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.

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



	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 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.

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.

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