10. INVESTMENTS

Ambac’s non-VIE 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 and are reported within Other investments on the Consolidated Balance Sheets. Other investments also include Ambac's debt (at December 31, 2017 only) and equity interests in an unconsolidated trust created in connection with its sale of Segregated Account junior surplus notes on August 28, 2014.

The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at December 31, 2018 and 2017 were as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Non-Credit Other- than-temporary Impairments ⁽¹⁾
December 31, 2018
Fixed income securities:
Municipal obligations	$	882,631	$	14,364	$	17,076	$	879,919	$	5
Corporate obligations ⁽²⁾	1,288,882		6,444		17,204		1,278,122		—
Foreign obligations	30,496		399		61		30,834		—
U.S. government obligations	93,636		1,371		613		94,394
Residential mortgage-backed securities	221,825		37,575		793		258,607		27
Collateralized debt obligations	133,075		8		1,727		131,356		—
Other asset-backed securities	370,199		72,868		624		442,443		—
	3,020,744		133,029		38,098		3,115,675		32
Short-term	430,405		23		97		430,331		—
Total available-for-sale investments	$	3,451,149	$	133,052	$	38,195	$	3,546,006	$	32

December 31, 2017
Fixed income securities:
Municipal obligations	$	845,778	$	3,456	$	69,400	$	779,834	$	—
Corporate obligations	858,774		6,772		5,471		860,075		—
Foreign obligations	26,245		409		111		26,543		—
U.S. government obligations	86,900		261		1,753		85,408		—
Residential mortgage-backed securities	2,214,512		67,303		30,482		2,251,333		23,832
Collateralized debt obligations	50,754		283		—		51,037		—
Other asset-backed securities	531,660		66,899		617		597,942		—
	4,614,623		145,383		107,834		4,652,172		23,832
Short-term	557,476		3		209		557,270		—
	5,172,099		145,386		108,043		5,209,442		23,832
Fixed income securities pledged as collateral:
U.S. government obligations	99,719		—		—		99,719		—
Total collateralized investments	99,719		—		—		99,719		—
Total available-for-sale investments	$	5,271,818	$	145,386	$	108,043	$	5,309,161	$	23,832


(1)	Represents the amount of non-credit other-than-temporary impairment losses remaining in accumulated other comprehensive income on securities that also had a credit impairment. These losses are included in gross unrealized losses as of December 31, 2018 and 2017.


(2)	Includes Ambac's holdings of the secured notes issued by Ambac LSNI in connection with the Rehabilitation Exist Transactions.

The amortized cost and estimated fair value of available-for-sale investments, excluding VIE investments, at December 31, 2018, by contractual maturity, were as follows:



	Amortized Cost		Estimated Fair Value
Due in one year or less	$	508,478	$	508,138
Due after one year through five years	1,094,712		1,093,945
Due after five years through ten years	301,303		296,305
Due after ten years	821,557		815,212
	2,726,050		2,713,600
Residential mortgage-backed securities	221,825		258,607
Collateralized debt obligations	133,075		131,356
Other asset-backed securities	370,199		442,443
Total	$	3,451,149	$	3,546,006

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 Income Securities:

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 December 31, 2018 and 2017:



	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, 2018
Fixed income securities:
Municipal obligations	$	537,904	$	15,878	$	28,533	$	1,198	$	566,437	$	17,076
Corporate obligations	306,506		8,634		190,273		8,570		496,779		17,204
Foreign obligations	1,161		1		5,163		60		6,324		61
U.S. government obligations	5,643		135		58,495		478		64,138		613
Residential mortgage-backed securities	34,852		793		—		—		34,852		793
Collateralized debt obligations	123,848		1,727		—		—		123,848		1,727
Other asset-backed securities	13,813		33		77,479		591		91,292		624
	1,023,727		27,201		359,943		10,897		1,383,670		38,098
Short-term	115,374		97		—		—		115,374		97
Total	$	1,139,101	$	27,298	$	359,943	$	10,897	$	1,499,044	$	38,195



	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, 2017
Fixed income securities:
Municipal obligations	$	667,335	$	68,578	$	32,525	$	822	$	699,860	$	69,400
Corporate obligations	292,028		3,377		87,272		2,094		379,300		5,471
Foreign obligations	8,122		81		1,700		30		9,822		111
U.S. government obligations	74,188		1,653		5,525		100		79,713		1,753
Residential mortgage-backed securities	668,524		12,524		418,617		17,958		1,087,141		30,482
Other asset-backed securities	26,655		58		88,023		559		114,678		617
	1,736,852		86,271		633,662		21,563		2,370,514		107,834
Short-term	251,926		209		—		—		251,926		209
Total	$	1,988,778	$	86,480	$	633,662	$	21,563	$	2,622,440	$	108,043

Management has determined that the unrealized losses reflected in the tables above are temporary in nature as of December 31, 2018 and 2017 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 December 31, 2018, 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 December 31, 2018, $660,063 of the total fair value and $17,838 of the unrealized loss related to below investment grade and non-rated securities. Of the securities that were in a gross unrealized loss position at December 31, 2017, $1,855,694 of the total fair value and $100,503 of the unrealized loss related to below investment grade and non-rated securities. As discussed further below, most of the securities in a gross unrealized loss position that are below investment grade or non-rated are guaranteed by Ambac Assurance. 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. If that judgment changes, Ambac may ultimately record a charge for other-than-temporary impairment in future periods.

Municipal obligations

The gross unrealized losses on municipal obligations as of December 31, 2018 are primarily on Puerto Rico bonds that are guaranteed by Ambac Assurance. Management assessed whether these securities suffered credit impairment as of December 31, 2018 based on the value of cash and securities received in the February 2019 commutation transactions executed in connection with the COFINA Plan of Adjustment. Management has determined that the amortized cost bases of these securities are fully recoverable.

Corporate obligations

The gross unrealized losses on corporate obligations as of December 31, 2018 are primarily the result of the increase in interest rates since purchase. 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.

Realized Gains and Losses and Other-Than-Temporary Impairments:

The following table details amounts included in net realized gains (losses) and other-than-temporary impairments included in earnings for the affected periods:



Year Ended December 31,	2018			2017			2016
Gross realized gains on securities	$	111,417		$	29,080		$	17,344
Gross realized losses on securities	(6,511		)	(18,945		)	(8,239		)
Foreign exchange (losses) gains	6,718			(4,769		)	30,179
Net realized gains	$	111,624		$	5,366		$	39,284
Net other-than-temporary impairments ⁽¹⁾	$	(3,238	)	$	(20,171	)	$	(21,819	)


(1)	Other-than-temporary impairments exclude impairment amounts recorded in other comprehensive income under ASC Paragraph 320-10-65-1, which comprise non-credit related amounts on securities that are credit impaired but which management does not intend to sell and it is not more likely than not that the company will be required to sell before recovery of the amortized cost basis.

During the Segregated Account Rehabilitation Proceedings, changes in the estimated timing of claim payments resulted in adverse changes in projected cash flows on certain impaired Ambac insured securities. Such changes in estimated claim payments on Ambac insured securities contributed to net other-than-temporary impairments for the years ended December 31, 2017 and 2016 presented in the table above.

Future changes in our estimated liquidity needs could result in a determination that Ambac no longer has the ability to hold 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 December 31, 2018 and 2017 for which a portion of an other-than-temporary impairment was recognized in other comprehensive income:



Year Ended December 31,	2018			2017		2016
Balance, beginning of period	$	67,085		$	52,070	$	31,176
Additions for credit impairments recognized on:
Securities not previously impaired	1,210			3,310		3,572
Securities previously impaired	226			11,705		17,322
Reductions for credit impairments previously recognized on:
Securities that matured or were sold during the period	(56,067		)	—		—
Balance, end of period	$	12,454		$	67,085	$	52,070

Counterparty Collateral, Deposits with Regulators and Other Restrictions:

Ambac routinely pledges and receives collateral related to certain transactions. Cash, cash equivalents and securities held directly in Ambac’s investment portfolio with a combined fair value of $102,904 and $120,645 at December 31, 2018 and 2017, 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 income securities pledged as collateral, at fair value”. There was no cash or securities received from other counterparties that were re-pledged by Ambac.

Securities carried at $5,975 and $5,974 at December 31, 2018 and 2017, respectively, were deposited by Ambac Assurance and Everspan with governmental authorities or designated custodian banks as required by laws affecting insurance companies.

Securities with fair value of $0 and $346,212 at December 31, 2018 and 2017, respectively, were held by a bankruptcy remote trust to collateralize and fund repayment of debt issued through a securitization transaction. The securities may not be sold or repledged by the trust. These assets were held and the secured debt was issued by entities that qualified as VIEs and are consolidated in Ambac’s consolidated financial statements. Refer to Note 3. Variable Interest Entities for a further description of this transaction.

As further discussed in Note 1. Background and Business Description, Ambac LSNI, an unconsolidated VIE, issued Secured Notes in connection with the Rehabilitation Exit Transactions of February 12, 2018. Securities with a fair value of $209,983 at December 31, 2018 were pledged as collateral and as sources of funding to repay the Secured Notes. The securities may not be transferred or repledged by Ambac LSNI. Collateral may be sold to fund redemptions of the Secured Notes. Ambac Assurance also pledged for the benefit of the holders of Secured Notes (other than Ambac Assurance) the proceeds of the Secured Notes held by Ambac Assurance. The amount of such proceeds from the December 31, 2018 interest payment and partial redemption of Secured Notes held by Ambac Assurance was $19,405 and is included in Restricted cash on the Consolidated Balance Sheet at December 31, 2018.

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). 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 December 31, 2018 and 2017, respectively:



	Municipal obligations		Corporate obligations (3)		Mortgage and asset- backed securities		Total		Weighted Average Underlying Rating ⁽¹⁾
December 31, 2018:
Ambac Assurance Corporation ⁽²⁾	$	833,241	$	656,473	$	599,185	$	2,088,899	CC
National Public Finance Guarantee Corporation	15,600		—		—		15,600		BBB-
Total	$	848,841	$	656,473	$	599,185	$	2,104,499	CC

December 31, 2017:
Ambac Assurance Corporation ⁽²⁾	$	706,715	$	32,660	$	2,702,887	$	3,442,262	CC
National Public Finance Guarantee Corporation	20,733		—		—		20,733		BBB-
Assured Guaranty Municipal Corporation	5,998		—		—		5,998		BBB+
Total	$	733,446	$	32,660	$	2,702,887	$	3,468,993	CC


(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 corporate obligations and asset-backed securities with a fair value of $144,672 and $170,280 at December 31, 2018 and 2017, respectively, insured by Ambac UK.


(3)	2018 includes Ambac's holdings of the secured notes issued by Ambac LSNI in connection with the Rehabilitation Exit Transactions. These secured notes are insured by Ambac Assurance.

Equity Interests:

Ambac's investment portfolio includes equity interests in various pooled investment funds, which are classified as trading. The fair value and additional information about such investments in pooled funds, by investment type, is summarized in the table below. Except as noted in the table, fair value reported is determined using NAV per share as a practical expedient. There are no unfunded commitments applicable to any of these investments for the periods disclosed.



Class of Funds	December 31, 2018		December 31, 2017		Redemption frequency	Redemption notice period
Real estate properties ⁽¹⁾	$	16,123	$	33,154	quarterly	10 business days
Diversified hedge fund strategies ⁽²⁾	—		53,054		semi-monthly	15 - 30 days
Interest rate products ^{(3) (7)}	177,357		136,603		daily, weekly or monthly	0 - 30 days
Illiquid investments ⁽⁴⁾	84,297		67,787		quarterly	180 days
Insurance-linked investments ⁽⁵⁾	29,318		22,666		quarterly	90-120 days
Equity market investments ^{(6) (7)}	43,954		53,675		daily	0 days
Total equity investments in pooled funds	$	351,049	$	366,939


(1)	Investments consist of UK property to generate income and capital growth.


(2)	Investments seek diversified exposure to hedge fund core strategies to produce high risk-adjusted returns, with low long-term correlation to traditional markets and with targeted volatility levels. Funds may have the right to defer redemptions under certain circumstances. Ambac sold its position in this fund in 2018.

(3)

This class of funds includes investments in a range of instruments including leveraged loans, CLOs, asset-backed securities and floating rate notes to generate income and capital appreciation. Funds with less frequent redemption periods limit redemptions to as little as 15% per period. Funds with a same day redemption notice period are redeemable only weekly, while funds that may be redeemed any business day have notice periods of 15-30 days.


(4)	This class seeks to obtain high long-term total return through investments with low liquidity and defined term, resulting in expected capital distributions to subscribers between 2020 and 2023. Redemptions were not able to occur prior to the expiration of the investment lock-up period in May 2018.

(5)

This class aims to provide returns from the insurance and reinsurance markets through investments in catastrophe bonds, life insurance and other insurance linked investments. Redemption periods are quarterly, subject to 90-day notice for January/July redemption dates and 120-day notice for April/October redemption dates with redemptions greater than 3.5% during the first five years following share issuance subject to redemption fees.


(6)	Investments represent a diversified exposure to global equity market returns through holdings of various regional market index funds.


(7)	Interest rate products include $27,154 at December 31, 2018 and $2,823 at December 31, 2017 and equity market investments include $43,954 at December 31, 2018 and $53,675 at December 31, 2017 that have readily determinable fair values priced through pricing vendors.

Ambac also holds an equity interest in an unconsolidated trust created in connection with the 2014 sale of Segregated Account junior surplus notes that is accounted for under the equity method. At December 31, 2017, Ambac also held debt securities issued by the trust that were accounted for as trading.

Investment Income:

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



Year Ended December 31,	2018			2017			2016
Fixed income securities	$	265,380		$	337,454		$	288,554
Short-term investments	11,014			7,898			1,505
Loans	730			520			337
Investment expense	(6,599		)	(8,098		)	(9,347		)
Securities available-for-sale and short-term	270,525			337,774			281,049
Other investments	2,192			23,179			32,318
Total net investment income	$	272,717		$	360,953		$	313,367

Net investment income from Other investments primarily represents changes in fair value on securities classified as trading or under the fair value option plus income from Ambac's interests in an unconsolidated trust created in connection with its sale of Segregated Account junior surplus notes. The portion of net unrealized gains (losses) related to trading securities still held at the end of each period is as follows:



Year Ended December 31,	2018			2017		2016
Net gains (losses) recognized during the period on trading securities	$	(3,035	)	$	18,242	$	27,654
Less: net gains (losses) recognized during the reporting period on trading securities sold during the period	615			4,854		7,474
Unrealized gains (losses) recognized during the reporting period on trading securities still held at the reporting date	$	(3,650	)	$	13,388	$	20,180