Chubb Relieved Of $500 M Surety Exposure

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 with Aquila that completely discharges the Warren, N.J.-based insurer of a $500 million surety exposure.[@@]

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

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

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

Chubb and Aquila jointly filed a motion with the United States District Court for the Western District of Missouri to approve the settlement and to dismiss current litigation between the two companies.

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

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

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

The bond secured a loan to purchase a chain of Texas and Illinois nursing homes. A Texas bankruptcy court decision (related to 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 exposure to a surety bond written to guarantee performance of a lessee under an equipment and vehicle leasing program.

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

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