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            UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                       WASHINGTON, DC 20549
                            FORM 10-K

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

             For the Fiscal Year Ended December 31, 1997
                  Commission File Number 33-94670-01

                        FARMERS GROUP, INC.

Incorporated in Nevada                      I.R.S. Employer Identification No.
4680 Wilshire Boulevard                                 95-0725935
Los Angeles, California 90010
(213) 932-3200


Securities registered pursuant to Section 12(b) of the Act:

                                                      Name of Each Exchange
Title of Each Class                                    on Which Registered
- -------------------                                    -------------------
8.45% Cumulative Quarterly Income                     New York Stock Exchange
Preferred Securities, Series A (QUIPS) 
(liquidation preference $25 per share)*

8.25% Cumulative Quarterly Income                     New York Stock Exchange
Preferred Securities, Series B (QUIPS) 
(liquidation preference $25 per share)*

*Issued by Farmers Group Capital (Series A) and Farmers Group Capital II 
(Series B) and the payments of trust distributions and payments on 
liquidation or redemption are guaranteed under certain circumstances by 
Farmers Group, Inc., the owner of 100% of the common securities issued by 
Farmers Group Capital and Farmers Group Capital II, Delaware statutory 
business trusts.

Securities registered pursuant to Section 12(g) of the Act: None.

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 
405 of Regulation S-K is not contained herein, and will not be contained, 
to the best of registrant's knowledge, in definitive proxy or information 
statements incorporated by reference in Part III of this form 10-K or any 
amendment to this Form 10-K. /X/

Registrant's Common Stock outstanding on December 31, 1997 was 1,000 shares.


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                             FARMERS GROUP, INC.
                              AND SUBSIDIARIES

                              TABLE OF CONTENTS
                                                                      Page
                                                                     ------ 

PART I  
  ITEM 1.  Business                                                     4
  ITEM 2.  Properties                                                  13
  ITEM 3.  Legal Proceedings                                           13
  ITEM 4.  Submission of Matters to a Vote of Security Holders         13

PART II
  ITEM 5.  Market for Farmers Group, Inc.'s Common Equity and
            Related Stockholder Matters                                14
  ITEM 6.  Selected Financial Data                                     14
  ITEM 7.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations                        16
  ITEM 8.  Financial Statements and Supplementary Data                 23
  ITEM 9.  Changes in and Disagreements With Accountants on
            Accounting and Financial Disclosures                       59

PART III
  ITEM 10.  Directors and Executive Officers of Farmers Group, Inc.    59
  ITEM 11.  Executive Compensation                                     62
  ITEM 12.  Security Ownership of Certain Beneficial Owners
             and Management                                            66
  ITEM 13.  Certain Relationships and Related Transactions             66

PART IV
  ITEM 14.  Exhibits, Financial Statement Schedules and Reports
             on Form 8-K                                               67

SIGNATURES                                                             69





<PAGE>   4


                              DOCUMENT SUMMARY

     The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements of the Company,including
the notes thereto, appearing elsewhere in this document. Unless the context
requires otherwise, (i) references to the Company are to Farmers Group, Inc.
("FGI") and its subsidiaries, (ii) references to the P&C Group are to Farmers
Insurance Exchange, Fire Insurance Exchange and Truck Insurance Exchange (each
an "Exchange" and collectively, the "Exchanges") and their respective
subsidiaries and Farmers Texas County Mutual Insurance Company ("FTCM"), (iii)
references to the Life Insurance Subsidiary are to Farmers New World Life
Insurance Company ("FNWL"), (iv) references to the Life Insurance Subsidiaries
are to FNWL, The Ohio State Life Insurance Company ("OSL") and Investors
Guaranty Life Insurance Company ("IGL"), and (v) references to the Insurance
Subsidiaries are to FNWL, OSL, IGL and Farmers Reinsurance Company.  Unless
otherwise indicated, financial information, operating statistics and ratios
applicable to the Company and the Insurance Subsidiaries set forth in this
document are based on generally accepted accounting principles ("GAAP") and
the same information with regard to the P&C Group is based on statutory
accounting practices ("SAP").  Unless otherwise specified, the financial
information for the P&C Group is on a combined basis.  Any reference to
the "Subsidiary Trusts" is to Farmers Group Capital and Farmers Group Capital
II, consolidated wholly owned subsidiaries of Farmers Group, Inc..

                                     PART I

ITEM 1.  Business

The Company

     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.  On April 15, 1997, OSL and IGL were sold to Great
Southern Life Insurance Company, a subsidiary of Americo Life, Inc..  As of
December 31, 1997, the Company had total assets of $12.1 billion, 
stockholder's equity of $6.8 billion and consolidated operating revenues for 
1997 of $2.0 billion.  As of December 31, 1997, the Company's remaining life
insurance subsidiary, FNWL, had total assets of $5.4 billion, combined SAP
capital and surplus (including asset valuation reserve) of $0.8 billion,
combined SAP premium and deposits received for 1997 of $0.5 billion and
policies-in-force of 1.1 million. The financial results and assets and
liabilities of the P&C Group are not reflected in the consolidated financial
statements of the Company.

     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 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.

     B.A.T is one of the United Kingdom's leading business enterprises with
interests principally in tobacco and financial services.  B.A.T operates in
more than 180 countries, employing more than 141,000 people.  As of December
31, 1997, B.A.T reported total assets of $84.9 billion (based on an exchange
rate of $1.657 per British pound sterling as of December 31, 1997) and, for
the year then ended, reported total revenues and income before taxes of
$41.1 billion and $2.9 billion, respectively (based on an average exchange
rate of $1.639 per British pound sterling for the year ended December 31,
1997).

     On December 22, 1997, a definitive agreement was reached to merge B.A.T
Industries' Financial Services Businesses ("BAFS") with Zurich Insurance
Company ("Zurich").  Completion of the merger is subject to regulatory
consents, tax clearance and the approval of the shareholders of B.A.T and
Zurich, and is expected to be finalized in late 1998.  Under the 

<PAGE>   5

agreement, the businesses of Zurich and BAFS, which include Farmers Group,
Inc., will be transferred to Zurich Financial Services, a new Swiss company
with headquarters in Zurich.


Financial Information About Industry Segments

     Financial information about industry segments can be found in Note Z 
contained in the Notes to Consolidated Financial Statements.  Following are 
descriptions of the Company's industry segments.

     Provision of Management Services to the P&C Group.  The insurers
constituting the P&C Group are owned by their policyholders.  Accordingly, the
Company has no ownership interest in the P&C Group. The policyholders each
appoint the Company as the exclusive attorney-in-fact ("AIF") to provide
management services to the P&C Group. For such services, the Company earns
management fees based primarily on the gross premiums earned by the P&C Group.
Consequently, the Company is not directly affected by the underwriting
results of the P&C Group. This is in contrast to a typical property and
casualty insurance holding company which depends on dividends from owned and
operated subsidiaries which are subject to fluctuations in underwriting
results. The management fees comprise a major part of the Company's revenue
and, as a result, the Company's ongoing financial performance depends on the
volume of business written by, and the business efficiency and financial
strength of, the P&C Group.

     As manager and AIF of the P&C Group, the Company selects risks, prepares
and mails policy forms and invoices, collects premiums, manages the investment
portfolios and performs certain other administrative functions. The insurers
of the P&C Group are responsible for the claims functions, including the
settlement and payment of claims and claims adjustment expenses. They are also
responsible for the payment of commissions, benefits for agents and district
managers, and their respective premium and income taxes. 

     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. In order to enable the P&C Group to maintain appropriate capital and
surplus while offering competitive insurance rates, the Company has
historically charged a lower management fee than permitted. The Company has
been able to do this while maintaining appropriate profit margins through
enhanced operating efficiencies that encompass the use of economies of scale,
the use of technology and the standardization of procedures. The range of fees
has varied by line of business over time and from year to year. During the
past five years, aggregate management fees averaged between 12% and 13% of
gross premiums earned by the P&C Group. The P&C Group has reported a growing
volume of premiums which has generated a corresponding rise in management fee
income to the Company. Gross premiums earned by the P&C Group were $10.1
billion, $9.5 billion, and $9.0 billion for 1997, 1996 and 1995, respectively,
giving rise to management fee revenues to the Company of $1.24 billion, $1.17 
billion, and $1.11 billion, respectively, for the same years. 

     The P&C Group markets personal auto, homeowners and selected commercial
insurance products in 31 states. For the year ended December 31, 1997,
approximately 68.3% of net premiums earned was from auto insurance policies,
21.5% was from homeowner policies, and the remainder was from commercial
policies.  As of December 31, 1997, the P&C Group had total assets of $12.6
billion, surplus as regards policyholders of $3.6 billion, gross premiums
earned of $10.1 billion and policies-in-force of 15.6 million.


<PAGE>   6

     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..  As a result, FNWL, a Washington
insurance company, remains as the only life insurance subsidiary of FGI.  FNWL
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.  As of December 31, 1997,
FNWL provided insurance to more than one million people and managed more than
$1.5 billion of annuity funds. FNWL's investment philosophy emphasizes
long-term fundamental value in the selection of the investment mix for its
portfolio.  As of December 31, 1997, approximately 91.3% of FNWL's
portfolio was invested in fixed income securities and cash, 6.8% in other
fixed income instruments, and 1.9% in equity securities and owned real estate.
As of December 31, 1997, approximately 92.9% of FNWL's fixed income securities
were rated investment grade.  FNWL's  ratio of SAP capital and surplus
(including asset valuation reserve) to total assets as of December 31, 1997
was 20.6%, well over the industry average of approximately 11.9% as of
September 30, 1997, as published in the Statistical Bulletin issued by the
American Council of Life Insurance.

     In 1997, OSL and IGL contributed $5,502,000 to net income.  The combined
net assets of these subsidiaries as of April 15, 1997 were $316,448,000.  The
sale of these subsidiaries resulted in an estimated $19,019,000 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 $26,826,000 and were reflected on the "Provision for income
taxes" line.  Both of these amounts were reflected in the "Management services
to property and casualty insurance companies; and other" section of the
Company's consolidated income statement for the year ended December 31, 1997.


     Other Businesses.  The Prematic Service Corporation ("Prematic"), a 
subsidiary of the Company, was established in 1961 to enable individuals 
and businesses purchasing insurance from one or more members of the P&C 
Group and FNWL to combine all premiums due into a single monthly payment.
In practice, Prematic combines amounts due from a single insured associated
with auto, fire, commercial and life policies into a single amount, and
Prematic then bills the insured on a monthly basis for all policies-in-force. 
For its services, Prematic collects a service fee, but since Prematic does 
not finance the premium, there is no interest charged.  Approximately 21.6% 
of the P&C Group's policies-in-force and 6.1% of FNWL's policies-in-force are
currently billed by Prematic, and in 1997, Prematic generated approximately
$76 million in service charge income. Net income earned by this subsidiary was
approximately $24 million in 1997. The Company has certain other nonmaterial
subsidiaries, the results of which are included in the Company's consolidated
results.
 
Employees	 

     As of December 31, 1997, the Company had 7,559 employees. 

Business Environment

     Strategic Objectives.  The Company's strategic objectives are to assist 
the P&C Group in growing the volume of profitably underwritten insurance and 
to increase life insurance and annuity sales to the P&C Group's existing 
policyholder base. The Company intends to achieve these objectives by (i) 
cross-selling insurance products and services to the P&C Group's nearly 
8.5 million existing households while focusing its efforts 
on the growth of FNWL, (ii) investing in technology to 
improve the efficiency and quality of service, (iii) maintaining its
long-standing tradition of providing

<PAGE>   7


high-quality customer service, (iv) capitalizing on the strong
brand name recognition of Farmers Insurance Group of Companies in its
31 state operating territory, (v) selectively expanding into new geographic
markets, and (vi) expanding the products and services offered to its
policyholders by taking advantage of horizontal marketing opportunities.

     Technology.   The Company makes substantial use of information technology
in its business.  Information technology is utilized for accounting and
billing, to provide management information services, to process policies, to
analyze and select risks, and to automate premium remittance processing.
An integrated network of computer workstations connects the Company's offices
and the P&C Group's offices, district managers and agents with the Company's
two data centers. 

     The Company is committed to an ongoing program of proprietary software
development which enhances the operating efficiency of FNWL and the management
services it provides to the members of the P&C Group.  Examples of the
Company's commitment to using technology to improve operating efficiencies are
the Auto Policy Processing System ("APPS") and the Fire Policy Processing
System ("FPPS"), which were developed to allow agents on-line access to auto
and fire policy data. Additional projects under development are the Farmers
EasyPay (SM) billing system, which is being developed in order to update the
Prematic policy processing software system to allow for faster and more
flexible policyholder billing, and the Auto Mainfile Replacement ("AMR")
system, which is being developed to replace the existing automobile policy
mainfile and will allow for easier and faster information retrieval and
analysis.

     These software systems are designed to significantly reduce the time and
expense associated with processing and servicing a Personal Lines policy.  In
addition, by allowing network access to more comprehensive policy and
policyholder information, these systems increase cross-selling opportunities
for the agent and provide better data to monitor and manage the quality of the
book of business. The above mentioned projects are expected to cost
approximately $299 million, of which an aggregate of $286 million has already
been capitalized as of December 31, 1997. 

     In 1995, the Company initiated the Year 2000 Project in order to prepare
for the information processing problems presented by the approach of the
new millennium.  The project encompasses all major areas of the Company's
operations, including internal and vendor mainframe applications, mainframe
systems software, third party interfaces, non-mainframe system software,
forms, facilities, and equipment.  As the Company and the P&C Group rely on
computer software logic to maintain accurate records, and as the business of
the P&C Group involves providing accurate and timely information and service
to its policyholders, the impact of the issues relating to the approach of the
new millennium are significant to the Company's ongoing performance.  As such,
a phased plan has been developed for completing this project.  As of December
31, 1997, the first two phases of the project (that is, the assessment and
strategic planning phases) have been completed.  The project is currently in
its final phase (the conversion and implementation phase) which is expected to
be completed in mid-year 1999.

     The Company has communicated with all external entities with which it
interfaces and is testing all third party applications, interfaces and system
software for compliancy.  Although the Company believes that all third party
interfaces will be compliant by the year 2000, there can be no guarantee that
the systems of other companies on which the Company's systems rely will
be timely converted or that a failure to convert by another company would not
have a material adverse effect on the Company.    


<PAGE>   8


     The costs associated with the Year 2000 Project are being expensed as
incurred.  For the year ended December 31, 1997, such costs totaled $6.8
million, of which $1.5 million was allocated to the Exchanges.  For the year
ended December 31, 1996, such costs totaled $0.8 million, of which $0.2
million was allocated to the Exchanges.  Total costs for this project are
expected to be approximately $20.5 million, of which approximately $5.1
million is expected to be allocated to the Exchanges.  The expenditures
associated with the Year 2000 Project are not expected to have a material
impact on the Company's results of operations, liquidity, or capital
resources.           


     Marketing and Distribution. The P&C Group and FNWL operate under a common
trade name and logo - Farmers Insurance Group of Companies - and
distribute their respective insurance products in 29 states (primarily in
western and midwestern states) through a common network of 14,447 direct
writing agents and 497 district managers, each of whom is an independent
contractor. The size, efficiency and scope of this agency force have made it a
major factor in the Company's growth. Each agent is required to first submit
business to the insurers in Farmers Insurance Group of Companies within
the classes and lines of business written by such insurers. To the extent that
such insurers decline such business or do not underwrite it, the agents may
offer the business to other insurers. 

     The Farmers Insurance Group of Companies' agents direct their marketing
efforts toward family accounts and small businesses. They leverage these
relationships using an extensive portfolio of products to increase the number
of policies per household or account. The P&C Group's existing relationships
with nearly 8.5 million households provide a potential resource for future
growth in policies-in-force and life insurance sales. Management believes that
higher retention rates and profitability are achieved on business written with
households having multiple policies. 

     Farmers Insurance Group of Companies maintains its brand name
recognition throughout its operating territory through television, radio and
print advertising on both a national and local basis. The Farmers Agency
Information Management System provides the agency force with a marketing
advantage by delivering high-quality consumer focused service at the point of
sale. Furthermore, Farmers Insurance Group of Companies' formalized
policyholder recontact program, the "Farmers Friendly Review", builds customer
loyalty and provides a vehicle for enhanced policy retention and future
internal growth through the cross-selling of property and casualty and life
products. 

     In 1997, the P&C Group began offering preferred auto policies via direct
telemarketing operations in the Commonwealth of Pennsylvania and the State
of Maryland through Farmers Direct Insurance Company.  The preferred
auto policies are offered through direct solicitation via direct mail,
television and other media. 
 
     Competition.  Property and casualty insurance is a very competitive
industry with over 3,000 insurers.  Many property and casualty insurers with a
small all-lines national market share have a significant market share within a
single state or a specialty market. The P&C Group competes through brand name
recognition of the Farmers Insurance Group of Companies, customer service,
product features, financial strength, price and the direct writing agency
force.

     There is substantial competition among insurance companies seeking
customers for the types of products sold by FNWL.  Most of the 1,700 life
insurance companies in the United


<PAGE>   9

States offer products similar to those offered by FNWL, and 
many use similar marketing techniques. Competitiveness in
the insurance business is affected by various factors including, but not
limited to, price, financial and claims-paying ratings, size and strength of
agency force, range of product lines, product quality, servicing ability and
general reputation.  FNWL competes on the basis of customer service, product
features, financial strength and price.  Many of FNWL's products contain
significant cash accumulation features; therefore, these products compete with
product offerings of banks, mutual funds and other financial institutions as
well.


     Regulatory and Related Matters.  The Insurance Subsidiaries and the P&C
Group are subject to extensive state regulatory oversight in the jurisdictions
in which they do business.  The Company and the P&C Group are an 
insurance holding company system as defined by the insurance laws and
regulations of various jurisdictions.  As such, certain transactions between an
insurance company and any other member company of the system, including
investments in subsidiaries and distributions by an insurance company to its
shareholders, are subject to regulation and oversight by the state of domicile
of the applicable insurance company.  Insurers having insufficient statutory
capital and surplus are subject to varying degrees of regulatory action
depending on the level of capital inadequacy.  As of December 31, 1997,
neither the P&C Group nor the Insurance Subsidiaries were subject to such
regulatory actions.  Most of FNWL's and the P&C Group's business is subject to
regulation with respect to policy rates and related matters. In addition,
assessments are levied against FNWL and the P&C Group as a result of
participation in various types of mandatory state guaranty associations.
Existing federal laws and regulations affect the taxation of life insurance
products and insurance companies.


Investments

     During the years ended December 31, 1997, 1996, and 1995, the Life
Insurance Subsidiaries had pretax net investment income and realized
investment gains of $306.4 million, $355.6 million, and $329.9 million,
respectively, and the Company other than the Life Insurance Subsidiaries
(collectively, the "FGI/Nonlife Account") had pretax net investment income
and realized investment gains of $217.6 million, $117.9 million, and $79.5
million, respectively.  As of December 31, 1997, the book value of the FNWL
investment portfolio was approximately $3.9 billion and the book value of the
FGI/Nonlife Account investment portfolio was approximately $2.7 billion. Both
of these portfolios are managed by the Company's Investment Department in
accordance with investment policies approved by the Board of Directors of the
Company as well as the Investment Committee, which is comprised of 10 officers
of the Company appointed by the Board of Directors of the Company. 

     The Company's investment philosophy for both the FNWL portfolio and the
FGI/Nonlife Account portfolio emphasizes long-term fundamental value in the
selection of the investment mix. For FNWL, the assets backing the interest
sensitive portfolio are internally segregated along product lines in order to
closely match the funding assets with the underlying liabilities to
policyholders. The asset/liability matching system is the basis by which
credited interest rates are determined.  Relatively short maturities are
maintained for the fixed income securities held in the FGI/Nonlife Account in
order to maintain capital preservation and to ensure liquidity. 

     The FNWL portfolio and the FGI/Nonlife Account portfolio are both
comprised of a broad range of assets, including corporate fixed income
securities, mortgage-backed securities, taxable and tax-exempt government
securities, preferred stock, common stock, owned real estate, commercial
mortgage loans and short-term instruments.  The FNWL portfolio also includes
policy loans.  Approximately 40.8% of the FGI/Nonlife Account portfolio
consists of notes issued by B.A.T 


<PAGE>   10


Capital Corporation, a subsidiary of B.A.T, and surplus certificates issued
by the P&C Group.  See "Certain Relationships and Related Transactions" and
Notes D and S contained in the Notes to the Consolidated Financial
Statements.

     Approximately 92.9% of the fixed income securities in the FNWL portfolio
are rated investment grade and approximately 98.4% of the fixed income
securities in the FGI/Nonlife Account portfolio are rated investment grade.
Approximately 68.0% of the mortgage-backed securities in the FNWL portfolio
are guaranteed by the Government National Mortgage Association ("GNMA"),
Federal Housing Authority ("FHA"), Federal National Mortgage Association
("FNMA"), or Federal Home Loan Mortgage Corporation ("FHLMC"), and
approximately 32.0% are rated "AAA". Approximately 63.6% of the
mortgage-backed securities in the FGI/Nonlife Account portfolio are
guaranteed by GNMA, FHA, FNMA, or FHLMC, and approximately 36.4% are rated
"AAA".

     The following table sets forth the book value of each portfolio, by 
asset category, as of December 31, 1997 and 1996.


                                      Book Value of Invested Assets
                                             ($ in millions)
<TABLE>
<CAPTION>
                                                          As of December 31,                      
                                      -------------------------------------------------------------
                                                1997                               1996         
                                      -------------------------         --------------------------- 
                                      Book Value          %             Book Value           %    
                                      ----------      ---------         ----------       ----------
<S>                                   <C>             <C>               <C>              <C>
                                                FNWL                    Life Insurance Subsidiaries
                                      -----------------------           ---------------------------
Fixed income securities               $ 3,555.1        91.1 %           $  3,854.1        86.9 %
Equity securities                           1.3         0.1                  110.2         2.5
Mortgage loans                             89.9         2.3                  122.6         2.8
Owned real estate                          69.3         1.8                   61.7         1.4
Policy loans                              165.9         4.2                  187.3         4.2
Cash and cash equivalents                  10.0         0.2                   87.3         2.0
Other                                      12.9         0.3                   12.0         0.2
                                      ---------       -------           ----------       ----------
    Total                             $ 3,904.4       100.0 %           $  4,435.2       100.0 %
                                      =========       =======           ==========       ==========

                                                        FGI/Nonlife Account
                                      -------------------------------------------------------------
Fixed income securities               $   616.5        23.1 %           $    303.1        14.0 %
Mortgage loans                              0.2         0.0                    0.0         0.0
Equity securities                         389.0        14.6                  307.8        14.2
Certificates in surplus of Exchanges      684.4        25.6                  684.4        31.5
B.A.T Capital Corporation notes           407.0        15.2                  407.0        18.8
Owned real estate                          63.5         2.4                   45.3         2.1
Cash and cash equivalents                 506.3        18.9                  412.0        19.0
Other                                       4.8         0.2                   10.4         0.4
                                      ---------       -------           ----------       ----------
    Total                             $ 2,671.7       100.0 %           $  2,170.0       100.0 %
                                      =========       =======           ==========       ==========

</TABLE>

     Investment Accounting Policies.  The Company follows the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities".  This Statement addresses
the accounting and reporting for investments in equity securities that have
readily determinable fair values and for all investments in debt securities.
As of December 31, 1997 and 1996, the Company classified all investments in
equity and debt securities as available-for-sale under SFAS No. 115.
Correspondingly, these investments are reported on the balance sheet at
fair value, with unrealized gains and losses, net of tax, excluded from
earnings and reported as a component of stockholder's equity.    

<PAGE>   11

     In compliance with a Securities and Exchange Commission ("SEC") staff
announcement, the Company has recorded certain entries to the Deferred Policy
Acquisition Costs ("DAC") and Value of Life Business Acquired line of the
consolidated balance sheet in connection with SFAS No. 115.  The SEC requires
that companies record entries to those assets and liabilities that would have
been adjusted had the unrealized investment gains or losses from securities
classified as available-for-sale actually been realized, with corresponding
credits or charges reported directly to stockholder's equity.
	
     Bonds acquired prior to the December 31, 1988 acquisition of the Company
by B.A.T were marked-to-market at the time of the acquisition and the
resulting net writedown is being amortized over a period approximately equal
to the remaining time to maturity.

     Real estate investments are accounted for on a depreciated cost basis.
Real estate acquired in foreclosure and held for sale is carried at the lower
of fair value or depreciated cost less a valuation allowance.  Short-term
instruments are carried at cost.  Other investments, which consist primarily
of certificates in surplus of the Exchanges, policy loans and the B.A.T
Capital Corporation notes, are carried at the unpaid principal balances.

 
     Fixed Income Securities.  As of December 31, 1997, approximately 91.1% of
the FNWL portfolio and 23.1% of the FGI/Nonlife Account portfolio were
invested in fixed income securities. These investments include taxable and
tax-exempt government securities, domestic and foreign corporate bonds,
redeemable preferred stock and mortgage-backed securities.  Approximately 92.9%
and 98.4% of the fixed income securities in the FNWL portfolio and FGI/Nonlife
Account portfolio, respectively, are rated investment grade.  The following
table sets forth the market values of the various categories of fixed income
securities included within the portfolios as of December 31, 1997.



                                      Value of Fixed Income Securities
                                               ($ in millions)

<TABLE>
<CAPTION>
                                       FNWL              FGI/Nonlife Account               Total        
                              ----------------------   -----------------------   -----------------------
                                 Market                   Market                    Market              
                                 Value          %         Value          %          Value          %    
                              -----------   --------   -----------   ---------   -----------   ---------
<S>                            <C>           <C>         <C>           <C>         <C>          <C>
Mortgage-backed                $ 1,706.5      48.0 %     $   67.7       11.0 %     $ 1,774.2     42.5 %
Corporate                          889.7      25.0           64.5       10.5           954.2     22.9
U.S. Government                    417.6      11.8           25.3        4.1           442.9     10.6
Municipal                          283.8       8.0          420.0       68.1           703.8     16.9
Foreign                            146.7       4.1            0.0        0.0           146.7      3.5
Redeemable preferred stock         110.8       3.1           39.0        6.3           149.8      3.6
                               ---------     -------     --------      -------     ---------    -------
    Total                      $ 3,555.1     100.0 %     $  616.5      100.0 %     $ 4.171.6    100.0 %
                               =========     =======     ========      =======     =========    =======

</TABLE>


     Credit Ratings.  The National Association of Insurance Commissioners
("NAIC") maintains a valuation system that assigns quality ratings known as
"NAIC Designations" to publicly traded and privately placed fixed income
securities.  The NAIC Designations range from 1 to 6, with categories 
1 (highest) and 2 considered investment grade and categories 3 through 6
(lowest) considered non-investment grade.  As of December 31, 1997, FNWL held
$252.3 million in below investment grade bonds, representing 6.5% of total
invested assets, and the FGI/Nonlife Account portfolio held $7.8 million in
below investment grade bonds, representing 0.3% of total invested assets.


<PAGE>  12

     Mortgage-backed Securities. Mortgage-backed securities ("MBS") are the
largest component of FNWL's fixed income portfolio and represented
approximately 48.0% of its fixed income portfolio as of December 31, 1997.
The FGI/Nonlife Account's MBS represented approximately 11.0% of its fixed
income portfolio as of December 31, 1997. Approximately 68.0% of the MBS in
the FNWL portfolio are guaranteed by various government agencies and
government sponsored entities, including the GNMA, FHA, FNMA, or FHLMC, and
approximately 32.0% are rated "AAA".  Approximately 63.6% of the MBS in the
FGI/Nonlife Account portfolio are guaranteed by GNMA, FHA, FNMA, or FHLMC, and
approximately 36.4% are rated "AAA".  The primary risk in holding MBS is the
cash flow uncertainty that arises from changes to prepayment speeds as
interest rates fluctuate. To reduce the uncertainties surrounding the cash
flows of MBS, the FNWL portfolio held significant MBS investments in
collateralized mortgage obligations ("CMOs") including $702.5 million of
planned amortization classes ("PACs") and $52.2 million of targeted
amortization classes ("TACs"), and the FGI/Nonlife Account portfolio held
$30.8 million of PACs. These securities provide protection by passing a
substantial portion of the risk of prepayment uncertainty to other tranches. 


     Equity Investments-Common Stock.  In 1997, the Company restructured its
common stock portfolio to diversify and to limit its exposure in any one
market sector.  As a result, the Company's common stock portfolio is
invested in the equities of many of the 3,000 largest United States Companies,
which represents approximately 98% of the investable United States equity
market.

     During 1997, FNWL participated in a class action lawsuit against
Structural Dynamics Research Corporation ("SDRC").  In settlement of this
lawsuit, the Company received both cash and common shares of SDRC.  The cost
basis assigned to these common shares is zero, as any applicable costs of
purchasing the original shares was charged to previous years' earnings as a
result of the disposal of the securities.  As of December 31, 1997, the fair
value of the SDRC common shares owned by FNWL was $120,000.


     Commercial Mortgage Loans. As of December 31, 1997, the FNWL portfolio
included commercial mortgage loans with an aggregate book value of
approximately $89.9 million (net of loss provisions of $7.9 million), or 2.3%
of total invested assets, and the FGI/Nonlife Account portfolio included
commercial mortgage loans of $0.2 million.

     All commercial mortgage loans included in the FNWL portfolio are secured
by first mortgages. The majority of the commercial mortgage loan portfolio
consists of loans secured by office buildings, light industrial properties and
retail properties located primarily in unanchored shopping centers.  Exposure
to potential losses from future commercial mortgage loan foreclosures and the
operation or sale of properties acquired through foreclosures is limited
because FNWL has not issued any commercial mortgage loans since 1989, and the
majority of the individual remaining commercial mortgage loan balances are
less than $1.0 million.


     Owned Real Estate Investments.  As of December 31, 1997, the FNWL
portfolio included owned real estate investments with a book value of $69.3
million (net of loss provisions of $4.3 million), or 1.8% of total invested
assets, and the FGI/Nonlife Account portfolio included owned real estate
investments with a book value of $63.5 million, or 2.4% of total
invested assets. The FNWL real estate holdings fall into two categories: real
property assets that were acquired directly as an equity investment and
foreclosed equity real estate properties. The FGI/Nonlife Account owned real
estate holdings were all acquired directly as equity investments.


<PAGE> 13

     Problem Investments-Fixed Income Securities.  As of December 31, 1997,
none of the fixed income securities held in the FNWL or the FGI/Nonlife
Account portfolios were classified as  "problem" or "potential problem"
assets.

     Problem Investments-Mortgage Loan Investments.  As of December 31, 1997, 
none of the mortgage loans held by the FNWL or the FGI/Nonlife Account were
classified as "troubled loans". 


ITEM 2.  Properties

     The Company owns three buildings in Los Angeles, six regional offices,  
seven business support centers and 1 commercial claims center in which its
administrative operations are conducted.  In addition, the Company owns a
building in Washington in which the operations of FNWL are conducted.


ITEM 3.  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 in various governmental 
and administrative proceedings.


ITEM 4.  Submission of Matters to a Vote of Security Holders

     There were no matters submitted to a vote of security holders during the 
year ended December 31, 1997.


<PAGE>   14

                                     PART II

ITEM 5.  Market for Farmers Group, Inc.'s Common Equity and Related 
         Stockholder Matters

     N/A


ITEM 6.  Selected Financial Data

     The following table sets forth summary consolidated income statement 
data, consolidated balance sheet data and other operating data for the 
periods indicated. The following consolidated income statement data of the 
Company for each of the years in the five-year period ended December 31, 
1997, and the consolidated balance sheet data of the Company as of December 
31, 1997 and each of the preceding four years ended December 31, have been 
derived from the Company's audited consolidated financial statements. The 
following data should be read in conjunction with the Company's Consolidated 
Financial Statements and related notes, "Management's Discussion and Analysis 
of Financial Condition and Results of Operations" and other financial 
information appearing elsewhere herein. 

     Income statement data includes the effect of amortizing the purchase 
accounting entries related to the acquisition of the Company by B.A.T in 
December 1988.  See Note A to the Company's Consolidated Financial 
Statements.  Major items incorporated in the purchase price of the Company 
include goodwill and the value of the AIF contracts of the P&C Group.  
The amortization of these two items, which is being taken on a straight-line 
basis over forty years, reduced annual pretax income by approximately $102.8 
million in each of the years 1993 through 1997.


<PAGE>   15

<TABLE>
<CAPTION>

                                                           Year Ended December 31,                       
                                     ------------------------------------------------------------------- 
                                        1997          1996          1995          1994          1993     
                                     -----------   -----------   -----------   -----------   ----------- 
<S>                                  <C>           <C>           <C>           <C>           <C>
                                                               ($ in millions)
INCOME STATEMENT DATA
Consolidated operating revenues      $   2,008.9   $   2,013.2   $   1,892.4   $   1,779.2   $   1,709.0 
                                     ===========   ===========   ===========   ===========   =========== 
Management services to property
  and casualty insurance companies;
  and other:
    Operating revenues               $   1,324.9   $   1,245.4   $   1,183.1   $   1,130.1   $   1,107.7 
                                     -----------   -----------   -----------   -----------   ----------- 
  Salaries and employee benefits           335.8         337.2         348.8         348.8         340.1 
  Buildings and equipment expenses          95.8          87.3          75.0          55.1          53.6 
  Amortization of AIF contracts   
    and goodwill                           102.8         102.8         102.8         102.8         102.8 
  General and administrative expenses      202.6         170.3         170.5         172.8         166.7 
                                     -----------   -----------   -----------   -----------   ----------- 
    Total operating expenses               737.0         697.6         697.1         679.5         663.2
                                     -----------   -----------   -----------   -----------   ----------- 
    Operating income                       587.9         547.8         486.0         450.6         444.5 
  Net investment income                    144.2         112.8          78.0          59.1          46.7 
  Net realized gains                        73.4           5.1           1.5           2.7           2.0 
  Gain on sale of subsidiaries              19.0           0.0           0.0           0.0           0.0   
  Dividends on preferred securities  
    of subsidiary trusts                   (42.1)        (42.1)        (10.4)          0.0           0.0 
                                     -----------   -----------   -----------   -----------   ----------- 
    Income before provision for 
      taxes                                782.4         623.6         555.1         512.4         493.2 
  Provision for income taxes               332.2         275.1         224.3         208.1         215.5 
                                     -----------   -----------   -----------   -----------   ----------- 
    Management services income             450.2         348.5         330.8         304.3         277.7 
                                     -----------   -----------   -----------   -----------   ----------- 

Life Insurance Subsidiaries:
  Premiums                                 161.1         170.4         158.8         153.1         146.6 
  Policy charges                           216.6         241.7         220.6         197.6         173.9 
  Investment income, net of expenses       293.1         317.7         298.3         251.6         241.8
  Net realized gains                        13.2          38.0          31.6          46.8          39.0 
                                     -----------   -----------   -----------   -----------   ----------- 
    Total revenues                         684.0         767.8         709.3         649.1         601.3
                                     -----------   -----------   -----------   -----------   ----------- 
  Policyholders' benefits                  294.4         335.1         316.7         276.4         262.2
  Amortization of deferred policy 
    acquisition costs and value of 
    life business acquired                 104.0         108.8         103.2          92.8          65.4 
  Commissions                               18.2          21.0          20.1          18.7          16.9 
  General and administrative expenses       47.7          63.4          60.9          57.4          58.0 
                                     -----------   -----------   -----------   -----------   ----------- 
    Total operating expenses               464.3         528.3         500.9         445.3         402.5 
                                     -----------   -----------   -----------   -----------   ----------- 

    Income before provision for 
      taxes                                219.7         239.5         208.4         203.8         198.8 
  Provision for income taxes                76.4          80.1          68.5          67.7          68.3 
                                     -----------   -----------   -----------   -----------   ----------- 
    Life Insurance Subsidiaries 
      income                               143.3         159.4         139.9         136.1         130.5  
                                     -----------   -----------   -----------   -----------   -----------
Consolidated net income before
    cumulative effect of accounting 
    change                                 593.5         507.9         470.7         440.4         408.2 
Cumulative effect of accounting 
    change                                   0.0           0.0           0.0          (4.7) (1)      0.0 
                                     -----------   -----------   -----------   -----------   ----------- 
Consolidated net income              $     593.5   $     507.9   $     470.7   $     435.7   $     408.2
                                     ===========   ===========   ===========   ===========   =========== 

BALANCE SHEET DATA
  Total investments (2)              $   6,576.0   $   6,605.3   $   6,545.7   $   5,181.9   $   4,914.8 
  Total assets                          12,117.4      12,928.8      12,630.6      11,270.9      10,929.8 
  Total short term debt                      0.0           0.0         200.0           0.0           0.0
  Total long term debt                       0.1           0.2           0.3         200.4         209.4
  Company obligated mandatorily
    redeemable preferred securities                                                                      
    of subsidiary trusts holding 
    solely junior subordinated
    debentures ("QUIPS")                   500.0         500.0         500.0           0.0           0.0 
  Stockholder's equity                   6,781.6       6,503.8       6,493.6       6,148.0       6,142.0 

OTHER OPERATING DATA (unaudited)
  Ratio of debt to total 
    capitalization                           6.9 %         7.1 %         9.7 %         3.2 %         3.3 %
  Ratio of earnings to fixed 
    charges (3)                             20.2 x        15.5 x        21.5 x        28.9 x        27.7 x

</TABLE>

----------------------------
 (1) Net income reflects the charge resulting from expensing the transition 
     obligation upon the implementation of SFAS No. 112, "Employers' 
     Accounting for Postemployment Benefits". Such amounts were $4.5 million 
     and $0.2 million, after tax, for Management services to property and 
     casualty insurance companies; and other and the Life Insurance
     Subsidiaries, respectively, for the year ended December 31, 1994.
(2)  Includes cash, short-term investments and notes receivable-affiliate.
(3)  The ratio of earnings to fixed charges has been determined by dividing 
     the sum of net income before income taxes plus fixed charges by fixed 
     charges.  Fixed charges consist of interest, capitalized interest, 
     dividends paid to QUIPS holders, amortization of QUIPS offering expenses 
     and that portion of rent expenses deemed to be interest.


<PAGE>   16

ITEM 7.  Management's Discussion and Analysis of Financial Condition and 
         Results of Operations

General

     The Company's principal activities are the management of property and
casualty insurance companies and the underwriting of life insurance and
annuity products.  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 SAP, which
FNWL is required to use for regulatory reporting purposes. 

     The Company underwrites life insurance and annuity products through FNWL.
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.


Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

  Management Services to Property and Casualty Insurance Companies; and Other

     Operating Revenues. Operating revenues increased from $1,245.4 million in
1996 to $1,324.9 million in 1997, an increase of $79.5 million, or 6.4%.
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 $9,458.2 million in 1996 to $10,070.1 million in 1997 due
primarily to higher average premium levels for the Auto and Fire lines of
business and an increase in the number of policies-in-force between years
reflecting stricter enforcement of the California mandatory auto insurance
law following enactment of California Assembly Bill 650 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 Company waived an additional
0.43% from the Farmers Preferred Auto Management fee rate that was in effect
prior to November 1, 1996.  This rate waiver resulted in a $22.3 million
reduction in management fees in 1997 from what such fees would have
been using the rates in effect during 1996.  

     Total Operating Expenses. Total operating expenses as a percentage of
operating revenues decreased from 56.0% in 1996 to 55.6% in 1997, a decrease
of 0.4%.  Although total operating expenses increased by 5.7%, this increase
was less than the 6.4% increase in operating revenues.  Specifically, the
Company continued to benefit from staffing efficiencies and improved
information technology systems and hence was able to control its labor costs,
reducing salaries and employee benefits from 27.1% of operating revenues in
1996 to 25.3% of operating revenues in 1997.  


<PAGE>   17


          Salaries and Employee Benefits.  Salaries and employee benefits
     decreased from $337.2 million in 1996 to $335.8 million in 1997, a
     decrease of $1.4 million, or 0.4%, primarily due to a reduction in
     employee complement.

          Buildings and Equipment Expenses.  Buildings and equipment expenses
     increased from $87.3 million in 1996 to $95.8 million in 1997, an
     increase of $8.5 million, or 9.7%.  This increase was primarily due to
     higher amortization expense associated with information technology
     systems software.

          Amortization of AIF Contracts and Goodwill.  The 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).  The amortization of these two items,
     which is being taken on a straight-line basis over forty years, 
     reduced pretax income by approximately $102.8 million for both 1997 
     and 1996.

          General and Administrative Expenses.  General and administrative
     expenses increased from $170.3 million in 1996 to $202.6 million in 1997,
     an increase of $32.3 million, or 19.0%.  This increase was primarily due
     to higher expenses attributable to increased business levels and the
     re-entry of the P&C Group into the California homeowners' market.  Also
     contributing to the increase in expense was a $4.6 million increase in
     costs associated with the modification of existing computer program logic 
     to accommodate years 2000 and beyond (Year 2000 Project).

     Net Investment Income.  Net investment income increased from $112.8
million in 1996 to $144.2 million in 1997, an increase of $31.4 million, or
27.8%.  This increase was primarily due to a larger invested asset base as a
result of the common stock received as part of a $374.9 million dividend from
FNWL to Farmers Group, Inc. in December 1996 and the reinvestment of cash
generated by the sale of OSL and IGL. 

     Net Realized Gains. Net realized gains increased from $5.1 million in
1996 to $73.4 million in 1997, an increase of $68.3 million, due primarily to
gains realized on equities formerly held by FNWL that were sold while
restructuring the portfolio.  

     Gain on Sale of Subsidiaries.  The estimated gain on the April 15, 1997
sale of OSL and IGL amounted to $19.0 million in 1997.

     Dividends on Preferred Securities of Subsidiary Trusts.  Dividends expense
related to the $500.0 million of Cumulative Quarterly Income Preferred
Securities ("QUIPS") issued in 1995 was $42.1 million in both 1996 and 1997.

     Provision for Income Taxes.  Provision for income taxes increased from
$275.1 million in 1996 to $332.2 million in 1997, an increase of $57.1
million, or 20.8%. This increase was due to the increase in pretax 
income between years and an estimated $26.8 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 $348.5 million for the year ended December 31,
1996 to $450.2 million for the year ended December 31, 1997, an increase of 
$101.7 million, or 29.2%.


<PAGE>   18

Life Insurance Subsidiaries

     On April 15, 1997, OSL and IGL were sold to Great Southern Life Insurance
Company, a subsidiary of Americo Life, Inc..  OSL and IGL contributed $5.5
million to net income in 1997, compared to $17.2 million in 1996 and $11.6
million in 1995.  The following commentary addresses the results of the
Company's remaining life insurance subsidiary, FNWL.

     Total Revenues.  Total revenues increased from $613.3 million in 1996 
to $638.6 million in 1997, an increase of $25.3 million, or 4.1%.

       Premiums.  Premiums increased $15.0 million, or 11.0%, between years.
     This increase was due to growth in renewal and first year business.  The
     increase in renewal premiums was attributable to a 12.2% growth in
     traditional life insurance in-force due in part to an increase in average
     policy size resulting from sales of the Premier Whole Life ("PWL")
     product.  The higher first year premiums were due primarily to growth in
     sales of the PWL product.

          Policy Charges.  Policy charges increased $12.5 million, or 6.6%,
     over 1996, reflecting a 4.2% growth in universal life-type insurance in-
     force.

          Investment Income.  Net investment income increased $17.9 million
     in 1997, or 6.9%, over 1996 due largely to higher bond interest income 
     resulting primarily from an increase in bond investments.

          Net Realized Gains.  Net realized gains decreased by $20.1 million,
     from $30.2 million in 1996 to $10.1 million in 1997 due to the fact that
     FNWL's common stock portfolio was transferred to Farmers Group, Inc. as
     part of the 1996 dividend.

     Total Operating Expenses.  Total operating expenses increased from
$399.9 million in 1996 to $427.0 million in 1997, an increase of $27.1
million, or 6.8%.

          Policyholders' Benefits.  Policyholders' benefits expense increased
     from $260.3 million in 1996 to $274.5 million in 1997, an increase of
     $14.2 million, or 5.5%.  Policy benefits, which consist primarily of
     death and surrender benefits on life products, increased $1.5 million
     over 1996 due to an increase in death claims resulting from an increase
     in insurance-in-force.  Increase in liability for future benefits
     expense increased from $11.4 million in 1996 to $15.7 million in 1997.
     This increase was primarily attributable to lower terminations on older
     whole life business carrying higher future benefit provisions and the
     effect of PWL sales in 1997 and 1996.  Interest credited to
     policyholders, which represents the amount credited under universal
     life-type contracts and deferred annuities for policyholder funds on
     deposit, increased from $138.0 million in 1996 to $146.4 million in 1997,
     or 6.1%, reflecting a 4.2% growth in universal life-type insurance
     in-force and a 3.5% increase in annuity funds on deposit.

          Amortization of DAC and Value of Life Business Acquired.   
     Amortization expense increased from $60.4 million in 1996 to $73.7 
     million in 1997, or  22.0%.  This increase reflects the continued 
     growth in the volume of universal life-type and traditional business 
     in-force.

          Commissions.  Commissions decreased from $18.3 million in 1996 to
     $17.3 million in 1997, or 5.5%.  The decrease results from the
     commutation, by IGL in the third quarter of 1997, of the block of
     business ceded to FNWL under the Yearly Renewable Term reinsurance
     treaty.

          General and Administrative Expenses.  General and administrative 
     expenses increased from $60.9 million in 1996 to $61.5 million in 1997,
     or 1.0%, due primarily to higher legal and


<PAGE>   19

     consulting fees.  Also contributing to the increase in expense was a
     $0.1 million increase in costs associated with the Year 2000 Project.   

     Provision for Income Taxes.  Provision for income taxes increased from
$71.1 million in 1996 to $73.8 million in 1997, an increase of $2.7 million,
due to a decrease in tax preference items, particularly tax exempt interest.  

     FNWL Income.  As a result of the foregoing, FNWL income decreased from
$142.3 million in 1996 to $137.8 million in 1997, a decrease of $4.5 million,
or 3.2%.

  Consolidated Net Income

     Consolidated net income of the Company increased from $507.9 million in 
1996 to $593.5 million in 1997, an increase of $85.6 million, or 16.9%. 


Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

  Management Services to Property and Casualty Insurance Companies; and Other

     Operating Revenues.  Operating revenues increased from $1,183.1 million in
1995 to $1,245.4 million in 1996, an increase of $62.3 million, or 5.3%.  This
growth reflects higher gross premiums earned by the P&C Group, which increased
from $9,003.8 million in 1995 to $9,458.2 million in 1996 due primarily to
higher average premium levels across all major lines of business and an
increase in the number of policies-in-force between years.  Partially
offsetting these increases is a 0.45% reduction in the Farmers Preferred Auto
Management fee rate, effective November 1, 1996.  This resulted in a $4.1
million reduction in management fees in 1996 from what such fees would have
been using the 1995 rates.   

     Total Operating Expenses.  Total operating expenses as a percentage of
operating revenues decreased from 58.9% in 1995 to 56.0% in 1996, a decrease
of 2.9%.  Specifically, labor costs (salaries and employee benefits) decreased
from 29.5% of operating revenues for the year ended December 31, 1995 to 27.1%
of operating revenues for the year ended December 31, 1996. 
  
          Salaries and Employee Benefits.  Salaries and employee benefits
     decreased from $348.8 million in 1995 to $337.2 million in 1996, a
     decrease of $11.6 million, or 3.3%, primarily due to a reduction in
     employee complement.

          Buildings and Equipment Expenses.  Buildings and equipment expenses
     increased from $75.1 million in 1995 to $87.3 million in 1996, an
     increase of $12.2 million, or 16.2%.  This increase was primarily due to
     the amortization of new information technology systems software, offset
     in part by a decrease in computer mainframe related expenses.

          Amortization of AIF Contracts and Goodwill.  Amortization expense 
     was $102.8 million in both 1996 and 1995. These assets are being 
     amortized on a straight-line basis over forty years. 

          General and Administrative Expenses.  General and administrative
     expenses decreased $0.2 million between years, from $170.5 million in
     1995 to $170.3 million in 1996.


<PAGE>   20

     Net Investment Income.  Net investment income increased from $78.0
million in 1995 to $112.8 million in 1996, an increase of $34.8 million,
or 44.6%.  This increase was primarily due to higher yield rates and a larger
invested asset base in 1996.

     Net Realized Gains. Net realized gains increased from $1.5 million in
1995 to $5.1 million in 1996, an increase of $3.6 million, due mainly to gains
realized on sales of bonds and investment real estate. 
	
     Dividends on Preferred Securities of Subsidiary Trusts.  As a result
of the $500.0 million of QUIPS issued in September and October 1995, dividend
expense increased from $10.4 million in 1995 to $42.1 million in 1996. 

     Provision for Income Taxes. Provision for income taxes increased from
$224.3 million in 1995 to $275.2 million in 1996, an increase of $50.9
million, or 22.7%. This increase was due in part to $22.5 million of taxes
that resulted from the $374.9 million dividend paid to FGI by FNWL in
December 1996.  The remaining increase was attributable to an increase in
pretax income between years. 

     Management Services Income.  As a result of the foregoing, management
services income increased from $330.8 million for the year ended December 31,
1995 to $348.5 million for the year ended December 31, 1996, an increase of
$17.7 million, or 5.4%.  


Life Insurance Subsidiaries

     On April 15, 1997, OSL and IGL were sold to Great Southern Life Insurance
Company, a subsidiary of Americo Life, Inc..   OSL and IGL contributed $17.2
million to net income in 1996 and $11.6 million in 1995.  The following
commentary addresses the results of the Company's remaining life insurance
subsidiary, FNWL.

     Total Revenues.  Total revenues increased from $558.4 million in 1995 
to $613.3 million in 1996, an increase of $54.9 million, or 9.8%.

          Premiums.  Premiums increased $12.2 million, or 9.8%, over 1995.
     This increase was due to growth in renewal and first year business.
     The increase in renewal premiums was attributable to an 11.9% growth in
     traditional life insurance in-force resulting from improved persistency
     and an increase in average policy size.  The higher first year premiums
     were due primarily to growth in PWL and Mortgage Protection Plan
     products.  

          Policy charges.  Policy charges increased $18.5 million, or 10.9%,
     over 1995, reflecting an 8.5% growth in universal life-type
     insurance-in-force.

          Investment income.  Net investment income increased $17.3 million in
     1996, or 7.2%, over 1995 due largely to higher bond interest income
     resulting from a higher invested asset base.

          Net realized gains. Net realized gains increased by $6.9 million in
     1996 due primarily to gains realized on common stock as a result of
     favorable market conditions.

     Total Operating Expenses.  Total operating expenses increased from 
$369.9 million in 1995 to $399.9 million in 1996, an increase of $30.0 
million, or 8.1%. 

          Policyholders' Benefits.  Policyholders' benefits expense increased
     from $241.4 million in 1995 to $260.3 million in 1996, an increase of
     $18.9 million, or 7.8%.  Policy benefits increased $4.9 million over 1995
     primarily due to an increase in death claims resulting from higher
     average


<PAGE>   21

insurance-in-force.  Increase in liability for future
benefits expense increased from $10.5 million in 1995 to $11.4 million in
1996, or 8.6%. This increase was primarily due to increases in PWL and other
traditional product premiums and to lower terminations in 1996.   Interest
credited to policyholders increased from $124.9 million in 1995 to $138.0
million in 1996, or 10.5%, reflecting an 8.5% growth in universal life-type
insurance in-force and a 7.3% increase in annuity funds on deposit.

         Amortization of DAC and Value of Life Business Acquired.
     Amortization expense increased from $50.5 million in 1995 to $60.4
     million in 1996, or 19.6%, reflecting the continued growth in universal
     life-type business and lower traditional terminations in 1996.

          Commissions.  Commissions increased from $17.7 million in 1995 to
     $18.3 million in 1996, reflecting increased renewal premiums from
     traditional and universal life products.

          General and Administrative Expenses. General and administrative
     expenses increased from $60.3 million in 1995 to $60.9 million in 1996,
     or 1.0%, due to higher salaries and benefits expense.

     Provision for Income Taxes. Provision for income taxes increased
from $60.2 million in 1995 to $71.1 million in 1996, an increase of $10.9
million.  This increase was attributable to the increase in pretax operating
income.

     FNWL Income.  As a result of the foregoing, FNWL income increased from
$128.3 million in 1995 to $142.3 million in 1996, an increase of $14.0
million, or 10.9%.
 
   Consolidated Net Income  
  
     Consolidated net income of the Company increased from $470.7 million in
1995 to $507.9 million in 1996, an increase of $37.2 million, or 7.9%.


Liquidity and Capital Resources

     General. The principal uses of funds by the Company are (i) operating
expenses, (ii) dividends to the shareholders of the Company's QUIPS, (iii)
capital expenditures and (iv) dividends to its stockholder.  In 1997,
dividends paid on the QUIPS totaled $42.1 million, capital expenditures
totaled $66.2 million and cash dividends paid to the stockholder totaled
$337.2 million.

     The principal sources of funds available to the Company are (i) the
management fees that it receives for managing the P&C Group, (ii) investment
income and (iii) dividends from its subsidiaries.  Historically, funds
available from the first two of these sources have been sufficient to satisfy
the liquidity needs of the Company, and the Company anticipates that such
funds will continue to be adequate to satisfy such needs in the future.  A
portion of the net income of FNWL is available for payment as a dividend to
the Company, subject to certain limitations imposed by the insurance laws of
the State of Washington and additional state taxation. As of December 31,
1997, an aggregate of $122.7 million was available for distribution as a
dividend without approval of the state insurance department (see Note G).
Additionally, as of December 31, 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 (see Note T). 

     In order to maintain the policyholders' surplus of the Exchanges, the
Company has purchased approximately $850.0 million of surplus certificates of
the Exchanges ($400.0 million of which were purchased in 1996, $250.0 million
of which were purchased in 1995 and $200.0

<PAGE>  22

million of which were purchased in 1986 and repaid in 1996, see Note D).
In addition, in 1991, the Company arranged for two subsidiaries of B.A.T
to purchase an aggregate of $400.0 million of surplus notes of two
subsidiaries of the Exchanges. The Company has, from time to time, made
other surplus contributions to the Exchanges totaling approximately $34.4
million, receiving certificates of contribution which bear interest at various
rates.  The Company believes that these purchases of surplus certificates and
notes have helped to support the historical growth in premiums earned and the
related growth in management fees paid to the Company. 

     Net cash provided by operating activities decreased from $688.7 million
in 1996 to $655.4 million in 1997, a decrease in cash of $33.3 million, or
4.8%.  This decrease in cash was principally due to a $34.9 million decrease
in Universal life type contracts as a result of a reduction in new life
business due to the sale of OSL and IGL.  In addition, cash decreased $89.1
million due to an increase in non-current assets.  The above decreases in cash
were partially offset by a $85.6 million increase in consolidated net income. 

     Net cash used in investing activities decreased from $532.1 million in
1996 to $351.9 million in 1997, an increase in cash of $180.2 million, or
33.9%, between years.  This increase in cash was principally due to $336.7
million of proceeds received from the sale of OSL and IGL and a $200.0 million
net decrease in the purchase of surplus certificates of the Exchanges between
years ($0 in 1997 versus a net $200.0 million purchase in 1996).  Partially
offsetting this increase in cash was an increase in net purchases of
investments available-for-sale of $381.5 million. 

     Net cash used in financing activities decreased $570.3 million in 1996 to
$286.5 million in 1997, an increase in cash of $283.8 million, or 49.8%.
This increase in cash was primarily due to the repayment of $200.0 million of
8.25% Notes Payable in July 1996 and the fact that cash dividends paid to
B.A.T decreased $127.7 million, from $464.9 million in 1996 to $337.2 million
in 1997.

Life Insurance Subsidiary.  The principal uses of funds by FNWL are (i)
policy benefits and claims, (ii) loans to policyholders, (iii) capital
expenditures, (iv) operating expenses, and (v) stockholder's dividends.
The principal sources of funds available to FNWL are premiums and amounts
earned from the investment of premiums and deposits.  These sources of funds
have historically satisfied the liquidity needs of FNWL.



<PAGE>   23


ITEM 8.  Financial Statements and Supplementary Data


                Index for Financial Statements and Supplementary Data


                                                                         Page
                                                                         ----

Independent Auditors' Report                                              24
Consolidated Financial Statements of Farmers Group, Inc.
 and Subsidiaries
  Consolidated Balance Sheets as of December 31, 1997 and 1996            25
  Consolidated Statements of Income for the years ended 
     December 31, 1997, 1996 and 1995                                     27
  Consolidated Statements of Stockholder's Equity for the years ended
     December 31, 1997, 1996 and 1995                                     28
  Consolidated Statements of Cash Flows for the years ended 
     December 31, 1997, 1996 and 1995                                     29
  Notes to Consolidated Financial Statements                              30
Quarterly Financial Data (Unaudited)                                      58



<PAGE>   24

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of Farmers Group, Inc.

     We have audited the consolidated balance sheets of Farmers Group, Inc. 
and subsidiaries (the "Company") as of December 31, 1997 and 1996, 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, 1997.  
Our audits also included the financial statement schedules listed in the 
Index at Item 14. These financial statements and financial statement 
schedules are the responsibility of the Company's management.  Our 
responsibility is to express an opinion on these financial statements and 
financial statement schedules based on our audits.

     We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit to 
obtain reasonable assurance about whether the financial statements are free 
of material misstatement. An audit includes examining, on a test basis, 
evidence supporting the amounts and disclosures in the financial statements. 
An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the overall 
financial statement presentation. We believe that our audits provide a 
reasonable basis for our opinion. 

     In our opinion, such consolidated financial statements present fairly, 
in all material respects, the financial position of the Company as of 
December 31, 1997 and 1996, and the results of its operations and its 
cash flows for each of the three years in the period ended December 31, 
1997 in conformity with generally accepted accounting principles.  Also, 
in our opinion, such financial statement schedules, when considered in 
relation to the basic consolidated financial statements taken as a whole, 
present fairly in all material respects the information set forth therein.



/s/ Deloitte & Touche LLP

DELOITTE & TOUCHE LLP
Los Angeles, California
February 16, 1998


<PAGE>   25


                                   FARMERS GROUP, INC.
                                    AND SUBSIDIARIES
                              CONSOLIDATED BALANCE SHEETS
                                 (Amounts in thousands)
                                         ASSETS
<TABLE>
<CAPTION>
                                                                        December 31,
                                                                -----------------------------
                                                                     1997             1996
                                                                -------------   -------------
<S>                                                             <C>             <C>  
Current assets, excluding life insurance subsidiaries:
 Cash and cash equivalents                                      $     506,273   $     412,018
 Marketable securities, at market value                               128,216         118,253
 Accrued interest                                                      43,895          39,148
 Accounts receivable, principally from the Exchanges                   34,804          28,641
 Notes receivable - affiliate                                         137,000         135,000
 Deferred taxes                                                        28,925          35,003
 Prepaid expenses and other                                            13,725          23,985
                                                                -------------   -------------
  Total current assets                                                892,838         792,048
                                                                -------------   -------------
Investments, excluding life insurance subsidiaries:
 Fixed maturities available-for-sale, at market value
  (cost: $482,355 and $182,474)                                       488,245         184,829
 Mortgage loans on real estate                                            240               0
 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: $322,741 and $250,421)                                       388,966         307,821
 Certificates in surplus of Exchanges                                 684,380         684,380
 Real estate, at cost (net of accumulated depreciation:
  $29,212 and $16,944)                                                 63,512          45,358
 Joint ventures, at equity                                              4,825          10,366
                                                                -------------   -------------
                                                                    1,630,168       1,232,774
                                                                -------------   -------------
Other assets, excluding life insurance subsidiaries:
 Notes receivable - affiliate                                         270,000         272,000
 Goodwill (net of accumulated amortization: $540,396 
   and $480,352)                                                    1,861,359       1,921,403
 Attorney-in-fact contracts (net of accumulated 
   amortization: $384,534 and $341,808)                             1,324,509       1,367,235
 Securities lending collateral                                         49,908               0
 Other assets                                                         297,602         357,104
                                                                -------------   -------------
                                                                    3,803,378       3,917,742
                                                                -------------   -------------
Properties, plant and equipment, at cost:  (net of 
  accumulated depreciation: $242,392 and $202,085)                    450,880         447,636
                                                                -------------   -------------
Investments of life insurance subsidiaries:
 Fixed maturities available-for-sale, at market value
  (cost: $3,408,426 and $3,764,192)                                 3,555,148       3,854,126
 Mortgage loans on real estate                                         89,903         122,635
 Non-redeemable preferred stocks available-for-sale, at market
  value (cost: $1,153 and $7,007)                                       1,227           6,308
 Common stocks available-for-sale, at market value
  (cost: $0 and $84,532)                                                  120         103,887
 Policy loans                                                         165,894         187,285
 Real estate, at cost (net of accumulated depreciation:
  $19,306 and $16,824)                                                 69,265          61,715
 Joint ventures, at equity                                              9,515          11,971
 Other investments, at market value (cost: $3,450 and $0)               3,299               0
                                                                -------------   -------------
                                                                    3,894,371       4,347,927
                                                                -------------   -------------
Other assets of life insurance subsidiaries:
 Cash and cash equivalents                                              9,980          87,310
 Accrued investment income                                             51,971          53,063
 Deferred policy acquisition costs and value of life business
  acquired                                                            798,725       1,001,044
 Securities lending collateral                                        544,580         221,216
 Other assets                                                          40,542          31,451
 Assets held in Separate Account                                            0         796,616
                                                                -------------   -------------
                                                                    1,445,798       2,190,700
                                                                -------------   -------------
   Total assets                                                 $  12,117,433   $  12,928,827
                                                                =============   =============
             The accompanying notes are an integral part of these financial statements.

</TABLE>


<PAGE>   26   
        
                               FARMERS GROUP, INC.
                                AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (Amounts in thousands)
                      LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
                                                                         December 31,
                                                                ----------------------------
                                                                     1997            1996
                                                                -------------   ------------
<S>                                                             <C>              <C>
Current liabilities, excluding life insurance subsidiaries:
 Notes and accounts payable:
  Exchanges                                                      $       2,553   $       8,234
  Other                                                                 28,204          21,004
 Accrued liabilities:
  Profit sharing                                                        51,067          52,690
  Income taxes                                                          82,282          29,831
  Other                                                                 12,276          18,474
                                                                 -------------   -------------
   Total current liabilities                                           176,382         130,233
                                                                 -------------   -------------
Other liabilities, excluding life insurance subsidiaries:
 Real estate mortgages payable                                              92             217
 Non-current deferred taxes                                            643,910         675,900
 Securities lending liability                                           49,908               0
 Other                                                                 131,056         251,315
                                                                 -------------   -------------
                                                                       824,966         927,432
                                                                 -------------   -------------
Liabilities of life insurance subsidiaries:
 Policy liabilities:
  Future policy benefits                                             3,010,162       3,474,862
  Claims                                                                22,156          32,732
  Policyholder dividends                                                     0          13,358
  Other policyholder funds                                              60,072          70,816
 Income taxes (including deferred taxes: $153,006 and $195,188)        148,865         194,222
 Unearned investment income                                              1,016           2,302
 Other liabilities                                                      47,660          61,207
 Securities lending liability                                          544,580         221,216
 Liabilities related to Separate Account                                     0         796,616
                                                                 -------------   -------------
                                                                     3,834,511       4,867,331
                                                                 -------------   -------------
   Total liabilities                                                 4,835,859       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:  1997 and 1996 -- 1000 shares                             1               1
 Additional capital                                                  5,212,618       5,212,618
 Unrealized gains (net of deferred taxes of $61,193
  and $49,781)                                                         113,549          92,104
 Retained earnings                                                   1,455,406       1,199,108
                                                                 -------------   -------------
   Total stockholder's equity                                        6,781,574       6,503,831
                                                                 -------------   -------------
     Total liabilities and stockholder's equity                  $  12,117,433   $  12,928,827
                                                                 =============   =============
             The accompanying notes are an integral part of these financial statements.

</TABLE>


<PAGE>   27

                               FARMERS GROUP, INC.
                                AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                             (Amounts in thousands)
<TABLE>
<CAPTION>
                                                                         Year ended December 31,
                                                                  -------------------------------------
                                                                      1997          1996        1995
                                                                  -----------  ----------- ------------
<S>                                                               <C>          <C>          <C>        
Consolidated operating revenues                                   $ 2,008,941  $ 2,013,152  $ 1,892,404
                                                                  ===========  ===========  ===========
Management services to property and casualty
 insurance companies; and other:
  Operating revenues                                              $ 1,324,895  $ 1,245,375  $ 1,183,098
                                                                  -----------  -----------  -----------
  Salaries and employee benefits                                      335,781      337,238      348,829
  Buildings and equipment expenses                                     95,833       87,276       75,053
  Amortization of AIF contracts and goodwill                          102,770      102,770      102,770
  General and administrative expenses                                 202,645      170,256      170,470
                                                                  -----------  -----------  -----------
    Total operating expenses                                          737,029      697,540      697,122
                                                                  -----------  -----------  -----------
    Operating income                                                  587,866      547,835      485,976
  Net investment income                                               144,178      112,780       78,021
  Net realized gains                                                   73,403        5,079        1,497
  Gain on sale of subsidiaries                                         19,019            0            0
  Dividends on preferred securities of subsidiary trusts              (42,070)     (42,070)     (10,414)
                                                                  -----------  -----------  -----------
    Income before provision for taxes                                 782,396      623,624      555,080
  Provision for income taxes                                          332,187      275,152      224,289
                                                                  -----------  -----------  -----------
    Management services income                                        450,209      348,472      330,791
                                                                  -----------  -----------  -----------
Life insurance subsidiaries:
  Premiums                                                            161,058      170,421      158,827
  Policy charges                                                      216,609      241,737      220,609
  Investment income, net of expenses                                  293,143      317,630      298,251
  Net realized gains                                                   13,236       37,989       31,619
                                                                  -----------  -----------  -----------
    Total revenues                                                    684,046      767,777      709,306
                                                                  -----------  -----------  -----------
  Policy benefits                                                     124,261      155,110      152,951
  Increase in liability for future policy benefits                     14,863       11,089        9,147
  Interest credited to policyholders                                  155,301      168,912      154,579
  Amortization of deferred policy acquisition costs and
   value of life business acquired                                    103,975      108,802      103,201
  Commissions                                                          18,188       20,986       20,160
  General and administrative expenses                                  47,748       63,359       60,855
                                                                  -----------  -----------  -----------
    Total operating expenses                                          464,336      528,258      500,893
                                                                  -----------  -----------  -----------
    Income before provision for taxes                                 219,710      239,519      208,413
  Provision for income taxes                                           76,421       80,050       68,474
                                                                  -----------  -----------  -----------
    Life insurance subsidiaries income                                143,289      159,469      139,939
                                                                  -----------  -----------  -----------

Consolidated net income                                           $   593,498  $   507,941  $   470,730
                                                                  ===========  ===========  ===========


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

</TABLE>


<PAGE>   28

                                   FARMERS GROUP, INC.
                                    AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
                     Years ended December 31, 1997, 1996 and 1995
                                (Amounts in thousands)
<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, 1994 $      1  $ 5,212,618  $     (35,146) $  970,537  $  6,148,010

Net income, 1995                                                    470,730       470,730

Change in net unrealized
  gains on investments
  net of tax of $86,448                                 160,108                   160,108 
  
Cash dividends paid                                                (285,200)     (285,200)
                           --------  -----------  -------------  ----------  ------------
Balance, December 31, 1995        1    5,212,618        124,962   1,156,067     6,493,648

Net income, 1996                                                    507,941       507,941

Change in net unrealized
  losses on investments
  net of tax of ($17,764)                               (32,858)                  (32,858)

Cash dividends paid                                                (464,900)     (464,900)
                           --------  -----------  -------------  ----------  ------------
Balance, December 31, 1996        1    5,212,618         92,104   1,199,108     6,503,831

Net income, 1997                                                    593,498       593,498

Change in net unrealized
  gains on investments 
  net of tax of $11,412                                  21,445                    21,445 

Cash dividends paid                                                (337,200)     (337,200)
                           --------  -----------  -------------  ----------  ------------
Balance, December 31, 1997 $      1  $ 5,212,618  $     113,549  $1,455,406  $  6,781,574
                           ========  ===========  =============  ==========  ============

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

</TABLE>


<PAGE>   29

                               FARMERS GROUP, INC.
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Amounts in thousands)
<TABLE>
<CAPTION>
                                                                        Year ended December 31,
                                                                  ------------------------------------
                                                                     1997         1996         1995
                                                                  ----------   ----------   ----------
<S>                                                               <C>          <C>          <C>
Cash Flows from Operating Activities:
 Consolidated net income                                          $  593,498   $  507,941   $  470,730
 Non-cash and operating activities adjustments:
  Depreciation and amortization                                      176,899      168,263      153,096
  Amortization of deferred policy acquisition costs and
    value of life business acquired                                  103,975      108,802      103,201
  Policy acquisition costs deferred                                  (98,372)    (129,922)    (133,166)
  Life insurance policy liabilities                                   15,001        3,468       (1,590)
  Universal life type contracts:
    Deposits received                                                295,747      317,742      300,274
    Withdrawals                                                     (232,728)    (235,658)    (211,789)
    Interest credited                                                 62,247       78,112       78,306
  Equity in earnings of joint ventures                                 5,150        2,164          510 
  Gain on sales of assets                                            (87,760)     (44,584)     (34,505)
  Gain on sale of subsidiaries                                       (19,019)           0            0
 Changes in assets and liabilities:
  Current assets and liabilities                                      31,182       10,068       21,184 
  Non-current assets and liabilities                                (153,157)     (64,024)     (66,953)
 Other, net                                                          (37,307)     (33,691)     (26,846)
                                                                  ----------   ----------   ----------
 Net cash provided by operating activities                           655,356      688,681      652,452
                                                                  ----------   ----------   ----------
Cash Flows from Investing Activities:
 Purchases of investments available-for-sale                      (1,682,243)  (1,279,073)    (939,186)
 Purchases of properties                                             (39,982)     (43,546)     (34,682)
 Purchase of surplus certificates of the Exchanges                         0     (400,000)    (250,000)
 Proceeds from sales and maturities of investments
  available-for-sale                                               1,001,351      979,701      541,376
 Proceeds from sales of properties                                    16,778       27,822       20,201
 Proceeds from sale of subsidiaries                                  336,714            0            0       
 Proceeds from surplus certificates of the 
  Exchanges                                                                0      200,000            0
 Purchases of mortgage loans                                               0            0          (75)
 Mortgage loan collections                                            32,849       23,624       20,418
 (Increase) in policy loans                                          (17,836)     (22,020)     (18,386)
 Other, net                                                              482      (18,601)      15,220 
                                                                  ----------   ----------   ----------
 Net cash (used in) investing activities                            (351,887)    (532,093)    (645,114)
                                                                  ----------   ----------   ----------
Cash Flows from Financing Activities:
 Dividends paid to stockholder                                      (337,200)    (464,900)    (285,200)
 Proceeds from issuance of cumulative quarterly
   income preferred securities                                             0            0      500,000
 Annuity contracts:
   Deposits received                                                 131,651      141,046      206,538
   Withdrawals                                                      (161,150)    (133,018)    (109,938)  
   Interest credited                                                  80,280       87,160       72,791           
 Issuance cost of cumulative quarterly income 
  preferred securities                                                     0         (438)     (17,803)
 Payment of long-term notes payable                                        0     (200,000)           0
 Payment of real estate mortgages payable                               (125)        (116)         (81)
                                                                  ----------   ----------   ----------
 Net cash (used in)/provided by financing activities                (286,544)    (570,266)     366,307 
                                                                  ----------   ----------   ----------
Increase/(decrease) in cash and cash equivalents                      16,925     (413,678)     373,645
Cash and cash equivalents - at beginning of year                     499,328      913,006      539,361
                                                                  ----------   ----------   ----------
Cash and cash equivalents - at end of year                        $  516,253   $  499,328   $  913,006
                                                                  ==========   ==========   ==========

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

</TABLE>


<PAGE>   30

                                FARMERS GROUP, INC.
                                 AND SUBSIDIARIES
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A.  Basis of presentation and summary of significant accounting policies

     The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP").  All material
inter-company transactions have been eliminated.  Certain amounts applicable
to prior years have been reclassified to conform with the 1997 presentation.
The consolidated financial statements include Farmers Group, Inc. ("FGI") and
its subsidiaries (together, the "Company").  On April 15, 1997, FGI sold two
of its life insurance subsidiaries, 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..  As a
result, the 1997 balance sheet information includes FGI and its remaining life
insurance subsidiary, Farmers New World Life Insurance Company ("FNWL"),
whereas the 1996 information includes FGI as well as FNWL, OSL, and IGL (the
"Life Insurance Subsidiaries").
	 
     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. 

     On December 22, 1997, a definitive agreement was reached to merge B.A.T
Industries' Financial Services Businesses ("BAFS") with Zurich Insurance
Company ("Zurich").  Completion of the merger is subject to regulatory
consents, tax clearance and the approval of the shareholders of B.A.T and
Zurich, and is expected to be finalized in late 1998.  Under the 
agreement, the businesses of Zurich and BAFS, which include Farmers Group,
Inc., will be transferred to Zurich Financial Services, a new Swiss company
with headquarters in Zurich.

     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 attorney-in-fact, FGI, or its
subsidiaries, as applicable, manages the affairs of 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 earned premiums. The management services generate a substantial portion of
the Company's revenue and profits, and as a result, the Company's ongoing
financial performance depends on the volume of business written by, and the
efficiency and financial strength of, the P&C Group.  A portion of the
purchase price ($1,709,043,000) associated with the acquisition was assigned
to these AIF contract relationships. The value so assigned is being amortized
on a straight-line basis over forty years. 


<PAGE>   31


     The excess of the purchase price over the fair value of the net assets
("Goodwill") of the Company at the date of acquisition ($2,401,755,000) is
being amortized on a straight-line basis over forty years. The carrying amount
of the Goodwill is regularly reviewed for indications of impairment in value
which in the view of management are other than temporary, including unexpected
or adverse changes in the following: (1) the economic or competitive
environments in which the Company operates, (2) profitability analyses and
(3) cashflow analyses. As of December 31, 1997, the reported value and the
remaining life of Goodwill are considered appropriate. 

     Prior to April 15, 1997 the Company's life insurance operations were
conducted by its three wholly owned subsidiaries.  A portion of the purchase
price ($662,778,000) was assigned to the "Value of Life Business Acquired",
which represented an actuarial determination of the expected profits from the
business in force at the date of acquisition.   The amount so assigned is
being amortized over its actuarially determined useful life with the
unamortized amount included in "Deferred Policy Acquisition Costs and Value of
Life Business Acquired" in the accompanying consolidated balance sheets.

     On April 15, 1997, upon receipt of regulatory approval, the Company sold
OSL and IGL.  The sale of these subsidiaries resulted in an estimated
$19,019,000 gain and was 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 $26,826,000 and were
reflected on the "Provision for income taxes" line.  Both of these amounts
were reflected in the "Management services to property and casualty insurance
companies; and other" section of the Company's consolidated income statement
for the year ended December 31, 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 FNWL, by far its largest insurance company, through increased
sales to the P&C Group's customer base.  FNWL 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
Exchanges' agents. 

     Properties are depreciated over the following estimated useful lives: 

          Buildings and improvements                  10 to 35 years
          Furniture and equipment                      5 to 10 years
          Data processing equipment and software             5 years

     Depreciation is calculated for financial statement purposes by the 
straight-line method. Repairs and maintenance are charged to operations; 
significant renewals and betterments are capitalized. 

     In 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.


<PAGE>  32


     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 Information by Nonpublic
Enterprises".  The adoption of this Statement did not have a significant
impact on the Company's 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 SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise" and amends SFAS 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.

     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.

B.  Life insurance accounting

     Traditional product premiums are recognized as revenues when they become
due, and future benefits and expenses are matched with such premiums so that
the majority of profits are recognized over the premium-paying period of the
policy.  This matching of revenues and expenses is accomplished through the
provision for future policy benefits and the amortization of deferred policy
acquisition costs ("DAC").

     Certain policy acquisition costs, principally first-year commissions and
other expenses for policy underwriting and issuance (which are primarily
related to and vary with the production of new


<PAGE>  33

business), are deferred and amortized proportionately over the estimated
period during which the related premiums will be recognized as income, based
on the same assumptions that are used for computing the liabilities for
future policy benefits.  Liabilities for future policy benefits are computed
principally by means of a net level premium method reflecting estimated future
investment yields, mortality, morbidity and withdrawals.  Interest rate
assumptions range from 2.25% to 9.25%, depending on the year of policy issue.
Mortality is calculated principally on select and ultimate tables in common
usage in the industry, modified for the Life Insurance Subsidiaries'
experience, and withdrawals are estimated based primarily on the Life
Insurance Subsidiaries' experience.

     Revenues associated with universal life products consist of policy
charges for the cost of insurance, policy administration fees, surrender
charges and investment income on assets allocated to support policyholder
account balances.  Revenues for deferred annuity products consist of surrender
charges and investment income on assets allocated to support policyholder
account balances.  Expenses include interest credited to policyholder account
balances and benefit claims incurred in excess of policyholder account
balances.  Liabilities for future policy benefits on universal life and
deferred annuity products are determined under the retrospective deposit
method.  DAC is amortized in relation to the present value of expected gross
profit margins on the policies, after giving recognition to differences
between actual and expected gross profit margins to date.  DAC and Value of
Life Business Acquired also includes amounts associated with the unrealized
gains and losses recorded as a component of stockholder's equity in accordance
with the application of SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities".  Accordingly, DAC and Value of Life Business
Acquired is increased or decreased for the impact on estimated future gross
profits as if net unrealized gains or losses on securities had been realized
at the balance sheet date.  Net unrealized gains or losses on securities
within stockholder's equity also reflects this impact.  These entries
decreased the DAC and Value of Life Business Acquired asset by $43,447,000 and
$27,927,000 as of December 31, 1997 and 1996, respectively.

C.  Property, plant and equipment

     A schedule of the Company's operating properties, plant and equipment at 
cost as of December 31 follows: 

<TABLE>
<CAPTION>
                                                    1997             1996
                                                -----------      -----------
                                                    (Amounts in thousands)
          <S>                                   <C>              <C>
          Buildings and improvements            $   227,406      $   260,937
          Data processing equipment and software    283,923          206,400
          Furniture and equipment                   111,489          105,264
                                                -----------      -----------
                                                    622,818          572,601
          Land                                       70,454           77,120
                                                -----------      -----------
                                                $   693,272      $   649,721
                                                ===========      ===========

</TABLE>


D.  Certificates in surplus of Exchanges

     The Company, as attorney-in-fact for the Exchanges, has made surplus 
contributions to the Exchanges from time to time.  In return, the Company has
received the following certificates of contribution totaling $684,380,000 as
of December 31, 1997:

      A $100,000,000 certificate of contribution, issued on December 20, 1996,
      bearing interest at 8.95% annually.

      A $135,000,000 certificate of contribution, issued on September 30, 1996,
      bearing interest at 8.95% annually.


<PAGE>   34


      A $165,000,000 certificate of contribution, issued on June 27, 1996, 
      bearing interest at 8.95% annually.

      A $250,000,000 certificate of contribution, issued in 1995, bearing 
      interest at 8.95% annually.

      Miscellaneous other certificates of contribution totaling $34,380,000 
      which bear interest at various rates.

     Conditions governing repayment of these amounts are outlined in the
certificates.  Generally, repayment may be made only when the surplus balance
of the appropriate Exchange reaches a certain specified level, and then only
after approval is granted by the Exchange Board of Governors and the
California Insurance Commissioner.

     On July 1, 1996, the Company received $200,000,000 from the Exchanges in
repayment of a surplus contribution made by the Company in 1986.

E.  Company Obligated Mandatorily Redeemable Preferred Securities of
    Subsidiary Trusts Holding Solely Junior Subordinate Debentures

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

     Under certain circumstances, the Junior Subordinated Debentures may be
distributed to holders of the QUIPS and holders of the Common Securities in
liquidation of the Subsidiary Trusts.  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 December 31, 1997 and 1996, a total of 20,000,000 shares of QUIPS
were outstanding.


<PAGE>  35



F.  Employees' profit sharing plans

     The Company has two profit sharing plans providing for cash payments to 
all eligible employees. The two plans, Cash Profit Sharing (consisting of 
Cash and Cash Plus) and Deferred Profit Sharing, provide for a maximum 
aggregate expense of 16.25% of the Company's consolidated annual pretax 
earnings, as adjusted. The Deferred Profit Sharing Plan, limited to 15% of 
the salary or wage paid or accrued to the eligible employee, provides for 
an annual payment by the Company to a trust for eventual payment to employees 
as provided in the Plan. The Cash Profit Sharing Plan provides for annual 
cash distributions limited to 5% (Cash) and 1.25% (Cash Plus) of the salary 
or wage paid or accrued to the eligible employee. 

     Expense under these plans was $52,235,000, $55,772,000, and $55,070,000
in 1997, 1996 and 1995, respectively. 

G.  Retained earnings

     Combined statutory capital and surplus of the Life Insurance Subsidiaries
was $894,738,000 as of December 31, 1996 and combined statutory net income was
$167,517,000 and $116,998,000 for the years ended December 31, 1996, and 1995,
respectively.  Due to the sale of OSL and IGL on April 15, 1997, statutory
capital and surplus as of December 31, 1997 reflects only the results of the
Company's remaining life insurance subsidiary, FNWL.  However, statutory
net income for the year ended December 31, 1997, reflects the results of FNWL
for the year and the results of OSL and IGL through the date of sale.  As a
result, statutory capital and surplus of FNWL was $817,588,000, and statutory
net income of the Life Insurance Subsidiaries was $122,863,000 for the year.    
  
     In December 1996, upon approval of the Washington State Department of
Insurance, FNWL paid a $374,916,000 dividend to its parent company, Farmers
Group, Inc., which consisted primarily of common stock investments.  As of
December 31, 1997, an aggregate of $122,667,000 was still available for
distribution without approval from the State Department of Insurance in
Washington, the state in which FNWL is domiciled.

H.  Investments

     The Company follows the provisions of SFAS No. 115.  This Statement
addresses the accounting and reporting for investments in equity securities
that have readily determinable fair values and for all investments in debt
securities. As of December 31, 1997 and 1996, the Company classified all
investments in equity and debt securities as available-for-sale under SFAS
No. 115.  Correspondingly, these investments are reported on the balance sheet
at fair value, with unrealized gains and losses, net of tax, excluded from
earnings and reported as a component of stockholder's equity.  Real estate
investments are accounted for on a depreciated cost basis.  Real estate
acquired in foreclosure and held for sale is carried at the lower of fair
value or depreciated cost less a valuation allowance.  Short-term instruments
are carried at cost.  Other investments, which consist primarily of
certificates in surplus of the Exchanges, policy loans and the B.A.T
Capital Corporation notes, are carried at the unpaid principal balances.

     In compliance with a Securities and Exchange Commission ("SEC") staff
announcement, the Company has recorded certain entries to the DAC and Value
of Life Business Acquired line of the consolidated balance sheet in connection
with SFAS No. 115. The SEC requires that companies record entries to those
assets and liabilities that would have been adjusted had the unrealized


<PAGE>  36

investment gains or losses from securities classified as available-for-sale
actually been realized, with corresponding credits or charges reported
directly to stockholder's equity.

     The sources of investment income on securities owned by the Company
(excluding the Life Insurance Subsidiaries) for the years ended December 31
are:

<TABLE>
<CAPTION>
                                         1997             1996              1995
                                      ----------       ----------        ---------
                                                 (Amounts in thousands)          
<S>                                   <C>              <C>              <C>       
Related parties:
  B.A.T Capital Corporation notes     $   23,620       $   18,151       $   17,331
                                      ----------       ----------       ----------
  Total related parties                   23,620           18,151           17,331
                                      ----------       ----------       ----------
Non-related parties:
  Interest income --
      certificates in surplus
      of Exchanges                        61,131           45,448           31,408
  Interest income --
      fixed income securities             36,264           41,714           27,762
  Dividend income                          9,268            4,863            5,263
  Interest income --
      short-term instruments              10,310           11,385           10,398
  Interest expense                             0           (8,938)         (16,500)
  Other                                    3,585              157            2,359 
                                      ----------       ----------       ----------
  Total non-related parties              120,558           94,629           60,690
                                      ----------       ----------       ----------
Total investment income                                                             
     by component                     $  144,178       $  112,780       $   78,021
                                      ==========       ==========       ==========

</TABLE>


     The sources of investment income on securities owned by the Life Insurance 
Subsidiaries for the years ended December 31 are: 

<TABLE>
<CAPTION>
                                         1997             1996             1995
                                      ----------       ----------        ---------
                                                 (Amounts in thousands)          
<S>                                   <C>              <C>              <C>       
Fixed income securities               $  251,727       $  258,828       $  235,596
Equity securities                         12,863           25,299           27,995
Mortgage loans                            12,205           14,721           16,526
B.A.T Capital Corporation notes                0            2,580            3,975
Owned real estate                          9,575           10,477           10,291
Policy loans                              12,118           12,152           10,571
Short-term instruments                     2,505            4,097            5,228
Other                                      5,592            2,906            3,193
Investment expenses                      (13,442)         (13,430)         (15,124)
                                      ----------       ----------       ----------
Total investment income                                                           
     by component                     $  293,143       $  317,630       $  298,251
                                      ==========       ==========       ==========
</TABLE>


<PAGE>  37

     Realized gains and losses on sales, redemptions and writedowns of
investments owned by the Company (excluding the Life Insurance Subsidiaries)
are determined based on either the cost of the individual securities or the
depreciated cost of real estate. Net realized investment gains or losses for
the years ended December 31 are:

<TABLE>
<CAPTION>
                                         1997             1996             1995
                                      ----------       ----------       ----------
                                                 (Amounts in thousands)          
<S>                                   <C>              <C>              <C>       
Bonds                                 $      (12)      $    1,626       $      (23)
Redeemable preferred stocks                  365              623               41 
Common stocks                             69,505             (524)               0
Investment real estate                     3,545            3,354            1,479
                                      ----------       ----------       ----------
Net realized investment gains         $   73,403       $    5,079       $    1,497
                                      ==========       ==========       ==========
</TABLE>


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

<TABLE>
<CAPTION>
                                         1997             1996             1995
                                      ----------       ----------        ---------
                                                 (Amounts in thousands)          
<S>                                   <C>              <C>              <C>       
Bonds                                 $    8,619       $      874       $    2,942
Redeemable preferred stocks                1,734            1,738               25 
Non-redeemable preferred stocks               71           (2,799)             742
Common stocks                              2,798           41,007           28,846
Investment real estate                         3           (2,131)            (919)
Other                                         11             (700)             (17)
                                      ----------       ----------       ----------
Net realized investment gains         $   13,236       $   37,989       $   31,619
                                      ==========       ==========       ==========
</TABLE>

     The amortized cost, gross unrealized gains and losses, and estimated
market values of investments in equity securities pertaining to non-redeemable
preferred stocks and common stocks owned by the Company (excluding life
insurance amounts) are as follows:

<TABLE>
<CAPTION>
                                                         As of December 31, 1997
                                              --------------------------------------------
                                                           Gross       Gross     Estimated
                                              Amortized  Unrealized  Unrealized   Market
                                                 Cost      Gains       Losses     Value
                                              ---------  ----------  ----------  ---------
                                                         (Amounts in thousands)
<S>                                           <C>        <C>         <C>         <C>  
Equity Securities Available-for-Sale

Non-redeemable preferred stocks               $       0  $        0  $        0  $       0
Common stocks                                   322,741      76,153      (9,928)   388,966
                                              ---------  ----------  ----------  ---------
Total                                         $ 322,741  $   76,153  $   (9,928) $ 388,966
                                              =========  ==========  ==========  =========

</TABLE>

<TABLE>
<CAPTION>
                                                         As of December 31, 1996
                                              ---------------------------------------------
                                                           Gross       Gross      Estimated
                                              Amortized  Unrealized  Unrealized    Market
                                                 Cost      Gains       Losses      Value
                                              ---------  ----------  ----------   ---------
                                                         (Amounts in thousands)
<S>                                           <C>        <C>         <C>          <C>  
Equity Securities Available-for-Sale

Non-redeemable preferred stocks               $      18  $        2  $        0   $      20
Common stocks                                   250,421      69,446     (12,046)    307,821
                                              ---------  ----------  -----------  ---------
Total                                         $ 250,439  $   69,448  $  (12,046)  $ 307,841
                                              =========  ==========  ===========  =========

</TABLE>


<PAGE>  38


     The amortized cost, gross unrealized gains and losses, and estimated
market values of investments in equity securities pertaining to non-redeemable
preferred stocks and common stocks owned by FNWL in 1997 and the Life
Insurance Subsidiaries in 1996 are as follows:


<TABLE>
<CAPTION>
                                                         As of December 31, 1997
                                              ---------------------------------------------
                                                           Gross       Gross      Estimated
                                              Amortized  Unrealized  Unrealized    Market
                                                 Cost      Gains       Losses      Value
                                              ---------  ----------  ----------   ---------
                                                         (Amounts in thousands)
<S>                                           <C>        <C>         <C>          <C>  
Equity Securities Available-for-Sale

Non-redeemable preferred stocks               $   1,153  $      111  $      (37)  $   1,227
Common stocks                                         0         120           0         120
                                              ---------  ----------  -----------  ---------
Total                                         $   1,153  $      231  $      (37)  $   1,347
                                              =========  ==========  ===========  =========

</TABLE>

<TABLE>
<CAPTION>
                                                       As of December 31, 1996
                                              ---------------------------------------------
                                                           Gross       Gross      Estimated
                                              Amortized  Unrealized  Unrealized    Market
                                                 Cost      Gains       Losses      Value
                                              ---------  ----------  ----------   ---------
                                                         (Amounts in thousands)
<S>                                           <C>        <C>         <C>          <C>  
Equity Securities Available-for-Sale

Non-redeemable preferred stocks               $   7,007  $      261  $     (960)  $   6,308
Common stocks                                    84,532      21,198      (1,843)    103,887
                                              ---------  ----------  -----------  ---------
Total                                         $  91,539  $   21,459  $   (2,803)  $ 110,195
                                              =========  ==========  ===========  =========

</TABLE>

<PAGE>   39

     The amortized cost, gross unrealized gains and losses, and estimated
market values of investments in debt securities, including bonds and
redeemable preferred stocks, owned by the Company (excluding life insurance
amounts) are as follows:

<TABLE>
<CAPTION>
                                                         As of December 31, 1997
                                              ---------------------------------------------
                                                           Gross       Gross      Estimated
                                              Amortized  Unrealized  Unrealized    Market
                                                 Cost      Gains       Losses      Value
                                              ---------  ----------  ----------   ---------
                                                         (Amounts in thousands)
<S>                                           <C>        <C>         <C>          <C>  
Debt Securities Available-for-Sale,
 including Marketable Securities

U.S. Treasury securities and obligations of
 U.S. government corporations and agencies    $  25,000  $      338  $        0   $  25,338
Obligations of states and political
 subdivisions                                   416,693       3,578        (235)    420,036
Corporate securities                             63,837         684           0      64,521
Mortgage-backed securities                       67,149         541         (22)     67,668
Other debt securities                            37,892       1,202        (196)     38,898
                                              ---------  ----------  -----------  ---------
 Total                                        $ 610,571  $    6,343  $     (453)  $ 616,461
                                              =========  ==========  ===========  =========

</TABLE>

<TABLE>
<CAPTION>
                                                         As of December 31, 1996
                                              ----------------------------------------------
                                                           Gross       Gross       Estimated
                                              Amortized  Unrealized   Unrealized    Market
                                                 Cost      Gains       Losses       Value
                                              ---------  ----------   ----------   ---------
                                                         (Amounts in thousands)
<S>                                           <C>        <C>          <C>          <C>  
Debt Securities Available-for-Sale,
 including Marketable Securities

U.S. Treasury securities and obligations of
 U.S. government corporations and agencies    $     247   $       3   $        0   $     250
Obligations of states and political
 subdivisions                                   244,380       1,193          (17)    245,556
Corporate securities                                 20           0            0          20
Other debt securities                            56,080       1,410         (234)     57,256
                                              ---------   ---------   -----------  ---------
 Total                                        $ 300,727   $   2,606   $     (251)  $ 303,082
                                              =========   =========   ===========  =========

</TABLE>


<PAGE>   40

     The amortized cost, gross unrealized gains and losses, and estimated
market values of investments in debt securities, including bonds and
redeemable preferred stocks, owned by FNWL in 1997 and the Life Insurance
Subsidiaries in 1996 are as follows:  

<TABLE>
<CAPTION>                                     
                                                            As of December 31, 1997
                                               -----------------------------------------------------
                                                                Gross         Gross        Estimated
                                                Amortized    Unrealized     Unrealized       Market
                                                   Cost         Gains         Losses         Value
                                               -----------   -----------   ------------    ---------
                                                               (Amounts in thousands)
<S>                                            <C>           <C>           <C>             <C>
Debt Securities Available-for-Sale 

U.S. Treasury securities and obligations of
 U.S. government corporations and agencies     $   393,538   $    24,174   $      (104)    $  417,608
Obligations of states and political 
 subdivisions                                      270,502        13,346           (58)       283,790
Debt securities issued by foreign governments      136,127        15,686        (5,113)       146,700
Corporate securities                               842,838        48,429        (1,578)       889,689
Mortgage-backed securities                       1,655,679        56,243        (5,376)     1,706,546
Other debt securities                              109,742         3,628        (2,555)       110,815
                                               -----------   -----------   ------------   -----------
 Total                                         $ 3,408,426   $   161,506   $   (14,784)   $ 3,555,148
                                               ===========   ===========   ============    ===========
</TABLE>

<TABLE>
<CAPTION>
                                                            As of December 31, 1996
                                              -----------------------------------------------------
                                                               Gross          Gross       Estimated
                                                Amortized    Unrealized     Unrealized      Market
                                                   Cost        Gains          Losses        Value
                                               -----------   -----------   ------------   ----------
                                                               (Amounts in thousands)
<S>                                            <C>           <C>           <C>            <C>
Debt Securities Available-for-Sale 

U.S. Treasury securities and obligations of
 U.S. government corporations and agencies     $  369,543    $    11,169   $    (2,726)   $  377,986
Obligations of states and political 
 subdivisions                                     364,836         13,014          (950)      376,900
Debt securities issued by foreign governments      52,133         17,057           (13)       69,177
Corporate securities                              934,695         35,790        (9,018)      961,467
Mortgage-backed securities                      1,843,673         44,630       (20,704)    1,867,599
Other debt securities                             199,312          6,469        (4,784)      200,997
                                               -----------   -----------   ------------   ----------
 Total                                         $3,764,192    $   128,129   $   (38,195)   $3,854,126
                                               ===========   ===========   ============   ==========
</TABLE>


<PAGE>   41

     The amortized cost and estimated market value of debt securities,
including marketable securities, owned by the Company (excluding FNWL) as of
December 31, 1997, by contractual maturity, are shown below.  Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.

<TABLE>
<CAPTION>
                                                                        Estimated
                                                         Amortized       Market
                                                            Cost          Value
                                                        -----------    ----------
                                                         (Amounts in thousands)
<S>                                                     <C>            <C>
Debt Securities Available-for-Sale,
  including Marketable Securities
Due in one year or less                                 $  128,061     $  128.216
Due after one year through five years                      277,649        280,253
Due after five years through ten years                         559            801
Due after ten years                                         99,261        100,625
                                                        -----------    ----------
                                                           505,530        509,895
Mortgage-backed securities                                  67,149         67,668
Redeemable preferred stocks
  with no stated maturities                                 37,892         38,898
                                                        ----------     ----------
                                                        $  610,571     $  616,461
                                                        ==========     ==========
</TABLE>

     The amortized cost and estimated market value of debt securities owned by
FNWL as of December 31, 1997, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.

<TABLE>
<CAPTION>
                                                                        Estimated
                                                         Amortized       Market
                                                            Cost          Value
                                                        -----------    ----------
                                                         (Amounts in thousands)
<S>                                                     <C>            <C>
Debt Securities Available-for-Sale 
Due in one year or less                                 $   21,711     $   22,065
Due after one year through five years                      361,353        371,226
Due after five years through ten years                     609,212        630,716
Due after ten years                                        650,729        713,780
                                                        -----------    ----------
                                                         1,643,005      1,737,787
Mortgage-backed securities                               1,655,679      1,706,546
Redeemable preferred stocks
  with no stated maturities                                109,742        110,815
                                                        -----------    ----------
                                                        $3,408,426     $3,555,148
                                                        ==========     ==========
</TABLE>

     Proceeds from sales of available-for-sale securities received by the
Company were $735,192,000 and $551,122,000 during 1997 and 1996, respectively.
Gross gains of $100,269,000 and $76,431,000 and gross losses of $21,274,000
and $32,009,000 were realized on sales and writedowns during 1997 and 1996,
respectively.

     Proceeds from sales and maturities of available-for-sale securities
received by the Company were $541,376,000 during 1995.  Gross gains of
$45,944,000 and gross losses of $13,371,000 were realized on sales and
writedowns during 1995. 


<PAGE>   42

     The change in the net unrealized gains or losses of the Company
(excluding life insurance amounts) for the years ended December 31 is as
follows:
     

<TABLE>
<CAPTION>
                                         1997             1996          
                                      ----------       ----------       
                                        (Amounts in thousands)           
<S>                                   <C>              <C>                      
Fixed maturities                      $    3,535       $   (4,376)      
Equity securities                          8,823           57,402       
</TABLE>

     The change in the net unrealized gains or losses of FNWL in 1997 and the
Life Insurance Subsidiaries in 1996 are as follows: 


<TABLE>
<CAPTION>
                                         1997             1996       
                                      ----------       ----------    
                                        (Amounts in thousands)           
<S>                                  <C>             <C>                     
Fixed maturities                      $   56,788       $  (74,439) 
Equity securities                        (18,462)         (45,584)
  
</TABLE>


I.  Equity-indexed annuities

     During 1997, FNWL began selling an equity-indexed annuity product.  At
the end of its seven year term, this product credits interest to the annuity
participant at a rate based on a specified portion of the change in the value
of the Standard & Poor's 500 Composite Stock Price Index ("S&P 500 Index"),
subject to a guaranteed annual minimum return.  In order to hedge the interest
liability generated on the annuities as the index rises, FNWL purchases call
options on the S&P 500 Index.   FNWL considers such call options to be held as
a hedge.  As of December 31, 1997, FNWL had call options with contract values
of $13,180,000 and carrying values of $3,299,000.

     Hedge accounting is used to account for the call options as FNWL believes
that the options reduce the risks associated with increases in the account
value of the annuities that result from increases in the S&P 500 Index.  The
call options effectively hedge the annuity contracts since they are both
purchased and sold with identical parameters.  Periodically, the value of the
assets (S&P 500 call options) are matched to the potential liability (annuity
contracts) to ensure the hedge has remained effective.  The annuities were
written based on a seven year investment term, absent early termination by
participants.  Therefore, the anticipated hedged transaction (i.e., payment of
interest to the policyholder at the end of the investment term and maturity of
the call option) for each annuity is generally expected to occur in seven 
years or less.  For the year ended December 31, 1997, the amount of unrealized
hedging losses deferred was $151,000.

     The call options are included in other invested assets and are carried at
estimated fair value.  Unrealized gains and losses resulting from changes
in the estimated fair value of the call options are recorded as an adjustment
to the interest liability credited to policyholders.  In addition, realized
gains and losses from maturity or termination of the call options are offset
against the interest credited to policyholders during the period incurred.
Premiums paid on indexed call options are amortized to net investment income
over the term of the contracts.  There were no early terminations by annuity
participants, or maturities or sales of the S&P 500 call options during 1997.

     The cash requirement of the call options consists of the initial premium
paid to purchase the index options.  Should a liability exist to the annuity
participant at maturity of the annuity policy, the termination or maturity of
the option contracts will generate positive cash flow to FNWL.  The
appropriate amount of cash will then be remitted to the annuity participant
based on the respective 


<PAGE>   43

participation rate.  The index options are generally expected to be held for
a seven year term, but can be terminated at any time.

     There are certain risks associated with the index call options, primarily
with respect to significant movements in the United States stock market and
counterparty nonperformance.  The Company believes that the counterparties to
its call option agreements are financially responsible and that the
counterparty risk associated with these transactions is minimal.

J.  Fair value of financial instruments

     The estimated fair values of financial instruments disclosed have been 
determined using available market information and appropriate valuation 
methodologies.  However, considerable judgment is required to interpret market 
data to develop the estimates of fair value.  Accordingly, the estimates 
presented may not be indicative of the amounts the Company could realize 
in a current market exchange.  The use of different market assumptions and/or 
estimation methodologies could have a significant effect on the estimated 
fair value amounts.

<TABLE>
<CAPTION>
                                                             December 31, 1997
                                                        ---------------------------
                                                         Carrying        Estimated
                                                          Value          Fair Value
                                                        -----------     -----------
                                                           (Amounts in thousands)
<S>                                                     <C>             <C>
Assets and liabilities excluding FNWL:
Assets:
  Cash and cash equivalents                              $  506,273      $  506,273
  Short-term marketable securities                          128,216         128,216
  Fixed maturities available-for-sale                       488,245         488,245
  Common stocks available-for-sale                          388,966         388,966
  Mortgage loans                                                240             256
  Certificates in surplus of Exchanges                      684,380         684,380
  Notes receivable - affiliate                              407,000         404,256
  Joint ventures, at equity                                   4,825           6,897
  Other assets                                               20,746          17,219
Liabilities:
  Real estate mortgages payable                                  92              96
  Company obligated mandatorily redeemable
    preferred securities of subsidiary trusts 
    holding solely junior subordinated debentures           500,000         518,332
FNWL:
Assets:
  Cash and cash equivalents                                   9,980           9,980
  Fixed maturities available-for-sale                     3,555,148       3,555,148
  Non-redeemable preferred stocks
    available-for-sale                                        1,227           1,227
  Common stocks available-for-sale                              120             120
  Mortgage loans                                             89,903         105,235
  Policy loans                                              165,894         172,115
  Joint ventures, at equity                                   9,515          10,037
  Other investments                                           3,299           3,299
Liabilities:
  Future policy benefits - deferred annuities             1,473,578       1,403,455

</TABLE>


<PAGE>   44

<TABLE>
<CAPTION>

                                                             December 31, 1996
                                                        ---------------------------
                                                         Carrying        Estimated
                                                          Value          Fair Value
                                                        -----------     -----------
                                                           (Amounts in thousands)
<S>                                                     <C>             <C>
Assets and liabilities excluding the Life Insurance
Subsidiaries:
Assets:
  Cash and cash equivalents                              $  412,018      $  412,018
  Short-term marketable securities                          118,253         118,253
  Fixed maturities available-for-sale                       184,829         184,829
  Non-redeemable preferred stocks 
   available-for-sale                                            20              20
  Common stocks available-for-sale                          307,821         307,821
  Certificates in surplus of Exchanges                      684,380         684,380
  Notes receivable - affiliate                              407,000         402,400
  Joint ventures, at equity                                  10,366          16,241
  Other assets                                               20,103          16,370
Liabilities:
  Real estate mortgages payable                                 217             227
  Company obligated mandatorily redeemable
    preferred securities of subsidiary trusts 
    holding solely junior subordinated debentures           500,000         507,600
Life Insurance Subsidiaries:
Assets:
  Cash and cash equivalents                                  87,310          87,310
  Fixed maturities available-for-sale                     3,854,126       3,854,126
  Non-redeemable preferred stocks
    available-for-sale                                        6,308           6,308
  Common stocks available-for-sale                          103,887         103,887
  Mortgage loans                                            122,635         138,515
  Policy loans                                              187,285         188,627
  Joint ventures, at equity                                  11,971          14,748
  Assets held in separate account                           796,616         796,616
Liabilities:
  Liabilities related to separate account                   796,616         796,616
  Future policy benefits - deferred annuities             1,600,983       1,518,075

</TABLE>


<PAGE>   45

     The following methods and assumptions were used to estimate the fair
value of financial instruments as of December 31, 1997 and 1996: 

     Cash and cash equivalents and short-term marketable securities  The
carrying amounts of these items are a reasonable estimate of their fair
values. 

     Fixed maturities, non-redeemable preferred stocks and common stocks  The
estimated fair values of bonds, redeemable and non-redeemable preferred stocks
and common stocks are based upon quoted market prices, dealer quotes, and
prices obtained from independent pricing services. 

     Mortgage loans  The estimated fair value of the mortgage loans portfolio
is determined by discounting the estimated future cash flows, using a year-end
market rate which is applicable to the yield, credit quality and average
maturity of the composite portfolio. 
	
     Certificates in surplus of Exchanges  The carrying amounts of these
certificates are a reasonable estimate of their fair values.

     Notes receivable-affiliate  The fair values are estimated by discounting
the future cash flows using the current rates at which similar loans would be
made by the Company to borrowers for the same remaining maturities. 

     Joint ventures, at equity  The estimated fair values are based upon
quoted market prices, current appraisals, and independent pricing services. 

     Other assets  Other assets consist primarily of advances to agents, the
fair value of which is determined by discounting the estimated future cash
flows using credit quality, the average maturity of related advances, and the
current rates at which similar loans would be made to borrowers by the
Company. 

     Policy loans  The estimated fair values of policy loans are determined by
discounting the future cash flows using the current rates at which similar
loans would be made. 

     Other Investments  Other investments consist of S&P 500 index call
options purchased as hedges against the interest liabilities generated on the
equity-indexed annuity products.  These call options are carried at an
estimated fair value based on stock price, strike price, time to expiration,
interest rates, dividends and volatility per the methodology of the
Black-Scholes Option Pricing Formula. 

     Assets held in separate account and liabilities related to separate
account  The carrying values are a reasonable estimate of their fair values
since assets and liabilities of separate accounts are carried at market value. 
	
     Real estate mortgages payable  The estimated fair values are determined
by discounting the estimated future cash flows at a rate which approximates
the Company's incremental borrowing rate. 

     Company obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely junior subordinated debentures  The estimated
fair values are based on quoted market prices.


<PAGE>   46


     Future policy benefits-deferred annuities  The estimated fair values of
flexible premium and single premium deferred annuities are based on their cash
surrender values. 
     
K.  Value of Life Business Acquired

     The changes in the Value of Life Business Acquired were as follows: 

<TABLE>
<CAPTION>
                                                 1997             1996              1995
                                              ----------       ----------        ----------
                                                          (Amounts in thousands)           
        <S>                                   <C>              <C>               <C>        
        Balance, beginning of year            $  443,318       $  473,398        $  525,699
        Amortization related to operations       (60,134)         (69,894)          (76,235)
        Interest accrued                          36,207           41,714            44,634
        Amortization related to net
         unrealized losses                        (1,700)          (1,900)          (20,700)
        Sale of OSL and IGL                      (58,545)               0                 0
                                              ----------       ----------        ----------
        Balance, end of year                  $  359,146       $  443,318        $  473,398
                                              ==========       ==========        ==========

</TABLE>

     Based on current conditions and assumptions as to future events, FNWL
expects to amortize the December 31, 1997 balance as follows: approximately
3.2% in 1998 and 1999, 3.4% in 2000, 3.6% in 2001, and 3.9% in 2002.  The
discount rate used to determine the amortization rate of the Value of Life
Business Acquired ranged from 12.5% to 7.5%. 

L.  Mortgage loans

     The Company follows the principles of SFAS No. 118 (amending SFAS No.
114), "Accounting by Creditors for Impairment of a Loan".  This Statement
requires that an impaired loan be measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate
or, as a practical expedient, at the loan's observable market price or the
fair value of the collateral, if the loan is collateral dependent.

     The total recorded investment in impaired mortgage loans and the amount
of recorded investment for which an allowance for credit losses exists as of
December 31 follows: 


<TABLE>
<CAPTION> 
                                                                1997              1996
                                                             ----------        ----------
                                                                (Amounts in thousands)
      <S>                                                    <C>              <C>        
      Total recorded investment in impaired mortgage
       loans and for which an allowance for
       credit losses exists                                  $   5,819         $   5,034
      Total allowance for credit losses
       related to impaired mortgage loans                        1,409             1,394

</TABLE>


     The Company records interest income received on impaired mortgage loans 
on a cash basis.  The average recorded investment and income recognized on 
impaired mortgage loans follows: 

<TABLE>
<CAPTION>
                                                               1997              1996
                                                            ----------        --------- 
                                                               (Amounts in thousands)
     <S>                                                    <C>              <C>        
     Average recorded investment in impaired
       loans during the period                               $   5,860        $   5,061
     Interest income recognized on the 
       impaired mortgage loans during the period                   230              233

</TABLE>

<PAGE>   47

     The activity in the total allowance for credit losses related to 
impaired mortgage loans follows: 

<TABLE>
<CAPTION>
                                                               1997              1996
                                                            ----------        ----------
                                                                (Amounts in thousands)
     <S>                                                    <C>                <C>
     Beginning balance                                      $   1,394          $   1,955
     Additions charged to operations                               15                 51
     Direct writedowns charged against the allowance                0               (612)
 						      ---------          ---------
     Ending balance                                         $   1,409          $   1,394
                                                            =========          =========
</TABLE>


M.  Security lending arrangement

     The Company has a security lending agreement with a financial
institution.  The agreement in effect as of December 31, 1997 authorizes the
institution to lend securities held in the Company's portfolio to a list of
authorized borrowers.  Concurrent with delivery of the securities, the
borrower provides the Company with cash collateral equal to at least 102% of
the market value of domestic securities and 105% of the market value of other
securities subject to the "loan."

     The securities are marked-to-market on a daily basis and the collateral
is adjusted on the next business day.  The collateral is invested in highly
liquid, fixed income assets with a duration of less than one year.  Income
earned from the security lending arrangement was allocated 60% to the Company
and 40% to the lending agent.  Income earned by the Company was approximately
$856,000 in 1997.  As of December 31, 1997, the collateral under the agreement
was $594,488,000. 

     In 1996 and 1995, the Life Insurance Subsidiaries had a security lending
agreement with a financial institution which had the same terms as the
agreement in effect as of December 31, 1997.  Income earned by the Life
Insurance Subsidiaries was $422,000 and $233,000 in 1996 and 1995,
respectively.  The collateral under these agreements as of December 31, 1996
was $221,216,000.

N.  Employees' retirement plans

     The Company has two noncontributory defined benefit pension plans (the 
Regular Plan and the Restoration Plan). The Regular Plan covers substantially 
all employees of the Company and the Exchanges who have reached age 21 and 
have rendered one year of service.  Benefits are based on years of service and 
the employee's compensation during the last five years of employment.  The 
Restoration Plan provides supplemental retirement benefits for certain key 
employees of the Company. 

     The Company's policy is to fund the amount determined under the aggregate
cost method, provided it does not exceed funding limitations.  There has been
no change in funding policy from prior years. 

     Assets of the Regular Plan are held by an independent trustee.  Assets
held are primarily in fixed maturity and equity investments. The principal
liability is for annuity benefit payments of current and future retirees.
Assets of the Restoration Plan are considered corporate assets and are held
in a grantor trust.  In 1996, assets and liabilities of the Regular Plan were
recorded by FNWL in Separate Accounts and were not commingled with the general
assets and liabilities of that company (see Note V). 

     Information regarding the Regular Plan's funded status is not developed
separately for the Company and the Exchanges. Information regarding the
Restoration Plan pertains only to the


<PAGE>   48


Company. The funded status of the Plans for the Company and the Exchanges as
of December 1, 1997 and 1996 (the latest date for which information is
available) was as follows:

<TABLE>
<CAPTION>
                                                               1997             1996
                                                           ----------       ---------- 
                                                               (Amounts in thousands)
     <S>                                                   <C>              <C>
     Actuarial present value of benefit obligations:
       Vested benefit obligation                           $ (562,686)      $ (520,715)
       Accumulated benefit obligation                        (588,020)        (545,459)
       Projected benefit obligation                          (747,069)        (695,346)
     Assets at fair market value                              817,552          744,340
     Plan assets in excess of projected benefit obligation     70,483           48,994
     Unrecognized net transition (asset)                      (30,862)         (35,538)
     Unrecognized prior service cost                           34,555           30,132
     Unrecognized net (gain)/loss                            (136,691)         (98,544)
     Additional liability                                      (3,685)               0
     Accrued pension cost                                     (66,200)         (54,956)

</TABLE>

     Upon purchase of the Company in 1988, the Company allocated part of the
purchase price to its portion of the Regular Plan assets in excess of the
projected benefit obligation at the date of acquisition. The asset is being
amortized for the difference between the Company's net pension cost and
amounts contributed to the Plan. The unamortized balance as of December 31,
1997 and 1996 was $24,304,000 and $29,252,000, respectively. 

     Components of net periodic pension expense for the Company follow: 

<TABLE>
<CAPTION>
                                              1997             1996              1995
                                           ----------       ----------        ----------
                                                       (Amounts in thousands)           
     <S>                                  <C>               <C>               <C>        
     Service costs                         $   14,238       $   15,275        $   12,829
     Interest costs                            28,362           27,409            25,533
     Return on plan assets                    (35,116)         (35,671)          (31,842)
     Net amortization and deferral              2,279            1,999              (235)
                                           ----------       ----------        ----------
     Net periodic pension expense          $    9,763       $    9,012        $    6,285
                                           ==========       ==========        ==========

</TABLE>

     The Company uses the projected unit credit cost actuarial method for
attribution of expense for financial reporting purposes. The interest cost and
the actuarial present value of benefit obligations were computed using an
interest rate of 7.25% in 1997, 1996 and 1995, while the expected return on
plan assets was computed using an interest rate of 9.00% in 1997 and 1996 and
9.25% in 1995.  The rate of increase in future compensation levels used in
determining the actuarial present value of the projected benefit obligation
was 5.00% in 1997 and 1996 and 4.50% in 1995.
 
     The Company's postretirement benefits plan is a contributory defined
benefit plan for employees who were retired or who were eligible for early
retirement as of January 1, 1995, and is a contributory defined dollar plan
for all other employees retiring after January 1, 1995. Health benefits are
provided for all employees who participated in the Company's and the
Exchanges' group medical benefits plan for 15 years prior to retirement at
age 55 or later.  A life insurance benefit of $5,000 is provided at no cost
to retirees who maintained group insurance coverage for 15 years prior to
retirement at age 55 or later. 

     There are no assets separated and allocated to this plan.


<PAGE>   49


     The funded status of the entire plan, which includes the Company and the
Exchanges, as of December 1, 1997 and 1996 (the latest date for which
information is available) was as follows: 

<TABLE>
<CAPTION>
                                                               1997            1996
                                                           ----------       ----------
                                                              (Amounts in thousands)
     <S>                                                   <C>              <C>
     Actuarial present value of benefit obligations:
       Vested benefit obligation                           $        0       $        0
       Accumulated benefit obligation:
         Retirees                                              43,216           44,051
         Eligible active plan participants                      9,935           11,564
         Other active plan participants                        17,606           19,527
     Assets at fair market value                                    0                0
     Unrecognized net gains                                    15,977            7,796
     Unrecognized net transition obligation                   (19,665)         (20,976)
                                                           ----------       ----------
     Accrued postretirement benefit cost                   $   67,069       $   61,962
                                                           ==========       ==========

</TABLE>

     The Company's share of the accrued postretirement benefit cost was
approximately $49,404,000 in 1997 and $47,948,000 in 1996.  The unrecognized
net transition obligation of $19,665,000 in 1997 and $20,976,000 in 1996
represents the remaining transition obligation of the Exchanges. 

     Components of postretirement benefits expense for the Company follow: 

<TABLE>
<CAPTION>
                                              1997             1996              1995
                                           ----------       ----------        ----------
                                                       (Amounts in thousands)           
     <S>                                  <C>             <C>                <C>        
     Service costs                         $      753       $    1,016        $      956
     Interest costs                             2,918            3,018             3,308
     Return on plan assets                          0                0                 0
     Net amortization and deferral                (13)               0                 0
                                           ----------       ----------        ----------
     Net periodic expense                  $    3,658       $    4,034        $    4,264
                                           ==========       ==========        ==========

</TABLE>

     The interest rate used in the above benefit computations was 7.25% in
1997, 1996 and 1995.  Beginning in 1995, the initial medical inflation rate
was 8.00%, to be graded over a 4-year period to 6.00% and level thereafter,
and contribution levels from retirees were the same as applicable medical cost
increases where defined benefits exist. The rate of increase in future
compensation levels used in determining the actuarial present value of the
accumulated benefit obligation was 5.00% in 1997 and 1996 and 4.50% in 1995.
A 1.00% increase in the medical inflation rate assumption would have resulted
in an approximate increase of $1,179,000 in 1997 and $1,231,000 in 1996 in the
accumulated benefit obligation for the Company.

O.  Commitments and contingencies

     Rental expense incurred by the Company was $20,322,000, $20,121,000,
and $21,944,000 in 1997, 1996 and 1995, respectively. 


<PAGE>  50


     The Company has long-term operating lease commitments on equipment and
buildings, with options to renew at the end of the lease periods.  As of
December 31, 1997, the remaining commitments payable over the next five years
under these leases are:  

<TABLE>
<CAPTION>
                                                           Equipment        Buildings
                                                          -----------      -----------
                                                               (Amounts in thousands)
          <S>                                             <C>              <C>
          1998                                            $    12,405      $     1,357
          1999                                                 11,851              889
          2000                                                  1,776              692
          2001                                                  1,071              635
          2002                                                    811              499
                                                          -----------      -----------
                                                          $    27,914      $     4,072
                                                          ===========      ===========
</TABLE>

     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. 

     The Company has entered into employment agreements with certain
executives of the Company.  Each agreement obligates the Company to
compensate the executive should the executive's employment be terminated due
to a qualifying event, as defined within the agreement.  In the opinion of 
management, any payments made as a result of these agreements would not have a
material adverse effect on the Company's consolidated results of operations
or financial position.

P.  Income taxes

     The Company follows the provisions of SFAS No. 109, "Accounting for
Income Taxes". Deferred tax assets and deferred tax liabilities are recorded
to reflect the tax consequences in future years of differences between the tax
bases of assets and liabilities and the corresponding bases used for financial
statements.  On April 15, 1997, OSL and IGL were sold pursuant to Internal
Revenue Code Section 338(h)(10).  Federal and state taxes incurred as a result
of this transaction amounted to an estimated $26,826,000. 

     The components of the provision for income taxes are:


<PAGE>   51


<TABLE>
<CAPTION>
                                              1997             1996             1995
                                           ----------       ----------       ----------
                                                       (Amounts in thousands)          
     <S>                                  <C>              <C>               <C>       
     Management services to P&C 
     Group; and other:
       Current
         Federal                           $  317,399       $  240,918       $  206,373
         State                                 42,601           63,963           27,842
       Deferred
         Federal                              (25,286)         (27,959)         (10,848)
         State                                 (2,527)          (1,770)             922
                                          -----------       ----------       ----------
           Total                              332,187          275,152          224,289
                                          -----------       ----------       ----------

     Life Insurance Subsidiaries:
       Current
         Federal                               80,116          101,712           77,233
         State                                  1,704              869            1,036
       Deferred
         Federal                               (5,399)         (22,531)          (9,795)
         State                                      0                0                0
                                          -----------       ----------       ----------
           Total                               76,421           80,050           68,474
                                          -----------       ----------       ----------
     Consolidated total                   $   408,608       $  355,202       $  292,763
                                          ===========       ==========       ==========

</TABLE>


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

<TABLE>
<CAPTION>
                                              1997             1996              1995
                                           ----------       -----------      ------------
                                                       (Amounts in thousands)            
     <S>                                  <C>                <C>               <C>       
     Management services to P&C 
     Group; and other:
       Expected tax expense               $   273,839        $  218,268        $  194,278
       State income taxes, net of 
         federal income tax benefits           21,152            40,100            18,950
       Tax exempt investment income            (8,490)           (8,571)           (9,438)
       Tax-effect of gain on sale of                                                  
         OSL and IGL in excess of U.S.                                 
         statutory rate                        20,169                 0                 0 
       Goodwill                                21,015            21,015            21,015
       Other, net                               4,502             4,340              (516)
                                          -----------        ----------        ----------
           Reported income tax expense        332,187           275,152           224,289
                                          -----------        ----------        ----------


     Life Insurance Subsidiaries:
       Expected tax expense                    76,899            83,832            72,945
       Tax exempt investment income            (2,337)           (3,843)           (4,424)
       State taxes                              1,704               869             1,036
       Other, net                                 155              (808)           (1,083)
                                          -----------        ----------         ---------
           Reported income tax expense         76,421            80,050            68,474
                                          ------------      -----------        ----------
     Consolidated income tax expense      $   408,608       $   355,202        $  292,763
                                          ===========       ===========        ==========

</TABLE>


<PAGE>   52

     The tax effects of temporary differences that give rise to significant 
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 1997 and 1996 are presented in the following tables:

<TABLE>
<CAPTION>
                                                     As of December 31, 1997
                                           ----------------------------------------------
                                             Current        Non-current         Total
                                           -----------     -------------     ------------
                                                       (Amounts in thousands)           
     <S>                                  <C>                <C>               <C>        
     Management services to P&C 
     Group; and other:
       Depreciation                       $         0        $  (72,028)       $  (72,028)
       Achievement awards                       1,269                 0             1,269
       Employee benefits                        5,368             4,481             9,849 
       Capitalized expenditures                     0           (77,718)          (77,718)
       California franchise tax                20,973                 0            20,973
       Postretirement benefits                      0            28,678            28,678
       Postemployment benefits                      0               165               165
       Valuation of investments 
         in securities                           (254)          (21,284)          (21,538)
       Attorney-in-fact contracts                   0          (499,340)         (499,340)
       Other                                    1,569            (6,864)           (5,295)
                                          -----------        ----------        ----------
          Total deferred tax 
             asset (liability)                 28,925          (643,910)         (614,985)
                                          -----------        ----------        ----------


     FNWL:
       Deferred policy acquisition 
         costs and value of life 
         business acquired                                     (243,270)         (243,270)
       Future policy benefits                                   145,733           145,733
       Investments                                                5,323             5,323 
       Valuation of investments 
         in securities                                          (43,320)          (43,320)
       Depreciable assets                                        (6,425)           (6,425)
       Other                                                    (11,047)          (11,047)
                                          -----------        ----------        ----------
           Total deferred tax liability                        (153,006)         (153,006)
                                          -----------        ----------        ----------
     Consolidated total deferred tax
       asset (liability)                  $    28,925        $ (796,916)       $ (767,991)
                                          ===========        ==========        ==========

</TABLE>


<PAGE>   53

<TABLE>
<CAPTION> 
                                                      As of December 31, 1996
                                           ----------------------------------------------
                                             Current        Non-current          Total
                                            ---------       -----------       -----------
                                                       (Amounts in thousands)           
     <S>                                  <C>                <C>               <C>        
     Management services to P&C 
     Group; and other:
       Depreciation                        $        0        $  (73,396)       $  (73,396)
       Achievement awards                       1,514                 0             1,514
       Employee benefits                        6,861            (9,702)           (2,841)
       Capitalized expenditures                     0           (86,076)          (86,076)
       California franchise tax                22,531                 0            22,531
       Postretirement benefits                      0            26,544            26,544
       Postemployment benefits                      0               155               155
       Valuation of investments 
         in securities                            742                 0               742 
       Proposition 103 provision                  147                 0               147
       Attorney-in-fact contracts                   0          (515,448)         (515,448)
       Other                                    3,208           (17,977)          (14,769)
                                           ----------        ----------        ----------
          Total deferred tax 
             asset (liability)                 35,003          (675,900)         (640,897)
                                           ----------        ----------        ----------


     Life Insurance Subsidiaries:
       Deferred policy acquisition 
         costs and value of life 
         business acquired                                     (326,958)         (326,958)
       Future policy benefits                                   180,718           180,718
       Investments                                               (2,336)           (2,336)
       Valuation of investments 
         in securities                                          (37,159)          (37,159)
       Depreciable assets                                       (10,519)          (10,519)
       Other                                                      1,066             1,066 
                                          -----------       -----------        ----------
           Total deferred tax liability                        (195,188)         (195,188)
                                          -----------       -----------       -----------
     Consolidated total deferred tax
       asset (liability)                  $    35,003       $  (871,088)      $  (836,085)
                                          ===========       ===========       ===========

</TABLE>

Q.   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>
                                                 Management
                                                 Services to      Life
                                                  P&C Group;    Insurance
                                                  and Other    Subsidiaries  Consolidated
                                                ------------   ------------  ------------
                                                        (Amounts in thousands)
<S>                                             <C>            <C>             <C>
Cash and cash equivalents --December 31, 1994   $  415,064     $   124,297     $  539,361
                              1995 Activity                                       373,645
                                                                               ----------
Cash and cash equivalents --December 31, 1995      763,212         149,794        913,006
                              1996 Activity                                      (413,678)
                                                                               ----------
Cash and cash equivalents --December 31, 1996      412,018          87,310        499,328 
                              1997 Activity                                        16,925 
                                                                               ----------
Cash and cash equivalents --December 31, 1997      506,273           9,980     $  516,253
                                                                               ==========
</TABLE>

     Cash payments for interest were $3,725,000, $18,674,000, and $18,995,000
in 1997, 1996, and 1995, respectively, while cash payments for dividends to
the holders of the Company's QUIPS were $42,070,000 in 1997 and 1996 and
$10,414,000 in 1995. Cash payments for income taxes were $430,588,000,
$379,455,000, and $315,603,000 in 1997, 1996 and 1995, respectively.  


<PAGE>   54


     In 1997, net cash proceeds from the sale of OSL and IGL amounted to an
estimated $336,714,000 and were in consideration primarily for the following:

     Investments                                                  823,666,000
     Deferred policy acquisition costs and Value of Life                     
       Business Acquired                                          181,196,000
     Life insurance policy liabilities                           (690,426,000)

     Also in 1997, the change in the Separate Accounts assets and liabilities
netted to $0 and was reflected in the Statements of Cash Flows (see Note V).   

     In July 1996, the Company used $200,000,000 of proceeds it received
from the Exchanges in connection with the repayment of the 1986 surplus
contribution (see Note D) to extinguish the $200,000,000 of 8.25% Notes
Payable the Company issued in July 1986.

     As a result of the adoption of SFAS No. 115, the Life Insurance
Subsidiaries have decreased the DAC asset and increased the Value of Life
Business Acquired asset to account for the impact on estimated future gross
profits of the net unrealized gains or losses on securities. 

R.   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 $1,241,153,000, $1,167,704,000 and
$1,109,425,000 in 1997, 1996, and 1995, respectively.

S.   Related parties

     Certain directors of the Company are partners in legal firms that
received fees for legal services from the Company and the Exchanges. These
fees totaled $5,208,000, $1,853,000 and $2,231,000 in 1997, 1996 and 1995,
respectively.  

     As of December 31, 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:
$137,000,000 in October 1998, $135,000,000 in October 1999 and $135,000,000 in
October 2000.  Interest on these notes is paid semi-annually at coupon rates
of 5.35%, 6.68% and 6.33%, respectively.  On October 7, 1997, a four year
$135,000,000 note with an interest rate of 5.10% matured and the $135,000,000
note maturing in October 2000 was subsequently issued at an interest rate
of 6.33%.  Income earned on the notes outstanding during 1997, 1996 and 1995
was $23,620,000, $21,245,000, and $20,697,000, 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%.

T.  Revolving credit agreement

     As of December 31, 1997 and 1996, the Company had a revolving credit
agreement with certain financial institutions and had an aggregate borrowing
facility of $500,000,000.  The

<PAGE>  55

proceeds of the facility were available to the Company for general corporate
purposes, including loans to the Exchanges.  As of December 31, 1997 and 1996,
facility fees were payable on the aggregate borrowing facility in the amount
of 7 and 9 basis points per annum, respectively, and were reimbursable to the
Company by the Exchanges.  In the case of a draw on the facility, the Company
has the option to borrow at annual rates equal to the prime rate, the banks'
certificate of deposit rate plus 1%, the federal funds effective rate plus
1/2 of 1% or the London Interbank Offered Rate ("LIBOR") plus certain
percentages.  As of December 31, 1997 and 1996, the Company did not have any
outstanding borrowings under the revolving credit agreement.  Facility fees
were $399,000, $592,000 and $526,000 for the years ended December 31, 1997,
1996 and 1995, respectively, and were reimbursed by the Exchanges.  The
revolving credit agreement in effect as of December 31, 1997 expires on July
1, 2002.

U.   Real estate mortgages payable

     As of December 31, 1997, the Company, excluding FNWL, was liable for two
mortgages, one with an interest rate of 6.98% maturing in June 1998 and one
with an interest rate of 7.24% maturing in June 2004.  The amount of principal
due within one year is approximately $67,000.  As of December 31, 1997, there
were no real estate mortgage notes payable by FNWL. 

V. Separate Accounts

     The assets and liabilities held in Separate Accounts as of December 31,
1996 related to the pension plan for the employees of the Company and the
Exchanges.  The assets were held primarily in fixed maturity and equity
investments, while the principal liability was for annuity benefit payments
under the pension plan.  A review of the trust agreement with Chase Manhattan
Bank, the trustee for the pension plan, led to the conclusion that Separate
Account treatment was no longer required.  Therefore, FNWL excluded the
pension plan assets and liabilities from Separate Accounts as of November
30, 1997.

W.   Participating policies

     Participating business, primarily group insurance, comprised
approximately 8.8% of FNWL's total insurance-in-force as of December 31, 1997
and 7.5% of the Life Insurance Subsidiaries' total insurance-in-force as of
December 31, 1996.  In addition, participating business represented 2.2% of
FNWL's premium income for the year ended December 31, 1997, and 2.2% of the
Life Insurance Subsidiaries' premium income for the years ended December 31,
1996 and 1995.
	
X.   Life reinsurance	

     In 1996 and 1995, the Life Insurance Subsidiaries had reciprocal
reinsurance treaties in place among themselves so that the maximum exposure
to the Life Insurance Subsidiaries, in the aggregate, for any one life was the
sum of their individual retention levels, or $1,400,000.  Due to the sale of
OSL and IGL on April 15, 1997, the reciprocal reinsurance treaties which
existed with FNWL ceased.  

     Premiums ceded to non-affiliates totaled $3,868,000 and $3,577,000 for
the years ended December 31, 1996 and 1995, respectively.  Reinsurance
receivables, which totaled $10,621,000 as of December 31, 1996, were included
in Other Assets of Life Insurance Subsidiaries. 

<PAGE>   56

     In the fourth quarter of 1997, FNWL revised the retention limit for
automatic reinsurance ceded.  The primary change was to set the maximum
retention on new issues at $2,000,000 per life for the Farmers Flexible
Universal Life policy, $1,500,000 per life for all Traditional policies except
Farmers Yearly Renewable Term, and $800,000 per life for Farmers Yearly
Renewable Term.  The excess is reinsured with a third party reinsurer.
Premiums ceded under these agreements totaled $4,236,000 in 1997.
Reinsurance receivables, which totaled $8,627,000 as of December 31, 1997
were included in Other Assets of Life Insurance Subsidiaries.  

Y.  Current liabilities accrued, other

     Current liabilities accrued, other consisted of the following:

<TABLE>
<CAPTION>
                                                           As of December 31,
                                                    ------------------------------
                                                        1997               1996
                                                    ------------      ------------
                                                        (Amounts in thousands)
<S>                                                 <C>               <C>
Accrued employee bonuses                            $     9,390       $      8,171
Accrued interest                                              3                766
Other                                                     2,883              9,537
                                                    -----------       ------------
                                                    $    12,276       $     18,474
                                                    ===========       ============
</TABLE>

Z.   Operations in different industries

     The Company operates primarily in two industries - management of property
and casualty insurance companies (principally reciprocal insurance exchanges)
and the life insurance industry.  Total revenue by industry includes both
revenues as reported in the Company's consolidated income statement, and
intersegment revenues which are eliminated in consolidation.

     Operating profit is comprised of total revenues less operating expenses.
Accordingly, investment income and realized gains on securities and real
estate investment income earned as a result of the management services to the
P&C Group have not been added, and general corporate expenses and income taxes
have not been deducted.  The Management Services to the P&C Group segment
incurred depreciation expense of $51,579,000, $40,096,000, and $28,023,000 in
1997, 1996 and 1995, respectively, while depreciation for the Life Insurance
Subsidiaries was $2,838,000 in 1997, $3,108,000 in 1996 and $3,699,000
in 1995.  Capital expenditures for the Management Services to the P&C Group
totaled $41,732,000, $51,605,000 and $55,811,000 in 1997, 1996 and 1995,
respectively, while capital expenditures for the Life Insurance Subsidiaries
were $1,696,000 in 1997, $132,000 in 1996 and $301,000 in 1995.  The Other
industry category includes certain subsidiary companies engaged in real estate
investment and leasing activities.  These companies incurred depreciation
expenses of $18,634,000, $20,202,000 and $17,270,000 in 1997, 1996 and 1995,
respectively.  Capital expenditures within the Other industry category were
$22,802,000 in 1997, $24,074,000 in 1996 and $17,493,000 in 1995.

     Identifiable assets by industry are those assets used in the Company's
operations within each industry.  Corporate assets are principally marketable
securities owned by the Company and its non-life subsidiaries and amounts
invested by the Company in joint ventures.


<PAGE>   57

     Information regarding the Company's operations in different industries 
follows:

<TABLE>
<CAPTION>

                                  Management       Life          Farmers                    Eliminations             
                                 Services to     Insurance     Reinsurance                      and
                                   P&C Group    Subsidiaries     Company         Other       Adjustments    Consolidated
                                 -----------   ------------    ------------  ------------   ------------    ------------
                                                                (Amounts in thousands)

<S>                              <C>            <C>           <C>            <C>            <C>            <C>
Year ended December 31, 1997
  Revenues                       $ 1,241,153   $    684,046   $          0   $     83,742   $          0   $  2,008,941
  Intersegment revenues               20,886              0              0         23,578        (44,464)             0
                                 -----------   ------------   -------------  ------------   -------------  ------------
     Total revenues                1,262,039        684,046              0        107,320        (44,464)     2,008,941
                                 ===========   ============   =============  ============   =============  ============
  Operating profit/(loss)            568,868        219,710            (38)        54,134              0        842,674
                                 ===========   ============   =============  ============   =============
  General corporate expenses                                                                                    (35,098)
  Net investment income                                                                                         102,108
  Net realized gains                                                                                             73,403
  Gain on sale of subsidiaries                                                                                   19,019
                                                                                                           ------------
    Income before provision
      for income taxes                                                                                        1,002,106
                                                                                                           ============
  Identifiable assets            $ 5,080,349   $  5,331,836   $      50,115       127,235    $     (2,069)   10,587,466
                                 ===========   ============   =============   ===========    =============
  Corporate assets                                                                                            1,529,967
                                                                                                           ------------
    Total assets                                                                                           $ 12,117,433
                                                                                                           ============

Year ended December 31, 1996 
  Revenues                       $ 1,167,704   $    767,777   $           0   $     77,671   $          0  $  2,013,152
  Intersegment revenues               20,526              0               0         18,878        (39,404)            0
                                 -----------   ------------   -------------   ------------   ------------  ------------
     Total revenues                1,188,230        767,777               0         96,549        (39,404)    2,013,152
                                 ===========   ============   =============   ============   ============  ============
  Operating profit                   531,503        239,519               0         50,307              0       821,329
                                 ===========   ============   =============   ============   ============
  General corporate expenses                                                                                    (33,975)
  Net investment income                                                                                          70,710
  Net realized gains                                                                                              5,079
                                                                                                           ------------
    Income before provision
      for income taxes                                                                                          863,143
                                                                                                           ============
  Identifiable assets            $ 5,217,924   $  6,484,917   $           0    $   149,182    $    (3,012)   11,849,011
                                 ===========   ============   =============    ===========    ============
  Corporate assets                                                                                            1,079,816
                                                                                                           ------------
    Total assets                                                                                           $ 12,928,827
                                                                                                           ============

Year ended December 31, 1995
  Revenues                       $ 1,109,425   $    709,306   $           0   $    73,673   $          0   $  1,892,404
  Intersegment revenues               21,085              0               0        18,860        (39,945)             0
                                 -----------   ------------   -------------  ------------    ------------  ------------
     Total revenues                1,130,510        709,306               0        92,533        (39,945)     1,892,404
                                 ===========   ============   =============  ============    ============  ============
  Operating profit                   471,098        208,413               0        48,320              0        727,831
                                 ===========   ============   =============  ============    ============
  General corporate expenses                                                                                    (33,442)
  Net investment income                                                                                          67,607
  Net realized gains                                                                                              1,497
                                                                                                           ------------
    Income before provision
      for income taxes                                                                                          763,493
                                                                                                           ============
  Identifiable assets            $ 4,814,316    $ 6,452,211   $           0   $   138,171    $     (5,266)   11,399,432
                                 ===========   ============   =============   ===========    =============
  Corporate assets                                                                                            1,231,212
                                                                                                           ------------
    Total assets                                                                                           $ 12,630,644
                                                                                                           ============
</TABLE>
 
<PAGE>   58



                                              FARMERS GROUP, INC.
                                                AND SUBSIDIARIES
                                            QUARTERLY FINANCIAL DATA
                                                  (Unaudited)

<TABLE>
<CAPTION>

                                                    Three months ended                       Year ended
                                 --------------------------------------------------------   ------------
                                   Mar. 31       June 30        Sept. 30        Dec. 31        Dec. 31
                                 ----------    -----------    -----------    -----------    ------------
                                                         (Amounts in thousands)

<S>                             <C>            <C>            <C>            <C>             <C>

1997
------
Revenues:
    Management services         $   320,852    $   328,686    $   331,569    $   343,788    $  1,324,895
    Life insurance subsidiaries     194,094        166,678        162,453        160,821         684,046
                                -----------    -----------    -----------    -----------    ------------
      Consolidated                  514,946        495,364        494,022        504,609       2,008,941
                                -----------    -----------    -----------    -----------    ------------

Income before provision for
  income taxes:
    Management services             194,635        197,906        190,058        199,797         782,396
    Life insurance subsidiaries      55,283         54,569         56,717         53,141         219,710
                                -----------    -----------    -----------    -----------    ------------
      Consolidated                  249,918        252,475        246,775        252,938       1,002,106
                                -----------    -----------    -----------    -----------    ------------

Provision for income taxes:
    Management services              96,692         79,282         76,861         79,352         332,187
    Life insurance subsidiaries      18,189         18,080         18,808         21,344          76,421
                                -----------    -----------    -----------    -----------    ------------
      Consolidated                  114,881         97,362         95,669        100,696         408,608
                                -----------    -----------    -----------    -----------    ------------
Consolidated net income         $   135,037    $   155,113    $   151,106    $   152,242    $    593,498
                                ===========    ===========    ===========    ===========    ============

1996
------
Revenues:
    Management services         $   306,585    $   311,677    $   317,708    $   309,405    $  1,245,375
    Life insurance subsidiaries     197,500        183,023        199,296        187,958         767,777
                                -----------    -----------    -----------    -----------    ------------
      Consolidated                  504,085        494,700        517,004        497,363       2,013,152
                                -----------    -----------    -----------    -----------    ------------
Income before provision for
  income taxes:
    Management services             146,459        157,956        158,214        160,995         623,624
    Life insurance subsidiaries      68,118         53,073         67,127         51,201         239,519
                                -----------    -----------    -----------    -----------    ------------
      Consolidated                  214,577        211,029        225,341        212,196         863,143
                                -----------    -----------    -----------    -----------    ------------

Provision for income taxes:
    Management services              59,450         63,680         64,278         87,744         275,152
    Life insurance subsidiaries      22,868         17,619         22,476         17,087          80,050
                                -----------    -----------    -----------    -----------    ------------
      Consolidated                   82,318         81,299         86,754        104,831         355,202
                                -----------    -----------    -----------    -----------    ------------
Consolidated net income         $   132,259    $   129,730    $   138,587    $   107,365    $    507,941
                                ===========    ===========    ===========    ===========    ============

</TABLE>


<PAGE>   59

ITEM 9.  Changes in and Disagreements With Accountants on Accounting and 
         Financial Disclosures

     None.


                                 PART III

ITEM 10.  Directors and Executive Officers of Farmers Group, Inc.

                              MANAGEMENT

Executive Officers and Directors

     The following table sets forth certain information concerning each
person who is an executive officer or director of FGI as of the filing 
date:

<TABLE>
<CAPTION>

     Name                       Age                         Position
    ------                     -----                       -----------

<S>                              <C>     <C>

Martin D. Feinstein (1)          49      Chairman of the Board, President and Chief Executive Officer
James A. MacKinnon               62      Executive Vice President - Insurance Operations and Director
Keitha T. Schofield              46      Executive Vice President - Support Services, Chief
                                           Information Officer and Director
Anthony L.R. Clark               53      Senior Vice President and Chief Financial Officer
Gerald E. Faulwell               56      Senior Vice President - Strategic Planning, Budgeting
                                           and Administration
Leonard H. Gelfand               53      Senior Vice President - Commercial 
Paul N. Hopkins                  41      Senior Vice President - Agencies
Jason L. Katz (1)                50      Senior Vice President, General Counsel and Director
John H. Lynch                    46      Senior Vice President - Personal Lines
Paul G. Secord                   51      Senior Vice President - Asset Management
David P. Allvey (2) (3)          53      Director
Edwin A. Heafey, Jr. (3)         67      Director
Benjamin C. Neff (2)             63      Director
Jack C. Parnell (1) (2) (3)      62      Director
Cornelius J. Pings (2) (3)       69      Director
Van Gordon Sauter (3)            62      Director
M. Faye Wilson (2)               60      Director
Clayton Yeutter (2) (3)          67      Director
- -----------------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee

</TABLE>

     The present position and principal occupation during each of the last
five years of the executive officers and directors named above are set forth
below. 

     Martin D. Feinstein has served as Chairman of the Board since November
1997, Chief Executive Officer of FGI since January 1997, President of FGI
since January 1995 and as a director of FGI since February 1995.  Mr.
Feinstein has also served as a director of B.A.T since January 1997.
Previously, Mr. Feinstein held various positions with FGI, including serving
as Vice President-Sales and Marketing from November 1989 to January 1993, as
Senior Vice President-Special Projects from January 1993 to October 1993, as
Senior Vice President-Property and Casualty Staff from October 1993 to January
1995 and as Chief Operating Officer of FGI from January 1995 to January 1997. 


<PAGE>   60


     James A. MacKinnon has served as Executive Vice President-Insurance
Operations since January 1997 and as a director of FGI since May 1997.  Mr.
MacKinnon served as Senior Vice President-Field Operations-Mid-West Zone of
FGI from 1989 to 1995 and Senior Vice President-Personal Lines Operations of
FGI from August 1995 to January 1997. 

     Keitha T. Schofield has served as Executive Vice President-Support
Services and Chief Information Officer since January 1997 and as a director of
FGI since May 1997.  Ms. Schofield served as Senior Vice President and Chief
Information Officer of FGI from May 1995 to January 1997.  Previously, Ms.
Schofield served as Vice President-Technology Division of Continental
Airlines, Inc. from 1988 to May 1995.

     Anthony L.R. Clark has served as Vice President and Chief Financial
Officer of FGI since March 1995 and effective January 1996 was appointed
Senior Vice President.  Previously, Mr. Clark served as Finance Director of
Eagle Star Insurance Co. Ltd., a subsidiary of B.A.T, from January 1991 to
March 1995.  Prior to this he held a number of financial positions with B.A.T
including Group Chief Accountant.

     Gerald E. Faulwell has served as Vice President-Strategic Planning,
Budgeting and Administration of FGI since January 1993 and effective January
1996 was appointed Senior Vice President.  Previously, Mr. Faulwell served as
Vice President-Corporate Investments and Treasurer of FGI from January 1988 to
January 1993.  

     Leonard H. Gelfand has served as Vice President-Commercial of FGI and
President-Truck Underwriters Association since April 1991 and effective
January 1995, was appointed Senior Vice President.  Previously, Mr. Gelfand
served as Vice President, Regional Manager of the Santa Ana Region from 1984
to 1987 and Regional Manager of the Pleasanton Region from 1987 to 1991. 

     Paul N. Hopkins has served as Vice President-Agencies since December 1994
and effective October 1997, was appointed Senior Vice President.  Previously,
Mr. Hopkins served as Assistant Vice President-Regional Operations from 1992
to 1994.

     Jason L. Katz has served as Senior Vice President and General Counsel of
FGI since February 1992 and as a director of FGI since May 1986.  Mr. Katz
served as Vice President and General Counsel from August 1984 through February
1992. 

     John H. Lynch has served as Vice President-Personal Lines Operations
since January 1997 and effective October 1997, was appointed Senior Vice
President.  Previously, Mr. Lynch served as Vice President, Regional Manager  
of the Pleasanton Region from 1993 to 1995 and Regional Manager of the
Colorado Springs Region from 1995 to 1996.

     Paul G. Secord has served as Senior Vice President-Asset Management of
FGI since December 1995.  Previously, Mr. Secord served as Vice
President-Equity of John Hancock Advisors from 1990 to 1993 and Senior Vice
President-Equity of Penn Mutual from 1993 to 1995.  

     David P. Allvey has served as a director of FGI since February 1995.  Mr.
Allvey joined B.A.T as Group Deputy Tax Manager in 1980. His positions have
included Finance Adviser and Manager of Taxation at British-American Tobacco
Co., Head of Finance of B.A.T and Finance Director.  Mr. Allvey was appointed
Finance Director at B.A.T in April 1989. 


<PAGE>   61

     Edwin A. Heafey, Jr. has served as a director of FGI since 1978.  Mr.
Heafey is a practicing attorney and has been a partner of the law firm of
Crosby, Heafey, Roach and May since 1962. 

     Benjamin C. Neff has served as a director of FGI since 1995. Mr. Neff
has served as Chairman of NECO Financial Services, Inc. since May 1995.
During the period from May 1992 through May 1995, Mr. Neff was the Managing
Director of Seabury & Smith, Inc., a wholly owned subsidiary of Marsh &
McClennan, Inc.. Prior to May 1992, Mr. Neff served as the President of Smith
Sternau Insurance Services, Inc., a wholly owned subsidiary of Marsh &
McClennan, Inc.. 

     Jack C. Parnell has served as a director of FGI since 1995. Mr. Parnell
has served as a Governmental Relations Advisor to the law firm of Kahn, Soares
& Conway and the public relations firm of Fleishman, Hilliard since 1991.
Previously, Mr. Parnell served as the Deputy Secretary-United States
Department of Agriculture from 1989 to 1991.  Mr. Parnell also serves on the
Board of Directors of Neogen Corporation, a company engaged in the veterinary
instruments and diagnostics business. 

     Cornelius J. Pings has served as a director of FGI since August 1991. Dr.
Pings has served as the President of the Association of American Universities
since February 1993 and served as the Provost (Senior Vice President for
Academic Affairs) for the University of Southern California from 1981 to 
early 1993.  Dr. Pings also serves on the Board of Directors of Pacific
Horizon Funds, Inc. and until 1992 served on the board of Maxtor, Inc., a
company engaged in the disk drive business. 

     Van Gordon Sauter has served as a director of FGI since May 1996.  Mr.
Sauter is the President and General Manager of PBS affiliate KVIE in
Sacramento, California.  Previously, he served as President of CBS News and
Fox News.

     M. Faye Wilson has served as a director of FGI since May 1996.  Ms.
Wilson has served as Executive Vice President of BankAmerica since 1977.  Ms.
Wilson also serves on the Board of Directors of Home Depot, a company engaged
in the retail hardware and building supplies business.

     Clayton Yeutter has served as a director of FGI since 1994.  Mr. Yeutter
was appointed a non-executive director of B.A.T in January 1993.  Mr. Yeutter
is Of Counsel to the law firm of Hogan and Hartson since February 1993.
During the preceding four years, he served in a series of positions in the
Bush Administration, first as Secretary of Agriculture, then as Chairman of
the Republican National Committee and finally as Counselor to the President
for Domestic Policy. 


<PAGE>   62


ITEM 11.  Executive Compensation

     The following table sets forth the annual compensation for services in 
all capacities to FGI for the fiscal years ended December 31, 1997, 1996 and 
1995 of those persons who were, as of December 31, 1997, (i) FGI's Chief 
Executive Officer and (ii) the other four most highly compensated executive 
officers of FGI (the "Named Executive Officers").

                              SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

                                   Annual Compensation      Long Term Compensation
                                 ------------------------  -------------------------
                                                             Awards       Payouts
                                                           -----------  ------------
                                                           Securities
                                                           Underlying
       Name and                                             Options/    LTIP Payouts       All Other
    Principal Position     Year  Salary ($)  Bonus ($)(1)    SARs (#)      ($)(2)     Compensation ($)(3)
--------------------------  -----  ----------  ------------  -----------  ------------  -------------------
<S>                        <C>     <C>        <C>           <C>           <C>              <C>
Martin D. Feinstein        1997    600,000    615,295            0            0             90,000
  Chairman of the          1996    400,000    279,918            0            0             61,235
  Board, President         1995    300,000    204,920            0            0             46,038
  and Chief Executive
  Officer   

Jason L. Katz              1997    328,800    351,327            0            0             49,320
  Senior Vice President    1996    317,800    222,653            0            0             48,651
  and General Counsel      1995    308,700    196,002            0            0             47,373

James A. MacKinnon         1997    318,300    335,222            0            0             47,745
  Executive Vice           1996    257,300    172,077            0            0             39,390
  President                1995    238,550    137,230            0            0             36,608

Keitha T. Schofield        1997    275,000    275,042            0            0             41,250
  Executive Vice           1996    215,000    151,046            0            0             16,457
  President                1995    129,546     82,300            0            0                  0

Paul G. Secord             1997    241,900    230,601            0            0             36,285
  Senior Vice President    1996    230,267    161,670            0            0                  0
                           1995     13,636        524            0            0                  0
</TABLE>
---------------------
(1)  Bonus amounts reported in the year in which service related to such bonus
     is rendered. Payment does not occur until the year subsequent to the year
     of service. 

(2)  In 1997, Messrs. Feinstein, Katz, MacKinnon, Secord and Ms. Schofield
     received awards of 17,982, 8,200, 8,000, 6,000 and 8,200 Premier Award
     Units ("PAUs"), respectively, under FGI's Premier Award Units Plan.  In
     1995, Messrs. Feinstein, Katz, MacKinnon and Ms. Schofield received
     awards of 7,495, 7,710, 5,805 and 4,995 PAUs.  Mr. Secord received an
     interim award of 5,620 PAUs in 1996.  The value of the PAUs is linked to
     performance goals set by the Compensation Committee based on the
     financial and operating results of the Company and the P&C Group and the
     price of B.A.T ADRs over a four-year period. The value of the PAUs will
     be paid to eligible employees in cash or in B.A.T ADRs if such ADRs are
     eligible for unrestricted issue pursuant to applicable law.  The receipt
     of such amounts may be deferred at the election of participants, subject
     to the approval of the Compensation Committee. In the event of certain
     changes in the capital structure of FGI or other events relating to
     control of FGI, the Compensation Committee has the discretion to pay out
     the value of outstanding PAUs immediately or make other appropriate
     adjustments to the PAUs. 
     
(3)  Represents estimated amounts to be contributed by FGI under the
     Employees' Profit Sharing Savings Plan Trust (the "Deferred Plan") and
     reported in the year of service as earned. To the extent that a
     participant's annual benefits under the Deferred Plan exceed certain
     limits imposed by law, such amounts will be paid under FGI's nonqualified
     Employee Benefits Restoration Plan (the "Benefits Restoration Plan"),
     which is funded through a grantor trust. 


<PAGE>   63

Employees' Pension Plan

     In addition to the compensation set forth above, the Named Executive
Officers participate with all eligible employees of the Company in the
Company's tax-qualified Employees' Pension Plan (the "Pension Plan"). The
Named Executive Officers also participate in the Benefits Restoration Plan,
funded through a grantor trust, which provides supplemental benefits to the
extent amounts otherwise payable under the Pension Plan and the Deferred Plan
are limited under applicable laws. (Together, the Pension Plan and the
Benefits Restoration Plan are referred to as the "Retirement Plans"). 

     Effective May 7, 1997, the Employee Benefits Restoration Plan was amended
to include awards made under the Executive Incentive Plan as compensation in
calculating pension benefits, starting with the 1996 awards paid in 1997.  The
entire benefit derived from inclusion of the Executive Incentive Plan award(s)
will be paid from the Employee Benefits Restoration Plan.  This amendment
impacts certain key officers and includes the Named Executive Officers.  

     The Pension Plan bases retirement benefits upon the employee's final
five-year average annual base salary and the total years of credited service,
subject to a maximum of 35 years of credited service. Employees who are at
least 21 years of age and who have completed one year of service participate
in the Pension Plan retroactive to the first day of the month following their
hire date. Eligible participants become vested and earn a nonforfeitable right
to Pension Plan benefits after completing five years of service or upon
reaching the first day of the month in which they become age 65. In addition,
the Pension Plan provides that if, following a Change in Control of the
Company (as defined in the Pension Plan), the Pension Plan is terminated or
the employment of a participant in the Pension Plan is terminated, and if at
the time of such termination there are surplus assets in the Pension Plan,
such surplus assets shall be used to increase the benefits payable to each
affected plan participant. The Retirement Plans both provide for the full
vesting of accrued benefits in the event of a Change in Control. 

     Normal retirement benefits begin at age 62 with 30 years of service and
at age 65 with less than 30 years of service, but participants may retire as
early as age 55 at actuarially reduced rates, provided that they have at least
15 years of service. Participants who become totally and permanently disabled
may qualify for disability retirement benefits if they have 10 or more years
of service and are between the ages of 35 and 65. 

     For purposes of illustration, the following table provides examples of the
annual pension benefits payable at age 65 pursuant to the defined benefit
portions of the Retirement Plans, assuming benefits are paid in the form of a
straight life annuity. Such benefits are not reduced for Social Security
payments or other offset amounts.


<PAGE>   64


<TABLE>
<CAPTION>

                                          PENSION PLAN TABLE

                                                       Years of Credited Service                     
                                 -----------------------------------------------------------------------
Five-Year Average Remuneration        15            20             25             30              35   
------------------------------   -----------   ------------   ------------   ------------   ------------
<S>                              <C>           <C>            <C>            <C>            <C>       
$  150,000                       $   38,288    $   51,051     $   63,814     $   76,577     $   89,339
   200,000                           51,413        68,551         85,689        102,827        119,965
   250,000                           64,538        86,051        107,564        129,077        150,589
   300,000                           77,663       103,551        129,439        155,327        181,215
   350,000                           90,788       121,051        151,314        181,576        211,839
   400,000                          103,913       138,551        173,189        207,827        242,464
   450,000                          117,038       156,051        195,064        234,077        273,089
   500,000                          130,163       173,551        216,939        260,327        303,715
   600,000                          156,413       208,551        260,689        312,827        364,964
   700,000                          182,663       243,551        304,439        365,327        426,214
   800,000                          208,913       278,551        348,189        417,826        487,464
   900,000                          235,163       313,551        391,939        470,327        548,714
   
</TABLE>

     At the end of 1997, Messrs. Feinstein, Katz, MacKinnon, Secord and Ms.
Schofield were credited under the Pension Plans with 24.0, 13.4, 35.0, 2.0 and
2.6 years of service, respectively.  The average annual salary for the
five-year period ended December 31, 1997 for Messrs. Feinstein, Katz,
MacKinnon, Secord and Ms. Schofield was $402,260, $350,880, $284,210, $311,580
and $289,420, respectively.  These figures include the 1996 Executive
Incentive Plan Awards paid in 1997.

Employment Agreements and Change-in-Control Arrangements

     The Company has entered into employment agreements with each of Messrs.
Feinstein, Katz, MacKinnon, Secord and Ms. Schofield.  Each of the agreements
provide that if the executive's employment is terminated following a
"Change-in-Control" (as defined in the agreement), the executive will receive
a severance payment equal to two (2) times the executive's "Cash
Compensation" (as defined in the agreement, but generally including certain
base salary, bonus and profit sharing plan allocation amounts).  In addition
to the Cash Compensation amount payable, the executive is also entitled to (i)
continued coverage under applicable group welfare benefit plans of the Company
(for example, the Company's life, disability and health insurance plans); (ii)
a benefit under the Company's long-term incentive plan (determined as if the
executive terminated employment due to retirement, and as if any remaining
performance criteria had been waived), and (iii) a lump sum payment of certain
enhanced benefit amounts under the Company's pension plans (including the
supplemental pension plan).  In the cases of Messrs. Feinstein and Katz, the
agreements provide for a tax gross-up payment equal to the amount of any
excise tax payable under Section 4999 of the Internal Revenue Code of 1986,
as amended.  In the case of the other executives, amounts payable under the
agreements will be reduced to the extent necessary to avoid the application of
such excise tax.

     The payments under the agreement will be made if the executive is
employed at the time of the Change-in-Control and his or her termination is
(i) by the Company other than for "Cause" (as defined in the agreement); (ii)
by the executive for "Good Reason" (as defined in the agreement) or
(iii) other than due to the executive's death, disability or retirement. 

     The agreements are effective until December 31, 1999.  In the event of a
"Potential Change-in-Control" (as defined in the agreement), however, the term
of the agreements will be extended for a period of two (2) years following
the Potential-Change-in-Control (unless the 

<PAGE>   65

Potential-Change-in-Control is abandoned prior to a Change-in-Control).
In the event of a Change-in-Control, the agreements will be extended for a
period of two (2) years following the date of the Change-in-Control.  In
all cases, however, the agreements will expire upon the death, retirement or
disability termination of the executive.


Compensation of Directors

     Directors who are not employees of FGI or B.A.T receive an annual
retainer of $21,000, together with $1,000 plus expenses for each FGI Board of
Directors (the "Board") meeting attended in 1997. Additionally, committee
members of the Board receive $950 plus expenses for each committee meeting
attended and Committee Chairs receive $1,100 plus expenses for each committee
meeting attended.  Directors who are employees of FGI or of B.A.T do not
receive the retainer fees, Board meeting fees or committee fees referred to
above.  Total payments, excluding reimbursement of expenses, to Messrs.
Heafey, Neff, Parnell, Pings, Sauter, Yeutter and Ms. Wilson amounted to
$29,400, $28,800, $32,600, $33,200, $28,800, $26,800 and $27,850, respectively,
in 1997 for services rendered in that year. 

     FGI has established an Outside Directors' Retirement Benefit Program.  Any
director who is not an employee of FGI or of B.A.T who has attained age 70 at
the time such director retires from service as a member of the Board and has
either accrued 10 or more calendar years of service as a Board member or who
was a Board member as of August 7, 1987, the inception date of this Program, is
entitled to an annual benefit commencing in May of the calendar year following
the director's retirement from the Board. Such annual benefit is equal to 100%
of the annual retainer fee in effect during the last year the director served
on the Board. Benefit payments are made for five or more years, depending on
the director's length of service on the Board. Based on their tenure as Board
members, Mr. Heafey has accrued benefits of seven annual payments, and Messrs.
Neff, Parnell, Pings, Sauter, Yeutter and Ms. Wilson have accrued no benefits
under this Program. Benefits for this Program were funded through a grantor
trust through 1995.  Effective January 1, 1996, retirement payments to
directors retiring after January 1, 1996 will be paid directly by FGI.
Payments under this Program to former Board members amounted to $51,000 in
1997.


Compensation Committee Interlocks and Insider Participation

     During 1997, FGI's Compensation Committee (the "Committee") consisted of
Mr. Heafey, who is Chairman, and Messrs. Allvey, Parnell, Pings, Sauter and
Yeutter.  None of these individuals is now or has ever been an officer or
employee of the Company.

     The Committee receives compensation recommendations from the Chief
Executive Officer and amends or revises them as appropriate.  The Committee
then submits a recommendation regarding executive compensation to the Board.
Compensation levels for Mr. Feinstein are approved by the Board of B.A.T
following recommendations of that Board's Compensation Committee, whose
composition consists of no members who are employees or executive officers
of FGI.  The compensation levels of certain senior officers are also reviewed
by the Chief Executive's Committee of B.A.T. 

     The law firm of Crosby, Heafey, Roach and May received fees of $5,177,000
for legal services rendered to the Company or the Exchanges in 1997.  Mr.
Heafey is a partner in such firm and has been a director of FGI since 1978.
In addition, the law firm of Hogan and Hartson, LLP, received fees of $31,000
for legal services rendered to the Company or the Exchanges in 1997.  Mr.
Yeutter is a partner in such firm and has been a director of FGI since 1994.


<PAGE>   66


ITEM 12.  Security Ownership of Certain Beneficial Owners and Management

     All of the outstanding voting securities of FGI are owned beneficially 
and of record by South Western Nominees Limited, Windsor House, 50 Victoria 
Street, London, England SW1H ONL.  South Western Nominees Limited is a wholly 
owned subsidiary of B.A.T. 

     The following table sets forth information regarding beneficial 
ownership of B.A.T ADRs and ordinary shares as of December 31, 1997 by 
(a) the Chief Executive Officer of FGI, (b) each of the four most highly 
compensated executive officers of FGI other than the Chief Executive Officer 
and (c) all directors and executive officers of FGI, as a group.

<TABLE>
<CAPTION>

                                                           B.A.T ADRs         B.A.T Ordinary Shares
                                                       Beneficially Owned      Beneficially Owned
                                                       ------------------   ----------------------
Name                                                    Number    Percent      Number      Percent
- ----------                                           --------- --------   ----------   ---------
<S>                                                      <C>       <C>       <C>           <C>
Martin D. Feinstein                                          0              191,147 (1)      (2)
Jason L. Katz                                                0                    0
James A. MacKinnon                                           0                    0
Keitha T. Schofield                                          0                    0
Paul G. Secord                                               0                    0
All Directors and Executive Officers as a group          2,420      (3)     589,933          (2)

</TABLE>
______________

(1)  Includes 173,770 options under the B.A.T Stock Plan "E" that become
     vested and exercisable on June 11, 2000 that were granted to
     Mr. Feinstein as a director of B.A.T.

(2)  Less than 1% of the outstanding B.A.T ordinary shares. 

(3)  Less than 1% of the outstanding B.A.T ADRs.

 
ITEM 13.  Certain Relationships and Related Transactions

     Certain directors of the Company were partners in legal firms which
received fees for legal services from the Company and the Exchanges.
These fees totaled $5,208,000, $1,853,000 and $2,231,000 in 1997, 1996 and
1995, respectively.  

     As of December 31, 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:
$137,000,000 in October 1998, $135,000,000 in October 1999 and $135,000,000 in
October 2000.  Interest on these notes is paid semi-annually at coupon rates
of 5.35%, 6.68% and 6.33%, respectively.  On October 7, 1997, a four year
$135,000,000 note with an interest rate of 5.10% matured and the $135,000,000
note maturing in October 2000 was subsequently issued at an interest rate of
6.33%.  Income earned on the notes outstanding during 1997, 1996 and 1995 was
$23,620,000, $21,245,000, and $20,697,000, 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%.


<PAGE>   67

                                  PART IV

ITEM 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)  Exhibits and Financial Statement Schedules

  (1)  Exhibits
	
       3.1   Restated Articles of Incorporation of FGI, as amended 
             May 23, 1977, as further amended September 24, 1984, as further 
             amended May 19, 1986 (i), as further amended February 3, 1989 (ii)
       3.2   Bylaws of FGI (i)
       3.3   Form of Certificate of Trust of the Issuer (ii)
       3.4   Trust Agreement (ii)
       4.1   Form of Amended and Restated Trust Agreement (ii)
       4.2   Form of Indenture among FGI and The Chase Manhattan Bank, N.A., 
             as Debenture Trustee (ii)
       4.3   Form of Preferred Security (included in Exhibit 4.1) (ii)
       4.4   Form of Junior Subordinated Debentures (included in 
             Exhibit 4.2) (ii)
       4.5   Form of Guarantee by FGI and The Chase Manhattan Bank, 
             N.A., as Guarantee Trustee (ii)
      10.1   Form of Subscription Agreement (Farmers Underwriters 
             Association) (ii)
      10.2   Form of Subscription Agreement (Truck Underwriters 
             Association) (ii)
      10.3   Form of Subscription Agreement (Fire Underwriters 
             Association) (ii)
      10.4   The Farmers Group, Inc. 1993 Premier Award Unit Plan, as amended 
             November 4, 1993 (ii), as amended February 14, 1996 (iii), as
             further amended November 10, 1997
      10.5   Farmers Group, Inc. Executive Incentive Program (ii), as amended
             May 7, 1997 and August 13, 1997 
      10.6   Description of Farmers Group, Inc. Outside Directors' Retirement 
             Program (ii)
      10.7   The Farmers Group, Inc. Discretionary Management Incentive 
             Program for Exceptional Performance (ii), as amended December 
             1996 (iv)
      10.8   Farmers Group, Inc. Employee Benefits Restoration Plan (ii), as
             amended May 7, 1997
      10.9   Description of Phantom B.A.T ADR Stock Option Plan (ii)
      10.10  Form of Employment Agreement with certain officers        
      12     Statement of Computation of the Ratio of Earnings to Fixed Charges
      21     Subsidiaries of FGI
      24     Power of Attorney (ii)

--------------------
(i)   Incorporated by reference to the corresponding Exhibit to FGI's Annual 
      Report on Form 10-K for the year ended December 31, 1987.

(ii)  Incorporated by reference to the corresponding Exhibit to FGI's 
      Registration Statement No. 33-94670 and No. 33-94670-01 on Form S-1.

(iii) Incorporated by reference to the corresponding Exhibit to FGI's Annual 
      Report on Form 10-K for the year ended December 31, 1995.

(iv)  Incorporated by reference to the corresponding Exhibit to FGI's Annual
      Report on Form 10-K for the year ended December 31, 1996.



<PAGE>   68

  (2)  Financial Statement Schedules
                                                                         Page
                                                                        ------
     a.  Financial Statements.  See Index to Financial Statements and 
         Supplementary Data for a list of financial statements 
         included in this Report.                                          23

     b.  Financial Statement Schedules
           Schedule I - Marketable Securities - Other Investments, as
             of December 31, 1997                                         S-1
           Schedule III - Supplementary Insurance Information, for the
             years ended December 31, 1997, 1996 and 1995                 S-2
           Schedule IV - Reinsurance, for the years ended 
             December 31, 1997, 1996 and 1995                             S-3
           Schedule V - Valuation and Qualifying Accounts for the
             years ended December 31, 1997, 1996, and 1995                S-4



(b)  Reports on Form 8-K

     The Company did not file any Reports on Form 8-K during the year ended 
December 31, 1997.


<PAGE>   69

                                        SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities 
Exchange Act of 1934, the Registrant has duly caused this report to be signed 
on its behalf by the undersigned, thereunto duly authorized, in the City of 
Los Angeles, State of California on March 26, 1998.




                                     FARMERS GROUP, INC.
                       ---------------------------------------------
                                       (Registrant)

Date: March 26, 1998   By:    /s/ Martin D. Feinstein              
                       ---------------------------------------------
                       Martin D. Feinstein, Chairman of the Board,
                       President and Chief Executive Officer


     Pursuant to the requirements of the Securities Exchange Act of 1934, 
this report has been signed below by the following persons on behalf of 
the Registrant and in the capacities and on the dates indicated.

        Signature                       Title                      Date
        ---------                       -----                      ----

Principal Executive Officer
/s/ Martin D. Feinstein         Chairman of the Board,        March 26, 1998
--------------------------------President and Chief                    
(Martin D. Feinstein)           Executive Officer



Principal Financial and            
  Accounting Officer
/s/ Anthony L.R. Clark          Senior Vice President and     March 26, 1998
--------------------------------Chief Financial Officer
(Anthony L.R. Clark)                                   

Directors
/s/ James A. MacKinnon          Executive Vice President      March 26, 1998
--------------------------------and Director
(James A. MacKinnon)                                       

/s/ Keitha T. Schofield         Executive Vice President      March 26, 1998
--------------------------------and Director
(Keitha T. Schofield)                                       

/s/ Jason L. Katz               Senior Vice President,        March 26, 1998
--------------------------------General Counsel and Director
(Jason L. Katz)         

/s/ David P. Allvey             Director                      March 26, 1998
--------------------------------
(David P. Allvey)   

/s/ Edwin A. Heafey, Jr.        Director                      March 26, 1998
--------------------------------
(Edwin A. Heafey, Jr.)

/s/ Benjamin C. Neff            Director                      March 26, 1998
--------------------------------
(Benjamin C. Neff)  

/s/ Jack C. Parnell             Director                      March 26, 1998
--------------------------------
(Jack C. Parnell)   

/s/ Cornelius J. Pings          Director                      March 26, 1998
--------------------------------
(Cornelius J. Pings)

/s/ Van Gordon Sauter           Director                      March 26, 1998
--------------------------------
(Van Gordon Sauter)

/s/ M. Faye Wilson              Director                      March 26, 1998
--------------------------------
(M. Faye Wilson)       

/s/ Clayton Yeutter             Director                      March 26, 1998
--------------------------------
(Clayton Yeutter)






<PAGE>   S-1

                                 FARMERS GROUP, INC.
                                  AND SUBSIDIARIES
                SCHEDULE I - MARKETABLE SECURITIES - OTHER INVESTMENTS
                                  December 31, 1997


<TABLE>
<CAPTION>
                                                                       Market value      Amount at which
                                                                        at balance         shown in the
Type of Investment                                      Cost            sheet date         balance sheet
- ------------------                                   -----------       -------------     ---------------
                                                                 (Amounts in thousands)          
<S>                                                 <C>               <C>                <C>       
FNWL:             
  Marketable securities - available-for-sale:
    United States government and its agencies        $  2,049,217      $   2,124,154     $     2,124,154
    States and municipalities                             270,502            283,790             283,790
    Public utilities                                       53,766             56,830              56,830
    Foreign government                                    136,127            146,700             146,700
    All other corporate                                   789,072            832,859             832,859
    Preferred stocks (redeemable)                         109,742            110,815             110,815
                                                     ------------      -------------     ---------------
                                                        3,408,426          3,555,148           3,555,148
                                                     ------------      -------------     ---------------

  Preferred stocks (non-redeemable)                         1,153              1,227               1,227
                                                     ------------      -------------     ---------------
  Common stocks:
    Public utilities                                            0                  0                   0
    Banks, trusts and insurance companies                       0                  0                   0
    Industrial, miscellaneous and all other                     0                120                 120
                                                     ------------      -------------     ---------------
                                                                0                120                 120
                                                     ------------      -------------     ---------------

  Mortgage loans on real estate                            89,903         xxxxx                   89,903
                                                     ------------      -------------     ---------------
  Policy loans                                            165,894         xxxxx                  165,894
                                                     ------------      -------------     ---------------
  Real estate (1)                                          69,265 (1)     xxxxx                   69,265
                                                     ------------      -------------     ---------------
  Joint ventures                                            9,515         xxxxx                    9,515
                                                     ------------      -------------     ---------------
  Other investments                                         3,450              3,299               3,299
                                                     ------------      -------------     ---------------

    Total investments                                $  3,747,606      $  xxxxx          $     3,894,371
                                                     ============      =============     ===============

---------------------
(1) Net of accumulated depreciation of $19,306




</TABLE>


<PAGE>   S-2

                                    FARMERS GROUP, INC.
                                     AND SUBSIDIARIES
                     SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
                   For the years ended December 31, 1997, 1996, and 1995

<TABLE>
<CAPTION>


Column A             Column B      Column C      Column D    Column E     Column F    Column G
--------             --------      --------      --------    --------     --------    -------- 

                                 Future policy
                     Deferred      benefits,               Other policy   Premium
                      policy     losses, claims             claims and   and policy     Net
                    acquisition     and loss     Unearned    benefits      charge    investment
Life insurance       costs (1)      expenses     premiums    payable      revenues     income
--------------      -----------  --------------  --------   ----------   ---------   ----------
                                             (Amounts in thousands)
<S>                 <C>           <C>            <C>        <C>          <C>         <C>
December 31, 1997   $   798,725   $   3,032,318  $  1,543   $   58,529   $ 377,667   $  293,143
                    ===========   =============  ========   ==========   =========   ==========

December 31, 1996     1,001,044       3,507,594     1,663       82,511     412,158      317,630
                    ===========   =============  ========   ==========   =========   ==========   

December 31, 1995                                                          379,436      298,251
                                                                         =========   ==========    



Column A             Column H      Column I      Column J
----------             --------      --------      --------

                     Benefits,    Amortization
                      claims,     of deferred
                    losses and       policy        Other
                    settlement    acquisition    operating
Life insurance       expenses      costs (1)     expenses
--------------      ----------    -----------    ---------

<S>                 <C>           <C>            <C>
December 31, 1997   $  139,124    $  103,975     $  65,936
                    ==========    ==========     =========   
                    
December 31, 1996      166,199       108,802        84,345 
                    ==========    ==========     =========

December 31, 1995      162,098       103,201        81,015
                    ==========    ==========     =========   

-------------------
(1) Includes value of life business acquired

</TABLE>


<PAGE>   S-3

                                    FARMERS GROUP, INC.
                                     AND SUBSIDIARIES
                                SCHEDULE IV - REINSURANCE
                  For the years ended December 31, 1997, 1996, and 1995


<TABLE>
<CAPTION>

Column A                             Column B             Column C            Column D         
--------                             --------             --------            --------
                   
                                                          Ceded to             Assumed
                                      Gross                 other             from other
                                      amount              companies           companies  
                                 ----------------     ----------------    ----------------
                                                   (Amounts in thousands)
 
<S>                              <C>                  <C>                 <C>    
  1997
----------
Life insurance in-force          $     89,613,224     $      1,209,978    $      8,428,465          
                                 ----------------     ----------------    ----------------
Premiums & policy charges                 371,606                4,236              10,297 
                                 ----------------     ----------------    ----------------

  1996
----------
Life insurance in-force          $    100,529,124     $        847,883    $     10,568,578
                                 ----------------     ----------------    ----------------
Premiums & policy charges                 405,654                3,868              10,372
                                 ----------------     ----------------    ----------------

  1995
----------
Life insurance in-force          $     93,142,714     $        629,649    $      9,130,641
                                 ----------------     ----------------    ----------------
Premiums & policy charges                 373,688                3,577               9,325
                                 ----------------     ----------------    ----------------



Column A                             Column E          Column F
--------                             --------          --------  
                                                      Percentage
                                                       of amount
                                        Net             assumed   
                                      Amount             to net
                                 ----------------     -----------

<S>                              <C>                     <C>
  1997                                               
----------
Life insurance in-force          $     96,831,711         8.7 %
                                 ----------------     -----------  
Premiums & policy charges                 377,667         2.7
                                 ----------------     -----------

  1996
----------
Life insurance in-force          $    110,249,819         9.6 %
                                 ----------------     -----------
Premiums & policy charges                 412,158         2.5
                                 ----------------     -----------

  1995
----------
Life insurance in-force          $    101,643,706         9.0 %
                                 ----------------     -----------
Premiums & policy charges                 379,436         2.5
                                 ----------------     -----------

</TABLE> 


<PAGE>   S-4

                           FARMERS GROUP, INC.
                            AND SUBSIDIARIES
               SCHEDULE V - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                               Balance at        Balance at
                                                beginning          end of
                                                 of year            year
                                              ------------      ------------ 
                                                  (Amounts in thousands)
<S>                                           <C>               <C>       
   YEAR
------------

   1997                                       $   18,960        $   15,118
   1996                                           14,164            18,960
   1995                                           12,916            14,164


</TABLE>