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Rating Action:

Moody’s assigns Baa2 issuer rating to Arthur J. Gallagher, stable outlook

08 March 2021


New York , March 8, 2021 – Moody's Investors Service has assigned a Baa2 long-term issuer rating to insurance broker Arthur J. Gallagher & Co. (Gallagher, NYSE: AJG). Moody's has also assigned a stable rating outlook for Gallagher.

RATINGS RATIONALE

Gallagher's rating reflects its strong US and international market presence in insurance brokerage and risk management services; its good diversification across product lines, client types and geographic regions; and its healthy profit margins and free cash flow, according to Moody's. The rating agency expects Gallagher to continue expanding through a combination of organic growth and acquisitions, which it funds through a mix of cash and stock to help manage its financial leverage. Credit challenges for Gallagher include acquisition integration risk, potential liabilities from errors and omissions in the delivery of professional services, and managing enterprise risk across multiple products and jurisdictions. The assignment of the new rating on Gallagher takes into account its governance as part of Moody's environmental, social and governance considerations.

Gallagher ranks as the fourth-largest insurance broker in the US and globally based on revenue. While it is more US focused than the three larger brokers, it has international operations mainly in the UK, Australia, Canada, New Zealand and Bermuda, and a correspondent network spanning many other countries. Gallagher reports its results through three segments: brokerage, risk management and corporate. The brokerage segment includes retail operations with diversified product and client practice groups, plus wholesale operations that help affiliated and unaffiliated retail brokers place specialized insurance coverages, often with excess and surplus lines insurers. Gallagher's risk management segment ranks among the largest independent claims servicers, and its clients include Fortune 1000 companies, large middle-market companies, insurance carriers and other organizations.

Gallagher's brokerage segment generated organic revenue growth of 3% in 2020, including low-single-digit growth in each quarter. The risk management segment produced an organic revenue decline of about 3% for the year, reflecting good growth in the first quarter, significant declines in the second and third quarters, and a breakeven result in the fourth quarter. Moody's expects that Gallagher's overall organic growth will rise toward its historical mid-single-digit range, helped by rising rates in commercial property & casualty insurance, including excess and surplus lines, and by the recovering economy.

Moody's estimates that Gallagher has a debt-to-EBITDA ratio of about 3x, (EBITDA - capex) interest coverage in the mid-to-high single digits, and a strong double-digit free-cash-flow-to-debt ratio. These metrics incorporate Moody's adjustments for leases, pensions and contingent earnout liabilities. The rating agency expects gradual improvement in these metrics as Gallagher completes its clean energy investments, which produce negative EBITDA, and begins to monetize the related deferred tax asset.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Factors that could lead to an upgrade of Gallagher's rating include: (i) debt-to-EBITDA ratio below 2.5x, (ii) (EBITDA - capex) coverage of interest above 8x, and (iii) net profit margin above 10%.

Factors that could lead to a rating downgrade include: (i) debt-to-EBITDA ratio above 3.2x, (ii) (EBITDA - capex) coverage of interest below 5x, or (iii) net profit margin below 7%.

The principal methodology used in this rating was Insurance Brokers and Service Companies published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121967 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Based in Rolling Meadows, Illinois, Gallagher is an international insurance brokerage and risk management services firm with operations in 49 countries plus client service capabilities in more than 150 countries through a network of correspondent brokers and consultants. The company generated revenue of $7.0 billion and net income attributable to controlling interests of $819 million in 2020. Gallagher had stockholders' equity of $6.2 billion at year-end 2020.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004 .

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406 .

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Bruce Ballentine
VP-Sr Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Sarah Hibler
Associate Managing Director
Financial Institutions Group
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Releasing Office :
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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