<PAGE>   1
             UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, DC 20549
--------------------------------------------------------------------------
                                 FORM 10-Q

/X/   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

              For the Quarterly Period Ended September 30, 2001

                                     OR

/ /   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
      For the transition period from                  to
                    -------------------------------------
                     Commission File Number   33-94670-01
                    -------------------------------------
                              FARMERS GROUP, INC.
           (Exact name of registrant as specified in its charter)

                                   NEVADA
                       (State or other jurisdiction of
                       incorporation or organization)

                                  95-0725935
                      (IRS Employer Identification No.)

           4680 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90010
             (Address of principal executive offices)(Zip Code)

                                (323) 932-3200
             (Registrants telephone number, including area code)

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

Registrant's Common Stock outstanding on September 30, 2001 was 1,000 shares.

<PAGE>   2

[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>   3

                               FARMERS GROUP, INC.
                                AND SUBSIDIARIES

                           TABLE OF CONTENTS FORM 10-Q

                        FOR THE PERIOD ENDED SEPTEMBER 30, 2001


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

          Consolidated Balance Sheets Assets
             September 30, 2001 and December 31, 2000                         4

          Consolidated Balance Sheets Liabilities and Stockholders'
             Equity
             September 30, 2001 and December 31, 2000                         5

          Consolidated Statements of Income
             Nine Month Periods ended September 30, 2001 and
             September 30, 2000                                               6

          Consolidated Statements of Comprehensive Income
             Nine Month Periods ended September 30, 2001 and
             September 30, 2000                                               7

          Consolidated Statements of Income
             Three Month Periods ended September 30, 2001 and
             September 30, 2000                                               8

          Consolidated Statements of Comprehensive Income
             Three Month Periods ended September 30, 2001 and
             September 30, 2000                                               9

          Consolidated Statement of Stockholders' Equity
             Nine Month Period ended September 30, 2001                       10

          Consolidated Statements of Cash Flows
             Nine Month Periods ended September 30, 2001 and
             September 30, 2000                                               11

          Notes to Interim Financial Statements                               12

  ITEM 2. Management's Discussion and Analysis of Financial Condition
             and Results of Operations                                        20

  ITEM 3. Quantitative and Qualitative Disclosures about Market Risks         27

PART II.  OTHER INFORMATION                                                   28

SIGNATURES                                                                    29

<PAGE>   4

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
                                 FARMERS GROUP, INC.
                                  AND SUBSIDIARIES
                             CONSOLIDATED BALANCE SHEETS
                               (Amounts in thousands)
                                       ASSETS
<TABLE>
<CAPTION>
                                                                 (Unaudited)
                                                                September 30,  December 31,
                                                                     2001         2000
                                                                ------------- ------------
<S>                                                             <C>           <C>
Current assets, excluding Insurance Subsidiaries:
 Cash and cash equivalents                                      $     509,244 $    132,245
 Marketable securities, at market value
  (cost: $27,294 and $10,386)                                          27,451       10,386
 Accrued interest                                                      21,177       41,995
 Accounts receivable, principally from the P&C Group                  106,548       36,052
 Notes receivable affiliate                                            95,000      207,000
 Deferred taxes                                                        60,012       40,609
 Prepaid expenses and other                                            21,112       15,437
                                                                ------------- ------------
  Total current assets                                                840,544      483,724
                                                                ------------- ------------
Investments, excluding Insurance Subsidiaries:
 Fixed maturities available-for-sale, at market value
  (cost: $116,919 and $292,039)                                       115,087      291,795
 Mortgage loans on real estate                                             49           92
 Common stocks available-for-sale, at market value
  (cost: $263,742 and $282,224)                                       206,338      242,066
 Certificates of contribution and surplus notes of the P&C Group      546,830      184,830
 Real estate, at cost (net of accumulated depreciation:
  $45,015 and $26,179)                                                 88,066       69,699
 Other investments                                                          0        3,341
                                                                ------------- ------------
                                                                      956,370      791,823
                                                                ------------- ------------
Other assets, excluding Insurance Subsidiaries:
 Notes receivable affiliates                                          250,000      345,000
 Goodwill (net of accumulated amortization:
  $765,561 and $720,528)                                            1,636,194    1,681,227
 Attorney-in-fact relationships (net of accumulated amortization:
  $544,757 and $512,712)                                            1,164,286    1,196,331
 Other assets                                                         269,286      255,174
                                                                ------------- ------------
                                                                    3,319,766    3,477,732
                                                                ------------- ------------
Properties, plant and equipment, at cost:  (net of accumulated
 depreciation: $414,786 and $391,360)                                 414,108      438,371
                                                                ------------- ------------
Investments of Insurance Subsidiaries:
 Fixed maturities available-for-sale, at market value
  (cost: $4,386,735 and $4,349,824)                                 4,548,724    4,365,338
 Mortgage loans on real estate                                         31,396       36,984
 Non-redeemable preferred stocks available-for-sale, at market
  value (cost: $11,128 and $11,128)                                    12,003       11,500
 Common stocks available-for-sale, at market value
  (cost: $354,629 and $330,785)                                       288,129      293,407
 Certificates of contribution and surplus notes of the P&C Group      490,500      502,500
 Policy loans                                                         228,670      218,162
 Real estate, at cost (net of accumulated depreciation:
  $31,135 and $29,369)                                                 85,479       89,426
 Joint ventures, at equity                                              3,235        4,651
 S&P 500 call options, at fair value (cost: $37,219 and $29,696)        8,438       26,271
 Other investments                                                     14,341        5,279
                                                                ------------- ------------
                                                                    5,710,915    5,553,518
                                                                ------------- ------------
Other assets of Insurance Subsidiaries:
 Cash and cash equivalents                                            308,455       84,431
 Marketable securities, at market value
  (cost: $86,499 and $9,997)                                           86,787        9,997
 Reinsurance premiums receivable P&C Group                             13,109      111,874
 Accrued investment income                                             67,866       69,922
 Deferred policy acquisition costs and value of life business
  acquired                                                            815,483      838,121
 Securities lending collateral                                         33,334      436,744
 Other assets                                                          84,373       29,151
 Assets held in Separate Account                                       39,349        8,423
                                                                ------------- ------------
                                                                    1,448,756    1,588,663
                                                                ------------- ------------
   Total assets                                                 $  12,690,459 $ 12,333,831
                                                                ============= ============
              The accompanying notes are an integral part of these interim financial statements.

</TABLE>

<PAGE>   5
                                  FARMERS GROUP, INC.
                                   AND SUBSIDIARIES
                              CONSOLIDATED BALANCE SHEETS
                                (Amounts in thousands)
                         LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                 (Unaudited)
                                                                September 30,  December 31,
                                                                     2001         2000
                                                                 ------------ ------------
<S>                                                              <C>          <C>
Current liabilities, excluding Insurance Subsidiaries:
 Notes and accounts payable:
  P&C Group                                                           362,000          481
  Other                                                                53,532       53,375
 Accrued liabilities:
  Profit sharing                                                       45,100       58,242
  Income taxes                                                        205,252      115,223
  Other                                                                 6,701        9,715
                                                                 ------------ ------------
   Total current liabilities                                          672,585      237,036
                                                                 ------------ ------------

Other liabilities, excluding Insurance Subsidiaries:
 Real estate mortgages payable                                             14           16
 Non-current deferred taxes                                           539,254      551,097
 Other                                                                105,625      120,405
                                                                 ------------ ------------
                                                                      644,893      671,518
                                                                 ------------ ------------
Liabilities of Insurance Subsidiaries:
 Policy liabilities:
  Future policy benefits                                            3,740,666    3,574,594
  Claims                                                               45,973       32,509
  Policyholders dividends                                                  10            3
  Other policyholders funds                                           213,271      141,544
  Death benefits payable                                               52,550       42,011
 Provision for non-life losses and loss adjustment expenses            47,746       89,936
 Income taxes (including deferred taxes: $96,199 and $97,267)         152,193      121,499
 Unearned investment income                                               910          903
 Reinsurance payable P&C Group                                          7,657      185,742
 Securities lending liability                                          33,334      436,744
 Other liabilities                                                    125,642       34,983
 Liabilities related to Separate Account                               39,349        8,423
                                                                 ------------ ------------
                                                                    4,459,301    4,668,891
                                                                 ------------ ------------
   Total liabilities                                                5,776,779    5,577,445
                                                                 ------------ ------------

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 September 30, 2001 450 shares,
  as of December 31, 2000 500 shares                                     0.45         0.50
 Class B common stock, $1 par value per share; authorized, issued
  and outstanding:  as of September 30, 2001 and
  December 31, 2000 500 shares                                           0.50         0.50
 Class C common stock, $1 par value per share; authorized, issued
  and outstanding:  as of September 30, 2001 50 shares                   0.05         0.00
 Additional capital                                                 5,212,618    5,212,618
 Accumulated other comprehensive income/(loss) (net of deferred
  taxes: $2,208 and ($23,946))                                          4,101      (44,471)
 Retained earnings                                                  1,196,960    1,088,238
                                                                 ------------ ------------
   Total stockholders' equity                                       6,413,680    6,256,386
                                                                 ------------ ------------
     Total liabilities and stockholders' equity                  $ 12,690,459 $ 12,333,831
                                                                 ============ ============
              The accompanying notes are an integral part of these interim financial statements.

</TABLE>

<PAGE>   6
                               FARMERS GROUP, INC.
                                AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                             (Amounts in thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                      Nine month period
                                                                     ended September 30,
                                                                  ------------------------
                                                                      2001         2000
                                                                  -----------  -----------
<S>                                                               <C>          <C>
Consolidated operating revenues                                   $ 2,279,549  $ 2,560,580
                                                                  ===========  ===========
Management services to property and casualty
insurance companies; and other:
  Operating revenues                                              $ 1,256,988  $ 1,179,798
  Operating expenses                                                  704,089      665,826
                                                                  -----------   ----------
    Operating income                                                  552,899      513,972
  Net investment income                                                59,983      100,408
  Net realized gains                                                   13,099       52,943
  Impairment losses on investments                                    (38,195)           0
  Dividends on preferred securities of subsidiary trusts              (31,553)     (31,553)
                                                                  -----------   ----------
    Income before provision for taxes                                 556,233      635,770
  Provision for income taxes                                          229,704      259,718
                                                                  -----------   ----------
    Management services income                                        326,529      376,052
                                                                  -----------   ----------
Insurance Subsidiaries:
  Life and annuity premiums                                           201,787      168,013
  Non-life reinsurance premiums                                       350,000      750,000
  Life policy charges                                                 162,991      161,090
  Net investment income                                               279,104      262,590
  Net realized gains                                                   42,287       39,089
  Impairment losses on investments                                    (47,925)           0
                                                                  -----------  -----------
    Total revenues                                                    988,244    1,380,782
                                                                  -----------  -----------
  Non-life losses and loss adjustment expenses                        248,042      515,362
  Life policyholders' benefits and charges                            341,105      283,274
  Non-life reinsurance commissions                                     93,208      215,903
  General operating expenses                                          112,772      124,775
                                                                  -----------  -----------
    Total operating expenses                                          795,127    1,139,314
                                                                  -----------  -----------
    Income before provision for taxes                                 193,117      241,468
  Provision for income taxes                                           62,424       83,007
                                                                  -----------  -----------
    Insurance Subsidiaries income                                     130,693      158,461
                                                                  -----------  -----------

Consolidated net income                                           $   457,222  $   534,513
                                                                  ===========  ===========
              The accompanying notes are an integral part of these interim financial statements.
</TABLE>

<PAGE>   7
                               FARMERS GROUP, INC.
                                AND SUBSIDIARIES
                           CONSOLIDATED STATEMENTS OF
                              COMPREHENSIVE INCOME
                             (Amounts in thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                      Nine month period
                                                                     ended September 30,
                                                                  ------------------------
                                                                      2001         2000
                                                                  -----------  -----------
<S>                                                               <C>          <C>
Consolidated net income                                           $   457,222  $   534,513
                                                                  -----------  -----------
Other comprehensive income/(loss), net of tax:
  Net unrealized holding gains/(losses) on securities,
      net of tax of $38,231 and ($8,569)                               71,000      (15,912)
  Change in effect of unrealized losses on other
      insurance accounts, net of tax of ($12,077) and ($4,128)        (22,428)      (7,667)
                                                                  -----------  -----------
  Other comprehensive income/(loss)                                    48,572      (23,579)
                                                                  -----------  -----------
Comprehensive income                                              $   505,794  $   510,934
                                                                  ===========  ===========

              The accompanying notes are an integral part of these interim financial statements.
</TABLE>

<PAGE>   8
                               FARMERS GROUP, INC.
                                AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                             (Amounts in thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                     Three month period
                                                                     ended September 30,
                                                                  ------------------------
                                                                      2001         2000
                                                                  -----------  -----------
<S>                                                               <C>          <C>
Consolidated operating revenues                                   $   701,087  $   880,005
                                                                  ===========  ===========
Management services to property and casualty
insurance companies; and other:
  Operating revenues                                              $   428,272  $   407,681
  Operating expenses                                                  231,348      231,607
                                                                  -----------  -----------
    Operating income                                                  196,924      176,074
  Net investment income                                                16,568       33,892
  Net realized gains/(losses)                                             (67)      16,215
  Impairment losses on investments                                    (38,195)           0
  Dividends on preferred securities of subsidiary trusts              (10,518)     (10,518)
                                                                  -----------  -----------
    Income before provision for taxes                                 164,712      215,663
  Provision for income taxes                                           69,316       88,664
                                                                  -----------  -----------
    Management services income                                         95,396      126,999
                                                                  -----------  -----------

Insurance Subsidiaries:
  Life and annuity premiums                                            68,463       59,743
  Non-life reinsurance premiums                                        50,000      250,000
  Life policy charges                                                  54,276       53,293
  Net investment income                                                92,222       89,833
  Net realized gains                                                   13,167       19,455
  Impairment losses on investments                                    (39,630)           0
                                                                  -----------  -----------
    Total revenues                                                    238,498      472,324
                                                                  -----------  -----------
  Non-life losses and loss adjustment expenses                         35,296      186,399
  Life policyholders' benefits and charges                            117,055       98,176
  Non-life reinsurance commissions                                     13,454       57,350
  General operating expenses                                           34,839       40,662
                                                                  -----------  -----------
    Total operating expenses                                          200,644      382,587
                                                                  -----------  -----------
    Income before provision for taxes                                  37,854       89,737
  Provision for income taxes                                           13,871       31,022
                                                                  -----------  -----------
    Insurance Subsidiaries income                                      23,983       58,715
                                                                  -----------  -----------

Consolidated net income                                           $   119,379  $   185,714
                                                                  ===========  ===========
              The accompanying notes are an integral part of these interim financial statements.
</TABLE>

<PAGE>   9
                               FARMERS GROUP, INC.
                                AND SUBSIDIARIES
                           CONSOLIDATED STATEMENTS OF
                              COMPREHENSIVE INCOME
                             (Amounts in thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                     Three month period
                                                                     ended September 30,
                                                                  ------------------------
                                                                      2001         2000
                                                                  -----------  -----------
<S>                                                               <C>          <C>
Consolidated net income                                           $   119,379  $   185,714
                                                                  -----------  -----------
Other comprehensive income, net of tax:
  Net unrealized holding gains on securities,
      net of tax of $34,504 and $13,135                                64,079       24,396
  Change in effect of unrealized losses on other
      insurance accounts, net of tax of ($7,881) and
      ($4,231)                                                        (14,636)      (7,858)
                                                                  -----------  -----------
  Other comprehensive income                                           49,443       16,538
                                                                  -----------  -----------
Comprehensive income                                              $   168,822  $   202,252
                                                                  ===========  ===========

              The accompanying notes are an integral part of these interim financial statements.
</TABLE>

<PAGE>   10

                                 FARMERS GROUP, INC.
                                  AND SUBSIDIARIES
                   CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                 For the nine month period ended September 30, 2001
                               (Amounts in thousands)
                                     (Unaudited)
<TABLE>
<CAPTION>
                                                     Accumulated Other                     Total
                                Common    Additional  Comprehensive        Retained    Stockholders'
                                 Stock     Capital    Income/(Loss)        Earnings       Equity
                               --------  ----------- -----------------   ------------  ------------
<S>                            <C>       <C>         <C>                 <C>           <C>
Balance, December 31, 2000     $      1  $ 5,212,618  $        (44,471)  $  1,088,238  $  6,256,386

Net income                                                                    457,222       457,222

Net unrealized holding gains on
  securities, net of tax of
  $38,231                                                       71,000                       71,000

Change in effect of unrealized
  losses on other insurance
  accounts, net of tax of
  ($12,077)                                                    (22,428)                     (22,428)

Cash dividends paid                                                          (348,500)     (348,500)
                               --------  -----------  ----------------   ------------  ------------
Balance, September 30, 2001    $      1  $ 5,212,618  $          4,101    $ 1,196,960  $  6,413,680
                               ========  ===========  ================   ============  ============

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

</TABLE>

<PAGE>   11

                                 FARMERS GROUP, INC.
                                  AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (Amounts in thousands)
                                     (Unaudited)
<TABLE>
<CAPTION>
                                                                     Nine month period
                                                                    ended September 30,
                                                                  -----------------------
                                                                     2001         2000
                                                                  ----------   ----------
<S>                                                               <C>          <C>
Cash Flows from Operating Activities:
 Consolidated net income                                          $  457,222   $  534,514
 Non-cash and operating activities adjustments:
  Depreciation and amortization                                      128,586      123,659
  Amortization of deferred policy acquisition costs and
    value of life business acquired                                   72,113       83,770
  Policy acquisition costs deferred                                  (83,980)     (76,637)
  Life insurance policy liabilities                                  169,716      104,467
  Provision for non-life losses and loss adjustment expenses         (42,190)      (7,540)
  Universal life type contracts:
     Deposits received                                               227,573      227,083
     Withdrawals                                                    (203,963)    (199,290)
     Interest credited                                                60,897       56,252
  Equity in earnings of joint ventures                                   750          738
  Gains on sales of assets                                           (69,325)     (92,746)
  Impairment losses on investments                                    86,120            0
 Changes in assets and liabilities:
  Current assets and liabilities                                      10,439        7,140
  Non-current assets and liabilities                                 (28,399)     (79,967)
 Other, net                                                           (4,038)      13,197
                                                                  ----------  -----------
 Net cash provided by operating activities                           781,521      694,640
                                                                  ----------  -----------
Cash Flows from Investing Activities:
 Purchases of investments available-for-sale                      (1,949,135)    (815,894)
 Purchases of properties                                             (60,335)     (88,676)
 Purchase of surplus notes of the P&C Group                                0     (175,000)
 Purchase of certificates of contribution of the P&C Group                 0     (370,000)
 Proceeds from sales and maturities of investments
  available-for-sale                                               1,955,838    1,521,491
 Proceeds from sales of properties                                    23,831        7,882
 Proceeds from redemption of notes receivable affiliate              207,000      175,000
 Mortgage loan collections                                             5,632        3,305
 Increase in policy loans                                            (10,508)     (12,809)
 Other, net                                                           (1,706)      (3,015)
                                                                  ----------  -----------
 Net cash provided by investing activities                           170,617      242,284
                                                                  ----------  -----------
Cash Flows from Financing Activities:
 Dividends paid to stockholders                                     (348,500)    (362,025)
 Annuity contracts:
    Deposits received                                                315,058      111,284
    Withdrawals                                                     (355,227)    (195,928)
    Interest credited                                                 37,556       53,652
 Payment of long-term notes payable                                       (2)          (2)
                                                                  ----------  -----------
 Net cash used in financing activities                              (351,115)    (393,019)
                                                                  ----------  -----------

Increase in cash and cash equivalents                                601,023      543,905
Cash and cash equivalents at beginning of year                       216,676      313,500
                                                                  ----------  -----------
Cash and cash equivalents at end of period                        $  817,699  $   857,405
                                                                  ==========  ===========

              The accompanying notes are an integral part of these interim financial statements.
</TABLE>

<PAGE>   12

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

A.   Basis of presentation and summary of significant accounting policies

     The accompanying consolidated balance sheet of Farmers Group, Inc. ("FGI")
and its subsidiaries (together, the "Company") as of September 30, 2001, the
related consolidated statements of income, comprehensive income, stockholders'
equity and cash flows for the nine month period ended September 30, 2001 and
the consolidated statement of income, comprehensive income and cash flows for
the nine month period ended September 30, 2000, as well as the consolidated
statements of income and comprehensive income for the three month periods ended
September 30, 2001 and September 30, 2000, 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, 2000 and 1999, and the related
consolidated statements of income, comprehensive income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2000.

     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 with the
2001 presentation.

     The preparation of the Company's financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported amounts of revenues and expenses during the reporting periods.  Actual
results could differ from those estimates.

     The Company is attorney-in-fact ("AIF") for three inter-insurance
exchanges: Farmers Insurance Exchange, Fire Insurance Exchange and Truck
Insurance Exchange (collectively the "Exchanges"), which operate in the
property and casualty insurance industry.  On March 7, 2000, the Exchanges
acquired Foremost Corporation of America and its subsidiaries ("Foremost"),
a prominent writer of insurance for manufactured homes, recreational vehicles
and other specialty lines.  Each policyholder of the Exchanges appoints the
Company as the exclusive AIF to provide management services.  For such
services, the Company earns management fees based on a percentage of gross
premiums earned by the Exchanges, their respective subsidiaries, Farmers
Texas County Mutual Insurance Company, Foremost County Mutual Insurance
Company and Foremost Lloyds of Texas (collectively the "P&C Group").  The P&C
Group is owned by the 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.

     Farmers New World Life Insurance Company ("Farmers Life"), a Washington
based insurance company, is a wholly owned subsidiary of the Company.  Farmers
Life markets a broad line of individual life insurance products, including
universal life, term life and whole life insurance, structured settlement and
annuity products, predominately flexible premium deferred annuities, as well as
variable universal life insurance and variable annuity products.  These
products are sold directly by the P&C Group's agents.

     Farmers Reinsurance Company ("Farmers Re"), a wholly owned subsidiary of
the Company, reinsures a percentage of the auto physical damage business
("APD") written by the P&C Group.  Effective April 1, 2001, the APD reinsurance
agreement between Farmers Re and the P&C Group which had been in force since
January 1998 was cancelled and replaced with a similar APD reinsurance
agreement with multiple reinsurers.  As a result of this new agreement, the
monthly premiums assumed by Farmers Re decreased from $83.3 million to $16.7
million.  Farmers Re continues to assume a quota share percentage of ultimate
net losses sustained by the P&C Group in its

<PAGE>   13

APD line of business.  This treaty, which can be terminated by either party,
also provides for the P&C Group 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.

     On March 31, 2001, Farmers Re and the P&C Group commuted $89,936,000 of
losses and loss adjustment expenses associated with the 2000 accident year.  As
a result, in May 2001, Farmers Re paid the P&C Group $89,936,000 of losses and
loss adjustment expenses and $8,766,000 of accrued interest in settlement of
this commutation.

     Additionally, on August 15, 2001, Farmers Re and the P&C Group commuted
$100,797,000 of losses and loss adjustment expenses due to the cancellation of
the original APD reinsurance agreement.  As a result, Farmers Re paid the P&C
Group $100,797,000 of losses and loss adjustment expenses and $1,036,000 of
accrued interest in settlement of this commutation.

     References to the "Insurance Subsidiaries" within the consolidated
financial statements are to Farmers Life and Farmers Re.

     In December 1988, B.A.T Industries p.l.c. ("B.A.T"), acquired 100%
ownership of the Company through its wholly owned subsidiary BATUS Financial
Services.  Immediately thereafter, BATUS Financial Services was merged into
FGI.  The acquisition was accounted for as a purchase and, accordingly, the
acquired assets and liabilities were recorded in the Company's consolidated
balance sheets based on their estimated fair values at December 31, 1988.

     In September 1998, the financial businesses of B.A.T, which included the
Company, were merged with Zurich Insurance Company ("ZIC").  The businesses of
ZIC and the financial services businesses of B.A.T were transferred to Zurich
Group Holding ("ZGH"), formerly known as Zurich Financial Services, a Swiss
company with headquarters in Zurich, Switzerland.  This merger was accounted
for by ZGH as a pooling of interests under International Accounting Standards.

     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 new
group holding company, Zurich Financial Services.

     In 1998, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities".  This Statement establishes
accounting and reporting standards for derivative instruments (including
certain derivative instruments embedded in other contracts) and for hedging
activities.  SFAS No. 133 requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at market value.  Subsequently, in June 1999, the FASB
released SFAS No. 137, "Deferral of the Effective Date of FASB Statement No.
133", which deferred the effective date of SFAS No. 133 to fiscal years
beginning after June 15, 2000.  Finally, in June 2000, the FASB released SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities".  This Statement amends the accounting and reporting standards of
SFAS No. 133 for the following items:  normal purchases and normal sales
exception, interest rate risk, recognized foreign-currency-denominated debt
instruments and intercompany derivatives.  This Statement also amends SFAS No.
133 for certain provisions related to the implementation guidance arising from
the Derivative Implementation Group process.  SFAS No. 133, No. 137, and No. 138
are effective for financial statements issued by the Company for periods
ending after December 31, 2000.  The adoption of these Statements did not have
a material impact on the Company's consolidated financial statements.

     In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities".  This
Statement revises accounting standards for securitizations and other transfers
of financial assets and collateral.  SFAS No. 140 replaces SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", and rescinds SFAS No. 127, "Deferral of the

<PAGE>   14

Effective Date of Certain Provisions of FASB Statement No. 125".  This
Statement, which is required to be applied prospectively with certain
exceptions, is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001.  Additionally,
this Statement is effective for recognition and reclassification of collateral
and for disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000.  The adoption of this Statement
did not have a material impact on the Company's consolidated financial
statements.

     In June 2001, the FASB issued SFAS No. 141, "Business Combinations".  This
Statement, effective for all business combinations initiated after June 30,
2001, establishes standards for accounting and reporting business combinations.
It requires that all business combinations be accounted for by the purchase
method and prohibits the pooling of interest method of accounting except for
transactions initiated before July 1, 2001.  This Statement supersedes
Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations",
and FASB Statement No. 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises".  The adoption of this Statement did not have a
material impact on the Company's consolidated financial statements.

     In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets".  This Statement addresses financial accounting and reporting for
intangible assets acquired individually or with a group of other assets (but
not those acquired in a business combination) at acquisition.  This Statement
also addresses financial accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition.  Upon adoption of this
Statement, goodwill and other intangible assets that are determined to have an
indefinite useful life will no longer be amortized.  Instead, goodwill will be
tested for impairment on an annual basis and intangible assets with indefinite
useful lives will be evaluated each reporting period to determine whether an
indefinite useful life is still supported.  Any intangible asset that is
determined to have a finite useful life shall be amortized over this period and
its useful life shall be evaluated each reporting period to determine whether
revisions to the remaining amortization period are warranted.  This Statement
is effective for financial statements issued for fiscal years beginning after
December 15, 2001 and supersedes APB Opinion No. 17, "Intangible Assets".
Early application is permitted for entities with fiscal years beginning after
March 15, 2001, provided that the first interim financial statements have not
previously been issued.  This Statement is required to be applied at the
beginning of an entity's fiscal year and to be applied to all goodwill and
other intangible assets recognized in its financial statements at that date.
The Company is currently assessing but has not yet determined the impact of
SFAS No. 142 on its consolidated financial statements.

     In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations".  This Statement, effective for fiscal years beginning
after June 15, 2002, establishes the standard to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred.  The Company does not expect the adoption of this Statement to have a
material impact on its consolidated financial statements.

     In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets".  This Statement addresses
financial accounting and reporting for the impairment of long-lived assets and
for long-lived assets to be disposed of.  This Statement supersedes SFAS No.
121, "Accounting for the Impairment of Long Lived Assets and for Long-Lived
assets to Be Disposed Of".  However, this Statement retains the fundamental
provisions of SFAS No. 121 for a) recognition and measurement of the impairment
of long-lived assets to be held and used and b) measurement of long-lived
assets to be disposed of by sale.  This Statement also supersedes the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for segments of a business to be disposed of.  However, this
Statement retains the requirements of APB Opinion No. 30 to report discontinued
operations separately from continuing operations and extends that reporting to
a component of an entity that either has been disposed of or is classified as
held for sale.  The provisions of this Statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years, with early application encouraged.
The provisions of this statement generally are to be applied prospectively.
The Company does not expect the adoption of this Statement to have a material
impact on its consolidated financial statements.

<PAGE>   15

B.   Capital structure

     As of September 30, 2001, the Company had three classes of common stock
Class A Common Stock (the "Class A Shares"), Class B Common Stock (the "Class B
Shares") and Class C Common Stock (the "Class C Shares").  Prior to a
recapitalization of the Company's capital structure which occurred in
connection with a private placement of an aggregate of $1,125,000,000 of
securities by six Zurich RegCaPS Funding Trusts on February 9, 2001, the
Company had 500 shares of Class A Common Stock, par value $1.00 per share, and
500 shares of Class B Common Stock, par value $1.00 per share.  All Class A
Shares were wholly owned by ZGH and all Class B Shares were wholly owned by
Allied Zurich Holdings Limited, an affiliated company created during the
restructuring of B.A.T.

     Subsequently, on February 9, 2001, in connection with the private
placement of the $1,125,000,000 of securities, ZGH exchanged 50 Class A Shares
for 50 shares of Class C Common Stock, par value $1.00 per share.  The Class C
Shares were issued in six series (C-1 through C-6).  ZGH subsequently
contributed each respective series of the Class C Shares to one of six Zurich
RegCaPS Funding Limited Partnerships (collectively, the "Partnerships"), which
are controlled by ZIC.  As a result, upon completion of the recapitalization,
450 Class A Shares were owned by ZGH, 500 Class B Shares were owned by Allied
Zurich Holdings Limited and 50 Class C Shares were owned by the Partnerships.

     The holders of the Class A Shares are entitled to 1.0694444 votes per
share and the holders of Class B Shares are entitled to .1111111 of a vote per
share (each subject to adjustment in the event of any stock dividend, stock
split, stock distribution or combination with respect to any shares of capital
stock of the Company) upon the election of directors and on all other matters
upon which stockholders generally are entitled to vote.  In the event of a
liquidation, dissolution or winding up of the Company, the holders of Class A
Shares are entitled to share equally and ratably with the holders of Class C
Shares in the assets of the Company, if any, remaining after payment of all
liabilities of the Company and the Class C Share liquidation preference, to the
exclusion of the holders of Class B Shares.

     Subject to the rights of the holders of Class C Shares, the holders of
Class A Shares and the holders of Class B Shares shall be entitled to receive
dividends, when and if declared by the Board of Directors, out of funds legally
available therefor.

     The holders of Class C Shares are entitled to 0.375 of a vote per share
upon the election of directors and on all other matters upon which stockholders
generally are entitled to vote.  However, at no time shall the aggregate voting
power of the Class C Shares be greater than 3.375% of the total voting power of
the Company.  Upon any dissolution, liquidation or winding up of the Company,
after payment of the liabilities of the Company and the expenses of such
dissolution, liquidation or winding up, the holders of Class C Shares will be
entitled to receive in the aggregate out of the assets of the Company, before
any payment or distribution is made to the holders of Class A Shares or Class B
Shares, $1,125,000,000 in liquidation preference (the "Class C Liquidation
Preference").  To the extent the amount available for distribution upon
liquidation, dissolution or winding up exceeds the Class C Liquidation
Preference, the holders of Class C Shares are entitled to receive 7.4503311%
(as adjusted from time to time based upon the percentage of the Company's fair
market value represented by the Class C Shares at the time of such adjustment)
of the aggregate amount available for payment of distributions on liquidation
with respect to the Company's common stock.  Amounts payable on the Class C
Shares in connection with the liquidation of the Company in excess of the Class
C Liquidation Preference are payable on a pari passu basis with the holders of
the Class A Shares and any other shares that rank junior to the Class C Shares
with respect to payments upon liquidation.

     The holders of Class C Shares are entitled to receive non-cumulative
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor.  No cash dividends may be declared or paid on any
Class A Shares, Class B Shares or any other shares of common stock that rank
junior to the Class C Shares with respect to payment of dividends, unless (i)
full dividends have been declared for payment on the Class C Shares in an
amount at least equal to the greater of (A) the dividends payable or set apart
during the dividend period during which such cash dividends are paid at the
respective Class C Share indicative rate (as defined in the Certificates of
Designations of Class C-1 through Class C-6 Shares) or (B) 7.4503311% (as
adjusted as set forth above) of the amount of dividends paid or

<PAGE>   16

set apart for payment by the Company on its common shares (including the Class
C Shares) during any relevant dividend period, (ii) the Partnerships have set
apart or paid the full amount of cash remittances (the "RegCaPS Payments")
payable to the holders of the regulatory capital preferred securities (the
"RegCaPS") issued by the Partnerships during any RegCaPS Payments period, (iii)
the six Zurich RegCaPS Funding LLCs (collectively, the "LLC") who hold the
RegCaPS, have set apart or paid certain cash payments during any LLC payment
period on the LLC preferred interests issued by each LLC, and (iv) such
dividend does not cause the net worth of the Company to be less than $3 billion
(as adjusted from time to time).

C.   Material contingencies

     The Company is a party to numerous lawsuits arising from its 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.

D.   Company Obligated Mandatorily Redeemable Preferred Securities of
     Subsidiary Trusts Holding Solely Junior Subordinated Debentures

     In 1995, Farmers Group Capital and Farmers Group Capital II (the
"Subsidiary Trusts"), consolidated wholly owned subsidiaries of Farmers Group,
Inc., issued $410 million of 8.45% Cumulative Quarterly Income Preferred
Securities ("QUIPS"), Series A and $90 million of 8.25% QUIPS, Series B,
respectively.  In connection with the Subsidiary Trusts' issuance of the QUIPS
and the related purchase by Farmers Group, Inc. of all of the Subsidiary
Trusts' Common Securities ("Common Securities"), Farmers Group, Inc. issued to
Farmers Group Capital $422,680,399 principal amount of its 8.45% Junior
Subordinated Debentures, Series A due on December 31, 2025, (the "Junior
Subordinated Debentures, Series A") and issued to Farmers Group Capital II
$92,783,505 principal amount of its 8.25% Junior Subordinated Debentures,
Series B due on December 31, 2025 (the "Junior Subordinated Debentures, Series
B" and, together with the Junior Subordinated Debentures, Series A, the "Junior
Subordinated Debentures").  The sole assets of Farmers Group Capital are the
Junior Subordinated Debentures, Series A.  The sole assets of Farmers Group
Capital II are the Junior Subordinated Debentures, Series B.  In addition,
these arrangements are governed by various agreements between Farmers Group,
Inc. and the Subsidiary Trusts (the Guarantee Agreements, the Trust Agreements,
the Expense Agreements, the Indentures and the Junior Subordinated Debentures)
which considered together constitute a full and unconditional guarantee by
Farmers Group, Inc. of the Subsidiary Trusts' obligations under the Preferred
Securities.

     Under certain circumstances, the Junior Subordinated Debentures may be
distributed to holders of the QUIPS and holders of the Common Securities in
liquidation of the Subsidiary Trusts.  As of September 27, 2000, Farmers Group,
Inc. had the option to redeem, in whole or in part, the Junior Subordinated
Debentures.  The QUIPS are subject to mandatory redemption upon repayment of
the Junior Subordinated Debentures at maturity, or upon their earlier
redemption, at a redemption price of $25 per Preferred Security, plus accrued
and unpaid distributions thereon to the date fixed for redemption.

     As of September 30, 2001 and 2000, a total of 20,000,000 shares of QUIPS
were outstanding.

E.   Management fees

     As AIF, the Company provides management services to the non-claims side of
the P&C Group and receives management fees for the services rendered.  As a
result, the Company received management fees from the P&C Group of
$1,177,440,000 and $1,108,411,000 for the nine month periods ended September
30,2001 and September 30, 2000, respectively.

<PAGE>   17

F.   Related parties

     As of September 30, 2001, the Company held a $250,000,000 note receivable
from ZGA US Limited ("ZGAUS"), a subsidiary of Zurich, formerly known as Orange
Stone (Delaware) Holdings Limited.  The Company loaned $250,000,000 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.  Interest on this note
is paid semi-annually and for each of the nine month periods ended September
30, 2001 and September 30, 2000 totaled $14,063,000.

     In addition, as of September 30, 2001, the Company held $95,000,000 of
notes receivable from Zurich (UKISA) Limited ("UKISA"), a subsidiary of Zurich.
The Company originally purchased $1,057,000,000 of notes from UKISA on
September 3, 1998.  Subsequently, on March 1, 2000, Eagle Star Life Assurance
Company Limited ("Eagle Star"), also an affiliate of Zurich, assigned
$175,000,000 of matured surplus notes of the P&C Group to the Company and, in
return, the Company reduced the outstanding balance of the notes receivable
from UKISA by $175,000,000.  Additionally, on September 3, 2000, $25,000,000 of
the notes receivable from UKISA, bearing interest at a coupon rate of 5.44%
with an original maturity date of September 3, 2000, were renewed for medium-
term notes with a 6.80% fixed interest rate maturing in September 2002.

     Also, on October 23, 2000, to help fund the payment of a $1,075,000,000
special dividend associated with the Zurich capital structure unification in
October 2000, the Company sold $580,000,000 of notes receivable from UKISA to
ZIC for par value.  Finally, on September 3, 2001, the Company received
$214,625,000 from UKISA in settlement of a $207,000,000 note receivable and
$7,625,000 of accrued interest.  This note had a maturity date of September 3,
2001 and a coupon rate of 5.48%.

     As a result, as of September 30, 2001, the Company held $95,000,000 of
notes receivable from UKISA each with a maturity date of September 2002.  The
$95,000,000 notes receivable are fixed rate short-term notes with coupon rates
as follows:  $25,000,000 at a coupon rate of 6.80% and $70,000,000 at a coupon
rate of 5.67%.  Interest on the UKISA notes is paid semi-annually and for the
nine month periods ended September 30, 2001 and September 30, 2000 totaled
$12,461,000 and $39,048,000, respectively.

G.   Certificates of contribution and surplus note of the P&C Group

     Effective September 27, 2001, the Company redeemed one-half of the
$175,000,000 surplus notes of the P&C Group which were obtained in March 2000
as a result of the assignment of the matured surplus notes of the P&C Group
from Eagle Star (see Note F).  In addition, effective September 27, 2001, the
Company redeemed a $119,000,000 surplus note of the P&C Group bearing interest
at 6.10% annually and maturing in October 2001.  Finally, effective September
27, 2001, the Company purchased $556,500,000 of certificates of contribution
of the P&C Group which mature in September 2006.

     As a result, at September 30, 2001, the Company held the following
certificates of contribution and surplus notes of the P&C Group:

     An $87,500,000 surplus note, issued in March 2000, bearing interest at
     8.50% annually.

     $370,000,000 of certificates of contribution, issued in March 2000,
     bearing interest at 7.85% annually.

     $556,500,000 of certificates of contribution issued in September 2001.

     Miscellaneous other certificates of contribution totaling $23,330,050
     which bear interest at various rates.

     Conditions governing repayment of these amounts are outlined in the
certificates of contribution and the surplus note.  Generally, repayment may be
made only when the surplus balance of the issuer reaches a certain

<PAGE>   18

specified level, and then only after approval is granted by the issuer's
governing Board and the appropriate state insurance regulatory department.

H.   Supplemental cash flow information

     For financial statement purposes, the Company considers all investments
with original maturities of 90 days or less as cash equivalents.  Following is
a reconciliation of the balance sheet cash and cash equivalent totals to the
consolidated cash flow total:


<TABLE>
<CAPTION>

                                                    Excluding
                                                    Insurance      Insurance
                                                  Subsidiaries   Subsidiaries   Consolidated
                                                  ------------   ------------   ------------
                                                            (Amounts in thousands)
<S>                                               <C>            <C>            <C>
Cash and cash equivalents  -- December 31, 1999   $   217,466    $     96,034   $    313,500
                              Activity through September 2000                        543,905
                                                                                 -----------
Cash and cash equivalents  -- September 30, 2000      823,556          33,849   $    857,405
                                                                                 ===========

Cash and cash equivalents  -- December 31, 2000   $   132,245    $     84,431   $    216,676
                              Activity through September 2001                        601,023
                                                                                 -----------
Cash and cash equivalents  -- September 30, 2001      509,244         308,455   $    817,699
                                                                                 ===========

</TABLE>

     Cash payments for interest were $1,807,000 and $1,726,000 for the nine
month periods ended September 30, 2001 and September 30, 2000, respectively,
while the cash payment for dividends to the holders of the Company's QUIPS was
$31,553,000 for each of the nine month periods ended September 30, 2001 and
September 30, 2000.  Cash payments for income taxes were $229,037,000 and
$302,345,000 for the nine month periods ended September 30, 2001 and September
30, 2000, respectively.

     On September 3, 2001, the Company received $214,625,000 from UKISA in
settlement of a $207,000,000 note receivable and $7,265,000 of accrued interest
(see Note F).  Also on March 7, 2000, the Company purchased $370,000,000 of
certificates of contribution of the P&C Group to help fund the Exchanges'
acquisition of Foremost (see Note G).

I.  Operating segments

     The Company's principal activities are the provision of management
services to the P&C Group and the ownership and operation of the life and
reinsurance subsidiaries.  These activities are managed separately as each
offers a unique set of services.  As a result, the Company is comprised of the
following three reportable operating segments as defined in SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information": the
management services segment, the life insurance segment and the reinsurance
segment.

     As AIF, the management services segment is primarily responsible for
providing management services to the P&C Group.  Management fees earned from
the P&C Group totaled $1,177,440,000 and $1,108,411,000 for the nine month
periods ended September 30, 2001 and September 30, 2000, respectively.  The
life insurance segment provides individual life insurance products, including
universal life, term life and whole life insurance and structured settlement
and annuity products, as well as variable universal life and annuity products.
Finally, the reinsurance segment provides reinsurance coverage to a percentage
of the auto physical damage business written by the P&C Group.

     The basis of accounting used by the Company's management in evaluating
segment performance and determining how resources should be allocated is
referred to as the Company's GAAP historical basis, which excludes the effects
of the purchase accounting ("PGAAP") adjustments related to the acquisition of
the Company by B.A.T in December 1988 (see Note A).  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 incorporates the effects of these
adjustments.

<PAGE>   19

     The Company accounts for intersegment transactions as if they were to
third parties and, as such, records the transactions at current market prices.
There were no intersegment revenues among the Company's three reportable
operating segments for the nine month periods ended September 30, 2001 and
September 30, 2000.

     Information regarding the Company's reportable operating segments follows:

<TABLE>
<CAPTION>                                             Nine month period ended September 30, 2001
            ------------------------------------------------------------------------------------------------------------------
                        GAAP historical basis                          PGAAP adjustments              Consolidated
            ------------------------------------------------------  ----------------------------------------------
              Management      Life                                  Management    Life                   PGAAP
               services     insurance   Reinsurance     Total        services    insurance  Total        basis
------------------------------------------------------  --------------------------------------------- ------------
                                                (Amounts in thousands)
<S>         <C>         <C>            <C>            <C>           <C>          <C>       <C<C>
Revenues    $1,256,988  $  639,455 (a) $  383,791 (a) $2,280,234    $      0     $   (685) $    (685) $2,279,549

Investment
 income         60,595     262,916         32,767        356,278        (612)        (685)    (1,297)    354,981

Investment
 expenses            0     (10,362)        (5,532)       (15,894)          0            0          0     (15,894)

Net realized
 gains/(losses) 14,125      34,855          7,432         56,412      (1,026)           0     (1,026)     55,386

Impairment
 losses on
 investments   (38,195)    (40,157)        (7,768)       (86,120)          0            0          0     (86,120)

Dividends on
preferred
 securities of
 subsidiary
 trusts        (31,553)          0              0        (31,553)          0            0          0     (31,553)

Income before
 provision for
 taxes         641,739     163,631         35,443        840,813     (85,506)      (5,957)   (91,463)    749,350

Provision for
 income taxes  250,876      59,855         11,042        321,773     (21,172)      (8,473)   (29,645)    292,128

Depreciation and
 amortization   46,854      69,987              0        116,841      78,321 (b)    5,537 (c)  83,858    200,699
-----------------------
</TABLE>

(a)  Revenues for the insurance operating segments include net investment
     income and net realized gains/(losses).

(b)  Amount includes PGAAP adjustments associated with the amortization of the
     AIF relationships ($32.0 million) and goodwill ($45.0 million).

(c)  Amount includes PGAAP adjustments associated with the amortization of the
     Value of Life Business Acquired ("VOLBA") asset and the reversal of
     amortization associated with the pre-1988 deferred policy acquisition
     costs ("DAC") asset.

<TABLE>
<CAPTION>
                                             Nine month period ended September 30, 2000
------------------------------------------------------------------------------------------------------------------
                         GAAP historical basis                         PGAAP adjustments              Consolidated
            ------------------------------------------------------  ----------------------------------------------
              Management      Life                                  Management    Life                   PGAAP
               services     insurance   Reinsurance     Total        services    insurance  Total        basis
------------------------------------------------------  --------------------------------------------- ------------
                                                (Amounts in thousands)
<S>         <C>         <C>            <C>            <C>           <C>          <C>       <C<C>
Revenues    $1,179,798  $  603,474 (a) $  777,996 (a) $2,561,268    $      0     $   (688) $    (688) $2,560,580

Investment
 income        105,017     249,075         32,103        386,195        (465)        (688)    (1,153)    385,042

Investment
 expenses       (4,144)     (9,099)        (8,801)       (22,044)          0            0          0     (22,044)

Net realized
 gains          52,943      34,395          4,694         92,032           0            0          0      92,032

Dividends on
preferred
 securities of
 subsidiary
 trusts        (31,553)          0              0        (31,553)          0            0          0     (31,553)

Income before
 provision for
 taxes         716,566     201,488         46,537        964,591     (80,796)      (6,557)   (87,353)    877,238

Provision for
 income taxes  273,424      71,334         14,475        359,233     (13,706)      (2,802)   (16,508)    342,725

Depreciation and
 amortization   42,703      80,393              0        123,096      78,197 (b)    6,137 (c)  84,334    207,430
-----------------------
</TABLE>

(a)  Revenues for the insurance operating segments include net investment
     income and net realized gains/(losses).

(b)  Amount includes PGAAP adjustments associated with the amortization of the
     AIF relationships ($32.0 million) and goodwill ($45.0 million).

(c)  Amount includes PGAAP adjustments associated with the amortization of the
     VOLBA asset and the reversal of amortization associated with the pre 1988
     DAC asset.

<PAGE>   20

J.  Notes and accounts payable P&C Group

     Notes and accounts payable consist of a liability to the P&C Group for the
purchase of certificates of contribution of the P&C Group (see Note G).

K.  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 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 reviewing the market
performance of similar types of investments.  As a result of the Company's
review, the Company determined that some of its investments had declines in
value that were other than temporary as of September 30, 2001 due to
unfavorable market and economic conditions as well as the events of September
11, 2001, which exacerbated the declines in value.  Accordingly, as of
September 30, 2001, the Company has recorded $86,120,000 of impairment losses
on investments, primarily in the equity portfolios.  Impairment losses were
recorded for each reporting segment and, as of September 30, 2001, amounted to
$38,195,000, $7,768,000, and $40,157,000 for the Management services, Farmers
Re, and Farmers Life segments, respectively.

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

General

     The Company's principal activities are the provision of management
services to the P&C Group and the ownership and operation of 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.

     On March 7, 2000, the Exchanges acquired Foremost.  Foremost is a
prominent writer of manufactured homes, recreational vehicles and other
specialty lines.  The Company provides management services in respect of this
business and receives compensation based on a percentage of gross premiums
earned.

     Farmers Life, a wholly owned subsidiary of the Company, underwrites and
sells life insurance, structured settlement and annuity products as well as
variable universal life and variable annuity products.  Revenues attributable
to traditional life insurance products, such as whole life or term life
contracts, as well as structured settlements with life contingencies are
classified as premiums as they become due.  Future benefits are associated with
such premiums (through increases in liabilities for future policy benefits),
and prior period capitalized costs are amortized (through amortization of DAC)
so that profits are generally recognized over the same period as revenue
income.  Revenues attributable to universal life, variable universal life and
variable annuity products consist of policy charges for the cost of insurance,
policy administration charges, surrender charges and investment income on
assets allocated to support policyholder account balances on deposit.  Revenues
for deferred annuity products consist of surrender charges and investment
income on assets allocated to support policyholder account balances.  Expenses
on universal life and annuity policies as well as on variable products include
interest credited to policyholders on policy balances as well as benefit claims
incurred in excess of policy account balances.  Revenues attributable to
structured settlements without life contingencies consist of investment income
on assets allocated to support the policyholder benefits schedule and expenses
consist of interest credited to policyholders on policy balances.

     Farmers Re, a wholly owned subsidiary of the Company, reinsures a
percentage of the auto physical damage business written by the P&C Group.
Effective April 1, 2001, the APD reinsurance agreement between Farmers Re and
the P&C Group which had been in force since January 1998 was cancelled and
replaced with a similar APD reinsurance agreement supported by multiple
reinsurers.  As a result of this new agreement, the monthly premiums assumed by
Farmers Re decreases from $83.3 million to $16.7 million.  Farmers Re continues
to assume a quota share percentage of ultimate net losses sustained by the P&C
Group in its APD line of business.  This treaty, which can be terminated by
either party, also provides for the P&C Group to receive a provisional ceding
commission of 18% of

<PAGE>   21

premiums.  This experience commission arrangement limits Farmers Re's potential
underwriting gain on the assumed business to 2.5% of premiums assumed.

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 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 reviewing the market
performance of similar types of investments.  As a result of the Company's
review, the Company determined that some of its investments had declines in
value that were other than temporary as of September 30, 2001 due to
unfavorable market and economic conditions as well as the events of September
11, 2001, which exacerbated the declines in value.  Accordingly, as of September
30, 2001, the Company has recorded $86.1 million of impairment losses on
investments, primarily in the equity portfolios.  Impairment losses were
recorded for each reporting segment and, as of September 30, 2001, amounted to
$38.2 million, $7.8 million, and $40.1 million for the Management services,
Farmers Re, and Farmers Life segments, respectively.

Three Months Ended September 30, 2001 Compared to Three Months Ended
September 30, 2000

   Management Services to Property and Casualty Insurance Companies; and Other

     Operating Revenues.  Operating revenues increased from $407.7 million for
the three months ended September 30, 2000 to $428.3 million for the three
months ended September 30, 2001, an increase of $20.6 million, or 5.1%.
Operating revenues primarily consist of management fees paid to the Company as
a percentage of gross premiums earned by the P&C Group.  Such premiums
increased from $2,889.1 million in the third quarter of 2000 to $3,115.1
million in the third quarter of 2001, an increase of $226.0 million, or 7.8%,
due to continued growth in all lines of business mainly as a result of rate
increases.

     Operating Expenses.

        Salaries and Employee Benefits.  Salaries and employee benefits
     increased from $105.3 million for the three months ended September 30,
     2000 to $107.4 million for the three months ended September 30, 2001, an
     increase of $2.1 million, or 2.0%, due primarily to an increase in
     employee benefits expenses.

        Buildings and Equipment Expenses.  Buildings and equipment expenses
     increased from $26.0 million for the three months ended September 30, 2000
     to $27.6 million for the three months ended September 30, 2001, an
     increase of $1.6 million, or 6.2% due primarily to growth in the
     mainframe capacity.

        Amortization of Attorney-In-Fact Relationships and Goodwill.  Purchase
     accounting entries related to the acquisition of the Company by B.A.T in
     December 1988 include goodwill (capitalized at $2.4 billion) and the value
     of the AIF relationships of the P&C Group (capitalized at $1.7 billion).
     Amortization of these two items, which is being taken on a straight-line
     basis over forty years, reduced pretax income by approximately $25.7
     million in each of the three month periods ended September 30, 2001 and
     September 30, 2000.

        General and Administrative Expenses.  General and administrative
     expenses decreased from $74.6 million for the three months ended September
     30, 2000 to $70.7 million for the three months ended September 30, 2001, a
     decrease of $3.9 million, or 5.2%.  This decrease was primarily due to a
     decrease in expenses related to a project to implement a new financial
     accounting and reporting system for the Company and the P&C Group.

     Net Investment Income.  Net investment income decreased from $33.9 million
for the three months ended September 30, 2000 to $16.6 million for the three
months ended September 30, 2001, a decrease of $17.3 million, or 51.0%.  This
decrease was due mainly to a decrease in the average invested asset base
resulting from the fact that a sizeable portion of the investment portfolio was
liquidated to help fund the payment of the $1,075.0 million special dividend
associated with the Zurich capital structure unification in October 2000 and
lower investment yields.

<PAGE>   22

     Net Realized Gains/(Losses).  Net realized gains/(losses) decreased $16.3
million, from a $16.2 million gain for the three months ended September 30,
2000 to a $0.1 million loss for the three months ended September 30, 2001, due
primarily to unfavorable market conditions experienced during the three month
period ended September 30, 2001, as well as a loss of flexibility that resulted
from the $1,075.0 million special dividend paid in October 2000.

     Impairment Losses on Investments.  Impairment losses on investments were
$38.2 million for the three months ended September 30, 2001.

     Dividends on Preferred Securities of Subsidiary Trusts.  Dividend expense
related to the $500.0 million of QUIPS issued in 1995 was $10.5 million for the
three months ended September 30, 2001 and September 30, 2000.

     Provision for Income Taxes.  Provision for income taxes decreased from
$88.7 million for the three months ended September 30, 2000 to $69.3 million
for the three months ended September 30, 2001, a decrease of $19.4 million, or
21.9%, due mainly to a decrease in pretax income between periods.

     Management Services Income.  As a result of the foregoing, management
services income decreased from $127.0 million for the three months ended
September 30, 2000 to $95.4 million for the three months ended September 30,
2001, a decrease of $31.6 million, or 24.9%.

Insurance Subsidiaries

Farmers Re

     As a result of the new quota share reinsurance agreement, effective
April 1, 2001, Farmers Re's assumed premiums decreased from $250.0 million for
the three month period ended September 30, 2000 to $50.0 million for the three
months ended September 30, 2001.  Losses and loss adjustment expenses incurred
under these treaties were $35.3 million for the three months ended September
30, 2001 and $186.4 million for the three months ended September 30, 2000 and
non-life reinsurance commissions were $13.5 million for the three months ended
September 30, 2001 and $57.3 million for the three months ended September 30,
2000.  Income before taxes decreased $8.9 million from $15.1 million for the
three months ended September 30, 2000 to $6.2 million for the three months
ended September 30, 2001 due primarily to the decrease in underwriting gain
between periods resulting from the new reinsurance agreement and the $7.8
million of impairment losses on investments recorded in 2001.  For the three
month periods ended September 30, 2001 and September 30, 2000, Farmers Re's
contribution to net income was $4.5 million and $10.3 million, respectively.

Farmers Life

     Total Revenues.  Total revenues decreased from $213.4 million for the three
months ended September 30, 2000 to $183.4 million for the three months ended
September 30, 2001, a decrease of $30.0 million, or 14.1%.

        Life and Annuity Premiums.  Life and annuity premiums increased
     $8.7 million for the three months ended September 30, 2001, or 14.6%, over
     the three months ended September 30, 2000.  This increase was due
     primarily to an 83.6% increase in structured settlement with life
     contingencies premiums over the three month period ended September 30,
     2001.

        Life Policy Charges.  Life policy charges increased $1.0 million for
     the three months ended September 30, 2001, or 1.9%, over the three months
     ended September 30, 2000, reflecting growth in universal life-type
     insurance in-force.

        Net Investment Income.  Net investment income increased $1.2 million
     for the three months ended September 30, 2001, or 1.4%, over the three
     months ended September 30, 2000.  The increase was due to an increase in
     average invested assets.

<PAGE>   23

        Net Realized Gains.  Net realized gains decreased by $9.0 million,
     from $18.4 million for the three months ended September 30, 2000 to $9.4
     million for the three months ended September 30, 2001 due to unfavorable
     market conditions

        Impairment Losses on Investments.  Impairment losses on investments
     were $31.9 million for the three months ended September 30, 2001.

     Total Operating Expenses.  Total operating expenses increased from $138.7
million for the three months ended September 30, 2000 to $151.8 million for the
three months ended September 30, 2001, an increase of $13.1 million, or 9.4%.

        Life Policyholders' Benefits and Charges.  Life policyholders'
     benefits expense and charges increased $19.0 million for the three months
     ended September 30, 2001, or 19.4%, over the three months ended September
     30, 2000.

             Policy Benefits.  Policy benefits, which consist primarily of
         death and surrender benefits on life products, increased $5.3 million
         for the three months ended September 30, 2001, to $41.5 million, due
         to growth in the volume of life insurance in-force.

             Increase in Liability for Future Benefits.  Increase in liability
         for future benefits expense increased from $21.4 million for the three
         months ended September 30, 2000 to $29.9 million for the three months
         ended September 30, 2001.  This increase was primarily attributable to
         an 83.6% increase in deposits for structured settlement products.

             Interest Credited to Policyholders.  Interest credited to
         policyholders, which represents the amount credited to policyholder
         funds on deposit under universal life-type contracts and deferred
         annuities, increased from $40.5 million for the three months ended
         September 30, 2000 to $45.7 million for the three months ended
         September 30, 2001, an increase of $5.2 million, or 12.8%.  This
         increase reflects a growth in the universal life, structured
         settlements with life contingencies and fixed annuity fund balances.

         General Operating Expenses.  General operating expenses decreased from
     $40.6 million for the three months ended September 30, 2000 to $34.7
     million for the three months ended September 30, 2001, a decrease of $5.9
     million, or 14.5%.

             Amortization of DAC and Value of Life Business Acquired.
         Amortization expense decreased from $26.8 million for the three months
         ended September 30, 2000 to $21.8 million for the three months ended
         September 30, 2001, due to favorable persistency on the Farmers
         Flexible Universal Life ("FFUL") and Farmers Universal Life ("FUL")
         product lines as well as differences in the mix of business.

             Net Commissions.  Net commissions decreased from $1.0 million for
         the three months ended September 30, 2000 to $0.1 million for the
         three months ended September 30, 2001, due to a 50.4% growth in
         reinsurance activity.

             General and Administrative Expenses. General and administrative
         expenses remained constant at $12.8 million for the three months ended
         September 30, 2000 and for the three months ended September 30, 2001.

     Provision for Income Taxes. Provision for income taxes decreased from
$26.3 million for the three months ended September 30, 2000 to $12.1 million
for the three months ended September 30, 2001.

<PAGE>   24

     Farmers Life Income.  As a result of the foregoing, Farmers Life income
decreased from $48.4 million for the three months ended September 30, 2000 to
$19.5 million for the three months ended September 30, 2001, a decrease of
$28.9 million, or 59.7%.

Consolidated Net Income

     Consolidated net income of the Company decreased from $185.7 million for
the three months ended September 30, 2000 to $119.4 million for the three
months ended September 30, 2001, a decrease of $66.3 million, or 35.7%.

Nine Months Ended September 30, 2001 Compared to Nine Months Ended
September 30, 2000

   Management Services to Property and Casualty Insurance Companies; and Other

     Operating Revenues.  Operating revenues increased from $1,179.8 million
for the nine months ended September 30, 2000 to $1,257.0 million for the nine
months ended September 30, 2001, an increase of $77.2 million, or 6.5%.  This
growth reflects higher gross premiums earned by the P&C Group, which increased
from $8,475.2 million in the first nine months of 2000 to $9,129.6 million in
the first nine months of 2001 due mainly to continued growth in all lines of
business.  Also contributing to the increase between periods was the fact that
revenues earned in connection with the provision of management services on the
business the P&C Group assumed from Foremost increased $12.0 million due to
the fact that the Foremost acquisition was not completed until March 2000.

     Operating Expenses.

        Salaries and Employee Benefits.  Salaries and employee benefits
     increased from $306.1 million for the nine months ended September 30, 2000
     to $317.4 million for the nine months ended September 30, 2001, an
     increase of $11.3 million, or 3.7%, due primarily to an increase in
     expenses incurred in connection with providing management services to the
     business assumed from Foremost.

        Buildings and Equipment Expenses.  Buildings and equipment expenses
     increased from $76.2 million for the nine months ended September 30, 2000
     to $79.0 million for the nine months ended September 30, 2001, an increase
     of $2.8 million, or 3.7%, due to expenses incurred in connection with
     providing management services to the business assumed from Foremost.  This
     increase in expense was partially offset by savings generated by
     renegotiated lease contracts.

        Amortization of Attorney-In-Fact Relationships and Goodwill.
     Amortization expense was $77.1 million in each of the nine month periods
     ended September 30, 2001 and September 30, 2000.

        General and Administrative Expenses.  General and administrative
     expenses increased from $206.3 million for the nine months ended
     September 30, 2000 to $230.6 million for the nine months ended
     September 30, 2001, an increase of $24.3 million, or 11.8%.  This increase
     was primarily due to increased levels of business activity between periods
     and increased postage expense resulting from the recent privacy notice
     requirements called for by the Gramm-Leach-Bliley Act.

     Net Investment Income.  Net investment income decreased from $100.4
million for the nine months ended September 30, 2000 to $60.0 million for the
nine months ended September 30, 2001, a decrease of $40.4 million, or 40.2%.
This decrease was due mainly to a decrease in the average invested asset base
resulting from the fact that a sizable portion of the investment portfolio was
liquidated to help fund the payment of the $1,075.0 million special dividend
associated with the Zurich capital structure unification in October 2000 and
lower investment yields.

     Net Realized Gains.  Net realized gains decreased $39.8 million, from
$52.9 million for the nine months ended September 30, 2000 to $13.1 million for
the nine months ended September 30, 2001, due primarily to unfavorable market
conditions experienced during the nine month period ended September 30, 2001
as well as a loss of flexibility that resulted from the $1,075.0 million
special dividend paid in October 2000.

<PAGE>   25

     Impairment Losses on Investments.  Impairment losses on investments were
$38.2 million for the nine months ended September 30, 2001.

     Dividends on Preferred Securities of Subsidiary Trusts.  Dividend expense
was $31.6 million in each of the nine month periods ended September 30, 2001
and September 30, 2000.

     Provision for Income Taxes.  Provision for income taxes decreased from
$259.7 million for the nine months ended September 30, 2000 to $229.7 million
for the nine months ended September 30, 2001, a decrease of $30.0 million, or
11.6%, due mainly to a decrease in pretax income between periods.

     Management Services Income.  As a result of the foregoing, management
services income decreased from $376.1 million for the nine months ended
September 30, 2000 to $326.5 million for the nine months ended September 30,
2001, a decrease of $49.6 million, or 13.2%.

Insurance Subsidiaries

Farmers Re

     As a result of the new quota share reinsurance agreement, effective April
1, 2001, Farmers Re's assumed premiums decreased from $750.0 million for the
nine month period ended September 30, 2000 to $350.0 million for the nine
months ended September 30, 2001.  Losses and loss adjustment expenses incurred
under these treaties were $248.0 million for the nine months ended September 30,
2001 and $515.4 million for the nine months ended September 30, 2000 and
non-life reinsurance commissions were $93.2 million for the nine months ended
September 30, 2001 and $215.9 million for the nine months ended September 30,
2000.  Income before taxes decreased $11.1 million from $46.5 million for the
nine months ended September 30, 2000 to $35.4 million for the nine months ended
September 30, 2001 due primarily to the decrease in underwriting gain between
periods resulting from the new reinsurance agreement and the $7.8 million of
impairment losses on investments recorded in 2001.  For the nine month
periods ended September 30, 2001 and September 30, 2000, Farmers Re's
contribution to net income was $24.4 million and $32.0 million, respectively.

Farmers Life

     Total Revenues.  Total revenues increased from $602.8 million for the nine
months ended September 30, 2000 to $611.4 million for the nine months ended
September 30, 2001, an increase of $8.6 million, or 1.4%.

        Life and Annuity Premiums.  Life and annuity premiums increased $33.8
     million for the nine months ended September 30, 2001, or 20.1%, over the
     nine months ended September 30, 2000.  This increase was due to a 22.2%
     growth in the volume of traditional life insurance in-force, as well as a
     129.0% increase in structured settlement with life contingencies premiums
     over the nine months ended September 30, 2000.

        Life Policy Charges.  Life policy charges increased $1.9 million for
     the nine months ended September 30, 2001, or 1.2%, over the nine months
     ended September 30, 2000, reflecting a 1.7% growth in universal life-type
     insurance in-force.

        Net Investment Income.  Net investment income increased $12.6 million
     for the nine months ended September 30, 2001, or 5.3%, over the nine
     months ended September 30, 2000.  The increase was due to an increase in
     average invested assets.

        Net Realized Gains.  Net realized gains increased by $0.5 million, or
     1.2%, from $34.4 million for the nine months ended September 30, 2000 to
     $34.9 million for the nine months ended September 30, 2001.

        Impairment Losses on Investments.  Impairment losses on investments
     were $40.1 million for the nine months ended September 30, 2001.

<PAGE>   26

     Total Operating Expenses.  Total operating expenses increased from $407.9
million for the nine months ended September 30, 2000 to $453.7 million for the
nine months ended September 30, 2001, an increase of $45.8 million, or 11.2%.

        Life Policyholders' Benefits and Charges.  Life policyholders'
     benefits expense and charges increased from $283.3 million for the nine
     months ended September 30, 2000 to $341.1 million for the nine months
     ended September 30, 2001, an increase of $57.8 million, or 20.4%.

             Policy Benefits.  Policy benefits increased $14.6 million for
        the nine months ended September 30, 2001 to $122.6 million, due to a
        10.4% growth in the volume of life insurance in-force.

             Increase in Liability for Future Benefits.  Increase in
        liability for future benefits expense increased from $54.1 million
        for the nine months ended September 30, 2000 to $85.1 million for the
        nine months ended September 30, 2001.  This increase was primarily
        attributable  to a 129.0% increase in deposits for structured
        settlement products.

             Interest Credited to Policyholders.  Interest credited to
        policyholders increased from $121.2 million for the nine months ended
        September 30, 2000 to $133.4 million for the nine months ended
        September 30, 2001, an increase of $12.2 million, or 10.1%,
        reflecting growth in the universal life, structured settlements with
        life contingencies and fixed annuity fund balances.

        General Operating Expenses.  General operating expenses decreased
     from $124.6 million for the nine months ended September 30, 2000 to $112.6
     million for the nine months ended September 30, 2001, a decrease of $12.0
     million, or 9.6%.

             Amortization of DAC and VOLBA.  Amortization expense decreased
        from $83.8 million for the nine months ended September 30, 2000 to
        $72.1 million for the nine months ended September 30, 2001 due
        primarily to favorable persistency on the FFUL and FUL product lines
        as well as differences in the mix of business.

             Net Commissions.  Net commissions decreased $3.7 million from
        $3.6 million for the nine months ended September 30, 2000 to ($0.1)
        million for the nine months ended September 30, 2001, due to a 51.0%
        growth in reinsurance activity.

             General and Administrative Expenses.  General and administrative
        expenses increased from $37.2 million for the nine months ended
        September 30, 2000 to $40.6 million for the nine months ended
        September 30, 2001, an increase of $3.4 million or 9.1%, due
        primarily to business growth and new initiatives.

     Provision for Income Taxes.  Provision for income taxes decreased from
$68.5 million for the nine months ended September 30, 2000 to $51.4 million
for the nine months ended September 30, 2001.

     Farmers Life Income.  As a result of the foregoing, Farmers Life income
decreased from $126.4 million for the nine months ended September 30, 2000 to
$106.3 million for the nine months ended September 30, 2001, a decrease
of $20.1 million, or 15.9%.

<PAGE>   27

Consolidated Net Income

     Consolidated net income of the Company decreased from $534.5 million for
the nine months ended September 30, 2000 to $457.2 million for the nine months
ended September 30, 2001, a decrease of $77.3 million, or 14.5%.

Liquidity and Capital Resources

     As of September 30, 2001 and September 30, 2000, the Company held cash
and cash equivalents of $817.7 million and $857.4 million, respectively.  In
addition, as of September 30, 2001, the Company had available revolving credit
facilities enabling it to borrow up to $500.0 million in the event such a need
should arise.

     Net cash provided by operating activities increased from $694.6 million
for the nine months ended September 30, 2000 to $781.5 million for the nine
months ended September 30, 2001, an increase of $86.9 million.  This increase
in cash was due primarily to a $65.2 million increase in life insurance policy
liabilities.  Although net income declined $77.3 million between years, this
was primarily a result of the $86.1 million of impairment losses recorded in
2001, which had no effect on cash.

     Net cash provided by investing activities decreased $71.7 million between
periods to $170.6 million for the nine months ended September 30, 2001.  This
decrease in cash was primarily due to a $1,133.2 million increase in purchases
of investments available-for-sale.  Partially offsetting this decrease in cash
was a $545.0 million decrease in purchases of surplus notes and certificates
of contribution of the P&C Group and a $434.3 million increase in proceeds from
sales and maturities of investments available-for-sale.

     Net cash used in financing activities decreased from $393.0 million for
the nine months ended September 30, 2000 to $351.1 million for the nine months
ended September 30, 2001, resulting in an increase in cash of $41.9 million.
This increase in cash was due primarily to a reduction in the net cash outflows
associated with annuity contracts between years.

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 2000.

<PAGE>   28

                        PART II.  OTHER INFORMATION

Item 1. Legal Proceedings.

            The Company is a party to numerous lawsuits arising from its
        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 Report on Form 8-K.

            (a) Exhibits.

            16.    Letter regarding change in Certifying Accountant.

            (b) Reports on Form 8-K.

            On June 7, 2001, FGI filed a report on Form 8-K announcing a change
            in its Certifying Accountant.

<PAGE>   29

                             FARMERS GROUP, INC.
                              AND SUBSIDIARIES

                                 SIGNATURES




Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

                                                     Farmers Group, Inc.
                                                            (Registrant)
                           November 14, 2001    /s/  Martin D. Feinstein
                           ---------------------------------------------
                           Date                      Martin D. Feinstein
                                                  Chairman of the Board,
                                   President and Chief Executive Officer


                           November 14, 2001     /s/  Gerald E. Faulwell
                           ---------------------------------------------
                           Date                       Gerald E. Faulwell
                                                  Senior Vice President,
                                                Chief Financial Officer,
                                                            and Director