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

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

              For the Quarterly Period Ended June 30, 1997    
                                     
                                     OR

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

                                  95-0725935
                      (IRS Employer Identification No.)

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

                                (213) 932-3200
             (Registrants telephone number, including area code)
                                     
Indicate  by  check mark whether the registrant (1) has  filed  all
reports  required  to be filed by Section 13 or 15(d)  of  the  Securities
Exchange  Act of 1934 during the preceding 12 months (or for such  shorter
period that the registrant was required to file such reports), and (2) has
been  subject  to  such filing requirements for the past  90  days.    
Yes  /X/   No  / /

Registrant's Common Stock outstanding on June 30, 1997 was 1,000 shares.


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<PAGE>   3

                               FARMERS GROUP, INC.
                                AND SUBSIDIARIES

                           TABLE OF CONTENTS FORM 10-Q

                        FOR THE PERIOD ENDED JUNE 30,1997


PART I.   FINANCIAL INFORMATION                                             PAGE
                                                                            ----
  ITEM 1. Financial Statements

          Consolidated Balance Sheets - Assets
             June 30, 1997 and December 31, 1996                              4

          Consolidated Balance Sheets - Liabilities and Stockholder's 
             Equity
             June 30, 1997 and December 31, 1996                              5

	 Consolidated Statements of Income
             Six Month Periods ended June 30, 1997 and     
             June 30, 1996                                                    6

          Consolidated Statements of Income
             Three Month Periods ended June 30, 1997 and     
             June 30, 1996                                                    7

          Consolidated Statement of Stockholder's Equity
             Six Month Period ended June 30, 1997                             8

          Consolidated Statement of Stockholder's Equity
             Six Month Period ended June 30, 1996                             9

          Consolidated Statements of Cash Flows
             Six Month Periods ended June 30, 1997 and   
             June 30, 1996                                                   10

          Notes to Interim Financial Statements                              11

  ITEM 2. Management's Discussion and Analysis of Financial Condition
          and Results of Operations                                          16

PART II.  OTHER INFORMATION                                                  24

SIGNATURES                                                                   25


<PAGE>   4

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
                                 FARMERS GROUP, INC.
                                  AND SUBSIDIARIES
                             CONSOLIDATED BALANCE SHEETS
                               (Amounts in thousands)
                                     (Unaudited)
                                       ASSETS
<TABLE>
<CAPTION>
                                                                   June 30,    December 31,
                                                                     1997         1996
                                                                ------------- ------------
<S>                                                             <C>           <C>  
Current assets, excluding life insurance subsidiary:
 Cash and cash equivalents                                      $     545,482 $    412,018
 Marketable securities, at market value                               121,741      118,253
 Accrued interest                                                      45,018       39,148
 Accounts receivable, principally from the exchanges                   28,081       28,641
 Notes receivable - affiliate                                         135,000      135,000
 Deferred taxes                                                        13,291       35,003
 Prepaid expenses and other                                            11,186       23,985
                                                                ------------- ------------
  Total current assets                                                899,799      792,048
                                                                ------------- ------------
Investments, excluding life insurance subsidiary:
 Fixed maturities available-for-sale, at market value
  (cost: $346,114 and $182,474)                                       350,673      184,829
 Non-redeemable preferred stocks available-for-sale, 
  at market value (cost: $0 and $18)                                        0           20
 Common stocks available-for-sale, at market value
  (cost: $288,234 and $250,421)                                       353,018      307,821
 Certificates in surplus of exchanges                                 684,380      684,380
 Real estate, at cost (net of accumulated depreciation:
  $17,451 and $16,944)                                                 44,933       45,358
 Joint ventures, at equity                                              8,405       10,366
                                                                ------------- ------------
                                                                    1,441,409    1,232,774
                                                                ------------- ------------
Other assets, excluding life insurance subsidiary:
 Notes receivable - affiliate                                         272,000      272,000
 Goodwill (net of accumulated amortization: 
  $510,374 and $480,352)                                            1,891,381    1,921,403
 Attorney-in-fact contracts (net of accumulated amortization:
  $363,170 and $341,808)                                            1,345,873    1,367,235
 Other assets                                                         405,408      357,104
                                                                ------------- ------------
                                                                    3,914,662    3,917,742
                                                                ------------- ------------
Properties, plant and equipment, at cost:  (net of accumulated
 depreciation: $217,345 and $202,085)                                 429,063      447,636
                                                                ------------- ------------
Investments of life insurance subsidiary:
 Fixed maturities available-for-sale, at market value
  (cost: $3,261,972 and $3,764,192)                                 3,323,567    3,854,126
 Mortgage loans on real estate                                        112,625      122,635
 Non-redeemable preferred stocks available-for-sale, at market
  value (cost: $1,153 and $7,007)                                       1,190        6,308
 Common stocks available-for-sale, at market value
  (cost: $45 and $84,532)                                                  18      103,887
 Policy loans                                                         156,051      187,285
 Real estate, at cost (net of accumulated depreciation:
  $13,045 and $16,824)                                                 69,153       61,715
 Joint ventures, at equity                                             11,841       11,971
                                                                ------------- ------------
                                                                    3,674,445    4,347,927
                                                                ------------- ------------
Other assets of life insurance subsidiary:
 Cash and cash equivalents                                             22,842       87,310
 Accrued investment income                                             49,284       53,063
 Deferred policy acquisition costs and value of life business
  acquired                                                            823,211    1.001,044
 Securities lending collateral                                        679,117      221,216
 Other assets                                                          29,066       31,451
 Assets held in Separate Account                                      778,043      796,616
                                                                ------------- ------------
                                                                    2,381,563    2,190,700
                                                                ------------- ------------
   Total assets                                                  $ 12,740,941 $ 12,928,827
                                                                ============= ============
The accompanying notes are an integral part of these interim financial statements.

</TABLE>


<PAGE>   5
                                  FARMERS GROUP, INC.
                                   AND SUBSIDIARIES
                              CONSOLIDATED BALANCE SHEETS
                                (Amounts in thousands)
                                      (Unaudited)
                         LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
                                                                  June 30,     December 31,
                                                                    1997          1996
                                                                ------------- ------------
<S>                                                             <C>           <C>
Current liabilities, excluding life insurance subsidiary:
 Notes and accounts payable:
  Exchanges                                                      $        629 $      8,234
  Other                                                                40,368       21,004
 Accrued liabilities:
  Profit sharing                                                       26,848       52,690
  Income taxes                                                         13,819       29,831
  Other                                                                12,443       18,474
                                                                 ------------ ------------
   Total current liabilities                                           94,107      130,233
                                                                 ------------ ------------
Other liabilities, excluding life insurance subsidiary:
 Real estate mortgages payable                                            157          217
 Non-current deferred taxes                                           650,490      675,900
 Other                                                                236,685      251,315
                                                                 ------------ ------------
                                                                      887,332      927,432
                                                                 ------------ ------------
Liabilities of life insurance subsidiary:
 Policy liabilities:
  Future policy benefits                                            2,910,091    3,474,862
  Claims                                                               24,409       32,732
  Policyholder dividends                                                    0       13,358
  Other policyholder funds                                             61,544       70,816
 Income taxes (including deferred taxes: $139,991 and $195,188)       143,664      194,222
 Unearned investment income                                             1,092        2,302
 Other liabilities                                                     54,613       61,207
 Securities lending liability                                         679,117      221,216
 Liabilities related to Separate Account                              778,043      796,616
                                                                 ------------ ------------
                                                                    4,652,573    4,867,331
                                                                 ------------ ------------
   Total liabilities                                                5,634,012    5,924,996
                                                                 ------------ ------------

Commitments and contingencies

Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debentures                                               500,000      500,000
                                                                 ------------ ------------
Stockholder's Equity:
 Common stock, $1 par value per share; authorized, issued
  and outstanding:  as of June 30, 1997 and    
  December 31, 1996--1,000 shares                                           1            1
 Additional capital                                                 5,212,618    5,212,618
 Unrealized gains (net of deferred taxes of $37,325
  and $49,781)                                                         73,652       92,104
 Retained earnings                                                  1,320,658    1,199,108
                                                                 ------------ ------------
   Total stockholder's equity                                       6,606,929    6,503,831
                                                                 ------------ ------------
     Total liabilities and stockholder's equity                  $ 12,740,941 $ 12,928,827
                                                                 ============ ============
The accompanying notes are an integral part of these interim financial statements.

</TABLE>

<PAGE>   6
                               FARMERS GROUP, INC.
                                AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                             (Amounts in thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                      Six month period
                                                                       ended June 30,
                                                                  ------------------------
                                                                      1997        1996
                                                                  -----------  -----------
<S>                                                               <C>          <C> 
Consolidated operating revenues                                   $ 1,010,310  $   998,785
                                                                  ===========  ===========
Management services to property and casualty
 insurance companies; and other:
  Operating revenues                                              $   649,538  $   618,262
                                                                  -----------  -----------
  Salaries and employee benefits                                      166,982      171,572
  Buildings and equipment expenses                                     45,438       41,962
  Amortization of AIF contracts and goodwill                           51,384       51,384
  General and administrative expenses                                  99,800       83,769
                                                                  -----------   ----------
    Total operating expenses                                          363,604      348,687
                                                                  -----------   ----------
    Operating income                                                  285,934      269,575
  Net investment income                                                70,403       54,289
  Net realized gains                                                   40,703        1,586
  Gain on sale of subsidiaries                                         16,536            0
  Dividends on preferred securities of subsidiary trusts              (21,035)     (21,035)
                                                                  -----------   ----------
    Income before provision for taxes                                 392,541      304,415
  Provision for income taxes                                          175,974      123,130
                                                                  -----------   ----------
    Management services income                                        216,567      181,285
                                                                  -----------   ----------
Life subsidiaries:
  Premiums                                                             83,881       83,738
  Policy charges                                                      115,521      118,810
  Investment income, net of expenses                                  152,765      156,268
  Net realized gains                                                    8,605       21,707
                                                                  -----------  -----------
    Total revenues                                                    360,772      380,523
                                                                  -----------  -----------
  Policy benefits                                                      69,677       73,440
  Increase in liability for future policy benefits                      6,247        5,548
  Interest credited to policyholders                                   80,834       82,647
  Amortization of deferred policy acquisition costs and
   value of life business acquired                                     55,481       56,274
  Commissions                                                          10,106       10,599
  General and administrative expenses                                  28,575       30,824
                                                                  -----------  -----------
    Total operating expenses                                          250,920      259,332
                                                                  -----------  -----------
    Income before provision for taxes                                 109,852      121,191
  Provision for income taxes                                           36,269       40,487
                                                                  -----------  -----------
    Life subsidiaries income                                           73,583       80,704
                                                                  -----------  -----------

Consolidated net income                                           $   290,150  $   261,989
                                                                  ===========  ===========
The accompanying notes are an integral part of these interim financial statements.
</TABLE>

<PAGE>   7
                               FARMERS GROUP, INC.
                                AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                             (Amounts in thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                     Three month period
                                                                       ended June 30,
                                                                  ------------------------
                                                                      1997        1996
                                                                  -----------  -----------
<S>                                                               <C>          <C> 
Consolidated operating revenues                                   $   495,364  $   494,700
                                                                  ===========  ===========
Management services to property and casualty
 insurance companies; and other:
  Operating revenues                                              $   328,686  $   311,677
                                                                  -----------  -----------
  Salaries and employee benefits                                       83,662       84,336
  Buildings and equipment expenses                                     23,140       21,378
  Amortization of AIF contracts and goodwill                           25,692       25,692
  General and administrative expenses                                  50,721       39,951
                                                                  -----------   ----------
    Total operating expenses                                          183,215      171,357
                                                                  -----------   ----------
    Operating income                                                  145,471      140,320
  Net investment income                                                36,148       27,376
  Net realized gains                                                   10,268          777
  Gain on sale of subsidiaries                                         16,536            0
  Dividends on preferred securities of subsidiary trusts              (10,517)     (10,517)
                                                                  -----------   ----------
    Income before provision for taxes                                 197,906      157,956
  Provision for income taxes                                           79,282       63,680
                                                                  -----------   ----------
    Management services income                                        118,624       94,276
                                                                  -----------   ----------
Life subsidiaries:
  Premiums                                                             38,922       41,212
  Policy charges                                                       52,334       60,090
  Investment income, net of expenses                                   71,709       79,651
  Net realized gains                                                    3,713        2,070
                                                                  -----------  -----------
    Total revenues                                                    166,678      183,023
                                                                  -----------  -----------
  Policy benefits                                                      32,006       36,040
  Increase in liability for future policy benefits                      2,976        2,442
  Interest credited to policyholders                                   37,573       41,858
  Amortization of deferred policy acquisition costs and
   value of life business acquired                                     22,855       28,482
  Commissions                                                           4,749        5,354
  General and administrative expenses                                  11,950       15,774
                                                                  -----------  -----------
    Total operating expenses                                          112,109      129,950
                                                                  -----------  -----------
    Income before provision for taxes                                  54,569       53,073
  Provision for income taxes                                           18,080       17,619
                                                                  -----------  -----------
    Life subsidiaries income                                           36,489       35,454
                                                                  -----------  -----------

Consolidated net income                                           $   155,113  $   129,730
                                                                  ===========  ===========
The accompanying notes are an integral part of these interim financial statements.
</TABLE>


<PAGE>   8

                                 FARMERS GROUP, INC.
                                  AND SUBSIDIARIES
                   CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
                   For the six month period ended June 30, 1997
                               (Amounts in thousands)
                                     (Unaudited)
<TABLE>
<CAPTION>
                                                   Net Unrealized                  Total
                              Common   Additional  Gains/(Losses)   Retained   Stockholder's
                              Stock     Capital    On Investments   Earnings       Equity
                             --------  -----------  -------------  ----------  ------------ 
<S>                          <C>       <C>          <C>            <C>         <C>
Balance, December 31, 1996   $      1  $ 5,212,618  $      92,104  $1,199,108  $  6,503,831

Net income                                                            290,150       290,150 

Change in net unrealized
  gains/(losses) on
  investments net
  of tax of ($12,456)                                     (18,452)                  (18,452)
  
Cash dividends paid                                                  (168,600)     (168,600)
                             --------  -----------  -------------  ----------  ------------ 
Balance, June 30, 1997       $      1  $ 5,212,618  $      73,652  $1,320,658  $  6,606,929 
                             ========  ===========  =============  ==========  ============ 

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

</TABLE>

<PAGE>   9

                                   FARMERS GROUP, INC.
                                    AND SUBSIDIARIES
                     CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
                     For the six month period ended June 30, 1996
                                 (Amounts in thousands)
                                       (Unaudited)
<TABLE>
<CAPTION>
                                                   Net Unrealized                   Total
                              Common    Additional Gains/(Losses)   Retained   Stockholder's
                              Stock      Capital   On Investments   Earnings       Equity
                             --------  ------------ -------------  ----------  ------------- 
<S>                          <C>       <C>          <C>            <C>         <C>
Balance, December 31, 1995   $      1  $  5,212,618 $     124,962  $ 1,156,067  $  6,493,648

Net income                                                             261,989       261,989

Change in net unrealized
  gains/(losses) on
  investments net
  of tax of ($43,694)                                     (81,079)                   (81,079)

Cash dividends paid                                                   (149,950)     (149,950)
                             --------  ------------ -------------   ----------  ------------  
Balance, June 30, 1996       $      1  $  5,212,618 $      43,883   $1,268,106  $  6,524,608 
                             ========  ============ =============   ==========  ============  

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


<PAGE>   10

                                 FARMERS GROUP, INC.
                                  AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (Amounts in thousands)
                                     (Unaudited)
<TABLE>
<CAPTION>
                                                                     Six month period
                                                                      ended June 30,
                                                                  -----------------------
                                                                     1997         1996
                                                                  ----------   ---------- 
<S>                                                               <C>          <C> 
Cash Flows from Operating Activities:
 Consolidated net income                                          $  290,150   $  261,989 
 Non-cash and operating activities adjustments:
  Depreciation and amortization                                       85,104       69,039 
  Amortization of deferred policy acquisition costs and
    value of life business acquired                                   55,481       56,274 
  Policy acquisition costs deferred                                  (53,216)     (66,195)
  Life insurance policy liabilities                                   94,702      133,931 
  Equity in earnings of joint ventures                                   571          820 
  Gain on sales of assets                                            (49,972)     (24,111)
  Gain on sale of subsidiaries                                       (16,536)           0
 Changes in assets and liabilities:
  Current assets and liabilities                                      (8,316)      12,186 
  Non-current assets and liabilities                                 (72,701)     (54,140)
 Other, net                                                          (16,906)      (6,109)
                                                                  ----------  ----------- 
  Net cash provided by operating activities                          308,361      383,684 
                                                                  ----------  ----------- 
Cash Flows from Investing Activities:
  Purchases of investments available-for-sale                       (947,134)    (579,077)
  Purchases of properties                                            (57,241)     (24,239)
  Purchase of surplus certificates of the exchanges                        0     (165,000)
  Proceeds from sales and maturities of investments
   available-for-sale                                                576,788      320,653 
  Proceeds from sales of properties                                   12,719       11,901
  Proceeds from sale of subsidiaries                                 335,408            0
  Mortgage loan collections                                           10,149       11,548 
  Other, net                                                          (1,394)       4,750 
                                                                  ----------  ----------- 
  Net cash used in investing activities                              (70,705)    (419,464)
                                                                  ----------  ----------- 
Cash Flows from Financing Activities:
  Dividends paid to stockholder                                     (168,600)    (149,950)
  Payment of long-term notes payable                                     (60)           0
  Payment of real estate mortgages payable                                 0          (56)
  Issuance cost of cumulative quarterly income preferred
    securities                                                             0         (409)
                                                                  -----------  -----------
  Net cash used in financing activities                             (168,660)    (150,415)
                                                                  -----------  -----------

Increase/(decrease) in cash and cash equivalents                      68,996     (186,195)
Cash and cash equivalents - at beginning of year                     499,328      913,006
                                                                  ----------  -----------
Cash and cash equivalents - at end of period                      $  568,324   $  726,811
                                                                  ==========  ===========

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




<PAGE>   11


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

A.  Basis of presentation and summary of significant accounting policies

     The accompanying consolidated balance sheet of Farmers Group, Inc. and 
subsidiaries (the "Company") as of June 30, 1997, the related consolidated
statements of income, stockholder's equity and cash flows for the six month
periods ended June 30, 1997 and June 30, 1996, and the consolidated statements
of income for the three months ended June 30, 1997 and June 30, 1996, have
been prepared in accordance with generally accepted accounting principles
("GAAP") for interim periods and are unaudited.  However, in management's
opinion, the consolidated financial statements include all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of results for such interim periods.  These statements do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements and should be read in
conjunction with the consolidated balance sheets of the Company as of December
31, 1996 and 1995, and the related consolidated statements of income,
stockholder's equity, and cash flows for each of the three years in the period
ended December 31, 1996.  

     Interim results are not necessarily indicative of results for the full
year.  All material inter-company transactions have been eliminated.  Certain
amounts applicable to prior years have been reclassified to conform with the
1997 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 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, BATUS Inc. ("BATUS"), a subsidiary of B.A.T Industries
p.l.c. ("B.A.T"), acquired 100% ownership of the Company for $5,212,619,000 in
cash, including related expenses, through its wholly owned subsidiary BATUS
Financial Services. Immediately thereafter, BATUS Financial Services was
merged into Farmers Group, Inc.. The acquisition was accounted for as a
purchase and, accordingly, the acquired assets and liabilities were recorded
in the Company's consolidated balance sheets based on their estimated fair
values at December 31, 1988. In January 1990, ownership of the Company was
transferred to South Western Nominees Limited, a subsidiary of B.A.T.

     The Company is attorney-in-fact 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. As attorney-in-fact, Farmers Group, Inc., or its
subsidiaries, as applicable, manages the affairs of the Exchanges, their
respective subsidiaries and Farmers Texas County Mutual Insurance
Company 


<PAGE>   12

(collectively, the "P&C Group") and receives compensation based on a
percentage of earned premiums.

     Prior to April 15, 1997, the Company's life insurance operations were
conducted by three wholly owned subsidiaries, Farmers New World Life Insurance
Company, The Ohio State Life Insurance Company and Investors Guaranty Life
Insurance Company (the "Life Subsidiaries").  They market a broad line of
individual life insurance products, including universal life, term life and
whole life insurance, and annuity products, predominately flexible premium
deferred annuities.  

     On April 15, 1997, upon receipt of regulatory approval, the Company sold 
The Ohio State Life Insurance Company ("OSL") and Investors Guaranty Life 
Insurance Company ("IGL") to Great Southern Life Insurance Company, a 
subsidiary of Americo Life, Inc..  The sale of these subsidiaries resulted 
in an estimated $16,536,000 gain and is reported on the "Gain on sale of 
subsidiaries" line of the income statement.  In addition, taxes associated with
the sale increased current year tax expense by an estimated $27,291,000 and are
reflected on the "Provision for income taxes" line.  Both of these amounts are
reflected in the "Management services to property and casualty insurance
companies; and other" section of the Company's consolidated income statements
for the six month period ended June 30, 1997.  The decision to sell these
subsidiaries was part of the Company's strategic plan to focus its life
insurance efforts on the growth of Farmers New World Life Insurance Company
("FNWL"), by far its largest insurance company, whose products and services are
sold directly by the Company's agents.

     In 1997, the Company adopted Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities".  This Statement establishes accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities based on a consistent application of a financial-components
approach that focuses on the issue of control.  This Statement was amended by
SFAS No. 127, "The Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125", which delays for one year the effective date of the
provisions that apply to certain transactions.  These transactions include
repurchase agreements, dollar-rolls, securities lending, secured borrowings
and collateral.  The adoption of these Statements did not have a material
impact on the Company's consolidated financial statements.

     In February 1997, the FASB released SFAS No. 128, "Earnings per Share".
This Statement, effective for financial statements issued for periods ending
after December 15, 1997, establishes standards for computing and presenting
earnings per share and applies to entities with publicly held common stock or
potential common stock.  The Company does not have any publicly held common
stock and, therefore, is not subject to the requirements of this Statement.

     In February 1997, the FASB released SFAS No. 129, "Disclosure of
Information about Capital Structure".  This Statement, effective for financial
statements issued for periods ending after December 15, 1997, establishes
standards for disclosing information about an entity's capital structure.
This statement eliminates the exemption of nonpublic entities from certain
disclosure requirements of Accounting Principles Board Opinion No. 15,
"Earnings Per Share", as provided by SFAS No. 21, "Suspension of the Reporting
of Earnings per Share and Segment

<PAGE>  13

Information by Nonpublic Enterprises".  The Company does not expect the 
adoption of this Statement to have a significant impact on its consolidated 
financial statements.
   
     In June 1997, the FASB released SFAS No. 130, "Reporting Comprehensive
Income".  This Statement, effective for fiscal periods beginning after
December 15, 1997, establishes standards for reporting and displaying
comprehensive income and its components.  This Statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement with
the same prominence as other financial statements.  The Company does not
expect the adoption of this Statement to have a material impact on its
consolidated financial statements.  

     In June 1997, the FASB released SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information".  This Statement, effective for
financial statements of public enterprises issued for periods beginning after
December 15, 1997, establishes standards for reporting information about
operating segments in annual financial statements and requires the reporting
of selected information about operating segments in interim financial reports
issued to shareholders.  It also establishes standards for related disclosures
about products and services, geographic areas, and major customers.  This
Statement supersedes FASB Statement No. 14, "Financial Reporting for Segments
of a Business Enterprise" and amends FASB Statement No. 94, "Consolidation of
All Majority-Owned Subsidiaries".  The Company does not expect the adoption of
this Statement to have a significant impact on its consolidated financial
statements.
 

B.  Material contingencies

     The Company is a party to numerous lawsuits arising from its normal
business activities. These actions are in various stages of discovery and
development, and some seek punitive as well as compensatory damages. In the
opinion of management, the Company has not engaged in any conduct which should
warrant the award of any material punitive or compensatory damages. The
Company intends to vigorously defend its position in each case, and management
believes that, while it is not possible to predict the outcome of such matters
with absolute certainty, ultimate disposition of these proceedings should not
have a material adverse effect on the Company's consolidated results of
operations or financial position. 


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

     In 1995, Farmers Group Capital and Farmers Group Capital II (the
"Subsidiary Trusts"), consolidated wholly owned subsidiaries of Farmers
Group, Inc., issued $410 million of 8.45% Cumulative Quarterly Income
Preferred Securities ("QUIPS"), Series A and $90 million of 8.25% QUIPS,
Series B, respectively.  In connection with the Subsidiary Trusts' issuance of
the QUIPS and the related purchase by Farmers Group, Inc. of all of the
Subsidiary Trusts' Common Securities ("Common Securities"), Farmers Group,
Inc. issued to Farmers Group Capital $422,680,399 principal amount of its
8.45% Junior Subordinated Debentures, Series A due on December 31, 2025, (the
"Junior Subordinated Debentures, Series A") and issued to Farmers Group
Capital II $92,783,505 principal amount of its 8.25% Junior Subordinated
Debentures, Series B due on December 31, 2025 (the "Junior Subordinated
Debentures, Series B" and, together with the Junior Subordinated Debentures,
Series A, the "Junior Subordinated Debentures").  The sole assets of Farmers
Group Capital are the Junior Subordinated Debentures, Series A.  The sole
assets of Farmers Group Capital 

<PAGE>  14

II are the Junior Subordinated Debentures, Series B.  In addition, these 
arrangements are governed by various agreements between Farmers Group, Inc. 
and the Subsidiary Trusts (the Guarantee Agreements, the Trust Agreements, 
the Expense Agreements, the Indentures and the Junior Subordinated 
Debentures) which considered together constitute a full and unconditional 
guarantee by Farmers Group, Inc. of the Subsidiary Trusts' obligations 
under the Preferred Securities.

     Under certain circumstances, the Junior Subordinated Debentures may be
distributed to holders of the QUIPS and holders of the Common Securities in
liquidation of the Subsidiary Trusts.  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.  Farmers Group, Inc. will have the option at any time on or after
September 27, 2000 to redeem, in whole or part, the Junior Subordinated
Debentures. 

     As of June 30, 1997 and 1996, a total of 20,000,000 shares of QUIPS
were outstanding.

D.  Management fees

     As attorney-in-fact, the Company, or its subsidiaries, as applicable,
manages the affairs of the P&C Group and receives management fees for the
services rendered to the Exchanges.  As a result, the Company received
management fees from the Exchanges of $608,281,000 and $580,002,000 for the
six month periods ended June 30, 1997 and June 30, 1996, respectively.

E.  Related parties

     As of June 30, 1997, the Company had $407,000,000 in notes receivable
related to loans made to B.A.T Capital Corporation, a subsidiary of B.A.T.
These notes are fixed rate medium-term notes with maturity dates as
follows: $135,000,000 in October 1997, $137,000,000 in October 1998, and
$135,000,000 in October 1999.  Interest on these notes is paid semi-annually
at coupon rates of 5.10%, 5.35%, and 6.68%, respectively.  On October 7, 1996,
a three year $135,000,000 note with an interest rate of 4.76% matured and the
$135,000,000 note maturing in October 1999 was subsequently issued at an
interest rate of 6.68%.  Income earned on the notes outstanding as of June 30,
1997 and June 30, 1996, was $11,617,000 and $10,320,000, respectively. 

<PAGE>  15

F.  Sale of life insurance subsidiaries

     On April 15, 1997, upon receipt of regulatory approval, the Company sold 
OSL and IGL to Great Southern Life Insurance Company, a subsidiary of Americo 
Life, Inc..  The contribution to net income of these subsidiaries for the six 
month period ended June 30, 1997 was $5,909,000.  The combined net assets of 
these subsidiaries as of April 15, 1997 was $317,625,000.  The sale of these 
subsidiaries resulted in an estimated $16,536,000 gain and was recorded on the 
"Gain on sale of subsidiaries" line of the income statement.  In addition,
taxes associated with the sale increased current year tax expense by an
estimated $27,291,000 and are reflected on the "Provision for income taxes"
line.  Both of these amounts are reflected in the "Management services to
property and casualty insurance companies; and other" section of the Company's
consolidated income statements for the six month period ended June 30, 1997.


G.  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. 

<TABLE>
<CAPTION>
                                                   Excluding         Life
                                                 Life Insurance    Insurance
                                                  Subsidiaries   Subsidiaries  Consolidated
                                                  ------------   ------------  ------------
                                                          (Amounts in thousands)
<S>                                               <C>            <C>           <C>
Cash and cash equivalents  -- December 31, 1995   $  763,212     $   149,794   $  913,006
                              Activity through June 1996                         (186,195)
                                                                                ---------
Cash and cash equivalents  -- June 30, 1996          686,787          40,024   $  726,811
                                                                                =========

Cash and cash equivalents  -- December 31, 1996      412,018          87,310   $  499,328
                              Activity through June 1997                           68,996
                                                                                ---------
Cash and cash equivalents  -- June 30, 1997          545,482          22,842   $  568,324
                                                                                =========
</TABLE>

Cash payments for interest were $1,073,000 and $8,568,000 for the six
month periods ended June 30, 1997 and June 30, 1996, respectively, while the
cash payment for dividends to the holders of the Company's QUIPS was
$21,035,000 and $10,518,000 for the six month periods ended June 30, 1997 and
June 30, 1996, respectively.  In 1996, the second quarter dividend payment to
the holders of the Company's QUIPS, of $10,517,000, was made on July 1, 1996.
Cash payments for income taxes were $229,309,000 and $196,552,000 for the six
month periods ended June 30, 1997 and June 30, 1996, respectively.

Net cash proceeds from the sale of OSL and IGL amounted to an estimated 
$335,408,000 and were in consideration primarily for the following:

     Investments                                               $ 808,208,000
     Deferred policy acquisition cost and value of               182,472,000 
       life business acquired
     Life insurance policy liabilities                          (690,426,000) 


<PAGE>   16

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

General

     The Company is engaged in the management of property and casualty
insurance companies and the underwriting of life insurance and annuity
products.  The Company does not own any property and casualty insurers, but
rather serves as the manager of the P&C Group. The Company receives management
fees primarily based on the gross premiums earned by the P&C Group. Revenues
and expenses relating to both of these principal business activities are
reflected in the Company's Consolidated Financial Statements prepared in
accordance with GAAP, which differs from the statutory accounting practices
("SAP"), which the Life Subsidiaries are required to use for regulatory
reporting purposes. 

     The Company underwrites life insurance and annuity products through its
life insurance subsidiaries.  Revenues attributable to traditional life
insurance products, such as whole life or term insurance contracts, are
classified as premiums as they become due.  Future benefits are associated
with such premiums (through increases in liabilities for future policy
benefits), and prior period capitalized costs are amortized (through
amortization of Deferred Policy Acquisition Costs ("DAC")) so that profits are
generally recognized over the same period as revenue income.  Revenues
attributable to Universal Life ("UL") 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 UL and annuity policies include interest
credited to policyholders on policy balances as well as benefit claims
incurred in excess of policy account balances.

Three Months Ended June 30, 1997 Compared to Three Months Ended June
 30, 1996

  Management Services to Property and Casualty Insurance Companies; and Other

     Operating Revenues.  Operating revenues increased from $311.7 million for
the three months ended June 30, 1996 to $328.7 million for the three months
ended June 30, 1997, an increase of $17.0 million, or 5.5%. Operating revenues
primarily consist of management fees paid to the Company as a percentage of
gross premiums earned by the P&C Group.  Such premiums increased from $2,365.0
million in the second quarter of 1996 to $2,515.7 million in the second
quarter of 1997 due primarily to policy growth in Personal Lines business as
a result of stricter enforcement of the California mandatory auto insurance
law and the P&C Group's re-entry into the California homeowners' market.  
Partially offsetting these increases is the fact that, in recognition of 
expense savings realized as a result of improved operating efficiencies, 
the Farmers Preferred Auto Management fee rate was reduced by 0.45% effective 
November 1, 1996. This resulted in a $6.4 million reduction in management fees 
in the second quarter of 1997 from what such fees would have been using the 
second quarter 1996 rates.  As the Company continues to benefit from improved 
operating efficiencies, it may further reduce management fee rates in the 
future.   

<PAGE>   17

     Total Operating Expenses. 

          Salaries and Employee Benefits.  Salaries and employee benefits
     decreased from $84.3 million for the three months ended June 30, 1996 to
     $83.7 million for the three months ended June 30, 1997, a decrease of
     $0.6 million, or 0.7%, primarily due to a reduction in employee complement
     resulting from staffing efficiencies realized from the use of technology.

          Buildings and Equipment Expenses.  Buildings and equipment expenses
     increased from $21.4 million for the three months ended June 30, 1996 to
     $23.1 million for the three months ended June 30, 1997, an increase of
     $1.7 million, or 7.9%.  This increase was primarily due to higher
     amortization expense associated with information technology systems 
     software.

          Amortization of Attorney-In-Fact Contracts and Goodwill.  Purchase
     accounting entries related to the acquisition of the Company by B.A.T 
     Industries p.l.c. in December 1988 include goodwill (capitalized at $2.4
     billion) and the value of the attorney-in-fact contracts of the P&C Group
     (capitalized at $1.7 billion).  Amortization of these two items, which is
     being taken on a straight-line basis over forty years, reduced pretax
     income by approximately $25.7 million in each of the three month periods
     ended June 30, 1997 and June 30, 1996.

          General and Administrative Expenses.  General and administrative
     expenses increased from $40.0 million for the three months ended June
     30, 1996 to $50.7 million for the three months ended June 30, 1997, an
     increase of $10.7 million, or 26.8%.  This increase was due substantially
     to higher advertising expenses (due to the fact that the 1997 media
     advertising campaign began in January, whereas, the 1996 campaign did not
     begin until August) and higher expenses attributable to increased business
     levels.

     Net Investment Income.  Net investment income increased from $27.4
million for the three months ended June 30, 1996 to $36.1 million for the
three months ended June 30, 1997 primarily due to higher yield rates in 1997
and a larger invested asset base as a result of the net cash generated by 
the sale of OSL and IGL and the common stock received as part of a dividend
FNWL paid to Farmers Group, Inc. in December 1996.

     Net Realized Gains.  Net realized gains increased from $0.8 million for
the three months ended June 30, 1996 to $10.3 million for the three months
ended June 30, 1997 due substantially to gains realized from restructuring 
the Company's equity portfolio. 

     Gain on sale of subsidiaries.  The estimated gain on the sale of OSL and 
IGL, on April 15, 1997, amounted to $16.5 million.

     Dividends on Preferred Securities of Subsidiary Trusts.  Dividend expense
for the three months ended June 30, 1997 and June 30, 1996 was $10.5 million.

     Provision for Income Taxes.  Provision for income taxes increased from
$63.7 million for the three months ended June 30, 1996 to $79.3 million for
the three months ended June 30, 1997, an increase of $15.6 million, or 24.5%. 
This increase was attributable to the increase in 

<PAGE>  18

pretax operating income between years and an estimated $6.3 million of 
additional taxes recorded in the second quarter of 1997 associated with the 
sale of OSL and IGL.

     Management Services Income.  As a result of the foregoing, management
services income increased from $94.3 million for the three months ended June
30, 1996 to $118.6 million for the three months ended June 30, 1997, an
increase of $24.3 million, or 25.8%.

Life Subsidiaries

     On April 15, 1997, OSL and IGL were sold to Great Southern Life 
Insurance Company, a subsidiary of Americo Life, Inc..  The contribution to 
net income from OSL and IGL was $0.6 million for the three months ended June 
30, 1997 and $2.5 million for the three months ended June 30, 1996.  The 
following commentary addresses the results of the Company's remaining life 
subsidiary, FNWL.

     Total Revenues. Total revenues increased from $146.9 million for the
three months ended June 30, 1996 to $160.6 million for the three months ended
June 30, 1997, an increase of $13.7 million, or 9.3%.  

          Premiums.  Premiums increased $3.7 million for the three months ended
     June 30, 1997, or 10.9%, over the three months ended June 30, 1996.  This
     increase was due to growth in renewal and first year business.  The
     increase in renewal premiums is attributable to growth in traditional 
     life insurance in-force resulting from improved persistency and an 
     increase in average policy size.  The higher first year premiums are due 
     primarily to growth in sales of Premier Whole Life products.

          Policy Charges.  Policy charges increased $3.3 million for the three
     months ended June 30, 1997, or 7.1%, over the three months ended June 30,
     1996, reflecting continued growth in universal life-type insurance in-
     force.  

          Investment Income.  Net investment income increased $4.1 million for
     the three months ended June 30, 1997, or 6.3%, over the three months ended
     June 30, 1996 due to higher bond interest income resulting primarily from
     a higher invested asset base.  

           Net Realized Gains.  Net realized gains increased $2.6 million, 
     from $1.1 million for the three months ended June 30, 1996 to $3.7 million
     for the three months ended June 30, 1997 due to an increase in bond sales,
     partially offset by the absence of common stock gains in 1997 due to the
     fact that FNWL's common stock portfolio was transferred to Farmers Group, 
     Inc. in December 1996 as part of the dividend.

     Total Operating Expenses.  Total operating expenses increased from $97.5
million for the three months ended June 30, 1996 to $106.9 million for the
three months ended June 30, 1997, an increase of $9.4 million, or 9.6%.

          Policyholders' Benefits. Policyholders' benefits expense increased
     from $61.8 million for the three months ended June 30, 1996 to $69.7
     million for the three months ended June 30, 1997, an increase of $7.9
     million, or 12.8%.  Policy benefits, which consist primarily of death
     and surrender benefits on life products, increased $5.3 million over
     June 30, 1996 to $30.3 

<PAGE>  19

     million, due to an increase in insurance in-force. Increase in liability 
     for future benefits expense increased from $2.6 million for the three 
     months ended June 30, 1996 to $3.1 million for the three months ended 
     June 30, 1997 due to fewer terminations on older whole life business 
     carrying higher reserves.  Interest credited to policyholders, which 
     represents the amount credited under universal life-type contracts and 
     deferred annuities for policyholder funds on deposit, increased from 
     $34.2 million for the three months ended June 30, 1996 to $36.3 million 
     for the three months ended June 30, 1997, or 6.1%, reflecting growth in 
     universal life-type insurance in-force and an increase in annuity funds 
     on deposit.

	 Amortization of DAC and Value of Life Business Acquired. 
     Amortization expense increased from $21.0 million for the three months 
     ended June 30, 1996 to $21.7 million for the three months ended June 30, 
     1997, or 3.3%. This increase reflects the continued growth in universal 
     life-type and traditional business.

          Commissions. Commissions were $4.6 million for the three months
     ended June 30, 1996 and June 30, 1997.

          General and Administrative Expenses. General and administrative
     expenses increased from $10.1 million for the three months ended June 30,
     1996 to $10.9 million for the three months ended June 30, 1997, or 7.9%.
     This increase resulted mainly from higher salaries and benefits expenses
     and higher audit and legal fees.

     Provision for Income Taxes.  Provision for income taxes increased from
$16.4 million for the three months ended June 30, 1996 to $17.8 million for
the three months ended June 30, 1997, an increase of $1.4 million, due to an
increase in pretax operating income.

     Life Subsidiary Income.  As a result of the foregoing, FNWL's income 
increased from $33.0 million for the three months ended June 30, 1996 to 
$35.9 million for the three months ended June 30, 1997, an increase of $2.9 
million, or 8.8%.

Consolidated Net Income

     Consolidated net income of the Company increased from $129.7 million for
the three months ended June 30, 1996 to $155.1 million for the three months
ended June 30,1997, an increase of $25.4 million, or 19.6%.


Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996

  Management Services to Property and Casualty Insurance Companies; and Other

     Operating Revenues.  Operating revenues increased from $618.3 million
for the six months ended June 30, 1996 to $649.5 million for the six months
ended June 30, 1997, an increase of $31.2 million, or 5.0%. This growth
reflects higher gross premiums earned by the P&C Group which increased 
from $4,683.9 million in the first six months of 1996 to $4,981.2 million 
in the first six months of 1997 due primarily to policy growth in 
Personal Lines business. Partially offsetting these increases is the 
0.45% reduction in the Farmers Preferred Auto Management fee 

<PAGE>  20

rate which resulted in a $12.7 million reduction in management fees in 1997 
from what such fees would have been using 1996 rates.

    Total Operating Expenses.  Total operating expenses as a percentage of 
operating revenues decreased from 56.4% for the six months ended June 30, 1996 
to 56.0% for the six months ended June 30, 1997, a decrease of 0.4%.
Specifically, labor costs (salaries and employee benefits) decreased from
27.8% of operating revenues for the six months ended June 30, 1996 to 25.7% of
operating revenues for the six months ended June 30, 1997 as the Company
continued to benefit from staffing efficiencies and the use of information
technology. 

         Salaries and Employee Benefits.  Salaries and employee benefits
     decreased from $171.6 million for the six months ended June 30, 1996 to
     $167.0 million for the six months ended June 30, 1997, a decrease of
     $4.6 million, or 2.7%, primarily due to a reduction in employee 
     complement.

         Buildings and Equipment Expenses.  Buildings and equipment expenses
     increased from $42.0 million for the six months ended June 30, 1996 to
     $45.4 million for the six months ended June 30, 1997, an increase of $3.4
     million, or 8.1%.  This increase was primarily due to higher amortization
     expense associated with information technology systems software.

         Amortization of Attorney-In-Fact Contracts and Goodwill.  Purchase
     accounting entries related to the acquisition of the Company by B.A.T
     Industries p.l.c. in December 1988 include goodwill (capitalized at $2.4
     billion) and the value of the attorney-in-fact contracts of the P&C Group
     (capitalized at $1.7 billion).  Amortization of these two items, which is
     being taken on a straight-line basis over forty years, reduced pretax
     income by approximately $51.4 million in each of the six month periods
     ended June 30, 1997 and June 30, 1996.

         General and Administrative Expenses.  General and administrative
     expenses increased from $83.8 million for the six months ended June 30,
     1996 to $99.8 million for the six months ended June 30, 1997, an increase
     of $16.0 million, or 19.1%.  This increase was primarily due to higher
     advertising expenses (due to the fact that the 1997 media advertising 
     campaign began in January, whereas, the 1996 campaign did not begin until 
     August) and higher expenses attributable to increased business levels.  

    Net Investment Income.  Net investment income increased from $54.3 million
for the six months ended June 30, 1996 to $70.4 million for the six months
ended June 30, 1997 primarily due to higher yield rates in 1997 and a larger
invested asset base as a result of the net cash generated by the sale of OSL 
and IGL and the common stock received as part of the dividend FNWL paid to 
Farmers Group, Inc. in December 1996.

    Net Realized Gains.  Net realized gains increased from $1.6 million for
the six months ended June 30, 1996 to $40.7 million for the six months ended
June 30, 1997 due primarily to gains realized from restructuring the Company's
equity portfolio.

    Gain on sale of subsidiaries.  The estimated gain on the sale of OSL and 
IGL, on April 15, 1997, amounted to $16.5 million for the six months ended
June 30, 1997.

<PAGE>  21

    Dividends on Preferred Securities of Subsidiary Trusts.  Dividend expense
for the six months ended June 30, 1997 and June 30, 1996 was $21.0 million.

    Provision for Income Taxes.  Provision for income taxes increased from
$123.1 million for the six months ended June 30, 1996 to $175.9 million for
the six months ended June 30, 1997, an increase of $52.8 million, or 43.0%.
This increase was attributable to the increase in pretax operating income
between years and an estimated $27.3 million of taxes associated with the sale
of OSL and IGL. 

    Management Services Income.  As a result of the foregoing, management
services income increased from $181.3 million for the six months ended June
30, 1996 to $216.6 million for the six months ended June 30, 1997, an increase
of $35.3 million, or 19.5%.


 Life Subsidiaries

     On April 15, 1997, OSL and IGL were sold to Great Southern Life Insurance
Company, a subsidiary of Americo Life, Inc..  The contribution to net income
from OSL and IGL was $5.5 million for the six months ended June 30, 1997 and
$9.0 million for the six months ended June 30, 1996.  The following commentary
addresses the results of the Company's remaining life subsidiary, FNWL.

     Total Revenues. Total revenues increased from $303.4 million for the six
months ended June 30, 1996 to $315.3 million for the six months ended June 30,
1997, an increase of $11.9 million, or 3.9%.  

          Premiums.  Premiums increased $6.9 million for the six months ended
     June 30, 1997, or 10.2%, over the six months ended June 30, 1996.  This
     increase was due to growth in renewal and first year business.  The
     increase in renewal premiums is attributable to an 11.7% growth in
     traditional life insurance in-force resulting from improved persistency
     and an increase in average policy size.  The higher first year premiums
     are due primarily to growth in sales of Premier Whole Life products.

          Policy Charges.  Policy charges increased $7.2 million for the six
     months ended June 30, 1997, or 7.8%, over the six months ended June 30,
     1996, reflecting continued growth in universal life-type insurance in-
     force.  
		
          Investment Income.  Net investment income increased $8.4 million for
     the six months ended June 30, 1997, or 6.6%, over the six months ended
     June 30, 1996 due to higher bond interest income resulting primarily from
     a higher invested asset base.  

          Net Realized Gains.  Net realized gains decreased by $10.6 million,
     from $16.0 million for the six months ended June 30, 1996 to $5.4 million
     for the six months ended June 30, 1997.  This decrease was substantially
     due to the fact that FNWL's common stock portfolio was transferred to 
     Farmers Group, Inc. in December 1996 as part of the dividend.

<PAGE>  22


     Total Operating Expenses.  Total operating expenses increased from $195.5
million for the six months ended June 30, 1996 to $213.5 million for the six
months ended June 30, 1997, an increase of $18.0 million, or 9.2%.

          Policyholders' Benefits. Policyholders' benefits expense increased
     from $125.0 million for the six months ended June 30, 1996 to $136.8
     million for the six months ended June 30, 1997, an increase of $11.8
     million, or 9.4%.  Policy benefits increased $6.3 million over June 30,
     1996 to $57.8 million, due to an increase in insurance-in-force.  Increase
     in liability for future benefits expense increased from $5.9 million for
     the six months ended June 30, 1996 to $7.1 million for the six months
     ended June 30, 1997 due to fewer terminations on older whole life
     business carrying higher reserves.  Interest credited to policyholders 
     increased from $67.6 million for the six months ended June 30, 1996 to 
     $71.9 million for the six months ended June 30, 1997, or 6.4%, reflecting 
     a 5.7% growth in universal life-type insurance in-force and a 4.8% 
     increase in annuity funds on deposit.

          Amortization of DAC and Value of Life Business Acquired. 
     Amortization expense increased from $41.6 million for the six months 
     ended June 30, 1996 to $46.1 million for the six months ended June 30, 
     1997, or 10.8%. This increase reflects the continued growth in universal 
     life-type and traditional business.

          Commissions. Commissions increased from $9.2 million for the six
     months ended June 30, 1996 to $9.3 million for the six months ended June
     30, 1997, or 1.1%.

          General and Administrative Expenses. General and administrative
     expenses increased from $19.7 million for the six months ended June 30,
     1996 to $21.3 million for the six months ended June 30, 1997, or 8.1%.
     This increase resulted mainly from higher salaries and benefits expenses 
     and higher audit and legal fees.

     Provision for Income Taxes.  Provision for income taxes decreased from
$36.2 million for the six months ended June 30, 1996 to $33.7 million for the
six months ended June 30, 1997, a decrease of $2.5 million, due to a decrease
in pretax operating income from reduced net realized gains.

    Life Subsidiary Income.  As a result of the foregoing, FNWL's income 
decreased from $71.7 million for the six months ended June 30, 1996 to
$68.1 million for the six months ended June 30, 1997, a decrease of $3.6
million, or 5.0%.

Consolidated Net Income

     Consolidated net income of the Company increased from $262.0 million for
the six months ended June 30, 1996 to $290.2 million for the six months ended
June 30, 1997, an increase of $28.2 million, or 10.8%.


<PAGE>  23

Liquidity and Capital Resources

     As of June 30, 1997 and June 30, 1996, the Company held cash and cash
equivalents of $568.3 million and $726.8 million, respectively.  In addition,
as of June 30, 1997, the Company had available revolving credit facilities
enabling it to borrow up to $500.0 million in the event such a need should
arise. 

     Net cash provided by operating activities decreased $75.3 million, or
19.6%, between years to $308.4 million for the six months ended June 30,
1997.  This decrease in cash is principally due to a decrease in the volume
of new annuity business coupled with a decrease in non-current liabilities.

     Net cash used in investing activities decreased $348.8 million, or 
83.1%, between years to $70.7 million for the six months ended June 30,
1997.  This increase in cash resulted primarily from a net increase in 
proceeds from the sales of investments.  In addition, cash increased between 
years due to the purchase of $165.0 million of surplus certificates of the 
Exchanges in June 1996.

     Net cash used in financing activities increased from $150.4 million for
the six months ended June 30, 1996 to $168.7 million for the six months ended
June 30, 1997, or 12.2%.  This decrease in cash is the result of an $18.7
million increase in dividends paid to the Company's stockholder.


<PAGE>   24

                             PART II.  OTHER INFORMATION


Item 1.  Legal Proceedings

          The Company is a party to numerous lawsuits arising from its normal
     business activities.  These actions are in various stages of discovery 
     and development, and some seek punitive as well as compensatory damages.
     In the opinion of management, the Company has not engaged in any conduct
     which should warrant the award of any material punitive or compensatory
     damages.  The Company intends to vigorously defend its position in each 
     case, and management believes that, while it is not possible to predict 
     the outcome of such matters with absolute certainty, ultimate disposition 
     of these proceedings should not have a material adverse effect on the 
     Company's consolidated results of operations or financial position.  In 
     addition, the Company is, from time to time, involved as a party to 
     various governmental and administrative proceedings.


Item 2.  Changes in Securities.  None.


Item 3.  Defaults upon Senior Securities.  None.


Item 4.  Submission of Matters to a Vote of Security Holders.  None.


Item 5.  Other Information.  None.


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

            (a)  Exhibits.  
                    21   Subsidiaries of FGI.
 
            (b)  Reports on Form 8-K.  None.


<PAGE>   25


                             FARMERS GROUP, INC. 
                              AND SUBSIDIARIES

                                 SIGNATURES
                                   



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

                                                     Farmers Group, Inc.
                                                            (Registrant)

                           August 14, 1997       /s/ Martin D. Feinstein
                           ---------------------------------------------
                           Date                      Martin D. Feinstein
                                                           President and
                                                 Chief Executive Officer


                           August 14, 1997        /s/ Anthony L.R. Clark
                           ---------------------------------------------
                           Date                       Anthony L.R. Clark
                                               Senior Vice President and
                                                 Chief Financial Officer