Presentation on theme: "Confidential Bauer College of Business Thursday, March 25, 2010 Julie Jackson / Sheila Lum / Laura DeLeon Risk Management & Insurance Targa Resources,"— Presentation transcript:
Confidential Bauer College of Business Thursday, March 25, 2010 Julie Jackson / Sheila Lum / Laura DeLeon Risk Management & Insurance Targa Resources, Inc.
Confidential 2 Agenda Introductions / Background Overview of Targa’s Business Overview of ‘Lloyds of London’ Market Onshore Property Market Offshore Property Market Break Sheila Lum / Laura DeLeon D&O Liability Market Excess Liability Market Questions
Confidential April 2004 Acquired Assets from ConocoPhillips ($247 MM) Formed Targa Resources April 2003 History of Growth Oct 2005 Acquired Dynegy Midstream Services ($2,452 MM) Successfully executing strategy to build a leading midstream energy company MLP IPO of North Texas Assets ($956 MM) Feb 2007 Sold ($117 MM ) Dec 2004 Aug 2005 Bridgeline Acquired ($100 MM) First Drop Down ($705 MM) Oct 2007 Drop Down of Downstream Assets ($530 MM) Sep 2009 4
Confidential 5 Overview of Targa’s Business Targa is a leading provider of midstream natural gas and NGL services in the US NGL Logistics and Marketing Natural Gas Gathering and Processing
Confidential Overview of Targa Family Assets Overall Leading gas gatherer and processor Leading NGL logistics and marketing business Targa Resources, Inc. (TRI) $3.4 billion of assets $4.5 billion of revenue Targa Resources Partners LP (NGLS) $2.2 billion of assets $4.1 billion of revenue Natural Gas Gathering and Processing Division 11,000 miles of natural gas pipelines 800 miles of NGL pipelines Gathering system encompassing 21,900 square miles Own interest in or operate 22 natural gas processing plants Contracts predominantly percent of gas and liquids or percent of liquids NGL Logistics and Marketing Division Gross capacity to fractionate approximately 380 MBbl/d of NGLs through interests in 3 fractionators, with approximately 900 MBbl of above ground storage and 65 MMBbl of below ground storage Approximately 17 operating terminals, 21 pressurized NGL barges, 70 transport tractors, 100 tank trailers and 855 managed railcars Predominantly fee-based business _________________________ Note:All financial data as of December 31, 2009 6
Confidential Primarily a physical settlement business which earns a margin from purchasing and selling NGL products from producers under contract Also earn margins by purchasing and reselling NGL products in the spot and forward physical markets 2008 sales of 245 MBbl/d Refinery Services Generally retain a portion of the resale price of NGL sales or receive a fixed minimum fee per gallon Earn fees for locating and supplying NGL feedstocks to the refineries based on a percentage of the cost or a minimum fee per gallon Wholesale propane marketing Sell propane on a fixed or posted price at delivery and, in some circumstances, earn a margin on a net-back basis The Downstream Business – Majority Fee-Based Logistics Assets NGL Distribution and Marketing Wholesale Marketing 7 Fractionation Storage and Terminalling Transportation and Distribution ♦ Majority under fee-based arrangements ♦ 3 facilities with ~380 MBbl/d maximum gross capacity ♦Long-and short-term storage and terminalling services and throughput capability to affiliates and third party customers for a fee ♦Storage wells with ~65 MMBbl of capacity and 17 terminal facilities; 800 miles of pipeline support fractionation, storage and terminalling ♦Fee-based transportation services to refineries and petrochemical companies throughout the U.S. ♦Approximately 855 railcars leased and managed, 70 owned and leased transport tractors, 100 tank trailers, and 21 pressurized NGL barges
Confidential Targa Corporate Structure 100% Indirect Ownership 2.0% General Partner Interest 69.09% Limited Partner Interest Public Unitholders 47,924,750 Common Units Targa Resources GP LLC 1,387,360 General Partner Units Incentive Distribution Rights Targa Resources Investments Inc. Targa Resources, Inc. Targa Resources Partners LP (“NGLS” or “Partnership”) The Downstream Business Logistics Assets NGL Distribution and Marketing Wholesale Marketing TRI (Only) Natural Gas Gathering and Processing Permian Basin of West Texas Southeast New Mexico and Louisiana Gulf Coast Natural Gas Gathering and Processing North Texas Louisiana San Angelo, Texas 8 ManagementMerrill Lynch Warburg Pincus LLC 73.6% Indirect Ownership Interest * 19.9% Indirect Ownership Interest * 6.5% Indirect Ownership Interest * 28.91% Limited Partner Interest 20,055,846 Common Units * Ownership percentages are presented on a fully-diluted basis 8
Confidential Targa Resources, Inc. Summary Highlights 9
Confidential History “From its first beginnings in Edward Lloyd’s Coffee House in 1688, Lloyd’s has been a pioneer in insurance. Starting with its roots in marine insurance, Lloyd’s has grown over 300 years to become the world’s leading market for specialist insurance.”
Confidential Owned by its members and unlisted, Lloyd’s is actually a marketplace rather than a company, describing itself as “a society of members which underwrite insurance (each for their own account) as members of syndicates.” Syndicate comes from the French word syndicat which means trade union (syndic meaning administrator), from the Latin word syndicus which in turn comes from the Greek word σύνδικος (syndikos) which means caretaker of an issue, compare to ombudsman or representative.Frenchtrade unionLatinGreekombudsmanrepresentative A group of individuals or companies formed to transact some specific business, or to promote a common interest; a self-coordinating group.group business 12 A Market of ‘Syndicates’ ….
Confidential From Coffee House…to Lloyd’s Present Time 1689 - Ships and goods insured by wealthy individuals acting on a personal basis. - Lloyd’s Coffee House: First recorded February 1689 1800-1850s - Development of the concept of “Lloyd’s member”: an official title for the business man who participate in practice of selling insurance within the Lloyd’s Market. 1904 – 1960s - Introduction of automobile, aircraft, and space equipment liability insurance. 1996 - Reconstruction and Renewal – Asbestos and Pollution Claims - Corporate members introduced. - Equitas reinsures liabilities from 1992 and prior years. 2001 - Lloyd’s regulated by the FSA (UK Financial Services Authority ) 2002 - Governance structure amended - Lloyds Franchise Board
Confidential Interesting Insurance Policies Issued One of the most famous … the $3.2 million policy for Tina Turner’s Legs… Just about ANYTHING …. can be insured by the Lloyd’s Market!! Or how about the legs of David Beckham… …or the voice of Bruce Springsteen!!
Confidential Internal View of Current Lloyd’s Building
Confidential The Lutine Bell The Lutine Bell, weighing 106 pounds and measuring 18 inches in diameter, is synonymous with the name of Lloyd’s. Traditionally it has been rung to herald important announcements – one stroke for bad news and two for good. The Lutine Bell is currently located in the center of the Market in the Lloyd’s building. Due to a crack that has developed on the main section of the bell, it is now only rung to commemorate large disasters such as the collapse of the Twin Towers and the death of Royal Family Members.
Confidential In what year did the Lutine Bell ring once (for bad news) related to the Titanic? (A)1910 (B)1911 (C) 1912 (D)1914 Quick Quiz!!!
Confidential A Possible Lloyd’s of New York? Want to establish International Insurance Exchange modeled on Lloyd’s Initial “Study” phase Attempted ~ 30 years ago Richard Ward, Lloyd’s Chief Executive comments: “It’s a challenging time to be setting up an insurance entity, considering the downward pressure on rates and oversupply in the market, far too early to say if Lloyd’s would participate in the ultimate project, whatever form it might take.” “Lloyd’s is at the center of the insurance market and London is the preeminent city for insurance. There’s no other place like it. The strength of London is the “cluster effect” -- 50,000 people working in insurance around the Lloyd’s building.” “Lloyd’s generated an investment return of £1.8 billion in 2009, but was unlikely to repeat that performance in the current climate. Further, results were bolstered by the release of reserves from prior years, he said, something that cannot be counted on in 2010”. Potential Competition from Wall Street 19 Reported by: David Jolly, New York Times, Thursday, March 25, 2010
Confidential First Decade of New Millennium in Review 2000Y2K – scare Presidential election decided by “hanging Chads” Non-event for insurance market 2001 - 2002 9/11 Enron melt down IPOD is launched $22.8 billion insurance disaster US Terrorism Coverage becomes a challenge D & O market ‘hardens’ and highlights need for Side “A” Only coverage 2003Launch of Iraqi War Space Shuttle Columbia tragedy Rates start reducing from 2001 peaks 2004Hurricane Ivan 12/26 Tsunami strikes Indonesia Super Bowl Wardrobe Malfunction Face Book launched Martha Stewart to prison $8.1 Billion insured loss and underwriters start trying to limit OEE coverage following Named Windstorm Courtesy of R. Blades, John L. Wortham & Son, LLP
Confidential First Decade of New Millennium in Review 2005Hurricane Katrina Hurricane Rita London Transit Bombings YouTube launched ! Most expensive Insurance disaster of all time - $45.3 Billion Oil Insurance Limited (OIL) loss exceeds $1 Billion CSL limit for all members for the first time $6.2 Billion insured loss OIL exceeds $1 Billion CSL again 2006Rates up post-2005 Hurricanes Pluto no longer a planet Twitter launched US Population reaches 300 Million Underwriters earn a record profit of $31.7 Billion. Only 2 nd year of underwriting profit since 1978! Courtesy of R. Blades, John L. Wortham & Son, LLP
Confidential First Decade of New Millennium in Review 2007 Another benign year for CAT losses Baseball Steroids scandal highlighted in Mitchell report Apple Iphone launched Underwriters earned a 19.3 billion profit; however cumulative underwriting deficit from 1975 to 2008 is still $442 Billion 2008 $700 Billion US Government bailout as result of financial crises Hurricane Ike strikes Houston Michael Phelps won 8 Gold Medals Elliot Spitzer resigns as NY governor Largest insurance “Capital event” of last 20 years as surplus was impacted 16.2% at one point $12.5 Billion insured losses 2009 Fewest Atlantic/GOM hurricanes since 1997 Bernard Madoff - $50 billion ponzi scheme Miracle on Hudson - U.S. Air HIN1 - Swine Flu declared a global Pandemic US insurers net income rose to $16.2 billion through 3rd quarter 2009 Lloyds underwriters earn a record profit of $5.81 Billion Courtesy of R. Blades, John L. Wortham & Son, LLP
Confidential 24 Factors Impacting Insurance Markets – Late 2008 Excluding hurricanes, the average property claim size increased from $6.3 million in 2002 to $22.2 million in 2007. Financial storm caused significant impact on the insurance market due to loss of investment income. Underwriters’ balance sheets have been negatively impacted, causing insurers to reduce available capacity. New capital was not flowing into the market in a similar fashion following other catastrophes and/or hard markets. The full effect of the government’s “bail out” of AIG still being determined as senior AIG underwriters change firms and AIG endeavors to maintain market share on certain lines of coverage – branding change of name to Chartis. Underwriters who relied on investment income to offset underwriting losses strove to achieve a true profit on underwriting.
Confidential 25 Insurer Solvency Concerns – 2009 a ‘key year’ The decline in the financial markets impacted the country’s insurance underwriters. As some of these insurance companies faced liquidity challenges (or even potential insolvency,) it was imperative that risk managers monitor and evaluate the viability of the carriers that participate in their insurance programs. Financial products – Credit Derivative Swaps / Mortgage Backed Securities Those insurers involved in these ‘products’ got caught up in the downward spiral AIG, Swiss Re, Hartford, XL and others – Largest Insurers AIG deemed ‘Too Big to Fail’ – U.S. Govt ‘Bail Out’ under TARP Targa Insurer minimum A.M. Best Rating: A- VII Monitor insurance programs Long-tail vs. short-tail risk programs D&O Policies Primary coverage vs. high excess coverage What are the alternatives? Cost? Coverage? Have a ‘back-up’ plan
Confidential Brief Market Observations - 2009 Rates increased for CAT exposures following: –Hurricane Ike in 2008 which was 4 th largest insurance event in history –Economic downturn impacting balance sheets Underwriters were concerned about replenishing capital following CAT loss Underwriters strived to obtain an underwriting profit Named Windstorm capacity severely contracted especially offshore Numerous assureds reduced or eliminated Offshore Named Windstorm limit Underwriters’ profits are up: –Benign hurricane season –Investment returns improve Courtesy of R. Blades, John L. Wortham & Son, LLP
Confidential Brief Market Observations - 2010 All assureds are looking to reduce premium / cost of risk Underwriters are under pressure from management and reinsurers to “hold the line” or provide only a nominal reduction Assured and brokers are striving for significant rate reduction in order to return to pre-Hurricane IKE rates or better! Will underwriters make Offshore named windstorm coverage more attractive to assureds? What is the most advantageous time to enter the market? Surplus has increased / investments improving New Entrants “Tug of war” over the right rate, retention and Named Windstorm limit will continue! Courtesy of R. Blades, John L. Wortham & Son, LLP
Confidential 36 Venice Main Office Post-Katrina’s Visit
Confidential 37 Venice Main Office Post-Katrina’s Visit
Confidential 38 Today…. All plants along coast damaged by storms now have new Modular buildings Office, MCC, I&E, anything with instrumentation/electrical components Elevated over 17 feet above Mean Sea Level (MSL) at bottom of frame Designed to withstand 150 MPH wind speed
Confidential 39 Some Loss Statistics… Insured Catastrophe (Cat) losses in 2008 exceeded all Cat losses in 2006 and 2007 combined. In the U.S. large claim activity included: Midwest floods - $725MM Wildfires in Southern California - $500MM Various property and business interruption energy, steel and mining occurrences 1,600 tornados (through September, 2008) compared to about 1,000 annually in a normal year Hurricane Ike projected between $13 billion to $21 billion 16 named windstorms occurred in 2008 (4th highest since 1944) making it the 10th year out of the last 14 to have above normal storm activity. 2010 not looking too good 1Q10 insured Cat losses - Haitian & Chilean Earthquakes Already at $7 - $10 billion
Confidential 40 Example of ‘Subscription’ Market Property Program Onshore Property Program Physical Damage / Business Interruption Excludes Named Windstorm Includes $12.5MM Offshore Contingent B.I. Coverage Various Deductibles, including Wind of 2% with $1MM min. and $10MM max. A “PATCHWORK QUILT”
Confidential 41 Pro-Forma View of Renewal Structure Onshore Property Program Physical Damage / Business Interruption Excludes Named Windstorm May include $10MM Offshore Contingent B.I. Coverage With potentially 25-50% Self-Insured Various Deductibles, including Wind of 2% with $1MM min. and $10MM max. …..EVEN MORE “PATCHWORK” $10MM Per Occurrence Retention for Windstorm Potentially Un-aggregated Windstorm (Provides full coverage for Each and Every Storm) Potentially Annual Aggregate Windstorm (Any Loss Erodes Coverage Limit) Potentially self-insure
Confidential Layer K $10MM CBI Separate Limit Amlin Order 7.5% Targa Onshore Property Program - April 16, 2009-2010 $25MM $400MM Base Retentions: $1MM PD; except $10MM Named Windstorm & Storm Surge Earthquake 2% $1MM min/ $10MM max – BI 45 days All Losses (60 days for 2 nd and Subsequent Storms) Note: AEGIS $50MM xs $50MM requires 60 day waiting period for all Windstorm losses Layer A $50MM Ascot et al Order 51%(42% CBI) Layer B $50MM xs $50MM MAP Order 7.5% Layer C $50MM xs $50MM AEGIS NJ Order 20% Layer E $25MM (includes CBI for Ironshore) Amlin & Ironshore Order 15% $100M M Layer D $50MM xs $50MM Allianz/ AIG/ Validus Order 18.5% Layer G $25MM xs $50MM Ironshore Order 12.5% Layer Q $25MM xs $50MM AES Order 4.5% (Excl. NWS) Layer R $25MM xs $50MM Jubilee Order 3% Layer H $25MM xs $75MM Argenta/Glacier/AES Order 20% Layer I 100MMM Excluding Named Windstorm (Risk Only) Catlin/Omega Order 12% Layer S $100MM Lexington Bermuda Order 12% Layer M $300MM xs $100MM London Order 11.5% Layer N $300MM xs $100MM Domestic Order 71% Layer O $100MM xs $100MM Glacier Re Order 7.5% Layer P $200MM xs $200MM Brit/Jubilee Order 7.5% Layer L Swiss Re Order 10% (Including Offshore CBI) Including Windstorm to $100MM 1)Offshore CBI Sublimit of $10MM – Only 79% complete. 2)Two layers not complete as respects NWS coverage: a. Primary $10MM: 88% (Self-Insuring 12%) b. $2.5MM xs $10MM: 94.67% (Self-Insuring 5.33%) Layer F (1) $25MM xs $25MM Max Re & Montpelier Order 15% Layer F (2) $25MM xs $25MM NWS Only Catlin/Omega Order 7% Layer V $12.5MM xs $12.5MM Montpelier Order 5.333% NWS Only Layer U $15MM xs $10MM Chaucer Order 6.667% NWS Only Layer J $75MM xs $25MM Barbican Order 5% Windstorm Only Layer T $25MM xs $50MM NWS Only Advent Order 11.5% Layer W $25MM xs $75MM NWS Only Berkley Order 7% Targa’s 4/09 Renewal Structure – Very Painful!!
Confidential 45m 100m 400m 75m Deductibles Layer A Primary 45m (incl Premium Protection) (45m NWS e&e) Ascot – 10%; Aegis – 5%; Apollo – 5%; Heritage – 5%; Markel – 1.50%; Cathedral – 5%; Beazley – 10%; Kiln – 2.50%; Torus – 3.50%; QBP – 1%; HCC – 5% TOTAL – 53.50% Layer F Primary 75m (75m NWS e&e) Lexington Bda – 10% (sub approval) Ironshore – 20% Hiscox – 3% (3% NWS ded) TOTAL – 33% Layer H 400m Swiss Re – 10% TOTAL – 10% Full ‘Quota-Share’ Layer G 325m xs 75m (pipelines s/l 75m) Aegis – 5% Argenta – 7.50% TOTAL – 12.50% Layer E 355m xs 45m (pipelines s/l 75m) Liberty – 10% TOTAL – 10% Layer C 300m xs 100m Ascot – 10% TOTAL – 10% Layer B 55m xs 45m (55m NWS e&e) MAP – 7.50%; Hardy – 3%; WRB – 3%; Ironshore – 10%; Torus – 3.50%; Montpelier Re – 7.50% TOTAL – 34.50% TOTAL – 87.50% TO GO – 12.50% TOTAL – 67% TO GO – 33% TOTAL – 42.50% TO GO – 57.50% TOTAL – 96.50% TO GO – 3.50% (100m NWS e&e) (55m NWS e&e) (25m NWS e&e) Current Renewal Structure – Much Better!! ‘Risk’ Only Sample View : Fewer ‘Layers’ – Larger % Lines by Insurers
Confidential 44 Hurricane Hardening / Elevation Loss Mitigation
Confidential 46 Storm Severity Damage Analysis Source: Watkins Syndicate Excerpt: Willis Energy Market Review – March 2009
Confidential 47 Hurricane Losses Difficult to Predict Excerpt: Willis Energy Market Review – March 2009
Confidential 48 Some Additional Loss Statistics… A record number of 6 consecutive storms hit the U.S. in 2008 (Dolly through Ike). 9 out of 11 most expensive hurricanes have occurred since 2004 per Insurance Information Institute (III). Hurricane Ike loss amount far exceeded underwriters’ forecast based on their models, which were updated post 2005 hurricanes Even though it was only a category 2 hurricane, the radius of hurricane force winds was 115 miles or 10 miles wider than Hurricane Katrina which was a category 3 at landfall, but also had category 4 surge. Risk Management Solutions (RMS) originally estimated Ike losses to be $7 billion to $12 billion, which was revised to $13 billion to $21 billion Lloyd’s has updated their Realistic Disaster Scenario (RDS) for offshore Gulf of Mexico named windstorm that include extending the wind field for the “dirty side” of a hurricane Underwriters have no choice but to assume an ‘Ike’ type storm will hit at least every 3 out of 5 years to make a profit (some may assume annually)
Confidential 49 Offshore Market Issues Last Year – Early 2009 Reinsurance underwriters are re-evaluating how much catastrophe protection to offer to direct underwriters: Seek to differentiate between those direct underwriters who change their approach to coastal and/or offshore exposures Some Reinsurers are exiting this class of business End of the year treaty renewals are still being finalized and are expected to be up between 30% - 40% Note: Chief Executive of Munich Re promised reinsurance rates “will now rise painfully”. Certain underwriters will not be able to renew their reinsurance at acceptable levels and may elect to withdraw from GOM business or write a much smaller net line. Certain onshore underwriters are contemplating the non-renewal of midstream accounts as they represent a disproportional amount of their hurricane claims. Reinsurers and direct underwriters will tighten up Operator’s Extra Expense extensions of coverage (extended redrill, making well safe, resulting P&A expenses) which represent a large portion of the Ike offshore claims. Underwriters are going to require a higher ‘Rate on Line’ (premium to limit provided) for both offshore and coastal exposures.
Confidential 50 Targa’s 2009 Offshore Property Renewal In a nutshell – IT WAS UGLY ….. VERY UGLY!!! In our face to face meetings in London, every Offshore Underwriter had the same message….. ”I am saving what little capacity I have for my existing insureds for renewal.” “Of my existing insureds, I am dropping those that I don’t have a ‘relationship’ with.” “If I lose money again this year, my capital will not continue to support me.” “I am basically having to write my capacity on a NET basis – Reinsurance too expensive and too high of a retention.” “Buy it, don’t buy it – I’m indifferent.” Damages from Ike offshore show that very large losses can occur $40mm+ Property Damage loss from Ike on neighboring pipeline Past losses not an indication of the future (mutually exclusive) Common sense asks …. “Where’s the value over the long-term????” $12MM per Occurrence Retention -- ~ 3% of Scheduled Offshore Values ~ $7MM Annual Premium $20MM Limits Year over year….. Targa’s options / decision: Purchase the commercial market insurance Consider alternative options to the commercial property insurance market Relied on other commercial options and take the risk (self-insure)
Confidential 51 2010 Offshore Property Expectations Market is ‘softening’ more than anybody thought even at end of 2009 Rate on Line is down to ~ 15 – 20% (vs. 25 – 30% last year) Underwriters know they need to sell their purchased Windstorm capacity Targa will consider after Onshore Property renewal completed
Confidential What it means to be a CPCU… “CPCU” or Chartered Property Casualty Underwriter An insurance professional who has earned the CPCU designation CPCU’s are considered the ‘standard setters’ of the insurance industry In order to achieve this prestigious designation, insurance professionals must meet certain requirements in the following areas: Education: CPCUs pass national exams on topics including insurance law, accounting, risk management, and ethics. CPCUs continually update their base of insurance expertise by participating in technical and professional development workshops and seminars. Ethics: CPCUs promise to abide by a Code of Professional Ethics, placing their clients’ needs before their own. Experience: CPCUs must meet an experience requirement of 2 years to become a CPCU and have proven insurance expertise and knowledge.
Confidential CPCU Courses The following courses are required to earn the CPCU designation: Five (5) “Foundation” courses: CPCU 510 Foundations of Risk Management, Insurance, and Professionalism CPCU 520 Insurance Operations, Regulation, and Statutory Accounting CPCU 530 The Legal Environment of Insurance CPCU 540 Finance for Risk Management and Insurance Professionals CPCU 560 Financial Services Institutions Three courses in either the “Commercial” or “Personal” concentration: Commercial Concentration CPCU 551 Commercial Property Risk Management and Insurance CPCU 552 Commercial Liability Risk Management and Insurance CPCU 553 Survey of Personal Risk Management, Insurance, and Financial Planning Personal Concentration CPCU 555 Personal Risk Management and Property-Liability Insurance CPCU 556 Personal Financial Planning CPCU 557 Survey of Commercial Risk Management and Insurance
Confidential Insurance Coverage Descriptions Onshore Property – covers 1 st party damage to or loss of buildings, personal property, business income caused by fire, lightning, smoke, water damage and other perils not specifically excluded under the policy. Offshore Property - covers damage to offshore assets such as platforms or pipelines. Builders Risk – covers a building and labor in the course of construction, including building materials and supplies while on or away from the building site.
Confidential General Liability - covers 3 rd party liability loss exposures, including its premises, operations and products. Excess Liability - provides additional liability limits for claims that are covered by specified underlying coverage such as general liability, automobile, and professional liability policies. Fiduciary Liability – covers the fiduciaries of an employee benefit plan against liability claims alleging breach of duties or errors in judgment and other wrongful acts involving their discretionary judgment. Insurance Coverage Descriptions (cont.)
Confidential Insurance Coverage Descriptions (cont.) Directors & Officers Liability – covers a corporation’s directors and officers against their alleged wrongful acts and provides reimbursement to the corporation for any sum paid to indemnify directors and officers. Can also cover the company itself if entity coverage is purchased. Crime - covers loss of property through criminal activity -- from employee dishonesty to burglary and robbery, computer fraud, and forgery. Terrorism – covers property owners for their potential losses and liabilities that might occur due to terrorists activities, domestic and/or foreign.
Confidential Hull & Machinery - covers physical damage to vessels, including their machinery and fuel, but not their cargo. Ocean Cargo – covers loss to cargo onboard vessel. Protection & Indemnity – covers shipowners against various liability claims due to operating the insured vessel. P&I War Risks – covers liability due to acts of war and war- like operations specifically described in the policy. Insurance Coverage Descriptions (cont.)
Confidential Non-Owned Aircraft – covers 3 rd party liability for bodily injury and property damage arising out of the use of a non- owned aircraft. Business Auto – covers bodily injury and property damage if an insured vehicle is involved in an accident. Workers’ Compensation & Employers Liability – provides coverage for benefits the insured employer is obligated to pay under workers compensations laws and also covers the employer if an injured employee sues for negligence in protecting the worker. Insurance Coverage Descriptions (cont.)
Confidential Surety Bond- is a guaranty from one party (the Surety) that a second party (the principal) will fulfill their obligations to third party (the Obligee) Principal: the one performing the work or fulfilling the obligation Obligee: the one for whom the principal is obligated to perform Surety: the company that is making the guarantee on behalf of the principal to the Obligee Differences between Surety Bonds and Insurance Surety Bonds have three (3) parties to the contract The principal is liable to the surety for losses paid by the surety In theory, the surety should not sustain losses on surety contracts Bankruptcy of the Principal is the key risk to the Surety company The coverage period is indefinite Insurance Coverage Descriptions (cont.)
Confidential 71 Alternatives to Commercial Insurance
Confidential 72 ‘Cat’ Bonds Utilizes the Capital Markets via Institutional Investors Can cover any ‘Cat’ perils specified Can be for 1 – 3 year term Typically set as a ‘parametric trigger’ Minimum wind speed trigger (e.g., Category 3 Hurricane or higher) Eye of storm must pass within a set ‘box’ or ‘circle’ to trigger payout Unlike traditional insurance, proof of damage sustained is not required Bonds can cost out at a ‘rate on line’ of 20%+ of limit purchased Very expensive to put together Risk to purchaser – extensive damage but bond not triggered Example: Hurricane Ike Ike’s wind speed was a Category 2, although storm surge was a Category 4 Significant damage – Onshore and Offshore If Category 3 wind speed had been a required trigger – would not have paid out Would have spent probably $6MM in premium and still had ??? $$ in potentially uninsured damage and business interruption
Confidential 74 OIL Insurance Ltd – an Oil & Gas Property Mutual Form of ‘mutualization’ for Property Risks Limit purchased – up to $250MM Attachment point – minimum of $20MM Provides $750MM Aggregate to All Insureds Provides Property Damage Coverage Only Coverage very restrictive – not as broad as London markets Only covers repairs to ‘mechanical completion’ Does not cover ‘expediting expenses’ Various other restrictions
Confidential 75 Marsh – Berkshire Hathaway ‘Triple C’ Product Another Form of Mutualization for Property Risks Similar to OIL Insurance Company Limit purchased – up to $100MM Attachment point – minimum of $25MM 5 Year Minimum Time Horizon Provides $500MM Annual Aggregate to All Insureds 20% Retrospective Penalty Premium Up front costs to join the ‘group’ Key questions: Who will I be in the ‘pool’ with? How much of the available $500MM Annual Aggregate received if losses? Any additional ‘capital contribution costs’ to join? Product got ‘scrapped’ in mid ‘09 due to lack of interest
Confidential A D&O Underwriter’s ‘Worst Nightmare’….. 77
Confidential D&O Liability – Summary of Coverages Side – A Coverage Provides coverage for Insured Individuals IF the Organization is UNABLE to provide Indemnification Indemnity is typically provided for under the organizations By-Laws Most common trigger of Side-A is ‘Bankruptcy’ of the Organization Side – B Coverage Provides coverage for Insured Individuals when the Organization is ABLE to provide Indemnification Insurer reimburses the Organization for costs it expends to defend and indemnify the D’s & O’s Most common coverage part utilized Side – C Coverage (aka ‘Entity’ Coverage) For Publicly Traded Companies: Provides coverage for the Organization itself for Securities Claims Only For Private and Non-Profit Companies: Provides coverage, with some limitation, to the Organization itself 78
Confidential Key D&O Underwriting Factors – Examples… Stock Analysis Stock Chart Analysis – 2 year ‘look-back’ Does stock perform in line with ‘peers’? Have there been any large volume ‘drops’ or ‘jumps’ in the stock over the past year? Reason? Does the company give ‘earnings guidance’? Current valuation in comparison to historic and peers Price/Earnings Ratio Price to Book Value EBITDA Multiple If stock dropped, we there ‘Insider Selling’ before the stock drop? Financial Analysis Does company have necessary ‘Cash on Hand’ and ‘Free Cash Flow’ Meet Debt / Other Corporate Obligations over next 3 years? Cash flow – steady or volatile? Use of cash flow? Amount available - Existing Credit Facility Trending of Revenues / Gross Margins / Net Income – Outlook Corporate Governance Make-up of Board / Management Team – Independence & Quality Any related Third-Party Transactions? Management Salary in line with Competitors? CEO / CFO have prior public experience? Any recent changes to Senior Management or the Board of Directors? 79
Confidential Targa NGLS v. Peer MLP’s – 2 year ‘look-back’ 80
Confidential 81 Targa’s D&O Renewal Expectations Many insurer’s Combined Ratios (losses plus expenses) are well below 100%, so still making a profit Several new ‘entrants’ adding capacity to the market, which drives competition and keeps rates steady AEGIS (industry mutual) provides ‘primary’ coverage on TRPLP tower – initially talking about increases, but expectation is to get reductions. So far still no Financial Industry (FI) impacts crossing over into Energy Book Targa expectations are minimum 10% reduction!!!
Confidential 83 Targa’s Excess Liability Renewal – 2009 was Tough!! Targa’s first $15mm and $100mm xs $35mm -- Industry Mutuals AEGIS Energy Insurance Mutual Significant industry liability losses in 2007/2008 CA Wildfires (through entire coverage tower of CA Utility) Significant loss of investment income – lost ~ 1/5 th of Policyholder Surplus Much of those investment losses have been recovered Some have not -- pulled out of equities and into ‘safer’ investments = lower recovery 2009 Renewal was very difficult in October 2009 Kept coverage with AEGIS – no General Aggregate key reason Reduced limit for ‘midstream’ accounts by ~60% – from $35mm to $15mm Increased retentions from $1 – 3mm to $3 – 5mm ‘Per Occurrence’ Propane Claim Issues (industry, not Targa specific) Annual Aggregate Limit for Wildfires Increased premium costs > 40% even with significant reduction in limits Filled in new $20mm ‘gap’ with Aspen Syndicate (Lloyds) - ~$800k NEW Spend Required
Confidential 84 U.S. Excess Liability Market – Then to Now… …A year ago, all the key indicators were in place that the market would continue to ‘harden’ into 2010…. Decline in most insurers’ Policyholder Surplus Collapse in Liquidity Excess Capital Disappeared Catastrophic Investment Losses Increased Costs in Reinsurance Several reasons why this market is actually moving into a ‘soft’ market… Cat losses not a severe as prior years Fewer insurers experienced combined ratios > 100% Reinsurance costs did not rise as much as anticipated Many ‘buyers’ exposures were lower (revenues, throughput) due to economy Better than expected investment returns Additional capacity entered the market on top of an existing over-abundance of capacity Insurers want to maintain market share creates downward pressure on prices Willis Energy Market Review 2010
Confidential 85 Targa’s Excess Liability Renewal – 2010 Expectations AEGIS may impose a General Aggregate on the $15mm limit – key issue Key competitors may be lower on premium Goal is to achieve 5 – 10% overall reduction A lot depends on AEGIS’ position Reductions likely in upper layers (excess of $100mm)