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Financial Guarantee Insurance Contracts | 12 Months Ended
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Dec. 31, 2018
Insurance [Abstract] |
Financial Guarantee Insurance Contracts | 7. 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: Below is the gross premium receivable roll-forward (direct and assumed contracts) for the affected periods:
Year Ended December 31, | 2018 |  | 2017 |  | 2016
Beginning premium receivable | $ | 586,312 |  |  | $ | 661,337 |  |  | $ | 831,575 |
Premium receipts | (56,441 | ) |  | (81,597 | ) |  | (77,038 | )
Adjustments for changes in expected and contractual cash flows | (41,762 | ) |  | (30,334 | ) |  | (78,528 | )
Accretion of premium receivable discount | 14,668 |  |  | 16,162 |  |  | 18,637 |
Changes to uncollectable premiums | 2,167 |  |  | (141 | ) |  | 6,054 |
Other adjustments (including foreign exchange) | (9,553 | ) |  | 20,885 |  |  | (39,363 | )
Ending premium receivable (1) | $ | 495,391 |  |  | $ | 586,312 |  |  | $ | 661,337 |
(1) | Gross premium receivable includes premiums to be received in foreign denominated currencies most notably in British Pounds and Euros. At December 31, 2018, 2017 and 2016 premium receivables include British Pounds of $131,458 (£103,088), $151,852 (£112,342) and $177,878 (£144,393), respectively, and Euros of $30,597 (€26,708), $36,001 (€29,976) and $34,866 (€33,108), respectively.
In structured finance transactions, the priority for the payment of financial guarantee premiums to Ambac, as required by bond indentures of insured structured finance obligations, is generally senior in the waterfall. In evaluating the credit quality of the premium receivables, management evaluates the transaction waterfall structures and the internal ratings of the transactions underlying the premium receivables. 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 December 31, 2018 and 2017, $7,136 and $9,331 respectively, of premium receivables were deemed uncollectable. As of December 31, 2018 and 2017, approximately 20% and 22%, respectively, of the premium receivables, net of uncollectible premiums, 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 $100 at December 31, 2018. The effect of reinsurance on premiums written and earned was as follows:
Year Ended December 31, | Direct |  | Assumed |  | Ceded |  | Net Premiums
2018: |  |  |  |  |  |  |
Written | $ | (23,828 | ) |  | $ | — |  |  | $ | 16,860 |  |  | $ | (40,688 | )
Earned | 118,977 |  |  | 79 |  |  | 7,967 |  |  | $ | 111,089 |
2017: |  |  |  |  |  |  |
Written | (14,313 | ) |  | — |  |  | (2,104 | ) |  | $ | (12,209 | )
Earned | 190,496 |  |  | 106 |  |  | 15,325 |  |  | $ | 175,277 |
2016: |  |  |  |  |  |  |
Written | (53,837 | ) |  | — |  |  | (8,772 | ) |  | $ | (45,065 | )
Earned | 215,564 |  |  | 85 |  |  | 18,362 |  |  | $ | 197,287 |
Ambac’s accelerated premium revenue for retired obligations for the years ended December 31, 2018, 2017 and 2016, was $32,482, $64,494 and $52,416, respectively. The following table summarizes net premiums earned by location of risk:
Year Ended December 31, |  | 2018 |  | 2017 |  | 2016
United States |  | $ | 87,539 |  |  | $ | 134,099 |  |  | $ | 168,646 |
United Kingdom |  | 18,580 |  |  | 32,928 |  |  | 24,470 |
Other international |  | 4,970 |  |  | 8,250 |  |  | 4,171 |
Total |  | $ | 111,089 |  |  | $ | 175,277 |  |  | $ | 197,287 |
The table below summarizes the future gross undiscounted premiums to be collected and future premiums earned, net of reinsurance at December 31, 2018:
| Future Premiums to be Collected (1) |  | Future Premiums to be Earned Net of Reinsurance (2)
Three months ended: |  |  |
March 31, 2019 | $ | 14,616 |  |  | $ | 12,179 |
June 30, 2019 | 11,795 |  |  | 12,504 |
September 30, 2019 | 12,262 |  |  | 12,458 |
December 31, 2019 | 12,121 |  |  | 12,321 |
Twelve months ended: |  |  |
December 31, 2020 | 48,030 |  |  | 47,064 |
December 31, 2021 | 41,828 |  |  | 43,285 |
December 31, 2022 | 39,867 |  |  | 40,692 |
December 31, 2023 | 38,268 |  |  | 37,994 |
Five years ended: |  |  |
December 31, 2028 | 168,545 |  |  | 156,237 |
December 31, 2033 | 127,753 |  |  | 104,420 |
December 31, 2038 | 64,142 |  |  | 54,562 |
December 31, 2043 | 24,907 |  |  | 20,764 |
December 31, 2048 | 11,335 |  |  | 10,965 |
December 31, 2053 | 2,251 |  |  | 3,310 |
December 31, 2058 | 31 |  |  | 82 |
Total | $ | 617,751 |  |  | $ | 568,837 |
(1) | Future premiums to be collected are undiscounted and are used to derive the discounted premium receivable asset recorded on Ambac's balance sheet.
(2) | 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. 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: A loss reserve is recorded on the balance sheet on a policy-by-policy basis as further described in Note 2. Basis of Presentation and Significant Accounting Policies. Below are the components of the Loss and loss expense reserves liability and the Subrogation recoverable asset at December 31, 2018 and 2017:
| Unpaid Claims |  | Present Value of Expected Net Cash Flows |  |  |  |
Balance Sheet Line Item | Claims |  | Accrued Interest |  | Claims and Loss Expenses |  | Recoveries |  | Unearned Premium Revenue |  | Gross Loss and Loss Expense Reserves
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 | )
December 31, 2017: |  |  |  |  |  |  |  |  |  |  |
Loss and loss expense reserves | $ | 2,411,632 |  |  | $ | 667,988 |  |  | $ | 2,855,010 |  |  | $ | (1,054,113 | ) |  | $ | (135,502 | ) |  | $ | 4,745,015 |
Subrogation recoverable | 615,391 |  |  | 171,755 |  |  | 102,171 |  |  | (1,520,530 | ) |  | — |  |  | (631,213 | )
Totals | $ | 3,027,023 |  |  | $ | 839,743 |  |  | $ | 2,957,181 |  |  | $ | (2,574,643 | ) |  | $ | (135,502 | ) |  | $ | 4,113,802 |
Below is the loss and loss expense reserve roll-forward, net of subrogation recoverable and reinsurance, for the affected periods.
Year Ended December 31, | 2018 |  | 2017 |  | 2016
Beginning gross loss and loss expense reserves | $ | 4,113,802 |  |  | $ | 3,696,038 |  |  | $ | 2,858,813 |
Reinsurance recoverable | 40,658 |  |  | 30,767 |  |  | 44,059 |
Beginning balance of net loss and loss expense reserves | $ | 4,073,144 |  |  | $ | 3,665,271 |  |  | $ | 2,814,754 |
Losses and loss expenses (benefit) incurred: |  |  |  |  |
Current year | 4,884 |  |  | 5,691 |  |  | 6,675 |
Prior years (3) | (228,497 | ) |  | 507,495 |  |  | (18,164 | )
Total (1)(2) | (223,613 | ) |  | 513,186 |  |  | (11,489 | )
Loss and loss expenses (recovered) paid: |  |  |  |  |
Current year | 204 |  |  | 825 |  |  | 5,371 |
Prior years (3) | 3,963,341 |  |  | 133,427 |  |  | (944,955 | )
Total | 3,963,545 |  |  | 134,252 |  |  | (939,584 | )
Foreign exchange effect | (15,491 | ) |  | 28,939 |  |  | (77,578 | )
Ending net loss and loss expense reserves | $ | (129,505 | ) |  | $ | 4,073,144 |  |  | $ | 3,665,271 |
Reinsurance recoverable (4) | 22,623 |  |  | 40,658 |  |  | 30,767 |
Ending gross loss and loss expense reserves (5) | $ | (106,882 | ) |  | $ | 4,113,802 |  |  | $ | 3,696,038 |
(1) | Total losses and loss expenses (benefit) includes $1,657, $(20,348) and $5,421 for the years ended December 31, 2018, 2017 and 2016, 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 within losses and loss expenses (benefit). The losses and loss expense (benefit) incurred associated with changes in estimated representation and warranty recoveries for the year ended December 31, 2018, 2017 and 2016 was $62,493, $72,003 and $(71,369), respectively.
(3) | 2018 loss and loss expenses (recovered) paid includes the settlement of Deferred Amounts and Interest Accrued on Deferred Amounts in the amount of $3,000,158 and $856,834, respectively in connection with the Rehabilitation Exit Transactions through a combination of cash, surplus notes and secured notes. 2018 loss and loss expenses incurred 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 $510, $339 and $(349) as of December 31, 2018, 2017 and 2016, respectively, related to previously presented loss and loss expenses and subrogation.
(5) | Includes Euro denominated gross loss and loss expense reserves of $3,328 (€2,905), $21,116 (€17,582) and $21,375 (€20,297) at December 31, 2018, 2017 and 2016, respectively.
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 portfolio and interest accrued on Deferred Amounts prior to the Rehabilitation Exit Transactions. For 2017, the net adverse development in prior years was primarily the result of negative development in certain public finance transactions, including Puerto Rico, and interest accrued on Deferred Amounts partially offset by positive developments in certain Ambac UK transactions, including a benefit of $144,600 related to a confidential settlement of litigation brought by Ambac UK in the name of Ballantyne Re plc ("Ballantyne") that will reduce the ultimate Ballantyne claims Ambac UK is expecting to pay. For 2016, the net positive development in prior years was primarily the result of lower projected losses in the RMBS portfolio due to improved deal performance and higher RMBS R&W subrogation recoveries and the impact of executed commutations in the student loan portfolio. This was partially offset by negative development in Puerto Rico, the adverse impact of foreign currency rate movements on the Ambac UK portfolio and interest accrued on Deferred Amounts. The tables below summarize information related to policies currently included in Ambac’s loss and loss expense reserves or subrogation recoverable at December 31, 2018 and 2017. 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 December 31, 2018 and 2017 was 2.8% and 2.5%, respectively.
|  | 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 representation and warranty ("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.
|  | Surveillance Categories as of December 31, 2017
|  | I |  | IA |  | II |  | III |  | IV |  | V |  | Total
Number of policies |  | 26 |  |  | 20 |  |  | 26 |  |  | 22 |  |  | 179 |  |  | 4 |  |  | 277 |
Remaining weighted-average contract period (in years) (1) |  | 10 |  |  | 23 |  |  | 10 |  |  | 24 |  |  | 13 |  |  | 4 |  |  | 17 |
Gross insured contractual payments outstanding: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Principal |  | $ | 1,046,267 |  |  | $ | 531,190 |  |  | $ | 1,199,909 |  |  | $ | 1,998,861 |  |  | $ | 6,862,281 |  |  | $ | 48,562 |  |  | $ | 11,687,070 |
Interest |  | 531,657 |  |  | 584,098 |  |  | 413,045 |  |  | 7,182,715 |  |  | 2,469,765 |  |  | 16,332 |  |  | 11,197,612 |
Total |  | $ | 1,577,924 |  |  | $ | 1,115,288 |  |  | $ | 1,612,954 |  |  | $ | 9,181,576 |  |  | $ | 9,332,046 |  |  | $ | 64,894 |  |  | $ | 22,884,682 |
Gross undiscounted claim liability (2) |  | $ | 4,434 |  |  | $ | 56,659 |  |  | $ | 77,289 |  |  | $ | 1,412,976 |  |  | $ | 6,409,340 |  |  | $ | 64,863 |  |  | $ | 8,025,561 |
Discount, gross claim liability |  | (465 | ) |  | (13,095 | ) |  | (12,250 | ) |  | (643,897 | ) |  | (616,559 | ) |  | (4,739 | ) |  | (1,291,005 | )
Gross claim liability before all subrogation and before reinsurance |  | $ | 3,969 |  |  | $ | 43,564 |  |  | $ | 65,039 |  |  | $ | 769,079 |  |  | $ | 5,792,781 |  |  | $ | 60,124 |  |  | $ | 6,734,556 |
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gross RMBS subrogation (3) |  | — |  |  | — |  |  | — |  |  | — |  |  | (1,857,502 | ) |  | — |  |  | (1,857,502 | )
Discount, RMBS subrogation |  | — |  |  | — |  |  | — |  |  | — |  |  | 23,115 |  |  | — |  |  | 23,115 |
Discounted RMBS subrogation, before reinsurance |  | — |  |  | — |  |  | — |  |  | — |  |  | (1,834,387 | ) |  | — |  |  | (1,834,387 | )
Less: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Gross other subrogation (4) |  | — |  |  | (7,990 | ) |  | (9,371 | ) |  | (53,070 | ) |  | (743,456 | ) |  | (13,191 | ) |  | (827,078 | )
Discount, other subrogation |  | — |  |  | 5,169 |  |  | 2,550 |  |  | 8,349 |  |  | 67,045 |  |  | 3,709 |  |  | 86,822 |
Discounted other subrogation, before reinsurance |  | — |  |  | (2,821 | ) |  | (6,821 | ) |  | (44,721 | ) |  | (676,411 | ) |  | (9,482 | ) |  | (740,256 | )
Gross claim liability, net of all subrogation and discounts, before reinsurance |  | $ | 3,969 |  |  | $ | 40,743 |  |  | $ | 58,218 |  |  | $ | 724,358 |  |  | $ | 3,281,983 |  |  | $ | 50,642 |  |  | $ | 4,159,913 |
Less: Unearned premium revenue |  | (2,126 | ) |  | (9,990 | ) |  | (12,238 | ) |  | (46,086 | ) |  | (64,786 | ) |  | (276 | ) |  | (135,502 | )
Plus: Loss expense reserves |  | 16,116 |  |  | 3,242 |  |  | 665 |  |  | 13,331 |  |  | 56,037 |  |  | — |  |  | 89,391 |
Gross loss and loss expense reserves |  | $ | 17,959 |  |  | $ | 33,995 |  |  | $ | 46,645 |  |  | $ | 691,603 |  |  | $ | 3,273,234 |  |  | $ | 50,366 |  |  | $ | 4,113,802 |
Reinsurance recoverable reported on Balance Sheet (5) |  | $ | 202 |  |  | $ | 4,894 |  |  | $ | 9,424 |  |  | $ | 38,465 |  |  | $ | (11,988 | ) |  | $ | — |  |  | $ | 40,997 |
(1) | Remaining weighted-average contract period is weighted based on projected gross claims over the lives of the respective policies.
(2) | Gross undiscounted claim liability includes unpaid claims, including accrued interest on Deferred Amounts, on policies allocated to the Segregated Account and Ambac's estimate of expected future claims.
(3) | RMBS subrogation represents Ambac’s estimate of subrogation recoveries from RMBS transaction sponsors for R&W breaches.
(4) | Other subrogation represents subrogation related to excess spread and other contractual cash flows on public finance and structured finance transactions, including RMBS.
(5) | Reinsurance recoverable reported on Balance Sheet includes reinsurance recoverables of $40,658 related to future loss and loss expenses and $339 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, as applicable, discrete revenue sources, direct general obligation pledges and/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 claim 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, 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 ("Revised Commonwealth Fiscal Plan"), certified by the Financial Oversight and Management Board for Puerto Rico ("Oversight Board") on October 23, 2018. The Revised 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 Revised Commonwealth Fiscal Plan 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, as well as actions taken pursuant to such laws, including Title III filings. 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. COFINA Debt Restructuring On October 19, 2018, following the certification of the COFINA Fiscal Plan, the Oversight Board filed the COFINA Plan of Adjustment ("POA") and Disclosure Statement as part of the COFINA Title III case. The Oversight Board also filed a Rule 9019 Motion in the Commonwealth Title III case to approve the settlement of the Commonwealth-COFINA dispute. The filing of the COFINA POA and Disclosure Statement as well as the settlement motion followed the execution of a settlement agreement between the Oversight Board and the COFINA Agent. That settlement agreement is based on the previously announced agreement in principle developed by the COFINA Agent and the Commonwealth Agent. The COFINA POA is based on the settlement agreement as well as the preliminary agreement among COFINA bondholders announced August 8, 2018 and the subsequent Plan Support Agreement and term sheet among the Oversight Board, FAFAA, COFINA, bond insurers (including Ambac Assurance), as well as certain COFINA and General Obligation creditors. The COFINA POA contemplated exchanging all existing COFINA senior and subordinate bonds for cash as well as new COFINA current interest and capital appreciation bonds ("new COFINA bonds"). The cash and new COFINA bonds allocated to 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 COFINA 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 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. As of the January 11, 2019 election date, 74.9% 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. On February 4, 2019, the COFINA Plan of Adjustment was confirmed and the Commonwealth 9019 motion was approved by Judge Laura Taylor Swain of the U.S. District Court for the District of Puerto Rico. On February 12, 2019, the COFINA POA went effective, concurrent with the completion of the commutation described above. Several parties are presently appealing the confirmation of the POA and no assurances can be given regarding the results of such appeals. As a result, Ambac Assurance's insured COFINA bond exposure decreased significantly and Ambac Assurance's remaining policy obligation shall be an asset of the COFINA Class 2 Trust, which holds a ratable distribution of cash and new COFINA bonds, which can be used to partially offset Ambac’s remaining insurance liability. 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. 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 aftereffects of 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 year ended December 31, 2018, Ambac had incurred losses associated with its Domestic Public Finance insured portfolio of $36,674, which was primarily impacted by the continued uncertainty and volatility of the situation in Puerto Rico, partially offset by an increase in loss reserve discount rates. 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 December 31, 2018, the possible increase in loss reserves under stress or other adverse conditions and circumstances was estimated to be approximately $1,000,000. 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 December 31, 2018 would decrease from $1,633,147 to $633,147. However, there can be no assurance that losses may not exceed such amount. Representation and Warranty Recoveries: Ambac records estimated RMBS R&W subrogation recoveries for breaches of R&W by sponsors of certain RMBS transactions. For a discussion of the approach utilized to estimate RMBS R&W subrogation recoveries, see Note 2. Basis of Presentation and Significant Accounting Policies. RMBS R&W subrogation may include estimates of potential sponsor settlements, but have not been subject to a sampling approach. However, such estimates are not material to Ambac’s financial results and therefore are included in the below table. Ambac has recorded RMBS R&W subrogation recoveries of $1,770,546, ($1,744,243 net of reinsurance) and $1,834,387, ($1,806,736 net of reinsurance) at December 31, 2018 and 2017, respectively. Below is the rollforward of RMBS R&W subrogation for the affected periods:
Year ended December 31, | 2018 |  | 2017 |  | 2016
Discounted RMBS subrogation recovery (gross of reinsurance) at beginning of year | $ | 1,834,387 |  |  | $ | 1,907,035 |  |  | $ | 2,829,575 |
Impact of sponsor actions (1) | — |  |  | — |  |  | (995,000 | )
All other changes (2) | (63,841 | ) |  | (72,648 | ) |  | 72,460 |
Discounted RMBS subrogation recovery (gross of reinsurance) at end of year | $ | 1,770,546 |  |  | $ | 1,834,387 |  |  | $ | 1,907,035 |
(1) | Sponsor actions include loan repurchases, direct payments to Ambac and other contributions from sponsors. In January 2016, Ambac Assurance settled its RMBS-related disputes and litigation against JP Morgan Chase & Co. and certain of its affiliates (collectively "JP Morgan"). Pursuant to the settlement, JP Morgan paid Ambac Assurance $995,000 in cash in return for releases of all of Ambac Assurance's claims against JP Morgan arising from certain RMBS transactions insured by Ambac Assurance. Ambac Assurance also agreed to withdraw its objections to JP Morgan's global RMBS settlement with RMBS trustees.
(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. All other changes may also include estimates of potential sponsor settlements that may not have been subject to a sampling approach or have been executed but the settlement amounts have not yet been received. Those that have not been subject to a sampling approach are not material to Ambac’s financial results and therefore are included in this table.
Assumed Reinsurance: Assumed par outstanding was $219,100 and $219,100 at December 31, 2018 and 2017, respectively. Ceded Reinsurance: Ambac Assurance has reinsurance in place pursuant to surplus share treaty and facultative reinsurance agreements. The reinsurance of risk does not relieve Ambac Assurance of its original liability to its policyholders. In the event that any of Ambac Assurance’s reinsurers are unable to meet their obligations under reinsurance contracts, Ambac Assurance would, nonetheless, be liable to its policyholders for the full amount of its policy. Ambac Assurance’s reinsurance assets, including deferred ceded premiums and reinsurance recoverables on losses amounted to $84,267 at December 31, 2018. Credit exposure existed at December 31, 2018 with respect to reinsurance recoverables to the extent that any reinsurer may not be able to reimburse Ambac Assurance under the terms of these reinsurance arrangements. At December 31, 2018, there were ceded reinsurance balances payable of $32,913 offsetting this credit exposure. To minimize its credit exposure to losses from reinsurer insolvencies, Ambac Assurance (i) is entitled to receive collateral from its reinsurance counterparties in certain reinsurance contracts; and (ii) has certain cancellation rights that can be exercised by Ambac Assurance in the event of rating agency downgrades of a reinsurer (among other events and circumstances). Ambac Assurance held letters of credit and collateral amounting to $114,294 from its reinsurers at December 31, 2018. As of December 31, 2018, the aggregate amount of insured par ceded by Ambac Assurance to reinsurers under reinsurance agreements was $5,128,000 with the largest reinsurer accounting for $3,076,000 or 5.9% of gross par outstanding at December 31, 2018. The following table represents the percentage ceded to reinsurers and reinsurance recoverable at December 31, 2018 and its rating levels obtained from each reinsurers website as of February 25, 2019:
Reinsurers |  | Percentage Ceded Par |  | Net Unsecured Reinsurance Recoverable (1)
Assured Guaranty Re Ltd |  | 60.0% |  | $ | — |
Build America Mutual Assurance Company (2) |  | 28.2 |  | 18,815 |
Assured Guaranty Corporation |  | 7.1 |  | — |
Sompo Japan Nipponkoa Insurance, Inc. |  | 4.7 |  | — |
Total |  | 100% |  | $ | 18,815 |
(1) | Represents reinsurance recoverables on paid and unpaid losses and deferred ceded premiums, net of ceded premium payables due to reinsurers, letters of credit, and collateral posted for the benefit of Ambac Assurance.
(2) | Build America Mutual Assurance Company has an S&P rating of AA.
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 years ended December 31, 2018, 2017 and 2016, the insurance intangible amortization expense was $107,281, $150,854 and $174,608, respectively. As of December 31, 2018 and 2017, the gross carrying value of the insurance intangible asset was $1,551,576 and $1,581,156, respectively. Accumulated amortization of the insurance intangible asset was $832,645 and $734,183, as of December 31, 2018 and 2017, respectively, resulting in a net insurance intangible asset of $718,931 and $846,973, respectively. The estimated future amortization expense for the net insurance intangible asset is as follows:
Amortization expense (1) |
2019 | $ | 63,665 |
2020 | 58,755 |
2021 | 53,419 |
2022 | 49,681 |
2023 | 46,342 |
Thereafter | 447,069 |
(1) | The insurance intangible asset will be amortized using a level yield method based on par exposure of the related financial guarantee insurance or reinsurance contracts as described in Note 2. Basis of Presentation and Significant Accounting Policies. 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 from the amounts provided in the table above.

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