Chubb Relieved Of $500 M Surety Exposure

NU Online News Service, July 20, 12:59 p.m.EDT?The Chubb Corp. yesterday announced an agreement withAquila that completely discharges the Warren, N.J.-based insurer ofa $500 million surety exposure.[@@]

Specifically, two of Chubb subsidiaries have reached asettlement agreement with Aquila Inc, a Kentucky-based operator ofoil and gas utilities, relating to a surety bond that guaranteeddelivery of gas from Aquila (gas forward purchase contracts).

Under the agreement, Aquila is providing Chubb'ssubsidiaries?Federal Insurance Company and Pacific IndemnityCompany?with collateral of $500 million.

This collateral represents Chubb's complete exposure to Aquilaunder gas forward purchase surety bonds. In connection with thesettlement, Chubb has agreed to pay Aquila up to $15 millionfollowing the complete discharge of Chubb's exposure.

Chubb and Aquila jointly filed a motion with the United StatesDistrict Court for the Western District of Missouri to approve thesettlement and to dismiss current litigation between the twocompanies.

Separately, Aquila said it will also provide $90 million to St.Paul Travelers to support a St. Paul Travelers surety bondexposure.

Surety bond exposures continue to plague severalproperty-casualty insurers, according to recent new reports.

A Financial Times report last week detailed a $500million exposure for Zurich Financial Services related to suretybond credit enhancement issued on behalf of Senior LivingProperties.

The bond secured a loan to purchase a chain of Texas andIllinois nursing homes. A Texas bankruptcy court decision (relatedto the bankruptcy of the nursing homes) was issued in April.

Last week, during its second-quarter earnings conference call,Peoria, Ill.-based RLI Corp. also commented on an ongoing exposureto a surety bond written to guarantee performance of a lessee underan equipment and vehicle leasing program.

In a year-end SEC filing, RLI explained that it is bothplaintiff and defendant in litigation related to this exposure, inwhich investment banks claim entitlement to upward of $53 millionunder the bonds.

While RLI executives commented during the call that it wouldhave a better take on the possible outcome in the third quarter,since discovery on the legal matters is scheduled to be stopped inAugust, the year-end filing indicated that the firm, which disputesliability and damages, did not expect a material adverse effect onresults.