paid dividends on the AMPS since 2010. Refer to Part I, Item 1, “Insurance Regulatory Matters - Dividend Restrictions, Including Contractual Restrictions” and Note 9. Insurance Regulatory Restrictions to the Consolidated Financial Statements included in Part II, Item 8, in in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for more information on dividend payment restrictions.
Our ability to recover RMBS representation and warranty recoveries is subject to significant uncertainty, including risks inherent in litigation, collectability of such amounts from counterparties (and/or their respective parents and affiliates), timing of receipt of any such recoveries, intervention by the Rehabilitator or OCI which could impede our ability to take actions required to realize such recoveries, and uncertainty inherent in the assumptions used in estimating such recoveries. The amount of these subrogation recoveries is significant and if we are unable to recover any amounts our future available liquidity to pay claims would be reduced materially. Ambac Assurance received other subrogation recoveries, net of reinsurance of $82.4 million during the three months ended March 31, 2015.
A wholly-owned subsidiary of Ambac Assurance is a party to credit default swaps (“CDS”) with various commercial counterparties. Ambac Assurance guarantees its subsidiary’s payment obligations under such CDS. The terms of such CDS include events of default or termination events based on the occurrence of certain events, or the existence of certain circumstances, relating to the financial condition of Ambac Assurance, including the commencement of an insolvency, rehabilitation or like proceeding. If such an event of default or termination event were to occur, the CDS counterparties could claim the contractual right to terminate the CDS and require Ambac Assurance, as financial guarantor, to make termination payments. Ambac Assurance estimates that such potential termination payments amount to $117.2 million as of March 31, 2015. However, the Rehabilitation Court has issued an injunction barring the early termination of contracts based on the occurrence of events or the existence of circumstances like those described above. As a result, Ambac Assurance does not expect to make early termination payments in respect of CDS where such amounts are claimed based on the occurrence of events, or the existence of circumstances, relating to the financial condition of Ambac Assurance.
Financial Services Liquidity. The principal uses of liquidity by Financial Services subsidiaries are payments on investment agreement obligations, payments on intercompany loans, payments under derivative contracts (primarily interest rate swaps and US Treasury futures), collateral posting and operating expenses. Management believes that its Financial Services’ short and long-term liquidity needs can be funded from net investment coupon receipts; the maturity of invested assets; sales of invested assets; intercompany loans from Ambac Assurance and receipts from derivative contracts.
While meaningful progress has been made in unwinding the Financial Services businesses, multiple sources of risk continue to exist. These include unexpected draws on outstanding investment agreements, potential swap terminations and the inability to replace or establish new hedge positions and interest rate volatility.
Investment agreements subject Ambac to liquidity risk associated with unanticipated withdrawals of principal as allowed by the terms of contingent withdrawal provisions within all remaining outstanding investment agreements. Investment agreements outstanding as of March 31, 2015 were issued in connection with structured credit-linked notes (“CLNs”). The investment agreements contain contingent withdrawal risk in the event of either an early redemption of the related bond issue or certain credit events pertaining to the underlying borrower. As of March 31, 2015, Ambac had $114.4 million of contingent withdrawal investment agreements related to CLNs. The investment agreement business manages liquidity risk by closely matching the maturity schedules of its invested assets with the maturity schedules of its investment agreement liabilities. Additionally, management performs regular surveillance of the related transactions. This surveillance process is customized for each investment agreement transaction and includes a review of past activity, recently issued trustee reports, reference name performance characteristics and third party tools to analyze early withdrawal risk.
Liquidity risk also exists in the derivative contract and investment agreement portfolios due to contract provisions which may require collateral posting or early termination of contracts. Both the investment agreement and swap businesses borrow cash and securities from Ambac Assurance to meet liquidity needs when such borrowing is determined to be most economically beneficial to Ambac Assurance. Intercompany loans are made under established lending agreements with defined borrowing limits that have received non-disapproval from OCI.
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Cash Flow Statement Discussion. The following table summarizes the net cash flows for the periods presented.

| Three Months Ended March 31,
($ in million) | 2015 |  | 2014
Cash provided by (used in): |  |  |
Operating activities | $ | 5.6 |  |  | $ | 38.5 |
Investing activities | (3.0 | ) |  | (84.2 | )
Financing activities | (49.9 | ) |  | — |
Net cash flow | $ | (47.3 | ) |  | $ | (45.7 | )

Operating activities
The principal sources of Ambac's operating cash flows are gross installment premiums on insurance contracts and fees on credit default swap contracts, investment coupon receipts, claim and reinsurance recoveries and RMBS subrogation recoveries. The principal uses of Ambac's liquidity are the payment of operating expenses, claim and commutation payments, ceded reinsurance premiums and tax payments. During the three months ended March 31, 2015, Ambac had net loss and loss expense payments of $104.2 million, compared to $9.4 million for the three months ended March 31, 2014. Included in payments for the three months ended March 31, 2015 were commutation and Segregated Account special policy payments for certain policies allocated to the Segregated Account.
Future operating cash flows will primarily be impacted by the level of premium collections, investment coupon receipts and claim payments (including further payments of Deferred Amounts and interest thereon) and payments under credit default swap contracts. Future payments of Deferred Amounts, including interest thereon, or increases to the percentage of Interim Payments as required by the Rehabilitator will have adverse consequences to Ambac's future cash flows
Investing Activities
The net cash provided by investing activities for the three months ended March 31, 2015 resulted primarily from sales and maturities of securities.
Financing Activities
Financing activities for the three months ended March 31, 2015 included payments for investment agreement draws of $49.9 million.
Credit Ratings and Collateral. Ambac Assurance is no longer rated by Moody’s and S&P, which resulted in the triggering of required cure provisions in nearly all of the investment agreements issued. At March 31, 2015 Ambac posted collateral of $108.4 million in connection with its outstanding investment agreements.
Ambac Financial Services, LLC (“AFS”) provides interest rate swaps for states, municipalities, asset-backed issuers and other entities in connection with their financings. AFS hedges its interest rate risk of these instruments, as well as a portion of the interest rate risk in the financial guarantee portfolio, with standardized derivative contracts, including financial futures contracts, which contain collateral or margin requirements. Under these hedge agreements, AFS is required to post collateral or margin to its counterparties and futures commission merchants to cover unrealized losses. In addition, AFS is required to post collateral or margin in excess of the amounts needed to cover unrealized losses. All AFS derivative contracts containing ratings-based downgrade triggers that could result in collateral or margin posting or a termination have been triggered. If terminations were to occur, AFS would be required to make termination payments but would also receive a return of collateral or margin in the form of cash, U.S. Treasury or U.S. government agency obligations with market values equal to or in excess of market values of the swaps and futures contracts. In most cases, AFS will look to re-establish hedge positions that are terminated early. This may result in additional collateral or margin obligations. The amount of additional collateral or margin posted on derivatives contracts will depend on several variables including the degree to which counterparties exercise their termination rights (or agreements terminate automatically) and the terms on which hedges can be replaced. All collateral and margin obligations are currently met. Collateral and margin posted by AFS totaled a net amount of $260.5 million, including independent amounts, under these contracts at March 31, 2015.
Ambac Credit Products (“ACP”) is not required to post collateral under any of its outstanding credit derivative contracts.
BALANCE SHEET
Total assets increased by approximately $227 million from December 31, 2014 to $25.4 billion at March 31, 2015, primarily due to higher VIE assets from declines in interest rates, partially offset by (i) lower premium receivables from runoff and early terminations of the insured portfolio and (ii) amortization of the insurance intangible asset during the period. Total liabilities increased by approximately $63 million from December 31, 2014 to $23.5 billion as of March 31, 2015, primarily as a result of higher derivative and VIE liabilities from declines in interest rates, partially offset by (i) lower loss and loss expense reserves from positive reserve development; (ii) lower unearned premium reserves; and (iii) repayments of investment agreement liabilities.
As of March 31, 2015 total stockholders’ equity was $1,838 million, compared with total stockholders’ equity of $1,674 million at December 31, 2014. This increase was primarily due to Other Comprehensive Income earned during the period.
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Investment Portfolio. Ambac Assurance’s non-VIE investment objective is to achieve the highest after-tax return on a diversified portfolio of primarily fixed income investments while employing asset/liability management practices to satisfy all operating and strategic liquidity needs. Ambac Assurance’s investment portfolio is subject to internal investment guidelines and is subject to limits on types and quality of investments imposed by the insurance laws and regulations of the States of Wisconsin and New York. Such guidelines set forth minimum credit rating requirements and credit risk concentration limits. Within these guidelines, Ambac Assurance opportunistically purchases Ambac Assurance insured securities in the open market given their relative risk/reward characteristics. Ambac Assurance’s investment policies are subject to oversight by the Rehabilitator of the Segregated Account pursuant to contracts entered into between Ambac Assurance and the Segregated Account. The Board of Directors of Ambac Assurance approves any changes to Ambac Assurance's investment policy.
Ambac UK’s non-VIE investment policy is designed with the primary objective of ensuring that Ambac UK is able to meet its financial obligations as they fall due, in particular with respect to policyholder claims. Ambac UK’s investment portfolio is primarily fixed income investments and a diversified holdings of pooled investment funds. The portfolio is subject to internal investment guidelines and may be subject to limits on types and quality of investments imposed by the PRA as regulator of Ambac UK. Ambac UK’s investment policy sets forth minimum credit rating requirements and concentration limits, among other restrictions. The Board of Directors of Ambac UK approves any changes or exceptions to Ambac UK’s investment policy.
The Financial Services non-VIE investment portfolio consists primarily of assets funded with proceeds from the issuance of investment agreement liabilities. The primary investment objective is to invest in a diversified portfolio of high-grade securities that produce sufficient cash flow to satisfy all investment agreement liabilities and their collateral requirements. The investment portfolio is subject to internal investment guidelines. Such guidelines set forth minimum credit rating requirements and credit risk concentration limits.
The Corporate non-VIE investment portfolio's primary objective is to preserve capital for strategic uses while maximizing income, including investments in securities issued by or guaranteed by Ambac Assurance. The investment portfolio is subject to internal investment guidelines. Such guidelines set forth minimum credit rating requirements and credit risk concentration limits.
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The following table summarizes the composition of Ambac’s investment portfolio, excluding VIE investments, at fair value by business segment at March 31, 2015 and December 31, 2014:

($ in millions) | Financial Guarantee |  | Financial Services |  | Corporate |  | Total
March 31, 2015: |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |
Municipal obligations (1) | $ | 525.2 |  |  | $ | — |  |  | $ | — |  |  | $ | 525.2 |
Corporate obligations | 1,609.8 |  |  | — |  |  | — |  |  | 1,609.8 |
Foreign obligations | 125.2 |  |  | — |  |  | — |  |  | 125.2 |
U.S. government obligations | 30.3 |  |  | — |  |  | — |  |  | 30.3 |
U.S. agency obligations | 4.4 |  |  | — |  |  | — |  |  | 4.4 |
Residential mortgage-backed securities (2) | 1,806.4 |  |  | — |  |  | 40.1 |  |  | 1,846.5 |
Collateralized debt obligations | 55.0 |  |  | — |  |  | 33.2 |  |  | 88.2 |
Other asset-backed securities | 365.9 |  |  | 109.4 |  |  | 160.9 |  |  | 636.2 |
| 4,522.2 |  |  | 109.4 |  |  | 234.2 |  |  | 4,865.8 |
Short-term (1) | 195.1 |  |  | 0.1 |  |  | 25.8 |  |  | 221.0 |
Other investments | 310.6 |  |  | — |  |  | 22.0 |  |  | 332.6 |
| 5,027.9 |  |  | 109.5 |  |  | 282.0 |  |  | 5,419.4 |
Fixed income securities pledged as collateral: |  |  |  |  |  |  |
U.S. government obligations | 64.8 |  |  | — |  |  | — |  |  | 64.8 |
| 64.8 |  |  | — |  |  | — |  |  | 64.8 |
Total investments | $ | 5,092.7 |  |  | $ | 109.5 |  |  | $ | 282.0 |  |  | $ | 5,484.2 |
Percent total | 92.9 | % |  | 2.0 | % |  | 5.1 | % |  | 100 | %
December 31, 2014: |  |  |  |  |  |  |
Fixed income securities: |  |  |  |  |  |  |
Municipal obligations (1) | $ | 525.8 |  |  | $ | — |  |  | $ | — |  |  | $ | 525.8 |
Corporate obligations | 1,385.6 |  |  | — |  |  | — |  |  | 1,385.6 |
Foreign obligations | 127.8 |  |  | — |  |  | — |  |  | 127.8 |
U.S. government obligations | 42.9 |  |  | — |  |  | — |  |  | 42.9 |
U.S. agency obligations | 29.5 |  |  | — |  |  | — |  |  | 29.5 |
Residential mortgage-backed securities (2) | 1,710.9 |  |  | — |  |  | — |  |  | 1,710.9 |
Collateralized debt obligations | 4.4 |  |  | — |  |  | 16.7 |  |  | 21.1 |
Other asset-backed securities | 555.2 |  |  | 109.2 |  |  | 217.6 |  |  | 882.0 |
| 4,382.1 |  |  | 109.2 |  |  | 234.3 |  |  | 4,725.6 |
Short-term (1) | 337.0 |  |  | 0.2 |  |  | 22.9 |  |  | 360.1 |
Other investments | 336.0 |  |  | — |  |  | 21.0 |  |  | 357.0 |
| 5,055.1 |  |  | 109.4 |  |  | 278.2 |  |  | 5,442.7 |
Fixed income securities pledged as collateral: |  |  |  |  |  |  |
U.S. government obligations | 64.3 |  |  | — |  |  | — |  |  | 64.3 |
| 64.3 |  |  | — |  |  | — |  |  | 64.3 |
Total investments | $ | 5,119.4 |  |  | $ | 109.4 |  |  | $ | 278.2 |  |  | $ | 5,507.0 |
Percent total | 93.0 | % |  | 2.0 | % |  | 5.0 | % |  | 100 | %

(1) | Includes taxable and tax exempt securities.

(2) | Includes RMBS insured by Ambac Assurance.

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The following table represents the fair value of mortgage and asset-backed securities at March 31, 2015 and December 31, 2014 by classification:

($ in millions) | Financial Guarantee |  | Financial Services |  | Corporate |  | Total
March 31, 2015: |  |  |  |  |  |  |
Residential mortgage-backed securities: |  |  |  |  |  |  |
RMBS—Second Lien | $ | 906.7 |  |  | $ | — |  |  | $ | — |  |  | $ | 906.7 |
RMBS—First-lien—Alt-A | 424.2 |  |  | — |  |  | 24.0 |  |  | 448.2 |
RMBS—First Lien—Sub Prime | 318.1 |  |  | — |  |  | — |  |  | 318.1 |
RMBS—First Lien—Prime | 157.4 |  |  | — |  |  | 16.1 |  |  | 173.5 |
Total residential mortgage-backed securities | 1,806.4 |  |  | — |  |  | 40.1 |  |  | 1,846.5 |
Other asset-backed securities |  |  |  |  |  |  |
Military Housing | 232.1 |  |  | — |  |  | — |  |  | 232.1 |
Auto | 31.1 |  |  | 4.5 |  |  | 107.3 |  |  | 142.9 |
Credit Cards | 9.6 |  |  | 104.9 |  |  | 25.5 |  |  | 140.0 |
Structured Insurance | 51.4 |  |  | — |  |  | — |  |  | 51.4 |
Student Loans | 22.2 |  |  | — |  |  | — |  |  | 22.2 |
Other | 19.5 |  |  | — |  |  | 28.1 |  |  | 47.6 |
Total other asset-backed securities | 365.9 |  |  | 109.4 |  |  | 160.9 |  |  | 636.2 |
Total | $ | 2,172.3 |  |  | $ | 109.4 |  |  | $ | 201.0 |  |  | $ | 2,482.7 |
December 31, 2014: |  |  |  |  |  |  |
Residential mortgage-backed securities: |  |  |  |  |  |  |
RMBS—Second Lien | $ | 875.9 |  |  | $ | — |  |  | $ | — |  |  | $ | 875.9 |
RMBS—First-lien—Alt-A | 440.3 |  |  | — |  |  | — |  |  | 440.3 |
RMBS—First Lien—Sub Prime | 271.9 |  |  | — |  |  | — |  |  | 271.9 |
RMBS—First Lien—Prime | 122.8 |  |  | — |  |  | — |  |  | 122.8 |
Total residential mortgage-backed securities | 1,710.9 |  |  | — |  |  | — |  |  | 1,710.9 |
Other asset-backed securities |  |  |  |  |  |  |
Military Housing | 228.8 |  |  | — |  |  | — |  |  | 228.8 |
Auto | 31.0 |  |  | 4.5 |  |  | 125.1 |  |  | 160.6 |
Credit Cards | 9.6 |  |  | 104.7 |  |  | 60.5 |  |  | 174.8 |
Structured Insurance | 51.4 |  |  | — |  |  | — |  |  | 51.4 |
Student Loans | 231.7 |  |  | — |  |  | — |  |  | 231.7 |
Other | 2.7 |  |  | — |  |  | 32.0 |  |  | 34.7 |
Total other asset-backed securities | 555.2 |  |  | 109.2 |  |  | 217.6 |  |  | 882.0 |
Total | $ | 2,266.1 |  |  | $ | 109.2 |  |  | $ | 217.6 |  |  | $ | 2,592.9 |

The weighted average rating, which is based on the lower of Standard & Poor’s or Moody’s ratings, of the mortgage and asset-backed securities is CC and BBB as of March 31, 2015, and CC and BB as of December 31, 2014, respectively.
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. In the event these underlying ratings are not available from the rating agencies, Ambac will assign an internal rating. Refer to Note 8. Investments to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for further details on securities insured by Ambac Assurance.
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The following table provides the ratings(1) distribution of the fixed income investment portfolio based on fair value at March 31, 2015 and December 31, 2014 by business segment:

Ratings (1) | Financial Guarantee (2) |  | Financial Services |  | Corporate |  | Combined
March 31, 2015 |  |  |  |  |  |  |
AAA | 11 | % |  | 100 | % |  | 83 | % |  | 17 | %
AA | 15 |  |  | — |  |  | — |  |  | 14 |
A | 18 |  |  | — |  |  | 2 |  |  | 17 |
BBB | 14 |  |  | — |  |  | — |  |  | 13 |
Below investment grade (2) | 37 |  |  | — |  |  | 15 |  |  | 35 |
Not rated | 5 |  |  | — |  |  | — |  |  | 4 |
Total | 100 | % |  | 100 | % |  | 100 | % |  | 100 | %
December 31, 2014 |  |  |  |  |  |  |
AAA | 14 | % |  | 100 | % |  | 100 | % |  | 20 | %
AA | 12 |  |  | — |  |  | — |  |  | 11 |
A | 15 |  |  | — |  |  | — |  |  | 14 |
BBB | 13 |  |  | — |  |  | — |  |  | 13 |
Below investment grade (2) | 41 |  |  | — |  |  | — |  |  | 38 |
Not rated | 5 |  |  | — |  |  | — |  |  | 4 |
Total | 100 | % |  | 100 | % |  | 100 | % |  | 100 | %

(1) | Ratings are based on the lower of Moody’s or S&P ratings. If ratings are unavailable from Moody's or S&P, Fitch ratings are used. If guaranteed, rating represents the higher of the underlying or guarantor’s financial strength rating.

(2) | Below investment grade bonds insured by Ambac represent 36% and 39% of the 2015 and 2014 Financial Guarantee portfolio, respectively and 15% and 0% of the Corporate portfolio, respectively.

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The following table summarizes, for all available-for-sale securities in an unrealized loss position as of March 31, 2015 and December 31, 2014, the aggregate fair value and gross unrealized loss by length of time those securities have been continuously in an unrealized loss position:

| March 31, 2015 |  | December 31, 2014
($ in millions) | Estimated Fair Value (1) |  | Gross Unrealized Losses |  | Estimated Fair Value(1) |  | Gross Unrealized Losses
Municipal obligations: |  |  |  |  |  |  |
Less than 12 months | $ | 46.5 |  |  | $ | 0.4 |  |  | $ | 77.8 |  |  | $ | 1.2 |
Greater than 12 months | 119.4 |  |  | 3.8 |  |  | 135.1 |  |  | 5.8 |
| 165.9 |  |  | 4.2 |  |  | 212.9 |  |  | 7.0 |
Corporate obligations: |  |  |  |  |  |  |
Less than 12 months | 278.0 |  |  | 2.1 |  |  | 453.5 |  |  | 5.0 |
Greater than 12 months | 81.7 |  |  | 1.2 |  |  | 172.0 |  |  | 4.4 |
| 359.7 |  |  | 3.3 |  |  | 625.5 |  |  | 9.4 |
Foreign government obligations: |  |  |  |  |  |  |
Less than 12 months | 32.2 |  |  | 1.9 |  |  | 20.8 |  |  | 0.7 |
Greater than 12 months | 8.9 |  |  | 0.6 |  |  | 14.3 |  |  | 0.6 |
| 41.1 |  |  | 2.5 |  |  | 35.1 |  |  | 1.3 |
U.S. government obligations: |  |  |  |  |  |  |
Less than 12 months | 1.7 |  |  | — |  |  | 71.5 |  |  | 0.3 |
Greater than 12 months | 10.8 |  |  | 0.1 |  |  | 14.7 |  |  | 0.3 |
| 12.5 |  |  | 0.1 |  |  | 86.2 |  |  | 0.6 |
U.S. agency obligations: |  |  |  |  |  |  |
Less than 12 months | — |  |  | — |  |  | 25.0 |  |  | — |
Greater than 12 months | 4.4 |  |  | — |  |  | 4.4 |  |  | — |
| 4.4 |  |  | — |  |  | 29.4 |  |  | — |
Residential mortgage-backed securities: |  |  |  |  |  |  |
Less than 12 months | 547.7 |  |  | 17.3 |  |  | 413.2 |  |  | 12.4 |
Greater than 12 months | 10.3 |  |  | 0.8 |  |  | 10.1 |  |  | 1.1 |
| 558.0 |  |  | 18.1 |  |  | 423.3 |  |  | 13.5 |
Collateralized debt obligations: |  |  |  |  |  |  |
Less than 12 months | 63.8 |  |  | 0.3 |  |  | 5.0 |  |  | 0.3 |
Greater than 12 months | 4.4 |  |  | 0.2 |  |  | — |  |  | — |
| 68.2 |  |  | 0.5 |  |  | 5.0 |  |  | 0.3 |
Other asset-backed securities: |  |  |  |  |  |  |
Less than 12 months | 163.2 |  |  | 0.7 |  |  | 248.8 |  |  | 0.2 |
Greater than 12 months | 0.1 |  |  | — |  |  | 0.1 |  |  | — |
| 163.3 |  |  | 0.7 |  |  | 248.9 |  |  | 0.2 |
Short-term securities: |  |  |  |  |  |  |
Less than 12 months | — |  |  | — |  |  | 8.8 |  |  | — |
Greater than 12 months | — |  |  | — |  |  | — |  |  | — |
| — |  |  | — |  |  | 8.8 |  |  | — |
Total | $ | 1,373.1 |  |  | $ | 29.4 |  |  | $ | 1,675.1 |  |  | $ | 32.3 |

(1) | Since the table is presented in millions, securities with market values and unrealized losses that are less than $0.1 will be shown as zero.

Management has determined that the unrealized losses in available-for-sale securities are primarily driven by increases in interest rates and shifts in market risk and liquidity premiums demanded by fixed income investors between April 30, 2013 (the "Fresh Start Reporting Date") and March 31, 2015. Ambac has concluded that unrealized losses reflected in the table above are temporary in nature based upon (a) there being no unexpected principal and interest payment defaults on these securities; (b) an analysis of the creditworthiness of the issuer and financial guarantor, as applicable, and analysis of projected defaults on the underlying collateral; (c) management having no intent to sell these securities; and (d) it being not more likely than not that Ambac will be required to sell these debt securities before the anticipated recovery of its amortized cost basis.
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The following table summarizes amortized cost and fair value for all available-for-sale securities in an unrealized loss position as of March 31, 2015 and December 31, 2014, by contractual maturity date:

| March 31, 2015 |  | December 31, 2014
($ in millions) | Amortized Cost |  | Estimated Fair Value |  | Amortized Cost |  | Estimated Fair Value
Municipal obligations: |  |  |  |  |  |  |
Due in one year or less | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Due after one year through five years | 6.6 |  |  | 6.6 |  |  | 11.8 |  |  | 11.7 |
Due after five years through ten years | 116.0 |  |  | 114.1 |  |  | 151.6 |  |  | 147.6 |
Due after ten years | 47.5 |  |  | 45.2 |  |  | 56.5 |  |  | 53.6 |
| 170.1 |  |  | 165.9 |  |  | 219.9 |  |  | 212.9 |
Corporate obligations: |  |  |  |  |  |  |
Due in one year or less | 34.9 |  |  | 34.8 |  |  | 56.1 |  |  | 56.1 |
Due after one year through five years | 189.9 |  |  | 188.7 |  |  | 337.7 |  |  | 334.7 |
Due after five years through ten years | 128.9 |  |  | 127.2 |  |  | 228.1 |  |  | 221.8 |
Due after ten years | 9.3 |  |  | 9.0 |  |  | 13.0 |  |  | 12.9 |
| 363.0 |  |  | 359.7 |  |  | 634.9 |  |  | 625.5 |
Foreign government obligations: |  |  |  |  |  |  |
Due in one year or less | 2.5 |  |  | 2.1 |  |  | 3.6 |  |  | 3.3 |
Due after one year through five years | 7.7 |  |  | 6.9 |  |  | 11.7 |  |  | 11.4 |
Due after five years through ten years | 32.6 |  |  | 31.3 |  |  | 19.2 |  |  | 18.5 |
Due after ten years | 0.8 |  |  | 0.8 |  |  | 1.9 |  |  | 1.9 |
| 43.6 |  |  | 41.1 |  |  | 36.4 |  |  | 35.1 |
U.S. government obligations: |  |  |  |  |  |  |
Due in one year or less | — |  |  | — |  |  | 1.8 |  |  | 1.8 |
Due after one year through five years | 10.2 |  |  | 10.2 |  |  | 79.9 |  |  | 79.5 |
Due after five years through ten years | 2.4 |  |  | 2.3 |  |  | 3.9 |  |  | 3.8 |
Due after ten years | — |  |  | — |  |  | 1.2 |  |  | 1.1 |
| 12.6 |  |  | 12.5 |  |  | 86.8 |  |  | 86.2 |
U.S. agency obligations: |  |  |  |  |  |  |
Due in one year or less | — |  |  | — |  |  | 25.0 |  |  | 25.0 |
Due after one year through five years | 4.4 |  |  | 4.4 |  |  | 4.4 |  |  | 4.4 |
Due after five years through ten years | — |  |  | — |  |  | — |  |  | — |
Due after ten years | — |  |  | — |  |  | — |  |  | — |
| 4.4 |  |  | 4.4 |  |  | 29.4 |  |  | 29.4 |
Residential mortgage-backed securities | 576.1 |  |  | 558.0 |  |  | 436.8 |  |  | 423.3 |
Collateralized debt obligations | 68.7 |  |  | 68.2 |  |  | 5.3 |  |  | 5.0 |
Other asset-backed securities | 164.0 |  |  | 163.3 |  |  | 249.1 |  |  | 248.9 |
Short-term securities | — |  |  | — |  |  | 8.8 |  |  | 8.8 |
Total | $ | 1,402.5 |  |  | $ | 1,373.1 |  |  | $ | 1,707.4 |  |  | $ | 1,675.1 |

Reinsurance Recoverable on Paid and Unpaid Losses. Ambac Assurance has reinsurance in place pursuant to surplus share treaty and facultative agreements. To minimize its exposure to losses from reinsurers, Ambac Assurance (i) monitors the financial condition of its reinsurers; (ii) is entitled to receive collateral from its reinsurance counterparties in certain reinsurance contracts; and (iii) has certain cancellation rights that can be exercised by Ambac Assurance in the event of rating agency downgrades of a reinsurer (among other events and circumstances). Ambac Assurance held letters of credit and collateral amounting to approximately $142.8 million from its reinsurers at March 31, 2015. These collateral amounts are in excess of Ambac’s reinsurance recoverable on paid and unpaid losses for each reinsurer. Effective April 8, 2015, at the request of Assured Guaranty Re Ltd., Moody's Investors Service has withdrawn the insurance financial strength ratings it assigned to Assured Guaranty Re Ltd (previously Baa1). This withdrawal may result in additional collateral being required to be provided to Ambac, although Assured Guaranty Re Ltd. has the option to novate the reinsurance agreement to Assured Guaranty Municipal Corporation (currently rated A2 by Moody's), which, at its current rating, could reduce the collateral provided to Ambac.
Insurance Intangible Asset. At the Fresh Start Reporting Date, an insurance intangible asset was recorded which represented the difference between the fair value and aggregate carrying value of the financial guarantee insurance and reinsurance assets and liabilities. For the three months ended March 31, 2015 and 2014, the insurance intangible amortization expense was $37.4 million and $31.7 million, respectively. As of March 31, 2015 and December 31, 2014, the gross carrying value of the insurance intangible asset was $1,631 million and $1,660 million,
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respectively. Accumulated amortization of the insurance intangible asset was $284 million and $249 million, as of March 31, 2015 and December 31, 2014, respectively, resulting in a net insurance intangible asset of $1,347 million and $1,411 million, respectively.
Goodwill. At the Fresh Start Reporting Date, goodwill of $515 million was recorded which represented the excess reorganization value which could not be attributed to the fair value of specific identified tangible and intangible assets. As of March 31, 2015 we concluded goodwill was not impaired and the asset remains at $515 million.
Derivative Liabilities. The interest rate derivative products portfolio is positioned to benefit from rising rates as an economic hedge against interest rate exposure in the financial guarantee portfolio. Derivative liabilities increased from $407 million to $447 million primarily due to decreases in interest rates during 2015. The valuation of derivative liabilities (credit derivatives and interest rate swaps) is impacted by the market’s view of Ambac Assurance’s credit quality. We reflect Ambac’s credit quality in the fair value of such liabilities by including a CVA in the determination of fair value, whereas a lower (higher) CVA, in isolation, would result in an increase (decrease) in the liability. Ambac reduced its derivative liabilities by $95.2 million at March 31, 2015 and $80.4 million at December 31, 2014 to incorporate the market’s view of Ambac’s credit quality. The higher CVA as of March 31, 2015 is a function of changes to the underlying derivative liabilities before considering Ambac credit quality. The market's view of Ambac Assurance's credit quality was relatively unchanged for the three months ended March 31, 2015.
Loss and Loss Expense Reserves. Loss and loss expense reserves are based upon estimates of the ultimate aggregate losses inherent in the non-derivative financial guarantee portfolio for insurance policies issued to beneficiaries, including unconsolidated VIEs. Loss and loss expense reserves include the unpaid portion of and interest accrued on Deferred Amounts pursuant to the amended Segregated Account Rehabilitation Plan. The loss and loss expense reserves for financial guarantee insurance discussed herein relates only to Ambac’s non-derivative insurance business for insurance policies for which we do not consolidate the VIE. The evaluation process for determining the level of reserves is subject to certain estimates and judgments.
The loss and loss expense reserves, before reinsurance as of March 31, 2015 and December 31, 2014 were $3,492 million and $3,799 million, respectively. As of March 31, 2015 and December 31, 2014, respectively, $3,302 million and $3,274 million of Segregated Account claims remain unpaid, including unpaid accrued interest on Deferred Amounts of $369 million and $329, respectively.
Loss and loss expense reserves are included in the Consolidated Balance Sheets as follows:

| Unpaid Claims |  | Present Value of Expected Net Cash Flows |  |  |  |
($ in millions) Balance Sheet Line Item | Claims |  | Accrued Interest |  | Claims and Loss Expenses |  | Recoveries (1) |  | Unearned Premium Revenue |  | Gross Loss and Loss Expense Reserves
March 31, 2015: |  |  |  |  |  |  |  |  |  |  |
Loss and loss expense reserves | $ | 2,158 |  |  | $ | 266 |  |  | $ | 3,580 |  |  | $ | (1,269 | ) |  | $ | (259 | ) |  | $ | 4,476 |
Subrogation recoverable | 775 |  |  | 103 |  |  | 175 |  |  | (2,037 | ) |  | — |  |  | (984 | )
Totals | $ | 2,933 |  |  | $ | 369 |  |  | $ | 3,755 |  |  | $ | (3,306 | ) |  | $ | (259 | ) |  | $ | 3,492 |
December 31, 2014: |  |  |  |  |  |  |  |  |  |  |
Loss and loss expense reserves | $ | 2,172 |  |  | $ | 235 |  |  | $ | 3,792 |  |  | $ | (1,206 | ) |  | $ | (241 | ) |  | $ | 4,752 |
Subrogation recoverable | 773 |  |  | 94 |  |  | 198 |  |  | (2,018 | ) |  | — |  |  | (953 | )
Totals | $ | 2,945 |  |  | $ | 329 |  |  | $ | 3,990 |  |  | $ | (3,224 | ) |  | $ | (241 | ) |  | $ | 3,799 |

(1) | Present value of future recoveries include RMBS representation and warranty recoveries of $2,568 and $2,523 at March 31, 2015 and December 31, 2014, respectively.

Ambac has exposure to various bond types issued in the debt capital markets. Our experience has shown that, for the majority of bond types, we have not experienced significant claims. The bond types that have experienced significant claims and loss reserves are residential mortgage-backed securities (“RMBS”) and student loan securities. These two bond types represent 93% of our ever-to-date insurance claims recorded with RMBS comprising 89% of our ever-to-date claims payments.
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The table below indicates gross par outstanding and the components of gross loss and loss expense reserves related to policies in Ambac’s loss reserves at March 31, 2015 and December 31, 2014:

|  |  | Unpaid Claims |  | Present Value of Expected Net Cash Flows |  |  |  |
($ in millions) | Gross par outstanding (1) |  | Claims |  | Accrued Interest |  | Claims and Loss Expenses |  | Recoveries |  | Unearned Premium Revenue |  | Gross Loss and Loss Expense Reserves (1)(2)
March 31, 2015: |  |  |  |  |  |  |  |  |  |  |  |  |
RMBS | $ | 9,556 |  |  | $ | 2,921 |  |  | $ | 368 |  |  | $ | 1,737 |  |  | $ | (3,147 | ) |  | $ | (37 | ) |  | $ | 1,842 |
Student Loans | 1,489 |  |  | — |  |  | — |  |  | 750 |  |  | (42 | ) |  | (45 | ) |  | 663 |
Domestic Public Finance | 5,412 |  |  | 12 |  |  | 1 |  |  | 574 |  |  | (107 | ) |  | (99 | ) |  | 381 |
Ambac UK | 945 |  |  | — |  |  | — |  |  | 546 |  |  | (10 | ) |  | (29 | ) |  | 507 |
All other credits | 1,080 |  |  | — |  |  | — |  |  | 62 |  |  | — |  |  | (49 | ) |  | 13 |
Loss expenses | — |  |  | — |  |  | — |  |  | 86 |  |  | — |  |  | — |  |  | 86 |
Totals | $ | 18,482 |  |  | $ | 2,933 |  |  | $ | 369 |  |  | $ | 3,755 |  |  | $ | (3,306 | ) |  | $ | (259 | ) |  | $ | 3,492 |
December 31, 2014: |  |  |  |  |  |  |  |  |  |  |  |  |
RMBS | $ | 9,713 |  |  | $ | 2,934 |  |  | $ | 328 |  |  | $ | 1,766 |  |  | $ | (3,077 | ) |  | $ | (36 | ) |  | $ | 1,915 |
Student Loans | 1,764 |  |  | — |  |  | — |  |  | 969 |  |  | (34 | ) |  | (56 | ) |  | 879 |
Domestic Public Finance | 4,796 |  |  | 11 |  |  | 1 |  |  | 520 |  |  | (109 | ) |  | (69 | ) |  | 354 |
Ambac UK | 951 |  |  | — |  |  | — |  |  | 577 |  |  | (4 | ) |  | (31 | ) |  | 542 |
All other credits | 1,099 |  |  | — |  |  | — |  |  | 64 |  |  | — |  |  | (49 | ) |  | 15 |
Loss expenses | — |  |  | — |  |  | — |  |  | 94 |  |  | — |  |  | — |  |  | 94 |
Totals | $ | 18,323 |  |  | $ | 2,945 |  |  | $ | 329 |  |  | $ | 3,990 |  |  | $ | (3,224 | ) |  | $ | (241 | ) |  | $ | 3,799 |

(1) | Ceded par outstanding on policies with loss reserves and ceded loss and loss expense reserves at March 31, 2015 and December 31, 2014, are $945 and $75 and $915 and $100, respectively. Ceded loss and loss expense reserves are included in Reinsurance recoverable on paid and unpaid losses.

(2) | Loss reserves are included in the balance sheet as Loss and loss expense reserves or Subrogation recoverable dependent on if a policy is in a net liability or net recoverable position.

RMBS
Ambac has exposure to the U.S. mortgage market primarily through direct financial guarantees of RMBS, including transactions collateralized by first and/or second liens. We established a representation and warranty subrogation recovery as further discussed in Note 6. Financial Guarantee Insurance Contracts to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q. The table below distinguishes between RMBS credits for which we have not established a representation and warranty subrogation recovery and those for which we have, providing in both cases the gross par outstanding, gross loss reserves before subrogation recoveries, and gross loss reserves net of subrogation for all RMBS exposures for which Ambac established reserves at March 31, 2015 and December 31, 2014:
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($ in millions) |  | Gross Par Outstanding |  | Gross Loss Reserves Before Representation and Warranty Subrogation Recoveries |  | Representation and Warranty Subrogation Recoveries |  | Gross Loss Reserves Net of Representation and Warranty Subrogation Recoveries
March 31, 2015: |  |  |  |  |  |  |  |
Second-lien |  | $ | 1,768 |  |  | $ | 516 |  |  | $ | — |  |  | $ | 516 |
First-lien Mid-prime |  | 3,020 |  |  | 1,582 |  |  | — |  |  | 1,582 |
First-lien Sub-prime |  | 1,495 |  |  | 274 |  |  | — |  |  | 274 |
Other |  | 218 |  |  | 139 |  |  | — |  |  | 139 |
Total Credits Without Subrogation |  | 6,501 |  |  | 2,511 |  |  | — |  |  | 2,511 |
Second-lien |  | 1,807 |  |  | 930 |  |  | (1,865 | ) |  | (935 | )
First-lien Mid-prime |  | 132 |  |  | 410 |  |  | (222 | ) |  | 188 |
First-lien Sub-prime |  | 1,116 |  |  | 559 |  |  | (481 | ) |  | 78 |
Total Credits With Subrogation |  | 3,055 |  |  | 1,899 |  |  | (2,568 | ) |  | (669 | )
Total |  | $ | 9,556 |  |  | $ | 4,410 |  |  | $ | (2,568 | ) |  | $ | 1,842 |
December 31, 2014: |  |  |  |  |  |  |  |
Second-lien |  | $ | 1,553 |  |  | $ | 492 |  |  | $ | — |  |  | $ | 492 |
First-lien-Mid-prime |  | 3,105 |  |  | 1,603 |  |  | — |  |  | 1,603 |
First-lien-Sub-prime |  | 1,611 |  |  | 307 |  |  | — |  |  | 307 |
Other |  | 227 |  |  | 139 |  |  | — |  |  | 139 |
Total Credits Without Subrogation |  | 6,496 |  |  | 2,541 |  |  | — |  |  | 2,541 |
Second-lien |  | 1,923 |  |  | 931 |  |  | (1,838 | ) |  | (907 | )
First-lien Mid-prime |  | 136 |  |  | 415 |  |  | (225 | ) |  | 190 |
First-lien Sub-prime |  | 1,158 |  |  | 551 |  |  | (460 | ) |  | 91 |
Total Credits With Subrogation |  | 3,217 |  |  | 1,897 |  |  | (2,523 | ) |  | (626 | )
Total |  | $ | 9,713 |  |  | $ | 4,438 |  |  | $ | (2,523 | ) |  | $ | 1,915 |

For policies which have estimated representation and warranty subrogation recoveries as of March 31, 2015, Ambac has estimated ultimate losses of $4,109 million, which includes net paid claims of $2,210 million and gross loss reserves of $1,899 million before estimated representation and warranty subrogation recoveries. Gross loss reserves include Deferred Amounts and accrued interest on Deferred Amounts of $1,283 million and $162 million, respectively. These estimated ultimate losses exclude estimated ultimate losses of $967 million (including interest on Deferred Amounts) associated with policies that are the subject of litigation filed in December 2014 against transaction sponsors asserting claims only for fraudulent inducement. Ambac's estimated representation and warranty subrogation recoveries do not include potential recoveries attributed solely to the fraudulent inducement claims in its litigations.
Student Loans
Our student loan portfolio consists of credits collateralized by (i) federally guaranteed loans under the Federal Family Education Loan Program (“FFELP”) and (ii) private student loans. Whereas FFELP loans are guaranteed for a minimum of 97% of defaulted principal and interest, private loans have no government guarantee and, therefore, are subject to credit risk as with other types of unguaranteed credits. Default data has shown a significant deterioration in the performance of private student loans underlying some of our transactions. Additionally, due to the failure of the auction rate markets, the interest rates on some student loan securities have increased significantly to punitive levels pursuant to the transaction terms. Such increases have caused the collateralization ratio in these transactions to deteriorate due to negative excess spread and/or the use of principal receipts to pay current interest. The combined increase in defaults and the penalty rate on the auction rate securities continue to erode the collateralization levels in many of the trusts we insure. This impact has been offset by the current low interest rate environment. Total student loan gross loss reserves and related gross par outstanding on Ambac insured obligations were as follows:

| March 31, 2015 |  | December 31, 2014
Issuer Type ($ in millions) | Gross Par Outstanding |  | Gross Loss Reserves |  | Gross Par Outstanding |  | Gross Loss Reserves
For-Profit Issuers | $ | 1,237 |  |  | $ | 613 |  |  | $ | 1,509 |  |  | $ | 816 |
Not-For-Profit Issuers | 252 |  |  | 50 |  |  | 255 |  |  | 63 |
Total | $ | 1,489 |  |  | $ | 663 |  |  | $ | 1,764 |  |  | $ | 879 |

Collateral for the For-Profit Issuers consists of private loans which do not have any federal guarantee as to defaulted principal and interest. Collateral for the Not-For-Profit Issuers consists of both FFELP and private student loans. For the Not-For-Profit student loan portfolio, approximately 96% of the collateral backing student loan trusts consists of private loans while the remaining 4% consists of FFELP loans.
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New private student loan capital market transactions require a significant amount of equity which makes the refinancing of Ambac insured transactions backed by private loans difficult for issuers. As such, we do not expect that our private loan exposure, particularly For-Profit Issuers, will be significantly reduced via refinancing in the near term.
REASONABLY POSSIBLE ADDITIONAL NET CASH FLOWS
Ambac’s management believes that the reserves for loss and loss expenses and unearned premium reserves are adequate to cover claims presented, but reserves for loss and loss expenses are based on estimates and there can be no assurance that the ultimate liability will not exceed such estimates. As discussed above and in Note 6. Financial Guarantee Insurance Contracts to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q, reserves for loss and loss expenses include unpaid claims for insurance policies allocated to the Segregated Account. These unpaid claims are measured based on the estimated cost of settling the claims, which is principal plus accrued interest. The following reasonably possible additional net cash flows exclude changes to such amounts since they are unrelated to the likelihood of issuer default and potential recoveries and they will only be settled at the sole and absolute discretion of the Rehabilitator.
It is possible that our loss estimate assumptions for insurance policies discussed above could be understated. We have attempted to identify reasonably possible cash flows using more stressful assumptions. The reasonably possible net cash flows consider the highest stress scenario that was utilized in the development of our probability-weighted expected loss at March 31, 2015 and assumes an inability to execute commutation transactions with issuers and/or investors. Such stress scenarios are developed based on management’s view about all possible outcomes. In arriving at such view, management makes considerable judgments about the possibility of various future events. Such judgments may not conform to outcomes considered possible by others. Although we do not believe it is reasonably possible to have worst case outcomes in all cases, it is reasonably possible we could have worst case outcomes in some or even many cases. Similarly, it is also reasonably possible we will achieve better outcomes than our recorded probability weighted loss reserve.
RMBS
Changes to assumptions that could make our reserves under-estimated include an increase in interest rates, deterioration in housing prices, poor servicing, the effects of a weakened economy marked by growing unemployment and wage pressures, and/or illiquidity of the mortgage market. Additionally, our actual subrogation recoveries could be significantly lower than our estimate of $2.6 billion as of March 31, 2015 if the sponsors of these transactions: (i) fail to honor their obligations to repurchase the mortgage loans, (ii) successfully dispute our breach findings, or (iii) no longer have the financial means to fully satisfy their obligations under the transaction documents.
In the case of both first and second-lien exposures, the reasonably possible stress case assumes a harsher HPA projection, which in turn drives higher defaults and severities. Using this approach, the reasonably possible increase in loss reserves for RMBS credits for which we have an estimate of expected loss at March 31, 2015 could be approximately $133 million.
Student Loans
Changes to assumptions that could make our reserves under-estimated include, but are not limited to, an increase interest rates, an increase in default rates and loss severities on the collateral due to economic factors, as well as a failure of issuers to refinance insured bonds which have a failed debt structure, such as auction rate securities. For student loan credits for which we have an estimate of expected loss at March 31, 2015, the reasonably possible increase in loss reserves could be approximately $356 million.
Public Finance
It is possible our loss reserves for public finance credits may be under-estimated because most credits and the portfolio as a whole have possible outcomes more adverse than our recorded loss reserves. For public finance credits with loss reserves at March 31, 2015, the reasonably possible increase in loss reserves could be approximately $1,803 million greater than the current probability weighted loss reserve, reflecting the sum of all losses in the highest stress case used in our current loss reserving process.
In our past experience, losses in the public finance portfolio have been contained, with most of our adversely classified credits resolving without loss to Ambac. For example, we have entered into settlements with two municipalities that went through bankruptcy that do not require us to suffer permanent losses, unless the municipalities re-default. We have a small exposure to another city in bankruptcy and have not yet resolved the treatment of our exposure in their plan. While an unfavorable outcome in this case would not be material financially, all adverse precedents are concerning to the extent they may influence the behavior of other stressed municipalities.
Our recent experience with the city of Detroit in its bankruptcy proceeding has not been favorable and renders future outcomes with other issuers even more difficult to predict and may increase the risk that we may suffer losses that could be sizable. We agreed to settlements regarding our insured Detroit general obligation bonds that provide better treatment of our exposures than the city planned to include in its plan, but nevertheless require us to incur a loss for a significant portion of our exposure. An additional troubling precedent in the Detroit case is the preferential treatment of certain creditor classes, especially the city pensions. The cost of pensions is often a key driver of municipal stress and less severe treatment of pension obligations in bankruptcy may lead to worse outcomes for traditional debt creditors. In addition, cities may be more inclined to use bankruptcy to resolve their financial stresses if they believe preferred outcomes for various creditor groups can be achieved.
We currently consider high severity outcomes to be outlying and therefore implicitly assign low or remote probabilities to such outcomes in our current loss reserves unless the situation develops adversely. We expect municipal bankruptcies and defaults to continue to be challenging to project given their complexity, long duration and relative infrequency as well as the uniqueness of each case, particularly with regard to policy
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and political issues. Another potentially adverse development that could cause the loss reserves on our public finance credits to be underestimated is deterioration in the municipal bond market that deprives issuers' access to funding necessary to avoid defaulting on their obligations. While our loss reserves consider our judgment regarding issuers’ financial flexibility to adapt to adverse markets, they may not adequately capture sudden, unexpected or protracted market volatility that closes markets.
Our exposures to the Commonwealth of Puerto Rico are under stress arising from the Commonwealth’s poor financial condition, low ratings and limited access to capital. The Commonwealth’s announced plans to improve its financial position and prospects include the restructuring of debt obligations, and while terms are unknown, and the targets of their restructuring may change, we believe there is a possibility of incurring a loss that could be higher than our current reserves. Our loss reserves include scenarios designed to cover a range of possible outcomes, but the possible outcomes could shift quickly and materially as this volatile situation unfolds.
Other Credits, including Ambac UK
It is possible our loss reserves on other types of credits, including those insured by Ambac UK, may be under-estimated because most credits have possible outcomes more adverse than the recorded loss reserve. For all other credits, including Ambac UK, for which we have an expected loss, the sum of all the highest stress case loss scenarios is $514 million greater than the current loss reserve at March 31, 2015.
SPECIAL PURPOSE AND VARIABLE INTEREST ENTITIES
Please refer to Note 3. Special Purpose Entities, Including Variable Interest Entities to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q and Note 2. Basis of Presentation and Significant Accounting Policies and Note 3. Special Purpose Entities, Including Variable Interest Entities to the Consolidated Financial Statements, included in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, for information regarding special purpose and variable interest entities. Ambac does not have any other off-balance sheet arrangements.
ACCOUNTING STANDARDS
Please refer to Note 2. Basis of Presentation and Significant Accounting Policies to the Unaudited Consolidated Financial Statements, included in Part I, Item 1 in this Form 10-Q, for a discussion of the impact of recent accounting pronouncements on Ambac’s financial condition and results of operations.
AMBAC ASSURANCE STATUTORY BASIS FINANCIAL RESULTS
Ambac Assurance, Everspan and the Segregated Account’s statutory financial statements are prepared on the basis of accounting practices prescribed or permitted by the OCI. OCI recognizes only statutory accounting practices prescribed or permitted by the State of Wisconsin (“SAP”) for determining and reporting the financial condition and results of operations of an insurance company for determining its solvency under Wisconsin Insurance Law. The National Association of Insurance Commissioners (“NAIC”) Accounting Practices and Procedures manual (“NAIC SAP”) has been adopted as a component of prescribed practices by the State of Wisconsin. For further information, see "Ambac Assurance Statutory Basis Financial Results," in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," in in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
Ambac Assurance’s statutory policyholder surplus and qualified statutory capital (defined as the sum of policyholders surplus and mandatory contingency reserves) were $100.0 million and $298.8 million at March 31, 2015, respectively, as compared to $100.0 million and $268.4 million at December 31, 2014, respectively. The Segregated Account’s statutory policyholder surplus amount was $362.0 million and $239.3 million as of March 31, 2015 and December 31, 2014, respectively. At March 31, 2015 and December 31, 2014, Ambac Assurance’s surplus as regards to policyholders is at the Minimum Surplus Amount and therefore $26.2 million and $149.5 million, respectively, of the Segregated Account’s insurance liabilities were not assumed by Ambac Assurance under the Reinsurance Agreement. The Segregated Account's increase in policyholder surplus was primarily due to net income during the three months ended March 31, 2015. In the event that Ambac Assurance does not generate future surplus in the amount of insurance liabilities not assumed under the Reinsurance Agreement because of the applicability of the Minimum Surplus Amount, the Segregated Account would experience a shortfall in funds available to pay its liabilities to the extent that such liabilities exceed amounts available under the Reinsurance Agreement and Cooperation Agreement (each as defined in Note 1. Background and Business Description to the Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q). Any such shortfall would be a consideration for the Rehabilitator in the determination of whether any changes to the Segregated Account Rehabilitation Plan and/or the amount of partial policy claim payments are necessary or appropriate or whether to institute general rehabilitation proceedings against Ambac Assurance.
Ambac Assurance’s statutory policyholder surplus includes $378.0 million of junior surplus notes issued by the Segregated Account). These junior surplus notes, as well as preferred stock issued by Ambac Assurance, are obligations that have claims on the resources of Ambac Assurance and the Segregated Account which impact Ambac's ability to realize residual value from its equity in Ambac Assurance.
Ambac Assurance’s statutory surplus is sensitive to multiple factors, including: (i) loss reserve development (inclusive of policies allocated to the Segregated Account), (ii) approval by OCI of interest payments on existing surplus notes issued by Ambac Assurance or the Segregated Account, (iii) approval by OCI of principal payments on existing junior surplus notes issued by the Segregated Account, (iv) deterioration in the financial position of Ambac Assurance subsidiaries that have their obligations guaranteed by Ambac Assurance, (v) first time payment defaults of insured obligations, which increase statutory loss reserves, (vi) commutations of insurance policies or credit derivative contracts at amounts that differ from the amount of liabilities recorded, (vii) reinsurance contract terminations at amounts that differ from net assets recorded,
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(viii) changes to the fair value of investments carried at fair value, (ix) settlements of representation and warranty breach claims at amounts that differ from amounts recorded, including failures to collect such amounts, (x) realized gains and losses, including losses arising from other than temporary impairments of investment securities, and (xi) future changes to prescribed SAP practices by the OCI.
AMBAC UK FINANCIAL RESULTS UNDER UK ACCOUNTING PRINCIPLES
Ambac UK is required to prepare financial statements under the provisions of The Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 relating to insurance companies, and in accordance with the Statement of Recommended Practice on Accounting for Insurance Business issued by the Association of British Insurers dated December 2005 (as amended in December 2006) (collectively referred to as “UK GAAP”). Ambac UK is also required to prepare financial statements pursuant to the Accounts and Statements Rules set out in Part I and Part IV of Chapter 9 to IPRU(INS) the Interim Prudential Sourcebook for Insurers, GENPRU the General Prudential Sourcebook and INSPRU the Insurance Prudential Sourcebook (“the Rules”) made by the Prudential Regulatory Authority under section 138 of the Financial Services and Markets Act 2000 (“UK Regulatory”). Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations in Ambac's 2014 Form 10-K for additional information on the significant differences between these accounting bases and U.S. GAAP.
The deficit in Ambac UK’s shareholder funds under UK GAAP was £59.6 million at March 31, 2015 as compared to a deficit of £103.2 million at December 31, 2014. Ambac UK’s improvement in shareholders’ funds was primarily due to net income. Notwithstanding the deficit in shareholders’ funds, the directors remain satisfied that Ambac UK has adequate resources to meet its obligations as they fall due and that Ambac UK remains a going concern. At March 31, 2015, the carrying value of cash and investments was £357.1 million, an increase from £337.6 million at December 31, 2014. The increase in cash and investments is due to the continued receipt of premium income and investment coupons from Ambac UK's investment portfolio.
The deficit in Ambac UK’s shareholder funds under UK Regulatory was £361.2 million at March 31, 2015 as compared to a deficit of £416.5 million at December 31, 2014, an improvement primarily due to net income. The deficit at March 31, 2015 and December 31, 2014 are in comparison to a regulatory capital requirement of £20.6 million, whereby Ambac UK is deficient in terms of compliance with applicable regulatory capital requirements by £381.8 million and £437.1 million at March 31, 2015 and December 31, 2014, respectively. The regulators are aware of this deficiency and dialogue between Ambac UK management and its regulators remains ongoing with respect to options for addressing the shortcoming, although such options remain few.
NON-GAAP FINANCIAL MEASURES
In addition to reporting the Company’s quarterly financial results in accordance with GAAP, the Company reports two non-GAAP financial measures: Operating Earnings (Losses) and Adjusted Book Value. A non-GAAP financial measure is a numerical measure of financial performance or financial position that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. We are presenting these non-GAAP financial measures because they provide greater transparency and enhanced visibility into the underlying drivers of our business and the impact of certain items that the Company believes will reverse from GAAP book value over time through the GAAP statements of comprehensive income. Operating Earnings (Losses) and Adjusted Book Value are not substitutes for the Company’s GAAP reporting, should not be viewed in isolation and may differ from similar reporting provided by other companies, which may define non-GAAP measures differently.
Ambac has a significant tax net operating loss (“NOL”) that is offset by a full valuation allowance in the GAAP consolidated financial statements. As a result, for purposes of non-GAAP measures, we utilized a 0% effective tax rate. We maintain a full valuation allowance against our deferred tax asset and recognition of the value of the NOL would be reflected in Adjusted Book Value considering all the facts and circumstances as of the relevant reporting date.
The following paragraphs define each non-GAAP financial measure and describe why it is useful. A reconciliation of the non-GAAP financial measure and the most directly comparable GAAP financial measure is also presented below.
Operating Earnings (Losses). Operating Earnings (Losses) eliminates the impact of certain GAAP accounting requirements and includes certain items that the Company has realized or expects to realize in the future, but that are not reported under GAAP. Operating Earnings (Losses) is defined as net income attributable to common shareholders, as reported under GAAP, adjusted on an after-tax basis for the following:

• | Elimination of the non-credit impairment fair value gains (losses) on credit derivatives, which is the amount in excess of the present value of the expected estimated credit losses. Such fair value adjustments are heavily affected by, and in part fluctuate with, changes in market factors such as interest rates and credit spreads, including the market’s perception of Ambac’s credit risk (“Ambac CVA”), and are not expected to result in an economic gain or loss. These adjustments allow for all financial guarantee segment contracts to be accounted for consistent with the Financial Services – Insurance Topic of ASC, whether or not they are subject to derivative accounting rules.

• | Elimination of the effects of VIEs that were consolidated as a result of being insured by Ambac. These adjustments eliminate the VIE consolidation and ensure that all financial guarantee segment contracts are accounted for consistent with the provisions of the Financial Services – Insurance Topic of the ASC, whether or not they are subject to consolidation accounting rules.

• | Elimination of the amortization of the financial guarantee insurance intangible asset and impairment of goodwill that arose as a result of Ambac’s emergence from bankruptcy and the implementation of Fresh Start reporting. The amount reported in net income attributable

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to common shareholders represents the amortization of Fresh Start adjustments relating to financial guarantee contracts. These adjustments ensure that all financial guarantee segment contracts are accounted for consistent with the provisions of the Financial Services – Insurance Topic of the ASC.

• | Elimination of the foreign exchange gains (losses) on re-measurement of net premium receivables and loss and loss expense reserves. Long-duration receivables constitute a significant portion of the net premium receivable balance and represent the present value of future contractual or expected collections. Therefore, the current period’s foreign exchange re-measurement gains (losses) are not necessarily indicative of the total foreign exchange gains (losses) that Ambac will ultimately recognize.

• | Elimination of the gains (losses) relating to Ambac’s CVA on derivative contracts other than credit derivatives. Similar to credit derivatives, fair values include the market’s perception of Ambac’s credit risk and this adjustment only allows for such gain or loss when realized.

The following table reconciles net income attributable to common shareholders to the non-GAAP measure, Operating Earnings (Losses) on a total dollar amount and per diluted share basis, for all periods presented:

| Three Months Ended March 31,
| 2015 |  | 2014
($ in millions, except share data) | $ Amount |  | Per Diluted Share |  | $ Amount |  | Per Diluted Share
Net income (loss) attributable to common shareholders | $ | 214.7 |  |  | $ | 4.57 |  |  | $ | 155.9 |  |  | $ | 3.31 |
Adjustments: |  |  |  |  |  |  |
Non-credit impairment fair value (gain) loss on credit derivatives | 4.4 |  |  | 0.09 |  |  | (4.2 | ) |  | (0.09 | )
Effect of consolidating financial guarantee VIEs | (26.2 | ) |  | (0.56 | ) |  | 0.3 |  |  | 0.01 |
Insurance intangible amortization | 37.4 |  |  | 0.80 |  |  | 31.7 |  |  | 0.67 |
Foreign exchange (gain) loss from re-measurement of premium receivables and loss and loss expense reserves | 29.9 |  |  | 0.64 |  |  | (1.7 | ) |  | (0.04 | )
Fair value (gain) loss on derivative products from Ambac CVA | (12.6 | ) |  | (0.27 | ) |  | (5.4 | ) |  | (0.11 | )
Operating earnings (losses) | $ | 247.6 |  |  | $ | 5.27 |  |  | $ | 176.6 |  |  | $ | 3.75 |

Adjusted Book Value. Adjusted Book Value eliminates the impact of certain GAAP accounting requirements and includes the addition of certain items that the Company has realized or expects to realize in the future, but that are not reported under GAAP. Adjusted Book Value is defined as Total Ambac Financial Group, Inc. stockholders’ equity as reported under GAAP, adjusted for after-tax impact of the following:

• | Elimination of the non-credit impairment fair value loss on credit derivatives, which is the amount in excess of the present value of the expected estimated economic credit loss. GAAP Fair values are heavily affected by, and in part fluctuate with, changes in market factors such as interest rates, credit spreads, including Ambac’s CVA that are not expected to result in an economic gain or loss. These adjustments allow for all financial guarantee segment contracts to be accounted for within Adjusted Book Value consistent with the provisions of the Financial Services—Insurance Topic of the ASC, whether or not they are subject to derivative accounting rules.

• | Elimination of the effects of VIEs that were consolidated as a result of being insured by Ambac. These adjustments eliminate VIE consolidation and ensure that all financial guarantee segment contracts are accounted for within Adjusted Book Value consistent with the provisions of the Financial Services—Insurance Topic of the ASC, whether or not they are subject to consolidation accounting rules.

• | Elimination of the financial guarantee insurance intangible asset and goodwill that arose as a result of Ambac’s emergence from bankruptcy and the implementation of Fresh Start reporting. These adjustments ensure that all financial guarantee segment contracts are accounted for within Adjusted Book Value consistent with the provisions of the Financial Services—Insurance Topic of the ASC.

• | Elimination of the gain relating to Ambac’s CVA embedded in the fair value of derivative contracts other than credit derivatives. Similar to credit derivatives, fair values include the market’s perception of Ambac’s credit risk and this adjustment only allows for such gain when realized.

• | Addition of the value of the unearned premium revenue on financial guarantee contracts and fees on credit derivative contracts, adjusted for management's expected future net premiums and credit derivative receipts, in excess of expected losses, net of reinsurance.

• | Elimination of the unrealized gains and losses on the Company’s investments that are recorded as a component of accumulated other comprehensive income (“AOCI”). The AOCI component of the fair value adjustment on the investment portfolio will differ materially from realized gains and losses ultimately recognized by the Company based on the Company’s investment strategy. This adjustment only allows for such gains and losses in Adjusted Book Value when realized.

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The following table reconciles Total Ambac Financial Group, Inc. stockholders’ equity to the non-GAAP measure Adjusted Book Value on a total dollar amount and per share basis, for all periods presented:

| March 31, 2015 |  | December 31, 2014
($ in millions, except share data) | $ Amount |  | Per Share |  | $ Amount |  | Per Share
Total Ambac Financial Group, Inc. stockholders’ equity | $ | 1,563.3 |  |  | $ | 34.74 |  |  | $ | 1,399.1 |  |  | $ | 31.09 |
Adjustments: |  |  |  |  |  |  |
Non-credit impairment fair value losses on credit derivatives | 60.1 |  |  | 1.34 |  |  | 55.7 |  |  | 1.24 |
Effect of consolidating financial guarantee variable interest entities | (338.3 | ) |  | (7.52 | ) |  | (319.1 | ) |  | (7.09 | )
Insurance intangible asset and goodwill | (1,861.8 | ) |  | (41.37 | ) |  | (1,925.4 | ) |  | (42.78 | )
Ambac CVA on derivative product liabilities (excluding credit derivatives) | (77.2 | ) |  | (1.72 | ) |  | (64.5 | ) |  | (1.44 | )
Net unearned premiums and fees in excess of expected losses | 1,326.1 |  |  | 29.46 |  |  | 1,402.3 |  |  | 31.16 |
Net unrealized investment (gains) losses in Accumulated Other Comprehensive Income | (193.2 | ) |  | (4.29 | ) |  | (210.7 | ) |  | (4.68 | )
Adjusted book value | $ | 479.0 |  |  | $ | 10.64 |  |  | $ | 337.4 |  |  | $ | 7.50 |

Factors that impact changes to Adjusted Book Value include many of the same factors that impact Operating Earnings (Losses), including the majority of revenues and expenses but exclude components of premium earnings since they are embedded in prior period's Adjusted Book Value through the net unearned premiums and fees in excess of expected losses adjustment. Net unearned premiums and fees in excess of expected losses will affect Adjusted Book Value for (i) changes to future premium assumptions (e.g. expected term, interest rates, foreign exchange rates, time passage) and (ii) changes to expected losses for policies which do not exceed their related unearned premiums. The Adjusted Book Value increase from December 31, 2014 to March 31, 2015 of $141.6 million was primarily driven by an increase in Ambac's total stockholders equity primarily related to a benefit in loss and loss expenses.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risks results primarily from fluctuations in interest rates, credit spread risk and foreign exchange risk. There have been no material changes to our exposure to these risks from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.
Market risk represents the potential for losses that may result from changes in the value of a financial instrument as a result of changes in market conditions. The primary market risks that would impact the value of Ambac’s financial instruments are interest rate risk, spread risk, and foreign currency exchange risk. Below we discuss each of these risks and the specific types of financial instruments impacted. Senior managers are responsible for developing and applying methods to measure risk. The estimation of potential losses arising from adverse changes in market conditions is a key element in managing market risk. Ambac utilizes various systems, models and sensitivity scenarios to monitor and manage market risk. This process includes frequent analysis of both parallel and non-parallel shifts in benchmark interest rates and “Value-at-Risk” (“VaR”) measures. These models include estimates, made by management, which utilize current and historical market information. The valuation results from these models could differ materially from amounts that would actually be realized in the market. Financial instruments of VIEs that are consolidated as a result of Ambac's financial guarantees are excluded from the market risk measures below.
Interest Rate Risk:
Financial instruments for which fair value may be affected by changes in interest rates consist primarily of fixed income investment securities, loans, investment agreements, long-term debt and interest rate derivatives. Fixed income investment securities that are guaranteed by Ambac neutralize interest rate risk associated with future financial guarantee claim payments. Accordingly, such securities are excluded from the company's interest rate sensitivity measures. The following table summarizes the estimated change in fair value (based primarily on the valuation methodology discussed in Note 7. Fair Value Measurements to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q) on these financial instruments, assuming immediate changes in interest rates at specified levels at March 31, 2015:

|  | Change in Interest Rates
($ in millions) |  | 300 basis point rise |  | 200 basis point rise |  | 100 basis point rise |  | Base scenario |  | 100 basis point decline(1) |  | 200 basis point decline(1)
Estimated change in net fair value |  | $ | 147 |  |  | $ | 118 |  |  | $ | 70 |  |  | $ | — |  |  | $ | (97 | ) |  | $ | (219 | )
Estimated net fair value |  | 2,118 |  |  | 2,089 |  |  | 2,041 |  |  | 1,971 |  |  | 1,874 |  |  | 1,752 |

(1) | Incorporates an interest rate floor of 0%.

Due to the low interest rate environment as of March 31, 2015, stress scenarios involving interest rate declines greater than 200 basis points are not meaningful to Ambac's portfolios.
Changes in fair value resulting from changes in interest rates are driven primarily by the impact of interest rate shifts on the investment portfolio (which declines in value as rates increase) and the interest rate swap portfolio (which is generally positioned to increase in value as rates increase). Interest rate increases would also have a negative economic impact on expected future claim payments within the financial guarantee portfolio.
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The interest rate derivatives portfolio is managed with the goal of retaining some interest rate sensitivity as an economic hedge against the effects of rising interest rates elsewhere in the Company, including on Ambac’s financial guarantee exposures (the “macro-hedge”). The interest rate sensitivity of the interest rate swap portfolio attributable to the macro-hedge position would produce mark-to-market gains or losses of approximately $0.7 million for a 1 basis point parallel shift in USD swap rates up or down at March 31, 2015. The impact of the macro-hedge is included in the interest rate sensitivity table above.
The estimation of potential losses arising from adverse changes in market relationships, known as VaR, is a consideration in management’s monitoring of interest rate risk for the interest rate swap portfolio. Ambac has developed a VaR methodology to estimate potential losses using a one day time horizon and a 99% confidence level. This means that Ambac would expect to incur losses due to changes in interest rates greater than that predicted by VaR estimates only once in every 100 trading days, or about 2.5 times a year. Ambac’s methodology estimates VaR using a 300-day historical “look back” period. This means that changes in market values are simulated using market inputs from the past 300 days. For the three months ended March 31, 2015, Ambac’s interest rate derivative portfolio VaR averaged approximately $15.7 million, and ranged from a high of $16.5 million to a low of $14.9 million. These VaR measures are intended to focus on the impact of observable market rates and therefore exclude fair value adjustments made by management to incorporate Ambac or counterparty credit risk. Ambac supplements its VaR methodology, which it believes is a good risk management tool in normal markets, by performing scenario testing to measure the potential for losses in volatile markets. These scenario tests include parallel and non-parallel shifts in the benchmark interest rate curve.
Credit Spread Risk:
Financial instruments that may be adversely affected by changes in spreads include Ambac’s outstanding credit derivative contracts, certain interest rate swap contracts and investment assets. Changes in spreads are generally caused by changes in the market’s perception of the credit quality of the underlying obligor. Market liquidity and prevailing risk premiums demanded by market participants are also reflected in spreads and impact valuations.
The following table summarizes the estimated change in fair values on Ambac’s credit derivative contracts assuming immediate parallel shifts in reference obligation credit spreads at March 31, 2015. It is more likely that actual changes in credit spreads will vary by security:

|  | Change in Reference Obligation Spreads
($ in millions) |  | 250 basis point widening |  | 50 basis point widening |  | Base scenario |  | 50 basis point narrowing |  | 250 basis point narrowing
Estimated change in fair value |  | $ | (67 | ) |  | $ | (13 | ) |  | $ | — |  |  | $ | 13 |  |  | $ | 58 |
Estimated fair value |  | (143 | ) |  | (89 | ) |  | (76 | ) |  | (63 | ) |  | (18 | )

Also included in the fair value of credit derivative liabilities is the effect of Ambac’s creditworthiness, which reflects market perception of Ambac’s ability to meet its obligations. Incorporating estimates of Ambac’s credit valuation adjustment into the determination of fair value has resulted in a $18.0 million reduction to the credit derivatives liability as of March 31, 2015. At March 31, 2015 the credit valuation adjustment resulted in a 19.1% reduction of the credit derivative liability as measured before considering Ambac credit risk. Refer to Note 7. Fair Value Measurements to the Unaudited Consolidated Financial Statements included in Part I, Item 1 in this Form 10-Q for further information on measurement of the credit valuation adjustment.
The fair value of interest rate swaps may be affected by changes to the credit valuation adjustment attributable to the risk of counterparty or Ambac non-performance. Generally, the need for a counterparty (or Ambac) credit valuation adjustment is mitigated by the existence of collateral posting agreements under which adequate collateral has been posted. Derivative contracts entered into with financial guarantee customers are not typically subject to collateral posting agreements. Valuation adjustments for counterparty credit risk were not significant as of March 31, 2015. Estimates of Ambac’s credit valuation adjustment included in the fair value of interest rate swaps reduced the derivative liability fair value by $77.2 million as of March 31, 2015.
The following table summarizes the estimated change in fair values on Ambac's credit derivative and interest rate derivative net liabilities assuming immediate shifts in Ambac credit spreads used to determine the CVA at March 31, 2015:

|  | Change in Ambac Credit Spreads
($ in millions) |  | 250 basis point widening |  | 50 basis point widening |  | Base scenario |  | 50 basis point narrowing |  | 250 basis point narrowing
Estimated change in fair value |  | $ | 30 |  |  | $ | 7 |  |  | $ | — |  |  | $ | (7 | ) |  | $ | (39 | )
Estimated fair value |  | (304 | ) |  | (327 | ) |  | (334 | ) |  | (341 | ) |  | (373 | )

Ambac’s fixed income investment portfolio contains securities with different sensitivities to and volatility of spreads. Fixed income securities that are guaranteed by Ambac and were purchased in Ambac's investment portfolio neutralize exposure to future financial guarantee claim payments. Accordingly, such securities are excluded from the company's spread sensitivity measures. The following table summarizes the estimated change in fair values of Successor Ambac’s fixed income investment portfolio assuming immediate shifts in credit spreads across all holdings at March 31, 2015. It is more likely that actual changes in credit spreads will vary be security:
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|  | Change in Spreads
($ in millions) |  | 250 basis point widening |  | 50 basis point widening |  | Base scenario |  | 50 basis point narrowing |  | 250 basis point narrowing
Estimated change in fair value |  | $ | (305 | ) |  | $ | (61 | ) |  | $ | — |  |  | $ | 61 |  |  | $ | 304 |
Estimated fair value |  | 3,052 |  |  | 3,296 |  |  | 3,357 |  |  | 3,418 |  |  | 3,661 |

Foreign Exchange Risk:
Ambac has financial instruments denominated in currencies other than the U.S. dollar, primarily pounds sterling and euros. These financial instruments are primarily invested assets, and assets and liabilities of Ambac UK. The following table summarizes the estimated net change in fair value of these financial instruments assuming immediate shifts in foreign exchange rates as of March 31, 2015.

|  | Change in Foreign Exchange Rates Against U.S. Dollar
($ in millions) |  | 20% Decrease |  | 10% Decrease |  | 10% Increase |  | 20% Increase
Estimated change in fair value |  | $ | (49.2 | ) |  | $ | (24.6 | ) |  | $ | 24.6 |  |  | $ | 49.2 |

Item 4. Controls and Procedures.
In connection with the preparation of this First Quarter Form 10-Q, an evaluation was carried out by Ambac’s management, with the participation of Ambac’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of Ambac’s disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Disclosure controls and procedures are designed to ensure that the information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Ambac management is committed to maintaining an effective internal control environment over financial reporting. Based on its evaluation, Ambac’s Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2015, Ambac’s disclosure controls and procedures were effective.
There was no change in the Company’s internal control over financial reporting that occurred during the period ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Please refer to Note 11. Commitments and Contingencies of the Unaudited Consolidated Financial Statements located in Part I, Item 1 in this Form 10-Q and Note 18. Commitments and Contingencies in Part II, Item 8 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for a discussion on legal proceedings against Ambac and its subsidiaries.
Item 1A. Risk Factors
You should carefully consider the risk factors set forth in the “Risk Factors” section, Item 1A to Part I in our Annual Report on Form 10-K for the year ended December 31, 2014, which are hereby incorporated by reference. These important factors may cause our actual results to differ materially from those indicated by our forward-looking statements, including those contained in this report. Please also see the section entitled “Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this quarterly report on Form 10-Q. There have been no material changes to the risk factors we have disclosed in the “Risk Factors” section of our aforementioned Annual Report on Form 10-K.

Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds

(a) | Unregistered Sales of Equ ity Securities

None.

(b) | Purchases of Equity Securities By the Issuer and Affiliated Purchasers

There were no repurchases of equity securities made during the three months ended March 31, 2015. Ambac does not have a stock repurchase program.
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Item 3. | Defaults Upon Senior Securities

None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits

Exhibit Number |  | Description
10.1 |  | Letter Agreement dated as of March 30, 2015, by and between Ambac Financial Group, Inc. and Nader Tavakoli (filed as Exhibit 10.1 to Ambac Financial Group, Inc.'s Current Report on Form 8-K filed April 3, 2015 and incorporated herein by reference).
10.2 |  | Award Agreement dated as of March 30, 2015, by and between Ambac Financial Group, Inc. and Nader Tavakoli (filed as Exhibit 10.2 to Ambac Financial Group, Inc.'s Current Report on Form 8-K filed April 3, 2015 and incorporated herein by reference).
31.1+ |  | Certification of Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) Promulgated under the Securities Exchange Act of 1934, as amended.
31.2+ |  | Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) Promulgated under the Securities Exchange Act of 1934, as amended.
32.1++ |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2++ |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS |  | XBRL Instance Document.
101.SCH |  | XBRL Taxonomy Extension Schema Document.
101.CAL |  | XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB |  | XBRL Taxonomy Extension Label Linkbase Document.
101.PRE |  | XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF |  | XBRL Taxonomy Extension Definition Linkbase Document.

+ |  | Filed herewith.
++ |  | Furnished herewith.

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|  | AMBAC FINANCIAL GROUP, INC.
Dated: | May 11, 2015 | By: | /S/ DAVID TRICK
|  | Name: | David Trick
|  | Title: | Chief Financial Officer and Treasurer
|  |  | (Duly Authorized Officer and
|  |  | Principal Financial Officer)

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