<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 March 31, 1999    
                                     
                                     OR

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

                                  95-0725935
                      (IRS Employer Identification No.)

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

                                (323) 932-3200
             (Registrants telephone number, including area code)
                                     
Indicate  by  check mark whether the registrant (1) has  filed  all
reports  required  to be filed by Section 13 or 15(d)  of  the  Securities
Exchange  Act of 1934 during the preceding 12 months (or for such  shorter
period that the registrant was required to file such reports), and (2) has
been  subject  to  such filing requirements for the past  90  days.    
Yes  /X/   No  / /

Registrant's Common Stock outstanding on March 31, 1999 was 1,000 shares.

<PAGE>   2

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<PAGE>   3

                               FARMERS GROUP, INC.
                                AND SUBSIDIARIES

                           TABLE OF CONTENTS FORM 10-Q

                        FOR THE PERIOD ENDED MARCH 31, 1999


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

          Consolidated Balance Sheets - Assets
             March 31, 1999 and December 31, 1998                             4

          Consolidated Balance Sheets - Liabilities and Stockholders' 
             Equity
             March 31, 1999 and December 31, 1998                             5

	 Consolidated Statements of Income 
             Three Month Periods ended March 31, 1999 and     
             March 31, 1998                                                   6

	 Consolidated Statements of Comprehensive Income 
             Three Month Periods ended March 31, 1999 and     
             March 31, 1998                                                   7

          Consolidated Statement of Stockholders' Equity
             Three Month Period ended March 31, 1999                          8

          Consolidated Statement of Stockholder's Equity
             Three Month Period ended March 31, 1998                          9

          Consolidated Statements of Cash Flows
             Three Month Periods ended March 31, 1999 and   
             March 31, 1998                                                  10

          Notes to Interim Financial Statements                              11

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

  ITEM 3. Quantitative and Qualitative Disclosures About Market Risks	     21

PART II.  OTHER INFORMATION                                                  21

SIGNATURES                                                                   22

<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>
                                                                   March 31,  December 31,
                                                                     1999         1998
                                                                ------------- ------------
<S>                                                             <C>           <C>  
Current assets, excluding Insurance Subsidiaries:
 Cash and cash equivalents                                      $     315,718 $    253,828
 Marketable securities, at market value                                74,612       53,536
 Accrued interest                                                      16,252       32,542
 Accounts receivable, principally from the P&C Group                   52,668       35,271
 Deferred taxes                                                        28,504       27,044
 Prepaid expenses and other                                            27,779       22,126
                                                                ------------- ------------
  Total current assets                                                515,533      424,347
                                                                ------------- ------------
Investments, excluding Insurance Subsidiaries:
 Fixed maturities available-for-sale, at market value
  (cost: $577,219 and $597,262)                                       586,143      608,539
 Mortgage loans on real estate                                            184          196
 Common stocks available-for-sale, at market value
  (cost: $281,325 and $278,107)                                       350,673      354,465
 Certificates of contribution of the P&C Group                         34,380       34,380
 Real estate, at cost (net of accumulated depreciation:
  $39,263 and $32,363)                                                 70,090       62,820
 Joint ventures, at equity                                                840          840
                                                                ------------- ------------
                                                                    1,042,310    1,061,240
                                                                ------------- ------------
Other assets, excluding Insurance Subsidiaries:
 Notes receivable - affiliate                                       1,057,000    1,057,000
 Goodwill (net of accumulated amortization: 
  $615,451 and $600,440)                                            1,786,304    1,801,315
 Attorney-in-fact contracts (net of accumulated amortization:
  $437,941 and $427,260)                                            1,271,102    1,281,783
 Other assets                                                        245,110      258,912
                                                                ------------- ------------
                                                                    4,359,516    4,399,010
                                                                ------------- ------------
Properties, plant and equipment, at cost:  (net of accumulated
 depreciation: $297,694 and $293,425)                                 413,120      402,061
                                                                ------------- ------------
Investments of Insurance Subsidiaries:
 Fixed maturities available-for-sale, at market value
  (cost: $4,333,994 and $4,178,305)                                 4,427,502    4,356,066
 Mortgage loans on real estate                                         44,031       52,879
 Non-redeemable preferred stocks available-for-sale, at market
  value (cost: $1,153 and $1,153)                                       1,233        1,270
 Common stocks available-for-sale, at market value
  (cost: $98,326 and $98,399)                                         106,960      106,095
 Surplus note of the P&C Group                                        119,000      119,000
 Policy loans                                                         189,134      185,211
 Real estate, at cost (net of accumulated depreciation:
  $28,923 and $28,366)                                                 56,161       59,047
 Joint ventures, at equity                                              8,608        8,456
 S&P 500 call options, at fair value (cost: $12,364 and $11,305)       17,662       14,817
                                                                ------------- ------------
                                                                    4,970,291    4,902,841
                                                                ------------- ------------
Other assets of Insurance Subsidiaries:
 Cash and cash equivalents                                             73,656       73,724
 Reinsurance premiums receivable - P&C Group                           55,523       80,124
 Accrued investment income                                             66,619       59,910
 Deferred policy acquisition costs and value of life business
  acquired                                                            824,107      801,690
 Securities lending collateral                                        461,987      461,801
 Other assets                                                          27,081       19,856
                                                                ------------- ------------
                                                                    1,508,973    1,497,105
                                                                ------------- ------------
   Total assets                                                  $ 12,809,743 $ 12,686,604
                                                                ============= ============
    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 STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                  March 31,   December 31,
                                                                    1999          1998
                                                                ------------- ------------
<S>                                                             <C>           <C>
Current liabilities, excluding Insurance Subsidiaries:
 Notes and accounts payable:
  P&C Group                                                      $         82 $        137
  Other                                                                57,771       28,420
 Accrued liabilities:
  Profit sharing                                                       12,465       50,404
  Income taxes                                                        128,002       69,906
  Other                                                                19,154       30,724
                                                                 ------------ ------------
   Total current liabilities                                          217,474      179,591
                                                                 ------------ ------------
Other liabilities, excluding Insurance Subsidiaries:
 Real estate mortgages payable                                             25           25
 Non-current deferred taxes                                           595,904      601,047
 Other                                                                140,769      136,135
                                                                 ------------ ------------
                                                                      736,698      737,207
                                                                 ------------ ------------
Liabilities of Insurance Subsidiaries:
 Policy liabilities:
  Future policy benefits                                            3,237,922    3,184,248
  Claims                                                               32,416       26,177
  Policyholder dividends                                                    1            1
  Other policyholder funds                                             57,328       57,357
 Provision for non-life losses and loss adjustment expenses            95,425      105,944
 Income taxes (including deferred taxes: $137,065 and $164,729)       166,359      168,618
 Unearned investment income                                             1,003          971
 Reinsurance payable - P&C Group                                      186,631      167,709
 Securities lending liability                                         461,987      461,801
 Other liabilities                                                     69,770       62,573
                                                                 ------------ ------------
                                                                    4,308,842    4,235,399
                                                                 ------------ ------------
   Total liabilities                                                5,263,014    5,152,197
                                                                 ------------ ------------

Commitments and contingencies

Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debentures                                               500,000      500,000
                                                                 ------------ ------------
Stockholders' Equity:
 Class A common stock, $1 par value per share; authorized, issued
  and outstanding:  as of March 31, 1999 and    
  December 31, 1998 - 500 shares                                          0.5          0.5
 Class B common stock, $1 par value per share; authorized, issued
  and outstanding:  as of March 31, 1999 and    
  December 31, 1998 - 500 shares                                          0.5          0.5
 Additional capital                                                 5,212,618    5,212,618
 Accumulated other comprehensive income (net of deferred 
  taxes: $54,126 and $77,897)                                         100,519      144,742
 Retained earnings                                                  1,733,591    1,677,046
                                                                 ------------ ------------
   Total stockholders' equity                                       7,046,729    7,034,407
                                                                 ------------ ------------
     Total liabilities and stockholders' equity                  $ 12,809,743  $12,686,604
                                                                 ============ ============
    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>
                                                                     Three month period
                                                                       ended March 31,
                                                                  ------------------------
                                                                      1999        1998
                                                                  -----------  -----------
<S>                                                               <C>          <C> 
Consolidated operating revenues                                   $   802,153  $   753,148
                                                                  ===========  ===========
Management services to property and casualty
 insurance companies; and other:
  Operating revenues                                              $   365,778  $   335,539
                                                                  -----------   ---------- 
  Operating expenses                                                  196,761      183,649
  Merger related expenses                                                 244            0
                                                                  -----------   ----------
    Total expenses                                                    197,005      183,649
                                                                  -----------   ----------
    Operating income                                                  168,773      151,890
  Net investment income                                                28,762       39,800
  Net realized gains/(losses)                                            (233)       9,813
  Dividends on preferred securities of subsidiary trusts              (10,518)     (10,518)
                                                                  -----------   ----------
    Income before provision for taxes                                 186,784      190,985
  Provision for income taxes                                           76,778       76,826
                                                                  -----------   ----------
    Management services income                                        110,006      114,159
                                                                  -----------   ----------
Insurance Subsidiaries:
  Life premiums                                                        47,810       41,092
  Non-life reinsurance premiums                                       250,000      250,000
  Life policy charges                                                  52,056       51,419
  Investment income, net of expenses                                   81,241       71,498
  Net realized gains                                                    5,268        3,600
                                                                  -----------  -----------
    Total revenues                                                    436,375      417,609
                                                                  -----------  -----------
  Non-life losses and loss adjustment expenses                        167,916      176,623
  Life policyholders' benefits and charges                             86,233       72,626
  Non-life reinsurance commissions                                     75,843       67,127
  General operating expenses                                           38,991       37,028
                                                                  -----------  -----------
    Total operating expenses                                          368,983      353,404
                                                                  -----------  -----------
    Income before provision for taxes                                  67,392       64,205
  Provision for income taxes                                           22,353       23,652
                                                                  -----------  -----------
    Insurance Subsidiaries income                                      45,039       40,553
                                                                  -----------  -----------

Consolidated net income                                           $   155,045  $   154,712
                                                                  ===========  ===========
    The accompanying notes are an integral part of these interim financial statements.
</TABLE>

<PAGE>   7
                               FARMERS GROUP, INC.
                                AND SUBSIDIARIES
                           CONSOLIDATED STATEMENTS OF 
                              COMPREHENSIVE INCOME
                             (Amounts in thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                     Three month period
                                                                       ended March 31,
                                                                  ------------------------
                                                                      1999        1998
                                                                  -----------  -----------
<S>                                                               <C>          <C> 
Consolidated net income                                           $   155,045  $   154,712
                                                                  -----------  -----------
Other comprehensive income/(loss), net of tax:
  Unrealized holding gains/(losses) on securities:
    Unrealized holding gains/(losses) arising during the
      period, net of tax of ($32,397) and $12,350                 $   (60,244)  $   22,963
    Less:  reclassification adjustment for losses
      included in net income, net of tax of $481 and $772                 894        1,434
                                                                  -----------  -----------
  Net unrealized holding gains/(losses) on securities,        
      net of tax of ($31,916) and $13,122                             (59,350)      24,397
  Change in effect of unrealized gains/(losses) on other 
      insurance accounts, net of tax of $8,145 and 
      ($695)                                                           15,127       (1,290)
                                                                  -----------  -----------
Other comprehensive income/(loss)                                     (44,223)      23,107
                                                                  -----------  -----------
Comprehensive income                                              $   110,822  $   177,819
                                                                  ===========  ===========

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

<PAGE>   8

                                 FARMERS GROUP, INC.
                                  AND SUBSIDIARIES
                   CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                   For the three month period ended March 31, 1999
                               (Amounts in thousands)
                                     (Unaudited)
<TABLE>
<CAPTION>
                                                     Accumulated Other                     Total
                                Common    Additional  Comprehensive      Retained    Stockholders'
                                Stock      Capital        Income         Earnings       Equity
                               --------  ----------- -----------------   ---------  ------------- 
<S>                            <C>       <C>          <C>                <C>           <C>
Balance, December 31, 1998     $      1  $ 5,212,618  $        144,742  $1,677,046     $  7,034,407

Net income                                                                 155,045          155,045

Unrealized holding losses   
  arising during the period,  
  net of tax of ($32,397)                                      (60,244)                     (60,244)
  
Reclassification adjustment 
  for losses included in net
  income, net of tax of $481                                       894                          894

Change in effect of unrealized 
  gains on other insurance 
  accounts, net of tax of $8,145                                15,127                       15,127   
  
Cash dividends paid                                                        (98,500)         (98,500)
                               --------  -----------  ----------------  ----------     ------------- 
Balance, March 31, 1999        $      1  $ 5,212,618  $        100,519  $1,733,591     $  7,046,729 
                               ========  ===========  ================  ==========     ============= 

        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 three month period ended March 31, 1998
                                 (Amounts in thousands)
                                       (Unaudited)
<TABLE>
<CAPTION>
                                                     Accumulated Other                  Total
                                Common    Additional   Comprehensive      Retained     Stockholder's
                                Stock      Capital        Income          Earnings       Equity
                               --------  ----------- -----------------   ------------  ------------- 
<S>                          <C>       <C>          <C>                 <C>         <C>
Balance, December 31, 1997     $      1  $ 5,212,618 $         113,549  $1,455,406     $  6,781,574

Net income                                                                 154,712          154,712

Unrealized holding gains
  arising during the period, 
  net of tax of $12,350                                         22,963                       22,963

Reclassification adjustment
  for losses included in net
  income, net of tax of $772                                     1,434                        1,434

Change in effect of unrealized
  losses on other insurance
  accounts, net of tax of ($695)                                (1,290)                      (1,290)

Cash dividends paid                                                        (88,800)         (88,800)
                               -------- ------------   ---------------  ----------     ------------  
Balance, March 31, 1998        $      1 $  5,212,618   $       136,656  $1,521,318     $  6,870,593 
                               ======== ============   ===============  ==========     ============  

        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>
                                                                    Three month period 
                                                                      ended March 31,
                                                                  -----------------------
                                                                     1999         1998
                                                                  ----------   ---------- 
<S>                                                               <C>          <C> 
Cash Flows from Operating Activities:
 Consolidated net income                                          $  155,045   $  154,712 
 Non-cash and operating activities adjustments:
  Depreciation and amortization                                       39,900       46,774 
  Amortization of deferred policy acquisition costs and
    value of life business acquired                                   23,731       21,560 
  Policy acquisition costs deferred                                  (22,876)     (23,039)
  Life insurance policy liabilities                                   15,883        6,126 
  Provision for non-life losses and loss adjustment expenses         (10,519)     100,622        
  Universal life type contracts:
     Deposits received                                                75,279       74,932
     Withdrawals                                                     (61,821)     (60,003)
     Interest credited                                                17,690       16,359
  Equity in earnings of joint ventures                                (2,210)        (581)
  Gain on sales of assets                                             (4,922)     (13,025)
 Changes in assets and liabilities:
  Current assets and liabilities                                      99,466      (86,371) 
  Non-current assets and liabilities                                 (12,356)      20,205 
 Other, net                                                           (5,832)     (10,348)
                                                                  ----------  ----------- 
 Net cash provided by operating activities                           306,458      247,923 
                                                                  ----------  ----------- 
Cash Flows from Investing Activities:
 Purchases of investments available-for-sale                        (471,084)    (432,169)
 Purchases of properties                                              (7,403)     (14,367)
 Proceeds from sales and maturities of investments
  available-for-sale                                                 311,893      178,499 
 Proceeds from sales of properties                                     2,664        6,371
 Mortgage loan collections                                             9,032        3,801
 Increase in policy loans                                             (3,923)      (4,859)
 Other, net                                                             (170)      12,994
                                                                  ----------- ------------
 Net cash used in investing activities                              (158,991)    (249,730)
                                                                  ----------- ------------
Cash Flows from Financing Activities:
 Dividends paid to stockholders                                      (98,500)     (88,800)
 Annuity contracts:                                                                     
    Deposits received                                                 36,783       29,758
    Withdrawals                                                      (45,819)     (53,598)
    Interest credited                                                 21,891       21,344 
                                                                   ----------  -----------
 Net cash used in financing activities                               (85,645)     (91,296)
                                                                   ----------  -----------

Increase/(decrease) in cash and cash equivalents                      61,822      (93,103) 
Cash and cash equivalents - at beginning of year                     327,552      516,253
                                                                  ----------  -----------
Cash and cash equivalents - at end of period                      $  389,374   $  423,150
                                                                  ==========  ===========

   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. ("FGI") 
and its subsidiaries (together, the "Company") as of March 31, 1999, the 
related consolidated statements of income, comprehensive income, stockholders' 
equity and cash flows for the three month periods ended March 31, 1999 and 
March 31, 1998, 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 
GAAP for complete financial statements and should be read in conjunction with 
the consolidated balance sheets of the Company as of December 31, 1998 and 
1997, and the related consolidated statements of income, comprehensive income, 
stockholders' equity, and cash flows for each of the three years in the period 
ended December 31, 1998.  

     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 
1999 presentation.

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

     The Company is attorney-in-fact ("AIF") for three inter-insurance 
exchanges: Farmers Insurance Exchange, Fire Insurance Exchange and Truck 
Insurance Exchange (collectively the "Exchanges"), which operate in the 
property and casualty insurance industry.  As AIF, FGI, or its subsidiaries, 
as applicable, provides certain management services to the Exchanges, their 
respective subsidiaries and Farmers Texas County Mutual Insurance Company 
(collectively the "P&C Group") and receives compensation based on a percentage 
of gross premiums earned.  The P&C Group is owned by the policyholders of the 
Exchanges and Farmers Texas County Mutual.  Accordingly, the Company has no 
ownership interest in the P&C Group.

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

     Farmers Reinsurance Company ("Farmers Re"), a wholly owned subsidiary of 
the Company, reinsures a percentage of the auto physical damage business 
written by the P&C Group.  Under a quota share reinsurance treaty, Farmers Re 
assumes monthly premiums of $83,333,000 and a quota share percentage of 
ultimate net losses sustained by the P&C Group in its auto physical damage 
lines of business.  This treaty also provides for the P&C Group to receive a 
provisional ceding commission of 20% of premiums with additional experience 
commissions that depend on loss experience.  This experience commission 
arrangement limits Farmers Re's potential underwriting gain on the assumed 
business to 2.5% of premiums assumed.

     On March 31, 1999, Farmers Re and the P&C Group commuted $105,944,000
of losses and loss adjustment expenses associated with the 1998 accident 
year.  As a result, on May 15, 1999, Farmers Re will pay the P&C Group 
$105,944,000 of losses and loss adjustment expenses and $8,205,000 of accrued
interest in settlement of this commutation.


<PAGE> 12

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

     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.

     In September 1998, B.A.T's Financial Services Businesses, which included 
the Company, were merged with Zurich Insurance Company ("Zurich").  The 
businesses of Zurich and B.A.T's Financial Services Businesses were 
transferred to Zurich Financial Services ("ZFS"), a new Swiss company with 
headquarters in Zurich.  As a result, each two shares of the Company's prior 
outstanding stock were recapitalized into one share of Class A Common Stock, 
par value $1.00 per share ("Ordinary Shares"), and one share of Class B Common 
Stock, par value $1.00 per share ("Income Shares").  Under the merger 
agreement, all Ordinary Shares became wholly owned by ZFS and all Income 
Shares became wholly owned by Allied Zurich Holdings Limited, an affiliated 
company created during the restructuring of B.A.T.  This merger was accounted 
for by ZFS as a pooling of interests and, therefore, no purchase accounting 
adjustments were made to the Company's assets and liabilities. 

     In 1999, the Company adopted Statement of Position ("SOP") No. 98-1, 
"Accounting for the Costs of Computer Software Developed or Obtained for 
Internal Use".  This SOP applies to all nongovernmental entities and 
establishes the rules for capitalizing or expensing internally developed 
software. 

     In 1999, the Company adopted SOP No. 98-5, "Reporting on the Costs of 
Start Up Activities".  This SOP addresses the recording of costs associated 
with a one-time activity, such as opening a new facility, introducing a new 
product or service, conducting business in a new territory or conducting 
business with a new class of customer. 

     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, effective for 
financial statements of public and nonpublic entities issued for fiscal years 
beginning after June 15, 1999, 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.  This Statement amends SFAS No. 52, "Foreign Currency Translation" and 
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments".  It 
supersedes SFAS No. 80, "Accounting for Futures Contracts", SFAS No. 105, 
"Disclosure of Information about Financial Instruments with Off-Balance-Sheet 
Risk and Financial Instruments with Concentrations of Credit Risk" and SFAS 
No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of 
Financial Instruments".  The Company does not expect the adoption of this 
Statement to have a material 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. 

<PAGE> 13

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 $410,000,000 of 8.45% Cumulative Quarterly Income Preferred 
Securities ("QUIPS"), Series A and $90,000,000 of 8.25% QUIPS, Series B, 
respectively.  In connection with the Subsidiary Trusts' issuance of the QUIPS 
and the related purchase by Farmers Group, Inc. of all of the Subsidiary 
Trusts' Common Securities ("Common Securities"), Farmers Group, Inc. issued to 
Farmers Group Capital $422,680,399 principal amount of its 8.45% Junior 
Subordinated Debentures, Series A due on December 31, 2025, (the "Junior 
Subordinated Debentures, Series A") and issued to Farmers Group Capital II 
$92,783,505 principal amount of its 8.25% Junior Subordinated Debentures, 
Series B due on December 31, 2025 (the "Junior Subordinated Debentures, Series 
B" and, together with the Junior Subordinated Debentures, Series A, the 
"Junior Subordinated Debentures").  The sole assets of Farmers Group Capital 
are the Junior Subordinated Debentures, Series A.  The sole assets of Farmers 
Group Capital II are the Junior Subordinated Debentures, Series B.  In 
addition, these arrangements are governed by various agreements between 
Farmers Group, Inc. and the Subsidiary Trusts (the Guarantee Agreements, the 
Trust Agreements, the Expense Agreements, the Indentures and the Junior 
Subordinated Debentures) which considered together constitute a full and 
unconditional guarantee by Farmers Group, Inc. of the Subsidiary Trusts' 
obligations under the Preferred Securities.

     Under certain circumstances, the Junior Subordinated Debentures may be 
distributed to holders of the QUIPS and holders of the Common Securities in 
liquidation of the Subsidiary Trusts.  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  March 31, 1999 and 1998, a total of 20,000,000 shares of QUIPS 
were outstanding.

D.   Management fees

     As AIF, the Company, or its subsidiaries, as applicable, provides 
management services to the P&C Group and receives management fees for the 
services rendered.  As a result, the Company received management fees from 
the P&C Group of $343,617,000 and $314,287,000 for the three month periods 
ended March 31, 1999 and March 31, 1998, respectively.

E.   Related parties

     As of March 31, 1999, the Company held $1,057,000,000 of notes receivable 
from British American Financial Services (UK and International), Ltd. 
("BAFS"), a subsidiary of ZFS.  The Company purchased notes from BAFS on 
September 3, 1998, using proceeds received in settlement of $407,000,000 of 
B.A.T Capital Corporation notes and proceeds received from the redemption of 
$650,000,000 of certificates of contribution of the P&C Group.  The 
$1,057,000,000 notes receivable are fixed rate medium-term notes with maturity
dates as follows: $200,000,000 in September 2000, $207,000,000 in September 
2001, $200,000,000 in September 2002, $200,000,000 in September 2003 and 
$250,000,000 in September 2004.  Interest on these notes is paid semi-annually 
at coupon rates of 5.44%, 5.48%, 5.67%, 5.71% and 5.78%, respectively.  Income
earned on these notes through March 31, 1999 was $14,858,400.

F.   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:  

<PAGE> 14

<TABLE>
<CAPTION>
                                                    Excluding          
                                                    Insurance      Insurance
                                                  Subsidiaries   Subsidiaries  Consolidated
                                                  ------------   ------------  ------------
                                                          (Amounts in thousands)
<S>                                               <C>            <C>           <C>
Cash and cash equivalents  -- December 31, 1997   $    506,273     $     9,980   $  516,253
                              Activity through March 1998                           (93,103) 
                                                                                  ---------
Cash and cash equivalents  -- March 31, 1998           268,935         154,215   $  423,150
                                                                                  =========

Cash and cash equivalents  -- December 31, 1998        253,828          73,724   $  327,552
                              Activity through March 1999                            61,822
                                                                                  ---------
Cash and cash equivalents  -- March 31, 1999           315,718          73,656   $  389,374
                                                                                  =========
</TABLE>

     Cash payments for interest were $1,415,000 and $1,345,000 for the three 
month periods ended March 31, 1999 and March 31, 1998, respectively, while 
cash payments for dividends to the holders of the Company's QUIPS were 
$10,518,000 for each of the three month periods ended March 31, 1999 and 
March 31, 1998.  Cash payments for income taxes were $22,395,000 and 
$46,794,000 for the three month periods ended March 31, 1999 and March 31, 
1998, respectively.

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

     In September 1998, Farmers Life purchased a $119,000,000 surplus note of 
the P&C Group which bears interest at 6.10% annually.  In addition, the 
Company has from time to time made surplus contributions to the P&C Group and, 
in return, has received certificates of contribution of the P&C Group which 
bear interest at various rates.  As of March 31, 1999, the Company held 
certificates of contribution of the P&C Group totaling $34,380,000.

     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 Department of Insurance.

H.   Operating segments

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

     The basis of accounting used by the Company's management in evaluating 
segment performance and determining how resources should be allocated is 
referred to as the Company's GAAP historical basis, which excludes the effects 
of the purchase accounting ("PGAAP") adjustments related to the acquisition of 
the Company by B.A.T in December 1998 (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 Company accounts for intersegment transactions as if they were to 
third parties and, as such, records the transactions at current market 
prices.  There were no intersegment revenues among the Company's three 
reportable operating segments for the three month periods ended March 31, 
1999 and March 31, 1998.  

<PAGE> 15

     Information regarding the Company's reportable operating segments follows:


<TABLE>
<CAPTION>
                                         Three month period ended March 31, 1999
             ---------------------------------------------------------------------------------------------------------
                        GAAP historical basis                            PGAAP adjustments               Consolidated
             ------------------------------------------------------  -------------------------------------
              Management      Life                                   Management      Life                     PGAAP
               services    insurance      Reinsurance       Total     services     insurance     Total        basis   
             ------------------------------------------------------  ------------------------------------- -----------
                                             (Amounts in thousands)
<S>          <C>           <C>            <C>            <C>         <C>           <C>         <C>         <C>     
Revenues     $  365,778    $  179,219 (a) $  257,402 (a) $  802,399  $        0    $   (246)   $     (246) $  802,153

Investment      
 income          29,123        77,880          6,528        113,531        (361)       (246)         (607)    112,924

Investment
 expenses             0        (2,921)             0         (2,921)          0           0             0      (2,921)

Net realized 
 gains/(losses)    (233)        4,394            874          5,035           0           0             0       5,035

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

Income before
 provision for
 taxes          213,925        77,215         13,591        304,731     (27,141)    (23,414)      (50,555)    254,176

Provision for
 income taxes    81,426        27,086          3,639        112,151      (4,648)     (8,372)      (13,020)     99,131

Depreciation and
 amortization    12,748         1,314 (b)          0         14,062      26,295 (c)  23,274 (d)    49,569      63,631
-----------------------
</TABLE>

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

(b)  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.

(c)  Amount includes PGAAP adjustments associated with the amortization of the
     AIF contracts ($10.7 million) and goodwill ($15.0 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 $23.1 million,
     increasing expense, due to unfavorable persistency experience on the pre-
     1988 business.


<TABLE>
<CAPTION>
                                        Three month period ended March 31, 1998
             ---------------------------------------------------------------------------------------------------------
                           GAAP historical basis                             PGAAP adjustments           Consolidated
             ------------------------------------------------------  -------------------------------------
              Management      Life                                   Management      Life                    PGAAP
               services     insurance      Reinsurance     Total      services     insurance     Total       basis   
             ------------------------------------------------------  ------------------------------------- -----------
                                                (Amounts in thousands)
<S>          <C>           <C>            <C>            <C>         <C>           <C>       <C>          <C>     
Revenues     $  335,539    $  166,819 (a) $  250,738 (a) $  753,096  $        0    $     52  $         52 $   753,148

Investment      
 income          40,063        73,916            697        114,676        (263)         52          (211)    114,465

Investment
 expenses             0        (3,167)             0         (3,167)          0           0             0      (3,167)

Net realized 
 gains           11,815         3,559             41         15,415      (2,002)          0        (2,002)     13,413

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

Income before
 provision for
 taxes          220,086        56,714          6,946        283,746     (29,101)        545       (28,556)    255,190

Provision for
 income taxes    82,213        21,095          2,431        105,739      (5,387)        126        (5,261)    100,478

Depreciation and 19,631        22,770 (b)          0         42,401      26,253 (c)    (320) (d)   25,933      68,334
 amortization
-----------------------
</TABLE>

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

(b)  Amount includes the historical basis amortization associated with the DAC 
     asset. 

(c)  Amount includes PGAAP adjustments associated with the amortization of the 
     AIF contracts ($10.7 million) and goodwill ($15.0 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.

<PAGE>   16


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

General

     The Company's principal activities are the provision of management 
services to the P&C Group and the ownership and operation of the Insurance 
Subsidiaries.  Revenues and expenses relating to these principal business 
activities are reflected in the Company's Consolidated Financial Statements 
prepared in accordance with GAAP, which differs from statutory accounting 
practices ("SAP"), which the Insurance Subsidiaries are required to use for 
regulatory reporting purposes. 

     Effective January 1, 1999, the P&C Group began assuming all personal 
lines business written by Zurich's subsidiary, Maryland Casualty Company 
("MCC").  The Company provides management services in respect of this business 
and, as with its services to the other P&C Group entities, receives 
compensation based on a percentage of gross premiums earned.

     Farmers Life, a wholly owned subsidiary of the Company, underwrites life 
insurance and annuity products. Revenues attributable to traditional life 
insurance products, such as whole life or term life 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 DAC) so
that profits are generally recognized over the same period as revenue income.
Revenues attributable to universal life 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 include 
interest credited to policyholders on policy balances as well as benefit claims
incurred in excess of policy account balances.

     Farmers Re, a wholly owned subsidiary of the Company, reinsures a 
percentage of the auto physical damage business written by the P&C Group.  
Under a quota share reinsurance treaty Farmers Re assumes monthly premiums of 
$83.3 million and a quota share percentage of ultimate net losses sustained by 
the P&C Group in its auto physical damage lines of business.  This treaty also 
provides for the P&C Group to receive a provisional ceding commission of 20% 
of premiums with additional experience commissions that depend on loss 
experience.  This experience commission arrangement limits Farmers Re's 
potential underwriting gain on the assumed business to 2.5% of premiums 
assumed.

Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 
1998

   Management Services to Property and Casualty Insurance Companies; and Other

     Operating Revenues.  Operating revenues increased from $335.5 million for 
the three months ended March 31, 1998 to $365.8 million for the three months 
ended March 31, 1999, an increase of $30.3 million, or 9.0%.  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 $2,547.3 million in the first quarter of 1998 to $2,678.5 million in the 
first quarter of 1999 due primarily to the P&C Group assuming personal lines 
business from MCC. Management fees earned on this assumed business totaled 
$12.4 million for the first quarter of 1999.  In addition, management fees
increased approximately $6.7 million between years due to the fact that the 
management fee rate was increased 0.25%.  The Company is entitled to receive a
management fee of up to 20% (25% in the case of Fire Insurance Exchange) of the
gross premiums earned by the P&C Group; through March 31, 1999, the average 
management fee rate was 12.1%.  

<PAGE> 17

     Operating Expenses.  Operating expenses as a percentage of operating 
revenues decreased from 54.7% in the first quarter of 1998 to 53.9% in the 
first quarter of 1999, a decrease of 0.8 percentage points.

          Salaries and Employee Benefits.  Salaries and employee benefits 
increased from $84.3 million for the three months ended March 31, 1998 to 
$89.9 million for the three months ended March 31, 1999, an increase of $5.6 
million, or 6.6%, due to $7.1 million of expenses incurred in connection with 
providing management services to the personal lines business previously 
managed by MCC.

          Buildings and Equipment Expenses.  Buildings and equipment expenses 
decreased from $26.3 million for the three months ended March 31, 1998 to 
$24.3 million for the three months ended March 31, 1999, a decrease of $2.0 
million, or 7.6%.  This decrease was due primarily to lower amortization 
expense associated with information technology systems software offset in 
part by $1.8 million of expenses incurred in connection with providing 
management services to the personal lines business previously managed by MCC.

          Amortization of Attorney-In-Fact Contracts and Goodwill.  Purchase 
accounting entries related to the acquisition of the Company by B.A.T in 
December 1988 include goodwill (capitalized at $2.4 billion) and the value of 
the AIF 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 March 31, 1999 and March 31, 1998.

          General and Administrative Expenses.  General and administrative 
expenses increased from $47.3 million for the three months ended March 31, 
1998 to $56.9 million for the three months ended March 31, 1999, an increase 
of $9.6 million, or 20.3%, due in part to $4.7 million of expenses incurred in 
connection with providing management services to the personal lines business 
previously managed by MCC.

     Merger Related Expenses.  Expenses incurred by the Company as a 
result of the merger between B.A.T's Financial Services Businesses 
and Zurich amounted to $0.3 million in the three month period ended March 31, 
1999.

     Net Investment Income.  Net investment income decreased from $39.8 
million for the three months ended March 31, 1998 to $28.8 million for the 
three months ended March 31, 1999, a decrease of $11.0 million, or 27.6%.  Of 
this decrease, $6.0 million was due to the redemption of the Exchange 
certificates of contribution and B.A.T notes and the subsequent issuance of 
the BAFS notes at lower interest rates in 1998. The remaining decrease was due 
primarily to a decrease in the invested asset base.

     Net Realized Gains/(Losses).  Net realized gains/(losses) decreased from 
a $9.8 million gain for the three months ended March 31, 1998 to a $0.2 
million loss for the three months ended March 31, 1999 due to fewer sales of 
investments in the first quarter of 1999.

     Dividends on Preferred Securities of Subsidiary Trusts.   Dividend 
expense related to the $500.0 million of QUIPS issued in 1995 was $10.5 
million for the three months ended March 31, 1999 and March 31, 1998.

     Provision for Income Taxes.  Provision for income taxes for both the 
three month periods ended March 31, 1999 and March 31, 1998 was $76.8 million.

     Management Services Income.  As a result of the foregoing, management 
services income decreased from $114.2 million for the three months ended March 
31, 1998 to $110.0 million for the three months ended March 31, 1999, a 
decrease of $4.2 million, or 3.7%.

<PAGE> 18

Insurance Subsidiaries

Farmers Re

     Under the quota share reinsurance treaty, Farmers Re assumed $250.0 
million of premiums in both the three month periods ended March 31, 1999 and 
March 31, 1998.  Losses and loss adjustment expenses incurred under this 
treaty were $167.9 million for the three months ended March 31, 1999 and 
$176.6 million for the three months ended March 31, 1998 and non-life 
reinsurance commissions were $75.8 million for the three months ended March 
31, 1999 and $67.1 million for the three months ended March 31, 1998.  Income 
before taxes increased $6.6 million between years to $13.6 million as of March 
31,1999 due to increased investment income as a result of a higher invested 
asset base.  Farmers Re's contribution to net income was $9.9 million through 
March 31, 1999 and $4.5 million through March 31, 1998.

Farmers Life

     Total Revenues. Total revenues increased from $166.9 million for the 
three months ended March 31, 1998 to $179.0 million for the three months 
ended March 31, 1999, an increase of $12.1 million, or 7.2%.  

          Life Premiums.  Life premiums increased $6.7 million for the three 
months ended March 31, 1999, or 16.3%, over the three months ended March 31, 
1998.  This increase was due to a 17.5% growth in the average volume of 
traditional life insurance in-force, coupled with the Life Company entering 
into the structured settlements market.
 
          Life Policy Charges.  Life policy charges increased $0.7 million for 
the three months ended March 31, 1999, or 1.4%, over the three months ended 
March 31, 1998, reflecting growth in universal life-type insurance in-force.  

          Investment Income.  Net investment income increased $3.9 million for 
the three months ended March 31, 1999, or 5.5%, over the three months ended 
March 31, 1998 due to higher bond interest income as a result of a higher 
invested asset base due to an 11.1% increase in the universal life fund 
account.  

          Net Realized Gains.  Net realized gains increased by $0.8 million, 
from $3.6 million for the three months ended March 31, 1998 to $4.4 million 
for the three months ended March 31, 1999.  This increase was due to higher 
gains realized on bond sales.

     Total Operating Expenses.  Total operating expenses increased from $109.6 
million for the three months ended March 31, 1998 to $125.1 million for the 
three months ended March 31, 1999, an increase of $15.5 million, or 14.1%.

          Life Policyholders' Benefits and Charges.  Life policyholders' 
benefits expense and charges increased from $72.6 million for the three months 
ended March 31, 1998 to $86.2 million for the three months ended March 31, 
1999, an increase of $13.6 million, or 18.7%.  

               Policy benefits.  Policy benefits, which consist primarily of 
          death and surrender benefits on life products, increased $7.3 
          million for the three months ended March 31, 1999, to $38.1 million, 
          due to a 7.5% growth in the volume of total life insurance in-force 
          and an increase in death benefits per thousand of volume of 
          insurance in-force.  

               Increase in liability for future benefits.  Increase in 
          liability for future benefits expense increased from $4.8 million 
          for the three months ended March 31, 1998 to $9.4 million for the 
          three months ended March 31, 1999.  This increase was primarily 
          attributable to higher traditional life insurance in-force volumes 
          (17.5%) particularly whole life, and entering the structured 
          settlements market.

               Interest credited to policyholders.  Interest credited to 
          policyholders, which represents the amount credited under universal 
          life-type contracts and deferred annuities to policyholder funds on 
          deposit, increased from $37.1 million for the three months ended 
          March 31, 1998 to $38.8 million for the three months ended March 31, 
          1999, or 4.6%, reflecting the 11.1% growth in the universal life 
          fund balance.

<PAGE> 19

          General Operating Expenses.  General operating expenses increased 
from $37.0 million for the three months ended March 31, 1998 to $38.9 million 
for the three months ended March 31, 1999, an increase of $1.9 million, or 
5.1%.  

               Amortization of DAC and Value of Life Business Acquired.  
          Amortization expense increased from $21.6 million for the three 
          months ended March 31, 1998 to $23.8 million for the three months 
          ended March 31, 1999 due primarily to differences in the mix of 
          terminations on traditional life products.

               In addition, adjustments were made to the fixed universal 
          product DAC asset and the Value of Life Business Acquired (VOLBA) 
          asset.  DAC amortization expense was reduced $23.3 million due to 
          favorable persistency experience on the fixed universal life 
          business.  This reduction in expense was largely offset by a $23.1 
          million increase in VOLBA amortization expense resulting from 
          unfavorable persistency experience on the pre-1988 business.  The 
          net impact of these adjustments was a $0.2 million reduction in 
          amortization expense, which is reflected in the $23.8 million 
          mentioned above. 

               Commissions. Commissions decreased $0.1 million from $4.7 
          million for the three months ended March 31, 1998 to $4.6 million 
          for the three months ended March 31, 1999. 

               General and Administrative Expenses. General and administrative 
          expenses decreased from $10.7 million for the three months ended 
          March 31, 1998 to $10.5 million for the three months ended March 31, 
          1999, or 1.9%, due to lower employee benefit expenses and decreased 
          premium taxes.

     Provision for Income Taxes.  Provision for income taxes decreased from 
$21.1 million for the three months ended March 31, 1998 to $18.6 million for 
the three months ended March 31, 1999 due to lower pretax operating income.

     Farmers Life Income.  As a result of the foregoing, Farmers Life income 
decreased from $36.0 million for the three months ended March 31, 1998 to 
$35.1 million for the three months ended March 31, 1999, a decrease of $0.9 
million, or 2.5%.
 
Consolidated Net Income

     Consolidated net income of the Company increased from $154.7 million for 
the three months ended March 31, 1998 to $155.0 million for the three months 
ended March 31, 1999, an increase of $0.3 million, or 0.2%.

 
Year 2000 Issue

     Many computer systems in use today were designed and developed using two 
digits, rather than four, to specify the year.  As a result, such systems will 
recognize "00" as the year 1900 rather than the year 2000.  This could cause 
many computer applications to fail completely or to create erroneous results 
unless corrective measures are taken.  As early as 1995, the Company's 
management recognized that its information systems were at risk to produce 
erroneous results due to the effect of the century rollover.  Significant 
efforts have been expended to gain a complete understanding of Year 2000 
implications and to develop a strategy to make the Company's and the P&C 
Group's systems Year 2000 compliant.  The costs associated with the Year 2000 
Project are being expensed as incurred. The cumulative costs through March 31, 
1999 totaled $19.5 million, of which $4.1 million was allocated to the P&C 
Group.  Total costs of the project are expected to be approximately $23.2 
million, of which approximately $5.4 million is expected to be allocated to 
the P&C Group. 

     To remedy the Year 2000 issue, management has devised a three-phase plan:

     Phase I -"Awareness and Initial Impact Assessment".  This phase was 
completed in May 1996.  During this phase, Year 2000 "Impact Assessment" was 
performed using a mainframe analysis tool to determine which areas were at 
risk. 

<PAGE> 20

     Phase II -"Year 2000 Workpackage and Development Blueprint Project".  
This phase was completed in November 1996 and consisted of creating a 
comprehensive master plan which included establishing and prioritizing 
clusters (groups of similar computer programs) and agreeing upon a definition 
of what would be acceptable Year 2000 compliance.  In addition, a timeframe 
was established for the conversion, compliance testing and the implementation 
of Year 2000 compliant programs into production.

     Phase III -"Year 2000 Conversion and Implementation".  The Company is 
currently in the process of converting, implementing and testing these Year 
2000 conversion programs.  Management expects this phase to be completed by 
mid-1999.

     In addition, the Company has evaluated its relationships with third 
parties with which the Company has a direct and material relationship to 
determine whether they are Year 2000 compliant.  The Company has sent out 
questionnaires and warranty requests to all third party vendors and is 
currently in the process of performing compliance testing with all vendors to 
validate the vendors' claims regarding Year 2000 compliance.  Management 
anticipates that by mid-1999, compliance testing related to third party 
relationships will be completed.  However, it is not possible to state with 
certainty that the operations of third parties will not be materially impacted 
in turn by other parties with whom they themselves have a relationship.

     The Year 2000 issue may not only affect the Company's information 
technology ("IT") systems but also its non-IT systems.  The Company has 
assessed the readiness of its non-IT systems and believes that in the event 
of an interruption of these systems, contingency plans have been established 
such that no major disruptions will occur.

     Preliminary drafts of the Company's Year 2000 contingency plans have been 
completed.  These plans are being reviewed and updated as more information 
becomes available.  In the event that the Company's vendors do not expect to 
be Year 2000 compliant, the Company's contingency plans may include replacing 
such vendors.  The operations of the Company and the P&C Group are such that 
in the event all electronic communications are down, the Company and the P&C 
Group could continue to operate until an alternative communication source is 
acquired. 


Liquidity and Capital Resources

     As of March 31, 1999 and March 31, 1998 the Company held cash and cash 
equivalents of $389.4 million and $423.2 million, respectively.  In addition, 
as of March 31, 1999, the Company had available revolving credit facilities 
enabling it to borrow up to $500.0 million in the event such a need should 
arise.

     Net cash provided by operating activities increased from $247.9 million 
for the three months ended March 31, 1998 to $306.5 million for the three 
months ended March 31, 1999, resulting in an increase of $58.6 million, or 
23.6%.  This increase in cash was due to a $185.8 million increase as a result 
of changes in current assets and liabilities, $135.0 million of which was due 
to changes in premiums receivable from Farmers Re and $24.8 million 
of which relates to an increase in accounts payable.  Partially offsetting 
these increases in cash was a $10.5 million decrease in the provision for 
non-life losses and loss adjustment expenses in 1999 versus a $100.6 million 
increase in the reserve in 1998. 

     Net cash used in investing activities decreased from $249.7 million for 
the three months ended March 31, 1998 to $159.0 million for the three months 
ended March 31, 1999, resulting in an increase in cash of $90.7 million.  This 
increase in cash was due primarily to a $133.4 million increase in proceeds 
from sales and maturities of investments available-for-sale offset in part by 
a $38.9 million increase in purchases of investments available-for-sale.

     Net cash used in financing activities decreased from $91.3 million for 
the three months ended March 31, 1998 to $85.6 million for the three months 
ended March 31, 1999, resulting in an increase in cash of $5.7 million, or 
6.2%, due primarily to higher cash flows from annuity contracts in 1999.  
This increase in cash was offset in part by a $9.7 million increase in 
dividends paid to stockholders.


<PAGE>   21

ITEM 3.	 Quantitative and Qualitative Disclosures about Market Risks  
  
     The market risks associated with the Company's investment portfolios have 
not changed materially from those disclosed at year-end 1998.
	

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>   22


                             FARMERS GROUP, INC. 
                              AND SUBSIDIARIES

                                 SIGNATURES
                                   



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

                                                     Farmers Group, Inc.
                                                            (Registrant)

                           May 11, 1999         /s/  Martin D. Feinstein
                           ---------------------------------------------
                           Date                      Martin D. Feinstein
                                                  Chairman of the Board, 
                                   President and Chief Executive Officer


                           May 11, 1999         /s/   Gerald E. Faulwell
                           ---------------------------------------------
                           Date                       Gerald E. Faulwell
                                               Senior Vice President and
                                                 Chief Financial Officer