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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 March 31, 2003

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 / /

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act 12b-2).
Yes /X/ No / /

Registrant's Common Stock outstanding on March 31, 2003 was 1,000 shares.

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FARMERS GROUP, INC.
AND SUBSIDIARIES

TABLE OF CONTENTS FORM 10-Q

FOR THE PERIOD ENDED MARCH 31, 2003


PART I. FINANCIAL INFORMATION PAGE
----
ITEM 1. Financial Statements (Unaudited)

Consolidated Balance Sheets - Assets
March 31, 2003 (Unaudited) and December 31, 2002 (Audited) 4

Consolidated Balance Sheets - Liabilities
and Stockholders' Equity
March 31, 2003 (Unaudited) and December 31, 2002 (Audited) 5

Unaudited Consolidated Statements of Income
Three Month Periods ended March 31, 2003 and
March 31, 2002 6

Unaudited Consolidated Statements of Comprehensive Income
Three Month Periods ended March 31, 2003 and
March 31, 2002 7

Unaudited Consolidated Statement of Stockholders' Equity
Three Month Period ended March 31, 2003 8

Unaudited Consolidated Statements of Cash Flows
Three Month Periods ended March 31, 2003 and
March 31, 2002 9

Notes to Unaudited Interim Financial Statements 10

ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18

ITEM 3. Quantitative and Qualitative Disclosures about Market Risks 29

ITEM 4. Controls and Procedures 29

PART II. OTHER INFORMATION 29

SIGNATURES 30

CERITIFICATIONS 31

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


(Unaudited)
March 31, December 31,
2003 2002
------------- ------------

Current assets, Farmers Management Services:
Cash and cash equivalents $ 328,208 $ 383,527
Marketable securities, at market value
(cost: $29,505 and $13,711) 29,927 13,832
Accrued interest 11,461 14,488
Accounts receivable, principally from the P&C Group Companies 37,378 76,109
Deferred taxes 52,809 49,865
Prepaid expenses and other 28,410 26,042
------------- ------------
Total current assets 488,193 563,863
------------- ------------
Investments, Farmers Management Services:
Fixed maturities available-for-sale, at market value
(cost: $358,585 and $144,282) 362,073 150,773
Common stocks available-for-sale, at market value
(cost: $124,515 and $144,773) 114,182 132,089
Certificates of contribution of the P&C Group Companies 546,830 546,830
Real estate, at cost (net of accumulated depreciation:
$46,510 and $45,374) 84,237 85,338
Notes receivable - affiliates 390,000 415,000
------------- ------------
1,497,322 1,330,030
------------- ------------
Other assets, Farmers Management Services:
Goodwill 1,621,183 1,621,183
Attorney-in-fact relationships 1,153,605 1,153,605
Other assets 205,189 244,706
------------- ------------
2,979,977 3,019,494
------------- ------------
Properties, plant and equipment, at cost: (net of accumulated
depreciation: $503,971 and $489,799) 436,956 412,406
------------- ------------
Investments of Insurance Subsidiaries:
Fixed maturities available-for-sale, at market value
(cost: $5,349,782 and $5,231,305) 5,628,137 5,524,070
Mortgage loans on real estate 6,792 8,219
Non-redeemable preferred stocks available-for-sale, at market
value (cost: $10,346 and $10,346) 11,644 10,203
Common stocks available-for-sale, at market value
(cost: $183,974 and $230,296) 168,346 213,664
Certificates of contribution and surplus note of the
P&C Group Companies 490,500 490,500
Policy loans 242,482 241,591
Real estate, at cost (net of accumulated depreciation:
$35,299 and $34,448) 77,578 78,240
Joint ventures, at equity 1,752 1,884
S&P 500 call options, at fair value (cost: $38,005 and $37,951) 959 1,845
Marketable securities, at market value (cost: $25,554 and
$2,712) 26,023 2,594
Other investments 22,435 22,435
------------- ------------
6,676,648 6,595,245
------------- ------------
Other assets of Insurance Subsidiaries:
Cash and cash equivalents 225,659 233,143
Life reinsurance receivable 106,904 99,128
Reinsurance premiums receivable, from the P&C Group Companies 80,794 0
Funds held by or deposited with reinsured companies 18,971 18,971
Accrued investment income 70,628 74,956
Income taxes 2,100 13,575
Life deferred policy acquisition costs 585,092 580,195
Value of life business acquired 247,407 254,510
Securities lending collateral 218,880 219,213
Non-life deferred acquisition costs 32,811 33,859
Other assets 54,245 45,673
Assets held in Separate Accounts 97,958 86,632
------------- ------------
1,741,449 1,659,855
------------- ------------
Total assets $ 13,820,545 $ 13,580,893
============= ============

The accompanying notes are an integral part of these interim financial statements.



5

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


(Unaudited)
March 31, December 31,
2003 2002
------------ -------------

Current liabilities, Farmers Management Services:
Accounts payable $ 36,548 $ 44,095
Accrued liabilities:
Profit sharing 19,957 70,485
Income taxes 225,126 142,027
Other 19,427 11,688
------------ -------------
Total current liabilities 301,058 268,295
------------ -------------
Other liabilities, Farmers Management Services:
Non-current deferred taxes 520,040 518,669
Other 69,333 77,995
------------ -------------
589,373 596,664
------------ -------------
Liabilities of Insurance Subsidiaries:
Policy liabilities:
Future policy benefits 4,263,557 4,191,202
Claims 39,630 40,656
Policyholders dividends 24 21
Other policyholders funds 335,933 329,858
Death benefits payable 74,110 70,301
Provision for non-life losses and loss adjustment expenses 91,540 18,971
Non-life unearned premiums 155,412 160,273
Deferred taxes 192,106 199,031
Unearned investment income 863 829
Reinsurance payable, to the P&C Group Companies 12,226 0
Securities lending liability 218,880 219,213
Unsettled security purchases 23,585 45,314
Other liabilities 67,829 73,486
Liabilities related to Separate Accounts 97,958 86,632
------------ -------------
5,573,653 5,435,787
------------ -------------
Total liabilities 6,464,084 6,300,746
------------ -------------

Commitments and contingencies

Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debentures 500,000 500,000
------------ -------------
Stockholders' Equity:
Class A common stock, $1 par value per share; authorized, issued
and outstanding: as of March 31, 2003 and
December 31, 2002 - 450 shares 0.45 0.45
Class B common stock, $1 par value per share; authorized, issued
and outstanding: as of March 31, 2003 and
December 31, 2002 - 500 shares 0.50 0.50
Class C common stock, $1 par value per share; authorized, issued
and outstanding: as of March 31, 2003 and
December 31, 2002 - 50 shares 0.05 0.05
Additional capital 5,227,049 5,227,049
Accumulated other comprehensive income (net of deferred
taxes: $67,292 and $70,128) 124,970 130,237
Retained earnings 1,504,441 1,422,860
------------ -------------
Total stockholders' equity 6,856,461 6,780,147
------------ -------------
Total liabilities and stockholders' equity $ 13,820,545 $ 13,580,893
============ =============

The accompanying notes are an integral part of these interim financial statements.



6

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


Three month period
ended March 31,
------------------------
2003 2002
----------- -----------

Consolidated operating revenues $ 810,143 $ 693,361
=========== ===========
Farmers Management Services:
Operating revenues $ 468,113 $ 435,888
----------- -----------
Salaries and employee benefits 108,019 109,262
Building and equipment expenses 28,379 28,250
General and administrative expenses 66,709 72,107
----------- -----------
Total operating expenses 203,107 209,619
----------- -----------
Operating income 265,006 226,269
Net investment income 17,406 18,724
Net realized gains/(losses) (29) 3,401
Impairment losses on investments (7,077) (4,603)
Dividends on preferred securities of subsidiary trusts (10,518) (10,518)
----------- ----------
Income before provision for taxes 264,788 233,273
Provision for income taxes 102,586 90,791
----------- ----------
Farmers Management Services net income 162,202 142,482
----------- ----------
Insurance Subsidiaries:
Life and annuity premiums 47,636 63,363
Non-life reinsurance premiums earned 156,108 50,000
Life policy charges 55,850 55,351
Net investment income 95,039 93,029
Net realized gains 15,757 4,647
Impairment losses on investments (28,360) (8,917)
----------- -----------
Total revenues 342,030 257,473
----------- -----------
Non-life losses and loss adjustment expenses 96,692 32,992
Life policy benefits 42,213 43,551
Increase in liability for future life policy benefits 8,008 23,795
Interest credited to life policyholders 44,042 46,351
Amortization of life deferred policy acquisition costs
and value of life business acquired 34,719 22,312
Life commissions (3,948) (1,196)
Amortization of non-life deferred policy acquisition costs 1,048 0
Non-life reinsurance commissions 58,555 15,758
General and administrative expenses 14,842 15,481
----------- -----------
Total operating expenses 296,171 199,044
----------- -----------
Income before provision for taxes 45,859 58,429
Provision for income taxes 15,480 20,222
----------- -----------
Insurance Subsidiaries net income 30,379 38,207
----------- -----------

Consolidated net income $ 192,581 $ 180,689
=========== ===========

The accompanying notes are an integral part of these interim financial statements.


7

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


Three month period
ended March 31,
------------------------
2003 2002
----------- -----------

Consolidated net income $ 192,581 $ 180,689
----------- -----------
Other comprehensive income/(loss), net of tax:

Net unrealized holding losses on securities,
net of tax of ($4,127) and ($25,865) (7,665) (48,035)
Change in effect of unrealized gains on other
insurance accounts, net of tax of $1,291 and
$6,177 2,398 11,473
----------- -----------
Other comprehensive loss (5,267) (36,562)
----------- -----------
Comprehensive income $ 187,314 $ 144,127
=========== ===========

The accompanying notes are an integral part of these interim financial statements.


8

FARMERS GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the three month period ended March 31, 2003
(Amounts in thousands)
(Unaudited)


Accumulated Other Total
Common Additional Comprehensive Retained Stockholders'
Stock Capital Income Earnings Equity
-------- ----------- --------------- ----------- -------------

Balance, December 31, 2002 $ 1 $ 5,227,049 $ 130,237 $ 1,422,860 $ 6,780,147

Net income 192,581 192,581

Net unrealized holding losses
on securities, net of tax
of ($4,127) (7,665) (7,665)

Change in effect of unrealized
gains on other insurance
accounts, net of tax of
$1,291 2,398 2,398

Cash dividends paid (111,000) (111,000)
-------- ------------ --------------- ----------- -------------
Balance, March 31, 2003 $ 1 $ 5,227,049 $ 124,970 $ 1,504,441 $ 6,856,461
======== ============ =============== =========== =============

The accompanying notes are an integral part of these interim financial statements.


9

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


Three month period
ended March 31,
-----------------------
2003 2002
---------- ----------

Cash Flows from Operating Activities:
Consolidated net income $ 192,581 $ 180,689
Non-cash and operating activities adjustments:
Depreciation and amortization 25,014 24,716
Amortization of life deferred policy acquisition costs and
value of life business acquired 34,719 22,312
Amortization of non-life deferred policy acquisition costs 1,048 0
Policy acquisition costs deferred (28,823) (25,896)
Life insurance policy liabilities 21,330 59,278
Provision for non-life losses and loss adjustment liability 72,569 19,200
Unearned non-life reinsurance premiums (4,861) 0
Interest credited on universal life and annuity contracts 37,493 40,018
Equity in earnings of joint ventures 66 83
Gains on sales of assets (15,228) (8,081)
Impairment losses on investments 35,437 13,520
Changes in assets and liabilities:
Current assets and liabilities 8,671 (31,400)
Non-current assets and liabilities (43,316) 21,908
Other, net 6,155 22,218
---------- ----------
Net cash provided by operating activities 342,855 338,565
---------- ----------
Cash Flows from Investing Activities:
Purchases of investments available-for-sale (934,582) (473,905)
Purchases of properties and equipment (8,764) (12,772)
Purchase of note receivable - affiliate (100,000) 0
Proceeds from sales and maturities of investments
available-for-sale 602,361 362,639
Proceeds from sales of properties and equipment 2,517 16,671
Proceeds from redemption of notes receivable - affiliate 125,000 0
Mortgage loan collections 1,428 2,071
Increase in policy loans (891) (2,898)
Other, net (311) 229
---------- ----------
Net cash used in investing activities (313,242) (107,965)
---------- ----------
Cash Flows from Financing Activities:
Dividends paid to stockholders (111,000) (116,750)
Deposits received from universal life and annuity contracts 140,698 112,912
Withdrawals from universal life and annuity contracts (122,114) (116,610)
---------- ----------
Net cash used in financing activities (92,416) (120,448)
---------- ----------

Increase/(decrease) in cash and cash equivalents (62,803) 110,152
Cash and cash equivalents - at beginning of year 616,670 397,402
---------- ----------
Cash and cash equivalents - at end of period $ 553,867 $ 507,554
========== ==========

The accompanying notes are an integral part of these interim financial statements.


10

FARMERS GROUP, INC.
AND SUBSIDIARIES
NOTES TO INTERIM FINANCIAL STATEMENTS
(Unaudited)

1. Basis of presentation and nature of operations

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 March 31, 2003, the related consolidated statements of income,
comprehensive income, stockholders' equity and cash flows for the three month
periods ended March 31, 2003 and March 31, 2002, 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, 2002 and 2001, 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, 2002.

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
2003 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.

In December 1988, B.A.T Industries p.l.c. ("B.A.T") acquired 100%
ownership of the Company for $5.2 billion 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 ("ZFS").

The Company has AIF relationships with 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 primarily 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

11

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
domiciled 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 Farmers Agency Force. Farmers Life also marketed
structured settlement annuities sold by independent brokers. As of December
2002, Farmers Life exited the business of writing structured settlements. The
5,200 structured settlement cases in force as of March 31, 2003 continue to be
serviced by Farmers Life. For the three months ended March 31, 2003 and March
31, 2002, the structured settlement business represented 0.7% and 2.1% of
Farmers Life's income before provision for income taxes, respectively.

Farmers Reinsurance Company ("Farmers Re"), a wholly owned subsidiary of
FGI which was formed and licensed to conduct business in December 1997,
provides reinsurance coverage to the P&C Group Companies. As of March 31,
2003, Farmers Re participates in three reinsurance treaties: 1) an Auto
Physical Damage ("APD") reinsurance agreement, 2) a 10% All Lines Quota Share
reinsurance treaty and 3) a 20% Personal Lines Auto Quota Share reinsurance
treaty (See Note 5 to Consolidated Financial Statements, "Note 5").

References to the "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 Insurance
Subsidiaries.

2. Recent Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board ("FASB")
issued Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others". This Interpretation identifies characteristics of certain guarantee
contracts and requires that a liability be recognized at fair value at the
inception of such guarantees for the obligations undertaken by the guarantor.
Additional disclosures also are prescribed for certain guarantee contracts.
The initial recognition and initial measurement provisions of this
Interpretation are effective for these guarantees issued or modified after
December 31, 2002. The disclosure requirements of this Interpretation are
effective for the Company as of December 31, 2002. The adoption of this
Statement did not have a material impact on the Company's consolidated
financial statements.

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities". This Interpretation provides guidance on the
identification of entities for which control is achieved through means other
than through voting rights, variable interest entities, and how to determine
when and which business enterprises should consolidate variable interest
entities. This Interpretation applies immediately to variable interest
entities created after January 31, 2003. It applies in the first fiscal year
or interim period beginning after June 15, 2003, to variable interest entities
in which an enterprise holds a variable interest that it acquired before
February 1, 2003. Based on the current Interpretation, the Company does not
believe they have variable interest entities.

In April 2003, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities". This Statement amends and clarifies
financial accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement is effective for
contracts entered into or modified after June 30, 2003. The Company does not
expect the adoption of this Statement to have a material impact on its
consolidated financial statements.

12

3. Intangible assets

As of March 31, 2003, the Company held the following intangible
assets:



Net Book Value
-----------------------------
2003 2002
------------ ------------
(Amounts in thousands)

Amortized intangible assets:
Insurance Subsidiaries:
Value of life business acquired ("VOLBA")
Balance, January 1 $ 254,510 $ 274,531
Amortization related to operations (11,810) (9,029)
Interest accrued 4,332 4,621
Amortization related to net
unrealized gains 375 3,103
------------ ------------
Balance, March 31 $ 247,407 $ 273,226
============ ============





Gross Carrying Amounts
-----------------------------------------
As of As of
March 31, 2003 December 31, 2002
-------------- -----------------
(Amounts in thousands)

Unamortized intangible assets:
Farmers Management Services:
Goodwill $ 1,621,183 $ 1,621,183
AIF relationships 1,153,605 1,153,605



For the three months ended March 31, 2003, amortization expense, net of
accrued interest, related to the VOLBA asset totaled $7.5 million. Estimated
amortization, net of accrued interest, related to the VOLBA asset for each of
the years in the five-year period ended December 31, 2007 follows:



Annual
Amortization
Expense
------------
(Amounts in thousands)

2003 $ 21,000
2004 19,000
2005 18,000
2006 17,000
2007 16,000
------------
$ 91,000
============



4. 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 $434.8
million and $407.7 million for the three month periods ended March 31, 2003
and March 31, 2002, respectively.

Management fees earned for the three month period ended March 31 are:

13



2003 2002
---------- ----------
(Amounts in thousands)

AIF fees:
Auto $ 217,819 $ 211,270
Homeowners 84,510 77,663
Commercial 57,335 53,128
Specialty Lines 39,038 33,926
Eastern Operations 12,510 10,095
Other 2,609 1,934
---------- ----------
Total AIF fees 413,821 388,016
Other fees 21,005 19,700
---------- ----------
Total management fees $ 434,826 $ 407,716
========== ==========



5. Non-life reinsurance

Farmers Re, a wholly owned subsidiary of FGI, reinsures a percentage of
the business written by the P&C Group Companies through three quota share
reinsurance agreements. Under an APD Quota Share agreement, Farmers Re
assumes $200.0 million of the APD premiums written by the P&C Group
Companies. The remaining $1.8 billion is assumed by the Zurich affiliates and
outside reinsurance companies identified in the agreement. As a result of
this APD agreement, on a monthly basis, Farmers Re assumes $16.7 million of
premiums written. Farmers Re assumes 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, with additional experience commissions that
depend on loss experience. This experience commission arrangement limits
Farmers Re's potential underwriting gain on the assumed business to 2.5% of
premiums assumed. As a result of this APD reinsurance agreement, Farmers Re
assumes an underwriting risk.

In December 2002, Farmers Re paid the P&C Group Companies $44.8 million
in settlement of losses and loss adjustment reserves and $0.4 million of
accrued interest as an estimate of a commutation related to the 2002 accident
year. A final commutation of the 2002 accident year losses and loss
adjustment expenses will be made in May 2003.

Effective December 31, 2002, Farmers Re and a Zurich affiliate entered
into a 10% All Lines Quota Share reinsurance treaty under which they assume a
percentage of all lines of business written by the P&C Group of Companies,
prospectively. Under this treaty, Farmers Re assumes a 2% quota share of the
premiums written and the ultimate net losses sustained in all lines of
business written by the P&C Group Companies after the APD reinsurance
agreement is applied. Underwriting results assumed are subject to a maximum
combined ratio of 112.5% and a minimum combined ratio of 93.5%. In addition,
they are limited to a pro-rata share of $800.0 million in annual catastrophe
losses. The reinsurance agreement, which can be terminated after 60 days
notice by any of the parties beginning with the quarter ending December 31,
2003, also provides for the P&C Group Companies to receive a provisional
ceding commission of 22% of premiums for acquisition expenses and 14.1% of
premiums for other expenses with additional experience commissions that depend
on loss experience. As a result of this new quota share reinsurance treaty,
Farmers Re assumes an underwriting risk.

In addition, effective December 31, 2002, Farmers Re and a Zurich
affiliate entered into a 20% Personal Lines Auto Quota Share reinsurance
treaty under which they assume a percentage of the personal lines auto
business written by the P&C Group of Companies, prospectively. Under this
treaty, Farmers Re assumes a 4% quota share of the premiums written and the
ultimate net losses sustained in the personal lines auto business written by
the P&C Group Companies after all other reinsurance treaties are applied.
Underwriting results assumed are subject to a maximum and minimum combined
ratio of 112.5% and 97.0%, respectively, and are limited to a pro-rata share
of $150.0 million in catastrophe losses. The reinsurance agreement, which can
be terminated after 60 days notice by any of the parties beginning with the
quarter ending December 31, 2003, also provides for the P&C Group Companies to
receive a provisional ceding commission of 20% of premiums for acquisition
expenses and 17.2% of premiums for

14

other expenses with additional experience commissions that depend on loss
experience. As a result of this new quota share reinsurance treaty, Farmers
Re assumes an underwriting risk.

6. Material contingencies

Due to its AIF relationships, the Company is a party to lawsuits in which
the Exchanges are the primary defendants. 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 in various
governmental and administrative proceedings.

On August 5, 2002, the Texas Attorney General and Texas Department of
Insurance initiated a legal action against Farmers Insurance Exchange, Fire
Insurance Exchange and certain of their affiliates which alleged certain
improprieties in the pricing of a portion of their homeowners insurance
policies written in the state of Texas. FGI and certain of its subsidiaries
were also named as parties in that action. On December 18, 2002, the parties
executed a Settlement Agreement respecting this litigation, which, when
approved by the court, will provide for certain rate reductions and refunds to
Texas policyholders. No fines or penalties are included, and there is no
admission of wrongdoing. The settlement has also allowed Farmers Insurance
Exchange and Fire Insurance Exchange, which had previously sent notices
terminating all of their homeowner policies, to continue operating in the
homeowners insurance market in Texas. Although it was a defendant in the
initial lawsuit, the settlement imposes no direct financial burdens on FGI.
There is a possible indirect financial impact on FGI which will depend upon
renewal rates subsequent to the Settlement.

7. Related parties

As of March 31, 2003, the Company held a $195.0 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.
Additionally, on March 17, 2003, $25.0 million of the note receivable was
redeemed. Interest on this note is paid semi-annually. Interest income
totaled $4.1 million and $4.7 million for the three month periods ended March
31, 2003 and March 31, 2002, respectively.

In addition, as of March 31, 2003, 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, having a fixed coupon rate of 6.80% and $70.0 million of notes
receivable bearing interest at a coupon rate of 5.67% matured. These notes
were renewed for short-term notes receivable 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 notes is paid semi-annually. Interest income
totaled $0.7 million and $1.4 million for the three month periods ended March
31, 2003 and March 31, 2002, respectively.

On December 27, 2002, the Company loaned $100.0 million to ZIC, a
subsidiary of Zurich and, in return, received a short-term note with a 1.50%
fixed interest rate that matured on February 14, 2003. On February 14, 2003,
$100.0 million of principal and $0.2 million of interest were paid to the
Company.

On March 24, 2003, the Company loaned $100.0 million to ZCM Matched
Funding Corp. ("ZCM"), a subsidiary of Zurich and, in return, received a
short-term note with a 1.95% fixed interest rate that matures on May 30,
2003. Interest income earned on this note totaled $38,000 for the three month
period ended March 31, 2003.

15

8. 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.

As of March 31, 2003 and December 31, 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.

- - Other certificates of contribution totaling $23.3 million which bear
interest at various rates.

Interest income related to the certificates of contribution and surplus
note of the P&C Group Companies totaled $17.8 million for each of the three
month periods ended March 31, 2003 and March 31, 2002.

Conditions governing payment of interest and repayment of principal are
outlined in the certificates of contribution and the surplus note. Generally,
payment of interest and repayment of principal 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.

9. 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:



Farmers
Management Insurance
Services Subsidiaries Consolidated
------------ ------------ ------------
(Amounts in thousands)

Cash and cash equivalents -- December 31, 2001 $ 225,008 $ 172,394 $ 397,402
Activity through
March 2002 110,152
------------
Cash and cash equivalents -- March 31, 2002 366,108 141,446 $ 507,554
============

Cash and cash equivalents -- December 31, 2002 $ 383,527 $ 233,143 $ 616,670
Activity through
March 2003 (62,803)
------------
Cash and cash equivalents -- March 31, 2002 328,208 225,659 $ 553,867
============


Cash payments for interest were $0.5 million and $1.0 million for the
three month periods ended March 31, 2003 and March 31, 2002, respectively,
while the cash payment for dividends to the holders of the Company's Quarterly
Income Preferred Securities ("QUIPS") was $10.5 million for each of the three
month periods ended March 31, 2003 and March 31, 2002. Cash payments for
income taxes were $23.6 million and $10.5 million for the three month periods
ended March 31, 2003 and March 31, 2002, respectively.

16

On February 14, 2003, the Company received $100.2 million from ZIC in
settlement of a $100.0 million note receivable and $0.2 million of accrued
interest (See Note 7). Also, on March 17, 2003, the Company received $25.0
million from OSDH in partial settlement of a $220.0 million note receivable
(See Note 7). In addition, on March 24, 2003, the Company issued a $100.0
million promissory note receivable with ZCM (See Note 7).

10. Operating segments

The Company provides management services to the P&C Group Companies and
owns and operates 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 non-claims related management services to the P&C Group Companies.
The P&C Group Companies collectively represent the Company's largest
customer. Management fees earned from the P&C Group Companies totaled $434.8
million and $407.7 million respectively, for the three months ended March 31,
2003 and March 31, 2002, which represented 53.7% and 58.8% of the Company's
consolidated operating revenues for the same periods. The Company has no
ownership interest in the P&C Group Companies and, therefore, excluding the
impact of the three quota share reinsurance treaties, 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 addition, a lack of appropriate surplus could impact the
P&C Group Companies' ability to make interest payments and repay the principal
on the certificates of contribution or the surplus note purchased by the
Company. 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. The reinsurance segment provides reinsurance coverage
to a percentage of the 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, as this
is the basis upon which ZFS, the Company's parent company, measures its
performance. 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.

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 reportable intersegment revenues among the Company's
three reportable operating segments for the three month periods ended March
31, 2003 and March 31, 2002.

The Company operates throughout the U.S. and does not earn revenues or
hold assets in any foreign countries.

Information regarding the Company's reportable operating segments follows:

17



Three month period ended March 31, 2003
---------------------------------------------------------------------------------------------------------------------
IAS basis Adjustments Consolidated
------------------------------------------------------ ------------------------------------------------
Management Life Management Life GAAP
services insurance Reinsurance Total services insurance Reinsurance Total basis
------------------------------------------------------ ------------------------------------------------ -----------
(Amounts in thousands)

Revenues $ 468,113 $ 195,297 (a) $ 165,530 (a) $ 828,940 $ 0 $ (17,602) $ (1,195) $(18,797) $ 810,143

Investment
income 18,436 87,888 10,991 117,315 (1,030) (770) 0 (1,800) $ 115,515

Investment
expenses 0 (3,070) 0 (3,070) 0 0 0 0 $ (3,070)

Net realized
gains/
(losses) (c) (2,032) 6,994 (1,570) 3,392 (5,074) (16,832) (1,195) (23,101) $ (19,709)

Dividends
on preferred
securities of
subsidiary
trusts (10,518) 0 0 (10,518) 0 0 0 0 $ (10,518)

Depreciation and
amortization 33,471 29,690 1,048 64,209 (9,652)(b) 6,224 0 (3,428) $ 60,781

Income before
provision for
taxes 258,152 60,700 9,170 328,022 6,636 (b) (22,816) (1,195) (17,375) $ 310,647

Provision for
income taxes 99,974 21,267 2,617 123,858 2,612 (7,986) (418) (5,792) $ 118,066

Net income 158,178 39,433 6,553 204,164 4,024 (14,830) (777) (11,583) $ 192,581
- -----------------------


(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 the AIF
relationships ($10.7 million).

(c) Amounts include impairment losses on investments.




Three month period ended March 31, 2002
---------------------------------------------------------------------------------------------------------------------
IAS basis Adjustments Consolidated
------------------------------------------------------ ------------------------------------------------
Management Life Management Life GAAP
services insurance Reinsurance Total services insurance Reinsurance Total basis
------------------------------------------------------ ------------------------------------------------ -----------
(Amounts in thousands)

Revenues $ 435,888 $ 199,812 (a) $ 58,421 (a) $ 694,121 $ 0 $ (760) $ 0 $ (760) $ 693,361

Investment
income 19,731 87,394 9,810 116,935 (1,007) (760) 0 (1,767) $ 115,168

Investment
expenses 0 (3,415) 0 (3,415) 0 0 0 0 $ (3,415)

Net realized
gains/
(losses) (c) (1,217) (2,881) (1,389) (5,487) 15 0 0 15 $ (5,472)

Dividends
on preferred
securities of
subsidiary
trusts (10,518) 0 0 (10,518) 0 0 0 0 $ (10,518)

Depreciation and
amortization 33,194 22,749 0 55,943 (9,675)(b) 760 0 (8,915) $ 47,028

Income before
provision for
taxes 223,496 49,458 9,621 282,575 9,777 (b) (650) 0 9,127 $ 291,702

Provision for
income taxes 87,080 17,445 3,005 107,530 3,711 (228) 0 3,483 $ 111,013

Net income 136,416 32,013 6,616 175,045 6,066 (422) 0 5,644 $ 180,689
- -----------------------


(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 the AIF
relationships ($10.7 million).

(c) Amounts include impairment losses on investments.

11. 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 March 31, 2003 and
March 31, 2002 due to unfavorable market and economic conditions.
Accordingly, for the three months ended March 31, 2003 and March 31, 2002, the
Company recorded $35.4 million and $13.5 million,

18

respectively, of impairment losses on investments in the equity and fixed
income portfolios. Impairment losses were recorded for each reporting segment
and, for the three months ended March 31, 2003, amounted to $7.1 million, $2.5
million and $5.9 million for Farmers Management Services, Farmers Re and
Farmers Life, respectively, in the equity portfolios. Also, for the three
months ended March 31, 2003, Farmers Life recorded $19.9 million of impairment
losses related to fixed income securities. For the three months ended March
31, 2002, Farmers Management Services, Farmers Re and Farmers Life recorded
$4.6 million, $2.7 million and $6.2 million, respectively, of impairment
losses in the equity portfolios.

12. Merger of the AIF

On October 31, 2002, the Board of Directors approved the merger into FGI
of certain FGI subsidiaries (Fire Underwriters Association and Truck
Underwriters Association) that act as AIF to the Exchanges. However, for the
merger to become effective, it first needs to be approved by the California
Department of Insurance ("DOI") and then must be filed with the appropriate
Secretaries of State. The Company filed the AIF merger with the DOI on
December 30, 2002 and is currently waiting approval.


ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

General

The Company provides management services to the P&C Group Companies and
owns and operates the 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 Insurance
Subsidiaries are required to use for regulatory reporting purposes. Unless
otherwise indicated, financial information, operating statistics and ratios
applicable to the P&C Group Companies set forth in this document are also
based on SAP. Under SAP, the financial results of the P&C Group Companies
are combined with the results of Farmers Re. This is known as a "Statutory
Combined Basis". Unless otherwise specified, the financial information for
the P&C Group Companies is on a Statutory Combined Basis.

Farmers Life, a Washington domiciled 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, predominantly flexible premium deferred
annuities 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 Deferred Policy Acquisition Costs ("DAC")) so that profits are
generally recognized over the same period as revenue income. Revenues
attributable to universal life, variable 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 policyholder 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.

As of December 2002, Farmers Life exited the business of writing
structured settlements. The 5,200 structured settlement cases in force as of
March 31, 2003 continue to be serviced by Farmers Life. For the three months
ended March 31, 2003 and March 31, 2002, the structured settlement business
represented 0.7% and 2.1% of Farmers Life's income before provision for income
taxes, respectively.

Farmers Re, a wholly owned subsidiary of FGI which was formed and
licensed to conduct business in December 1997, provides reinsurance coverage
to the P&C Group Companies. As of March 31, 2003, Farmers Re

19

participates in three reinsurance treaties: 1) an APD reinsurance agreement,
2) a 10% All Lines Quota Share reinsurance treaty and 3) a 20% Personal Lines
Auto Quota Share reinsurance treaty (See Note 5).

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 $434.8 million and $407.7 million, respectively, for the three months
ended March 31, 2003 and March 31, 2002, which represented 53.7% and 58.8%,
respectively, of the Company's consolidated operating revenues for the same
periods. On a Statutory Combined Basis, as of March 31, 2003, the P&C Group
Companies had surplus of $3.5 billion, and for the three months ended March
31, 2003, had gross premiums earned of $3.4 billion. The Company has no
ownership interest in the P&C Group Companies and, therefore, excluding the
impact of the three quota share reinsurance treaties, 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 2003, the P&C Group Companies have shown continued improvement in
their underwriting results. Their combined ratio, excluding the APD and new
quota share reinsurance agreements, decreased 10.2 percentage points from
112.2% for the three months ended March 31, 2002 to 102.0% for the three
months ended March 31, 2003. The 102.0% combined ratio for the three months
ended March 31, 2003 also compares favorably to the 105.6% combined ratio for
the year ended December 31, 2002. Please note that the combined ratios
reported in this section of the Report include 100% of the management fees
paid to the Company by the P&C Group Companies and, as such, are not fully
comparable to insurance industry results. The improvement in the P&C Group
Companies' underwriting results, however, was offset in part by a
deterioration in investment results due to continuing adverse market
conditions.

On December 31, 2002, two new prospective quota share reinsurance
treaties were implemented. These treaties not only increased the Statutory
Combined Basis surplus as of December 31, but also provide additional
protection for the year 2003. The Statutory Combined Basis surplus increased
$7.2 million from December 31, 2002 and amounted to $3.5 billion as of March
31, 2003. In addition, the Statutory Combined Basis surplus ratio improved
from 31.5% as of March 31, 2002 to 32.5% as of December 31, 2002 to 33.5% as
of March 31, 2003 due to the reduced risk profile created by the new
reinsurance treaties.

Future operating losses suffered by the P&C Group Companies and any
corresponding reduction in surplus could impact their ability to grow written
premiums which, in turn, would impact the amount of management fees earned by
the Company. In addition, a lack of adequate surplus could impact the P&C
Group Companies' ability to make interest payments and repay principal on the
certificates of contribution or the surplus notes purchased by the Company.

On August 5, 2002, the Texas Attorney General and Texas Department of
Insurance initiated a legal action against Farmers Insurance Exchange, Fire
Insurance Exchange and certain of their affiliates which alleged certain
improprieties in the pricing of a portion of their homeowners insurance
policies written in the state of Texas. FGI and certain of its subsidiaries
were also named as parties in that action. On December 18, 2002, the parties
executed a Settlement Agreement respecting this litigation, which, when
approved by the court, will provide for certain rate reductions and refunds to
Texas policyholders. No fines or penalties are included, and there is no
admission of wrongdoing. The settlement has also allowed Farmers Insurance
Exchange and Fire Insurance Exchange, which had previously sent notices
terminating all of their homeowner policies, to continue operating in the
homeowners insurance market in Texas. Although it was a defendant in the
initial lawsuit, the settlement imposes no direct financial burdens on FGI.
There is a possible indirect financial impact on FGI which will depend upon
renewal rates subsequent to the Settlement.

20

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, loss and loss adjustment expense reserves,
impairment of investments, the fair value of financial instruments and
accounting for internally developed 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 an AIF 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 AIF 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 AIF fee than the contractually permitted fee of
20% (25% in the case of the Fire Insurance Exchange). In order to ensure that
its AIF 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 AIF 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.

Premiums for traditional life insurance policies, structured settlement
contracts involving life contingencies ("SSILC"), and other annuity contracts
with life contingencies are recognized as revenues when due from
policyholders. Accident and health insurance premiums are recognized as
revenue pro rata over the terms of the contract.

Revenues associated with universal life, variable universal life products
and other investment type contracts consist of policy charges for the cost of
insurance, policy administration fees, surrender charges, and investment
income on assets allocated to support policyholder account balances on
deposit. Revenues for deferred fixed and variable annuity products and
structured settlement contracts not involving life contingencies ("SSNILC")
consist of surrender charges, investment income on assets allocated to support
policyholder account balances on deposit, and administrative charges for
equity-indexed annuities. Consideration received for interest-sensitive
insurance, SSNILC, and annuity products are recorded as a liability when
received. Policy withdrawal and other charges are recognized as revenue when
assessed.

Farmers Re reinsures a percentage of the business written by the P&C
Group Companies. Under the APD reinsurance agreement, Farmers Re assumes
$200.0 million of annual premiums. Under the 10% All Lines Quota Share
reinsurance treaty, Farmers Re assumes a 2% quota share of premiums written in
all lines of business written by the P&C Group Companies after the APD
contract is applied. Under the 20% Personal Lines Quota Share reinsurance
treaty, Farmers Re assumes a 4% quota share of the personal lines auto
business written by the P&C Group Companies after all other reinsurance
treaties are applied. Premiums assumed by Farmers Re are earned ratably over
the life of the underlying insurance policy.

21

Intangible Assets. The Company's critical accounting policies related to
the valuation of intangible assets include the AIF relationships, Goodwill,
VOLBA and DAC.

AIF Relationships. Through its AIF relationships, 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 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.

Effective January 1, 2002, the Company adopted the provisions of SFAS No.
142, "Goodwill and Other Intangible Assets", and identified the AIF
relationships as intangible assets with indefinite useful lives. Under SFAS
No. 142, intangible assets with indefinite useful lives are no longer
amortized, and as such, the Company no longer records $42.8 million of pretax
annual amortization relating to the AIF relationships. In addition, SFAS No.
142 requires that intangible assets not subject to amortization be tested for
impairment annually, or more frequently if events or changes in circumstances
indicate that the asset might be impaired. The Company performed impairment
tests of the AIF relationships balance of $1.2 billion as of January 1, 2002,
as part of the implementation of SFAS No. 142, and then as of December 31,
2002, in accordance with the annual impairment test, using discounted future
cash flows. Such tests did not indicate any impairment of the recorded AIF
relationships.

Goodwill. Through December 31, 2001, the excess of the purchase price
over the fair value of the net assets ("Goodwill") 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.

Effective January 1, 2002, the Company adopted the provisions of SFAS No.
142. Under SFAS No. 142, goodwill is no longer amortized, and as such, the
Company no longer records $60.0 million of annual amortization relating to
goodwill. In addition, SFAS No. 142 requires goodwill to be tested for
impairment on an annual basis and between annual tests in certain
circumstances (e.g., a significant adverse change in legal factors or the
business climate of the Company, an adverse action by a regulator, a loss of
key personnel, etc.) using a two-step process. The first step of the goodwill
impairment test identifies a potential impairment by comparing the fair value
of a reporting unit with its carrying value, including goodwill. The second
step measures the amount of the impairment by comparing the implied fair value
of the goodwill with the carrying amount of that goodwill. The Company
performed impairment tests of its Goodwill balance of $1.6 billion as of
January 1, 2002, as part of the implementation of SFAS No. 142, and then as of
December 31, 2002, in accordance with the annual impairment test, using
discounted future cash flows. Such tests did not indicate any impairment of
recorded goodwill.

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 $247.4 million and $254.5
million for the period ended March 31, 2003 and the year ended December 31,
2002, respectively.

Life DAC. Costs that vary with, and are related primarily to, the
production of new business have been deferred to the extent that they are
deemed recoverable. Such costs include commissions, certain costs of policy
and underwriting, and certain agency expenses. For universal life insurance
contracts and investment-type products, such costs are being amortized
generally in proportion to the present value of expected gross profits arising
principally from surrender charges and investment results, and mortality and
expense margins. Interest rates are based on rates in effect during the
period. The effects on the amortization of deferred policy acquisition costs
of revisions to estimated gross margins and profits are reflected in earnings
in the period such estimated gross margins and profits are revised.

Management periodically updates these estimates and evaluates the
recoverability of deferred policy acquisition costs. When appropriate,
management revises its assumptions of the estimated gross margins or profits
of

22

these contracts, and the cumulative amortization is re-estimated and
adjusted by a cumulative charge or credit to current operations.

Deferred policy acquisition costs for non-participating traditional life
and annuity policies with life contingencies are amortized in proportion to
anticipated premiums. Assumptions as to anticipated premiums are made at the
date of policy issuance or acquisition and are consistently applied during the
lives of the contracts. Deviations from estimated experience are included in
operations when they occur. For these contracts, the amortization period is
typically the estimated life of the policy.

Deferred policy acquisition costs include amounts associated with the
unrealized gains and losses recorded as other comprehensive income, a
component of stockholder's equity. Accordingly, deferred policy acquisition
costs are increased or decreased for the impact of estimated future gross
profits as if net unrealized gains or losses on securities had been realized
at the balance sheet date. Net unrealized gains or losses on securities
within other comprehensive income also reflect this impact.

Non-life DAC. Acquisition costs, consisting primarily of commissions
incurred on business related to the two new prospective quota share
reinsurance treaties, are deferred and amortized over the period in which the
related premiums are earned. Anticipated losses and loss adjustment expenses
as well as any estimated remaining costs associated with the treaties are
considered in determining acquisition costs to be deferred. Anticipated
investment income is not considered in the deferral of acquisition costs.

Loss and Loss Adjustment Expense Reserves. Under the three reinsurance
treaties, Farmers Re assumes a percentage of the ultimate net losses sustained
by the P&C Group Companies. Loss and loss adjustment expense reserves for all
claims outstanding of the P&C Group Companies are established as of the
reporting date. Reserves include a provision for claims incurred but not yet
reported, as well as development of known claims. The Company's actuaries
review the reserves on a regular basis and make any necessary changes to the
estimates in the current period.

Loss and loss adjustment expense reserve estimates are uncertain by their
very nature. Although reserves are established on the basis of a reasonable
estimate, it is probable that reserves will differ from their related
subsequent developments. Underlying causes for this uncertainty include, but
are not limited to, changes in judicial interpretation of coverage, statutory
and other changes in the regulation of insurance and unanticipated
inflationary trends. This uncertainty can result in both adverse as well as
favorable development of actual subsequent activity when compared to the
reserves established.

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. 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 March
31, 2003 and March 31, 2002 due to unfavorable market and economic
conditions. Accordingly, for the three month periods ended March 31, 2003 and
March 31, 2002, the Company recorded $35.4 million and $13.5 million,
respectively, of impairment losses on investments in the equity and fixed
income portfolios. Impairment losses were recorded for each reporting segment
and, for the three month period ended March 31, 2003, amounted to $7.1
million, $2.5 million and $5.9 million for Farmers Management Services,
Farmers Re and Farmers Life, respectively, in the equity portfolios. Also,
for the three month period ended March 31, 2003, Farmers Life recorded $19.9
million of impairment losses related to fixed income securities. For the
three month period ended March 31, 2002, the Company recorded $4.6 million,
$2.7 million and $6.2 million for Farmers Management Services, Farmers Re and
Farmers Life, respectively, of impairment losses on investments in the equity
portfolios.

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

23

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 Internally Developed 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 March 31, 2003 Compared to Three Months Ended March 31, 2002

Farmers Management Services

Operating Revenues. Operating revenues, which primarily consist of AIF
fees paid to Farmers Management Services as a percentage of gross premiums
earned by the P&C Group Companies and other fees, increased $32.2 million, or
7.4%, from $435.9 million for the three months ended March 31, 2002 to $468.1
million for the three months ended March 31, 2003. 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 $0.2 billion, or 6.3%, from $3.2 billion for
the three months ended March 31, 2002 to $3.4 billion for the three months
ended March 31, 2003.

Operating Expenses. Operating expenses decreased from $209.6 million
for the three months ended March 31, 2002 to $203.1 million for the three
months ended March 31, 2003, a decrease of $6.5 million, or 3.1%, due in part
to a delay in planned expenditures.

Salaries and Employee Benefits. Salaries and employee benefits
expenses decreased $1.3 million, or 1.2%, from $109.3 million for the
three months ended March 31, 2002 to $108.0 million for the three months
ended March 31, 2003 due primarily to a decrease in profit sharing and
outside contractor expenses. This decrease was offset in part by an
increase in pension and medical insurance expenses.

Buildings and Equipment Expenses. Buildings and equipment expenses
increased from $28.2 million for the three months ended March 31, 2002 to
$28.4 million for the three months ended March 31, 2003, an increase of
$0.2 million, or 0.7%, due primarily to an increase in the amortization
expense related to software and equipment.

General and Administrative Expenses. General and administrative
expenses decreased from $72.1 million for the three months ended March 31,
2002 to $66.7 million for the three months ended March 31, 2003, a
decrease of $5.4 million, or 7.5%, due primarily to a decrease in
maintenance costs related to the financial accounting and reporting
system. Also contributing to the decrease between periods was a decrease
in certain general and administrative expenses resulting from a lower
number of policies in-force.

Net Investment Income. Net investment income decreased from $18.7
million for the three months ended March 31, 2002 to $17.4 million for the
three months ended March 31, 2003, a decrease of $1.3 million, or 7.0%. This
decrease was due mainly to lower interest income on the UKISA notes which were
reissued in September 2002 at a lower interest rate as well as the lost
interest income resulting from the April 2002 $30.0 million redemption and the
March 2003 $25.0 million redemption of the ZGAUS notes.

Net Realized Gains/(Losses). Net realized gains/(losses) decreased from
a $3.4 million gain for the three months ended March 31, 2002 to a $29,000
loss for the three months ended March 31, 2003, a decrease of $3.4 million.

24

Impairment Losses on Investments. Impairment losses on investments
increased from $4.6 million for the three months ended March 31, 2002 to $7.1
million for the three months ended March 31, 2003, an increase of $2.5
million, or 54.3%, due primarily to an increase in 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 $10.5 million in
each of the three months ended March 31, 2003 and March 31, 2002.

Provision for Income Taxes. Provision for income taxes increased from
$90.8 million for the three months ended March 31, 2002 to $102.6 million for
the three months ended March 31, 2003, an increase of $11.8 million, or 13.0%,
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 $142.5 million for the three months
ended March 31, 2002 to $162.2 million for the three months ended March 31,
2003, an increase of $19.7 million, or 13.8%.

FGI Insurance Subsidiaries

Farmers Re

Total Revenues. Total revenues increased $105.9 million, or 181.3%, from
$58.4 million for the three months ended March 31, 2002 to $164.3 million for
the three months ended March 31, 2003.

Non-life Reinsurance Premiums. Non-life reinsurance premiums
increased $106.1 million, or 212.2%, from $50.0 million for the three
months ended March 31, 2002 to $156.1 million for the three months ended
March 31, 2003. Under the APD quota share reinsurance agreement, Farmers
Re assumed $50.0 million of premiums in each of the three-month periods
ended March 31, 2003 and March 31, 2002. Under the 10% All Lines Quota
Share treaty which took effect December 31, 2002, Farmers Re assumed
$53.2 million of premiums for the three month period ended March 31,
2003. In addition, under the 20% Personal Lines Auto Quota Share treaty
which took effect December 31, 2002, Farmers Re assumed $52.9 million of
premiums for the three month period ended March 31, 2003.

Net Investment Income. Net investment income increased $1.2
million, or 12.2%, from $9.8 million for the three months ended March 31,
2002 to $11.0 million for the three months ended March 31, 2003. The
increase is due primarily to higher average invested assets between
periods resulting primarily from the increase in unearned premiums
transferred from the P&C Group Companies to Farmers Re as a result of the
two new quota share reinsurance agreements.

Net Realized Gains/(Losses). Net realized gains/(losses) decreased
$1.6 million, or 123.1%, from a $1.3 million gain for the three months
ended March 31, 2002 to a $0.3 million loss for the three months ended
March 31, 2003. The decrease is due to an increase in losses realized in
fixed income sales between periods.

Impairment Losses. Impairment losses on investments decreased $0.2
million, or 7.4%, from $2.7 million for the three months ended March 31,
2002 to $2.5 million for the three months ended March 31, 2003. The
decrease was due to lower impairment losses recognized in the equity
portfolio between periods.

Total Operating Expenses. Total operating expenses increased $107.5
million, or 220.3%, from $48.8 million for the three months ended March 31,
2002 to $156.3 million for the three months ended March 31, 2003.

Non-life Losses and Loss Adjustment Expenses. Non-life losses and
loss adjustment expenses increased $63.7 million, or 193.0%, from $33.0
million for the three months ended March 31, 2002 to $96.7 million for the
three months ended March 31, 2003 due primarily to the two new quota share
reinsurance treaties.

25

Non-life Reinsurance Commissions. Non-life reinsurance commissions
increased $42.8 million, or 272.6%, from $15.7 million for the three
months ended March 31, 2002 to $58.5 million for the three months ended
March 31, 2003 due primarily to the two new quota share reinsurance
treaties.

Amortization of Non-life DAC. Amortization of non-life DAC
resulting from the two quota share reinsurance treaties which became
effective on December 31, 2002 was $1.0 million for the three months
ended March 31, 2003.

General and Administrative Expenses. General and administrative
expenses were $0.1 million for each of the three months ended March 31,
2002 and March 31, 2003.

Provision for Income Taxes. Provision for income taxes decreased $0.8
million, or 26.7%, from $3.0 million for the three months ended March 31, 2002
to $2.2 million for the three months ended March 31, 2003 due primarily to a
decrease in pretax income between periods and a decrease in the effective tax
rate as a result of an increase in tax-exempt investment income between
periods.

Farmers Re Income. As a result of the foregoing, Farmers Re's income
decreased $0.8 million, or 12.1%, from $6.6 million for the three months ended
March 31, 2002 to $5.8 million for the three months ended March 31, 2003.

Farmers Life

Total Revenues. Total revenues decreased from $199.1 million for the
three months ended March 31, 2002 to $177.7 million for the three months ended
March 31, 2003, a decrease of $21.4 million, or 10.7%.

Life and Annuity Premiums. Life premiums decreased from $63.4
million for the three months ended March 31, 2002 to $47.6 million for
the three months ended March 31, 2003, a decrease of $15.8 million, or
24.9%. This decrease was primarily due to a $15.4 million, or 96.7%,
decrease in premiums for structured settlements involving life
contingencies compared to the three months ended March 31, 2002. Farmers
Life exited the business of writing structured settlements as of December
31, 2002 (see Note 1). Excluding structured settlements, life premiums
decreased from $47.5 million for the three months ended March 31, 2002 to
$47.1 million for the three months ended March 31, 2003, a decrease of
$0.4 million, or 0.8%.

Life Policy Charges. Life policy charges increased from $55.4
million for the three months ended March 31, 2002 to $55.9 million for
the three months ended March 31, 2003, an increase of $0.5 million, or
0.9%, reflecting a 2.0% growth in universal life-type insurance in-force.

Net Investment Income. Net investment income increased from $83.2
million for the three months ended March 31, 2002 to $84.0 million for
the three months ended March 31, 2003, an increase of $0.8 million, or
1.0%. This increase was primarily due to growth in mean invested assets,
principally fixed income instruments, partially offset by a decline of
fixed income yields of 59 basis points.

Net Realized Gains. Net realized gains increased from $3.3 million
for the three months ended March 31, 2002 to $16.0 million for the
three months ended March 31, 2003, an increase of $12.7 million, or
384.8%. This increase was due primarily to gains generated from fixed
income sales during the three months ended March 31, 2003. The most
significant disposals were of collateralized mortgage obligations
vulnerable to accelerated prepayment risk and previously impaired
securities that have since appreciated in price.

Impairment Losses on Investments. Impairment losses on investments
increased from $6.2 million for the three months ended March 31, 2002 to
$25.8 million for the three months ended March 31, 2003, an increase of
$19.6 million, or 316.1%. This increase was primarily due to $19.9
million of fixed income impairments taken during the three months ended
March 31, 2003 on positions issued by the major U.S.

26

airlines. Equity impairments for the three months ended March 31, 2003
totaled $5.9 million, a decrease of $0.3 million from the three months
ended March 31, 2002.

Total Operating Expenses. Total operating expenses decreased from $150.3
million for the three months ended March 31, 2002 to $139.8 million for the
three months ended March 31, 2003, a decrease of $10.5 million, or 6.9%.

Life Policyholders' Benefits and Charges. Life policyholders'
benefits expense and charges decreased from $113.7 million for the three
months ended March 31, 2002 to $94.2 million for the three months ended
March 31, 2003, a decrease of $19.5 million, or 17.2%.

Policy Benefits. Policy benefits, which consist primarily of
death and surrender benefits on life insurance products, decreased
from $43.6 million for the three months ended March 31, 2002 to
$42.2 million for the three months ended March 31, 2003, a decrease
of $1.4 million, or 3.2%, due to favorable claims experience in the
three months ended March 31, 2003.

Increase in Liability for Future Benefits. Increase in
liability for future benefits expense decreased from $23.8 million
for the three months ended March 31, 2002 to $8.0 million for the
three months ended March 31, 2003, a decrease of $15.8 million, or
66.4%. This decrease was primarily due to a $15.4 million, or 96.7%,
decrease in deposits for structured settlements involving life
contingencies compared to the three months ended March 31, 2002.
Farmers Life exited the business of writing structured settlements
as of December 31, 2002 (see Note 1). Excluding structured
settlements, the increase in liability for future benefits expense
decreased from $8.2 million for the three months ended March 31,
2002 to $7.1 million for the three months ended March 31, 2003, a
decrease of $1.1 million, or 13.4%.

Interest Credited to Policyholders. Interest credited to
policyholders, which represents the amount credited under universal
life-type contracts, deferred annuities and structured settlements
not involving life contingencies to policyholder funds on deposit,
decreased from $46.3 million for the three months ended March 31,
2002 to $44.0 million for the three months ended March 31, 2003, a
decrease of $2.3 million or 5.0%. This decrease is primarily due to
reductions in crediting rates related to the deferred annuity and
universal life products. The effect of the reductions is offset by
a 7.9% growth in policyholder funds that credit interest.

General Operating Expenses. General operating expenses increased
from $36.6 million for the three months ended March 31, 2002 to $45.6
million for the three months ended March 31, 2003, an increase of $9.0
million, or 24.6%.

Amortization of DAC and VOLBA. Amortization expense increased
from $22.3 million for the three months ended March 31, 2002 to
$34.7 million for three months ended March 31, 2003, an increase of
$12.4 million, or 55.6%, due to a change in the rate at which DAC is
amortized. The DAC amortization rate is determined using profit
margin projections, which include current period realized gains and
losses.

Life Commissions. Life commissions expense decreased from
($1.2) million for the three months ended March 31, 2002 to ($3.9)
million for the three months ended March 31, 2003, a change of $2.7
million, due primarily to a $2.3 million, or 36.7%, growth in
reinsurance activity between periods. Commissions are reported net
of expense reimbursements related to reinsured business.

General and Administrative Expenses. General and administrative
expenses decreased from $15.5 million for the three months ended
March 31, 2002 to $14.8 million for the three months ended March 31,
2003, a decrease of $0.7 million, or 4.5%. This decrease is
primarily attributable to lower premium taxes and fees.

27

Provision for Income Taxes. Provision for income taxes decreased from
$17.2 million for the three months ended March 31, 2002 to $13.3 million for
the three months ended March 31, 2003, a decrease of $3.9 million, or 22.7%,
as a result of a decrease in pretax income between periods.

Farmers Life Income. As a result of the foregoing, Farmers Life income
decreased from $31.6 million for the three months ended March 31, 2002 to
$24.6 million for the three months ended March 31, 2003, a decrease of $7.0
million, or 22.2%.

Consolidated Net Income

Consolidated net income of the Company increased from $180.7 million for
the three months ended March 31, 2002 to $192.6 million for the three months
ended March 31, 2003, an increase of $11.9 million, or 6.6%.

Liquidity and Capital Resources

As of March 31, 2003 and March 31, 2002, the Company held cash and cash
equivalents of $553.9 million and $507.6 million, respectively. In addition,
as of March 31, 2003, the Company had an aggregate borrowing facility of
$250.0 million. As such, the Company believes that, combined with cash
generated from operations, its total invested assets, including cash and
short-term investments, are more than sufficient to satisfy the liquidity
needs of the Company.

The principal uses of funds by Farmers Management Services are: (i)
operating expenses, (ii) dividends to the shareholders of the Company's QUIPS,
(iii) capital expenditures and (iv) dividends to its stockholders. The
principal uses of funds by Farmers Life are: (i) policy benefits and claims,
(ii) loans to policyholders, (iii) capital expenditures, (iv) life
commissions, (v) operating expenses and (vi) stockholder's dividends. The
principal uses of funds by Farmers Re are: (i) the payment of non-life losses
and loss adjustment expenses, (ii) the payment of reinsurance commissions and
(iii) operating expenses.

The principal sources of funds available to Farmers Management Services
are: (i) the management fees that it receives for providing management
services to the P&C Group Companies, (ii) investment income and (iii)
dividends from its subsidiaries. The principal sources of funds available to
Farmers Life are premiums and amounts earned from the investment of premiums
and deposits. The principal sources of funds available to Farmers Re are
premiums assumed from the P&C Group Companies and investment income.

In order to maintain the policyholders' surplus of the P&C Group
Companies, the Company has, from time to time, purchased surplus notes or
certificates of contributions of the P&C Group Companies, receiving
certificates of contribution or surplus notes which bear interest at various
rates. As of March 31, 2003, the Company held $949.8 million of certificates
of contribution and an $87.5 million surplus note of the P&C Group Companies.
The Company is under no obligation to purchase these certificates of
contributions from the P&C Group Companies. However, the Company believes
that these purchases of certificates of contribution and the surplus note have
helped to support the historical growth in premiums earned by the P&C Group
Companies and the related growth in management fees paid to the Company. The
Company also believes that it is receiving a fair rate of return on its
certificates of contributions and surplus note.

Net cash provided by operating activities increased from $338.6 million
for the three months ended March 31, 2002 to $342.9 million for the three
months ended March 31, 2003, an increase of $4.3 million, or 1.3%. The
resulting increase in cash was due in part to a $52.0 million decrease between
periods in cash contributed to the Company's pension plan ($70.0 million vs.
$18.0 million for the three months ended March 31, 2002 and March 31, 2003,
respectively). Also contributing to the increase in cash was a $53.4 million
increase between periods in reserves for non-life losses and loss adjustment
expenses as a result of the new Farmers Re quota share reinsurance treaties
that became effective December 31, 2002. In addition, the Company received
$35.4 million in January 2003 from the P&C Group Companies related to
reimbursement of pension costs. Furthermore, the increase in cash was driven
in part by a $17.1 million decrease between periods in cash used for software
development. Partially offsetting the aforementioned increases in net cash
provided by operating activities were: 1) a $69.1 million increase in cash
used for

28

unsettled security purchases, 2) a $46.6 million decrease in cash resulting
from higher premiums in collection and 3) a $37.9 million decrease in cash
between periods due to a decrease in the future policy benefits liability.

Net cash used in investing activities increased from $108.0 million of
cash used for the three months ended March 31, 2002 to $313.2 million of cash
used for the three months ended March 31, 2003, resulting in a decrease in
cash of $205.3 million, or 190.1%. This decrease in cash was the result of a
$460.7 million increase in purchases of investments available-for-sale in the
three month period ended March 31, 2003, compared to the same period in 2002
due in part to the increase in unearned premiums transferred from the P&C
Group Companies to Farmers Re as a result of the two new quota share
reinsurance agreements. Also contributing to the decrease in cash was the
purchase of a $100.0 million note receivable affiliate for the three months
ended March 31, 2003. Partially offsetting this decrease was a $239.7 million
increase in cash provided by the proceeds of investments available-for-sale
between the three month periods ended March 31, 2003 and March 31, 2002, a
$100.0 million cash increase resulting from the February 14, 2003 redemption
of a ZIC note and a $25.0 million cash increase resulting from the March 17,
2003 partial redemption of a ZGAUS note.

Net cash used in financing activities decreased from $120.4 million for
the three months ended March 31, 2002 to $92.4 million for the three months
ended March 31, 2003, resulting in an increase in cash of $28.0 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.

Recent Accounting Pronouncements

The following is a summary of recent FASB pronouncements. Please refer
to Note 2 for further information related to these pronouncements.

- - In November 2002, the FASB issued Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". This
Interpretation identifies characteristics of certain guarantee contracts
and requires that a liability be recognized at fair value at the
inception of such guarantees for the obligations undertaken by the
guarantor. The initial recognition and initial measurement provisions of
this Interpretation are effective for these guarantees issued or modified
after December 31, 2002. The disclosure requirements of this
Interpretation are effective for the Company as of December 31, 2002.
The adoption of this Interpretation did not have a material impact on the
Company's consolidated financial statements.

- - In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities". This Interpretation provides guidance on the
identification of entities for which control is achieved through means
other than through voting rights, variable interest entities, and how to
determine when and which business enterprises should consolidate variable
interest entities. This Interpretation applies immediately to variable
interest entities created after January 31, 2003. It applies in the
first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. Based on the current
Interpretation, the Company does not believe they have variable interest
entities.

- - In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities". This Statement amends
and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This
Statement is effective for contracts entered into or modified after June
30, 2003. The Company does not expect the adoption of this Statement to
have a material impact on its consolidated financial statements.

29

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 2002.

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.

(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.

Due to its AIF relationships, the Company is a party to lawsuits
in which the Exchanges are the primary defendants. 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. None.

Item 5. Other Information. None.

Item 6. Exhibits and Reports on Form 8-K.

(a) Exhibits.

99.2 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

99.3 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K. None.

30

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)

May 13, 2003 /s/ Martin D. Feinstein
---------------------------------------------
Date Martin D. Feinstein
Chairman of the Board,
President and Chief Executive Officer


May 13, 2003 /s/ Pierre Wauthier
---------------------------------------------
Date Pierre Wauthier
Executive Vice President,
Chief Financial Officer
and Director

31

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.

32

Date: May 13, 2003


/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.

33

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.

34

Date: May 13, 2003


/s/ Pierre Wauthier
- --------------------------
Pierre Wauthier
Executive 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


Certification of CEO 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 March 31, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), Martin D.
Feinstein, as Chief Executive Officer of the Company, 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
May 13, 2003


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.


Exhibit 99.3


Certification of 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 March 31, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), Pierre Wauthier,
as Chief Financial Officer of the Company, 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/ Pierre Wauthier
- -----------------------
Pierre Wauthier
Chief Financial Officer
May 13, 2003

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.