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Investments | 9 Months Ended
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Sep. 30, 2021
Investments, Debt and Equity Securities [Abstract] |
Investments | 9. INVESTMENTS Ambac’s non-VIE invested assets are primarily comprised of fixed maturity securities classified as available-for-sale and interests in pooled investment funds, which are reported within Other investments on the Consolidated Balance Sheets. Interests in pooled investment funds in the form of common stock or in-substance common stock are classified as trading securities, while limited partner interests in such funds are reported using the equity method. Other investments also included equity interests held by AFG, including the equity Certificates in Corolla Trust, an unconsolidated trust created in connection with its sale of Segregated Account junior surplus notes on August 28, 2014. As further described in Note 1. Background and Business Description, on January 22, 2021, AAC completed the Corolla Note Exchange transaction whereby it acquired 100% of the outstanding obligations and the Certificates of, and subsequently dissolved, the Corolla Trust. Disclosures in this Note for the periods ended September 30, 2021 and December 31, 2020, are in accordance with the new CECL standard adopted January 1, 2020, which is more fully described in 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, 2020, Fixed Maturity Securities: The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at September 30, 2021 and December 31, 2020, were as follows:
|  | Amortized Cost |  | Allowance for Credit Losses |  | Gross Unrealized Gains |  | Gross Unrealized Losses |  | Estimated Fair Value
September 30, 2021: |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |
Municipal obligations |  | $ | 323 |  |  | $ | — |  |  | $ | 29 |  |  | $ | 1 |  |  | $ | 352 |
Corporate obligations |  | 650 |  |  | — |  |  | 15 |  |  | 6 |  |  | 659 |
Foreign obligations |  | 88 |  |  | — |  |  | — |  |  | 2 |  |  | 87 |
U.S. government obligations |  | 39 |  |  | — |  |  | 1 |  |  | 1 |  |  | 40 |
Residential mortgage-backed securities |  | 185 |  |  | — |  |  | 62 |  |  | — |  |  | 247 |
Collateralized debt obligations |  | 116 |  |  | — |  |  | — |  |  | — |  |  | 116 |
Other asset-backed securities (2) |  | 258 |  |  | — |  |  | 40 |  |  | — |  |  | 298 |
|  | 1,660 |  |  | — |  |  | 147 |  |  | 9 |  |  | 1,797 |
Short-term |  | 368 |  |  | — |  |  | — |  |  | — |  |  | 368 |
|  | 2,027 |  |  | — |  |  | 147 |  |  | 9 |  |  | 2,165 |
Fixed maturity securities pledged as collateral: |  |  |  |  |  |  |  |  |  |
U.S. government obligations |  | 15 |  |  | — |  |  | — |  |  | — |  |  | 15 |
Short-term |  | 105 |  |  | — |  |  | — |  |  | — |  |  | 105 |
|  | 120 |  |  | — |  |  | — |  |  | — |  |  | 120 |
Total available-for-sale investments |  | $ | 2,147 |  |  | $ | — |  |  | $ | 147 |  |  | $ | 9 |  |  | $ | 2,285 |
December 31, 2020: |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |
Municipal obligations |  | $ | 321 |  |  | $ | — |  |  | $ | 37 |  |  | $ | — |  |  | $ | 358 |
Corporate obligations (1) |  | 1,059 |  |  | — |  |  | 24 |  |  | 6 |  |  | 1,077 |
Foreign obligations |  | 97 |  |  | — |  |  | 1 |  |  | — |  |  | 98 |
U.S. government obligations |  | 105 |  |  | — |  |  | 2 |  |  | 1 |  |  | 106 |
Residential mortgage-backed securities |  | 256 |  |  | — |  |  | 46 |  |  | — |  |  | 302 |
Collateralized debt obligations |  | 74 |  |  | — |  |  | — |  |  | — |  |  | 74 |
Other asset-backed securities (2) |  | 263 |  |  | — |  |  | 40 |  |  | — |  |  | 303 |
|  | 2,175 |  |  | — |  |  | 149 |  |  | 8 |  |  | 2,317 |
Short-term |  | 492 |  |  | — |  |  | — |  |  | — |  |  | 492 |
|  | 2,667 |  |  | — |  |  | 149 |  |  | 8 |  |  | 2,809 |
Fixed maturity securities pledged as collateral: |  |  |  |  |  |  |  |  |  |
U.S. government obligations |  | 15 |  |  | — |  |  | — |  |  | — |  |  | 15 |
Short-term |  | 125 |  |  | — |  |  | — |  |  | — |  |  | 125 |
|  | 140 |  |  | — |  |  | — |  |  | — |  |  | 140 |
Total available-for-sale investments |  | $ | 2,807 |  |  | $ | — |  |  | $ | 149 |  |  | $ | 8 |  |  | $ | 2,949 |
(1)Includes Ambac's holdings of the LSNI Secured Notes issued in connection with the Rehabilitation Exit Transactions. (2)Consists primarily of Ambac's holdings of military housing and student loan securities. The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at September 30, 2021, by contractual maturity, were as follows:
|  | Amortized Cost |  | Estimated Fair Value
Due in one year or less |  | $ | 537 |  |  | $ | 537 |
Due after one year through five years |  | 479 |  |  | 485 |
Due after five years through ten years |  | 400 |  |  | 409 |
Due after ten years |  | 173 |  |  | 193 |
|  | 1,589 |  |  | 1,625 |
Residential mortgage-backed securities |  | 185 |  |  | 247 |
Collateralized debt obligations |  | 116 |  |  | 116 |
Other asset-backed securities |  | 258 |  |  | 298 |
Total |  | $ | 2,147 |  |  | $ | 2,285 |
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 on Fixed Maturity Securities: The following table shows gross unrealized losses and fair values of Ambac’s available-for-sale investments, excluding VIE investments, which at September 30, 2021 and December 31, 2020, did not have an allowance for credit losses under the CECL standard. This information is aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at September 30, 2021 and December 31, 2020:
|  | Less Than 12 Months |  | 12 Months or More |  | Total
|  | Fair Value |  | Gross Unrealized Loss |  | Fair Value |  | Gross Unrealized Loss |  | Fair Value |  | Gross Unrealized Loss
September 30, 2021: |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |  |  |
Municipal obligations |  | $ | 42 |  |  | $ | 1 |  |  | $ | 2 |  |  | $ | — |  |  | $ | 43 |  |  | $ | 1 |
Corporate obligations |  | 243 |  |  | 5 |  |  | 12 |  |  | — |  |  | 256 |  |  | 6 |
Foreign obligations |  | 78 |  |  | 2 |  |  | — |  |  | — |  |  | 78 |  |  | 2 |
U.S. government obligations |  | 19 |  |  | 1 |  |  | — |  |  | — |  |  | 19 |  |  | 1 |
Residential mortgage-backed securities |  | — |  |  | — |  |  | 2 |  |  | — |  |  | 2 |  |  | — |
Collateralized debt obligations |  | 18 |  |  | — |  |  | 3 |  |  | — |  |  | 21 |  |  | — |
Other asset-backed securities |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
|  | 401 |  |  | 8 |  |  | 19 |  |  | — |  |  | 419 |  |  | 9 |
Short-term |  | 77 |  |  | — |  |  | 7 |  |  | — |  |  | 84 |  |  | — |
Total securities |  | $ | 477 |  |  | $ | 9 |  |  | $ | 25 |  |  | $ | — |  |  | $ | 503 |  |  | $ | 9 |
December 31, 2020: |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity securities: |  |  |  |  |  |  |  |  |  |  |  |
Municipal obligations |  | $ | 25 |  |  | $ | — |  |  | $ | 6 |  |  | $ | — |  |  | $ | 31 |  |  | $ | — |
Corporate obligations |  | 543 |  |  | 6 |  |  | — |  |  | — |  |  | 543 |  |  | 6 |
Foreign obligations |  | 3 |  |  | — |  |  | — |  |  | — |  |  | 3 |  |  | — |
U.S. government obligations |  | 17 |  |  | 1 |  |  | — |  |  | — |  |  | 17 |  |  | 1 |
Residential mortgage-backed securities |  | 14 |  |  | — |  |  | — |  |  | — |  |  | 14 |  |  | — |
Collateralized debt obligations |  | 27 |  |  | — |  |  | 15 |  |  | — |  |  | 42 |  |  | — |
Other asset-backed securities |  | — |  |  | — |  |  | 4 |  |  | — |  |  | 4 |  |  | — |
|  | 629 |  |  | 7 |  |  | 25 |  |  | — |  |  | 654 |  |  | 8 |
Short-term |  | 187 |  |  | — |  |  | — |  |  | — |  |  | 187 |  |  | — |
Total securities |  | $ | 816 |  |  | $ | 7 |  |  | $ | 25 |  |  | $ | — |  |  | $ | 841 |  |  | $ | 8 |
Management has determined that the securities in the above table do not have credit impairment as of September 30, 2021 and December 31, 2020, based upon (i) no actual or expected principal and interest payment defaults on these securities; (ii) analysis of the creditworthiness of the issuer and financial guarantor, as applicable, and (iii) for debt securities that are non-highly rated beneficial interests in securitized financial assets, analysis of whether there was an adverse change in projected cash flows. Management's evaluation as of September 30, 2021, includes the expectation that all principal and interest payments on securities guaranteed by AAC or Ambac UK will be made timely and in full. Ambac’s assessment about whether a security is credit impaired reflects management’s current judgment regarding facts and circumstances specific to the security and other factors. If that judgment changes, Ambac may record a charge for credit impairment in future periods. Realized Gains and Losses including Impairments: The following table details amounts included in net realized gains (losses) and impairments included in earnings for the affected periods:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2021 |  | 2020 |  | 2021 |  | 2020
Gross realized gains on securities |  | $ | 1 |  |  | $ | 5 |  |  | $ | 9 |  |  | $ | 32 |
Gross realized losses on securities |  | — |  |  | (1) |  |  | (2) |  |  | (12) |
Foreign exchange (losses) gains |  | 3 |  |  | (2) |  |  | (3) |  |  | — |
Credit impairments |  | — |  |  | — |  |  | — |  |  | — |
Intent / requirement to sell impairments |  | — |  |  | — |  |  | — |  |  | — |
Net realized gains (losses) |  | $ | 3 |  |  | $ | 2 |  |  | $ | 4 |  |  | $ | 20 |
Ambac had zero allowance for credit losses at September 30, 2021 and 2020. Ambac did not purchase any financial assets with credit deterioration for the three and nine months ended September 30, 2021 and 2020. Counterparty Collateral, Deposits with Regulators and Other Restrictions: Ambac routinely pledges and receives collateral related to certain transactions. Securities held directly in Ambac’s investment portfolio with a fair value of $120 and $140 at September 30, 2021 and December 31, 2020, respectively, were pledged to derivative counterparties. Ambac’s derivative counterparties have the right to re-pledge the investment securities and as such, these pledged securities are separately classified on the Consolidated Balance Sheets as “Fixed maturity securities pledged as collateral, at fair value” and "Short-term investments pledged as collateral, at fair value." Refer to Note 10. Derivative Instruments for further information on cash collateral. There was no cash or securities received from other counterparties that were re-pledged by Ambac. Securities carried at $9 and $8 at September 30, 2021 and December 31, 2020, respectively, were deposited by Ambac's insurance subsidiaries with governmental authorities or designated custodian banks as required by laws affecting insurance companies. Invested assets carried at $1 and $1 at September 30, 2021 and December 31, 2020, were deposited as security in connection with a letter of credit issued for an office lease. Securities with a fair value of $0 and $178 at September 30, 2021 and December 31, 2020, respectively, were pledged as collateral and as sources of funding to repay the LSNI Ambac Note. AAC also pledged for the benefit of the holders of LSNI Secured Notes (other than AAC) the proceeds of interest payments and partial redemptions of the LSNI Secured Notes held by AAC. The amount of such proceeds held by AAC was $0 and $9 at September 30, 2021 and December 31, 2020, respectively, and is included in Restricted cash on the Consolidated Balance Sheet. As further described in Note 1. Background and Business Description, on July 6, 2021, the LSNI Secured Notes were fully redeemed. Securities with a fair value of $655 at September 30, 2021 were held by Ambac UK, the capital stock of which was pledged as collateral on the Sitka AAC Note. Refer to Note 11. Long-term Debt for further information about the Sitka AAC Note. Guaranteed Securities: Ambac’s fixed maturity portfolio includes securities covered by guarantees issued by AAC 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). 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 and weighted-average underlying rating of insured securities in Ambac's investment portfolio at September 30, 2021 and December 31, 2020, respectively:
|  | Municipal Obligations |  | Corporate Obligations (2) |  | Mortgage and Asset- backed Securities |  |  |  | Total |  | Weighted Average Underlying Rating (1)
September 30, 2021: |  |  |  |  |  |  |  |  |  |  |  |
Ambac Assurance Corporation |  | $ | 317 |  |  | $ | — |  |  | $ | 466 |  |  |  |  | $ | 783 |  |  | B
National Public Finance Guarantee Corporation |  | 2 |  |  | — |  |  | — |  |  |  |  | 2 |  |  | BBB-
Assured Guaranty Municipal Corporation |  | 1 |  |  | — |  |  | — |  |  |  |  | 1 |  |  | A-
Total |  | $ | 320 |  |  | $ | — |  |  | $ | 466 |  |  |  |  | $ | 785 |  |  | B
December 31, 2020: |  |  |  |  |  |  |  |  |  |  |  |
Ambac Assurance Corporation |  | $ | 320 |  |  | $ | 465 |  |  | $ | 481 |  |  |  |  | $ | 1,266 |  |  | CCC+
National Public Finance Guarantee Corporation |  | 6 |  |  | — |  |  | — |  |  |  |  | 6 |  |  | BBB-
Assured Guaranty Municipal Corporation |  | 1 |  |  | — |  |  | — |  |  |  |  | 1 |  |  | C
Total |  | $ | 327 |  |  | $ | 465 |  |  | $ | 481 |  |  |  |  | $ | 1,273 |  |  | 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)Represents Ambac's holdings of LSNI Secured Notes issued in connection with the Rehabilitation Exit Transactions. These secured notes were insured by AAC. As further described in Note 1. Background and Business Description, on July 6, 2021, the LSNI Secured Notes were fully redeemed. Other Investments: Ambac's investment portfolio includes interests in various pooled investment funds. Fair value and additional information about investments in pooled funds, by investment type, is summarized in the table below. Except as noted in the table, fair value as reported is determined using net asset value ("NAV") as a practical expedient. Redemption of certain funds valued using NAV may be subject to withdrawal limitations and/or redemption fees which vary with the timing and notification of withdrawal provided by the investor. In addition to these investments, Ambac has unfunded commitments of $90 to private credit and private equity funds at September 30, 2021.
|  | Fair Value |  |  |  |
Class of Funds |  | September 30, 2021 |  | December 31, 2020 |  | Redemption Frequency |  | Redemption Notice Period
Real estate properties (1) |  | $ | 28 |  |  | $ | 16 |  |  | quarterly |  | 10 business days
Hedge funds (2) |  | 213 |  |  | 196 |  |  | quarterly or semi-annually |  | 90 days
High yields and leveraged loans (3) (10) |  | 77 |  |  | 78 |  |  | daily |  | 0 - 30 days
Private credit (4) |  | 75 |  |  | 65 |  |  | quarterly if permitted |  | 180 days if permitted
Insurance-linked investments (5) |  | 3 |  |  | 3 |  |  | see footnote (5) |  | see footnote (5)
Equity market investments (6) (10) |  | 93 |  |  | 73 |  |  | daily or quarterly |  | 0 - 90 days
Investment grade floating rate income (7) |  | 106 |  |  | 73 |  |  | weekly |  | 0 days
Private equity (8) |  | 23 |  |  | 13 |  |  | quarterly if permitted |  | 90 days if permitted
Emerging markets debt (9) (10) |  | 38 |  |  | 25 |  |  | daily |  | 0 days
Total equity investments in pooled funds |  | $ | 656 |  |  | $ | 543 |  |  |  |  |
(1)Investments consist of UK property to generate income and capital growth. (2)This class seeks to generate superior risk-adjusted returns through selective asset sourcing, active trading and hedging strategies across a range of asset types. (3)This class of funds includes investments in a range of instruments including high-yield bonds, leveraged loans, CLOs, ABS and floating rate notes to generate income and capital appreciation. (4)This class aims to obtain high long-term returns primarily through credit and preferred equity investments with low liquidity and defined term. (5)This class seeks to generate returns from insurance markets through investments in catastrophe bonds, life insurance and other insurance linked investments. This investment is restricted in connection with the unwind of certain insurance linked exposures. Ambac has redeemed its investment to the extent permitted by the fund. (6)This class of funds aim to achieve long term growth through diversified exposure to global equity-markets. (7)This class of funds includes investments in high quality floating rate debt securities including ABS and corporate floating rate notes. (8)This class seeks to generate long-term capital appreciation through investments in private equity, equity-related and other instruments. (9)This class seeks long-term income and growth through investments in the bonds of issuers in emerging markets. (10)These categories include fair value amounts totaling $115 and $89 at September 30, 2021 and December 31, 2020, respectively, that are readily determinable and are priced through pricing vendors, including for High yield and leveraged loans products: $0 and $3; for Equity market investments: $77 and $60; and for Emerging markets debt $38 and $25. Ambac held preferred equity investments with a carrying value of $8 and $— as of September 30, 2021 and December 31, 2020, respectively, that do not have readily determinable fair values and are carried at cost, less any impairments as permitted under the Investments — Equity Securities Topic of the ASC. There were no impairments recorded on these investments or adjustments to fair value to reflect observable price changes in identical or similar investments from the same issuer during the periods presented. Ambac held direct equity interests as of December 31, 2020, including in an unconsolidated trust created in connection with the 2014 sale of Segregated Account junior surplus notes, which was accounted for under the equity method. Investment Income (Loss): Net investment income (loss) was comprised of the following for the affected periods:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2021 |  | 2020 |  | 2021 |  | 2020
Fixed maturity securities |  | $ | 16 |  |  | $ | 24 |  |  | $ | 63 |  |  | $ | 79 |
Short-term investments |  | — |  |  | 1 |  |  | — |  |  | 4 |
Investment expense |  | (1) |  |  | (1) |  |  | (4) |  |  | (4) |
Securities available-for-sale and short-term |  | 15 |  |  | 24 |  |  | 59 |  |  | 80 |
Other investments |  | 6 |  |  | 14 |  |  | 53 |  |  | (11) |
Total net investment income (loss) |  | $ | 21 |  |  | $ | 37 |  |  | $ | 112 |  |  | $ | 69 |
Net investment income (loss) from Other investments primarily represents changes in fair value on equity securities, including certain pooled investment funds, and income from investment limited partnerships and other equity interests accounted for under the equity method. The portion of net unrealized gains (losses) related to securities classified as trading and equity securities, excluding those reported using the equity method, still held at the end of each period is as follows:
|  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|  | 2021 |  | 2020 |  | 2021 |  | 2020
Net gains (losses) recognized during the period on equity securities |  | $ | — |  |  | $ | 3 |  |  | $ | 16 |  |  | $ | (12) |
Less: net gains (losses) recognized during the reporting period on equity securities sold during the period |  | — |  |  | — |  |  | 2 |  |  | (19) |
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the reporting date |  | $ | (1) |  |  | $ | 3 |  |  | $ | 14 |  |  | $ | 7 |

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- Definition The entire disclosure for investments in certain debt and equity securities. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 942 -SubTopic 320 -URI http://asc.fasb.org/subtopic&trid=2209399 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 946 -SubTopic 320 -URI http://asc.fasb.org/subtopic&trid=2324412 Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 320 -URI http://asc.fasb.org/topic&trid=2196928 Reference 4: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 940 -SubTopic 320 -URI http://asc.fasb.org/subtopic&trid=2176304 + Details
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