Guidelines to Farmers Group - JUN 1171 7a If,
General
1. Farmers' mission is to be recognised as the premier insurance company in America, by
being the best insurance company in terms of the cam taken of all its constituencies,
though not necessarily the biggest company.
2. The primary objective agreed for Farmers is to achieve a steady increase in net income
from the management of Property and Casualty businesses and from the ownership of
Life Insurance subsidiaries. Priority should be given to improving profitability in the
Exchanges through improved underwriting and through rate increases.
3. Farmers must ensure the highest standards of compliance with local regulations
throughout its bu i esses.
Financial Guidelines
4. Farmers should aim to increase net Income by an average of at least 15 % per annum.
5. The growth rate in dividends should be raised to about 18% per annum so that the
dividend payout ratio increases by 1% per annum from 35% in 1991 towards a level
consistent with B.A.T Industries' declared intention of a 40%-50% payout ratio. The
minimum dividends expected from Farmers (gross of 5% withholding tax) are:-
sm JM = 1294 JW IM 12L7
Dividend 174 203 236 289 349 420
6. Farmers should, where possible, continue to lend its spare financial resources
(currently around S400 million) to B.A.T Industries, on an arm's length basis. In
particular, consideration should be given to the utilisadon of surplus funds retained by
the Life Companies which are currently estimated to be in the region of S250 million.
7. Farmers should seek to achieve a superior investment return for the Management
Company, Life Companies and the Exchanges.
Investment performance is measured on the basis of total return, using market value for
all securities.
The objective for the common stock portfolio is to out-perform both the S&P 500 and
the median equity fund as reported quazterly by the PIPER Survey (Pension and
Investments Performance Evaluation Report).
For fixed income portfolios, the goal for municipals is to out-perform a duration-
matched Shearson Lehman Index, and for axables, to out-perform both the PIPER
median fixed income manager and a Merrill Lynch market-weighted, dumtion-matchad
Index.
S. Farmers should develop a method of managing and presenting information on a cash PO
flow basis over the nut 12 months with a view to establishing cash flow based CD
guidelines in the hill=
9. Property & Casualty: Farmers should aim to achieve a minimum of 10% per annum
growth In net prendums written. Clearly in this context, priority should be given to J:1b
improved underwriting and achievement of adequate ram rises. c-n
BAT INDUSTRIES CONFIDENTIAL. CATEGORY 1: MINNESOTA TOBACCO LITIGATION
BAT Industries document for Province of British Columbia 23 April 1999

2 -
Growth in policies in force should be secondary to achieving a satisfactory underwriting
result in order to maintain the long-term strength of the Exchanges.
10. Farmers' Consolidated Exchanges should keep the surplus ratio over 33 1/3% on a US
Statutory accounting basis with an *ective of 40% by the end of the Plan period. This
ratio will be reviewed on receipt of the NAIC proposals for the development of a risk
based capital formula.
Farmers should seek to maintain a Best's 'A' rating.
Means of supporting the Exchanges Premium/Surplus ratio must continue to be fully
researched. Reductions to the rate of management fee or additional capital contribution
are only acceptable if it can be demonstrated that this will provide the Management
Company with more profitable growth.
11. Farmers should aim for an avenge 20% after-tax return on the property and casualty
operations of the Management Company, based on historical accounting (i.e. GAAP)
figures. The Exchanges should aim for a minimum 18% after tax return on a statutory
accounting basis. When compiling the figures, the Exchanges' increase in surplus
should be used rather than net income as unrealised gains should be recognised. Cne
return rate is based on the requirement to meet the solvency margin target in 10. above
and enable the Exchanges to repay the Surplus notes of S642 million on the due dates).
In both, cases, 1991 should be used as the base yew.
12. To reduce the expense ratio (currently around 34%) as measured by the combined
exchanges and management company expenses expressed as a perccnmge of net
premiums written to 28% by 1997.
13. Life subsidiaries: Farmers should actively seek to achieve a 15 % post-tax return on
the opening shareholders' funds after making allowance for surplus funds (estimated at
S250 million) retained within die Life operation. Alternative uses of the S250m surplus
funds should be sought to improve current returns. 'nis measure will be reviewed
following finalisadon of UK proposals for the measurement of life business profits.
14. Farmers New World Life, Ohio State Life and Investors Guaranty Life should aim to
achieve growth in premiums and policy charges of at least 15% per annum.
Snecific Priorities
15. Market Share: Priority should be given to the objective of achieving and maintaining a
market share within the top three within each State in which Farmers operates. The Plan
should include a state by state review of how this should be achieved. This review
should consider the history of ==Mphes I regulatory environment to assess whether
the objective is valid for ew.b State.
16. Geogmphk Balance: Farmers should give priority to balancing its geographic
representation in order to reduce cm=tr-ation in those Sta= with a high incidence of
natural disasters.
17. New Statec While pursuing organic growth within its existing businesses, Farmers
should also review opportunities to expand into new Stan, aiming to achieve market
BAT INDUSTRIES CONFIDENTIAL. CATEGORY 1: MINNESOTA T013ACCO LITIGATION
BAT Industries document for Province of British Columbia 23 April 1999

.3
positions similar to those achieved for the existing businesses. Where an acquisition is
proposed, a key criterion to be met should be that the company to be acquired has
sufficient internal management to support its own development without significant senior
management input by Farmers. It most also be ensured that the managers given the
responsibility for opening grow field sites should be of the highest calibre.
18. Management: A high priority should be given to ensuring that the management strength
of the Company is sufficient both to support the existing businesses and to prepare and
implement plans for expansion. This should include a review of what external
recruitment will be required.
19. Agents: 717he improvement in quality of Agents must be accelerated. Farmers should
assist Agents to increase their average policies in force levels in order to increase d%eir
commission income and to enable them to provide a fully professional scrvice to
policyholders. The target is for Agents to have a minimum of 3,000 policies in for=
within five years of their appointment 71he Plan should include a review of the
implications of this objective on the Agency force.
20. I.T. and Systems Development : Farmers should seek to strengthen its technological
competitive advantage and increase the effectiveness and efficiency of its operations
through the progressive implementation of the Business Processing System (BPS) to
schedule and on budget. Plans should also be established regarding the organisational
changes, recruitment and training that are necessary to take maximum advantage of the
BPS.
21. Employee/Agent Ratio: In the light of the focus goal, this ratio should be improved
from 1.2:1 currently to 0.75:1 by 1996, partly as a result of the technology
improvements. The ratio should be improved to 1:1 by 1994, and the Plan should
include the action steps needed to achieve this.
22. Account Selling: The focus should be on identifying and targeting profitable market
segments and on increasing the penetration of the existing customer base by raising the
number of policies sold (including Life) to each household to 2 by 1994 and to 2.5 by
1997.
23. P&C Operations-. A high priority should be given to transferring accountability and
responsibility for improving underwriting results into the regions.
24. In Commercial Lines, the focus should continue to be on 'Main Strtw America'
business, but concentrating an achieving improved profitability with volume growth only
being pursued where this does not endanger achievement of the necessary improvements
in underwriting and expenses.
25. For the We Opemitions, the key objectives should be to accelerate the growth in N)
profitable Po ficies-in -force and to improve market share through well-defined marketing C)
strategies focused on dwse market segments identified as having the best prospects for
profitable growth and through improved retention of business. -@4
-%0
HCB/djs job
23rd July IM (_n
LA
BAT INDUSTRIES CONFIDENTIAL- CATEGORY 1: MINNESOTA TosAcco LITIGATION
BAT Industries document for Province of British Columbia 23 April 1999