Hostess looks to use Ace Insurance cash collateral to pay deductibles

By Caroline Salls

Pittsburgh, Nov. 6 - Hostess Brands, Inc. requested court approval to use the cash collateral of Ace American Insurance Co., according to a Monday filing with the U.S. Bankruptcy Court for the Southern District of New York.

Hostess said the cash collateral would be used for any deductible or other payments required to be made on account of claims incurred under its workers' compensation and automobile liability policies issued by Ace or Ace's affiliates. The company said those claims amount to $2.3 million to $2.6 million per month.

In July, Ace notified Hostess that it would not renew its insurance policies. The last day of coverage under the Ace program was Oct. 7.

Hostess said Ace's notice of non-renewal forced it to obtain replacement insurance policies from a new carrier at a higher premium.

As a result, Hostess said the Ace policies are now in "run-off," and the additional liquidity constraints caused by Ace's cancellation will reach $16.2 million in the fourth quarter.

Under the terms of some of the previously issued Ace auto liability and workers' compensation policies, Hostess said it continues to reimburse Ace more than $2.3 million per month in deductible payments on account of legacy claims under the policies in runoff.

The company said Ace holds more than $120 million in cash collateral previously provided by the Hostess debtors to secure their reimbursement obligations under the run-off policies.

Hostess said it has determined that Ace is over-collateralized by more than $28 million.

"If the debtors continue to pay the deductible payments, the amount of over-collateralization will continue to increase, as the number and amount of unpaid claims decreases over time," the motion said.

As a result, Hostess said the debtors have essentially prepaid their obligations under the Ace insurance program.

"Requiring them to deplete precious cash from the estates while Ace sits on over $120 million in liquid cash collateral harms the estates and all the debtors' other creditors," Hostess said in the motion.

A hearing is scheduled for Nov. 29.

Hostess Brands, an Irving, Texas-based operator of regional bakeries, filed for bankruptcy on Jan. 11, 2012. Its Chapter 11 case number is 12-22052.

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