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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Aon Corporation
(Exact Name of Registrant as Specified in its Charter)

        Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý        No o

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes ý        No o

        Number of shares of common stock outstanding:

PART 1

FINANCIAL INFORMATION

Aon CORPORATION
Condensed Consolidated Statements of Financial Position

See the accompanying notes to the condensed consolidated financial statements.

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Aon Corporation
Condensed Consolidated Statements of Income
(Unaudited)

See the accompanying notes to the condensed consolidated financial statements.

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Aon CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See the accompanying notes to condensed consolidated financial statements.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Statement of Accounting Principles

        The financial results included in this report are stated in conformity with accounting principles generally accepted in the United States and are unaudited but include all normal recurring adjustments which the Registrant ("Aon") considers necessary for a fair presentation of the results for such periods. These interim figures are not necessarily indicative of results for a full year as further discussed below.

        Refer to the consolidated financial statements and notes in the Annual Report on Form 10-K for the year ended December 31, 2002 for additional details of Aon's financial position, as well as a description of the accounting policies which have been continued without material change.

        Certain amounts in prior year's condensed consolidated financial statements relating to segments have been reclassified to conform to the 2003 presentation.

Stock Compensation Plans

        Aon applies Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation expense has been recognized for its stock option plan as the exercise price of the options equaled the market price of the stock at the date of grant. Compensation expense has been recognized for stock awards based on the market price at the date of the award.

        The following table illustrates the effect on net income and earnings per share if Aon had applied the fair value recognition provision of Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

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        The fair value per share of options and awards granted is estimated as $3.21 and $17.44 in first quarter 2003 and $6.36 and $29.81 in first quarter 2002, respectively, on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions.

        The pro forma information reflected above may not be representative of the amounts to be expected in future years as the fair value method of accounting contained in FASB Statement No. 123 has not been applied to options and awards granted prior to January 1995.

Endurance Warrants

        In December 2001, Aon's underwriting subsidiaries invested $227 million in Endurance Specialty Holdings, Ltd., formerly known as Endurance Specialty Insurance Ltd. (Endurance), a Bermuda-based insurance and reinsurance company formed to provide additional underwriting capacity to commercial property and casualty insurance and reinsurance clients. In conjunction with this common stock investment, Aon received approximately 4 million stock purchase warrants which allow Aon to purchase additional Endurance common stock through December 2011. These warrants meet the definition of a derivative as described in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which requires them to be recorded in the financial statements at fair value, with changes in fair value recognized in earnings on a current basis.

        Through December 31, 2002, these warrants had been carried at fair value, which approximated their original cost. Fair value had been estimated taking into consideration the original cost, subjectivity in determining the value of the underlying shares since Endurance was not yet publicly traded, illiquidity of the underlying shares, recent capital transactions in 2002 between Endurance and its shareholders for the warrants and the general uncertainty regarding the ability of Endurance to access the public markets.

        In first quarter 2003, Endurance completed its initial public offering, which provided a market value for the underlying shares and removed much of the uncertainty regarding the fair value of Endurance and the warrants. Aon obtained a third-party independent valuation of these warrants as of March 31, 2003. The independent valuation experts utilized the Black-Scholes option-pricing model to determine that the warrants had a fair value of approximately $45 million pretax.

        The valuation assumptions used in the model were as follows:

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        The spot and exercise prices are reduced by expected future dividends.

        The $45 million (pretax) increase in value was recognized as investment income in the Corporate and Other segment in first quarter 2003. The future value of the warrants may vary considerably from the value at March 31, 2003 due to the inherent volatility of the underlying shares, as well as the passage of time and changes in other factors that are employed in the valuation model.

2. Accounting and Disclosure Changes

        In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Statement No. 146 supercedes Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Statement No. 146 was effective January 1, 2003. This statement did not have a material impact on Aon's consolidated financial statements.

        In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). Guarantees meeting the characteristics described in FIN 45 are required to be initially recorded at fair value, which is different from the general current practice of recording a liability only when a loss is probable and reasonably estimable, as those terms are defined in FASB Statement No. 5, Accounting for Contingencies. FIN 45's disclosure requirements are applicable for each guarantee, or each group of similar guarantees, even if the likelihood of the guarantor having to make payments is remote.

        FIN 45's disclosure requirements were effective for financial statements ending after December 15, 2002. FIN 45's initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Implementation of this Interpretation did not have a material impact on Aon's consolidated financial statements.

        In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). This Interpretation clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 identifies circumstances in which the consolidation decision should be based on voting interests and other circumstances in which the consolidation decision should be based on variable interests. FIN 46's disclosure requirements were effective for financial statements issued after January 31, 2003.

        The provisions of FIN 46 are effective for variable interest entities created after January 31, 2003, and are effective for variable interest entities existing prior to that date beginning July 1, 2003. Aon has not yet determined the effect, if any, this statement will have on the consolidated financial statements.

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3. Income Per Share

        Income per share is calculated as follows:

4. Comprehensive Income

        The components of comprehensive income, net of related tax, for the first quarter ended March 31, 2003 and 2002 are as follows:

        The components of accumulated other comprehensive loss, net of related tax, are as follows:

5. Business Segments

        Aon classifies its businesses into three operating segments based on the types of services and/or products delivered. There is also a fourth segment, Corporate and Other. The Risk and Insurance Brokerage Services segment (formerly called Insurance Brokerage and Other Services) consists primarily of Aon's retail, reinsurance and wholesale brokerage operations, as well as related insurance services, including claims services, underwriting management, captive insurance company management services and premium financing. The Consulting segment is Aon's human capital consulting organization which utilizes five major practices: employee benefits, compensation, management consulting, communications and outsourcing. The Insurance Underwriting segment provides specialty insurance products including supplemental accident, health and life insurance coverages, extended

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warranty and select property and casualty insurance products. Corporate and Other segment revenue consists primarily of investment income from equity, fixed maturity and short-term investments that are assets primarily of the insurance underwriting subsidiaries that exceed policyholders liabilities and which may include non-income producing equities, valuation changes in limited partnership investments, and income and losses on disposals of all securities, including those pertaining to assets maintained by the operating segments. Corporate and Other expenses include general expenses, including administrative and certain information technology costs, and interest expense. Corporate and Other segment revenue and expenses also include the results of Aon's auto finance operations, as discussed below.

        The business units below have been reclassified among segments as follows:

•

Certain administration and marketing services relating to our insurance underwriting operations, previously included in the Risk and Insurance Brokerage Services segment, were reclassified into the Insurance Underwriting segment.



•

Auto finance service business, previously included in the Risk and Insurance Brokerage Services segment, were reclassified into the Corporate and Other segment. Aon has decided to wind down the existing service obligation for this business, which is expected to be substantially finished by the end of 2004.

        No changes or restatements have been made to prior period earnings per share or financial statements (income statement, balance sheet, or cash flow statement) as reported under accounting principles generally accepted in the United States as a result of the segment modifications. For the segment disclosures only, three of the segments will have reclassified revenue and pretax income beginning in first quarter 2003.

        The accounting policies of the operating segments are the same as those described in Aon's Annual Report on Form 10-K for the year ended December 31, 2002, except that the disaggregated financial results have been prepared using a management approach, which is consistent with the basis and manner in which Aon senior management internally disaggregates financial information for the purposes of assisting in making internal operating decisions. Aon evaluates performance based on stand-alone operating segment income before income taxes and generally accounts for inter-segment revenue as if the revenue were to third parties, that is, at current market prices.

        Revenues are attributed to geographic areas based on the location of the resources producing the revenues.

        Revenue for Aon's segments follows:

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        Aon's operating segments' geographic revenue and total income before tax follows:

(1)

Includes $5 million of expenses related to the previously planned divestiture of the insurance underwriting businesses.

        Selected information for Aon's Corporate and Other segment follows:

(1)

Includes impairment write-downs of $28 million and $8 million for the first quarters ended March 31, 2003 and 2002, respectively.

(2)

Includes $11 million and $10 million of costs for the first quarters ended March 31, 2003 and 2002, respectively, related to the auto finance service business.

6. Goodwill and Other Intangible Assets

        In accordance with FASB Statement No. 142, Aon's goodwill is no longer amortized. The costs of other intangible assets are amortized over the lives of the assets, which range from one to ten years. Goodwill and other intangible assets are allocated to various reporting units, either at the operating segment level or one reporting level below the operating segment. Statement No. 142 requires Aon to

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compare the fair value of the reporting unit to its carrying amount on an annual basis to determine if there is potential impairment of goodwill. If the fair value of the reporting unit is less than its carrying value, an impairment loss would be recorded to the extent that the fair value of the goodwill within the reporting unit is less than the carrying value. Fair value is estimated based on various valuation metrics.

        The changes in the carrying amount of goodwill for the quarter ended March 31, 2003 are as follows:

        Amortizable intangible assets by asset class follow:

        Amortization expense for amortizable intangible assets for the years ended December 31, 2003, 2004, 2005, 2006 and 2007 is estimated to be $58 million, $47 million, $41 million, $32 million and $13 million, respectively.

7. Business Combinations

        For the first quarter 2003, Aon made payments of $2 million on restructuring charges and purchase accounting liabilities relating to business combinations.

        In 1996 and 1997, Aon recorded pretax special charges of $60 million and $145 million, respectively, related to management's commitment to a formal plan of restructuring Aon's brokerage operations as a result of the acquisition of Alexander & Alexander Services, Inc. (A&A). Also in 1997, following management's commitment to a formal plan of restructuring the A&A and Bain Hogg brokerage operations, Aon recorded $264 million in costs to restructure those acquisitions. Together, these costs were primarily related to termination benefits of $152 million, lease abandonments and

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other exit costs of $280 million, and asset impairments of $37 million. All termination benefits have been paid. The remaining liability of $49 million is for lease abandonments and other exit costs, and is being paid out over several years as planned.

        The following table sets forth recent activity relating to these liabilities:

        All of Aon's unpaid liabilities relating to acquisitions are reflected in general expense liabilities in the condensed consolidated statements of financial position.

8. Business Transformation Plan

        In fourth quarter 2000, after final approval by its Board of Directors, Aon began a comprehensive business transformation plan designed to enhance client service, improve productivity through process redesign and accelerate growth. In connection with the overall plan and strategic initiatives, Aon recorded total net expenses of $294 million in 2002, 2001 and 2000 that were reflected in general expenses in the condensed consolidated statements of income.

        Most of the terminations have occurred and are related to the Risk and Insurance Brokerage Services segment in the U.S. and the U.K.

        For the first quarter 2003, Aon made payments of $4 million related to the business transformation plan.

        The following table sets forth the activity related to the liability for termination benefits and other costs to exit an activity:

        All of Aon's unpaid liabilities relating to the business transformation plan are reflected in general expense liabilities in the condensed consolidated statements of financial position. Remaining termination benefits of $15 million and $6 million are expected to be paid in 2003 and 2004, respectively, with the remainder payable thereafter.

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9. Capital Stock

        During first quarter 2003, Aon issued 1,488,000 shares of common stock for employee benefit plans, and 623,000 shares in connection with current year acquisitions and commitments from previous acquisitions. Aon purchased 98,000 shares of its common stock at a total cost of $5 million during first quarter 2003, resulting from the settlement of a contingent payment related to a prior acquisition. There were 22.8 million shares of common stock held in treasury at March 31, 2003, of which all but 421,000 shares are restricted as to their reissuance.

10. Capital Securities

        In 1997, Aon Capital A, a subsidiary trust of Aon, issued $800 million of 8.205% mandatorily redeemable preferred capital securities (capital securities). During 2002, approximately $98 million of the capital securities were repurchased on the open market for $87 million excluding accrued interest. The sole asset of Aon Capital A is $726 million aggregate principal amount of Aon's 8.205% Junior Subordinated Deferrable Interest Debentures due January 1, 2027.

11. Alexander & Alexander Services Inc. (A&A) Discontinued Operations

        Prior to its acquisition by Aon, A&A discontinued its property and casualty insurance underwriting operations in 1985, some of which were then placed into run-off, with the remainder sold in 1987. In connection with those sales, A&A provided indemnities to the purchaser for various estimated and potential liabilities, including provisions to cover future losses attributable to insurance pooling arrangements, a stop-loss reinsurance agreement and actions or omissions by various underwriting agencies previously managed by an A&A subsidiary. In 2002, Aon settled certain of these liabilities. The settlements had no material effect on the condensed consolidated financial statements.

        As of March 31, 2003, the liabilities associated with the foregoing indemnities were included in other liabilities in the condensed consolidated statements of financial position. Such liabilities amounted to $46 million, net of reinsurance recoverables and other assets of $89 million.

12. Contingencies

        Aon and its subsidiaries are subject to numerous claims, tax assessments and lawsuits that arise in the ordinary course of business. The damages that may be claimed are substantial, including, in many instances, claims for punitive or extraordinary damages. Accruals for these items have been provided to the extent that losses are deemed probable and are reasonably estimable.

        In the second quarter of 1999, Allianz Life Insurance Company of North America, Inc. ("Allianz") filed an amended complaint in Minnesota adding a brokerage subsidiary of Aon as a defendant in an action which Allianz brought against three insurance carriers reinsured by Allianz. These three carriers provided certain types of workers' compensation reinsurance to a pool of insurers and to certain facilities managed by Unicover Managers, Inc. ("Unicover"), a New Jersey corporation not affiliated with Aon. Allianz alleges that the Aon subsidiary acted as an agent of the three carriers when placing reinsurance coverage on their behalf. Allianz claims that the reinsurance it issued should be rescinded or that it should be awarded damages, based on alleged fraudulent, negligent and innocent misrepresentations by the carriers, through their agents, including the Aon subsidiary defendant.

        On August 30, 2002, two of the three carriers referred to above filed a complaint in the United States District Court for the District of Connecticut against the Aon brokerage subsidiary. The two carriers are currently involved in an arbitration proceeding with Allianz, related to the original litigation, in which Allianz seeks the recission of the reinsurance placements. These carriers also seek to recover from the Aon brokerage subsidiary any damages, costs and expenses, including legal fees,

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suffered by such carriers as a result of an adverse arbitration award. Aon believes that the Aon subsidiary has meritorious defenses and the Aon subsidiary intends to vigorously defend this claim. On January 8, 2003, the two carriers dismissed their lawsuit without prejudice, meaning it could be refiled at a later time.The remaining Unicover issues are complex, and therefore, the timing and amount of resolution cannot be determined at this time. In early October 2002, there was reportedly an award made by arbitrators in an arbitration held in New York among Unicover Managers, Inc., Unicover pool members and the three carriers referred to above. Aon has not received a copy of the arbitration award and therefore cannot make an informed statement as to its content.

        Certain U.K. subsidiaries of Aon have been required by their regulatory body, the Personal Investment Authority (PIA), to review advice given by those subsidiaries to individuals who bought pension plans during the period from April 1988 to June 1994. These reviews have resulted in a requirement to pay compensation to clients based on guidelines issued by the PIA. Aon's ultimate exposure from the private pension plan review, as presently calculated, is subject to a number of variable factors including, among others, general level of pricing in the equity markets, the interest rate established quarterly for calculating compensation, and the precise scope, duration and methodology of the review, including whether recent regulatory guidance will have to be applied to previously settled claims. These variable factors are ones that the U.K. Financial Services Authority, the current governing body in the U.K., has used as a basis in the past for establishing the calculation tables to determine redress or compensatory amounts. Because Aon is unable to predict if, or how, regulators may change these tables or if, or how, they may apply future regulatory guidance to previous claims, Aon has been, and will continue to be, unable to determine a range or estimate of additional possible exposure.

        One of Aon's insurance subsidiaries is a defendant in more than twenty lawsuits in Mississippi. The lawsuits generally allege misconduct by the subsidiary in the solicitation and sale of insurance policies. Attorneys representing the plaintiffs in these lawsuits have advised the subsidiary that approximately 2,700 other current or former policyholders may file similar claims. Each lawsuit includes, and each threatened claim could include, a request for punitive damages. Aon's insurance subsidiary has been litigating the pending suits and investigating the claims. In the second quarter 2002, Aon negotiated a compromise of several of the lawsuits and approximately 2,000 of the claims. In the third quarter of 2002, the settlement of approximately 1,000 of these claims was concluded. The remainder of the settlements is of uncertain status. Aon's insurance subsidiary has filed a lawsuit against the claimaints' attorney asserting that the settlements were not appropriately completed. If these settlements are concluded, there will still be at least 2,700 threatened claims outstanding. Each of the remaining lawsuits and any threatened claim is being investigated and vigorously defended.

        On August 8, 2002, Daniel & Raizel Taubenfeld, a purported Aon stockholder, filed a putative class action lawsuit in the United States District Court for the Northern District of Illinois, Eastern Division, on behalf of purchasers of Aon Common Stock between May 4, 1999 and August 6, 2002. The complaint names Aon, Patrick G. Ryan, Chairman and Chief Executive Officer, and Harvey N. Medvin, Executive Vice President and Chief Financial Officer, as defendants, and contains allegations of violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated under such Act relating to Aon's press release issued on August 7, 2002. The plaintiff seeks, among other things, class action certification, compensatory damages in an unspecified amount and an award of costs and expenses, including counsel fees. On January 17, 2003, the lead plaintiff filed a "Consolidated Amended Complaint" against the same defendants which alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated under such Act. Aon intends to defend this action vigorously.

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        There have been nine other putative class action lawsuits filed against Aon and certain of its officers and directors in the United States District Court for the Northern District of Illinois and each is substantially similar to the lawsuit described in the immediately preceding paragraph. All of these actions have been consolidated with the Taubenfeld action and a lead plaintiff has been appointed by the court. Aon intends to defend each of these actions vigorously.

        Aon has also received a complaint which purports to be a shareholder's derivative action against Aon and each of Aon's directors. This complaint, which is styled Bernard Stern v. Patrick Ryan, et al. was filed in the United States District Court for the Northern District of Illinois on September 13, 2002. This lawsuit makes allegations which are substantially similar to the original Taubenfeld lawsuit. Aon intends to defend this action vigorously.

        Although the ultimate outcome of all matters referred to above cannot be ascertained and liabilities in indeterminate amounts may be imposed on Aon or its subsidiaries, on the basis of present information, amounts already provided, availability of insurance coverages and legal advice received, it is the opinion of management that the disposition or ultimate determination of such claims will not have a material adverse effect on the consolidated financial position of Aon. However, it is possible that future results of operations or cash flows for any particular quarterly or annual period could be materially affected by an unfavorable resolution of these matters.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

        This Management's Discussion and Analysis is divided into five sections. In the first section, "Key Recent Events," we describe items that significantly affected our results of operations and our financial condition during the periods covered by the financial statements included in this report. We then proceed with the sections providing quarter-to-quarter comparisons of our results on a consolidated basis and on a segment basis. These sections are designated by the captions "Review of Consolidated Results" and "Review by Segment," respectively. The section entitled "Financial Condition and Liquidity" covers several items including disclosures related to the statement of financial position, cash flows and information on special purpose entities. The final section, "Information Concerning Forward-looking Statements," addresses issues and factors that may influence future results.

        Beginning with 2003 reporting, we have renamed our Insurance Brokerage and Other Services segment. This segment will now be called Risk and Insurance Brokerage Services. We believe that this new name more accurately represents the business operations contained within this segment, given the reclassification of certain businesses out of the segment.

        This Management's Discussion and Analysis is organized using the following outline:

KEY RECENT EVENTS
        Segment Reporting and Cost Reallocation
        Discontinuance of Certain Operations
        World Trade Center
        Endurance Warrants

REVIEW OF CONSOLIDATED RESULTS
        General
        Consolidated Results for First Quarter 2003 Compared to First Quarter 2002

REVIEW BY SEGMENT
        General
        Risk and Insurance Brokerage Services
        Consulting
        Insurance Underwriting
        Corporate and Other

FINANCIAL CONDITION AND LIQUIDITY
        Cash Flows
        Financial Condition
        Short-term Borrowings and Notes Payable
        Stockholders' Equity
        Special Purpose Entities

INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS

KEY RECENT EVENTS

Segment Reporting and Cost Reallocation

        We classify our businesses into three operating segments: Risk and Insurance Brokerage Services, Consulting and Insurance Underwriting. A fourth segment, Corporate and Other, when aggregated with the operating segments, and after the elimination of intersegment revenues, totals to the amounts included in our condensed consolidated financial statements. The Risk and Insurance Brokerage

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Services segment consists principally of our retail, reinsurance and wholesale brokerage, as well as related insurance services, including claims services, underwriting management, captive insurance company management services and premium financing. Our Consulting segment is Aon's human capital consulting organization, which utilizes five major practices: employee benefits, compensation, management consulting, outsourcing and communications. The Insurance Underwriting segment provides specialty insurance products including supplemental accident, health and life insurance coverages, extended warranty and select property and casualty insurance products. Corporate and Other revenues consist primarily of investment income from investments, valuation changes in limited partnership investments and income and losses on disposals of all securities.

        Beginning in first quarter 2003, the business units below were reclassified among segments as follows:

•

Certain administration and marketing services relating to our insurance underwriting operations, previously included in the Risk and Insurance Brokerage Services segment, were reclassified into the Insurance Underwriting segment.



•

Our auto finance service business, previously included in the Risk and Insurance Brokerage Services segment, was reclassified into the Corporate and Other segment. Aon has decided to wind down the existing service obligation for this business, which is expected to be substantially finished by the end of 2004.

        For first quarter 2003, we refined our methodology for allocating certain costs to the segments. This revised cost allocation methodology reduced Consulting and Insurance Underwriting segment pretax income by approximately $4 million and $3 million, respectively, with the $7 million offset reflected in the Risk and Insurance Brokerage Services segment. The revised methodology improves the assignment of costs, which are controlled on a centralized basis, to the operating segments.

        Previously reported segment information has been reclassified to conform to this new presentation. No changes or restatements have been made to prior period earnings per share or financial statements (income statement, balance sheet, or cash flow statement) as reported under accounting principles generally accepted in the United States (GAAP) as a result of the segment modifications.

        In our segment discussion, three of the segments will have reclassified revenue, pretax income and pretax margins.

Discontinuance of Certain Operations

        In February 2003, we announced that we would be discontinuing our accident and health insurance underwriting operations in Mexico, Argentina and Brazil, as well as our large company group life business. These lines of businesses generated $7 million of revenues and $2 million of losses in the first quarter 2003, compared to $18 million of revenues and breakeven results last year. Total premiums earned in 2002 were approximately $100 million. We will pursue a "back to basics" strategy in the accident and health insurance business, where the focus will be on core products and regions with the best returns on investments.

World Trade Center

        In order to resume business operations and minimize the loss caused by the World Trade Center disaster, we secured temporary office space in Manhattan. Subsequently, permanent space was leased, and during the first quarter we assigned all of our temporary space to another company. The costs relating to this assignment were $37 million pretax. We will incur additional costs related to this sublease in future quarters, which in aggregate, will not exceed $15 million. We have included these costs as part of the final, overall World Trade Center property insurance claim; however, accounting principles do not allow us to offset this expense in the current quarter with an insurance recoverable.

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Endurance Warrants

        In December 2001, Aon's underwriting subsidiaries invested $227 million in Endurance Specialty Holdings, Ltd., formerly known as Endurance Specialty Insurance Ltd. (Endurance), a Bermuda-based insurance and reinsurance company formed to provide additional underwriting capacity to commercial property and casualty insurance and reinsurance clients. In conjunction with this common stock investment, Aon received approximately 4 million stock purchase warrants which allow Aon to purchase additional Endurance common stock through December 2011. These warrants meet the definition of a derivative as described in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which requires them to be recorded in the financial statements at fair value, with changes in fair value recognized in earnings on a current basis.

        Through December 31, 2002, these warrants had been carried at fair value, which approximated their original cost. Fair value had been estimated taking into consideration the original cost, subjectivity in determining the value of the underlying shares since Endurance was not yet publicly traded, illiquidity of the underlying shares, recent capital transactions in 2002 between Endurance and its shareholders for the warrants and the general uncertainty regarding the ability of Endurance to access the public markets.

        In first quarter 2003, Endurance completed its initial public offering, which provided a market value for the underlying shares and removed much of the uncertainty regarding the fair value of Endurance and the warrants. Aon obtained a third-party independent valuation of these warrants as of March 31, 2003. The independent valuation experts utilized the Black-Scholes option-pricing model to determine that the warrants had a fair value of approximately $45 million pretax.

        The valuation assumptions used in the model were as follows:

        The spot and exercise prices are reduced by expected future dividends.

        The $45 million (pretax) increase in value was recognized as investment income in the Corporate and Other segment in first quarter 2003. The future value of the warrants may vary considerably from the value at March 31, 2003 due to the inherent volatility of the underlying shares, as well as the passage of time and changes in other factors that are employed in the valuation model.

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REVIEW OF CONSOLIDATED RESULTS

General

        When we refer to organic revenue growth in the discussion of operating results, we exclude the impact of foreign exchange. In addition, we also exclude the impact of acquisitions, dispositions, transfers, investment income, and unusual items. Written premiums and fees are the basis for organic revenue growth within the Insurance Underwriting segment, but our reported revenues reflect earned premiums. Management utilizes organic revenue growth as an important indicator when assessing and managing performance of its segments and sub-segments.

        When we refer to income before income tax, we exclude minority interest related to the 8.205% mandatorily redeemable preferred capital securities (capital securities) (see note 10 to the condensed consolidated financial statements).

        The following table and commentary provide selected consolidated financial information.

(1)

Includes items discussed in our organic growth description, except currency impact.

Consolidated Results for First Quarter 2003 Compared to First Quarter 2002

Revenue

        Total revenues in the quarter rose 14% to $2.4 billion. On a comparable currency basis, revenue climbed 9%. The higher revenue growth is primarily due to:

•

an increase in brokerage commissions and fees, reflecting the growth in new business, strong renewal rates of existing products and outsourcing contracts



•

an increase of premiums and other which is primarily related to insurance underwriting operations



•

overall operating segment organic growth of 12%.

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        The revenue growth is reflective of:

•

very good results from the reinsurance and international brokerage areas



•

America's brokerage improvement through new business development and better retention rates



•

Consulting segment revenue growth, driven mostly by new outsourcing business initiated in third quarter 2002, and good improvements in the Continent of Europe and United Kingdom



•

select property and casualty insurance business growth

        These factors were partially offset by a decline of $29 million in investment income, primarily in Insurance Underwriting ($14 million) and Corporate and Other ($14 million). The fall-off in Insurance Underwriting was principally due to a decline in interest earned on investments underlying investment-type contracts ($10 million), as that business has been placed in run-off. Investment costs related to these contracts are reflected in Benefits to Policyholders in the Condensed Consolidated Statements of Income. In the Corporate and Other segment, the decrease in investment income reflected impairment write-downs of $28 million in the first quarter 2003 compared with $8 million last year and a $48 million one-time tax related settlement in 2002. First quarter 2003 results reflected a $45 million increase in the value of stock warrants of Endurance and equity income from Endurance of $7 million in first quarter 2003. Overall, investment income continues to suffer from declining average short-term interest rates. The weighted average short-term rate for the first quarter 2003 was 2.26% compared with 2.63% in 2002.

Expenses

        Total expenses increased 17% over the same period last year to $2.1 billion. General expenses increased $246 million or 17% reflecting growth of the businesses, higher pension plan and insurance costs and the impact of exchange rates. Benefits to policyholders rose $31 million or 10% due to a continuing shift in business mix to products with higher benefit payout ratios, new business volume and an increased payout ratio of benefits to policyholders versus net premiums earned. Benefits to policyholders were $11 million lower year-to-year due to a reduction in investment-type contracts. First quarter expenses also included a $37 million pretax charge in connection with an assignment to a third party of temporary premises that were obtained after the destruction of the World Trade Center.

Income Before Income Tax and Minority Interest

        Income before income taxes and minority interest decreased by $15 million to $256 million for the first quarter from $271 million last year. This decline is due primarily to lower margins in the Consulting segment as a result of the new human resource outsourcing business, lower margins in Insurance Underwriting and the expense incurred for assigning temporary premises.

Income Taxes

        The effective tax rate was 37% in both first quarter 2003 and 2002. The overall effective tax rates are higher than the U.S. federal statutory rate primarily because of state income tax provisions.

Net Income

        Net income for the first quarter 2003 decreased to $152 million ($0.48 per dilutive share) from $160 million ($0.57 per dilutive share) in first quarter 2002. Basic net income per share was $0.48 and $0.58 for first quarter 2003 and 2002, respectively. The impact from the fourth quarter 2002 common stock offering amounted to $0.07 per share in the quarter compared to first quarter 2002. After netting the effect of currency hedges, the positive impact of foreign currency translations was approximately $0.03 per share in first quarter 2003. The comparable impact on first quarter 2002 results was

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immaterial. Dividends paid for the redeemable preferred stock have been deducted from net income to compute income per share.

REVIEW BY SEGMENT

General

        Aon classifies its businesses into three operating segments: Risk and Insurance Brokerage Services, Consulting and Insurance Underwriting (see note 5 to the condensed consolidated financial statements). Aon's operating segments are identified as those that:

•

report separate financial information



•

are evaluated regularly when we are deciding how to allocate resources and assess performance.

        Revenues are attributed to geographic areas based on the location of the resources producing the revenues.

        Because our culture fosters interdependence among the operating units, allocating expenses by product and geography is difficult. While we track and evaluate revenue for each segment, expenses are allocated to products and services within each of the operating segments. In addition to revenue, we also measure each segment's financial performance using its income before income tax.

        Operating segment revenue includes investment income, as well as the impact of related derivatives, generated by operating invested assets of that segment. Investment characteristics mirror liability characteristics of the respective operating segments:

•

Our Risk and Insurance Brokerage Services and Consulting businesses invest fiduciary funds and operating funds in short-term obligations.



•

In Insurance Underwriting, policyholder claims and other types of non-interest sensitive insurance liabilities are primarily supported by intermediate to long-term fixed-maturity instruments. Investments underlying interest-sensitive capital accumulation insurance liabilities are fixed- or floating-rate fixed-maturity obligations. For this business segment, operating invested assets are equivalent to average net policy liabilities.



•

Our insurance subsidiaries also have invested assets that exceed average net policy liabilities, in order to maintain solid claims paying ratings. A majority of these investments are equity related and income from these investments is reflected in Corporate and Other segment revenues.

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        The following table and commentary provide selected financial information on the operating segments.

(1)

Includes investment income of $20 million and $21 million for the first quarters ended March 31, 2003 and 2002, respectively.

(2)

Includes investment income of $1 million for both the first quarters ended March 31, 2003 and 2002.

(3)

Includes investment income of $28 million and $42 million, of which $2 million and $12 million pertain to interest on investment-type contracts, for the first quarters ended March 31, 2003 and 2002, respectively.

Risk and Insurance Brokerage Services

        Aon is a leader in many sectors of the insurance industry: globally, it is the second largest insurance broker, the largest reinsurance broker and the leading manager of captive insurance companies worldwide. In the U.S., Aon is the second largest multi-line claims services provider, and the largest wholesale broker and underwriting manager. These rankings are based on most recent surveys compiled and reports printed by Business Insurance.

        Risk and Insurance Brokerage Services generated approximately 58% of Aon's total operating segment revenues in first quarter 2003. Revenues are generated primarily through:

•

commissions and fees paid by insurance and reinsurance companies



•

fees paid by clients



•

certain other carrier compensation



•

interest income on funds held primarily in a fiduciary capacity.

        Our revenues vary from quarter to quarter throughout the year as a result of:

•

how our clients' policy renewals are timed

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•

the net effect of new and lost business



•

volume-based commissions and overrides



•

the timing of services provided to our clients



•

the income we earn on investments, which is heavily influenced by short-term interest rates.

        This segment:

•

addresses the highly specialized product development, consulting and risk management needs of professional groups, service businesses, governments, healthcare providers, commercial organizations and non-profit groups, among others



•

provides affinity products for professional liability, life, disability income and personal lines for individuals, associations and businesses.



•

offers claims management and loss cost management services to insurance companies and firms with self-insurance programs



•

provides wholesale brokerage, managing underwriting and premium finance services to independent agents and brokers.

        We review our product revenue results using the following sub-segments:

•

Risk Management and Insurance Brokerage—Americas encompasses our retail and wholesale brokerage services, affinity products, managing underwriting, placement and captive management services and premium finance services in the United States, Canada, Latin America, the Caribbean and Bermuda.



•

Risk Management and Insurance Brokerage—International offers similar products and services to the rest of the world not identified above.



•

Reinsurance Brokerage and Related Services offers sophisticated advisory services in program design and claim recoveries that enhances the risk/return characteristics of insurance policy portfolios and improve capital utilization, along with the evaluation of catastrophic loss exposures, worldwide.



•

Claim Services offers claims administration and loss cost management services worldwide.

        The Risk and Insurance Brokerage Services segment revenues vary because a large part of our compensation is tied to the premiums paid by our clients to insurers, and both premium rate levels in the property and casualty insurance markets and available insurance capacity fluctuate.

Revenue

        First quarter 2003 Risk and Insurance Brokerage Services revenue was $1.4 billion, up 19% on a reported basis. Excluding the effect of foreign exchange rates, revenue rose 12% over last year. Operating revenue, on an organic basis, grew approximately 12% in this segment in a very competitive environment.

        Investment income for this segment decreased $1 million in the first quarter as short-term interest rates declined from the same period last year.

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        This chart details Risk and Insurance Brokerage Services revenue by product sub-segment.

(1)

Includes items discussed in our organic growth description, except currency impact.

•

RMIB-A revenue improved due to good organic growth in the retail and wholesale brokerage business

•

RMIB-I revenue increase was a result of the impact of foreign exchange rates and good organic growth in the retail brokerage area

•

RBRS revenue growth reflected strong results in U.S. reinsurance, driven by new business from existing clients and growth in renewal volumes

•

Claims revenue increase was driven by higher U.K. volume

        This chart details Risk and Insurance Brokerage Services revenue by geographic area.