This discussion includes references to non-GAAP financial measures as defined in Regulation G of the rules of the Securities and Exchange Commission ('SEC'). We present such non-GAAP financial measures, specifically, organic growth in commissions and fees, adjusted operating margin, adjusted operating income, adjusted net income from continuing operations and adjusted earnings per diluted share from continuing operations, as we believe such information is of interest to the investment community because it provides additional meaningful methods of evaluating certain aspects of the Company's operating performance from period to period on a basis that may not be otherwise apparent on a GAAP basis. Organic growth in commissions and fees excludes the impact of acquisitions and disposals, period over period movements in foreign exchange, legacy contingent commissions assumed as part of the HRH acquisition, and investment and other income from growth in revenues and commissions and fees. Adjusted operating income, adjusted operating margin, adjusted net income from continuing operations and adjusted earnings per diluted share from continuing operations are calculated by excluding the impact of certain specified items from operating income, net income from continuing operations, and earnings per diluted share from continuing operations, respectively, the most directly comparable GAAP measures. These financial measures should be viewed in addition to, not in lieu of, the consolidated financial statements for the year ended December 31, 2012.

This discussion includes forward-looking statements, including under the headings 'Executive Summary', 'Liquidity and Capital Resources', 'Critical Accounting Estimates' and 'Contractual Obligations'. Please see 'Forward-Looking Statements' for certain cautionary information regarding forward-looking statements and a list of factors that could cause actual results to differ materially from those predicted in those statements.

EXECUTIVE SUMMARY
Business Overview

We provide a broad range of insurance broking, risk management and consulting services to our clients worldwide and organize our business into three segments:
Global, North America and International.

Our Global business provides specialist brokerage and consulting services to clients worldwide arising from specific industries and activities including Aerospace; Energy; Marine; Construction, Property and Casualty; Financial and Executive Risks; Financial Solutions; Faber Global; Fine Art, Jewelry and Specie; Special Contingency Risks; and Reinsurance.

North America and International comprise our retail operations and provide services to small, medium and large corporations and the Human Capital practice, our largest product-based practice group, provides health, welfare and human resources consulting and brokerage services.

In our capacity as advisor and insurance broker, we act as an intermediary between our clients and insurance carriers by advising our clients on their risk management requirements, helping clients determine the best means of managing risk, and negotiating and placing insurance with insurance carriers through our global distribution network.

We derive most of our revenues from commissions and fees for brokerage and consulting services and do not determine the insurance premiums on which our commissions are generally based. Commission levels generally follow the same trend as premium levels as they are derived from a percentage of the premiums paid by the insureds. Fluctuations in these premiums charged by the insurance carriers can therefore have a direct and potentially material impact on our results of operations.

Due to the cyclical nature of the insurance market and the impact of other market conditions on insurance premiums, commission revenues may vary widely between accounting periods. A period of low or declining premium rates, generally known as a 'soft' or 'softening' market, generally leads to downward pressure on commission revenues and can have a material adverse impact on our commission revenues and operating margin. A 'hard' or 'firming' market, during which premium rates rise, generally has a favorable impact on our commission revenues and operating margin.

Market Conditions

The years 2005 through 2010 were generally viewed as soft market years across most of our product offerings and our commission revenues and operating margins throughout that period were negatively impacted, although in 2009 the market experienced modest stabilization in the reinsurance market and certain specialty markets.

Our North America, UK and Irish retail operations were particularly impacted by the weakened economic climate and continued soft market throughout 2009 and 2010 with no material improvement in rates across most sectors in these geographic regions. This resulted in declines in revenues in these operations, particularly amongst our smaller clients who have been especially vulnerable to the economic downturn.

In 2011, we saw some modest increases in catastrophe-exposed property insurance and reinsurance pricing levels driven by significant 2011 catastrophe losses including the Japanese earthquake and tsunami, the New Zealand earthquake, the mid-west US tornadoes and Thailand floods. The trend in rates noted in 2011 in catastrophe-exposed regions continues as insurance and reinsurance rates in such regions firmed or hardened during 2012. However, in general, we continued to be negatively impacted by the soft insurance market and challenging economic conditions across other sectors and most geographic regions.

There have been recent signs that the unprofitability of certain business lines such as property catastrophe and workers' compensation is slowly firming rates in those lines. However, we believe that, in the absence of a significant catastrophe loss or capital impairment in the industry, a universal turn in market rates is not likely to occur.

The outlook for our business, operating results and financial condition continues to be challenging due to the economic conditions within certain European Union countries, in particular, Greece, Ireland, Italy, Portugal and Spain. If the Eurozone crisis continues or further deteriorates, there will likely be a negative effect on our European business as well as the businesses of our European clients. A significant devaluation of the Euro would cause the value of our financial assets that are denominated in Euros to be reduced.

Financial Performance
Consolidated Financial Performance
2012 compared to 2011

Total revenues in 2012 of $3,480 million increased by $33 million, or 1 percent, compared to 2011, including a $59 million or 2 percent negative impact from movements in foreign exchange. Organic growth in commissions and fees of 3 percent was driven by our International and Global operations. Our North America operations reported a decline of 1 percent in commissions and fees, due to lower revenues generated by Loan Protector, a specialty business acquired as part of the HRH business, and the continued adverse impact of difficult economic conditions in the US.

Total expenses in 2012 of $3,689 million increased $808 million compared to 2011, primarily due to the recognition of a $492 million non-cash goodwill impairment charge related to our North American reporting unit, a $200 million write-off of unamortized cash retention awards following the decision to eliminate the repayment requirement of past awards, and a $252 million expense related to the accrual for 2012 cash bonuses due to be paid in 2013, that do not feature a repayment requirement.

Excluding these expenses, total operating expenses declined $136 million, or 5 percent, principally due to $180 million expense recognised in 2011 related to the Operational Review and favorable movements in foreign exchange partially offset by increases in salary and benefits expenses linked to annual pay reviews, new hires and investments in targeted businesses and geographies.

Net loss attributable to Willis shareholders from continuing operations was $446 million or a loss of $2.58 per diluted share in 2012 compared to a profit of $203 million or $1.15 per diluted share in 2011. The $649 million decrease in net income compared to 2011 primarily reflects the increase in total expenses described above and the $113 million charge to establish a valuation allowance against deferred tax assets in our U.S. operations, partially offset by the non-recurrence of the $131 million

Willis Group Holdings plc

post-tax cost in 2011 relating to the make-whole amounts on the repurchase and redemption of $500 million of our senior debt and the write-off of related unamortized debt issuance costs and by the revenue growth achieved during the year. Net income was also adversely impacted by a $7 million reduction in interest in earnings of associates, net of tax, mainly due to declining performance in our principal associate, Gras Savoye. 2011 compared to 2010

Despite difficult market conditions, total revenues in 2011 of $3,447 million increased by $115 million, or 3 percent, compared to 2010. This included organic growth in commissions and fees of 2 percent driven by our International and Global operations. Our North America operations reported a revenue decline of 4 percent, including a 4 percent decline in organic commissions and fees reflecting lower revenues generated by Loan Protector and the continued adverse impact of difficult economic conditions in the US.

Total expenses in 2011 of $2,881 million increased $302 million compared to 2010, primarily due to incremental expense relating to the 2011 Operational Review, a $22 million write-off of an uncollectible accounts receivable balance relating to periods prior to January 1, 2011, discussed later in this section, continued investment to support future growth, increased incentives amortization relating to our cash retention awards, reinstatement of salary reviews for all associates in March 2011 and 401(k) matching contributions for our US associates from January 2011, unfavorable foreign currency translation and an $11 million UK FSA regulatory settlement. These increases were partially offset by cost savings arising from implementation of the 2011 Operational Review, reduced pension expense of $24 million and the year-on-year $8 million benefit from the release of funds and reserves related to potential legal liabilities.

Net income attributable to Willis shareholders from continuing operations was $203 million or $1.15 per diluted share in 2011 compared to $455 million or $2.66 per diluted share in 2010. The $252 million reduction in net income compared to 2010 primarily reflects the increase in total expenses described above and the $131 million post-tax cost relating to the make-whole amounts on the repurchase and redemption of $500 million of our senior debt and the write-off of related unamortized debt issuance costs, partly offset by revenue growth achieved during the year. Net income was also adversely impacted by an $11 million reduction in interest in earnings of associates, net of tax, mainly due to declining performance in our principal associate, Gras Savoye.

Adjusted Operating Income, Adjusted Net Income from Continuing Operations and Adjusted Earnings per Diluted Share from Continuing Operations

Adjusted operating income, adjusted net income from continuing operations and adjusted earnings per diluted share from continuing operations are calculated by excluding the impact of certain items (as detailed below) from operating income, net income from continuing operations, and earnings per diluted share from continuing operations, respectively, the most directly comparable GAAP measures.

The following items are excluded from operating income and net income from continuing operations as applicable:

(i) the additional accrual recognized following the change in cash retention awards under our annual incentive program;

(ii) write-off of unamortized cash retention awards following decision to eliminate the repayment requirement on past awards;

(iii) goodwill impairment charge;

(iv) valuation allowance against deferred tax assets;

(v) write-off of uncollectible accounts receivable balance and associated legal fees arising in Chicago due to fraudulent overstatement of commissions and fees;

(vi) costs associated with the 2011 Operational Review;

(vii) significant legal and regulatory settlements which are managed centrally;

(viii) gains and losses on the disposal of operations;

(ix) insurance recoveries;

(x) foreign exchange loss from the devaluation of the Venezuelan currency; and

(xi) make-whole amounts on repurchase and redemption of senior notes and write-off of unamortized debt issuance costs.

We believe that excluding these items, as applicable, from operating income, net income from continuing operations and earnings per diluted share from continuing operations provides a more complete and consistent comparative analysis of our results of operations. We use these and other measures to establish Group performance targets and evaluate the performance of our operations. The Company also uses both adjusted earnings per diluted share from continuing operations and adjusted operating margin measures to form the basis of establishing and assessing components of compensation.

As set out in the tables below, adjusted operating margin at 21.6 percent in 2012, was down 90 basis points compared to 2011, while adjusted net income from continuing operations at $454 million was $28 million lower than in 2011. Adjusted earnings per diluted share from continuing operations was $2.58 in 2012, compared to $2.74 in 2011.

Willis Group Holdings plc


A reconciliation of reported operating (loss) income, the most directly
comparable GAAP measure, to adjusted operating income is as follows (in
millions, except percentages):
                                                                  Year Ended December 31,
                                                                2012          2011       2010
Operating (loss) income, GAAP basis                         $   (209 )      $  566     $  753
Excluding:
Additional incentive accrual for change in remuneration
policy (a)                                                       252             -          -
Write-off of unamortized cash retention awards (b)               200             -          -
Goodwill impairment charge (c)                                   492             -          -
India JV settlement (d)                                           11             -          -
Insurance recovery (e)                                           (10 )           -          -
Write-off of uncollectible accounts receivable balance (f)        13            22          -
Net loss (gain) on disposal of operations                          3            (4 )        2
2011 Operational Review (g)                                        -           180          -
FSA regulatory settlement (h)                                      -            11          -
Venezuela currency devaluation (i)                                 -             -         12
Adjusted operating income                                   $    752        $  775     $  767
Operating margin, GAAP basis, or operating income as a
percentage of total revenues                                    (6.0 )%       16.4 %     22.6 %
Adjusted operating margin, or adjusted operating income as
a percentage of total revenues                                  21.6  %       22.5 %     23.0 %


_________________

(b) Write-off of unamortized cash retention awards following decision to eliminate the repayment requirement on past awards.

(c) Non-cash charge recognized related to the impairment of the carrying value of the North America reporting unit's goodwill.

(d) $11 million settlement with former partners related to the termination of a joint venture arrangement in India. In addition, a $1 million loss on disposal of operations was recorded related to the termination.

(e) Insurance recovery related to the previously disclosed fraudulent activity in Chicago. See 'Correction of Commissions and Fees Overstatement Relating to 2011 and Prior Periods', below.

(f) Write-off of uncollectible accounts receivable balance relating to periods prior to January 1, 2011, see 'Correction of commissions and fees overstatement relating to 2011 and prior periods', below.

(g) Charge relating to the 2011 Operational Review, including $98 million of severance costs related to the elimination of approximately 1,200 positions for the full year 2011.

(h) Regulatory settlement with the UK Financial Services Authority (FSA).

(i) With effect from January 1, 2010 the Venezuelan economy was designated as hyper-inflationary. The Venezuelan government also devalued the Bolivar Fuerte in January 2010. As a result of these actions, the Company recorded a charge in other operating expenses to reflect the re-measurement of its net assets denominated in Venezuelan Bolivar Fuerte.

A reconciliation of reported net (loss) income from continuing operations and reported earnings per diluted share from continuing operations, the most directly comparable GAAP measures, to adjusted net income from continuing operations and adjusted earnings per diluted share from continuing operations is as follows (in millions, except per share data):

                                                         Year Ended                    Per diluted share
                                                        December 31,                Year Ended December 31,
                                                  2012      2011      2010         2012         2011       2010
Net (loss) income from continuing operations,
GAAP basis                                      $ (446 )   $ 203     $ 455     $   (2.58 )    $ 1.15     $ 2.66
Excluding:
Additional incentive accrual for change in
remuneration policy, net of tax ($77, $nil,
$nil) (a)                                          175         -         -          0.99           -          -
Write-off of unamortized cash retention awards,
net of tax ($62, $nil, $nil) (b)                   138         -         -          0.78           -          -
Goodwill impairment charge, net of tax ($34,
$nil, $nil) (c)                                    458         -         -          2.60           -          -
India JV settlement, net of tax ($nil, $nil,
$nil) (d)                                           11         -         -          0.06           -          -
Insurance recovery, net of tax ($4, $nil,
$nil) (e)                                           (6 )       -         -         (0.03 )         -          -
Write-off of uncollectible accounts receivable
balance, net of tax ($5, $9, $nil) (f)               8        13         -          0.05        0.08          -
Net loss (gain) on disposal of operations, net
of tax ($nil, $nil, $1)                              3        (4 )       3          0.02       (0.02 )     0.02
2011 Operational Review, net of tax ($nil, $52,
$nil) (g)                                            -       128         -             -        0.73          -
FSA regulatory settlement, net of tax ($nil,
$nil, $nil) (h)                                      -        11         -             -        0.06          -
Make-whole amounts on repurchase and redemption
of Senior Notes and write-off of unamortized
debt issuance costs, net of tax ($nil, $50,
$nil)                                                -       131         -             -        0.74          -
Venezuela currency devaluation, net of tax
($nil, $nil, $nil) (i)                               -         -        12             -           -       0.07
Deferred tax valuation allowance                   113         -         -          0.64           -          -
Dilutive impact of potentially issuable shares
(j)                                                  -         -         -          0.05           -          -
Adjusted net income from continuing operations  $  454     $ 482     $ 470     $    2.58      $ 2.74     $ 2.75
Average diluted shares outstanding, GAAP basis
(j)                                                173       176       171


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(a) Additional incentive accrual recognized following the replacement of annual cash retention awards with annual cash bonuses which will not feature a repayment requirement.

(b) Write-off of unamortized cash retention awards following decision to eliminate the repayment requirement on past awards.

(c) Non-cash charge recognized related to the impairment of the carrying value of the North America reporting unit's goodwill.

(d) $11 million settlement with former partners related to the termination of a joint venture arrangement in India. In addition, a $1 million loss on disposal of operations was recorded related to the termination.

(e) Insurance recovery related to the previously disclosed fraudulent activity in Chicago. See 'Correction of Commissions and Fees Overstatement Relating to 2011 and Prior Periods', below.

(f) Write-off of uncollectible accounts receivable balance relating to periods prior to January 1, 2011, see 'Correction of commissions and fees overstatement relating to 2011 and prior periods', below.

(g) Charge relating to the 2011 Operational Review, including $98 million pre-tax of severance costs related to the elimination of approximately 1,200 positions for the full year 2011.

(h) Regulatory settlement with the UK Financial Services Authority (FSA).

(i) With effect from January 1, 2010 the Venezuelan economy was designated as hyper-inflationary. The Venezuelan government also devalued the Bolivar Fuerte in January 2010. As a result of these actions the Company recorded a charge in other operating expenses to reflect the re-measurement of its net assets denominated in Venezuelan Bolivar Fuerte.

(j) Potentially issuable shares were not included in the calculation of diluted earnings per share, GAAP basis, because the Company's net loss from continuing operations rendered their impact anti-dilutive.

Willis Group Holdings plc

Goodwill Impairment

We completed our annual goodwill impairment test as of October 1, 2012 and concluded that an impairment charge was required to reduce the carrying value of the goodwill associated with the Company's North America reporting unit. The goodwill impairment charge for the North America reporting unit amounted to $492 million. There was no impairment for the Global and International reporting units, as the fair values of these units were significantly in excess of their carrying value.
Correction of commissions and fees overstatement relating to 2011 and prior periods

As previously disclosed, in early 2012 we identified through our internal financial control process and a subsequent internal investigation an uncollectible accounts receivable balance of approximately $40 million in Chicago from the fraudulent overstatement of Commissions and fees from the years 2005 to 2011.
We concluded that the total $40 million of overstatement does not materially affect our previously issued financial statements for any of the prior periods and we corrected the misstatement by recognizing a charge to Other operating expenses to write off the uncollectible receivable (a) of $13 million (including legal expenses) in the first quarter of 2012 and (b) of $22 million in the fourth quarter of 2011. In the fourth quarter 2011 we also reversed a $6 million balance of Commissions and fees which had been recorded during 2011 and $2 million of Salaries and benefits expense representing an over-accrual of production bonuses relating to the overstated revenue. During 2012, we have recorded within Other operating expenses a $10 million insurance settlement from insurers in respect of our claim under Group insurance policies, for compensation paid out in the years 2005 to 2010 on the fraudulently overstated revenues discussed above.

The employees in question, who have been terminated, were not members of Willis executive management nor did they play a significant role in internal control over financial reporting. Based on the results of our investigation, which has now been completed, we do not believe that any client or carrier funds were misappropriated or that any other business units were affected. We have enhanced our internal controls in relation to the business unit in question, including enhanced procedures over receipt of checks and application of cash, increased segregation of duties between the operating unit and the accounting and settlement function, and additional central sign off requirement on revenue recognition.

Headcount Reduction
In our initial assessment of the Company's organizational design, we have identified a number of positions that we can eliminate and leases we can exit to realize cost savings. The assessment is ongoing but will be completed in the first quarter of 2013 and is expected to result in the elimination of approximately 200 full-time positions.
As a result we expect to incur a pre-tax charge of approximately $35 million to $45 million in the first quarter of 2013. These actions are expected to deliver cost savings, primarily through headcount reduction, of approximately $20 million to $25 million in 2013, beginning in the second quarter, and annualized cost savings of approximately $25 million to $30 million. Cash retention awards
For the past several years, certain cash retention awards under the Company's annual incentive programs included a feature which required the recipient to repay a proportionate amount of the annual award if the employee voluntarily left the Company before a specified date, which was generally three years following the award. As previously disclosed, the Company made the cash payment to the recipient in the year of grant and recognized the payment in expense ratably over the period it was subject to repayment, beginning in the quarter in which the award was made. The unamortized portion of cash retention awards was recorded within 'other current assets' and 'other non-current assets' in the consolidated balance sheets.
The following table sets out the amount of cash retention awards made and the related amortization of those awards for the three years ended December 31, 2012.

                                                             Business discussion

                                                              Years ended December 31,
                                                           2012          2011         2010
                                                                     (millions)
. . .