10-Q 1 edgar092002.txt 0209 10Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------------------------------------------------------------------- FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2002 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------------------------- Commission File Number 33-94670-01 ------------------------------------- FARMERS GROUP, INC. (Exact name of registrant as specified in its charter) NEVADA (State or other jurisdiction of incorporation or organization) 95-0725935 (IRS Employer Identification No.) 4680 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90010 (Address of principal executive offices)(Zip Code) (323) 932-3200 (Registrants telephone number, including area code) 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 /X/ No / / Registrant's Common Stock outstanding on September 30, 2002 was 1,000 shares. 2 [THIS PAGE INTENTIONALLY LEFT BLANK] 3 FARMERS GROUP, INC. AND SUBSIDIARIES TABLE OF CONTENTS FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2002 PART I. FINANCIAL INFORMATION PAGE ---- ITEM 1. Financial Statements (Unaudited) Consolidated Balance Sheets - Assets September 30, 2002 (Unaudited) and December 31, 2001 (Audited) 4 Consolidated Balance Sheets - Liabilities and Stockholders' Equity September 30, 2002 (Unaudited) and December 31, 2001 (Audited) 5 Unaudited Consolidated Statements of Income Nine Month Periods ended September 30, 2002 and September 30, 2001 6 Unaudited Consolidated Statements of Comprehensive Income Nine Month Periods ended September 30, 2002 and September 30, 2001 7 Unaudited Consolidated Statements of Income Three Month Periods ended September 30, 2002 and September 30, 2001 8 Unaudited Consolidated Statements of Comprehensive Income Three Month Periods ended September 30, 2002 and September 30, 2001 9 Unaudited Consolidated Statement of Stockholders' Equity Nine Month Period ended September 30, 2002 10 Unaudited Consolidated Statement of Stockholders' Equity Nine Month Period ended September 30, 2001 11 Unaudited Consolidated Statements of Cash Flows Nine Month Periods ended September 30, 2002 and September 30, 2001 12 Notes to Unaudited Interim Financial Statements 13 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 23 ITEM 3. Quantitative and Qualitative Disclosures about Market Risks 34 ITEM 4. Controls and Procedures 34 PART II. OTHER INFORMATION 35 SIGNATURES 36 CERITIFICATIONS 37 4 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS FARMERS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except for per share data) ASSETS

5 FARMERS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except for per share data) LIABILITIES AND STOCKHOLDERS' EQUITY

6 FARMERS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands) (Unaudited)

7 FARMERS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands) (Unaudited)

8 FARMERS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands) (Unaudited)

9 FARMERS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Amounts in thousands) (Unaudited)

10 FARMERS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the nine month period ended September 30, 2002 (Amounts in thousands) (Unaudited)

11 FARMERS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the nine month period ended September 30, 2001 (Amounts in thousands) (Unaudited)

12 FARMERS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)

13 FARMERS GROUP, INC. AND SUBSIDIARIES NOTES TO INTERIM FINANCIAL STATEMENTS (Unaudited) A. Basis of presentation and summary of significant accounting policies The accompanying consolidated balance sheet of Farmers Group, Inc. ("FGI") and its subsidiaries (together, the "Company"; references to attorney-in-fact ("AIF"), as applicable in context, are to FGI, dba Farmers Underwriters Association, attorney-in-fact of Farmers Insurance Exchange; or Fire Underwriters Association, attorney-in-fact of Fire Insurance Exchange; or Truck Underwriters Association, attorney-in-fact of Truck Insurance Exchange) as of September 30, 2002, the related consolidated statements of income, comprehensive income for the three and nine month periods ended September 30, 2002 and September 30, 2001 and stockholders' equity and cash flows for the nine month periods ended September 30, 2002 and September 30, 2001, have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim periods and are unaudited. However, in management's opinion, the consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of results for such interim periods. These statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the consolidated balance sheets of the Company as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years reported in the SEC Form 10-K for the period ended December 31, 2001. Interim results are not necessarily indicative of results for the full year. All material inter-company transactions have been eliminated. Certain amounts applicable to prior years have been reclassified to conform to the 2002 presentation. The preparation of the Company's financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Company is AIF for three inter-insurance exchanges: Farmers Insurance Exchange, Fire Insurance Exchange and Truck Insurance Exchange (collectively the "Exchanges"), which operate in the property and casualty insurance industry. Each policyholder of each Exchange appoints the AIF to provide management services to each Exchange. For such services, the Company earns management fees based on a percentage of gross premiums earned by the Exchanges, their respective subsidiaries, Farmers Texas County Mutual Insurance Company, Foremost County Mutual Insurance Company and Foremost Lloyds of Texas (collectively the "P&C Group Companies"). The P&C Group Companies are owned by the respective policyholders of the Exchanges, Farmers Texas County Mutual Insurance Company and Foremost County Mutual Insurance Company as well as the underwriters of Foremost Lloyds of Texas. Accordingly, the Company has no ownership interest in the P&C Group Companies. Farmers New World Life Insurance Company ("Farmers Life"), a Washington based insurance company, is a wholly owned subsidiary of FGI. Farmers Life markets a broad line of individual life insurance products, including universal life, term life and whole life insurance and fixed annuity products, predominately flexible premium deferred annuities, as well as variable universal life insurance and variable annuity products. These products are sold directly by the P&C Group Companies' agents. Farmers Life also markets structured settlement annuities sold by independent brokers. However, by year end 2002, Farmers Life will exit the business of writing structured settlements. This decision to exit the structured settlement market was driven by A.M. Best's recent rating downgrade of Farmers Life from A+ (superior) to A (excellent) as structured settlements can often be written only by companies rated A+ or better. For the nine months ended September 30, 2002, the structured settlement business represented only 1.2% of Farmers Life's $168.9 million operating income. Farmers Reinsurance Company ("Farmers Re") is a wholly owned subsidiary of FGI. Effective January 1, 1998, Farmers Re entered into an auto physical damage ("APD") reinsurance agreement with the P&C Group 14 Companies. Effective April 1, 2001, this APD reinsurance agreement was cancelled and replaced with a similar APD reinsurance agreement supported by Farmers Re, Zurich affiliates and outside reinsurers. As a result, annual premiums ceded by the P&C Group Companies increased from $1.0 billion to $2.0 billion with Farmers Re assuming 10%, or $200.0 million. The remaining $1.8 billion is ceded to the Zurich affiliates and outside reinsurance companies identified in the agreement. As a result of the current agreement, on a monthly basis, premiums assumed by Farmers Re decreased from $83.3 million under the old agreement to $16.7 million under the current agreement. As such, Farmers Re's assumed premiums decreased from $350.0 million for the nine months ended September 30, 2001 to $150.0 million for the nine months ended September 30, 2002. For each of the three month periods ended September 30, 2002 and September 30, 2001, Farmers Re assumed premiums of $50.0 million. Farmers Re continues to assume a quota share percentage of ultimate net losses sustained by the P&C Group Companies in its APD line of business. The agreement, which can be terminated after 30 days notice by any of the parties, also provides for the P&C Group Companies to receive a ceding commission of 18% of premiums, versus 20% under the old agreement, with additional experience commissions that depend on loss experience. Similar to the old agreement, this experience commission arrangement limits Farmers Re's potential underwriting gain on the assumed business to 2.5% of premiums assumed. In December 2001, Farmers Re paid the P&C Group Companies $19.3 million of losses and loss adjustment reserves and $0.3 million of accrued interest as an estimate of a commutation related to the 2001 accident year. In May 2002, a final commutation of the 2001 accident year losses and loss adjustment expenses was made. Under this commutation, Farmers Re and the P&C Group Companies ultimately commuted $18.9 million of losses and loss adjustment expenses related to the 2001 accident year. References to the "FGI Insurance Subsidiaries" within the consolidated financial statements are to Farmers Life and Farmers Re. References to "Farmers Management Services" are to the Company excluding the FGI Insurance Subsidiaries. In December 1988, B.A.T Industries p.l.c. ("B.A.T"), acquired 100% ownership of the Company through its wholly owned subsidiary BATUS Financial Services. Immediately thereafter, BATUS Financial Services was merged into FGI. The acquisition was accounted for as a purchase and, accordingly, the acquired assets and liabilities were recorded in the Company's consolidated balance sheets based on their estimated fair values at December 31, 1988. In September 1998, the financial businesses of B.A.T, which included the Company, were merged with Zurich Insurance Company ("ZIC"). The businesses of ZIC and the financial services businesses of B.A.T were transferred to Zurich Group Holding ("ZGH"), formerly known as Zurich Financial Services, a Swiss holding company with headquarters in Zurich, Switzerland. This merger was accounted for by ZGH as a pooling of interests under International Accounting Standards ("IAS"). As a result of a unification of the holding structure of the Zurich Financial Services Group in October 2000, Zurich Financial Services was renamed Zurich Group Holding, as noted above, and a new group holding company, Zurich Financial Services, was formed. As such, references to "Zurich" are to the group holding company, Zurich Financial Services. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations". This Statement establishes the standard to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. It also applies to legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal operation of a long-lived asset, except for certain obligations of lessees. The provisions of this Statement are effective for fiscal years beginning after June 15, 2002, with early application encouraged. The Company does not expect the adoption of this Statement to have a material impact on its consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This Statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. This Statement supersedes SFAS No. 121, "Accounting for the Impairment of 15 Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". However, this Statement retains the fundamental provisions of SFAS No. 121 for a) recognition and measurement of the impairment of long-lived assets to be held and used and b) measurement of long-lived assets to be disposed of by sale. This Statement also supersedes the accounting and reporting provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for segments of a business to be disposed of. However, this Statement retains the requirements of APB Opinion No. 30 to report discontinued operations separately from continuing operations and extends that reporting to a component (rather than a segment of a business) of an entity that either has been disposed of or is classified as held for sale. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The provisions of this Statement generally are to be applied prospectively. The adoption of this Statement did not have a material impact on the Company's consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements". This Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers". In addition, this Statement amends SFAS No. 13, "Accounting for Leases", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The provisions of this Statement are effective for fiscal years beginning after June 15, 2002. The Company does not expect the adoption of this Statement to have a material impact on its consolidated financial statements. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". This Statement replaces 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)". This Statement requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of the Statement are to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not expect the adoption of this Statement to have a material impact on its consolidated financial statements. In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain Financial Institutions". This Statement amends SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions", SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", and FASB Interpretation No. 9, "Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method". This Statement provides guidance on the accounting for the acquisitions of a financial institution. The provisions of this Statement are effective for activity on or after October 1, 2002. The Company is not impacted by the adoption of this Statement as it is not involved in the acquisition of banking or thrift institutions. 16 B. Intangible assets As of September 30, 2002, the Company held the following intangible assets:

For the three and nine months ended September 30, 2002, amortization expense, net of accrued interest, related to the VOLBA asset totaled $3.1 million and $12.1 million, respectively. Estimated amortization, net of accrued interest, related to the VOLBA asset for each of the years in the five-year period ended December 31, 2006 follows:

17 Following is a reconciliation of reported net income to net income adjusted to exclude the effects of amortization expenses related to goodwill and the AIF relationships:

C. Management fees FGI and its subsidiaries, through their AIF relationships with the Exchanges, provide non-claims related management services to the P&C Group Companies and receive management fees for the services rendered. As a result, the Company received management fees from the P&C Group Companies of $1,256.3 million and $1,177.4 million for the nine month periods ended September 30, 2002 and September 30, 2001, respectively. For the three month periods ended September 30, 2002 and September 30, 2001, the Company received management fees from the P&C Group Companies of $428.8 million and $399.9 million, respectively. D. Texas On September 24, 2002, Farmers Insurance Exchange and Fire Insurance Exchange announced that they will not be renewing their current homeowners insurance policies in the state of Texas beginning in November 2002. This action was taken in connection with the issuance by the Texas Commissioner of Insurance of an emergency cease and desist order against Farmers Insurance Exchange and Fire Insurance Exchange alleging unfair rate-setting practices by both and will impact approximately 700,000 households in Texas. The decision to stop providing homeowners insurance in Texas will negatively impact the revenues received by the Company from Farmers Insurance Exchange and Fire Insurance Exchange. Farmers Insurance Exchange and Fire Insurance Exchange have been actively discussing and engaging in negotiations with the Texas Department of Insurance and other Texas state agencies to resolve these homeowners insurance issues. As a part of the negotiation process, Farmers Insurance Exchange and Fire Insurance Exchange announced on November 11, 2002 that they would extend the offering of homeowners insurance to existing policyholders whose policies were scheduled to renew between November 11, 2002 and December 10, 2002. For the nine months ended September 30, 2002, the Company earned approximately $50.4 million in management fees related to the homeowners business in Texas. As of September 30, 2002, the Company is unable to determine the impact this decision will have on other insurance provided by the P&C Group Companies (e.g., automobile, umbrella, flood, commercial) and Farmers Life. E. Material Contingencies FGI is a party to lawsuits arising from its attorney in fact relationship with Farmers Insurance Exchange and similar relationships involving its subsidiaries Fire Underwriters Association and Truck Underwriters Association. The 18 Company is also party to lawsuits arising from its other normal business activities. These actions are in various stages of discovery and development, and some seek punitive as well as compensatory damages. In the opinion of management, the Company has not engaged in any conduct which should warrant the award of any material punitive or compensatory damages. The Company intends to vigorously defend its position in each case, and management believes that, while it is not possible to predict the outcome of such matters with absolute certainty, ultimate disposition of these proceedings should not have a material adverse effect on the Company's consolidated results of operations or financial position. In addition, the Company is, from time to time, involved as a party in various governmental and administrative proceedings. F. Related parties As of September 30, 2002, the Company held a $220.0 million note receivable from ZGA US Limited ("ZGAUS"), a subsidiary of Zurich, formerly known as Orange Stone (Delaware) Holdings Limited. The Company loaned $250.0 million to ZGAUS on December 15, 1999 and, in return, received a medium-term note with a 7.50% fixed interest rate that matures on December 15, 2004. Subsequently, on April 9, 2002, $30.0 million of the note receivable was redeemed. Interest on this note is paid semi-annually. Interest income totaled $13.0 million and $14.1 million for each of the nine month periods ended September 30, 2002 and September 30, 2001, respectively. For each of the three month periods ended September 30, 2002 and September 30, 2001, interest income totaled $4.1 million and $4.7 million, respectively. In addition, as of September 30, 2002, the Company held $95.0 million of notes receivable from Zurich Financial Services (UKISA) Limited ("UKISA"), a subsidiary of Zurich. On September 3, 2002, $25.0 million of notes receivable from UKISA, having a fixed coupon rate of 6.80% and $70.0 million of notes receivable from UKISA bearing interest at a coupon rate of 5.67% matured. These notes were renewed for short-term notes receivable from UKISA of $12.5 million, $12.5 million and $70.0 million, each with a 2.75% fixed coupon rate and a September 2, 2003 maturity date. Interest on the UKISA notes is paid semi-annually. Interest income totaled $4.0 million and $12.5 million for each of the nine month periods ended September 30, 2002 and September 30, 2001, respectively. For each of the three month periods ended September 30, 2002 and September 30, 2001, interest income totaled $1.2 million and $3.4 million, respectively. G. Certificates of contribution and surplus note of the P&C Group Companies From time to time, the Company has purchased certificates of contribution or surplus notes of the P&C Group Companies in order to supplement the policyholders' surplus of the P&C Group Companies. Effective December 2001, Farmers Life redeemed a $119.0 million surplus note of the P&C Group Companies and subsequently purchased $107.0 million of certificates of contribution of the P&C Group Companies. These transactions were settled in January 2002. At September 30, 2002, the Company held the following certificates of contribution and surplus note of the P&C Group Companies: An $87.5 million surplus note, issued in March 2000, bearing interest at 8.50% annually and maturing in February 2005. $370.0 million of certificates of contribution, issued in March 2000, bearing interest at 7.85% annually and maturing in March 2010. $350.0 million of certificates of contribution, issued in November 2001, bearing interest at 6.00% annually and maturing in September 2006. $206.5 million of certificates of contribution, issued in December 2001, bearing interest at 6.00% annually and maturing in September 2006. 19 Other certificates of contribution totaling $23.3 million which bear interest at various rates. Interest income related to the certificates of contribution and surplus notes of the P&C Group Companies totaled $53.3 million and $39.7 million for each of the nine month periods ended September 30, 2002 and September 30, 2001, respectively. For each of the three months ended September 30, 2002 and September 30, 2001, interest income related to the certificates of contribution and surplus notes of the P&C Group Companies totaled $17.8 million and $13.2 million, respectively. Conditions governing payment of interest and repayment of principal are outlined in the certificates of contribution and the surplus note. Generally, repayment may be made only when the issuer has an appropriate amount of surplus and then only after approval is granted by the issuer's governing Board and the appropriate state insurance regulatory department. H. Supplemental cash flow information For financial statement purposes, the Company considers all investments with original maturities of 90 days or less as cash equivalents. Following is a reconciliation of the balance sheet cash and cash equivalent totals to the consolidated cash flow total:

Cash payments for interest were $2.7 million and $1.8 million for the nine month periods ended September 30, 2002 and September 30, 2001, respectively, while the cash payment for dividends to the holders of the Company's Quarterly Income Preferred Securities ("QUIPS") was $31.6 million for each of the nine month periods ended September 30, 2002 and September 30, 2001. Cash payments for income taxes were $290.3 million and $229.0 million for the nine month periods ended September 30, 2002 and September 30, 2001, respectively. On September 3, 2001, the Company received $214.6 million from UKISA in settlement of a $207.0 million note receivable and $7.6 million of accrued interest. In addition, on April 9, 2002, the Company received $30.0 million from ZGAUS in partial settlement of a $250.0 million note receivable and $0.6 million of accrued interest (see Note F). I. Operating segments The Company's principal activities are the provision of management services to the P&C Group Companies and the ownership and operation of the life and reinsurance subsidiaries. These activities are managed separately as each offers a unique set of services. As a result, the Company is comprised of the following three reportable operating segments as defined in SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information": the management services segment, the life insurance segment and the reinsurance segment. Through its AIF relationships with the Exchanges, the Company's management services segment (Farmers Management Services) is responsible for providing management services to the P&C Group Companies. Management fees earned from the P&C Group Companies totaled $1,256.3 million and $1,177.4 million respectively, for the nine months ended September 30, 2002 and September 30, 2001, which represented 60.8% and 52.4% of the Company's 20 consolidated operating revenues for the same periods. For the three month period ended September 30, 2002 and September 30, 2001, management fees earned by the Company as AIF for the Exchanges totaled $428.8 million and $399.9 million, respectively, which represented 61.6% and 60.0% of the Company's consolidated operating revenue for the same periods. The Company has no ownership interest in the P&C Group Companies and, therefore, is not directly affected by the underwriting results of the P&C Group Companies. However, as management fees comprise a significant part of the Company's revenues, the ongoing financial performance of the Company depends on the volume of business written by and the operating performance and financial strength of the P&C Group Companies. The life insurance segment provides individual life insurance products, including universal life, term life and whole life insurance and structured settlement and annuity products, as well as variable universal life and annuity products. Finally, the reinsurance segment provides reinsurance coverage to a percentage of the APD business written by the P&C Group Companies. The Company's management uses an IAS basis of accounting for evaluating segment performance and determining how resources should be allocated. This differs from the basis used in preparing the Company's financial statements included in the SEC Form 10-K and 10-Q reports, which is based on GAAP and therefore excludes the effects of all IAS adjustments. As of September 30, 2001, the Company recorded amortization for both goodwill and the AIF relationships on a GAAP basis. As a result, the Company recorded an IAS adjustment to reverse the GAAP amortization of goodwill on an IAS basis, under which there is no goodwill. As of September 30, 2002, the Company no longer records amortization related to goodwill and the AIF relationships on a GAAP basis due to SFAS 142. As a result, the Company no longer records an IAS adjustment for the reversal of the GAAP amortization of goodwill. However, the Company now records an IAS adjustment for the amortization of the AIF relationships on an IAS basis. The Company accounts for intersegment transactions as if they were to third parties and, as such, records the transactions at current market prices. There were no intersegment revenues among the Company's three reportable operating segments for the nine month and three month periods ended September 30, 2002 and September 30, 2001. Information regarding the Company's reportable operating segments follows:

(a) Revenues for the insurance operating segments include net investment income, net realized losses and impairment losses on investments. (b) Amount includes adjustment associated with the amortization of the AIF relationships ($32.1 million). (c) Amounts include impairment losses on investments. 21

(a) Revenues for the insurance operating segments include net investment income, net realized gains/(losses) and impairment losses on investments. (b) Amount includes adjustment associated with the amortization of goodwill ($15.0 million). (c) Amounts include impairment losses on investments. J. Impairment losses on investments The Company regularly reviews its investment portfolio to determine whether declines in the value of investments are other than temporary as defined by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The Company's review for declines in value includes reviewing historical and forecasted financial information as well as analyzing the market performance of similar types of investments. As a result of the Company's review, the Company determined that some of its investments had declines in value that were other than temporary as of September 30, 2002 and September 30, 2001 due to unfavorable market and economic conditions. Accordingly, for the three and nine months ended September 30, 2002, the Company recorded $28.9 million and $78.8 million, respectively, of impairment losses on investments in the equity portfolios. Impairment losses were recorded for each reporting segment and, for the three months ended September 30, 2002, amounted to $11.0 million, $4.0 million and $13.9 million for Farmers Management Services, Farmers Re and Farmers Life, respectively. For the nine months ended September 30, 2002, Farmers Management Services, Farmers Re and Farmers Life recorded $31.9 million, $12.9 million and $34.0 million, respectively, of impairment losses. For the three and nine months ended September 30, 2001, the Company recorded $77.8 million and $86.1 million, respectively, of impairment losses on investments primarily in the equity portfolios. Impairment losses recorded for each reporting segment for the three months ended September 30, 2001 amounted to $38.2 million, $7.8 million and $31.8 million for Farmers Management Services, Farmers Re and Farmers Life, respectively. For the nine months ended September 30, 2001, Farmers Management Services, Farmers Re and Farmers Life recorded $38.2 million, $7.8 million and $40.1 million, respectively, of impairment losses. K. Software abandonment On September 4, 2002, the Zurich Board of Directors approved a set of strategic initiatives which call for Zurich to refocus its strategic direction on core insurance operations. This replaced Zurich's previous strategy of increasing product density and customer reach through e-based initiatives. In light of this new strategy, the Company undertook a review of its existing capitalized software assets in order to determine which, if any, should be deemed abandoned. This review resulted in the identification of $27.5 million of internally developed software that no longer supports the Company's strategic direction. As a result, the Company wrote down the $27.5 million of capitalized assets in the quarter ended September 30, 2002, which is reflected in the general and administrative expense line. 23 L. Other investments In December 2001, the Company purchased $50.0 million of Endurance Specialty Insurance Limited ("Endurance") equity securities in a private placement offering. As non-exchange traded securities, these investments were carried at cost and were reported on the "Other investments" line in the Farmers Management Services section of the consolidated balance sheet. On September 30, 2002, the Company sold the Endurance equity investment at par for $50.0 million as a result of a share repurchase agreement with Endurance. M. Revolving credit agreement On July 1, 2002, the Company's existing $500.0 million revolving credit agreement expired. On September 26, 2002, the Company entered into a new revolving credit agreement with certain financial institutions. Under this one year agreement, the Company has an aggregate borrowing facility of $250.0 million. The proceeds of the facility are available to the Company for general corporate purposes, including loans to the P&C Group Companies. Facility fees are payable on the aggregate borrowing facility in the amount of 6 basis points per annum. In the case of a draw on the facility, the Company has the option to borrow at an annual rate equal to (i) London Interbank Offered Rate ("LIBOR") plus an Applicable Margin of 19 basis points or (ii) the Alternate Base Rate (to be defined as the higher of (a) the Bank of America prime rate or (b) the Federal Funds rate plus 50 basis points). As of September 30, 2002, the Company did not have any outstanding borrowings under the revolving credit agreement. Facility fees paid under the prior agreement for the period ended June 30, 2002 were $0.1 million and were reimbursed by the P&C Group Companies. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General The Company's principal activities are the provision of management services to the P&C Group Companies and the ownership and operation of the FGI Insurance Subsidiaries. Revenues and expenses relating to these principal business activities are reflected in the Company's Consolidated Financial Statements prepared in accordance with GAAP, which differs from statutory accounting practices ("SAP"), which the FGI Insurance Subsidiaries are required to use for regulatory reporting purposes. Farmers Life, a wholly owned subsidiary of the Company, underwrites and sells life insurance, structured settlement and annuity products as well as variable universal life and variable annuity products. Revenues attributable to traditional life insurance products, such as whole life or term life contracts, as well as structured settlements with life contingencies are classified as premiums as they become due. Future benefits are associated with such premiums (through increases in liabilities for future policy benefits), and prior period capitalized costs are amortized (through amortization of DAC) so that profits are generally recognized over the same period as revenue income. Revenues attributable to universal life, variable universal life and variable annuity products consist of policy charges for the cost of insurance, policy administration charges, surrender charges and investment income on assets allocated to support policyholder account balances on deposit. Revenues for deferred annuity products consist of surrender charges and investment income on assets allocated to support policyholder account balances. Expenses on universal life and annuity policies as well as on variable products include interest credited to policyholders on policy balances as well as benefit claims incurred in excess of policy account balances. Revenues attributable to structured settlements without life contingencies consist of investment income on assets allocated to support the policyholder benefits schedule and expenses consist of interest credited to policyholders on policy balances. By year end 2002, Farmers Life will exit the business of writing structured settlements. This decision to exit the structured settlement market was driven by A.M. Best's recent rating downgrade of Farmers Life from A+ (superior) to A (excellent) as structured settlements can often only be written by companies rated A+ or better. For the nine months ended September 30, 2002, the structured settlement business represented only 1.2% of Farmers Life's $168.9 million operating income. 24 The Company provides reinsurance coverage to the P&C Group Companies through its subsidiary, Farmers Re. Effective April 1, 2001, the APD reinsurance agreement between Farmers Re and the P&C Group Companies which had been in force since January 1998 was cancelled and replaced with a similar APD reinsurance agreement supported by Farmers Re, Zurich affiliates and outside reinsurers. As a result, premiums ceded by the P&C Group Companies increased from $1.0 billion to $2.0 billion, with Farmers Re assuming 10%, or $200.0 million. The remaining $1.8 billion is ceded to the Zurich affiliates and outside reinsurance companies identified in the agreement. As a result of this current agreement, Farmers Re's premiums decreased from $350.0 million for the nine month period ended September 30, 2001 to $150.0 million for the nine month period ended September 30, 2002. For each of the three month periods ended September 30, 2002 and September 30, 2001, Farmers Re assumed premiums of $50.0 million. Additionally, on a monthly basis, premiums assumed by Farmers Re decreased from $83.3 million under the old agreement to $16.7 million under the current agreement. Farmers Re continues to assume a quota share percentage of ultimate net losses sustained by the P&C Group Companies in their APD lines of business. The agreement, which can be terminated after 30 days notice by any of the parties, also provides for the P&C Group Companies to receive a ceding commission of 18% of premiums, versus 20% under the old agreement, with additional experience commissions that depend on loss experience. Similar to the old agreement, this experience commission arrangement limits Farmers Re's potential underwriting gain on the assumed business to 2.5% of premiums assumed. Major Customer and Related Matters The P&C Group Companies collectively represent the Company's largest customer. Management fees earned by the Company as AIF for the Exchanges totaled $1,256.3 million and $1,177.4 million, respectively, for the nine months ended September 30, 2002 and September 30, 2001, which represented 60.8% and 52.4% of the Company's consolidated operating revenues for the same periods. For the three month period ended September 30, 2002 and September 30, 2001, management fees earned by the Company as AIF for the Exchanges totaled $428.8 million and $399.9 million, respectively, which represented 61.6% and 60.0% of the Company's consolidated operating revenue for the same periods. The Company has no ownership interest in the P&C Group Companies and, therefore, is not directly affected by the underwriting results of the P&C Group Companies. However, as management fees comprise a significant part of the Company's revenues, the ongoing financial performance of the Company depends on the volume of business written by and the operating performance and financial strength of the P&C Group Companies. In 2002, the P&C Group Companies have shown a significant improvement in their underwriting results. Their combined ratio decreased 10.6 percentage points from 117.4% for the nine months ended September 30, 2001 to 106.8% for the nine months ended September 30, 2002. However, the improvement in underwriting results was offset in part by a deterioration in investment results due to continuing adverse market conditions. As a result, the P&C Group Companies' statutory surplus as regards to policyholders decreased from $3.46 billion as of December 31, 2001 to $3.27 billion as of September 30, 2002 and included a $0.2 billion operating loss, net of tax, in 2002, which compares favorably to the $0.7 billion operating loss, net of tax, as of September 30, 2001. This decrease in surplus largely reflects the unfavorable underwriting cycle and poor investment environment initially experienced by the P&C Group Companies in 2000. In response to this unfavorable underwriting cycle, the P&C Group Companies initiated aggressive rate increases in 2001 and throughout 2002 and tightened underwriting guidelines. Although the full effect of these actions have not fully been realized as of September 30, 2002, third quarter 2002 results showed signs of continued improvement and outperformed the results achieved in previous quarters. However, continued operating losses by the P&C Group Companies and further decline in their surplus would impact their ability to grow written premiums which, in turn, would impact the amount of the management fees earned by the Company. On September 24, 2002, Farmers Insurance Exchange and Fire Insurance Exchange announced that they will not renew their current homeowners insurance policies in the state of Texas beginning in November 2002. This decision will have a negative impact on the revenues received by the Company. Farmers Insurance Exchange and Fire Insurance Exchange have been actively discussing and engaging in negotiations with the Texas Department of Insurance and other Texas state agencies to resolve these homeowners insurance issues. As a part of the negotiation process, Farmers Insurance Exchange and Fire Insurance Exchange announced on November 11, 2002 that they would extend the offering of homeowners insurance to existing policyholders whose policies were scheduled to renew between November 11, 2002 and December 10, 2002. As of September 30, 2002, the Company is unable to 25 determine the impact this decision will have on other insurance provided by the P&C Group Companies (e.g., automobile, umbrella, flood, commercial) and Farmers Life (see Note D to Consolidated Financial Statements, see "Note D"). Critical Accounting Policies The consolidated financial statements of the Company have been prepared in accordance with GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Company's critical accounting policies relate to revenue recognition, valuation of intangible assets, impairment of investments, the fair value of financial instruments and accounting for software. Revenue Recognition. Through its AIF relationships with the Exchanges, the Company provides non-claims related management services to the P&C Group Companies' business and receives management fees for the services rendered. The Company recognizes management fee revenue according to the revenue recognition criteria established by Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". The Company, through its AIF relationships with the Exchanges, is contractually permitted to receive a management fee based on the gross premiums earned by the P&C Group Companies. The range of fees has varied by line of business over time. During the past five years, aggregate management fees have averaged between 12% and 13% of gross premiums earned by the P&C Group Companies. In order to enable the P&C Group Companies to maintain appropriate capital and surplus while offering competitive insurance rates, each AIF has historically charged a lower management fee than the contractually permitted fee of 20% (25% in the case of the Fire Insurance Exchange). In order to ensure that its management fees remain competitive, the Company periodically reviews the fee it charges for the services it provides based on the level and cost of the services as well as market conditions. As the P&C Group Companies earn gross premiums ratably over the life of the underlying insurance policy, the Company receives and recognizes the corresponding management fee ratably over the life of the underlying policies for which it is providing services. The risk of uncollectable premiums is borne by the P&C Group Companies and collectability of the premiums does not affect the amount of revenues the Company recognizes in a given period. Intangible Assets. The Company's critical accounting policies related to the valuation of intangible assets include the AIF relationships, Goodwill, VOLBA and DAC. AIF. As AIF, the Company receives a substantial portion of its revenues and profits through the management services the Company provides to the P&C Group Companies. Therefore, the Company's ongoing financial performance depends on the volume of business written by and the operating performance and financial strength of the P&C Group Companies. As a result, a portion of the purchase price ($1.7 billion) associated with B.A.T's acquisition of the Company in 1988 was assigned to these AIF relationships. Through December 31, 2001, the value so assigned was amortized on a straight-line basis over forty years and was regularly reviewed for indications of impairment in value which in the view of management were other than temporary, including unexpected or adverse changes in the following: (1) the economic or competitive environments in which the Company operates, (2) profitability analyses and (3) cashflow analyses. Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142 and has identified the AIF relationships as intangible assets with indefinite useful lives. The Company performed impairment tests of the AIF relationships using discounted future cashflows and such tests did not result in any impairment of the recorded AIF relationships. Additionally, as SFAS No. 142 ceases amortization of intangible assets with indefinite useful lives, the Company no longer records $42.8 million of pretax annual amortization relating to the AIF relationships. For the 26 three and nine months ended September 30, 2001 pretax amortization of the AIF relationships totaled $10.7 million and $32.1 million, respectively. Goodwill. The excess of the purchase price over the fair value of the net assets of the Company at the date of the Company's acquisition by B.A.T ($2.4 billion) was amortized on a straight-line basis over forty years as of December 31, 2001. The carrying amount of the Goodwill was regularly reviewed for indications of impairment in value which in the view of management were other than temporary, including unexpected or adverse changes in the following: (1) the economic or competitive environments in which the Company operates, (2) profitability analyses and (3) cashflow analyses. Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142. As of March 31, 2002, the Company completed the transitional goodwill impairment test using discounted future cashflows. This test did not result in any impairment of recorded goodwill. Additionally, as SFAS No. 142 ceases amortization of goodwill, the Company no longer records $60.0 million of annual amortization. For the three and nine months ended September 30, 2001, amortization of goodwill totaled $15.0 million and $45.0 million, respectively. VOLBA. At the date of B.A.T's acquisition of the Company, a portion of the purchase price ($662.8 million) was assigned to the VOLBA asset, which represented an actuarial determination of the expected profits from the life business in force at that time. The amount so assigned is being amortized over its actuarially determined useful life with the unamortized amount included in the "Value of Life Business Acquired" line in the accompanying consolidated balance sheets, which amounted to $255.3 million as of September 30, 2002. DAC. The Company recognizes traditional life product premiums as revenues when they become due and future benefits and expenses are matched with such premiums so that the majority of profits are recognized over the premium-paying period of the policy. This matching of revenues and expenses is accomplished through the provision for future policy benefits and the amortization of DAC. DAC is amortized in relation to the present value of expected gross profit margins on the policies, after giving recognition to differences between actual and expected gross profit margins to date. In compliance with a SEC staff announcement, the Company has recorded certain entries to the DAC and VOLBA lines of the consolidated balance sheet in connection with SFAS No. 115. The SEC requires that companies record entries to those assets and liabilities that would have been adjusted had the unrealized investment gains or losses from securities classified as available-for-sale actually been realized, with corresponding credits or charges reported directly to stockholders' equity. Accordingly, DAC and VOLBA are increased or decreased to reflect what would have been the impact on estimated future gross profits, had net unrealized gains or losses on securities been realized at the balance sheet date. Net unrealized gains or losses on securities, within stockholders' equity, also reflect this impact. Impairment of Investments. The Company regularly reviews its investment portfolio to determine whether declines in the value of investments are other than temporary as defined by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The Company's review for declines in value includes analyzing historical and forecasted financial information as well as reviewing the market performance of similar types of investments. As a result of the Company's review, the Company determined that some of its investments had declines in value that were other than temporary as of September 30, 2002 and September 30, 2001 due to unfavorable market and economic conditions. Accordingly, for the three and nine months ended September 30, 2002, the Company recorded $28.9 million and $78.8 million, respectively, of impairment losses on investments in the equity portfolios. Impairment losses were recorded for each reporting segment and, for the three months ended September 30, 2002, amounted to $11.0 million, $4.0 million and $13.9 million for Farmers Management Services, Farmers Re and Farmers Life, respectively. Impairment losses recorded for each reporting segment for the nine months ended September 30, 2002 amounted to $31.9 million, $12.9 million and $34.0 million for Farmers Management Services, Farmers Re and Farmers Life, respectively. For the three and nine months ended September 30, 2001, the Company recorded $77.8 million and $86.1 million, respectively, of impairment losses on investments primarily in the equity portfolios. Impairment losses recorded for each reporting segment for the three months ended September 30, 2001 amounted to 27 $38.2 million, $7.8 million and $31.8 million for Farmers Management Services, Farmers Re and Farmers Life, respectively. For the nine months ended September 30, 2001, Farmers Management Services, Farmers Re and Farmers Life recorded $38.2 million, $7.8 million and $40.1 million, respectively, of impairment losses. Fair Value of Financial Instruments. The fair values of financial instruments have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, these estimates may not be indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts. Accounting for Software. The Company follows the provisions of Statement of Position No. 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use". The Company expenses costs incurred in the preliminary project stage and, thereafter, capitalizes costs incurred in developing or obtaining internal use software. Certain costs, such as maintenance and training, are expensed as incurred. Capitalized costs are amortized on a straight-line basis over the useful life of the software once it is placed into service. The Company regularly reviews its existing capitalized software assets in order to determine if any should be considered impaired or abandoned. Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001 Farmers Management Services Operating Revenues. Operating revenues, which primarily consist of management fees paid to Farmers Management Services as a percentage of gross premiums earned by the P&C Group Companies, increased $30.9 million, or 7.2%, from $428.3 million for the three months ended September 30, 2001 to $459.2 million for the three months ended September 30, 2002. This growth in operating revenues was primarily attributable to higher gross premiums earned by the P&C Group Companies, which benefited from a rising premium rate environment. Gross premiums earned increased $258.9 million, or 8.5%, to $3,310.0 million for the three months ended September 30, 2002 due primarily to increases in premium written driven by significant rate increases taken in 2001 and 2002. Operating Expenses. Operating expenses as a percentage of operating revenues decreased from 54.0% for the three months ended September 30, 2001 to 52.7% for the three months ended September 30, 2002, a decrease of 1.3 percentage points. This decrease was partially due to the fact that effective January 1, 2002, the Company ceased recording amortization related to goodwill and the AIF relationships as a result of the adoption of SFAS No. 142. For the three months ended September 30, 2001, amortization related to these two items totaled $25.7 million. Offsetting the above decrease was a $27.5 million write down of internally developed software in the quarter ended September 30, 2002. Excluding the effects of the software write down and the amortization of goodwill and the AIF relationships, operating expenses as a percentage of operating revenues decreased from 48.0% for the three months ended September 30, 2001 to 46.7% for the three months ended September 30, 2002, a decrease of 1.3 percentage points. Salaries and Employee Benefits. Salaries and employee benefits expenses increased $5.2 million, or 4.8%, from $107.4 million for the three months ended September 30, 2001 to $112.6 million for the three months ended September 30, 2002 due primarily to an increase in pension, medical insurance and profit sharing expenses. This increase was offset in part by a decrease in outside contractors expenses. Buildings and Equipment Expenses. Buildings and equipment expenses increased from $27.6 million for the three months ended September 30, 2001 to $28.1 million for the three months ended September 30, 2002, an increase of $0.5 million, or 2.0%, due primarily to an increase in the amortization expense related to internally developed software as well as increased software maintenance costs. Amortization of the Attorney-In-Fact Relationships and Goodwill. Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142. As a result, the Company ceased recording amortization related to goodwill and the AIF relationships. For the three months ended September 30, 2001, amortization of the AIF 28 relationships and goodwill totaled $25.7 million. This amortization resulted from purchase accounting adjustments made as a result of the acquisition of the Company by B.A.T in December 1988. General and Administrative Expenses. General and administrative expenses increased from $70.7 million for the three months ended September 30, 2001 to $101.4 million for the three months ended September 30, 2002, an increase of $30.7 million, or 43.4%, due primarily to the $27.5 million write down of internally developed software in the quarter ended September 30, 2002 (see Note K). Net Investment Income. Net investment income decreased from $16.6 million for the three months ended September 30, 2001 to $14.9 million for the three months ended September 30, 2002, a decrease of $1.7 million, or 10.2%. This decrease was due mainly to a change in the portfolio mix which resulted in a larger portion of invested assets held in short term securities earning lower investment yields, as well as declining market yields. Net Realized Gains/(Losses). Net realized gains/(losses) increased from a $0.1 million loss for the three months ended September 30, 2001 to $0.2 million gain for the three months ended September 30, 2002, an increase of $0.3 million. Impairment Losses on Investments. Impairment losses on investments decreased from $38.2 million for the three months ended September 30, 2001 to $11.0 million for the three months ended September 30, 2002, a decrease of $27.2 million, or 71.2%, due primarily to a decrease in equity impairments related to common stock. Dividends on Preferred Securities of Subsidiary Trusts. Dividend expense related to the $500.0 million of QUIPS issued in 1995 was $10.6 million in each of the three months ended September 30, 2002 and September 30, 2001. Provision for Income Taxes. Provision for income taxes increased from $69.3 million for the three months ended September 30, 2001 to $77.3 million for the three months ended September 30, 2002, an increase of $8.0 million, or 11.5%, due mainly to an increase in pretax income between periods. Farmers Management Services. As a result of the foregoing, Farmers Management Services income increased from $95.4 million for the three months ended September 30, 2001 to $133.4 million for the three months ended September 30, 2002, an increase of $38.0 million, or 39.8%. Excluding the software write down and the change in the amortization of intangibles, income increased by $33.4 million, or 28.5%, between the three month periods of September 30, 2001 and September 30, 2002. FGI Insurance Subsidiaries Farmers Re Under the quota share reinsurance treaty, Farmers Re assumed $50.0 million of premiums in each of the three month periods ended September 30, 2002 and September 30, 2001. Losses and loss adjustment expenses incurred under this treaty were $28.9 million for the three months ended September 30, 2002 and $35.3 million for the three months ended September 30, 2001. Non-life reinsurance commissions were $19.8 million for the three months ended September 30, 2002 and $13.5 million for the three months ended September 30, 2001. Income before taxes decreased $0.5 million from $6.2 million for the three months ended September 30, 2001 to $5.7 million for the three months ended September 30, 2002. This decrease was due to a $5.5 million decrease in realized gains offset by a $3.7 million decrease of impairment losses on investments and a $1.3 million increase in net investment income. For the three month periods ended September 30, 2002 and September 31, 2001, Farmers Re's contribution to net income was $4.2 million and $4.4 million, respectively. Farmers Life Total Revenues. Total revenues decreased from $183.5 million for the three months ended September 30, 2001 to $182.0 million for the three months ended September 30, 2002 a decrease of $1.5 million, or 0.8%. 29 Life and Annuity Premiums. Life premiums increased from $68.4 million for the three months ended September 30, 2001 to $69.8 million for the three months ended September 30, 2002, an increase of $1.4 million or 2.0%. Life Policy Charges. Life policy charges increased from $54.3 million for the three months ended September 30, 2001 to $56.1 million for the three months ended September 30, 2002, an increase of $1.8 million, or 3.3%, reflecting a growth in universal life-type insurance in-force. Net Investment Income. Net investment income increased from $83.1 million for the three months ended September 30, 2001 to $86.1 million for the three months ended September 30, 2002, an increase of $3.0 million, or 3.6%. This increase was due to growth in mean invested assets, principally fixed income instruments, partially offset by a decline of yields on fixed income instruments of 57 basis points. Net Realized Gains/(Losses). Net realized gains/(losses) decreased from a $9.5 million gain for the three months ended September 30, 2001 to a $16.1 million loss for the three months ended September 30, 2002, a decrease of $25.6 million, or 268.4%. This decrease was due primarily to losses generated from fixed income sales particularly in the telecommunications sector made for risk mitigation purposes. The largest of these sales was the disposal of $25.3 million of securities issued by Qwest Capital Funding, Inc., resulting in a loss of $11.7 million. Impairment Losses on Investments. Impairment losses on investments decreased from $31.9 million for the three months ended September 30, 2001 to $13.9 million for the three months ended September 30, 2002, a decrease of $18.0 million, or 56.4%, due primarily to timing differences between periods in loss recognitions related to equity holdings. Due to the timing of unfavorable market conditions, equity impairments were initially recorded in September 2001, while in 2002 equity impairments were taken each quarter. Total Operating Expenses. Total operating expenses decreased from $151.8 million for the three months ended September 30, 2001 to $150.7 million for the three months ended September 30, 2002, a decrease of $1.1 million, or 0.7%. Life Policyholders' Benefits and Charges. Life policyholders' benefits expense and charges increased from $117.0 million for the three months ended September 30, 2001 to $118.5 million for the three months ended September 30, 2002, an increase of $1.5 million, or 1.3%. Policy Benefits. Policy benefits, which consist primarily of death and surrender benefits on life products, increased from $41.5 million for the three months ended September 30, 2001 to $43.7 million for the three months ended September 30, 2002, an increase of $2.2 million, or 5.3%, due to growth in the volume of life insurance in-force. Increase in Liability for Future Benefits. Increase in liability for future benefits expense increased from $29.9 million for the three months ended September 30, 2001 to $31.0 million for the three months ended September 30, 2002, an increase of $1.1 million, or 3.7%. This increase was primarily attributable to an increase in deposits for structured settlements involving life contingencies compared to the three months ended September 30, 2001. Farmers Life will exit the business of writing structured settlements by the end of 2002 due to the recent rating downgrade of Farmers Life (see Note A). Interest Credited to Policyholders. Interest credited to policyholders, which represents the amount credited to policyholder funds on deposit under universal life-type contracts, deferred annuities and structured settlements not involving life contingencies, decreased from $45.6 million for the three months ended September 30, 2001 to $43.8 million for the three months ended September 30, 2002, a decrease of $1.8 million or 3.9%. This decrease was primarily due to a reduction in crediting rates related to the deferred annuity and universal life products, offset by growth in the structured 30 settlement not involving life contingencies fund balance. Farmers Life will exit the business of writing structured settlements by the end of 2002 due to the recent rating downgrade of Farmers Life (see Note A). General Operating Expenses. General operating expenses decreased from $34.8 million for the three months ended September 30, 2001 to $32.2 million for the three months ended September 30, 2002, a decrease of $2.6 million, or 7.4%. Amortization of DAC and VOLBA. Amortization expense decreased from $21.8 million for the three months ended September 30, 2001 to $19.9 million for three months ended September 30, 2002 a decrease of $1.9 million, or 8.7%. The decrease reflects the $1.0 million increase, or 16.9%, in DAC unlocking compared to the three months ended September 30, 2001. DAC unlocking entries are made when future profit margins are projected to be different than previously estimated. Life Commissions. Life commissions decreased from $0.2 million for the three months ended September 30, 2001 to ($2.5) million for the three months ended September 30, 2002, a decrease of $2.7 million, due to a 73.3% growth in reinsurance activity between periods. General and Administrative Expenses. General and administrative expenses increased from $12.8 million for the three months ended September 30, 2001 to $14.8 million for the three months ended September 30, 2002, an increase of $2.0 million, or 15.6%. This increase was due to higher premium taxes resulting from an increase in the effective premium tax rate and increased pension/postretirement benefit expenses. Provision for Income Taxes. Provision for income taxes decreased from $12.1 million for the three months ended September 30, 2001 to $11.0 million for the three months ended September 31, 2002, a decrease of $1.1 million, or 9.1%, as a result of a decrease in pretax income between periods. Farmers Life Income. As a result of the foregoing, Farmers Life income increased from $19.6 million for the three months ended September 30, 2001 to $20.3 million for the three months ended September 30, 2002, an increase of $0.7 million, or 3.6%. Consolidated Net Income Consolidated net income of the Company increased from $119.4 million for the three months ended September 30, 2001 to $158.0 million for the three months ended September 30, 2002, an increase of $38.6 million, or 32.3%. Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001 Farmers Management Services Operating Revenues. Operating revenues increased $87.4 million, or 7.0%, from $1,257.0 million for the nine months ended September 30, 2001 to $1,344.4 million for the nine months ended September 30, 2002. This growth in operating revenues was primarily attributable to higher gross premiums earned by the P&C Group Companies, which increased $730.4 million, or 8.2%, to $9,672.2 million for the nine months ended September 30, 2002. This increase in gross premiums earned was driven by continued growth in the auto, fire, commercial and Farmers Specialty lines of business, which benefited from a rising premium rate environment. Operating Expenses. Operating expenses as a percentage of operating revenues decreased from 56.0% for the nine months ended September 30, 2001 to 50.0% for the nine months ended September 30, 2002, a decrease of 6.0 percentage points. This decrease was partially due to the fact that effective January 1, 2002, the Company ceased recording amortization related to goodwill and the AIF relationships as a result of the adoption of SFAS No. 142. For the nine months ended September 30, 2001, amortization related to these two items totaled $77.1 million. Partially 31 offsetting the above decrease was a $27.5 million write down of internally developed software in the quarter ended September 30, 2002. Excluding the effects of the software write down and the amortization of goodwill and the AIF relationships, operating expenses as a percentage of operating revenues decreased from 49.9% for the nine months ended September 30, 2001 to 48.0% for the nine months ended September 30, 2002, a decrease of 1.9 percentage points. Salaries and Employee Benefits. Salaries and employee benefits increased from $317.4 million for the nine months ended September 30, 2001 to $332.1 million for the nine months ended September 30, 2002, an increase of $14.7 million, or 4.6%, due primarily to an increase in pension, medical insurance and profit sharing expenses. This increase was offset in part by a decrease in outside contractors expenses. Buildings and Equipment Expenses. Buildings and equipment expenses increased from $79.0 million for the nine months ended September 30, 2001 to $86.4 million for the nine months ended September 30, 2002, an increase of $7.4 million, or 9.4%, due primarily to an increase in the amortization expense related to internally developed software, data processing equipment and software as well as increased hardware and software maintenance costs. Amortization of the Attorney-In-Fact Relationships and Goodwill. Effective January 1, 2002, the Company adopted the provisions of SFAS No. 142. As a result, the Company ceased recording amortization related to goodwill and the AIF relationships. For the nine months ended September 30, 2001, amortization of the AIF relationships and goodwill totaled $77.1 million. General and Administrative Expenses. General and administrative expenses increased from $230.6 million for the nine months ended September 30, 2001 to $254.4 million for the nine months ended September 30, 2002, an increase of $23.8 million, or 10.3%, due primarily to the $27.5 million write down of internally developed software in the quarter ended September 30, 2002 (see Note K). This increase was partially offset by savings from a continued focus on cost controls and delayed expenses. Net Investment Income. Net investment income decreased from $60.0 million for the nine months ended September 30, 2001 to $48.0 million for the nine months ended September 30, 2002, a decrease of $12.0 million, or 20.0%. This decrease was due mainly to a change in the portfolio mix which resulted in a larger portion of invested assets held in short term securities earning lower investment yields, as well as declining market yields. Net Realized Gains. Net realized gains decreased from $13.1 million for the nine months ended September 30, 2001 to $4.2 million for the nine months ended September 30, 2002, a decrease of $8.9 million, or 67.9%. This decrease was due primarily to unfavorable market conditions experienced during the nine month period ended September 30, 2002. Impairment Losses on Investments. Impairment losses on investments decreased from $38.2 million for the nine months ended September 30, 2001 to $31.9 million for the nine months ended September 30, 2002, a decrease of $6.3 million, or 16.5%, due primarily to a decrease in equity impairments related to common stock. Dividends on Preferred Securities of Subsidiary Trusts. Dividend expense was $31.6 million in each of the nine month periods ended September 30, 2002 and September 30, 2001. Provision for Income Taxes. Provision for income taxes increased from $229.7 million for the nine months ended September 30, 2001 to $252.4 million for the nine months ended September 30, 2002, an increase of $22.7 million, or 9.9%, due mainly to an increase in pretax income between periods. Farmers Management Services. As a result of the foregoing, management services income increased from $326.5 million for the nine months ended September 30, 2001 to $407.9 million for the nine months ended September 30, 2002, an increase of $81.4 million, or 24.9%. Excluding the software write down and the change in the amortization of intangibles, income increased by $33.4 million, or 8.5%, between the nine months periods ended September 30, 2001 and September 30, 2002. 32 Insurance Subsidiaries Farmers Re As a result of the quota share reinsurance agreement, which became effective April 1, 2001, Farmers Re's assumed premiums decreased from $350.0 million for the nine months ended September 30, 2001 to $150.0 million for the nine months ended September 30, 2002, a decrease of $200.0 million, or 57.1%. Losses and loss adjustment expenses incurred were $96.3 million for the nine months ended September 30, 2002 and $248.0 million for the nine months ended September 30, 2001 and non-life reinsurance commissions paid were $49.9 million for the nine months ended September 30, 2002 and $93.2 million for the nine months ended September 30, 2001. Income before taxes decreased $14.7 million from $35.4 million for the nine months ended September 30, 2001 to $20.7 million for the nine months ended September 30, 2002. This decrease was due primarily to a $7.8 million decrease in realized gains and a $5.2 million increase of impairment losses on investments. For the nine month periods ended September 30, 2002 and September 30, 2001, Farmers Re's contribution to net income was $14.8 million and $24.4 million, respectively. Farmers Life Total Revenues. Total revenues decreased from $611.4 million for the nine months ended September 30, 2001 to $555.8 million for the nine months ended September 30, 2002, a decrease of $55.6 million, or 9.1%. Life and Annuity Premiums. Life and annuity premiums decreased from $201.7 million for the nine months ended September 30, 2001 to $195.5 million for the nine months ended September 30, 2002, a decrease of $6.2 million, or 3.1%. This decrease was primarily due to a 12.0% decrease in premiums for structured settlements involving life contingencies compared to the nine months ended September 30, 2001. Farmers Life will exit the business of writing structured settlements by the end of 2002 due to the recent rating downgrade of Farmers Life (see Note A). Life Policy Charges. Life policy charges increased from $163.0 million for the nine months ended September 30, 2001 to $167.3 million for the nine months ended September 30, 2002, an increase of $4.3 million, or 2.6%, reflecting a 1.5% growth in universal life-type insurance in-force. Net Investment Income. Net investment income increased from $251.9 million for the nine months ended September 30, 2001 to $254.8 million for the nine months ended September 30, 2002, an increase of $2.9 million, or 1.2%, due to growth in mean bond assets partially offset by the decline of fixed income yields (53 basis points). Net Realized Gains/(Losses). Net realized gains/(losses) decreased from a $34.9 million gain for the nine months ended September 30, 2001 to a $27.8 million loss for the nine months ended September 30, 2002, a decrease of $62.7 million, or 179.7%. This decrease was due primarily to losses generated from fixed income sales made for risk mitigation purposes. The most significant disposals were of holding of WorldCom, Inc. and Qwest Capital Funding, Inc., resulting in losses totaling $36.7 million. Impairment Losses on Investments. Impairment losses on investments decreased from $40.1 million for the nine months ended September 30, 2001 to $34.0 million for the nine months ended September 30, 2002, a decrease of $6.1 million, or 15.2%, due primarily to the fact that impairment losses were recognized on the Indah Kiat International Finance holdings in 2001. Partially offsetting this decrease was an increase in impairment losses related to common stock. Total Operating Expenses. Total operating expenses decreased from $453.7 million for the nine months ended September 30, 2001 to $448.8 million for the nine months ended September 30, 2002, a decrease of $4.9 million, or 1.1%. 33 Life Policyholders' Benefits and Charges. Life policyholders' benefits expense and charges increased from $341.1 million for the nine months ended September 30, 2001 to $342.6 million for the nine months ended September 30, 2002, an increase of $1.5 million, or 0.4%. Policy Benefits. Policy benefits increased from $122.6 million for the nine months ended September 30, 2001 to $128.0 million for the nine months ended September 30, 2002, an increase of $5.4 million, or 4.4%, due to a 9.7% growth in the volume of life insurance in-force. Increase in Liability for Future Benefits. Increase in liability for future benefits expense decreased from $85.1 million for the nine months ended September 30, 2001 to $80.0 million for the nine months ended September 30, 2002, a decrease of $5.1 million, or 6.0%. This decrease was attributable to the 12.0% decrease in deposits for structured settlements involving life contingencies compared to the nine months ended September 30, 2001. Farmers Life will exit the business of writing structured settlements by the end of 2002 due to recent rating downgrade of Farmers Life (see Note A). Interest Credited to Policyholders. Interest credited to policyholders increased from $133.4 million for the nine months ended September 30, 2001 to $134.6 million for the nine months ended September 30, 2002, an increase of $1.2 million, or 0.9%. This increase is attributable to a 7.1% increase in Farmers Life's interest sensitive fund balances, offset by a reduction in crediting rates related to the deferred annuity and universal life products. General Operating Expenses. General operating expenses decreased from $112.6 million for the nine months ended September 30, 2001 to $106.2 million for the nine months ended September 30, 2002, a decrease of $6.4 million, or 5.7%. Amortization of DAC and VOLBA. Amortization expense decreased from $72.1 million for the nine months ended September 30, 2001 to $66.6 million for the nine months ended September 30, 2002, a decrease of $5.5 million, or 7.6%, reflecting a $4.3 million increase in DAC unlocking compared to September 30, 2001. DAC unlocking entries are made when future profit margins are projected to be different than previously estimated. Life Commissions. Life commissions decreased from ($0.1) million for the nine months ended September 30, 2001 to ($5.5) million for the nine months ended September 30, 2002, a decrease of $5.4 million, due to a 48.4% growth in reinsurance activity between periods. General and Administrative Expenses. General and administrative expenses increased from $40.6 million for the nine months ended September 30, 2001 to $45.1 million for the nine months ended September 30, 2002, an increase of $4.5 million, or 11.1%. The increase was due to higher premium taxes resulting from an increase in the effective premium tax rate and increased pension/postretirement benefit expenses. Provision for Income Taxes. Provision for income taxes decreased from $51.4 million for the nine months ended September 30, 2001 to $37.7 million for the nine months September 30, 2002, a decrease of $13.7 million, or 26.7%. Farmers Life Income. As a result of the foregoing, Farmers Life income decreased from $106.3 million for the nine months ended September 30, 2001 to $69.3 million for the nine months ended September 30, 2002, a decrease of $37.0 million, or 34.8%. 33 Consolidated Net Income Consolidated net income of the Company increased from $457.2 million for the nine months ended September 30, 2001 to $492.0 million for the nine months ended September 30, 2002, an increase of $34.8 million, or 7.6%. Liquidity and Capital Resources As of September 30, 2002 and September 30, 2001, the Company held cash and cash equivalents of $601.6 million and $817.7 million, respectively. In addition, on July 1, 2002, the Company's existing revolving credit agreement expired. On September 26, 2002, the Company entered into a new revolving credit agreement with certain financial institutions. Under this agreement, the Company has an aggregate borrowing facility of $250.0 million in the event such a need should arise (see Note M). Net cash provided by operating activities increased from $795.5 million for the nine months ended September 30, 2001 to $963.0 million for the nine months ended September 30, 2002, an increase of $167.5 million, or 21.1%. This increase is due partially to a $55.8 million increase in deferred taxes between periods as well as a $45.1 million increase between periods in the reserves for non-life losses and loss adjustment liability. Furthermore, the increase in net cash provided by operating activities resulted in part from a $22.2 million decrease between periods in development costs for internally developed software. Although consolidated net income increased by $34.8 million between periods, this increase was impacted by the following non-cash items: a $93.3 million decrease in gains on the sale of assets between periods partially offset by a $70.1 million decrease in amortization expense between periods as the result of the adoption of SFAS No. 142 and a $7.3 million decrease in impairment losses between periods. Net cash used in investing activities increased from $170.6 million of cash provided for the nine months ended September 30, 2001 to $449.3 million of cash used for the nine months ended September 30, 2002, resulting in a decrease in cash of $619.9 million or 363.4%. This decrease in cash was the result of a $966.9 million decrease in proceeds of investments available-for-sale in the nine month period ended September 30, 2002, compared to the same period in 2001. In addition, proceeds from the redemption of notes receivable affiliate decreased by $177.0 million between periods. Partially offsetting this decrease was a $413.6 million decrease in cash used for the purchases of investments available-for-sale between the nine month periods ended September 30, 2001 and 2002 and a $50.0 million cash increase resulting from the September 30, 2002 sale of the Endurance common stock. Net cash used in financing activities decreased from $365.1 million for the nine months ended September 30, 2001 to $309.5 million for the nine months ended September 30, 2002, resulting in an increase in cash of $55.6 million between periods. This increase was due primarily to a reduction in the net cash outflows associated with universal life and annuity contracts between periods. Item 3. Quantitative and Qualitative Disclosures about Market Risks The market risks associated with the Company's investment portfolios have not changed materially from those disclosed at year-end 2001. ITEM 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures. The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date , the Company's disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's reports filed or submitted under the Exchange Act. 35 (b) Changes in Internal Controls. Since the Evaluation Date , there have not been any significant changes in the Company's internal controls or in other factors that could significantly affect such controls. PART II. OTHER INFORMATION Item 1. Legal Proceedings. FGI is a party to lawsuits arising from its attorney in fact relationship with Farmers Insurance Exchange and similar relationships involving its subsidiaries Fire Underwriters Association and Truck Underwriters Association. The Company is also party to lawsuits arising from its other normal business activities. These actions are in various stages of discovery and development, and some seek punitive as well as compensatory damages. In the opinion of management, the Company has not engaged in any conduct which should warrant the award of any material punitive or compensatory damages. The Company intends to vigorously defend its position in each case, and management believes that, while it is not possible to predict the outcome of such matters with absolute certainty, ultimate disposition of these proceedings should not have a material adverse effect on the Company's consolidated results of operations or financial position. In addition, the Company is, from time to time, involved as a party to various governmental and administrative proceedings. Item 2. Changes in Securities. None. Item 3. Defaults upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. Election of Board of Directors - Incorporated by reference to FGI's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002. Item 5. Other Information. Changes in Board of Directors - Incorporated by reference to FGI's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 3.2 Bylaws of FGI - Incorporated by reference to FGI's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002. 99.2 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350 (b) Reports on Form 8-K. On October 4, 2002, FGI filed a report on Form 8-K announcing that Farmers Insurance Exchange and Fire Insurance Exchange will not be renewing their current homeowners insurance policies in Texas beginning in November 2002. 36 FARMERS GROUP, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Farmers Group, Inc. (Registrant) November 13, 2002 /s/ Martin D. Feinstein --------------------------------------------- Date Martin D. Feinstein Chairman of the Board, President and Chief Executive Officer November 13, 2002 /s/ Pierre Wauthier --------------------------------------------- Date Pierre Wauthier Senior Vice President, Chief Financial Officer and Director 37 SARBANES-OXLEY Section 302 Certification I, Martin D. Feinstein, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Farmers Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 38 Date: November 13, 2002 /s/ Martin D. Feinstein ----------------------------- Martin D. Feinstein Chairman of the Board President and Chief Executive Officer * Provide a separate certification for each principal executive officer and principal financial officer of the registrant. See Rules 13a-14 and 15d-14. The required certification must be in the exact form set forth above. 39 SARBANES-OXLEY Section 302 Certification I, Pierre Wauthier, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Farmers Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 40 Date: November 13, 2002 /s/ Pierre Wauthier -------------------------- Pierre Wauthier Senior Vice President Chief Financial Officer and Director * Provide a separate certification for each principal executive officer and principal financial officer of the registrant. See Rules 13a-14 and 15d-14. The required certification must be in the exact form set forth above. Exhibit 99.2 1 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Farmers Group, Inc. (the "Company") on Form 10-Q for the period ending September 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Martin D. Feinstein, as Chief Executive Officer of the Company, and Pierre Wauthier, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Martin D. Feinstein ------------------------ Martin D. Feinstein Chief Executive Officer November 13, 2002 /s/ Pierre Wauthier ----------------------- Pierre Wauthier Chief Financial Officer November 13, 2002 This certification accompanies this Report pursuant to section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

FARMERS GROUP INC 10-Q