Arthur J. Gallagher & Co.‌‌‌

CFO Commentary

January 26, 2017

Arthur J. Gallagher & Co.

Non-GAAP Measures and Forward-Looking Statements

Information Regarding Non-GAAP Measures

In this CFO Commentary, we have provided information regarding Adjusted EBITDAC Margin (for the brokerage and risk management segments) and Adjusted Net Earnings Attributable to Controlling Interests (for the corporate segment) presented on a forward-looking and historical basis. Adjusted EBITDAC margin is Adjusted EBITDAC divided by Adjusted Revenue (EBITDAC and Revenue, respectively, adjusted to exclude the impact of net gains realized from sales of books of business, acquisition integration costs, workforce related charges, lease termination related charges, acquisition related adjustments and the period-over-period impact of foreign currency translation, as applicable; acquisition integration costs are related to certain of our large acquisitions outside the scope of our usual tuck-in strategy, not expected to occur on an ongoing basis in the future once we fully assimilate the applicable acquisition). EBITDAC is net earnings before interest, income taxes, depreciation, amortization and the change in estimated acquisition earnout payables. Adjusted Net Earnings Attributable to Controlling Interests is net earnings attributable to controlling interests adjusted to exclude the impact of a litigation settlement and our home office move. Management believes that both Adjusted EBITDAC Margin and Adjusted Net Earnings Attributable to Controlling Interests are meaningful indicators of our operating performance. The adjustments made to each measure are intended to improve the comparability of our results between periods by eliminating the impact of items that have a high degree of variability and, in the case of the litigation settlement, are unlikely to recur during the next two years.

We have not reconciled the forward-looking Adjusted EBITDAC Margin information to the most directly comparable GAAP measure because certain material items that impact this measure, including the timing and exact amount of highly variable elements of revenue (such as acquired revenue), gains from the sales of books of business and acquisition related adjustments, have not yet occurred or are out of management's control or cannot be reasonably predicted. Accordingly, a reconciliation of forward-looking Adjusted EBITDAC Margin to the corresponding GAAP measure is not available without unreasonable effort. The non-GAAP information provided in this CFO Commentary should be used in addition to, but not as a substitute for, GAAP information.

Cautionary Statement Regarding Forward-Looking Statements

This CFO Commentary contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, for our brokerage and risk management segments, 2017 estimates of the impact of foreign currency on EPS and revenues, integration costs, workforce and lease termination costs, adjusted EBITDAC margin, amortization, depreciation, change in estimated earnout payables, acquisition rollover revenues, the adjusted effective tax rate, earnings from continuing operations attributable to non-controlling interests, run-off revenues in Australia and the UK and the weighted average multiple paid for acquisitions. These forward-looking statements also include, for our corporate segment, estimates of the net earnings attributable to controlling interests impact of various items, including interest and banking costs, Gallagher's clean energy investments, acquisition costs, corporate expenses, the impact of a litigation settlement and our home office move. We also make forward-looking statements relating to our clean energy investments, including the low and high ranges of potential 2017 annual after-tax earnings of the various clean energy plants.

Actual results may differ materially from the estimates set forth herein. Readers are therefore cautioned against relying on any of the forward-looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance. The statements regarding our clean energy investments and future effective tax rates could be materially impacted by various risk and uncertainties, including uncertainties related to political and regulatory risks, such as potential actions by Congress or challenges by the IRS eliminating or reducing the availability of tax credits under IRC Section 45 retroactively and/or going forward; the ability to maintain and find co-investors; the potential for divergent business objectives by co-investors and other stakeholders; plant operational risks, including supply-chain risks; utilities' future use of, or demand for, coal; the market price of coal; the costs of moving a clean coal plant; intellectual property litigation risks; and environmental risks. The value of our tax credits could be impacted by changes in the tax code as a result of the recent election in the United States. The other forward-looking statements referred to above could be materially impacted by various risks and uncertainties including changes in the economy (including due to the recent Brexit vote or in the wake of the recent U.S. election) or premium rates; changes in our acquisition pipeline; changes in our competitive position; and fluctuations in global exchange rates. Please refer to Gallagher's filings with the SEC, including Item 1A, "Risk Factors," of its most recently filed Annual Report on Form

10-K and subsequent Quarterly Reports on Form 10-Q, for a detailed discussion of these and other factors that could impact its forward-looking statements. Any forward-looking statement made by Gallagher in this press release speaks only as of the date on which it is made. Except as required by applicable law, Gallagher does not undertake to update the information included herein.

Page 1

ARTHUR J. GALLAGHER & CO. - CFO COMMENTARY - JANUARY 26, 2017

This communication is intended to be used in conjunction with, and should be read and understood in combination with, the commentary provided on the January 27, 2017 earnings call.

Other commentary is likely to be made during the earnings call. This communication is subject to, and you are urged to carefully read, the cautions set forth at the beginning of this communication.

ACTUAL

ESTIMATES ON DECEMBER 13, 2016

ESTIMATES ON JANUARY 26, 2017

BROKERAGE SEGMENT

Q1 2016

Q2 2016

Q3 2016

Q4 2016

Q4 2016

Full Year 2017

2017 Quarterly

Full Year 2017

Foreign Currency Impact on Earnings Per Share

(will be shown as an adjustment to 2015 & 2016 numbers)

$0.01

very little impact

very little impact

Q1 & Q2: $0.01 to $0.02

Q3 & Q4: very little impact

Approx. $0.04

Foreign Currency Impact on Revenues

(will be shown as an adjustment to 2015 & 2016 numbers)

$18 million

$15 million

$22 million

$31 million

$29 million

$50 million

Q1: $15 million Q2: $25 million

Q3 & Q4: very little impact

$50 million

Integration Costs Per Share

$0.06

$0.05

$0.04

$0.04

Approx. $0.04

very little impact

Q1 & Q2: $0.01 to $0.02 Q3 & Q4: $0.01

Approx. $0.05

Workforce & Lease Termination Costs Per Share

$0.02

$0.02

$0.04

Approx. $0.02

ncp

ncp

ncp

Adjusted EBITDAC Margin

Expanded 79 bpts over Q1 2015

Expanded 57 bpts over Q2 2015

Expanded 20 bpts over Q3 2015

Expanded 31 bpts over Q4 2015

difficult to expand margins if organic is below 3%

difficult to expand margins if organic is below 3%

Amortization - Recurring

$59 million pretax

$62 million pretax

$61 million pretax

$61 million pretax

$61 million pretax

$244 million pretax (1)

$63 million pretax

$252 million pretax (1)

Depreciation - Recurring

$14 million pretax

$14 million pretax

$14 million pretax

$15 million pretax

$14 million pretax

$56 million pretax

$15 million pretax

$60 million pretax

Change in Estimated Earnout Payable - Recurring

$4 million pretax

$4 million pretax

$4 million pretax

$4 million pretax

$4 million pretax

$16 million pretax

$5 million pretax

$20 million pretax

Rollover Revenues from Acquisitions

--------------------------------------------------------------------------------------------------------------------------------- See table on page 5 -------------------------------------------------------------------------------------------------------------------------------

Adjusted Effective Tax Rate

34%

35%

34%

35%

34% to 36%

34% to 36% (2)

34% to 36% (2)

34% to 36% (2)

Earnings from continuing operations attributable to noncontrolling interests

$4.5 million

very little impact

very little impact

very little impact

very little impact

ncp

Q1: $3 million to $5 million Q2 to Q4: very little impact

Approx. $5 million

RISK MANAGEMENT SEGMENT

Foreign Currency Impact on Earnings Per Share

(will be shown as an adjustment to 2015 & 2016 numbers)

very little impact

very little impact

very little impact

very little impact

Foreign Currency Impact on Revenues

(will be shown as an adjustment to 2015 & 2016 numbers)

$3 million

$2 million

very little impact

very little impact

very little impact

very little impact

Adjusted EBITDAC Margin

17.6%

17.1%

16.8%

17.9%

------------- Approx. 17.2% margin target -----------

------------------ Between 17.0% and 17.5% ----------------

Run-off Revenues in Australia & UK

(will be shown as an adjustment to 2015 numbers)

$5 million (Q1 2015)

$7 million (Q2 2015)

$4 million (Q3 2015)

very little impact

very little impact

none

none

none

Amortization - Recurring

$1 million pretax

$1 million pretax

$1 million pretax

$1 million pretax

$4 million pretax

$1 million pretax

$4 million pretax

Depreciation - Recurring

$7 million pretax

$7 million pretax

$7 million pretax

$7 million pretax

$7 million pretax

$28 million pretax

$7 million pretax

$28 million pretax

Adjusted Effective Tax Rate

37.6%

37.7%

38.4%

38.4%

38%

36% to 38% (2)

36% to 38% (2)

36% to 38% (2)

OTHER

Weighted Average Multiple of EBITDAC for Acquisition Pricing

7.0x

6.7x (Q2 2016)

6.8x (YTD)

7.6x (Q3 2016)

7.0x (YTD)

7.1x (Q4 2016)

7.0x (YTD)

Between 7.0x and 7.5x

similar to 2016

--------------------------- 7.0x to 8.0x ----------------------------

Notes

Yellow highlighted rows will be presented as adjustments to GAAP earnings

All commentary related to foreign currency is based on January 25, 2017 exchange rates. All information on this page assumes no future proposed or contemplated income tax laws in any tax jurisdiction.

(1) As we do more acquisitions, for every dollar we spend, increase amortization by about 1% of the purchase price per quarter.

(2) Assuming no U.S. federal corporate tax rate change. If the U.S. federal corporate tax rate dropped to 20% on January 1, 2017, both the Brokerage and Risk Management Segment effective tax rates would drop to a range of 24% to 26%.

ncp = no commentary provided

Page 2

ARTHUR J. GALLAGHER & CO. - CFO COMMENTARY - JANUARY 26, 2017

This communication is intended to be used in conjunction with, and should be read and understood in combination with, the commentary provided on the January 27, 2017 earnings call.

Other commentary is likely to be made during the earnings call. This communication is subject to, and you are urged to carefully read, the cautions set forth at the beginning of this communication.

CORPORATE SEGMENT

2016 Actual

Net Earnings

Pretax

Taxes

(Loss) Attributable

Earnings

Benefit

to Controlling

(Loss)

(Expense)

Interests

1st Quarter

Interest and banking costs

$ (26.3)

$ 10.5

$ (15.8)

(2)

Clean-energy related (3)

(33.9)

31.2

(2.7)

Acquisition costs

(1.7)

0.3

(1.4)

Corporate

(8.6)

2.3

(6.3)

Litigation settlement (4)

(4.7)

1.0

(3.7)

Home office early lease term and move (5)

-

Reported 1st quarter

(75.2)

45.3

(29.9)

Litigation settlement (4)

4.7

(1.0)

3.7

Home office early lease term and move (5)

-

-

-

Adjusted 1st quarter

$ (70.5)

$ 44.3

$ (26.2)

2nd Quarter

Interest and banking costs

$ (28.0)

$ 11.2

$ (16.8)

(2)

Clean-energy related (3)

(24.4)

73.6

49.2

Acquisition costs

(1.1)

0.2

(0.9)

Corporate

(10.0)

3.9

(6.1)

Litigation settlement (4)

(5.5)

1.1

(4.4)

Home office early lease term and move (5)

-

Reported 2nd quarter

(69.0)

90.0

21.0

Litigation settlement (4)

5.5

(1.1)

4.4

Home office early lease term and move (5)

-

-

-

Adjusted 2nd quarter

$ (63.5)

$ 88.9

$ 25.4

3rd Quarter

Interest and banking costs

$ (29.3)

$ 11.7

$ (17.6)

(2)

Clean-energy related (3)

(39.8)

79.1

39.3

Notes:

Acquisition costs

(0.9)

0.1

(0.8)

Corporate

(9.1)

3.4

(5.7)

(1) See important cautionary information on

Litigation settlement (4)

Home office early lease term and move (5)

(4.4)

0.9

(3.5)

-

page 1 of these exhibits regarding our use of

these forward-looking statements.

Reported 3rd quarter

(83.5)

95.2

11.7

Litigation settlement (4)

4.4

(0.9)

3.5

(2) On December 1, 2016, Gallagher entered into

Home office early lease term and move (5)

-

-

-

a note purchase agreement for a private

Adjusted 3rd quarter

$ (79.1)

$ 94.3

$ 15.2

placement of $100.0 million of senior unsecured

2017 Estimates (1)

Net Earnings (Loss)

Attributable to

Controlling Interests

Range

$ (19.0)

$ (18.0)

(3.0)

1.0

(2.0)

(1.0)

(7.0)

(6.0)

(4.5)

(4.5)

(3.0)

(2.0)

(38.5)

(30.5)

4.5

4.5

3.0

2.0

$ (31.0)

$ (24.0)

$ (19.0)

$ (18.0)

54.0

58.0

(2.0)

(1.0)

(6.0)

(5.0)

(4.5)

(4.5)

(4.5)

(3.5)

18.0

26.0

4.5

4.5

4.5

3.5

$ 27.0

$ 34.0

$ (19.0)

$ (18.0)

33.0

37.0

(2.0)

(1.0)

(6.0)

(5.0)

-

-

(1.5)

(1.0)

4.5

12.0

-

-

1.5

1.0

$ 6.0

$ 13.0

$ (19.0)

$ (18.0)

33.0

37.0

(2.0)

(1.0)

(6.0)

(5.0)

-

-

-

-

6.0

13.0

-

-

-

-

$ 6.0

$ 13.0

$ (76.0)

$ (72.0)

117.0

133.0

(8.0)

(4.0)

(25.0)

(21.0)

(9.0)

(9.0)

(9.0)

(6.5)

(10.0)

20.5

9.0

9.0

9.0

6.5

$ 8.0

$ 36.0

4th Quarter

notes.

Interest and banking costs

$ (29.2)

$ 11.7

$ (17.5)

(2)

Clean-energy related (3) Acquisition costs

(35.1)

(0.9)

63.7

0.1

28.6

(0.8)

(3) Pretax earnings are presented net of

Corporate

(15.3)

10.4

(4.9)

Litigation settlement (4)

(5.6)

1.1

(4.5)

Home office early lease term and move (5)

-

-

-

(4) During the third quarter of 2015, Gallagher

Reported 4th quarter

(86.1)

87.0

0.9

settled litigation against certain former U.K.

amounts attributable to noncontrolling interests.

Litigation settlement (4) 5.6 (1.1) 4.5

Home office early lease term and move (5) - - -

executives and their advisors for a pretax gain of

$31.0 million ($22.3 million net of costs and taxes). Incremental expenses that arose in

Adjusted 4th quarter $ (80.5)

$ 85.9 $

5.4

connection with this matter will result in after-

YTD

tax charges of up to $4.5 million per quarter

Interest and banking costs

$ (112.8)

$ 45.1

$ (67.7)

(2)

through June 30, 2017.

Clean-energy related (3)

(133.2)

247.6

114.4

Acquisition costs

(4.6)

0.7

(3.9)

Corporate

(43.0)

20.0

(23.0)

(5) During 2017, we will be relocating our

Litigation settlement (4)

(20.2)

4.1

(16.1)

corporate office headquarters to a nearby

Home office early lease term and move (5)

-

-

-

suburb of Chicago. One-time move and lease

Reported YTD

(313.8)

317.5

3.7

abandonment charges are expected in first,

Litigation settlement (4)

20.2

(4.1)

16.1

second and third quarters of 2017.

Home office early lease term and move (5)

-

-

-

Adjusted YTD

$ (293.6)

$ 313.4

$ 19.8

Page 3

Arthur J.Gallagher & Co. published this content on 26 January 2017 and is solely responsible for the information contained herein.
Distributed by Public, unedited and unaltered, on 26 January 2017 21:49:06 UTC.

Original documenthttp://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MzYzODc3fENoaWxkSUQ9LTF8VHlwZT0z&t=1&cb=636210477564284397

Public permalinkhttp://www.publicnow.com/view/44FC36F701F26C337C0A8BF7B6BF159E58A10837