Bauer College of Business Thursday, March 25, 2010 Julie Jackson / Sheila Lum / Laura DeLeon Risk Management & Insurance Targa Resources, Inc.
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
Overview of Targa’s Business
History of Growth Drop Down of Downstream Assets ($530 MM) Acquired Dynegy Midstream Services ($2,452 MM) MLP IPO of North Texas Assets ($956 MM) Acquired Assets from ConocoPhillips ($247 MM) Formed Targa Resources First Drop Down ($705 MM) Bridgeline Acquired ($100 MM) Sold ($117 MM) Sep 2009 April 2003 Oct 2007 April 2004 Oct 2005 Feb 2007 Aug 2005 Dec 2004 Successfully executing strategy to build a leading midstream energy company
Overview of Targa’s Business Natural Gas Gathering and Processing NGL Logistics and Marketing Targa is a leading provider of midstream natural gas and NGL services in the US
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
The Downstream Business – Majority Fee-Based • 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 Fractionation Storage and Terminalling Transportation and Distribution LogisticsAssets NGL Distribution and Marketing WholesaleMarketing 7
Targa Corporate Structure Merrill Lynch Management Warburg Pincus LLC 6.5% Indirect Ownership Interest * 73.6% Indirect Ownership Interest * 19.9% Indirect Ownership Interest * Targa Resources Investments Inc. Targa Resources, Inc. TRI (Only) Natural Gas Gathering and Processing • Permian Basin of West Texas • Southeast New Mexico and • Louisiana Gulf Coast 100% Indirect Ownership Targa Resources GP LLC 1,387,360 General Partner Units Incentive Distribution Rights 28.91% Limited Partner Interest 20,055,846 Common Units Targa Resources Partners LP (“NGLS” or “Partnership”) Public Unitholders 47,924,750 Common Units 69.09% Limited Partner Interest 2.0% General Partner Interest Natural Gas Gatheringand Processing • North Texas • Louisiana • San Angelo, Texas The Downstream Business • Logistics Assets • NGL Distribution and Marketing • Wholesale Marketing • * Ownership percentages are presented on a fully-diluted basis 8
Overview of Lloyd’s of London
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.”
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.
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
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!!
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.
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
A Possible Lloyd’s of New York? Reported by: David Jolly, New York Times, Thursday, March 25, 2010 • 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
First Decade of New Millennium in Review Courtesy of R. Blades, John L. Wortham & Son, LLP
First Decade of New Millennium in Review Courtesy of R. Blades, John L. Wortham & Son, LLP
First Decade of New Millennium in Review Courtesy of R. Blades, John L. Wortham & Son, LLP
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.
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
Brief 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 Courtesy of R. Blades, John L. Wortham & Son, LLP
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 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 Courtesy of R. Blades, John L. Wortham & Son, LLP
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 38
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
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. Example of ‘Subscription’ Market Property Program A “PATCHWORK QUILT”
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. Pro-Forma View of Renewal Structure …..EVEN MORE “PATCHWORK” Potentially self-insure $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)
Targa’s 4/09 Renewal Structure – Very Painful!! Targa Onshore Property Program - April 16, 2009-2010 $400MM Layer M $300MM xs $100MM London Order 11.5% Layer N $300MM xs $100MM Domestic Order 71% Layer P $200MM xs $200MM Brit/Jubilee Order 7.5% Layer L Swiss Re Order 10% (Including Offshore CBI) Including Windstorm to $100MM Layer O $100MM xs $100MM Glacier Re Order 7.5% $100MM Layer B $50MM xs $50MM MAP Order 7.5% Layer C $50MM xs $50MM AEGIS NJ Order 20% Layer D $50MM xs $50MM Allianz/ AIG/ Validus Order 18.5% 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 J $75MM xs $25MM Barbican Order 5% Windstorm Only Layer W $25MM xs $75MM NWS Only Berkley Order 7% 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 T $25MM xs $50MM NWS Only Advent Order 11.5% Layer K $10MM CBI Separate Limit Amlin Order 7.5% Layer F (2) $25MM xs $25MM NWS Only Catlin/Omega Order 7% Layer A $50MM Ascot et al Order 51%(42% CBI) Layer F (1) $25MM xs $25MM Max Re & Montpelier Order 15% $25MM Layer E $25MM (includes CBI for Ironshore) Amlin & Ironshore Order 15% Layer V $12.5MM xs $12.5MM Montpelier Order 5.333% NWS Only Layer U $15MM xs $10MM Chaucer Order 6.667% NWS Only Base Retentions: $1MM PD; except $10MM Named Windstorm & Storm Surge Earthquake 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 • Offshore 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%)
Current Renewal Structure – Much Better!! Sample View : Fewer ‘Layers’ – Larger % Lines by Insurers 400m Layer G 325m xs 75m(pipelines s/l 75m)Aegis – 5%Argenta – 7.50%TOTAL – 12.50% Layer H 400mSwiss Re – 10%TOTAL – 10% Full ‘Quota-Share’ Layer E 355m xs 45m(pipelines s/l 75m)Liberty – 10%TOTAL – 10% Layer C 300m xs 100m Ascot – 10%TOTAL – 10% ‘Risk’ Only TOTAL – 42.50% TO GO – 57.50% 100m 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 – 67% TO GO – 33% (25m NWS e&e) 75m TOTAL – 87.50% TO GO – 12.50% (55m NWS e&e) Layer F Primary 75m(75m NWS e&e) Lexington Bda – 10% (sub approval)Ironshore – 20%Hiscox – 3% (3% NWS ded)TOTAL – 33% 45m 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% (100m NWS e&e) TOTAL – 96.50% TO GO – 3.50% Deductibles
Storm Severity Damage Analysis Source: Watkins Syndicate Excerpt: Willis Energy Market Review – March 2009
Hurricane Losses Difficult to Predict Excerpt: Willis Energy Market Review – March 2009
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)
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.
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)