bauer college of business thursday, march 25, 2010 julie jackson / sheila lum / laura deleon

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

3

Overviewof

Targa’s Business

Confidential

April2004

Acquired Assetsfrom

ConocoPhillips($247 MM)

Formed Targa

Resources

April2003

History of Growth

Oct2005

AcquiredDynegy

MidstreamServices

($2,452 MM)

Successfully executing strategy to build a leading midstream energy company

MLP IPO of North Texas

Assets($956 MM)

Feb2007

Sold($117 MM)

Dec2004

Aug2005

BridgelineAcquired($100 MM)

First Drop Down

($705 MM)

Oct2007

Drop Down of

Downstream Assets

($530 MM)

Sep2009

4

Confidential

5

Overview of Targa’s Business

Targa is a leading provider of midstream natural gas and NGL services in the US

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ConfidentialOverview 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

LogisticsAssets

NGL Distribution and Marketing

WholesaleMarketing

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

ConfidentialTarga Corporate Structure

100% Indirect Ownership

2.0% General Partner Interest

69.09% Limited Partner Interest

Public Unitholders47,924,750Common

Units

Targa Resources GP LLC1,387,360 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 Gatheringand Processing

North Texas

Louisiana

San Angelo, Texas

8

ManagementMerrill LynchWarburg Pincus LLC

73.6% IndirectOwnership Interest *



28.91% Limited Partner Interest20,055,846 Common Units

* Ownership percentages are presented on a fully-diluted basis

8

ConfidentialTarga Resources, Inc. Summary Highlights

9

($ in millions)

RevenueIncome from OperationsNet Income

ASSETS

Cash and Cash EquivalentsOther Current AssetsPP&E, netOther Assets

TOTAL ASSETS

Current Liabilities (excl. ST debt)Total DebtOther Liabilities

TOTAL LIABILITIES

Minority / Non-controlling Interest 815.1 Stockholder's Equity

TOTAL LIABILITIES &STOCKHOLDER'S EQUITY 3,435.5

178.1

1,941.1

926.9 567.5

2,548.1 142.4

3,435.5

542.4 1,220.6

YE 2009

4,536.5 217.4

85.4

3,790.0

LIABILITIES & STOCKHOLDER'S EQUITY

2,430.1 174.1 97.5

494.4 252.4 492.6

949.6

2,119.3

3,648.6

2,482.4

579.6 492.4

1,564.9 1,411.0 99.3 145.8

3,648.6 3,790.0

455.0 925.7

1,084.4 2,617.4

YE 2007

7,269.7 280.5

68.6

362.8 177.9

YE 2008

7,998.9 235.0 150.0

Confidential

10

Overviewof

Lloyd’s of London

ConfidentialHistory

“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.

A group of individuals or companies formed to transact some specific business, or to promote a common interest; a self-coordinating group.

12

A Market of ‘Syndicates’ ….

ConfidentialFrom 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

ConfidentialInteresting 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!!

ConfidentialInternal View of Current Lloyd’s Building

ConfidentialThe Lutine Bell

The 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.

ConfidentialImage of the Titanic ‘Slip’

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!!!

ConfidentialA 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

20

Overall Market Observations

ConfidentialFirst Decade of New Millennium in Review

2000 Y2K – 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

2003 Launch of Iraqi War

Space Shuttle Columbia tragedy

• Rates start reducing from 2001 peaks

2004 Hurricane 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


2005 Hurricane 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

2006 Rates 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 2nd year of underwriting profit since 1978!



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


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.

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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

ConfidentialBrief Market Observations - 2009

Rates increased for CAT exposures following:

– Hurricane Ike in 2008 which was 4th 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


ConfidentialBrief 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!


Confidential

28

Loss Deterioration Over Time

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29

Energy Losses vs. Total Premium Income

Confidential

Confidential

34

Onshore Energy Market

Confidential

35

Targa Key Gulf Coast Facility Locations

Confidential

36

Venice Main Office Post-Katrina’s Visit

Confidential

37

Venice Main Office Post-Katrina’s Visit

Confidential

3838

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

Stand-Alone Terrorism

Deductible: $1MM PD; 30 Days BI

Lloyd’s & Other Companies100% of $200MM

$200 MM

Onshore Property Program Physical Damage / Business Interruption

Various Deductibles

Lloyd’s & OtherCompanies

10% of$200MM Primary

Lloyd’s of London7.5% of

$50MM Primary


7.5% of$50MM xs $50MM


13% of$100MM xs $100MM

Primary


77.5% of$100MM Primary

Domestics5% of

$100MM Primary

Domestics77% of

$100MM xs $100MM

Lloyd’s of London33% of

$200MM xs $200MM

Domestics67% of

$200MM xs $200MM

$400 MM

$200 MM

$100 MMPrimary

$50 MMPrimary

$199,451.25

$787,71010% of primary$200MM

$1,156,816.50

$5,836,250

$7,980,227.75 *

* Premium Protector: 100% part of $3MM primary$550,000 addt’l annual premium

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

Stand-Alone Terrorism

Deductible: $1MM PD; 30 Days BI

Lloyd’s & Other Companies100% of $200MM

$200 MM

Onshore Property Program Physical Damage / Business Interruption

Various Deductibles


10% of$200MM Primary

Lloyd’s of London7.5% of

$50MM Primary


7.5% of$50MM xs $50MM


13% of$100MM xs $100MM

Primary


77.5% of$100MM Primary

Domestics5% of

$100MM Primary

Domestics77% of

$100MM xs $100MM

Lloyd’s of London33% of

$200MM xs $200MM

Domestics67% of

$200MM xs $200MM

$400 MM

$200 MM

$100 MMPrimary

$50 MMPrimary

$199,451.25

$787,71010% of primary$200MM

$1,156,816.50

$5,836,250

$7,980,227.75 *

* Premium Protector: 100% part of $3MM primary$550,000 addt’l annual premium

Excludes Named

Windstorm

May include $10MM Offshore

Contingent B.I.

CoverageWith

potentially 25-50%

Self-InsuredVarious Deductibles, including Wind of 2% with $1MM min. and $10MM max.

…..EVEN MORE “PATCHWORK”

$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)

Potentially self-insure

Confidential

Layer K$10MM CBI

Separate LimitAmlin

Order 7.5%

Targa Onshore Property Program - April 16, 2009-2010

$25MM

$400MM

Base 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 losses

Layer A$50MM

Ascot et al Order 51%(42% CBI)

Layer B$50MM xs $50MM

MAP Order 7.5%

Layer C$50MM xs

$50MMAEGIS NJOrder 20%

Layer E $25MM(includes CBI for Ironshore)

Amlin & Ironshore Order 15%

$100MM

Layer D$50MM xs

$50MMAllianz/

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 I100MMMExcluding

NamedWindstorm(Risk Only)

Catlin/OmegaOrder 12%

Layer S$100MMLexingtonBermuda Order 12%

Layer M$300MM xs $100MMLondon Order 11.5%

Layer N$300MM xs $100MMDomestic Order 71% Layer O

$100MM xs $100MMGlacier Re Order 7.5%

Layer P$200MM xs $200MM

Brit/Jubilee Order 7.5%

Layer L

Swiss ReOrder 10%(Including

Offshore CBI)

IncludingWindstormto $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 OnlyCatlin/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

$25MMBarbicanOrder 5%Windstorm

Only

Layer T$25MM xs $50MM

NWS OnlyAdvent Order 11.5%

Layer W$25MM xs $75MM

NWS OnlyBerkley Order 7%

Targa’s 4/09 Renewal Structure – Very Painful!!

Confidential

45m

100m

400m

75m

Deductibles

Layer 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%

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

100% 100%

LocationsPD Gross

100%

PD Net (after

deductible)(MM)

BI Net(MM)

Total ClaimPD/BI(MM)

Spend on Improvements

100%(MM)

Claim Value Mitigated

(MM) 100%

PD Gross100%

PD Net (after deductible)

(MM)BI Net(MM)

Total ClaimPD/BI(MM)

SE Louisiana 100%

Total for Katrina Like Event

288.63$ 66.53$ 61.31$ 127.84$ 5.00$ 84.39$ (117.61)$ (29.17)$ (57.73)$ (86.60)$

SW Louisiana & Texas Gulf Coast

100%

Total for Ike Like Event

61.22$ 44.25$ 12.79$ 57.04$ 6.61$ 35.03$ (34.77)$ (23.67)$ (4.51)$ (28.18)$

TOTAL if both storms (unlikely)

349.85$ 110.78$ 74.10$ 184.88$ 11.61$ 119.42$ (152.38)$ (52.85)$ (62.24)$ (114.79)$

Net to Targa's Interest

ACTUAL HURRICANE KATRINA CLAIM(w/original actual

Katrina ownership %)

Mitigation of claim resulting from Hardening

Improvements(AS-IF No Change in

Ownership %)

MITIGATION IMPACTNet to Targa's Interest

HURRICANE IKE FORECAST

AS OF 02-09-09

Mitigation of claim resulting from Hardening

Improvements

Confidential

45

Offshore Energy Market

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

52

Sheila Lum

Risk Analyst

ConfidentialWhat 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.

ConfidentialCPCU 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

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Onshore Property

Offshore Property

Builders Risk

General Liability

Excess Liability

Fiduciary Liability

Directors & Officers Liability

Crime

Terrorism

Hull & Machinery

Ocean Cargo

Protection & Indemnity

Hull War Risks P&I

Non-Owned Aircraft

Commercial Auto

Workers’ Compensation & Employers Liability

Surety Bonds

Types of Commercial Insurance

ConfidentialInsurance 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.

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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.

Insurance Coverage Descriptions (cont.)

ConfidentialInsurance 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.

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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.


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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.


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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


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Laura DeLeon

Risk Analyst

ConfidentialNature of Risk

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ConfidentialClasses of Risk

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ConfidentialBasic Risk

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ConfidentialCertificate of Insurance – ‘Fronted GL Policy’

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ConfidentialCertificate of Insurance – ‘Self-Insured’ GL

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ConfidentialRecent Auto Accident – Targa Truck

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ConfidentialThird-Party Driver at Fault

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Truck that caused the accident

ConfidentialTarga’s Truck – A Total Loss

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Alternatives to Commercial Insurance

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‘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

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Targa Resources: Storm tracker map showing 50 mile and 100 mile radius

ACE ‘StormTracker’ Option

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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

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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

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Directors & Officers Liability Market

ConfidentialA D&O Underwriter’s ‘Worst Nightmare’…..

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ConfidentialD&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

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ConfidentialKey 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?

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ConfidentialTarga NGLS v. Peer MLP’s – 2 year ‘look-back’

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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!!!

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Excess Liability Market

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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 ~ 1/5th 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

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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

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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)

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bauer college of business thursday, march 25, 2010 julie jackson / sheila lum / laura deleon

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