I believe there's a bug in PHPMailer for embedding images. The issue - as far as I can tell - is that that cid: use with AddEmbeddedImage is incorrect.

Around line 2491, this line exists:
$cid = 'cid:'. md5($url).'@phpmailer.0'; //RFC2392 S 2

This creates a string with the prefix of cid: at the front, which is later passed to AddEmbeddedImage and this appears to be the issue, as the cid: prefix should not be passed as part of the CID. Instead of embedding the image, it comes through as a standard attachment.

Here's how I fixed it. I removed the cid: prefix from here:
$cid = md5($url).'@phpmailer.0'; //RFC2392 S 2

And added it back in the preg_replace on line 2496 here:
$message = preg_replace("/".$images[1][$i]."=["']".preg_quote($url, '/')."["']/Ui", $images[1][$i]."="cid:".$cid.""", $message);

Test it out, make sure I'm making sense. Thanks!