4 History of Growth Acquired Dynegy Midstream Services ($2,452 MM) Drop Down of Downstream Assets($530 MM)Acquired AssetsfromConocoPhillips($247 MM)MLP IPO of North Texas Assets($956 MM)Formed Targa ResourcesFirst Drop Down ($705 MM)BridgelineAcquired($100 MM)Sold($117 MM)April2003April2004Dec2004Aug2005Oct2005Feb2007Oct2007Sep2009Successfully executing strategy to build a leadingmidstream energy company
5 Overview of Targa’s Business Natural Gas Gatheringand ProcessingNGL Logistics and MarketingTarga is a leading provider of midstream natural gas and NGL services in the US
6 Overview of Targa Family Assets OverallLeading gas gatherer and processorLeading NGL logistics and marketing businessTarga Resources, Inc. (TRI)$3.4 billion of assets$4.5 billion of revenueTarga Resources Partners LP (NGLS)$2.2 billion of assets$4.1 billion of revenueNatural Gas Gathering and Processing Division11,000 miles of natural gas pipelines800 miles of NGL pipelinesGathering system encompassing 21,900 square milesOwn interest in or operate 22 natural gas processing plantsContracts predominantly percent of gas and liquids or percent of liquidsNGL Logistics and Marketing DivisionGross 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 storageApproximately 17 operating terminals, 21 pressurized NGL barges, 70 transport tractors, 100 tank trailers and 855 managed railcarsPredominantly fee-based business_________________________Note: All financial data as of December 31, 2009
7 The Downstream Business – Majority Fee-Based Logistics AssetsFractionationStorage andTerminallingTransportationand DistributionMajority under fee-based arrangements3 facilities with ~380 MBbl/d maximum gross capacityLong-and short-term storage and terminalling services and throughput capability to affiliates and third party customers for a feeStorage wells with ~65 MMBbl of capacity and 17 terminal facilities; 800 miles of pipeline support fractionation, storage and terminallingFee-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 bargesPrimarily a physical settlement business which earns a margin from purchasing and selling NGL products from producers under contractAlso earn margins by purchasing and reselling NGL products in the spot and forward physical markets2008 sales of 245 MBbl/dRefinery ServicesGenerally retain a portion of the resale price of NGL sales or receive a fixed minimum fee per gallonEarn fees for locating and supplying NGL feedstocks to the refineries based on a percentage of the cost or a minimum fee per gallonWholesale propane marketingSell propane on a fixed or posted price at delivery and, in some circumstances, earn a margin on a net-back basisNGL Distribution and MarketingWholesale Marketing7
8 Targa Corporate Structure Warburg Pincus LLCMerrill LynchManagement6.5% IndirectOwnership Interest *73.6% IndirectOwnership Interest *19.9% IndirectOwnership Interest *Targa Resources Investments Inc.100% Indirect OwnershipTarga Resources, Inc.TRI (Only) Natural Gas Gathering and ProcessingPermian Basin of West TexasSoutheast New Mexico andLouisiana Gulf CoastTarga Resources GP LLC1,387,360 General Partner UnitsIncentive Distribution Rights28.91% Limited Partner Interest20,055,846 Common UnitsTarga Resources Partners LP(“NGLS” or “Partnership”)Public Unitholders47,924,750CommonUnits69.09% Limited Partner Interest2.0% General Partner InterestNatural Gas Gathering and ProcessingNorth TexasLouisianaSan Angelo, TexasThe Downstream BusinessLogistics AssetsNGL Distribution and MarketingWholesale Marketing* Ownership percentages are presented on a fully-diluted basis8
11 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.”
12 A Market of ‘Syndicates’ …. 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.A group of individuals or companies formed to transact some specific business, or to promote a common interest; a self-coordinating group.
13 From Coffee House…to Lloyd’s Present Time 1689Ships and goods insured by wealthy individuals acting on a personal basis.Lloyd’s Coffee House: First recorded February 1689sDevelopment 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 – 1960sIntroduction of automobile, aircraft, and space equipment liability insurance.1996Reconstruction and Renewal – Asbestos and Pollution ClaimsCorporate members introduced.Equitas reinsures liabilities from 1992 and prior years.2001Lloyd’s regulated by the FSA (UK Financial Services Authority )2002- Governance structure amended - Lloyds Franchise BoardThe Franchise Board sets the franchise strategy, and is responsible for risk management and profitability targets across the market. It lays down guidelines for all syndicates and operates a business planning and monitoring process to safeguard high standards of underwriting and risk management, thereby improving sustainable profitability and enhancing the financial strength of the market.In a bid to ensure that past mistakes are not repeated, Lloyd's decided back in July 2002 to make big changes to the way it was run. The most fundamental change was to start treating Lloyd's like a franchise and syndicates like franchisees. The idea behind this was to formalise the concept of Lloyd's as a brand that could be damaged by bad results. This would give the market greater power to kick out poorly performing syndicates.
14 Interesting Insurance Policies Issued One of the most famous … the $3.2 million policy for Tina Turner’s Legs…Or how about the legs of David Beckham……or the voice of Bruce Springsteen!!Just about ANYTHING …. can be insured by the Lloyd’s Market!!
16 important announcements – one stroke for bad news and two for good. The Lutine BellThe Lutine Bell, weighing 106 pounds and measuring 18 inches in diameter, issynonymous with the name of Lloyd’s. Traditionally it has been rung to heraldimportant 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.
18 Quick Quiz!!!In what year did the Lutine Bell ring once (for bad news) related to the Titanic?(A) 1910(B) 1911(C) 1912(D) 1914
19 A Possible Lloyd’s of New York? Want to establish International Insurance Exchange modeled on Lloyd’sInitial “Study” phaseAttempted ~ 30 years agoRichard 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” ,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 StreetReported by: David Jolly, New York Times, Thursday, March 25, 2010
21 First Decade of New Millennium in Review 2000Y2K – scarePresidential election decided by “hanging Chads”Non-event for insurance market2001 -20029/11Enron melt downIPOD is launched$22.8 billion insurance disasterUS Terrorism Coverage becomes a challengeD & O market ‘hardens’ and highlights need for Side “A” Only coverage2003Launch of Iraqi WarSpace Shuttle Columbia tragedyRates start reducing from 2001 peaks2004Hurricane Ivan12/26 Tsunami strikes IndonesiaSuper Bowl Wardrobe MalfunctionFace Book launchedMartha Stewart to prison$8.1 Billion insured loss and underwriters start trying to limit OEE coverage following Named WindstormCourtesy of R. Blades, John L. Wortham & Son, LLP
22 First Decade of New Millennium in Review 2005Hurricane KatrinaHurricane RitaLondon Transit BombingsYouTube launched !Most expensive Insurance disaster of all time - $45.3 BillionOil Insurance Limited (OIL) loss exceeds $1 Billion CSL limit for all members for the first time$6.2 Billion insured lossOIL exceeds $1 Billion CSL again2006Rates up post-2005 HurricanesPluto no longer a planetTwitter launchedUS Population reaches 300 MillionUnderwriters earn a record profit of $31.7 Billion. Only 2nd year of underwriting profit since 1978!Courtesy of R. Blades, John L. Wortham & Son, LLP
23 First Decade of New Millennium in Review 2007Another benign year for CAT lossesBaseball Steroids scandal highlighted in Mitchell reportApple Iphone launchedUnderwriters earned a 19.3 billion profit; however cumulative underwriting deficit from 1975 to 2008 is still $442 Billion2008$700 Billion US Government bailout as result of financial crisesHurricane Ike strikes HoustonMichael Phelps won 8 Gold MedalsElliot Spitzer resigns as NY governorLargest insurance “Capital event” of last 20 years as surplus was impacted 16.2% at one point$12.5 Billion insured losses2009Fewest Atlantic/GOM hurricanes since 1997Bernard Madoff - $50 billion ponzi schemeMiracle on Hudson - U.S. AirHIN1 - Swine Flu declared a global PandemicUS insurers net income rose to $16.2 billion through 3rd quarter 2009Lloyds underwriters earn a record profit of $5.81 BillionCourtesy of R. Blades, John L. Wortham & Son, LLP
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.
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 SecuritiesThose insurers involved in these ‘products’ got caught up in the downward spiralAIG, Swiss Re, Hartford, XL and others – Largest InsurersAIG deemed ‘Too Big to Fail’ – U.S. Govt ‘Bail Out’ under TARPTarga Insurer minimum A.M. Best Rating: A- VIIMonitor insurance programsLong-tail vs. short-tail risk programsD&O PoliciesPrimary coverage vs. high excess coverageWhat are the alternatives? Cost? Coverage?Have a ‘back-up’ plan
26 Brief Market Observations - 2009 Rates increased for CAT exposures following:Hurricane Ike in 2008 which was 4th largest insurance event in historyEconomic downturn impacting balance sheetsUnderwriters were concerned about replenishing capital following CAT lossUnderwriters strived to obtain an underwriting profitNamed Windstorm capacity severely contracted especially offshoreNumerous assureds reduced or eliminated Offshore Named Windstorm limitUnderwriters’ profits are up:Benign hurricane seasonInvestment returns improveCourtesy of R. Blades, John L. Wortham & Son, LLP
27 Brief Market Observations - 2010 “Tug of war” over the right rate, retention and Named Windstorm limit will continue!All assureds are looking to reduce premium / cost of riskUnderwriters are under pressure from management and reinsurers to “hold the line” or provide only a nominal reductionAssured 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 improvingNew EntrantsCourtesy of R. Blades, John L. Wortham & Son, LLP
35 Targa Key Gulf Coast Facility Locations Facilities along coast built in 60’s era – offshore gas productionSustained multiple severe hurricanes since constructedDamage as far back as Camille in ’69 as a Category 5 storm was not as severe as Katrina in ’05 as a Category 3/4 storm
38 Today….All plants along coast damaged by storms now have new Modular buildingsOffice, MCC, I&E, anything with instrumentation/electrical componentsElevated over 17 feet above Mean Sea Level (MSL) at bottom of frameDesigned to withstand 150 MPH wind speed38
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 - $725MMWildfires in Southern California - $500MMVarious property and business interruption energy, steel and mining occurrences1,600 tornados (through September, 2008) compared to about 1,000 annually in a normal yearHurricane Ike projected between $13 billion to $21 billion16 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 good1Q10 insured Cat losses - Haitian & Chilean EarthquakesAlready at $7 - $10 billion
40 Example of ‘Subscription’ Market Property Program A “PATCHWORK QUILT”Onshore Property Program Physical Damage / Business InterruptionExcludes Named WindstormIncludes $12.5MM Offshore Contingent B.I. CoverageVarious Deductibles, including Wind of 2% with $1MM min. and $10MM max.
41 Pro-Forma View of Renewal Structure …..EVEN MORE “PATCHWORK”Onshore Property Program Physical Damage / Business InterruptionExcludes Named WindstormMay include $10MM Offshore Contingent B.I. CoverageWith potentially 25-50%Self-InsuredVarious Deductibles, including Wind of 2% with $1MM min. and $10MM max.Potentially self-insure$10MM Per Occurrence Retention for WindstormPotentially Un-aggregated Windstorm (Provides full coverage for Each and Every Storm)Potentially Annual Aggregate Windstorm (Any Loss Erodes Coverage Limit)
42 Targa Onshore Property Program - April 16, 2009-2010 Targa’s 4/09 Renewal Structure – Very Painful!!Targa Onshore Property Program - April 16,$400MMLayer M$300MM xs $100MMLondon Order 11.5%Layer N$300MM xs $100MMDomestic Order 71%Layer P$200MM xs $200MMBrit/JubileeOrder 7.5%Layer LSwiss ReOrder 10%(IncludingOffshore CBI)IncludingWindstormto $100MMLayer O$100MM xs $100MMGlacier ReOrder 7.5%$100MMLayer B$50MM xs $50MMMAPOrder 7.5%Layer C$50MM xs$50MMAEGIS NJOrder 20%Layer D$50MM xs$50MMAllianz/AIG/ValidusOrder 18.5%Layer H$25MM xs $75MMArgenta/Glacier/AESOrder 20%Layer I100MMMExcludingNamedWindstorm(Risk Only)Catlin/OmegaOrder 12%Layer S$100MMLexingtonBermudaOrder 12%Layer J$75MM xs$25MMBarbicanOrder 5%WindstormOnlyLayer W$25MM xs $75MMNWS OnlyBerkley Order 7%Layer G$25MM xs $50MMIronshoreOrder 12.5%Layer Q$25MM xs $50MMAESOrder 4.5%(Excl. NWS)Layer R$25MM xs $50MMJubileeOrder 3%Layer T$25MM xs $50MMNWS OnlyAdvent Order 11.5%Layer K$10MM CBISeparate LimitAmlinOrder 7.5%Layer A$50MMAscot et alOrder 51%(42% CBI)Layer F (1)$25MM xs $25MMMax Re & Montpelier Order 15%Layer F (2)$25MM xs $25MMNWS OnlyCatlin/OmegaOrder 7%Underwriters had the leverageTail wagging the dogVery Expensive ‘Hanging Chads’ of windstorm coverage on the side$25MMLayer E $25MM(includes CBI for Ironshore)Amlin & IronshoreOrder 15%Layer V$12.5MM xs $12.5MMMontpelierOrder 5.333%NWS OnlyLayer U$15MM xs $10MMChaucer Order6.667%NWS OnlyBase Retentions: $1MM PD; except $10MM Named Windstorm & Storm SurgeEarthquake 2% $1MM min/ $10MM max – BI 45 days All Losses (60 days for 2nd and Subsequent Storms)Note: AEGIS $50MM xs $50MM requires 60 day waiting period for all Windstorm lossesOffshore CBI Sublimit of $10MM – Only 79% complete.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%)
43 Current Renewal Structure – Much Better!! Sample View : Fewer ‘Layers’ – Larger % Lines by Insurers400mLayer E355m xs 45m (pipelines s/l 75m) Liberty – 10% TOTAL – 10%Layer G325m xs 75m (pipelines s/l 75m) Aegis – 5% Argenta – 7.50% TOTAL – 12.50%Layer H400m Swiss Re – 10% TOTAL – 10%Full ‘Quota-Share’Layer C300m xs 100m Ascot – 10% TOTAL – 10%‘Risk’ OnlyTOTAL – 42.50%TO GO – 57.50%100mLayer B55m 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 – 67%TO GO – 33%(25m NWS e&e)75m(55m NWS e&e)Layer FPrimary 75m (75m NWS e&e)Lexington Bda – 10%(sub approval) Ironshore – 20% Hiscox – 3% (3% NWS ded) TOTAL – 33%TOTAL – 87.50%TO GO – 12.50%45mLayer APrimary 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%(100m NWS e&e)TOTAL – 96.50%TO GO – 3.50%Deductibles
44 Hurricane Hardening / Elevation Loss Mitigation
46 Storm Severity Damage Analysis Source: Watkins SyndicateExcerpt: Willis Energy Market Review – March 2009
47 Hurricane Losses Difficult to Predict Excerpt: Willis Energy Market Review – March 2009
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 hurricanesEven 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 billionLloyd’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 hurricaneUnderwriters 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)
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 exposuresSome Reinsurers are exiting this class of businessEnd 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.
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 pipelinePast 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 LimitsYear over year…..Targa’s options / decision:Purchase the commercial market insuranceConsider alternative options to the commercial property insurance marketRelied on other commercial options and take the risk (self-insure)
51 2010 Offshore Property Expectations Market is ‘softening’ more than anybody thought even at end of 2009Rate on Line is down to ~ 15 – 20% (vs. 25 – 30% last year)Underwriters know they need to sell their purchased Windstorm capacityTarga will consider after Onshore Property renewal completed
53 What it means to be a CPCU… “CPCU” or Chartered Property Casualty UnderwriterAn insurance professional who has earned the CPCU designationCPCU’s are considered the ‘standard setters’ of the insurance industryIn 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.
54 CPCU CoursesThe following courses are required to earn the CPCU designation:Five (5) “Foundation” courses:CPCU 510 Foundations of Risk Management, Insurance, and ProfessionalismCPCU 520 Insurance Operations, Regulation, and Statutory AccountingCPCU 530 The Legal Environment of InsuranceCPCU 540 Finance for Risk Management and Insurance ProfessionalsCPCU 560 Financial Services InstitutionsThree courses in either the “Commercial” or “Personal” concentration:Commercial ConcentrationCPCU 551 Commercial Property Risk Management and InsuranceCPCU 552 Commercial Liability Risk Management and InsuranceCPCU 553 Survey of Personal Risk Management, Insurance, and Financial PlanningPersonal ConcentrationCPCU 555 Personal Risk Management and Property-Liability InsuranceCPCU 556 Personal Financial PlanningCPCU 557 Survey of Commercial Risk Management and Insurance
55 Types of Commercial Insurance Onshore PropertyOffshore PropertyBuilders RiskGeneral LiabilityExcess LiabilityFiduciary LiabilityDirectors & Officers LiabilityCrimeTerrorismHull & MachineryOcean CargoProtection & IndemnityHull War Risks P&INon-Owned AircraftCommercial AutoWorkers’ Compensation & Employers LiabilitySurety BondsThe obligatory credit strength pageTarga has the key components of a strong creditOperational scaleGeographical diversificationBasin diversificationStrong cash flowsCommodity price risk mitigationAnd an operational and structural platform designed to facilitate continued deleveraging and flexibility
56 Insurance Coverage Descriptions Onshore Property – covers 1st 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.
57 Insurance Coverage Descriptions (cont.) General Liability - covers 3rd 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.
58 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.
59 Insurance Coverage Descriptions (cont.) 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.
60 Insurance Coverage Descriptions (cont.) Non-Owned Aircraft – covers 3rd 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.
61 Insurance Coverage Descriptions (cont.) 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 obligationObligee: the one for whom the principal is obligated to performSurety: the company that is making the guarantee on behalf of the principal to the ObligeeDifferences between Surety Bonds and InsuranceSurety Bonds have three (3) parties to the contractThe principal is liable to the surety for losses paid by the suretyIn theory, the surety should not sustain losses on surety contractsBankruptcy of the Principal is the key risk to the Surety companyThe coverage period is indefinite
72 ‘Cat’ Bonds Utilizes the Capital Markets via Institutional Investors Can cover any ‘Cat’ perils specifiedCan be for 1 – 3 year termTypically 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 payoutUnlike traditional insurance, proof of damage sustained is not requiredBonds can cost out at a ‘rate on line’ of 20%+ of limit purchasedVery expensive to put togetherRisk to purchaser – extensive damage but bond not triggeredExample: Hurricane IkeIke’s wind speed was a Category 2, although storm surge was a Category 4Significant damage – Onshore and OffshoreIf Category 3 wind speed had been a required trigger – would not have paid outWould have spent probably $6MM in premium and still had ??? $$ in potentially uninsured damage and business interruption
74 OIL Insurance Ltd – an Oil & Gas Property Mutual Form of ‘mutualization’ for Property RisksLimit purchased – up to $250MMAttachment point – minimum of $20MMProvides $750MM Aggregate to All InsuredsProvides Property Damage Coverage OnlyCoverage very restrictive – not as broad as London marketsOnly covers repairs to ‘mechanical completion’Does not cover ‘expediting expenses’Various other restrictions
75 Marsh – Berkshire Hathaway ‘Triple C’ Product Another Form of Mutualization for Property RisksSimilar to OIL Insurance CompanyLimit purchased – up to $100MMAttachment point – minimum of $25MM5 Year Minimum Time HorizonProvides $500MM Annual Aggregate to All Insureds20% Retrospective Penalty PremiumUp 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
78 D&O Liability – Summary of Coverages Side – A CoverageProvides coverage for Insured Individuals IF the Organization is UNABLE to provide IndemnificationIndemnity is typically provided for under the organizations By-LawsMost common trigger of Side-A is ‘Bankruptcy’ of the OrganizationSide – B CoverageProvides coverage for Insured Individuals when the Organization is ABLE to provide IndemnificationInsurer reimburses the Organization for costs it expends to defend and indemnify the D’s & O’sMost common coverage part utilizedSide – C Coverage (aka ‘Entity’ Coverage)For Publicly Traded Companies: Provides coverage for the Organization itself for Securities Claims OnlyFor Private and Non-Profit Companies: Provides coverage, with some limitation, to the Organization itself
79 Key D&O Underwriting Factors – Examples… Stock AnalysisStock 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 peersPrice/Earnings RatioPrice to Book ValueEBITDA MultipleIf stock dropped, we there ‘Insider Selling’ before the stock drop?Financial AnalysisDoes 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 FacilityTrending of Revenues / Gross Margins / Net Income – OutlookCorporate GovernanceMake-up of Board / Management Team – Independence & QualityAny 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?
81 Targa’s D&O Renewal Expectations Many insurer’s Combined Ratios (losses plus expenses) are well below 100%, so still making a profitSeveral new ‘entrants’ adding capacity to the market, which drives competition and keeps rates steadyAEGIS (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 BookTarga expectations are minimum 10% reduction!!!
83 Targa’s Excess Liability Renewal – 2009 was Tough!! Targa’s first $15mm and $100mm xs $35mm -- Industry MutualsAEGISEnergy Insurance MutualSignificant industry liability losses in 2007/2008CA Wildfires (through entire coverage tower of CA Utility)Significant loss of investment income – lost ~ 1/5th of Policyholder SurplusMuch of those investment losses have been recoveredSome have not -- pulled out of equities and into ‘safer’ investments = lower recovery2009 Renewal was very difficult in October 2009Kept coverage with AEGIS – no General Aggregate key reasonReduced limit for ‘midstream’ accounts by ~60% – from $35mm to $15mmIncreased retentions from $1 – 3mm to $3 – 5mm ‘Per Occurrence’Propane Claim Issues (industry, not Targa specific)Annual Aggregate Limit for WildfiresIncreased premium costs > 40% even with significant reduction in limitsFilled in new $20mm ‘gap’ with Aspen Syndicate (Lloyds) - ~$800k NEW Spend Required
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 SurplusCollapse in LiquidityExcess Capital DisappearedCatastrophic Investment LossesIncreased Costs in ReinsuranceSeveral reasons why this market is actually moving into a ‘soft’ market…Cat losses not a severe as prior yearsFewer insurers experienced combined ratios > 100%Reinsurance costs did not rise as much as anticipatedMany ‘buyers’ exposures were lower (revenues, throughput) due to economyBetter than expected investment returnsAdditional capacity entered the market on top of an existing over-abundance of capacityInsurers want to maintain market share creates downward pressure on pricesWillis Energy Market Review 2010
85 Targa’s Excess Liability Renewal – 2010 Expectations AEGIS may impose a General Aggregate on the $15mm limit – key issueKey competitors may be lower on premiumGoal is to achieve 5 – 10% overall reductionA lot depends on AEGIS’ positionReductions likely in upper layers (excess of $100mm)