I N V E S TO R P R E S E N TAT I O N A U G U S T, 2 0 1 4
Certain information in this presentation is forward-looking and related to anticipated financial performance, events and strategies. When used in this context, words such as will, anticipate, believe, plan, intend, target and expect or similar words suggest future outcomes. Forward-looking statements relate to, among other things, Element Financial Corporation s ( Element ) objectives and strategy; future cash flows, financial condition, operating performance, financial ratios, projected asset base and capital expenditures; Element s anticipated dividend policy; anticipated cash needs, capital requirements and need for and cost of additional financing; future assets; demand for services; Element s competitive position; and anticipated trends and challenges in Element s business and the markets in which it operates. The forward-looking information and statements contained in this presentation reflect several material factors and expectations and assumptions of Element including, without limitation: that Element will conduct its operations in a manner consistent with its expectations and, where applicable, consistent with past practice; the general continuance of current or, where applicable, assumed industry conditions; the continuance of existing (and in certain circumstances, the implementation of proposed) tax and regulatory regimes; certain cost assumptions; the continued availability of adequate debt and/or equity financing and cash flow to fund its capital and operating requirements as needed; and the extent of its liabilities. Element believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable but no assurance can be given that these factors, expectations and assumptions will prove to be correct. By their nature, such forward-looking information and statements are subject to significant risks and uncertainties, which could cause the actual results and experience to be materially different than the anticipated results. Such risks and uncertainties include, but are not limited to, operating performance, regulatory and government decisions, competitive pressures and the ability to retain major customers, rapid technological changes, availability and cost of financing, availability of labour and management resources and the performance of partners, contractors and suppliers. Readers are cautioned not to place undue reliance on forward-looking statements as actual results could differ materially from the plans, expectations, estimates or intentions expressed in the forward-looking statements. Except as required by law, Element disclaims any intention and assumes no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. 2
North American Equipment Finance Experts Element Financial Post PHH Arval $10.0 billion total assets $3.8 billion market capitalization TSX composite index member FTSE Global Equity index member 1,750 employees 100,000+ customers Head Office Toronto, ON US Philadelphia, PA and Sparks, MD 3
Element s Business Model Funding partners align their investment objectives Life Insurance Companies Pension Funds Banks Duration Currency Interest Rate Validating investments for annuities, structured settlements and group life and health products Alternative asset class not correlated to commercial or residential real estate Capital friendly alongside Element s lending criteria Secured lending 48 to 60 month fully amortizing Manufacturer remarketing support High barriers to entry Service differentiation 4
Gross Average Yield 850 Element s Business Model basis points of average finance receivables (indicative) Average Cost of Funds -350 Average OPEX -220 Loss Provision (20 year average) -40 Tax Provision (deferred for 20 years) -90 Return on Assets =150 5
Growth Drivers VENDOR FINANCE AVIATION FINANCE RAILCAR FINANCE FLEET MANAGEMENT 6
Total Assets Element s Growth PHH Pro Forma $10 Billion 2011 2012 2013 2014 $47 Million $428 Million $1.8 Billion $4.2 Billion Toronto Stock Exchange listing under EFN Alter Moneta Capital Aerospace Team TLS Fleet Co-Active Capital Partners Nexcap Finance EFN added to the TSX Composite Index GE Capital Canadian Fleet Services Bush Truck Leasing GE Capital Helicopter Portfolio EFN added to the FTSE Global Equity Index Trinity Industries Alliance expansion Celadon Group Bridger CargoJet Trinity Industries Alliance PHH Arval 7
2014 YTD Milestones 2014 January February March April May June July Significant achievements Targets $3.8 billion in originations for 2014 Completed purchase of US$400 million of leased railcars from Trinity Announced $997 million of originations for Q4-2013 Issued $125 million of cumulative 5-year rate rest preferred shares EFN added to the FTSE Global Equity Index Completed purchase of US$118 million of leased railcars from Trinity Entered multi-year equipment financing agreement with US-based Celadon Accessed rated ABS market for US$340 million to fund rail assets Signed US$220 million transportation equipment financing facility with Dallas-based Bridger Signed US$ 1.4 billion agreement to acquire PHH Arval at 1.56 X adjusted book value 10+ percent accretive in 2015 and 2016 with leverage at 3.6:1 on closing Closed PHH Arval acquisition and commenced 6 month integration process Hired structured finance team to drive incremental fee income from Rail and Aviation verticals 8
Growth Drivers 2012 Results 2013A 2014E 2015E 2016E 20127E US GDP 2.8% (Real) 1.9% 2.8% 3.1% 3.1% 2.4% US Equipment Investment Equipment Finance Volume 8.0% Growth 16.4% Growth Average equipment replacement cycle of 8 years Growth led by various transportation segments including Air, Rail & Autos Propensity to finance increasing with competing calls on capital US Commercial Finance is one of the fastest growing financial services sectors Source: US Federal Reserve Bank of Philadelphia 9
2014 Growth Drivers COMMERCIAL & VENDOR FINANCE AVIATION FINANCE RAILCAR FINANCE FLEET MANAGEMENT Continued US commercial and industrial recovery Continued US commercial and industrial recovery Continued US commercial and industrial recovery Deferred vehicle replacement cycle Deferred equipment replacement cycle Favourable C$/US$ exchange for Canadian equipment manufacturers Demand for energy to fuel US economic growth Retrenchment of key competitors Engagement of US-based helicopter team Deep relationships with key manufacturers Demand for energy to fuel US economic growth Deep relationships with Trinity Industries, leading NA railcar manufacturer Opportunities to acquire third party portfolios Strong growth in 2009/2010 fleet registrations drive 2014 replacements Expansion of fleet management services offering Continued commercial and industrial recovery in Canada 10
2014 Growth Drivers COMMERCIAL & VENDOR FINANCE AVIATION FINANCE RAILCAR FINANCE FLEET MANAGEMENT 11
US Commercial & Vendor Originations 339% CAGR 12
millions Balance Sheet Capacity $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $- Unsecured Convertible Debt Warehouse Facilities Total Sources of Liquidity Committed Funding Facilities Senior Facilities 3.57:1 $9,729 Q4-2011 Q4-2012 Q1-2013 Q2-2013 Q3-2013 Q4-2013 Q1-2014 Q2-2014 Q2-2014 (incl. PHH) 4 3.5 3 2.5 2 1.5 1 0.5 0 13
Allowance for Credit Losses ($,000 s) Portfolio Quality Contractual Delinquencies As a % of Finance Receivables June 30, 2014 Allowance for Credit Losses as a % of Finance Receivables 99.6% 0.4% Current Past Due 14
PHH Arval Acquisition F L E E T M A N A G E M E N T 15
A North American Fleet Management Leader Founded in 1946 US$4.6 billion in total assets as at March 31, 2014 US$4 billion net investment in fleet leases Annual originations of US$1.7 billion in 2013 12% CAGR pre-tax income growth from 2009 to 2013 Strong management team Exceptional customer service culture Pristine credit quality Efficient established funding sources PHH Arval Transaction 16
Arval Global Alliance Canada USA Comercial Ariete Mexico Mareauto S.A. Colombia Ecuador Peru Austria Belgium Brazil Czech Republic China Denmark Finland France Germany Greece Hungary India Italy Luxembourg Morocco Netherlands Poland Portugal Romania Russia Slovakia Spain Switzerland Turkey United Kingdom Avis Fleet Services Botswana Ghana Lesotho Mozambique Namibia South Africa Swaziland Japan Japan Thailand Australia New Zealand Ireland 17
Transaction Highlights Transformative Transformational benefits Benefits Increased scale Establishes Element as a North American $10 billion asset company on closing Balance sheet scale allows Element to source/keep larger deals across all verticals Adds stability North American fleet business delivers longterm stable cash flows Visibility on cash flow increases from 3 years to +10 years Reduces risk North American fleet customers are Fortune 500 credits < 3 bps of credit losses over last 10 years 18 Accelerates growth Delivers minimum 10% accretion on 2015 Operating EPS of $0.88 No taxes payable until 2030 + Improves profitability Transaction immediately increases leverage Provides documented pathway to investment grade ratings and lower cost of capital (debt and equity
Transaction Highlights with some acceptable costs Defers achievement of target ROE by 12 months but improves economics on arrival Brings convertible debt into the capital structure but minimizes common issuance Leverage not immediately optimized but delivers 200% increase on closing and optimizes in 2015 19
Three Accretion Drivers 1. PHH Arval Acquisition 2. Increased Balance Sheet Scale 3. Reduced Funding Costs = ROA Leverage ROE 20
1. PHH Arval Acquisition Identified accretion drivers $20 million annualized synergies by end of 2014 Public company costs, corporate allocations and Canadian duplication 10% increase in finance assets Growth of portfolios and increased penetration of card programs Significant opportunity to add other assets (material handling equipment/trucks) to PHH client customer base 21
1. PHH Arval Acquisition Added and potential accretion drivers not factored into our model Additional cost savings beyond $20 million Additional portfolio growth beyond forecast 10% increase Expand Chesapeake and FLRT funding 22
Larger scale drives growth across all verticals 2. Increased Balance Sheet Scale Railcar Finance, Aviation Finance, Vendor Finance to benefit from balance sheet scale Raises overall transaction size limits and single obligor limits Higher commitment capacity to take deals off the street and deliver commitments and advisory services More on balance sheet financing with annuity income versus lower up front returns from syndication Before After 23 Equity $1.6 billion $2.8 billion * Single Obligor Limit $99mln/name $168mln/name * Excludes overallotment option
2. Increased Balance Sheet Scale Transaction examples RAILCAR FINANCE Bridger $220 million driven by railcar expertise VENDOR FINANCE Celadon $100 million driven by size, scope and products AVIATION FINANCE CargoJet $100 million driven by aviation expertise 24
3. Reduced Funding Costs Update unpublished Kroll rating review post Trinity and PHH Issue $400 million private placement with at least NAIC 2 rating Security release occurs automatically Debt Cost of Funds (Spreads) Bank Lines Before IG After IG Comparables Fully secured Borrowing Base +200bps Unsecured +150bps AirLease T+100bps Fleet Securitization 150bps 70 80bps PHH Fleet Equity (Coupon) Before IG After IG Comparables Preferred Shares 6.40% - 6.50% 4.25% - 5.0% (P-3,pfd-3) P-3, pfd3 25
3. Reduced Funding Costs Common 825,000 Convertible 300,000 Preferred 125,000 Tangible Leverage Bank Covenant Rating Agencies Pro Forma March 31, 2014 2.9 3.7 Pro Forma June 30, 2014 3.2 3.9 Pro Forma December 31, 2014 3.4 4.3 Pro Forma December 31, 2015 4.1 5.1 Pro Forma December 31, 2016 4.3 5.5 26
Timing of achieving target ROE deferred 12 months 2015 2016 2017 Before 11.0% 13.1% 14.5% After 10.0% 12.6% 14.5% However, tax deferral increased to 20+ years 2015 2016 Pre Tax EPS $1.33 $1.87 Post Tax EPS $0.95 $1.35 ROE & EPS Impact 27
Leverage & ROA Drives ROE Annual Return on Average Assets Leverage 2.3% 2.5% 2.75% 3:1 9.2% 10.0% 11.0% 4:1 11.5% 12.5% 13.8% 5:1 13.8% 15.0% 16.5% 6:1 16.1% 17.5% 19.3% 28
2014 Outlook 29
2014 Originations 4,500 4,000 2013 2014 Outlook * Prior to PHH Arval Acquisition 3,500 3,000 2,500 2,000 1,500 1,000 500 - $ millions Fleet Management Aviation Commercial & Vendor Railcar TOTAL 30
North American Portfolio Distribution Canada USA Portfolio Mix 2012 Actual 81% 19% 2013 Actual 74% 26% 2014 Outlook* 58% 42% Originations 2012 Actual 98% 2% 2013 Actual 69% 31% 2014 Outlook* 50% 50% * Prior to PHH Arval Acquisition 31
Growth Trajectory Total Assets $ billions ~ 20.0 16.9 12.2 $ billions 3.5 2013 2014 2015 2016 32
Key Performance Indicators Q3-2013 Q4-2013 Q1-2014 Q2-2014 Financial Revenue 857 bps 830 bps 790 bps 791 bps Financial Expense 269 bps 272 bps 255 bps 242 bps Average Net Financial Margin 588 bps 558 bps 535 bps 549 bps Operating Expense 249 bps 226 bps 222 bps 219 bps Total Originations $0.4 billion $0.9 billion $1.1 billion $0.8 billion Pipeline Aviation & Rail $2.0 billion $2.0 billion $2.4 billion $2.0 billion 33
Q U E S T I O N S