Confidential
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
Confidential
2
Confidential
Overview
of
Targa’s Business
3
History of Growth
Acquired Assets
Formed
from
Targa
ConocoPhillips
Resources
($247 MM)
April
2003
April
2004
Confidential
Bridgeline
Acquired
Sold
($100 MM) ($117 MM)
Dec
2004
Aug
2005
Acquired
Dynegy
Midstream
Services
($2,452 MM)
Oct
2005
Drop Down
MLP IPO of
of
North Texas First Drop Downstream
Assets
Assets
Down
($956 MM) ($705 MM) ($530 MM)
Feb
2007
Oct
2007
Sep
2009
Successfully executing strategy to build a leading
midstream energy company
4
Confidential
NGL Logistics
and Marketing
Natural Gas Gathering
and Processing
Overview of Targa’s Business
Targa is a leading provider of midstream natural gas
and NGL services in the US
5
Overview of Targa Family Assets

Confidential
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


_________________________
Note:
All financial data as of December 31, 2009

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
6
The Downstream Business – Majority Fee-Based
Fractionation
♦ Majority under fee-based arrangements
♦ 3 facilities with ~380 MBbl/d maximum gross capacity
Storage and
Terminalling
♦
Transportation
and Distribution
♦
Logistics
Assets
NGL Distribution
and Marketing
♦
♦
Confidential
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

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
Wholesale
Marketing


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
7
Targa Corporate Structure
Confidential
Merrill Lynch
Warburg Pincus LLC
Management
6.5% Indirect
Ownership Interest *
73.6% Indirect
Ownership Interest *
19.9% Indirect
Ownership Interest *
Targa Resources Investments Inc.
100% Indirect
Ownership
TRI (Only) Natural Gas Gathering
and Processing
Targa Resources, Inc.
Targa Resources GP LLC
1,387,360 General Partner Units
Incentive Distribution Rights

Permian Basin of West Texas

Southeast New Mexico and

Louisiana Gulf Coast
28.91% Limited Partner Interest
20,055,846 Common Units
Targa Resources Partners LP
(“NGLS” or “Partnership”)
2.0% General Partner
Interest
Natural Gas Gathering
and Processing

North Texas

Louisiana

San Angelo, Texas
69.09%
Limited
Partner
Interest
Public Unitholders
47,924,750
Common
Units
The Downstream Business

Logistics Assets

NGL Distribution and Marketing

Wholesale Marketing
* Ownership percentages are presented on a fully-diluted basis
8
Targa Resources, Inc. Summary Highlights
($ in millions)
Revenue
Income from Operations
Net Income
YE 2009
YE 2008
Confidential
YE 2007
4,536.5
217.4
85.4
7,998.9
235.0
150.0
7,269.7
280.5
68.6
Cash and Cash Equivalents
Other Current Assets
PP&E, net
Other Assets
252.4
492.6
2,548.1
142.4
362.8
494.4
2,617.4
174.1
177.9
1,084.4
2,430.1
97.5
TOTAL ASSETS
3,435.5
3,648.6
3,790.0
Current Liabilities (excl. ST debt)
Total Debt
Other Liabilities
542.4
1,220.6
178.1
455.0
1,564.9
99.3
925.7
1,411.0
145.8
TOTAL LIABILITIES
1,941.1
2,119.3
2,482.4
926.9
567.5
949.6
579.6
815.1
492.4
3,435.5
3,648.6
3,790.0
ASSETS
LIABILITIES & STOCKHOLDER'S EQUITY
Minority / Non-controlling Interest
Stockholder's Equity
TOTAL LIABILITIES &
STOCKHOLDER'S EQUITY
9
Confidential
Overview
of
Lloyd’s of London
10
History
“From its first
beginnings in Edward
Lloyd’s Coffee House
in 1688, Lloyd’s has
been a pioneer in
insurance.
Starting with its roots
in marine insurance,
Lloyd’s has grown
over 300 years to
become the world’s
leading market for
specialist insurance.”
Confidential
A Market of ‘Syndicates’ ….
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
From Coffee House…to Lloyd’s Present Time
Confidential
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
Confidential
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!!
Internal View of Current Lloyd’s Building
Confidential
The Lutine Bell
Confidential
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.
Image of the Titanic ‘Slip’
Confidential
Quick Quiz!!!
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
A Possible Lloyd’s of New York?


Want to establish International Insurance Exchange modeled on Lloyd’s

Initial “Study” phase

Attempted ~ 30 years ago
Richard Ward, Lloyd’s Chief Executive comments:




Confidential
“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
Reported by: David Jolly, New York Times, Thursday, March 25, 2010
19
Confidential
Overall Market
Observations
20
First Decade of New Millennium in Review
2000
Y2K – scare
Confidential
• Non-event for insurance market
Presidential election decided by
“hanging Chads”
• $22.8 billion insurance disaster
2001
2002
9/11
Enron melt down
IPOD is launched
2003
Launch of Iraqi War
• US Terrorism Coverage becomes a challenge
• D & O market ‘hardens’ and highlights need for
Side “A” Only coverage
• Rates start reducing from 2001 peaks
Space Shuttle Columbia tragedy
2004
Hurricane Ivan
12/26 Tsunami strikes Indonesia
• $8.1 Billion insured loss and underwriters start
trying to limit OEE coverage following Named
Windstorm
Super Bowl Wardrobe Malfunction
Face Book launched
Martha Stewart to prison
Courtesy of R. Blades, John L. Wortham & Son, LLP
First Decade of New Millennium in Review
2005
Hurricane Katrina
Confidential
• 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
Hurricane Rita
• $6.2 Billion insured loss
• OIL exceeds $1 Billion CSL again
London Transit Bombings
YouTube launched !
2006
Rates up post-2005 Hurricanes
• Underwriters earn a record profit of $31.7 Billion.
Only 2nd year of underwriting profit since 1978!
Pluto no longer a planet
Twitter launched
US Population reaches 300 Million
Courtesy of R. Blades, John L. Wortham & Son, LLP
First Decade of New Millennium in Review
2007
Another benign year for CAT losses
Baseball Steroids scandal highlighted in
Mitchell report
Confidential
• Underwriters earned a 19.3 billion profit;
however cumulative underwriting deficit
from 1975 to 2008 is still $442 Billion
Apple Iphone launched
2008
$700 Billion US Government bailout as
result of financial crises
Hurricane Ike strikes Houston
• Largest insurance “Capital event” of last
20 years as surplus was impacted 16.2%
at one point
• $12.5 Billion insured losses
Michael Phelps won 8 Gold Medals
Elliot Spitzer resigns as NY governor
2009
Fewest Atlantic/GOM hurricanes since
1997
• US insurers net income rose to $16.2
billion through 3rd quarter 2009
Bernard Madoff - $50 billion ponzi scheme
• Lloyds underwriters earn a record profit
of $5.81 Billion
Miracle on Hudson - U.S. Air
HIN1 - Swine Flu declared a global
Pandemic
Courtesy of R. Blades, John L. Wortham & Son, LLP
Factors Impacting Insurance Markets – Late 2008
Confidential

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.
24
Insurer Solvency Concerns – 2009 a ‘key year’
Confidential
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
25
Brief Market Observations - 2009
Confidential
 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
Confidential
“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
Loss Deterioration Over Time
Confidential
28
Energy Losses vs. Total Premium Income
Confidential
29
Confidential
Confidential
Confidential
Confidential
Confidential
Onshore
Energy Market
34
Targa Key Gulf Coast Facility Locations
Confidential
35
Venice Main Office Post-Katrina’s Visit
Confidential
36
Venice Main Office Post-Katrina’s Visit
Confidential
37
Today….

Confidential
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:
Confidential

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
39
Example of ‘Subscription’ Market Property Program
Confidential
A “PATCHWORK QUILT”
Onshore Property Program Physical Damage / Business Interruption$199,451.25
$400 MM
Lloyd’s of London
33% of
$200MM xs $200MM
Domestics
67% of
$200MM xs $200MM
Excludes
Named
Windstorm
$200 MM
$200 MM
Lloyd’s & Other
Companies
13% of
$100MM xs $100MM
Primary
Stand-Alone Terrorism
$787,710
10% of primary
$200MM
Domestics
77% of
$100MM xs $100MM
$1,156,816.50
$100 MM
Primary
Lloyd’s & Other Companies
100% of $200MM
Lloyd’s & Other Lloyd’s & Other
Companies
Companies
10% of
7.5% of
$200MM Primary $50MM xs $50MM
$50 MM
Primary
Lloyd’s of London
7.5% of
$50MM Primary
Lloyd’s & Other
Companies
77.5% of
$100MM Primary
Domestics
5% of
$100MM Primary
Includes
$12.5MM
Offshore
$5,836,250
Contingent
B.I.
Coverage
$7,980,227.75 *
Deductible: $1MM PD; 30 Days BI
Various Deductibles, including
Wind of
2% with $1MM min. and $10MM max.
Various
Deductibles
* Premium Protector:
100% part of $3MM primary
$550,000 addt’l annual premium
40
Pro-Forma View of Renewal Structure
Confidential
…..EVEN MORE “PATCHWORK”
Onshore Property Program Physical Damage / Business Interruption$199,451.25
$400 MM
Lloyd’s of London
33% of
$200MM xs $200MM
Domestics
67% of
$200MM xs $200MM
Excludes
Named
Windstorm
$200 MM
$200 MM
Lloyd’s & Other
Companies
13% of
$100MM xs $100MM
Primary
Stand-Alone Terrorism
$787,710
10% of primary
$200MM
Domestics
77% of
$100MM xs $100MM
$1,156,816.50
$100 MM
Primary
Lloyd’s & Other Companies
100% of $200MM
Lloyd’s & Other Lloyd’s & Other
Companies
Companies
10% of
7.5% of
$200MM Primary $50MM xs $50MM
$50 MM
Primary
Lloyd’s of London
7.5% of
$50MM Primary
Deductible: $1MM PD; 30 Days BI
Potentially Un-aggregated Windstorm (Provides
full coverage for Each and Every Storm)
Lloyd’s & Other
Companies
77.5% of
$100MM Primary
Domestics
5% of
$100MM Primary
Potentially
self-insure
May include
$10MM
Offshore
$5,836,250
Contingent
B.I.
Coverage
With
potentially
25-50%
Self-Insured
$7,980,227.75 *
Various Deductibles, including
Wind of
2% with $1MM min. and $10MM max.
Various
Deductibles
$10MM Per Occurrence Retention for Windstorm
* Premium Protector:
100% part of $3MM primary
$550,000 addt’l annual premium
Potentially Annual Aggregate Windstorm
(Any Loss Erodes Coverage Limit)
41
Targa’s 4/09 Renewal Structure – Very Painful!!
Confidential
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%
$100M
M
Layer P
$200MM xs $200MM
Brit/Jubilee
Order 7.5%
Layer O
$100MM xs $100MM
Glacier Re
Order 7.5%
Layer H
$25MM xs $75MM
Argenta/Glacier/AES
Order 20%
Layer W
$25MM xs $75MM
NWS Only
Berkley Order 7%
Layer L
Layer D
Layer C $50MM xs
Layer B
$50MM xs $50MM
$50MM xs $50MM
Swiss Re
$50MM Allianz/
Layer J
MAP
Order 10% $75MM xs
AEGIS NJ AIG/
Layer
Q
Layer T
Order 7.5%
Layer
G
Layer
R
(Including
Order 20% Validus
$25MM xs $50MM
$25MM $25MM xs $50MM
Layer
I
$25MM xs $50MM
Offshore CBI) Barbican
Order 18.5% $25MM xs $50MM
AES
NWS Only
100MMM
Ironshore
Jubilee
Layer K
Order 4.5%
Order 5% Advent Order 11.5%
Excluding
Layer S
Order
12.5%
Order
3%
Including Windstorm
$10MM CBI
(Excl. NWS)
Named
$100MM
Windstorm
Separate Limit
Only
Windstorm Lexington
to $100MM
Layer F (2)
Amlin
Layer F (1)
(Risk Only) Bermuda
$25MM xs $25MM
Order 7.5%
$25MM xs $25MM
Order 12%
NWS Only
Max Re & Montpelier
Catlin/Omega
Catlin/Omega
Order 15%
Order 12%
Order 7%
Layer A
$50MM
$25MM
Ascot et al
Layer V
Layer U
Order 51%(42% CBI)
$12.5MM xs $12.5MM
Layer E $25MM
$15MM xs $10MM
Montpelier
(includes CBI for Ironshore)
Order 5.333% Chaucer Order
Amlin & Ironshore
6.667%
NWS Only
Order 15%
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
1)
2)
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!!
Confidential
Sample View : Fewer ‘Layers’ – Larger % Lines by Insurers
400m
‘Risk’
Only
Layer C
Layer E
Layer G
Layer H
300m xs 100m
355m xs 45m
(pipelines s/l 75m)
325m xs 75m
(pipelines s/l 75m)
400m
Liberty – 10%
Aegis – 5%
Argenta – 7.50%
Ascot – 10%
TOTAL – 10%
100m
75m
45m
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%
Swiss Re – 10%
TOTAL – 12.50%
TOTAL – 10%
Full ‘Quota-Share’
TOTAL – 67%
TO GO – 33%
(25m NWS e&e)
(55m NWS e&e)
TOTAL –
87.50%
TO GO –
12.50%
Layer F
Primary 75m
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%
(75m NWS e&e)
Lexington Bda – 10%
(sub approval)
Ironshore – 20%
Hiscox – 3% (3% NWS
ded)
TOTAL – 33%
Deductibles
TOTAL –
42.50%
TO GO –
57.50%
(100m NWS e&e)
TOTAL –
96.50%
TO GO – 3.50%
Hurricane Hardening / Elevation Loss Mitigation
Net to Targa's
Interest
100%
Locations
PD Net
(after
PD Gross
deductible)
100%
(MM)
Spend on
Total Claim
Improvements
PD/BI
100%
(MM)
(MM)
Claim Value
Mitigated
(MM) 100%
ACTUAL HURRICANE
KATRINA CLAIM
(w/original actual
Katrina ownership %)
SE Louisiana
Total for
Katrina Like
Event
BI Net
(MM)
100%
$ 288.63
$
66.53
$
61.31
127.84
$
5.00
$
HURRICANE IKE
FORECAST
AS OF 02-09-09
SW Louisiana &
Texas Gulf
Coast
84.39
MITIGATION IMPACT
Net to Targa's Interest
PD Net
PD Gross
(after deductible)
100%
(MM)
BI Net
(MM)
Total Claim
PD/BI
(MM)
Mitigation of claim
resulting from Hardening
Improvements
(AS-IF No Change in
Ownership %)
100%
$
Confidential
$
(117.61) $
(29.17) $
(57.73) $
(86.60)
Mitigation of claim
resulting from Hardening
Improvements
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)
44
Confidential
Offshore
Energy Market
45
Storm Severity Damage Analysis
Confidential
Source: Watkins Syndicate
Excerpt: Willis Energy Market Review – March 2009
46
Hurricane Losses Difficult to Predict
Confidential
Excerpt: Willis Energy Market Review – March 2009
47
Some Additional Loss Statistics…
Confidential

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)
48
Offshore Market Issues Last Year – Early 2009

Confidential
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.
49
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.”
Confidential
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)
50
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
51
Confidential
Sheila Lum
Risk Analyst
52
What it means to be a CPCU…
Confidential
“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:


Ethics:


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.
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.
CPCU Courses
The following courses are required to earn the CPCU designation:

Five (5) “Foundation” courses:





CPCU 510
CPCU 520
CPCU 530
CPCU 540
CPCU 560
Foundations of Risk Management, Insurance, and Professionalism
Insurance Operations, Regulation, and Statutory Accounting
The Legal Environment of Insurance
Finance for Risk Management and Insurance Professionals
Financial Services Institutions
Three courses in either the “Commercial” or “Personal” concentration:

Commercial Concentration




CPCU 551 Commercial Property Risk Management and Insurance
CPCU 552 Commercial Liability Risk Management and Insurance
CPCU 553 Survey of Personal Risk Management, Insurance, and Financial Planning
Personal Concentration



CPCU 555 Personal Risk Management and Property-Liability Insurance
CPCU 556 Personal Financial Planning
CPCU 557 Survey of Commercial Risk Management and Insurance
Confidential
Types of Commercial Insurance
55

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
Confidential
Insurance Coverage Descriptions



Confidential
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.
Insurance Coverage Descriptions (cont.)
Confidential

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.)



Confidential
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.
Insurance Coverage Descriptions (cont.)




Confidential
Hull & Machinery - covers physical damage to vessels,
including their machinery and fuel, but not their cargo.
Ocean Cargo – covers loss to cargo onboard vessel.
Protection & Indemnity – covers shipowners against various
liability claims due to operating the insured vessel.
P&I War Risks – covers liability due to acts of war and warlike operations specifically described in the policy.
Insurance Coverage Descriptions (cont.)



Confidential
Non-Owned Aircraft – covers 3rd party liability for bodily
injury and property damage arising out of the use of a nonowned aircraft.
Business Auto – covers bodily injury and property damage if
an insured vehicle is involved in an accident.
Workers’ Compensation & Employers Liability – provides
coverage for benefits the insured employer is obligated to
pay under workers compensations laws and also covers the
employer if an injured employee sues for negligence in
protecting the worker.
Insurance Coverage Descriptions (cont.)
Confidential
Surety Bond- is a guaranty from one party (the Surety) that a second
party (the principal) will fulfill their obligations to third party (the
Obligee)


Principal: the one performing the work or fulfilling the obligation

Obligee: the one for whom the principal is obligated to perform

Surety: the company that is making the guarantee on behalf of the principal
to the Obligee
Differences between Surety Bonds and Insurance


Surety Bonds have three (3) parties to the contract

The principal is liable to the surety for losses paid by the surety

In theory, the surety should not sustain losses on surety contracts


Bankruptcy of the Principal is the key risk to the Surety company
The coverage period is indefinite
Confidential
Laura DeLeon
Risk Analyst
62
Nature of Risk
Confidential
63
Classes of Risk
Confidential
64
Basic Risk
Confidential
65
Certificate of Insurance – ‘Fronted GL Policy’
Confidential
66
Certificate of Insurance – ‘Self-Insured’ GL
Confidential
67
Recent Auto Accident – Targa Truck
Confidential
68
Third-Party Driver at Fault
Confidential
Truck that caused the accident
69
Targa’s Truck – A Total Loss
Confidential
70
Confidential
Alternatives to
Commercial
Insurance
71
‘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
Confidential
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
72
ACE ‘StormTracker’ Option
Confidential
Targa Resources: Storm tracker map showing 50 mile and 100 mile
radius
73
OIL Insurance Ltd – an Oil & Gas Property Mutual

Form of ‘mutualization’ for Property Risks

Limit purchased – up to $250MM

Attachment point – minimum of $20MM

Provides $750MM Aggregate to All Insureds

Provides Property Damage Coverage Only

Coverage very restrictive – not as broad as London markets

Only covers repairs to ‘mechanical completion’

Does not cover ‘expediting expenses’

Various other restrictions
Confidential
74
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?
Confidential
Product got ‘scrapped’ in mid ‘09 due to lack of interest
75
Confidential
Directors & Officers
Liability Market
76
A D&O Underwriter’s ‘Worst Nightmare’…..
Confidential
77
D&O Liability – Summary of Coverages

Side – A Coverage

Provides coverage for Insured Individuals IF the Organization is UNABLE to provide
Indemnification



Indemnity is typically provided for under the organizations By-Laws
Most common trigger of Side-A is ‘Bankruptcy’ of the Organization
Side – B Coverage

Provides coverage for Insured Individuals when the Organization is ABLE to provide
Indemnification



Confidential
Insurer reimburses the Organization for costs it expends to defend and indemnify the D’s & O’s
Most common coverage part utilized
Side – C Coverage (aka ‘Entity’ Coverage)

For Publicly Traded Companies: Provides coverage for the Organization itself for
Securities Claims Only

For Private and Non-Profit Companies: Provides coverage, with some limitation, to the
Organization itself
78
Key D&O Underwriting Factors – Examples…

Confidential
Stock Analysis

Stock Chart Analysis – 2 year ‘look-back’


Does stock perform in line with ‘peers’?
Have there been any large volume ‘drops’ or ‘jumps’ in the stock over the past year? Reason?
Does the company give ‘earnings guidance’?
 Current valuation in comparison to historic and peers






Price/Earnings Ratio
Price to Book Value
EBITDA Multiple
If stock dropped, we there ‘Insider Selling’ before the stock drop?
Financial Analysis

Does company have necessary ‘Cash on Hand’ and ‘Free Cash Flow’



Meet Debt / Other Corporate Obligations over next 3 years?
Cash flow – steady or volatile?
Use of cash flow?
Amount available - Existing Credit Facility
 Trending of Revenues / Gross Margins / Net Income – Outlook


Corporate Governance
Make-up of Board / Management Team – Independence & Quality
 Any related Third-Party Transactions?
 Management Salary in line with Competitors?
 CEO / CFO have prior public experience?
 Any recent changes to Senior Management or the Board of Directors?

79
Targa NGLS v. Peer MLP’s – 2 year ‘look-back’
Confidential
80
Targa’s D&O Renewal Expectations



Confidential
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!!!
81
Confidential
Excess
Liability
Market
82
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


Confidential
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

83
U.S. Excess Liability Market – Then to Now…
Confidential
…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
84
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)
Confidential
85
Confidential
86