1 ---------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2001 Commission File Number 33-94670-01 FARMERS GROUP, INC. Incorporated in Nevada I.R.S. Employer Identification No. 4680 Wilshire Boulevard, 95-0725935 Los Angeles, California 90010 (323) 932-3200 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered --------------------- ----------------------- 8.45% Cumulative Quarterly Income New York Stock Exchange Preferred Securities, Series A (QUIPS) (liquidation preference $25 per share)* 8.25% Cumulative Quarterly Income New York Stock Exchange Preferred Securities, Series B (QUIPS) (liquidation preference $25 per share)* *Issued by Farmers Group Capital (Series A) and Farmers Group Capital II (Series B) and the payments of trust distributions and payments on liquidation or redemption are guaranteed under certain circumstances by Farmers Group, Inc., the owner of 100% of the common securities issued by Farmers Group Capital and Farmers Group Capital II, Delaware statutory business trusts. Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ Registrant's Common Stock outstanding on December 31, 2001 was 1,000 shares. 2 [THIS PAGE INTENTIONALLY LEFT BLANK] 3 FARMERS GROUP, INC. AND SUBSIDIARIES TABLE OF CONTENTS Page ------ PART I ITEM 1. Business 4 ITEM 2. Properties 14 ITEM 3. Legal Proceedings 14 ITEM 4. Submission of Matters to a Vote of Security Holders 14 PART II ITEM 5. Market for Farmers Group, Inc.'s Common Equity and Related Stockholders Matters 15 ITEM 6. Selected Financial Data 15 ITEM 7. Management's Discussion and Analysis of Financial 17 Condition and Results of Operations ITEM 7a. Quantitative and Qualitative Disclosures about Market Risks 27 ITEM 8. Financial Statements and Supplementary Data 28 ITEM 9. Changes in and Disagreements with Accountants on 73 Accounting and Financial Disclosures PART III ITEM 10. Directors and Executive Officers of Farmers Group, Inc. 73 ITEM 11. Executive Compensation 75 ITEM 12. Security Ownership of Certain Beneficial Owners 78 and Management ITEM 13. Certain Relationships and Related Transactions 79 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports 80 on Form 8-K SIGNATURES 82 4 DOCUMENT SUMMARY The following summary is qualified in its entirety by the more detailed information and the Consolidated Financial Statements of the Company, including the notes thereto, appearing elsewhere in this document. Unless the context requires otherwise, (i) references to the Company are to Farmers Group, Inc. ("FGI") and its subsidiaries; references to attorney-in-fact ("AIF"), as applicable in context, are to FGI, dba Farmers Underwriters Association, attorney-in-fact of Farmers Insurance Exchange; or Fire Underwriters Association, attorney-in-fact of Fire Insurance Exchange; or Truck Underwriters Association, attorney-in-fact of Truck Insurance Exchange, (ii) references to Farmers Management Services are to the Company excluding the Insurance Subsidiaries, (iii) references to the P&C Group Companies are to Farmers Insurance Exchange, Fire Insurance Exchange and Truck Insurance Exchange (each an "Exchange" and collectively, the "Exchanges"), their respective subsidiaries, Farmers Texas County Mutual Insurance Company ("FTCM"), Foremost County Mutual Insurance Company and Foremost Lloyds of Texas in 2001 and 2000 and to the Exchanges, their respective subsidiaries and FTCM in 1999, 1998 and 1997, (iv) references to Farmers Life are to Farmers New World Life Insurance Company, (v) references to the Life Insurance Subsidiaries are to Farmers Life, The Ohio State Life Insurance Company ("OSL") and Investors Guaranty Life Insurance Company ("IGL") and (vi) references to the Insurance Subsidiaries are to Farmers Life and Farmers Reinsurance Company ("Farmers Re") in 2001, 2000, 1999 and 1998 and to Farmers Life, OSL, IGL and Farmers Re in 1997. 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 ("ZGH") and a new group holding company, Zurich Financial Services, was formed. As such, references to Zurich are to the group holding company, Zurich Financial Services. Unless otherwise indicated, financial information, operating statistics and ratios applicable to the Company and the Insurance Subsidiaries set forth in this document are based on accounting principles generally accepted in the United States ("GAAP") and with regard to the P&C Group Companies are based on statutory accounting practices ("SAP"). Unless otherwise specified, the financial information for the P&C Group Companies is on a statutory combined basis. Any reference to the "Subsidiary Trusts" is to Farmers Group Capital and Farmers Group Capital II, consolidated wholly owned subsidiaries of Farmers Group, Inc. Any reference to "Note" is to the Notes to Consolidated Financial Statements included in Item 8 of this Report. PART I ITEM 1. Business The Company General. The Company's principal activities are the provision of management services to the P&C Group Companies and the ownership and operation of the Insurance Subsidiaries. As of December 31, 2001, the Company had consolidated assets of $12.4 billion, stockholders' equity of $6.5 billion and for the period ended December 31, 2001, the Company had consolidated operating revenues of $2.9 billion. As of December 31, 2001, the Insurance Subsidiaries had total assets of $7.3 billion, combined SAP capital and surplus (including asset valuation reserve) of $1.9 billion, life policies-in-force of 1.2 million and for the period ended December 31, 2001, the Insurance Subsidiaries had combined SAP life premiums and deposits received of $0.9 billion and non-life reinsurance premiums of $0.4 billion. The financial results and assets and liabilities of the P&C Group Companies are not reflected in the consolidated financial statements of the Company as the P&C Group Companies are not owned by the Company. 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 market values at December 31, 1988. In September 1998, the financial services 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 ZGH, a Swiss holding company with headquarters in Zurich, Switzerland. This merger was accounted for by ZGH as a pooling of interests under International Accounting Standards. As of December 31, 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 $1.1 billion of securities by six Zurich RegCaPS Funding Trusts on February 9, 2001, 5 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 ("Allied Zurich"), an affiliated company created during the restructuring of B.A.T. Subsequently, on February 9, 2001, in connection with the private placement of the $1.1 billion 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 and 50 Class C Shares were owned by the Partnerships. Operating Segments Financial information by operating segment can be found in Note Z. Following are descriptions of the Company's operating segments. Farmers Management Services. The Company is AIF for 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 each Exchange appoints an exclusive AIF to provide management services to each Exchange. For such services, the Company earns management fees based primarily on a percentage of gross premiums earned by the P&C Group Companies. Each AIF also receives a management fee based on reinsurance premiums earned by the Exchanges on business of the P&C Group Companies insured by the Exchanges. The P&C Group Companies are owned by the respective policyholders of the Exchanges, FTCM and Foremost County Mutual Insurance Company as well as the underwriters of Foremost Lloyds of Texas. Accordingly, the Company has no ownership interest in the P&C Group Companies nor is the Company directly affected by the underwriting results of the P&C Group Companies. However, management fees comprise a significant part of the Company's revenue and, as a result, the Company's ongoing financial performance depends on the volume of business written by, and the business efficiency and financial strength of, the P&C Group Companies as well as the continued AIF relationships with the Exchanges. Through its AIF relationships with the Exchanges, the Company provides management services to the non-claims side of the P&C Group Companies' businesses. These management services include selecting risks, preparing and mailing policy forms and invoices, collecting premiums and performing certain other administrative and managerial functions. Each of the P&C Group Companies is responsible for its own claims functions, including the settlement and payment of claims and claims adjustment expenses. Each of the P&C Group Companies is also responsible for the payment of commissions and bonuses for agents and district managers, and premium and income taxes. The Company, through its AIF relationships with the Exchanges, is contractually permitted to receive a management fee based on the gross premiums earned by the P&C Group Companies. The range of fees has varied by line of business over time. During the past five years, aggregate management fees have averaged between 12% and 13% of gross premiums earned by the P&C Group Companies. In order to enable the P&C Group Companies to maintain appropriate capital and surplus while offering competitive insurance rates, each AIF has historically charged a lower management fee than the contractually permitted fee of 20% (25% in the case of the Fire Insurance Exchange). The Company has been able to do this while maintaining appropriate profit margins through enhanced operating efficiencies that encompass the use of economies of scale and technology and the standardization of procedures. The P&C Group Companies have reported a growing volume of premiums, which has generated a corresponding rise in management fee income to the Company. Gross premiums earned by the 6 P&C Group Companies were $12.4 billion, $11.4 billion and $10.8 billion for 2001, 2000 and 1999, respectively, giving rise to management fee revenues to the Company of $1.6 billion, $1.5 billion and $1.4 billion, respectively, for the same years. The P&C Group Companies market personal auto, homeowners, selected commercial and specialty insurance products. For the year ended December 31, 2001, approximately 58.3% of net premiums earned were from auto insurance policies, 23.5% were from homeowner policies, 5.6% were from specialty insurance policies and the remainder were primarily from commercial policies. FGI, through its wholly owned subsidiary Prematic Service Corporation ("Prematic"), allows individuals and businesses purchasing insurance from one or more members of the P&C Group Companies and Farmers Life to combine, if they so choose, all premiums due into a single payment. In practice, Prematic combines amounts due from a single insured for all policies in-force into a single amount and then bills the insured on a periodic basis. For this service, Prematic collected service fees totaling $92.0 million in 2001 and generated net income of $19.9 million for the year. FGI has certain other nonmaterial subsidiaries, the results of which are included in the Company's consolidated results. Life Insurance. As part of the Company's strategic plan to focus its life insurance efforts on Farmers Life, the Company sold two of its life insurance subsidiaries, OSL and IGL, to Great Southern Life Insurance Company, a subsidiary of Americo Life, Inc., on April 15, 1997. These subsidiaries contributed $5.5 million to net income in 1997. The Company's remaining life insurance subsidiary, Farmers Life, markets a broad line of individual life insurance products, including universal life, variable universal life, term life and whole life insurance, as well as flexible premium, single premium and equity-indexed deferred annuities, variable annuities and structured settlement products. Farmers Life also markets variable universal life and annuity products, which it began selling in 2000. As of December 31, 2001, Farmers Life provided insurance to nearly 1.2 million people and managed approximately $1.8 billion of annuity funds. Farmers Life's investment philosophy emphasizes long-term fundamental value in the selection of the investment mix for its portfolio. As of December 31, 2001, approximately 78.7% of Farmers Life's portfolio was invested in fixed income securities and cash and 6.7% in equity securities and owned real estate. As of December 31, 2001, approximately 95.4% of Farmers Life's fixed income securities were rated investment grade. Farmers Life's ratio of SAP capital and surplus (including asset valuation reserve) to total assets as of December 31, 2001 was 19.5%. Farmers Reinsurance Company. Farmers Re is a wholly owned subsidiary of FGI. On January 1, 1998, Farmers Re entered into an auto physical damage ("APD") reinsurance agreement with the P&C Group Companies. Effective April 1, 2001, this APD reinsurance agreement was cancelled and replaced with a similar APD reinsurance agreement supported by Farmers Re, Zurich affiliates and outside reinsurers. Under the new agreement, annual premiums ceded by the P&C Group Companies increased from $1.0 billion to $2.0 billion, with Farmers Re assuming 10%, or $200.0 million. The remaining $1.8 billion is ceded to the Zurich affiliates and outside reinsurance companies identified in the agreement. As a result of the new agreement, Farmers Re's premiums decreased from $1.0 billion for the year ended December 31, 2000 to $400.0 million for the year ended December 31, 2001. Additionally, on a monthly basis, premiums assumed decreased from $83.3 million in 2000 to $16.7 million in 2001. This new agreement, which can be terminated by any of the parties, also provides for the P&C Group Companies to receive a ceding commission of 18% of premiums, versus 20% under the old agreement, with additional experience commissions that depend on loss experience. Similar to the old agreement, this experience commission arrangement limits Farmers Re's potential underwriting gain on the assumed business to 2.5% of premiums assumed. 7 The following table sets forth data related to Farmers Re for the years ended December 31:

As2001 ~~of December 31, -------------------------------------------------------------~~ 2000 1999 ----------~~---------------~~ ----------~~-----------------~~ ~~Book Value % Book Value %~~ ---------- ~~---------~~(Amounts ~~----------~~in ~~----------~~thousands) ~~Insurance~~Premiums ~~Subsidiaries~~assumed ~~Fixed income securities~~ $ 4400,~~375.3~~000 ~~77.5 %~~ $ ~~4,376.3 85.0 % Mortgage loans 37.0 0.6 35.9 0.7 Equity securities 304.9 5.4 213.4 4.2 Owned real estate 89.4~~ 1.6 66.7 1.3 Cash and cash equivalents 84.4 1.5 96.0 1.9 Certificates of contribution and surplus notes of the P&C Group 502.5 8.9 119.0 2.3 Policy loans 218.2 3.8 201.7 3.9 S&P 500 call options 26.3 0.5 32.7 0.6 Other 9.9 0.2 6.7 0.1 --------- ------- ---------- ---------- Total $ 5,~~647.9 100.0 % $ 5~~000,~~148.4~~000 ~~100.0 % ========= ======= ========== ========== Noninsurance Fixed income securities~~ $ ~~302.2 20.3 % $ 578.3 23.0 % Mortgage loans 0.~~1,000,000 ~~0.0~~Losses ~~0.1 0.0 Equity securities 242.1 16.3 334.2 13.3 Owned real estate 69.7 4.7 49.5 2.0 Cash~~ and ~~cash~~loss ~~equivalents~~adjustment ~~132.3~~expenses ~~8.9~~paid ~~217.5~~263,074 ~~8.7~~596,939 ~~Certificates of contribution and surplus notes of the P&C Group 184.8 12.5 23.3 0.9 UKISA notes 302.0 20.3 1~~554,~~057.0~~807 ~~42.1~~Reinsurance ~~OSDH~~commissions ~~note~~paid ~~250.0 16.8 250.0 10.0 Other 3.3 0.2 0.8 0.0 --------- ------- ---------- ---------- Total $ 1~~108,~~486.5~~004 ~~100.0 % $ 2~~288,~~510.7~~126 ~~100.0 % ========= ======= ========== ==========~~313,749

In March 2001, Farmers Re and the P&C Group Companies commuted $89.9 million 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 Companies $89.9 million of losses and loss adjustment expenses and $8.8 million of accrued interest in settlement of this commutation. Further, on August 15, 2001, Farmers Re and the P&C Group Companies commuted $100.8 million 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 Companies $100.8 million of losses and loss adjustment expenses and $1.0 million of accrued interest in settlement of this commutation. Also, in March 2000, Farmers Re and the P&C Group Companies commuted $106.4 million of losses and loss adjustment expenses associated with the 1999 accident year. In order to settle this commutation, in May 2000, Farmers Re paid the P&C Group Companies $106.4 million of losses and loss adjustment expenses and $9.0 million of accrued interest. Employees As of December 31, 2001, the Company had 8,379 employees. Major Customer and Related Matters The P&C Group Companies collectively represent the Company's largest customer. Management fees earned by the Company as AIF for the Exchanges totaled $1.6 billion, $1.5 billion and $1.4 billion, respectively, for the years ended December 31, 2001, 2000 and 1999, which represented 54.6%, 43.3% and 42.9%, respectively, of the Company's consolidated operating revenues for the same years. The Company has no ownership interest in the P&C Group Companies and therefore is not directly affected by the underwriting results of the P&C Group Companies. However, as management fees comprise a significant part of the Company's revenues, the ongoing financial performance of the Company depends on the volume of business written by, and the business efficiency and financial strength of, the P&C Group Companies. In 2001, the insurance industry in the U.S. experienced one of its worst years in recorded history. Much of this downturn was due to the estimates of insured losses resulting from the disaster at the World Trade Center in New York and other related events tied in with the terrorist attacks of September 11. However, ignoring the impact of the events of September 11, the insurance industry still experienced one of its worst years ever due to increased levels of operating losses and unrealized investment losses as well as a general decline in the economy. Similar to the rest of the industry, the P&C Group Companies, whose results were not significantly affected by the events of September 11, experienced an unfavorable underwriting cycle in 2001. Compared to industry results, the P&C Group Companies performed slightly better than the industry for the nine month period ended September 30, 2001 (the latest period for which industry information was available). The P&C Group Companies' surplus as regards policyholders decreased from $3.8 billion as of December 31, 2000 to $3.5 billion as of December 31, 2001, which included a $0.8 billion operating loss, net of tax, in 2001. This decrease largely reflects the unfavorable underwriting cycle experienced by the P&C Group Companies in 2001. In response to this unfavorable underwriting cycle, the P&C Group Companies initiated aggressive rate increases in 2001. Although the full effect of these rate increases has not fully been realized as of December 31, 2001, fourth quarter 2001 results showed signs of continued improvement and outperformed the results achieved in previous quarters. However, continued operating losses by the P&C Group Companies could impact their ability to grow written premiums which, in turn, would impact the amount of management fees earned by the Company. 8 Business Environment Strategic Objectives. The Company's strategic objective is to assist Farmers Management Services, the P&C Group Companies and Farmers Life (collectively, the "Farmers Companies") in providing world-class personal insurance and a full range of financial services solutions to individuals, families and small businesses, thereby earning them the reputation of being first choice in protecting and building people's assets within their chosen markets. The Company intends to achieve this objective by (i) maintaining its long-standing tradition of providing high-quality customer service, (ii) expanding the Farmers Companies' portfolio of value-added products and services, (iii) cross-selling insurance products and services to the P&C Group Companies' nearly 10.0 million existing customers, (iv) investing in technology to improve the efficiency and quality of service, (v) capitalizing on the strong brand name recognition of Farmers Insurance Group of Companies(r) in its operating territory and (vi) forming strategic alliances to capitalize on the distribution capabilities of the agency force. Marketing and Distribution. The Farmers Companies operate using federally registered trade names, including Farmers Insurance Group of Companies(r), Farmers Insurance Group(r) and Farmers(r). The P&C Group Companies and Farmers Life share a common network of direct writing agents and district managers (collectively, the "Farmers Agency Force"). The Farmers Companies distribute their respective insurance products primarily in a 29-state core territory (mainly in western and midwestern states) through the Farmers Agency Force. In 1999, the Company and the P&C Group Companies expanded operations into 12 new eastern states and entered into new specialty lines of business, such as recreational products. This was a result of the Company's merger with ZIC and was accomplished with the assistance of Zurich Personal Insurance employees, who became employees of either the Company or the P&C Group Companies as of January 1, 2000. The distribution of Farmers Companies' products in these 12 eastern states is accomplished through a network of more than 900 independent agents, many of whom have established books of business. Additionally, in 2000, the Exchanges' acquisition of Foremost enabled the P&C Group Companies to increase their presence in the specialty homeowners market and enabled the Farmers Agency Force to distribute Foremost products. Foremost writes insurance throughout the United States, particularly in southern and southwestern states. Foremost's insurance products are primarily offered through three distribution channels: general and independent agents, mobile home and recreational vehicle dealer agents and direct marketing. As of December 31, 2001, the Farmers Agency Force consisted of more than 14,000 direct writing agents and approximately 500 district managers, each of whom is an independent contractor. The size, efficiency and scope of this agency force have made it a major factor in the Farmers Companies' growth. Each direct writing agent is required to first submit business to the insurers of the P&C Group Companies and Farmers Life within the classes and lines of business written by such insurers. To the extent that such insurers decline such business, or do not underwrite it, the direct writing agents may offer the business to other insurers. The Farmers Agency Force markets to family accounts and small businesses. It leverages these relationships using an extensive portfolio of products to increase the number of policies per household or account. The P&C Group Companies' existing relationships with nearly 10.0 million customers provide a potential opportunity for future growth in policies- in-force and life insurance sales. Higher retention rates and profitability are expected to be achieved on business written with households having multiple policies. The Farmers Companies promote the Farmers(r) brand name throughout their operating territory through television, radio and print advertising on both a national and local basis. The Farmers Agency Force is provided access to the Farmers Agency Information Management System, which enables an agent to deliver high-quality consumer focused service at the point of sale. Furthermore, Farmers Life and the P&C Group Companies have a formalized policyholder recontact program, the "Farmers Friendly Review(r)", which builds customer loyalty and provides a vehicle for enhanced policy retention and future internal growth through the cross selling of property and casualty and life products. 9 In 2001, the Farmers Companies entered into strategic alliances with Bank of America and the ULICO Insurance Group. The P&C Group Companies and Bank of America will offer integrated banking and insurance products for both Farmers Companies and Bank of America customers. In addition, the P&C Group will offer personal lines property and casualty insurance products to the union-based groups serviced by the ULICO Insurance Group. Also in 2001, the Farmers Companies formed a strategic alliance with UNICARE. Through this alliance, the Farmers Agency Force is able to offer customers individual and small group healthcare policies in the states of Texas, Illinois, Indiana and Nevada. Offerings include a broad spectrum of network-based health products including open access PPO, HMO and some specialty products. Customers will have the convenience of obtaining their insurance and financial products from one trusted source - the Farmers Agency Force. UNICARE is the national operating subsidiary of WellPoint Health Networks Inc., one of the largest publicly traded health care companies in the U.S., serving the needs of approximately 10.0 million medical and more than 44.0 million specialty members. Further, in 2001, Farmers Life continued its strategy of simplifying the life sales process by commencing the development of telephone and electronic application forms. The new application process will be implemented in 2002. In addition, in 2001, Farmers Life introduced new enhancements to LifeNet, its Internet distribution support system that was introduced in 2000 for the Farmers Agency Force. These enhancements included online leads, financial calculators and sales ideas. Finally, in 2001, the P&C Group Companies and Farmers Life created an auto/life discount, given to qualifying drivers whose households carry insurance from Farmers Life. Competition. Property and casualty insurance is a very competitive industry with approximately 3,300 insurers operating in the United States. Many property and casualty insurers with a small all-lines national market share have a significant market share within a single state or a specialty market. The P&C Group Companies compete in their selected markets through Farmers(r) brand name recognition of customer service, product features, financial strength, price and the Farmers Agency Force. There is substantial competition among insurance companies seeking customers for the types of products sold by Farmers Life. Approximately 1,500 life insurance companies in the United States offer products similar to those offered by Farmers Life, and many use similar marketing techniques. Farmers Life competes on the basis of customer service, product features, financial strength and price. Many of the products offered by Farmers Life contain significant cash accumulation features; therefore, these products compete with product offerings of banks, mutual funds and other financial institutions as well. Regulatory and Related Matters. The Insurance Subsidiaries and the P&C Group Companies are subject to extensive state regulatory oversight in the jurisdictions in which they do business. Through its AIF relationships with the Exchanges, the Company, which does not own the P&C Group Companies, and the P&C Group Companies constitute an insurance holding company system as defined by the insurance laws and regulations of various jurisdictions. As such, certain transactions between an insurance company and any other member company of the system, including investments in subsidiaries and distributions by an insurance company to its shareholders, are subject to regulation and oversight by the state of domicile of the applicable insurance company and certain other states where the insurance company writes a substantial amount of insurance business. Insurers having insufficient statutory capital and surplus are subject to varying degrees of regulatory action depending on the level of capital inadequacy. As of December 31, 2001, neither the Insurance Subsidiaries nor the P&C Group Companies were subject to such regulatory actions. Most of the business of Farmers Life and the P&C Group Companies is subject to regulation with respect to policy rates and related matters. In addition, assessments are levied against Farmers Life and the P&C Group Companies as a result of participation in various types of mandatory state guaranty associations. Existing federal laws and regulations affect the taxation of life insurance products and insurance companies. 10 Investments During the years ended December 31, 2001, 2000 and 1999, the Insurance Subsidiaries had pretax net investment income, net realized investment gains/(losses) and impairment losses on investments of $316.1 million, $414.5 million and $360.4 million, respectively, and Farmers Management Services had pretax net investment income, net realized investment gains/(losses) and impairment losses on investments of $38.5 million, $195.6 million and $192.7 million, respectively. As of December 31, 2001, the book value of the Insurance Subsidiaries investment portfolio was approximately $6.1 billion and the book value of the Farmers Management Services investment portfolio was approximately $1.5 billion. The Board of Directors of the Company is responsible for developing investment policies, and the Investment Committee, which is comprised of thirteen officers of the Company who are appointed by the Board of Directors, is responsible for administering such policies. During 1998, Zurich Scudder Investments, Inc. ("ZSI"), formerly known as Scudder Kemper Investments, Inc., took over management of the Insurance Subsidiaries investment portfolio and the Farmers Management Services investment portfolio in accordance with these policies. Prior to that, the Company's investment department managed these portfolios. As of December 31, 2001, Zurich had entered into an agreement to sell ZSI to Deutsche Bank AG. Deutsche Asset Management, a member of Deutsche Bank AG, will manage the Insurance Subsidiaries investment portfolio and the Farmers Management Services investment portfolio after the sale is completed. The investment philosophy for both the Insurance Subsidiaries investment portfolio and the Farmers Management Services investment portfolio emphasizes long-term fundamental value in the selection of the investment mix. For the Insurance Subsidiaries, the assets backing the Farmers Life interest sensitive investment portfolio are internally segregated along product lines in order to closely match the funding assets with the underlying liabilities to policyholders. This asset/liability matching system is the basis by which credited interest rates are determined. In the Farmers Management Services investment portfolio, excluding certificates of contribution and surplus notes of the P&C Group Companies and notes from affiliates, relatively short maturities are maintained to ensure liquidity. The Insurance Subsidiaries investment portfolio and the Farmers Management Services investment portfolio are both comprised of a broad range of assets, including corporate fixed income securities, mortgage- backed securities, taxable and tax-exempt government securities, preferred stock, common stock, owned real estate, mortgage loans and short-term financial instruments. The Insurance Subsidiaries investment portfolio also includes, policy loans and Standard & Poor's 500 Composite Stock Price Index ("S&P 500") call options. Approximately 6.3% of the Farmers Management Services investment portfolio consists of notes issued by Zurich Financial Services (UKISA) Limited ("UKISA"), a subsidiary of Zurich, formerly known as British American Financial Services (UK and International), Ltd., and 16.5% of the portfolio consists of a note issued by ZGA US Limited ("ZGAUS"), a subsidiary of Zurich, formerly known as Orange Stone (Delaware) Holdings Limited. Approximately 36.1% of the Farmers Management Services investment portfolio and 8.1% of the Insurance Subsidiaries investment portfolio consist of certificates of contribution and surplus notes of the P&C Group Companies. See Item 13 and Notes G and H. Excluding non-rated fixed income investments, approximately 94.6% of the fixed income securities in the Insurance Subsidiaries investment portfolio are rated investment grade and approximately 72.9% of the fixed income securities in the Farmers Management Services investment portfolio are rated investment grade as of December 31, 2001. Approximately 53.3% of the mortgage-backed securities in the Insurance Subsidiaries investment portfolio are guaranteed by the Government National Mortgage Association ("GNMA"), Federal Housing Authority ("FHA"), Federal National Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation ("FHLMC"), and approximately 83.7% of the remaining 46.7% are rated "AAA". The Farmers Management Services investment portfolio does not include any mortgage-backed securities as of December 31, 2001. 11 The following table sets forth the book value of each portfolio, by asset category, as of December 31, 2001 and 2000. Book Value of Invested Assets (Amounts in millions)

~~Insurance~~As ~~Subsidiaries~~of ~~Noninsurance~~December ~~Total~~31, ---------------------- ----------------------- ---------------- 2001 2000 ------- ~~Market Market Market Value % Value % Value %~~ ------------------ -------- ------------------- Book Value % Book Value % ---------- --------- ---------- --------- ~~Mortgage~~-~~backed~~ Insurance Subsidiaries Fixed income securities $ 24,~~002~~699.1 4577.82 % $ ~~103~~4,375.13 3477.15 % $Mortgage ~~2,105~~loans 28.29 450.5 37.0 %0.6 ~~Corporate~~Equity ~~1,851.3~~securities 42351.39 ~~28.~~5.8 304.9 5.4 ~~1,879~~Owned real estate 80.8 401.23 U89.S4 1.6 ~~Government~~Cash ~~262~~and cash equivalents 172.54 62.08 084.4 01.5 Certificates of contribution and surplus notes of the P&C Group Companies 490.5 8.1 ~~262~~502.5 8.9 5Policy loans 232.63 ~~Municipal~~3.8 ~~165~~218.72 3.8 ~~159~~S&P 500 call options 12.7 0.2 26.3 0.5 52Other 16.81 ~~325~~0.3 9.9 0.2 --------- ------- ---------- ---------- Total $ 6,084.7 100.0 ~~Foreign~~% 63$ 5,647.19 1100.40 % ========= ======= ========== ========== Farmers Management Services Fixed income securities $ 82.9 5.5 % $ 302.2 20.3 % Mortgage loans 0.0 0.0 630.1 0.0 Equity securities 167.6 11.0 242.1 16.3 ~~Redeemable~~Owned ~~preferred~~real ~~stock~~estate 3098.4 6.5 069.7 104.7 Cash and cash equivalents 225.0 14.8 132.3 8.9 Certificates of contribution and surplus notes of the P&C Group Companies 546.8 36.1 184.8 12.5 UKISA notes 95.0 6.3 41302.0 20.3 ZGAUS note 250.0 16.95 250.0 16.8 Other 50.0 3.3 3.3 0.2 --------- ------- -------- --~~-----~~ --------- -~~------~~ Total $ 41,~~375~~515.37 100.0 % $ ~~302.2 100.0 % $ 4~~1,~~677~~486.5 100.0 % ========= ======= ======== ==~~=====~~ ========= =~~======~~

Investment Accounting Policies. The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities". This Statement addresses the accounting and reporting for investments in equity securities that have readily determinable market values and for all investments in debt securities. The Company classified all investments in equity and debt securities as available-for-sale under SFAS No. 115, with the exception of an investment held as of December 31, 2001 in Endurance Specialty Insurance Limited ("Endurance") as well as investments related to the grantor trusts held as of December 31, 2001 and 2000. The available-for-sale investments are reported on the balance sheet at market value, with unrealized gains and losses, net of tax, excluded from earnings and reported as a component of stockholders' equity. As of December 31, 2001, the Company held $50.0 million of common stock of Endurance. The Company purchased the Endurance equity securities in a private placement offer in December 2001. As non-exchange traded securities, these investments were carried at cost as of December 31, 2001 and were reported on the "Other investments" line in the Farmers Management Services section of the consolidated balance sheet. In addition, as of December 31, 2001 and December 31, 2000, investments related to the grantor trusts totaled $60.7 million and $61.1 million, respectively, and were classified as trading securities under SFAS No. 115. As a result, these investments were reported on the "Other assets" line in the Farmers Management Services section of the consolidated balance sheets at market value with both realized and unrealized gains and losses included in earnings, net of tax, in the year in which they occurred. 12 In compliance with a Securities and Exchange Commission ("SEC") staff announcement, the Company has recorded certain entries to the Deferred Policy Acquisition Costs ("DAC") and Value of Life Business Acquired ("VOLBA") line of the consolidated balance sheet in connection with SFAS No. 115. The SEC requires that companies record entries to those assets and liabilities that would have been adjusted had the unrealized investment gains or losses from securities classified as available-for- sale actually been realized, with corresponding credits or charges reported directly to stockholders' equity. Real estate held for investment is accounted for on a depreciated cost basis. Real estate held for sale is carried at the lower of fair value less selling costs or depreciated cost less a valuation allowance. Marketable securities are carried at market. Other investments, which consist primarily of the UKISA notes receivable, the ZGAUS note receivable, certificates of contribution of the P&C Group Companies, surplus notes of the P&C Group Companies and policy loans, are carried at the unpaid principal balances. S&P 500 call options, which are held by Farmers Life, are carried at estimated fair value. Unrealized gains and losses resulting from changes in the estimated fair value of the call options are recorded as an adjustment to the interest liability credited to policyholders. In addition, realized gains and losses from maturity or termination of the call options are offset against the interest credited to policyholders during the period incurred. Premiums paid on call options are amortized to net investment income over the term of the contracts. Fixed Income Securities. As of December 31, 2001, approximately 77.2% of the Insurance Subsidiaries investment portfolio and 5.5% of the Farmers Management Services investment portfolio were invested in fixed income securities. These investments included taxable and tax-exempt government securities, domestic and foreign corporate bonds, redeemable preferred stock and mortgage-backed securities. Excluding non-rated fixed income investments, approximately 94.6% of the fixed income securities in the Insurance Subsidiaries investment portfolio and 72.9% of the fixed income securities in the Farmers Management Services investment portfolio were rated investment grade. The following table sets forth the market values of the various categories of fixed income securities included within the portfolios as of December 31, 2001. Value of Fixed Income Securities (Amounts in millions)

~~Year~~Farmers ~~ended~~Insurance ~~December~~Subsidiaries 31, ------------------------------------------------------------------- 2000 1999 1998 1997 1996 ----------- ----------- ----------- ----------- ----------- (Amounts in millions) INCOME STATEMENT DATA Consolidated operating revenues $ 3,446.5 $ 3,270.4 $ 3,031.2 $ 2,009.0 $ 2,013.2 =========== =========== =========== =========== =========== Management ~~services~~Services toTotal ~~property and casualty insurance companies; and other: Operating revenues $ 1,588.8 $ 1,489.7 $ 1,358.2 $ 1,324.9 $ 1,245.4~~ ----------- ----------- ----------- ----------- -~~----------~~ Salaries and employee benefits 406.3 373.2 328.6 335.8 337.2 Buildings and equipment expenses 104.0 91.5 145.4 95.8 87.3 Amortization of AIF relationships and goodwill 102.8 102.8 102.8 102.8 102.8 General and administrative expenses 278.0 266.3 204.1 202.6 170.3 ----------- ----------- -~~----------~~ ~~-----------~~Market ~~-----------~~Market ~~Total~~Market ~~operating~~Value ~~expenses~~% ~~891.1~~Value ~~833.8~~% ~~780.9~~Value ~~737.0~~% ~~697.6 Merger related expenses(see Note E) 0.0 0.2 21.1 0.0 0.0~~ ----------- --------~~---~~ ----------- ----------- ----------- ~~Total expenses 891.1 834.0 802.0 737.0 697.6~~ ----------- Mortgage-~~----------~~backed ~~-----------~~$ ~~----------- ----------- Operating income 697.7 655.7 556.~~2 ~~587~~,456.~~9 547.8 Net investment income 127.1 117.~~5 ~~135~~52.~~1 144.2 112.8 Net realized gains 68.5 75.~~3 ~~62.4~~% ~~73.4~~$ ~~5.1 Gain on sale of subsidiaries~~ 0.0 0.0 ~~0.0~~% ~~19.0~~$ ~~0.0 Dividends on preferred securities of subsidiary trusts (42.1) (42.1) (42.1) (42.1) (42.1) ----------- ----------- ----------- ----------- ----------- Income before provision for taxes 851.~~2 ~~806~~,456.45 ~~711~~51.~~6 782.~~4 ~~623.6~~% ~~Provision~~Corporate ~~for income taxes 348.~~1 ~~325~~,586.3 ~~290~~33.8 ~~332~~53.~~2 275.~~1 ~~----------- ----------- ----------- ----------- ----------- Management services income 503~~64.1 ~~481.~~1 ~~420~~,639.84 ~~450~~34.23 ~~348~~U.~~5 ----------- ----------- ----------- ----------- ----------- Insurance Subsidiaries: Life and annuity premiums 228~~S.7 ~~209.7~~Government ~~173~~346.~~9 161.1 170.4 Non-life reinsurance premiums 1,000.~~0 ~~1,000~~7.03 ~~1,000.1~~ 0.07 0.08 ~~Life policy charges 214~~346.~~5 210.6 206.4 216.6 241.~~7 ~~Net investment income 353~~7.42 ~~335.6~~Municipal ~~307~~268.49 ~~293~~5.~~2 317.~~7 ~~Net realized gains/(losses) 61~~19.13 2423.83 ~~(14~~288.~~8) 13.~~2 386.0 ~~-----------~~Foreign ~~----------- ----------- ----------- ----------- Total revenues 1,857~~20.7 1~~,780.7~~ ~~1,673.~~0 ~~684~~.14 ~~767.8 ----------- ----------- ----------- ----------- ----------- Non-life losses and loss adjustment expenses 686.9 661.3 655.1~~ 0.0 0.0 ~~Life policyholders' benefits and charges 381~~20.01 ~~347~~0.~~8 308.3 294.~~4 ~~335.1~~Redeemable ~~Amortization~~preferred ofstock ~~deferred policy acquisition costs and value of life business acquired 108~~21.83 ~~102.6 90.1 104.~~0 ~~108~~.~~8 Life net commissions 3.9 13.~~5 ~~18.~~9 18.28 2111.08 ~~Non-life reinsurance commissions 288~~31.1 ~~313.7 319.9~~ 0.~~0 0.0 General and administrative expenses 51.~~7 ~~44.3 41.7 47.8 63.4~~ ----------- ------- ---- ---- ------- ----------- -------~~----~~ Total ~~operating~~$ ~~expenses 1,520.~~4 1,~~483~~699.2 1~~,434.0~~ ~~464~~100.~~4 528.3 ----------- ----------- ----------- ----------- ----------- Income before provision for taxes 337.3 297.5 239.~~0 ~~219.7~~% ~~239.5~~$ ~~Provision for income taxes 115~~82.~~1 101.6 83.0 76.4 80.1 ----------- ----------- ----------- ----------- ----------- Insurance Subsidiaries income 222.2 195.~~9 ~~156~~100.0 ~~143.3~~% ~~159.4 ----------- ----------- ----------- ----------- ----------- Consolidated net income~~ $ ~~725~~4,782.30 ~~$ 677~~100.0 $% ~~576.8 $ 593.5 $ 507.9~~ =========== ======= ==== ==== ======= =========== =========== BALANCE SHEET DATA Total investments (1) $ 7,134.4 $ 7,659.1 $ 7,402.2 $ 6,576.0 $ 6,605.3 Total assets 12,333.8 12,796.3 12,686.6 12,117.4 12,928.8 Total debt 0.0 0.0 0.0 0.1 0.2 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures ("QUIPS") 500.0 500.0 500.0 500.0 500.0 Stockholders' equity 6,256.4 (2) 7,099.2 7,034.4 6,781.6 6,503.8 OTHER OPERATING DATA (unaudited) Ratio of debt to total capitalization (3) 7.4 % 6.6 % 6.6 % 6.9 % 7.1 % Ratio of earnings to fixed charges (4) 22.9 x 21.0 x 19.5 x 20.2 x 15.5 x

Credit Ratings. The National Association of Insurance Commissioners ("NAIC") maintains a valuation system that assigns quality ratings known as "NAIC designations" to publicly traded and privately placed fixed income securities. The NAIC designations range from 1 to 6, with categories 1 (highest) and 2 considered investment grade and categories 3 through 6 (lowest) considered non-investment grade. As of December 31, 2001, the Insurance Subsidiaries held $193.3 million in below investment grade bonds, representing 3.2% of total invested assets, and Farmers Management Services held $5.1 million in below investment grade bonds, representing 0.3% of total invested assets. Mortgage-backed Securities. Mortgage-backed securities ("MBS") are the largest component of the Insurance Subsidiaries fixed income portfolio, representing approximately 52.3% of its fixed income portfolio, as of December 31, 2001. The Farmers Management Services investment portfolio did not hold any MBS in its fixed 13 income portfolio as of December 31, 2001. Approximately 53.3% of the MBS in the Insurance Subsidiaries investment portfolio are guaranteed by various government agencies and government sponsored entities, including the GNMA, FHA, FNMA or FHLMC, and 83.7% of the remaining 46.7% are rated "AAA". The primary risk in holding MBS is the cash flow uncertainty that arises from changes to prepayment speeds as interest rates fluctuate. To reduce the uncertainties surrounding the cash flows of MBS, the Insurance Subsidiaries investment portfolio held significant MBS investments in collateralized mortgage obligations ("CMOs") including $803.8 million of planned amortization classes ("PACs") and $8.0 million of targeted amortization classes ("TACs"). These securities provide protection by passing a substantial portion of the risk of prepayment uncertainty to other tranches. Mortgage Loans. As of December 31, 2001, the Insurance Subsidiaries investment portfolio included mortgage loans with an aggregate book value of approximately $28.9 million, or 0.5%, of total invested assets. The Farmers Management Services investment portfolio did not hold any mortgage loans as of December 31, 2001. All mortgage loans included in the Insurance Subsidiaries investment portfolio are secured by first mortgages. The majority of the mortgage loan portfolio consists of loans secured by office buildings, light industrial properties and retail properties located primarily in unanchored shopping centers. Exposure to potential losses from future mortgage loan foreclosures and the operation or sale of properties acquired through foreclosures is limited because the Insurance Subsidiaries have not issued any mortgage loans since 1989, and the majority of the individual remaining mortgage loan balances are less than $1.0 million. Equity Securities. In order to diversify and limit its exposure in any single market sector, the Company's common stock portfolio is invested in the equities of companies that are listed on the S&P 500 index. Owned Real Estate. As of December 31, 2001, the Insurance Subsidiaries investment portfolio included owned real estate investments with a book value of $80.8 million, or 1.3% of total invested assets, and the Farmers Management Services investment portfolio included owned real estate investments with a book value of $98.4 million, or 6.5%, of total invested assets. The Insurance Subsidiaries owned real estate holdings fall into two categories: real property assets that were acquired directly as an equity investment and foreclosed equity real estate properties. The Farmers Management Services investment portfolio owned real estate holdings were all acquired directly as equity investments. Impairment Losses on Investments. The Company regularly reviews its investment portfolio to determine whether declines in the value of investments are other than temporary as defined by SFAS No. 115. 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 this review, the Company determined that some of its investments had declines in value that were other than temporary as of December 31, 2001 due to unfavorable market and economic conditions. Accordingly, for the year ended December 31, 2001, the Company recorded $151.0 million of impairment losses on investments, primarily in the equity portfolios. This included $32.4 million of impairment losses related to Enron Corporation. Impairment losses were recorded for each reporting segment and, for the year ended December 31, 2001, amounted to $57.2 million, $11.0 million and $82.8 million for Farmers Management Services, Farmers Re and Farmers Life, respectively. For the year ended December 31, 2000, Farmers Life recorded $22.4 million of impairment losses on fixed income securities of Armstrong World Industries, Inc. and Owens Corning. Impairment of Investments-Fixed Income Securities. In 2001, the Company had impairment losses of $37.7 million in fixed income securities held in the Insurance Subsidiaries investment portfolio and $2.5 million held in the Farmers Management Services investment portfolio. Impairments were determined based on the market value of the securities on the date of impairment. 14 Impairment of Investments-Mortgage Loan Investments. As of December 31, 2001, none of the mortgage loans held by the Insurance Subsidiaries investment portfolio were classified as "troubled loans". Impairment of Investments-Equity Securities. In 2001, the Company had impairment losses of $50.6 million in equity securities held in the Farmers Management Services investment portfolio and $54.0 million in the Insurance Subsidiaries investment portfolio. Equity impairments were determined based on the market value of the securities on the date of impairment. Impairment of Investments-Investment Real Estate. In 2001, the Company listed its Columbus business service center, held in the Farmers Management Services investment portfolio, for sale. As a result, an impairment loss of $0.7 million was incurred due to the fact that the fair value of this investment was lower than its carrying value. Impairment of Investments-Other Securities. In 2001, the Company had $3.4 million of impairment losses in the Farmers Management Services investment portfolio due to impairments of joint ventures. Also, the Insurance Subsidiaries investment portfolio had impairment losses of $1.3 million and $0.8 million related to a joint venture and notes receivable, respectively. ITEM 2. Properties The Company owns three buildings in Los Angeles and nine business service centers in which its administrative operations are conducted. In addition, the Company owns a building in the state of Washington in which the operations of Farmers Life are conducted. ITEM 3. Legal Proceedings The Company is a party to numerous lawsuits arising from its AIF relationships with the Exchanges. The Company is also a party to additional 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 in various governmental and administrative proceedings. ITEM 4. Submission of Matters to a Vote of Security Holders On February 6, 2001, at a special meeting, the shareholders of the Company, by unanimous consent, authorized a recapitalization of FGI (see Note B) and a restatement of FGI's Articles of Incorporation. Additionally, in May 2001, the shareholders held their annual meeting. Martin D. Feinstein, Jason L. Katz, John H. Lynch, Keitha T. Schofield, Cecilia M. Claudio, Gerald E. Faulwell, Stephen J. Feely, Leonard H. Gelfand, Paul N. Hopkins, Stephen J. Leaman and C. Paul Patsis were re- elected to the Board of Directors of the Company. The election of each director was unanimous and uncontested. 15 PART II ITEM 5. Market for Farmers Group, Inc.'s Common Equity and Related Stockholders Matters N/A ITEM 6. Selected Financial Data The following table sets forth summary consolidated income statement data, consolidated balance sheet data and other operating data for the periods indicated. The following consolidated income statement data of the Company for each of the years in the five-year period ended December 31, 2001, and the consolidated balance sheet data of the Company as of December 31, 2001 and as of December 31, for each of the preceding four years have been derived from the Company's audited consolidated financial statements. The following data should be read in conjunction with the Company's Consolidated Financial Statements and related notes, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial information appearing elsewhere herein. Income statement data includes the effect of amortizing the purchase accounting entries related to B.A.T's acquisition of the Company in December 1988. Major items incorporated in the purchase price of the Company include goodwill and the value of the AIF relationships of the P&C Group Companies (see Note A). Through December 31, 2001, the amortization of these two items is being taken on a straight-line basis over forty years and reduced annual pretax income by $102.8 million in each of the years 1997 through 2001. 16

~~Page~~Year ended December 31, ------------------------------------------------------------------- ~~Independent~~2001 ~~Auditors'~~2000 ~~Report~~1999 231998 1997 ----------- ----------- ----------- ----------- ----------- (Amounts in millions) INCOME STATEMENT DATA Consolidated ~~Financial~~operating ~~Statements~~revenues of$ 2,900.2 $ 3,446.5 $ 3,270.4 $ 3,031.2 $ 2,009.0 =========== =========== =========== =========== =========== Farmers ~~Group~~Management Services: Operating revenues $ 1,690.3 ~~Inc~~$ 1,588.8 $ 1,489.7 $ 1,358.2 $ 1,324.9 ----------- ----------- ----------- ----------- ----------- Salaries and ~~Subsidiaries~~employee ~~Consolidated~~benefits ~~Balance~~417.4 ~~Sheets~~406.3 as373.2 328.6 335.8 Buildings and equipment expenses 102.8 104.0 91.5 145.4 95.8 Amortization of ~~December~~AIF ~~31,~~relationships ~~2000~~and goodwill 102.8 102.8 102.8 102.8 102.8 General and ~~1999~~administrative 24expenses ~~Consolidated~~314.5 ~~Statements~~278.0 266.3 204.1 202.6 ----------- ----------- ----------- ----------- ----------- Total operating expenses 937.5 891.1 833.8 780.9 737.0 Merger related expenses 0.0 0.0 0.2 21.1 0.0 ----------- ----------- ----------- ----------- ----------- Total expenses 937.5 891.1 834.0 802.0 737.0 ----------- ----------- ----------- ----------- ----------- Operating income 752.8 697.7 655.7 556.2 587.9 Net investment income 80.5 127.1 117.5 135.1 144.2 Net realized gains 15.2 68.5 75.3 62.4 73.4 Impairment losses on investments (57.2) 0.0 0.0 0.0 0.0 Gain on sale of subsidiaries 0.0 0.0 0.0 0.0 19.0 Dividends on preferred securities of subsidiary trusts (42.1) (42.1) (42.1) (42.1) (42.1) ----------- ----------- ----------- ----------- ----------- Income before provision for ~~the~~taxes ~~years~~749.2 ~~ended~~851.2 ~~December~~806.4 31711.6 782.4 Provision for income taxes 310.5 348.1 325.3 290.8 332.2 ----------- ----------- ----------- ----------- ----------- Farmers Management Services income 438.7 503.1 481.1 420.8 450.2 ----------- ----------- ----------- ----------- ----------- Insurance Subsidiaries: Life and annuity premiums 275.5 228.7 209.7 173.9 161.1 Non-life reinsurance premiums 400.0 1,000.0 ~~2000~~1,000.0 ~~1999~~1,000.1 ~~and~~0.0 ~~1998~~Life 26policy ~~Consolidated~~charges ~~Statements~~218.3 of214.5 ~~Comprehensive~~210.6 ~~Income~~206.4 ~~for~~216.6 ~~the~~Net ~~years~~investment ~~ended~~income ~~December~~368.2 31353.4 335.6 307.4 293.2 Net realized gains 41.7 83.5 24.8 13.0 13.2 Impairment losses on investments (93.8) (22.4) 0.0 (27.8) 0.0 ----------- ----------- ----------- ----------- ----------- Total revenues 1,209.9 ~~2000~~1,857.7 ~~1999~~1,780.7 1,673.0 684.1 ----------- ----------- ----------- ----------- ----------- Non-life losses and ~~1998~~loss 27adjustment ~~Consolidated~~expenses ~~Statements~~282.0 of686.9 ~~Stockholders~~661.3 655.1 0.0 Life policyholders' ~~Equity~~benefits ~~for~~and ~~the~~charges ~~years~~459.2 ~~ended~~381.0 ~~December~~347.8 31308.3 294.4 Amortization of deferred policy acquisition costs and value of life business acquired 97.4 108.8 102.6 90.1 104.0 Life net commissions (0.9) 3.9 13.5 18.9 18.2 Non-life reinsurance commissions 108.0 288.1 313.7 319.9 0.0 General and administrative expenses 55.3 51.7 44.3 41.7 47.8 ----------- ----------- ----------- ----------- ----------- Total operating expenses 1,001.0 ~~2000~~1,520.4 ~~1999~~1,483.2 ~~and~~1,434.0 ~~1998~~464.4 28----------- ----------- ----------- ----------- ----------- Income before provision for taxes 208.9 337.3 297.5 239.0 219.7 Provision for income taxes 67.6 115.1 101.6 83.0 76.4 ----------- ----------- ----------- ----------- ----------- Insurance Subsidiaries income 141.3 222.2 195.9 156.0 143.3 ----------- ----------- ----------- ----------- ----------- Consolidated ~~Statements~~net income $ 580.0 $ 725.3 $ 677.0 $ 576.8 $ 593.5 =========== =========== =========== =========== =========== BALANCE SHEET DATA Total investments (1) $ 7,600.4 $ 7,134.4 $ 7,659.1 $ 7,402.2 $ 6,576.0 Total assets 12,423.1 12,333.8 12,796.3 12,686.6 12,117.4 Total debt 0.0 0.0 0.0 0.0 0.1 Company obligated mandatorily redeemable preferred securities of ~~Cash~~subsidiary ~~Flows~~trusts ~~for~~holding ~~the~~solely ~~years~~junior ~~ended~~subordinated ~~December~~debentures 31("QUIPS") 500.0 500.0 500.0 500.0 500.0 Stockholders' equity 6,467.5 ~~2000~~6,256.4 ~~1999~~(2) ~~and~~7,099.2 ~~1998~~7,034.4 296,781.6 ~~Notes~~OTHER OPERATING DATA (unaudited) Ratio of debt to ~~Consolidated~~total ~~Financial~~capitalization ~~Statements~~(3) 307.2 ~~Quarterly~~% ~~Financial~~7.4 ~~Data~~% 6.6 % 6.6 % 6.9 % Ratio of earnings to fixed charges (~~Unaudited~~4) 6118.6 x 22.9 x 21.0 x 19.5 x 20.2 x

---------------------------- (1) Includes cash and cash equivalents, marketable securities and notes receivable-affiliates. (2) On October 23, 2000, a $1,075,000,000 special dividend was paid to Allied Zurich in connection with the Zurich capital structure unification in October 2000. (3) The ratio of debt to total capitalization has been determined by dividing the sum of total debt plus QUIPS by stockholders' equity plus QUIPS. (4) The ratio of earnings to fixed charges has been determined by dividing the sum of income before income taxes plus fixed charges by fixed charges. Fixed charges consist of interest, capitalized interest, dividends paid to QUIPS holders, amortization of QUIPS offering expenses and that portion of rent expenses deemed to be interest. 17 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations General The Company's principal activities are the provision of management services to the P&C Group Companies and the ownership and operation of the 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 SAP, which the Insurance Subsidiaries are required to use for regulatory reporting purposes. A description of the Company's major customer and related matters are discussed in Part I, Item 1, of this Report. On March 7, 2000, the Exchanges acquired Foremost. Foremost is a prominent writer of insurance on 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. The Company provides reinsurance coverage to the P&C Group Companies through its subsidiary, Farmers Re, which was formed and licensed to conduct business in December 1997. Effective April 1, 2001, the APD reinsurance agreement between Farmers Re and the P&C Group Companies which had been in force since January 1998 was cancelled and replaced with a similar APD reinsurance agreement supported by Farmers Re, Zurich affiliates and outside reinsurers. Under the new agreement, premiums ceded by the P&C Group Companies increased from $1.0 billion to $2.0 billion, with Farmers Re assuming 10%, or $200.0 million. The remaining $1.8 billion is ceded to the Zurich affiliates and outside reinsurance companies identified in the agreement. As a result of this new agreement, Farmers Re's premiums decreased from $1.0 billion for the year ended December 31, 2000 to $400.0 million for the year ended December 31, 2001. Additionally, on a monthly basis, premiums assumed by Farmers Re decreased from $83.3 million in 2000 to $16.7 million in 2001. Farmers Re continues to assume a quota share percentage of ultimate net losses sustained by the P&C Group Companies in their APD lines of business. This new agreement, which can be terminated by any of the parties, also provides for the P&C Group Companies to receive a ceding commission of 18% of premiums, versus 20% under the old agreement, with additional experience commissions that depend on loss experience. Similar to the old agreement, this experience commission arrangement limits Farmers Re's potential underwriting gain on the assumed business to 2.5% of premiums assumed. 18 Critical Accounting Policies The consolidated financial statements of the Company have been prepared in accordance with GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Company's critical accounting policies relate to revenue recognition, valuation of intangible assets, impairment of investments and the fair value of financial instruments. Revenue Recognition. Through its AIF relationships with the Exchanges, the Company provides management services to the non-claims side of the P&C Group Companies' business and receives management fees for the services rendered. The Company recognizes management fee revenue according to the revenue recognition criteria established by Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". The Company, through its AIF relationships with the Exchanges, is contractually permitted to receive a management fee based on the gross premiums earned by the P&C Group Companies. The range of fees has varied by line of business over time. During the past five years, aggregate management fees have averaged between 12% and 13% of gross premiums earned by the P&C Group Companies. In order to enable the P&C Group Companies to maintain appropriate capital and surplus while offering competitive insurance rates, each AIF has historically charged a lower management fee than the contractually permitted fee of 20% (25% in the case of the Fire Insurance Exchange). In order to ensure that its management fees remain competitive, the Company periodically reviews the fee it charges for the services it provides based on the level and cost of the services as well as market conditions. As the P&C Group Companies earn gross premiums ratably over the life of the underlying insurance policy, the Company receives and recognizes the corresponding management fee ratably over the life of the underlying policies for which it is providing services. The risk of uncollectable premiums is borne by the P&C Group Companies and collectability of the premiums does not affect the amount of revenues the Company recognizes in a given period. Intangible Assets. The Company's critical accounting policies related to the valuation of intangible assets include the AIF relationships, Goodwill, VOLBA and DAC. AIF. As AIF, the Company receives a substantial portion of its revenues and profits through the management services the Company provides to the P&C Group Companies. As a result, the Company's ongoing financial performance depends on the volume of business written by, and the efficiency and financial strength of, the P&C Group Companies. As a result, a portion of the purchase price ($1.7 billion) associated with B.A.T's acquisition of the Company in 1988 was assigned to these AIF relationships. As of December 31, 2001, the value so assigned is being amortized on a straight-line basis over forty years. The carrying amount of the AIF relationships is regularly reviewed for indications of impairment in value which in the view of management are other than temporary, including unexpected or adverse changes in the following: (1) the economic or competitive environments in which the Company operates, (2) profitability analyses and (3) cashflow analyses. As of December 31, 2001, management believes that the reported value related to the AIF relationships is recoverable. Goodwill. The excess of the purchase price over the fair value of the net assets ("Goodwill") of the Company at the date of the Company's acquisition by B.A.T ($2.4 billion) is being amortized on a straight-line basis over forty years as of December 31, 2001. The carrying amount of the Goodwill is regularly reviewed for indications of impairment in value which in the view of management are other than temporary, including unexpected or adverse changes in the following: (1) the economic or competitive environments in which the 19 Company operates, (2) profitability analyses and (3) cashflow analyses. As of December 31, 2001, management believes that the reported value is recoverable. VOLBA. At the date of B.A.T's acquisition of the Company, a portion of the purchase price ($662.8 million) was assigned to the VOLBA asset, which represented an actuarial determination of the expected profits from the life business in force at that time. The amount so assigned is being amortized over its actuarially determined useful life with the unamortized amount included in the "Deferred Policy Acquisition Costs and Value of Life Business Acquired" line in the accompanying consolidated balance sheets. DAC. The Company recognizes traditional life product premiums as revenues when they become due and future benefits and expenses are matched with such premiums so that the majority of profits are recognized over the premium-paying period of the policy. This matching of revenues and expenses is accomplished through the provision for future policy benefits and the amortization of DAC. DAC is amortized in relation to the present value of expected gross profit margins on the policies, after giving recognition to differences between actual and expected gross profit margins to date. In compliance with a SEC staff announcement, the Company has recorded certain entries to the DAC and VOLBA line of the consolidated balance sheet in connection with SFAS No. 115. The SEC requires that companies record entries to those assets and liabilities that would have been adjusted had the unrealized investment gains or losses from securities classified as available-for-sale actually been realized, with corresponding credits or charges reported directly to stockholders' equity. Accordingly, DAC and VOLBA are increased or decreased to reflect what would have been the impact on estimated future gross profits, had net unrealized gains or losses on securities been realized at the balance sheet date. Net unrealized gains or losses on securities, within stockholders' equity, also reflect this impact. Impairment of Investments. The Company regularly reviews its investment portfolio to determine whether declines in the value of investments are other than temporary as defined by SFAS No. 115. 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 this review, the Company determined that some of its investments had declines in value that were other than temporary as of December 31, 2001 due to unfavorable market and economic conditions. Accordingly, for the year ended December 31, 2001, the Company recorded $151.0 million of impairment losses on investments, primarily in the equity portfolios. This included $32.4 million of impairment losses related to Enron Corporation. Impairment losses were recorded for each reporting segment and, for the year ended December 31, 2001, amounted to $57.2 million, $11.0 million and $82.8 million for Farmers Management Services, Farmers Re and Farmers Life, respectively. For the year ended December 31, 2000, Farmers Life recorded $22.4 million of impairment losses on fixed income securities of Armstrong World Industries, Inc. and Owens Corning. Fair Value of Financial Instruments. The fair values of financial instruments have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, these estimates may not be indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts. 20 Commitments and Obligations As of December 31, 2001, the Company held the following commitments and obligations related to the QUIPS (see Note I) and long-term operating leases on equipment and buildings (see Note S):

~~December~~Commitments ~~31, ----------------------------- 2000 1999 ------------- ------------- Current assets, excluding Insurance Subsidiaries: Cash~~ and ~~cash~~Obligations ~~equivalents $ 132,245 $ 217,466 Marketable securities, at market value 10,386 66,558 Accrued interest 41,995 30,825 Accounts receivable, principally from the P&C Group 36,052 44,021 Note receivable~~ - ~~affiliate 207,000 200,000 Deferred taxes 40,609 36,895 Prepaid expenses and other 15,437 21,950~~ ------------- ------------- ~~Total current assets 483,724 617,715~~ ------------- ------------- ~~Investments, excluding Insurance Subsidiaries: Fixed maturities available~~-~~for~~-~~sale, at market value (cost: $292,039 and $516,001) 291,795 511,708 Mortgage loans on real estate 92 146 Common stocks available~~-~~for~~-~~sale,~~ atOperating ~~market~~Leases ~~value~~QUIPS ~~(cost:~~Total $282,224 and $299,251) 242,066 334,212 Certificates of contribution and surplus notes of the P&C Group 184,830 23,330 Real estate, at cost (net of accumulated depreciation: $26,179 and $23,505) 69,699 49,459 Other investments 3,341 840 ------------- -------~~------~~ ~~791,823 919,695~~ ------------- ------------- ~~Other assets, excluding Insurance Subsidiaries: Notes receivable~~ - ~~affiliates 345,000 1,107,000 Goodwill~~ (~~net~~Amounts ofin ~~accumulated amortization: $720,528 and $660,484~~thousands) ~~1,681,227~~2002 ~~1,741,271 Attorney-in-fact relationships (net of accumulated amortization:~~ $~~512,712~~ ~~and $469~~15,~~986)~~947 1,196,331 1,239,057 Securities lending collateral 0 4,150 Other assets 255,174 244,088 ------------- ------------- 3,477,732 4,335,566 ------------- ------------- Properties, plant and equipment, at cost: (net of accumulated depreciation: $~~391,360~~ ~~and $324~~42,~~902)~~070 ~~438,371 422,311 ------------- ------------- Investments of Insurance Subsidiaries: Fixed maturities available-for-sale, at market value (cost:~~ $~~4,349,824~~ ~~and $4~~58,~~514,104)~~017 ~~4,365,338~~2003 412,~~376,320~~222 ~~Mortgage loans on real estate 36~~42,~~984~~070 3554,~~834~~292 ~~Non-redeemable~~2004 ~~preferred stocks available-for-sale, at market value (cost: $~~11,~~128~~547 ~~and $1~~42,~~153)~~070 1153,~~500~~617 ~~1,158~~2005 ~~Common stocks available-for-sale~~5,270 ~~at market value (cost: $330~~42,~~785~~070 ~~and $188~~47,~~851)~~340 ~~293,407~~2006 ~~212,274 Certificates of contribution~~ and ~~surplus~~thereafter ~~notes~~467 ~~of the P&C Group 502~~1,~~500 119~~341,~~000~~400 ~~Policy loans 218~~1,~~162 201~~341,~~687~~867 Real estate, at cost (net of accumulated depreciation: $29,369 and $27,292) 89,426 66,672 Joint ventures, at equity 4,651 6,662 S&P 500 call options, at fair value (cost: $29,696 and $19,521) 26,271 32,718 Other investments 5,279 0 ------------- -------~~------~~ ~~5,553,518 5,052,325~~ ------------- -~~------------~~ ~~Other assets of Insurance Subsidiaries: Cash and cash equivalents 84,431 96,034 Marketable securities, at market value 9,997 0 Reinsurance premiums receivable~~ - P&C Group 111,874 86,245 Accrued investment income 69,922 61,040 Deferred policy acquisition costs and value of life business acquired 838,121 879,625 Securities lending collateral 436,744 303,379 Other assets 29,151 22,350 Assets held in Separate Account 8,423 0 ------------- ~~-------------~~$ 145,~~588,663~~453 ~~1,448,673 ------------- ------------- Total assets~~ $ 121,~~333~~509,~~831~~680 $ 121,~~796~~555,~~285~~133 ==================== ============== ~~The accompanying notes are an integral part of these financial statements.~~==============

Recent Pronouncements The following is a summary of recent FASB pronouncements. Please refer to Note A for further information related to these pronouncements. - 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. 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. 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 and intangible assets with indefinite useful lives will be tested for impairment at least annually and intangible assets with indefinite useful lives will be evaluated to determine whether an indefinite useful life is still supported. The Company has adopted the provisions of SFAS No. 142 effective January 1, 2002, as applicable to all goodwill and other intangibles recognized in its financial statements at that date. The Company is in the process of completing the transitional goodwill impairment test and has identified the AIF relationships as intangible assets with indefinite useful lives. The Company will perform impairment tests of goodwill and the AIF relationships using discounted future cashflows and, based on such tests, the Company does not expect any impairment of recorded goodwill or AIF relationships. Additionally, as SFAS No. 142 ceases amortization of goodwill and AIF relationships with indefinite useful lives, the Company expects that it 21 will no longer record $102.8 million of pretax annual amortization, $64.0 million net of tax, relating to such intangibles. - In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This Statement establishes the standard to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The provisions of this Statement are effective for fiscal years beginning after June 15, 2002, with early application encouraged. The Company does not expect the adoption of this Statement to have a material impact on its consolidated financial statements. - In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This Statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. 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 Company does not expect the adoption of this Statement to have a material impact on its consolidated financial statements. Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 Farmers Management Services Operating Revenues. Operating revenues, which primarily consist of management fees paid to Farmers Management Services as a percentage of gross premiums earned by the P&C Group Companies, increased $101.5 million, or 6.4%, to $1,690.3 million for the year ended December 31, 2001. This growth in operating revenues was primarily attributable to higher volumes of gross premiums earned by the P&C Group Companies, which increased $968.6 million, or 8.5%, to $12,363.0 million in 2001. The increase in gross premiums earned was driven primarily by continued growth in all lines of business, which benefited from a rising premium rate environment. Also contributing to the increase in operating revenues was the fact that revenues earned in connection with the provision of management services on the business the P&C Group Companies assumed from Foremost increased $12.0 million due to the fact that the Foremost acquisition was not completed until March 2000. Total Expenses. Total expenses as a percentage of operating revenues decreased from 56.1% in 2000 to 55.5% in 2001, a decrease of 0.6 percentage points. Salaries and Employee Benefits. Salaries and employee benefits increased from $406.3 million in 2000 to $417.4 million in 2001, a change of $11.1 million, or 2.7%, due to higher expenses incurred as a result of increased levels of business activity between years and an increase in employee pension and postretirement expenses. For additional information regarding the Company's pension plans, please see Note R. Buildings and Equipment Expenses. Buildings and equipment expenses decreased from $104.0 million in 2000 to $102.8 million in 2001, a decrease of $1.2 million, or 1.2%, due to savings generated by renegotiated lease contracts. This decrease was largely offset by an increase in expenses incurred in connection with providing management services to the business assumed from Foremost. Amortization of AIF Relationships and Goodwill. Purchase accounting entries related to the acquisition of the Company by B.A.T in December 1988 include both goodwill (capitalized at $2.4 billion) and the value of the AIF relationships (capitalized at $1.7 billion). Through December 31, 2001, the amortization of these two items was taken on a straight- line basis over forty years and reduced pretax income by $102.8 million for each of the years ended December 31, 2001 and 2000. 22 General and Administrative Expenses. General and administrative expenses increased from $278.0 million in 2000 to $314.5 million in 2001, an increase of $36.5 million, or 13.1%. This increase was primarily due to increased levels of business activity between years, an increase in expenses incurred in connection with providing management services to the business assumed from Foremost as well as 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 $127.1 million in 2000 to $80.5 million in 2001, a decrease of $46.6 million, or 36.7%. This decrease was due mainly to a decrease in the average invested asset base resulting from the liquidation of a sizable portion of the fixed income portfolio, which was used to help fund the payment of the $1,075.0 million special dividend paid in October 2000, and lower investment yields. Investment income earned from related parties is disclosed in Notes G and L of this Report Net Realized Gains. Net realized gains decreased from $68.5 million in 2000 to $15.2 million in 2001, a decrease of $53.3 million, or 77.8%. This decrease was due primarily to unfavorable market conditions experienced in 2001 as well as a loss of investment flexibility that resulted from the $1,075.0 million special dividend paid in October 2000. Impairment Losses on Investments. Impairment losses on investments were $57.2 million for the year ended December 31, 2001. Dividends on Preferred Securities of Subsidiary Trusts. Dividend expense related to the $500.0 million of QUIPS issued in 1995 was $42.1 million in each of the years ended December 31, 2001 and 2000. Provision for Income Taxes. Provision for income taxes decreased from $348.1 million in 2000 to $310.5 million in 2001, a decrease of $37.6 million, or 10.8%, as a result of a decrease in pretax income between years. Farmers Management Services. As a result of the foregoing, Farmers Management Services income decreased from $503.1 million for the year ended December 31, 2000 to $438.7 million for the year ended December 31, 2001, a decrease of $64.4 million, or 12.8%. Insurance Subsidiaries Farmers Re As a result of the new quota share reinsurance agreement which became effective April 1, 2001, Farmers Re's assumed premiums decreased from $1,000.0 million for the year ended December 31, 2000 to $400.0 million for the year ended December 31, 2001, a decrease of $600.0 million, or 60.0%. Losses and loss adjustment expenses incurred were $282.0 million in 2001 and $686.9 million in 2000 and non-life reinsurance commissions paid were $108.0 million in 2001 and $288.1 million in 2000. Income before taxes decreased from $77.3 million in 2000 to $36.0 million in 2001, a decrease of $41.3 million, or 53.4%. This decrease was due primarily to the decrease in underwriting gains between years resulting from the new reinsurance agreement, a $20.9 million decrease in realized gains due to unfavorable market conditions experienced during 2001 and the $11.0 million of impairment losses on investments recorded in 2001. Farmers Re's contribution to net income was $25.1 million and $52.6 million in 2001 and 2000, respectively. Farmers Life Total Revenues. Total revenues decreased from $805.0 million in 2000 to $783.7 million in 2001, a decrease of $21.3 million, or 2.6%. 23 Life and Annuity Premiums. Life and annuity premiums increased $46.8 million, or 20.5%, between years. This increase was due to a 19.4% growth in the volume of traditional life insurance in-force, as well as a 113.2% increase in structured settlements with life contingencies premiums issued in 2001. Life Policy Charges. Life policy charges increased $3.8 million in 2001, or 1.8%, over 2000, reflecting a 1.4% growth in universal life-type insurance in-force. Net Investment Income. Net investment income increased $9.4 million, or 2.9%, over 2000 due primarily to an increase in average invested assets. Net Realized Gains. Net realized gains decreased $21.0 million, or 33.7%, from $62.3 million to $41.3 million in 2001 due primarily to unfavorable market conditions experienced in 2001. Impairment Losses on Investments. Impairment losses on investments increased $60.4 million, or 270.0%, from $22.4 million to $82.8 million in 2001. Total Operating Expenses. Total operating expenses increased from $545.0 million in 2000 to $610.8 million in 2001, an increase of $65.8 million, or 12.1%. Life Policyholders' Benefits and Charges. Life policyholders' benefits expense and charges increased from $381.0 million in 2000 to $459.2 million in 2001, an increase of $78.2 million, or 20.5%. Policy Benefits. Policy benefits, which consist primarily of death and surrender benefits on life products, increased $23.3 million over 2000 to $165.1 million, due to a 9.3% growth in the volume of life insurance in-force in 2001. Increase in Liability for Future Benefits. Increase in liability for future benefits expense increased from $76.3 million in 2000 to $115.3 million in 2001. This increase was primarily attributable to a 113.2% 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 $162.9 million in 2000 to $178.8 million in 2001, or 9.8%, reflecting growth in the universal life, structured settlements with life contingencies and fixed annuity fund balances. General Operating Expenses. General operating expenses decreased from $164.0 million in 2000 to $151.6 million in 2001, a decrease of $12.4 million, or 7.6%. Amortization of DAC and VOLBA. Amortization expense decreased from $108.8 million in 2000 to $97.4 million in 2001, due to differences in the mix of business and favorable persistency on the Farmers Flexible Universal Life ("FFUL") product line. Life Net Commissions. Life net commissions expense decreased $4.8 million from $3.9 million in 2000 to ($0.9) million in 2001, due to a 48.4% growth in reinsurance activity. General and Administrative Expenses. General and administrative expenses increased $3.8 million, from $51.3 million in 2000 to $55.1 million in 2001. This increase was due primarily to business growth. 24 Provision for Income Taxes. Provision for income taxes decreased from $90.4 million in 2000 to $56.7 million in 2001 due mainly to a decrease in pretax income between years. Farmers Life Income. As a result of the foregoing, Farmers Life income decreased from $169.6 million in 2000 to $116.2 million in 2001, a decrease of $53.4 million, or 31.5%. Consolidated Net Income Consolidated net income of the Company decreased from $725.3 million in 2000 to $580.0 million in 2001, a decrease of $145.3 million, or 20.0%. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Farmers Management Services Operating Revenues. Operating revenues increased from $1,489.7 million in 1999, to a record level of $1,588.8 million in 2000, an increase of $99.1 million, or 6.7%. This growth was primarily attributable to higher volumes of gross premiums earned by the P&C Group Companies, which increased $589.5 million, or 5.5%, to $11,394.4 million in 2000. The increase in gross premiums earned was driven primarily by $390.3 million of premiums earned as a result of the acquisition of Foremost. Growth in Commercial and Fire management fees also contributed to the increase in management fees between years. Total Expenses. Salaries and Employee Benefits. Salaries and employee benefits increased from $373.2 million in 1999 to $406.3 million in 2000, an increase of $33.1 million, or 8.9%. This increase was due to $35.9 million of expenses incurred in connection with providing management services to the business assumed from Foremost. Buildings and Equipment Expenses. Buildings and equipment expenses increased from $91.5 million in 1999 to $104.0 million in 2000, an increase of $12.5 million, or 13.7%, due primarily to expenses incurred in connection with providing management services to the business assumed from Foremost. Amortization of AIF Relationships and Goodwill. The amortization of these two items reduced pretax income by $102.8 million for each of the years ended December 31, 2000 and 1999. General and Administrative Expenses. General and administrative expenses increased from $266.3 million in 1999 to $278.0 million in 2000, an increase of $11.7 million, or 4.4%. This increase was a result of expenses incurred in connection with providing management services to the business assumed from Foremost. Partially offsetting this increase in expense between years was $3.7 million of Year 2000 Project related expenses incurred in 1999. No similar expenses were incurred in 2000. Merger Related Expenses. Expenses incurred by the Company as a result of the merger between B.A.T's financial services businesses and ZIC amounted to $0.2 million in 1999. Net Investment Income. Net investment income increased from $117.5 million in 1999 to $127.1 million in 2000, an increase of $9.6 million, or 8.2%, due to higher investment yields. Investment income earned from related parties is disclosed in Notes G and L of this Report. Net Realized Gains. Net realized gains decreased from $75.3 million in 1999 to $68.5 million in 2000, a decrease of $6.8 million, or 9.0%. This decrease was due primarily to losses incurred on sales of bonds in the third 25 quarter of 2000 as a result of the liquidation of a sizable portion of the fixed income portfolio, which was used to help fund the payment of the $1,075.0 million special dividend associated with the Zurich capital structure unification in October 2000. Dividends on Preferred Securities of Subsidiary Trusts. Dividend expense was $42.1 million in each of the years ended December 31, 1999 and 2000. Provision for Income Taxes. Provision for income taxes increased from $325.3 million in 1999 to $348.1 million in 2000, an increase of $22.8 million, or 7.0%, as a result of an increase in pretax income between years. Farmers Management Services. As a result of the foregoing, Farmers Management Services income increased from $481.1 million for the year ended December 31, 1999 to $503.1 million for the year ended December 31, 2000, an increase of $22.0 million, or 4.6%. Insurance Subsidiaries Farmers Re Under the quota share reinsurance treaty in effect as of December 31, 2000, Farmers Re assumed $1,000.0 million of premiums in each of the years ended 2000 and 1999. Losses and loss adjustment expenses incurred under this treaty were $686.9 million in 2000 and $661.3 million in 1999 and non- life reinsurance commissions paid were $288.1 million in 2000 and $313.7 million in 1999. Income before taxes increased from $53.3 million in 1999 to $77.3 million in 2000, an increase of $24.0 million, or 45.0%. This increase was due primarily to increased realized capital gains and investment income. Farmers Re's contribution to net income was $52.6 million and $37.7 million in 2000 and 1999, respectively. Farmers Life Total Revenues. Total revenues increased from $752.2 million in 1999 to $805.0 million in 2000, an increase of $52.8 million, or 7.0%. Life and Annuity Premiums. Life and annuity premiums increased $19.0 million, or 9.1%, between years. This growth in premiums was due to an increase in the volume of traditional policies in-force as well as an increase in the number of structured settlements with life contingencies issued in 2000. Life Policy Charges. Life policy charges increased $3.9 million in 2000, or 1.8%, over 1999, reflecting growth in universal life-type insurance in-force. Net Investment Income. Net investment income increased $14.3 million, or 4.7%, over 1999 due primarily to an increase in average invested assets. Net Realized Gains. Net realized gains increased $38.0 million, or 157.0%, from $24.2 million in 1999 to $62.2 million in 2000 due primarily to an increase in gains realized on stock sales. Impairment Losses on Investments. Impairment losses on investments were $22.4 million in 2000. Total Operating Expenses. Total operating expenses increased from $508.0 million in 1999 to $545.0 million in 2000, an increase of $37.0 million, or 7.3%. Life Policyholders' Benefits and Charges. Life policyholders' benefits expense and charges increased from $347.8 million in 1999 to $381.0 million in 2000, an increase of $33.2 million, or 9.5%. 26 Policy Benefits. Policy benefits increased $4.0 million over 1999 to $141.8 million due to higher mortality experience in the FFUL product line as well as growth in the volume of policies in-force in 2000. Increase in Liability for Future Benefits. Increase in liability for future benefits expense increased from $52.2 million in 1999 to $76.3 million in 2000. This increase was primarily attributable to higher sales volumes related to structured settlements and growth in the volume of traditional life insurance in-force in 2000. Interest Credited to Policyholders. Interest credited to policyholders increased from $157.8 million in 1999 to $162.9 million in 2000 or 3.2%, reflecting growth in the universal life fund balance. General Operating Expenses. General operating expenses increased from $160.2 million in 1999 to $164.0 million in 2000, an increase of $3.8 million, or 2.4%. Amortization of DAC and VOLBA. Amortization expense increased from $102.6 million in 1999 to $108.8 million in 2000 due to differences in the mix of business. Life Net Commissions. Life net commissions expense decreased from $13.5 million in 1999 to $3.9 million in 2000 due to higher reinsurance activity. General and Administrative Expenses. General and administrative expenses increased $7.2 million, from $44.1 million in 1999 to $51.3 million in 2000. This increase was due primarily to expenses incurred in 2000 related to entering the variable market as well as expanding the number of states in which Farmers Life is licensed. Provision for Income Taxes. Provision for income taxes increased from $86.0 million in 1999 to $90.4 million in 2000 due to higher pretax operating income. Farmers Life Income. As a result of the foregoing, Farmers Life income increased from $158.2 million in 1999 to $169.6 million in 2000, an increase of $11.4 million, or 7.2%. Consolidated Net Income Consolidated net income of the Company increased from $677.0 million in 1999 to $725.3 million in 2000, an increase of $48.3 million, or 7.1%. Liquidity and Capital Resources General. The principal uses of funds by the Company are (i) operating expenses, (ii) dividends to the shareholders of the Company's QUIPS, (iii) capital expenditures and (iv) dividends to its stockholders. In 2001, dividends paid on QUIPS totaled $42.1 million, capital expenditures totaled $128.0 million and cash dividends paid to stockholders totaled $461.7 million. The principal sources of funds available to the Company are (i) the management fees that it receives for providing management services to the P&C Group Companies, (ii) investment income and (iii) dividends from its subsidiaries. A portion of the net income of the Insurance Subsidiaries is available for payment as a dividend to Farmers Management Services. In January 2001, Farmers Life paid a $112.0 million dividend to Farmers Management Services. There are certain statutory limitations on the distribution of surplus. As of December 31, 2001, an aggregate of $213.0 million was available for distribution as a dividend without the approval of the state insurance departments in which the Insurance Subsidiaries are domiciled. Additionally, as of December 31, 2001, 27 the Company had available revolving credit facilities enabling it to borrow up to $500.0 million in the event such a need should arise (see Note V). In order to maintain the policyholders' surplus of the P&C Group Companies, the Company has, from time to time, made surplus contributions to the P&C Group Companies, receiving certificates of contribution or surplus notes which bear interest at various rates. As of December 31, 2001, the Company held $949.8 million of certificates of contribution and an $87.5 million surplus note of the P&C Group Companies (see Note H). The Company is under no obligation to make these contributions to the P&C Group Companies. However, the Company believes that these purchases of certificates of contribution and surplus notes have helped to support the historical growth in premiums earned by the P&C Group Companies and the related growth in management fees paid to the Company. As of December 31, 2001, the P&C Group Companies had total assets of $14.9 billion, surplus as regards policyholders of $3.5 billion, policies-in-force of 17.4 million and for the year ended December 31, 2001, had gross premiums earned of $12.4 billion. Net cash provided by operating activities decreased from $1,062.1 million in 2000 to $987.4 million in 2001, a decrease of $74.7 million, or 7.0%. This decrease was primarily driven by the changes in assets and liabilities held by Farmers Re, which resulted from Farmers Re's reduced retention under the new APD reinsurance agreement. Although net income declined $145.3 million between years, this was primarily a result of a $128.5 million increase in impairment losses, which had no effect on cash. Net cash used in investing activities increased $790.1 million between years to $337.9 million in 2001. This decrease in cash was mainly the result of the partial liquidation of the Farmers Management Services investment portfolio in 2000 due to the $1,075.0 million special dividend paid in October 2000. Net cash used in financing activities decreased from $1,611.1 million in 2000 to $468.8 million in 2001, resulting in an increase in cash of $1,142.3 million. This increase in cash was substantially due to a $1,096.1 million decrease in dividends paid to the Company's stockholders resulting mainly from the payment of the $1,075.0 million special dividend associated with the Zurich capital structure unification in October 2000. Farmers Life. The principal uses of funds by Farmers Life are (i) policy benefits and claims, (ii) loans to policyholders, (iii) capital expenditures, (iv) life commissions, (v) operating expenses and (vi) stockholder's dividends. The principal sources of funds available to Farmers Life are premiums and amounts earned from the investment of premiums and deposits. These sources of funds have historically satisfied the liquidity needs of Farmers Life. Farmers Re. The principal uses of funds by Farmers Re are (i) the payment of non-life losses and loss adjustment expenses, (ii) the payment of reinsurance commissions and (iii) operating expenses. The principal sources of funds available to Farmers Re are premiums assumed from the P&C Group Companies and investment income. ITEM 7a. Quantitative and Qualitative Disclosures about Market Risks The information required is presented under the caption "Risk Management" in Exhibit No. 99 of this Report. 28 ITEM 8. Financial Statements and Supplementary Data Index for Financial Statements and Quarterly Financial Data

~~December~~Page ~~31,~~ ----~~-------------------------~~ ~~2000~~Report ~~1999~~of ~~-------------~~Independent ~~-------------~~Accountants ~~Current~~(For ~~liabilities,~~the ~~excluding~~year ~~Insurance~~ended ~~Subsidiaries:~~December ~~Notes and accounts payable: P&C Group $ 481 $ 303 Other 53~~31,~~375~~ ~~55,730~~2001) ~~Accrued~~29 ~~liabilities:~~Independent ~~Profit~~Auditors' ~~sharing~~Report ~~58,242~~(For ~~51,621~~the ~~Income~~years ~~taxes~~ended ~~115,223~~December 7731,~~173~~ ~~Other~~2000 ~~9,715~~and ~~10,109~~1999) ~~-------------~~30 ~~-------------~~Consolidated ~~Total~~Financial ~~current~~Statements ~~liabilities~~of ~~237,036~~Farmers ~~194~~Group,~~936~~ ~~-------------~~Inc. ~~-------------~~and ~~Other liabilities, excluding Insurance~~ Subsidiaries: ~~Real~~Consolidated ~~estate~~Balance ~~mortgages~~Sheets ~~payable~~as 16of 21December ~~Non-current deferred taxes 551~~31,~~097~~ ~~579,902~~2001 ~~Securities~~and ~~lending~~2000 ~~liability~~31 0Consolidated ~~4,150~~Statements ~~Other 120,405 136,487 ------------- ------------- 671,518 720,560 ------------- ------------- Liabilities~~ of ~~Insurance~~Income ~~Subsidiaries:~~for ~~Policy~~the ~~liabilities:~~years ~~Future~~ended ~~policy~~December ~~benefits 3~~31,~~574,594~~ 32001,~~412,452~~ ~~Claims~~2000 ~~32,509~~and ~~28,396~~1999 ~~Policyholder~~33 ~~dividends~~Consolidated 3Statements 1of ~~Other~~Comprehensive ~~policyholders~~Income ~~funds 141,544 83,478 Death benefits payable 42,011 45,423 Provision~~ for ~~non-life~~the ~~losses~~years ~~and~~ended ~~loss~~December ~~adjustment expenses 89~~31,~~936~~ ~~106~~2001,~~444~~ ~~Income~~2000 ~~taxes (including deferred taxes: $97,267~~ and ~~$88,723)~~1999 ~~121,499 98,880 Unearned investment income 903 936 Reinsurance payable - P&C Group 185,742 166,716 Securities lending liability 436,744 303,379 Other liabilities~~ 34~~,983~~ ~~35,445~~Consolidated ~~Liabilities~~Statements related to Separate Account 8,423 0 ------------- ------------- 4,668,891 4,281,550 ------------- ------------- Total liabilities 5,577,445 5,197,046 ------------- ------------- Commitments and contingencies Company obligated mandatorily redeemable preferred securities of ~~subsidiary trusts holding solely junior subordinated debentures 500,000 500,000 ------------- -------------~~ Stockholders' Equity: ~~Class~~for Athe ~~common~~years ~~stock,~~ended ~~$1 par value per share; authorized, issued and outstanding: as of~~ December 31, 2001, 2000 and ~~December 31,~~ 1999 -35 ~~500~~Consolidated ~~shares~~Statements ~~0.5~~of ~~0.5~~Cash ~~Class~~Flows Bfor ~~common~~the ~~stock,~~years $1ended ~~par value per share; authorized, issued and outstanding: as of~~ December 31, 2001, 2000 and ~~December 31,~~ 1999 -36 ~~500~~Notes ~~shares~~to ~~0.5~~Consolidated ~~0.5~~Financial ~~Additional~~Statements ~~capital~~37 ~~5,212,618~~Quarterly ~~5,212,618~~Financial ~~Accumulated~~Data ~~other comprehensive loss~~ (~~net of deferred taxes: ($23,946~~Unaudited) and ($18,307)) (44,471) (33,999) Retained earnings 1,088,238 1,920,619 ------------- ------------- Total stockholders' equity 6,256,386 7,099,239 ------------- ------------- Total liabilities and stockholders' equity $ 12,333,831 $ 12,796,285 ============= ============= The accompanying notes are an integral part of these financial statements.72

29 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Farmers Group, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(2) on page 81 present fairly, in all material respects, the financial position of Farmers Group, Inc. and subsidiaries (the "Company") at December 31, 2001, and the results of their operations and their cash flows for the year ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules for the year ended December 31, 2001 listed in the index appearing under Item 14(a)(2) on page 81 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Los Angeles, California February 4, 2002 30 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Farmers Group, Inc. We have audited the accompanying consolidated balance sheet of Farmers Group, Inc. and subsidiaries (the "Company") as of December 31, 2000 and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the two years in the period then ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2000, and the results of its operations and its cash flows for each of the two years in the period then ended in conformity with accounting principles generally accepted in the United States of America. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial statement schedules for each of the two years in the period ended December 31, 2000 listed in the Table of Contents at Item 14 are presented for the purpose of additional analysis and are not a required part of the basic financial statements. These schedules are the responsibility of the Company's management. Such schedules have been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, are fairly stated in all material respects when considered in relation to the basic financial statements as a whole. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Los Angeles, California February 12, 2001 31 FARMERS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except per share data) ASSETS

~~Year ended~~ December 31, -----------------------------~~--------~~ 2001 2000 ~~1999 1998~~ ----------- -- --------- ----~~-------~~ ~~Consolidated~~Current ~~operating~~assets, ~~revenues~~Farmers Management Services: Cash and cash equivalents $ 3225,~~446,482~~008 $ 3132,~~270~~245 Marketable securities,~~400~~ at market value (cost: $0 3and $10,~~031~~386) 0 10,~~191~~386 ~~===========~~Accrued ~~===========~~interest ~~===========~~7,058 ~~Management~~41,995 ~~services~~Accounts toreceivable, ~~property~~principally ~~and~~from ~~casualty~~the ~~insurance~~P&C ~~companies;~~Group ~~and~~Companies ~~other:~~51,429 ~~Operating~~36,052 ~~revenues~~Notes $receivable 1- affiliate 95,~~588~~000 207,~~797~~000 $Deferred 1taxes 43,~~489~~165 40,~~683~~609 $Prepaid 1expenses and other 27,~~358~~396 15,~~175~~437 ------------- ------------- Total current assets 449,056 483,724 ------------- ~~Salaries~~------------- ~~and~~Investments, ~~employee~~Farmers ~~benefits~~Management ~~406,278~~Services: ~~373,116~~Fixed ~~328~~maturities available-for-sale,~~611~~ ~~Buildings~~at market value (cost: $81,530 and ~~equipment~~$292,039) ~~expenses~~82,856 ~~103~~291,~~995~~795 91Mortgage loans on real estate,~~507~~ ~~145~~at amortized cost 33 92 Common stocks available-for-sale,~~461~~ ~~Amortization~~at ofmarket ~~AIF~~value ~~relationships~~(cost: $184,243 and ~~goodwill 102~~$282,~~770~~224) ~~102~~167,~~770~~637 ~~102~~242,~~770~~066 ~~General~~Certificates of contribution and ~~administrative~~surplus ~~expenses~~notes ~~278~~of the P&C Group Companies 546,~~072~~830 ~~266~~184,~~302~~830 ~~204~~Real estate,~~101~~ ~~-----------~~at ~~-----------~~cost ~~-----------~~(net ~~Total~~of ~~operating~~accumulated ~~expenses~~depreciation: ~~891~~$46,~~115~~148 ~~833~~and $26,~~695~~179) ~~780~~98,~~943~~374 ~~Merger~~69,699 ~~related~~Other ~~expenses~~investments 050,000 ~~244 21~~3,~~056~~341 ----------- -- --------- ----~~-------~~ ~~Total expenses 891~~945,~~115~~730 ~~833~~791,~~939~~823 ~~801,999~~ ----------- -- --------- ----~~-------~~ ~~Operating~~Other ~~income 697~~assets,~~682~~ ~~655,744~~Farmers ~~556,176~~Management ~~Net~~Services: ~~investment~~Notes ~~income~~receivable ~~127,116~~- ~~117~~affiliates 250,~~490~~000 ~~135~~345,~~062~~000 ~~Net~~Goodwill ~~realized~~(net ~~gains~~of 68accumulated amortization: $780,~~481~~572 75and $720,~~238~~528) 621,~~428~~621,183 ~~Dividends~~1,681,227 onAttorney-in-fact ~~preferred~~relationships ~~securities~~(net of ~~subsidiary~~accumulated ~~trusts~~amortization: ~~(42~~$555,~~070)~~438 ~~(42~~and $512,~~070~~712) ~~(42~~1,~~070)~~153,605 1,196,331 Other assets 250,640 255,174 ----------- -- --------- ----~~-------~~ ~~Income before provision for taxes 851~~3,~~209 806~~275,~~402~~428 ~~711~~3,~~596 Provision for income taxes 348~~477,~~134~~732 ~~325,323 290,752~~ ----------- -- --------- ----~~-------~~ ~~Management~~Properties, ~~services~~plant ~~income~~and ~~503~~equipment,~~075~~ ~~481~~at cost (net of accumulated depreciation: $431,~~079~~556 ~~420~~and $391,~~844~~360) 436,010 438,371 ----------- -- --------- ----~~-------~~ Investments of Insurance Subsidiaries: ~~Life~~Fixed maturities available-for-sale, at market value (cost: $4,564,103 and ~~annuity~~$4,349,824) ~~premiums~~4,668,755 ~~228~~4,~~700~~365,338 ~~209~~Mortgage loans on real estate 28,~~719~~901 ~~173~~36,~~936~~984 Non-~~life~~redeemable ~~reinsurance~~preferred ~~premiums~~stocks 1available-for-sale,~~000~~ at market value (cost: $11,~~000~~123 1and $11,~~000~~128) 12,~~000~~245 111,~~000~~500 Common stocks available-for-sale,~~104~~ ~~Life~~at ~~policy~~market ~~charges~~value ~~214~~(cost: $353,~~504~~748 ~~210~~and $330,~~639~~785) ~~206~~339,~~393~~684 ~~Net~~293,407 ~~investment~~Certificates ~~income~~of ~~353~~contribution and surplus notes of the P&C Group Companies 490,~~349~~500 ~~335~~502,~~565~~500 ~~307~~Policy loans 232,~~391~~287 ~~Net~~218,162 ~~realized~~Real ~~gains/~~estate, at cost (~~losses~~net of accumulated depreciation: $25,217 and $29,369) 6180,~~132~~814 2489,~~794~~426 Joint ventures, at equity 3,625 4,651 S&P 500 call options, at fair value (14cost: $36,~~808~~453 and $29,696) 12,690 26,271 Other investments 12,435 5,279 ----------- -- --------- ----~~-------~~ ~~Total revenues 1~~5,~~857~~881,~~685~~936 15,~~780~~553,~~717~~518 ~~1,673,016~~ ----------- -- --------- ----~~-------~~ ~~Non-life~~Other ~~losses~~assets ~~and~~of ~~loss~~Insurance ~~adjustment~~Subsidiaries: ~~expenses~~Cash ~~686,874~~and ~~661,260~~cash ~~655,125~~equivalents ~~Life policy benefits 141~~172,~~759~~394 ~~137~~84,~~798~~431 ~~133~~Marketable securities,~~984~~ ~~Increase~~at inmarket ~~liability~~value ~~for~~(cost: ~~future~~$30,303 ~~life~~and ~~policy~~$9,997) ~~benefits 76~~30,~~327~~342 529,~~200~~997 23Accounts receivable,~~711~~ ~~Interest~~from ~~credited~~the toP&C ~~life~~Group ~~policyholders~~Companies ~~162~~119,~~888~~000 ~~157,831~~0 ~~150,618~~Life ~~Amortization~~reinsurance ofreceivable ~~deferred~~65,240 ~~policy~~39,063 ~~acquisition~~Reinsurance ~~costs~~premiums ~~and~~receivable, ~~value~~from ofthe ~~life~~P&C ~~business~~Group ~~acquired~~Companies ~~108,757~~0 ~~102~~111,~~581~~874 ~~90,082~~Funds ~~Life~~held ~~net~~by ~~commissions~~or ~~3,881~~deposited ~~13,520~~with reinsured companies 18,~~972~~905 ~~Non-life~~0 ~~reinsurance~~Accrued ~~commissions~~investment ~~288,126~~income ~~313~~65,~~749~~925 ~~319~~69,~~875~~922 ~~General~~Income ~~and~~taxes ~~administrative~~5,718 ~~expenses~~0 ~~51,739~~Deferred ~~44,280~~policy ~~41,683~~acquisition ~~-----------~~costs ~~-----------~~and ~~-----------~~value ~~Total~~of ~~operating~~life ~~expenses~~business ~~1,520,351~~acquired 1835,~~483,219~~779 1838,~~434,050~~121 ~~-----------~~Securities ~~-----------~~lending ~~-----------~~collateral ~~Income~~45,494 ~~before~~436,744 ~~provision~~Other ~~for~~assets ~~taxes 337~~23,~~334~~110 ~~297~~23,~~498~~279 ~~238,966~~Assets ~~Provision~~held ~~for~~in ~~income~~Separate ~~taxes~~Account ~~115~~53,~~090~~074 ~~101~~8,~~604~~423 ~~82,970~~ ----------- -- --------- ----~~-------~~ ~~Insurance Subsidiaries income 222~~1,~~244 195~~434,~~894~~981 ~~155~~1,~~996~~621,854 ----------- -- --------- ----~~-------~~ ~~Consolidated~~Total ~~net~~assets ~~income~~ $ ~~725~~12,~~319 $ 676~~423,~~973~~141 $ ~~576~~12,~~840~~367,022 =========== == ========= ====~~=======~~ The accompanying notes are an integral part of these financial statements.

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

~~Year ended~~ December 31, ----------------------------- 2001 2000 ------------- ~~2000~~------------- ~~1999~~Current ~~1998~~liabilities, Farmers Management Services: Notes and accounts payable: P&C Group Companies $ 0 $ 481 Other 45,643 53,375 Accrued liabilities: Profit sharing 53,232 58,242 Income taxes 128,588 115,223 Other 8,501 9,715 ------------- ------------- Total current liabilities 235,964 237,036 ------------- ~~Consolidated~~------------- ~~net~~Other ~~income~~liabilities, $Farmers ~~725,319~~Management $Services: ~~676~~Real estate mortgages payable 12 16 Non-current deferred taxes 512,~~973~~376 $551,097 ~~576~~Other 106,~~840~~788 120,405 ------------- ------------- 619,176 671,518 ------------- ~~Other~~------------- ~~comprehensive~~Liabilities ~~income/(loss),~~of ~~net~~Insurance ofSubsidiaries: ~~tax~~Policy liabilities: ~~Unrealized~~Future ~~holding~~policy ~~gains/(losses)~~benefits on3,858,012 ~~securities:~~3,598,381 ~~Unrealized~~Claims ~~holding~~38,076 ~~gains/(losses)~~32,509 ~~arising~~Policyholders ~~during~~dividends ~~the~~12 ~~year~~3 Other policyholders funds 264,446 ~~net~~141,544 ofDeath ~~tax~~benefits ofpayable ~~$16~~60,~~791~~980 42,011 Provision for non-life losses and loss adjustment expenses 18,922 89,936 Income taxes (including deferred taxes: $~~100~~109,~~634)~~594 and $2697,~~193~~267) 31109,~~184~~594 ~~(186~~121,~~967)~~499 48Unearned investment income 867 903 Accounts payable,~~738~~ ~~Less:~~to ~~reclassification~~the ~~adjustment~~P&C ~~for~~Group ~~gains~~Companies ~~included~~107,000 in0 ~~net~~Reinsurance ~~income~~payable, ~~net~~to ofthe ~~tax~~P&C ofGroup ~~($8~~Companies 0 185,~~423)~~742 Securities lending liability 45,494 ~~($23~~436,~~851)~~744 ~~and~~Other ~~($7,105)~~liabilities ~~(15~~44,~~643)~~045 (44,~~296)~~387 ~~(13~~Liabilities related to Separate Account 53,~~195)~~074 8,423 ------------- ------------- 4,600,522 4,702,082 ------------- ~~Net~~------------- ~~unrealized~~Total ~~holding~~liabilities ~~gains/(losses)~~5,455,662 ~~on securities~~5,610,636 ~~net~~------------- of------------- ~~tax~~Commitments and contingencies Company obligated mandatorily redeemable preferred securities of $8subsidiary trusts holding solely junior subordinated debentures 500,~~368~~000 500,000 (------------- ------------- Stockholders' Equity: Class A common stock, $~~124~~1 par value per share; authorized,~~485),~~ issued and ~~$19,088~~outstanding: 15as of December 31,~~541~~ ~~(231~~2001 - 450 shares,~~263)~~ 35as of December 31,~~543~~ ~~Change~~2000 in- ~~effect~~500 ofshares ~~unrealized~~0.45 ~~gains/(losses)~~0.50 onClass ~~other~~B ~~insurance~~common ~~accounts~~stock, ~~net~~$1 ofpar ~~tax~~value per share; authorized, issued and outstanding: as of ~~($13~~December 31,~~311),$28,332~~ 2001 and (December 31, 2000 - 500 shares 0.50 0.50 Class C common stock, $1 par value per share; authorized,~~949)~~ ~~(24~~issued and outstanding: as of December 31,~~720)~~ 522001 - 50 shares 0.05 0.00 Additional capital 5,~~616~~227,049 (35,~~619)~~212,618 ~~Minimum~~Accumulated ~~pension~~other ~~liability~~comprehensive ~~adjustment,~~income/(loss) (net of ~~tax~~deferred oftaxes: ($~~696)~~18,231 ~~($51)~~and ($~~435~~23,946)) (133,~~293)~~857 (9444,471) ~~(731)~~Retained earnings 1,206,572 1,088,238 ----------- -- --------- ----~~-------~~ ~~Other~~Total ~~comprehensive~~stockholders' ~~income/(loss)~~equity ~~(10~~6,~~472) (178~~467,~~741)~~479 316,~~193~~256,386 ----------- -- --------- ----~~-------~~ ~~Comprehensive~~Total ~~income~~liabilities $and ~~714,847~~stockholders' equity $ ~~498~~12,~~232~~423,141 $ ~~608~~12,~~033~~367,022 =========== == ========= ====~~=======~~ The accompanying notes are an integral part of these financial statements.

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

~~Accumulated~~Year ~~Other~~ended ~~Total~~December ~~Common~~31, ~~Additional Comprehensive Retained Stockholders' Stock Capital Income/(Loss) Earnings Equity~~ -------- ----------- --------------- --- 2001 2000 1999 ----------- ----------- ----------- ~~Balance,~~Consolidated ~~December~~operating ~~31,~~revenues ~~1997~~ $ ~~1 $ 5~~2,~~212~~900,~~618~~238 $ ~~113~~3,~~549 $ 1~~446,~~455,406~~482 $ 63,~~781~~270,~~574~~400 ~~Net~~=========== ~~income,~~=========== ~~1998~~=========== ~~576,840~~Farmers ~~576,840~~Management ~~Unrealized~~Services: ~~holding~~Operating ~~gains~~revenues ~~arising~~$ ~~during~~1,690,334 ~~the~~$ ~~year~~1,588,797 ~~net of tax of~~ $~~26,193~~ 481,~~738 48~~489,~~738~~683 ~~Reclassification~~----------- ~~adjustment~~----------- ~~for~~----------- ~~gains~~Salaries ~~included~~and inemployee ~~net~~benefits ~~income~~417,389 ~~net~~406,278 of373,116 ~~tax~~Buildings ofand ~~($7~~equipment expenses 102,~~105)~~794 ~~(13~~103,~~195)~~995 ~~(13~~91,~~195)~~507 ~~Change~~Amortization ~~in effect~~ of ~~unrealized~~AIF ~~losses~~relationships onand ~~other~~goodwill ~~insurance~~102,770 ~~accounts~~102,770 ~~net~~102,770 ofGeneral ~~tax~~and ofadministrative ~~($1~~expenses 314,~~949)~~547 (3278,~~619)~~072 (3266,~~619)~~302 ~~Minimum~~----------- ~~pension~~----------- ~~liability~~----------- ~~adjustment,~~Total ~~net~~operating ofexpenses ~~tax~~937,500 of891,115 ~~($435)~~833,695 ~~(731)~~Merger ~~(731)~~related ~~Cash~~expenses ~~dividends~~0 ~~paid~~0 ~~(355,200)~~244 ~~(355,200)~~ ----------- ----------- ----------- Total expenses 937,500 891,115 833,939 -- --------- --- -------- ----------- ~~Balance~~Operating income 752,834 ~~December~~697,682 31655,744 ~~1998~~Net 1investment ~~5,212,618~~income ~~144~~80,~~742~~481 1127,~~677,046~~116 7117,~~034,407~~490 Net ~~income,~~realized ~~1999~~gains ~~676~~15,~~973~~164 ~~676~~68,~~973~~481 ~~Unrealized~~75,238 ~~holding~~Impairment losses ~~arising~~on ~~during~~investments ~~the year~~(57,151) ~~net~~0 of0 ~~tax~~Dividends on preferred securities of subsidiary trusts (~~$100~~42,~~634~~070) (~~186~~42,~~967~~070) (~~186~~42,~~967~~070) ~~Reclassification~~----------- ~~adjustment~~----------- ----------- Income before provision for ~~gains~~taxes ~~included~~749,258 in851,209 ~~net~~806,402 Provision for income taxes 310,535 ~~net~~348,134 of325,323 ~~tax~~----------- of----------- ~~($23~~----------- Farmers Management Services net income 438,~~851)~~723 ~~(44~~503,~~296)~~075 ~~(44~~481,~~296)~~079 ~~Change~~----------- in----------- ~~effect~~----------- ofInsurance ~~unrealized~~Subsidiaries: ~~gains~~Life onand ~~other~~annuity ~~insurance~~premiums ~~accounts~~275,509 ~~net~~228,700 of209,719 ~~tax~~Non-life ofreinsurance ~~$28~~premiums 400,~~332~~000 521,~~616~~000,000 521,~~616~~000,000 ~~Minimum~~Life ~~pension~~policy ~~liability~~charges ~~adjustment~~218,258 ~~net~~214,504 of210,639 ~~tax~~Net ofinvestment ~~($51)~~income ~~(94)~~368,232 ~~(94)~~353,349 ~~Cash~~335,565 ~~dividends~~Net ~~paid~~realized gains 41,732 83,561 24,794 Impairment losses on investments (~~433~~93,~~400~~827) (~~433~~22,~~400~~429) 0 ----------- ----------- ----------- Total revenues 1,209,904 1,857,685 1,780,717 -- --------- ----------- ----------- Non-life ~~Balance,~~losses ~~December~~and ~~31,~~loss ~~1999~~adjustment 1expenses 5281,~~212,618~~996 ~~(33~~686,~~999)~~874 1661,~~920,619~~260 ~~7,099,239~~Life ~~Net~~policy ~~income~~benefits 165,076 ~~2000 725~~141,~~319~~759 ~~725~~137,~~319~~798 ~~Unrealized~~Increase ~~holding~~in ~~gains~~liability ~~arising~~for ~~during~~future ~~the~~life ~~year,~~policy ~~net~~benefits ~~of tax of $16~~115,~~791~~324 3176,~~184~~327 3152,~~184~~200 ~~Reclassification~~Interest ~~adjustment~~credited ~~for~~to ~~gains~~life ~~included~~policyholders in178,821 ~~net~~162,888 ~~income~~157,831 ~~net~~Amortization of ~~tax~~deferred ofpolicy ~~($8,423)~~acquisition ~~(15,643)~~costs ~~(15,643)~~and ~~Change~~value ~~in effect~~ of ~~unrealized~~life ~~losses~~business onacquired ~~other~~97,408 ~~insurance~~108,757 ~~accounts~~102,581 Life net ofcommissions ~~tax of~~ (~~$13,311~~963) ~~(24~~3,~~720)~~881 ~~(24~~13,~~720)~~520 ~~Minimum~~Non-life ~~pension~~reinsurance ~~liability~~commissions ~~adjustment~~108,004 ~~net~~288,126 of313,749 ~~tax~~General ofand ~~($696)~~administrative (1expenses 55,~~293)~~297 (151,~~293)~~739 ~~Cash~~44,280 ~~dividends~~----------- ~~paid~~----------- (----------- Total operating expenses 1,~~557~~000,~~700)~~963 (1,~~557~~520,~~700)~~351 1,483,219 ----------- ----------- ----------- Income before provision for taxes 208,941 337,334 297,498 Provision for income taxes 67,680 115,090 101,604 -- --------- ----------- ----------- ~~Balance~~Insurance Subsidiaries net income 141,261 ~~December~~222,244 31195,894 ~~2000~~----------- $----------- 1----------- $Consolidated ~~5,212,618~~net income $ ~~(44~~579,~~471)~~984 $ 1725,~~088,238~~319 $ 6676,~~256,386~~973 ======== ===~~========~~ ============= ============ ~~===========~~ The accompanying notes are an integral part of these financial statements.

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

Year ended December 31, ------------------------------------- 2001 2000 1999 ~~1998~~ ----------- ----------- ----------- ~~Cash Flows from Operating Activities:~~ Consolidated net income $ 579,984 $ 725,319 $ 676,973 ~~$ 576,840 Non~~-cash and operating activities adjustments: Depreciation and amortization 205,098 161,535 180,089 Amortization of deferred policy acquisition costs and value of life business acquired 108,757 102,581 90,082 Policy acquisition costs deferred (105,283) (99,568) (98,615) Life insurance policy liabilities 138,861 81,262 25,085 Provision for non-life losses and loss adjustment expenses (16,508) 500 105,944 Universal life type contracts: Deposits received 302,774 302,423 299,007 Withdrawals (263,643) (253,228) (241,765) Interest credited 76,006 71,386 67,585 Equity in earnings of joint ventures 1,326 (8,888) (4,275) Gain on sales of assets (130,578) (100,649) (48,154) Changes in assets and liabilities: Current assets and liabilities 38,690 14,053 110,354 Non-~~current assets and liabilities (67,095) (39,424) 63,351 Other, net 24,630 17,312 (33,345)~~ ---------- ---------- -~~---------~~ ~~Net cash provided by operating activities 1,038,354 926,268 1,092,183~~ ---------- -~~---------~~ ~~----------~~Other ~~Cash~~comprehensive ~~Flows from Investing Activities: Purchases of investments available-for-sale~~ income/(~~1,712,785~~loss) (2,~~175,297)~~ ~~(1,869,877)~~net ~~Purchases~~ of ~~properties~~tax: ~~(140,478)~~Unrealized ~~(59,309)~~holding gains/(~~37,806~~losses) ~~Purchase~~on ofsecurities: ~~notes~~Unrealized ~~receivable~~holding ~~- affiliates 0~~ gains/(~~440,000~~losses) ~~(1,057,000)~~arising ~~Purchase~~during ~~of surplus notes of~~ the ~~P&C Group (175~~year,~~000)~~ 0net ~~(119,000) Purchase~~ of ~~certificates~~tax of ~~contribution of the P&C Group (~~$18,370,~~000)~~ 0$50,275 ~~0 Proceeds from sales~~ and ~~maturities of investments available-for-sale 2~~($89,~~107,901~~850) 134,~~873,122~~116 193,~~032,173~~368 ~~Proceeds from sales of properties 12~~(166,~~442~~941) ~~38,240~~Less: ~~27,329~~reclassification ~~Proceeds~~adjustment ~~from~~for ~~redemption~~(gains)/losses ofincluded ~~certificates~~in ofnet ~~contribution of the P&C Group 0 11~~income,~~050~~ ~~650,000~~net ~~Proceeds~~of ~~from~~tax ~~redemption~~ of ~~notes receivable - affiliates 755~~$31,~~000 190~~736,~~000~~ ~~407,000 Mortgage loan collections 4,854 18,471 36,883 Increase in policy loans~~ (16$41,~~475~~907) ~~(16,476)~~and (19$34,~~317~~635) ~~Other~~58,939 ~~net~~ (1377,~~257~~827) (164,~~420~~322) ~~(1,481)~~ ----------- ----------- ----------- Net ~~cash~~unrealized ~~provided~~holding bygains/(~~used in~~losses) ~~investing~~on ~~activities~~securities, ~~452~~net of tax of $50,~~202~~106, $8,368 and (~~561~~$124,~~619~~485) 93,055 15,541 (~~951~~231,~~096~~263) ~~----------~~Change ~~----------~~in ~~----------~~effect ~~Cash~~of ~~Flows~~unrealized ~~from~~gains/(losses) ~~Financing~~on ~~Activities:~~other ~~Dividends~~insurance ~~paid~~accounts, tonet ~~stockholders~~of ~~(1,557,700)~~tax of (~~433~~$6,~~400~~570), (~~355~~$13,~~200~~311) ~~Annuity~~and ~~contracts: Deposits received 163~~$28,~~111~~332 ~~157,468 144,793 Withdrawals~~ (~~255~~12,~~615~~202) (~~194~~24,~~187~~720) ~~(202~~52,~~244)~~616 ~~Interest~~Minimum ~~credited~~pension ~~62,828~~liability 91adjustment,~~422~~ ~~82,930~~net ~~Payment~~ of ~~long-term~~tax ~~notes~~of ~~payable~~ (4$1,359), (4$696) and (67$51) ~~---------- ---------- ---------- Net cash used in financing activities~~ (12,~~587,380~~525) (~~378~~1,~~701~~293) (~~329,788~~94) ----------- ----------- ----------- ~~Decrease~~Other incomprehensive ~~cash and cash equivalents~~ income/(~~96,824~~loss) 78,328 (1410,~~052~~472) (~~188~~178,~~701~~741) ~~Cash and cash equivalents~~ - ~~at beginning of year 313,500 327,552 516,253~~ ---------- ----------- ---------- ~~Cash and cash equivalents~~ - atComprehensive ~~end~~income ~~of year~~ $ ~~216~~658,~~676~~312 $ ~~313~~714,~~500~~847 $ ~~327~~498,~~552~~232 =========== =========== =========== The accompanying notes are an integral part of these financial statements.

35 FARMERS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 31, 2001, 2000 and 1999 (Amounts in thousands)

~~2000~~Accumulated ~~1999~~Other Total Common Additional Comprehensive Retained Stockholders' Stock Capital Income/(Loss) Earnings Equity -------- ----------- --------------- ------------ ------------ Balance, December 31, 1998 $ 1 $ 5,212,618 $ 144,742 $ 1,677,046 $ 7,034,407 Net income, 1999 676,973 676,973 Unrealized holding losses arising during the year, net of tax of (~~Amounts~~$89,850) (166,941) (166,941) Reclassification adjustment for gains included in ~~thousands~~net income, net of tax of ($34,635) ~~Buildings~~(64,322) ~~and~~(64,322) ~~improvements~~Change in effect of unrealized gains on other insurance accounts, net of tax of $28,332 ~~213~~52,~~025~~616 52,616 Minimum pension liability adjustment, net of tax of ($51) ~~210~~(94) (94) Cash dividends paid (433,~~823~~400) ~~Data~~(433,400) ~~processing~~-------- ~~equipment~~----------- ~~and~~------------- ~~software~~------------ ~~377~~------------ Balance,~~905~~ ~~347~~December 31,~~021~~ ~~Furniture~~1999 ~~and~~1 ~~equipment~~5,212,618 ~~173~~(33,~~676~~999) ~~124~~1,~~142~~920,619 7,099,239 Net income, 2000 725,319 725,319 Unrealized holding gains arising during the year, net of tax of $50,275 93,368 93,368 Reclassification adjustment for gains included in net income, net of tax of ($41,907) (77,827) (77,827) Change in effect of unrealized losses on other insurance accounts, net of tax of ($13,311) (24,720) (24,720) Minimum pension liability adjustment, net of tax of ($696) (1,293) (1,293) Cash dividends paid (1,557,700) (1,557,700) -------- ----------- ------------- ~~764~~------------ ----------- Balance,~~606~~ ~~681~~December 31,~~986~~ ~~Land~~2000 651 5,~~125~~212,618 65(44,~~227~~471) 1,088,238 6,256,386 Net income, 2001 579,984 579,984 Contribution from parent 14,431 14,431 Unrealized holding gains arising during the year, net of tax of $18,370 34,116 34,116 Reclassification adjustment for losses included in net income, net of tax of $31,736 58,939 58,939 Change in effect of unrealized losses on other insurance accounts, net of tax of ($6,570) (12,202) (12,202) Minimum pension liability adjustment, net of tax of ($1,359) (2,525) (2,525) Cash dividends paid (461,650) (461,650) -------- ----------- ------------- ------------ ----------- Balance, December 31, 2001 $ ~~829~~1 $ 5,~~731~~227,049 $ ~~747~~33,~~213~~857 $ 1,206,572 $ 6,467,479 ======== =========== ============= ============ =========== The accompanying notes are an integral part of these financial statements.

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

Year ended December 31, ------------------------------------ 2001 2000 1999 ~~1998~~ ---------- ---------- ---------- ~~(Amounts~~Cash inFlows ~~thousands)~~from ~~Related~~Operating ~~parties~~Activities: ~~B.A.T~~Consolidated ~~Capital~~net ~~Corporation~~income ~~notes~~ $ 0579,984 $ 0725,319 $ 14676,~~672~~973 ~~UKISA~~Non-cash ~~notes~~and 45operating activities adjustments: Depreciation and amortization 174,~~425~~954 59205,~~434~~098 19161,~~481~~535 ~~Centre~~Amortization ~~Reinsurance~~of ~~Holdings~~deferred policy acquisition costs and value of life business acquired 97,408 108,757 102,581 Policy acquisition costs deferred (~~Delaware~~113,838) II(105,283) ~~Ltd.~~(99,568) ~~note~~Life 0insurance 7policy liabilities 274,~~805~~606 0138,861 ~~OSDH~~81,262 ~~note~~Provision for non-life losses and loss adjustment expenses (~~see~~71,014) ~~Note~~(16,508) F500 Interest credited on universal life and annuity contracts 144,737 138,834 162,808 Equity in earnings of joint ventures 1,008 1,326 (8,888) 18Gain on sales of assets (60,~~750~~280) ~~781~~(153,007) (100,649) Impairment losses on investments 150,978 22,429 0 Changes in assets and liabilities: Current assets and liabilities (6,895) 38,690 14,053 Non-current assets and liabilities (146,056) (67,095) (39,424) Other, net (38,225) 24,630 17,312 ---------- ---------- ---------- ~~Total~~Net ~~related~~cash ~~parties~~provided 64by operating activities 987,~~175~~367 681,~~020~~062,051 34968,~~153~~495 ---------- ---------- ---------- ~~Non-related~~Cash ~~parties~~Flows from Investing Activities: ~~Interest~~Purchases ~~income~~of investments available-for-sale (2,619,610) (1,712,785) (2,175,297) Purchases of properties (114,566) (140,478) (59,309) Purchase of other investments (50,000) 0 0 Purchase of notes receivable - affiliates 0 0 (440,000) Purchase of surplus notes of the P&C Group Companies 0 (175,000) 0 Purchases of certificates of contribution of the P&C Group Companies (556,500) (370,000) 0 Proceeds from sales and maturities of investments available-for-sale 2,561,285 2,107,901 1,873,122 Proceeds from sales of properties 31,154 12,442 38,240 Proceeds from redemption of certificates of contribution of the P&C Group Companies 0 0 11,050 Proceeds from redemptions of surplus notes of the P&C Group 17Companies 206,~~893~~500 20 0 Proceeds from redemptions of notes receivable - affiliates 207,~~123~~000 33755,~~417~~000 ~~Interest~~190,000 ~~income-~~Mortgage ~~fixed~~loan ~~income~~collections ~~securities~~8,143 244,~~363~~854 3918,~~030~~471 50Increase in policy loans (14,~~373~~125) ~~Dividend~~(16,475) ~~income~~(16,476) 4Other,~~944~~ 6net 2,~~503~~839 7(13,~~825~~257) ~~Interest~~(1,420) ~~income~~---------- ---------- ---------- Net cash ~~equivalents~~provided by/(used in) investing activities (337,880) 452,202 (561,619) ---------- ---------- ---------- Cash Flows from Financing Activities: Dividends paid to stockholders (461,650) (1,557,700) (433,400) Deposits received from universal life and ~~marketable~~annuity ~~securities~~contracts 12656,938 465,885 459,891 Withdrawals from universal life and annuity contracts (664,045) (519,258) (447,415) ~~617~~Payment of long-term notes payable (4~~,205~~) ~~Other~~(4) *(4) 3---------- ---------- ---------- Net cash used in financing activities (468,~~326~~761) (1,~~197~~611,077) 5(420,~~089~~928) ---------- ---------- ---------- ~~Total~~Increase/(decrease) ~~non~~in cash and cash equivalents 180,726 (96,824) (14,052) Cash and cash equivalents -~~related~~ ~~parties~~at 62beginning of year 216,~~941~~676 49313,~~470~~500 ~~100~~327,~~909~~552 ---------- ---------- ---------- ~~Total~~Cash ~~investment~~and ~~income~~cash byequivalents ~~component~~- at end of year $ ~~127~~397,~~116~~402 $ ~~117~~216,~~490~~676 $ ~~135~~313,~~062~~500 ========== ========== ========== The accompanying notes are an integral part of these financial statements.

37 FARMERS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. Basis of presentation and summary of significant accounting policies The accompanying consolidated financial statements of Farmers Group, Inc. ("FGI") and its subsidiaries (together "the Company"; references to attorney-in-fact ("AIF"), as applicable in context, are to FGI, dba Farmers Underwriters Association, attorney-in-fact of Farmers Insurance Exchange; or Fire Underwriters Association, attorney-in-fact of Fire Insurance Exchange; or Truck Underwriters Association, attorney-in-fact of Truck Insurance Exchange) have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). 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. In December 1988, B.A.T Industries p.l.c. ("B.A.T") acquired 100% ownership of the Company for $5,212,619,000 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. The Company is AIF for three inter-insurance exchanges: Farmers Insurance Exchange, Fire Insurance Exchange and Truck Insurance Exchange (collectively the "Exchanges"), which operate in the property and casualty insurance industry. 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 each Exchange appoints the Company as the exclusive AIF to provide management services to each Exchange. For such services, the Company earns management fees based on a percentage of gross premiums earned by the Exchanges, their respective subsidiaries, Farmers Texas County Mutual Insurance Company, Foremost County Mutual Insurance Company and Foremost Lloyds of Texas (collectively the "P&C Group Companies"). Each AIF also receives a management fee based on reinsurance premiums earned by the Exchanges on business of the P&C Group Companies insured by the Exchanges. The P&C Group Companies are owned by the respective policyholders of the Exchanges, Farmers Texas County Mutual Insurance Company and Foremost County Mutual Insurance Company as well as the underwriters of Foremost Lloyds of Texas. Accordingly, the Company has no ownership interest in the P&C Group Companies. Management services generate a substantial portion of the Company's revenue and profits and, as a result, the Company's ongoing financial performance depends on the volume of business written by, and the efficiency and financial strength of, the P&C Group Companies. A portion of the purchase price ($1,709,043,000) associated with B.A.T's acquisition of the Company was assigned to these AIF relationships. As of December 31, 2001, the value so assigned is being amortized on a straight-line basis over forty years. The carrying amount of the AIF relationships is regularly reviewed for indications of impairment in value which in the view of management are other than temporary, including unexpected or adverse changes in the following: (1) the economic or competitive environments in which the Company operates, (2) profitability analyses and (3) cashflow analyses. As of December 31, 2001, management believes that the reported value related to the AIF relationships is recoverable. The excess of the purchase price over the fair value of the net assets ("Goodwill") of the Company at the date of the Company's acquisition by B.A.T ($2,401,755,000) is being amortized on a straight-line basis over forty 38 years as of December 31, 2001. The carrying amount of the Goodwill is regularly reviewed for indications of impairment in value which in the view of management are other than temporary, including unexpected or adverse changes in the following: (1) the economic or competitive environments in which the Company operates, (2) profitability analyses and (3) cashflow analyses. As of December 31, 2001, management believes that the reported value is recoverable. At the date of the Company's acquisition by B.A.T, the Company's life insurance operations were conducted by three wholly owned subsidiaries, Farmers New World Life Insurance Company ("Farmers Life"), The Ohio State Life Insurance Company ("OSL") and Investors Guaranty Life Insurance Company ("IGL"). A portion of the purchase price ($662,778,000) was assigned to the "Value of Life Business Acquired" ("VOLBA"), which represented an actuarial determination of the expected profits from the business in force at the date of B.A.T's acquisition of the Company. The amount so assigned is being amortized over its actuarially determined useful life with the unamortized amount included in the "Deferred Policy Acquisition Costs and Value of Life Business Acquired" line in the accompanying consolidated balance sheets. As part of the Company's strategic plan to focus its life insurance efforts on Farmers Life, the Company sold OSL and IGL to Great Southern Life Insurance Company, a subsidiary of Americo Life, Inc. in April 1997. 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. The products and services offered by Farmers Life are sold directly by the P&C Group Companies' agents. Farmers Re is a wholly owned subsidiary of FGI. On January 1, 1998, Farmers Re entered into an auto physical damage ("APD") reinsurance agreement with the P&C Group Companies. Effective April 1, 2001, this APD reinsurance agreement was cancelled and replaced with a similar APD reinsurance agreement supported by Farmers Re, Zurich affiliates and outside re-insurers. Under the new agreement, annual premiums ceded by the P&C Group Companies increased from $1,000,000,000 to $2,000,000,000 with Farmers Re assuming 10%, or $200,000,000. The remaining $1,800,000,000 is ceded to the Zurich affiliates and outside reinsurance companies identified in the agreement. As a result of the new agreement, Farmers Re's premiums decreased from $1,000,000,000 for the year ended December 31, 2000 to $400,000,000 for the year ended December 31, 2001. Additionally, on a monthly basis, premiums assumed decreased from $83,333,000 in 2000 to $16,667,000 in 2001. This new agreement, which can be terminated by any of the parties, also provides for the P&C Group Companies to receive a ceding commission of 18% of premiums, versus 20% under the old agreement, with additional experience commissions that depend on loss experience. Similar to the old agreement, this experience commission arrangement limits Farmers Re's potential underwriting gain on the assumed business to 2.5% of premiums assumed. References to the "Insurance Subsidiaries" within the consolidated financial statements are to Farmers Life and Farmers Re. References to "Farmers Management Services" are to the Company excluding the Insurance Subsidiaries. In September 1998, the financial businesses of B.A.T, which included the Company, were merged with Zurich Insurance Company ("ZIC"). The businesses of ZIC and the financial services businesses of B.A.T were transferred to Zurich Group Holding ("ZGH"), formerly known as Zurich Financial Services, a Swiss holding company with headquarters in Zurich, Switzerland. This merger was accounted for by ZGH as a pooling of interests under International Accounting Standards. As a result of a unification of the holding structure of the Zurich Financial Services Group in October 2000, Zurich Financial Services was renamed Zurich Group Holding, as noted above, and a new group holding company, Zurich Financial Services, was formed. As such, references to "Zurich" are to the group holding company, Zurich Financial Services. 39 The Company's properties are depreciated over the following estimated useful lives: Buildings and improvements 10 to 45 years Furniture and equipment 5 to 10 years Data processing equipment and software 5 to 10 years Depreciation is calculated for financial statement purposes by the straight-line method. Repairs and maintenance are charged to operations; significant renewals and betterments are capitalized. 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 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 annually for impairment using a two-step process. The first step is to identify a potential impairment and, in transition, this step must be measured as of the beginning of the 40 fiscal year. The second step of the goodwill impairment test measures the amount of impairment loss (measured as of the beginning of the year of adoption), if any, and must be completed by the end of the year of initial adoption. Additionally, intangible assets with indefinite useful lives will be evaluated each reporting period to determine whether an indefinite useful life is still supported. Further, such assets will be tested for impairment using a one-step process which compares the fair value to the carrying amount of the asset as of the beginning of the fiscal year. 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". 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 has adopted the provisions of SFAS No. 142 effective January 1, 2002, as applicable to all goodwill and other intangibles recognized in its financial statements at that date. The Company is in the process of completing the transitional goodwill impairment test and has identified the AIF relationships as intangible assets with indefinite useful lives. The Company will perform impairment tests of goodwill and the AIF relationships using discounted future cashflows and, based on such tests, the Company does not expect any impairment of recorded goodwill or AIF relationships. Additionally, as SFAS No. 142 ceases amortization of goodwill and AIF relationships with indefinite useful lives, the Company expects that it will no longer record $102,770,000 of pretax annual amortization, $64,026,000, net of tax, relating to such intangibles. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This Statement establishes the standard to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. It also applies to legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal operation of a long-lived asset, except for certain obligations of lessees. This Statement amends SFAS No. 19, "Financial Accounting and Reporting by Oil and Gas Producing Companies". The provisions of this Statement are effective for fiscal years beginning after June 15, 2002, with early application encouraged. The Company does not expect the adoption of this Statement to have a material impact on its consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". This Statement addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. This Statement supersedes SFAS No. 121, "Accounting for the Impairment of 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 (rather than a segment of a business) of an entity that either has been disposed of or is classified as held for sale. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, 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. B. Capital structure As of December 31, 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 41 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 ("Allied Zurich"), 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 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 set apart for payment by the Company on its common shares (including the Class C 42 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. Management fees The Company, through its AIF relationships with the Exchanges, provides management services to the non-claims side of the P&C Group Companies and receives management fees for the services rendered. As a result, the Company received management fees from the P&C Group Companies of $1,582,200,000, $1,492,217,000 and $1,402,107,000 in 2001, 2000 and 1999, respectively. D. Life insurance accounting Traditional product premiums are recognized as revenues when they become due and future benefits and expenses are matched with such premiums so that the majority of profits are recognized over the premium-paying period of the policy. This matching of revenues and expenses is accomplished through the provision for future policy benefits and the amortization of deferred policy acquisition costs ("DAC"). Certain policy acquisition costs, principally first-year commissions and other expenses for policy underwriting and issuance (which are primarily related to and vary with the production of new business), are deferred and amortized proportionately over the estimated period during which the related premiums will be recognized as income, based on the same assumptions that are used for computing the liabilities for future policy benefits. Liabilities for future policy benefits are computed principally by means of a net level premium method reflecting estimated future investment yields, mortality, morbidity and withdrawals. Interest rate assumptions range from 2.25% to 8.50%, depending on the year of policy issue. Mortality is calculated principally on select and ultimate tables in common usage in the industry, modified for actual experience, and withdrawals are estimated based primarily on experience. Revenues associated with universal life products as well as structured settlements involving life contingencies consist of policy charges for the cost of insurance, policy administration fees, surrender charges and investment income on assets allocated to support policyholder account balances. Revenues for deferred annuity products consist of surrender charges and investment income on assets allocated to support policyholder account balances. Expenses include interest credited to policyholder account balances and benefit claims incurred in excess of policyholder account balances. Revenues and expenses related to structured settlements not involving life contingencies are recorded consistent with guidelines for investment contracts, which are not subject to mortality risks. Liabilities for future policy benefits on universal life and deferred annuity products are determined under the retrospective deposit method. DAC is amortized in relation to the present value of expected gross profit margins on the policies, after giving recognition to differences between actual and expected gross profit margins to date. In compliance with a Securities and Exchange Commission ("SEC") staff announcement, the Company has recorded certain entries to the DAC and VOLBA line of the consolidated balance sheet in connection with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". The SEC requires that companies record entries to those assets and liabilities that would have been adjusted had the unrealized investment gains or losses from securities classified as available- for-sale actually been realized, with corresponding credits or charges reported directly to stockholders' equity. Accordingly, DAC and VOLBA are increased or decreased to reflect what would have been the impact on estimated future gross profits, had net unrealized gains or losses on securities been realized at the balance sheet date. Net unrealized gains or losses on securities, within stockholders' equity, also reflect this impact. These entries decreased the DAC and VOLBA assets by $24,869,000 and $6,097,000 as of December 31, 2001 and 2000, respectively. 43 In 2000, Farmers Life introduced variable universal life and deferred variable annuity contracts. Revenues and expenses for variable universal life annuities are recognized in a manner similar to universal life products. Recognition of revenues and expenses for deferred variable annuities is consistent with that of deferred annuity products. However, unlike other Farmers Life products, assets and liabilities for both variable universal life and deferred variable annuity contracts are legally segregated from the general assets of the Company and are reported on the Separate Accounts lines on the Company's consolidated balance sheets. E. Non-life reinsurance Farmers Re, a wholly owned subsidiary of the Company, reinsures a percentage of the APD business written by the P&C Group Companies. Effective April 1, 2001, the APD reinsurance agreement between Farmers Re and the P&C Group Companies which had been in force since January 1998 was cancelled and replaced with a similar APD reinsurance agreement supported by Farmers Re, Zurich affiliates and outside re-insurers. Under the new agreement, annual premiums ceded by the P&C Group Companies increased from $1,000,000,000 to $2,000,000,000, with Farmers Re assuming 10%, or $200,000,000. The remaining $1,800,000,000 is ceded to the Zurich affiliates and outside reinsurance companies identified in the agreement. As a result of this new agreement, Farmers Re's premiums decreased from $1,000,000,000 for the year ended December 31, 2000 to $400,000,000 for the year ended December 31, 2001. On a monthly basis, premiums assumed by Farmers Re decreased from $83,333,000 in 2000 to $16,667,000 in 2001. Farmers Re continues to assume a quota share percentage of ultimate net losses sustained by the P&C Group Companies in their APD lines of business. This new agreement, which can be terminated by any of the parties, also provides for the P&C Group Companies to receive a ceding commission of 18% of premiums, versus 20% under the old agreement, with additional experience commissions that depend on loss experience. Similar to the old agreement, this experience commission arrangement limits Farmers Re's potential underwriting gain on the assumed business to 2.5% of premiums assumed. On March 31, 2001, Farmers Re and the P&C Group Companies 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 Companies $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 Companies 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 Companies $100,797,000 of losses and loss adjustment expenses and $1,036,000 of accrued interest in settlement of this commutation. In March 2000, Farmers Re and the P&C Group Companies commuted $106,444,000 of losses and loss adjustment expenses associated with the 1999 accident year. As a result, in May 2000, Farmers Re paid the P&C Group Companies $106,444,000 of losses and loss adjustment expenses and $8,966,000 of accrued interest in settlement of this commutation. Total losses paid by Farmers Re were $260,174,000, $590,214,000 and $547,827,000 in 2001, 2000 and 1999, respectively, while total loss adjustment expenses were $2,900,000, $6,725,000 and $6,980,000 in 2001, 2000 and 1999, respectively. Additionally, reinsurance commissions were $108,004,000 in 2001, $288,126,000 in 2000 and $313,749,000 in 1999. Farmers Re had loss reserves of $18,922,000 and $89,936,000 as of December 31, 2001 and 2000, respectively. The decreases between 2001 and 2000 results were due to Farmers Re's reduced retention under the new APD reinsurance agreement. All reinsurance receivables and payables were settled as of December 31, 2001. 44 F. Property, plant and equipment A schedule of the Company's operating properties, plant and equipment at cost as of December 31 follows:

2001 2000 ~~1999 1998~~ ---------- -~~---------~~ ----------- (Amounts in thousands) ~~Fixed~~Buildings ~~income~~and ~~securities~~improvements $ ~~306~~181,~~999~~640 $ ~~308~~213,~~303~~025 $Data ~~279,157~~processing ~~Equity~~equipment ~~securities 3,406 1,786 249 Mortgage loans 3,892 5,060 8,789 Owned real estate 12,058 9,414 9,907 Policy loans 15,881 14,436 12,993 Cash equivalents~~ and ~~marketable~~software ~~securities 5~~443,~~506~~637 5377,~~387~~905 ~~7,302~~Furniture ~~Certificates of contribution~~ and ~~surplus~~equipment ~~notes of the P&C Group 27~~189,~~533~~664 7173,~~259~~676 ~~2,279~~----------- ~~Investment expenses (23,151) (21,758) (13,658) Other 1,225 5,678 373~~ ----------- 814,941 764,606 Land 52,625 65,125 ----------- ----------- ~~Total investment income by component~~ $ ~~353~~867,~~349~~566 $ ~~335~~829,~~565~~731 ~~$ 307,391~~ ========== =~~=========~~ ===========

The Company follows the provisions of Statement of Position No. 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use". The Company expenses costs incurred in the preliminary project stage and, thereafter, capitalizes costs incurred in developing or obtaining internal use software. Certain costs, such as maintenance and training, are expensed as incurred. Capitalized costs are amortized on a straight-line basis over the useful life of the software once it is placed into service. As of December 31, 1999, the Company was committed to a plan to sell one of its business service centers at a market price which was $1,789,000 lower than the carrying value of the property. In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", the Company recognized an impairment loss of $1,789,000 which was reflected on the "General and administrative expenses" line in the Farmers Management Services section of the Company's consolidated income statement for the year ended December 31, 1999. This business service center was subsequently sold on July 20, 2001. G. Related parties As of December 31, 2001 and 2000, all of the members of the Company's Board of Directors were employees of the Company as a result of a restructuring of the Company's Board of Directors in April 2000. Prior to April 2000, certain directors of the Company were partners in legal firms that received fees for legal services from the Company and the P&C Group Companies. As such, for the year ended December 31, 1999, these fees totaled $8,492,000. As of December 31, 2001, the Company held the following notes receivable from related parties: - 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. Income earned on this note totaled $18,750,000 for each of the years ended December 31, 2001 and 2000 and $781,000 for the year ended December 31, 1999. - $95,000,000 of notes receivable from Zurich Financial Services (UKISA) Limited ("UKISA"), a subsidiary of Zurich. The Company 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 Companies 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 45 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 December 31, 2001, the Company held $95,000,000 of notes receivable from UKISA each with a maturity date of September 2002. The $95,000,000 of 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 years ended December 31, 2001, 2000 and 1999, income earned totaled $14,589,000, $45,425,000 and $59,434,000, respectively. H. Certificates of contribution and surplus notes of the P&C Group Companies From time to time, the Company has purchased certificates of contribution or surplus notes of the P&C Group Companies in order to maintain the policyholders' surplus of the P&C Group Companies. In September 2001, the Company redeemed one-half of the $175,000,000 surplus notes of the P&C Group Companies, which were obtained in March 2000 as a result of the assignment of the matured surplus notes of the P&C Group Companies from Eagle Star (see Note G). In addition, effective December 2001, Farmers Life redeemed a $119,000,000 surplus note of the P&C Group Companies bearing interest at 6.10% annually and maturing in October 2001. This redemption was settled in January 2002 and, as such, Farmers Life held a $119,000,000 receivable from the P&C Group Companies as of December 31, 2001. Finally, effective November 2001 and December 2001, the Company purchased $350,000,000 and $206,500,000, respectively, of certificates of contribution of the P&C Group Companies, which mature in September 2006. Of the $206,500,000 of certificates of contribution of the P&C Group Companies purchased in December 2001, $107,000,000 was purchased by Farmers Life and was settled in January 2002. As a result, Farmers Life held a $107,000,000 payable to the P&C Group Companies as of December 31, 2001. At December 31, 2001, the Company held the following certificates of contribution and surplus note of the P&C Group Companies: - An $87,500,000 surplus note, issued in March 2000, bearing interest at 8.50% annually and maturing in February 2005. - $370,000,000 of certificates of contribution, issued in March 2000, bearing interest at 7.85% annually and maturing in March 2010. - $350,000,000 of certificates of contribution, issued in November 2001, bearing interest at 6.00% annually and maturing in September 2006. - $206,500,000 of certificates of contribution, issued in December 2001, bearing interest at 6.00% annually and maturing in September 2006. - Other certificates of contribution totaling $23,330,000 which bear interest at various rates. 46 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 specified level, and then only after approval is granted by the issuer's governing Board and the appropriate state insurance regulatory department. I. Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Junior Subordinate Debentures In 1995, Farmers Group Capital and Farmers Group Capital II (the "Subsidiary Trusts"), consolidated wholly owned subsidiaries of FGI, 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 FGI of all of the Subsidiary Trusts' Common Securities ("Common Securities"), FGI 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 FGI 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 FGI 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, FGI had the option to redeem, in whole or 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 December 31, 2001 and 2000, a total of 20,000,000 shares of QUIPS were outstanding. J. Employees' profit sharing plans The Company has two profit sharing plans providing for cash payment to all eligible employees. The two plans, Deferred Profit Sharing and Cash Profit Sharing, provide for a maximum aggregate expense of 16.25% of the Company's consolidated annual pretax earnings, as adjusted. The Deferred Profit Sharing Plan, limited to 10% of pretax earnings, as adjusted, or 15% of the salary or wage paid or accrued to eligible employees, provides for an annual contribution by the Company to a trust for eventual payment to employees as provided in the Plan. The Cash Profit Sharing Plan provides for annual cash distributions to eligible employees if certain criteria are met. The Cash Profit Sharing Plan is limited to 5% of pretax earnings, as adjusted, or 5% of employee salaries or wages paid or accrued. Expense under these plans was $51,100,000, $59,491,000 and $52,984,000 in 2001, 2000 and 1999, respectively. 47 K. Statutory financial data Statutory capital and surplus of the Insurance Subsidiaries was $1,863,927,000 and $1,728,378,000 as of December 31, 2001 and 2000, respectively. Statutory net income was $55,234,000, $187,712,000 and $152,716,000 for the years ended December 31, 2001, 2000 and 1999, respectively. The decrease in statutory net income between 2000 and 2001 was due primarily to realized losses and impairment losses on investments. There are certain statutory limitations on the distribution of surplus. As of December 31, 2001, an aggregate of $212,969,000 was available for distribution as dividends by the Insurance Subsidiaries without the approval of the state insurance departments in which they are domiciled. In January 2001, Farmers Life paid a $112,000,000 dividend to Farmers Management Services. L. Investments The Company follows the provisions of SFAS No. 115. This Statement addresses the accounting and reporting for investments in equity securities that have readily determinable market values and for all investments in debt securities. The Company classified all investments in equity and debt securities as available-for-sale under SFAS No. 115, with the exception of an investment held as of December 31, 2001 in Endurance Specialty Insurance Limited ("Endurance") as well as investments held as of December 31, 2001 and 2000 related to the grantor trusts. The available-for-sale investments are reported on the balance sheet at market value, with unrealized gains and losses, net of tax, excluded from earnings and reported as a component of stockholders' equity. As of December 31, 2001, the Company held $50,000,000 of common stock of Endurance. The Company purchased the Endurance equity securities in a private placement offer in December 2001. As non-exchange traded securities, these investments were carried at cost as of December 31, 2001 and were reported on the "Other investments" line in the Farmers Management Services section of the consolidated balance sheet. In addition, as of December 31, 2001 and 2000, investments related to the grantor trusts totaled $60,721,000 and $61,131,000, respectively, and were classified as trading securities under SFAS No. 115. As a result, these investments were reported on the "Other assets" line in the Farmers Management Services section of the consolidated balance sheets at market value with both realized and unrealized gains and losses included in earnings, net of tax, in the year in which they occurred. Real estate investments are accounted for on a depreciated cost basis. Real estate acquired in foreclosure and held for sale is carried at the lower of market value or depreciated cost less a valuation allowance. Marketable securities are carried at market. The Standard & Poor's 500 Composite Stock Price Index ("S&P 500") call options are carried at estimated fair value. Other investments, which consist primarily of certificates of contribution of the P&C Group Companies, surplus notes of the P&C Group Companies, policy loans and notes receivable from affiliates, which include the UKISA notes and ZGAUS note, are carried at the unpaid principal balances. In compliance with a SEC staff announcement, the Company has recorded certain entries to the DAC and VOLBA line of the consolidated balance sheet in connection with SFAS No. 115. The SEC requires that companies record entries to those assets and liabilities that would have been adjusted had the unrealized investment gains or losses from securities classified as available-for-sale actually been realized, with corresponding credits or charges reported directly to stockholders' equity. 48 The sources of investment income on securities owned by Farmers Management Services for the years ended December 31 are:

2001 2000 1999 ~~1998~~ ---------- ---------- ---------- (Amounts in thousands) ~~Bonds~~Related parties: UKISA notes $ (214,~~917)~~589 $ ~~(753)~~45,425 $ ~~280~~59,434 ~~Redeemable~~Centre ~~preferred~~Reinsurance ~~stocks~~Holdings (20Delaware II) Ltd. note 0 570 ~~Common~~7,805 ~~stocks~~ZGAUS 75note 18,~~522~~750 7618,~~478~~750 59781 ---------- ---------- ---------- Total related parties 33,~~864~~339 ~~Investment~~64,175 ~~real~~68,020 ~~estate~~---------- (---------- ---------- Non-related parties: Interest income- certificates of contribution and surplus notes of the P&C Group Companies 16,400 17,893 2,123 Interest income- fixed income securities 12,853 24,363 39,030 Dividend income 3,451 4,~~104)~~944 ~~(864)~~6,503 ~~(34)~~Interest income- cash equivalents and marketable securities 12,734 12,415 617 Other 0* ~~377~~1,704 23,~~261~~326 1,197 ---------- ---------- ---------- ~~Net~~Total ~~realized~~non-related parties 47,142 62,941 49,470 ---------- ---------- ---------- Net investment ~~gains/(losses)~~income $ 6880,481 $ 75127,~~238~~116 $ 62117,~~428~~490 ========== ========== ==========

* Includes ($3.7 million), ($1.8 million) and $4.1 million in 2001, 2000 and 1999, respectively, of unrealized gains/(losses) associated with the trading securities reported on the "Other assets" line of the consolidated balance sheets. The sources of investment income on securities owned by the Insurance Subsidiaries for the years ended December 31 are:

2001 2000 1999 ~~1998~~ ---------- ---------- ---------- (Amounts in thousands) ~~Bonds~~Fixed income securities $ ~~(10~~304,~~714)~~691 $ 17306,~~777~~999 $ ~~(16~~308,~~461)~~303 ~~Redeemable~~Equity ~~preferred~~securities ~~stocks~~5,433 23,~~688~~406 ~~450~~1,786 25Mortgage ~~Common~~loans ~~stocks~~3,241 553,~~176~~892 5,~~005~~060 ~~117~~Owned ~~Investment~~ real estate 1314,~~982~~531 112,~~562~~058 19,~~393~~414 Policy loans 17,029 15,881 14,436 Cash equivalents and marketable securities 4,618 5,506 5,387 Interest income-certificates of contribution and surplus notes of the P&C Group Companies 37,932 27,533 7,259 Investment expenses (20,333) (23,151) (21,758) Other 01,090 01,225 ~~118~~5,678 ---------- ---------- ---------- Net ~~realized~~ investment ~~gains/(losses)~~income $ 61368,~~132~~232 $ 24353,~~794~~349 $ ~~(14~~335,~~808)~~565 ========== ========== ==========

49 Realized gains and losses on sales and redemptions owned by Farmers Management Services are determined based on either the cost of the individual securities or the amortized cost of real estate. Net realized investment gains or losses for the years ended December 31 are:

As2001 ~~of December 31,~~ 2000 ~~-----------------------------------------------~~1999 ~~Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value~~ ---------- ---------- ---------- ~~----------~~ (Amounts in thousands) ~~Equity~~Bonds ~~Securities~~$ ~~Available-for-Sale~~6,422 ~~Non-redeemable~~$ ~~preferred~~(2,917) ~~stocks~~ $ 0(753) $Redeemable 0preferred $stocks 0 $(20) 0 Common stocks ~~282~~8,~~224~~354 1375,~~963~~522 76,478 Investment real estate 388 (544,~~121~~104) ~~242,066~~(864) ~~----------~~Other 0 0 377 ---------- ---------- ---------- ~~Total~~Net $realized ~~282,224~~investment gains/(losses) $ 1315,~~963~~164 $ ~~(54~~68,~~121)~~481 $ ~~242~~75,~~066~~238 ========== ========== ========== ~~==========~~

Realized gains and losses on sales and redemptions by the Insurance Subsidiaries are determined based on either the cost of the individual securities or the amortized cost of real estate. Net realized investment gains or losses for the years ended December 31 are:

As2001 of2000 ~~December 31,~~ 1999 ----------~~-------------------------------------~~ ~~Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value~~ ---------- ---------- ~~---------- ----------~~ (Amounts in thousands) ~~Equity~~Bonds ~~Securities~~$ ~~Available-for-Sale~~31,113 ~~Non-redeemable~~$ ~~preferred~~11,715 ~~stocks~~ $ 017,777 $Redeemable 0preferred $stocks 0(49) $2,688 0450 Common stocks ~~299~~9,~~251~~916 7255,~~314~~176 5,005 Investment real estate 1,801 13,982 1,562 Other (371,~~353~~049) ~~334,212~~0 ~~----------~~0 ---------- ---------- ---------- ~~Total~~Net $realized ~~299,251~~investment gains/(losses) $ 7241,~~314~~732 $ ~~(37~~83,~~353)~~561 $ ~~334~~24,~~212~~794 ========== ========== ========== ~~==========~~

The Company regularly reviews its investment portfolio to determine whether declines in the value of investments are other than temporary as defined by SFAS No. 115. The Company's review for declines in value includes reviewing historical and forecasted financial information as well as reviewing the market performance of similar types of investments. As a result of this review, the Company determined that some of its investments had declines in value that were other than temporary as of December 31, 2001 due to unfavorable market and economic conditions. Accordingly, for the year ended December 31, 2001, the Company recorded $150,978,000 of impairment losses on investments, primarily in the equity portfolios. This included $32,389,000 of impairment losses related to Enron Corporation. Also, for the year ended December 31, 2000, Farmers Life recorded $22,429,000 of impairment losses on fixed income securities of Armstrong World Industries, Inc. and Owens Corning. Impairment losses on investments owned by Farmers Management Services are determined based on the market value of those investments on the date of impairment. Impairment losses on investments for the years ended December 31 are:

50 Impairment losses on investments owned by the Insurance Subsidiaries are determined based on the market value of those investments on the date of impairment. Impairment losses on investments for the years ended December 31 are:

The amortized cost, gross unrealized gains and losses, and estimated market values of investments in equity securities pertaining to common stocks owned by Farmers Management Services are as follows:

The amortized cost, gross unrealized gains and losses, and estimated market values of investments in equity securities pertaining to non-redeemable preferred stocks and common stocks owned by the Insurance Subsidiaries are as follows:

51 The amortized cost, gross unrealized gains and losses and estimated market values of investments in debt securities, including bonds and redeemable preferred stocks, owned by Farmers Management Services are as follows:

As of December 31, ~~1999~~2001 ----------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ---------- ---------- ---------- ---------- (Amounts in thousands) ~~Equity~~Debt Securities Available-for-Sale ~~Non-redeemable~~U.S. ~~preferred~~Treasury ~~stocks~~securities and obligations of U.S. government corporations and agencies $ ~~1,153~~644 $ 9720 $ (925) $ 1659 Obligations of states and political subdivisions 18,~~158~~438 ~~Common~~812 ~~stocks~~0 ~~188~~19,~~851~~250 35Corporate securities 52,~~555~~141 ~~(12~~984 0 53,~~132~~125 Other debt securities 10,307 11 (496) ~~212~~9,~~274~~822 ---------- ---------- ---------- ---------- Total $ ~~190~~81,~~004~~530 $ 351,~~652~~827 $ (~~12,224~~501) $ ~~213~~82,~~432~~856 ========== ========== ========== ==========

52 The amortized cost, gross unrealized gains and losses, and estimated market values of investments in debt securities, including bonds and redeemable preferred stocks, owned by the Insurance Subsidiaries are as follows:

As of December 31, ~~1999~~2001 ------------------------------------------------ Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ---------- ----------- ---------- ---------- (Amounts in thousands) Debt Securities Available-for-Sale, including Marketable Securities U.S. Treasury securities and obligations of U.S. government corporations and agencies $ ~~239~~347,017 $ 14,184 $ 0(5,170) $ ~~240~~346,031 Obligations of states and political subdivisions ~~476~~259,~~080~~050 ~~805~~9,967 (~~3,788~~126) ~~473~~268,~~097~~891 ~~Corporate~~Debt securities 45issued by foreign governments 19,~~503~~938 191 0 20,129 Corporate securities 1,559,031 50,027 (~~551~~22,890) 441,~~952~~586,168 Mortgage-backed securities 422,~~350~~387,564 075,653 (~~986~~6,646) 412,~~364~~456,571 Other debt securities 1821,~~387~~806 ~~280~~457 (54956) 1821,~~613~~307 ---------- ----------- ---------- ---------- Total $ ~~582~~4,~~559~~594,406 $ 1140,~~086~~479 $ (535,~~379~~788) $ ~~578~~4,~~266~~699,097 ========== =========== ========== ==========

The amortized cost and estimated market value of debt securities, including marketable securities, owned by Farmers Management Services as of December 31, 2001, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

~~As of December 31, 1999 ------------------------------------------------ Gross Gross~~ Estimated Amortized ~~Unrealized Unrealized~~ Market Cost ~~Gains Losses~~ Value ---------- ----------- ~~---------- ----------~~ (Amounts in thousands) Debt Securities Available-for-Sale ~~U.S.~~Due ~~Treasury~~after ~~securities~~one ~~and~~year ~~obligations~~through offive ~~U.S.~~years ~~government corporations and agencies~~ $ ~~421~~18,~~688~~435 $ ~~553 $ (24~~18,~~382)~~746 $Due ~~397,859~~after ~~Obligations~~five ofyears ~~states~~through ~~and~~ten ~~political~~years ~~subdivisions 496~~45,~~368~~768 347,~~104~~268 ~~(14,132)~~Due ~~485,340~~after ~~Debt~~ten ~~securities~~years ~~issued by foreign governments 71~~7,~~946~~020 57,~~902~~020 ~~(1,149) 76,699 Corporate securities 1,373,138 6,957 (52,811) 1,327,284 Mortgage~~-~~backed securities 2,086,788 8,758 (71,262) 2,024,284 Other debt securities 64,176 1,346 (668) 64,854~~ ---------- ----------- 71,223 73,034 Redeemable preferred stocks with no stated maturities 10,307 9,822 ---------- ---------- Total $~~4,514,104~~ ~~$ 26~~81,~~620~~530 $ ~~(164~~82,~~404)~~856 ~~$4,376,320~~ ========== ==========~~= ========== ==========~~

53 The amortized cost and estimated market value of debt securities owned by the Insurance Subsidiaries as of December 31, 2001, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Estimated Amortized Market Cost Value ---------- ---------- (Amounts in thousands) Debt Securities Available-for-Sale, including Marketable Securities Due in one year or less $ 1090,~~386~~720 $ 1092,~~386~~388 Due after one year through five years ~~118~~511,~~229~~250 ~~117~~529,~~214~~075 Due after five years through ten years 19873,~~339~~524 19883,~~915~~287 Due after ten years 40709,~~863~~542 40716,~~945~~469 ---------- ---------- ~~188~~2,~~817~~185,036 ~~188~~2,~~460~~221,219 Mortgage-backed securities ~~102~~2,~~301~~387,564 ~~103~~2,~~048~~456,571 Redeemable preferred stocks with no stated maturities 1121,~~307~~806 1021,~~673~~307 ---------- ---------- $Total ~~302~~$4,~~425~~594,406 $ ~~302~~4,~~181~~699,097 ========== ==========

Proceeds from sales of available-for-sale securities received by the Company were $2,487,105,000, $2,052,734,000 and $1,808,735,000 in 2001, 2000 and 1999, respectively. Gross gains of $100,364,000, $174,940,000 and $142,027,000 and gross losses of $196,052,000, $54,563,000 and $44,999,000 were realized on sales and write-downs during 2001, 2000 and 1999, respectively. The change in the net unrealized gains or (losses) of Farmers Management Services for the years ended December 31 are as follows:

~~Estimated~~2001 ~~Amortized~~2000 ~~Market Cost Value~~ ---------- ---------- (Amounts in thousands) ~~Debt~~Fixed ~~Securities~~maturities ~~Available-for-Sale, including Marketable Securities Due in one year or less~~ $ ~~255~~1,~~300~~570 $ ~~252~~4,~~310~~049 ~~Due~~Equity ~~after one year through five years 712,155 707,940 Due after five years through ten years 801,285 803,511 Due after ten years 580,900 578,808 ---------- ---------- 2,349,640 2,342,569 Mortgage-backed~~ securities 123,~~980,532~~552 2(75,~~002,120 Redeemable preferred stocks with no stated maturities 29,649 30,646 ---------- ---------- $4,359,821 $4,375,335 ========== ==========~~119)

The change in the net unrealized gains or (losses) of the Insurance Subsidiaries for the years ended December 31 are as follows:

2000 1999 ---------- ---------- (Amounts in thousands) Fixed maturities $ 489,~~049~~177 $ ~~(15~~153,~~570)~~298 Equity securities ~~(75~~24,~~119)~~064 (4160,~~397~~434)

M. Equity-indexed annuities During 1997, Farmers Life began selling an equity-indexed annuity product. At the end of its seven year term, this product credits interest to the annuity participant at a rate based on a specified portion of the change in the value of the S&P 500, subject to a guaranteed annual minimum return. In order to hedge the interest liability generated on the annuities as the index rises, Farmers Life purchases call options on the S&P 500. Farmers Life considers such S&P 500 call options to be held as a hedge. As of December 31, 2001 and 2000, Farmers Life had S&P 500 call options with contract values of $117,257,000 and $94,535,000, respectively, and carrying values of $12,690,000 and $26,271,000, respectively. 54 Hedge accounting is used to account for the call options as Farmers Life believes that the options reduce the risks associated with increases in the account value of the annuities that result from increases in the S&P 500. The call options effectively hedge the annuity contracts since they are both purchased and sold with identical parameters. Periodically, the value of the assets (S&P 500 call options) is matched to the potential liability (annuity contracts) to ensure the hedge has remained effective. The annuities were written based on a seven year investment term, absent early termination by participants. Therefore, the anticipated hedged transaction (i.e., payment of interest to the policyholder at the end of the investment term and maturity of the call option) for each annuity is generally expected to occur in seven years or less. The amount of unrealized hedging losses was $23,763,000 and $3,425,000 in 2001 and 2000, respectively. The S&P 500 call options are carried at estimated fair value. Unrealized gains and losses resulting from changes in the estimated fair value of the call options are recorded as an adjustment to the interest credited to policyholders. In addition, realized gains and losses from maturity or termination of the call options are offset against the interest credited to policyholders during the period incurred. Premiums paid on call options are amortized to net investment income over the term of the contracts. There were no early terminations by annuity participants, or maturities or sales of the S&P 500 call options during 2001. On December 27, 2001, Farmers Life disposed of 1,598 and 1,319 S&P 500 call option contracts acquired in January and February 2001, respectively. Farmers Life received $518,000 in S&P 500 disposition proceeds, resulting in a $682,000 realized loss on disposition. This disposal was necessary as Farmers Life purchased a larger than necessary quantity of S&P 500 call options to hedge against the equity indexed annuity product liability. The cash requirement of the call options consists of the initial premium paid to purchase the call options. Should a liability exist to the annuity participant at maturity of the annuity policy, the termination or maturity of the option contracts will generate positive cash flow to Farmers Life. The appropriate amount of cash will then be remitted to the annuity participant based on the respective participation rate. The call options are generally expected to be held for a seven year term, but can be terminated at any time. There are certain risks associated with the call options, primarily with respect to significant movements in the United States stock market and counterparty nonperformance. The Company believes that the counterparties to its call option agreements are financially responsible and that the counterparty risk associated with these transactions is minimal. N. Fair value of financial instruments The estimated fair values of financial instruments disclosed have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented may not be indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts. 55

~~2000~~December ~~1999~~31, 2001 -------------------------- Carrying Estimated Value Fair Value ---------- ---------- (Amounts in thousands) ~~Fixed~~Assets ~~maturities~~and liabilities, Farmers Management Services: Assets: Cash and cash equivalents $ ~~153~~225,~~298~~008 $ ~~(315~~225,~~545)~~008 ~~Equity~~Fixed ~~securities~~maturities (available-for-sale 82,856 82,856 Common stocks available-for-sale 167,637 167,637 Mortgage loans 33 34 Certificates of contribution and surplus notes of the P&C Group Companies 546,830 546,830 Notes receivable - affiliates 345,000 357,447 Grantor trusts 60,~~434)~~721 1560,~~615~~721 Other investments 50,000 50,000 Other assets 31,873 27,191 Liabilities: Real estate mortgages payable 12 13 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 500,000 506,844 Insurance Subsidiaries: Assets: Cash and cash equivalents 172,394 172,394 Marketable securities 30,342 30,342 Fixed maturities available-for-sale 4,668,755 4,668,755 Non-redeemable preferred stocks available-for-sale 12,245 12,245 Common stocks available-for-sale 339,684 339,684 Mortgage loans 28,901 31,853 Certificates of contribution and surplus notes of the P&C Group Companies 490,500 490,500 Policy loans 232,287 246,829 Joint ventures, at equity 3,625 5,437 S&P 500 call options 12,690 12,690 Other investments 12,435 12,435 Liabilities: Future policy benefits - deferred annuities 1,545,583 1,491,873

December 31, 2000 -------------------------- Carrying Estimated Value Fair Value ---------- ---------- (Amounts in thousands) Assets and liabilities, ~~excluding~~Farmers ~~Insurance~~Management ~~Subsidiaries~~Services: Assets: Cash and cash equivalents $ 132,245 $ 132,245 Marketable securities 10,386 10,386 Fixed maturities available-for-sale 291,795 291,795 Common stocks available-for-sale 242,066 242,066 Mortgage loans 92 96 Certificates of contribution and surplus notes of the P&C Group Companies 184,830 184,830 Notes receivable - affiliates 552,000 565,466 Grantor ~~trust~~trusts 61,131 61,131 Other investments 3,341 2,506 Other assets 31,303 25,598 Liabilities: Real estate mortgages payable 16 17 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 500,000 497,050 Insurance Subsidiaries: Assets: Cash and cash equivalents 84,431 84,431 Marketable securities 9,997 9,997 Fixed maturities available-for-sale 4,365,338 4,365,338 Non-redeemable preferred stocks available-for-sale 11,500 11,500 Common stocks available-for-sale 293,407 293,407 Mortgage loans 36,984 41,815 Certificates of contribution and surplus notes of the P&C Group Companies 502,500 502,500 Policy loans 218,162 226,304 Joint ventures, at equity 4,651 6,136 S&P 500 call options 26,271 26,271 Other investments 5,279 5,279 Liabilities: Future policy benefits - deferred annuities 1,510,908 1,467,806

57 The following methods and assumptions were used to estimate the fair value of financial instruments as of December 31, 2001 and 2000: Cash and cash equivalents and marketable securities. The carrying amounts of these items are at fair value. Fixed maturities, non-redeemable preferred stocks and common stocks. The estimated fair values of bonds, redeemable and non-redeemable preferred stocks and common stocks are based upon quoted market prices, dealer quotes and prices obtained from independent pricing services. Mortgage loans. The estimated fair value of the mortgage loans portfolio is determined by discounting the estimated future cash flows, using a year-end market rate which is applicable to the yield, credit quality and average maturity of the composite portfolio. Certificates of contribution and surplus notes of the P&C Group Companies. The carrying amounts of these items are a reasonable estimate of their fair values. Notes receivable-affiliates. The fair values are estimated by discounting the future cash flows using the current rates at which similar loans would be made by the Company to borrowers for the same remaining maturities. Grantor trusts. The carrying amounts related to the grantor trusts are a reasonable estimate of their fair values. Joint ventures, at equity. The estimated fair values are based upon quoted market prices, current appraisals and independent pricing services. Other investments. Other investments consist of Endurance common stock and miscellaneous notes and investments. The carrying amounts of the Endurance common stock (see Note L) and the miscellaneous notes are a reasonable estimate of their fair values. The estimated fair values related to miscellaneous investments are based upon quoted market prices, current appraisals and independent pricing services. Other assets. Other assets consist primarily of advances to agents, the fair value of which is determined by discounting the estimated future cash flows using credit quality, the average maturity of related advances, and the current rates at which similar loans would be made to borrowers by the Company. Policy loans. The estimated fair values of policy loans are determined by discounting the future cash flows using the current rates at which similar loans would be made. S&P 500 call options. S&P 500 call options are purchased as hedges against the interest liabilities generated on the equity-indexed annuity products. These call options are carried at an estimated fair value based on stock price, strike price, time to expiration, interest rates, dividends and volatility per the methodology of the Black-Scholes Option Pricing Formula. Real estate mortgages payable. The estimated fair values are determined by discounting the estimated future cash flows at a rate which approximates the Company's incremental borrowing rate. Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures. The estimated fair values are based on quoted market prices. Future policy benefits-deferred annuities. The estimated fair values of flexible premium and single premium deferred annuities are based on their cash surrender values. 58 O. Value of Life Business Acquired The changes in the Value of Life Business Acquired were as follows:

~~December~~2001 ~~31,~~2000 1999 ----------~~----------------~~ ~~Carrying Estimated Value Fair Value~~ ---------- ---------- (Amounts in thousands) ~~Assets~~Balance, ~~and~~beginning ~~liabilities~~of ~~excluding~~year ~~Insurance Subsidiaries: Assets: Cash and cash equivalents~~ $ ~~217~~300,~~466~~141 $ ~~217~~328,~~466~~718 ~~Marketable~~$ ~~securities 66,558 66,558 Fixed maturities available-for-sale 511,708 511,708 Common stocks available-for-sale~~ 334,~~212~~442 ~~334,212~~Amortization ~~Mortgage~~related ~~loans~~to ~~146~~operations ~~152 Certificates of contribution of the P&C Group 23~~(41,~~330~~777) 23(51,~~330~~648) ~~Notes receivable - affiliates 1~~(50,~~307,000 1,280,~~685) ~~Grantor~~Interest ~~trust~~accrued 5919,~~727~~378 5928,~~727~~799 ~~Other assets 26~~30,~~293~~998 ~~19,001~~Amortization ~~Liabilities:~~related ~~Real~~to ~~estate~~net ~~mortgages~~unrealized ~~payable~~gains/(losses) ~~21 21 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 500~~(3,~~000~~211) ~~448~~(5,~~668~~728) ~~Insurance Subsidiaries: Assets: Cash and cash equivalents 96~~13,~~034~~963 ~~96,034 Fixed maturities available~~-~~for~~-~~sale 4,376,320 4,376,320 Non~~-~~redeemable~~------- ~~preferred stocks available~~-~~for~~-~~sale~~-------- ~~1,158 1,158 Common stocks available~~-~~for~~-~~sale~~-------- ~~212~~Balance,~~274~~ ~~212,274~~end ~~Mortgage loans 35,834 43,818 Surplus note~~ of ~~the~~year ~~P&C~~$ ~~Group 119~~274,~~000~~531 ~~119,000~~$ ~~Policy loans 201~~300,~~687~~141 ~~199,166~~$ ~~Joint ventures~~328, ~~at equity 6,662 5,137 S&P 500 call options 32,~~718 ~~32,718~~========== ~~Liabilities:~~========== ~~Future policy benefits - deferred annuities 1,531,412 1,481,098~~==========

Based on current conditions and assumptions as to future events, Farmers Life expects to amortize the December 31, 2001 balance as follows: approximately 8.0% in 2002 and 2003 and 9.0% in 2004, 2005 and 2006. The discount rate used to determine the amortization rate of the VOLBA asset ranged from 9.0% to 3.5%. P. Mortgage loans The Company follows the principles of SFAS No. 118, "Accounting by Creditors for Impairment of a Loan". This Statement requires that an impaired loan be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral, if the loan is collateral dependent. For the year ended December 31, 2001, no loans were considered to be impaired, and no impaired loan allowance was recorded. For the year ended December 31, 2000, Farmers Life held one mortgage loan which was considered impaired. This loan was paid off in November 2000 and, as a result, no loans were considered to be impaired, and no impaired loan allowance was recorded as of December 31, 2000. The Company records interest income received on impaired mortgage loans on a cash basis. The average recorded investment and income recognized on impaired mortgage loans follows:

2001 2000 ~~1999 1998~~ ---------- ---------- ~~----------~~ (Amounts in thousands) ~~Balance,~~Average ~~beginning~~recorded ofinvestment ~~year~~in $impaired ~~328,718~~loans $during ~~334,442~~the period $ ~~359,146~~0 ~~Amortization~~$ ~~related~~652 ~~to operations (51,648) (50,685) (53,598)~~ Interest ~~accrued~~income ~~28,799~~recognized ~~30,998~~on ~~29,701~~the ~~Amortization~~impaired ~~related~~mortgage toloans ~~net~~during ~~unrealized~~the ~~gains/(losses)~~period ~~(5,728)~~0 ~~13,963 (807) ---------- ---------- ---------- Balance, end of year $ 300,141 $ 328,718 $ 334,442 ========== ========== ==========~~71

Q. Security lending arrangements The Company has security lending arrangements with a securities lending provider. The arrangements in effect as of December 31, 2001 authorize the lending provider to lend securities held in the Company's portfolio to a list of authorized borrowers. Concurrent with delivery of the securities, the borrower provides the Company's lending provider with cash collateral equal to 102% of the market value of securities subject to the "loan". 59 The securities are marked-to-market on a daily basis and the collateral is adjusted on the next business day. The collateral is invested in highly liquid, fixed income assets with a maturity of less than one year. Income earned from the security lending arrangements was allocated 75% to the Company and 25% to the lending provider for the years ended December 31, 2001, 2000 and 1999. Income earned by the Company was $306,000, $687,000 and $799,000 in 2001, 2000 and 1999, respectively. The collateral under these arrangements as of December 31, 2001 and 2000 was $45,494,000 and $436,744,000, respectively. R. Employees' retirement plans The Company has two noncontributory defined benefit pension plans (the Regular Plan and the Restoration Plan). The Regular Plan covers substantially all employees of the Company and the P&C Group Companies who have reached age 21 and have rendered one year of service. Benefits are based on years of service and the employee's compensation during the last five years of employment. The Restoration Plan provides supplemental retirement benefits for certain key employees of the Company and the P&C Group Companies. The Company's policy is to fund the amount determined under the aggregate cost method, provided it does not exceed funding limitations. There has been no change in funding policy from prior years, and in 2001, a contribution of $25,487,000 was made to the Regular Plan. The Company's share of this contribution was $11,867,000. Assets of the Regular Plan are held by an independent trustee. Assets held are primarily in fixed maturity and equity investments. The principal liability is for annuity benefit payments of current and future retirees. Assets of the Restoration Plan are considered corporate assets and are held in a grantor trust. 60 Information regarding the Regular Plan's and the Restoration Plan's funded status is not developed separately for the Company and the P&C Group Companies. The funded status of the Plans for the Company and the P&C Group Companies as of December 1, 2001 and 2000 (the latest date for which information is available) was as follows:

2001 2000 ~~1999~~ ---------- ---------- (Amounts in thousands) ~~Average~~Change ~~recorded investment~~ in ~~impaired~~Benefit ~~loans~~Obligation ~~during~~Net ~~the~~benefit ~~period~~obligation $at ~~652~~beginning $of 0the ~~Interest~~year ~~income~~$ ~~recognized~~904,557 on$ ~~the~~803,894 ~~impaired~~Service ~~mortgage~~cost ~~loans~~32,169 ~~during~~27,262 ~~the~~Interest ~~period~~cost 71,041 ~~0 47 P. Security lending arrangements The Company has security lending agreements with a financial institution. The agreements in effect as of December 31~~65,023 ~~2000~~Plan ~~authorize the financial institution to lend securities held in the Company~~participants's ~~portfolio~~contributions to0 a0 ~~list~~Plan ofamendments ~~authorized~~(9) ~~borrowers.~~0 ~~Concurrent~~Actuarial ~~with~~(gain)/loss ~~delivery~~79,239 ~~of the securities~~51,563 ~~the~~Benefits ~~borrower~~paid ~~provides~~(41,096) ~~the~~(43,185) ~~Company~~---------- ~~with~~---------- ~~cash~~$1,045,901 ~~collateral~~$ ~~equal~~904,557 to========== at========== ~~least~~Change ~~102%~~in ofPlan ~~the~~Assets ~~market~~Fair value of ~~domestic~~plan ~~securities~~assets ~~and~~at ~~105%~~beginning of the ~~market~~year ~~value~~$1,014,299 of$1,015,928 ~~other~~Actual ~~securities~~return ~~subject to the "loan". The securities are marked-to-market~~ on aplan ~~daily~~assets ~~basis~~(24,970) ~~and~~21,594 ~~the~~Employer ~~collateral~~contributions is25,487 ~~adjusted~~18,689 onPlan ~~the~~participants' ~~next~~contributions ~~business~~0 ~~day.~~0 ~~The~~Benefits ~~collateral~~paid is(39,719) ~~invested in highly liquid~~(41,912) ~~fixed~~---------- ~~income~~---------- ~~assets~~Fair ~~with~~value ~~a maturity~~ of ~~less~~plan ~~than~~assets ~~one~~at ~~year.~~end ~~Income~~of ~~earned from~~ the ~~security~~year ~~lending~~$ ~~arrangements~~975,097 ~~was allocated 75% to the Company and 25% to the institution for the years ended December 31~~$1,014,299 ~~2000~~========== ~~and~~========== ~~1999~~Funded ~~and~~status ~~60%~~at toend ~~the~~of ~~Company and 40% to~~ the ~~institution for the~~ year ~~ended~~$ ~~December 31~~(70,803) ~~1998. Income earned by the Company was~~ $~~687,000,~~ ~~$799~~109,~~000~~743 ~~and~~Unrecognized ~~$968,000~~net inactuarial ~~2000,~~(gain)/loss ~~1999 and 1998~~57,578 ~~respectively. The collateral under these agreements as of December 31~~(147,236) ~~2000~~Unrecognized ~~and~~prior ~~1999~~service ~~was~~cost ~~$436~~27,~~744,000~~840 ~~and $307~~31,~~529,000,~~854 ~~respectively.~~Unrecognized Q.net ~~Employees'~~transition ~~retirement~~obligation/(asset) ~~plans The Company has two noncontributory defined benefit pension plans~~ (~~the~~12,158) ~~Regular Plan and the Restoration Plan~~(16,834). ~~The~~---------- ~~Regular~~---------- ~~Plan~~Net ~~covers~~amount ~~substantially~~recognized ~~all~~at ~~employees~~end of the ~~Company and the P&C Group who have reached age 21 and have rendered one~~ year of$ ~~service.~~2,457 ~~Benefits~~$ ~~are~~(22,473) ~~based~~========== on========== ~~years~~Amounts ofrecognized ~~service~~in ~~and~~ the ~~employee's~~statement ~~compensation during the last five years~~ of ~~employment.~~financial ~~The~~position ~~Restoration~~consist ~~Plan provides supplemental retirement benefits for certain key employees~~ of: ~~the~~Prepaid ~~Company~~benefit ~~and~~cost ~~the~~$ ~~P&C~~23,373 ~~Group.~~$ ~~The~~0 ~~Company's~~Accrued ~~policy~~benefit ~~is to fund the amount determined under the aggregate~~ cost ~~method~~(20,916) ~~provided~~(22,473) itAdditional ~~does~~minimum ~~not~~liability ~~exceed~~(6,479) ~~funding limitations. There has been no change in funding policy from prior years~~(6,367) ~~and~~Intangible inasset ~~2000~~2,595 ~~a contribution of $18~~4,~~689,000~~378 ~~was~~Accumulated ~~made~~other tocomprehensive ~~the~~income ~~Regular~~3,884 ~~Plan. The Company's share of this contribution was $8~~1,~~357,000.~~989 ~~Assets~~---------- of---------- ~~the~~Net ~~Regular~~amount ~~Plan~~recognized ~~are~~at ~~held~~end ~~by an independent trustee. Assets held are primarily in fixed maturity and equity investments. The principal liability is for annuity benefit payments~~ of ~~current and future retirees. Assets of~~ the ~~Restoration~~year ~~Plan~~$ are considered corporate assets and are held in a grantor trust. 48 Information regarding the Regular Plan's and the Restoration Plan's funded status is not developed separately for the Company and the P&C Group. The funded status of the Plans for the Company and the P&C Group as of December 12,457 ~~2000~~$ ~~and 1999~~ (~~the latest date for which information is available~~22,473) ~~was~~========== ~~as follows:~~==========

Upon B.A.T's purchase of the Company in 1988, the Company allocated part of the purchase price to its portion of the Regular Plan assets in excess of the projected benefit obligation at the date of acquisition. The asset is being amortized for the difference between the Company's net pension cost and amounts contributed to the Plan. The unamortized balance as of December 31, 2001 and 2000 was $9,576,000 and $13,258,000, respectively. 61 Components of net periodic pension expense for the Company follow:

2001 2000 1999 ---------- ---------- ---------- (Amounts in thousands) ~~Change~~Service incosts ~~Benefit Obligation Net benefit obligation at beginning of the year~~ $ ~~803~~16,~~894~~992 $ ~~853~~14,~~174~~064 ~~Service~~$ ~~cost 27~~15,~~262~~126 ~~29,395~~ Interest ~~cost~~costs 6540,~~023~~948 5838,~~469~~035 ~~Plan~~34,525 ~~participants'~~Return ~~contributions~~on 0plan 0assets ~~Plan amendments 0 7,903 Actuarial~~ (~~gain)/loss 51~~54,~~563 (111,100~~232) ~~Benefits paid~~ (4353,~~185~~947) (3349,~~948~~000) ~~----------~~Amortization ~~---------- $ 904,557 $ 803,893 ========== ========== Change in Plan Assets Fair value~~ of: ~~plan~~Transition ~~assets~~obligation ~~at beginning of the year $~~1,~~015,928~~023 $987 ~~924,301~~955 ~~Actual~~Prior ~~return~~service oncost ~~plan~~2,573 ~~assets 21~~2,~~594~~597 ~~124~~2,~~380~~207 ~~Employer~~Actuarial ~~contributions~~(gain)/loss 18(2,~~689~~031) ~~0 Plan participants' contributions 0 0 Benefits paid~~ (419,~~912~~561) (322,~~753~~445) ---------- ---------- Fair value of plan assets at end of the year $1,014,299 $1,015,928 ========== ========== Funded status at end of the year $ 109,743 $ 212,034 Unrecognized net actuarial (gain)/loss (147,236) (287,586) Unrecognized prior service cost 31,854 35,859 Unrecognized net transition obligation/(asset) (16,834) (21,510) ---------- ~~----------~~ Net ~~amount~~periodic ~~recognized~~pension atexpense ~~end~~$ of5,273 ~~the year~~ $ (227,~~473~~825) $ ~~(61~~1,~~203)~~368 ========== ========== Amounts recognized in the statement of financial position consist of: Prepaid benefit cost $ 0 $ 0 Accrued benefit cost (22,473) (61,203) Additional minimum liability (6,367) (5,382) Intangible asset 4,378 5,237 Accumulated other comprehensive income 1,989 145 ---------- ---------- Net amount recognized at end of the year $ (22,473) $ (61,203) ========== ~~==========~~

The Company uses the projected unit credit cost actuarial method for attribution of expense for financial reporting purposes. The interest cost and the actuarial present value of benefit obligations were computed using a weighted average interest rate of 7.25% in 2001, 7.75% in 2000 and 8.00% in 1999, while the expected return on plan assets was computed using a weighted average interest rate of 9.50% in 2001 and 2000 and 9.25% in 1999. The weighted average rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation was 4.70% in 2001 and 2000 and 5.00% in 1999. The Company's postretirement benefits plan is a contributory defined benefit plan for employees who were retired or who were eligible for early retirement as of January 1, 1995, and is a contributory defined dollar plan for all other employees retiring after January 1, 1995. Health benefits are provided for all employees who participated in the Company's and the P&C Group Companies' group medical benefits plan for the 10 years prior to retirement at age 55 or later. A life insurance benefit of $5,000 is provided at no cost to retirees who maintained group insurance coverage for the 10 years prior to retirement at age 55 or later. There are no assets separated and allocated to this plan. 62 The funded status of the entire plan, which includes the Company and the P&C Group Companies, as of December 1, 2001 and 2000 (the latest date for which information is available), was as follows:

2001 2000 ~~1999 1998~~ ---------- ---------- ~~----------~~ (Amounts in thousands) ~~Service~~Change ~~costs~~in Benefit Obligation Net benefit obligation at beginning of the year $ 14117,~~064~~895 $ 1579,~~126~~501 $Service 13cost 2,~~240~~537 1,427 Interest ~~costs~~cost 389,~~035~~082 346,~~525~~280 27Plan participants' contributions 2,~~810~~768 ~~Return~~1,729 onPlan ~~plan~~amendments ~~assets~~0 0 Actuarial (~~53,947~~gain)/loss 34,185 34,131 Benefits paid (4910,~~000~~325) (355,~~817~~173) ~~Amortization~~---------- ---------- $ 156,142 $ 117,895 ========== ========== Fair value of: ~~Transition~~plan ~~obligation~~assets ~~987~~at ~~955~~end ~~1,365~~of ~~Prior~~the ~~service~~year ~~cost~~$ ~~2,597~~0 2$ 0 ========== ========== Funded status at end of the year $ (156,~~207~~142) 1$ (117,~~986~~895) ~~Actuarial~~Unrecognized net actuarial (gain)/loss (951,~~561)~~823 (220,~~445)~~659 Unrecognized prior service cost 0 0 Unrecognized net transition obligation/(~~2,447~~asset) ~~----------~~14,421 15,732 ---------- ---------- Net ~~periodic~~amount ~~pension~~recognized ~~expense~~at end of the year $ (789,~~825~~898) $ 1(81,~~368~~504) $========== ~~6,137~~ ========== Amounts recognized in the statement of financial position consist of: Prepaid benefit cost $ 0 $ 0 Accrued benefit cost (89,898) (81,504) Additional minimum liability 0 0 Intangible asset 0 0 Accumulated other comprehensive income 0 0 ---------- ---------- Net amount recognized at end of the year $ (89,898) $ (81,504) ========== ==========

63 The unrecognized net transition obligation of $14,421,000 in 2001 and $15,732,000 in 2000 represents the remaining transition obligation of the P&C Group Companies. The Company's share of the accrued postretirement benefit cost was approximately $61,544,000 in 2001 and $57,758,000 in 2000. Components of postretirement benefits expense for the Company follow:

2001 2000 1999 ---------- ---------- ---------- (Amounts in thousands) ~~Change~~Service incosts ~~Benefit~~$ ~~Obligation~~1,322 ~~Net~~$ ~~benefit~~736 ~~obligation~~$ at696 ~~beginning~~Interest ofcosts ~~the~~5,367 ~~year~~3,786 ~~$ 79~~3,~~501~~263 $Return ~~80,367~~on ~~Service~~plan ~~cost~~assets ~~1,427~~0 ~~1,537~~0 ~~Interest~~0 ~~cost~~Amortization ~~6,280~~of: ~~5,374~~Transition ~~Plan~~obligation ~~participants'~~0 ~~contributions~~0 ~~1,729~~0 ~~1,575~~Prior ~~Plan~~service ~~amendments~~cost 0 0 0 Actuarial (gain)/loss ~~34,131~~333 (~~5,892~~361) ~~Benefits paid~~ (~~5,173~~9) ~~(3,460)~~ ---------- ---------- $ 117,895 $ 79,501 ========== ========== Fair value of plan assets at end of the year $ 0 $ 0 ========== ========== Funded status at end of the year $ (117,895) $ (79,501) Unrecognized net actuarial (gain)/loss 20,659 (14,070) Unrecognized prior service cost 0 0 Unrecognized net transition obligation/(asset) 15,732 17,044 ---------- ~~----------~~ Net ~~amount~~periodic ~~recognized~~expense at$ ~~end~~7,022 ~~of the year~~ $ ~~(81~~4,~~504)~~161 $ ~~(76~~3,~~527)~~950 ========== ========== Amounts recognized in the statement of financial position consist of: Prepaid benefit cost $ 0 $ 0 Accrued benefit cost (81,504) (76,527) Additional minimum liability 0 0 Intangible asset 0 0 Accumulated other comprehensive income 0 0 ---------- ---------- Net amount recognized at end of the year $ (81,504) $ (76,527) ========== ~~==========~~

The weighted average interest rate used in the above benefit computations was 7.25% in 2001, 7.75% in 2000 and 8.00% in 1999. Beginning in 2002, the initial medical inflation rate is assumed to be 10.00% and will be graded over a 5-year period to 6.00% and level thereafter, and contribution levels from retirees were the same as applicable medical cost increases where defined benefits exist. The weighted average rate of increase in future compensation levels used in determining the actuarial present value of the accumulated benefit obligation was 4.70% in 2001 and 2000 and 5.00% in 1999. A 1.00% increase or decrease in the medical inflation rate assumption would have resulted in the following:

~~2000~~1% ~~1999~~increase ~~1998~~1% decrease ---------- --- ------- ------~~----~~ (Amounts in thousands) ~~Service~~Effect ~~costs $ 736 $ 696 $ 636 Interest costs 3,786 3,263 2,527 Return~~ on ~~plan~~2001 ~~assets~~service 0and 0interest 0components ~~Amortization~~ of: ~~Transition~~net ~~obligation~~periodic ~~0 0 0 Prior service~~ cost 0$ 0177 0$ ~~Actuarial~~ (~~gain~~172)~~/loss~~ ~~(361)~~Effect ~~(9)~~on ~~(435)~~accumulated ~~----------~~postretirement ~~----------~~benefit ~~----------~~obligation ~~Net~~at ~~periodic~~December ~~expense $ 4~~31,~~161~~ $2001 32,~~950~~469 $ (2,~~728 ========== ========== ==========~~214)

S. Commitments and contingencies Rental expense incurred by the Company was $36,092,000, $33,568,000 and $28,727,000 in 2001, 2000 and 1999, respectively. The Company has long-term operating lease commitments on equipment and buildings, with options to renew at the end of the lease periods. As of December 31, 2001, the remaining commitments payable under these leases were: 64

1%Equipment ~~increase~~Buildings ~~1% decrease~~ ------------- ------------- (Amounts in thousands) ~~Effect~~2002 on$ ~~2000~~8,456 ~~service~~$ ~~and~~7,491 ~~interest~~2003 ~~components~~6,599 of5,623 ~~net~~2004 ~~periodic~~6,308 ~~cost~~5,239 $2005 ~~161~~120 $5,150 ~~(147)~~2006 ~~Effect~~and onthereafter ~~accumulated~~230 ~~postretirement~~237 ~~benefit~~----------- ~~obligation~~----------- at$ ~~December 31~~21,713 ~~2000~~$ 223,~~279~~740 ~~(2,219)~~=========== ===========

The Company is a party to numerous lawsuits arising from its AIF relationships with the Exchanges. The Company is also a party to additional 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. The Company has entered into employment agreements with certain executives of the Company. Each agreement obligates the Company to compensate the executive should the executive's employment be terminated due to a qualifying event, as defined within the agreement. In the opinion of management, any payments made as a result of these agreements would not have a material adverse effect on the Company's consolidated results of operations or financial position. T. Income taxes The Company follows the provisions of SFAS No. 109, "Accounting for Income Taxes". Deferred tax assets and deferred tax liabilities are recorded to reflect the tax consequences in future years of differences between the tax bases of assets and liabilities and the corresponding bases used for financial statements. 65 The components of the provision for income taxes are:

~~Equipment~~2001 ~~Buildings~~2000 1999 ----------- ---------- ---------- (Amounts in thousands) ~~2001~~Farmers Management Services: Current Federal $ 7306,~~986~~589 $ 5309,~~323~~996 ~~2002~~$ 6293,~~644~~191 5State 48,~~465~~570 ~~2003~~45,447 243,~~048~~148 3Deferred Federal (41,~~828~~907) ~~2004~~(7,079) ~~545~~(10,976) State (2,~~971~~717) ~~2005~~(230) 38(40) ---------- ---------- ---------- Total 310,535 348,134 325,323 ---------- ---------- ---------- Insurance Subsidiaries: Current Federal 86,924 128,373 98,166 State 706 1,107 1,512 Deferred Federal (19,312) (13,740) 2,~~890~~500 State (638) (650) (574) ---------- ---------- ---------- Total 67,680 115,090 101,604 ---------- ---------- ---------- Consolidated total $ 17378,~~261~~215 $ 20463,~~477~~224 $ 426,927 =========== ========== ==========

The table below reconciles the provision for income taxes computed at the U.S. statutory income tax rate of 35% to the Company's provision for income taxes:

2001 2000 1999 ~~1998~~ ---------- ---------- ---------- (Amounts in thousands) Farmers Management ~~services to the P&C Group; and other~~Services: ~~Current~~Expected ~~Federal~~tax expense $ ~~309~~262,~~996~~240 $ ~~293~~297,~~191~~923 $ ~~302~~282,~~669~~241 State 45income taxes,~~447~~ 43net of federal income tax benefits 29,~~148~~219 3828,~~271~~928 ~~Deferred~~27,442 ~~Federal~~Tax exempt investment income (72,~~079~~444) (104,~~976~~321) (4610,~~701~~026) ~~State~~Goodwill ~~(230)~~21,015 ~~(40)~~21,015 (321,~~487)~~015 Other, net 505 4,589 4,651 ---------- ---------- ---------- ~~Total~~Reported income tax expense 310,535 348,134 325,323 ~~290,752~~ ---------- ---------- ---------- Insurance Subsidiaries: ~~Current~~Expected ~~Federal~~tax ~~128,373~~expense 9873,~~166~~129 83118,~~981~~067 ~~State 1~~104,~~107~~124 ~~1,512~~Tax ~~1,089~~exempt ~~Deferred~~investment ~~Federal~~income (132,~~740~~951) 2(3,~~500~~345) (24,~~100~~523) State taxes 48 457 1,029 Other, net (~~650~~2,546) (~~574~~89) 0974 ---------- ---------- ---------- ~~Total~~Reported income tax expense 67,680 115,090 101,604 ~~82,970~~ ---------- ---------- ---------- Consolidated ~~total~~income tax expense $ 378,215 $ 463,224 $ 426,927 ~~$ 373,722~~ ========== ========== ==========

66 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2001 and 2000 are presented in the following tables:

~~2000~~As ~~1999~~of ~~1998~~December 31, 2001 ----------------------------------------------- Current Non-current Total ----------- ------------ ------------ (Amounts in thousands) Farmers Management ~~services~~Services: toDepreciation ~~the~~$ ~~P&C~~0 ~~Group;~~$ ~~and~~(58,144) ~~other:~~$ ~~Expected~~(58,144) ~~tax~~Employee ~~expense~~benefits $10,802 ~~297~~14,~~923~~459 ~~$ 282~~25,~~241~~261 $Capitalized ~~249,059~~expenditures ~~State~~0 ~~income~~(84,939) ~~taxes~~(84,939) ~~net~~California offranchise ~~federal~~tax ~~income~~41,125 ~~tax~~0 41,125 Postretirement benefits ~~28,928~~0 2713,~~442~~360 2213,~~059~~360 ~~Tax~~Postemployment ~~exempt~~benefits ~~investment~~0 ~~income~~161 161 Valuation of investments in securities (49,~~321~~603) ~~(10~~14,~~026)~~951 ~~(11~~5,~~086)~~348 ~~Goodwill~~Investment 210 17,~~015~~969 2117,~~015~~969 21Attorney-in-fact relationships 0 (434,~~015~~909) ~~Other~~(434,909) ~~net~~Other ~~4,589~~841 4,~~651~~716 95,~~705~~557 ----------- ------------ ------------ ~~Reported~~Total ~~income~~deferred tax ~~expense~~asset/(liability) ~~348~~43,~~134~~165 ~~325~~(512,~~323~~376) ~~290~~(469,~~752~~211) ----------- ------------ ------------ Insurance Subsidiaries: ~~Expected~~Deferred ~~tax~~policy ~~expense~~acquisition ~~118~~costs and value of life business acquired 0 (233,~~067~~902) ~~104~~(233,~~124~~902) 83Future policy benefits 0 106,~~637~~025 ~~Tax~~106,025 ~~exempt~~Investments ~~investment~~0 ~~income~~50,951 50,951 Valuation of investments in securities 0 (323,~~345~~579) (423,~~523~~579) Depreciable assets 0 (35,~~013~~371) ~~State~~(5,371) ~~taxes~~Loss ~~457~~reserves ~~1,029~~0 ~~362~~305 305 Other, ~~net~~0 (894,023) ~~974 1~~(4,~~984~~023) ----------- ------------ ------------ ~~Reported~~Total ~~income~~deferred tax ~~expense~~liability ~~115,090~~0 ~~101~~(109,~~604~~594) 82(109,~~970~~594) ----------- ------------ ------------ Consolidated ~~income~~total deferred tax ~~expense~~asset/(liability) $ ~~463~~43,~~224~~165 $ ~~426~~(621,~~927~~970) $ ~~373~~(578,~~722~~805) =========== ============ ============

As of December 31, 2000 ----------------------------------------------- Current Non-current Total ----------- ------------ ------------ (Amounts in thousands) Farmers Management ~~services to the P&C Group; and other~~Services: Depreciation $ 0 $ (60,424) $ (60,424) ~~Achievement awards 0 0 0~~ Employee benefits 8,276 16,631 24,907 Capitalized expenditures 0 (78,988) (78,988) California franchise tax 31,651 0 31,651 Postretirement benefits 0 15,619 15,619 Postemployment benefits 0 161 161 Valuation of investments in securities 85 14,951 15,036 Attorney-in-fact relationships 0 (451,017) (451,017) Other 597 (8,030) (7,433) ----------- ------------ ------------ Total deferred tax asset/(liability) 40,609 (551,097) (510,488) ----------- ------------ ------------ Insurance Subsidiaries: Deferred policy acquisition costs and value of life business acquired 0 (234,762) (234,762) Future policy benefits 0 89,459 89,459 Investments 0 33,601 33,601 Valuation of investments in securities 0 9,805 9,805 Depreciable assets 0 (4,334) (4,334) Loss reserves 0 987 987 Other 0 7,977 7,977 ----------- ------------ ------------ Total deferred tax liability 0 (97,267) (97,267) ----------- ------------ ------------ Consolidated total deferred tax asset/(liability) $ 40,609 $ (648,364) $ (607,755) =========== ============ ============

67 U. 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 individual balance sheet cash and cash equivalent totals to the consolidated cash flow total:

AsFarmers ofManagement ~~December~~Insurance ~~31,~~Services ~~1999~~Subsidiaries ~~-----------------------------------------------~~Consolidated ~~Current Non~~-~~current Total~~ ----------- ------------ ------------ (Amounts in thousands) ~~Management~~Cash ~~services~~and tocash ~~the~~equivalents ~~P&C~~--December ~~Group;~~31, ~~and~~1998 ~~other: Depreciation~~ $ 0253,828 $ ~~(60~~73,~~781)~~724 $ ~~(60~~327,~~781)~~552 ~~Achievement~~1999 ~~awards~~Activity ~~298~~( ~~0 298 Employee benefits 7,050~~ 14,~~585 21,635 Capitalized expenditures 0 (68,114) (68,114) California franchise tax 26,338 0 26,338 Postretirement benefits 0 22,~~052 ~~22,052 Postemployment benefits 0 161 161 Valuation of investments in securities 1,503 (11,537~~) ~~(10,034) Attorney~~-in-~~fact relationships 0 (467,124) (467,124) Other 1,706 (9,144) (7,438)~~ ----------- ~~------------~~Cash and cash equivalents --~~----------~~December ~~Total~~31, ~~deferred~~1999 ~~tax~~217,466 ~~asset/(liability) 36~~96,~~895~~034 ~~(579~~313,~~902)~~500 2000 Activity (~~543~~96,~~007~~824) ----------- -~~-----------~~ ~~------------~~Cash ~~Insurance Subsidiaries: Deferred policy acquisition costs~~ and ~~value~~cash ofequivalents ~~life~~--December ~~business~~31, ~~acquired~~2000 ~~0 (245~~132,~~850) (~~245~~,850)~~ ~~Future policy benefits 0 115~~84,~~336~~431 ~~115,336~~$ ~~Investments 0 15~~216,~~447~~676 ~~15,447~~2001 ~~Valuation~~Activity ~~of investments in securities 0 28~~180,~~990~~726 ~~28,990 Depreciable assets 0 (4,620) (4,620) Loss reserves 0 1,323 1,323 Other 0 651 651~~ ----------- -~~-----------~~ ~~------------~~Cash ~~Total~~and ~~deferred~~cash ~~tax~~equivalents ~~liability 0 (88,723) (88,723)~~ --~~---------~~December ~~------------~~31, ~~------------~~2001 ~~Consolidated total deferred tax asset/(liability) $ 36~~225,~~895~~008 ~~$ (668~~172,~~625)~~394 $ ~~(631~~397,~~730)~~402 =========== =~~=========== ============~~

Cash payments for interest were $2,223,000, $1,742,000 and $1,693,000 in 2001, 2000 and 1999, respectively, while cash payments for dividends to the holders of the Company's QUIPS were $42,070,000 in 2001, 2000 and 1999. Cash payments for income taxes were $455,685,000, $440,008,000 and $426,017,000 in 2001, 2000 and 1999, respectively. In 2001, the Company used $207,000,000 of proceeds received from the settlement of the note receivable from UKISA (see Note G) as well as $206,500,000 of proceeds received from the redemption of the surplus notes of the P&C Group Companies (see Note H) to substantially fund the purchase of $556,500,000 of certificates of contribution of the P&C Group Companies (see Note H). In 2000, the Company used $580,000,000 of proceeds received from the sale of the notes receivable from UKISA (see Note G) to help fund the payment of the $1,075,000,000 special dividend associated with the Zurich capital structure unification in October 2000. Also, in 2000, the Company purchased $370,000,000 of certificates of contribution of the P&C Group Companies to help fund the Exchanges' acquisition of Foremost (see Note H). In 1999, the Company used $190,000,000 of proceeds it received from the settlement of a loan to Centre Reinsurance Holdings (Delaware II) Ltd., a subsidiary of Zurich, to substantially fund the issuance of the $250,000,000 loan to ZGAUS (see Note G). V. Revolving credit agreement As of December 31, 2001 and 2000, the Company had a revolving credit agreement with certain financial institutions and had an aggregate borrowing facility of $500,000,000. The proceeds of the facility were available to the Company for general corporate purposes, including loans to the P&C Group Companies. Facility fees were payable on the aggregate borrowing facility in the amount of 6 basis points per annum as of December 31, 2001 and 7 basis points per annum as of December 31, 2000 and were reimbursable to the Company by the P&C Group Companies. In the case of a draw on the facility, the Company has the option to borrow at annual rates equal to the prime rate, the banks' certificate of deposit rate plus one percentage point, the federal funds effective rate plus 1/2 of one percentage point or the London Interbank Offered Rate plus certain percentages. As of December 31, 2001 and 2000, the Company did not have any outstanding borrowings under the revolving credit agreement. Facility fees were $300,000 for the year ended December 31, 2001 and $350,000 for each of the years ended December 31, 2000 and 1999, and were reimbursed by the P&C Group Companies. The revolving credit agreement in effect as of December 31, 2001 will expire on July 1, 2002. 68 W. Separate Accounts The assets and liabilities held in Separate Accounts relate to the variable universal life and annuity products offered by Farmers Life. The assets and liabilities held in the Separate Accounts are legally segregated from the general assets and liabilities of the Company. The assets of the Separate Accounts are carried at fair market value. The Separate Accounts liabilities represent the contract holders' claims to the related assets and are carried at the fair market value of the assets. Investment income and realized capital gains and losses of the Separate Accounts accrue directly to the contract holders and therefore are not included in the Company's consolidated statements of income and comprehensive income. Revenues to the Company from the Separate Accounts generally consist of administration, surrender and mortality fees. X. Participating policies Participating business, which consists of group business, comprised approximately 10.4% of Farmers Life's total insurance in-force as of December 31, 2001 and 7.7% of the total insurance in-force as of December 31, 2000. In addition, participating business represented 2.2% of Farmers Life's premium income for the year ended December 31, 2001 and 2.0% for the years ended December 31, 2000 and 1999. The amount of dividends paid on participating business is determined by the Farmers Life Board of Directors and is paid annually on the policyholder's anniversary date. Amounts allocable to participating policyholders are based on published dividend projections or expected dividend scales. Y. Life reinsurance Farmers Life has retention limits for automatic reinsurance ceded which set the maximum retention on new issues at $2,000,000 per life for the Farmers Flexible Universal Life policy; $1,500,000 per life for all Traditional policies except Farmers Yearly Renewable Term; and $800,000 per life for Farmers Yearly Renewable Term. The excess is reinsured with a third party reinsurer. In addition, beginning in January 2000, Farmers Life entered into a co-insurance agreement with a third party insurer to reinsure the Farmers Level Term 2000 5, 10 and 20 year products, which replaced the Farmers Premier 5, 10 and 20 year products. Premiums ceded under these agreements totaled $54,420,000 in 2001, $33,527,000 in 2000 and $13,939,000 in 1999. Life reinsurance receivables totaled $65,240,000 and $39,063,000 at December 31, 2001 and 2000, respectively. Z. Operating segments The Company's principal services are the provision of management services to the P&C Group Companies and the ownership and operation of the life and reinsurance subsidiaries. These activities are managed separately as each offers a unique set of services. As a result, the Company is comprised of the following three reportable operating segments as defined in SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information": the management services segment, the life insurance segment and the reinsurance segment. The Company, through its AIF relationships with the Exchanges, is AIF for the Exchanges. As such, the management services segment (Farmers Management Services) is primarily responsible for providing management services to the P&C Group Companies. Management fees earned from the P&C Group Companies totaled $1,582,200,000, $1,492,217,000 and $1,402,107,000 for the years ended December 31, 2001, 2000 and 1999, 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 APD business written by the P&C Group Companies. 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 69 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 the PGAAP adjustments. The P&C Group Companies collectively represent the Company's largest customer. Management fees earned by the Company as AIF for the Exchanges totaled $1.6 billion, $1.5 billion and $1.4 billion, respectively, for the years ended December 31, 2001, 2000 and 1999, which represented 54.6%, 43.3% and 42.9%, respectively, of the Company's consolidated operating revenues for the same years. The Company has no ownership interest in the P&C Group Companies and therefore is not directly affected by the underwriting results of the P&C Group Companies. However, as management fees comprise a significant part of the Company's revenues, the ongoing financial performance of the Company depends on the volume of business written by, and the business efficiency and financial strength of, the P&C Group Companies. The Company accounts for intersegment transactions as if they were to third parties and, as such, records the transactions at current market prices. There were no reportable intersegment revenues among the Company's three reportable operating segments for the years ended December 31, 2001, 2000 and 1999. The Company operates throughout the U.S. and does not earn revenues or hold assets in any foreign countries. Information regarding the Company's reportable operating segments follows:

~~Excluding~~Year ~~Insurance~~ended ~~Insurance~~December ~~Subsidiaries~~31, ~~Subsidiaries~~2001 --------------------------------------------------------------------------------------------------- ------ GAAP historical basis PGAAP adjustments Consolidated ------------------------------------------------------ ------------------------------------- Management Life Management Life PGAAP services insurance Reinsurance Total services insurance Total basis ------------------------------------------------------ ------------------------------------- ----- ------ (Amounts in thousands) ~~Cash~~Revenues ~~and~~$1,690,334 ~~cash~~$ ~~equivalents~~784,612 ~~--December~~(a) 31$ 426,204 ~~1997~~(a) $ ~~479~~2,~~935~~901,150 $ ~~36,318~~0 $ ~~516~~(912) $ (912) $ 2,~~253~~900,238 ~~1998~~Investment ~~Activity~~income 81,500 346,837 42,640 470,977 (~~188~~1,~~701~~019) ~~------------~~(912) ~~Cash~~(1,931) ~~and~~469,046 ~~cash~~Investment ~~equivalents~~expenses ~~--December~~0 31(14,547) ~~1998~~(5,786) ~~253~~(20,~~828~~333) 730 0 0 (20,~~724~~333) ~~327~~Net realized gains/(losses) 16,~~552~~558 ~~1999~~41,319 ~~Activity~~413 58,290 (141,~~052~~394) ~~------------~~0 ~~Cash~~(1,394) ~~and~~56,896 ~~cash~~Impairment ~~equivalents~~losses ~~--December~~on 31investments (56,420) ~~1999~~(82,764) ~~217~~(11,~~466~~063) 96(150,~~034~~247) $(731) ~~313~~0 (731) (150,~~500~~978) ~~2000~~Dividends ~~Activity~~on preferred securities of subsidiary trusts (9642,~~824~~070) ~~------------~~0 ~~Cash~~0 ~~and~~(42,070) ~~cash~~0 ~~equivalents~~0 ~~--December~~0 31(42,070) ~~2000~~Income ~~132~~before provision for taxes 862,~~245~~261 84(b) 181,~~431~~688 $36,004 ~~216~~1,~~676~~079,953 ~~============~~(113,003)(c) (8,751)(d) (121,754) 958,199 Provision for income taxes 338,384 66,387 10,898 415,669 (27,849) (9,605) (37,454) 378,215 Assets 2,246,691 6,374,947 825,032 9,446,670 2,844,717 (e) 131,754 (f) 2,976,471 12,423,141 Capital expenditures 125,052 2,961 0 128,013 0 0 0 128,013 Depreciation and amortization 65,757 93,811 (g) 0 159,568 104,603 (c) 8,191 (d) 112,794 272,362 -----------------------

(a) Revenues for the insurance operating segments include net investment income, net realized gains/(losses) and impairment losses on investments. (b) Amount includes $46.8 million of corporate expenses. (c) Amount includes PGAAP adjustments associated with the amortization of the AIF relationships ($42.7 million) and goodwill ($60.0 million). (d) Amount includes PGAAP adjustments associated with the amortization of the VOLBA asset and the reversal of amortization associated with the pre-1988 DAC asset. (e) Amount includes PGAAP adjustments associated with the AIF relationships ($1,153.6 million) and goodwill ($1,621.2 million). (f) Amount includes PGAAP adjustments related to the DAC (($155.0) million) and VOLBA ($274.5 million) assets. (g) Amount includes the historical basis amortization associated with the DAC asset. 70

Year ended December 31, 2000 --------------------------------------------------------------------------------------------------- ------ GAAP historical basis PGAAP adjustments Consolidated ------------------------------------------------------ ------------------------------------- Management Life Management Life PGAAP services insurance Reinsurance Total services insurance Total basis ------------------------------------------------------ ------------------------------------- ----- ------ (Amounts in thousands) Revenues $1,588,797 $ 805,967 (a) $1,052,636 (a) $3,447,400 $ 0 $ (918) $ (918) $ 3,446,482 Investment income 127,736 334,840 42,578 505,154 (620) (918) (1,538) 503,616 Investment expenses 0 (11,933) (11,218) (23,151) 0 0 0 (23,151) Net realized gains~~/(losses)~~ 68,481 3962,~~856~~285 21,276 ~~129~~152,~~613~~042 0 0 0 ~~129~~152,~~613~~042 Impairment losses on investments 0 (22,429) 0 (22,429) 0 0 0 (22,429) Dividends on preferred securities of subsidiary trusts (42,070) 0 0 (42,070) 0 0 0 (42,070) Income before provision for taxes 958,919 (b) 268,783 77,328 1,305,030 (107,710)(c) (8,777)(d) (116,487) 1,188,543 Provision for income taxes 366,402 94,112 24,699 485,213 (18,268) (3,721) (21,989) 463,224 Assets 2,218,960 6,~~043~~077,~~953~~144 972,838 9,~~235~~268,~~751~~942 2,957,720 (e) 140,360 (f) 3,098,080 12,~~333~~367,~~831~~022 Capital expenditures 93,727 7,174 0 100,901 0 0 0 100,901 Depreciation and amortization 96,961 104,414 (g) 0 201,375 104,264 (c) 8,216 (d) 112,480 313,855 -----------------------

(a) Revenues for the insurance operating segments include net investment income, net realized gains/(losses) and impairment losses on investments. (b) Amount includes $44.7 million of corporate expenses. (c) Amount includes PGAAP adjustments associated with the amortization of the AIF relationships ($42.7 million) and goodwill ($60.0 million). (d) Amount includes PGAAP adjustments associated with the amortization of the VOLBA asset and the reversal of amortization associated with the pre-1988 DAC asset. (e) Amount includes PGAAP adjustments associated with the AIF relationships ($1,196.3 million) and goodwill ($1,681.2 million). (f) Amount includes PGAAP adjustments related to the DAC (($169.8) million) and VOLBA ($300.1 million) assets. (g) Amount includes the historical basis amortization associated with the DAC asset. 71

Year ended December 31, 1999 --------------------------------------------------------------------------------------------------- ------ GAAP historical basis PGAAP adjustments Consolidated ------------------------------------------------------ ------------------------------------- Management Life Management Life PGAAP services insurance Reinsurance Total services insurance Total basis ------------------------------------------------------ ------------------------------------- ----- ------ (Amounts in thousands) Revenues $1,489,683 $ 753,463 (a) $1,028,526 (a) $3,271,672 $ 0 $ (1,272) $ (1,272) $ 3,270,400 Investment income 118,829 320,760 37,512 477,101 (1,339) (949) (2,288) 474,813 Investment expenses 0 (12,137) (9,621) (21,758) 0 0 0 (21,758) Net realized gains/(losses) 82,667 24,482 635 107,784 (7,429) (323) (7,752) 100,032 Dividends on preferred securities of subsidiary trusts (42,070) 0 0 (42,070) 0 0 0 (42,070) Income before provision for taxes 924,084 (b) 273,289 53,314 1,250,687 (117,682)(c) (29,105)(d) (146,787) 1,103,900 Provision for income taxes 347,351 96,740 15,625 459,716 (22,028) (10,761) (32,789) 426,927 Assets 3,215,497 5,516,874 849,192 9,581,563 3,065,440 (e) 149,282 (f) 3,214,722 12,796,285 Capital expenditures 87,167 2,507 0 89,674 0 0 0 89,674 Depreciation and amortization 53,163 77,652 (g) 0 130,815 105,079 (c) 28,222 (d) 133,301 264,116 -----------------------

(a) Revenues for the insurance operating segments include net investment income and net realized gains/(losses). (b) Amount includes $47.9 million of corporate expenses. (c) Amount includes PGAAP adjustments associated with the amortization of the AIF relationships ($42.7 million) and goodwill ($60.0 million). (d) Amount includes PGAAP adjustments associated with the amortization of the VOLBA asset and the reversal of amortization associated with the pre-1988 DAC asset. Included in this amount are adjustments totaling $21.3 million, increasing expense, due to unfavorable persistency experience on the pre-1988 business. (e) Amount includes PGAAP adjustments associated with the AIF relationships ($1,239.1 million) and goodwill ($1,741.3 million). (f) Amount includes PGAAP adjustments related to the DAC (($190.1) million) and VOLBA ($328.7 million) assets. (g) Amount includes the historical basis amortization associated with the DAC asset which included a $23.3 million adjustment, reducing expense, due to favorable persistency experience on the fixed universal life business. 72 FARMERS GROUP, INC. AND SUBSIDIARIES QUARTERLY FINANCIAL DATA (Unaudited)

~~Year~~Three months ended ~~December~~Year ~~31,~~ended ~~1998~~ -------------------------------------------------------- Mar. 31 June 30 Sept. 30 Dec. 31 Dec. 31 ----------- ----------- ----------- ----------- ------------ ~~GAAP~~(Amounts ~~historical~~in ~~basis~~thousands) ~~PGAAP~~2001 ~~adjustments~~------ ~~Consolidated~~Revenues: Farmers Management Services $ 415,074 $ 413,642 $ 428,272 $ 433,346 $ 1,690,334 Insurance Subsidiaries 474,115 275,631 238,498 221,660 1,209,904 ----------- ----------- ----------- ----------- ------------ Consolidated 889,189 689,273 666,770 655,006 2,900,238 ----------- ----------- ----------- ----------- ~~Management~~------------ ~~Life~~Income before provision for income taxes: Farmers Management ~~Life~~Services ~~PGAAP~~193,526 ~~services~~197,995 ~~insurance~~164,712 ~~Reinsurance~~193,025 ~~Total~~749,258 ~~services~~Insurance ~~insurance~~Subsidiaries ~~Total~~67,005 ~~basis~~88,258 37,854 15,824 208,941 ----------- ----------- ----------- ----------- ------------ Consolidated 260,531 286,253 202,566 * 208,849 * 958,199 ----------- ----------- ----------- ---- ------- ------------ ~~(Amounts~~Provision infor ~~thousands)~~income ~~Revenues~~taxes: $1Farmers Management Services 81,~~358~~046 79,~~175~~342 $69,316 ~~660~~80,~~419~~831 ~~(a)~~310,535 $1Insurance Subsidiaries 22,~~012~~975 25,~~390~~578 ~~(a)~~13,871 $35,~~030~~256 67,~~984~~680 $----------- 0----------- $----------- ~~207~~----------- $------------ ~~207~~Consolidated $104,021 3104,~~031~~920 83,~~191~~187 ~~Investment~~86,087 378,215 ----------- ----------- ----------- ----------- ------------ Consolidated net income ~~136,024~~$ ~~307~~156,~~221~~510 13$ 181,~~621~~333 ~~456~~$ 119,~~866~~379 ~~(962)~~$ ~~207~~122,762 ~~(755)~~$ ~~456~~579,~~111~~984 ~~Investment~~=========== ~~expenses~~=========== 0=========== ~~(13,658)~~=========== 0============ ~~(13,658)~~2000 0------ 0Revenues: 0Farmers ~~(13~~Management Services $ 375,~~658)~~332 ~~Net~~$ ~~realized~~396,785 ~~gains/(losses)~~$ 64407,~~430~~681 ~~(13~~$ 408,~~473)~~999 ($ 1,~~335)~~588,797 49Insurance Subsidiaries 449,~~622~~800 (2458,~~002)~~658 0472,324 (2476,~~002)~~903 471,~~620~~857,685 ~~Dividends~~----------- on----------- ~~preferred~~----------- ~~securities~~----------- of------------ ~~subsidiary~~Consolidated ~~trusts~~825,132 ~~(42~~855,~~070)~~443 0880,005 0885,902 ~~(42~~3,~~070)~~446,482 0----------- 0----------- 0----------- ~~(42,070)~~----------- ------------ Income before provision for income taxes: ~~821,885~~Farmers ~~(b)~~Management Services 209,908 210,199 215,~~609~~663 37215,~~178~~439 1851,~~058~~209 Insurance Subsidiaries 73,~~672~~304 ~~(110~~78,~~289)(c)~~427 289,~~179~~737 ~~(108~~95,~~110)~~866 ~~950~~337,~~562~~334 ~~Provision~~----------- ~~for~~----------- ~~income~~----------- ~~taxes~~----------- ~~309~~------------ Consolidated 283,~~992~~212 71288,~~072~~626 11305,~~784~~400 ~~392~~311,~~848~~305 ~~(19~~1,~~240)~~188,543 ~~114~~----------- ~~(19,126)~~----------- ~~373,722~~----------- ~~Assets~~----------- ~~3,089,150~~------------ ~~5,437,577~~Provision ~~797,984~~for ~~9,324,711~~income ~~3,183,651~~taxes: ~~(d)~~Farmers ~~178,242~~Management ~~(e)~~Services 386,~~361~~039 85,~~893~~015 1288,~~686~~664 88,~~604~~416 ~~Capital expenditures 59~~348,~~300~~134 ~~572~~Insurance 0Subsidiaries 5925,~~872~~091 026,894 031,022 032,083 59115,~~872~~090 ~~Depreciation~~----------- ~~and~~----------- ~~amortization~~----------- ~~71,658~~----------- ~~94,902~~------------ ~~(f)~~Consolidated ~~0 166~~111,~~560~~130 ~~104~~111,~~891~~909 ~~(c) (1~~119,~~280)(g)~~686 ~~103~~120,~~611~~499 ~~270~~463,~~171~~224 ----------- ----------- ----------- ----------- ------------ Consolidated net income $ 172,082 $ 176,717 $ 185,714 $ 190,806 $ 725,319 =========== =========== =========== =========== ============

* Consolidated income before provision for income taxes for the three months ended September 30, 2001 and December 31, 2001 decreased $86,120,000 and $64,858,000, respectively, due to impairment losses on investments (see Note L). 73 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures On June 7, 2001, FGI filed a report on Form 8-K announcing a change in its Certifying Accountant. PART III ITEM 10. Directors and Executive Officers of Farmers Group, Inc. MANAGEMENT Executive Officers and Directors The following table sets forth certain information concerning each person who is an executive officer or director of FGI as of the filing date:

~~Three~~Name ~~months~~Age ~~ended~~Position ~~Year ended~~ ------ -----~~---------------------------------------------~~ ------------ ~~Mar.~~Martin ~~31 June 30 Sept~~D. 30Feinstein ~~Dec. 31 Dec. 31 ----------- ----------- ----------- ----------- ------------~~ (~~Amounts~~1) ~~in thousands~~(2) ~~2000~~53 ~~------~~Chairman ~~Revenues:~~of ~~Management~~the ~~services $ 375~~Board,~~332~~ $President ~~396,785~~and $Chief ~~407,681~~Executive $Officer ~~408,999~~Jason $L. ~~1,588,797~~Katz ~~Insurance Subsidiaries 449,800 458,658 472,324 476,903~~ (1~~,857,685~~) ~~-----------~~(2) ~~-----------~~54 ~~-----------~~Executive ~~-----------~~Vice ~~------------ Consolidated 825~~President,~~132~~ ~~855,443~~General ~~880,005~~Counsel ~~885,902~~and ~~3,446,482~~Director ~~-----------~~Stephen ~~-----------~~J. ~~-----------~~Leaman ~~-----------~~(2) ~~------------~~54 ~~Income~~Executive ~~before~~Vice ~~provision for income taxes: Management services 209,908 210,199 215,663 215,439 851,209 Insurance Subsidiaries 73,304 78,427 89,737 95,866 337,334~~ President-~~----------~~Property ~~-----------~~and ~~-----------~~Casualty ~~-----------~~Operations ~~------------~~and ~~Consolidated~~Director ~~283,212~~John ~~288,626~~H. ~~305,400~~Lynch ~~311,305~~(2) ~~1,188,543~~50 ~~-----------~~Executive ~~-----------~~Vice President-~~----------~~Market ~~----------- ------------ Provision for income taxes:~~ Management ~~services~~and ~~86,039~~Director ~~85,015~~Keitha ~~88,664~~T. ~~88,416~~Schofield ~~348,134~~(2) ~~Insurance~~50 ~~Subsidiaries~~Executive ~~25,091~~Vice ~~26,894 31,022 32,083 115,090~~ President-~~----------~~Support ~~-----------~~Services ~~-----------~~and ~~-----------~~Director ~~------------~~Cecilia ~~Consolidated~~M. ~~111,130~~Claudio ~~111,909~~(2) ~~119,686~~47 ~~120,499~~Senior ~~463,224~~Vice ~~----------- ----------- ----------- ----------- ------------ Consolidated net income $ 172~~President,~~082~~ $Chief ~~176,717~~Information $Officer ~~185,714~~and $Director ~~190,806~~Gerald $E. ~~725,319~~Faulwell ~~===========~~(2) ~~===========~~59 ~~===========~~Senior ~~===========~~Vice ~~============ 1999 ------ Revenues: Management services $ 365~~President,~~778~~ $Chief ~~375,312~~Financial $Officer ~~375,177~~and $Director ~~373,416~~Stephen $J. ~~1,489,683~~Feely ~~Insurance~~(2) ~~Subsidiaries~~53 ~~436,375~~Senior ~~449,272~~Vice ~~437,964 457,106 1,780,717~~ President-~~----------~~State ~~-----------~~Operations ~~-----------~~and ~~-----------~~Director ~~------------~~Leonard ~~Consolidated~~H. ~~802,153~~Gelfand ~~824,584~~(2) ~~813,141~~57 ~~830,522~~Senior ~~3,270,400~~Vice ~~----------- ----------- ----------- ----------- ------------ Income before provision for income taxes: Management services 186~~President,~~784~~ ~~221,992~~President ~~213,487~~of ~~184,139~~Farmers ~~806,402~~Business Insurance ~~Subsidiaries~~and ~~67,392~~Director ~~76,546~~Paul ~~67,374~~N. ~~86,186~~Hopkins ~~297,498~~(2) ~~-----------~~45 ~~-----------~~Senior ~~-----------~~Vice ~~----------- ------------ Consolidated 254~~President,~~176~~ ~~298,538~~President ~~280,861~~of ~~270,325~~Strategic ~~1,103,900~~Alliances ~~-----------~~and ~~-----------~~Director ~~-----------~~C. ~~-----------~~Paul ~~------------~~Patsis ~~Provision~~(2) ~~for~~53 ~~income~~Senior ~~taxes:~~Vice ~~Management services 76~~President,~~778~~ ~~89,885~~President ~~89,145~~of ~~69,515~~Farmers ~~325,323~~Life ~~Insurance~~and ~~Subsidiaries~~Director ~~22,353~~Jerry ~~26,007~~J. ~~22,818~~Carnahan ~~30,426~~(2) ~~101,604~~45 ~~-----------~~Vice ~~----------- ----------- ----------- ------------ Consolidated 99~~President,~~131~~ ~~115,892~~President ~~111,963~~of ~~99,941~~Farmers ~~426,927~~Personal ~~-----------~~Lines ~~-----------~~and ~~-----------~~Director ----------- ------~~------~~ ~~Consolidated~~(1) ~~net~~Member ~~income~~of $the ~~155,045~~Administrative $Committee ~~182,646~~(2) $Member ~~168,898~~of $the ~~170,384~~Audit $and ~~676,973~~Compliance ~~=========== =========== =========== =========== ============~~Committee

The present position and principal occupation during each of the last five years of the executive officers and directors named above are set forth below. Martin D. Feinstein has served as Chairman of the Board since November 1997, Chief Executive Officer of FGI since January 1997, President of FGI since January 1995 and as a director of FGI since February 1995. In addition, Mr. Feinstein is a member of the Group Management Board of ZGH. Previously, Mr. Feinstein served as a director of B.A.T from January 1997 to September 1998 and held various positions with FGI, including serving as Chief Operating Officer of FGI from January 1995 to January 1997. Jason L. Katz has served as Executive Vice President and General Counsel of FGI since June 1998 and as a director of FGI since May 1986. Previously, Mr. Katz served as Senior Vice President and General Counsel of FGI from February 1992 to June 1998. Stephen J. Leaman has served as Executive Vice President-Property and Casualty Operations since June 2001 and as a director of FGI since April 2000. Previously, Mr. Leaman served as Senior Vice President of Maryland Casualty Company from January 1997 to June 1997, Executive Vice President of Maryland Casualty Company from June 1997 to January 1999, Senior Vice President of FGI and President of Farmers Specialty Products from 74 January 1999 to June 1999 and Senior Vice President of FGI and President of Farmers Personal Lines from June 1999 to June 2001. John H. Lynch has served as Executive Vice President-Market Management since June 2001 and as a director of FGI since July 1998. Previously, Mr. Lynch served as Vice President-Personal Lines Operations of FGI from January 1997 to October 1997, Senior Vice President-Personal Lines Operations of FGI from October 1997 to July 1998, Senior Vice President of FGI and President- Farmers Personal Lines from July 1998 to June 1999 and Executive Vice President-Field Operations from June 1999 to June 2001. Keitha T. Schofield has served as Executive Vice President-Support Services since January 1998 and as a director of FGI since May 1997. Ms. Schofield served as Senior Vice President and Chief Information Officer of FGI from May 1995 to January 1997 and Chief Information Officer from January 1997 to January 1998. Cecilia M. Claudio has served as a director of FGI since April 2000 and as Senior Vice President and Chief Information Officer of FGI since July 1998. Previously, Ms. Claudio served as Chief Information Officer and Senior Vice President of Information Technology of Anthem, Inc. from 1996 to May 1998. Additionally, Ms. Claudio has served on the Board of Directors of Sybase, Inc., a business intelligence and mobile technology company, since November 1999. Gerald E. Faulwell has served as a director of FGI since April 2000 and as Senior Vice President and Chief Financial Officer of FGI since September 1998. Previously, Mr. Faulwell served as Senior Vice President-Strategic Planning, Budgeting and Administration of FGI from January 1996 to September 1998. Stephen J. Feely has served as Senior Vice President of State Operations since April 2001 and as a director of FGI since April 2000. Previously, Mr. Feely served as Vice President of FGI and California State Executive from September 1996 to September 1998, Vice President-State Operations of FGI from September 1998 to January 2000 and Senior Vice President and Chief Marketing Officer of FGI from January 2000 to April 2001. Leonard H. Gelfand has served as a director of FGI since April 2000 and as Senior Vice President of FGI and President of Farmers Business Insurance since July 1998. Previously, Mr. Gelfand served as Senior Vice President-Commercial of FGI and President-Truck Underwriters Association from January 1995 to July 1998. Paul N. Hopkins has served as Senior Vice President of FGI and President of Strategic Alliances since April 2001 and as a director of FGI since April 2000. Previously, Mr. Hopkins served as Vice President-Agencies of FGI from November 1994 to October 1997, Senior Vice President-Agencies of FGI from October 1997 to September 1998, Senior Vice President and Chief Marketing Officer of FGI from September 1998 to January 2000 and Senior Vice President- State Operations of FGI from January 2000 to April 2001. C. Paul Patsis has served as a director of FGI since April 2000 and as Senior Vice President of FGI and President of Farmers Life since May 1998. Previously, Mr. Patsis served as Chairman and Chief Executive Officer of Marketing One, Inc. from 1989 to 1996. Jerry J. Carnahan has served as a director of FGI since August 2001 and as Vice President of FGI and President of Farmers Personal Lines since June 2001. Previously, Mr. Carnahan served as Assistant Vice President and Executive Director for Nevada from May 1996 to September 1998, Vice President of Sales from September 1998 to June 1999 and Executive Director for California from June 1999 to June 2001. 75 ITEM 11. Executive Compensation The following table sets forth the annual compensation for services in all capacities to FGI for the fiscal years ended December 31, 2001, 2000 and 1999 of those persons who were, as of December 31, 2001, (i) FGI's Chief Executive Officer and (ii) the other four most highly compensated executive officers of FGI (the "Named Executive Officers").

~~Name~~SUMMARY ~~Age~~COMPENSATION ~~Position~~TABLE Annual Compensation ------ ----- ------------- ~~Martin~~All D.Other ~~Feinstein~~Name ~~(1)~~and ~~(2)~~LTIP 52Payouts ~~Chairman~~Compensation ofPrincipal ~~the~~Position ~~Board,~~Year ~~President~~Salary ~~and~~($) ~~Chief~~Bonus ~~Executive Officer Jason L. Katz~~ ($)(1) ($)(2) ~~53 Executive Vice President, General Counsel and Director John H. Lynch~~ (2$)(3) 49------------------------- ~~Executive~~------ ~~Vice~~------------- ~~President~~-~~Field~~----------- ~~Operations~~------------ ~~and~~------------- ~~Director~~Martin ~~Keitha T~~D. ~~Schofield~~Feinstein ~~(2)~~2001 491,033,333 ~~Executive~~175,000 ~~Vice~~155,000 ~~President-Support~~Chairman ~~Services~~of ~~and~~the ~~Director~~2000 ~~Cecilia~~950,000 M.896,122 ~~Claudio~~195,804 ~~(2)~~145,412 46Board, ~~Senior~~President ~~Vice~~1999 ~~President~~900,000 ~~Chief~~1,006,689 ~~Information~~0 ~~Officer~~136,562 and ~~Director~~Chief ~~Gerald~~Executive E.Officer ~~Faulwell~~Stephen ~~(2)~~J. 58Leaman ~~Senior~~2001 ~~Vice~~442,500 ~~President~~312,058 ~~Chief~~0 ~~Financial~~66,375 ~~Officer~~Executive ~~and~~Vice ~~Director~~President ~~Stephen~~2000 J.365,000 ~~Feely~~248,670 520 ~~Senior~~55,869 ~~Vice~~1999 ~~President~~316,666 ~~Chief~~272,462 ~~Marketing~~0 ~~Officer~~48,049 ~~and~~John ~~Director Leonard~~ H. ~~Gelfand~~Lynch ~~(2)~~2001 56417,500 ~~Senior~~254,066 ~~Vice~~0 ~~President~~62,625 ~~President~~Executive ofVice ~~Farmers~~President ~~Business~~2000 ~~Insurance~~352,500 ~~and~~207,075 ~~Director~~0 ~~Paul~~53,955 N.1999 ~~Hopkins~~285,417 44261,586 ~~Senior~~0 ~~Vice~~43,308 ~~President-State~~Jason ~~Operations~~L. ~~and~~Katz ~~Director~~2001 ~~Stephen~~395,000 J.310,994 ~~Leaman~~0 ~~(2)~~59,250 53Executive ~~Senior~~ Vice President, ~~President~~2000 of377,400 ~~Farmers~~291,761 ~~Personal~~0 ~~Lines~~57,767 and ~~Director~~General C.Counsel ~~Paul~~1999 ~~Patsis~~364,000 ~~(2)~~413,017 520 ~~Senior Vice President~~55,232 ~~President~~Keitha ofT. ~~Farmers~~Schofield ~~Life~~2001 ~~and~~392,800 ~~Director~~292,171 ~~-----------------~~0 ~~(1)~~58,920 ~~Member~~Executive ofVice ~~the~~President ~~Administrative~~2000 ~~Committee~~372,800 ~~(2)~~263,642 ~~Member~~0 of57,063 ~~the~~1999 ~~Audit~~363,000 ~~and~~331,639 ~~Compliance~~0 ~~Committee~~55,080

--------------------- (1) Bonus amounts reported in the year in which service related to such bonus is rendered. A portion of each amount is not paid until the year subsequent to the year of service. Information related to 2001 for Mr. Feinstein was not available for inclusion in this Report. (2) During 2000 and 2001, Mr. Feinstein received payouts associated with the 1997 and 1998 Zurich Long Term Incentive Plan awards, respectively. As a member of the Zurich Group Management Board, Mr. Feinstein participated on a pro-rata basis for the years 1997 and 1998. Awards are based on the financial performance of ZGH over a three-year period in relation to the achieved levels of return on equity in excess of minimum threshold levels. The awards are only determined at the end of the performance period and are made partially in cash and partially in Zurich shares. As a result in 2000, Mr. Feinstein received $195,804 in cash and deferred receipt of 466 shares related to the 1997 awards, and in 2001 Mr. Feinstein received $175,000 in cash and deferred receipt of 314 shares related to the 1998 awards. The deferred shares are held by the Zurich Central Share Vehicle. In 1999, 2000 and 2001, Messrs. Feinstein, Katz, Leaman and Lynch and Ms. Schofield participated in Zurich and FGI's Long Term Performance Share Plans. The target number of performance shares to be awarded for 2001 is 1,463, 405, 440, 415 and 402, respectively. The target number of performance shares to be awarded for 2000 is 976, 272, 244, 237 and 268, respectively. The target number of performance shares to be awarded for 1999 is 627, 178, 149, 130 and 177, respectively. The number of shares awarded is linked to performance goals over a three-year period. Shares for the 1999 plan will be awarded in 2002. Depending upon performance, the range of shares to be awarded will vary from 0% to 200% of the target number of shares indicated. (3) Represents estimated amounts to be contributed by FGI under the Employees' Profit Sharing Savings Plan Trust (the "Deferred Plan") and reported in the year of service as earned. To the extent that a participant's annual benefits under the Deferred Plan exceed certain limits imposed by law, such amounts will be paid under FGI's nonqualified Employee Benefits Restoration Plan (the "Benefits Restoration Plan"), which is funded through a grantor trust. 76 The following table sets forth the options granted to the Named Executive Officers for the fiscal years ended December 31, 2001, 2000 and 1999 under the Zurich Global Share Option Plan.

~~SUMMARY~~2001 ~~COMPENSATION~~2000 ~~TABLE~~1999 ~~Annual~~Options ~~Compensation~~Options ~~------------------------~~Options ~~Name~~Over ~~and~~Over ~~LTIP~~Over ~~Payouts~~Zurich ~~All~~Zurich ~~Other~~Zurich ~~Principal~~Financial ~~Position~~Services ~~Year~~Financial ~~Salary~~Services ~~($)~~Financial ~~Bonus~~Services Officer Shares ($#)(1) Shares ($#)(2)(3) ~~Compensation~~Shares ($#)(32)(4) ------- ------------------ ------ ---------- --~~----------~~ ------------ -------~~------~~ Martin D. Feinstein ~~2000 950~~14,~~000~~503 ~~896~~3,~~122~~749 ~~195~~2,~~804~~293 ~~145,412~~Stephen ~~Chairman~~J. ofLeaman ~~the 1999 900,000~~ 1,~~006,689~~613 0671 ~~136,562~~388 ~~Board,~~John ~~President~~H. ~~1998~~Lynch ~~900~~1,~~000~~519 ~~948,192~~651 0338 ~~137,024 and Chief Executive Officer~~ Jason L. Katz ~~2000 377~~1,~~400~~482 ~~291,761~~745 0463 ~~57,767 Executive Vice President 1999 364,000 413,017 0 55,232 and General Counsel 1998 345,000 407,642 0 52,526~~ Keitha T. Schofield ~~2000 372~~1,~~800~~474 ~~263,642~~735 0 57,063 Executive Vice 1999 363,000 331,639 0 55,080 President 1998 332,500 330,784 0 50,623 Stephen J. Leaman 2000 365,000 248,670 0 55,869 Senior Vice President 1999 316,666 272,462 0 48,049 John H. Lynch 2000 352,500 207,075 0 53,955 Executive Vice President 1999 285,417 261,586 0 43,308 1998 237,500 234,267 0 36,159463

--------------------- (1) Zurich share options were granted at an exercise price of 584.85 CHF for the 2001 grant. As of the grant date, the currency exchange rate was 1.71 CHF per $1. The exercise period related to these options is February 1, 2004 through January 31, 2008. (2) Due to the Zurich capital structure unification in October 2000, share options in the previous holding companies, Allied Zurich p.l.c. ("Allied Zurich") and Zurich Allied AG ("Zurich Allied"), were replaced by share options in the new group holding company, Zurich Financial Services ("Zurich"). The exercise price of Allied Zurich and Zurich Allied share options granted in 2000 and 1999 were based on a 10% premium to the average market value during January 2000 and January 1999, respectively. The exercise periods related to these options were February 1, 2003 through January 31, 2007 for the 2000 grant and February 1, 2002 through January 31, 2006 for the 1999 grant. As a result of the unification in October 2000, Allied Zurich share options were converted to Zurich share options using an exchange ratio of 42.928 while the Zurich Allied share options were converted using an exchange ratio of 1.00. (3) The Allied Zurich share options and the Zurich Allied share options were granted at an exercise price of 7.06 GBP and 901.20 CHF, respectively, for the 2000 grant. As of the grant date, the currency exchange rate was 0.61 GBP per $1 and 1.59 CHF per $1 for the Allied Zurich share options and the Zurich Allied share options, respectively. The exercise price of the 2000 Allied Zurich and Zurich Allied share options as of the date of share unification was 762.46 CHF and 901.20 CHF, respectively. (4) The Allied Zurich share options and the Zurich Allied share options were granted at an exercise price of 10.34 GBP and 1,157.10 CHF, respectively, for the 1999 grant. As of the grant date, the currency exchange rate was 0.61 GBP per $1 and 1.42 CHF per $1 for the Allied Zurich share options and Zurich Allied share options, respectively. The exercise price of the 1999 Allied Zurich and Zurich Allied share options as of the date of share unification was 1,116.71 CHF and 1,157.0 CHF, respectively. Employees' Pension Plan In addition to the compensation set forth above, the Named Executive Officers participate with all eligible employees of the Company in the Company's tax-qualified Employees' Pension Plan (the "Pension Plan"). The Named Executive Officers also participate in the Benefits Restoration Plan, funded through a grantor trust, which provides supplemental benefits to the extent amounts otherwise payable under the Pension Plan and the Deferred Plan are limited under applicable laws. (Together, the Pension Plan and the Benefits Restoration Plan are referred to as the "Retirement Plans"). Effective May 7, 1997, the Employee Benefits Restoration Plan was amended to include awards made under the Executive Incentive Plan as compensation in calculating pension benefits, starting with the 1996 awards paid in 1997. The entire benefit derived from inclusion of the Executive Incentive Plan award(s) will be paid from the Employee Benefits Restoration Plan. This amendment impacts certain key officers and includes the Named Executive Officers. The Pension Plan bases retirement benefits upon the employees' final five-year average annual base salary and the total years of credited service, subject to a maximum of 35 years of credited service. Employees who are at least 21 years of age and who have completed one year of service participate in the Pension Plan retroactive to the first day of the month following their hire date. Eligible participants become vested and earn a nonforfeitable right 77 to Pension Plan benefits after completing five years of service or upon reaching the first day of the month in which they become age 65. Unreduced monthly pension benefits begin at age 62 with 30 years of service and at age 65 with less than 30 years of service, but participants may retire as early as age 55 at actuarially reduced rates, provided that they have at least 15 years of service. Participants who become totally and permanently disabled may qualify for disability retirement benefits if they have 10 or more years of service and are between the ages of 35 and 65. For purposes of illustration, the following table provides examples of the annual pension benefits payable at age 65 pursuant to the defined benefit portions of the Retirement Plans, assuming benefits are paid in the form of a straight life annuity. Such benefits are not reduced for Social Security payments or other offset amounts.

~~2000~~PENSION ~~1999~~PLAN ~~Options~~TABLE ~~Options~~Years ~~Over~~of ~~Over~~Credited ~~Zurich~~Service ~~Zurich~~----------------------------------------------------------------------- ~~Financial~~Five-Year ~~Services~~Average ~~Financial~~15 ~~Services~~20 ~~Officer~~25 ~~Shares~~30 ~~(#)(1)(2)~~35 ~~Shares~~Remuneration ~~(#)(1)(3)~~------------------------------ ----------- ------------ ------------ ------------ ------------ ~~Martin~~450,000 D.$ ~~Feinstein~~116,916 3$ 155,~~749~~889 2$ 194,~~293~~861 ~~Jason~~$ L233,833 ~~Katz~~$ ~~745~~272,805 ~~463~~500,000 ~~Keitha~~130,041 T.173,389 ~~Schofield~~216,736 ~~735~~260,083 ~~463~~303,431 ~~Stephen~~600,000 J.156,291 ~~Leaman~~208,389 ~~671~~260,486 ~~388~~312,583 ~~John~~364,680 H.700,000 ~~Lynch~~182,541 ~~651~~243,389 ~~338~~304,236 365,083 425,930 800,000 208,791 278,389 347,986 417,583 487,181 900,000 235,041 313,389 391,736 470,083 548,430 1,000,000 261,291 348,389 435,486 522,583 609,680 1,100,000 287,541 383,389 479,236 575,083 670,931 1,200,000 313,791 418,389 522,986 627,583 732,180 1,300,000 340,041 453,389 566,736 680,083 793,430 1,400,000 366,291 488,389 610,486 732,583 854,681 1,500,000 392,541 523,389 654,236 785,083 915,930 1,600,000 418,791 558,389 697,986 837,583 977,180

At the end of 2001, Messrs. Feinstein, Katz, Leaman and Lynch and Ms. Schofield were credited under the Pension Plans with 28.0, 17.4, 5.0, 24.8 and 6.6 years of service, respectively. The average annual salary for the five-year period ended December 31, 2001 for Messrs. Feinstein, Katz, Leaman and Lynch and Ms. Schofield was $1,566,360, $654,440, $538,135, $462,203 and $587,360, respectively. These figures include the 1996, 1997, 1998, 1999 and 2000 Executive Incentive Plan Awards paid in 1997, 1998, 1999, 2000 and 2001. Employment Agreements and Change-in-Control Arrangements The Company has entered into employment agreements with each of Messrs. Feinstein and Katz and Ms. Schofield. Each of the agreements provide that if the executive's employment is terminated following a "Change-in-Control" (as defined in the agreement), the executive will receive a severance payment equal to two (2) times the executive's "Cash Compensation" (as defined in the agreement, but generally including certain base salary, bonus and profit sharing plan allocation amounts). In addition to the Cash Compensation amount payable, the executive is also entitled to (i) continued coverage under applicable group welfare benefit plans of the Company (for example, the Company's life, disability and health insurance plans), (ii) a benefit under the Company's long-term incentive plan (determined as if the executive terminated employment due to retirement, and as if any remaining performance criteria had been waived) and (iii) a lump sum payment of certain enhanced benefit amounts under the Company's pension plans (including the supplemental pension plan). Mr. Feinstein and Katz's agreements provide for a tax gross-up payment equal to the amount of any excise tax payable under Section 4999 of the Internal Revenue Code of 1986, as amended. In the case of Ms. Schofield, amounts payable under the agreement will be reduced to the extent necessary to avoid the application of such excise tax. 78 The payments under each agreement will be made if the executive is employed at the time of the Change-in-Control and his or her termination is (i) by the Company other than for "Cause" (as defined in the agreement), (ii) by the executive for "Good Reason" (as defined in the agreement) or (iii) other than due to the executive's death, disability or retirement. The agreement provides for an automatic annual 12-month extension of the "Initial Term" (as defined in the agreement). In all cases, however, the agreements will expire upon the death, retirement or disability termination of the executive. Compensation Committee Interlocks and Insider Participation N/A ITEM 12. Security Ownership of Certain Beneficial Owners and Management All of the outstanding Class A Shares, which have 86.625% of the voting power of FGI, are owned beneficially and of record by ZGH, Mythenquai 2, P.O. Box 8022, Zurich, Switzerland. All of the outstanding Class B Shares, which have 10% of the voting power of FGI, are owned beneficially and of record by Allied Zurich Holdings Limited, Mourant du Feu & Jeune, P.O. Box 87, 22 Grenville Street, St. Helier, Jersey JE4 8PX, Channel Islands. All of the Class C Shares, which have the remaining 3.375% of the voting power of FGI, are owned beneficially and of record by the Partnerships (see Note B), Mythenquai 2, CH-8002, Zurich, Switzerland. The following table sets forth information regarding beneficial ownership of Zurich ordinary shares as of December 31, 2001 by (a) the Chief Executive Officer of FGI, (b) each of the four most highly compensated executive officers of FGI other than the Chief Executive Officer and (c) all directors and executive officers of FGI, as a group.

~~PENSION~~Zurich ~~PLAN~~Ordinary ~~TABLE~~Shares ~~Years~~Beneficially ofOwned ~~Credited Service~~ ---------------------~~--------------------------------------------------~~ ~~Five-Year~~Name ~~Average~~Number 15Percent ~~20 25 30 35 Remuneration~~ ------~~------------------------~~ ----------- ---------~~---~~ ~~------------~~Martin ~~------------~~D. ~~------------~~Feinstein $409 ~~350,000~~(1) $Stephen ~~90,700~~J. $Leaman ~~120,934~~5 $ 151,167 $ 181,401 $ 211,634 400,000 103,825 138,434 173,042 207,651 242,259 450,000 116,950 155,934 194,917 233,901 272,884 500,000 130,075 173,434 216,792 260,151 303,509 600,000 156,325 208,434 260,542 312,651 364,759 700,000 182,575 243,434 304,292 365,151 426,009 800,000 208,825 278,434 348,042 417,651 487,259 900,000 235,075 313,434 391,792 470,151 548,509 (1~~,000,000~~) ~~261,325~~Jason ~~348,434~~L. ~~435,542~~Katz ~~522,651~~0 ~~609,759~~John ~~1,100,000~~H. ~~287,575~~Lynch ~~383,434~~0 ~~479,292~~Keitha ~~575,151~~T. ~~671,009~~Schofield ~~1,200,000~~0 ~~313,825~~All ~~418,434~~Directors ~~523,042~~and ~~627,651~~Executive ~~732,259~~Officers ~~1,300,000~~as ~~340,075~~a ~~453,434~~group ~~566,792~~414 ~~680,151 793,509~~(1)

------------ (1) Less than 1% of the outstanding Zurich ordinary shares. 79 ITEM 13. Certain Relationships and Related Transactions As of December 31, 2001 and 2000, all of the members of the Company's Board of Directors were employees of the Company as a result of a restructuring of the Company's Board of Directors in April 2000. Prior to April 2000, certain directors of the Company were partners in legal firms that received fees for legal services from the Company and the P&C Group Companies. As such, for the year ended December 31, 1999, these fees totaled $8,492,000. As of December 31, 2001, the Company held the following notes receivable from related parties: - A $250,000,000 note receivable from ZGAUS. 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. Income earned on this note totaled $18,750,000 for each of the years ended December 31, 2001 and 2000 and $781,000 for the year ended December 31, 1999. - $95,000,000 of notes receivable from UKISA. The Company purchased $1,057,000,000 of notes from UKISA on September 3, 1998. Subsequently, on March 1, 2000, Eagle Star assigned $175,000,000 of matured surplus notes of the P&C Group Companies 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 December 31, 2001, the Company held $95,000,000 of notes receivable from UKISA each with a maturity date of September 2002. The $95,000,000 of 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 years ended December 31, 2001, 2000 and 1999, income earned totaled $14,589,000, $45,425,000 and $59,434,000, respectively. 80 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Exhibits and Financial Statement Schedules (1) Exhibits 3.1 Articles of Incorporation of FGI, restated as of February 6, 2001, plus Certificates of Designation C-1 through C-6 3.2 Bylaws of FGI (i) 3.3 Form of Certificate of Trust of the Issuer (ii) 3.4 Trust Agreement (ii) 4.1 Form of Amended and Restated Trust Agreement (ii) 4.2 Form of Indenture among FGI and The Chase Manhattan Bank, N.A., as Debenture Trustee (ii) 4.3 Form of Preferred Security (included in Exhibit 4.1) (ii) 4.4 Form of Junior Subordinated Debentures (included in Exhibit 4.2) (ii) 4.5 Form of Guarantee by FGI and The Chase Manhattan Bank, N.A., as Guarantee Trustee (ii) 10.1 Form of Subscription Agreement (Farmers Underwriters Association) (ii) 10.2 Form of Subscription Agreement (Truck Underwriters Association) (ii) 10.3 Form of Subscription Agreement (Fire Underwriters Association) (ii) 10.4 The Farmers Group, Inc. 1993 Premier Award Unit Plan, as amended November 4, 1993 (ii), as further amended February 14, 1996 (iii), as further amended November 10, 1997 (v) 10.5 Farmers Group, Inc. Executive Incentive Program (ii), as amended May 7, 1997 and August 13, 1997 (v), as further amended February 10, 1999 (ix), as further amended December 2000 10.6 Description of Farmers Group, Inc. Outside Directors' Retirement Program (ii) 10.7 The Farmers Group, Inc. Discretionary Management Incentive Program for Exceptional Performance (ii), as amended December 1996 (iv), as further amended January 2001 (x) 10.8 Farmers Group, Inc. Employee Benefits Restoration Plan (ii), as amended May 7, 1997 (v) 10.9 The Zurich Financial Services Group Long Term Performance Share Plan For Selected Executives (ix) 10.10 Form of Employment Agreement with certain officers (v), as amended June 15, 1998 (vii), as further amended June 1, 1999 (ix) 10.11 The Zurich Financial Services Group Share Option Plan For Selected Executives (ix) 12 Statement of Computation of the Ratio of Earnings to Fixed Charges 16 Letter regarding change in Certifying Accountant (xi) 21 Subsidiaries of FGI (viii) 24 Power of Attorney (ii) 99 Risk Management ---------------- (i) Incorporated by reference to the corresponding Exhibit to FGI's Annual Report on Form 10-K for the year ended December 31, 1987. (ii) Incorporated by reference to the corresponding Exhibit to FGI's Registration Statement No. 33-94670 and No. 33-94670-01 on Form S-1. (iii) Incorporated by reference to the corresponding Exhibit to FGI's Annual Report on Form 10-K for the year ended December 31, 1995. (iv) Incorporated by reference to the corresponding Exhibit to FGI's Annual Report on Form 10-K for the year ended December 31, 1996. (v) Incorporated by reference to the corresponding Exhibit to FGI's Annual Report on Form 10-K for the year ended December 31, 1997. (vi) Incorporated by reference to the corresponding Exhibit to FGI's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1998. (vii) Incorporated by reference to the corresponding Exhibit to FGI's Annual Report on Form 10-K for the year ended December 31, 1998. (viii) Incorporated by reference to the corresponding Exhibit to FGI's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999. (ix) Incorporated by reference to the corresponding Exhibit to FGI's Annual Report on Form 10-K for the year ended December 31, 1999. (x) Incorporated by reference to the corresponding Exhibit to FGI's Annual Report on Form 10-K for the year ended December 31, 2000. (xi) Incorporated by reference to the corresponding Exhibit to FGI's Form 8-K filed on June 7, 2001. 81 (2) Financial Statement Schedules Page ------ a. Financial Statements. See Index to Financial Statements and Quarterly Financial Data for a list of financial statements included in this Report. 28 b. Financial Statement Schedules Schedule I - Marketable Securities - Other Investments, as of December 31, 2001 S-1 Schedule III - Supplementary Insurance Information, for the years ended December 31, 2001, 2000 and 1999 S-2 Schedule IV - Reinsurance, for the years ended December 31, 2001, 2000 and 1999 S-3 Schedule V - Valuation and Qualifying Accounts, for the years ended December 31, 2001, 2000 and 1999 S-4 (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. 82 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Los Angeles, State of California on FARMERS GROUP, INC. --------------------------------------------- (Registrant) Date: March 26, 2002 By: /s/ Martin D. Feinstein --------------------------------------------- Martin D. Feinstein, Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- Principal Executive Officer /s/ Martin D. Feinstein Chairman of the Board, March 26, 2002 ------------------------------- President and Chief (Martin D. Feinstein) Executive Officer Principal Financial and Accounting Officer /s/ Gerald E. Faulwell Senior Vice President, March 26, 2002 ------------------------------- Chief Financial Officer (Gerald E. Faulwell) and Director Directors /s/ Jason L. Katz Executive Vice President, March 26, 2002 ------------------------------- General Counsel and Director (Jason L. Katz) /s/ Stephen J. Leaman Executive Vice President March 26, 2002 --------------------------------and Director (Stephen J. Leaman) /s/ John H. Lynch Executive Vice President March 26, 2002 ------------------------------- and Director (John H. Lynch) /s/ Keitha T. Schofield Executive Vice President March 26, 2002 ------------------------------- and Director (Keitha T. Schofield) /s/ Cecilia M. Claudio Senior Vice President, March 26, 2002 ------------------------------- Chief Information Officer (Cecilia M. Claudio) and Director /s/ Stephen J. Feely Senior Vice President March 26, 2002 ------------------------------- and Director (Stephen J. Feely) /s/ Leonard H. Gelfand Senior Vice President, March 26, 2002 ------------------------------- President of Farmers (Leonard H. Gelfand) Business Insurance and Director /s/ Paul N. Hopkins Senior Vice President, March 26, 2002 ------------------------------- President of Strategic (Paul N. Hopkins) Alliances and Director /s/ C. Paul Patsis Senior Vice President, March 26, 2002 ------------------------------- President of Farmers Life (C. Paul Patsis) and Director /s/ Jerry J. Carnahan Vice President, President March 26, 2002 ------------------------------- of Farmers Personal Lines and (Jerry J. Carnahan) Director S-1 FARMERS GROUP, INC. AND SUBSIDIARIES SCHEDULE I - MARKETABLE SECURITIES - OTHER INVESTMENTS December 31, 2001 (Amounts in thousands)

~~Zurich~~Market ~~Ordinary~~value ~~Shares~~Amount ~~Beneficially~~at ~~Owned~~which at balance shown on the Type of Investment Cost sheet date balance sheet -------------------- ------------ ~~Number~~------------- ~~Percent~~--------------- Insurance Subsidiaries: Marketable securities - available-for-sale: United States government and its agencies $ 1,618,411 $ 1,653,249 $ 1,653,249 States and municipalities 259,050 268,891 268,891 Public utilities 111,685 111,827 111,827 Foreign government 19,938 20,129 20,129 Mortgage backed securities-Corporate 917,690 945,944 945,944 All other corporate 1,645,826 1,677,750 1,677,750 Preferred stocks (redeemable) 21,806 21,307 21,307 ------------ ------------- --------------- ~~Martin~~4,594,406 D.4,699,097 ~~Feinstein~~4,699,097 ~~409~~------------ ------------- --------------- Preferred stocks (1non-redeemable) ~~Jason~~11,123 L.12,245 ~~Katz~~12,245 0------------ ~~Keitha~~------------- T.--------------- ~~Schofield~~Common 0stocks: ~~Stephen~~Public J.utilities ~~Leaman~~17,544 516,335 ~~(1)~~16,335 ~~John~~Banks, H.trusts ~~Lynch~~and 45insurance companies 49,684 48,176 48,176 Industrial, miscellaneous and all other 286,520 275,173 275,173 ------------ ------------- --------------- 353,748 339,684 339,684 ------------ ------------- --------------- Mortgage loans on real estate 28,901 xxxxx 28,901 ------------ ------------- --------------- Policy loans 232,287 xxxxx 232,287 ------------ ------------- --------------- Real estate (1) ~~All~~80,814 ~~Directors~~(1) ~~and~~xxxxx ~~Executive~~80,814 ~~Officers~~------------ as------------- a--------------- ~~group~~Joint ~~570~~ventures 3,625 xxxxx 3,625 ------------ ------------- --------------- Certificates of contribution of the P&C Group Companies 403,000 xxxxx 403,000 ------------ ------------- --------------- Surplus note of the P&C Group Companies 87,500 xxxxx 87,500 ------------ ------------- --------------- S&P 500 call options 36,453 12,690 12,690 ------------ ------------- --------------- Other investments 12,435 xxxxx 12,435 ------------ ------------- --------------- Total investments $ 5,844,292 $ 5,063,716 $ 5,912,278 ============ ============= =============== (1) Net of accumulated depreciation of $25,217.

S-2 FARMERS GROUP, INC. AND SUBSIDIARIES SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION For the years ended December 31, 2001, 2000 and 1999 (Amounts in thousands)

~~Market~~Column ~~value~~A ~~Amount~~Column atB ~~which~~Column atC ~~balance~~Column ~~shown~~D inColumn ~~the~~E ~~Type~~Column ofF ~~Investment~~Column ~~Cost~~G ~~sheet date balance sheet~~ -------- -------- ---- ---- -------- --------~~-----~~ -------- ------- ~~Insurance Subsidiaries: Marketable securities~~ - ~~available-for-sale:~~Future ~~United~~policy ~~States~~Deferred ~~government~~benefits, ~~and~~Other ~~its~~policy ~~agencies~~Premium $policy 1losses,~~442,809~~ $claims ~~2,131,213~~claims $and ~~2,131,213 States~~ and ~~municipalities~~policy ~~164,871~~Net ~~165,650~~Insurance ~~165,650~~acquisition ~~Public~~and ~~utilities~~loss ~~146,887~~Unearned ~~143,494~~benefits ~~143,494~~charge ~~Foreign~~investment ~~government~~Subsidiaries ~~62,646~~costs ~~63,054 63,054 All other corporate 2,512,959~~ (1~~,841,278~~) ~~1,841,278~~expenses ~~Preferred~~premiums ~~stocks~~payable ~~(redeemable)~~revenues ~~29,649~~income ~~30,646 30,646~~ ------------ -- ----------- --------------- ~~4,359,821 4,375,335 4,375,335~~ -------- ---- ------ ------- --- ------------ ~~Preferred~~FARMERS ~~stocks~~RE ~~(non-redeemable)~~December 1131,~~128~~ 112001 $ 0 $ 18,~~500~~922 11$ 0 $ 0 $ 400,~~500~~000 ~~------------~~$ ~~-------------~~36,854 ~~---------------~~=========== ~~Common~~============= ~~stocks:~~======== ~~Public~~========== ~~utilities~~========== 10========== December 31,~~309~~ 112000 $ 0 $ 89,~~340~~936 11$ 0 $ 0 $1,~~340~~000,000 ~~Banks~~$ 31,360 ~~trusts~~=========== ~~and~~============= ~~insurance~~======== ~~companies~~========== 34========== ========== December 31,~~313~~ 351999 $1,~~766~~000,000 35$ 27,~~766~~891 ~~Industrial~~========== ========== FARMERS LIFE December 31, ~~miscellaneous~~2001 ~~and~~$ ~~all~~835,779 ~~other~~$ ~~286~~3,~~163~~896,088 ~~246~~$ 1,~~301~~504 ~~246~~$ 262,~~301~~954 ~~------------~~$ ~~-------------~~493,767 ~~---------------~~$ ~~330~~331,~~785~~378 ~~293~~=========== ============ ======== ========== ========== ========== December 31,~~407~~ ~~293~~2000 $ 838,~~407~~121 ~~------------~~$ ~~-------------~~3,607,103 ~~---------------~~$ ~~Mortgage~~1,590 ~~loans~~$ on139,957 ~~real~~$ ~~estate~~443,204 36$ 321,~~984~~989 ~~xxxxx~~=========== 36============ ======== ========== ========== ========== December 31,~~984~~ ~~------------~~1999 ~~-------------~~$ ~~---------------~~420,358 ~~Policy~~$ ~~loans~~307,674 ~~218~~========== ========== TOTAL FARMERS RE & FARMERS LIFE December 31,~~162~~ ~~xxxxx~~2001 ~~218~~$ 835,~~162~~779 $ 3,915,010 $ 1,504 $ 262,954 $ 893,767 $ 368,232 =========== ============ ======== ========== ========== ========== December 31, 2000 $ 838,121 $ 3,697,039 $ 1,590 $ 139,957 $1,443,204 $ 353,349 =========== ============ ======== ========== ========== ========== December 31, 1999 $1,420,358 $ 335,565 ========== ========== Column A Column H Column I Column J Column K ---------- -- ------ -------- -------- -------- ~~Real~~Benefits, ~~estate~~Amortization ~~(1) 89~~claims,~~426~~ of deferred losses and policy Other Insurance settlement acquisition operating Premiums Subsidiaries expenses costs (1) ~~xxxxx~~expenses ~~89,426~~written (2) ------------ -- ----------- --------------- ~~Joint ventures 4,651 xxxxx 4,651~~ ------------ ------------- ~~---------------~~FARMERS ~~Certificates~~RE ofDecember ~~contribution~~31, of2001 ~~the~~$ ~~P&C~~281,996 ~~Group~~$ ~~296~~0 $ 108,204 $ 400,000 ~~xxxxx~~========== ~~296~~============= ============ =========== December 31, 2000 $ 686,874 $ 0 $ 288,433 $ 1,000,000 ~~------------~~========== ~~-------------~~============= ~~---------------~~============ ~~Surplus~~=========== ~~notes~~December of31, ~~the~~1999 ~~P&C~~$ ~~Group~~661,260 ~~206~~$ 0 $ 313,~~500~~952 ~~xxxxx~~$ ~~206~~1,~~500~~000,000 ~~------------~~========== ~~-------------~~============= ~~---------------~~============ ~~S&P~~=========== ~~500~~FARMERS ~~call~~LIFE ~~options~~December 2931,~~696~~ 262001 $ 280,~~271~~400 26$ 97,~~271~~408 ~~------------~~$ ~~-------------~~54,134 ~~---------------~~$ ~~Other~~0 ~~investments~~========== 5============= ============ =========== December 31,~~279~~ ~~xxxxx~~2000 5$ 218,~~279~~086 ~~------------~~$ ~~-------------~~108,757 ~~---------------~~$ ~~Total~~55,313 ~~investments~~$ 0 ========== ============= ============ =========== December 31, 1999 $ 5189,~~588~~998 $ 102,~~432~~581 $ 457,~~706~~597 $ 0 ========== ============= ============ =========== TOTAL FARMERS RE & FARMERS LIFE December 31,~~513~~ 2001 $ 5562,~~563~~396 $ 97,~~515~~408 $ 162,338 $ 400,000 ========== ============= ============ =========== December 31, 2000 $ 904,960 $ 108,757 $ 343,746 $ 1,000,000 ========== ============= ============ =========== December 31, 1999 $ 851,258 $ 102,581 $ 371,549 $ 1,000,000 ========== ============= ============ =========== ------------------- (1) ~~Net~~Includes value of ~~accumulated~~life ~~depreciation~~business ofacquired ~~$29~~(2) Does not apply to life insurance or title insurance. This amount includes premiums from reinsurance assumed,~~369~~ and is net of premiums on reinsurance ceded.

S-3 FARMERS GROUP, INC. AND SUBSIDIARIES SCHEDULE IV - REINSURANCE For the years ended December 31, 2001, 2000 and 1999 (Amounts in thousands)

Column A Column B Column C Column D Column E Column F ~~Column G~~ --------- -------- ---- ---- -------- ------------ ------------- ------------ ~~Future~~Percentage ~~policy~~Ceded ~~Deferred~~to ~~benefits,~~Assumed ~~Other~~of ~~policy~~amount ~~Premium~~Gross ~~policy~~other ~~losses,~~from ~~claims~~other ~~claims and and policy~~ Net ~~Insurance~~assumed ~~acquisition~~amount ~~and~~companies ~~loss~~companies ~~Unearned~~amount ~~benefits~~to ~~charge~~net ~~investment Subsidiaries costs (1) expenses premiums payable revenues income~~ -------------- ------------ -------------- -------- ----- ----- --------- 2001 ---------- ~~December~~Life ~~31,~~insurance ~~2000~~in-force $ ~~838~~122,~~121~~932,279 $ 333,~~697~~062,~~039~~102 $ 114,~~590~~258,822 $ ~~139~~104,~~957 $1~~128,~~443,204~~999 $13.7% ~~353,349~~------------ ~~===========~~------------ ~~=============~~------------ ~~========~~------------- ~~==========~~-------- ~~==========~~Life ~~==========~~premium ~~December~~& ~~31,~~policy ~~1999~~charges ~~879~~543,~~625~~658 361,~~547,292~~212 111,~~686~~321 81493,~~793~~767 ~~1,420,358~~2.3 ~~335,565~~------------ ~~===========~~------------ ~~=============~~------------ ~~========~~------------- ~~==========~~-------- ~~==========~~Non-life ~~==========~~premiums ~~December~~0 ~~31,~~0 ~~1998 1~~400,~~380,433~~000 ~~307~~400,~~391~~000 ~~==========~~100.0 ~~==========~~------------ ~~Column~~------------ A------------ ~~Column~~------------- H-------- ~~Column~~2000 I---------- ~~Column~~Life Jinsurance in-force $112,177,578 $ 21,976,688 $ 9,576,567 $ 99,777,457 9.6% ------------ ------------ ------------ ------------- ~~Benefits,~~-------- ~~Amortization~~Life ~~claims~~premium & policy charges 466,898 of33,527 ~~deferred~~9,833 ~~losses~~443,204 ~~and~~2.2 ~~policy~~------------ ~~Other~~------------ ~~Insurance~~------------ ~~settlement~~------------- ~~acquisition~~-------- ~~operating~~Non-life ~~Subsidiaries~~premiums ~~expenses~~0 ~~costs~~0 (1),000,000 ~~expenses~~1,000,000 100.0 ------------ -- ---------- ------------ ------------- -------- 1999 ---------- ~~December~~Life ~~31,~~insurance ~~2000~~in-force $ ~~904~~102,~~960~~137,710 $ ~~108~~12,~~757~~179,486 $ ~~343~~9,~~746~~724,860 ~~==========~~$ ~~=============~~99,683,084 ~~============~~9.8% ~~December~~------------ ~~31,~~------------ ~~1999~~------------ ~~851,258~~------------- ~~102,581~~-------- ~~371,549~~Life ~~==========~~premiums ~~=============~~& ~~============~~policy ~~December~~charges 31425,232 ~~1998 812~~13,~~820~~939 909,~~082~~065 ~~380~~420,~~530~~358 ~~==========~~2.2 ~~=============~~------------ ~~============~~------------ ------------ ------------- (-------- Non-life premiums 0 0 1),000,000 ~~Includes~~1,000,000 ~~value~~100.0 of------------ ~~life~~------------ ~~business~~------------ ~~acquired~~------------- --------

S-4 FARMERS GROUP, INC. AND SUBSIDIARIES SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS (Amounts in thousands)

~~Column~~Balance Aat ~~Column~~Balance Bat ~~Column~~beginning Cend ~~Column~~of ~~D Column E Column F --------- ------------ ------------ ------------ ------------- ------- ----- Percentage Ceded to Assumed~~ of ~~amount~~year ~~Gross~~year ~~other from other Net assumed amount companies companies amount to net~~ ------------ ------------ ~~------------~~Year ----------~~---~~ ~~-------~~2001 ~~----- 2000 ---------- Life insurance in-force~~ $~~112,177,578~~ ~~$ 21~~3,~~976,688~~553 $ 93,~~576,567~~798 $2000 9911,~~777,457~~817 ~~9.6% ------------ ------------ ------------ ------------- ------- ----- Life premium & policy charges 466~~3,~~898~~553 33,527 9,833 443,204 2.2 ------------ ------------ ------------ ------------- ------- ----- Non-life premiums 0 0 1,000,000 1,000,000 100.0 ------------ ------------ ------------ ------------- ------- ----- 1999 ~~---------- Life insurance in-force $102~~14,~~137,710~~206 ~~$ 12~~11,179,486 $ 9,724,860 $ 99,683,084 9.8% ------------ ------------ ------------ ------------- ------- ----- Life premium & policy charges 425,232 13,939 9,065 420,358 2.2 ------------ ------------ ------------ ------------- ------- ----- Non-life premiums 0 0 1,000,000 1,000,000 100.0 ------------ ------------ ------------ ------------- ------- ----- 1998 ---------- Life insurance in-force $ 96,883,459 $ 968,606 $ 8,893,263 $104,808,116 8.5% ------------ ------------ ------------ ------------- ------- ----- Life premiums & policy charges 375,259 3,728 8,798 380,329 2.3 ------------ ------------ ------------ ------------- ------- ----- Non-life premiums 104 0 1,000,000 1,000,104 100.0 ------------ ------------ ------------ ------------- ------- -----817

Includes allowances for investment properties, mortgage loan reserves and other miscellaneous reserves. Exhibit 3.1 1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF FARMERS GROUP, INC. FIRST: The name of this corporation is Farmers Group, Inc. SECOND: The principal office and place of business of this Corporation in the State of Nevada shall be located at Scheeline Banking and Trust Company, in the City of Reno, County of Washoe, State of Nevada, but the Corporation may maintain an office, or offices, in such Towns, Cities, places and foreign Countries outside of the State of Nevada, as the Board of Directors may from time to time determine, or as may be designated by the By-Laws of the Corporation, and all Corporate business of every kind and nature may be conducted outside the State of Nevada the same as in the State of Nevada. THIRD: The nature of the business and the objects and purposes proposed to be transacted, promoted and carried on by this Corporation are: 1. To purchase and otherwise acquire, become interested in, hold, sell, mortgage, pledge or otherwise dispose of, or turn to account or realize upon, all forms of securities including stocks, bonds, debentures, notes, evidences of indebtedness, certificates of indebtedness, certificates of interest, commercial papers, mortgages, deeds of trust and other similar instruments and rights, issued or created by corporations, domestic or foreign, associations, firms, trustees, syndicates, individuals, governments, states, municipalities, or other political divisions, or issued or created by others, and to deal in and with the same, and to issue in exchange therefor or in payment thereof its own stocks, bonds or other obligations or securities, or otherwise pay therefor; to exercise in respect thereof any and all rights, powers and privileges of individual ownership or interest therein, including the right to vote thereon and to consent or otherwise act with respect thereto; to do any and all acts and things for the preservation, protection, improvement, and enhancement in value thereof or designed to accomplish any such purpose, and to aid by loan, subsidy, guaranty, or in any other manner those issuing, creating or responsible for any of such securities, all to such extent as a corporation organized under said General Corporation Law may then lawfully do. 2. To take, hold, manage or control escrow of any kind or nature and to act as escrow or escrow holder in escrows of any and every kind. 3. To investigate and report with respect to, and to undertake, carry on, aid, assist or participate in the litigation or reorganization of, financial, commercial, mercantile, agricultural, industrial or other business concerns, firms, associations and corporations, and for that purpose to take over the properties, manage the affairs and conduct the business of such concerns, firms associations and corporations, and in the course of such business to acquire and dispose of, or otherwise turn to account, all or any negotiable or transferable instruments or securities, including debentures, bonds, notes, certificates of indebtedness, certificates of interest, and all kinds of commercial paper. 4. To purchase or otherwise acquire, sell or otherwise dispose of, realize upon or otherwise turn to account, manage, liquidate or reorganize the properties, assets, business, undertakings, enterprises or ventures, or any part thereof, of corporations, associations, firms, 2 individuals, syndicates and others, to further and promote the general business interests of any thereof, and to improve, extend and place upon a safe and more permanent foundation any such business, undertaking, enterprises or venture. 5. To act as financial, commercial or general agent or representative of any corporation, association, firm, syndicate, individual or others, and as such to develop, improve and extend the property, trade and business interests thereof, and to aid any lawful enterprise in connection therewith, and in connection with acting as such, or as agent or broker for any principal to give any other aid or assistance. 6. To promote and assist, financially or otherwise, corporations, firms, syndicates, associations, individuals and others and to give any guaranty in connection therewith or otherwise for the payment of money or for the performance of any other undertaking or obligation. 7. To borrow money, and for moneys borrowed or in payment for property acquired, or for any other objects and purposes of the corporation or otherwise in connection with the transaction of any part of its business, to issue bonds, debentures, notes and other obligations, secured or unsecured, and to mortgage, pledge or hypothecate any or all of its properties or assets as security therefor. To make, accept, endorse, guarantee, execute and issue notes and other obligations, to mortgage, pledge or hypothecate any stocks, bonds or other evidences of indebtedness or securities and any other property held by it, or in which it may be interested, and to loan money with or without collateral or other security. 8. To guarantee the payment of the principal of and/or interest upon bonds, notes, or other evidences of secured indebtedness or obligations, or the performance of the contracts or other undertakings of any corporation, co-partnership, syndicate, individual or others, and, to such extent, to enter into, make, perform and carry out contracts of every kind and any lawful purpose, with any person, firm, association, corporation, syndicate or others. 9. To purchase, hold, sell and transfer the shares of its own capital stock; provided it shall not use its funds or property for the purchase of its own shares of capital stock when such use would cause any impairment of its capital; and provided further that shares of its own capital stock belonging to it shall not be voted upon directly or indirectly. 10. To purchase or otherwise acquire, hold, own, mortgage, sell, convey, exchange, option, subdivide, or otherwise dispose of real and personal property of every class and description and any estate or interest therein, including leaseholds for any term, in any of the States, Districts, Territories or Colonies of the United States, and in any and all foreign countries, subject to the laws of such State, District, Territory, Colony or Country. 11. In general, to manage, operate and carry on any other business in connection with the foregoing, and to have and exercise all the powers conferred by the laws of Nevada upon corporations formed under the act hereinafter referred to, and to do any or all of the things hereinbefore set forth to the same extent as natural persons might or could do. 12. The foregoing clauses shall be construed both as objects and powers; and it is hereby expressly provided that the foregoing enumeration of specific powers shall not be held to limit or restrict in any manner the powers of this corporation. 3 And in addition to the foregoing to exercise, transact and carry on in all of the States, Territories and Colonial possessions of the United States, exclusive of the State of Nevada, the following additional objects and purposes, to-wit: 13. To act as the agent, under Power of Attorney, or otherwise, of any number of individuals, partnerships and/or Corporations in the exchange of reciprocal or inter-insurance contracts, covering any and all forms of hazards which may be lawfully insured against except that of Life Insurance; to execute contracts for and on behalf of such Subscribers, whether individually or collectively, and to collect premiums and other fees for the same; to act as agent for any such Subscribers in obtaining such Insurance from other individuals, partnerships and/or Corporations. 14. To establish and maintain, on behalf of such Subscribers, out of the capital assets of this Company, or otherwise, a reserve in accordance with law, to meet losses which may accrue and to pay out the funds of Subscribers in meeting any such losses and any other expenses accruing in regard thereto. 15. To charge and receive from the Subscribers any such premiums and/or fees as may be fixed in such reciprocal and/or inter-insurance contracts and to disburse the same without restrictions, except those which may be required by law in the maintaining of legal reserves to meet losses. 16. To execute any and all bonds, documents, contracts or other instruments of writing which may be deemed necessary or desirable to carry out the purpose aforesaid, and to do all things necessary and requisite thereto, the same as an individual might or could do to carry those purposes into effect. FOURTH: The total authorized capital stock of the corporation shall consist of One Thousand (1,000) shares of common stock having a par value of One Dollar ($1.00) per share, of which four-hundred fifty (450) shares are to be Class A Common Stock, Five Hundred (500) shares are to be Class B Common Stock and fifty (50) shares are to be Class C Common Stock. The holders of the shares of Class A Common Stock shall be entitled to 1.0694444 votes per share (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 Corporation) upon the election of directors and on all other matters upon which stockholders generally are entitled to vote. The holders of the shares of Class B Common Stock shall be entitled to 0.1111111 of a vote per share upon the election of directors and on all other matters upon which stockholders generally are entitled to vote. The holders of the shares of Class C Common Stock shall be 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 as may be provided in a certificate of designation for any series of the Class C Common Stock. The holders of the shares of Class A Common Stock, Class B Common Stock and the Class C Common Stock shall be entitled to notice of any stockholders' meeting in accordance with the By-Laws of the Corporation, and the holders of the shares of Class A Common Stock, Class B Common Stock and Class C Common Stock shall vote together as a single class with respect to any matter brought to a stockholder vote, except as otherwise provided by law or in a certificate of designation for any series of the Class C Common Stock. Subject to the rights of the holders of the Class C Common Stock, the holders of the shares of Class A Common Stock and the holders of the shares of Class B Common Stock shall be entitled to 4 receive, when and if declared by the board of directors, out of funds of the Corporation at the time legally available therefor, dividends or distributions payable either in cash, in stock, or otherwise; provided, however, that the board of directors may, in its sole discretion, declare dividends or distributions payable exclusively to the holders of the shares of Class A Common Stock, or payable exclusively to the holders of the shares of Class B Common Stock, or payable to the holders of the shares of Class A Common Stock and the holders of the shares of Class B Common Stock in equal or unequal amounts, notwithstanding the amount of prior dividends or distributions declared on either such class or any other factor. In the event of a liquidation, dissolution or winding up of the Corporation, the holders of the shares of Class A Common Stock shall be entitled to receive any and all distributions of money or other property of the corporation to the exclusion of the holders of the shares of Class B Common Stock, but subject to the rights of the holders of Class C Common Stock. The shares of Class C Common Stock shall be designated into such series having such voting powers, preferences, limitations, restrictions and relative rights, including without limitation the dividend rights, dividend rate, conversion rights, special voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price or prices, the liquidation rights, and the number of shares constituting any such series, or any or all of them; as are determined by the Corporation's Board of Directors, or committee thereof, and as set forth in resolutions adopted by the Board of Directors, or committee thereof, prior to the issuance of any shares of such series of Class C Common Stock; provided, however, that in the event the Corporation fails to fully declare or pay the full amount of cash dividends to which the holders of each series of Class C Common Stock are entitled, cash dividends on the Class C Common Stock must be declared and paid pro rata based on the relative number of outstanding shares of each series of Class C Common Stock as provided in the certificates of designation of each series of Class C Common Stock. FIFTH: That the amount of capital with which the Corporation will begin business is Nine Hundred ($900.00) Dollars. SIXTH: The members of the Governing Board shall be styled Directors and the number of such Directors, which shall be not less than three, shall be the number thereof provided in the By-Laws of this Corporation. The names and post office addresses of the first Board of Directors are as follows: 5 NAME RESIDENCE ------ ---------- Louis H. Didier Puente, California Edward R. Moore Route #3, Santa Ana, California Frank A. Borchard Oxnard, California Thomas E. Leavey 616 Broadway Arcade Bldg. Los Angeles, California John C. Tyler 616 Broadway Arcade Bldg. Los Angeles, California Harry L. Person 616 Broadway Arcade Bldg. Los Angeles, California A.B. Person 616 Broadway Arcade Bldg. Los Angeles, California Geo. D. Rodgers 616 Broadway Arcade Bldg. Los Angeles, California J.K. Mahoney 616 Broadway Arcade Bldg. Los Angeles, California SEVENTH: The names and post office addresses of the original Subscribers of these Articles of Incorporation, and the number of shares and amount subscribed for by each respectively, are as follows:

~~Balance~~SHARES atNO. ~~Balance~~OF atNAME ~~beginning~~RESIDENCE ~~end~~PREFERRED ofAMOUNT ~~of year year~~ ---- -------- -- ----------- ~~YEAR~~ -------~~---~~ ~~2000~~Louis $H. 11Didier Puente,~~817~~ California One (1) $1.00 Edward R. Moore Route #3,~~553~~ ~~1999~~Santa 14Ana One (1) $1.00 California Frank R. Borchard Oxnard,~~206~~ 11California One (1) $1.00 Thomas E. Leavey 616 Broadway Arcade Bldg. One (1) $1.00 Los Angeles,~~817~~ ~~1998~~California 15John C. Tyler 616 Broadway Arcade Bldg. One (1) $1.00 Los Angeles,~~118~~ 14California Harry L. Person 616 Broadway Arcade Bldg. One (1) $1.00 Los Angeles,~~206~~ California A.B. Person 616 Broadway Arcade Bldg. One (1) $1.00 Los Angeles, California Geo. D. Rodgers 616 Broadway Arcade Bldg. One (1) $1.00 Los Angeles, California J. K. Mahoney 616 Broadway Arcade Bldg. One (1) $1.00 Los Angeles, California

EIGHTH: The Capital Stock of this Corporation, after the amount of the subscription price or par value has been paid in, shall not be subject to assessment to pay debts of this Corporation, and no stock issued as fully paid up shall ever be assessable or assessed and the Articles of Incorporation shall not be amended in this particular. 6 NINTH: This Corporation is to have perpetual existence. TENTH: In furtherance and not in limitation of the powers conferred by Statute the Board of Directors is expressly authorized: To make, alter and amend the By-Laws of this Corporation, to fix the amount to be reserved as working capital over and above its capital stock paid in, to authorize and cause to be executed mortgages and liens upon the real and personal property of this Corporation; From time to time to determine whether and to what extent, and at what times and places, and under what conditions and regulations, the accounts and books of this Corporation, (other than the stock ledger), or any of them, shall be open to inspection of stockholders, and no stockholders shall have any right of inspecting any account, book or documents of this Corporation except as conferred by the Statute, unless authorized by resolution of the stockholders or Directors; If the By-Laws so provide, to designate two (2) or more of its members to constitute an executive committee, which committee shall for the time being as provided in said resolution or in the By-Laws of this Corporation have and exercise any or all of the powers of the Board of Directors in the management of the business affairs of the Corporation, and to have power to authorize the seal of this Corporation to be affixed to all papers which may require it. Pursuant to the affirmative vote of the holders of at least a majority of the stock issued and outstanding, having voting power, given at a stockholders' meeting duly called for that purpose, or when authorized by a written consent of at least a majority of the holders of the voting stock issued and outstanding, the Board of Directors shall have power and authority at any meeting to sell, lease or exchange all of the property and assets of this Corporation, including its Good Will and its Corporate franchises, upon such terms and conditions as its Board of Directors deem expedient for the best interests of the Corporation. This Corporation may in its By-Laws confer power upon its Directors in addition to the foregoing, and in addition to the powers and authorities expressly conferred upon them by the Statute. Both stockholders and Directors shall have power if the By-Laws so provide, to hold their meetings, and to have one or more offices within or without the State of Nevada, and to keep the books of this Corporation (subject to the provisions of the Statutes), outside of the State of Nevada, at such place or places as may be from time to time designated by the Board of Directors. ELEVENTH: This Corporation reserves the right to amend, alter, change or repeal any provisions contained in these Articles of Incorporation (except such as are expressly stated herein as not to be amended), in the manner now or hereafter prescribed by Statute, and all rights conferred upon stockholders herein, and granted subject to this reservation. 7 The undersigned certify that the Board of Directors of the corporation, by unanimous written consent in lieu of meeting dated as of February 6, 2001, adopted a resolution to amend and restate the articles of incorporation of the corporation as set forth above, that the holders of all of the outstanding shares of the common stock of the corporation, by unanimous written consent in lieu of meeting dated as of February 6, 2001, voted in favor of the amended and restated articles of incorporation of the corporation as set forth above. Dated this 7 day of February, 2001. ----- By:/s/ Julian R.M. Harvey -------------------------------- Name: Julian R.M. Harvey Title: Vice President By:/s/ Doren Hohl ----------------------------------------- Name: Doren Hohl Title: Secretary 1 CERTIFICATE OF DESIGNATION OF CLASS C-1 COMMON STOCK of FARMERS GROUP, INC Pursuant to Sections 78.1955 and 78.315 of the General Corporation Law of the State of Nevada Farmers Group, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the provisions of the General Corporation Law of the State of Nevada, certifies as follows: FIRST: The Amended and Restated Articles of Incorporation of the Corporation (the "Articles of Incorporation") authorize the issuance of up to 50 shares of Class C common stock, par value $1.00 per share (the "Class C Common Stock"), and further, authorize the Board of Directors of the Corporation (the "Board of Directors") by resolution or resolutions, at any time and from time to time, to divide and establish any or all of the shares of Class C Common Stock into one or more series of Class C Common Stock, and without limiting the generality of the foregoing, to fix and determine the designation of each such series, the number of shares which shall constitute such series and such voting powers, and such preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof of the shares of each series so established. SECOND: The following resolutions authorizing the creation and issuance of a series of said shares of Class C Common Stock to be known as Class C-1 Common Stock were duly adopted by the Board of Directors on the 6th day of February, 2001, in accordance with Sections 78.1955 and 78.315 of the Nevada General Corporation Law. RESOLVED, that the Board of Directors, pursuant to authority vested in it by the provisions of the Articles of Incorporation, hereby authorizes the issuance of a series of the Corporation's Class C Common Stock, and hereby fixes the number, designation, preferences, rights, limitations and restrictions thereof in addition to those set forth in the Articles of Incorporation as follows: ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions. In this Certificate of Designation, unless the context otherwise requires "Affiliate" means, with respect to a specified Person, any other Person that directly or indirectly controls, is controlled by, or is under common control with, such specified Person. "Book-Entry Interest" means a beneficial ownership in Class C-1 Shares, the ownership and transfers of which are maintained through book entries of the Registrar as set forth in Section 9.04(b) of this Certificate of Designation. "Business Day" means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which commercial banks are authorized or required by law, regulation or 2 executive order to close in The City of New York. With respect to the LIBOR Determination Date, "Business Day" means a day on which dealings in deposits in U.S. dollars are transacted in the London interbank market. "Change of Control Event" means the Corporation ceasing to be an Affiliate of ZGH or any of its Affiliates, including, but not limited to a Change of Control Tax Event. "Change of Control Tax Event" means a Change of Control Event which results in an adverse tax effect on the holders of Trust Capital Securities I. "Class A Shares" means the Class A Common Stock, par value $1.00 per share, of the Corporation. "Class B Shares" means the Class B Common Stock, par value $1.00 per share, of the Corporation. "Class C Shares" means, collectively, the Class C-1 Shares and all other series of Class C Common Stock, par value $1.00 per share, of the Corporation, for which a certificate or certificates of designation have been filed with the Nevada Secretary of State. "Class C-1 Shares" has the meaning set forth in Section 2.01 hereof. "Class C-1 Indicative Rate" means initially, a fixed annual rate of 6.01% of the Class C-1 Share Liquidation Preference and on or after March 30, 2006, a variable rate equal to Three-Month LIBOR plus 150 basis points, reset quarterly, determined by reference to the Class C-1 Share Liquidation Preference; provided, however, that such variable rate shall never be greater than 15%. "Class C-1 Share Liquidation Amount" means, with respect to each Class C-1 Share, an amount equal to the greater of (i) the Class C-1 Share Liquidation Preference, plus an amount (whether or not declared) equal to the Class C-1 Share Liquidation Preference multiplied by the Class C-1 Indicative Rate multiplied by a fraction, the numerator of which is the number of days in the current Dividend Period that have passed prior to the date on which the liquidation occurs and the denominator of which is 360 and (ii) the Economic Dividend Payable. "Class C-1 Share Liquidation Preference" has the meaning set forth in Section 2.01 hereof. "Clearing Agency" means the clearing agency with respect to the Class C-1 Shares. "Code" means the United States Internal Revenue Code of 1986, as amended. "Common Shares" means, collectively, the Class A Shares and the Class B Shares. "DTC" means The Depository Trust Company. "Dividend" means a cash distribution to holders of the Class C-1 Shares from the Corporation with respect to any applicable Dividend Period and payable on an applicable Dividend Date. 3 "Dividend Date" means the 15th day of February, May, August and November in each year (or the preceding Business Day if such day is not a Business Day) commencing February 15, 2001, with respect to Dividends for each relevant Dividend Period on the Class C-1 Shares. "Dividend Period" means for each Dividend Date, a quarterly period comprised of two components: On or prior to March 30, 2006, (i) an arrears component from and including the date of the original issuance of the Class C-1 Shares (in the case of the first Dividend Period) or, in all other cases, from and including the 30th day of any of March, June, September or December immediately preceding the then current Dividend Date, to but excluding the then current Dividend Date and (ii) an advance component from and including the then current Dividend Date to but excluding the next 30th day of any of March, June, September or December (as the case may be) immediately succeeding the then current Dividend Date, and no additional dividends will accrue in respect of such additional day(s). The foregoing is intended to provide for a computation of dividends on the basis of a 360 day year of twelve 30-day months with four equal quarterly payments. After March 30, 2006, (i) an arrears component from and including the 30th day of any of March, June, September or December immediately preceding the then current Dividend Date, provided, that if any such day is not a Business Day, then the start of the period will be postponed to the next succeeding Business Day, except that in the case in which the Business Day falls in the next succeeding calendar month, any such period will start on the immediately preceding Business Day, to but excluding the then current Dividend Date, and (ii) an advance component from and including the then current Dividend Date to but excluding the next 30th day of any of March, June, September or December (as the case may be) immediately succeeding the then current Dividend Date, provided, that if any such day is not a Business Day, then the end of the period (and associated first day of the next Dividend Period) will be postponed to the next succeeding Business Day, except that in the case in which the Business Day falls in the next succeeding calendar month any such period will end (and associated first day of the next Dividend Period will start) on the immediately preceding Business Day. "Economic Dividend Payable" means initially, as determined in good faith by the Board of Directors based on the opinion of a nationally recognized investment bank, for the Class C-1 Shares in the aggregate 1.3245033% of, as applicable, (i) the amount of dividends paid or set apart for payment by the Corporation on its common shares (including the Class C Shares) during any Dividend Period, (ii) the amount of any redemption proceeds on the Corporation's common shares to the extent such proceeds are greater than the fair market value of the common shares being redeemed, or (iii) the aggregate amount available for payment of distributions on liquidation with respect to the Corporation's common shares entitled to payments upon liquidation; provided that: (A) subsection (i) above shall only apply when determining whether the Class C-1 Shares are entitled to Dividends, (B) subsection (ii) above shall only apply upon a redemption of the Corporation's common shares and (C) subsection (iii) above shall only apply upon a liquidation, dissolution and winding up of the Corporation. This percentage shall be adjusted from time to time (for example upon the issuance of common shares by the Corporation in exchange for cash or property) based upon the percentage of the Corporation's fair market value represented by the Class C-1 Shares at the time of such adjustment; provided that any such adjustment shall be determined in good faith by the Board of Directors based on the opinion of a nationally recognized investment bank. "Holder" means the beneficial owners of the Class C-1 Shares. 4 "IAI" means a Person that is an "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act or the analog provisions of any successor rule. "IRS" means the United States Internal Revenue Service. "Junior Shares" has the meaning set forth in Section 3.01. "LIBOR Determination Date" the first LIBOR Determination Date will be March 28th, 2006, and thereafter will be two Business Days prior to each June 30th, September 30th, December 30th and March 30th thereafter (except if any such day is not a Business Day, then the relevant LIBOR Determination Date will be two Business Days prior to the preceding Business Day). "LLC I" means Zurich RegCaPS Funding LLC I, a Delaware limited liability company. "LLC I Payment Date" means the 30th day of March, June, September and December in each year (or the preceding Business Day if such day is not a Business Day) when the corresponding RegCaPS I Payment for such period has been made. "LLC I Payments" means cash payments on the LLC Preferred Interests I. LLC I Payments shall not include tax amounts withheld and not refunded. "LLC Preferred Interest I" means the preferred membership interests in LLC I. "Minimum Net Worth Amount" initially means US$ 3 billion. The Minimum Net Worth Amount will be increased by the proceeds paid to the Corporation in consideration for the issuance and sale of any of its capital stock ranking pari passu with or senior to the Class C-1 Shares with respect to the payment of distributions or amounts payable upon liquidation. The Minimum Net Worth Amount will be reduced by the amounts paid to purchase or redeem any shares of Class C Common Stock or any of its capital stock ranking pari passu with or senior to the Class C-1 Shares or the other Class C Shares, but only by an amount equal to the liquidation preference of such shares. The net worth of the Corporation will be determined in accordance with U.S. GAAP. "Partnership I" means Zurich RegCaPS Funding Limited Partnership I, a Delaware limited partnership. "Person" means any legal person, including any individual, corporation, association, partnership (general or limited), joint venture, trust, estate, limited liability company, or other legal entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Purchaser" ZGH, or any of its Affiliates. "QIB" means a qualified institutional buyer within the meaning of Rule 144A under the Securities Act. "RegCaPS I" means any regulatory capital preferred securities of Partnership I. 5 "RegCaPS I Payment Date" means the 15th day of February, May, August and November in each year (or on the preceding Business Day if such day is not a Business Day) commencing February 15, 2001 with respect to the RegCaPS I Payments for each relevant RegCaPS Payment Period. "RegCaPS I Payment Period" means for each RegCaPS I Payment Date, a quarterly period comprised of two components: (i) an arrears component from and including the date of the original issuance of the RegCaPS I (in the case of the first RegCaPS I Payment Period) or, in all other cases, from and including the relevant LLC I Payment Date immediately preceding the then current RegCaPS I Payment Date to but excluding the then current RegCaPS I Payment Date and (ii) an advance component from and including the then current RegCaPS I Payment Date to but excluding the next relevant succeeding LLC I Payment Date. "RegCaPS I Payments" means cash remittances, initially, at a fixed annual rate of 6.01% of the liquidation preference of the RegCaPS I, and on or after March 30, 2006, a variable annual rate equal to Three-Month LIBOR plus 150 basis points, reset quarterly to the registered holder of the RegCaPS I with respect to any applicable RegCaPS I Payment Period and payable on an applicable RegCaPS I Payment Date. "Securities Act" means the U.S. Securities Act of 1933, as amended. "Securities Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended. "Special Independent Directors" means two (2) independent directors of the Corporation to be elected by holders of the Class C Shares upon the occurrence of certain events as stated in this Certificate of Designation and in the certificates of designation of the other Class C Shares. The holders of the Class C-1 Shares shall have the right to vote for the Special Independent Directors only upon the failure of the Corporation to pay Dividends for 24 consecutive months at the Class C-1 Indicative Rate on the Class C-1 Shares. "Three Month LIBOR" means with respect to any LIBOR Determination Date, a rate determined on the basis of the offered rates for three-month United States dollar deposits of not less than a principal amount equal to that which is representative for a single transaction in such market at such time, commencing on the second Business Day immediately following such LIBOR Determination Date, which appears on US LIBOR Telerate Page 3750 as of approximately 11:00 a.m., London time, on such LIBOR Determination Date. If on any LIBOR Determination Date no rate appears on US LIBOR Telerate Page 3750 as of approximately 11:00 a.m., London time, the Paying Agent shall on such LIBOR Determination Date request the four major reference banks in the London interbank market selected by the Paying Agent to provide the Paying Agent with a quotation of the rate at which three-month deposits in United States dollars, commencing on the second Business Day immediately following such LIBOR Determination Date, are offered by it to prime banks in the London interbank market as of approximately 11:00 a.m., London time, on such LIBOR Determination Date and in a principal amount equal to that which is representative for a single transaction in such market at such time. If at least two such quotations are provided, Three-Month LIBOR for such LIBOR Determination Date will be the arithmetic mean of such quotations as calculated by the Paying Agent. If fewer than two quotations are provided, Three-Month LIBOR for such LIBOR Determination Date will be the arithmetic mean of the rates quoted as of approximately 11:00 a.m., London time, on such LIBOR 6 Determination Date by three major banks in the London interbank market selected by the Paying Agent for loans in United States dollars to leading European banks, having a three-month maturity commencing on the second Business Day immediately following such LIBOR Determination Date and in a principal amount equal to that which is representative for a single transaction in such market at such time; provided, however, that, if the banks selected as aforesaid by the Paying Agent are not quoting as mentioned in this sentence, Three-Month LIBOR for such LIBOR Determination Date will be Three-Month LIBOR determined with respect to (i) the immediately preceding Dividend Period for purposes of the Class C Shares and (ii) the immediately preceding RegCaPS I Payment Period for purposes of the RegCaPS I. "Transfer Agent" means the transfer agent with respect to the Class C-1 Shares which shall initially be the Corporation. "Trust I" means Zurich RegCaPS Funding Trust I, a Delaware statutory business trust. "Trust Capital Securities I" means 200,000 trust capital securities, liquidation preference US $1,000 each, representing undivided beneficial ownership interests in Trust I. "U.S. GAAP" means the generally accepted accounting principles in the United States. "ZGH" means Zurich Group Holding a Swiss stock corporation (as defined in Article 620 et seq., of the Swiss Code of Obligation), formerly known as Zurich Financial Services, a wholly-owned subsidiary of Zurich Financial Services or its successors and assigns. "Zurich Financial Services" means Zurich Financial Services, a Swiss stock corporation (as defined in Article 620 et seq., of the Swiss Code of Obligation) listed on the Swiss Exchange SWX with a secondary listing on the London Stock Exchange and the holder of directly or indirectly 100% of the shares of ZGH or its successors and assigns. "1940 Act" means the U.S. Investment Company Act of 1940, as amended. ARTICLE 2 NUMBER AND DESIGNATION SECTION 2.01. Number and Designation. 8 and 8/9 shares of the Class C Common Stock of the Corporation are hereby designated as a series of Class C Common Stock designated as Class C-1 Common Stock, par value $1.00 per share (the "Class C-1 Shares"). The Class C-1 Shares shall have a liquidation preference of twenty-two million five hundred thousand United States dollars ($22,500,000) per share (the "Class C-1 Share Liquidation Preference"). ARTICLE 3 RANK SECTION 3.01 Rank. (a)The Class C-1 Shares shall, only with respect to payment of Dividends at the Class C-1 Indicative Rate (as defined below) and with respect to the payment of the Class C-1 Share Liquidation Preference upon the liquidation, dissolution and winding up of the Corporation, rank senior to all of the Junior Shares, including the Common Shares. In all other respects, the Class C-1 Shares shall rank pari passu with the Junior Shares, including the Common 7 Shares and the other series of Class C Shares and shall participate equally with the Common Shares and the other series of Class C Shares with respect to distributions paid by the Corporation and shall participate equally with the Class A Shares and the other series of Class C Shares with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation. The Class C-1 Shares will rank junior in all respects to any indebtedness of the Corporation. The Class C-1 Shares shall rank pari passu with the other series of Class C Shares for all purposes. All securities of the Corporation to which the Class C-1 Shares rank senior (whether with respect to dividends or upon liquidation, dissolution, winding up or otherwise), including the Common Shares, are collectively referred to herein as the "Junior Shares." The definition of Junior Shares shall also include any rights or options exercisable for or convertible into any of the Junior Shares. (b) Without prior consent of the holders of not less than a majority of the outstanding Class C-1 Shares, the Corporation shall not issue any class or series of equity securities whose terms provide that such securities rank senior to or pari passu with the Class C-1 Shares with respect to the rights to receive dividends and other distributions or with respect to any amounts payable upon liquidation, dissolution or winding up; provided that the Corporation may file certificates of designation and issue shares in accordance therewith for other series of Class C Shares to be designated as Class C-2 Common Stock, Class C-3 Common Stock, Class C-4 Common Stock, Class C-5 Common Stock, and Class C-6 Common Stock, each of which ranks pari passu with the Class C-1 Shares with respect to distributions paid by the Corporation and with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation. Further, if the Corporation has paid in full the lesser of (i) each Dividend on its respective Dividend Payment Date during the last 24 months at the Class C-1 Indicative Rate, or (ii) prior to February 9, 2003, all Dividends in an amount at least equal to the Class C Share Indicative Rate that could have been paid on the Class C Shares, the Corporation may issue an unlimited amount of additional Class C Shares and other equity ranking pari passu with the Class C-1 Shares without the consent of the holders of the Class C-1 Shares. ARTICLE 4 DIVIDENDS SECTION 4.01 Rate; Dividend Date. (a) Each Class C-1 Share shall be entitled to receive cash Dividends on a non-cumulative basis, when as and if declared by the Board of Directors, out of funds legally available for the payment of distributions on each Dividend Date commencing February 15, 2001. Prior to March 30, 2006 the amount of Dividends will be computed on the basis of twelve 30-day months and will be computed on the basis of equal quarterly payments. On or after March 30, 2006, the amount of Dividends will be computed on the basis of a 360-day year and the actual number of days in such Dividend Period. When Dividends are paid on the Class C-1 Shares at less than the Class C-1 Indicative Rate, all Dividends declared on the Class C Shares will be paid pro rata based on the outstanding number of shares of each series of Class C Common Stock and such Dividends declared on the Class C-1 Shares will be paid pro rata based on the outstanding number of Class C-1 Shares. (b) The Paying Agent will calculate Three-Month LIBOR as of each LIBOR Determination Date and shall make such rate calculation available to holders of Class C-1 Shares. The Paying Agent also shall determine the Dividends payable on each Dividend Date and give notice thereof (including the applicable rate, amount, the applicable period and payment) to the holders of Class C-1 Shares. The notices set forth in this paragraph shall be sent by first class mail to the address of each holder of 8 Class C-1 Shares as it appears on the register kept by the Registrar and shall be available at the offices of the Paying Agent. SECTION 4.02 Dividend Restrictions. (a) No distribution or redemption, including without limitation cash dividends, may be declared or paid or set apart for payment on any Junior Shares and neither the Corporation nor any of its Affiliates may purchase or redeem for cash any outstanding Junior Shares, unless: (i) full Dividends have been declared and paid or set apart for payment on the Class C-1 Shares in an amount at least equal to the greater of (A) the Dividends payable or set apart during such Dividend Period at the Class C-1 Indicative Rate; or (B) the Economic Dividend Payable; (ii) Partnership I has paid or set apart for payment the full amount of RegCaPS I Payments for the current RegCaPS I Payment Period; (iii) LLC I has set apart or paid the full amount of the LLC I Payments on an LLC I Payment Date in any period when the corresponding RegCaPS I Payment for such LLC I Payment Date has been made; and (iv) in the case of a repurchase or redemption, such repurchase or redemption does not cause the net worth of the Corporation to be less than the Minimum Net Worth Amount. Notwithstanding the foregoing, for so long as the Corporation has paid or set apart for payment Dividends on the Class C-1 Shares at least equal to the greater of (i)(A) or (i)(B) and clauses (ii) (iii) and (iv) above are satisfied, the Corporation may declare and pay Dividends on any Junior Shares with respect to such Dividend Period. (b) (i) If a Dividend is paid or set apart on the Class C-1 Shares during any Dividend Period at a rate less than the Class C-1 Indicative Rate, the Corporation may not make any dividend payments on the Junior Shares and may only make dividend payments on its other securities that rank pari passu with the Class C-1 Shares, if any, in the same proportion as the partial Dividend paid or set apart on the Class C-1 Shares for the current Dividend Period bears to the full Dividend payment determined for such Dividend Period at the Class C-1 Indicative Rate. (ii) For so long as the Class C-1 Shares are outstanding, if a partial RegCaPS I Payment is made or set apart for any RegCaPS I Payment Period, the Corporation may not make any dividend payments during such RegCaPS I Payment Period on its Junior Shares and may only make dividend payments on its other securities that rank pari passu with the Class C-1 Shares in the same proportion as the lesser of (i) the proportion the partial RegCaPS I Payment made or set apart for the Current RegCaPS I Payment Period bears to the RegCaPS I Payment determined for such RegCaPS I Payment Period and (ii) the proportion the partial Dividend paid or set apart on the Class C-1 Shares for the corresponding Dividend Period bears to the full Dividend payment for such Dividend Period at the Class C-1 Indicative Rate. Additionally, for so long as the Class C-1 Shares are outstanding, all shares of common or preferred stock issued by majority-owned subsidiaries of the Corporation which shares are not beneficially owned by the Corporation or its wholly-owned subsidiaries will be subject to the 9 restrictions set forth above on the payment of distributions and other payments only to the extent that such minority shares are owned by Zurich Financial Services or one of its controlled Affiliates. (c) The Corporation intends that the holders of the RegCaPS I shall be third party beneficiaries of, and entitled to enforce, the provisions of this Section 4.02 as if such provisions constituted a contract between the Corporation and the holders of the Class C-1 Shares, and the holders of the RegCaPS I were third-party beneficiaries to such contracts. SECTION 4.03. Payment of Dividends. Dividends and other payments on the Class C-1 Shares will be payable to the holders thereof as they appear on the books and records of the Corporation on the relevant record dates, which will be one Business Day prior to the relevant Dividend Date or other payment date. Such Dividends will be paid either (i) by the Corporation or (ii) in the event such Class C-1 Shares are not held by an Affiliate of ZGH through the Paying Agent who will hold amounts received from the Corporation in respect of the Class C-1 Shares for the benefit of the registered holders of the Class C-1 Shares. In the event that any Class C-1 Shares do not remain in book-entry only form, the relevant record dates shall be the 15th day of the month of the relevant Dividend Date or other payment date. In the event that any Dividend Date is not a Business Day, payment of the Dividends payable on such date will be made on the next succeeding day which is a Business Day (without any interest or other payment in respect of the dividends subject to such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. SECTION 4.04. Changes in the Dividends-Received Percentage. (a) If, prior to 18 months after the date of the original issuance of the Class C-1 Shares, one or more amendments to the Code are enacted that reduce the dividends-received deduction (currently 70%), as specified in Section 243 (a)(i) of the Code or any successor provision (the "Dividend-Received Percentage"), certain adjustments will be made as appropriate in respect of the Dividends paid by the Corporation, and Post Declaration Date Dividends and Retroactive Dividends may become payable (as such terms are defined below), except that no adjustments will be made with respect to any reduction of the Dividends-Received Percentage below 50%. (b) The amount per share of each Dividend declared at the applicable rate described in Section 4.01 above for Dividend payments made on or after the effective date of such change in the Code will be increased, to the extent of funds legally available for distribution by the Corporation, by multiplying the amount of the Dividend payable before adjustment, by a factor, which will be the number determined in accordance with the following formula (the "DRD Formula"), and rounding the result to the nearest cent (with one-half cent rounded up): I-.35(I-.70) ------------ I-.35(I-DRP) For purposes of the DRD Formula with regard to the Class C-1 Shares, "DRP" means the Dividend-Received Percentage (expressed as a decimal) applicable to the Dividends in question; provided, that in no event shall the DRP be less than 0.50. No amendment to the Code, other than a change in the Dividends-Received Percentage enacted prior to 18 months after the date of the original issuance of the Class C-1 Shares, will give rise to an adjustment. Notwithstanding the foregoing provisions, if, with respect to any such amendment, the Corporation receives either an unqualified 10 opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form of authorization from the IRS to the effect that such an amendment does not apply to a Dividend payable on the Class C-1 Shares, then such amendment will not result in the adjustment provided for pursuant to the DRD Formula with respect to such Dividend. The opinion referenced in the previous sentence shall be based upon the legislation amending or establishing the DRP or upon a published pronouncement of the IRS addressing such legislation. Absent manifest error, the Corporation's calculation of the Dividends payable as so adjusted shall be final and not subject to review. (c) Notwithstanding the foregoing, if any such aforementioned amendment to the Code is enacted after the Dividend payable on a Dividend Date has been declared, and if such amendment is effective with respect to such Dividend, the amount of the Dividend payable on such Dividend Date will not be increased; instead, additional Dividend payments (the "Post Declaration Date Dividend"), equal to the excess, if any, of (x) the product of the Dividend paid by the Corporation on such Dividend Date and the DRD Formula over (y) the Dividend paid by the Corporation on such Dividend Date, will be declared to the extent funds legally available for distribution by the Corporation to holders of Class C-1 Shares on the record date applicable to the next succeeding Dividend Date, or, if Class C-1 Shares are called for redemption prior to such record date, to holders of Class C-1 Shares on the applicable redemption date, as the case may be, in addition to any other amounts payable on such date. (d) If any such amendment to the Code is enacted and the reduction in the Dividends-Received Percentage retroactively applies to one or more Dividend Dates on which the Corporation previously paid Dividends with respect to the Class C-1 Shares (each, an "Affected Dividend Date"), additional Dividends (the "Retroactive Dividends") will be declared, to the extent of funds legally available therefor, to holders of Class C-1 Shares on the record date applicable to the next succeeding Dividend Dates or, if the Class C-1 Shares are called for redemption prior to such record date, to holders of Class C-1 Shares on the applicable redemption date, as the case may be, in an amount equal to the excess of (x) the product of the Dividend paid by the Corporation on each Affected Dividend Date and the DRD Formula over (y) the sum of the Dividend paid by the Corporation on each Affected Dividend Date. The Corporation will only make one payment of Retroactive Dividends for any such amendment. Notwithstanding the foregoing provisions, if, with respect to any such amendment, the Corporation receives either an unqualified opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form of authorization from the IRS to the effect that such amendment does not apply to a Dividend payable on an Affected Dividend Date for the Class C-1 Shares, then such amendment will not result in the payment of a Retroactive Dividend with respect to such Affected Dividend Date. The opinion referenced in the previous sentence shall be based upon the legislation amending or establishing the Dividends-Received Percentage or upon a published pronouncement of the IRS addressing such legislation. (e) Notwithstanding the foregoing, no adjustment in the dividends payable by the Corporation shall be made, and no Post Declaration Date Dividends or Retroactive Dividends shall be payable by the Corporation, in respect of the enactment of any amendment to the Code 18 months or more after the date of original issuance of the Class C-1 Shares that reduces the Dividends-Received Percentage or to the extent such amendment reduces the Dividends-Received Percentage to less than 50%. 11 (f) In the event that the amount of Dividends payable per share of the Class C-1 Shares is increased pursuant to the DRD Formula and/or Post Declaration Date Dividends or Retroactive Dividends are to be paid, the Corporation will give notice of each such adjustment and, if applicable, any Post Declaration Date Dividends and Retroactive Dividends to the holders of Class C-1 Shares. (g) The various payment restrictions and obligations described above and applicable in respect of any Dividend Period in which a Dividend on the Class C-1 Shares is not paid in an amount at least equal to the Class C-1 Indicative Rate to the extent that any Post Declaration Date Dividend or Retroactive Dividend is not declared and paid or set apart for payment as and when due in respect of a reduction in the Dividends Received Percentage; provided that such payment restrictions and obligations will remain in effect, not only during the current Dividend Period, but until such Post Declaration Date Dividend or Retroactive Dividend is declared and paid or set apart for payment. SECTION 4.05. Earnings and Profits Gross-Up Payments. (a) To the extent that Dividends paid with respect to the Class C-1 Shares exceeds the Corporation's earnings and profits as calculated for U.S. federal income tax purposes, they will not constitute dividends for U.S. federal income tax purposes and will not qualify for the dividends-received deduction. In such event, additional distributions will be made by the Corporation to place each holder of the Class C-1 Shares in the same position it would have been in if all Dividends from the Corporation were paid from such earnings and profits, assuming for these purposes that such holder was eligible for the dividends-received deduction. (b) If any Dividend on the Class C-1 Shares with respect to any fiscal year (including any Gross-Up Payment (as defined below)) constitutes, in whole or in part, a return of capital (or is treated as gain from the sale or exchange of the Class C-1 Shares) for U.S. federal income tax purposes (a "Qualifying Dividend"), within 180 days after the end of such fiscal year, the Corporation will pay (if declared), out of funds legally available therefor, an amount equal to the aggregate Gross-Up Payments to Qualified Investors (as defined below) with respect to all Qualifying Dividends on the Class C-1 Shares during such fiscal year. A "Qualified Investor" with respect to a Qualifying Dividend during a fiscal year means a person who was entitled to receive such Qualifying Dividend. (c) A "Gross-Up Payment" to a Qualified Investor with respect to all Qualifying Dividends on Class C-1 Shares paid by the Corporation during a fiscal year means an additional Dividend on the Class C-1 Shares to a Qualifying Investor in an amount which, when taken together with the aggregate Qualifying Dividends paid to such Qualified Investor during such fiscal year, would cause such Qualified Investor's net yield in dollars (after U.S. federal income tax consequences and treating, for purposes of calculating net yield in dollars, the sum of that portion of the Qualifying Dividends and the Gross-Up Payment otherwise treated as a return of capital as capital gain recognized upon the taxable sale or exchange of Class C-1 Shares) from the aggregate of both the Qualifying Dividends and the Gross-Up Payment to be equal to the net yield in dollars (after U.S. federal income tax consequences) which would have been received by such Qualified Investor if the entire amount of the aggregate Qualifying Dividends had instead been treated as a dividend for U.S. federal income tax purposes. Such Gross-Up Payment shall be calculated using the applicable maximum marginal U.S. federal corporate income tax rate applicable to ordinary income and capital gains, as the case may be, and, where applicable, the Dividends-Received Percentage, without consideration being given to the time value of money, the U.S. federal income tax situation of any specific Qualified Investor (including the application of the alternative minimum tax or the application of Section 246 of the Code), or any state or local tax consequences that may arise. The Corporation shall make a determination, based upon the reasonably estimated earnings and profits of that portion, if any, of a Qualifying Dividend 12 for a fiscal year that will be treated as dividend for U.S. federal tax purposes, and such determination shall be final and binding for purposes of calculating the amount of the Gross-Up Payments with respect to all Qualifying Dividends for such fiscal year. SECTION 4.06. Change of Control Gross-Up Payments. If as a result of a Change of Control Tax Event, there is an increase in any non-refundable foreign taxes withheld ("Foreign Tax Increase") with respect to RegCaPS I Payments or Cumulative RegCaPS I Payment Amounts paid to a RegCaPS I registered holder ("Foreign Taxed RegCaPS Payments"), additional distributions shall be made on the Class C-1 Shares in an amount which, when taken together with the aggregate Dividends paid to the Holders of the Class C-1 Shares during such fiscal year reduced by the amount of such Foreign Tax Increase, would cause the net yield in dollars (after U.S. federal income tax consequences other than the use of foreign tax credits resulting from the Foreign Tax Increase) to be equal to the net yield in dollars (after U.S. federal income tax consequences) to the Holder from receipt of the aggregate Dividends paid to the Holder during such fiscal year without any reduction by the amount of such Foreign Tax Increase. The foregoing amount shall be calculated based on the assumption that the Holder is a U.S. corporation and using the applicable maximum marginal U.S. federal corporate income tax rate applicable to ordinary income and capital gains, as the case may be, and the Dividends-Received Percentage, without consideration being given to the time value of money, the U.S. federal income tax situation of any specific Holder, or any state or local tax consequences that may arise. If for a prior fiscal year Foreign Taxed RegCaPS Payments are made by the Partnership, the Corporation will pay (if declares), within 90 days after the end of such fiscal year, out of funds legally available therefor, an amount equal to the aggregate Change of Control Gross-Up Payments to the Partnership. ARTICLE 5 LIQUIDATION PREFERENCE SECTION 5.01. Liquidation Preference. (a) In the event of any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, after payment or provision for the liabilities of the Corporation and the expenses of such dissolution, liquidation or winding up, the holders of the outstanding Class C-1 Shares will be entitled to receive, the Class C-1 Share Liquidation Amount, out of the assets of the Corporation or proceeds thereof available for distribution to holders of Class C-1 Shares. Out of such amount, the holders of Class C-1 Shares will be entitled to receive the Class C-1 Share Liquidation Preference before any payment or distribution of assets is made to holders of the Common Shares or any other Junior Shares. Amounts payable on the Class C-1 Shares in connection with the liquidation of the Corporation in excess of the Class C-1 Share Liquidation Preference are payable (to the extent the Class C-1 Share Liquidation Amount exceeds the Class C-1 Share Liquidation Preference) on a pari passu basis with any Common Shares entitled to receive payment or distribution upon a liquidation, dissolution or winding up of the Corporation. If the assets of the Corporation available for distribution in such event are insufficient to pay in full the aggregate amount payable to holders of the Class C-1 Shares and holders of all other classes or series of equity securities of the Corporation, if any, ranking, as to the distribution of assets upon dissolution, liquidation or winding up of the Corporation, on a parity with the Class C-1 Shares, the assets will be distributed to the holders of Class C-1 Shares and holders of such other equity interests pro rata, based on the full respective preferential amounts to which they are entitled. After payment of the Class C-1 Share Liquidation Amount upon dissolution, liquidation or winding up of the Corporation, the holders of Class C-1 Shares will not be entitled to any further participation in any distribution of assets by the Corporation. 13 (b) Notwithstanding Section 5.01(a) above, holders of Class C-1 Shares will not be entitled to be paid any amount in respect of a dissolution, liquidation or winding up of the Corporation until holders of any classes or series of securities of the Corporation ranking, as to the distribution of assets upon dissolution, liquidation or winding up of the Corporation, senior to the Class C-1 Shares have been paid all amounts to which such classes or series are entitled. Notwithstanding anything else in this Certificate, neither the sale, lease or exchange (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation, nor the merger, consolidation or combination of the Corporation into or with any other person or the merger, consolidation or combination of any other person into or with the Corporation, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Section 5.01. ARTICLE 6 REDEMPTION SECTION 6.01. Optional Redemption. (a) The Class C-1 Shares will not be subject to mandatory redemption at any time. Prior to February 15, 2031, Class C-1 Shares will not be subject to optional redemption. On or after February 15, 2031, Class C-1 Shares may be redeemed at the option of the Corporation at any time, subject to the prior consent of ZGH, in whole but not in part, at their fair market value (the "Redemption Amount") as determined by a nationally recognized investment bank retained by the Corporation. SECTION 6.02. Procedure for Redemption. (a) Notice of any redemption of the Class C-1 Shares (a "Redemption Notice") will be given by the Corporation by mail to each holder of Class C-1 Shares not fewer than 30 nor more than 60 days before the date fixed for redemption. For purposes of the calculation of the date of redemption and the dates on which notices are given pursuant to this Section 6.02(a), a Redemption Notice shall be deemed to be given on the day such notice is first mailed, by first-class mail, postage prepaid, to holders of the Class C-1 Shares. Each Redemption Notice shall be addressed to the holders of Class C-1 Shares at the address of each such holder appearing in the books and records of the Corporation. No defect in the Redemption Notice or in the mailing thereof with respect to any holder of Class C-1 Shares shall affect the validity of the redemption proceedings with respect to any other holder of Class C-1 Shares. (b) If the Corporation gives a Redemption Notice (which notice will be irrevocable), then by 12:00 noon, New York City time, on the redemption date, the Corporation (A) if the Class C-1 Shares are in book-entry form with DTC, will deposit irrevocably with DTC funds sufficient to pay the applicable Redemption Amount and will give DTC irrevocable instruction and authority to pay the Redemption Amount in respect of the Class C-1 Shares held through DTC in global form or (B) if the Class C-1 Shares are held in certificated form (each such certificate a "Class C-1 Share Certificate"), will deposit with the Paying Agent, funds sufficient to pay the applicable Redemption Amount of any such Class C-1 Shares and will give to the Paying Agent irrevocable instructions and authority to pay such amounts to the holders of Class C-1 Shares, upon surrender of their certificates, by delivery of check, mailed to the address of the relevant holder appearing on the books and records of the Corporation on the redemption date. For these purposes, the applicable Redemption Amount shall not include Dividends which are being paid to holders of Class C-1 Shares who were holders of Class C-1 Shares on a relevant record date. Upon satisfaction of the foregoing conditions, then immediately prior to the close of business on the date of such deposit or payment, all rights of holders of Class C-1 Shares so called for redemption will cease, except the right of the holders of Class C-1 Shares to receive 14 the Redemption Amount, but without interest on such Redemption Amount, and from and after the date fixed for redemption, such Class C-1 Shares will not receive dividends or bear interest. (c) In the event that any date fixed for redemption of Class C-1 Shares is not a Business Day, then payment of the Redemption Amount payable on such date will be made on the next succeeding Business Day (and without any interest in respect of any such delay), except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day in each case, with the same force and effect as if made on such date fixed for redemption. In the event that payment of the Redemption Amount is improperly withheld or refused and not paid by the Corporation, Dividends on the Class C-1 Shares called for redemption will continue to be payable in accordance with the terms hereof from the original redemption date until the Redemption Amount is actually paid. (d) The Corporation shall not be required to register or cause to be registered the transfer of any Class C-1 Shares which have been called for redemption. (e) The Class C-1 Shares which have been issued and reacquired in any manner, including shares purchased or redeemed, shall (upon compliance with any applicable provisions of the laws of the State of Nevada) have the status of authorized and unissued Class C-1 Shares and may be reissued. ARTICLE 7 VOTING RIGHTS SECTION 7.01. Voting Rights. (a) The holders of the Class C-1 Shares will be entitled to 0.375 of a vote per share (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 Corporation) and will be entitled to vote with the Common Shares as a single class on all matters submitted to a vote of the Common Shares (other than those matters affecting only the Common Shares, or either of them); provided, however, that at no time shall the aggregate Voting Power of the Class C-1 Shares be greater than 0.6% of the total Voting Power of the Corporation. Prior to transferring ownership of any Class C-1 Shares to a transferee other than an Affiliate of ZGH and subject to receipt of any required regulatory approval, if any, such Class C-1 Shares shall be (i) split into a number of shares of Class C-1 Shares equal to and with a liquidation preference equal to the liquidation amount of the number of Trust Capital Securities I, and (ii) converted on a one to one basis to the same number of shares of a class of common stock of the Corporation (the "Conversion Shares") having rights, preferences and privileges substantially identical to the Class C-1 Shares except that the Conversion Shares will be entitled to no voting rights other than as required by law and other than with respect to adverse amendments to the terms of the Conversion Shares and the issuance of equity securities that rank senior to or pari passu with the Conversion Shares with respect to the payment of distributions or amounts upon liquidation, provided that the Corporation may file certificates of designation and issue shares in accordance therewith for other Class C Shares which rank pari passu with the Conversion Shares with respect to distributions paid by the Corporation and with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation. If, however, any necessary regulatory approvals to issue the Conversion Shares are not obtained, the Class C-1 Shares rather than the Conversion Shares may be transferred to a transferee other than an Affiliate of ZGH. (b) The holders of the Class C-1 Shares and the Conversion Shares will be entitled to vote separately as a single class on the matters described in this paragraph. The consent of the holders of 15 not less than a majority of the outstanding Class C-1 Shares and Conversion Shares, voting as a single class, is required(i) to amend, alter, supplement or repeal the terms of the Class C-1 Shares and the Conversion Shares (it being a condition to any such amendment, alteration, supplement or repeal that it has a substantially identical effect on the rights, preferences and privileges of both the Class C-1 Shares and the Conversion Shares), or (ii) if the Corporation has not paid in full the lesser of (A) each of the last twenty-four months of Dividends on their respective Dividend Payment Dates at the Class C-1 Indicative Rate, or (B) prior to the second anniversary of the first issue date, all Dividends at the Class C-1 Indicative Rate that could have been paid on the Class C-1 Shares and the Conversion Shares, for the Corporation to issue, or to increase the authorized amount of, the Class C-1 Shares or the Conversion Shares or any other equity securities that rank pari passu with or senior to the Class C-1 Shares and the Conversion Shares; provided that the Corporation may file certificates of designation and issue shares in accordance therewith for other Class C Shares to be designated as Class C-2 Common Stock, Class C-3 Common Stock, Class C-4 Common Stock, Class C-5 Common Stock, and Class C-6 Common Stock, each of which rank pari passu with the Class C-1 Shares with respect to distributions paid by the Corporation and with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation without the consent of the holders of the Class C-1 Shares or the Conversion Shares. (c) Whenever Dividends on the Class C-1 Shares and the Conversion Shares at the Class C-1 Indicative Rate are in arrears for twenty-four or more consecutive months, the holders of Class C-1 Shares and the Conversion Shares, voting together with the other Class C Shares as a single class, will be entitled, subject to any necessary regulatory actions, to elect two Special Independent Directors to the Board of Directors, at a special meeting called by the holders of record of at least 25% of the Class C-1 Shares and the Conversion Shares in the aggregate or by the holders of record of 25% of any of the other series of Class C Shares pursuant to the terms of the certificate of designation creating such other series of Class C Shares. The Special Independent Directors shall vacate office if Dividends at the Class C-1 Indicative Rate are resumed and are paid regularly for at least twelve consecutive months, unless otherwise provided by the terms of any other certificate of designation for any other series of Class C Shares. If Dividends are resumed and paid regularly for at least twelve consecutive months at the Class C-1 Indicative Rate, the holders of the Class C-1 Shares and the Conversion Shares shall no longer be entitled to vote for the two Special Independent Directors on account of that arrearage. When no holder of Class C-1 Shares is entitled to vote for the two Special Independent Directors, the Special Independent Directors shall vacate office. Notwithstanding the foregoing, in the event that more than one series of Class C Shares are entitled to elect Special Independent Directors to the Board of Directors, such series shall vote together as a single class to elect such two directors. In no event shall the holders of Class C Shares be entitled to elect more than two Independent Directors to the Board of Directors. (d) Notwithstanding the foregoing, the Corporation shall have the right, without the prior consent of the holders of Class C-1 Shares and Conversion Shares, if any, to amend, alter, supplement or repeal any terms of the Class C-1 Shares (i) to cure any ambiguity, or to cure, correct or supplement any defective provision thereof or (ii) to make any other provision with respect to matters or questions arising with respect to the Class C-1 Shares and Conversion Shares, if any, that is not inconsistent with the provisions thereof so long as such action does not materially and adversely affect any of the rights, preferences and privileges of the holders of Class C-1 Shares and Conversion Shares, if any, provided, however, that any increase in the amount of authorized or issued Class C-1 Shares will be deemed not to materially and adversely affect any of the rights, preferences and privileges of the holders of Class C-1 Shares. 16 (e) The consent or votes required in Section 7.01(b) and (c) above shall be in addition to any approval of stockholders of the Corporation which may be required by law or pursuant to any provision of the Corporation's Articles of Incorporation or bylaws, which approval shall be obtained by vote of the stockholders of the Corporation in the manner provided in Section 7.01(a) above. ARTICLE 8 MERGER, CONSOLIDATION OR AMALGAMATION OF THE CORPORATION SECTION 8.01. Merger, Conversion, Consolidation or Amalgamation of the Corporation. Without the consent of either one Special Independent Director, if any, or a majority of the holders of Class C-1 Shares, the Corporation may not consolidate, amalgamate, merge with or into, convert or domesticate with or into, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to, any corporation or other entity, except as permitted below. The Corporation may, with the consent of at least one of the Special Independent Directors, if any, on the Board of Directors at the time the issue is considered and without the consent of the holders of the Class C-1 Shares, consolidate, amalgamate, merge with or into, convert or domesticate with or into, or be replaced by a corporation organized as such under the laws of any State of the United States; provided, that: (a) if the Corporation is not the surviving entity, such successor entity either (x) expressly assumes all of the obligations of the Corporation under the Class C-1 Shares or (y) substitutes securities for the Class C-1 Shares (the "Successor Securities"), so long as the Successor Securities rank the same as the Class C-1 Shares rank with respect to Dividends and other payments thereon; (b) such merger, consolidation, amalgamation, conversion, domestication or replacement does not adversely affect any of the rights, preferences and privileges of the holders of the Class C-1 Shares (including any Successor Securities) in any material respect; (c) prior to such merger, consolidation, amalgamation, conversion, domestication or replacement, the Corporation has received an opinion of a nationally recognized law firm experienced in such matters to the effect that (i) such merger, consolidation, amalgamation, conversion, domestication or replacement will not adversely affect any of the rights, preferences and privileges of the holders of the Class C-1 Shares (including any Successor Securities) in any material respect and (ii) following such merger, consolidation, amalgamation, conversion, domestication or replacement, the Corporation (or such successor entity) will not be required to register under the 1940 Act; and (d) distributions with respect to the Class C-1 Shares or Successor Securities would be eligible for the dividends-received deduction. ARTICLE 9 TRANSFER OF CLASS C-1 SHARES SECTION 9.01. General. The Corporation shall provide for the registration of Class C-1 Share Certificates and of transfers of Class C-1 Share Certificates. Upon surrender for registration of transfer of any Class C-1 Share Certificate, the Corporation shall cause one or more new Class C-1 Share Certificates to be issued in the name of the designated transferee or transferees. Every Class C-1 Share Certificate surrendered for registration of transfer shall be accompanied by a written instrument of transfer in form satisfactory to the Corporation duly executed by the holder of such Class C-1 Shares or his or her attorney duly authorized in writing. Each Class C-1 Share Certificate surrendered for 17 registration of transfer shall be cancelled by the Corporation. A transferee of a Class C-1 Share Certificate shall be entitled to the rights and subject to the obligations of a holder of Class C-1 Shares hereunder upon the receipt by the transferee of a Class C-1 Share Certificate, which receipt shall be deemed to constitute a request by such transferee that the books and records of the Corporation reflect such transferee as a holder of Class C-1 Share. SECTION 9.02. Definitive Certificates. Unless and until the Corporation issues a global Class C-1 Share Certificate pursuant to Section 9.03(a), the Corporation shall only issue definitive Class C-1 Share Certificates to the holders of Class C-1 Shares. The Corporation may treat the Person in whose name any Class C-1 Share Certificate shall be registered on the books and records of the Corporation as the sole holder of such Class C-1 Share Certificate and of the Class C-1 Shares represented by such Class C-1 Share Certificate for purposes of receiving Dividends and for all other purposes whatsoever (including without limitation, tax returns and information reports) and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Class C-1 Share Certificate or in the Class C-1 Shares represented by such Class C-1 Share Certificate on the part of any other Person, whether or not the Corporation shall have actual or other notice thereof. SECTION 9.03. Book Entry Provisions. (a) General. The provisions of this Section 9.03(a) shall apply only in the event that the Class C-1 Shares are distributed to a Person other than the Purchaser. Upon the occurrence of such event, a global Class C-1 Share Certificate representing the Book-Entry Interests shall be delivered to DTC, the initial Clearing Agency, by, or on behalf of, the Corporation and any previously issued and still outstanding definitive Class C-1 Share Certificates shall be of no further force and effect. The global Class C-1 Share Certificate shall initially be registered on the books and records of the Corporation in the name of Cede & Co., the nominee of DTC, and no holder of Class C-1 Shares will receive a new definitive Class C-1 Share Certificate representing such holder's interest in such Class C-1 Share Certificate, except as provided in Section 9.03(c). Unless and until new definitive, fully registered Class C-1 Share Certificates (the "Definitive Class C-1 Share Certificates") have been issued to the holders of Class C-1 Shares pursuant to Section 9.03(c): (i) The provisions of this Section shall be in full force and effect; (ii) The Corporation shall be entitled to deal with the Clearing Agency for all purposes of this Certificate (including the payment of Dividends, Redemption Amounts and liquidation proceeds on the Class C-1 Share Certificates and receiving approvals, votes or consents hereunder) as the sole holder of the Class C-1 Share Certificates and shall have no obligation to the holders of Class C-1 Shares; (iii) None of the Corporation, the Board of Directors, or any Special Independent Director or any agents of any of the foregoing shall have any liability or responsibility for any aspect of the records relating to or Dividends made on account of beneficial ownership interests in a global Class C-1 Share Certificate for such beneficial ownership interests or for maintaining, supervising or reviewing any records relating to such beneficial ownership interest; and (iv) Except as provided in Section 9.03(c) below, the holders of Class C-1 Shares will not be entitled to receive physical delivery of the Class C-1 Shares in definitive form and 18 will not be considered holders thereof for any purpose under this Certificate of Designation, and no global Class C-1 Share Certificate representing Class C-1 Shares shall be exchangeable, except for another global Class C-1 Share Certificate of like denomination and tenor to be registered in the name of DTC or Cede & Co., or to a successor depository or its nominee. Accordingly, each holder of Class C-1 Shares must rely on the procedures of DTC or if such person is not a Participant, on the procedures of the Participant through which such person owns its interest to exercise any rights of a holder under this Certificate of Designation. (b) Notices to Clearing Agency. Whenever the holders of Class C-1 Shares are required to give a notice or other communication to their equity holders, unless and until definitive Class C-1 Share Certificates shall have been issued to the holders of Class C-1 Shares pursuant to Section 9.03(c), the Corporation shall give all such notices and communications specified herein to be given to the holders of Class C-1 Shares to the Clearing Agency, and shall have no obligations to the holders of Class C-1 Shares. (c) Definitive Class C-1 Share Certificates. Definitive Class C-1 Share Certificates shall be prepared by the Corporation and exchangeable for the global Class C-1 Share Certificate or Certificates if and only if (i) DTC notifies the Corporation that it is unwilling or unable to continue its services as a securities depository and no successor depository shall have been appointed, (ii) DTC, at any time, ceases to be a Clearing Agency registered under the Exchange Act at such time as DTC shall have been appointed, or (iii) the Corporation, in its sole discretion, determines that such global Class C-1 Share Certificate shall be so exchangeable. Upon surrender of the global Class C-1 Share Certificate or Certificates representing the Book-Entry Interests by the Clearing Agency, accompanied by registration instructions, the Corporation shall cause definitive Class C-1 Share Certificates to be delivered to holders of Class C-1 Shares in accordance with the instructions of the Clearing Agency. The Corporation shall not be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be protected in relying on, such instructions. The definitive Class C-1 Share Certificates shall be printed, lithographed or engraved or may be produced in any other manner as may be required by any national securities exchange on which Class C-1 Shares may be listed and is reasonably acceptable to the Corporation, as evidenced by its execution thereof. SECTION 9.04. Registrar, Transfer Agent and Paying Agent. (a) The Corporation will act as Registrar, Transfer Agent and Paying Agent of the Class C-1 Share for so long as the Class C-1 Shares are held by an Affiliate of ZGH, for so long as the Class C-1 Shares remain in book- entry only form. (b) Except in such case where the Corporation shall act as Registrar or Paying Agent pursuant to Section 9.04(a) hereof, the Corporation shall maintain in the Borough of Manhattan, City of New York, State of New York (i) an office or agency where Class C-1 Shares may be presented for registration of transfer or for exchange ("Registrar") and (ii) an office or agency where Class C-1 Shares may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Class C-1 Shares and of their transfer and exchange. The Corporation may appoint the Registrar and the Paying Agent and may appoint one or more co-registrars and one or more additional paying agents in such other location as it shall determine. The term "Paying Agent" includes any additional paying agent. The Corporation may change any Paying Agent, Registrar or co-registrar without prior notice to any holder. If the Corporation fails to appoint or maintain another entity as Registrar or Paying Agent, the Corporation shall act as such. 19 (c) Registration of transfers of Class C-1 Shares shall be effected without charge by or on behalf of the Corporation, but upon payment (with the giving of such indemnity as the Corporation may require) in respect of any tax or other governmental charges that may be imposed. SECTION 9.05. Transfer Restrictions. The Class C-1 Shares may only be transferred (i) to QIBs and (ii) to IAIs who, if they are not QIBs, prior to such transfer, furnish to the Corporation or the Transfer Agent a signed letter containing certain representations and agreements relating to restrictions on transfer by such IAI and who hold their Class C-1 Shares through a DTC Participant. The foregoing restriction may be waived if the Corporation, in its sole discretion, determines such restrictions are no longer necessary to preserve the Corporation's exemptions from registration requirements under the Securities Act, the Securities Exchange Act and the 1940 Act. Any purported purchase or transfer of the Class C-1 Shares in violation of such restrictions will be null and void. Furthermore the Corporation may also require the sale of Class C-1 Shares held by holders who fail to comply with the foregoing. ARTICLE 10 MISCELLANEOUS PROVISIONS SECTION 10.01. Preemptive Rights. No holder of any of the Class C-1 Shares shall have any preemptive or preferential right to acquire or subscribe for any treasury or unissued shares of any class or series of the stock of the Corporation now or hereafter to be authorized, or any notes, debentures, bonds, or other securities convertible into or carrying any right, option or warrant to subscribe for or acquire shares of any class or series of stock of the Corporation now or hereafter to be authorized, whether or not the issuance of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the distribution or voting rights of such holder, and the Board of Directors of this Corporation may issue shares of any class or series of stock of this Corporation, without offering any such shares of any class or series of stock of the Corporation, either in whole or in part, to the existing shareholders of any class or series of stock of this Corporation. SECTION 10.02. Conversion Rights. The Class C-1 Shares shall have no right to convert into the Common Shares, any of the other Class C Shares or any other equity security or indebtedness of the Corporation other than the Conversion Shares. ARTICLE 11 GENERAL PROVISIONS SECTION 11.01. General Provisions. The headings of the paragraphs, subparagraphs, clauses and subclauses of this Certificate of Designation are for convenience of reference only and shall not define, limit or affect any of the provisions hereof. 20 IN WITNESS WHEEREOF, Farmers Group, Inc. has caused this Certificate of Designation to be signed and attested by its undersigned Vice President and Secretary this 7th day of February, 2001. --- FARMERS GROUP, INC. By: /s/ Julian R.M Harvey ---------------------------- Name: Julian R.M. Harvey Title: Vice President /s/ Doren Hohl ------------------------------------- Name: Doren Hohl Title: Secretary STATE OF CALIFORNIA ) )ss COUNTY OF Los Angeles --------------- On February 7 , 2001 before me, Hazel C. Bautista, personally appeared - ----------------- Julian R.M. Harvey and Doren Hohl. X personally known to me. --- -or- ___ proved to me on the basis of satisfactory evidence to be the persons whose names are subscribed to the within instrument and acknowledge to me that they executed the same in their authorized capacities, and that by their signatures on the instrument the persons, or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. /s/ Hazel C. Bautista ----------------------------------------- Notary Public in and for said County and State 1 CERTIFICATE OF DESIGNATION OF CLASS C-2 COMMON STOCK of FARMERS GROUP, INC. Pursuant to Sections 78.1955 and 78.315 of the General Corporation Law of the State of Nevada Farmers Group, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the provisions of the General Corporation Law of the State of Nevada, certifies as follows: FIRST: The Amended and Restated Articles of Incorporation of the Corporation (the "Articles of Incorporation") authorize the issuance of up to 50 shares of Class C common stock, par value $1.00 per share (the "Class C Common Stock"), and further, authorize the Board of Directors of the Corporation (the "Board of Directors") by resolution or resolutions, at any time and from time to time, to divide and establish any or all of the shares of Class C Common Stock into one or more series of Class C Common Stock, and without limiting the generality of the foregoing, to fix and determine the designation of each such series, the number of shares which shall constitute such series and such voting powers, and such preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof of the shares of each series so established. SECOND: The following resolutions authorizing the creation and issuance of a series of said shares of Class C Common Stock to be known as Class C-2 Common Stock were duly adopted by the Board of Directors on the 6th day of February, 2001, in accordance with Sections 78.1955 and 78.315 of the Nevada General Corporation Law. RESOLVED, that the Board of Directors, pursuant to authority vested in it by the provisions of the Articles of Incorporation, hereby authorizes the issuance of a series of the Corporation's Class C Common Stock, and hereby fixes the number, designation, preferences, rights, limitations and restrictions thereof in addition to those set forth in the Articles of Incorporation as follows: ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions. In this Certificate of Designation, unless the context otherwise requires "Affiliate" means, with respect to a specified Person, any other Person that directly or indirectly controls, is controlled by, or is under common control with, such specified Person. "Book-Entry Interest" means a beneficial ownership in Class C-2 Shares, the ownership and transfers of which are maintained through book entries of the Registrar as set forth in Section 9.04(b) of this Certificate of Designation. "Business Day" means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which commercial banks are authorized or required by law, regulation or 2 executive order to close in The City of New York. With respect to the LIBOR Determination Date, "Business Day" means a day on which dealings in deposits in U.S. dollars are transacted in the London interbank market. "Change of Control Event" means the Corporation ceasing to be an Affiliate of ZGH or any of its Affiliates, including, but not limited to a Change of Control Tax Event. "Change of Control Tax Event" means a Change of Control Event which results in an adverse tax effect on the holders of Trust Capital Securities II. "Class A Shares" means the Class A Common Stock, par value $1.00 per share, of the Corporation. "Class B Shares" means the Class B Common Stock, par value $1.00 per share, of the Corporation. "Class C Shares" means, collectively, the Class C-2 Shares and all other series of Class C Common Stock, par value $1.00 per share, of the Corporation, for which a certificate or certificates of designation have been filed with the Nevada Secretary of State. "Class C-2 Shares" has the meaning set forth in Section 2.01 hereof. "Class C-2 Indicative Rate" means initially, a fixed annual rate of 6.58% of the Class C-2 Share Liquidation Preference and on or after March 30, 2011, a variable rate equal to Three-Month LIBOR plus 175 basis points, reset quarterly, determined by reference to the Class C-2 Share Liquidation Preference; provided, however, that such variable rate shall never be greater than 15%. "Class C-2 Share Liquidation Amount" means, with respect to each Class C-2 Share, an amount equal to the greater of (i) the Class C-2 Share Liquidation Preference, plus an amount (whether or not declared) equal to the Class C-2 Share Liquidation Preference multiplied by the Class C-2 Indicative Rate multiplied by a fraction, the numerator of which is the number of days in the current Dividend Period that have passed prior to the date on which the liquidation occurs and the denominator of which is 360 and (ii) the Economic Dividend Payable. "Class C-2 Share Liquidation Preference" has the meaning set forth in Section 2.01 hereof. "Clearing Agency" means the clearing agency with respect to the Class C-2 Shares. "Code" means the United States Internal Revenue Code of 1986, as amended. "Common Shares" means, collectively, the Class A Shares and the Class B Shares. "DTC" means The Depository Trust Company. "Dividend" means a cash distribution to holders of the Class C-2 Shares from the Corporation with respect to any applicable Dividend Period and payable on an applicable Dividend Date. 3 "Dividend Date" means the 15th day of February, May, August and November in each year (or the preceding Business Day if such day is not a Business Day) commencing February 15, 2001, with respect to Dividends for each relevant Dividend Period on the Class C-2 Shares. "Dividend Period" means for each Dividend Date, a quarterly period comprised of two components: On or prior to March 30, 2011, (i) an arrears component from and including the date of the original issuance of the Class C-2 Shares (in the case of the first Dividend Period) or, in all other cases, from and including the 30th day of any of March, June, September or December immediately preceding the then current Dividend Date, to but excluding the then current Dividend Date and (ii) an advance component from and including the then current Dividend Date to but excluding the next 30th day of any of March, June, September or December (as the case may be) immediately succeeding the then current Dividend Date, and no additional dividends will accrue in respect of such additional day(s). The foregoing is intended to provide for a computation of dividends on the basis of a 360 day year of twelve 30-day months with four equal quarterly payments. After March 30, 2011, (i) an arrears component from and including the 30th day of any of March, June, September or December immediately preceding the then current Dividend Date, provided, that if any such day is not a Business Day, then the start of the period will be postponed to the next succeeding Business Day, except that in the case in which the Business Day falls in the next succeeding calendar month, any such period will start on the immediately preceding Business Day, to but excluding the then current Dividend Date, and (ii) an advance component from and including the then current Dividend Date to but excluding the next 30th day of any of March, June, September or December (as the case may be) immediately succeeding the then current Dividend Date, provided, that if any such day is not a Business Day, then the end of the period (and associated first day of the next Dividend Period) will be postponed to the next succeeding Business Day, except that in the case in which the Business Day falls in the next succeeding calendar month any such period will end (and associated first day of the next Dividend Period will start) on the immediately preceding Business Day. "Economic Dividend Payable" means initially, as determined in good faith by the Board of Directors based on the opinion of a nationally recognized investment bank, for the Class C-2 Shares in the aggregate 0.9933775% of, as applicable, (i) the amount of dividends paid or set apart for payment by the Corporation on its common shares (including the Class C Shares) during any Dividend Period, (ii) the amount of any redemption proceeds on the Corporation's common shares to the extent such proceeds are greater than the fair market value of the common shares being redeemed, or (iii) the aggregate amount available for payment of distributions on liquidation with respect to the Corporation's common shares entitled to payments upon liquidation; provided that: (A) subsection (i) above shall only apply when determining whether the Class C-2 Shares are entitled to Dividends, (B) subsection (ii) above shall only apply upon a redemption of the Corporation's common shares and (C) subsection (iii) above shall only apply upon a liquidation, dissolution and winding up of the Corporation. This percentage shall be adjusted from time to time (for example upon the issuance of common shares by the Corporation in exchange for cash or property) based upon the percentage of the Corporation's fair market value represented by the Class C-2 Shares at the time of such adjustment; provided that any such adjustment shall be determined in good faith by the Board of Directors based on the opinion of a nationally recognized investment bank. "Holder" means the beneficial owners of the Class C-2 Shares. 4 "IAI" means a Person that is an "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act or the analog provisions of any successor rule. "IRS" means the United States Internal Revenue Service. "Junior Shares" has the meaning set forth in Section 3.01 hereof. "LIBOR Determination Date" the first LIBOR Determination Date will be March 28th, 2006, and thereafter will be two Business Days prior to each June 30th, September 30th, December 30th and March 30th thereafter (except if any such day is not a Business Day, then the relevant LIBOR Determination Date will be two Business Days prior to the preceding Business Day). "LLC II" means Zurich RegCaPS Funding LLC II, a Delaware limited liability company. "LLC II Payment Date" means the 30th day of March, June, September and December in each year (or the preceding Business Day if such day is not a Business Day) when the corresponding RegCaPS II Payment for such period has been made. "LLC II Payments" means cash payments on the LLC Preferred Interests II. LLC II Payments shall not include tax amounts withheld and not refunded. "LLC Preferred Interest II" means the preferred membership interests in LLC II. "Minimum Net Worth Amount" initially means US$ 3 billion. The Minimum Net Worth Amount will be increased by the proceeds paid to the Corporation in consideration for the issuance and sale of any of its capital stock ranking pari passu with or senior to the Class C-2 Shares with respect to the payment of distributions or amounts payable upon liquidation. The Minimum Net Worth Amount will be reduced by the amounts paid to purchase or redeem any shares of Class C Common Stock or any of its capital stock ranking pari passu with or senior to the Class C-2 Shares or the other Class C Shares, but only by an amount equal to the liquidation preference of such shares. The net worth of the Corporation will be determined in accordance with U.S. GAAP. "Partnership II" means Zurich RegCaPS Funding Limited Partnership II, a Delaware limited partnership. "Person" means any legal person, including any individual, corporation, association, partnership (general or limited), joint venture, trust, estate, limited liability company, or other legal entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Purchaser" means ZGH, or any of its Affiliates. "QIB" means a qualified institutional buyer within the meaning of Rule 144A under the Securities Act. "RegCaPS II" means any regulatory capital preferred securities of Partnership II. "RegCaPS II Payment Date" means the 15th day of February, May, August and November in each year (or on the preceding Business Day if such day is not a Business Day) commencing 5 February 15, 2001 with respect to the RegCaPS II Payments for each relevant RegCaPS Payment Period. "RegCaPS II Payment Period" means for each RegCaPS II Payment Date, a quarterly period comprised of two components: (i) an arrears component from and including the date of the original issuance of the RegCaPS II (in the case of the first RegCaPS II Payment Period) or, in all other cases, from and including the relevant LLC II Payment Date immediately preceding the then current RegCaPS II Payment Date to but excluding the then current RegCaPS II Payment Date and (ii) an advance component from and including the then current RegCaPS II Payment Date to but excluding the next relevant succeeding LLC II Payment Date. "RegCaPS II Payments" means cash remittances, initially, at a fixed annual rate of 6.58% of the liquidation preference of the RegCaPS II, and on or after March 30, 2011, a variable annual rate equal to Three-Month LIBOR plus 175 basis points, reset quarterly, to the registered holder of the RegCaPS II with respect to any applicable RegCaPS II Payment Period and payable on an applicable RegCaPS II Payment Date. "Securities Act" means the U.S. Securities Act of 1933, as amended. "Securities Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended. "Special Independent Directors" means two (2) independent directors of the Corporation to be elected by holders of the Class C Shares upon the occurrence of certain events as stated in this Certificate of Designation and in the certificates of designation of the other Class C Shares. The holders of the Class C-2 Shares shall have the right to vote for the Special Independent Directors only upon the failure of the Corporation to pay Dividends for 24 consecutive months at the Class C-2 Indicative Rate on the Class C-2 Shares. "Three-Month LIBOR" means with respect to any LIBOR Determination Date, a rate determined on the basis of the offered rates for three-month United States dollar deposits of not less than a principal amount equal to that which is representative for a single transaction in such market at such time, commencing on the second Business Day immediately following such LIBOR Determination Date, which appears on US LIBOR Telerate Page 3750 as of approximately 11:00 a.m., London time, on such LIBOR Determination Date. If on any LIBOR Determination Date no rate appears on US LIBOR Telerate Page 3750 as of approximately 11:00 a.m., London time, the Paying Agent shall on such LIBOR Determination Date request the four major reference banks in the London interbank market selected by the Paying Agent to provide the Paying Agent with a quotation of the rate at which three-month deposits in United States dollars, commencing on the second Business Day immediately following such LIBOR Determination Date, are offered by it to prime banks in the London interbank market as of approximately 11:00 a.m., London time, on such LIBOR Determination Date and in a principal amount equal to that which is representative for a single transaction in such market at such time. If at least two such quotations are provided, Three-Month LIBOR for such LIBOR Determination Date will be the arithmetic mean of such quotations as calculated by the Paying Agent. If fewer than two quotations are provided, Three-Month LIBOR for such LIBOR Determination Date will be the arithmetic mean of the rates quoted as of approximately 11:00 a.m., London time, on such LIBOR Determination Date by three major banks in the London interbank market selected by the Paying 6 Agent for loans in United States dollars to leading European banks, having a three-month maturity commencing on the second Business Day immediately following such LIBOR Determination Date and in a principal amount equal to that which is representative for a single transaction in such market at such time; provided, however, that, if the banks selected as aforesaid by the Paying Agent are not quoting as mentioned in this sentence, Three-Month LIBOR for such LIBOR Determination Date will be Three-Month LIBOR determined with respect to (i) the immediately preceding Dividend Period for purposes of the Class C Shares and (ii) the immediately preceding RegCaPS II Payment Period for purposes of the RegCaPS II. "Transfer Agent" means the transfer agent with respect to the Class C-2 Shares which shall initially be the Corporation. "Trust II" means Zurich RegCaPS Funding Trust II, a Delaware statutory business trust. "Trust Capital Securities II" means 150,000 trust capital securities, liquidation preference US $1,000 each, representing undivided beneficial ownership interests in Trust II. "U.S. GAAP" means the generally accepted accounting principles in the United States. "ZGH" means Zurich Group Holding a Swiss stock corporation (as defined in Article 620 et seq., of the Swiss Code of Obligation), formerly known as Zurich Financial Services, a wholly-owned subsidiary of Zurich Financial Services or its successors and assigns. "Zurich Financial Services" means Zurich Financial Services, a Swiss stock corporation (as defined in Article 620 et seq., of the Swiss Code of Obligation) listed on the Swiss Exchange SWX with a secondary listing on the London Stock Exchange and the holder of directly or indirectly 100% of the shares of ZGH or its successors and assigns. "1940 Act" means the U.S. Investment Company Act of 1940, as amended. ARTICLE 2 NUMBER AND DESIGNATION SECTION 2.01. Number and Designation. 6 and 2/3 shares of the Class C Common Stock of the Corporation are hereby designated as a series of Class C Common Stock designated as Class C-2 Common Stock, par value $1.00 per share (the "Class C-2 Shares"). The Class C-2 Shares shall have a liquidation preference of twenty-two million five hundred thousand United States dollars ($22,500,000) per share (the "Class C-2 Share Liquidation Preference"). ARTICLE 3 RANK SECTION 3.01. Rank. (a) The Class C-2 Shares shall, only with respect to payment of Dividends at the Class C-2 Indicative Rate (as defined below) and with respect to the payment of the Class C-2 Share Liquidation Preference upon the liquidation, dissolution and winding up of the Corporation, rank senior to all of the Junior Shares, including the Common Shares. In all other respects, the Class C-2 Shares shall rank pari passu with the Junior Shares, including the Common Shares and the other series of Class C Shares and shall participate equally with the Common Shares 7 and the other series of Class C Shares with respect to distributions paid by the Corporation and shall participate equally with the Class A Shares and the other series of Class C Shares with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation. The Class C- 2 Shares will rank junior in all respects to any indebtedness of the Corporation. The Class C-2 Shares shall rank pari passu with the other series of Class C Shares for all purposes. All securities of the Corporation to which the Class C-2 Shares rank senior (whether with respect to dividends or upon liquidation, dissolution, winding up or otherwise), including the Common Shares, are collectively referred to herein as the "Junior Shares." The definition of Junior Shares shall also include any rights or options exercisable for or convertible into any of the Junior Shares. (b) Without prior consent of the holders of not less than a majority of the outstanding Class C-2 Shares, the Corporation shall not issue any class or series of equity securities whose terms provide that such securities rank senior to or pari passu with the Class C-2 Shares with respect to the rights to receive dividends and other distributions or with respect to any amounts payable upon liquidation, dissolution or winding up; provided that the Corporation may file certificates of designation and issue shares in accordance therewith for other series of Class C Shares to be designated as Class C-1 Common Stock, Class C-3 Common Stock, Class C-4 Common Stock, Class C-5 Common Stock, and Class C-6 Common Stock, each of which ranks pari passu with the Class C-2 Shares with respect to distributions paid by the Corporation and with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation. Further, if the Corporation has paid in full the lesser of (i) each Dividend on its respective Dividend Payment Date during the last 24 months at the Class C-2 Indicative Rate, or (ii) prior to February 9, 2003, all Dividends in an amount at least equal to the Class C Share Indicative Rate that could have been paid on the Class C Shares, the Corporation may issue an unlimited amount of additional Class C Shares and other equity ranking pari passu with the Class C-2 Shares without the consent of the holders of the Class C-2 Shares. ARTICLE 4 DIVIDENDS SECTION 4.01. Rate; Dividend Date. (a) Each Class C-2 Share shall be entitled to receive cash Dividends on a non-cumulative basis, when as and if declared by the Board of Directors, out of funds legally available for the payment of distributions on each Dividend Date commencing February 15, 2001. Prior to March 30, 2006 the amount of Dividends will be computed on the basis of twelve 30-day months and will be computed on the basis of equal quarterly payments. On or after March 30, 2006, the amount of Dividends will be computed on the basis of a 360-day year and the actual number of days in such Dividend Period. When Dividends are paid on the Class C-2 Shares at less than the Class C-2 Indicative Rate, all Dividends declared on the Class C Shares will be paid pro rata based on the outstanding number of shares of each series of Class C Common Stock and such Dividends declared on the Class C-2 Shares will be paid pro rata based on the outstanding number of Class C-2 Shares. (b) The Paying Agent will calculate Three-Month LIBOR as of each LIBOR Determination Date and shall make such rate calculation available to holders of Class C-2 Shares. The Paying Agent also shall determine the Dividends payable on each Dividend Date and give notice thereof (including the applicable rate, amount, the applicable period and payment) to the holders of Class C-2 Shares. The notices set forth in this paragraph shall be sent by first class mail to the address of each holder of Class C-2 Shares as it appears on the register kept by the Registrar and shall be available at the offices of the Paying Agent. 8 SECTION 4.02. Dividend Restrictions. (a) No distribution or redemption, including without limitation cash dividends, may be declared or paid or set apart for payment on any Junior Shares and neither the Corporation nor any of its Affiliates may purchase or redeem for cash any outstanding Junior Shares, unless: (i) full Dividends have been declared and paid or set apart for payment on the Class C-2 Shares in an amount at least equal to the greater of (A) the Dividends payable or set apart during such Dividend Period at the Class C-2 Indicative Rate; or (B) the Economic Dividend Payable; (ii) Partnership II has paid or set apart for payment the full amount of RegCaPS II Payments for the current RegCaPS II Payment Period; (iii) LLC II has set apart or paid the full amount of the LLC II Payments on an LLC II Payment Date in any period when the corresponding RegCaPS II Payment for such LLC II Payment Date has been made; and (iv) in the case of a repurchase or redemption, such repurchase or redemption does not cause the net worth of the Corporation to be less than the Minimum Net Worth Amount. Notwithstanding the foregoing, for so long as the Corporation has paid or set apart for payment Dividends on the Class C-2 Shares at least equal to the greater of (i)(A) or (i)(B) and clauses (ii) (iii) and (iv) above are satisfied, the Corporation may declare and pay Dividends on any Junior Shares with respect to such Dividend Period. (b) (i) If a Dividend is paid or set apart on the Class C-2 Shares during any Dividend Period at a rate less than the Class C-2 Indicative Rate, the Corporation may not make any dividend payments on the Junior Shares and may only make dividend payments on its other securities that rank pari passu with the Class C-2 Shares, if any, in the same proportion as the partial Dividend paid or set apart on the Class C-2 Shares for the current Dividend Period bears to the full Dividend payment determined for such Dividend Period at the Class C-2 Indicative Rate. (ii) For so long as the Class C-2 Shares are outstanding, if a partial RegCaPS II Payment is made or set apart for any RegCaPS II Payment Period, the Corporation may not make any dividend payments during such RegCaPS II Payment Period on its Junior Shares and may only make dividend payments on its other securities that rank pari passu with the Class C-2 Shares in the same proportion as the lesser of (i) the proportion the partial RegCaPS II Payment made or set apart for the Current RegCaPS II Payment Period bears to the RegCaPS II Payment determined for such RegCaPS II Payment Period and (ii) the proportion the partial Dividend paid or set apart on the Class C-2 Shares for the corresponding Dividend Period bears to the full Dividend payment for such Dividend Period at the Class C-2 Indicative Rate. Additionally, for so long as the Class C-2 Shares are outstanding, all shares of common or preferred stock issued by majority-owned subsidiaries of the Corporation which shares are not beneficially owned by the Corporation or its wholly-owned subsidiaries will be subject to the 9 restrictions set forth above on the payment of distributions and other payments only to the extent that such minority shares are owned by Zurich Financial Services or one of its controlled Affiliates. (c) The Corporation intends that the holders of the RegCaPS II shall be third party beneficiaries of, and entitled to enforce, the provisions of this Section 4.02 as if such provisions constituted a contract between the Corporation and the holders of the Class C-2 Shares, and the holders of the RegCaPS II were third-party beneficiaries to such contracts. SECTION 4.03. Payment of Dividends. Dividends and other payments on the Class C-2 Shares will be payable to the holders thereof as they appear on the books and records of the Corporation on the relevant record dates, which will be one Business Day prior to the relevant Dividend Date or other payment date. Such Dividends will be paid either (i) by the Corporation or (ii) in the event such Class C-2 Shares are not held by an Affiliate of ZGH through the Paying Agent who will hold amounts received from the Corporation in respect of the Class C-2 Shares for the benefit of the registered holders of the Class C-2 Shares. In the event that any Class C-2 Shares do not remain in book-entry only form, the relevant record dates shall be the 15th day of the month of the relevant Dividend Date or other payment date. In the event that any Dividend Date is not a Business Day, payment of the Dividends payable on such date will be made on the next succeeding day which is a Business Day (without any interest or other payment in respect of the dividends subject to such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. SECTION 4.04. Changes in the Dividends-Received Percentage. (a) If, prior to 18 months after the date of the original issuance of the Class C-2 Shares, one or more amendments to the Code are enacted that reduce the dividends-received deduction (currently 70%), as specified in Section 243(a)(i) of the Code or any successor provision (the "Dividend-Received Percentage"), certain adjustments will be made as appropriate in respect of the Dividends paid by the Corporation, and Post Declaration Date Dividends and Retroactive Dividends may become payable (as such terms are defined below), except that no adjustments will be made with respect to any reduction of the Dividends-Received Percentage below 50%. (b) The amount per share of each Dividend declared at the applicable rate described in Section 4.01 above for Dividend payments made on or after the effective date of such change in the Code will be increased, to the extent of funds legally available for distribution by the Corporation, by multiplying the amount of the Dividend payable before adjustment, by a factor, which will be the number determined in accordance with the following formula (the "DRD Formula"), and rounding the result to the nearest cent (with one-half cent rounded up): I-.35(I-.70) ------------ I-.35(I-DRP) For purposes of the DRD Formula with regard to the Class C-2 Shares, "DRP" means the Dividend-Received Percentage (expressed as a decimal) applicable to the Dividends in question; provided, that in no event shall the DRP be less than 0.50. No amendment to the Code, other than a change in the Dividends-Received Percentage enacted prior to 18 months after the date of the original issuance of the Class C-2 Shares, will give rise to an adjustment. Notwithstanding the foregoing provisions, if, with respect to any such amendment, the Corporation receives either an unqualified 10 opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form of authorization from the IRS to the effect that such an amendment does not apply to a Dividend payable on the Class C-2 Shares, then such amendment will not result in the adjustment provided for pursuant to the DRD Formula with respect to such Dividend. The opinion referenced in the previous sentence shall be based upon the legislation amending or establishing the DRP or upon a published pronouncement of the IRS addressing such legislation. Absent manifest error, the Corporation's calculation of the Dividends payable as so adjusted shall be final and not subject to review. (c) Notwithstanding the foregoing, if any such aforementioned amendment to the Code is enacted after the Dividend payable on a Dividend Date has been declared, and if such amendment is effective with respect to such Dividend, the amount of the Dividend payable on such Dividend Date will not be increased; instead, additional Dividend payments (the "Post Declaration Date Dividend"), equal to the excess, if any, of (x) the product of the Dividend paid by the Corporation on such Dividend Date and the DRD Formula over (y) the Dividend paid by the Corporation on such Dividend Date, will be declared to the extent funds legally available for distribution by the Corporation to holders of Class C-2 Shares on the record date applicable to the next succeeding Dividend Date, or, if Class C-2 Shares are called for redemption prior to such record date, to holders of Class C-2 Shares on the applicable redemption date, as the case may be, in addition to any other amounts payable on such date. (d) If any such amendment to the Code is enacted and the reduction in the Dividends-Received Percentage retroactively applies to one or more Dividend Dates on which the Corporation previously paid Dividends with respect to the Class C-2 Shares (each, an "Affected Dividend Date"), additional Dividends (the "Retroactive Dividends") will be declared, to the extent of funds legally available therefor, to holders of Class C-2 Shares on the record date applicable to the next succeeding Dividend Dates or, if the Class C-2 Shares are called for redemption prior to such record date, to holders of Class C-2 Shares on the applicable redemption date, as the case may be, in an amount equal to the excess of (x) the product of the Dividend paid by the Corporation on each Affected Dividend Date and the DRD Formula over (y) the sum of the Dividend paid by the Corporation on each Affected Dividend Date. The Corporation will only make one payment of Retroactive Dividends for any such amendment. Notwithstanding the foregoing provisions, if, with respect to any such amendment, the Corporation receives either an unqualified opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form of authorization from the IRS to the effect that such amendment does not apply to a Dividend payable on an Affected Dividend Date for the Class C-2 Shares, then such amendment will not result in the payment of a Retroactive Dividend with respect to such Affected Dividend Date. The opinion referenced in the previous sentence shall be based upon the legislation amending or establishing the Dividends-Received Percentage or upon a published pronouncement of the IRS addressing such legislation. (e) Notwithstanding the foregoing, no adjustment in the dividends payable by the Corporation shall be made, and no Post Declaration Date Dividends or Retroactive Dividends shall be payable by the Corporation, in respect of the enactment of any amendment to the Code 18 months or more after the date of original issuance of the Class C-2 Shares that reduces the Dividends-Received Percentage or to the extent such amendment reduces the Dividends-Received Percentage to less than 50%. 11 (f) In the event that the amount of Dividends payable per share of the Class C-2 Shares is increased pursuant to the DRD Formula and/or Post Declaration Date Dividends or Retroactive Dividends are to be paid, the Corporation will give notice of each such adjustment and, if applicable, any Post Declaration Date Dividends and Retroactive Dividends to the holders of Class C-2 Shares. (g) The various payment restrictions and obligations described above and applicable in respect of any Dividend Period in which a Dividend on the Class C-2 Shares is not paid in an amount at least equal to the Class C-2 Indicative Rate to the extent that any Post Declaration Date Dividend or Retroactive Dividend is not declared and paid or set apart for payment as and when due in respect of a reduction in the Dividends-Received Percentage; provided that such payment restrictions and obligations will remain in effect, not only during the current Dividend Period, but until such Post Declaration Date Dividend or Retroactive Dividend is declared and paid or set apart for payment. SECTION 4.05. Earnings and Profits Gross-Up Payments. (a) To the extent that Dividends paid with respect to the Class C-2 Shares exceeds the Corporation's earnings and profits as calculated for U.S. federal income tax purposes, they will not constitute dividends for U.S. federal income tax purposes and will not qualify for the dividends-received deduction. In such event, additional distributions will be made by the Corporation to place each holder of the Class C-2 Shares in the same position it would have been in if all Dividends from the Corporation were paid from such earnings and profits, assuming for these purposes that such holder was eligible for the dividends-received deduction. (b) If any Dividend on the Class C-2 Shares with respect to any fiscal year (including any Gross-Up Payment (as defined below)) constitutes, in whole or in part, a return of capital (or is treated as gain from the sale or exchange of the Class C-2 Shares) for U.S. federal income tax purposes (a "Qualifying Dividend"), within 180 days after the end of such fiscal year, the Corporation will pay (if declared), out of funds legally available therefor, an amount equal to the aggregate Gross-Up Payments to Qualified Investors (as defined below) with respect to all Qualifying Dividends on the Class C-2 Shares during such fiscal year. A "Qualified Investor" with respect to a Qualifying Dividend during a fiscal year means a person who was entitled to receive such Qualifying Dividend. (c) A "Gross-Up Payment" to a Qualified Investor with respect to all Qualifying Dividends on Class C-2 Shares paid by the Corporation during a fiscal year means an additional Dividend on the Class C-2 Shares to a Qualifying Investor in an amount which, when taken together with the aggregate Qualifying Dividends paid to such Qualified Investor during such fiscal year, would cause such Qualified Investor's net yield in dollars (after U.S. federal income tax consequences and treating, for purposes of calculating net yield in dollars, the sum of that portion of the Qualifying Dividends and the Gross-Up Payment otherwise treated as a return of capital as capital gain recognized upon the taxable sale or exchange of Class C-2 Shares) from the aggregate of both the Qualifying Dividends and the Gross-Up Payment to be equal to the net yield in dollars (after U.S. federal income tax consequences) which would have been received by such Qualified Investor if the entire amount of the aggregate Qualifying Dividends had instead been treated as a dividend for U.S. federal income tax purposes. Such Gross-Up Payment shall be calculated using the applicable maximum marginal U.S. federal corporate income tax rate applicable to ordinary income and capital gains, as the case may be, and, where applicable, the Dividends-Received Percentage, without consideration being given to the time value of money, the U.S. federal income tax situation of any specific Qualified Investor (including the application of the alternative minimum tax or the application of Section 246 of the Code), or any state or local tax consequences that may arise. The Corporation shall make a determination, based upon the reasonably estimated earnings and profits of that portion, if any, of a Qualifying Dividend 12 for a fiscal year that will be treated as dividend for U.S. federal tax purposes, and such determination shall be final and binding for purposes of calculating the amount of the Gross-Up Payments with respect to all Qualifying Dividends for such fiscal year. SECTION 4.06. Change of Control Gross-Up Payments. If as a result of a Change of Control Tax Event, there is an increase in any non-refundable foreign taxes withheld ("Foreign Tax Increase") with respect to RegCaPS II Payments or Cumulative RegCaPS II Payment Amounts paid to a RegCaPS II registered holder ("Foreign Taxed RegCaPS Payments"), additional distributions shall be made on the Class C -2 Shares in an amount which, when taken together with the aggregate Dividends paid to the Holders of the Class C-2 Shares during such fiscal year reduced by the amount of such Foreign Tax Increase, would cause the net yield in dollars (after U.S. federal income tax consequences other than the use of foreign tax credits resulting from the Foreign Tax Increase) to be equal to the net yield in dollars (after U.S. federal income tax consequences) to the Holder from receipt of the aggregate Dividends paid to the Holder during such fiscal year without any reduction by the amount of such Foreign Tax Increase. The foregoing amount shall be calculated based on the assumption that the Holder is a U.S. corporation and using the applicable maximum marginal U.S. federal corporate income tax rate applicable to ordinary income and capital gains, as the case may be, and the Dividends-Received Percentage, without consideration being given to the time value of money, the U.S. federal income tax situation of any specific Holder, or any state or local tax consequences that may arise. If for a prior fiscal year Foreign Taxed RegCaPS Payments are made by the Partnership, the Corporation will pay (if declared), within 90 days after the end of such fiscal year, out of funds legally available therefor, an amount equal to the aggregate Change of Control Gross-Up Payments to the Partnership. ARTICLE 5 LIQUIDATION PREFERENCE SECTION 5.01. Liquidation Preference. (a) In the event of any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, after payment or provision for the liabilities of the Corporation and the expenses of such dissolution, liquidation or winding up, the holders of the outstanding Class C-2 Shares will be entitled to receive, the Class C-2 Share Liquidation Amount, out of the assets of the Corporation or proceeds thereof available for distribution to holders of Class C-2 Shares. Out of such amount, the holders of Class C-2 Shares will be entitled to receive the Class C-2 Share Liquidation Preference before any payment or distribution of assets is made to holders of the Common Shares or any other Junior Shares. Amounts payable on the Class C-2 Shares in connection with the liquidation of the Corporation in excess of the Class C- 2 Share Liquidation Preference are payable (to the extent the Class C-2 Share Liquidation Amount exceeds the Class C-2 Share Liquidation Preference) on a pari passu basis with any Common Shares entitled to receive payment or distribution upon a liquidation, dissolution or winding up of the Corporation. If the assets of the Corporation available for distribution in such event are insufficient to pay in full the aggregate amount payable to holders of the Class C-2 Shares and holders of all other classes or series of equity securities of the Corporation, if any, ranking, as to the distribution of assets upon dissolution, liquidation or winding up of the Corporation, on a parity with the Class C-2 Shares, the assets will be distributed to the holders of Class C-2 Shares and holders of such other equity interests pro rata, based on the full respective preferential amounts to which they are entitled. After payment of the Class C-2 Share Liquidation Amount upon dissolution, liquidation or winding up of the Corporation, the holders of Class C-2 Shares will not be entitled to any further participation in any distribution of assets by the Corporation. 13 (b) Notwithstanding Section 5.01(a) above, holders of Class C-2 Shares will not be entitled to be paid any amount in respect of a dissolution, liquidation or winding up of the Corporation until holders of any classes or series of securities of the Corporation ranking, as to the distribution of assets upon dissolution, liquidation or winding up of the Corporation, senior to the Class C-2 Shares have been paid all amounts to which such classes or series are entitled. Notwithstanding anything else in this Certificate, neither the sale, lease or exchange (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation, nor the merger, consolidation or combination of the Corporation into or with any other person or the merger, consolidation or combination of any other person into or with the Corporation, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Section 5.01. ARTICLE 6 REDEMPTION SECTION 6.01. Optional Redemption. (a) The Class C-2 Shares will not be subject to mandatory redemption at any time. Prior to February 15, 2031, Class C-2 Shares will not be subject to optional redemption. On or after February 15, 2031, Class C-2 Shares may be redeemed at the option of the Corporation at any time, subject to the prior consent of ZGH, in whole but not in part, at their fair market value (the "Redemption Amount") as determined by a nationally recognized investment bank retained by the Corporation. SECTION 6.02. Procedure for Redemption. (a) Notice of any redemption of the Class C-2 Shares (a "Redemption Notice") will be given by the Corporation by mail to each holder of Class C-2 Shares not fewer than 30 nor more than 60 days before the date fixed for redemption. For purposes of the calculation of the date of redemption and the dates on which notices are given pursuant to this Section 6.02(a), a Redemption Notice shall be deemed to be given on the day such notice is first mailed, by first-class mail, postage prepaid, to holders of the Class C-2 Shares. Each Redemption Notice shall be addressed to the holders of Class C-2 Shares at the address of each such holder appearing in the books and records of the Corporation. No defect in the Redemption Notice or in the mailing thereof with respect to any holder of Class C-2 Shares shall affect the validity of the redemption proceedings with respect to any other holder of Class C-2 Shares. (b) If the Corporation gives a Redemption Notice (which notice will be irrevocable), then by 12:00 noon, New York City time, on the redemption date, the Corporation (A) if the Class C-2 Shares are in book-entry form with DTC, will deposit irrevocably with DTC funds sufficient to pay the applicable Redemption Amount and will give DTC irrevocable instruction and authority to pay the Redemption Amount in respect of the Class C-2 Shares held through DTC in global form or (B) if the Class C-2 Shares are held in certificated form (each such certificate a "Class C-2 Share Certificate"), will deposit with the Paying Agent, funds sufficient to pay the applicable Redemption Amount of any such Class C-2 Shares and will give to the Paying Agent irrevocable instructions and authority to pay such amounts to the holders of Class C-2 Shares, upon surrender of their certificates, by delivery of check, mailed to the address of the relevant holder appearing on the books and records of the Corporation on the redemption date. For these purposes, the applicable Redemption Amount shall not include Dividends which are being paid to holders of Class C-2 Shares who were holders of Class C-2 Shares on a relevant record date. Upon satisfaction of the foregoing conditions, then immediately prior to the close of business on the date of such deposit or payment, all rights of holders of Class C-2 Shares so called for redemption will cease, except the right of the holders of Class C-2 Shares to receive 14 the Redemption Amount, but without interest on such Redemption Amount, and from and after the date fixed for redemption, such Class C-2 Shares will not receive dividends or bear interest. (c) In the event that any date fixed for redemption of Class C-2 Shares is not a Business Day, then payment of the Redemption Amount payable on such date will be made on the next succeeding Business Day (and without any interest in respect of any such delay), except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day in each case, with the same force and effect as if made on such date fixed for redemption. In the event that payment of the Redemption Amount is improperly withheld or refused and not paid by the Corporation, Dividends on the Class C-2 Shares called for redemption will continue to be payable in accordance with the terms hereof from the original redemption date until the Redemption Amount is actually paid. (d) The Corporation shall not be required to register or cause to be registered the transfer of any Class C-2 Shares which have been called for redemption. (e) The Class C-2 Shares which have been issued and reacquired in any manner, including shares purchased or redeemed, shall (upon compliance with any applicable provisions of the laws of the State of Nevada) have the status of authorized and unissued Class C-2 Shares and may be reissued. ARTICLE 7 VOTING RIGHTS SECTION 7.01. Voting Rights. (a) The holders of the Class C-2 Shares will be entitled to 0.375 of a vote per share (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 Corporation) and will be entitled to vote with the Common Shares as a single class on all matters submitted to a vote of the Common Shares (other than those matters affecting only the Common Shares, or either of them); provided, however, that at no time shall the aggregate Voting Power of the Class C-2 Shares be greater than 0.45% of the total Voting Power of the Corporation. Prior to transferring ownership of any Class C-2 Shares to a transferee other than an Affiliate of ZGH and subject to receipt of any required regulatory approval, if any, such Class C-2 Shares shall be (i) split into a number of shares of Class C-2 Shares equal to and with a liquidation preference equal to the liquidation amount of the number of Trust Capital Securities II, and (ii) converted on a one to one basis to the same number of shares of a class of common stock of the Corporation (the "Conversion Shares") having rights, preferences and privileges substantially identical to the Class C-2 Shares except that the Conversion Shares will be entitled to no voting rights other than as required by law and other than with respect to adverse amendments to the terms of the Conversion Shares and the issuance of equity securities that rank senior to or pari passu with the Conversion Shares with respect to the payment of distributions or amounts upon liquidation, provided that the Corporation may file certificates of designation and issue shares in accordance therewith for other Class C Shares which rank pari passu with the Conversion Shares with respect to distributions paid by the Corporation and with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation. If, however, any necessary regulatory approvals to issue the Conversion Shares are not obtained, the Class C-2 Shares rather than the Conversion Shares may be transferred to a transferee other than an Affiliate of ZGH. (b) The holders of the Class C-2 Shares and the Conversion Shares will be entitled to vote separately as a single class on the matters described in this paragraph. The consent of the holders of 15 not less than a majority of the outstanding Class C-2 Shares and Conversion Shares, voting as a single class, is required (i) to amend, alter, supplement or repeal the terms of the Class C-2 Shares and the Conversion Shares (it being a condition to any such amendment, alteration, supplement or repeal that it has a substantially identical effect on the rights, preferences and privileges of both the Class C-2 Shares and the Conversion Shares), or (ii) if the Corporation has not paid in full the lesser of (A) each of the last twenty-four months of Dividends on their respective Dividend Payment Dates at the Class C-2 Indicative Rate, or (B) prior to the second anniversary of the first issue date, all Dividends at the Class C-2 Indicative Rate that could have been paid on the Class C-2 Shares and the Conversion Shares, for the Corporation to issue, or to increase the authorized amount of, the Class C-2 Shares or the Conversion Shares or any other equity securities that rank pari passu with or senior to the Class C-2 Shares and the Conversion Shares; provided that the Corporation may file certificates of designation and issue shares in accordance therewith for other Class C Shares to be designated as Class C-1 Common Stock, Class C-3 Common Stock, Class C-4 Common Stock, Class C-5 Common Stock, and Class C-6 Common Stock, each of which rank pari passu with the Class C-2 Shares with respect to distributions paid by the Corporation and with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation without the consent of the holders of the Class C-2 Shares or the Conversion Shares. (c) Whenever Dividends on the Class C-2 Shares and the Conversion Shares at the Class C-2 Indicative Rate are in arrears for twenty-four or more consecutive months, the holders of Class C-2 Shares and the Conversion Shares, voting together with the other Class C Shares as a single class, will be entitled, subject to any necessary regulatory actions, to elect two Special Independent Directors to the Board of Directors, at a special meeting called by the holders of record of at least 25% of the Class C-2 Shares and the Conversion Shares in the aggregate or by the holders of record of 25% of any of the other series of Class C Shares pursuant to the terms of the certificate of designation creating such other series of Class C Shares. The Special Independent Directors shall vacate office if Dividends at the Class C-2 Indicative Rate are resumed and are paid regularly for at least twelve consecutive months, unless otherwise provided by the terms of any other certificate of designation for any other series of Class C Shares. If Dividends are resumed and paid regularly for at least twelve consecutive months at the Class C-2 Indicative Rate, the holders of the Class C-2 Shares and the Conversion Shares shall no longer be entitled to vote for the two Special Independent Directors on account of that arrearage. When no holder of Class C-2 Shares is entitled to vote for the two Special Independent Directors, the Special Independent Directors shall vacate office. Notwithstanding the foregoing, in the event that more than one series of Class C Shares are entitled to elect Special Independent Directors to the Board of Directors, such series shall vote together as a single class to elect such two directors. In no event shall the holders of Class C Shares be entitled to elect more than two Independent Directors to the Board of Directors. (d) Notwithstanding the foregoing, the Corporation shall have the right, without the prior consent of the holders of Class C-2 Shares and Conversion Shares, if any, to amend, alter, supplement or repeal any terms of the Class C-2 Shares (i) to cure any ambiguity, or to cure, correct or supplement any defective provision thereof or (ii) to make any other provision with respect to matters or questions arising with respect to the Class C-2 Shares and Conversion Shares, if any, that is not inconsistent with the provisions thereof so long as such action does not materially and adversely affect any of the rights, preferences and privileges of the holders of Class C-2 Shares and Conversion Shares, if any, provided, however, that any increase in the amount of authorized or issued Class C-2 Shares will be deemed not to materially and adversely affect any of the rights, preferences and privileges of the holders of Class C-2 Shares. 16 (e) The consent or votes required in Section 7.01(b) and (c) above shall be in addition to any approval of stockholders of the Corporation which may be required by law or pursuant to any provision of the Corporation's Articles of Incorporation or bylaws, which approval shall be obtained by vote of the stockholders of the Corporation in the manner provided in Section 7.01(a) above. ARTICLE 8 MERGER, CONSOLIDATION OR AMALGAMATION OF THE CORPORATION SECTION 8.01. Merger, Conversion, Consolidation or Amalgamation of the Corporation. Without the consent of either one Special Independent Director, if any, or a majority of the holders of Class C-2 Shares, the Corporation may not consolidate, amalgamate, merge with or into, convert or domesticate with or into, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to, any corporation or other entity, except as permitted below. The Corporation may, with the consent of at least one of the Special Independent Directors, if any, on the Board of Directors at the time the issue is considered and without the consent of the holders of the Class C-2 Shares, consolidate, amalgamate, merge with or into, convert or domesticate with or into, or be replaced by a corporation organized as such under the laws of any State of the United States; provided, that: (a) if the Corporation is not the surviving entity, such successor entity either (x) expressly assumes all of the obligations of the Corporation under the Class C-2 Shares or (y) substitutes securities for the Class C-2 Shares (the "Successor Securities"), so long as the Successor Securities rank the same as the Class C-2 Shares rank with respect to Dividends and other payments thereon; (b) such merger, consolidation, amalgamation, conversion, domestication or replacement does not adversely affect any of the rights, preferences and privileges of the holders of the Class C-2 Shares (including any Successor Securities) in any material respect; (c) prior to such merger, consolidation, amalgamation, conversion, domestication or replacement, the Corporation has received an opinion of a nationally recognized law firm experienced in such matters to the effect that (i) such merger, consolidation, amalgamation, conversion, domestication or replacement will not adversely affect any of the rights, preferences and privileges of the holders of the Class C-2 Shares (including any Successor Securities) in any material respect and (ii) following such merger, consolidation, amalgamation, conversion, domestication or replacement, the Corporation (or such successor entity) will not be required to register under the 1940 Act; and (d) distributions with respect to the Class C-2 Shares or Successor Securities would be eligible for the dividends-received deduction. ARTICLE 9 TRANSFER OF CLASS C-2 SHARES SECTION 9.01. General. The Corporation shall provide for the registration of Class C-2 Share Certificates and of transfers of Class C-2 Share Certificates. Upon surrender for registration of transfer of any Class C-2 Share Certificate, the Corporation shall cause one or more new Class C-2 Share Certificates to be issued in the name of the designated transferee or transferees. Every Class C-2 Share Certificate surrendered for registration of transfer shall be accompanied by a written instrument of transfer in form satisfactory to the Corporation duly executed by the holder of such Class C-2 Shares or his or her attorney duly authorized in writing. Each Class C-2 Share Certificate surrendered for 17 registration of transfer shall be cancelled by the Corporation. A transferee of a Class C-2 Share Certificate shall be entitled to the rights and subject to the obligations of a holder of Class C-2 Shares hereunder upon the receipt by the transferee of a Class C-2 Share Certificate, which receipt shall be deemed to constitute a request by such transferee that the books and records of the Corporation reflect such transferee as a holder of Class C-2 Share. SECTION 9.02. Definitive Certificates. Unless and until the Corporation issues a global Class C-2 Share Certificate pursuant to Section 9.03(a), the Corporation shall only issue definitive Class C-2 Share Certificates to the holders of Class C-2 Shares. The Corporation may treat the Person in whose name any Class C-2 Share Certificate shall be registered on the books and records of the Corporation as the sole holder of such Class C-2 Share Certificate and of the Class C-2 Shares represented by such Class C-2 Share Certificate for purposes of receiving Dividends and for all other purposes whatsoever (including without limitation, tax returns and information reports) and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Class C-2 Share Certificate or in the Class C-2 Shares represented by such Class C-2 Share Certificate on the part of any other Person, whether or not the Corporation shall have actual or other notice thereof. SECTION 9.03. Book Entry Provisions. (a) General. The provisions of this Section 9.03(a) shall apply only in the event that the Class C-2 Shares are distributed to a Person other than the Purchaser. Upon the occurrence of such event, a global Class C-2 Share Certificate representing the Book-Entry Interests shall be delivered to DTC, the initial Clearing Agency, by, or on behalf of, the Corporation and any previously issued and still outstanding definitive Class C-2 Share Certificates shall be of no further force and effect. The global Class C-2 Share Certificate shall initially be registered on the books and records of the Corporation in the name of Cede & Co., the nominee of DTC, and no holder of Class C-2 Shares will receive a new definitive Class C-2 Share Certificate representing such holder's interest in such Class C-2 Share Certificate, except as provided in Section 9.03(c). Unless and until new definitive, fully registered Class C-2 Share Certificates (the "Definitive Class C-2 Share Certificates") have been issued to the holders of Class C-2 Shares pursuant to Section 9.03(c): (i) The provisions of this Section shall be in full force and effect; (ii) The Corporation shall be entitled to deal with the Clearing Agency for all purposes of this Certificate (including the payment of Dividends, Redemption Amounts and liquidation proceeds on the Class C-2 Share Certificates and receiving approvals, votes or consents hereunder) as the sole holder of the Class C-2 Share Certificates and shall have no obligation to the holders of Class C-2 Shares; (iii) None of the Corporation, the Board of Directors, or any Special Independent Director or any agents of any of the foregoing shall have any liability or responsibility for any aspect of the records relating to or Dividends made on account of beneficial ownership interests in a global Class C-2 Share Certificate for such beneficial ownership interests or for maintaining, supervising or reviewing any records relating to such beneficial ownership interest; and (iv) Except as provided in Section 9.03(c) below, the holders of Class C-2 Shares will not be entitled to receive physical delivery of the Class C-2 Shares in definitive form and 18 will not be considered holders thereof for any purpose under this Certificate of Designation, and no global Class C-2 Share Certificate representing Class C-2 Shares shall be exchangeable, except for another global Class C-2 Share Certificate of like denomination and tenor to be registered in the name of DTC or Cede & Co., or to a successor depository or its nominee. Accordingly, each holder of Class C-2 Shares must rely on the procedures of DTC or if such person is not a Participant, on the procedures of the Participant through which such person owns its interest to exercise any rights of a holder under this Certificate of Designation. (b) Notices to Clearing Agency. Whenever the holders of Class C-2 Shares are required to give a notice or other communication to their equity holders, unless and until definitive Class C-2 Share Certificates shall have been issued to the holders of Class C-2 Shares pursuant to Section 9.03(c), the Corporation shall give all such notices and communications specified herein to be given to the holders of Class C-2 Shares to the Clearing Agency, and shall have no obligations to the holders of Class C-2 Shares. (c) Definitive Class C-2 Share Certificates. Definitive Class C-2 Share Certificates shall be prepared by the Corporation and exchangeable for the global Class C-2 Share Certificate or Certificates if and only if (i) DTC notifies the Corporation that it is unwilling or unable to continue its services as a securities depository and no successor depository shall have been appointed, (ii) DTC, at any time, ceases to be a Clearing Agency registered under the Exchange Act at such time as the DTC shall have been appointed, or (iii) the Corporation, in its sole discretion, determines that such global Class C-2 Share Certificate shall be so exchangeable. Upon surrender of the global Class C-2 Share Certificate or Certificates representing the Book-Entry Interests by the Clearing Agency, accompanied by registration instructions, the Corporation shall cause definitive Class C-2 Share Certificates to be delivered to holders of Class C-2 Shares in accordance with the instructions of the Clearing Agency. The Corporation shall not be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be protected in relying on, such instructions. The definitive Class C-2 Share Certificates shall be printed, lithographed or engraved or may be produced in any other manner as may be required by any national securities exchange on which Class C-2 Shares may be listed and is reasonably acceptable to the Corporation, as evidenced by its execution thereof. SECTION 9.04. Registrar, Transfer Agent and Paying Agent. (a) The Corporation will act as Registrar, Transfer Agent and Paying Agent of the Class C-2 Share for so long as the Class C-2 Shares are held by an Affiliate of ZGH, for so long as the Class C-2 Shares remain in book- entry only form. (b) Except in such case where the Corporation shall act as Registrar or Paying Agent pursuant to Section 9.04(a) hereof, the Corporation shall maintain in the Borough of Manhattan, City of New York, State of New York (i) an office or agency where Class C-2 Shares may be presented for registration of transfer or for exchange ("Registrar") and (ii) an office or agency where Class C-2 Shares may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Class C-2 Shares and of their transfer and exchange. The Corporation may appoint the Registrar and the Paying Agent and may appoint one or more co-registrars and one or more additional paying agents in such other location as it shall determine. The term "Paying Agent" includes any additional paying agent. The Corporation may change any Paying Agent, Registrar or co-registrar without prior notice to any holder. If the Corporation fails to appoint or maintain another entity as Registrar or Paying Agent, the Corporation shall act as such. 19 (c) Registration of transfers of Class C-2 Shares shall be effected without charge by or on behalf of the Corporation, but upon payment (with the giving of such indemnity as the Corporation may require) in respect of any tax or other governmental charges that may be imposed. SECTION 9.05. Transfer Restrictions. The Class C-2 Shares may only be transferred (i) to QIBs and (ii) to IAIs who, if they are not QIBs, prior to such transfer, furnish to the Corporation or the Transfer Agent a signed letter containing certain representations and agreements relating to restrictions on transfer by such IAI and who hold their Class C-2 Shares through a DTC Participant. The foregoing restriction may be waived if the Corporation, in its sole discretion, determines such restrictions are no longer necessary to preserve the Corporation's exemptions from registration requirements under the Securities Act, the Securities Exchange Act and the 1940 Act. Any purported purchase or transfer of the Class C-2 Shares in violation of such restrictions will be null and void. Furthermore the Corporation may also require the sale of Class C-2 Shares held by holders who fail to comply with the foregoing. ARTICLE 10 MISCELLANEOUS PROVISIONS SECTION 10.01. Preemptive Rights. No holder of any of the Class C-2 Shares shall have any preemptive or preferential right to acquire or subscribe for any treasury or unissued shares of any class or series of the stock of the Corporation now or hereafter to be authorized, or any notes, debentures, bonds, or other securities convertible into or carrying any right, option or warrant to subscribe for or acquire shares of any class or series of stock of the Corporation now or hereafter to be authorized, whether or not the issuance of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the distribution or voting rights of such holder, and the Board of Directors of this Corporation may issue shares of any class or series of stock of this Corporation, without offering any such shares of any class or series of stock of the Corporation, either in whole or in part, to the existing shareholders of any class or series of stock of this Corporation. SECTION 10.02. Conversion Rights. The Class C-2 Shares shall have no right to convert into the Common Shares, any of the other Class C Shares or any other equity security or indebtedness of the Corporation other than the Conversion Shares. ARTICLE 11 GENERAL PROVISIONS SECTION 11.01. General Provisions. The headings of the paragraphs, subparagraphs, clauses and subclauses of this Certificate of Designation are for convenience of reference only and shall not define, limit or affect any of the provisions hereof. 20 IN WITNESS WHEREOF, Farmers Group, Inc. has caused this Certificate of Designation to be signed and attested by its undersigned Vice President and Secretary this 7th day of February, 2001. --- FARMERS GROUP, INC. By:/s/ Julian R.M. Harvey ---------------------------- Name: Julian R.M. Harvey Title: Vice President /s/ Doren Hohl ------------------------------------- Name: Doren Hohl Title: Secretary STATE OF CALIFORNIA ) )ss COUNTY OF Los Angeles --------------- On February 7 , 2001 before me, Hazel C. Bautista, personally appeared - ----------------- Julian R.M. Harvey and Doren Hohl. X personally known to me. --- -or- ___ proved to me on the basis of satisfactory evidence to be the persons whose names are subscribed to the within instrument and acknowledge to me that they executed the same in their authorized capacities, and that by their signatures on the instrument the persons, or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. /s/ Hazel C. Bautista ----------------------------------------- Notary Public in and for said County and State 1 CERTIFICATE OF DESIGNATION OF CLASS C-3 COMMON STOCK of FARMERS GROUP, INC. Pursuant to Sections 78.1955 and 78.315 of the General Corporation Law of the State of Nevada Farmers Group, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the provisions of the General Corporation Law of the State of Nevada, certifies as follows: FIRST: The Amended and Restated Articles of Incorporation of the Corporation (the "Articles of Incorporation") authorize the issuance of up to 50 shares of Class C common stock, par value $1.00 per share (the "Class C Common Stock"), and further, authorize the Board of Directors of the Corporation (the "Board of Directors") by resolution or resolutions, at any time and from time to time, to divide and establish any or all of the shares of Class C Common Stock into one or more series of Class C Common Stock, and without limiting the generality of the foregoing, to fix and determine the designation of each such series, the number of shares which shall constitute such series and such voting powers, and such preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof of the shares of each series so established. SECOND: The following resolutions authorizing the creation and issuance of a series of said shares of Class C Common Stock to be known as Class C-3 Common Stock were duly adopted by the Board of Directors on the 6th day of February, 2001, in accordance with Sections 78.1955 and 78.315 of the Nevada General Corporation Law. RESOLVED, that the Board of Directors, pursuant to authority vested in it by the provisions of the Articles of Incorporation, hereby authorizes the issuance of a series of the Corporation's Class C Common Stock, and hereby fixes the number, designation, preferences, rights, limitations and restrictions thereof in addition to those set forth in the Articles of Incorporation as follows: ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions. In this Certificate of Designation, unless the context otherwise requires "Affiliate" means, with respect to a specified Person, any other Person that directly or indirectly controls, is controlled by, or is under common control with, such specified Person. "Book-Entry Interest" means a beneficial ownership in Class C-3 Shares, the ownership and transfers of which are maintained through book entries of the Registrar as set forth in Section 9.04(b) of this Certificate of Designation. "Business Day" means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which commercial banks are authorized or required by law, regulation or 2 executive order to close in The City of New York. With respect to the LIBOR Determination Date, "Business Day" means a day on which dealings in deposits in U.S. dollars are transacted in the London interbank market. "Change of Control Event" means the Corporation ceasing to be an Affiliate of ZGH or any of its Affiliates, including, but not limited to, a Change of Control Tax Event. "Change of Control Tax Event" means a Change of Control Event which results in an adverse tax effect on the holders of Trust Capital Securities III. "Class A Shares" means the Class A Common Stock, par value $1.00 per share, of the Corporation. "Class B Shares" means the Class B Common Stock, par value $1.00 per share, of the Corporation. "Class C Shares" means, collectively, the Class C-3 Shares and all other series of Class C Common Stock, par value $1.00 per share, of the Corporation, for which a certificate or certificates of designation have been filed with the Nevada Secretary of State. "Class C-3 Shares" has the meaning set forth in Section 2.01 hereof. "Class C-3 Indicative Rate" means initially, 5.96%, and on or after April 11, 2001, a variable rate equal to Three-Month LIBOR plus 46 basis points, reset quarterly, and on or after April 11, 2006, a variable rate equal to Three-Month LIBOR plus 150 basis points, reset quarterly, in each case, the rate shall be determined by reference to the Class C-3 Share Liquidation Preference; provided, however, that such variable rate shall never be greater than 15%. "Class C-3 Share Liquidation Amount" means, with respect to each Class C-3 Share, an amount equal to the greater of (i) the Class C-3 Share Liquidation Preference, plus an amount (whether or not declared) equal to the Class C-3 Share Liquidation Preference multiplied by the Class C-3 Indicative Rate multiplied by a fraction, the numerator of which is the number of days in the current Dividend Period that have passed prior to the date on which the liquidation occurs and the denominator of which is 360 and (ii) the Economic Dividend Payable. "Class C-3 Share Liquidation Preference" has the meaning set forth in Section 2.01 hereof. "Clearing Agency" means the clearing agency with respect to the Class C-3 Shares. "Code" means the United States Internal Revenue Code of 1986, as amended. "Common Shares" means, collectively, the Class A Shares and the Class B Shares. "DTC" means The Depository Trust Company. "Dividend" means a cash distribution to holders of the Class C-3 Shares from the Corporation with respect to any applicable Dividend Period and payable on an applicable Dividend Date. 3 "Dividend Date" means the 15th day of February, May, August and November in each year (or the preceding Business Day if such day is not a Business Day) commencing February 15, 2001, with respect to Dividends for each relevant Dividend Period on the Class C-3 Shares. "Dividend Period" means for each Dividend Date, a quarterly period comprised of two components: (i) an arrears component from and including the date of the original issuance of the Class C-3 Shares (in the case of the first Dividend Period) or, in all other cases, from and including the 11th day of any of April, July, October or January immediately preceding the then current Dividend Date, provided, that if any such day is not a Business Day, then the start of the period will be postponed to the next succeeding Business Day, to but excluding the then current Dividend Date, and (ii) an advance component from and including the then current Dividend Date to but excluding the next 11th day of any of April, July, October or January (as the case may be) immediately succeeding the then current Dividend Date, provided, that if any such day is not a Business Day, then the end of the period (and associated first day of the next Dividend Period) will be postponed to the next succeeding Business Day. "Economic Dividend Payable" means initially, as determined in good faith by the Board of Directors based on the opinion of a nationally recognized investment bank, for the Class C-3 Shares in the aggregate 1.4900662% of, as applicable, (i) the amount of dividends paid or set apart for payment by the Corporation on its common shares (including the Class C Shares) during any Dividend Period, (ii) the amount of any redemption proceeds on the Corporation's common shares to the extent such proceeds are greater than the fair market value of the common shares being redeemed, or (iii) the aggregate amount available for payment of distributions on liquidation with respect to the Corporation's common shares entitled to payments upon liquidation; provided that: (A) subsection (i) above shall only apply when determining whether the Class C-3 Shares are entitled to Dividends, (B) subsection (ii) above shall only apply upon a redemption of the Corporation's common shares and (C) subsection (iii) above shall only apply upon a liquidation, dissolution and winding up of the Corporation. This percentage shall be adjusted from time to time (for example upon the issuance of common shares by the Corporation in exchange for cash or property) based upon the percentage of the Corporation's fair market value represented by the Class C-3 Shares at the time of such adjustment; provided that any such adjustment shall be determined in good faith by the Board of Directors based on the opinion of a nationally recognized investment bank. "Holder" means the beneficial owners of the Class C-3 Shares. "IAI" means a Person that is an "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act or the analog provisions of any successor rule. "IRS" means the United States Internal Revenue Service. "Junior Shares" has the meaning set forth in Section 3.01 hereof. "LIBOR Determination Date" the first LIBOR Determination Date will be April 9th, 2001, and thereafter will be two Business Days prior to each July 11th, October 11th, January 11th and April 11th thereafter (except if any such day is not a Business Day, then the relevant LIBOR Determination Date will be two Business Days prior to the preceding Business Day). "LLC III" means Zurich RegCaPS Funding LLC III, a Delaware limited liability company. 4 "LLC III Payment Date" means the 11th day of any of April, July, October and January in each year (or the preceding Business Day if such day is not a Business Day) when the corresponding RegCaPS III payment for such period has been made. "LLC III Payments" means cash payments on the LLC Preferred Interests III. LLC III Payments shall not include tax amounts withheld and not refunded. "LLC Preferred Interest III" means the preferred membership interests in LLC III. "Minimum Net Worth Amount" initially means US$ 3 billion. The Minimum Net Worth Amount will be increased by the proceeds paid to the Corporation in consideration for the issuance and sale of any of its capital stock ranking pari passu with or senior to the Class C-3 Shares with respect to the payment of distributions or amounts payable upon liquidation. The Minimum Net Worth Amount will be reduced by the amounts paid to purchase or redeem any shares of Class C Common Stock or any of its capital stock ranking pari passu with or senior to the Class C-3 Shares or the other Class C Shares, but only by an amount equal to the liquidation preference of such shares. The net worth of the Corporation will be determined in accordance with U.S. GAAP. "Partnership III" means Zurich RegCaPS Funding Limited Partnership III, a Delaware limited partnership. "Person" means any legal person, including any individual, corporation, association, partnership (general or limited), joint venture, trust, estate, limited liability company, or other legal entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Purchaser" means ZGH or any of its Affiliates. "QIB" means a qualified institutional buyer within the meaning of Rule 144A under the Securities Act. "RegCaPS III" means any regulatory capital preferred securities of Partnership III. "RegCaPS III Payment Date" means the 15th day of February, May, August and November in each year (or on the preceding Business Day if such day is not a Business Day) commencing February 15, 2001 with respect to the RegCaPS III Payments for each relevant RegCaPS III Payment Period. "RegCaPS III Payment Period" means for each RegCaPS III Payment Date, a quarterly period comprised of two components (i) an arrears component from and including the date of the original issuance of the RegCaPS III (in the case of the first RegCaPS III Payment Period) or, in all other cases, from and including the relevant LLC III Payment Date immediately preceding the then current RegCaPS III Payment Date to but excluding the then current RegCaPS III Payment Date and (ii) an advance component from and including the then current RegCaPS III Payment Date to but excluding the next relevant succeeding LLC III Payment Date. "RegCaPS III Payments" means cash remittances, initially 5.96%, on or after April 11, 2001, a variable annual rate equal to Three-Month LIBOR plus 46 basis points, reset quarterly, and 5 on or after April 11, 2006, a variable annual rate equal to Three-Month LIBOR plus 150 basis points, reset quarterly, in each case the rate shall be determined by reference to the liquidation preference of the RegCaPS III, to the registered holder of the RegCaPS III with respect to any applicable RegCaPS III Payment Period and payable on an applicable RegCaPS III Payment Date. "Securities Act" means the U.S. Securities Act of 1933, as amended. "Securities Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended. "Special Independent Directors" means two (2) independent directors of the Corporation to be elected by holders of the Class C Shares upon the occurrence of certain events as stated in this Certificate of Designation and in the certificates of designation of the other Class C Shares. The holders of the Class C-3 Shares shall have the right to vote for the Special Independent Directors only upon the failure of the Corporation to pay Dividends for 24 consecutive months at the Class C-3 Indicative Rate on the Class C-3 Shares. "Three-Month LIBOR" means with respect to any LIBOR Determination Date, a rate determined on the basis of the offered rates for three-month United States dollar deposits of not less than a principal amount equal to that which is representative for a single transaction in such market at such time, commencing on the second Business Day immediately following such LIBOR Determination Date, which appears on US LIBOR Telerate Page 3750 as of approximately 11:00 a.m., London time, on such LIBOR Determination Date. If on any LIBOR Determination Date no rate appears on US LIBOR Telerate Page 3750 as of approximately 11:00 a.m., London time, the Paying Agent shall on such LIBOR Determination Date request the four major reference banks in the London interbank market selected by the Paying Agent to provide the Paying Agent with a quotation of the rate at which three-month deposits in United States dollars, commencing on the second Business Day immediately following such LIBOR Determination Date, are offered by it to prime banks in the London interbank market as of approximately 11:00 a.m., London time, on such LIBOR Determination Date and in a principal amount equal to that which is representative for a single transaction in such market at such time. If at least two such quotations are provided, Three-Month LIBOR for such LIBOR Determination Date will be the arithmetic mean of such quotations as calculated by the Paying Agent. If fewer than two quotations are provided, Three-Month LIBOR for such LIBOR Determination Date will be the arithmetic mean of the rates quoted as of approximately 11:00 a.m., London time, on such LIBOR Determination Date by three major banks in the London interbank market selected by the Paying Agent for loans in United States dollars to leading European banks, having a three-month maturity commencing on the second Business Day immediately following such LIBOR Determination Date and in a principal amount equal to that which is representative for a single transaction in such market at such time; provided, however, that, if the banks selected as aforesaid by the Paying Agent are not quoting as mentioned in this sentence, Three-Month LIBOR for such LIBOR Determination Date will be Three-Month LIBOR determined with respect to (i) the immediately preceding Dividend Period for purposes of the Class C-3 Shares and (ii) the immediately preceding RegCaPS III Payment Period for purposes of the RegCaPS III. "Transfer Agent" means the transfer agent with respect to the Class C-3 Shares which shall initially be the Corporation. 6 "Trust III" means Zurich RegCaPS Funding Trust III, a Delaware statutory business trust. "Trust Capital Securities III" means 225,000 trust capital securities, liquidation amount US $1,000 each, representing undivided beneficial ownership interests in the assets of Trust III. "U.S. GAAP" means the generally accepted accounting principles in the United States. "ZGH" means Zurich Group Holding, a Swiss stock corporation (as defined in Article 620 et. seq., of the Swiss Code of Obligation) formerly known as Zurich Financial Services, a wholly-owned subsidiary of Zurich Financial Services or its successors and assigns. "Zurich Financial Services" means Zurich Financial Services, a Swiss stock corporation (as defined in Article 620 et seq., of the Swiss Code of Obligations) listed on the Swiss Exchange SWX with a secondary listing on the London Stock Exchange and the holder of directly or indirectly 100% of the shares of ZGH or its successors and assigns. "1940 Act" means the U.S. Investment Company Act of 1940, as amended. ARTICLE 2 NUMBER AND DESIGNATION SECTION 2.01. Number and Designation. 10 shares of the Class C Common Stock of the Corporation are hereby designated as a series of Class C Common Stock designated as Class C-3 Common Stock, par value $1.00 per share (the "Class C-3 Shares"). The Class C-3 Shares shall have a liquidation preference of twenty two million five hundred thousand United States dollars ($22,500,000) per share (the "Class C-3 Share Liquidation Preference"). ARTICLE 3 RANK SECTION 3.01. Rank. (a) The Class C-3 Shares shall, only with respect to payment of Dividends at the Class C-3 Indicative Rate (as defined below) and with respect to the payment of the Class C-3 Share Liquidation Preference upon the liquidation, dissolution and winding up of the Corporation, rank senior to all of the Junior Shares, including the Common Shares. In all other respects, the Class C-3 Shares shall rank pari passu with the Junior Shares, including the Common Shares and the other series of Class C Shares and shall participate equally with the Junior Shares and the other series of Class C Shares with respect to distributions paid by the Corporation and shall participate equally with the Class A Shares and the other series of Class C Shares with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation. The Class C-3 Shares will rank junior in all respects to any indebtedness of the Corporation. The Class C-3 Shares shall rank pari passu with the other series of Class C Shares for all purposes. All securities of the Corporation to which the Class C-3 Shares rank senior (whether with respect to dividends or upon liquidation, dissolution, winding up or otherwise), including the Common Shares, are collectively referred to herein as the "Junior Shares." The definition of Junior Shares shall also include any rights or options exercisable for or convertible into any of the Junior Shares. (b) Without prior consent of the holders of not less than a majority of the outstanding Class C-3 Shares, the Corporation shall not issue any class or series of equity securities whose terms provide 7 that such securities rank senior to or pari passu with the Class C-3 Shares with respect to the rights to receive dividends and other distributions or with respect to any amounts payable upon liquidation, dissolution or winding up; provided that the Corporation may file certificates of designation and issue shares in accordance therewith for other series of Class C Shares to be designated as Class C-1 Common Stock, Class C-2 Common Stock, Class C-4 Common Stock, Class C-5 Common Stock, and Class C-6 Common Stock, each of which ranks pari passu with the Class C-3 Shares with respect to distributions paid by the Corporation and with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation. Further, if the Corporation has paid in full the lesser of (i) each Dividend on its respective Dividend Payment Date during the last 24 months at the Class C-3 Indicative Rate, or (ii) prior to February 9, 2003, all Dividends in an amount at least equal to the Class C-3 Share Indicative Rate that could have been paid on the Class C Shares, the Corporation may issue an unlimited amount of additional Class C-3 Shares and other equity ranking pari passu with the Class C-3 Shares without the consent of the holders of the Class C-3 Shares. ARTICLE 4 DIVIDENDS SECTION 4.01. Rate; Dividend Date. (a) Each Class C-3 Share shall be entitled to receive cash Dividends on a non-cumulative basis, when as and if declared by the Board of Directors, out of funds legally available for the payment of distributions on each Dividend Date commencing February 15, 2001. The amount of Dividends will be computed on the basis of a 360-day year and the actual number of days in such Dividend Period. When Dividends are paid on the Class C-3 Shares at less than the Class C-3 Indicative Rate, all Dividends declared on the Class C Shares will be paid pro rata based on the outstanding number of shares of each series of Class C Common Stock and such Dividends declared on the Class C-3 Shares will be paid pro rata based on the outstanding number of Class C-3 Shares. (b) The Paying Agent will calculate Three-Month LIBOR as of each LIBOR Determination Date and shall make such rate calculation available to holders of Class C-3 Shares. The Paying Agent also shall determine the Dividends payable on each Dividend Date and give notice thereof (including the applicable rate, amount, the applicable period and payment) to the holders of Class C-3 Shares. The notices set forth in this paragraph shall be sent by first class mail to the address of each holder of Class C-3 Shares as it appears on the register kept by the Registrar and shall be available at the offices of the Paying Agent. SECTION 4.02. Dividend Restrictions. (a) No distribution or redemption, including without limitation cash dividends, may be declared or paid or set apart for payment on any Junior Shares and neither the Corporation nor any of its Affiliates may purchase or redeem for cash any outstanding Junior Shares, unless: (i) full Dividends have been declared and paid or set apart for payment on the Class C-3 Shares in an amount at least equal to the greater of (A) the Dividends payable or set apart during such Dividend Period at the Class C-3 Indicative Rate; or (B) the Economic Dividend Payable; (ii) Partnership III has paid or set apart for payment the full amount of RegCaPS III Payments for the current RegCaPS III Payment Period; 8 (iii) LLC III has set apart or paid the full amount of the LLC III Payments on an LLC III Payment Date in any period when the corresponding RegCaPS III Payment for such LLC III Payment Date has been made; and (iv) in the case of a repurchase or redemption, such repurchase or redemption does not cause the net worth of the Corporation to be less than the Minimum Net Worth Amount. Notwithstanding the foregoing, for so long as the Corporation has paid or set apart for payment Dividends on the Class C-3 Shares at least equal to the greater of (i)(A) or (i)(B) and clauses (ii) (iii) and (iv) above are satisfied, the Corporation may declare and pay Dividends on any Junior Shares with respect to such Dividend Period. (b) (i) If a Dividend is paid or set apart on the Class C-3 Shares during any Dividend Period at a rate less than the Class C-3 Indicative Rate, the Corporation may not make any dividend payments on the Junior Shares and may only make dividend payments on its other securities that rank pari passu with the Class C-3 Shares, if any, in the same proportion as the partial Dividend paid or set apart on the Class C-3 Shares for the current Dividend Period bears to the full Dividend payment determined for such Dividend Period at the Class C-3 Indicative Rate. (ii) For so long as the Class C-3 Shares are outstanding, if a partial RegCaPS III Payment is made or set apart for any RegCaPS III Payment Period, the Corporation may not make any dividend payments during such RegCaPS III Payment Period on its Junior Shares and may only make dividend payments on its other securities that rank pari passu with the Class C-3 Shares in the same proportion as the lesser of (i) the proportion the partial RegCaPS III Payment made or set apart for the Current RegCaPS III Payment Period bears to the RegCaPS III Payment determined for such RegCaPS III Payment Period and (ii) the proportion the partial Dividend paid or set apart on the Class C-3 Shares for the corresponding Dividend Period bears to the full Dividend payment for such Dividend Period at the Class C-3 Indicative Rate. Additionally, for so long as the Class C-3 Shares are outstanding, all shares of common or preferred stock issued by majority-owned subsidiaries of the Corporation which shares are not beneficially owned by the Corporation or its wholly-owned subsidiaries will be subject to the restrictions set forth above on the payment of distributions and other payments only to the extent that such minority shares are owned by Zurich Financial Services or one of its controlled Affiliates. (c) The Corporation intends that the holders of the RegCaPS III shall be third party beneficiaries of, and entitled to enforce, the provisions of this Section 4.02 as if such provisions constituted a contract between the Corporation and the holders of the Class C-3 Shares, and the holders of the RegCaPS III were third-party beneficiaries to such contracts. SECTION 4.03. Payment of Dividends. Dividends and other payments on the Class C-3 Shares will be payable to the holders thereof as they appear on the books and records of the Corporation on the relevant record dates, which will be one Business Day prior to the relevant Dividend Date or other payment date. Such Dividends will be paid either (i) by the Corporation or (ii) in the event such Class C-3 Shares are not held by an Affiliate of ZGH through the Paying Agent who will hold amounts received from the Corporation in respect of the Class C-3 Shares for the benefit of the registered 9 holders of the Class C-3 Shares. In the event that any Class C-3 Shares do not remain in book-entry only form, the relevant record dates shall be the 15th day of the month of the relevant Dividend Date or other payment date. In the event that any Dividend Date is not a Business Day, payment of the Dividends payable on such date will be made on the next succeeding day which is a Business Day (without any interest or other payment in respect of the dividends subject to such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. SECTION 4.04. Changes in the Dividends-Received Percentage. (a) If, prior to 18 months after the date of the original issuance of the Class C-3 Shares, one or more amendments to the Code are enacted that reduce the dividends-received deduction (currently 70%), as specified in Section 243(a)(i) of the Code or any successor provision (the "Dividend-Received Percentage"), certain adjustments will be made as appropriate in respect of the Dividends paid by the Corporation, and Post Declaration Date Dividends and Retroactive Dividends may become payable (as such terms are defined below), except that no adjustments will be made with respect to any reduction of the Dividends- Received Percentage below 50%. (b) The amount per share of each Dividend declared at the applicable rate described in Section 4.01 above for Dividend payments made on or after the effective date of such change in the Code will be increased, to the extent of funds legally available for distribution by the Corporation, by multiplying the amount of the Dividend payable before adjustment, by a factor, which will be the number determined in accordance with the following formula (the "DRD Formula"), and rounding the result to the nearest cent (with one-half cent rounded up): I-.35(I-.70) ------------ I-.35(I-DRP) For purposes of the DRD Formula with regard to the Class C-3 Shares, "DRP" means the Dividend-Received Percentage (expressed as a decimal) applicable to the Dividends in question; provided, that in no event shall the DRP be less than 0.50. No amendment to the Code, other than a change in the Dividends- Received Percentage enacted prior to 18 months after the date of the original issuance of the Class C-3 Shares, will give rise to an adjustment. Notwithstanding the foregoing provisions, if, with respect to any such amendment, the Corporation receives either an unqualified opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form of authorization from the IRS to the effect that such an amendment does not apply to a Dividend payable on the Class C-3 Shares, then such amendment will not result in the adjustment provided for pursuant to the DRD Formula with respect to such Dividend. The opinion referenced in the previous sentence shall be based upon the legislation amending or establishing the DRP or upon a published pronouncement of the IRS addressing such legislation. Absent manifest error, the Corporation's calculation of the Dividends payable as so adjusted shall be final and not subject to review. (c) Notwithstanding the foregoing, if any such aforementioned amendment to the Code is enacted after the Dividend payable on a Dividend Date has been declared, and if such amendment is effective with respect to such Dividend, the amount of the Dividend payable on such Dividend Date will not be increased; instead, additional Dividend payments (the "Post Declaration Date Dividend"), equal to the excess, if any, of (x) the product of the Dividend paid by the Corporation on 10 such Dividend Date and the DRD Formula over (y) the Dividend paid by the Corporation on such Dividend Date, will be declared to the extent funds legally available for distribution by the Corporation to holders of Class C-3 Shares on the record date applicable to the next succeeding Dividend Date, or, if Class C-3 Shares are called for redemption prior to such record date, to holders of Class C-3 Shares on the applicable redemption date, as the case may be, in addition to any other amounts payable on such date. (d) If any such amendment to the Code is enacted and the reduction in the Dividends-Received Percentage retroactively applies to one or more Dividend Dates on which the Corporation previously paid Dividends with respect to the Class C-3 Shares (each, an "Affected Dividend Date"), additional Dividends (the "Retroactive Dividends") will be declared, to the extent of funds legally available therefor, to holders of Class C-3 Shares on the record date applicable to the next succeeding Dividend Dates or, if the Class C-3 Shares are called for redemption prior to such record date, to holders of Class C-3 Shares on the applicable redemption date, as the case may be, in an amount equal to the excess of (x) the product of the Dividend paid by the Corporation on each Affected Dividend Date and the DRD Formula over (y) the sum of the Dividend paid by the Corporation on each Affected Dividend Date. The Corporation will only make one payment of Retroactive Dividends for any such amendment. Notwithstanding the foregoing provisions, if, with respect to any such amendment, the Corporation receives either an unqualified opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form of authorization from the IRS to the effect that such amendment does not apply to a Dividend payable on an Affected Dividend Date for the Class C-3 Shares, then such amendment will not result in the payment of a Retroactive Dividend with respect to such Affected Dividend Date. The opinion referenced in the previous sentence shall be based upon the legislation amending or establishing the Dividends-Received Percentage or upon a published pronouncement of the IRS addressing such legislation. (e) Notwithstanding the foregoing, no adjustment in the dividends payable by the Corporation shall be made, and no Post Declaration Date Dividends or Retroactive Dividends shall be payable by the Corporation, in respect of the enactment of any amendment to the Code 18 months or more after the date of original issuance of the Class C-3 Shares that reduces the Dividends-Received Percentage or to the extent such amendment reduces the Dividends-Received Percentage to less than 50%. (f) In the event that the amount of Dividends payable per share of the Class C-3 Shares is increased pursuant to the DRD Formula and/or Post Declaration Date Dividends or Retroactive Dividends are to be paid, the Corporation will give notice of each such adjustment and, if applicable, any Post Declaration Date Dividends and Retroactive Dividends to the holders of Class C-3 Shares. (g) The various payment restrictions and obligations described above and applicable in respect of any Dividend Period in which a Dividend on the Class C-3 Shares is not paid in an amount at least equal to the Class C-3 Indicative Rate to the extent that any Post Declaration Date Dividend or Retroactive Dividend is not declared and paid or set apart for payment as and when due in respect of a reduction in the Dividends-Received Percentage; provided that such payment restrictions and obligations will remain in effect, not only during the current Dividend Period, but until such Post Declaration Date Dividend or Retroactive Dividend is declared and paid or set apart for payment. 11 SECTION 4.05. Earnings and Profits Gross-Up Payments. (a) To the extent that Dividends paid with respect to the Class C-3 Shares exceeds the Corporation's earnings and profits as calculated for U.S. federal income tax purposes, they will not constitute dividends for U.S. federal income tax purposes and will not qualify for the dividends-received deduction. In such event, additional distributions will be made by the Corporation to place each holder of the Class C-3 Shares in the same position it would have been in if all Dividends from the Corporation were paid from such earnings and profits, assuming for these purposes that such holder was eligible for the dividends- received deduction. (b) If any Dividend on the Class C-3 Shares with respect to any fiscal year (including any Gross-Up Payment (as defined below)) constitutes, in whole or in part, a return of capital (or is treated as gain from the sale or exchange of the Class C-3 Shares) for U.S. federal income tax purposes (a "Qualifying Dividend"), within 180 days after the end of such fiscal year, the Corporation will pay (if declared), out of funds legally available therefor, an amount equal to the aggregate Gross-Up Payments to Qualified Investors (as defined below) with respect to all Qualifying Dividends on the Class C-3 Shares during such fiscal year. A "Qualified Investor" with respect to a Qualifying Dividend during a fiscal year means a person who was entitled to receive such Qualifying Dividend. (c) A "Gross-Up Payment" to a Qualified Investor with respect to all Qualifying Dividends on Class C-3 Shares paid by the Corporation during a fiscal year means an additional Dividend on the Class C-3 Shares to a Qualifying Investor in an amount which, when taken together with the aggregate Qualifying Dividends paid to such Qualified Investor during such fiscal year, would cause such Qualified Investor's net yield in dollars (after U.S. federal income tax consequences and treating, for purposes of calculating net yield in dollars, the sum of that portion of the Qualifying Dividends and the Gross-Up Payment otherwise treated as a return of capital as capital gain recognized upon the taxable sale or exchange of Class C-3 Shares) from the aggregate of both the Qualifying Dividends and the Gross-Up Payment to be equal to the net yield in dollars (after U.S. federal income tax consequences) which would have been received by such Qualified Investor if the entire amount of the aggregate Qualifying Dividends had instead been treated as a dividend for U.S. federal income tax purposes. Such Gross-Up Payment shall be calculated using the applicable maximum marginal U.S. federal corporate income tax rate applicable to ordinary income and capital gains, as the case may be, and, where applicable, the Dividends-Received Percentage, without consideration being given to the time value of money, the U.S. federal income tax situation of any specific Qualified Investor (including the application of the alternative minimum tax or the application of Section 246 of the Code), or any state or local tax consequences that may arise. The Corporation shall make a determination, based upon the reasonably estimated earnings and profits of that portion, if any, of a Qualifying Dividend for a fiscal year that will be treated as dividend for U.S. federal tax purposes, and such determination shall be final and binding for purposes of calculating the amount of the Gross- Up Payments with respect to all Qualifying Dividends for such fiscal year. SECTION 4.06. Change of Control Gross-Up Payments. If as a result of a Change of Control Tax Event, there is an increase in any non-refundable foreign taxes withheld ("Foreign Tax Increase") with respect to RegCaPS III Payments or Cumulative RegCaPS III Payment Amounts paid to a RegCaPS III registered holder ("Foreign Taxed RegCaPS Payments"), additional distributions shall be made on the Class C -3 Shares in an amount which, when taken together with the aggregate Dividends paid to the Holders of the Class C-3 Shares during such fiscal year reduced by the amount of such Foreign Tax Increase, would cause the net yield in dollars (after U.S. federal income tax consequences other than the use of foreign tax credits resulting from the Foreign Tax Increase) to be equal to the net yield in dollars (after U.S. federal income tax consequences) to the 12 Holder from receipt of the aggregate Dividends paid to the Holder during such fiscal year without any reduction by the amount of such Foreign Tax Increase. The foregoing amount shall be calculated based on the assumption that the Holder is a U.S. corporation and using the applicable maximum marginal U.S. federal corporate income tax rate applicable to ordinary income and capital gains, as the case may be, and the Dividends-Received Percentage, without consideration being given to the time value of money, the U.S. federal income tax situation of any specific Holder, or any state or local tax consequences that may arise. If for a prior fiscal year Foreign Taxed RegCaPS Payments are made by the Partnership III, the Corporation will pay (if declared), within 90 days after the end of such fiscal year, out of funds legally available therefor, an amount equal to the aggregate Change of Control Gross-Up Payments to the Partnership. ARTICLE 5 LIQUIDATION PREFERENCE SECTION 5.01. Liquidation Preference. (a) In the event of any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, after payment or provision for the liabilities of the Corporation and the expenses of such dissolution, liquidation or winding up, the holders of the outstanding Class C-3 Shares will be entitled to receive the Class C-3 Share Liquidation Amount, out of the assets of the Corporation or proceeds thereof available for distribution to holders of Class C-3 Shares. Out of such amount, the holders of Class C-3 Shares will be entitled to receive the Class C-3 Share Liquidation Preference before any payment or distribution of assets is made to holders of the Common Shares or any other Junior Shares. Amounts payable on the Class C-3 Shares in connection with the liquidation of the Corporation in excess of the Class C-3 Share Liquidation Preference are payable (to the extent the Class C-3 Share Liquidation Amount exceeds the Class C-3 Share Liquidation Preference) on a pari passu basis with any Common Shares entitled to receive payment or distribution upon a liquidation, dissolution or winding up of the Corporation. If the assets of the Corporation available for distribution in such event are insufficient to pay in full the aggregate amount payable to holders of the Class C-3 Shares and holders of all other classes or series of equity securities of the Corporation, if any, ranking, as to the distribution of assets upon dissolution, liquidation or winding up of the Corporation, on a parity with the Class C-3 Shares, the assets will be distributed to the holders of Class C-3 Shares and holders of such other equity interests pro rata, based on the full respective preferential amounts to which they are entitled. After payment of the Class C-3 Share Liquidation Amount upon dissolution, liquidation or winding up of the Corporation, the holders of Class C-3 Shares will not be entitled to any further participation in any distribution of assets by the Corporation. (b) Notwithstanding Section 5.01(a) above, holders of Class C-3 Shares will not be entitled to be paid any amount in respect of a dissolution, liquidation or winding up of the Corporation until holders of any classes or series of securities of the Corporation ranking, as to the distribution of assets upon dissolution, liquidation or winding up of the Corporation, senior to the Class C-3 Shares have been paid all amounts to which such classes or series are entitled. (c) Notwithstanding anything else in this Certificate, neither the sale, lease or exchange (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation, nor the merger, consolidation or combination of the Corporation into or with any other person or the merger, consolidation or combination of any other person into or with the Corporation, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Section 5.01. 13 ARTICLE 6 REDEMPTION SECTION 6.01. Optional Redemption. (a) The Class C-3 Shares will not be subject to mandatory redemption at any time. Prior to February 15, 2031, Class C-3 Shares will not be subject to optional redemption. On or after February 15, 2031, Class C-3 Shares may be redeemed at the option of the Corporation at any time, subject to the prior consent of ZGH, in whole but not in part, at their fair market value (the "Redemption Amount") as determined by a nationally recognized investment bank retained by the Corporation. SECTION 6.02. Procedure for Redemption. (a) Notice of any redemption of the Class C-3 Shares (a "Redemption Notice") will be given by the Corporation by mail to each holder of Class C-3 Shares not fewer than 30 nor more than 60 days before the date fixed for redemption. For purposes of the calculation of the date of redemption and the dates on which notices are given pursuant to this Section 6.02(a), a Redemption Notice shall be deemed to be given on the day such notice is first mailed, by first-class mail, postage prepaid, to holders of the Class C-3 Shares. Each Redemption Notice shall be addressed to the holders of Class C-3 Shares at the address of each such holder appearing in the books and records of the Corporation. No defect in the Redemption Notice or in the mailing thereof with respect to any holder of Class C-3 Shares shall affect the validity of the redemption proceedings with respect to any other holder of Class C-3 Shares. (b) If the Corporation gives a Redemption Notice (which notice will be irrevocable), then by 12:00 noon, New York City time, on the redemption date, the Corporation (A) if the Class C-3 Shares are in book-entry form with DTC, will deposit irrevocably with DTC funds sufficient to pay the applicable Redemption Amount and will give DTC irrevocable instruction and authority to pay the Redemption Amount in respect of the Class C-3 Shares held through DTC in global form or (B) if the Class C-3 Shares are held in certificated form (each such certificate a "Class C-3 Share Certificate"), will deposit with the Paying Agent, funds sufficient to pay the applicable Redemption Amount of any such Class C-3 Shares and will give to the Paying Agent irrevocable instructions and authority to pay such amounts to the holders of Class C-3 Shares, upon surrender of their certificates, by delivery of check, mailed to the address of the relevant holder appearing on the books and records of the Corporation on the redemption date. For these purposes, the applicable Redemption Amount shall not include Dividends which are being paid to holders of Class C-3 Shares who were holders of Class C-3 Shares on a relevant record date. Upon satisfaction of the foregoing conditions, then immediately prior to the close of business on the date of such deposit or payment, all rights of holders of Class C-3 Shares so called for redemption will cease, except the right of the holders of Class C-3 Shares to receive the Redemption Amount, but without interest on such Redemption Amount, and from and after the date fixed for redemption, such Class C-3 Shares will not receive dividends or bear interest. (c) In the event that any date fixed for redemption of Class C-3 Shares is not a Business Day, then payment of the Redemption Amount payable on such date will be made on the next succeeding Business Day (and without any interest in respect of any such delay), except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day in each case, with the same force and effect as if made on such date fixed for redemption. In the event that payment of the Redemption Amount is improperly withheld or refused and not paid by the Corporation, Dividends on the Class C-3 Shares called for redemption will continue to be payable in accordance with the terms hereof from the original redemption date until the Redemption Amount is actually paid. 14 (d) The Corporation shall not be required to register or cause to be registered the transfer of any Class C-3 Shares which have been called for redemption. (e) The Class C-3 Shares which have been issued and reacquired in any manner, including shares purchased or redeemed, shall (upon compliance with any applicable provisions of the laws of the State of Nevada) have the status of authorized and unissued Class C-3 Shares and may be reissued. ARTICLE 7 VOTING RIGHTS SECTION 7.01. Voting Rights. (a) The holders of the Class C-3 Shares will be entitled to 0.375 of a vote per share (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 Corporation) and will be entitled to vote with the Common Shares as a single class on all matters submitted to a vote of the Common Shares (other than those matters affecting only the Common Shares, or either of them); provided, however, that at no time shall the aggregate Voting Power of the Class C-3 Shares be greater than 0.675% of the total Voting Power of the Corporation. Prior to transferring ownership of any Class C-3 Shares to a transferee other than an Affiliate of ZGH and subject to receipt of any required regulatory approval, if any, such Class C-3 Shares shall be (i) split into a number of shares of Class C-3 Shares equal to, and with a liquidation preference equal to the liquidation amount of the number of Trust Capital Securities III, and (ii) converted on a one-to-one basis to the same number of shares of a class of common stock of the Corporation (the "Conversion Shares") having rights, preferences and privileges substantially identical to the Class C-3 Shares except that the Conversion Shares will be entitled to no voting rights other than as required by law and other than with respect to adverse amendments to the terms of the Conversion Shares and the issuance of equity securities that rank senior to or pari passu with the Conversion Shares with respect to the payment of distributions or amounts upon liquidation, provided that the Corporation may file certificates of designation and issue shares in accordance therewith for other Class C Shares which rank pari passu with the Conversion Shares with respect to distributions paid by the Corporation and with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation. If, however, any necessary regulatory approvals to issue the Conversion Shares are not obtained, the Class C-3 Shares rather than the Conversion Shares may be transferred to a transferee other than an Affiliate of ZGH. (b) The holders of the Class C-3 Shares and the Conversion Shares will be entitled to vote separately as a single class on the matters described in this paragraph. The consent of the holders of not less than a majority of the outstanding Class C-3 Shares and Conversion Shares, voting as a single class, is required (i) to amend, alter, supplement or repeal the terms of the Class C-3 Shares and the Conversion Shares (it being a condition to any such amendment, alteration, supplement or repeal that it has a substantially identical effect on the rights, preferences and privileges of both the Class C-3 Shares and the Conversion Shares), or (ii) if the Corporation has not paid in full the lesser of (A) each of the last twenty-four months of Dividends on their respective Dividend Payment Dates at the Class C-3 Indicative Rate, or (B) prior to the second anniversary of the first issue date, all Dividends at the Class C-3 Indicative Rate that could have been paid on the Class C-3 Shares and the Conversion Shares, for the Corporation to issue, or to increase the authorized amount of, the Class C-3 Shares or the Conversion Shares or any other equity securities that rank pari passu with or senior to the Class C-3 Shares and the Conversion Shares; provided that the Corporation may file certificates of designation and issue shares in accordance therewith for other Class C Shares to be designated as Class C-1 Common Stock, Class C-2 Common Stock, Class C-4 Common Stock, Class C-5 Common Stock, and Class C-6 15 Common Stock, each of which rank pari passu with the Class C-3 Shares with respect to distributions paid by the Corporation and with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation without the consent of the holders of the Class C-3 Shares or the Conversion Shares. (c) Whenever Dividends on the Class C-3 Shares and the Conversion Shares at the Class C-3 Indicative Rate are in arrears for twenty-four or more consecutive months, the holders of Class C-3 Shares and the Conversion Shares, voting together with the other Class C Shares as a single class, will be entitled, subject to any necessary regulatory actions, to elect two Special Independent Directors to the Board of Directors, at a special meeting called by the holders of record of at least 25% of the Class C-3 Shares and the Conversion Shares in the aggregate or by the holders of record of 25% of any of the other series of Class C Shares pursuant to the terms of the certificate of designation creating such other series of Class C Shares. The Special Independent Directors shall vacate office if Dividends at the Class C-3 Indicative Rate are resumed and are paid regularly for at least twelve consecutive months, unless otherwise provided by the terms of any other certificate of designation for any other series of Class C Shares. If Dividends are resumed and paid regularly for at least twelve consecutive months at the Class C-3 Indicative Rate, the holders of the Class C-3 Shares and the Conversion Shares shall no longer be entitled to vote for the two Special Independent Directors on account of that arrearage. When no holder of Class C-3 Shares is entitled to vote for the two Special Independent Directors, the Special Independent Directors shall vacate office. Notwithstanding the foregoing, in the event that more than one series of Class C Shares are entitled to elect Special Independent Directors to the Board of Directors, such series shall vote together as a single class to elect such two directors. In no event shall the holders of Class C Shares be entitled to elect more than two Independent Directors to the Board of Directors. (d) Notwithstanding the foregoing, the Corporation shall have the right, without the prior consent of the holders of Class C-3 Shares and Conversion Shares if any, to amend, alter, supplement or repeal any terms of the Class C-3 Shares (i) to cure any ambiguity, or to cure, correct or supplement any defective provision thereof or (ii) to make any other provision with respect to matters or questions arising with respect to the Class C-3 Shares and Conversion Shares, if any, that is not inconsistent with the provisions thereof so long as such action does not materially and adversely affect any of the rights, preferences and privileges of the holders of Class C-3 Shares and Conversion Shares, if any, provided, however, that any increase in the amount of authorized or issued Class C-3 Shares will be deemed not to materially and adversely affect any of the rights, preferences and privileges of the holder of Class C-3 Shares. (e) The consent or votes required in Section 7.01(b) and (c) above shall be in addition to any approval of stockholders of the Corporation which may be required by law or pursuant to any provision of the Corporation's Articles of Incorporation or bylaws, which approval shall be obtained by vote of the stockholders of the Corporation in the manner provided in Section 7.01(a) above. ARTICLE 8 MERGER, CONSOLIDATION OR AMALGAMATION OF THE CORPORATION SECTION 8.01. Merger, Conversion, Consolidation or Amalgamation of the Corporation. Without the consent of either one Special Independent Director, if any, or a majority of the holders of Class C-3 Shares, the Corporation may not consolidate, amalgamate, merge with or into, convert or domesticate with or into, or be replaced by, or convey, transfer or lease its properties and assets substantially as an 16 entirety to, any corporation or other entity, except as permitted below. The Corporation may, with the consent of at least one of the Special Independent Directors, if any, on the Board of Directors at the time the issue is considered and without the consent of the holders of the Class C-3 Shares, consolidate, amalgamate, merge with or into, convert or domesticate with or into, or be replaced by a corporation organized as such under the laws of any State of the United States; provided, that: (a) if the Corporation is not the surviving entity, such successor entity either (x) expressly assumes all of the obligations of the Corporation under the Class C-3 Shares or (y) substitutes securities for the Class C-3 Shares (the "Successor Securities"), so long as the Successor Securities rank the same as the Class C-3 Shares rank with respect to Dividends and other payments thereon; (b) such merger, consolidation, amalgamation, conversion, domestication or replacement does not adversely affect any of the rights, preferences and privileges of the holders of the Class C-3 Shares (including any Successor Securities) in any material respect; (c) prior to such merger, consolidation, amalgamation, conversion, domestication or replacement, the Corporation has received an opinion of a nationally recognized law firm experienced in such matters to the effect that (i) such merger, consolidation, amalgamation, conversion, domestication or replacement will not adversely affect any of the rights, preferences and privileges of the holders of the Class C-3 Shares (including any Successor Securities) in any material respect and (ii) following such merger, consolidation, amalgamation, conversion, domestication or replacement, the Corporation (or such successor entity) will not be required to register under the 1940 Act; and (d) distributions with respect to the Class C-3 Shares or Successor Securities would be eligible for the dividends-received deduction. ARTICLE 9 TRANSFER OF CLASS C-3 SHARES SECTION 9.01. General. The Corporation shall provide for the registration of Class C-3 Share Certificates and of transfers of Class C-3 Share Certificates. Upon surrender for registration of transfer of any Class C-3 Share Certificate, the Corporation shall cause one or more new Class C-3 Share Certificates to be issued in the name of the designated transferee or transferees. Every Class C-3 Share Certificate surrendered for registration of transfer shall be accompanied by a written instrument of transfer in form satisfactory to the Corporation duly executed by the holder of such Class C-3 Shares or his or her attorney duly authorized in writing. Each Class C-3 Share Certificate surrendered for registration of transfer shall be cancelled by the Corporation. A transferee of a Class C-3 Share Certificate shall be entitled to the rights and subject to the obligations of a holder of Class C-3 Shares hereunder upon the receipt by the transferee of a Class C-3 Share Certificate, which receipt shall be deemed to constitute a request by such transferee that the books and records of the Corporation reflect such transferee as a holder of Class C-3 Share. SECTION 9.02. Definitive Certificates. Unless and until the Corporation issues a global Class C-3 Share Certificate pursuant to Section 9.03(a), the Corporation shall only issue definitive Class C-3 Share Certificates to the holders of Class C-3 Shares. The Corporation may treat the Person in whose name any Class C-3 Share Certificate shall be registered on the books and records of the Corporation as the sole holder of such Class C-3 Share Certificate and of the Class C-3 Shares represented by such Class C-3 Share Certificate for purposes of receiving Dividends and for all other purposes whatsoever 17 (including without limitation, tax returns and information reports) and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Class C-3 Share Certificate or in the Class C-3 Shares represented by such Class C-3 Share Certificate on the part of any other Person, whether or not the Corporation shall have actual or other notice thereof. SECTION 9.03. Book Entry Provisions. (a) General. The provisions of this Section 9.03(a) shall apply only in the event that the Class C-3 Shares are distributed to a Person other than the Purchaser. Upon the occurrence of such event, a global Class C-3 Share Certificate representing the Book-Entry Interests shall be delivered to DTC, the initial Clearing Agency, by, or on behalf of, the Corporation and any previously issued and still outstanding definitive Class C-3 Share Certificates shall be of no further force and effect. The global Class C-3 Share Certificate shall initially be registered on the books and records of the Corporation in the name of Cede & Co., the nominee of DTC, and no holder of Class C-3 Shares will receive a new definitive Class C-3 Share Certificate representing such holder's interest in such Class C-3 Share Certificate, except as provided in Section 9.03(c). Unless and until new definitive, fully registered Class C-3 Share Certificates (the "Definitive Class C-3 Share Certificates") have been issued to the holders of Class C-3 Shares pursuant to Section 9.03(c): (i) The provisions of this Section shall be in full force and effect; (ii) The Corporation shall be entitled to deal with the Clearing Agency for all purposes of this Certificate (including the payment of Dividends, Redemption Amounts and liquidation proceeds on the Class C-3 Share Certificates and receiving approvals, votes or consents hereunder) as the sole holder of the Class C-3 Share Certificates and shall have no obligation to the holders of Class C-3 Shares; (iii) None of the Corporation, the Board of Directors, or any Special Independent Director or any agents of any of the foregoing shall have any liability or responsibility for any aspect of the records relating to or Dividends made on account of beneficial ownership interests in a global Class C-3 Share Certificate for such beneficial ownership interests or for maintaining, supervising or reviewing any records relating to such beneficial ownership interest; and (iv) Except as provided in Section 9.03(c) below, the holders of Class C-3 Shares will not be entitled to receive physical delivery of the Class C-3 Shares in definitive form and will not be considered holders thereof for any purpose under this Certificate of Designation, and no global Class C-3 Share Certificate representing Class C-3 Shares shall be exchangeable, except for another global Class C-3 Share Certificate of like denomination and tenor to be registered in the name of DTC or Cede & Co., or to a successor Depository or its nominee. Accordingly, each holder of Class C-3 Shares must rely on the procedures of DTC or if such person is not a Participant, on the procedures of the Participant through which such person owns its interest to exercise any rights of a holder under this Certificate of Designation. (b) Notices to Clearing Agency. Whenever the holders of the Class C-3 Shares are required to give a notice or other communication to their equity holders, unless and until definitive Class C-3 Share Certificates shall have been issued to the holders of Class C-3 Shares pursuant to Section 9.03(c), the Corporation shall give all such notices and communications specified herein to be given to the 18 holders of Class C-3 Shares to the Clearing Agency, and shall have no obligations to the holders of Class C-3 Shares. (c) Definitive Class C-3 Share Certificates. Definitive Class C-3 Share Certificates shall be prepared by the Corporation and exchangeable for the global Class C-3 Share Certificate or Certificates if and only if (i) the DTC notifies the Corporation that it is unwilling or unable to continue its services as a securities depository and no successor depository shall have been appointed, (ii) the DTC, at any time, ceases to be a Clearing Agency registered under the Exchange Act at such time as the DTC shall have been appointed, or (iii) the Corporation, in its sole discretion, determines that such global Class C-3 Share Certificate shall be so exchangeable. Upon surrender of the global Class C-3 Share Certificate or Certificates representing the Book-Entry Interests by the Clearing Agency, accompanied by registration instructions, the Corporation shall cause definitive Class C-3 Share Certificates to be delivered to holders of Class C-3 Shares in accordance with the instructions of the Clearing Agency. The Corporation shall not be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be protected in relying on, such instructions. The definitive Class C-3 Share Certificates shall be printed, lithographed or engraved or may be produced in any other manner as may be required by any national securities exchange on which Class C-3 Shares may be listed and is reasonably acceptable to the Corporation, as evidenced by its execution thereof. SECTION 9.04. Registrar, Transfer Agent and Paying Agent. (a) The Corporation will act as Registrar, Transfer Agent and Paying Agent of the Class C-3 Share for so long as the Class C-3 Shares are held by an Affiliate of ZGH, for so long as the Class C-3 Shares remain in book-entry only form. (b) Except in such case where the Corporation shall act as Registrar or Paying Agent pursuant to Section 9.04(a) hereof, the Corporation shall maintain in the Borough of Manhattan, City of New York, State of New York (i) an office or agency where Class C-3 Shares may be presented for registration of transfer or for exchange ("Registrar") and (ii) an office or agency where Class C-3 Shares may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Class C-3 Shares and of their transfer and exchange. The Corporation may appoint the Registrar and the Paying Agent and may appoint one or more co-registrars and one or more additional paying agents in such other location as it shall determine. The term "Paying Agent" includes any additional paying agent. The Corporation may change any Paying Agent, Registrar or co-registrar without prior notice to any holder. If the Corporation fails to appoint or maintain another entity as Registrar or Paying Agent, the Corporation shall act as such. (c) Registration of transfers of Class C-3 Shares shall be effected without charge by or on behalf of the Corporation, but upon payment (with the giving of such indemnity as the Corporation may require) in respect of any tax or other governmental charges that may be imposed. SECTION 9.05. Transfer Restrictions. The Class C-3 Shares may only be transferred (i) to QIBs and (ii) to IAIs who, if they are not QIBs, prior to such transfer, furnish to the Corporation or the Transfer Agent a signed letter containing certain representations and agreements relating to restrictions on transfer by such IAI and who hold their Class C-3 Shares through a DTC participant. The foregoing restriction may be waived if the Corporation, in its sole discretion, determines such restrictions are no longer necessary to preserve the Corporation's exemptions from registration requirements under the Securities Act, the Securities Exchange Act and the 1940 Act. Any purported 19 purchase or transfer of the Class C-3 Shares in violation of such restrictions will be null and void. Furthermore the Corporation may also require the sale of Class C-3 Shares held by holders who fail to comply with the foregoing. ARTICLE 10 MISCELLANEOUS PROVISIONS SECTION 10.01. Preemptive Rights. No holder of any of the Class C-3 Shares shall have any preemptive or preferential right to acquire or subscribe for any treasury or unissued shares of any class or series of the stock of the Corporation now or hereafter to be authorized, or any notes, debentures, bonds, or other securities convertible into or carrying any right, option or warrant to subscribe for or acquire shares of any class or series of stock of the Corporation now or hereafter to be authorized, whether or not the issuance of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the distribution or voting rights of such holder, and the Board of Directors of this Corporation may issue shares of any class or series of stock of this Corporation, without offering any such shares of any class or series of stock of the Corporation, either in whole or in part, to the existing shareholders of any class or series of stock of this Corporation. SECTION 10.02. Conversion Rights. The Class C-3 Shares shall have no right to convert into the Common Shares, any of the other Class C Shares or any other equity security or indebtedness of the Corporation other than the Conversion Shares. ARTICLE 11 GENERAL PROVISIONS SECTION 11.01. General Provisions. The headings of the paragraphs, subparagraphs, clauses and subclauses of this Certificate of Designation are for convenience of reference only and shall not define, limit or affect any of the provisions hereof. 20 IN WITNESS WHEREOF, Farmers Group, Inc. has caused this Certificate of Designation to be signed and attested by its undersigned Vice President and Secretary this 7th day of February, 2001. --- FARMERS GROUP, INC. By:/s/ Julian R.M. Harvey -------------------------------- Name: Julian R.M. Harvey Title: Vice President /s/ Doren Hohl ----------------------------------------- Name: Doren Hohl Title: Secretary STATE OF CALIFORNIA ) )ss COUNTY OF Los Angeles --------------- On February 7 , 2001 before me, Hazel C. Bautista, personally appeared - ----------------- Julian R.M. Harvey and Doren Hohl. X personally known to me. --- -or- ___ proved to me on the basis of satisfactory evidence to be the persons whose names are subscribed to the within instrument and acknowledge to me that they executed the same in their authorized capacities, and that by their signatures on the instrument the persons, or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. /s/ Hazel C. Bautista ----------------------------------------- Notary Public in and for said County and State 1 CERTIFICATE OF DESIGNATION OF CLASS C-4 COMMON STOCK of FARMERS GROUP, INC. Pursuant to Sections 78.1955 and 78.315 of the General Corporation Law of the State of Nevada Farmers Group, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the provisions of the General Corporation Law of the State of Nevada, certifies as follows: FIRST: The Amended and Restated Articles of Incorporation of the Corporation (the "Articles of Incorporation") authorize the issuance of up to 50 shares of Class C common stock, par value $1.00 per share (the "Class C Common Stock"), and further, authorize the Board of Directors of the Corporation (the "Board of Directors") by resolution or resolutions, at any time and from time to time, to divide and establish any or all of the shares of Class C Common Stock into one or more series of Class C Common Stock, and without limiting the generality of the foregoing, to fix and determine the designation of each such series, the number of shares which shall constitute such series and such voting powers, and such preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof of the shares of each series so established. SECOND: The following resolutions authorizing the creation and issuance of a series of said shares of Class C Common Stock to be known as Class C-4 Common Stock were duly adopted by the Board of Directors on the 6th day of February, 2001, in accordance with Sections 78.1955 and 78.315 of the Nevada General Corporation Law. RESOLVED, that the Board of Directors, pursuant to authority vested in it by the provisions of the Articles of Incorporation, hereby authorizes the issuance of a series of the Corporation's Class C Common Stock, and hereby fixes the number, designation, preferences, rights, limitations and restrictions thereof in addition to those set forth in the Articles of Incorporation as follows: ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions. In this Certificate of Designation, unless the context otherwise requires "Affiliate" means, with respect to a specified Person, any other Person that directly or indirectly controls, is controlled by, or is under common control with, such specified Person. "Book-Entry Interest" means a beneficial ownership in Class C-4 Shares, the ownership and transfers of which are maintained through book entries of the Registrar as set forth in Section 9.04(b) of this Certificate of Designation. "Business Day" means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which commercial banks are authorized or required by law, regulation or 2 executive order to close in The City of New York. With respect to the LIBOR Determination Date, "Business Day" means a day on which dealings in deposits in U.S. dollars are transacted in the London interbank market. "Change of Control Event" means the Corporation ceasing to be an Affiliate of ZGH or any of its Affiliates, including, but not limited to, a Change of Control Tax Event. "Change of Control Tax Event" means a Change of Control Event which results in an adverse tax effect on the holders of Trust Capital Securities IV. "Class A Shares" means the Class A Common Stock, par value $1.00 per share, of the Corporation. "Class B Shares" means the Class B Common Stock, par value $1.00 per share, of the Corporation. "Class C Shares" means, collectively, the Class C-4 Shares and all other series of Class C Common Stock, par value $1.00 per share, of the Corporation, for which a certificate or certificates of designation have been filed with the Nevada Secretary of State. "Class C-4 Shares" has the meaning set forth in Section 2.01 hereof. "Class C-4 Indicative Rate" means initially, 5.98%, and on or after April 18, 2001, a variable rate equal to Three-Month LIBOR plus 53 basis points, reset quarterly, and on or after April 18, 2008, a variable rate equal to Three-Month LIBOR plus 155 basis points, reset quarterly, in each case, the rate shall be determined by reference to the Class C-4 Share Liquidation Preference; provided, however, that such variable rate shall never be greater than 15%. "Class C-4 Share Liquidation Amount" means, with respect to each Class C-4 Share, an amount equal to the greater of (i) the Class C-4 Share Liquidation Preference, plus an amount (whether or not declared) equal to the Class C-4 Share Liquidation Preference multiplied by the Class C-4 Indicative Rate multiplied by a fraction, the numerator of which is the number of days in the current Dividend Period that have passed prior to the date on which the liquidation occurs and the denominator of which is 360 and (ii) the Economic Dividend Payable. "Class C-4 Share Liquidation Preference" has the meaning set forth in Section 2.01 hereof. "Clearing Agency" means the clearing agency with respect to the Class C-4 Shares. "Code" means the United States Internal Revenue Code of 1986, as amended. "Common Shares" means, collectively, the Class A Shares and the Class B Shares. "DTC" means The Depository Trust Company. "Dividend" means a cash distribution to holders of the Class C-4 Shares from the Corporation with respect to any applicable Dividend Period and payable on an applicable Dividend Date. 3 "Dividend Date" means the 15th day of February, May, August and November in each year (or the preceding Business Day if such day is not a Business Day) commencing February 15, 2001, with respect to Dividends for each relevant Dividend Period on the Class C-4 Shares. "Dividend Period" means for each Dividend Date, a quarterly period comprised of two components: (i) an arrears component from and including the date of the original issuance of the Class C-4 Shares (in the case of the first Dividend Period) or, in all other cases, from and including the 18th day of any of April, July, October or January immediately preceding the then current Dividend Date, provided, that if any such day is not a Business Day, then the start of the period will be postponed to the next succeeding Business Day, to but excluding the then current Dividend Date, and (ii) an advance component from and including the then current Dividend Date to but excluding the next 18th day of any of April, July, October or January (as the case may be) immediately succeeding the then current Dividend Date, provided, that if any such day is not a Business Day, then the end of the period (and associated first day of the next Dividend Period) will be postponed to the next succeeding Business Day. "Economic Dividend Payable" mean initially, as determined in good faith by the Board of Directors based on the opinion of a nationally recognized investment bank, for the Class C-4 Shares in the aggregate 0.8278146% of, as applicable, (i) the amount of dividends paid or set apart for payment by the Corporation on its common shares (including the Class C Shares) during any Dividend Period, (ii) the amount of any redemption proceeds on the Corporation's common shares to the extent such proceeds are greater than the fair market value of the common shares being redeemed, or (iii) the aggregate amount available for payment of distributions on liquidation with respect to the Corporation's common shares entitled to payments upon liquidation; provided that: (A) subsection (i) above shall only apply when determining whether the Class C-4 Shares are entitled to Dividends, (B) subsection (ii) above shall only apply upon a redemption of the Corporation's common shares and (C) subsection (iii) above shall only apply upon a liquidation, dissolution and winding up of the Corporation. This percentage shall be adjusted from time to time (for example upon the issuance of common shares by the Corporation in exchange for cash or property) based upon the percentage of the Corporation's fair market value represented by the Class C-4 Shares at the time of such adjustment; provided that any such adjustment shall be determined in good faith by the Board of Directors based on the opinion of a nationally recognized investment bank. "Holder" means the beneficial owners of the Class C-4 Shares. "IAI" means a Person that is an "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act or the analog provisions of any successor rule. "IRS" means the United States Internal Revenue Service. "Junior Shares" has the meaning set forth in Section 3.01 hereof. "LIBOR Determination Date" the first LIBOR Determination Date will be April 9th, 2001, and thereafter will be two Business Days prior to each July 11th, October 11th, January 11th and April 11th thereafter (except if any such day is not a Business Day, then the relevant LIBOR Determination Date will be two Business Days prior to the preceding Business Day). "LLC IV" means Zurich RegCaPS Funding LLC IV, a Delaware limited liability company. 4 "LLC IV Payment Date" means the 18th day of any of April, July, October and January in each year (or the preceding Business Day if such day is not a Business Day) when the corresponding RegCaPS IV payment for such period has been made. "LLC IV Payments" means cash payments on the LLC Preferred Interests IV. LLC IV Payments shall not include tax amounts withheld and not refunded. "LLC Preferred Interest IV" means the preferred membership interests in LLC IV. "Minimum Net Worth Amount" initially means US$ 3 billion. The Minimum Net Worth Amount will be increased by the proceeds paid to the Corporation in consideration for the issuance and sale of any of its capital stock ranking pari passu with or senior to the Class C-4 Shares with respect to the payment of distributions or amounts payable upon liquidation. The Minimum Net Worth Amount will be reduced by the amounts paid to purchase or redeem any shares of Class C Common Stock or any of its capital stock ranking pari passu with or senior to the Class C-4 Shares or the other Class C Shares, but only by an amount equal to the liquidation preference of such shares. The net worth of the Corporation will be determined in accordance with U.S. GAAP. "Partnership IV" means Zurich RegCaPS Funding Limited Partnership IV, a Delaware limited partnership. "Person" means any legal person, including any individual, corporation, association, partnership (general or limited), joint venture, trust, estate, limited liability company, or other legal entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Purchaser" means ZGH or any of its Affiliates. "QIB" means a qualified institutional buyer within the meaning of Rule 144A under the Securities Act. "RegCaPS IV" means any regulatory capital preferred securities of Partnership IV. "RegCaPS IV Payment Date" means the 15th day of February, May, August and November in each year (or on the preceding Business day if such day is not a Business Day) commencing February 15, 2001 with respect to the RegCaPS IV Payments for each relevant RegCaPS IV Payment Period. "RegCaPS IV Payment Period" means for each RegCaPS IV Payment Date, a quarterly period comprised of two components (i) an arrears component from and including the date of the original issuance of the RegCaPS IV (in the case of the first RegCaPS IV Payment Period) or, in all other cases, from and including the relevant LLC IV Payment Date immediately preceding the then current RegCaPS IV Payment Date to but excluding the then current RegCaPS IV Payment Date and (ii) an advance component from and including the then current RegCaPS IV Payment Date to but excluding the next relevant succeeding LLC IV Payment Date. "RegCaPS IV Payments" means cash remittances initially, at 5.98%, on or after April 18, 2001, a variable annual rate equal to Three-Month LIBOR plus 53 basis points, reset quarterly, and 5 on or after April 18, 2008, a variable annual rate equal to Three-Month LIBOR plus 155 basis points, reset quarterly, in each case the rate shall be determined by reference to the liquidation preference of the RegCaPS IV, to the registered holder of the RegCaPS IV with respect to any applicable RegCaPS IV Payment Period and payable on an applicable RegCaPS IV Payment Date. "Securities Act" means the U.S. Securities Act of 1933, as amended. "Securities Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended. "Special Independent Directors" means two (2) independent directors of the Corporation to be elected by holders of the Class C Shares upon the occurrence of certain events as stated in this Certificate of Designation and in the certificates of designation of the other Class C Shares. The holders of the Class C-4 Shares shall have the right to vote for the Special Independent Directors only upon the failure of the Corporation to pay Dividends for 24 consecutive months at the Class C-4 Indicative Rate on the Class C-4 Shares. "Three-Month LIBOR" means with respect to any LIBOR Determination Date, a rate determined on the basis of the offered rates for three-month United States dollar deposits of not less than a principal amount equal to that which is representative for a single transaction in such market at such time, commencing on the second Business Day immediately following such LIBOR Determination Date, which appears on US LIBOR Telerate Page 3750 as of approximately 11:00 a.m., London time, on such LIBOR Determination Date. If on any LIBOR Determination Date no rate appears on US LIBOR Telerate Page 3750 as of approximately 11:00 a.m., London time, the Paying Agent shall on such LIBOR Determination Date request the four major reference banks in the London interbank market selected by the Paying Agent to provide the Paying Agent with a quotation of the rate at which three-month deposits in United States dollars, commencing on the second Business Day immediately following such LIBOR Determination Date, are offered by it to prime banks in the London interbank market as of approximately 11:00 a.m., London time, on such LIBOR Determination Date and in a principal amount equal to that which is representative for a single transaction in such market at such time. If at least two such quotations are provided, Three-Month LIBOR for such LIBOR Determination Date will be the arithmetic mean of such quotations as calculated by the Paying Agent. If fewer than two quotations are provided, Three-Month LIBOR for such LIBOR Determination Date will be the arithmetic mean of the rates quoted as of approximately 11:00 a.m., London time, on such LIBOR Determination Date by three major banks in the London interbank market selected by the Paying Agent for loans in United States dollars to leading European banks, having a three-month maturity commencing on the second Business Day immediately following such LIBOR Determination Date and in a principal amount equal to that which is representative for a single transaction in such market at such time; provided, however, that, if the banks selected as aforesaid by the Paying Agent are not quoting as mentioned in this sentence, Three-Month LIBOR for such LIBOR Determination Date will be Three-Month LIBOR determined with respect to (i) the immediately preceding Dividend Period for purposes of the Class C-4 Shares and (ii) the immediately preceding RegCaPS IV Payment Period for purposes of the RegCaPS IV. "Transfer Agent" means the transfer agent with respect to the Class C-4 Shares which shall initially be the Corporation. 6 "Trust IV" means Zurich RegCaPS Funding Trust IV, a Delaware statutory business trust. "Trust Capital Securities IV" means 125,000 trust capital securities, liquidation amount US $1,000 each, representing undivided beneficial ownership interests in the assets of Trust IV. "U.S. GAAP" means the generally accepted accounting principles in the United States. "ZGH" means Zurich Group Holding, a Swiss stock corporation (as defined in Article 620 et. seq., of the Swiss Code of Obligation) formerly known as Zurich Financial Services, a wholly-owned subsidiary of Zurich Financial Services or its successors and assigns. "Zurich Financial Services" means Zurich Financial Services, a Swiss stock corporation (as defined in Article 620 et seq., of the Swiss Code of Obligations) listed on the Swiss Exchange SWX with a secondary listing on the London Stock Exchange and the holder of directly or indirectly 100% of the shares of ZGH or its successors and assigns. "1940 Act" means the U.S. Investment Company Act of 1940, as amended. ARTICLE 2 NUMBER AND DESIGNATION SECTION 2.01. Number and Designation. 5 and 5/9 shares of the Class C Common Stock of the Corporation are hereby designated as a series of Class C Common Stock designated as Class C-4 Common Stock, par value $1.00 per share (the "Class C-4 Shares"). The Class C-4 Shares shall have a liquidation preference of twenty two million five hundred thousand United States dollars ($22,500,000) per share (the "Class C-4 Share Liquidation Preference"). ARTICLE 3 RANK SECTION 3.01. Rank. (a) The Class C-4 Shares shall, only with respect to payment of Dividends at the Class C-4 Indicative Rate (as defined below) and with respect to the payment of the Class C-4 Share Liquidation Preference upon the liquidation, dissolution and winding up of the Corporation, rank senior to all of the Junior Shares, including the Common Shares. In all other respects, the Class C-4 Shares shall rank pari passu with the Junior Shares, including the Common Shares and the other series of Class C Shares and shall participate equally with the Junior Shares and the other series of Class C Shares with respect to distributions paid by the Corporation and shall participate equally with the Class A Shares and the other series of Class C Shares with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation. The Class C-4 Shares will rank junior in all respects to any indebtedness of the Corporation. The Class C-4 Shares shall rank pari passu with the other series of Class C Shares for all purposes. All securities of the Corporation to which the Class C-4 Shares rank senior (whether with respect to dividends or upon liquidation, dissolution, winding up or otherwise), including the Common Shares, are collectively referred to herein as the "Junior Shares." The definition of Junior Shares shall also include any rights or options exercisable for or convertible into any of the Junior Shares. (b) Without prior consent of the holders of not less than a majority of the outstanding Class C-4 Shares, the Corporation shall not issue any class or series of equity securities whose terms provide 7 that such securities rank senior to or pari passu with the Class C-4 Shares with respect to the rights to receive dividends and other distributions or with respect to any amounts payable upon liquidation, dissolution or winding up; provided that the Corporation may file certificates of designation and issue shares in accordance therewith for other series of Class C Shares to be designated as Class C-1 Common Stock, Class C-2 Common Stock, Class C-3 Common Stock, Class C-5 Common Stock, and Class C-6 Common Stock, each of which ranks pari passu with the Class C-4 Shares with respect to distributions paid by the Corporation and with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation. Further, if the Corporation has paid in full the lesser of (i) each Dividend on its respective Dividend Payment Date during the last 24 months at the Class C-4 Indicative Rate, or (ii) prior to February 9, 2003, all Dividends in an amount at least equal to the Class C-4 Share Indicative Rate that could have been paid on the Class C Shares, the Corporation may issue an unlimited amount of additional Class C-4 Shares and other equity ranking pari passu with the Class C-4 Shares without the consent of the holders of the Class C-4 Shares. ARTICLE 4 DIVIDENDS SECTION 4.01. Rate; Dividend Date. (a) Each Class C-4 Share shall be entitled to receive cash Dividends on a non-cumulative basis, when as and if declared by the Board of Directors, out of funds legally available for the payment of distributions on each Dividend Date commencing February 15, 2001. The amount of Dividends will be computed on the basis of a 360-day year and the actual number of days in such Dividend Period. When Dividends are paid on the Class C-4 Shares at less than the Class C-4 Indicative Rate, all Dividends declared on the Class C Shares will be paid pro rata based on the outstanding number of shares of each series of Class C Common Stock and such Dividends declared on the Class C-4 Shares will be paid pro rata based on the outstanding number of Class C-4 Shares. (b) The Paying Agent will calculate Three-Month LIBOR as of each LIBOR Determination Date and shall make such rate calculation available to holders of Class C-4 Shares. The Paying Agent also shall determine the Dividends payable on each Dividend Date and give notice thereof (including the applicable rate, amount, the applicable period and payment) to the holders of Class C-4 Shares. The notices set forth in this paragraph shall be sent by first class mail to the address of each holder of Class C-4 Shares as it appears on the register kept by the Registrar and shall be available at the offices of the Paying Agent. SECTION 4.02. Dividend Restrictions. (a) No distribution or redemption, including without limitation cash dividends, may be declared or paid or set apart for payment on any Junior Shares and neither the Corporation nor any of its Affiliates may purchase or redeem for cash any outstanding Junior Shares, unless: (i) full Dividends have been declared and paid or set apart for payment on the Class C-4 Shares in an amount at least equal to the greater of (A) the Dividends payable or set apart during such Dividend Period at the Class C-4 Indicative Rate; or (B) the Economic Dividend Payable; (ii) Partnership IV has paid or set apart for payment the full amount of RegCaPS IV Payments for the current RegCaPS IV Payment Period; 8 (iii) LLC IV has set apart or paid the full amount of the LLC IV Payments on an LLC IV Payment Date in any period when the corresponding RegCaPS IV Payment for such LLC IV Payment Date has been made; and (iv) in the case of a repurchase or redemption, such repurchase or redemption does not cause the net worth of the Corporation to be less than the Minimum Net Worth Amount. Notwithstanding the foregoing, for so long as the Corporation has paid or set apart for payment Dividends on the Class C-4 Shares at least equal to the greater of (i)(A) or (i)(B) and clauses (ii) (iii) and (iv) above are satisfied, the Corporation may declare and pay Dividends on any Junior Shares with respect to such Dividend Period. (b) (i) If a Dividend is paid or set apart on the Class C-4 Shares during any Dividend Period at a rate less than the Class C-4 Indicative Rate, the Corporation may not make any dividend payments on the Junior Shares and may only make dividend payments on its other securities that rank pari passu with the Class C-4 Shares, if any, in the same proportion as the partial Dividend paid or set apart on the Class C-4 Shares for the current Dividend Period bears to the full Dividend payment determined for such Dividend Period at the Class C-4 Indicative Rate. (ii) For so long as the Class C-4 Shares are outstanding, if a partial RegCaPS IV Payment is made or set apart for any RegCaPS IV Payment Period, the Corporation may not make any dividend payments during such RegCaPS IV Payment Period on its Junior Shares and may only make dividend payments on its other securities that rank pari passu with the Class C-4 Shares in the same proportion as the lesser of (i) the proportion the partial RegCaPS IV Payment made or set apart for the Current RegCaPS IV Payment Period bears to the RegCaPS IV Payment determined for such RegCaPS IV Payment Period and (ii) the proportion the partial Dividend paid or set apart on the Class C-4 Shares for the corresponding Dividend Period bears to the full Dividend payment for such Dividend Period at the Class C-4 Indicative Rate. Additionally, for so long as the Class C-4 Shares are outstanding, all shares of common or preferred stock issued by majority-owned subsidiaries of the Corporation which shares are not beneficially owned by the Corporation or its wholly-owned subsidiaries will be subject to the restrictions set forth above on the payment of distributions and other payments only to the extent that such minority shares are owned by Zurich Financial Services or one of its controlled Affiliates. (c) The Corporation intends that the holders of the RegCaPS IV shall be third party beneficiaries of, and entitled to enforce, the provisions of this Section 4.02 as if such provisions constituted a contract between the Corporation and the holders of the Class C-4 Shares, and the holders of the RegCaPS IV were third-party beneficiaries to such contracts. SECTION 4.03. Payment of Dividends. Dividends and other payments on the Class C-4 Shares will be payable to the holders thereof as they appear on the books and records of the Corporation on the relevant record dates, which will be one Business Day prior to the relevant Dividend Date or other payment date. Such Dividends will be paid either (i) by the Corporation or (ii) in the event such Class C-4 Shares are not held by an Affiliate of ZGH through the Paying Agent who will hold amounts received from the Corporation in respect of the Class C-4 Shares for the benefit of the registered 9 holders of the Class C-4 Shares. In the event that any Class C-4 Shares do not remain in book-entry only form, the relevant record dates shall be the 15th day of the month of the relevant Dividend Date or other payment date. In the event that any Dividend Date is not a Business Day, payment of the Dividends payable on such date will be made on the next succeeding day which is a Business Day (without any interest or other payment in respect of the dividends subject to such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. SECTION 4.04. Changes in the Dividends-Received Percentage. (a) If, prior to 18 months after the date of the original issuance of the Class C-4 Shares, one or more amendments to the Code are enacted that reduce the dividends-received deduction (currently 70%), as specified in Section 243(a)(i) of the Code or any successor provision (the "Dividend-Received Percentage"), certain adjustments will be made as appropriate in respect of the Dividends paid by the Corporation, and Post Declaration Date Dividends and Retroactive Dividends may become payable (as such terms are defined below), except that no adjustments will be made with respect to any reduction of the Dividends- Received Percentage below 50%. (b) The amount per share of each Dividend declared at the applicable rate described in Section 4.01 above for Dividend payments made on or after the effective date of such change in the Code will be increased, to the extent of funds legally available for distribution by the Corporation, by multiplying the amount of the Dividend payable before adjustment, by a factor, which will be the number determined in accordance with the following formula (the "DRD Formula"), and rounding the result to the nearest cent (with one-half cent rounded up): I-.35(I-.70) ------------ I-.35(I-DRP) For purposes of the DRD Formula with regard to the Class C-4 Shares, "DRP" means the Dividend-Received Percentage (expressed as a decimal) applicable to the Dividends in question; provided, that in no event shall the DRP be less than 0.50. No amendment to the Code, other than a change in the Dividends- Received Percentage enacted prior to 18 months after the date of the original issuance of the Class C-4 Shares, will give rise to an adjustment. Notwithstanding the foregoing provisions, if, with respect to any such amendment, the Corporation receives either an unqualified opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form of authorization from the IRS to the effect that such an amendment does not apply to a Dividend payable on the Class C-4 Shares, then such amendment will not result in the adjustment provided for pursuant to the DRD Formula with respect to such Dividend. The opinion referenced in the previous sentence shall be based upon the legislation amending or establishing the DRP or upon a published pronouncement of the IRS addressing such legislation. Absent manifest error, the Corporation's calculation of the Dividends payable as so adjusted shall be final and not subject to review. (c) Notwithstanding the foregoing, if any such aforementioned amendment to the Code is enacted after the Dividend payable on a Dividend Date has been declared, and if such amendment is effective with respect to such Dividend, the amount of the Dividend payable on such Dividend Date will not be increased; instead, additional Dividend payments (the "Post Declaration Date Dividend"), equal to the excess, if any, of (x) the product of the Dividend paid by the Corporation on 10 such Dividend Date and the DRD Formula over (y) the Dividend paid by the Corporation on such Dividend Date, will be declared to the extent funds legally available for distribution by the Corporation to holders of Class C-4 Shares on the record date applicable to the next succeeding Dividend Date, or, if Class C-4 Shares are called for redemption prior to such record date, to holders of Class C-4 Shares on the applicable redemption date, as the case may be, in addition to any other amounts payable on such date. (d) If any such amendment to the Code is enacted and the reduction in the Dividends-Received Percentage retroactively applies to one or more Dividend Dates on which the Corporation previously paid Dividends with respect to the Class C-4 Shares (each, an "Affected Dividend Date"), additional Dividends (the "Retroactive Dividends") will be declared, to the extent of funds legally available therefor, to holders of Class C-4 Shares on the record date applicable to the next succeeding Dividend Dates or, if the Class C-4 Shares are called for redemption prior to such record date, to holders of Class C-4 Shares on the applicable redemption date, as the case may be, in an amount equal to the excess of (x) the product of the Dividend paid by the Corporation on each Affected Dividend Date and the DRD Formula over (y) the sum of the Dividend paid by the Corporation on each Affected Dividend Date. The Corporation will only make one payment of Retroactive Dividends for any such amendment. Notwithstanding the foregoing provisions, if, with respect to any such amendment, the Corporation receives either an unqualified opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form of authorization from the IRS to the effect that such amendment does not apply to a Dividend payable on an Affected Dividend Date for the Class C-4 Shares, then such amendment will not result in the payment of a Retroactive Dividend with respect to such Affected Dividend Date. The opinion referenced in the previous sentence shall be based upon the legislation amending or establishing the Dividends-Received Percentage or upon a published pronouncement of the IRS addressing such legislation. (e) Notwithstanding the foregoing, no adjustment in the dividends payable by the Corporation shall be made, and no Post Declaration Date Dividends or Retroactive Dividends shall be payable by the Corporation, in respect of the enactment of any amendment to the Code 18 months or more after the date of original issuance of the Class C-4 Shares that reduces the Dividends-Received Percentage or to the extent such amendment reduces the Dividends-Received Percentage to less than 50%. (f) In the event that the amount of Dividends payable per share of the Class C-4 Shares is increased pursuant to the DRD Formula and/or Post Declaration Date Dividends or Retroactive Dividends are to be paid, the Corporation will give notice of each such adjustment and, if applicable, any Post Declaration Date Dividends and Retroactive Dividends to the holders of Class C-4 Shares. (g) The various payment restrictions and obligations described above and applicable in respect of any Dividend Period in which a Dividend on the Class C-4 Shares is not paid in an amount at least equal to the Class C-4 Indicative Rate to the extent that any Post Declaration Date Dividend or Retroactive Dividend is not declared and paid or set apart for payment as and when due in respect of a reduction in the Dividends-Received Percentage; provided that such payment restrictions and obligations will remain in effect, not only during the current Dividend Period, but until such Post Declaration Date Dividend or Retroactive Dividend is declared and paid or set apart for payment. 11 SECTION 4.05. Earnings and Profits Gross-Up Payments. (a) To the extent that Dividends paid with respect to the Class C-4 Shares exceeds the Corporation's earnings and profits as calculated for U.S. federal income tax purposes, they will not constitute dividends for U.S. federal income tax purposes and will not qualify for the dividends-received deduction. In such event, additional distributions will be made by the Corporation to place each holder of the Class C-4 Shares in the same position it would have been in if all Dividends from the Corporation were paid from such earnings and profits, assuming for these purposes that such holder was eligible for the dividends- received deduction. (b) If any Dividend on the Class C-4 Shares with respect to any fiscal year (including any Gross-Up Payment (as defined below)) constitutes, in whole or in part, a return of capital (or is treated as gain from the sale or exchange of the Class C-4 Shares) for U.S. federal income tax purposes (a "Qualifying Dividend"), within 180 days after the end of such fiscal year, the Corporation will pay (if declared), out of funds legally available therefor, an amount equal to the aggregate Gross-Up Payments to Qualified Investors (as defined below) with respect to all Qualifying Dividends on the Class C-4 Shares during such fiscal year. A "Qualified Investor" with respect to a Qualifying Dividend during a fiscal year means a person who was entitled to receive such Qualifying Dividend. (c) A "Gross-Up Payment" to a Qualified Investor with respect to all Qualifying Dividends on Class C-4 Shares paid by the Corporation during a fiscal year means an additional Dividend on the Class C-4 Shares to a Qualifying Investor in an amount which, when taken together with the aggregate Qualifying Dividends paid to such Qualified Investor during such fiscal year, would cause such Qualified Investor's net yield in dollars (after U.S. federal income tax consequences and treating, for purposes of calculating net yield in dollars, the sum of that portion of the Qualifying Dividends and the Gross-Up Payment otherwise treated as a return of capital as capital gain recognized upon the taxable sale or exchange of Class C-4 Shares) from the aggregate of both the Qualifying Dividends and the Gross-Up Payment to be equal to the net yield in dollars (after U.S. federal income tax consequences) which would have been received by such Qualified Investor if the entire amount of the aggregate Qualifying Dividends had instead been treated as a dividend for U.S. federal income tax purposes. Such Gross-Up Payment shall be calculated using the applicable maximum marginal U.S. federal corporate income tax rate applicable to ordinary income and capital gains, as the case may be, and, where applicable, the Dividends-Received Percentage, without consideration being given to the time value of money, the U.S. federal income tax situation of any specific Qualified Investor (including the application of the alternative minimum tax or the application of Section 246 of the Code), or any state or local tax consequences that may arise. The Corporation shall make a determination, based upon the reasonably estimated earnings and profits of that portion, if any, of a Qualifying Dividend for a fiscal year that will be treated as dividend for U.S. federal tax purposes, and such determination shall be final and binding for purposes of calculating the amount of the Gross-Up Payments with respect to all Qualifying Dividends for such fiscal year. SECTION 4.06. Change of Control Gross-Up Payments. If as a result of a Change of Control Tax Event, there is an increase in any non-refundable foreign taxes withheld ("Foreign Tax Increase") with respect to RegCaPS IV Payments or Cumulative RegCaPS IV Payment Amounts paid to a RegCaPS IV registered holder ("Foreign Taxed RegCaPS Payments"), additional distributions shall be made on the Class C-4 Shares in an amount which, when taken together with the aggregate Dividends paid to the Holders of the Class C-4 Shares during such fiscal year reduced by the amount of such Foreign Tax Increase, would cause the net yield in dollars (after U.S. federal income tax consequences other than the use of foreign tax credits resulting from the Foreign Tax Increase) to be equal to the net yield in dollars (after U.S. federal income tax consequences) to the Holder from 12 receipt of the aggregate Dividends paid to the Holder during such fiscal year without any reduction by the amount of such Foreign Tax Increase. The foregoing amount shall be calculated based on the assumption that the Holder is a U.S. corporation and using the applicable maximum marginal U.S. federal corporate income tax rate applicable to ordinary income and capital gains, as the case may be, and the Dividends-Received Percentage, without consideration being given to the time value of money, the U.S. federal income tax situation of any specific Holder, or any state or local tax consequences that may arise. If for a prior fiscal year Foreign Taxed RegCaPS Payments are made by the Partnership IV, the Corporation will pay (if declared), within 90 days after the end of such fiscal year, out of funds legally available therefor, an amount equal to the aggregate Change of Control Gross-Up Payments to the Partnership. ARTICLE 5 LIQUIDATION PREFERENCE SECTION 5.01. Liquidation Preference. (a) In the event of any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, after payment or provision for the liabilities of the Corporation and the expenses of such dissolution, liquidation or winding up, the holders of the outstanding Class C-4 Shares will be entitled to receive the Class C-4 Share Liquidation Amount, out of the assets of the Corporation or proceeds thereof available for distribution to holders of Class C-4 Shares. Out of such amount, the holders of Class C-4 Shares will be entitled to receive the Class C-4 Share Liquidation Preference before any payment or distribution of assets is made to holders of the Common Shares or any other Junior Shares. Amounts payable on the Class C-4 Shares in connection with the liquidation of the Corporation in excess of the Class C-4 Share Liquidation Preference are payable (to the extent the Class C-4 Share Liquidation Amount exceeds the Class C-4 Share Liquidation Preference) on a pari passu basis with any Common Shares entitled to receive payment or distribution upon a liquidation, dissolution or winding up of the Corporation. If the assets of the Corporation available for distribution in such event are insufficient to pay in full the aggregate amount payable to holders of the Class C-4 Shares and holders of all other classes or series of equity securities of the Corporation, if any, ranking, as to the distribution of assets upon dissolution, liquidation or winding up of the Corporation, on a parity with the Class C-4 Shares, the assets will be distributed to the holders of Class C-4 Shares and holders of such other equity interests pro rata, based on the full respective preferential amounts to which they are entitled. After payment of the Class C-4 Share Liquidation Amount upon dissolution, liquidation or winding up of the Corporation, the holders of Class C-4 Shares will not be entitled to any further participation in any distribution of assets by the Corporation. (b) Notwithstanding Section 5.01(a) above, holders of Class C-4 Shares will not be entitled to be paid any amount in respect of a dissolution, liquidation or winding up of the Corporation until holders of any classes or series of securities of the Corporation ranking, as to the distribution of assets upon dissolution, liquidation or winding up of the Corporation, senior to the Class C-4 Shares have been paid all amounts to which such classes or series are entitled. (c) Notwithstanding anything else in this Certificate, neither the sale, lease or exchange (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation, nor the merger, consolidation or combination of the Corporation into or with any other person or the merger, consolidation or combination of any other person into or with the Corporation, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Section 5.01. 13 ARTICLE 6 REDEMPTION SECTION 6.01. Optional Redemption. (a) The Class C-4 Shares will not be subject to mandatory redemption at any time. Prior to February 15, 2031, Class C-4 Shares will not be subject to optional redemption. On or after February 15, 2031, Class C-4 Shares may be redeemed at the option of the Corporation at any time, subject to the prior consent of ZGH, in whole but not in part, at their fair market value (the "Redemption Amount") as determined by a nationally recognized investment bank retained by the Corporation. SECTION 6.02. Procedure for Redemption. (a) Notice of any redemption of the Class C-4 Shares (a "Redemption Notice") will be given by the Corporation by mail to each holder of Class C-4 Shares not fewer than 30 nor more than 60 days before the date fixed for redemption. For purposes of the calculation of the date of redemption and the dates on which notices are given pursuant to this Section 6.02(a), a Redemption Notice shall be deemed to be given on the day such notice is first mailed, by first-class mail, postage prepaid, to holders of the Class C-4 Shares. Each Redemption Notice shall be addressed to the holders of Class C-4 Shares at the address of each such holder appearing in the books and records of the Corporation. No defect in the Redemption Notice or in the mailing thereof with respect to any holder of Class C-4 Shares shall affect the validity of the redemption proceedings with respect to any other holder of Class C-4 Shares. (b) If the Corporation gives a Redemption Notice (which notice will be irrevocable), then by 12:00 noon, New York City time, on the redemption date, the Corporation (A) if the Class C-4 Shares are in book-entry form with DTC, will deposit irrevocably with DTC funds sufficient to pay the applicable Redemption Amount and will give DTC irrevocable instruction and authority to pay the Redemption Amount in respect of the Class C-4 Shares held through DTC in global form or (B) if the Class C-4 Shares are held in certificated form (each such certificate a "Class C-4 Share Certificate"), will deposit with the Paying Agent, funds sufficient to pay the applicable Redemption Amount of any such Class C-4 Shares and will give to the Paying Agent irrevocable instructions and authority to pay such amounts to the holders of Class C-4 Shares, upon surrender of their certificates, by delivery of check, mailed to the address of the relevant holder appearing on the books and records of the Corporation on the redemption date. For these purposes, the applicable Redemption Amount shall not include Dividends which are being paid to holders of Class C-4 Shares who were holders of Class C-4 Shares on a relevant record date. Upon satisfaction of the foregoing conditions, then immediately prior to the close of business on the date of such deposit or payment, all rights of holders of Class C-4 Shares so called for redemption will cease, except the right of the holders of Class C-4 Shares to receive the Redemption Amount, but without interest on such Redemption Amount, and from and after the date fixed for redemption, such Class C-4 Shares will not receive dividends or bear interest. (c) In the event that any date fixed for redemption of Class C-4 Shares is not a Business Day, then payment of the Redemption Amount payable on such date will be made on the next succeeding Business Day (and without any interest in respect of any such delay), except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day in each case, with the same force and effect as if made on such date fixed for redemption. In the event that payment of the Redemption Amount is improperly withheld or refused and not paid by the Corporation, Dividends on the Class C-4 Shares called for redemption will continue to be payable in accordance with the terms hereof from the original redemption date until the Redemption Amount is actually paid. 14 (d) The Corporation shall not be required to register or cause to be registered the transfer of any Class C-4 Shares which have been called for redemption. (e) The Class C-4 Shares which have been issued and reacquired in any manner, including shares purchased or redeemed, shall (upon compliance with any applicable provisions of the laws of the State of Nevada) have the status of authorized and unissued Class C-4 Shares and may be reissued. ARTICLE 7 VOTING RIGHTS SECTION 7.01. Voting Rights. (a) The holders of the Class C-4 Shares will be entitled to 0.375 of a vote per share (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 Corporation) and will be entitled to vote with the Common Shares as a single class on all matters submitted to a vote of the Common Shares (other than those matters affecting only the Common Shares, or either of them); provided, however, that at no time shall the aggregate Voting Power of the Class C-4 Shares be greater than 0.375% of the total Voting Power of the Corporation. Prior to transferring ownership of any Class C-4 Shares to a transferee other than an Affiliate of ZGH and subject to receipt of any required regulatory approval, if any, such Class C-4 Shares shall be (i) split into a number of shares of Class C-4 Shares equal to, and with a liquidation preference equal to the liquidation amount of the number of Trust Capital Securities IV, and (ii) converted on a one-to-one basis to the same number of shares of a class of common stock of the Corporation (the "Conversion Shares") having rights, preferences and privileges substantially identical to the Class C-4 Shares except that the Conversion Shares will be entitled to no voting rights other than as required by law and other than with respect to adverse amendments to the terms of the Conversion Shares and the issuance of equity securities that rank senior to or pari passu with the Conversion Shares with respect to the payment of distributions or amounts upon liquidation, provided that the Corporation may file certificates of designation and issue shares in accordance therewith for other Class C Shares which rank pari passu with the Conversion Shares with respect to distributions paid by the Corporation and with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation. If, however, any necessary regulatory approvals to issue the Conversion Shares are not obtained, the Class C-4 Shares rather than the Conversion Shares may be transferred to a transferee other than an Affiliate of ZGH. (b) The holders of the Class C-4 Shares and the Conversion Shares will be entitled to vote separately as a single class on the matters described in this paragraph. The consent of the holders of not less than a majority of the outstanding Class C-4 Shares and Conversion Shares, voting as a single class, is required (i) to amend, alter, supplement or repeal the terms of the Class C-4 Shares and the Conversion Shares (it being a condition to any such amendment, alteration, supplement or repeal that it has a substantially identical effect on the rights, preferences and privileges of both the Class C-4 Shares and the Conversion Shares), or (ii) if the Corporation has not paid in full the lesser of (A) each of the last twenty-four months of Dividends on their respective Dividend Payment Dates at the Class C-4 Indicative Rate, or (B) prior to the second anniversary of the first issue date, all Dividends at the Class C-4 Indicative Rate that could have been paid on the Class C-4 Shares and the Conversion Shares, for the Corporation to issue, or to increase the authorized amount of, the Class C-4 Shares or the Conversion Shares or any other equity securities that rank pari passu with or senior to the Class C-4 Shares and the Conversion Shares; provided that the Corporation may file certificates of designation and issue shares in accordance therewith for other Class C Shares to be designated as Class C-1 Common Stock, Class C-2 Common Stock, Class C-3 Common Stock, Class C-5 Common Stock, and Class C-6 15 Common Stock, each of which rank pari passu with the Class C-4 Shares with respect to distributions paid by the Corporation and with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation without the consent of the holders of the Class C-4 Shares or the Conversion Shares. (c) Whenever Dividends on the Class C-4 Shares and the Conversion Shares at the Class C-4 Indicative Rate are in arrears for twenty-four or more consecutive months, the holders of Class C-4 Shares and the Conversion Shares, voting together with the other Class C Shares as a single class, will be entitled, subject to any necessary regulatory actions, to elect two Special Independent Directors to the Board of Directors, at a special meeting called by the holders of record of at least 25% of the Class C-4 Shares and the Conversion Shares in the aggregate or by the holders of record of 25% of any of the other series of Class C Shares pursuant to the terms of the certificate of designation creating such other series of Class C Shares. The Special Independent Directors shall vacate office if Dividends at the Class C-4 Indicative Rate are resumed and are paid regularly for at least twelve consecutive months, unless otherwise provided by the terms of any other certificate of designation for any other series of Class C Shares. If Dividends are resumed and paid regularly for at least twelve consecutive months at the Class C-4 Indicative Rate, the holders of the Class C-4 Shares and the Conversion Shares shall no longer be entitled to vote for the two Special Independent Directors on account of that arrearage. When no holder of Class C-4 Shares is entitled to vote for the two Special Independent Directors, the Special Independent Directors shall vacate office. Notwithstanding the foregoing, in the event that more than one series of Class C Shares are entitled to elect Special Independent Directors to the Board of Directors, such series shall vote together as a single class to elect such two directors. In no event shall the holders of Class C Shares be entitled to elect more than two Independent Directors to the Board of Directors. (d) Notwithstanding the foregoing, the Corporation shall have the right, without the prior consent of the holders of Class C-4 Shares and Conversion Shares if any, to amend, alter, supplement or repeal any terms of the Class C-4 Shares (i) to cure any ambiguity, or to cure, correct or supplement any defective provision thereof or (ii) to make any other provision with respect to matters or questions arising with respect to the Class C-4 Shares and Conversion Shares, if any, that is not inconsistent with the provisions thereof so long as such action does not materially and adversely affect any of the rights, preferences and privileges of the holders of Class C-4 Shares and Conversion Shares, if any, provided, however, that any increase in the amount of authorized or issued Class C-4 Shares will be deemed not to materially and adversely affect any of the rights, preferences and privileges of the holders of Class C-4 Shares. (e) The consent or votes required in Section 7.01(b) and (c) above shall be in addition to any approval of stockholders of the Corporation which may be required by law or pursuant to any provision of the Corporation's Articles of Incorporation or bylaws, which approval shall be obtained by vote of the stockholders of the Corporation in the manner provided in Section 7.01(a) above. ARTICLE 8 MERGER, CONSOLIDATION OR AMALGAMATION OF THE CORPORATION SECTION 8.01. Merger, Conversion, Consolidation or Amalgamation of the Corporation. Without the consent of either one Special Independent Director, if any, or a majority of the holders of Class C-4 Shares, the Corporation may not consolidate, amalgamate, merge with or into, convert or domesticate with or into, or be replaced by, or convey, transfer or lease its properties and assets substantially as an 16 entirety to, any corporation or other entity, except as permitted below. The Corporation may, with the consent of at least one of the Special Independent Directors, if any, on the Board of Directors at the time the issue is considered and without the consent of the holders of the Class C-4 Shares, consolidate, amalgamate, merge with or into, convert or domesticate with or into, or be replaced by a corporation organized as such under the laws of any State of the United States; provided, that: (a) if the Corporation is not the surviving entity, such successor entity either (x) expressly assumes all of the obligations of the Corporation under the Class C-4 Shares or (y) substitutes securities for the Class C-4 Shares (the "Successor Securities"), so long as the Successor Securities rank the same as the Class C-4 Shares rank with respect to Dividends and other payments thereon; (b) such merger, consolidation, amalgamation, conversion, domestication or replacement does not adversely affect any of the rights, preferences and privileges of the holders of the Class C-4 Shares (including any Successor Securities) in any material respect; (c) prior to such merger, consolidation, amalgamation, conversion, domestication or replacement, the Corporation has received an opinion of a nationally recognized law firm experienced in such matters to the effect that (i) such merger, consolidation, amalgamation, conversion, domestication or replacement will not adversely affect any of the rights, preferences and privileges of the holders of the Class C-4 Shares (including any Successor Securities) in any material respect and (ii) following such merger, consolidation, amalgamation, conversion, domestication or replacement, the Corporation (or such successor entity) will not be required to register under the 1940 Act; and (d) distributions with respect to the Class C-4 Shares or Successor Securities would be eligible for the dividends-received deduction. ARTICLE 9 TRANSFER OF CLASS C-4 SHARES SECTION 9.01. General. The Corporation shall provide for the registration of Class C-4 Share Certificates and of transfers of Class C-4 Share Certificates. Upon surrender for registration of transfer of any Class C-4 Share Certificate, the Corporation shall cause one or more new Class C-4 Share Certificates to be issued in the name of the designated transferee or transferees. Every Class C-4 Share Certificate surrendered for registration of transfer shall be accompanied by a written instrument of transfer in form satisfactory to the Corporation duly executed by the holder of such Class C-4 Shares or his or her attorney duly authorized in writing. Each Class C-4 Share Certificate surrendered for registration of transfer shall be cancelled by the Corporation. A transferee of a Class C-4 Share Certificate shall be entitled to the rights and subject to the obligations of a holder of Class C-4 Shares hereunder upon the receipt by the transferee of a Class C-4 Share Certificate, which receipt shall be deemed to constitute a request by such transferee that the books and records of the Corporation reflect such transferee as a holder of Class C-4 Share. SECTION 9.02. Definitive Certificates. Unless and until the Corporation issues a global Class C-4 Share Certificate pursuant to Section 9.03(a), the Corporation shall only issue definitive Class C-4 Share Certificates to the holders of Class C-4 Shares. The Corporation may treat the Person in whose name any Class C-4 Share Certificate shall be registered on the books and records of the Corporation as the sole holder of such Class C-4 Share Certificate and of the Class C-4 Shares represented by such Class C-4 Share Certificate for purposes of receiving Dividends and for all other purposes whatsoever 17 (including without limitation, tax returns and information reports) and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Class C-4 Share Certificate or in the Class C-4 Shares represented by such Class C-4 Share Certificate on the part of any other Person, whether or not the Corporation shall have actual or other notice thereof. SECTION 9.03. Book Entry Provisions. (a) General. The provisions of this Section 9.03(a) shall apply only in the event that the Class C-4 Shares are distributed to a Person other than the Purchaser. Upon the occurrence of such event, a global Class C-4 Share Certificate representing the Book-Entry Interests shall be delivered to DTC, the initial Clearing Agency, by, or on behalf of, the Corporation and any previously issued and still outstanding definitive Class C-4 Share Certificates shall be of no further force and effect. The global Class C-4 Share Certificate shall initially be registered on the books and records of the Corporation in the name of Cede & Co., the nominee of DTC, and no holder of Class C-4 Shares will receive a new definitive Class C-4 Share Certificate representing such holder's interest in such Class C-4 Share Certificate, except as provided in Section 9.03(c). Unless and until new definitive, fully registered Class C-4 Share Certificates (the "Definitive Class C-4 Share Certificates") have been issued to the holders of Class C-4 Shares pursuant to Section 9.03(c): (i) The provisions of this Section shall be in full force and effect; (ii) The Corporation shall be entitled to deal with the Clearing Agency for all purposes of this Certificate (including the payment of Dividends, Redemption Amounts and liquidation proceeds on the Class C-4 Share Certificates and receiving approvals, votes or consents hereunder) as the sole holder of the Class C-4 Share Certificates and shall have no obligation to the holders of Class C-4 Shares; (iii) None of the Corporation, the Board of Directors, or any Special Independent Director or any agents of any of the foregoing shall have any liability or responsibility for any aspect of the records relating to or Dividends made on account of beneficial ownership interests in a global Class C-4 Share Certificate for such beneficial ownership interests or for maintaining, supervising or reviewing any records relating to such beneficial ownership interest; and (iv) Except as provided in Section 9.03(c) below, the holders of Class C-4 Shares will not be entitled to receive physical delivery of the Class C-4 Shares in definitive form and will not be considered holders thereof for any purpose under this Certificate of Designation, and no global Class C-4 Share Certificate representing Class C-4 Shares shall be exchangeable, except for another global Class C-4 Share Certificate of like denomination and tenor to be registered in the name of DTC or Cede & Co., or to a successor depository or its nominee. Accordingly, each holder of Class C-4 Shares must rely on the procedures of DTC or if such person is not a Participant, on the procedures of the Participant through which such person owns its interest to exercise any rights of a holder under this Certificate of Designation. (b) Notices to Clearing Agency. Whenever the holders of the Class C-4 Shares are required to give a notice or other communication to their equity holders, unless and until definitive Class C-4 Share Certificates shall have been issued to the holders of Class C-4 Shares pursuant to Section 9.03(c), the Corporation shall give all such notices and communications specified herein to be given to the 18 holders of Class C-4 Shares to the Clearing Agency, and shall have no obligations to the holders of Class C-4 Shares. (c) Definitive Class C-4 Share Certificates. Definitive Class C-4 Share Certificates shall be prepared by the Corporation and exchangeable for the global Class C-4 Share Certificate or Certificates if and only if (i) DTC notifies the Corporation that it is unwilling or unable to continue its services as a securities depository and no successor depository shall have been appointed, (ii) DTC, at any time, ceases to be a Clearing Agency registered under the Exchange Act at such time as DTC shall have been appointed, or (iii) the Corporation, in its sole discretion, determines that such global Class C-4 Share Certificate shall be so exchangeable. Upon surrender of the global Class C-4 Share Certificate or Certificates representing the Book-Entry Interests by the Clearing Agency, accompanied by registration instructions, the Corporation shall cause definitive Class C-4 Share Certificates to be delivered to holders of Class C-4 Shares in accordance with the instructions of the Clearing Agency. The Corporation shall not be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be protected in relying on, such instructions. The definitive Class C-4 Share Certificates shall be printed, lithographed or engraved or may be produced in any other manner as may be required by any national securities exchange on which Class C-4 Shares may be listed and is reasonably acceptable to the Corporation, as evidenced by its execution thereof. SECTION 9.04. Registrar, Transfer Agent and Paying Agent. (a) The Corporation will act as Registrar, Transfer Agent and Paying Agent of the Class C-4 Share for so long as the Class C-4 Shares are held by an Affiliate of ZGH, for so long as the Class C-4 Shares remain in book-entry only form. (b) Except in such case where the Corporation shall act as Registrar or Paying Agent pursuant to Section 9.04(a) hereof, the Corporation shall maintain in the Borough of Manhattan, City of New York, State of New York (i) an office or agency where Class C-4 Shares may be presented for registration of transfer or for exchange ("Registrar") and (ii) an office or agency where Class C-4 Shares may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Class C-4 Shares and of their transfer and exchange. The Corporation may appoint the Registrar and the Paying Agent and may appoint one or more co-registrars and one or more additional paying agents in such other location as it shall determine. The term "Paying Agent" includes any additional paying agent. The Corporation may change any Paying Agent, Registrar or co-registrar without prior notice to any holder. If the Corporation fails to appoint or maintain another entity as Registrar or Paying Agent, the Corporation shall act as such. (c) Registration of transfers of Class C-4 Shares shall be effected without charge by or on behalf of the Corporation, but upon payment (with the giving of such indemnity as the Corporation may require) in respect of any tax or other governmental charges that may be imposed. SECTION 9.05. Transfer Restrictions. The Class C-4 Shares may only be transferred (i) to QIBs and (ii) to IAIs who, if they are not QIBs, prior to such transfer, furnish to the Corporation or the Transfer Agent a signed letter containing certain representations and agreements relating to restrictions on transfer by such IAI and who hold their Class C-4 Shares through a DTC participant. The foregoing restriction may be waived if the Corporation, in its sole discretion, determines such restrictions are no longer necessary to preserve the Corporation's exemptions from registration requirements under the Securities Act, the Securities Exchange Act and the 1940 Act. Any purported 19 purchase or transfer of the Class C-4 Shares in violation of such restrictions will be null and void. Furthermore the Corporation may also require the sale of Class C-4 Shares held by holders who fail to comply with the foregoing. ARTICLE 10 MISCELLANEOUS PROVISIONS SECTION 10.01. Preemptive Rights. No holder of any of the Class C-4 Shares shall have any preemptive or preferential right to acquire or subscribe for any treasury or unissued shares of any class or series of the stock of the Corporation now or hereafter to be authorized, or any notes, debentures, bonds, or other securities convertible into or carrying any right, option or warrant to subscribe for or acquire shares of any class or series of stock of the Corporation now or hereafter to be authorized, whether or not the issuance of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the distribution or voting rights of such holder, and the Board of Directors of this Corporation may issue shares of any class or series of stock of this Corporation, without offering any such shares of any class or series of stock of the Corporation, either in whole or in part, to the existing shareholders of any class or series of stock of this Corporation. SECTION 10.02. Conversion Rights. The Class C-4 Shares shall have no right to convert into the Common Shares, any of the other Class C Shares or any other equity security or indebtedness of the Corporation other than the Conversion Shares. ARTICLE 11 GENERAL PROVISIONS SECTION 11.01. General Provisions. The headings of the paragraphs, subparagraphs, clauses and subclauses of this Certificate of Designation are for convenience of reference only and shall not define, limit or affect any of the provisions hereof. 20 IN WITNESS WHEREOF, Farmers Group, Inc. has caused this Certificate of Designation to be signed and attested by its undersigned Vice President and Secretary this 7th day of February, 2001. --- FARMERS GROUP, INC. By:/s/ Julian R.M. Harvey -------------------------------- Name: Julian R.M. Harvey Title: Vice President /s/ Doren Hohl ----------------------------------------- Name: Doren Hohl Title: Secretary STATE OF CALIFORNIA ) )ss COUNTY OF Los Angeles --------------- On February 7 , 2001 before me, Hazel C. Bautista, personally appeared --- ----------------- Julian R.M. Harvey and Doren Hohl. X personally known to me. --- -or- ___ proved to me on the basis of satisfactory evidence to be the persons whose names are subscribed to the within instrument and acknowledge to me that they executed the same in their authorized capacities, and that by their signatures on the instrument the persons, or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. /s/ Hazel C. Bautista ---------------------------------------------- Notary Public in and for said County and State 1 CERTIFICATE OF DESIGNATION OF CLASS C-5 COMMON STOCK of FARMERS GROUP, INC. Pursuant to Sections 78.1955 and 78.315 of the General Corporation Law of the State of Nevada Farmers Group, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the provisions of the General Corporation Law of the State of Nevada, certifies as follows: FIRST: The Amended and Restated Articles of Incorporation of the Corporation (the "Articles of Incorporation") authorize the issuance of up to 50 shares of Class C common stock, par value $1.00 per share (the "Class C Common Stock"), and further, authorize the Board of Directors of the Corporation (the "Board of Directors") by resolution or resolutions, at any time and from time to time, to divide and establish any or all of the shares of Class C Common Stock into one or more series of Class C Common Stock, and without limiting the generality of the foregoing, to fix and determine the designation of each such series, the number of shares which shall constitute such series and such voting powers, and such preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof of the shares of each series so established. SECOND: The following resolutions authorizing the creation and issuance of a series of said shares of Class C Common Stock to be known as Class C-5 Common Stock were duly adopted by the Board of Directors on the 6th day of February, 2001, in accordance with Sections 78.1955 and 78.315 of the Nevada General Corporation Law. RESOLVED, that the Board of Directors, pursuant to authority vested in it by the provisions of the Articles of Incorporation, hereby authorizes the issuance of a series of the Corporation's Class C Common Stock, and hereby fixes the number, designation, preferences, rights, limitations and restrictions thereof in addition to those set forth in the Articles of Incorporation as follows: ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions. In this Certificate of Designation, unless the context otherwise requires "Affiliate" means, with respect to a specified Person, any other Person that directly or indirectly controls, is controlled by, or is under common control with, such specified Person. "Book-Entry Interest" means a beneficial ownership in Class C-5 Shares, the ownership and transfers of which are maintained through book entries of the Registrar as set forth in Section 9.04(b) of this Certificate of Designation. "Business Day" means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which commercial banks are authorized or required by law, regulation or 2 executive order to close in The City of New York. With respect to the LIBOR Determination Date, "Business Day" means a day on which dealings in deposits in U.S. dollars are transacted in the London interbank market. "Change of Control Event" means the Corporation ceasing to be an Affiliate of ZGH or any of its Affiliates, including, but not limited to, a Change of Control Tax Event. "Change of Control Tax Event" means a Change of Control Event which results in an adverse tax effect on the holders of Trust Capital Securities V. "Class A Shares" means the Class A Common Stock, par value $1.00 per share, of the Corporation. "Class B Shares" means the Class B Common Stock, par value $1.00 per share, of the Corporation. "Class C Shares" means, collectively, the Class C-5 Shares and all other series of Class C Common Stock, par value $1.00 per share, of the Corporation, for which a certificate or certificates of designation have been filed with the Nevada Secretary of State. "Class C-5 Shares" has the meaning set forth in Section 2.01 hereof. "Class C-5 Indicative Rate" means initially, 6.21%, and on or after April 4, 2001, a variable rate equal to Three-Month LIBOR plus 71 basis points, reset quarterly, and on or after April 4, 2011, a variable rate equal to Three-Month LIBOR plus 175 basis points, reset quarterly, in each case, the rate shall be determined by reference to the Class C-5 Share Liquidation Preference; provided, however, that such variable rate shall never be greater than 15%. "Class C-5 Share Liquidation Amount" means, with respect to each Class C-5 Share, an amount equal to the greater of (i) the Class C-5 Share Liquidation Preference, plus an amount (whether or not declared) equal to the Class C-5 Share Liquidation Preference multiplied by the Class C-5 Indicative Rate multiplied by a fraction, the numerator of which is the number of days in the current Dividend Period that have passed prior to the date on which the liquidation occurs and the denominator of which is 360 and (ii) the Economic Dividend Payable. "Class C-5 Share Liquidation Preference" has the meaning set forth in Section 2.01 hereof. "Clearing Agency" means the clearing agency with respect to the Class C-5 Shares. "Code" means the United States Internal Revenue Code of 1986, as amended. "Common Shares" means, collectively, the Class A Shares and the Class B Shares. "DTC" means The Depository Trust Company. "Dividend" means a cash distribution to holders of the Class C-5 Shares from the Corporation with respect to any applicable Dividend Period and payable on an applicable Dividend Date. 3 "Dividend Date" means the 15th day of February, May, August and November in each year (or the preceding Business Day if such day is not a Business Day) commencing February 15, 2001, with respect to Dividends for each relevant Dividend Period on the Class C-5 Shares. "Dividend Period" means for each Dividend Date, a quarterly period comprised of two components: (i) an arrears component from and including the date of the original issuance of the Class C-5 Shares (in the case of the first Dividend Period) or, in all other cases, from and including the 4th day of any of April, July, October or January immediately preceding the then current Dividend Date, provided, that if any such day is not a Business Day, then the start of the period will be postponed to the next succeeding Business Day, to but excluding the then current Dividend Date, and (ii) an advance component from and including the then current Dividend Date to but excluding the next 4th day of any of April, July, October or January (as the case may be) immediately succeeding the then current Dividend Date, provided, that if any such day is not a Business Day, then the end of the period (and associated first day of the next Dividend Period) will be postponed to the next succeeding Business Day. "Economic Dividend Payable" means initially, as determined in good faith by the Board of Directors based on the opinion of a nationally recognized investment bank, for the Class C-5 Shares in the aggregate 1.3245033% of, as applicable, (i) the amount of dividends paid or set apart for payment by the Corporation on its common shares (including the Class C Shares) during any Dividend Period, (ii) the amount of any redemption proceeds on the Corporation's common shares to the extent such proceeds are greater than the fair market value of the common shares being redeemed, or (iii) the aggregate amount available for payment of distributions on liquidation with respect to the Corporation's common shares entitled to payments upon liquidation; provided that: (A) subsection (i) above shall only apply when determining whether the Class C-5 Shares are entitled to Dividends, (B) subsection (ii) above shall only apply upon a redemption of the Corporation's common shares and (C) subsection (iii) above shall only apply upon a liquidation, dissolution and winding up of the Corporation. This percentage shall be adjusted from time to time (for example upon the issuance of common shares by the Corporation in exchange for cash or property) based upon the percentage of the Corporation's fair market value represented by the Class C-5 Shares at the time of such adjustment; provided that any such adjustment shall be determined in good faith by the Board of Directors based on the opinion of a nationally recognized investment bank. "Holder" means the beneficial owners of the Class C-5 Shares. "IAI" means a Person that is an "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act or the analog provisions of any successor rule. "IRS" means the United States Internal Revenue Service. "Junior Shares" has the meaning set forth in Section 3.01 hereof. "LIBOR Determination Date" the first LIBOR Determination Date will be April 9th, 2001, and thereafter will be two Business Days prior to each July 11th, October 11th, January 11th and April 11th thereafter (except if any such day is not a Business Day, then the relevant LIBOR Determination Date will be two Business Days prior to the preceding Business Day). "LLC V" means Zurich RegCaPS Funding LLC V, a Delaware limited liability company. 4 "LLC V Payment Date" means the 4th day of any of April, July, October and January in each year (or the preceding Business Day if such day is not a Business Day) when the corresponding RegCaPS V payment for such period has been made. "LLC V Payments" means cash payments on the LLC Preferred Interests V. LLC V Payments shall not include tax amounts withheld and not refunded. "LLC Preferred Interest V" means the preferred membership interests in LLC V. "Minimum Net Worth Amount" initially means US$ 3 billion. The Minimum Net Worth Amount will be increased by the proceeds paid to the Corporation in consideration for the issuance and sale of any of its capital stock ranking pari passu with or senior to the Class C-5 Shares with respect to the payment of distributions or amounts payable upon liquidation. The Minimum Net Worth Amount will be reduced by the amounts paid to purchase or redeem any shares of Class C Common Stock or any of its capital stock ranking pari passu with or senior to the Class C-5 Shares or the other Class C Shares, but only by an amount equal to the liquidation preference of such shares. The net worth of the Corporation will be determined in accordance with U.S. GAAP. "Partnership V" means Zurich RegCaPS Funding Limited Partnership V, a Delaware limited partnership. "Person" means any legal person, including any individual, corporation, association, partnership (general or limited), joint venture, trust, estate, limited liability company, or other legal entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Purchaser" means ZGH or any of its Affiliates. "QIB" means a qualified institutional buyer within the meaning of Rule 144A under the Securities Act. "RegCaPS V" means any regulatory capital preferred securities of Partnership V. "RegCaPS V Payment Date" means the 15th day of February, May, August and November in each year (or on the preceding Business Day if such day is not a Business Day) commencing February 15, 2001 with respect to the RegCaPS V Payments for each relevant RegCaPS V Payment Period. "RegCaPS V Payment Period" means for each RegCaPS V Payment Date, a quarterly period comprised of two components (i) an arrears component from and including the date of the original issuance of the RegCaPS V (in the case of the first RegCaPS V Payment Period) or, in all other cases, from and including the relevant LLC V Payment Date immediately preceding the then current RegCaPS V Payment Date to but excluding the then current RegCaPS V Payment Date and (ii) an advance component from and including the then current RegCaPS V Payment Date to but excluding the next relevant succeeding LLC V Payment Date. "RegCaPS V Payments" means cash remittances, initially at 6.21%, on or after April 4, 2001, a variable annual rate equal to Three-Month LIBOR plus 71 basis points, reset quarterly, and on or after April 4, 2011, a variable annual rate equal to Three-Month LIBOR plus 175 points, reset 5 quarterly, in each case the rate shall be determined by reference to the liquidation preference of the RegCaPS V, to the registered holder of the RegCaPS V with respect to any applicable RegCaPS V Payment Period and payable on an applicable RegCaPS V Payment Date. "Securities Act" means the U.S. Securities Act of 1933, as amended. "Securities Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended. "Special Independent Directors" means two (2) independent directors of the Corporation to be elected by holders of the Class C Shares upon the occurrence of certain events as stated in this Certificate of Designation and in the certificates of designation of the other Class C Shares. The holders of the Class C-5 Shares shall have the right to vote for the Special Independent Directors only upon the failure of the Corporation to pay Dividends for 24 consecutive months at the Class C-5 Indicative Rate on the Class C-5 Shares. "Three-Month LIBOR" means with respect to any LIBOR Determination Date, a rate determined on the basis of the offered rates for three-month United States dollar deposits of not less than a principal amount equal to that which is representative for a single transaction in such market at such time, commencing on the second Business Day immediately following such LIBOR Determination Date, which appears on US LIBOR Telerate Page 3750 as of approximately 11:00 a.m., London time, on such LIBOR Determination Date. If on any LIBOR Determination Date no rate appears on US LIBOR Telerate Page 3750 as of approximately 11:00 a.m., London time, the Paying Agent shall on such LIBOR Determination Date request the four major reference banks in the London interbank market selected by the Paying Agent to provide the Paying Agent with a quotation of the rate at which three-month deposits in United States dollars, commencing on the second Business Day immediately following such LIBOR Determination Date, are offered by it to prime banks in the London interbank market as of approximately 11:00 a.m., London time, on such LIBOR Determination Date and in a principal amount equal to that which is representative for a single transaction in such market at such time. If at least two such quotations are provided, Three-Month LIBOR for such LIBOR Determination Date will be the arithmetic mean of such quotations as calculated by the Paying Agent. If fewer than two quotations are provided, Three-Month LIBOR for such LIBOR Determination Date will be the arithmetic mean of the rates quoted as of approximately 11:00 a.m., London time, on such LIBOR Determination Date by three major banks in the London interbank market selected by the Paying Agent for loans in United States dollars to leading European banks, having a three-month maturity commencing on the second Business Day immediately following such LIBOR Determination Date and in a principal amount equal to that which is representative for a single transaction in such market at such time; provided, however, that, if the banks selected as aforesaid by the Paying Agent are not quoting as mentioned in this sentence, Three-Month LIBOR for such LIBOR Determination Date will be Three-Month LIBOR determined with respect to (i) the immediately preceding Dividend Period for purposes of the Class C-5 Shares and (ii) the immediately preceding RegCaPS V Payment Period for purposes of the RegCaPS V. "Transfer Agent" means the transfer agent with respect to the Class C-5 Shares which shall initially be the Corporation. "Trust V" means Zurich RegCaPS Funding Trust V, a Delaware statutory business trust. 6 "Trust Capital Securities V" means 200,000 trust capital securities, liquidation amount US $1,000 each, representing undivided beneficial ownership interests in the assets of Trust V. "U.S. GAAP" means the generally accepted accounting principles in the United States. "ZGH" means Zurich Group Holding, a Swiss stock corporation (as defined in Article 620 et. seq., of the Swiss Code of Obligation) formerly known as Zurich Financial Services, a wholly-owned subsidiary of Zurich Financial Services or its successors and assigns. "Zurich Financial Services" means Zurich Financial Services, a Swiss stock corporation (as defined in Article 620 et seq., of the Swiss Code of Obligation) listed on the Swiss Exchange SWX with a secondary listing on the London Stock Exchange and the holder of directly or indirectly 100% of the shares of ZGH or its successors and assigns. "1940 Act" means the U.S. Investment Company Act of 1940, as amended. ARTICLE 2 NUMBER AND DESIGNATION SECTION 2.01. Number and Designation. 8 and 8/9 shares of the Class C Common Stock of the Corporation are hereby designated as a series of Class C Common Stock designated as Class C-5 Common Stock, par value $1.00 per share (the "Class C-5 Shares"). The Class C-5 Shares shall have a liquidation preference of twenty two million five hundred thousand United States dollars ($22,500,000) per share (the "Class C-5 Share Liquidation Preference"). ARTICLE 3 RANK SECTION 3.01. Rank. (a) The Class C-5 Shares shall, only with respect to payment of Dividends at the Class C-5 Indicative Rate (as defined below) and with respect to the payment of the Class C-5 Share Liquidation Preference upon the liquidation, dissolution and winding up of the Corporation, rank senior to all of the Junior Shares, including the Common Shares. In all other respects, the Class C-5 Shares shall rank pari passu with the Junior Shares, including the Common Shares and the other series of Class C Shares and shall participate equally with the Junior Shares and the other series of Class C Shares with respect to distributions paid by the Corporation and shall participate equally with the Class A Shares and the other series of Class C Shares with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation. The Class C-5 Shares will rank junior in all respects to any indebtedness of the Corporation. The Class C-5 Shares shall rank pari passu with the other series of Class C Shares for all purposes. All securities of the Corporation to which the Class C-5 Shares rank senior (whether with respect to dividends or upon liquidation, dissolution, winding up or otherwise), including the Common Shares, are collectively referred to herein as the "Junior Shares." The definition of Junior Shares shall also include any rights or options exercisable for or convertible into any of the Junior Shares. (b) Without prior consent of the holders of not less than a majority of the outstanding Class C-5 Shares, the Corporation shall not issue any class or series of equity securities whose terms provide that such securities rank senior to or pari passu with the Class C-5 Shares with respect to the rights to receive dividends and other distributions or with respect to any amounts payable upon liquidation, 7 dissolution or winding up; provided that the Corporation may file certificates of designation and issue shares in accordance therewith for other series of Class C Shares to be designated as Class C-1 Common Stock, Class C-2 Common Stock, Class C-3 Common Stock, Class C-4 Common Stock, and Class C-6 Common Stock, each of which ranks pari passu with the Class C-5 Shares with respect to distributions paid by the Corporation and with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation. Further, if the Corporation has paid in full the lesser of (i) each Dividend on its respective Dividend Payment Date during the last 24 months at the Class C-5 Indicative Rate, or (ii) prior to February 9, 2003, all Dividends in an amount at least equal to the Class C-5 Share Indicative Rate that could have been paid on the Class C Shares, the Corporation may issue an unlimited amount of additional Class C-5 Shares and other equity ranking pari passu with the Class C-5 Shares without the consent of the holders of the Class C-5 Shares. ARTICLE 4 DIVIDENDS SECTION 4.01. Rate; Dividend Date. (a) Each Class C-5 Share shall be entitled to receive cash Dividends on a non-cumulative basis, when as and if declared by the Board of Directors, out of funds legally available for the payment of distributions on each Dividend Date commencing February 15, 2001. The amount of Dividends will be computed on the basis of a 360-day year and the actual number of days in such Dividend Period. When Dividends are paid on the Class C-5 Shares at less than the Class C-5 Indicative Rate, all Dividends declared on the Class C Shares will be paid pro rata based on the outstanding number of shares of each series of Class C Common Stock and such Dividends declared on the Class C-5 Shares will be paid pro rata based on the outstanding number of Class C-5 Shares. (b) The Paying Agent will calculate Three-Month LIBOR as of each LIBOR Determination Date and shall make such rate calculation available to holders of Class C-5 Shares. The Paying Agent also shall determine the Dividends payable on each Dividend Date and give notice thereof (including the applicable rate, amount, the applicable period and payment) to the holders of Class C-5 Shares. The notices set forth in this paragraph shall be sent by first class mail to the address of each holder of Class C-5 Shares as it appears on the register kept by the Registrar and shall be available at the offices of the Paying Agent. SECTION 4.02. Dividend Restrictions. (a) No distribution or redemption, including without limitation cash dividends, may be declared or paid or set apart for payment on any Junior Shares and neither the Corporation nor any of its Affiliates may purchase or redeem for cash any outstanding Junior Shares, unless: (i) full Dividends have been declared and paid or set apart for payment on the Class C-5 Shares in an amount at least equal to the greater of (A) the Dividends payable or set apart during such Dividend Period at the Class C-5 Indicative Rate; or (B) the Economic Dividend Payable; (ii) Partnership V has paid or set apart for payment the full amount of RegCaPS V Payments for the current RegCaPS V Payment Period; 8 (iii) LLC V has set apart or paid the full amount of the LLC V Payments on an LLC V Payment Date in any period when the corresponding RegCaPS V Payment for such LLC V Payment Date has been made; and (iv) in the case of a repurchase or redemption, such repurchase or redemption does not cause the net worth of the Corporation to be less than the Minimum Net Worth Amount. Notwithstanding the foregoing, for so long as the Corporation has paid or set apart for payment Dividends on the Class C-5 Shares at least equal to the greater of (i)(A) or (i)(B) and clauses (ii) (iii) and (iv) above are satisfied, the Corporation may declare and pay Dividends on any Junior Shares with respect to such Dividend Period. (b) (i) If a Dividend is paid or set apart on the Class C-5 Shares during any Dividend Period at a rate less than the Class C-5 Indicative Rate, the Corporation may not make any dividend payments on the Junior Shares and may only make dividend payments on its other securities that rank pari passu with the Class C-5 Shares, if any, in the same proportion as the partial Dividend paid or set apart on the Class C-5 Shares for the current Dividend Period bears to the full Dividend payment determined for such Dividend Period at the Class C-5 Indicative Rate. (ii) For so long as the Class C-5 Shares are outstanding, if a partial RegCaPS V Payment is made or set apart for any RegCaPS V Payment Period, the Corporation may not make any dividend payments during such RegCaPS V Payment Period on its Junior Shares and may only make dividend payments on its other securities that rank pari passu with the Class C-5 Shares in the same proportion as the lesser of (i) the proportion the partial RegCaPS V Payment made or set apart for the Current RegCaPS V Payment Period bears to the RegCaPS V Payment determined for such RegCaPS V Payment Period and (ii) the proportion the partial Dividend paid or set apart on the Class C-5 Shares for the corresponding Dividend Period bears to the full Dividend payment for such Dividend Period at the Class C-5 Indicative Rate. Additionally, for so long as the Class C-5 Shares are outstanding, all shares of common or preferred stock issued by majority-owned subsidiaries of the Corporation which shares are not beneficially owned by the Corporation or its wholly-owned subsidiaries will be subject to the restrictions set forth above on the payment of distributions and other payments only to the extent that such minority shares are owned by Zurich Financial Services or one of its controlled Affiliates. (c) The Corporation intends that the holders of the RegCaPS V shall be third party beneficiaries of, and entitled to enforce, the provisions of this Section 4.02 as if such provisions constituted a contract between the Corporation and the holders of the Class C-5 Shares, and the holders of the RegCaPS V were third-party beneficiaries to such contracts. SECTION 4.03. Payment of Dividends. Dividends and other payments on the Class C-5 Shares will be payable to the holders thereof as they appear on the books and records of the Corporation on the relevant record dates, which will be one Business Day prior to the relevant Dividend Date or other payment date. Such Dividends will be paid either (i) by the Corporation or (ii) in the event such Class C-5 Shares are not held by an Affiliate of ZGH through the Paying Agent who will hold amounts received from the Corporation in respect of the Class C-5 Shares for the benefit of the registered 9 holders of the Class C-5 Shares. In the event that any Class C-5 Shares do not remain in book-entry only form, the relevant record dates shall be the 15th day of the month of the relevant Dividend Date or other payment date. In the event that any Dividend Date is not a Business Day, payment of the Dividends payable on such date will be made on the next succeeding day which is a Business Day (without any interest or other payment in respect of the dividends subject to such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. SECTION 4.04. Changes in the Dividends-Received Percentage. (a) If, prior to 18 months after the date of the original issuance of the Class C-5 Shares, one or more amendments to the Code are enacted that reduce the dividends-received deduction (currently 70%), as specified in Section 243(a) (i) of the Code or any successor provision (the "Dividend-Received Percentage"), certain adjustments will be made as appropriate in respect of the Dividends paid by the Corporation, and Post Declaration Date Dividends and Retroactive Dividends may become payable (as such terms are defined below), except that no adjustments will be made with respect to any reduction of the Dividends-Received Percentage below 50%. (b) The amount per share of each Dividend declared at the applicable rate described in Section 4.01 above for Dividend payments made on or after the effective date of such change in the Code will be increased, to the extent of funds legally available for distribution by the Corporation, by multiplying the amount of the Dividend payable before adjustment, by a factor, which will be the number determined in accordance with the following formula (the "DRD Formula"), and rounding the result to the nearest cent (with one-half cent rounded up): I-.35(I-.70) ------------ I-.35(I-DRP) For purposes of the DRD Formula with regard to the Class C-5 Shares, "DRP" means the Dividend-Received Percentage (expressed as a decimal) applicable to the Dividends in question; provided, that in no event shall the DRP be less than 0.50. No amendment to the Code, other than a change in the Dividends- Received Percentage enacted prior to 18 months after the date of the original issuance of the Class C-5 Shares, will give rise to an adjustment. Notwithstanding the foregoing provisions, if, with respect to any such amendment, the Corporation receives either an unqualified opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form of authorization from the IRS to the effect that such an amendment does not apply to a Dividend payable on the Class C-5 Shares, then such amendment will not result in the adjustment provided for pursuant to the DRD Formula with respect to such Dividend. The opinion referenced in the previous sentence shall be based upon the legislation amending or establishing the DRP or upon a published pronouncement of the IRS addressing such legislation. Absent manifest error, the Corporation's calculation of the Dividends payable as so adjusted shall be final and not subject to review. (c) Notwithstanding the foregoing, if any such aforementioned amendment to the Code is enacted after the Dividend payable on a Dividend Date has been declared, and if such amendment is effective with respect to such Dividend, the amount of the Dividend payable on such Dividend Date will not be increased; instead, additional Dividend payments (the "Post Declaration Date Dividend"), equal to the excess, if any, of (x) the product of the Dividend paid by the Corporation on 10 such Dividend Date and the DRD Formula over (y) the Dividend paid by the Corporation on such Dividend Date, will be declared to the extent funds legally available for distribution by the Corporation to holders of Class C-5 Shares on the record date applicable to the next succeeding Dividend Date, or, if Class C-5 Shares are called for redemption prior to such record date, to holders of Class C-5 Shares on the applicable redemption date, as the case may be, in addition to any other amounts payable on such date. (d) If any such amendment to the Code is enacted and the reduction in the Dividends-Received Percentage retroactively applies to one or more Dividend Dates on which the Corporation previously paid Dividends with respect to the Class C-5 Shares (each, an "Affected Dividend Date"), additional Dividends (the "Retroactive Dividends") will be declared, to the extent of funds legally available therefor, to holders of Class C-5 Shares on the record date applicable to the next succeeding Dividend Dates or, if the Class C-5 Shares are called for redemption prior to such record date, to holders of Class C-5 Shares on the applicable redemption date, as the case may be, in an amount equal to the excess of (x) the product of the Dividend paid by the Corporation on each Affected Dividend Date and the DRD Formula over (y) the sum of the Dividend paid by the Corporation on each Affected Dividend Date. The Corporation will only make one payment of Retroactive Dividends for any such amendment. Notwithstanding the foregoing provisions, if, with respect to any such amendment, the Corporation receives either an unqualified opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form of authorization from the IRS to the effect that such amendment does not apply to a Dividend payable on an Affected Dividend Date for the Class C-5 Shares, then such amendment will not result in the payment of a Retroactive Dividend with respect to such Affected Dividend Date. The opinion referenced in the previous sentence shall be based upon the legislation amending or establishing the Dividends-Received Percentage or upon a published pronouncement of the IRS addressing such legislation. (e) Notwithstanding the foregoing, no adjustment in the dividends payable by the Corporation shall be made, and no Post Declaration Date Dividends or Retroactive Dividends shall be payable by the Corporation, in respect of the enactment of any amendment to the Code 18 months or more after the date of original issuance of the Class C-5 Shares that reduces the Dividends-Received Percentage or to the extent such amendment reduces the Dividends-Received Percentage to less than 50%. (f) In the event that the amount of Dividends payable per share of the Class C-5 Shares is increased pursuant to the DRD Formula and/or Post Declaration Date Dividends or Retroactive Dividends are to be paid, the Corporation will give notice of each such adjustment and, if applicable, any Post Declaration Date Dividends and Retroactive Dividends to the holders of Class C-5 Shares. (g) The various payment restrictions and obligations described above and applicable in respect of any Dividend Period in which a Dividend on the Class C-5 Shares is not paid in an amount at least equal to the Class C-5 Indicative Rate to the extent that any Post Declaration Date Dividend or Retroactive Dividend is not declared and paid or set apart for payment as and when due in respect of a reduction in the Dividends-Received Percentage; provided that such payment restrictions and obligations will remain in effect, not only during the current Dividend Period, but until such Post Declaration Date Dividend or Retroactive Dividend is declared and paid or set apart for payment. 11 SECTION 4.05. Earnings and Profits Gross-Up Payments. (a) To the extent that Dividends paid with respect to the Class C-5 Shares exceeds the Corporation's earnings and profits as calculated for U.S. federal income tax purposes, they will not constitute dividends for U.S. federal income tax purposes and will not qualify for the dividends-received deduction. In such event, additional distributions will be made by the Corporation to place each holder of the Class C-5 Shares in the same position it would have been in if all Dividends from the Corporation were paid from such earnings and profits, assuming for these purposes that such holder was eligible for the dividends- received deduction. (b) If any Dividend on the Class C-5 Shares with respect to any fiscal year (including any Gross-Up Payment (as defined below)) constitutes, in whole or in part, a return of capital (or is treated as gain from the sale or exchange of the Class C-5 Shares) for U.S. federal income tax purposes (a "Qualifying Dividend"), within 180 days after the end of such fiscal year, the Corporation will pay (if declared), out of funds legally available therefor, an amount equal to the aggregate Gross-Up Payments to Qualified Investors (as defined below) with respect to all Qualifying Dividends on the Class C-5 Shares during such fiscal year. A "Qualified Investor" with respect to a Qualifying Dividend during a fiscal year means a person who was entitled to receive such Qualifying Dividend. (c) A "Gross-Up Payment" to a Qualified Investor with respect to all Qualifying Dividends on Class C-5 Shares paid by the Corporation during a fiscal year means an additional Dividend on the Class C-5 Shares to a Qualifying Investor in an amount which, when taken together with the aggregate Qualifying Dividends paid to such Qualified Investor during such fiscal year, would cause such Qualified Investor's net yield in dollars (after U.S. federal income tax consequences and treating, for purposes of calculating net yield in dollars, the sum of that portion of the Qualifying Dividends and the Gross-Up Payment otherwise treated as a return of capital as capital gain recognized upon the taxable sale or exchange of Class C-5 Shares) from the aggregate of both the Qualifying Dividends and the Gross-Up Payment to be equal to the net yield in dollars (after U.S. federal income tax consequences) which would have been received by such Qualified Investor if the entire amount of the aggregate Qualifying Dividends had instead been treated as a dividend for U.S. federal income tax purposes. Such Gross-Up Payment shall be calculated using the applicable maximum marginal U.S. federal corporate income tax rate applicable to ordinary income and capital gains, as the case may be, and, where applicable, the Dividends-Received Percentage, without consideration being given to the time value of money, the U.S. federal income tax situation of any specific Qualified Investor (including the application of the alternative minimum tax or the application of Section 246 of the Code), or any state or local tax consequences that may arise. The Corporation shall make a determination, based upon the reasonably estimated earnings and profits of that portion, if any, of a Qualifying Dividend for a fiscal year that will be treated as dividend for U.S. federal tax purposes, and such determination shall be final and binding for purposes of calculating the amount of the Gross-Up Payments with respect to all Qualifying Dividends for such fiscal year. SECTION 4.06. Change of Control Gross-Up Payments. If as a result of a Change of Control Tax Event, there is an increase in any non-refundable foreign taxes withheld ("Foreign Tax Increase") with respect to RegCaPS V Payments or Cumulative RegCaPS V Payment Amounts paid to a RegCaPS V registered holder ("Foreign Taxed RegCaPS Payments"), additional distributions shall be made on the Class C-5 Shares in an amount which, when taken together with the aggregate Dividends paid to the Holders of the Class C-5 Shares during such fiscal year reduced by the amount of such Foreign Tax Increase, would cause the net yield in dollars (after U.S. federal income tax consequences other than the use of foreign tax credits resulting from the Foreign Tax Increase) to be equal to the net yield in dollars (after U.S. federal income tax consequences) to the Holder from 12 receipt of the aggregate Dividends paid to the Holder during such fiscal year without any reduction by the amount of such Foreign Tax Increase. The foregoing amount shall be calculated based on the assumption that the Holder is a U.S. corporation and using the applicable maximum marginal U.S. federal corporate income tax rate applicable to ordinary income and capital gains, as the case may be, and the Dividends-Received Percentage, without consideration being given to the time value of money, the U.S. federal income tax situation of any specific Holder, or any state or local tax consequences that may arise. If for a prior fiscal year Foreign Taxed RegCaPS Payments are made by the Partnership V, the Corporation will pay (if declared), within 90 days after the end of such fiscal year, out of funds legally available therefor, an amount equal to the aggregate Change of Control Gross-Up Payments to the Partnership. ARTICLE 5 LIQUIDATION PREFERENCE SECTION 5.01. Liquidation Preference. (a) In the event of any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, after payment or provision for the liabilities of the Corporation and the expenses of such dissolution, liquidation or winding up, the holders of the outstanding Class C-5 Shares will be entitled to receive, the Class C-5 Share Liquidation Amount, out of the assets of the Corporation or proceeds thereof available for distribution to holders of Class C-5 Shares. Out of such amount, the holders of the Class C-5 Shares will be entitled to receive the Class C-5 Share Liquidation Preference before any payment or distribution of assets is made to holders of the Common Shares or any other Junior Shares. Amounts payable on the Class C-5 Shares in connection with the liquidation of the Corporation in excess of the Class C-5 Share Liquidation Preference are payable (to the extent the Class C-5 Share Liquidation Amount exceeds the Class C-5 Share Liquidation Preference) on a pari passu basis with any Common Shares entitled to receive payment or distribution upon a liquidation, dissolution or winding up of the Corporation. If the assets of the Corporation available for distribution in such event are insufficient to pay in full the aggregate amount payable to holders of the Class C-5 Shares and holders of all other classes or series of equity securities of the Corporation, if any, ranking, as to the distribution of assets upon dissolution, liquidation or winding up of the Corporation, on a parity with the Class C-5 Shares, the assets will be distributed to the holders of Class C-5 Shares and holders of such other equity interests pro rata, based on the full respective preferential amounts to which they are entitled. After payment of the Class C-5 Share Liquidation Amount upon dissolution, liquidation or winding up of the Corporation, the holders of Class C-5 Shares will not be entitled to any further participation in any distribution of assets by the Corporation. (b) Notwithstanding Section 5.01(a) above, holders of Class C-5 Shares will not be entitled to be paid any amount in respect of a dissolution, liquidation or winding up of the Corporation until holders of any classes or series of securities of the Corporation ranking, as to the distribution of assets upon dissolution, liquidation or winding up of the Corporation, senior to the Class C-5 Shares have been paid all amounts to which such classes or series are entitled. (c) Notwithstanding anything else in this Certificate, neither the sale, lease or exchange (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation, nor the merger, consolidation or combination of the Corporation into or with any other person or the merger, consolidation or combination of any other person into or with the Corporation, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Section 5.01. 13 ARTICLE 6 REDEMPTION SECTION 6.01. Optional Redemption. (a) The Class C-5 Shares will not be subject to mandatory redemption at any time. Prior to February 15, 2031, Class C-5 Shares will not be subject to optional redemption. On or after February 15, 2031, Class C-5 Shares may be redeemed at the option of the Corporation at any time, subject to the prior consent of ZGH, in whole but not in part, at their fair market value (the "Redemption Amount") as determined by a nationally recognized investment bank retained by the Corporation. SECTION 6.02. Procedure for Redemption. (a) Notice of any redemption of the Class C-5 Shares (a "Redemption Notice") will be given by the Corporation by mail to each holder of Class C-5 Shares not fewer than 30 nor more than 60 days before the date fixed for redemption. For purposes of the calculation of the date of redemption and the dates on which notices are given pursuant to this Section 6.02(a), a Redemption Notice shall be deemed to be given on the day such notice is first mailed, by first-class mail, postage prepaid, to holders of the Class C-5 Shares. Each Redemption Notice shall be addressed to the holders of Class C-5 Shares at the address of each such holder appearing in the books and records of the Corporation. No defect in the Redemption Notice or in the mailing thereof with respect to any holder of Class C-5 Shares shall affect the validity of the redemption proceedings with respect to any other holder of Class C-5 Shares. (b) If the Corporation gives a Redemption Notice (which notice will be irrevocable), then by 12:00 noon, New York City time, on the redemption date, the Corporation (A) if the Class C-5 Shares are in book-entry form with DTC, will deposit irrevocably with DTC funds sufficient to pay the applicable Redemption Amount and will give DTC irrevocable instruction and authority to pay the Redemption Amount in respect of the Class C-5 Shares held through DTC in global form or (B) if the Class C-5 Shares are held in certificated form (each such certificate a "Class C-5 Share Certificate"), will deposit with the Paying Agent, funds sufficient to pay the applicable Redemption Amount of any such Class C-5 Shares and will give to the Paying Agent irrevocable instructions and authority to pay such amounts to the holders of Class C-5 Shares, upon surrender of their certificates, by delivery of check, mailed to the address of the relevant holder appearing on the books and records of the Corporation on the redemption date. For these purposes, the applicable Redemption Amount shall not include Dividends which are being paid to holders of Class C-5 Shares who were holders of Class C-5 Shares on a relevant record date. Upon satisfaction of the foregoing conditions, then immediately prior to the close of business on the date of such deposit or payment, all rights of holders of Class C-5 Shares so called for redemption will cease, except the right of the holders of Class C-5 Shares to receive the Redemption Amount, but without interest on such Redemption Amount, and from and after the date fixed for redemption, such Class C-5 Shares will not receive dividends or bear interest. (c) In the event that any date fixed for redemption of Class C-5 Shares is not a Business Day, then payment of the Redemption Amount payable on such date will be made on the next succeeding Business Day (and without any interest in respect of any such delay), except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day in each case, with the same force and effect as if made on such date fixed for redemption. In the event that payment of the Redemption Amount is improperly withheld or refused and not paid by the Corporation, Dividends on the Class C-5 Shares called for redemption will continue to be payable in accordance with the terms hereof from the original redemption date until the Redemption Amount is actually paid. 14 (d) The Corporation shall not be required to register or cause to be registered the transfer of any Class C-5 Shares which have been called for redemption. (e) The Class C-5 Shares which have been issued and reacquired in any manner, including shares purchased or redeemed, shall (upon compliance with any applicable provisions of the laws of the State of Nevada) have the status of authorized and unissued Class C-5 Shares and may be reissued. ARTICLE 7 VOTING RIGHTS SECTION 7.01. Voting Rights. (a) The holders of the Class C-5 Shares will be entitled to 0.375 of a vote per share (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 Corporation) and will be entitled to vote with the Common Shares as a single class on all matters submitted to a vote of the Common Shares (other than those matters affecting only the Common Shares, or either of them); provided, however, that at no time shall the aggregate Voting Power of the Class C-5 Shares be greater than 0.6% of the total Voting Power of the Corporation. Prior to transferring ownership of any Class C-5 Shares to a transferee other than an Affiliate of ZGH and subject to receipt of any required regulatory approval, if any, such Class C-5 Shares shall be (i) split into a number of shares of Class C-5 Shares equal to, and with a liquidation preference equal to the liquidation amount of the number of Trust Capital Securities V, and (ii) converted on a one-to-one basis to the same number of shares of a class of common stock of the Corporation (the "Conversion Shares") having rights, preferences and privileges substantially identical to the Class C-5 Shares except that the Conversion Shares will be entitled to no voting rights other than as required by law and other than with respect to adverse amendments to the terms of the Conversion Shares and the issuance of equity securities that rank senior to or pari passu with the Conversion Shares with respect to the payment of distributions or amounts upon liquidation, provided that the Corporation may file certificates of designation and issue shares in accordance therewith for other Class C Shares which rank pari passu with the Conversion Shares with respect to distributions paid by the Corporation and with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation. If, however, any necessary regulatory approvals to issue the Conversion Shares are not obtained, the Class C-5 Shares rather than the Conversion Shares may be transferred to a transferee other than an Affiliate of ZGH. (b) The holders of the Class C-5 Shares and the Conversion Shares will be entitled to vote separately as a single class on the matters described in this paragraph. The consent of the holders of not less than a majority of the outstanding Class C-5 Shares and Conversion Shares, voting as a single class, is required (i) to amend, alter, supplement or repeal the terms of the Class C-5 Shares and the Conversion Shares (it being a condition to any such amendment, alteration, supplement or repeal that it has a substantially identical effect on the rights, preferences and privileges of both the Class C-5 Shares and the Conversion Shares), or (ii) if the Corporation has not paid in full the lesser of (A) each of the last twenty-four months of Dividends on their respective Dividend Payment Dates at the Class C-5 Indicative Rate, or (B) prior to the second anniversary of the first issue date, all Dividends at the Class C-5 Indicative Rate that could have been paid on the Class C-5 Shares and the Conversion Shares, for the Corporation to issue, or to increase the authorized amount of, the Class C-5 Shares or the Conversion Shares or any other equity securities that rank pari passu with or senior to the Class C-5 Shares and the Conversion Shares; provided that the Corporation may file certificates of designation and issue shares in accordance therewith for other Class C Shares to be designated as Class C-1 Common Stock, Class C-2 Common Stock, Class C-3 Common Stock, Class C-4 Common Stock, and Class C-6 15 Common Stock, each of which rank pari passu with the Class C-5 Shares with respect to distributions paid by the Corporation and with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation without the consent of the holders of the Class C-5 Shares or the Conversion Shares. (c) Whenever Dividends on the Class C-5 Shares and the Conversion Shares at the Class C-5 Indicative Rate are in arrears for twenty-four or more consecutive months, the holders of Class C-5 Shares and the Conversion Shares, voting together with the other Class C Shares as a single class, will be entitled, subject to any necessary regulatory actions, to elect two Special Independent Directors to the Board of Directors, at a special meeting called by the holders of record of at least 25% of the Class C-5 Shares and the Conversion Shares in the aggregate or by the holders of record of 25% of any of the other series of Class C Shares pursuant to the terms of the certificate of designation creating such other series of Class C Shares. The Special Independent Directors shall vacate office if Dividends at the Class C-5 Indicative Rate are resumed and are paid regularly for at least twelve consecutive months, unless otherwise provided by the terms of any other certificate of designation for any other series of Class C Shares. If Dividends are resumed and paid regularly for at least twelve consecutive months at the Class C-5 Indicative Rate, the holders of the Class C-5 Shares and the Conversion Shares shall no longer be entitled to vote for the two Special Independent Directors on account of that arrearage. When no holder of Class C-5 Shares is entitled to vote for the two Special Independent Directors, the Special Independent Directors shall vacate office. Notwithstanding the foregoing, in the event that more than one series of Class C Shares are entitled to elect Special Independent Directors to the Board of Directors, such series shall vote together as a single class to elect such two directors. In no event shall the holders of Class C Shares be entitled to elect more than two Independent Directors to the Board of Directors. (d) Notwithstanding the foregoing, the Corporation shall have the right, without the prior consent of the holders of Class C-5 Shares and Conversion Shares if any, to amend, alter, supplement or repeal any terms of the Class C-5 Shares (i) to cure any ambiguity, or to cure, correct or supplement any defective provision thereof or (ii) to make any other provision with respect to matters or questions arising with respect to the Class C-5 Shares and Conversion Shares, if any, that is not inconsistent with the provisions thereof so long as such action does not materially and adversely affect any of the rights, preferences and privileges of the holders of Class C-5 Shares and Conversion Shares, if any, provided, however, that any increase in the amount of authorized or issued Class C-5 Shares will be deemed not to materially and adversely affect any of the rights, preferences and privileges of the holders of Class C-5 Shares. (e) The consent or votes required in Section 7.01(b) and (c) above shall be in addition to any approval of stockholders of the Corporation which may be required by law or pursuant to any provision of the Corporation's Articles of Incorporation or bylaws, which approval shall be obtained by vote of the stockholders of the Corporation in the manner provided in Section 7.01(a) above. ARTICLE 8 MERGER, CONSOLIDATION OR AMALGAMATION OF THE CORPORATION SECTION 8.01. Merger, Conversion, Consolidation or Amalgamation of the Corporation. Without the consent of either one Special Independent Director, if any, or a majority of the holders of Class C-5 Shares, the Corporation may not consolidate, amalgamate, merge with or into, convert or domesticate with or into, or be replaced by, or convey, transfer or lease its properties and assets substantially as an 16 entirety to, any corporation or other entity, except as permitted below. The Corporation may, with the consent of at least one of the Special Independent Directors, if any, on the Board of Directors at the time the issue is considered and without the consent of the holders of the Class C-5 Shares, consolidate, amalgamate, merge with or into, convert or domesticate with or into, or be replaced by a corporation organized as such under the laws of any State of the United States; provided, that: (a) if the Corporation is not the surviving entity, such successor entity either (x) expressly assumes all of the obligations of the Corporation under the Class C-5 Shares or (y) substitutes securities for the Class C-5 Shares (the "Successor Securities"), so long as the Successor Securities rank the same as the Class C-5 Shares rank with respect to Dividends and other payments thereon; (b) such merger, consolidation, amalgamation, conversion, domestication or replacement does not adversely affect any of the rights, preferences and privileges of the holders of the Class C-5 Shares (including any Successor Securities) in any material respect; (c) prior to such merger, consolidation, amalgamation, conversion, domestication or replacement, the Corporation has received an opinion of a nationally recognized law firm experienced in such matters to the effect that (i) such merger, consolidation, amalgamation, conversion, domestication or replacement will not adversely affect any of the rights, preferences and privileges of the holders of the Class C-5 Shares (including any Successor Securities) in any material respect and (ii) following such merger, consolidation, amalgamation, conversion, domestication or replacement, the Corporation (or such successor entity) will not be required to register under the 1940 Act; and (d) distributions with respect to the Class C-5 Shares or Successor Securities would be eligible for the dividends-received deduction. ARTICLE 9 TRANSFER OF CLASS C-5 SHARES SECTION 9.01. General. The Corporation shall provide for the registration of Class C-5 Share Certificates and of transfers of Class C-5 Share Certificates. Upon surrender for registration of transfer of any Class C-5 Share Certificate, the Corporation shall cause one or more new Class C-5 Share Certificates to be issued in the name of the designated transferee or transferees. Every Class C-5 Share Certificate surrendered for registration of transfer shall be accompanied by a written instrument of transfer in form satisfactory to the Corporation duly executed by the holder of such Class C-5 Shares or his or her attorney duly authorized in writing. Each Class C-5 Share Certificate surrendered for registration of transfer shall be cancelled by the Corporation. A transferee of a Class C-5 Share Certificate shall be entitled to the rights and subject to the obligations of a holder of Class C-5 Shares hereunder upon the receipt by the transferee of a Class C-5 Share Certificate, which receipt shall be deemed to constitute a request by such transferee that the books and records of the Corporation reflect such transferee as a holder of Class C-5 Share. SECTION 9.02. Definitive Certificates. Unless and until the Corporation issues a global Class C-5 Share Certificate pursuant to Section 9.03(a), the Corporation shall only issue definitive Class C-5 Share Certificates to the holders of Class C-5 Shares. The Corporation may treat the Person in whose name any Class C-5 Share Certificate shall be registered on the books and records of the Corporation as the sole holder of such Class C-5 Share Certificate and of the Class C-5 Shares represented by such Class C-5 Share Certificate for purposes of receiving Dividends and for all other purposes whatsoever 17 (including without limitation, tax returns and information reports) and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Class C-5 Share Certificate or in the Class C-5 Shares represented by such Class C-5 Share Certificate on the part of any other Person, whether or not the Corporation shall have actual or other notice thereof. SECTION 9.03. Book Entry Provisions. (a) General. The provisions of this Section 9.03(a) shall apply only in the event that the Class C-5 Shares are distributed to a Person other than the Purchaser. Upon the occurrence of such event, a global Class C-5 Share Certificate representing the Book-Entry Interests shall be delivered to DTC, the initial Clearing Agency, by, or on behalf of, the Corporation and any previously issued and still outstanding definitive Class C-5 Share Certificates shall be of no further force and effect. The global Class C-5 Share Certificate shall initially be registered on the books and records of the Corporation in the name of Cede & Co., the nominee of DTC, and no holder of Class C-5 Shares will receive a new definitive Class C-5 Share Certificate representing such holder's interest in such Class C-5 Share Certificate, except as provided in Section 9.03(c). Unless and until new definitive, fully registered Class C-5 Share Certificates (the "Definitive Class C-5 Share Certificates") have been issued to the holders of Class C-5 Shares pursuant to Section 9.03(c): (i) The provisions of this Section shall be in full force and effect; (ii) The Corporation shall be entitled to deal with the Clearing Agency for all purposes of this Certificate (including the payment of Dividends, Redemption Amounts and liquidation proceeds on the Class C-5 Share Certificates and receiving approvals, votes or consents hereunder) as the sole holder of the Class C-5 Share Certificates and shall have no obligation to the holders of Class C-5 Shares; (iii) None of the Corporation, the Board of Directors, or any Special Independent Director or any agents of any of the foregoing shall have any liability or responsibility for any aspect of the records relating to or Dividends made on account of beneficial ownership interests in a global Class C-5 Share Certificate for such beneficial ownership interests or for maintaining, supervising or reviewing any records relating to such beneficial ownership interest; and (iv) Except as provided in Section 9.03(c) below, the holders of Class C-5 Shares will not be entitled to receive physical delivery of the Class C-5 Shares in definitive form and will not be considered holders thereof for any purpose under this Certificate of Designation, and no global Class C-5 Share Certificate representing Class C-5 Shares shall be exchangeable, except for another global Class C-5 Share Certificate of like denomination and tenor to be registered in the name of DTC or Cede & Co., or to a successor depository or its nominee. Accordingly, each holder of Class C-5 Shares must rely on the procedures of DTC or if such person is not a Participant, on the procedures of the Participant through which such person owns its interest to exercise any rights of a holder under this Certificate of Designation. (b) Notices to Clearing Agency. Whenever the holders of the Class C-5 Shares are required to give a notice or other communication to their equity holders, unless and until definitive Class C-5 Share Certificates shall have been issued to the holders of Class C-5 Shares pursuant to Section 9.03(c), the Corporation shall give all such notices and communications specified herein to be given to the 18 holders of Class C-5 Shares to the Clearing Agency, and shall have no obligations to the holders of Class C-5 Shares. (c) Definitive Class C-5 Share Certificates. Definitive Class C-5 Share Certificates shall be prepared by the Corporation and exchangeable for the global Class C-5 Share Certificate or Certificates if and only if (i) DTC notifies the Corporation that it is unwilling or unable to continue its services as a securities depository and no successor depository shall have been appointed, (ii) DTC, at any time, ceases to be a Clearing Agency registered under the Exchange Act at such time as DTC shall have been appointed, or (iii) the Corporation, in its sole discretion, determines that such global Class C-5 Share Certificate shall be so exchangeable. Upon surrender of the global Class C-5 Share Certificate or Certificates representing the Book-Entry Interests by the Clearing Agency, accompanied by registration instructions, the Corporation shall cause definitive Class C-5 Share Certificates to be delivered to holders of Class C-5 Shares in accordance with the instructions of the Clearing Agency. The Corporation shall not be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be protected in relying on, such instructions. The definitive Class C-5 Share Certificates shall be printed, lithographed or engraved or may be produced in any other manner as may be required by any national securities exchange on which Class C-5 Shares may be listed and is reasonably acceptable to the Corporation, as evidenced by its execution thereof. SECTION 9.04. Registrar, Transfer Agent and Paying Agent. (a) The Corporation will act as Registrar, Transfer Agent and Paying Agent of the Class C-5 Share for so long as the Class C-5 Shares are held by an Affiliate of ZGH, for so long as the Class C-5 Shares remain in book-entry only form. (b) Except in such case where the Corporation shall act as Registrar or Paying Agent pursuant to Section 9.04(a) hereof, the Corporation shall maintain in the Borough of Manhattan, City of New York, State of New York (i) an office or agency where Class C-5 Shares may be presented for registration of transfer or for exchange ("Registrar") and (ii) an office or agency where Class C-5 Shares may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Class C-5 Shares and of their transfer and exchange. The Corporation may appoint the Registrar and the Paying Agent and may appoint one or more co-registrars and one or more additional paying agents in such other location as it shall determine. The term "Paying Agent" includes any additional paying agent. The Corporation may change any Paying Agent, Registrar or co-registrar without prior notice to any holder. If the Corporation fails to appoint or maintain another entity as Registrar or Paying Agent, the Corporation shall act as such. (c) Registration of transfers of Class C-5 Shares shall be effected without charge by or on behalf of the Corporation, but upon payment (with the giving of such indemnity as the Corporation may require) in respect of any tax or other governmental charges that may be imposed. SECTION 9.05. Transfer Restrictions. The Class C-5 Shares may only be transferred (i) to QIBs and (ii) to IAIs who, if they are not QIBs, prior to such transfer, furnish to the Corporation or the Transfer Agent a signed letter containing certain representations and agreements relating to restrictions on transfer by such IAI and who hold their Class C-5 Shares through a DTC participant. The foregoing restriction may be waived if the Corporation, in its sole discretion, determines such restrictions are no longer necessary to preserve the Corporation's exemptions from registration requirements under the Securities Act, the Securities Exchange Act and the 1940 Act. Any purported 19 purchase or transfer of the Class C-5 Shares in violation of such restrictions will be null and void. Furthermore the Corporation may also require the sale of Class C-5 Shares held by holders who fail to comply with the foregoing. ARTICLE 10 MISCELLANEOUS PROVISIONS SECTION 10.01. Preemptive Rights. No holder of any of the Class C-5 Shares shall have any preemptive or preferential right to acquire or subscribe for any treasury or unissued shares of any class or series of the stock of the Corporation now or hereafter to be authorized, or any notes, debentures, bonds, or other securities convertible into or carrying any right, option or warrant to subscribe for or acquire shares of any class or series of stock of the Corporation now or hereafter to be authorized, whether or not the issuance of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the distribution or voting rights of such holder, and the Board of Directors of this Corporation may issue shares of any class or series of stock of this Corporation, without offering any such shares of any class or series of stock of the Corporation, either in whole or in part, to the existing shareholders of any class or series of stock of this Corporation. SECTION 10.02. Conversion Rights. The Class C-5 Shares shall have no right to convert into the Common Shares, any of the other Class C Shares or any other equity security or indebtedness of the Corporation other than the Conversion Shares. ARTICLE 11 GENERAL PROVISIONS SECTION 11.01. General Provisions. The headings of the paragraphs, subparagraphs, clauses and subclauses of this Certificate of Designation are for convenience of reference only and shall not define, limit or affect any of the provisions hereof. 20 IN WITNESS WHEREOF, Farmers Group, Inc. has caused this Certificate of Designation to be signed and attested by its undersigned Vice President and Secretary this 7th day of February, 2001. --- FARMERS GROUP, INC. By:/s/ Julian R.M. Harvey -------------------------------- Name: Julian R.M. Harvey Title: Vice President /s/ Doren Hohl ----------------------------------------- Name: Doren Hohl Title: Secretary STATE OF CALIFORNIA ) )ss COUNTY OF Los Angeles ------------- On February 7 , 2001 before me, Hazel C. Bautista, personally appeared --- ----------------- Julian R.M. Harvey and Doren Hohl. X personally known to me. ---- -or- ___ proved to me on the basis of satisfactory evidence to be the persons whose names are subscribed to the within instrument and acknowledge to me that they executed the same in their authorized capacities, and that by their signatures on the instrument the persons, or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. /s/ Hazel C. Bautista ---------------------------------------------- Notary Public in and for said County and State 1 CERTIFICATE OF DESIGNATION OF CLASS C-6 COMMON STOCK of FARMERS GROUP, INC. Pursuant to Sections 78.1955 and 78.315 of the General Corporation Law of the State of Nevada Farmers Group, Inc. (the "Corporation"), a corporation organized and existing under and by virtue of the provisions of the General Corporation Law of the State of Nevada, certifies as follows: FIRST: The Amended and Restated Articles of Incorporation of the Corporation (the "Articles of Incorporation") authorize the issuance of up to 50 shares of Class C common stock, par value $1.00 per share (the "Class C Common Stock"), and further, authorize the Board of Directors of the Corporation (the "Board of Directors") by resolution or resolutions, at any time and from time to time, to divide and establish any or all of the shares of Class C Common Stock into one or more series of Class C Common Stock, and without limiting the generality of the foregoing, to fix and determine the designation of each such series, the number of shares which shall constitute such series and such voting powers, and such preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof of the shares of each series so established. SECOND: The following resolutions authorizing the creation and issuance of a series of said shares of Class C Common Stock to be known as Class C-6 Common Stock were duly adopted by the Board of Directors on the 6th day of February, 2001, in accordance with Sections 78.1955 and 78.315 of the Nevada General Corporation Law. RESOLVED, that the Board of Directors, pursuant to authority vested in it by the provisions of the Articles of Incorporation, hereby authorizes the issuance of a series of the Corporation's Class C Common Stock, and hereby fixes the number, designation, preferences, rights, limitations and restrictions thereof in addition to those set forth in the Articles of Incorporation as follows: ARTICLE 1 DEFINITIONS SECTION 1.01. Definitions. In this Certificate of Designation, unless the context otherwise requires "Affiliate" means, with respect to a specified Person, any other Person that directly or indirectly controls, is controlled by, or is under common control with, such specified Person. "Book-Entry Interest" means a beneficial ownership in Class C-6 Shares, the ownership and transfers of which are maintained through book entries of the Registrar as set forth in Section 9.04(b) of this Certificate of Designation. "Business Day" means any day, other than a Saturday or Sunday, that is neither a legal holiday nor a day on which commercial banks are authorized or required by law, regulation or 2 executive order to close in The City of New York. With respect to the LIBOR Determination Date, "Business Day" means a day on which dealings in deposits in U.S. dollars are transacted in the London interbank market. "Change of Control Event" means the Corporation ceasing to be an Affiliate of ZGH or any of its Affiliates, including, but not limited to, a Change of Control Tax Event. "Change of Control Tax Event" means a Change of Control Event which results in an adverse tax effect on the holders of Trust Capital Securities VI. "Class A Shares" means the Class A Common Stock, par value $1.00 per share, of the Corporation. "Class B Shares" means the Class B Common Stock, par value $1.00 per share, of the Corporation. "Class C Shares" means, collectively, the Class C-6 Shares and all other series of Class C Common Stock, par value $1.00 per share, of the Corporation, for which a certificate or certificates of designation have been filed with the Nevada Secretary of State. "Class C-6 Shares" has the meaning set forth in Section 2.01 hereof. "Class C-6 Indicative Rate" means initially, 6.16%, and on or after April 25, 2001, a variable rate equal to Three-Month LIBOR plus 71 basis points, reset quarterly, and on or after April 25, 2011, a variable rate equal to Three-Month LIBOR plus 175 basis points, reset quarterly, in each case, the rate shall be determined by reference to the Class C-6 Share Liquidation Preference; provided, however, that such variable rate shall never be greater than 15%. "Class C-6 Share Liquidation Amount" means, with respect to each Class C-6 Share, an amount equal to the greater of (i) the Class C-6 Share Liquidation Preference, plus an amount (whether or not declared) equal to the Class C-6 Share Liquidation Preference multiplied by the Class C-6 Indicative Rate multiplied by a fraction, the numerator of which is the number of days in the current Dividend Period that have passed prior to the date on which the liquidation occurs and the denominator of which is 360 and (ii) the Economic Dividend Payable. "Class C-6 Share Liquidation Preference" has the meaning set forth in Section 2.01 hereof. "Clearing Agency" means the clearing agency with respect to the Class C-6 Shares. "Code" means the United States Internal Revenue Code of 1986, as amended. "Common Shares" means, collectively, the Class A Shares and the Class B Shares. "DTC" means The Depository Trust Company. "Dividend" means a cash distribution to holders of the Class C-6 Shares from the Corporation with respect to any applicable Dividend Period and payable on an applicable Dividend Date. 3 "Dividend Date" means the 15th day of February, May, August and November in each year (or the preceding Business Day if such day is not a Business Day) commencing February 15, 2001, with respect to Dividends for each relevant Dividend Period on the Class C-6 Shares. "Dividend Period" means for each Dividend Date, a quarterly period comprised of two components: (i) an arrears component from and including the date of the original issuance of the Class C-6 Shares (in the case of the first Dividend Period) or, in all other cases, from and including the 25th day of any of April, July, October or January immediately preceding the then current Dividend Date, provided, that if any such day is not a Business Day, then the start of the period will be postponed to the next succeeding Business Day, to but excluding the then current Dividend Date, and (ii) an advance component from and including the then current Dividend Date to but excluding the next 25th day of any of April, July, October or January (as the case may be) immediately succeeding the then current Dividend Date, provided, that if any such day is not a Business Day, then the end of the period (and associated first day of the next Dividend Period) will be postponed to the next succeeding Business Day. "Economic Dividend Payable" means initially, as determined in good faith by the Board of Directors based on the opinion of a nationally recognized investment bank, for the Class C-6 Shares in the aggregate 1.4900662% of, as applicable, (i) the amount of dividends paid or set apart for payment by the Corporation on its common shares (including the Class C Shares) during any Dividend Period, (ii) the amount of any redemption proceeds on the Corporation's common shares to the extent such proceeds are greater than the fair market value of the common shares being redeemed, or (iii) the aggregate amount available for payment of distributions on liquidation with respect to the Corporation's common shares entitled to payments upon liquidation; provided that: (A) subsection (i) above shall only apply when determining whether the Class C-6 Shares are entitled to Dividends, (B) subsection (ii) above shall only apply upon a redemption of the Corporation's common shares and (C) subsection (iii) above shall only apply upon a liquidation, dissolution and winding up of the Corporation. This percentage shall be adjusted from time to time (for example upon the issuance of common shares by the Corporation in exchange for cash or property) based upon the percentage of the Corporation's fair market value represented by the Class C-6 Shares at the time of such adjustment; provided that any such adjustment shall be determined in good faith by the Board of Directors based on the opinion of a nationally recognized investment bank. "Holder" means the beneficial owners of the Class C-6 Shares. "IAI" means a Person that is an "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act or the analog provisions of any successor rule. "IRS" means the United States Internal Revenue Service. "Junior Shares" has the meaning set forth in Section 3.01 hereof. "LIBOR Determination Date" the first LIBOR Determination Date will be April 9th, 2001, and thereafter will be two Business Days prior to each July 11th, October 11th, January 11th and April 11th thereafter (except if any such day is not a Business Day, then the relevant LIBOR Determination Date will be two Business Days prior to the preceding Business Day). "LLC VI" means Zurich RegCaPS Funding LLC VI, a Delaware limited liability company. 4 "LLC VI Payment Date" means the 25th day of any of April, July, October and January in each year (or the preceding Business Day if such day is not a Business Day) when the corresponding RegCaPS VI payment for such period has been made. "LLC VI Payments" means cash payments on the LLC Preferred Interests VI. LLC VI Payments shall not include tax amounts withheld and not refunded. "LLC Preferred Interest VI" means the preferred membership interests in LLC VI. "Minimum Net Worth Amount" initially means US$ 3 billion. The Minimum Net Worth Amount will be increased by the proceeds paid to the Corporation in consideration for the issuance and sale of any of its capital stock ranking pari passu with or senior to the Class C-6 Shares with respect to the payment of distributions or amounts payable upon liquidation. The Minimum Net Worth Amount will be reduced by the amounts paid to purchase or redeem any shares of Class C Common Stock or any of its capital stock ranking pari passu with or senior to the Class C-6 Shares or the other Class C Shares, but only by an amount equal to the liquidation preference of such shares. The net worth of the Corporation will be determined in accordance with U.S. GAAP. "Partnership VI" means Zurich RegCaPS Funding Limited Partnership VI, a Delaware limited partnership. "Person" means any legal person, including any individual, corporation, association, partnership (general or limited), joint venture, trust, estate, limited liability company, or other legal entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Purchaser" means ZGH or any of its Affiliates. "QIB" means a qualified institutional buyer within the meaning of Rule 144A under the Securities Act. "RegCaPS VI" means any regulatory capital preferred securities of Partnership VI. "RegCaPS VI Payment Date" means the 15th day of February, May, August and November in each year (or on the preceding Business Day if such day is not a Business Day) commencing February 15, 2001 with respect to the RegCaPS VI Payments for each relevant RegCaPS VI Payment Period. "RegCaPS VI Payment Period" means for each RegCaPS VI Payment Date, a quarterly period comprised of two components (i) an arrears component from and including the date of the original issuance of the RegCaPS VI (in the case of the first RegCaPS VI Payment Period) or, in all other cases, from and including the relevant LLC VI Payment Date immediately preceding the then current RegCaPS VI Payment Date to but excluding the then current RegCaPS VI Payment Date and (ii) an advance component from and including the then current RegCaPS VI Payment Date to but excluding the next relevant succeeding LLC VI Payment Date. "RegCaPS VI Payments" means cash remittances, initially at 6.16%, on or after April 25, 2001, a variable annual rate equal to Three-Month LIBOR plus 71 basis points, reset quarterly, and 5 on or after April 25, 2011, a variable annual rate equal to Three-Month LIBOR plus 175 basis points, reset quarterly, in each case the rate shall be determined by reference to the liquidation preference of the RegCaPS VI, to the registered holder of the RegCaPS VI with respect to any applicable RegCaPS VI Payment Period and payable on an applicable RegCaPS VI Payment Date. "Securities Act" means the U.S. Securities Act of 1933, as amended. "Securities Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended. "Special Independent Directors" means two (2) independent directors of the Corporation to be elected by holders of the Class C Shares upon the occurrence of certain events as stated in this Certificate of Designation and in the certificates of designation of the other Class C Shares. The holders of the Class C-6 Shares shall have the right to vote for the Special Independent Directors only upon the failure of the Corporation to pay Dividends for 24 consecutive months at the Class C-6 Indicative Rate on the Class C-6 Shares. "Three-Month LIBOR" means with respect to any LIBOR Determination Date, a rate determined on the basis of the offered rates for three-month United States dollar deposits of not less than a principal amount equal to that which is representative for a single transaction in such market at such time, commencing on the second Business Day immediately following such LIBOR Determination Date, which appears on US LIBOR Telerate Page 3750 as of approximately 11:00 a.m., London time, on such LIBOR Determination Date. If on any LIBOR Determination Date no rate appears on US LIBOR Telerate Page 3750 as of approximately 11:00 a.m., London time, the Paying Agent shall on such LIBOR Determination Date request the four major reference banks in the London interbank market selected by the Paying Agent to provide the Paying Agent with a quotation of the rate at which three-month deposits in United States dollars, commencing on the second Business Day immediately following such LIBOR Determination Date, are offered by it to prime banks in the London interbank market as of approximately 11:00 a.m., London time, on such LIBOR Determination Date and in a principal amount equal to that which is representative for a single transaction in such market at such time. If at least two such quotations are provided, Three-Month LIBOR for such LIBOR Determination Date will be the arithmetic mean of such quotations as calculated by the Paying Agent. If fewer than two quotations are provided, Three-Month LIBOR for such LIBOR Determination Date will be the arithmetic mean of the rates quoted as of approximately 11:00 a.m., London time, on such LIBOR Determination Date by three major banks in the London interbank market selected by the Paying Agent for loans in United States dollars to leading European banks, having a three-month maturity commencing on the second Business Day immediately following such LIBOR Determination Date and in a principal amount equal to that which is representative for a single transaction in such market at such time; provided, however, that, if the banks selected as aforesaid by the Paying Agent are not quoting as mentioned in this sentence, Three-Month LIBOR for such LIBOR Determination Date will be Three-Month LIBOR determined with respect to (i) the immediately preceding Dividend Period for purposes of the Class C-6 Shares and (ii) the immediately preceding RegCaPS VI Payment Period for purposes of the RegCaPS VI. "Transfer Agent" means the transfer agent with respect to the Class C-6 Shares which shall initially be the Corporation. 6 "Trust VI" means Zurich RegCaPS Funding Trust VI, a Delaware statutory business trust. "Trust Capital Securities VI" means 225,000 trust capital securities, liquidation amount US $1,000 each, representing undivided beneficial ownership interests in the assets of Trust VI. "U.S. GAAP" means the generally accepted accounting principles in the United States. "ZGH" means Zurich Group Holding, a Swiss stock corporation (as defined in Article 620 et. seq., of the Swiss Code of Obligation) formerly known as Zurich Financial Services, a wholly-owned subsidiary of Zurich Financial Services or its successors and assigns. "Zurich Financial Services" means Zurich Financial Services, a Swiss stock corporation (as defined in Article 620 et seq., of the Swiss Code of Obligation) listed on the Swiss Exchange SWX with a secondary listing on the London Stock Exchange and the holder of directly or indirectly 100% of the shares of ZGH or its successors and assigns. "1940 Act" means the U.S. Investment Company Act of 1940, as amended. ARTICLE 2 NUMBER AND DESIGNATION SECTION 2.01. Number and Designation. 10 shares of the Class C Common Stock of the Corporation are hereby designated as a series of Class C Common Stock designated as Class C-6 Common Stock, par value $1.00 per share (the "Class C-6 Shares"). The Class C-6 Shares shall have a liquidation preference of twenty two million five hundred thousand United States dollars ($22,500,000) per share (the "Class C-6 Share Liquidation Preference"). ARTICLE 3 RANK SECTION 3.01. Rank. (a) The Class C-6 Shares shall, only with respect to payment of Dividends at the Class C-6 Indicative Rate (as defined below) and with respect to the payment of the Class C-6 Share Liquidation Preference upon the liquidation, dissolution and winding up of the Corporation, rank senior to all of the Junior Shares, including the Common Shares. In all other respects, the Class C-6 Shares shall rank pari passu with the Junior Shares, including the Common Shares and the other series of Class C Shares and shall participate equally with the Junior Shares and the other series of Class C Shares with respect to distributions paid by the Corporation and shall participate equally with the Class A Shares and the other series of Class C Shares with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation. The Class C-6 Shares will rank junior in all respects to any indebtedness of the Corporation. The Class C-6 Shares shall rank pari passu with the other series of Class C Shares for all purposes. All securities of the Corporation to which the Class C-6 Shares rank senior (whether with respect to dividends or upon liquidation, dissolution, winding up or otherwise), including the Common Shares, are collectively referred to herein as the "Junior Shares." The definition of Junior Shares shall also include any rights or options exercisable for or convertible into any of the Junior Shares. (b) Without prior consent of the holders of not less than a majority of the outstanding Class C-6 Shares, the Corporation shall not issue any class or series of equity securities whose terms provide 7 that such securities rank senior to or pari passu with the Class C-6 Shares with respect to the rights to receive dividends and other distributions or with respect to any amounts payable upon liquidation, dissolution or winding up; provided that the Corporation may file certificates of designation and issue shares in accordance therewith for other series of Class C Shares to be designated as Class C-1 Common Stock, Class C-2 Common Stock, Class C-3 Common Stock, Class C-4 Common Stock and Class C-5 Common Stock, each of which ranks pari passu with the Class C-6 Shares with respect to distributions paid by the Corporation and with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation. Further, if the Corporation has paid in full the lesser of (i) each Dividend on its respective Dividend Payment Date during the last 24 months at the Class C-6 Indicative Rate, or (ii) prior to February 9, 2003, all Dividends in an amount at least equal to the Class C-6 Share Indicative Rate that could have been paid on the Class C Shares, the Corporation may issue an unlimited amount of additional Class C-6 Shares and other equity ranking pari passu with the Class C-6 Shares without the consent of the holders of the Class C-6 Shares. ARTICLE 4 DIVIDENDS SECTION 4.01. Rate; Dividend Date. (a) Each Class C-6 Share shall be entitled to receive cash Dividends on a non-cumulative basis, when as and if declared by the Board of Directors, out of funds legally available for the payment of distributions on each Dividend Date commencing February 15, 2001. The amount of Dividends will be computed on the basis of a 360-day year and the actual number of days in such Dividend Period. When Dividends are paid on the Class C-6 Shares at less than the Class C-6 Indicative Rate, all Dividends declared on the Class C Shares will be paid pro rata based on the outstanding number of shares of each series of Class C Common Stock and such Dividends declared on the Class C-6 Shares will be paid pro rata based on the outstanding number of Class C-6 Shares. (b) The Paying Agent will calculate Three-Month LIBOR as of each LIBOR Determination Date and shall make such rate calculation available to holders of Class C-6 Shares. The Paying Agent also shall determine the Dividends payable on each Dividend Date and give notice thereof (including the applicable rate, amount, the applicable period and payment) to the holders of Class C-6 Shares. The notices set forth in this paragraph shall be sent by first class mail to the address of each holder of Class C-6 Shares as it appears on the register kept by the Registrar and shall be available at the offices of the Paying Agent. SECTION 4.02. Dividend Restrictions. (a) No distribution or redemption, including without limitation cash dividends, may be declared or paid or set apart for payment on any Junior Shares and neither the Corporation nor any of its Affiliates may purchase or redeem for cash any outstanding Junior Shares, unless: (i) full Dividends have been declared and paid or set apart for payment on the Class C-6 Shares in an amount at least equal to the greater of (A) the Dividends payable or set apart during such Dividend Period at the Class C-6 Indicative Rate; or (B) the Economic Dividend Payable; (ii) Partnership VI has paid or set apart for payment the full amount of RegCaPS VI Payments for the current RegCaPS VI Payment Period; 8 (iii) LLC VI has set apart or paid the full amount of the LLC VI Payments on an LLC VI Payment Date in any period when the corresponding RegCaPS VI Payment for such LLC VI Payment Date has been made; and (iv) in the case of a repurchase or redemption, such repurchase or redemption does not cause the net worth of the Corporation to be less than the Minimum Net Worth Amount. Notwithstanding the foregoing, for so long as the Corporation has paid or set apart for payment Dividends on the Class C-6 Shares at least equal to the greater of (i)(A) or (i)(B) and clauses (ii) (iii) and (iv) above are satisfied, the Corporation may declare and pay Dividends on any Junior Shares with respect to such Dividend Period. (b) (i) If a Dividend is paid or set apart on the Class C-6 Shares during any Dividend Period at a rate less than the Class C-6 Indicative Rate, the Corporation may not make any dividend payments on the Junior Shares and may only make dividend payments on its other securities that rank pari passu with the Class C-6 Shares, if any, in the same proportion as the partial Dividend paid or set apart on the Class C-6 Shares for the current Dividend Period bears to the full Dividend payment determined for such Dividend Period at the Class C-6 Indicative Rate. (ii) For so long as the Class C-6 Shares are outstanding, if a partial RegCaPS VI Payment is made or set apart for any RegCaPS VI Payment Period, the Corporation may not make any dividend payments during such RegCaPS VI Payment Period on its Junior Shares and may only make dividend payments on its other securities that rank pari passu with the Class C-6 Shares in the same proportion as the lesser of (i) the proportion the partial RegCaPS VI Payment made or set apart for the Current RegCaPS VI Payment Period bears to the RegCaPS VI Payment determined for such RegCaPS VI Payment Period and (ii) the proportion the partial Dividend paid or set apart on the Class C-6 Shares for the corresponding Dividend Period bears to the full Dividend payment for such Dividend Period at the Class C-6 Indicative Rate. Additionally, for so long as the Class C-6 Shares are outstanding, all shares of common or preferred stock issued by majority-owned subsidiaries of the Corporation which shares are not beneficially owned by the Corporation or its wholly-owned subsidiaries will be subject to the restrictions set forth above on the payment of distributions and other payments only to the extent that such minority shares are owned by Zurich Financial Services or one of its controlled Affiliates. (c) The Corporation intends that the holders of the RegCaPS VI shall be third party beneficiaries of, and entitled to enforce, the provisions of this Section 4.02 as if such provisions constituted a contract between the Corporation and the holders of the Class C-6 Shares, and the holders of the RegCaPS VI were third-party beneficiaries to such contracts. SECTION 4.03. Payment of Dividends. Dividends and other payments on the Class C-6 Shares will be payable to the holders thereof as they appear on the books and records of the Corporation on the relevant record dates, which will be one Business Day prior to the relevant Dividend Date or other payment date. Such Dividends will be paid either (i) by the Corporation or (ii) in the event such Class C-6 Shares are not held by an Affiliate of ZGH through the Paying Agent who will hold amounts received from the Corporation in respect of the Class C-6 Shares for the benefit of the registered 9 holders of the Class C-6 Shares. In the event that any Class C-6 Shares do not remain in book-entry only form, the relevant record dates shall be the 15th day of the month of the relevant Dividend Date or other payment date. In the event that any Dividend Date is not a Business Day, payment of the Dividends payable on such date will be made on the next succeeding day which is a Business Day (without any interest or other payment in respect of the dividends subject to such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. SECTION 4.04. Changes in the Dividends-Received Percentage. (a) If, prior to 18 months after the date of the original issuance of the Class C-6 Shares, one or more amendments to the Code are enacted that reduce the dividends-received deduction (currently 70%), as specified in Section 243(a)(i) of the Code or any successor provision (the "Dividend-Received Percentage"), certain adjustments will be made as appropriate in respect of the Dividends paid by the Corporation, and Post Declaration Date Dividends and Retroactive Dividends may become payable (as such terms are defined below), except that no adjustments will be made with respect to any reduction of the Dividends-Received Percentage below 50%. (b) The amount per share of each Dividend declared at the applicable rate described in Section 4.01 above for Dividend payments made on or after the effective date of such change in the Code will be increased, to the extent of funds legally available for distribution by the Corporation, by multiplying the amount of the Dividend payable before adjustment, by a factor, which will be the number determined in accordance with the following formula (the "DRD Formula"), and rounding the result to the nearest cent (with one-half cent rounded up): I-.35(I-.70) ------------ I-.35(I-DRP) For purposes of the DRD Formula with regard to the Class C-6 Shares, "DRP" means the Dividend-Received Percentage (expressed as a decimal) applicable to the Dividends in question; provided, that in no event shall the DRP be less than 0.50. No amendment to the Code, other than a change in the Dividends-Received Percentage enacted prior to 18 months after the date of the original issuance of the Class C-6 Shares, will give rise to an adjustment. Notwithstanding the foregoing provisions, if, with respect to any such amendment, the Corporation receives either an unqualified opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form of authorization from the IRS to the effect that such an amendment does not apply to a Dividend payable on the Class C-6 Shares, then such amendment will not result in the adjustment provided for pursuant to the DRD Formula with respect to such Dividend. The opinion referenced in the previous sentence shall be based upon the legislation amending or establishing the DRP or upon a published pronouncement of the IRS addressing such legislation. Absent manifest error, the Corporation's calculation of the Dividends payable as so adjusted shall be final and not subject to review. (c) Notwithstanding the foregoing, if any such aforementioned amendment to the Code is enacted after the Dividend payable on a Dividend Date has been declared, and if such amendment is effective with respect to such Dividend, the amount of the Dividend payable on such Dividend Date will not be increased; instead, additional Dividend payments (the "Post Declaration Date Dividend"), equal to the excess, if any, of (x) the product of the Dividend paid by the Corporation on 10 such Dividend Date and the DRD Formula over (y) the Dividend paid by the Corporation on such Dividend Date, will be declared to the extent funds legally available for distribution by the Corporation to holders of Class C-6 Shares on the record date applicable to the next succeeding Dividend Date, or, if Class C-6 Shares are called for redemption prior to such record date, to holders of Class C-6 Shares on the applicable redemption date, as the case may be, in addition to any other amounts payable on such date. (d) If any such amendment to the Code is enacted and the reduction in the Dividends-Received Percentage retroactively applies to one or more Dividend Dates on which the Corporation previously paid Dividends with respect to the Class C-6 Shares (each, an "Affected Dividend Date"), additional Dividends (the "Retroactive Dividends") will be declared, to the extent of funds legally available therefor, to holders of Class C-6 Shares on the record date applicable to the next succeeding Dividend Dates or, if the Class C-6 Shares are called for redemption prior to such record date, to holders of Class C-6 Shares on the applicable redemption date, as the case may be, in an amount equal to the excess of (x) the product of the Dividend paid by the Corporation on each Affected Dividend Date and the DRD Formula over (y) the sum of the Dividend paid by the Corporation on each Affected Dividend Date. The Corporation will only make one payment of Retroactive Dividends for any such amendment. Notwithstanding the foregoing provisions, if, with respect to any such amendment, the Corporation receives either an unqualified opinion of nationally recognized independent tax counsel selected by the Corporation or a private letter ruling or similar form of authorization from the IRS to the effect that such amendment does not apply to a Dividend payable on an Affected Dividend Date for the Class C-6 Shares, then such amendment will not result in the payment of a Retroactive Dividend with respect to such Affected Dividend Date. The opinion referenced in the previous sentence shall be based upon the legislation amending or establishing the Dividends-Received Percentage or upon a published pronouncement of the IRS addressing such legislation. (e) Notwithstanding the foregoing, no adjustment in the dividends payable by the Corporation shall be made, and no Post Declaration Date Dividends or Retroactive Dividends shall be payable by the Corporation, in respect of the enactment of any amendment to the Code 18 months or more after the date of original issuance of the Class C-6 Shares that reduces the Dividends-Received Percentage or to the extent such amendment reduces the Dividends-Received Percentage to less than 50%. (f) In the event that the amount of Dividends payable per share of the Class C-6 Shares is increased pursuant to the DRD Formula and/or Post Declaration Date Dividends or Retroactive Dividends are to be paid, the Corporation will give notice of each such adjustment and, if applicable, any Post Declaration Date Dividends and Retroactive Dividends to the holders of Class C-6 Shares. (g) The various payment restrictions and obligations described above and applicable in respect of any Dividend Period in which a Dividend on the Class C-6 Shares is not paid in an amount at least equal to the Class C-6 Indicative Rate to the extent that any Post Declaration Date Dividend or Retroactive Dividend is not declared and paid or set apart for payment as and when due in respect of a reduction in the Dividends-Received Percentage; provided that such payment restrictions and obligations will remain in effect, not only during the current Dividend Period, but until such Post Declaration Date Dividend or Retroactive Dividend is declared and paid or set apart for payment. 11 SECTION 4.05. Earnings and Profits Gross-Up Payments. (a) To the extent that Dividends paid with respect to the Class C-6 Shares exceeds the Corporation's earnings and profits as calculated for U.S. federal income tax purposes, they will not constitute dividends for U.S. federal income tax purposes and will not qualify for the dividends-received deduction. In such event, additional distributions will be made by the Corporation to place each holder of the Class C-6 Shares in the same position it would have been in if all Dividends from the Corporation were paid from such earnings and profits, assuming for these purposes that such holder was eligible for the dividends-received deduction. (b) If any Dividend on the Class C-6 Shares with respect to any fiscal year (including any Gross-Up Payment (as defined below)) constitutes, in whole or in part, a return of capital (or is treated as gain from the sale or exchange of the Class C-6 Shares) for U.S. federal income tax purposes (a "Qualifying Dividend"), within 180 days after the end of such fiscal year, the Corporation will pay (if declared), out of funds legally available therefor, an amount equal to the aggregate Gross-Up Payments to Qualified Investors (as defined below) with respect to all Qualifying Dividends on the Class C-6 Shares during such fiscal year. A "Qualified Investor" with respect to a Qualifying Dividend during a fiscal year means a person who was entitled to receive such Qualifying Dividend. (c) A "Gross-Up Payment" to a Qualified Investor with respect to all Qualifying Dividends on Class C-6 Shares paid by the Corporation during a fiscal year means an additional Dividend on the Class C-6 Shares to a Qualifying Investor in an amount which, when taken together with the aggregate Qualifying Dividends paid to such Qualified Investor during such fiscal year, would cause such Qualified Investor's net yield in dollars (after U.S. federal income tax consequences and treating, for purposes of calculating net yield in dollars, the sum of that portion of the Qualifying Dividends and the Gross-Up Payment otherwise treated as a return of capital as capital gain recognized upon the taxable sale or exchange of Class C-6 Shares) from the aggregate of both the Qualifying Dividends and the Gross-Up Payment to be equal to the net yield in dollars (after U.S. federal income tax consequences) which would have been received by such Qualified Investor if the entire amount of the aggregate Qualifying Dividends had instead been treated as a dividend for U.S. federal income tax purposes. Such Gross-Up Payment shall be calculated using the applicable maximum marginal U.S. federal corporate income tax rate applicable to ordinary income and capital gains, as the case may be, and, where applicable, the Dividends-Received Percentage, without consideration being given to the time value of money, the U.S. federal income tax situation of any specific Qualified Investor (including the application of the alternative minimum tax or the application of Section 246 of the Code), or any state or local tax consequences that may arise. The Corporation shall make a determination, based upon the reasonably estimated earnings and profits of that portion, if any, of a Qualifying Dividend for a fiscal year that will be treated as dividend for U.S. federal tax purposes, and such determination shall be final and binding for purposes of calculating the amount of the Gross-Up Payments with respect to all Qualifying Dividends for such fiscal year. SECTION 4.06. Change of Control Gross-Up Payments. If as a result of a Change of Control Tax Event, there is an increase in any non-refundable foreign taxes withheld ("Foreign Tax Increase") with respect to RegCaPS VI Payments or Cumulative RegCaPS VI Payment Amounts paid to a RegCaPS VI registered holder ("Foreign Taxed RegCaPS Payments"), additional distributions shall be made on the Class C -6 Shares in an amount which, when taken together with the aggregate Dividends paid to the Holders of the Class C-6 Shares during such fiscal year reduced by the amount of such Foreign Tax Increase, would cause the net yield in dollars (after U.S. federal income tax consequences other than the use of foreign tax credits resulting from the Foreign Tax Increase) to be equal to the net yield in dollars (after U.S. federal income tax consequences) to the Holder from 12 receipt of the aggregate Dividends paid to the Holder during such fiscal year without any reduction by the amount of such Foreign Tax Increase. The foregoing amount shall be calculated based on the assumption that the Holder is a U.S. corporation and using the applicable maximum marginal U.S. federal corporate income tax rate applicable to ordinary income and capital gains, as the case may be, and the Dividends-Received Percentage, without consideration being given to the time value of money, the U.S. federal income tax situation of any specific Holder, or any state or local tax consequences that may arise. If for a prior fiscal year Foreign Taxed RegCaPS Payments are made by the Partnership VI, the Corporation will pay (if declared), within 90 days after the end of such fiscal year, out of funds legally available therefor, an amount equal to the aggregate Change of Control Gross-Up Payments to the Partnership. ARTICLE 5 LIQUIDATION PREFERENCE SECTION 5.01. Liquidation Preference. (a) In the event of any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, after payment or provision for the liabilities of the Corporation and the expenses of such dissolution, liquidation or winding up, the holders of the outstanding Class C-6 Shares will be entitled to receive, the Class C-6 Share Liquidation Amount, out of the assets of the Corporation or proceeds thereof available for distribution to holders of Class C-6 Shares. Out of such amount, the holders of Class C-6 Shares will be entitled to receive the Class C-6 Share Liquidation Preference before any payment or distribution of assets is made to holders of the Common Shares or any other Junior Shares. Amounts payable on the Class C-6 Shares in connection with the liquidation of the Corporation in excess of the Class C-6 Share Liquidation Preference are payable (to the extent the Class C-6 Share Liquidation Amount exceeds the Class C-6 Share Liquidation Preference) on a pari passu basis with any Common Shares entitled to receive payment or distribution upon a liquidation, dissolution or winding up of the Corporation. If the assets of the Corporation available for distribution in such event are insufficient to pay in full the aggregate amount payable to holders of the Class C-6 Shares and holders of all other classes or series of equity securities of the Corporation, if any, ranking, as to the distribution of assets upon dissolution, liquidation or winding up of the Corporation, on a parity with the Class C-6 Shares, the assets will be distributed to the holders of Class C-6 Shares and holders of such other equity interests pro rata, based on the full respective preferential amounts to which they are entitled. After payment of the Class C-6 Share Liquidation Amount upon dissolution, liquidation or winding up of the Corporation, the holders of Class C-6 Shares will not be entitled to any further participation in any distribution of assets by the Corporation. (b) Notwithstanding Section 5.01(a) above, holders of Class C-6 Shares will not be entitled to be paid any amount in respect of a dissolution, liquidation or winding up of the Corporation until holders of any classes or series of securities of the Corporation ranking, as to the distribution of assets upon dissolution, liquidation or winding up of the Corporation, senior to the Class C-6 Shares have been paid all amounts to which such classes or series are entitled. (c) Notwithstanding anything else in this Certificate, neither the sale, lease or exchange (for cash, shares of stock, securities or other consideration) of all or substantially all of the property and assets of the Corporation, nor the merger, consolidation or combination of the Corporation into or with any other person or the merger, consolidation or combination of any other person into or with the Corporation, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Section 5.01. 13 ARTICLE 6 REDEMPTION SECTION 6.01. Optional Redemption. (a) The Class C-6 Shares will not be subject to mandatory redemption at any time. Prior to February 15, 2031, Class C-6 Shares will not be subject to optional redemption. On or after February 15, 2031, Class C-6 Shares may be redeemed at the option of the Corporation at any time, subject to the prior consent of ZGH, in whole but not in part, at their fair market value (the "Redemption Amount") as determined by a nationally recognized investment bank retained by the Corporation. SECTION 6.02. Procedure for Redemption. (a) Notice of any redemption of the Class C-6 Shares (a "Redemption Notice") will be given by the Corporation by mail to each holder of Class C-6 Shares not fewer than 30 nor more than 60 days before the date fixed for redemption. For purposes of the calculation of the date of redemption and the dates on which notices are given pursuant to this Section 6.02(a), a Redemption Notice shall be deemed to be given on the day such notice is first mailed, by first-class mail, postage prepaid, to holders of the Class C-6 Shares. Each Redemption Notice shall be addressed to the holders of Class C-6 Shares at the address of each such holder appearing in the books and records of the Corporation. No defect in the Redemption Notice or in the mailing thereof with respect to any holder of Class C-6 Shares shall affect the validity of the redemption proceedings with respect to any other holder of Class C-6 Shares. (b) If the Corporation gives a Redemption Notice (which notice will be irrevocable), then by 12:00 noon, New York City time, on the redemption date, the Corporation (A) if the Class C-6 Shares are in book-entry form with DTC, will deposit irrevocably with DTC funds sufficient to pay the applicable Redemption Amount and will give DTC irrevocable instruction and authority to pay the Redemption Amount in respect of the Class C-6 Shares held through DTC in global form or (B) if the Class C-6 Shares are held in certificated form (each such certificate a "Class C-6 Share Certificate"), will deposit with the Paying Agent, funds sufficient to pay the applicable Redemption Amount of any such Class C-6 Shares and will give to the Paying Agent irrevocable instructions and authority to pay such amounts to the holders of Class C-6 Shares, upon surrender of their certificates, by delivery of check, mailed to the address of the relevant holder appearing on the books and records of the Corporation on the redemption date. For these purposes, the applicable Redemption Amount shall not include Dividends which are being paid to holders of Class C-6 Shares who were holders of Class C-6 Shares on a relevant record date. Upon satisfaction of the foregoing conditions, then immediately prior to the close of business on the date of such deposit or payment, all rights of holders of Class C-6 Shares so called for redemption will cease, except the right of the holders of Class C-6 Shares to receive the Redemption Amount, but without interest on such Redemption Amount, and from and after the date fixed for redemption, such Class C-6 Shares will not receive dividends or bear interest. (c) In the event that any date fixed for redemption of Class C-6 Shares is not a Business Day, then payment of the Redemption Amount payable on such date will be made on the next succeeding Business Day (and without any interest in respect of any such delay), except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day in each case, with the same force and effect as if made on such date fixed for redemption. In the event that payment of the Redemption Amount is improperly withheld or refused and not paid by the Corporation, Dividends on the Class C-6 Shares called for redemption will continue to be payable in accordance with the terms hereof from the original redemption date until the Redemption Amount is actually paid. 14 (d) The Corporation shall not be required to register or cause to be registered the transfer of any Class C-6 Shares which have been called for redemption. (e) The Class C-6 Shares which have been issued and reacquired in any manner, including shares purchased or redeemed, shall (upon compliance with any applicable provisions of the laws of the State of Nevada) have the status of authorized and unissued Class C-6 Shares and may be reissued. ARTICLE 7 VOTING RIGHTS SECTION 7.01. Voting Rights. (a) The holders of the Class C-6 Shares will be entitled to 0.375 of a vote per share (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 Corporation) and will be entitled to vote with the Common Shares as a single class on all matters submitted to a vote of the Common Shares (other than those matters affecting only the Common Shares, or either of them); provided, however, that at no time shall the aggregate Voting Power of the Class C-6 Shares be greater than 0.675% of the total Voting Power of the Corporation. Prior to transferring ownership of any Class C-6 Shares to a transferee other than an Affiliate of ZGH and subject to receipt of any required regulatory approval, if any, such Class C-6 Shares shall be (i) split into a number of shares of Class C-6 Shares equal to, and with a liquidation preference equal to the liquidation amount of the number of Trust Capital Securities VI, and (ii) converted on a one-to-one basis to the same number of shares of a class of common stock of the Corporation (the "Conversion Shares") having rights, preferences and privileges substantially identical to the Class C-6 Shares except that the Conversion Shares will be entitled to no voting rights other than as required by law and other than with respect to adverse amendments to the terms of the Conversion Shares and the issuance of equity securities that rank senior to or pari passu with the Conversion Shares with respect to the payment of distributions or amounts upon liquidation, provided that the Corporation may file certificates of designation and issue shares in accordance therewith for other Class C Shares which rank pari passu with the Conversion Shares with respect to distributions paid by the Corporation and with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation. If, however, any necessary regulatory approvals to issue the Conversion Shares are not obtained, the Class C-6 Shares rather than the Conversion Shares may be transferred to a transferee other than an Affiliate of ZGH. (b) The holders of the Class C-6 Shares and the Conversion Shares will be entitled to vote separately as a single class on the matters described in this paragraph. The consent of the holders of not less than a majority of the outstanding Class C-6 Shares and Conversion Shares, voting as a single class, is required (i) to amend, alter, supplement or repeal the terms of the Class C-6 Shares and the Conversion Shares (it being a condition to any such amendment, alteration, supplement or repeal that it has a substantially identical effect on the rights, preferences and privileges of both the Class C-6 Shares and the Conversion Shares), or (ii) if the Corporation has not paid in full the lesser of (A) each of the last twenty-four months of Dividends on their respective Dividend Payment Dates at the Class C-6 Indicative Rate, or (B) prior to the second anniversary of the first issue date, all Dividends at the Class C-6 Indicative Rate that could have been paid on the Class C-6 Shares and the Conversion Shares, for the Corporation to issue, or to increase the authorized amount of, the Class C-6 Shares or the Conversion Shares or any other equity securities that rank pari passu with or senior to the Class C-6 Shares and the Conversion Shares; provided that the Corporation may file certificates of designation and issue shares in accordance therewith for other Class C Shares to be designated as Class C-1 Common Stock, Class C-2 Common Stock, Class C-3 Common Stock, Class C-4 Common Stock and Class C-5 15 Common Stock each of which rank pari passu with the Class C-6 Shares with respect to distributions paid by the Corporation and with respect to any amounts payable upon the liquidation, dissolution or winding up of the Corporation without the consent of the holders of the Class C-6 Shares or the Conversion Shares. (c) Whenever Dividends on the Class C-6 Shares and the Conversion Shares at the Class C-6 Indicative Rate are in arrears for twenty-four or more consecutive months, the holders of Class C-6 Shares and the Conversion Shares, voting together with the other Class C Shares as a single class, will be entitled, subject to any necessary regulatory actions, to elect two Special Independent Directors to the Board of Directors, at a special meeting called by the holders of record of at least 25% of the Class C-6 Shares and the Conversion Shares in the aggregate or by the holders of record of 25% of any of the other series of Class C Shares pursuant to the terms of the certificate of designation creating such other series of Class C Shares. The Special Independent Directors shall vacate office if Dividends at the Class C-6 Indicative Rate are resumed and are paid regularly for at least twelve consecutive months, unless otherwise provided by the terms of any other certificate of designation for any other series of Class C Shares. If Dividends are resumed and paid regularly for at least twelve consecutive months at the Class C-6 Indicative Rate, the holders of the Class C-6 Shares and the Conversion Shares shall no longer be entitled to vote for the two Special Independent Directors on account of that arrearage. When no holder of Class C-6 Shares is entitled to vote for the two Special Independent Directors, the Special Independent Directors shall vacate office. Notwithstanding the foregoing, in the event that more than one series of Class C Shares are entitled to elect Special Independent Directors to the Board of Directors, such series shall vote together as a single class to elect such two directors. In no event shall the holders of Class C Shares be entitled to elect more than two Independent Directors to the Board of Directors. (d) Notwithstanding the foregoing, the Corporation shall have the right, without the prior consent of the holders of Class C-6 Shares and Conversion Shares if any, to amend, alter, supplement or repeal any terms of the Class C-6 Shares (i) to cure any ambiguity, or to cure, correct or supplement any defective provision thereof or (ii) to make any other provision with respect to matters or questions arising with respect to the Class C-6 Shares and Conversion Shares, if any, that is not inconsistent with the provisions thereof so long as such action does not materially and adversely affect any of the rights, preferences and privileges of the holders of Class C-6 Shares and Conversion Shares, if any, provided, however, that any increase in the amount of authorized or issued Class C-6 Shares will be deemed not to materially and adversely affect any of the rights, preferences and privileges of the holders of Class C-6 Shares. (e) The consent or votes required in Section 7.01(b) and (c) above shall be in addition to any approval of stockholders of the Corporation which may be required by law or pursuant to any provision of the Corporation's Articles of Incorporation or bylaws, which approval shall be obtained by vote of the stockholders of the Corporation in the manner provided in Section 7.01(a) above. ARTICLE 8 MERGER, CONSOLIDATION OR AMALGAMATION OF THE CORPORATION SECTION 8.01. Merger, Conversion, Consolidation or Amalgamation of the Corporation. Without the consent of either one Special Independent Director, if any, or a majority of the holders of Class C-6 Shares, the Corporation may not consolidate, amalgamate, merge with or into, convert or domesticate with or into, or be replaced by, or convey, transfer or lease its properties and assets substantially as an 16 entirety to, any corporation or other entity, except as permitted below. The Corporation may, with the consent of at least one of the Special Independent Directors, if any, on the Board of Directors at the time the issue is considered and without the consent of the holders of the Class C-6 Shares, consolidate, amalgamate, merge with or into, convert or domesticate with or into, or be replaced by a corporation organized as such under the laws of any State of the United States; provided, that: (a) if the Corporation is not the surviving entity, such successor entity either (x) expressly assumes all of the obligations of the Corporation under the Class C-6 Shares or (y) substitutes securities for the Class C-6 Shares (the "Successor Securities"), so long as the Successor Securities rank the same as the Class C-6 Shares rank with respect to Dividends and other payments thereon; (b) such merger, consolidation, amalgamation, conversion, domestication or replacement does not adversely affect any of the rights, preferences and privileges of the holders of the Class C-6 Shares (including any Successor Securities) in any material respect; (c) prior to such merger, consolidation, amalgamation, conversion, domestication or replacement, the Corporation has received an opinion of a nationally recognized law firm experienced in such matters to the effect that (i) such merger, consolidation, amalgamation, conversion, domestication or replacement will not adversely affect any of the rights, preferences and privileges of the holders of the Class C-6 Shares (including any Successor Securities) in any material respect and (ii) following such merger, consolidation, amalgamation, conversion, domestication or replacement, the Corporation (or such successor entity) will not be required to register under the 1940 Act; and (d) distributions with respect to the Class C-6 Shares or Successor Securities would be eligible for the dividends-received deduction. ARTICLE 9 TRANSFER OF CLASS C-6 SHARES SECTION 9.01. General. The Corporation shall provide for the registration of Class C-6 Share Certificates and of transfers of Class C-6 Share Certificates. Upon surrender for registration of transfer of any Class C-6 Share Certificate, the Corporation shall cause one or more new Class C-6 Share Certificates to be issued in the name of the designated transferee or transferees. Every Class C-6 Share Certificate surrendered for registration of transfer shall be accompanied by a written instrument of transfer in form satisfactory to the Corporation duly executed by the holder of such Class C-6 Shares or his or her attorney duly authorized in writing. Each Class C-6 Share Certificate surrendered for registration of transfer shall be cancelled by the Corporation. A transferee of a Class C-6 Share Certificate shall be entitled to the rights and subject to the obligations of a holder of Class C-6 Shares hereunder upon the receipt by the transferee of a Class C-6 Share Certificate, which receipt shall be deemed to constitute a request by such transferee that the books and records of the Corporation reflect such transferee as a holder of Class C-6 Share. SECTION 9.02. Definitive Certificates. Unless and until the Corporation issues a global Class C-6 Share Certificate pursuant to Section 9.03(a), the Corporation shall only issue definitive Class C-6 Share Certificates to the holders of Class C-6 Shares. The Corporation may treat the Person in whose name any Class C-6 Share Certificate shall be registered on the books and records of the Corporation as the sole holder of such Class C-6 Share Certificate and of the Class C-6 Shares represented by such Class C-6 Share Certificate for purposes of receiving Dividends and for all other purposes whatsoever 17 (including without limitation, tax returns and information reports) and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Class C-6 Share Certificate or in the Class C-6 Shares represented by such Class C-6 Share Certificate on the part of any other Person, whether or not the Corporation shall have actual or other notice thereof. SECTION 9.03. Book Entry Provisions. (a) General. The provisions of this Section 9.03(a) shall apply only in the event that the Class C-6 Shares are distributed to a Person other than the Purchaser. Upon the occurrence of such event, a global Class C-6 Share Certificate representing the Book-Entry Interests shall be delivered to DTC, the initial Clearing Agency, by, or on behalf of, the Corporation and any previously issued and still outstanding definitive Class C-6 Share Certificates shall be of no further force and effect. The global Class C-6 Share Certificate shall initially be registered on the books and records of the Corporation in the name of Cede & Co., the nominee of DTC, and no holder of Class C-6 Shares will receive a new definitive Class C-6 Share Certificate representing such holder's interest in such Class C-6 Share Certificate, except as provided in Section 9.03(c). Unless and until new definitive, fully registered Class C-6 Share Certificates (the "Definitive Class C-6 Share Certificates") have been issued to the holders of Class C-6 Shares pursuant to Section 9.03(c): (i) The provisions of this Section shall be in full force and effect; (ii) The Corporation shall be entitled to deal with the Clearing Agency for all purposes of this Certificate (including the payment of Dividends, Redemption Amounts and liquidation proceeds on the Class C-6 Share Certificates and receiving approvals, votes or consents hereunder) as the sole holder of the Class C-6 Share Certificates and shall have no obligation to the holders of Class C-6 Shares; (iii) None of the Corporation, the Board of Directors, or any Special Independent Director or any agents of any of the foregoing shall have any liability or responsibility for any aspect of the records relating to or Dividends made on account of beneficial ownership interests in a global Class C-6 Share Certificate for such beneficial ownership interests or for maintaining, supervising or reviewing any records relating to such beneficial ownership interest; and (iv) Except as provided in Section 9.03(c) below, the holders of Class C-6 Shares will not be entitled to receive physical delivery of the Class C-6 Shares in definitive form and will not be considered holders thereof for any purpose under this Certificate of Designation, and no global Class C-6 Share Certificate representing Class C-6 Shares shall be exchangeable, except for another global Class C-6 Share Certificate of like denomination and tenor to be registered in the name of DTC or Cede & Co., or to a successor depository or its nominee. Accordingly, each holder of Class C-6 Shares must rely on the procedures of DTC or if such person is not a Participant, on the procedures of the Participant through which such person owns its interest to exercise any rights of a holder under this Certificate of Designation. (b) Notices to Clearing Agency. Whenever the holders of the Class C-6 Shares are required to give a notice or other communication to their equity holders, unless and until definitive Class C-6 Share Certificates shall have been issued to the holders of Class C-6 Shares pursuant to Section 9.03(c), the Corporation shall give all such notices and communications specified herein to be given to the 18 holders of Class C-6 Shares to the Clearing Agency, and shall have no obligations to the holders of Class C-6 Shares. (c) Definitive Class C-6 Share Certificates. Definitive Class C-6 Share Certificates shall be prepared by the Corporation and exchangeable for the global Class C-6 Share Certificate or Certificates if and only if (i) DTC notifies the Corporation that it is unwilling or unable to continue its services as a securities depository and no successor depository shall have been appointed, (ii) DTC, at any time, ceases to be a Clearing Agency registered under the Exchange Act at such time as DTC shall have been appointed, or (iii) the Corporation, in its sole discretion, determines that such global Class C-6 Share Certificate shall be so exchangeable. Upon surrender of the global Class C-6 Share Certificate or Certificates representing the Book-Entry Interests by the Clearing Agency, accompanied by registration instructions, the Corporation shall cause definitive Class C-6 Share Certificates to be delivered to holders of Class C-6 Shares in accordance with the instructions of the Clearing Agency. The Corporation shall not be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be protected in relying on, such instructions. The definitive Class C-6 Share Certificates shall be printed, lithographed or engraved or may be produced in any other manner as may be required by any national securities exchange on which Class C-6 Shares may be listed and is reasonably acceptable to the Corporation, as evidenced by its execution thereof. SECTION 9.04. Registrar, Transfer Agent and Paying Agent. (a) The Corporation will act as Registrar, Transfer Agent and Paying Agent of the Class C-6 Share for so long as the Class C-6 Shares are held by an Affiliate of ZGH, for so long as the Class C-6 Shares remain in book-entry only form. (b) Except in such case where the Corporation shall act as Registrar or Paying Agent pursuant to Section 9.04(a) hereof, the Corporation shall maintain in the Borough of Manhattan, City of New York, State of New York (i) an office or agency where Class C-6 Shares may be presented for registration of transfer or for exchange ("Registrar") and (ii) an office or agency where Class C-6 Shares may be presented for payment ("Paying Agent"). The Registrar shall keep a register of the Class C-6 Shares and of their transfer and exchange. The Corporation may appoint the Registrar and the Paying Agent and may appoint one or more co-registrars and one or more additional paying agents in such other location as it shall determine. The term "Paying Agent" includes any additional paying agent. The Corporation may change any Paying Agent, Registrar or co-registrar without prior notice to any holder. If the Corporation fails to appoint or maintain another entity as Registrar or Paying Agent, the Corporation shall act as such. (c) Registration of transfers of Class C-6 Shares shall be effected without charge by or on behalf of the Corporation, but upon payment (with the giving of such indemnity as the Corporation may require) in respect of any tax or other governmental charges that may be imposed. SECTION 9.05. Transfer Restrictions. The Class C-6 Shares may only be transferred (i) to QIBs and (ii) to IAIs who, if they are not QIBs, prior to such transfer, furnish to the Corporation or the Transfer Agent a signed letter containing certain representations and agreements relating to restrictions on transfer by such IAI and who hold their Class C-6 Shares through a DTC participant. The foregoing restriction may be waived if the Corporation, in its sole discretion, determines such restrictions are no longer necessary to preserve the Corporation's exemptions from registration requirements under the Securities Act, the Securities Exchange Act and the 1940 Act. Any purported 19 purchase or transfer of the Class C-6 Shares in violation of such restrictions will be null and void. Furthermore the Corporation may also require the sale of Class C-6 Shares held by holders who fail to comply with the foregoing. ARTICLE 10 MISCELLANEOUS PROVISIONS SECTION 10.01. Preemptive Rights. No holder of any of the Class C-6 Shares shall have any preemptive or preferential right to acquire or subscribe for any treasury or unissued shares of any class or series of the stock of the Corporation now or hereafter to be authorized, or any notes, debentures, bonds, or other securities convertible into or carrying any right, option or warrant to subscribe for or acquire shares of any class or series of stock of the Corporation now or hereafter to be authorized, whether or not the issuance of any such shares, or such notes, debentures, bonds or other securities, would adversely affect the distribution or voting rights of such holder, and the Board of Directors of this Corporation may issue shares of any class or series of stock of this Corporation, without offering any such shares of any class or series of stock of the Corporation, either in whole or in part, to the existing shareholders of any class or series of stock of this Corporation. SECTION 10.02. Conversion Rights. The Class C-6 Shares shall have no right to convert into the Common Shares, any of the other Class C Shares or any other equity security or indebtedness of the Corporation other than the Conversion Shares. ARTICLE 11 GENERAL PROVISIONS SECTION 11.01. General Provisions. The headings of the paragraphs, subparagraphs, clauses and subclauses of this Certificate of Designation are for convenience of reference only and shall not define, limit or affect any of the provisions hereof. 20 IN WITNESS WHEREOF, Farmers Group, Inc. has caused this Certificate of Designation to be signed and attested by its undersigned Vice President and Secretary this 7th day of February, 2001. --- FARMERS GROUP, INC. By:/s/ Julian R.M. Harvey -------------------------------- Name: Julian R.M. Harvey Title: Vice President /s/ Doren Hohl ----------------------------------------- Name: Doren Hohl Title: Secretary STATE OF CALIFORNIA ) )ss COUNTY OF Los Angeles ----------- On February 7, 2001 before me, Hazel C. Bautista, personally appeared --- ----------------- Julian R.M. Harvey and Doren Hohl. X personally known to me. --- -or- ___ proved to me on the basis of satisfactory evidence to be the persons whose names are subscribed to the within instrument and acknowledge to me that they executed the same in their authorized capacities, and that by their signatures on the instrument the persons, or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. /s/ Hazel C. Bautista ---------------------------------------------- Notary Public in and for said County and State Exhibit 10.5 1 FARMERS GROUP, INC. EXECUTIVE INCENTIVE PROGRAM AS AMENDED DECEMBER 2000 1. Purpose ------- The Farmers Group, Inc. Executive Incentive Program (the "Program") is designed to award and compensate key executives who contribute substantially to the financial success of Farmers Group, Inc., its subsidiaries and its affiliates (the "Corporation"), and to focus the efforts of such key executives on the continued success of the Corporation. 2. Administration -------------- (a) The Program shall be administered by the Chief Executive Officer (CEO) as hereinbelow described. The CEO shall have discretion to select key executives who are to be eligible to receive awards under the Program with respect to each fiscal year, and to determine the amount of such awards, subject to the terms and conditions set forth in the Program and such other terms and conditions as are not inconsistent with the purposes and provisions of the Program. (b) The CEO may establish such rules and regulations as deemed appropriate for proper administration of the Program and may modify or revoke such rules and regulations from time to time. In addition, the CEO may make such determinations and take such action in connection with the Program as are necessary. (c) All determinations and interpretations of the CEO shall be final and binding, except that awards for the CEO and the direct reports to the CEO are subject to final approval by the Zurich Financial Services Chairman. 3. Eligibility and Participation ----------------------------- Eligibility and participation in the Program are restricted to the Chief Executive Officer (CEO) of the Corporation and such Home Office Officers and Field Executives of the Corporation whom the CEO selects to receive awards under the Program. 4. Determination and Allocation of Awards -------------------------------------- (a) Awards under the Program shall be made from a pool (the "Pool"). The Pool for a given year shall consist of twenty percent (20%) of Growth in Earnings (as hereinbelow defined) for that year, less a factor for a decrease in Exchange Surplus as also defined below. (b) Growth in Earnings for a particular year shall mean the increase in the IAS Net Income of the Corporation over the IAS Net Income of the Corporation for the immediately preceding year. For purposes of determining the amount of the Pool, IAS Net Income shall be adjusted as follows: (1) Awards paid or accrued under this Program shall be excluded; 2 (2) Capital gains or losses attributable to sales of real estate or equipment used solely in the Corporation's insurance business shall be excluded to the extent that they individually or collectively exceed two percent (2%) of IAS Net Income in any one calendar quarter; (3) In the event that the statutory rates used in determining Federal Income Tax and/or California Franchise Tax are increased or decreased in a particular year from the rates applicable during the immediately preceding year, or if the method of determining and reporting said taxes changes due to a change in accounting method required by a recognized rule-making body, said taxes applicable to the preceding year shall be recalculated on an equivalent basis in determining IAS Net Income for such preceding year; (4) Capital gains or losses arising from the sale or other disposition of any joint venture investment of FIG Holding Company entered into before January 1, 1974 shall be excluded; (5) Any expense or income attributable to merger or acquisition activities shall be excluded; and (6) Other extraordinary items as approved jointly by the CEO and the Chief Financial Officer (CFO) of the Corporation. (c) Growth in Earnings for each year shall be determined by the CFO for the Corporation and verified by the independent certified public accountants of the Corporation. The Pool shall be an accrued liability in the consolidated financial statements of the Corporation and the amount accrued in the Pool shall not be placed in a separate account or in trust or otherwise be segregated from the general funds of the Corporation. (d) A three-year weighted average Surplus Ratio shall be calculated and compared to the Target Surplus Ratio of 33 1/3% (premium written to surplus of 3 to 1). If the three-year weighted average Surplus Ratio is at or greater than 33 1/3%, no reduction in the Bonus Pool will be made. If the three-year weighted average Surplus Ratio is less than 33 1/3%, the Bonus Pool will be reduced in the following manner. A Maximum Reduction of 20% of the Bonus Pool will be made when the Exchange Surplus Ratio is 28.57% (premium written to surplus of 3.5 to 1) or lower. The Maximum Reduction will be reduced proportionately based on where the three-year weighted average Surplus Ratio falls between 33 1/3% and 28.57%. (e) The Award to the Chief Executive Officer of the Corporation under the Program for each year shall not exceed seventy-five percent (75%) of the base salary paid to the Chief Executive Officer during the year to which the award relates, except as outlined in section 4(h) below. The Award amount for the Chief Executive officer shall be determined by the Zurich Financial Services Chairman. (f) Each year during first quarter, the Chief Executive Officer shall evaluate the performance and contribution to the successful operation of the Corporation of each Officer and Field Executive of the Corporation and determine the percentage of the Pool for the preceding year which he believes should be awarded to each such individual. Such recommendations shall be in an amount not to exceed one hundred percent (100%) of the Pool, except as outlined in section 4(h) below, less the percentage of the Pool awarded to the Chief Executive Officer. Awards for Level I executives shall not exceed 75% of salary, awards to Level II executives shall not exceed 60% of salary, awards for Level III executives shall not exceed 40% of salary, except as outlined in section 4(h) below. Membership in each level shall be determined by the Chief Executive Officer at the outset of the 3 performance year. (g) Such awards may be based on estimated prior year end and financial results and confirmed when actual year end and financial results are available. No award made under the Program shall exceed the maximum award applicable to the level of the incumbent either 75%, 60%, or 40% of the base salary paid to an individual during the year to which the award relates, except as outlined in section 4(h) below. (h) Payment of EIP awards is contingent upon performance of the Corporation as it relates to the performance of a peer group of companies. Depending upon which quartile performance falls, individual awards may be increased/decreased based on individual performance as shown below:

Should the results in the Peer Group Comparison differ between the Property & Casualty operations (P&C) and the Life Company, the proportion of each business' net income to total net income will be used to modify the above award adjustments. Should the Award Pool be insufficient to fund the approved awards in the 4th quartile, additional funds will be added and expensed. In no event will the amount of the additional funds be greater than one-third of the original Pool for the year. A comparative analysis is to be provided to the CEO each year to substantiate the current year's awards. (i) Payments of awards under the Program shall be within the absolute discretion of the CEO except as outlined in section 2(c). The CEO shall be under no obligation to award all of the Pool or any portion thereof. (j) The Pool shall not accumulate from year to year, and any amount in the Pool not distributed pursuant to the Program shall revert to net income of this Corporation. (k) Payment of awards under the Program shall be made no later than April 15 after the close of the calendar year to which the award relates. (l) The Corporation shall have the right to deduct any sums required to be withheld by federal, state or other applicable laws from payments of awards under the Program. 5. Rights of Participants and Beneficiaries ---------------------------------------- (a) No individual shall have any vested or protectable interest in, legal right to, or shall otherwise be entitled to, any amount under the Program until awards are distributed each year. Nothing in the Program shall be deemed to give any individual, or his or her legal representative or assigns, or any other person or entity claiming under or through him, any contract or right to participate in the benefits of the Program. 4 (b) The Corporation shall pay all amounts payable hereunder only to the individual or beneficiaries entitled thereto pursuant to this Program. The Corporation shall not be liable for the debts, contracts, or engagements of any individual or his or her beneficiaries, and rights to payments under this Program may not be taken in execution by attachment or garnishment, or by any other legal or equitable proceeding while in the hands of the Corporation; nor shall any individual or his or her beneficiaries have any right to assign, pledge, or hypothecate any benefits or payments hereunder. (c) Participation in the Program shall not be construed as constituting a commitment, guarantee, agreement or understanding of any kind that the Corporation shall continue to employ any individual. (d) Any individual eligible to participate in the Program may designate a beneficiary to receive payments of awards under the Program in the case of such individual's death. (e) Commencing with awards to be made for services rendered, on or after January 1, 1984 and for which awards are to be paid after January 1, 1985, any individual eligible to participate in the Program may request that payment of all or a portion of any award be deferred until the occurrence of retirement, death or permanent disability. Such request must be made to the CEO in writing on or before December 31 of each performance year, which is the year prior to the date the awards are determined and paid (i.e., a request must be made on or before December 31, 1988, relating to any award under the Program which might be determined and paid in 1989). Such request shall specify a percentage of the award to be deferred in accordance with the guidelines in effect at the time. Once such a request for deferral is made, it may not be withdrawn by the participant except with respect to any awards for service to be performed in calendar years following the year in which the date such request for withdrawal is made. If the CEO selects the individual for an award and consents to the request for deferred payment, to any amount so deferred there will be interest added to the deferred amount for each year or partial year the payment of the award is deferred. The participant in this Deferred Payment Plan may elect at the time of initially requesting deferral to commence payment of benefits within thirty (30) days of retirement, death or the date it is established to the satisfaction of the CEO that the participant has a permanent disability, either in a single payment or in five (5) or ten (10) equal annual payments to which will be added an interest equivalent from the first payment date computed as provided above. On single payments made within 30 days of retirement, death or disability, the interest rate earned between the date of retirement, death or disability until the date of disbursement will be based on the average yield of the institutional money market fund in which the Corporation invests. In the event of extreme hardship, any participant may make a written request to the CEO for immediate payment. For this purpose, an extreme hardship is an unanticipated emergency caused by an event beyond the control of the participant that would result in severe financial hardship if early withdrawal were not permitted. The amount to be withdrawn must be limited to the amount necessary to meet the emergency. Amounts deferred under this Section 5 (e) will be held as part of the general assets of the Corporation and shall not be set aside or funded in any manner; provided that deferred amounts and any earnings thereon may be set aside in one or more non-qualified grantor trusts so long as such arrangements do not result in benefits hereunder being considered funded for federal tax purposes. Notwithstanding any other provision hereof, to the extent deferred amounts are funded through one or more grantor trusts, then earnings or appreciation thereon shall be determined solely by reference to the experience of assets in such trust or trusts. This Corporation shall direct the trustee or trustees of such trust or trusts, as the case may be, as to the investment of assets in such 5 trust or trusts and the Corporation may, in advising the trustee, offer, in any manner and to any extent it deems appropriate, Participants the opportunity to advise the Corporation as to how assets allocated to their respective accounts are to be invested. In no event may Participants communicate directly with any trustee in regard to asset investment. Participants shall in no event have rights greater than those of general creditors of the Corporation with respect to any amounts held in trust. Any amounts deferred hereunder as well as any earnings are not subject to anticipation, alienation or hypothecation by any Participant. 6. Termination of Employment ------------------------- (a) In the event of death, disability or retirement during the year to which the award relates, a pro rata award shall be paid to any individual who would have otherwise received an award under the Program. In the event of disability or retirement, such award shall be paid to the individual. In the event of death, such award shall be paid to the individual's estate or legal representative, as determined by the CEO or, in the event the individual has designated a beneficiary to receive payments of awards under the Program in the case of such individual's death, to such beneficiary. (b) In the event of termination of employment for any other reason during the year to which the award relates, such individual's eligibility to receive any award for such year shall be terminated, although the Chief Executive Officer may, at his discretion, grant a pro rata award. (c) In the event of termination of a participant's employment in the Deferred Payment Plan for any reason other than retirement, permanent disability or death, payment of all deferred amounts in the Deferred Payment Plan together with the appropriate interest equivalent will be made in a single payment within 30 days after the employment termination date. From the date of termination until distribution, Deferred amounts will earn an interest rate based on the average yield of the institutional money market fund in which the Corporation invests. 7. Effective Date, Amendment and Termination of Program ---------------------------------------------------- The amendments to the Program adopted by the Board of Directors on August 5, 1983 shall be effective for the year ending December 31, 1983. The amendments to the Program adopted by the Board of Directors in November 1987 and in February 1988 shall be effective for the year ending December 31, 1987 and subsequent years. The amendments to the Program adopted in November 1988 shall be effective for the year ending in December 1988 ad subsequent years. The amendments to the Program adopted in February 1990 shall be effective for the year ending in December 1990 and subsequent years. The amendments to the Program adopted in May and November 1993 shall be effective for the year ending in December 1993 and subsequent years. The amendments to the Program adopted in May and August 1997 shall be effective for the year ending in December 1997 and subsequent years. The amendments to the Program adopted in February 1999 shall be effective for the year ending December 31, 1998 and subsequent years. The amendments to the Program adopted in December 2000 shall be effective for the year ending December 31, 2000 and subsequent years. The Program may be amended or terminated at any time by the CEO or the Zurich Financial Services Chairman. Such amendment or termination shall not adversely affect or alter any right or obligation with respect to any award previously made hereunder. 8. Special Rule ------------ Benefits under the Program, whether paid currently or deferred under Section 5, constitute no more than an unsecured promise by the Corporation to provide said benefits and no participant or beneficiary shall have rights greater than those of a general creditor of the Corporation 6 in either the general assets of the Corporation or the assets of any trust established under Section 7 hereof in connection with such benefits. 9. Governing Law ------------- This Program shall be governed by the laws of the State of California. Exhibit 12 FARMERS GROUP, INC. AND SUBSIDIARIES COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (Amounts in thousands) (Unaudited)

Exhibit 99 1 RISK MANAGEMENT Disclosure - General Comment ---------------------------- When used or incorporated by reference in disclosure documents, the words "anticipate", "estimate", "expect", "project", "target", "goal" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933. These forward-looking statements are subject to certain uncertainties, risks and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove to be inaccurate, the actual results may vary materially from those anticipated, estimated, expected or projected. Additionally, these forward-looking statements are relevant only as of the date of the document. The Company's management expressly disclaims any obligation to publicly release updates or revisions to any forward-looking statement contained herein to reflect changes in the Company's expectations with regard to any change in events, conditions or circumstances on which any such statement is based. Market Risk ----------- Generally, market risk represents the risk of loss that may occur due to potential changes in a financial instrument's valuation or cash flow due to changes in interest rates, currency exchange rates and in equity and commodity prices. Market risk is inherent to both derivative and non-derivative financial instruments. General Risk Management Procedures ---------------------------------- The Company's Investment Committee has oversight responsibilities for all operational and other matters that affect the Company's day-to-day investment activities. The Investment Committee monitors the market risk faced by the Company's various entities and portfolios. The asset and liability management strategy are formulated and monitored by the Investment Committee. The Committee meets monthly to review, among other things, statements detailing the Company's market risks and trends, portfolio holdings at book and market value, equity exposure and surplus positions, and interest rate scenario stress tests. The stress testing provides insights into the sensitivity of the assets to interest rate changes. The Committee is comprised of the Chief Executive Officer, Chief Investment Officer, Chief Financial Officer and other senior executives. The Company also conducts extensive cash flow testing on an annual basis for the Farmers New World Life Insurance Company ("Farmers Life") book of business. This review examines the adequacy of reserves under various interest rate environments. The Company examines the asset and liability matching throughout the year using quarterly scenario tests and monthly asset duration reports. This Committee also reviews investment policies and procedures and makes recommendations to the Board of Directors of the Company based upon the results of its review. In addition, Farmers Life's Interest Committee has responsibility for managing spreads between rates credited on interest-sensitive products and portfolio earnings rates. The Interest Committee is comprised of the following Farmers Life personnel: Actuary, Treasurer and other officers. The Company has contracted with Zurich Scudder Investments, Inc. ("ZSI"), formerly known as Scudder Kemper Investments, Inc., for the purpose of providing investment advice, trade execution and other investment related services. As of December 31, 2001, Zurich had entered into an agreement to sell ZSI to Deutsche Bank AG. Deutsche Asset Management, a member of Deutsche Bank AG, will manage the Insurance Subsidiaries investment portfolio and the Farmers Management Services investment portfolio after the sale is completed. ZSI utilizes a number of market risk management tools including, but not limited to, fixed income securities interest rate sensitivity analysis, following established limits on trading activity and asset allocation, marking all equity positions to market on a daily basis, marking all fixed income positions to market at least monthly and analyzing investment profit and loss statements and investment holding asset class mix reports. Additionally, ZSI reports positions, profits and losses, credit quality evaluation results and trading strategies, including the period's acquisitions 2 and dispositions to the Investment Committee on a monthly basis. The Company believes that these procedures, which focus on meaningful communication between ZSI and the Company's senior management, are one of the most important elements of the risk management process. Although the Company has a number of procedures to reduce the level of exposure to interest rate risk and equity price risk, the Company continues to remain vulnerable to both of these market risks. There can be no assurance that the Company will not experience changes in stockholders' equity, net income and net interest income during periods of increasing or decreasing interest rates and/or equity prices. The Company's management does not anticipate any significant changes in the way it currently manages market risks. Primary Market Risk Exposures ----------------------------- The Company's exposure to market risk is primarily attributable to the interest rate risk and equity price risk inherent in the Company's investment related activities and in the Company's annuity product underwriting activities. To a lesser extent, the Company has exposure to interest rate risk as a result of its issuance of Cumulative Quarterly Income Preferred Securities ("QUIPS"). A description of the Company's primary market risk exposures as of December 31, 2001 and a brief narrative explaining how each exposure is currently being managed follows: Interest Rate Risk ------------------ The Company has significant exposure to interest rate risk primarily as a result of maintaining an investment portfolio which includes interest rate sensitive financial instruments and as a consequence of underwriting interest rate sensitive annuity products. Therefore, the Company exposes itself to interest rate risk, arising from changes in the level or volatility of interest rates, mortgage prepayment speeds or the shape and slope of the yield curve. Additionally, the fair value of the Company's QUIPS has exposure to interest rate risk. In general, the fair values of fixed-rate financial instruments have an inverse correlation to changes in interest rates. Therefore, an increase in interest rates could result in an unfavorable or untimely decrease in the market value of the Company's fixed income investments. Furthermore, the Company has classified all of its marketable fixed income investments as available-for-sale as defined by SFAS No. 115, with the exception of the grantor trusts which were classified as trading securities as defined by SFAS No. 115. The available-for-sale fixed income investments are reported on the balance sheet at market value, with unrealized gains and losses, net of tax, excluded from earnings and reported as a component of stockholders' equity. The trading investments are reported on the "Other assets" line in the Farmers Management Services section of the balance sheet at market value with both realized and unrealized gains and losses included in earnings, net of tax, in the year in which they occur. As such, an increase in interest rates could adversely affect the Company's stockholders' equity. Generally, the change in fair value of the Company's QUIPS, UKISA notes receivable and ZGAUS note receivable (see Note G) and investments in certificates of contribution and the surplus notes of the P&C Group Companies (see Note H) that may arise due to changes in interest rates would not be reflected in the Company's consolidated financial statements, since these financial instruments are not classified as marketable securities pursuant to SFAS No. 115. Exposure Management ------------------- The principal objective of the Company's interest rate risk management activities is to evaluate the interest rate risk included in certain balance sheet accounts, determine the level of risk appropriate given the Company's business objectives, operating environment, capital and liquidity requirements and performance objectives and to manage this risk consistent with approved guidelines. 3 Farmers Life employs various methodologies to manage its exposure to interest rate risks. Its asset/liability matching process focuses primarily on the management of interest rate risk. The duration of insurance liabilities is compared to the duration of assets backing the insurance product lines, measured in terms of cash flows. The goal is to prudently balance profitability and risk for each insurance product class and for Farmers Life as a whole. Farmers Life also considers the timing of cash flows arising from market risk sensitive instruments and insurance portfolios under varying interest rate scenarios (cash flow testing) to verify its ability to meet future obligations. Although these activities seek to reduce interest rate exposures, a change in levels of interest rates remains an uncertainty that could have an impact on the fair values or earnings of the Company. Quantitative Disclosure of Interest Rate Risk --------------------------------------------- The table below represents a summary of the par values of the Company's financial instruments at their expected maturity dates, the weighted average coupons by those maturity dates and the estimated fair value of those instruments as of December 31, 2001. The expected maturity categories take into consideration par amortization (for mortgage backed securities), call features and sinking fund features. The estimated market value of available-for-sale securities is based on bid quotations from security dealers or on bid prices published in securities pricing services. The fair value of UKISA notes receivable, ZGAUS note receivable, QUIPS, certificates of contribution and surplus notes of the P&C Group Companies, mortgage loans, policy loans and future policy benefits, were analytically determined utilizing discounted cash flow analysis. December 31, 2001 market interest rates were used as discounting rates in the estimation of fair value. Generally, the assets included in the table below have fixed stated interest rates. The QUIPS also have fixed stated rates; whereas, the future policy benefits-deferred annuities generally include variable rate contract terms. 4 Financial Instruments - With Interest Rate Risk As of December 31, 2001 (Amounts in thousands) (Unaudited)

5 Equity Price Risk ----------------- As a consequence of maintaining an investment portfolio composed of equity securities and maintaining purchased S&P 500 call options that hedge certain liabilities created as a result of underwriting equity-linked annuity products, the Company is exposed to equity price risk. Equity price risk arises as a result of changes in the level and volatility of equity prices which in turn affect the value of equity securities and/or instruments that derive their value from a particular equity security, basket of equity securities or an equity securities index. The Company has classified all of its marketable equity investments as available-for-sale as defined by SFAS No. 115, with the exception of an investment in Endurance Specialty Insurance Limited ("Endurance") as well as investments related to the grantor trusts. The available-for-sale investments are reported on the balance sheet at market value, with unrealized gains and losses, net of tax, excluded from earnings and reported as a component of stockholders' equity. As of December 31, 2001, the Company held $50.0 million of common stock of Endurance. The Company purchased the Endurance equity securities in a private placement offer in December 2001. Accordingly, these investments were carried at cost as of December 31, 2001 and were reported on the "Other investments" line in the Farmers Management Services section of the consolidated balance sheet. In addition, as of December 31, 2001 investments related to the grantor trusts, which were classified as trading securities under SFAS No. 115, were reported on the "Other assets" line in the Farmers Management Services section of the consolidated balance sheet at market value with both realized and unrealized gains and losses included in earnings, net of tax, in the year in which they occurred. The Company's equity price risk relative to its underwriting of equity-linked annuity products exists as a result of the potential liability that may exist at the end of these products' contract terms. At the end of a seven year term, these annuity products credit interest to the annuity participant at a rate based on a specified portion of the change in the value of the S&P 500, subject to a guaranteed annual minimum return. As such, an increase in the S&P 500 could increase the liability due at the maturity of these annuity products and adversely affect the Company's stockholders' equity. Exposure Management ------------------- On a monthly basis, the Investment Committee evaluates the level of equity price risk that it believes the Company should carry giving consideration to, among other things, the ratio of investments in equity securities as a percentage of stockholders' equity. Management utilizes a number of equity price risk management tools including, but not limited to, reviewing equity investment trading activity, marking all equity positions to market daily, analyzing investment profit and loss statements and reviewing the industry sector allocation and capitalization mix of the Company's investments in marketable equity securities. As indicated above, the Company is exposed to equity price risk (primarily the S&P 500) as a consequence of underwriting equity-linked annuity products through Farmers Life. However, the Company addresses this risk through a controlled program of risk management that includes the use of derivative financial instruments. The Company purchases S&P 500 call options to reduce the exposure to rising equity prices that results from underwriting the equity linked annuity product. Call options are contracts that grant the purchaser the right to buy the underlying index on a certain date for a specified price. The Interest Committee of Farmers Life monitors option market pricing and manages the participation rate on the equity-linked annuity products to minimize the associated equity price risk. See Note M of the Company's consolidated financial statements. Quantitative Disclosure of Equity Price Risk -------------------------------------------- The table below represents a sensitivity analysis of the equity price risk that exists within the Company's investment in equity financial instruments. The equity market risk associated with the equity-linked annuity products is substantially offset by the related option contracts, therefore, these instruments taken as a whole, do not materially impact the Company's market risk position. As such, the table below focuses on the equity investment securities. The Farmers Management Services equity investment portfolio and the Insurance Subsidiaries equity investment portfolio 6 both have weighted average betas of .97. The weighted average beta is calculated as the portfolio weighted average of the individual asset betas. The individual asset betas are calculated using sixty months of historical data. The individual asset betas are calculated relative to a broadly defined universe of approximately 3,100 assets, consisting of companies whose market capitalization is greater than $250 million. Then a portfolio beta is calculated for both the Company's portfolio and the benchmark S&P 500 index. The weighted average beta is equal to the ratio of the portfolio beta to the S&P 500 beta. In light of the Company's weighted average beta, the Company expects the market value of its equity investment portfolio to have a strong correlation to movements in the S&P 500 index. As indicated in the table below, if the S&P 500 index were to move by a positive or negative 10%, the Company estimates that there would be a corresponding 9.7% change in the market value of both the Farmers Management Services' investment in equity securities and in the market value of the Insurance Subsidiaries' investment in equity securities. The change in the market value of the Company's investments in equity securities would be in the same direction as the change in the S&P 500 index. Trading Financial Instruments - With Equity Price Risk As of December 31, 2001 (Amounts in thousands)

Foreign Exchange Rate Risk -------------------------- Foreign exchange rate risk arises from the possibility that changes in foreign exchange rates will impact the value or cash flows of financial instruments. When a company buys or sells a financial instrument denominated in a currency other than US dollars, exposure exists from the net open currency position. Until the position is covered by the selling or buying of an equivalent amount of the same currency or by entering into a financing arrangement denominated in the same currency, a company is exposed to a risk that the exchange rate may move in an unfavorable direction against the US dollar. The Company does not have any material holdings of financial instruments denominated in a currency other than US dollars as of December 31, 2001. Credit Risk ----------- Credit risk arises from the potential inability of a counterparty to perform on an obligation in accordance with the terms of the contract. The Company's primary credit risk exposure exists as a result of maintaining both a fixed income investment portfolio and a mortgage loan portfolio. As a holder of these financial instruments, the Company is exposed to default by the issuer or to the possibility of market price deterioration as a counterparty may experience deterioration in its credit quality. The Company has established policies and procedures to manage this credit risk. For example, the Investment Committee is responsible for monitoring the credit quality of securities positions held in the Company's fixed income investment portfolios in order to quantify and limit the risk to the Company of issuer default or changes in credit spreads. The Company's management does not believe that there are any concentrations of credit risk to unaffiliated parties as of the year ended December 31, 2001. The Company does not currently use derivative products to manage credit risk. 15

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