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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Commission file number 1-7933

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 Exchange Act Rule 12b-2). 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, 2003 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 the 2003 condensed consolidated financial statements relating to discontinued operations have been reclassified to conform to the 2004 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.

        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 and Common Stock Investment

        In December 2001, Aon's underwriting subsidiaries invested $227 million in Endurance Specialty Holdings, Ltd. (Endurance), formerly known as Endurance Specialty Insurance Ltd., a Bermuda-based

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insurance and reinsurance company formed to provide additional underwriting capacity to commercial property and casualty insurance and reinsurance clients. The investment in Endurance is carried under the equity method, and is included in Other Investments in the Condensed Consolidated Statements of Financial Position. As of March 31, 2004 and December 31, 2003, the carrying value of Aon's common stock investment in Endurance was $279 million and $298 million, representing approximately 9.9 million and 11.3 million shares, respectively. During first quarter 2004, Aon sold approximately 1.4 million shares of Endurance stock which resulted in a pretax gain of approximately $11 million. In conjunction with the initial 2001 common stock investment, Aon's underwriting subsidiaries also received 4.1 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 zero value, which approximated their original cost. 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. With the assistance of an independent third party, Aon has valued the warrants using the Black-Scholes pricing methodology and determined the warrants had a fair value of approximately $84 million, $80 million and $45 million as of March 31, 2004, December 31, 2003 and March 31, 2003, respectively. The increase in value of the warrants was $4 million and $45 million for the first quarters ended March 31, 2004 and 2003, respectively.

        The valuation assumptions used in the model were as follows:

        The model assumes: the warrants are "European-style", which means they are valued as if the exercise can only occur on the expiration date; the spot and exercise prices are reduced by expected future dividends; and the dividend remains unchanged during the period the warrants are outstanding. Although Endurance currently pays a dividend, a zero dividend yield is used in the Endurance warrants valuation, since the future dividend payment value has been reflected in the spot and exercise valuation price.

        The quarterly increase in value was recognized as investment income in the Corporate and Other segment. The future value of the warrants may vary considerably from the value at March 31, 2004 due to the price movement 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 January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, (FIN 46). In December 2003, the FASB modified FIN 46 to make certain technical corrections and address certain implementation issues that had arisen. FIN 46 provides a new framework for identifying valuable interest entities (VIEs) and determining when a company should include the assets, liabilities, non-controlling interests and results of activities of a VIE in its consolidated financial statements.

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        In general, a VIE is a corporation, partnership, limited-liability corporation, trust, or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to finance its principal activities without additional subordinated financial support, (2) has equity owners at risk that are unable to make significant decisions about its activities, or (3) has a group of equity owners that do not have the obligation to absorb expected losses or the right to receive expected residual returns generated by its operations.

        FIN 46 requires a VIE to be consolidated if a party with an ownership, contractual or other financial interest in the VIE ("a variable interest holder") is obligated to absorb a majority of the risk of expected loss from the VIE's activities, is entitled to receive a majority of the VIE's expected residual returns (if no party absorbs a majority of the VIE's expected losses), or both. A variable interest holder that consolidates the VIE is called the primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the VIE's assets, liabilities and non-controlling interests at fair value and subsequently account for the VIE as if it were consolidated based on majority voting interest. FIN 46 also requires disclosures about VIEs that the variable interest holder is not required to consolidate but in which it has a significant variable interest.

        FIN 46 was effective immediately for VIEs created after January 31, 2003. The provisions of FIN 46, as revised, were adopted as of December 31, 2003 for Aon's interests in VIEs that are special purpose entities (SPEs). Aon adopted the provisions of FIN 46 for its variable interests in all other VIEs as of March 31, 2004, which did not have a material effect on the consolidated financial statements.

        In January 1997, Aon created Aon Capital A, a wholly-owned statutory business trust, for the purpose of issuing mandatorily redeemable preferred capital securities (Capital Securities). 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.

        Aon has determined that it is not the primary beneficiary of Aon Capital A, a VIE, and was required to deconsolidate the Trust based on the provisions of FIN 46 on December 31, 2003. Prior to the deconsolidation of Aon Capital A, after-tax interest incurred on the Capital Securities was reported as minority interest in the condensed consolidated statements of income. Beginning first quarter 2004, interest expense on the notes payable is reported as part of interest expense on the condensed consolidated statements of income. There was no effect on net income or consolidated stockholders' equity as a result of this deconsolidation. Prior periods were not restated.

        In December 2003, the FASB issued Statement No. 132 (revised 2003), Employers' Disclosures about Pension and Other Postretirement Benefits. This Statement revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition provisions of FASB Statements No. 87, Employers' Accounting for Pensions, No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. This Statement retains the disclosure requirements contained in the original FASB Statement No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which it replaces. It requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. The required information is to be provided separately for pension plans and for other postretirement benefit plans.

        The provisions of the original Statement 132 remain in effect until the provisions of the revised Statement are adopted. Except as noted below, the revised Statement is effective for financial statements with fiscal years ending after December 15, 2003. The interim-period disclosures required by the revised Statement are effective for interim periods beginning after December 15, 2003. The additional disclosure of information about foreign plans required by the revised statement is effective for fiscal years ending after June 15, 2004. In addition, disclosure of the benefits expected to be paid in

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each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter is effective for fiscal years ending after June 15, 2004.

        Aon adopted the disclosure requirements for its domestic plans effective with its 2003 Form 10-K. Aon's interim-period disclosures can be found in footnote 11. Aon's disclosures about its foreign plans will be included with its 2004 Form 10-K.

        In July 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts (SOP 03-1). SOP 03-1 provides guidance on accounting and reporting by insurance enterprises for certain nontraditional long-duration contracts and for separate accounts. SOP 03-1 is effective for financial statements for fiscal years beginning after December 15, 2003. SOP 03-1 may not be applied retroactively to prior years' financial statements, and initial application should be as of the beginning of an entity's fiscal year. Aon adopted SOP 03-1 as of January 1, 2004. The adoption of SOP 03-1 did not have a significant impact on the results of operations or equity of the Company, but did affect the classification and presentation of certain balance sheet items. At March 31, 2004, other assets decreased by $56 million, which was offset by an increase in fixed maturities of $43 million, short-term investments of $7 million, other investments of $5 million and other receivables of $1 million. Correspondingly, the related $56 million of other liabilities declined by $50 million, which was offset by an increase in future policy benefits of $50 million.

3.    Income Per Share

        Income per share is calculated as follows:

        Certain common stock equivalents related to options were not included in the computation of diluted net income per share because the options' exercise price was greater than the average market

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price of the common shares. The number of options excluded from the calculation were 18 million and 30 million at March 31, 2004 and 2003, respectively.

        Aon's 3.5% convertible debt securities may be converted into a maximum of 14 million shares of Aon's common stock. These shares have not been included in the computation of diluted net income per share in first quarter 2004 because all the circumstances which would trigger the conversion did not occur. These securities are convertible into Aon common stock at an initial conversion price of approximately $21.475 per common share under certain circumstances, including if the closing price of Aon's common stock exceeds 120% of the conversion price (i.e. $25.77) for at least 20 trading days in the 30 consecutive trading day period ending on the last trading day of the previous fiscal quarter. During first quarter 2004, the closing price of Aon's common stock exceeded the 120% threshold for more than 20 of the last 30 trading days in the quarter. As a result, the debt securities will be convertible at the option of the holder at any time during the quarter ended June 30, 2004.

4.    Comprehensive Income

        The components of comprehensive income, net of related tax, for first quarter ended March 31, 2004 and 2003 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: 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 in the accompanying condensed consolidated financial statements.

        The Risk and Insurance Brokerage Services segment consists primarily of Aon's retail, reinsurance and wholesale brokerage operations, as well as related insurance services, including underwriting management, captive insurance company management services, claims services, and premium financing. The Consulting segment provides a full range of human capital management services delivered predominantly to corporate clientele utilizing five major practices: employee benefits, compensation, management consulting, communications and human resource outsourcing. The Insurance Underwriting segment provides specialty insurance products including supplemental accident, health and life

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insurance coverages, extended warranty, credit 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, and income and losses on disposals of all securities, including those pertaining to assets maintained by the operating segments. Corporate and Other general expenses include administrative and certain information technology costs.

        Certain amounts in prior periods' condensed consolidated financial statements have been reclassified to reflect sold businesses as discontinued operations.

        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, 2003, 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 intersegment 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. Intercompany revenues and expenses are eliminated in computing consolidated revenues and income before tax.

        Revenue from continuing operations for Aon's segments follows:

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

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

(1)

Upon the adoption of FIN 46 on December 31, 2003, Aon was required to deconsolidate its trust preferred capital securities, which was offset by an increase in notes payable. Interest expense for the first quarter ended March 31, 2004 includes $14 million on these notes payable.

6.    Goodwill and Other Intangible Assets

        In accordance with FASB Statement No. 142, Aon's goodwill is no longer amortized. Goodwill and other intangible assets are allocated to various reporting units, which are either its operating segments or one reporting level below the operating segment. Statement No. 142 requires Aon to 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 at the valuation date, an impairment loss would be recorded to the extent that the implied fair value of the goodwill within the reporting unit is less than the recorded amount of goodwill. Fair value is estimated based on various valuation metrics.

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        The changes in the net carrying amount of goodwill for the three months ended March 31, 2004 are as follows:

        Intangible assets are classified into three categories:

•

"Customer Related and Contract Based" include client lists as well as non-compete covenants;



•

"Present Value of Future Profits" represents the future profits of purchased books of business of the insurance underwriting subsidiaries; and



•

"Marketing, Technology and Other" are all other purchased intangibles not included in the preceding categories.

        Amortizable intangible assets by asset class follow:

        Amortization expense for intangible assets for the years ended December 31, 2004, 2005, 2006, 2007 and 2008 is estimated to be $53 million, $47 million, $37 million, $14 million and $10 million, respectively.

7.    Business Combinations

        For first quarter 2004, Aon made payments of $3 million on restructuring charges and purchase accounting liabilities relating to business combinations.

        Aon has remaining liabilities of $37 million for lease abandonments and other exit costs related to prior acquisitions which are being paid out over several years as planned.

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        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 over the three years ended December 31, 2002, 2001 and 2000 that were reflected in general expenses in the condensed consolidated statements of income.

        All 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 first quarter 2004, Aon made payments of $1 million related to the business transformation plan.

        The following table sets forth recent 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. Termination benefits of $5 million and $3 million are expected to be paid in the remainder of 2004 and in 2005, respectively, with the remainder payable thereafter.

9.    Capital Stock

        During first quarter 2004, Aon issued 855,000 shares of common stock for employee benefit plans and 205,600 shares in connection with the employee stock purchase plan. There were 22.4 million shares of common stock held in treasury at March 31, 2004, of which all but 32,000 shares are restricted as to their reissuance.

10.    Discontinued Operations

U.K. Claims Businesses

        In first quarter 2004, Aon decided to sell certain of its U.K. claims services businesses included in the Risk and Insurance Brokerage Services segment. The sale of all but one business was completed

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during the quarter. Aon reached an agreement to sell this remaining business in early second quarter 2004. The operating results are classified as discontinued operations, and prior year's operating results have been reclassified to discontinued operations. Revenues attributable to those businesses reclassified as discontinued operations were $12 million and $13 million for the first quarters ended March 31, 2004 and 2003, respectively. Included in the loss from discontinued operations in first quarter 2004 was a pretax loss from operations of $8 million ($5 million after-tax) and a loss from the revaluation of the business of $24 million ($17 million after-tax). In 2003, the pretax operating loss from these businesses was $4 million ($3 million after-tax). The assets and liabilities of the discontinued operations are immaterial to the condensed consolidated statements of financial position at both March 31, 2004 and December 31, 2003.

Consulting Business

        Also in early first quarter 2004, Aon sold a non-core Consulting subsidiary. Included in the loss from discontinued operations in first quarter 2004 was a gain on sale of this business of $4 million ($0 million after-tax). For first quarter 2003, revenues attributable to that unit, reclassified to discontinued operations, were $2 million, with a pretax operating loss of $1 million ($1 million after-tax).

Automotive Finance Servicing Business

        In third quarter 2003, Aon decided to sell its automobile finance servicing business, which has been in run-off since first quarter 2001. The sale was completed in fourth quarter 2003. Operating results from prior periods attributable to this unit have been reclassified as discontinued operations. Revenue of this business was $4 million for first quarter 2003, with a pretax loss of $7 million ($4 million after-tax). In first quarter 2004, this business had a nominal pretax loss.

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.

        As of March 31, 2004, the liabilities associated with the foregoing indemnities were included in other liabilities in the condensed consolidated statements of financial position. Such liabilities amounted to $19 million, net of reinsurance recoverables and other assets of $85 million.

        The insurance liabilities represent estimates of known and future claims expected to be settled over the next 20 to 30 years, principally with regards to asbestos, pollution and other health exposures.

        Although these insurance liabilities represent a best estimate of the probable liabilities, adverse developments may occur given the nature of the information available and the variables inherent in the estimation processes. Based on current estimates, management believes that the established liabilities of discontinued operations are sufficient.

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11.    Net Periodic Benefit Cost

        The following table provides the components of net periodic benefit cost for Aon's U.S. plans:

        The following table provides the components of net periodic benefit costs for Aon's material international pension plans, which are located in the U.K. and The Netherlands:

Employer Contribution

        Aon previously disclosed in its financial statements for the year ended December 31, 2003 that it expected to contribute in 2004 $28 million to its U.S. defined benefit pension plans to satisfy minimum funding requirements and $8 million to fund other postretirement benefit plans. As of March 31, 2004, contributions of $1 million have been made to the U.S. pension plans and $2 million to other postretirement benefit plans. Due to a change in pension legislation, Aon currently expects to contribute a total of $3 million in 2004 to its U.S. pension plans.

        Aon previously disclosed in its 2003 financial statements that, based on current rules and assumptions, it expected to contribute $195 million in 2004 to its major defined benefit pension plans including $167 million for its major international defined benefit pension plans. Based on current rules and assumptions, Aon now plans to contribute $163 million to its major international defined pension plans during 2004. As of March 31, 2004, $56 million has been contributed.

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12.    Other-Than-Temporary Impairments

        The following table analyzes our investment positions with unrealized losses segmented by quality and period of continuous unrealized loss (excluding deferred amortizable derivative losses of $3 million) as of March 31, 2004.

        For categorization purposes, Aon considers any rating of Baa or higher by Moody's Investor Services or equivalent rating agency to be investment grade. Aon has no fixed maturities below investment grade with an unrealized loss.

        Aon's fixed-maturity portfolio in total had a $15 million gross unrealized loss at March 31, 2004, excluding $3 million related to deferred amortizable derivative losses, and is subject to interest rate, market, and credit risks.

        No single position had an unrealized loss greater than $1 million. With a carrying value of over $2.9 billion at March 31, 2004, our total fixed-maturity portfolio is approximately 97% investment grade based on market value. Fixed-maturity securities with an unrealized loss are all investment grade and

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have a weighted average rating of "Aa" based on amortized cost. Aon's non publicly-traded fixed maturity portfolio had a carrying value of $319 million, including $115 million in notes received from Private Equity Partnership Structures I, LLC, (PEPS I) on December 31, 2001 related to the securitization of limited partnerships and $71 million in notes issued by PEPS I to Aon during 2004, 2003 and 2002. Valuations of these securities primarily reflect the fundamental analysis of the issuer and current market price of comparable securities.

        Aon's equity portfolio is comprised of non-redeemable preferred stocks, publicly traded common stocks and other common and preferred stocks not publicly traded. This portfolio had no gross unrealized loss at March 31, 2004, and is subject to interest rate, market, credit, illiquidity, concentration and operation performance risks.

        Aon periodically reviews securities with material unrealized losses and evaluates them for other than temporary impairments. Aon analyzes various risk factors and determines if any specific asset impairments exist. If there is a specific asset impairment, Aon recognizes a realized loss and adjusts the cost basis of the impaired asset to its fair value.

        Aon reviews invested assets with material unrealized losses each quarter. Please see note 7 to Aon's 2003 Form 10-K for further information.

13.    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.

        As previously reported, a reinsurance brokerage subsidiary of Aon has been named in a total of six lawsuits relating to a worker's compensation reinsurance pool known as the Unicover Occupational Accident Reinsurance Pool ("Unicover Pool"). The Unicover Pool was managed by Unicover Managers, Inc. ("Unicover"). Along with another broker, Aon's reinsurance brokerage subsidiary procured certain retrocessional cover for the Unicover Pool, and was also involved in arranging further retrocessional protections for certain Unicover retrocessionaires. In one suit, Allianz Life Insurance Company of North America, Inc. ("Allianz") claims that the reinsurance it issued should be rescinded or that it should be awarded damages based on alleged fraudulent misrepresentation by the carriers through their agents, including Aon's subsidiary. That case is currently stayed pending arbitration to which Aon is not a party. In the five other suits, four of which are pending in the U.S. District Court for the District of New Jersey and one of which is pending in New Jersey state court, several participants in the Unicover Pool seek from Aon compensatory and punitive damages for the alleged failure of the retrocessional coverage, alleged breaches of contract, alleged breaches of the duty of good faith, various alleged torts, and an alleged conspiracy with Unicover.

        Aon's management has reviewed these complaints, believes that Aon's subsidiary has meritorious defenses, and intends to vigorously defend itself against all of these claims. As previously reported, the issues in these lawsuits are complex, and therefore the timing and amount of resolution of these claims cannot be determined at this time.

        As previously reported, 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 has resolved the vast majority of the known claims against it. Aon has submitted to its errors and omissions ("E&O") insurers a claim for a portion of the amounts paid, and those insurers are considering Aon's claim in due course. Although one recent decision in the U.K., which did not involve

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Aon, held that pension mis-selling claims could not be aggregated for purposes of applying the E&O insurance deductible, the language in that contested E&O policy is significantly different from the language in Aon's E&O policy. Aon continues to believe that its insurance claim is probable of recovery.

        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. Each of the remaining lawsuits and any threatened claim is being investigated and vigorously defended.

        As previously reported, beginning in August 2002, ten putative class action lawsuits were filed against Aon and certain of its officers and directors in the United States District Court for the Northern District of Illinois. The complaints alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated under such Act, and sought, among other things, compensatory damages and an award of costs and expenses. All of these actions were consolidated before the same judge, and a lead plaintiff was appointed by the court. On September 13, 2002, a purported derivative action against Aon and each of Aon's directors was filed in the Circuit Court of Cook County, Illinois. The derivative complaint made allegations substantially similar to the original class action lawsuits.

        In the third quarter of 2003, Aon and attorneys representing plaintiffs in the purported shareholder and derivative actions agreed to settle all of these actions. The memorandum of understanding memorializing the settlement calls for Aon to pay a total of $7.25 million and to take certain steps relating to Aon's corporate governance, some of which had already been undertaken by Aon. As part of that settlement, the purported state court derivative action was refiled in federal court and is pending before the same judge who is overseeing the purported shareholder class actions. The settlement is subject to a process that includes preliminary approval, notice to putative class members, and final court approval. On April 14, 2004, the parties to the purported class actions commenced this process when they filed with the court an Agreed Motion for Preliminary Approval of the settlement of that action. Aon has fully reserved the settlement and estimated remaining litigation costs.

        In December 2001, Radmanovich v. Combined Insurance Company of America, a putative class action lawsuit seeking compensatory and punitive damages from CICA, was filed on behalf of former and current employees of CICA in the U.S. District Court for the Northern District of Illinois. The action alleges discrimination against women in hiring, training and promotion and in tolerating a hostile work environment. The lawsuit seeks to recover damages for the plaintiff and for all women who worked for CICA since April 1, 1999. In March 2002, a second putative class action lawsuit, Palmer v. Combined, was filed against CICA in the same court, making similar allegations but seeking injunctive and punitive damages on behalf of a putative class of current CICA employees. On June 26, 2003, the Court in Radmanovich denied plaintiffs' motion for class certification, after which a number of the putative class members filed individual lawsuits in the same court. On September 2, 2003, the Court in Palmer granted plaintiffs' motion for class certification for injunctive and punitive damages.

        In March 2004, the parties to these lawsuits informed the court in the Palmer action that they were negotiating a possible settlement of these matters. If a settlement is agreed to by the parties, it would be subject to a process that includes notice to class members and final court approval. Aon has fully reserved the expected costs of a settlement and estimated remaining litigation costs.

        On April 21, 2004, Aon received a subpoena from the Office of the Attorney General of New York calling for the production of documents relating to Placement Service Agreements, Market Service Agreements and similar agreements under which insurance carriers pay compensation to Aon

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beyond standard commissions. The New York Department of Insurance has also requested information regarding such agreements. Compensation agreements between insurance companies and brokers are longstanding, common, and well-known practice within the insurance industry. Aon discloses such arrangements in fee agreements with clients, invoices to clients, and on its web site. Both of these inquiries are at the preliminary stages, and their outcomes cannot be predicted. Aon is fully cooperating with both of these inquiries. Such agreements are also the subject of a putative class action styled Daniel v. Affinity, which has been pending in the Circuit Court of Cook County, Illinois since August 1999. The court has not ruled on the plaintiff's motion for class certification or set a trial date. Aon believes it has meritorious defenses, and intends to vigorously defend itself against these claims.

        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. First, key recent events are described that affected our financial results in first quarter 2004. We then review our consolidated results and segments with quarter-to-quarter comparisons. Next, we cover our financial condition and liquidity along with related disclosures as well as information on our off balance sheet arrangements. The final section addresses the factors that can influence future results.

        The outline for our Management's Discussion and Analysis is as follows:

KEY RECENT EVENTS

Discontinued Operations
Endurance Warrants and Common Stock Investment
Run-off of Certain Operations

REVIEW OF CONSOLIDATED RESULTS

General
Consolidated Results for First Quarter 2004 Compared to First Quarter 2003

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
Off Balance Sheet Arrangements

INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS

KEY RECENT EVENTS

Discontinued Operations