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Financial Guarantee Insurance Contracts
 6 Months Ended
Jun. 30, 2019
Insurance [Abstract]  
Financial Guarantee Insurance Contracts
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 or in installments. 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 assets underlying the insured obligation are homogenous pools 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. The weighted average risk-free rate at June 30, 2019 and December 31, 2018, was 2.5% and 2.7%, respectively, and the weighted average period of future premiums used to estimate the premium receivable at June 30, 2019 and December 31, 2018, was 8.7 years and 8.7 years, respectively.
In evaluating the credit quality of the premium receivables, management evaluates the obligor's ability to pay. For structured finance transactions, this evaluation will include a review of the priority for the payment of financial guarantee premiums to Ambac, as required by bond indentures, in the transaction's waterfall structure. The financial guarantee premium is generally senior in
the waterfall. 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. At June 30, 2019 and December 31, 2018, $8,288 and $7,136 respectively, of premium receivables were deemed uncollectable. As of June 30, 2019 and December 31, 2018, approximately 13% and 20% of the premium receivables, net of uncollectable receivables, related to transactions with non-investment grade internal ratings, mainly structured finance transactions. Past due premiums on policies insuring non-investment grade obligations amounted to less than $200 at June 30, 2019.
Below is the gross premium receivable roll-forward for the affected periods:
 
 
Six Months Ended June 30,
 
 
2019
 
2018
Beginning premium receivable
 
$
495,391

 
$
586,312

Premium receipts
 
(25,693
)
 
(29,822
)
Adjustments for changes in expected and contractual cash flows (1)
 
(22,310
)
 
(5,066
)
Accretion of premium receivable discount
 
6,206

 
7,627

Changes to uncollectable premiums
 
(1,155
)
 
(11
)
Other adjustments (including foreign exchange)
 
(10,913
)
 
(5,082
)
Ending premium receivable (2)
 
$
441,526

 
$
553,958


(1)
Adjustments for changes in expected and contractual cash flows primarily due to reductions in insured exposure as a result of early policy terminations and unscheduled principal paydowns.
(2)
Premium receivable includes premiums to be received in foreign denominated currencies most notably in British Pounds and Euros. At June 30, 2019 and 2018, premium receivables include British Pounds of $137,137 (£107,974) and $151,316 (£114,729), respectively, and Euros of $28,367 (€24,941) and $33,114 (€28,380), respectively.
When a bond issue insured by Ambac Assurance has been retired early, typically due to an issuer call, 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, 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. Ambac’s accelerated premium revenue for retired obligations for the three and six months ended June 30, 2019 was $(6,169) and $6,054, respectively, and for the three and six months ended June 30, 2018 was $6,103 and 15,495, respectively.
The effect of reinsurance on premiums written and earned for the respective periods was as follows:
 
Three Months Ended June 30,
 
2019
 
2018
 
Written
 
Earned
 
Written
 
Earned
Direct
$
(20,605
)
 
$
10,066

 
$
(611
)
 
$
27,339

Assumed
—

 
20

 
—

 
19

Ceded
(343
)
 
2,253

 
(224
)
 
1,522

Net premiums
$
(20,262
)
 
$
7,833

 
$
(387
)
 
$
25,836


 
Six Months Ended June 30,
 
2019
 
2018
 
Written
 
Earned
 
Written
 
Earned
Direct
$
(17,259
)
 
$
39,500

 
$
3,650

 
$
59,947

Assumed
—

 
39

 
—

 
39

Ceded
(844
)
 
3,948

 
(1,043
)
 
3,267

Net premiums
$
(16,415
)
 
$
35,591

 
$
4,693

 
$
56,719


The following table summarizes net premiums earned by location of risk for the respective periods:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
United States
$
5,626

 
$
19,752

 
$
33,869

 
$
44,469

United Kingdom
4,224

 
4,958

 
8,415

 
9,815

Other international
(2,017
)
 
1,126

 
(6,693
)
 
2,435

Total
$
7,833

 
$
25,836

 
$
35,591

 
$
56,719


The table below summarizes the future gross undiscounted premiums to be collected and future premiums earned, net of reinsurance at June 30, 2019:
 
Future Premiums
to be
Collected (1)
 
Future
Premiums to
be Earned Net of
Reinsurance (1)
Three months ended:
 
 
 
September 30, 2019
$
12,324

 
$
11,927

December 31, 2019
11,060

 
11,541

Twelve months ended:
 
 
 
December 31, 2020
43,319

 
45,409

December 31, 2021
37,827

 
41,186

December 31, 2022
35,997

 
38,351

December 31, 2023
34,530

 
35,714

Five years ended:
 
 
 
December 31, 2028
151,837

 
146,197

December 31, 2033
113,812

 
96,407

December 31, 2038
61,127

 
48,749

December 31, 2043
26,437

 
16,643

December 31, 2048
11,782

 
6,885

December 31, 2053
2,252

 
1,577

December 31, 2058
31

 
50

Total
$
542,335

 
$
500,636

(1)
Future premiums to be collected are undiscounted and are used to derive the discounted premium receivable asset recorded on Ambac's balance sheet. Future premiums to be earned, net of reinsurance relate to the unearned premiums 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 further described in Note 2. Basis of Presentation and Significant Accounting Policies in the Notes to Consolidated Financial Statements included in Ambac's Annual Report on Form 10-K for the year ended December 31, 2018. 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. 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 may result in different 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:
The loss and loss expense reserve (“loss reserve”) policy for financial guarantee insurance relates only to Ambac’s non-derivative insurance business for insurance policies issued to beneficiaries, including VIEs, for which we do not consolidate the VIE. Ambac’s loss reserves are based on management’s on-going review of the financial guarantee credit portfolio. Below are the components of the Loss and loss expense reserves liability and the Subrogation recoverable asset at June 30, 2019 and December 31, 2018:
 
 
Present Value of Expected
Net Cash Flows
 
Unearned
Premium
Revenue
 
Gross Loss and
Loss Expense
Reserves
Balance Sheet Line Item
 
Claims and
Loss Expenses
 
Recoveries
 
 
June 30, 2019:
 
 
 
 
 
 
 
 
Loss and loss expense reserves
 
$
1,828,116

 
$
(273,597
)
 
$
(60,413
)
 
$
1,494,106

Subrogation recoverable
 
157,307

 
(2,142,133
)
 
—

 
(1,984,826
)
Totals
 
$
1,985,423

 
$
(2,415,730
)
 
$
(60,413
)
 
$
(490,720
)
 
 
 
 
 
 
 
 
 
December 31, 2018:
 
 
 
 
 
 
 
 
Loss and loss expense reserves
 
$
2,246,335

 
$
(313,595
)
 
$
(106,662
)
 
$
1,826,078

Subrogation recoverable
 
175,694

 
(2,108,654
)
 
—

 
(1,932,960
)
Totals
 
$
2,422,029

 
$
(2,422,249
)
 
$
(106,662
)
 
$
(106,882
)

Below is the loss and loss expense reserve roll-forward, net of subrogation recoverable and reinsurance, for the affected periods:
 
Six Months Ended June 30,
 
2019
 
2018
Beginning gross loss and loss expense reserves
$
(106,882
)
 
$
4,113,802

Reinsurance recoverable
22,623

 
40,658

Beginning balance of net loss and loss expense reserves
(129,505
)
 
4,073,144

Losses and loss expenses (benefit):
 
 
 
Current year
806

 
996

Prior years
(121,879
)
 
(215,812
)
Total (1) (2) (3)
(121,073
)
 
(214,816
)
Loss and loss expenses paid (recovered):
 
 
 
Current year
40

 
105

Prior years (3)
194,106

 
3,708,992

Total
194,146

 
3,709,097

Foreign exchange effect
(799
)
 
(6,378
)
Ending net loss and loss expense reserves
(445,523
)
 
142,853

Impact of VIE consolidation
(72,159
)
 
—

Reinsurance recoverable (4)
26,962

 
38,293

Ending gross loss and loss expense reserves
$
(490,720
)
 
$
181,146


(1)
Total losses and loss expenses (benefit) includes $(6,067) and $870 for the six months ended June 30, 2019 and 2018, respectively, related to ceded reinsurance.
(2)
Ambac records the impact of estimated recoveries related to securitized loans in RMBS transactions that breached certain representations and warranties ("R&W"s) by transaction sponsors within losses and loss expenses (benefit). The losses and loss expense (benefit) incurred associated with changes in estimated R&Ws for the six months ended June 30, 2019 and 2018 was $8,188 and $17,602, respectively.
(3)
On February 12, 2018, Deferred Amounts and Interest Accrued on Deferred Amounts in the amount of $3,000,158 and $856,834, respectively were settled in connection with the Rehabilitation Exit Transactions. 2018 includes a $288,204 loss and loss expense benefit on these settled Deferred Amounts.
(4)
Represents reinsurance recoverable on future loss and loss expenses. Additionally, the Balance Sheet line "Reinsurance recoverable on paid and unpaid losses" includes reinsurance recoverables (payables) of $253 and $778 as of June 30, 2019 and 2018, respectively, related to previously presented loss and loss expenses and subrogation.
For 2019, the positive development in prior years was primarily a result of the Ballantyne and Puerto Rico COFINA commutations and positive development in the RMBS portfolio, partially offset by deterioration in other Public Finance credits, primarily Puerto Rico credits other than COFINA.
For 2018, the net positive development in prior years was primarily a result of the discount recorded on the Rehabilitation Exit Transactions partially offset by negative development in the Public Finance and RMBS portfolios and interest accrued on Deferred Amounts prior to the Rehabilitation Exit Transactions.

The tables below summarize information related to policies currently included in Ambac’s loss and loss expense reserves or subrogation recoverable at June 30, 2019 and December 31, 2018. Gross par exposures include capital appreciation bonds which are reported at the par amount at the time of issuance of the insurance policy as opposed to the current accreted value of the bond. The weighted average risk-free rate used to discount loss reserves at June 30, 2019 and December 31, 2018 was 2.1% and 2.8%, respectively.
Surveillance Categories as of June 30, 2019
 
I
 
IA
 
II
 
III
 
IV
 
V
 
Total
Number of policies
36

 
23

 
14

 
16

 
141

 
3

 
233

Remaining weighted-average contract period (in years) (1)
8

 
18

 
8

 
18

 
14

 
3

 
14

Gross insured contractual payments outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal
$
993,210

 
$
659,974

 
$
201,537

 
$
884,385

 
$
4,179,704

 
$
37,962

 
$
6,956,772

Interest
489,600

 
590,727

 
101,507

 
422,528

 
1,789,609

 
12,413

 
3,406,384

Total
$
1,482,810

 
$
1,250,701

 
$
303,044

 
$
1,306,913

 
$
5,969,313

 
$
50,375

 
$
10,363,156

Gross undiscounted claim liability
$
6,295

 
$
53,913

 
$
27,057

 
$
558,922

 
$
1,778,465

 
$
50,343

 
$
2,474,995

Discount, gross claim liability
(492
)
 
(5,850
)
 
(1,627
)
 
(169,017
)
 
(392,990
)
 
(2,524
)
 
(572,500
)
Gross claim liability before all subrogation and before reinsurance
5,803

 
48,063

 
25,430

 
389,905

 
1,385,475

 
47,819

 
1,902,495

Less:
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross RMBS subrogation (2)
—

 
—

 
—

 
—

 
(1,792,616
)
 
—

 
(1,792,616
)
Discount, RMBS subrogation
—

 
—

 
—

 
—

 
30,399

 
—

 
30,399

Discounted RMBS subrogation, before reinsurance
—

 
—

 
—

 
—

 
(1,762,217
)
 
—

 
(1,762,217
)
Less:
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross other subrogation (3)
—

 
—

 
—

 
(43,231
)
 
(649,071
)
 
(12,758
)
 
(705,060
)
Discount, other subrogation
—

 
—

 
—

 
4,586

 
43,997

 
2,964

 
51,547

Discounted other subrogation, before reinsurance
—

 
—

 
—

 
(38,645
)
 
(605,074
)
 
(9,794
)
 
(653,513
)
Gross claim liability, net of all subrogation and discounts, before reinsurance
5,803

 
48,063

 
25,430

 
351,260

 
(981,816
)
 
38,025

 
(513,235
)
Less: Unearned premium revenue
(3,695
)
 
(9,463
)
 
(1,870
)
 
(7,201
)
 
(38,005
)
 
(179
)
 
(60,413
)
Plus: Loss expense reserves
1,140

 
3,809

 
374

 
1,361

 
76,244

 
—

 
82,928

Gross loss and loss expense reserves
$
3,248

 
$
42,409

 
$
23,934

 
$
345,420

 
$
(943,577
)
 
$
37,846

 
$
(490,720
)
Reinsurance recoverable reported on Balance Sheet (4)
$
186

 
$
9,225

 
$
3,673

 
$
26,601

 
$
(12,470
)
 
$
—

 
$
27,215

 
(1)
Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.
(2)
RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for R&W breaches.
(3)
Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance transactions, including RMBS.
(4)
Reinsurance recoverable reported on the Balance Sheet includes reinsurance recoverables of $26,962 related to future loss and loss expenses and $253 related to presented loss and loss expenses and subrogation.
Surveillance Categories as of December 31, 2018
 
I
 
IA
 
II
 
III
 
IV
 
V
 
Total
Number of policies
21

 
28

 
18

 
16

 
145

 
3

 
231

Remaining weighted-average contract period (in years) (1)
9

 
19

 
9

 
22

 
14

 
3

 
16

Gross insured contractual payments outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal
$
916,530

 
$
708,249

 
$
622,820

 
$
1,705,464

 
$
5,407,202

 
$
43,140

 
$
9,403,405

Interest
487,702

 
631,708

 
293,293

 
6,979,130

 
2,177,539

 
13,401

 
10,582,773

Total
$
1,404,232

 
$
1,339,957

 
$
916,113

 
$
8,684,594

 
$
7,584,741

 
$
56,541

 
$
19,986,178

Gross undiscounted claim liability
$
4,019

 
$
63,712

 
$
36,000

 
$
992,019

 
$
2,295,968

 
$
56,510

 
$
3,448,228

Discount, gross claim liability
(481
)
 
(13,008
)
 
(3,069
)
 
(433,709
)
 
(637,548
)
 
(4,143
)
 
(1,091,958
)
Gross claim liability before all subrogation and before reinsurance
3,538

 
50,704

 
32,931

 
558,310

 
1,658,420

 
52,367

 
2,356,270

Less:
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross RMBS subrogation (2)
—

 
—

 
—

 
—

 
(1,809,937
)
 
—

 
(1,809,937
)
Discount, RMBS subrogation
—

 
—

 
—

 
—

 
39,391

 
—

 
39,391

Discounted RMBS subrogation, before reinsurance
—

 
—

 
—

 
—

 
(1,770,546
)
 
—

 
(1,770,546
)
Less:
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross other subrogation (3)
—

 
(10,816
)
 
—

 
(136,541
)
 
(624,654
)
 
(12,880
)
 
(784,891
)
Discount, other subrogation
—

 
7,318

 
—

 
67,008

 
55,088

 
3,774

 
133,188

Discounted other subrogation, before reinsurance
—

 
(3,498
)
 
—

 
(69,533
)
 
(569,566
)
 
(9,106
)
 
(651,703
)
Gross claim liability, net of all subrogation and discounts, before reinsurance
3,538

 
47,206

 
32,931

 
488,777

 
(681,692
)
 
43,261

 
(65,979
)
Less: Unearned premium revenue
(943
)
 
(10,073
)
 
(5,085
)
 
(36,365
)
 
(53,987
)
 
(209
)
 
(106,662
)
Plus: Loss expense reserves
1,369

 
4,253

 
2,564

 
(5,926
)
 
63,499

 
—

 
65,759

Gross loss and loss expense reserves
$
3,964

 
$
41,386

 
$
30,410

 
$
446,486

 
$
(672,180
)
 
$
43,052

 
$
(106,882
)
Reinsurance recoverable reported on Balance Sheet (4)
$
367

 
$
7,285

 
$
4,223

 
$
26,096

 
$
(14,838
)
 
$
—

 
$
23,133

(1)
Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.
(2)
RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for R&W breaches.
(3)
Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance transactions, including RMBS.
(4)
Reinsurance recoverable reported on Balance Sheet includes reinsurance recoverables of $22,623 related to future loss and loss expenses and $510 related to presented loss and loss expenses and subrogation.
Puerto Rico:
Ambac has exposure to the Commonwealth of Puerto Rico (the "Commonwealth") and its instrumentalities across several different issuing entities. Each has its own credit risk profile attributable to discrete revenue sources, direct general obligation pledges or general obligation guarantees. The Commonwealth of Puerto Rico and certain of its instrumentalities have defaulted and may continue to default on debt service payments, including payments owed on bonds insured by Ambac Assurance. Ambac Assurance may be required to make significant amounts of policy payments over the next several years, the recoverability of which is subject to great uncertainty, which may lead to a material increase in permanent losses causing a material adverse impact on our results of operations and financial condition. Our exposure to Puerto Rico is impacted by the amount of monies available for debt service, which is in turn affected by a number of factors including demographic trends, economic growth, tax policy and revenues, impact of reforms, fiscal plans, government actions, political instability, budgetary
performance and flexibility, weather events, litigation outcomes, as well as federal funding of Commonwealth needs. In the near term, the financial and economic outlook for Puerto Rico is dependent upon a still fragile infrastructure, heightening its vulnerability to additional weather events. The longer term recovery of the Commonwealth economy and its essential infrastructure will likely be dependent on, amongst other factors, the management, usage and efficacy of federal resources.
Also important to Puerto Rico's economic growth, government reform and creditor outcomes is the revised Fiscal Plan for the Commonwealth of Puerto Rico, certified by the Financial Oversight and Management Board for Puerto Rico ("Oversight Board") on May 9, 2019. The Commonwealth Fiscal Plan outlines a series of reforms, projects the fiscal and economic impact of those reforms, and provides forecasts of resulting budgetary surpluses over a fiscal year series. However, as was the case with prior Commonwealth Fiscal Plans, the Commonwealth Fiscal Plan certified on May 9,
2019 lacks a high degree of transparency regarding the underlying data, assumptions and rationales supporting those assumptions, making reconciliation and due diligence difficult. As a result, it is difficult to predict the long-term capacity and willingness of the Puerto Rico government and its instrumentalities to pay debt service on bonded debt and how their debt burden and financial flexibility might affect Ambac Assurance's claim potential, risk profile and long-term financial strength.
Substantial uncertainty exists with respect to the ultimate outcome for creditors in Puerto Rico, such as Ambac Assurance, due to, amongst other matters, legislation enacted by the Commonwealth and the federal government, including PROMESA, actions taken pursuant to such laws, including Title III filings, as well as political uncertainty and leadership turnover, including the resignation of Governor Ricardo Rosselló, many of his cabinet members and other public officials. Ambac Assurance is involved in multiple litigations relating to such actions and other issues and may not be successful in pursuing claims or protecting its interests. As a result of litigation or other aspects of the restructuring processes, the difference among the credits insured by Ambac Assurance may not be respected.
Ambac Assurance has and may continue to participate in mediation processes related to potential debt restructurings. Mediation may not be productive or may not resolve Ambac Assurance's claims in a manner that avoids significant losses. No assurances can be given that negotiations will be successfully concluded, that Commonwealth, Oversight Board and creditor parties will reach definitive agreements on additional debt restructurings, that any additional negotiated transaction debt restructuring, definitive agreement or Plan of Adjustment will be approved by the court and completed, or that any transaction or Plan of Adjustment will not have an adverse impact on Ambac's financial conditions or results. It is possible that certain restructuring process solutions, together with associated legislation, budgetary, and/or public policy proposals could be adopted and could further impair our exposures, causing losses that could have a material adverse impact on our results of operations and financial condition.
While our reserving scenarios reflect a wide range of possible outcomes, reflecting the significant uncertainty regarding future developments and outcomes, given our exposure to Puerto Rico and the economic, fiscal, legal and political uncertainties associated therewith as well as the uncertainties emanating from the damage caused by hurricanes Maria and Irma, our loss reserves may ultimately prove to be insufficient to cover our losses, potentially by a material amount, and may be subject to material volatility.
Ambac has considered these developments and other factors in evaluating its Puerto Rico loss reserves. During the six months ended June 30, 2019, Ambac had incurred losses associated with its Domestic Public Finance insured portfolio of $119,560, which was primarily impacted by the continued uncertainty and volatility of the situation in Puerto Rico. While management believes its reserves are adequate to cover losses in its Public Finance insured portfolio, there can be no assurance that Ambac may not incur additional losses in the future, particularly given the developing economic, political, and legal circumstances in Puerto Rico. Such additional losses may have a material adverse effect on Ambac’s results of operations and financial condition. For public finance credits, including Puerto Rico, as well as other issuers, for which Ambac has an estimate of
expected loss at June 30, 2019, the possible increase in loss reserves under stress or other adverse conditions and circumstances was estimated to be approximately $1,100,000. This possible increase in loss reserves under stress or other adverse conditions is significant and if we were to experience such incremental losses, our stockholders’ equity as of June 30, 2019 would decrease from $1,552,916 to $452,916. However, there can be no assurance that losses may not exceed such amount.
COFINA Debt Restructuring
On January 16-17, 2019, the hearings for the confirmation of the COFINA Plan of Adjustment ("POA") and the Commonwealth 9019 motion were held. On February 4, 2019, the COFINA POA was confirmed and the Commonwealth 9019 motion was approved by the U.S. District Court for the District of Puerto Rico. On February 12, 2019, the COFINA POA went effective. Pursuant to the POA, all existing COFINA senior and subordinate bonds were discharged and exchanged for cash and new COFINA current interest and capital appreciation bonds ("new COFINA bonds"). The cash and new COFINA bonds allocated to COFINA senior bondholders equaled approximately 93% (considering the new COFINA bonds at par) of such senior bondholders’ allowed claim, in the amount of the COFINA senior bond accreted value, as of, but not including, May 5, 2017 (the COFINA Title III Petition Date).
Pursuant to the POA, each holder of Ambac Assurance-insured senior COFINA bonds had the option to elect by January 11, 2019 to either (i) commute their rights in respect of the Ambac Assurance insurance policy associated with the existing senior COFINA bonds, which bonds would be discharged and Ambac Assurance policy obligations with respect thereto would be released, in exchange for new COFINA bonds, cash amounts to be paid by COFINA plus additional cash consideration provided by Ambac Assurance equal to 5.25% of the accreted value of the Ambac Assurance-insured senior COFINA bonds as of the COFINA Petition Date or (ii) agree to deposit their Ambac Assurance-insured senior COFINA bonds into a trust in exchange for units issued by the trust (the "COFINA Class 2 Trust"), which trust would receive the new COFINA bonds and the cash amounts to be paid by COFINA that such bondholders would have otherwise received to the extent they had elected the recovery under clause (i) above (thereby entitling the COFINA Class 2 Trust to receive debt service payments from COFINA with respect to the new COFINA bonds deposited into the trust) plus any accelerated policy payments (made solely at Ambac Assurance's own discretion) or claim payments due under the existing Ambac Assurance insurance policy for the deficiency relating to the existing senior COFINA bonds at the relevant scheduled payment dates (2047 through 2054). Any claims payable under the existing Ambac Assurance policy for the Ambac Assurance-insured senior COFINA bonds held in the trust will be reduced by all amounts distributed or deemed distributed from the trust to the holders of the trust units from the new COFINA bonds and cash as well as accelerated policy payments made by Ambac Assurance at its own discretion. Ambac makes no representation and can give no assurances that the new COFINA bonds or COFINA Class 2 Trust units, both of which are not insured by Ambac Assurance, will trade at par or any other price. Under the COFINA POA, Ambac Assurance-insured bondholders who did not affirmatively elect the trust option in clause (ii) above were deemed to have elected the commutation option described in clause (i) above. Approximately 75% of Ambac Assurance-insured
senior COFINA bondholders, by measure of insured par, elected the commutation option or did not affirmatively elect to exchange their bonds for units of the COFINA Class 2 Trust.
As a result of the POA, commutations, amendments, and subsequent redemptions of obligations of the COFINA Class 2 Trust, Ambac Assurance's net par outstanding was reduced to $177,605 as of June 30, 2019. Ambac Assurance's remaining policy obligation of $177,605 net par is an asset of the COFINA Class 2 Trust, which holds a ratable distribution of new COFINA bonds, the interest and principal from which can be used to partially offset Ambac’s remaining insurance liability. As further discussed in Note 3. Variable Interest Entities, Ambac Assurance consolidated the COFINA Class 2 Trust.
At this time, it is unclear what impact the COFINA restructuring will have on the prospective recoveries of Ambac Assurance's other insured Puerto Rico instrumentalities.
Representation and Warranty Recoveries:
Ambac records estimated subrogation recoveries for breaches of R&Ws by sponsors of certain RMBS transactions. For a discussion of the approach utilized to estimate R&W subrogation recoveries, 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, 2018.
Ambac has recorded R&W subrogation recoveries of $1,762,217 ($1,736,055 net of reinsurance) and $1,770,546 ($1,744,243 net of reinsurance) at June 30, 2019 and December 31, 2018, respectively. R&W recovery proceeds up to the first $1,400,000 and above $1,600,000 have been pledged as security on certain of Ambac's long-term debt obligations as described further 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, 2018.
Below is the rollforward of R&W subrogation for the affected periods:
 
Six Months Ended June 30,
 
2019
 
2018
Discounted R&W subrogation (gross of reinsurance) at beginning of period
$
1,770,546

 
$
1,834,387

Changes recognized during the period:
 
 
 
Impact of sponsor actions (1)
—

 
—

All other changes (2)
(8,329
)
 
(18,002
)
Discounted R&W subrogation (gross of reinsurance) at end of period
$
1,762,217

 
$
1,816,385

(1)
Sponsor actions include loan repurchases, direct payments to Ambac and other contributions from sponsors.
(2)
All other changes which may impact RMBS R&W subrogation recoveries include changes in actual or projected collateral
performance, changes in the creditworthiness of a sponsor and/or the projected timing of recoveries.
Our ability to realize R&W subrogation 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 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. Failure to realize R&W subrogation recoveries for any reason or the realization of R&W subrogation recoveries materially below the amount recorded on Ambac's consolidated balance sheet would have a material adverse effect on our results of operations and financial condition and may result in adverse consequences such as impairing the ability of Ambac Assurance to honor its financial obligations; the initiation of rehabilitation proceedings against Ambac Assurance; decreased likelihood of Ambac Assurance delivering value to Ambac, through dividends or otherwise; and a significant drop in the value of securities issued or insured by Ambac or Ambac Assurance.
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 and six months ended June 30, 2019, the insurance intangible amortization expense was $226,242 and $262,520, respectively, and for the three and six months ended June 30, 2018, the insurance intangible amortization expense was $23,242 and $51,878, respectively. As of June 30, 2019 and December 31, 2018, the gross carrying value of the insurance intangible asset was $1,265,052 and $1,551,576, respectively. Accumulated amortization of the insurance intangible asset was $810,222 and $832,645, as of June 30, 2019 and December 31, 2018, respectively, resulting in a net insurance intangible asset of $454,830 and $718,931, respectively.
The estimated future amortization expense for the net insurance intangible asset is as follows:
Amortization expense (1)
 
 
2019 (six months)
 
$
24,591

2020
 
45,139

2021
 
39,777

2022
 
36,194

2023
 
33,016

Thereafter
 
276,113

(1)  
Future amortization considers the use of contractual lives for many bond types which do not have homogeneous pools of underlying collateral. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay certain obligations. If those bonds types are retired early, amortization expense may differ in the period of call or refinancing.