15. EMPLOYMENT BENEFIT PLANS

Postretirement Health Care and Other Benefits:

Ambac provides postretirement and postemployment / severance benefits, including health and life benefits for certain employees who meet certain age and service requirements. None of the plans are currently funded. Postretirement and postemployment benefits expenses, including severance benefits paid, was $936, $5,223 and $9,465 for the years ended December 31, 2018, 2017 and 2016, respectively.

Effective August 1, 2005, new employees were not eligible for postretirement benefits. The current postretirement benefit requires retirees to purchase their own medical insurance policy with a portion of their premium being reimbursed by Ambac. The unfunded accumulated postretirement benefit obligation was $8,720 as of December 31, 2018. The assumed health care cost trend rates range from 5.4% in 2019, decreasing ratably to 4.5% in 2025. Increasing the assumed health care cost trend rate by one percentage point in each future year would increase the accumulated postretirement benefit obligation at December 31, 2018, by $170 and the 2018 benefit expense by $11. Decreasing the assumed health care cost trend rate by one percentage point in each future year would decrease the accumulated postretirement benefit obligation at December 31, 2018 by $237 and the 2018 benefit expense by $17.

The following table sets forth projected benefit payments from Ambac’s postretirement plan over the next ten years for current retirees:



2019	$	364
2020	364
2021	377
2022	404
2023	429
2024-2028	2,464
Total	$	4,402

The discount rate used in determining the projected benefit obligations for the postretirement plan is selected by reference to the year-end Citigroup pension liability index with similar duration to that of the benefit plan. The rates used for the projected plan benefit obligations at the measurement date for December 31, 2018 and 2017 were 4.00% and 3.50%, respectively.

Savings Incentive Plan:

Substantially all employees of Ambac Assurance are covered by a defined contribution plan (the “Savings Incentive Plan”). Ambac Assurance makes employer matching contributions equal 100% of the employees’ contributions, up to 3% of such participants’ compensation, as defined in the plan, plus 50% of contributions up to an additional 2% of compensation, subject to limits set by the Internal Revenue Code. The total cost of the Savings Incentive Plan was $1,029, $691 and $911 for the years December 31, 2018, 2017 and 2016, respectively.

Incentive Compensation - Stock Units and Cash:

Incentive compensation is a key component of our compensation strategy. Our incentive compensation awards generally have two components: short term incentive compensation or annual bonuses and long term incentive plan awards. Annual decisions with regard to incentive compensation are generally made in the first quarter of each year and are based on Company performance and individual and business unit performance of the previous year. For all employees, an allocation of incentive compensation is made between annual bonuses and LTIP awards. Beginning for the 2016 performance year, the annual bonus was settled via cash and vested restricted stock units for certain employees.

Employees, directors and consultants of Ambac are eligible to participate in Ambac’s 2013 Incentive Compensation Plan (“2013 Plan”) subject to the discretion of the compensation committee of Ambac’s Board of Directors. The 2013 Plan provides for incentives and rewards that are valued or determined by reference to Ambac common stock as traded on the NASDAQ exchange. There are 4,000,000 shares of Ambac’s common stock authorized for awards under the 2013 Plan of which 1,972,068 shares are available for future grant as of December 31, 2018.

In March 2014, Ambac developed a long term incentive compensation plan (“LTIP”) as a sub-plan of the 2013 Plan. The LTIP is intended to be an annual program that allows for both cash and equity performance awards to certain US employees. Beginning with grants issued in 2017, the entire LTIP award was issued as equity performance awards to employees.

In 2015, Ambac UK 's Board of Directors adopted a long term incentive plan which provides cash based performance awards to Ambac UK employees. Cash based compensation expense related to performance awards granted to Ambac UK employees was $1,096, $2,159 and $283 for the years ended December 31, 2018, 2017 and 2016, respectively.

The amount of stock-based compensation expense and corresponding after-tax expense are as follows:



Year Ended December 31,	2018		2017 ⁽¹⁾		2016
Stock options	$	—	$	—	$	—
Restricted stock units	6,234		1,640		3,463
Performance awards ^{(2) (3)}	5,620		2,653		1,790
Total stock-based compensation	$	11,854	$	4,293	$	5,253
Total stock-based compensation (after-tax)	$	11,854	$	4,293	$	5,194

(1)

As discussed in Note 2. Basis of Presentation and Significant Accounting Policies , we adopted ASU 2016-09 as of January 1, 2017. One of the provisions of this ASU requires entities to make an accounting policy election with respect to forfeitures of share-based payment awards. We elected to account for forfeitures as they occur and adopted this provision of ASU 2016-09 using a modified retrospective approach resulting in recording a cumulative-effect adjustment to equity of $137.


(2)	Represents expense related to performance stock units portion of performance awards. Certain performance awards are split evenly between performance stock units and cash. Cash based compensation expense related to performance awards granted to US employees was $1,453, $1,565 and $1,790 for the years ended December 31, 2018, 2017 and 2016, respectively.


(3)	A performance award issued to Ambac's former Chief Executive Officer in the form of performance stock units was expensed during 2018.

Stock Options:

Stock options were awarded in years prior to 2016 to directors that had an expiry term of seven years from the grant date, subject to earlier expiration upon the recipient's departure from the Company. The Company intends to use Treasury shares first and then, if necessary, issue new shares to satisfy stock option exercises.

A summary of stock option activity for 2018 is as follows:



	Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Life (in years)
Outstanding at beginning of period	126,667		$	24.03
Granted	—		—
Exercised	—		—
Forfeited or expired	(110,000	)	24.55
Outstanding at end of period	16,667		$	20.63	$	—
Exercisable	16,667		$	20.63	$	—	1.97

All stock options granted were fully vested as of December 31, 2018. Total unrecognized compensation costs related to unvested stock options granted were $0 as of December 31, 2018. No stock options were exercised during the years ended December 31, 2018, 2017 and 2016, respectively.

Restricted Stock Units (“RSUs”):

RSUs are awarded annually to certain employees for (i) a portion of their annual bonus and special awards for exceptional performance and (ii) a portion of their long term incentive compensation. For those granted in connection with (i) above, awards vest upon grant, but settlement is deferred, other than for employment tax withholdings, into two equal installments generally on the first and second anniversary date of the grant. For those granted in connection with (ii) above, awards generally vest in equal installments over a three year period. Such vesting is expressly conditioned upon the respective employees continued service with Ambac through the applicable vesting date.

RSUs are awarded annually to directors that vest on the last day of April of the following year. These RSUs will not settle until the respective director’s termination from the board of directors or, if earlier, upon a change in control. All RSUs provide for accelerated vesting upon a change in control, death or disability or involuntary removal other than for cause (not including removal pursuant to a shareholder vote at a regularly scheduled annual meeting of shareholders). Upon termination (other than for cause), the unvested RSUs shall partially vest as of the date of such termination in an amount equal to the number of then outstanding unvested RSUs multiplied by a fraction, the numerator of which shall be the number of calendar days which have lapsed since the grant date and the denominator of which shall be the total number of calendar days of the original vesting period.

As of December 31, 2018, 645,028 RSUs remained outstanding, of which (i) 209,093 units required future service as a condition to the delivery of the underlying shares of common stock and (ii) 435,935 units did not require future service and are deferred for future settlement. As of December 31, 2017, 221,803 RSUs remained outstanding, of which (i) 68,654 units required future service as a condition to the delivery of the underlying shares of common stock,and (ii) 153,149 units did not require future service and are deferred for future settlement.

A summary of RSU activity for 2018 is as follows:



	Shares		Weighted Average Grant Date Fair Value
Outstanding at beginning of period	221,803		$	18.93
Granted	461,116		16.35
Delivered or returned to plan ⁽¹⁾	(36,454	)	17.53
Forfeited	(1,437	)	15.09
Outstanding at end of period	645,028		$	17.17


(1)	When restricted stock unit awards issued by Ambac become taxable compensation to employees, shares may be withheld to cover the employee’s withholding taxes. For the year ended December 31, 2018, Ambac purchased 22,929 of shares from employees that settled restricted stock units to meet the required tax withholdings.

Ambac’s closing share price on the grant date was used to estimate the fair value of the service condition based RSU on the grant date. The weighted average grant date fair value of RSUs granted during 2018, 2017 and 2016 was $16.35, $20.22 and $14.34, respectively. As of December 31, 2018, there was $1,760 of total unrecognized compensation costs related to unvested RSUs granted. These costs are expected to be recognized over a weighted average period of 1.8 years. The fair value for RSUs vested and delivered during the year ended December 31, 2018, 2017 and 2016 was $609, $2,536 and $2,965, respectively.

Performance Stock Awards ("PSUs"):

Performance awards granted vest in 3 years and actual awards will be based on performance at both Ambac and Ambac Assurance. Actual awards can payout 0% to 200% of the number of units granted.

Ambac performance will be evaluated relative to cumulative earnings before interest, taxes, depreciation and amortization over the vesting period (exclusive of Ambac Assurance and its subsidiaries' earnings), which is intended to reward participants on generating pre-tax income. Over the same period, Ambac Assurance performance will be evaluated according to changes in a ratio or value of Ambac Assurance's assets relative to its insurance and financial obligations, which is intended to reward participants for increases in the relative value of Ambac Assurance. Other than voluntary termination or involuntary termination for cause, and provided that the participant meets certain minimum service requirements, the performance awards shall partially vest as of the date of such termination in the proportion of the number of calendar days which have lapsed since the grant date and the denominator of which shall be the total number of calendar days of the original vesting period. Settlement of the 2016 performance award shall be within 60 days after the end of the performance period, including those with a partial vesting. 2017 and 2018 performance awards, shall be settled within 75 days after the end of the performance period, including those with a partial vesting.

In 2015, a performance award was granted to the former Chief Executive Officer. This award vested on February 12, 2018 upon the emergence of the Segregated Account from rehabilitation.

A summary of PSU activity for 2018 is as follows:



	Shares		Weighted Average Grant Date Fair Value
Outstanding at beginning of period	322,943		$	21.06
Granted ⁽¹⁾	302,002		15.09
Delivered ⁽²⁾	(121,690	)	24.63
Forfeited ⁽¹⁾	(15,573	)	18.20
Performance adjustment ⁽³⁾	29,317		24.66
Outstanding at end of period	516,999		$	17.02


(1)	Represents performance share units at 100% of units granted for LTIP Awards.

(2)

Reflects the number of performance shares attributable to the performance goals attained over the completed performance period and for which service conditions have been met. When performance stock unit awards issued by Ambac become taxable compensation to employees, shares may be withheld to cover the employee’s withholding taxes. For the year ended December 31, 2018, Ambac purchased 50,297 of shares from employees that settled performance based restricted stock units to meet the required tax withholdings.


(3)	Represents the increase (decrease) in shares issued for awards granted in 2015 based upon the attainment of performance metrics at the end of the performance period.

As of December 31, 2018 there was $4,313 of total unrecognized compensation costs related to the PSU portion of unvested performance awards, which are expected to be recognized over a weighted average period of 1.7 years.