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'Snug' = comfortable and cosy (e.g. two parts of a machine might 'fit snugly together'; many pubs have a 'snug bar' where there is a fire burning in winter and people can relax and be comfortable together)
'Bug' = a small insect, such as a fly or beetle
'Rug' = a (probably fairly small) piece of carpet, perhaps along the floor in a hallway; or if you are going off by car for a picnic, you might bring one with you to spread out on the ground before you sit down.
'As snug as a bug in a rug' suggests that the little insect has made itself comfortable at home in the soft surroundings of the rug.