1
<PAGE>

<TABLE>
<CAPTION>



                                   EXHIBIT 13
   SELECTED FINANCIAL DATA
-------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------
In millions For the Years Ended December 31,       1997         1996          1995          1994         1993
-------------------------------------------------------------------------------------------------------------------



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

   STATEMENT OF OPERATIONS DATA
   Premiums:
      Workers compensation                          $140.6       $129.5        $176.7       $240.2       $280.0
      Other insurance                                 24.3         32.2         31.4          39.5         35.4
-------------------------------------------------------------------------------------------------------------------
                                                     164.9        161.7        208.1         279.7        315.4
   Net investment income                              87.2         89.5        102.0         110.7        118.1
   Gains on sales of investments                       4.5         21.6          3.1           3.8          5.4
-------------------------------------------------------------------------------------------------------------------
   Total revenue                                    $256.6       $272.8        $313.2       $394.2        $438.9
===================================================================================================================

   Underwriting gain (loss) before income taxes:
      Workers compensation                          $(24.0)       $(7.5)       $(0.2)         $3.9       $(10.7)
      Other continuing lines                          (8.8)      (125.2)       (35.2)        (24.4)       (19.8)
      Run off lines                                    2.4       (127.4)        -             12.0         24.9
-------------------------------------------------------------------------------------------------------------------
                                                    $(30.4)     $(260.1)      $(35.4)        $(8.5)       $(5.6)
===================================================================================================================

   Income (loss) before income taxes                 $61.3      $(149.0)      $ 69.7        $106.0       $117.9
   Provision for income taxes                         12.8        (55.0)        12.8          29.3         28.8
-------------------------------------------------------------------------------------------------------------------
   Net income (loss)                                 $48.5       $(94.0)      $ 56.9         $76.7        $89.1
===================================================================================================================

   Income (loss) per common share:
      Basic                                          $2.04       $(3.92)       $2.34         $3.00        $3.48
===================================================================================================================

      Diluted                                        $2.02       $(3.92)       $2.32         $2.97        $3.44
===================================================================================================================


   BALANCE SHEET DATA
   Portfolio investments                             $1,369.1     $1,395.5     $1,489.2      $1,484.8     $1,564.4
===================================================================================================================
   Total assets                                      $1,860.5     $1,944.4     $1,977.5      $2,058.8     $2,182.7
===================================================================================================================

   Reserves for losses and loss
      adjustment expenses                            $1,024.9     $1,158.8     $1,026.1      $1,161.5     $1,284.1
===================================================================================================================

   Shareholders' equity                              $717.9       $665.3       $810.8        $745.6       $729.6
===================================================================================================================

   Cash dividends declared per
      common share                                   $1.60        $1.44        $1.28        $1.12         $0.96
===================================================================================================================

</TABLE>

   The accompanying notes are an integral part of these statements.







                                                       13-1


                                       2
<PAGE>


                                                                     EXHIBIT 13



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Shareholders of Argonaut Group, Inc.

We have audited the accompanying  consolidated balance sheets of Argonaut Group,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996,
and the related  consolidated  statements of income,  shareholders'  equity, and
cash flows for each of the three years in the period  ended  December  31, 1997.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.
    We conducted  our audits in  accordance  with  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,  the financial  statements referred to above present fairly,
in all material respects, the consolidated financial position of Argonaut Group,
Inc. and  subsidiaries  as of December 31, 1997 and 1996,  and their  results of
operations  and cash  flows  for each of the  three  years in the  period  ended
December 31, 1997, in conformity with generally accepted accounting principles.


ARTHUR ANDERSEN LLP

San Francisco, California
January 7, 1998








                                                       13-2



                                       3
<PAGE>


                                                                     EXHIBIT 13
<TABLE>
<CAPTION>



   CONSOLIDATED BALANCE SHEETS
-------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------


   In millions except per share amounts      December 31,                               1997         1996
-------------------------------------------------------------------------------------------------------------------

<S>                                                                                     <C>          <C> 

   ASSETS
   Investments:
      Fixed maturities, available for sale, at fair value                                 $  857.6     $  945.3
         (cost: 1997-$845.8; 1996-$938.5)
      Equity securities, available for sale, at fair value                                   440.1        442.9
         (cost: 1997-$227.4; 1996-$288.1)
      Short-term investments, available for sale, at fair value                               80.9          6.1
      Securities in transit                                                                   (9.5)         1.2
-------------------------------------------------------------------------------------------------------------------
                                                                                           1,369.1      1,395.5
   Cash and cash equivalents                                                                  59.0         30.6
   Accrued investment income                                                                  20.3         22.4
   Receivables:
      Reinsurance                                                                            210.2        234.6
      Agents' balances                                                                        74.2         76.5
      Accrued retrospective premiums                                                          61.8         80.6
   Cost in excess of net assets purchased                                                     38.3         41.1
   Unearned premiums on ceded reinsurance                                                      0.8          1.0
   Deferred federal income taxes receivable                                                   11.5         46.8
   Other assets                                                                               15.3         15.3
-------------------------------------------------------------------------------------------------------------------
                                                                                          $1,860.5     $1,944.4
===================================================================================================================


   LIABILITIES AND SHAREHOLDERS' EQUITY
   Reserves for losses and loss adjustment expenses                                       $1,024.9     $1,158.8
   Unearned premiums                                                                          40.2         65.3
   Accrued policyholder dividends                                                             (2.4)         1.3
   Other liabilities                                                                          79.9         53.6
-------------------------------------------------------------------------------------------------------------------
                                                                                           1,142.6      1,279.1
===================================================================================================================

   Shareholders' equity:
      Common stock - $.10 par,  35,000,000  shares  authorized,  23,854,720  and
         23,788,285 shares issued and outstanding
         at December 31, 1997 and December 31, 1996, respectively                              2.4          2.4
      Additional paid-in capital                                                              98.3         97.1
      Retained earnings                                                                      471.2        460.9
      Net unrealized appreciation on securities                                              146.0        104.9
-------------------------------------------------------------------------------------------------------------------
                                                                                             717.9        665.3
-------------------------------------------------------------------------------------------------------------------
                                                                                          $1,860.5     $1,944.4
===================================================================================================================

</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                                       13-3



                                       4
<PAGE>


                                                                     EXHIBIT 13



<TABLE>
<CAPTION>


   CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------

   In millions except per share amounts    For the Years Ended December 31,  1997         1996         1995
-------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>          <C>          <C>    


   Premiums and other revenue:
      Premiums, net                                                           $164.9       $ 161.7       $208.1
      Net investment income                                                     87.2          89.5        102.0
      Gains on sales of investments                                              4.5          21.6          3.1
-------------------------------------------------------------------------------------------------------------------
   Total revenue                                                               256.6         272.8        313.2
-------------------------------------------------------------------------------------------------------------------
   Expenses:
      Losses and loss adjustment expenses                                      112.8         346.2        152.8
      Underwriting, acquisition, and
         insurance expenses                                                     80.6          64.1         67.3
      Amortization of cost in excess of
         net assets purchased                                                    2.8           2.8          2.8
      Policyholder dividends                                                    (0.9)          8.7         20.6
-------------------------------------------------------------------------------------------------------------------
   Total expenses                                                              195.3         421.8        243.5
-------------------------------------------------------------------------------------------------------------------
   Income (loss) before income taxes                                            61.3        (149.0)        69.7
   Provision for income taxes                                                   12.8         (55.0)        12.8
-------------------------------------------------------------------------------------------------------------------
   Net income (loss)                                                         $  48.5      $  (94.0)      $  56.9
===================================================================================================================
   Income (loss) per common share:
      Basic                                                                  $  2.04      $  (3.92)      $  2.34
===================================================================================================================

      Diluted                                                                $  2.02      $  (3.92)      $  2.32
===================================================================================================================
</TABLE>


   The accompanying notes are an integral part of these statements.


                                                       13-4



                                       5
<PAGE>


                                                                     EXHIBIT 13



<TABLE>
<CAPTION>



   COSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY




   In millions except per share amounts       Common        Additional     Retained      Net            Shareholders'
                                               Stock        Paid-In        Earnings      Unrealized     Equity
                                                            Capital                      Appreciation
   on Securities
-------------------------------------------------------------------------------------------------------------------

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

   Balance, December 31, 1994                  $ 2.5         $100.6         $595.5       $  47.0         $745.6

      Net income                                                              56.9                         56.9
      Change in net unrealized
         appreciation on securities                                                         64.8           64.8
      Retirement of common stock                (0.1)          (3.4)         (22.4)                       (25.9)
      Cash dividends ($1.28 per share)                                       (31.1)                       (31.1)
      Stock options exercised                                   0.5                                         0.5
-------------------------------------------------------------------------------------------------------------------
   Balance, December 31, 1995                    2.4           97.7          598.9         111.8          810.8

      Net loss                                                               (94.0)                       (94.0)
      Change in net unrealized
         appreciation on securities                                                         (6.9)          (6.9)
      Retirement of common stock                               (1.4)          (9.4)                       (10.8)
      Cash dividends ($1.44 per share)                                       (34.6)                       (34.6)
      Stock options exercised                                   0.8                                         0.8
-------------------------------------------------------------------------------------------------------------------
   Balance, December 31, 1996                    2.4           97.1          460.9         104.9          665.3

      Net income                                                              48.5                         48.5

      Change in net unrealized
         appreciation on securities                                                         41.1           41.1
      Cash dividends ($1.60 per share)                                       (38.2)                       (38.2)
      Stock options exercised                                   1.2                                         1.2
-------------------------------------------------------------------------------------------------------------------
   Balance, December 31, 1997                  $ 2.4          $98.3         $471.2        $146.0         $717.9
===================================================================================================================

</TABLE>

   The accompanying notes are an integral part of these statements.



                                                       13-5

                                       6
<PAGE>


                                                                      EXHIBIT 13
<TABLE>
<CAPTION>





   CONSOLIDATED STATEMENTS OF CASH FLOW
-------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------


   In millions                        For the Years Ended December 31,      1997          1996         1995
-------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>           <C>          <C>    

   Cash flows from operating activities:
      Net income (loss)                                                     $   48.5      $  (94.0)     $  56.9
      Adjustments to reconcile net income (loss) to
         net cash used by operations:
         Amortization and depreciation                                          12.1          12.1         11.9
         Decrease in accrued investment income                                   2.1           1.5          5.7
         Decrease (increase) in reinsurance receivables                         24.4         (36.0)        36.8
         Decrease (increase) in agents' balances                                 2.3          (2.5)         1.1
         Decrease (increase) in accrued retrospective premiums                  18.8          11.9        (17.3)
         Decrease in unearned premiums on ceded reinsurance                      0.2           1.6          0.8
         Decrease (increase) in deferred federal income taxes receivable        13.4         (27.6)         6.7
         Increase (decrease) in reserves for losses and loss adjustment 
          expenses                                                            (134.0)        132.8       (135.4)
         Increase (decrease) in unearned premiums                              (25.1)          1.3         (9.5)
         Increase (decrease) in accrued policyholder dividends                  (3.7)          6.2         (5.2)
         Increase (decrease) in income taxes payable                            38.6         (36.8)         1.3
         Increase (decrease) in other assets and liabilities                   (15.0)          4.4         (1.2)
-------------------------------------------------------------------------------------------------------------------
                                                                               (17.4)        (25.1)       (47.4)
-------------------------------------------------------------------------------------------------------------------
   Cash flows from investing activities:
      Sales of fixed maturity investments                                       13.0          35.7        224.2
      Maturities and mandatory calls of fixed maturity investments             392.0         165.1         28.6
      Sales of equity securities                                                76.0          28.5          4.6
      Purchases of fixed maturity investments                                 (319.2)       (112.6)        (2.2)
      Purchases of equity securities                                           (15.0)        (64.4)      (155.4)
      Decrease (increase) in short-term investments                            (74.8)         28.8          0.3
      Other, net                                                                10.7          (4.1)        (2.1)
-------------------------------------------------------------------------------------------------------------------
                                                                                82.7          77.0         98.0
-------------------------------------------------------------------------------------------------------------------
   Cash flows from financing activities:
      Repurchase of common stock                                                 -           (10.8)       (25.9)
      Payment of cash dividend                                                 (38.1)        (34.6)       (31.1)
      Exercise of stock options                                                  1.2           0.8          0.5
-------------------------------------------------------------------------------------------------------------------
                                                                               (36.9)        (44.6)       (56.5)
-------------------------------------------------------------------------------------------------------------------
   Increase (decrease) in cash and cash equivalents                             28.4           7.3         (5.9)
   Cash and cash equivalents, beginning of period                               30.6          23.3         29.2
-------------------------------------------------------------------------------------------------------------------
   Cash and cash equivalents, end of period                                 $   59.0      $   30.6      $  23.3
===================================================================================================================

   Additional disclosure:
      Income taxes paid                                                    $     0.0      $     9.2      $  3.1
===================================================================================================================

</TABLE>

   The accompanying notes are an integral part of these statements.




                                                       13-6


                                       7
<PAGE>


                                                                      EXHIBIT 13

NOTE 1.  BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES


BUSINESS  Argonaut  Group,  Inc.  (the  Company)  is  a  holding  company  whose
subsidiaries are primarily engaged in the selling,  underwriting,  and servicing
of workers compensation and other lines of property-casualty  insurance. Workers
compensation  is the primary  line of  insurance  written by Argonaut  Insurance
Company,  the larger  insurance  subsidiary.  The Company  also writes a limited
amount of complementary  lines of commercial  insurance,  primarily  general and
automobile  liability.  Argonaut  Insurance's  target market is companies  whose
workers compensation needs will result in significant annual premiums (generally
between  $250,000 and $5 million) in classes of insurance which require specific
expertise to  underwrite  prudently,  enhance the safety of the  workplace,  and
effectively  manage losses through  partnership with the insured.  These classes
include contractors, wholesalers, retailers, light manufacturers and "high tech"
firms, service firms (such as in the hospitality industry),  and clients who use
self-insurance to meet some or all of their insurance needs.
   Argonaut  Great Central  specializes  in commercial  multiple-peril,  workers
compensation,   and  umbrella   coverages   specifically   for  food  merchants,
restaurants,  churches,  and  laundry/dry  cleaners.  They also provide  workers
compensation for mid-sized accounts,  generally with annual premiums of $100,000
to $300,000.

BASIS OF PRESENTATION The consolidated  financial  statements of Argonaut Group,
Inc. and subsidiaries  have been prepared in accordance with generally  accepted
accounting  principles (GAAP),  which differ from statutory insurance accounting
practices.  The preparation of financial statements in conformity with generally
accepted  accounting  principles  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  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.
   The  financial  statements  include the accounts and  operations  of Argonaut
Group,  Inc.  and its  subsidiaries.  All  material  intercompany  accounts  and
transactions  have  been  eliminated.  Certain  prior  year  balances  have been
restated to reflect current year classifications.
   For purposes of reporting cash flows, cash and cash equivalents  include cash
on hand and securities with an original maturity of less than ninety days.

INVESTMENTS  Investments  in fixed  maturities  at  December  31,  1997 and 1996
include bonds, notes, and redeemable preferred stocks. Equity securities include
common and nonredeemable  preferred stocks.  Short-term  investments  consist of
funds which are in excess of the Company's near-term operating and claims-paying
needs and are invested in repurchase  agreements,  commercial  paper,  and money
market funds.
   All  investments  are  considered  available for sale and are carried at fair
value.  Fair values for fixed  maturity  investments  and equity  securities are
based on quoted  market  prices or dealer  quotes.  Unrealized  appreciation  or
depreciation on fixed maturity  investments  and equity  securities is included,
net of applicable  deferred income taxes,  in  shareholders'  equity.  Gains and
losses on sales of  investments  are  computed  on the  specific  identification
method and are reflected in total revenue.

RECEIVABLES  Agents'  balances are presented net of a reserve for  uncollectible
accounts of $1.4 million at December 31, 1997 and 1996.
   Accrued retrospective premiums are based upon actuarial estimates of expected
ultimate  losses.  Management  believes that the accrued  retrospective  premium
receivable  is  reasonable.  While the eventual  receivable  may differ from the
current  estimates,  management does not believe that the difference will have a
material  effect,  either  adversely or favorably,  on the  Company's  financial
position and results of operations.

COST IN EXCESS OF NET ASSETS PURCHASED Cost in excess of net assets purchased of
$38.3  million at December  31, 1997 and $41.1  million at  December  31,  1996,
relate to Teledyne,  Inc.'s  acquisition of Argonaut  Insurance Company in 1969,
and is net of  accumulated  amortization  of $31.3  million  and $28.6  million,
respectively.  Cost in excess of net assets  purchased  is being  amortized on a
straight-line  basis over a 25-year  period  beginning  October 1, 1986. At each
balance  sheet date,  the Company  evaluates the  recoverability  of its cost in
excess of net assets  purchased in relation to anticipated  future cash flows on
an undiscounted basis. If the carrying value of the cost in excess of net assets
purchased exceeds anticipated future cash flows on an undiscounted basis,

then the cost in excess of net assets  purchased  is deemed to be  impaired  and
written down to the value of the  anticipated  future cash flows.  Based on this
annual  assessment,  the  Company  expects  its  cost in  excess  of net  assets
purchased to be fully recovered.

                                                       13-7
 

                                       8
<PAGE>


                                                                      EXHIBIT 13


RECOGNITION OF PREMIUM REVENUE & RELATED  EXPENSES Premium revenue is recognized
ratably over the period to which the premium relates.  Policy acquisition costs,
included in other assets, consisting primarily of commissions and premium taxes,
are  deferred  and  amortized  over the period in which the  related  premium is
earned.  Deferred  policy  acquisition  costs  are  limited  to their  estimated
realizable  value based on the related  unearned  premium and take into  account
anticipated  claims  and  claims  expenses,  based  on  historical  and  current
experience.

PER SHARE DATA In  February  1997,  the  Financial  Accounting  Standards  Board
("FASB") issued Statement of Financial  Accounting  Standards  ("SFAS") No. 128,
"Earnings Per Share",  which requires the  presentation of "basic" and "diluted"
earnings per share  ("EPS") and is effective for periods  ending after  December
15, 1997. Basic EPS is calculated based on the weighted-average number of shares
outstanding  and diluted EPS includes the effects of dilutive  potential  common
shares. The effect of this accounting change on reported EPS data is as follows.

<TABLE>
<CAPTION>

   For the Year Ended December 31,
-------------------------------------------------------------------------------------------------------------------


                             Income          Shares           Per-Share
                             (Numerator)    (Denominator)       Amount
                            ($ in millions)                   (Dollars)

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

   Basic EPS:
     Income available to
       common stockholders
       1997                  $ 48.5         23,827,934        $ 2.04
       1996                  $(94.0)        23,984,543        $(3.92)
       1995                  $ 56.9         24,286,245        $ 2.34

   Effect of Dilutive 
   Securities:
     Options issued
       1997                                 231,850
       1996                                 247,421
       1995                                 264,248

   Diluted EPS:
     Income available to 
     common stockholders +
       assumed conversions
       1997                  $ 48.5         24,059,784        $ 2.02
       1996                  $(94.0)        24,231,964        $(3.92)
       1995                  $ 56.9         24,550,493        $ 2.32
-------------------------------------------------------------------------------------------------------------------
</TABLE>


Diluted  earnings  per common  share for 1996 is the same as basic  earnings per
share  because  the result of the  calculation  is  antidilutive  due to the net
operating loss reported for the year.





                                                       13-8


                                       9
<PAGE>


                                                                      EXHIBIT 13


<TABLE>
<CAPTION>



NOTE 2.  INVESTMENTS


Gains on sales and calls of investments for the years ended December 31, were as
follows.


In millions                          1997    1996     1995
-------------------------------------------------------------------------------------------------------------------
<S>                                  <C>    <C>       <C>   


Fixed maturities                     $0.4   $  0.3     $2.9
Equity securities                     4.1     21.3      0.2
-------------------------------------------------------------------------------------------------------------------
                                     $4.5    $21.6     $3.1
===================================================================================================================

</TABLE>
<TABLE>
<CAPTION>

The  amortized  cost and  market  values  of fixed  maturity  investments  as of
December 31, were as follows.


In millions                                                1997
-------------------------------------------------------------------------------------------------------------------



                            Amortized Gross        Gross        Fair
                            Cost      Unrealized   Unrealized   Value
                                      Gains        Losses

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

U.S. Treasury securities  $454.9      $  5.5       $   -        $460.4
U.S Government agencies    281.2         4.1         -           285.3
Obligations of states and
  political subdivisions    95.8         1.8        0.2           97.4
Redemptive
  preferred stock           13.9         0.8        0.2           14.5
-------------------------------------------------------------------------------------------------------------------
                          $845.8       $12.2       $0.4         $857.6
===================================================================================================================

</TABLE>
<TABLE>
<CAPTION>


-------------------------------------------------------------------------------------------------------------------


In millions                                                 1996
-------------------------------------------------------------------------------------------------------------------


                            Amortized    Gross      Gross         Fair
                            Cost         Unrealized Unrealized    Value
                                         Gains      Losses

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

U.S. Treasury securities    $766.6       $6.4       $1.2          $771.9
U.S Government agencies       47.5        0.1        0.5            47.1
Obligations of states and
  political subdivisions     110.7        1.8        0.2           112.2
Redemptive
  preferred stock             13.7        0.6        0.2            14.1
-------------------------------------------------------------------------------------------------------------------
                            $938.5       $8.9       $2.1          $945.3
===================================================================================================================

</TABLE>



                                                       13-9

                                       10
<PAGE>


                                                                  EXHIBIT 13

<TABLE>
<CAPTION>


The  amortized  cost and  market  values  of fixed  maturity  investments  as of
December 31, 1997 by contractual maturity, are shown below.

In millions                               Amortized Fair
                                            Cost    Value
-------------------------------------------------------------------------------------------------------------------

<S>                                       <C>       <C>   

Due in one year or less                    $231.8    $233.0
Due after one year to five years            219.5     222.0
Due after five years to ten years           394.5     402.6
Due after ten years                            -          -
-------------------------------------------------------------------------------------------------------------------
                                           $845.8     $857.6
===================================================================================================================
</TABLE>


The  expected  maturities  may differ from the  contractual  maturities  because
debtors may have the right to call or prepay obligations without penalties.
   Proceeds from sales of fixed maturity  investments were $13.0 million,  $35.7
million, and $224.2 million in 1997, 1996, and 1995,  respectively.  Gross gains
of $0.3 million,  $0.4 million, and $4.0 million and gross losses of $0 million,
$0 million,  and $0.7 million were  realized on those sales in 1997,  1996,  and
1995, respectively.
   At December  31, 1997 the fair value and  amortized  cost of bonds on deposit
with  various  insurance  regulatory  agencies  were  $399.2  million and $404.3
million, respectively.  Additionally, U.S. Treasury Notes with an amortized cost
of $8.7 million and fair value of $8.8 million  were pledged as  collateral  for
surety bonds which were issued to various states in lieu of depositing bonds.
     At December 31, 1997 and 1996,  there were no investments in any one 
investee  exceeding 10% of  shareholders'   equity.



                                                       13-10

                                       11
<PAGE>


                                                                     EXHIBIT 13




NOTE 3.  REINSURANCE


The  Company  reinsures  certain  risks with  other  insurance  companies.  Such
arrangements serve to limit the Company's maximum loss on catastrophes and large
or unusually hazardous risks. The Company is liable for reinsurance ceded in the
event its reinsurers do not meet their  obligations.  The Company's reserves for
nonrecoverable reinsurance were $9.3 million and $9.9 million as of December 31,
1997 and 1996, respectively.  Under certain of the reinsurance agreements, funds
are held to secure performance of reinsurers in meeting their  obligations.  The
amount of such funds was $25.8  million and $29.3  million at December  31, 1997
and 1996, respectively.
   Estimated  losses  recoverable  from  reinsurers  and the  ceded  portion  of
   unearned premiums are reported as assets. Losses and loss adjustment expenses
   of $112.8 million, $346.2 million, and $152.8 million for the years ending
December 31, 1997, 1996, and 1995,  respectively,  are net of cessions of $27.1 
million,  $72.9 million,  and $15.3
million, respectively.
   While the Company is not in the business of assuming reinsurance risks, it is
required to accept certain assigned risks and other legally mandated reinsurance
obligations.
   In previous  years,  the Company  actively  assumed various forms of casualty
reinsurance  for  which it  continues  to  maintain  reserves  for loss and loss
adjustment expenses (Note 12).
<TABLE>
<CAPTION>
   
Premiums for the years ended December 31, were as follows.


In millions                       1997      1996     1995
-------------------------------------------------------------------------------------------------------------------
<S>                               <C>       <C>      <C>    


Direct written premiums           $165.7    $187.8   $196.6
Reinsurance ceded to
  other companies                  (15.8)    (15.6)   (30.4)
Reinsurance assumed from
  other companies                    8.3       4.0     13.8
-------------------------------------------------------------------------------------------------------------------
Net written premiums              $158.2    $176.2   $180.0
===================================================================================================================

Direct earned premiums             176.6     172.2   $223.9
Reinsurance ceded to
  other companies                  (16.0)    (17.4)  (29.2)
Reinsurance assumed from
  other companies                    4.3       6.9    13.4
-------------------------------------------------------------------------------------------------------------------
Net earned premiums               $164.9    $161.7   $208.1
===================================================================================================================

Percentage of reinsurance
  assumed to net earned premiums     2.6%    4.3%    6.4%
</TABLE>





                                                       13-11

                                       12
<PAGE>



                                                                    EXHIBIT 13




NOTE 4.  RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

<TABLE>
<CAPTION>

The following  table provides a  reconciliation  of reserves for losses and loss
adjustment expenses for the years ended December 31, 1997, 1996, and 1995.


In millions                          1997     1996     1995
-------------------------------------------------------------------------------------------------------------------
<S>                                  <C>      <C>      <C>    


Reserves for losses and loss
  adjustment expenses at
  beginning of year                  $1,158.9 $1,026.1 $1,161.5

Losses and loss adjustment expenses:
  Provision for losses and loss
    adjustment expenses for claims
    occurring in the current year    132.6    178.8      183.6
  Increase (decrease) in estimated
    losses and loss adjustment
    expenses for claims occurring
    in prior years                    7.3     240.3       (15.5)
-------------------------------------------------------------------------------------------------------------------
                                     139.9    419.1       168.1
-------------------------------------------------------------------------------------------------------------------
Losses and loss adjustment
  expense payments for claims
  occurring during:
  Current year                       39.7      42.1       38.4
  Prior years                        234.2    244.2      265.1
-------------------------------------------------------------------------------------------------------------------
                                     273.9    286.3      303.5
-------------------------------------------------------------------------------------------------------------------
Reserves for losses and
  loss adjustment expenses
  at end of year                     $1,024.9 $1,158.9 $1,026.1
===================================================================================================================
</TABLE>

Reserves  for  losses  and loss  adjustment  expenses  represent  the  estimated
indemnity cost and related  adjustment  expenses  necessary to  investigate  and
settle  claims.  Such  estimates are based upon  individual  case  estimates for
reported claims,  estimates from ceding companies for reinsurance  assumed,  and
actuarial  estimates for losses which have been incurred but not yet reported to
the insurer. Any change in probable ultimate liabilities is reflected in current
operating results.
   The ultimate cost of claims,  particularly  liability claims, is difficult to
predict for several reasons  including:  the uncertain time period for reporting
claims,  changes in the legal  environment and court decisions,  and federal and
state legislation which may dramatically increase the liability between the time
a policy is written and associated claims are ultimately resolved.
   As an example,  liability for exposure to toxic substances and  environmental
impairment,  which did not appear  likely or even exist when the  policies  were
written,  has been  imposed by  legislators  and judicial  interpretation.  Tort
liability  has  been  expanded  by  some   jurisdictions   to  cover   defective
workmanship.
   Liabilities   assumed  from  other  insurance   companies  under  reinsurance
contracts  are  subject to the same  factors,  and further  complicated  by long
periods of time  between the date of  occurrence  and the date of the  Company's
notification of the claim.
   1996 reserves were substantially  affected by a $229 million increase of loss
reserves,  principally  relating to certain  general  liability and  reinsurance
policies.
   Management  believes  the  reserves  for loss and  loss  adjustment  expenses
established are adequate and the associated estimate of reinsurance  recoverable
is reasonable. While the eventual ultimate liability and reinsurance recoverable
may differ  from the current  estimates,  management  does not believe  that the
difference will have a material effect,  either  adversely or favorably,  on the
Company's financial position and results of operations.
   The Company discounted  certain workers  compensation  pension-type  reserves
using  a  maximum  interest  rate  of  3.5% in 1997  and  1996.  The  amount  of
unamortized discount was $38.7 million at December 31, 1997 and $26.7 million at
December 31, 1996.
                                                       13-12

                                       13
<PAGE>



                                                                    EXHIBIT 13





NOTE 5.  INCOME TAXES
<TABLE>
<CAPTION>


The Company's income tax provision includes the following components.


In millions                         1997     1996     1995
-------------------------------------------------------------------------------------------------------------------
<S>                                 <C>       <C>     <C>       


Current tax provision               $(0.3)    $(27.6) $  6.1
Deferred tax provision related to:
  Future tax deductions              18.9       (6.7)   11.0
  Net operating loss carryforward    (5.1)     (18.8)     -
  Deferred alternative minimum
    tax provision                    (0.7)      (1.9)  (4.3)
-------------------------------------------------------------------------------------------------------------------
Income tax provision                $12.8    $(55.0)  $12.8
===================================================================================================================
</TABLE>

<TABLE>
<CAPTION>


A  reconciliation  of the Company's  income tax provision to the provision which
would have  resulted if the tax had been  computed at the  statutory  rate is as
follows.


In millions                         1997    1996      1995
-------------------------------------------------------------------------------------------------------------------
<S>                                 <C>      <C>      <C>   
Income tax provision at statutory
  tax rates (35%)                   $21.1    $(52.6)  $24.0
Tax effect of:
  Tax exempt interest                (1.7)    (1.9)    (4.7)
  Dividends received deduction       (6.1)    (5.0)    (4.2)
  Other permanent adjustments, net   (1.6)     3.4     (3.4)
State income tax provision            1.1      1.1      1.1
-------------------------------------------------------------------------------------------------------------------
  Income tax provision              $12.8    $(55.0)  $12.8
===================================================================================================================
</TABLE>


Deferred  taxes arise from temporary  differences in the  recognition of revenue
and expenses for tax and financial reporting  purposes.  Net deferred tax assets
at December  31, 1997,  1996,  and 1995 result from the  following  tax-effected
temporary differences.
<TABLE>
<CAPTION>


In millions                         1997    1996         1995
-------------------------------------------------------------------------------------------------------------------
<S>                                 <C>     <C>          <C>    


Deferred  liability on unrealized  
gains                               $(78.6) $(56.5)       $(60.2) 
Deferred  tax
assets:
  Reserve discounting                53.8     74.9          68.9
  Alternative minimum tax             6.8      6.3           4.3
  Net operating loss carryforward    23.9     18.8            -
  Other, net                          5.6      3.3           2.7
-------------------------------------------------------------------------------------------------------------------
Deferred tax asset, net             $11.5    $46.8         $15.7
===================================================================================================================
</TABLE>


Realization of deferred tax assets is dependent upon the Company's generation of
sufficient  taxable  income in the future to recover tax benefits that cannot be
recovered  from taxes  paid in the  carryback  period,  generally  three  years.
Although realization is not assured,  management believes it is more likely than
not that all of the  deferred  tax asset  will be  realized.  The  amount of the
deferred tax asset considered realizable,  however, could be reduced in the near
term if estimates of future  taxable income during the  carryforward  period are
reduced.  The Company has a regular federal tax net operating loss  carryforward
of $68.4 million which will expire after 2011.





                                                       13-13

                                       14
<PAGE>




                                                                      EXHIBIT 13

NOTE 6. SHAREHOLDERS' EQUITY


The Company is authorized to issue 5,000,000 shares of $0.10 par value preferred
stock. No preferred shares were issued or outstanding at December 31, 1997.
   During 1996, the Company  reacquired and retired 360,245 shares of its common
stock at prevailing market prices. No shares were reacquired during 1997.
   The Company's  insurance  subsidiaries are regulated by the various states in
which they do business and prepare their financial statements in accordance with
statutory accounting principles.  The amount of statutory net income and surplus
(shareholders'  equity)  for the  insurance  subsidiaries  for the  years  ended
December 31, were as follows.
<TABLE>
<CAPTION>


In millions                   1997       1996      1995
-------------------------------------------------------------------------------------------------------------------
<S>                           <C>        <C>       <C>  


Net income (loss)             $  68.1    $(122.6)  $  58.1
Surplus                       $575.0     $ 487.1   $630.8

-------------------------------------------------------------------------------------------------------------------

</TABLE>

Various  state  insurance  laws restrict the amount that may be  transferred  to
Argonaut  Group,  Inc. from its  subsidiaries  in the form of dividends  without
prior  approval of  regulatory  authorities.  In  addition,  that portion of the
Company's  net  equity  which  results  from the  difference  between  statutory
insurance  practices and generally accepted  accounting  principles would not be
available for  dividends.  At December 31, 1997,  $9.8 million was available for
dividends to Argonaut  Group without  prior  regulatory  approval.  During 1997,
dividends of $38.3 million were paid to Argonaut Group.





























                                                       13-14



                                       15
<PAGE>


                                                                      EXHIBIT 13




NOTE 7.  NET INVESTMENT INCOME


Investment income and expenses for the years ended December 31, were as follows.
<TABLE>
<CAPTION>


In millions                         1997     1996     1995
-------------------------------------------------------------------------------------------------------------------
<S>                                 <C>      <C>      <C>  


Investment income:
  Interest and dividends on
    fixed maturities                $62.0    $69.2    $82.9
  Dividends on equity securities     20.7     24.2     17.9
  Interest on short-term investments  2.8      1.6      1.2
  Other                               2.1      1.2      1.1
-------------------------------------------------------------------------------------------------------------------
                                     87.6     96.2    103.1
Investment expenses                  (0.4)    (1.0)    (1.1)
Interest relating to Prop 103         -       (5.7)          -
-------------------------------------------------------------------------------------------------------------------
Net investment income               $87.2    $89.5    $102.0
===================================================================================================================
</TABLE>










NOTE 8  UNDERWRITING, ACQUISITION, AND INSURANCE EXPENSES


Underwriting,  acquisition,  and insurance expenses for the years ended December
31, were as follows.

<TABLE>
<CAPTION>

In millions                         1997    1996     1995
-------------------------------------------------------------------------------------------------------------------
<S>                                 <C>     <C>      <C>   


Commissions                         $15.8    $13.0    $12.2
General expenses                     45.1     44.3     44.8
State assessments                    12.5      2.2      6.8
Taxes, licenses, and bureau fees      6.0      5.2      4.5
-------------------------------------------------------------------------------------------------------------------
                                     79.4     64.7     68.3
Amortization (deferral) of policy
  acquisition costs                   1.2     (0.6)    (1.0)
-------------------------------------------------------------------------------------------------------------------
                                    $80.6    $64.1    $67.3
===================================================================================================================
</TABLE>





                                                       13-15

                                       16
<PAGE>

                                                               EXHIBIT 13






NOTE 9.  BENEFIT PLANS





PENSION  The Company  sponsors a qualified  defined  benefit  plan which  covers
substantially  all of its employees.  The benefits are based on years of service
and the employee's  compensation  during the last ten years of  employment.  The
Company's funding policy is to contribute  annually the maximum allowable by the
Employee  Retirement Income Security Act of 1974, as amended.  Contributions are
intended to provide not only for  benefits  attributed  to service to date,  but
also for those expected to be earned in the future.
   The Company also  maintains a  non-qualified  unfunded  supplemental  defined
benefit plan designed to  compensate  individuals  to the extent their  benefits
under the Company's  qualified  plan are curtailed due to Internal  Revenue Code
Limitations.
   The following table sets forth a  reconciliation  of the plan's funded status
and amounts  recognized  in the  Company's  balance sheet as of December 31 with
respect to the qualified and non-qualified pension plans.

<TABLE>
<CAPTION>

In millions                                       1997       1996
-------------------------------------------------------------------------------------------------------------------
<S>                                               <C>        <C> 


Actuarial present value of benefit obligations: 
 Accumulated benefit obligation,
(vested benefits:
  1997-$(19.0); 1996-$(16.2)                      $(19.5)     $(16.7)
===================================================================================================================

Projected benefit obligation for service
  rendered to date                                $(25.6)     $(21.9)
Plan assets at fair value, primarily Treasury 
bonds                                              30.6       27.1
-------------------------------------------------------------------------------------------------------------------
Plan assets (less than) in excess of projected
  benefit obligation                               5.0         5.2
Unrecognized net gain (loss) from past experience
  different from that assumed and effects of
  changes in assumptions                          (3.0)       (4.4)
Unrecognized prior service cost                    1.4         1.4
Unrecognized net asset                            (0.4)       (0.4)
Adjustment required to recognize
  minimum liability                               (0.3)       (0.5)
-------------------------------------------------------------------------------------------------------------------
Pension asset recognized in the Balance Sheet     $2.7        $1.3
===================================================================================================================
</TABLE>


Net pension cost included the following:

<TABLE>
<CAPTION>

In millions                        1997      1996     1995
-------------------------------------------------------------------------------------------------------------------

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

Service cost-benefits earned
  during the period                $ 1.5     $ 1.5    $ 1.3
Interest cost on projected
  benefit obligation                 1.6       1.4      1.4
Actual return on plan assets        (1.7)     (1.4)    (2.9)
Net amortization                    (0.2)     (0.3)     1.5
-------------------------------------------------------------------------------------------------------------------
Net periodic pension cost          $ 1.2     $ 1.2    $ 1.3
===================================================================================================================
</TABLE>


In determining the actuarial present value of the projected  benefit  obligation
as of December 31, 1997 and 1996,  the weighted  average  discount rate was 7.0%
and 7.5% respectively.  The rate of increase in future  compensation  levels was
4.5% and the long-term rate of return on assets was 6.0% in 1997 and 1996.

STOCK OPTIONS In August 1986,  the Board of Directors of Argonaut  Group,  Inc. 
 adopted the 1986 Stock Option Plan covering an aggregate 1,500,000 shares of 
Argonaut Group, Inc. Common Stock.  An amendment to

                                                       13-16

                                       17
<PAGE>


                                                                      EXHIBIT 13

the Plan increasing the number of shares of common stock issuable under the Plan
from  1,500,000  to 2,000,000  was  approved on April 23, 1996 at the  Company's
Annual Meeting.  Under the 1986 Stock Option Plan, options to purchase shares of
Argonaut Group,  Inc. common stock may be granted to certain key employees.  The
options  may be  incentive  stock  options or  nonqualified  stock  options.  If
incentive  options are granted,  the  exercise  price of the options will be the
fair  market  value of the  shares on the date that the option is  granted.  The
exercise price of nonqualified stock options to be granted can be below the fair
market value of the shares on the grant date.  To date all options  granted have
been at the fair market  value of the shares on the date of grant,  and as such,
no  compensation  expense has been recognized as accounted for under APB Opinion
No. 25. The options are nontransferable and are exercisable in installments.
   In October, 1995 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 123 "Accounting for Stock-Based  Compensation"
(FAS 123).  As  permitted  by FAS 123, the Company will not change its method of
accounting  for  stock  options  but  has  provided  the   additional   required
disclosures in the tables below.  The additional  compensation  costs that would
have been recorded if the Company had adopted FAS 123 are not material.
   Because  the FAS 123  method of  accounting  has not been  applied to options
granted prior to January 1, 1995, the resulting pro forma  compensation cost may
not be representative of that to be expected in future years.
   At December 31, 1997,  529,540  shares were  available for future grant.  The
options are fully vested after 6 years and expire after 11 years.
   A summary of the status of the  Company's  stock option plan at December 31,
 1997,  1996,  and 1995 is presented in the table below.
<TABLE>
<CAPTION>
                                                          1997                           1996                 1995
-------------------------------------------------------------------------------------------------------------------


                                     Number       Weighted-Average  Number          Weighted-Average Number    Weighted-Average
                                     of Shares    Exercise Price    of Shares       Exercise Price   of Shares Exercise Price
<S>                                  <C>          <C>               <C>             <C>              <C>       <C>


Outstanding at beginning of the year 1,036,170    $23.79            970,860           $22.32         924,790   $21.60
  Granted                              151,900      29.01           168,250            32.86         120,600    30.00
  Exercised                            (64,880)     17.84           (43,440)           17.39         (19,380)   22.16
  Cancelled                            (42,250)     30.05           (59,500)           30.23         (55,150)   27.05
                                       --------                     --------                         --------
Outstanding at end of the year        1,080,940     $24.63          1,036,170           $23.79       970,860   $22.32
Exercisable at end of year              560,560      19.91          521,040            18.13         456,860    16.06
Weighted-average fair value of options
  granted during the year                          $ 4.26                             $  4.69                 $  4.93

-------------------------------------------------------------------------------------------------------------------
</TABLE>


The following table summarizes  information  about stock options  outstanding at
December 31, 1997.
<TABLE>
<CAPTION>


                                                                  Options Outstanding                 Options Exercisable
-------------------------------------------------------------------------------------------------------------------


Range of                           Number           Weighted-Average     Weighted-Average        Number      Weighted-Average
Exercise Price                     Outstanding at  Remaining             Exercise Price     Exercisable      Exercise Price
                                   12/31/97        Contractual Life                                          at 12/31/97
-------------------------------------------------------------------------------------------------------------------
<S>                                <C>             <C>                   <C>                <C>              <C>  
$8.58 to $23.75                     327,840        1.75 yrs.               $14.33           327,840          $14.33
$26.25 to $33.00                    753,100        7.83 yrs.               $29.11           232,720          $27.78
                                    -------
                                    1,080,940
-------------------------------------------------------------------------------------------------------------------
</TABLE>

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option   pricing  model  with  the  following   weighted-average
assumptions  used for  grants in 1997,  1996 and 1995,  respectively:  risk-free
rates of 6.32% and 6.73% for options issued in 1997, 6.00%, 6.04%, and 6.31% for
options issued in 1996, and 7.08% and 6.79% for options issued in 1995; expected
dividend yields of 5.10%,  4.62%,  and 4.17%;  expected lives of 6.15, 5.51, and
4.85 years;  and expected  volatility of 16.65%,  15.39%,  and 15.82%.  EMPLOYEE
SAVINGS  PLANS  Substantially  all  employees  of the  Company  are  eligible to
participate  in employee  savings  plans.  Under these plans, a percentage of an
employee's  pay may be contributed to various  savings  alternatives  including,
under one plan, investment in the Company's common stock. The plans call for the
Company to match the employee's contribution under various formulae.  Charges to
income  related to such  Company  matching  were $0.6  million per year in 1997,
1996, and 1995.




                                                       13-17

                                       18
<PAGE>



                                                                    EXHIBIT 13


NOTE 10.  BUSINESS SEGMENTS


The Company and its  subsidiaries  are engaged  principally  in the  business of
selling  workers  compensation  and other  insurance.  The  Company's  insurance
subsidiaries  are  authorized  to  sell a  portfolio  of  workers  compensation,
commercial and homeowners multi-peril, automobile liability and physical damage,
medical  malpractice,  fire,  and other lines in all states and the  District of
Columbia.  In accordance with insurance accounting  practice,  all expenses have
been allocated to the two business segments.
   Information on the Company's  business  segments for the years ended December
31, is as follows.

<TABLE>
<CAPTION>

   In millions                  1997       1996      1995
-------------------------------------------------------------------------------------------------------------------
<S>                             <C>        <C>       <C>  


   Premiums:
     Workers compensation         $140.6    $ 129.5    $176.7
     Other insurance                24.3       32.2      31.4
-------------------------------------------------------------------------------------------------------------------
                                  $164.9    $ 161.7    $208.1
===================================================================================================================

   Pre-tax underwriting income 
   (loss):
     Workers compensation        $ (24.0)   $  (7.5)  $  (0.2)
     Other insurance                (6.4)    (252.6)    (35.2)
-------------------------------------------------------------------------------------------------------------------
                                 $ (30.4)   $(260.1)  $ (35.4)
   Net investment income            87.2       89.5     102.0
   Gains on sales of investments     4.5       21.6       3.1
-------------------------------------------------------------------------------------------------------------------
   Income (loss) before income 
   taxes                         $  61.3    $(149.0)  $ 69.7
===================================================================================================================
</TABLE>



NOTE 11.  COMMITMENTS AND CONTINGENCIES


Rental expenses for operating leases,  principally for offices,  were 
$4.0 million,  $3.8 million, and $3.8 million in 1997, 1996, and 1995, 
respectively.
   As of December  31,  1997,  future  minimum  noncancellable  operating  lease
commitments  are as follows:  $3.6 million in 1998,  $2.9 million in 1999,  $2.7
million in 2000, $1.8 million in 2001, $1.9 million in 2002 and thereafter for a
total of $12.9 million.
   The Company's  insurance  subsidiaries are members of the statutorily created
insolvency  guarantee  associations  in all states where they are  authorized to
transact business.  These associations were formed for the purpose of paying the
claims of  insolvent  companies.  The Company is assessed  its pro rata share of
such  claims  based  on  its  premium  writings,  subject  to a  maximum  annual
assessment per line of insurance.  Such costs can generally be recovered through
surcharges on future premiums.  The Company does not believe that assessments on
current  insolvencies will have a material effect on its financial  condition or
results of operations.
   On August  30,  1996,  the Los  Angeles  County  Metropolitan  Transportation
Authority  (MTA) filed a civil  action  against the Company  alleging  breach of
contract,  breach of the covenant of good faith and fair dealing, and requesting
ancillary relief in the form of an accounting,  an injunction and restitution in
connection  with  allegations   regarding  failures  to  perform  under  certain
contracts  of  insurance.  The MTA  contends  that  it has  been  damaged  by an
unspecified amount.
   The Company has responded to the Complaint, and brought certain counterclaims
against the MTA, and possibly  others,  in connection with the facts  underlying
the lawsuit.  The Company believes it has meritorious  defenses,  and intends to
vigorously  contest  these  claims.  The  Company is unable,  with any degree of
certainty,  to comment upon the range of any potential  loss, or whether such an
outcome is probable or remote,  in light of the lack of any discovery  conducted
in the case, and the preliminary investigation conducted thus far.
   The  insurance  subsidiaries  of the  Company  are  parties to legal  actions
incidental to their business. Based on the advice of counsel,  management of the
Company believes that the resolution of these matters will not materially affect
the Company's financial condition or results of operations.
                                                       13-18

                                       19
<PAGE>



                                                                     Exhibit 13

NOTE 12.  RUN OFF LINES

Although the Company has discontinued active underwriting of hospital liability,
medical malpractice liability, and assumed casualty reinsurance, these lines are
in run off status,  meaning  that the Company is still  obligated  to pay losses
incurred on policies written in past years. Each of these lines is characterized
by long elapsed periods  between the occurrence of a claim and ultimate  payment
of the settled  claim.  The Company has a  specialized  and  dedicated  staff to
administer and settle hospital  liability and medical  malpractice  claims.  The
following  tables present the Company's  reserves for losses and loss adjustment
expenses and their  underwriting loss,  including  detailed  information for the
years ended December 31.


RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
<TABLE>
<CAPTION>


   In millions          1997         1996       1995
-------------------------------------------------------------------------------------------------------------------
<S>                     <C>          <C>        <C>   


   Run off lines:
     Medical liability     $10.7        $11.2      $12.6
     Hospital liability     43.7         46.6       49.3
     Other*                217.8        229.4      134.7
-------------------------------------------------------------------------------------------------------------------
                           272.2        287.2      196.6
   Continuing lines        752.7        871.7      829.5
-------------------------------------------------------------------------------------------------------------------
   Total reserves       $1,024.9     $1,158.9   $1,026.1
===================================================================================================================
</TABLE>

   * Primarily casualty reinsurance assumed





UNDERWRITING INCOME (LOSS)
<TABLE>
<CAPTION>


   In millions                1997      1996       1995
-------------------------------------------------------------------------------------------------------------------
<S>                           <C>       <C>        <C>


   Run off lines:
     Medical liability        $   0.4   $    0.0   $ 2.4
     Hospital liability           1.6        0.1     9.9
     Other*                       0.4     (127.5)  (12.3)
-------------------------------------------------------------------------------------------------------------------
                                  2.4     (127.4)    0.0
   Continuing lines             (32.8)    (132.7)  (35.4)
-------------------------------------------------------------------------------------------------------------------
     Total underwriting loss   $(30.4)  $(260.1)   $(35.4)
===================================================================================================================
</TABLE>

   * Primarily casualty reinsurance assumed




NOTE 13.  PERMITTED STATUTORY ACCOUNTING PRACTICES

The  Company's   insurance   subsidiaries   prepare  their  statutory  financial
statements in accordance  with accounting  practices  prescribed or permitted by
the insurance  departments of the state in which they are domiciled.  Prescribed
statutory accounting practices include a variety of publications of the National
Association  of  Insurance  Commissioners  ("NAIC"),  as  well  as  state  laws,
regulations,  and general  administrative rules.  Permitted statutory accounting
practices  encompass all  accounting  practices not so prescribed  but which the
appropriate  regulatory agency has allowed in practice.  The Company's insurance
subsidiaries do not apply any permitted statutory  accounting  practices,  which
individually  or  in  the  aggregate  materially  affect  statutory  surplus  or
risk-based capital.

                                                       13-19

                                       20
<PAGE>


                                                                     EXHIBIT 13



QUARTERLY FINANCIAL DATA -- UNAUDITED



The following table represents  unaudited quarterly financial data for the years
ended December 31, 1997 and 1996. In the opinion of management,  all adjustments
necessary to present fairly the results of operations for such periods have been
made.  Total revenues and net income  include gains on the sale of  investments.
The Company cannot  anticipate when or if similar gains may occur in the future.
Since  financial  results rely heavily on estimates,  caution  should be used in
drawing specific conclusions from quarterly consolidated results.

<TABLE>
<CAPTION>

In millions except per share amounts        Three Months Ended
-------------------------------------------------------------------------------------------------------------------


                             March 31 June 30  Sept. 30   Dec. 31

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

1997
Total revenues               $67.9    $60.7    $ 60.3     $67.7
Underwriting (loss)           (1.1)    (6.0)    (10.8)    (12.5)
Net income                    15.5     12.8       9.3      10.9
Income per common share
  Basic*                      0.65     0.54      0.39      0.46
  Diluted*                    0.65     0.54      0.39      0.45

1996
Total revenues               $92.4    $60.1    $ 55.5     $64.8
Underwriting income (loss)    (4.5)   (16.8)   (239.3)      0.5
Net income (loss)             27.4      2.3    (139.3)     15.6
Income (loss) per common 
share
  Basic*                      1.14     0.10    (5.82)     0.66
  Diluted*                    1.10     0.10    (5.82)     0.65
</TABLE>

--------------------------------------------------------------------------------

*Basic  and  diluted  earnings  per share are  computed  independently  for each
quarter  and the full  year  based on the  respective  average  number of common
shares  outstanding;  therefore,  the sum of the  quarterly net income per share
data may not equal the net income per share for the year.






<TABLE>
<CAPTION>

COMMON STOCK MARKET PRICES -- UNAUDITED



The following  table shows the high, low, and closing prices during each quarter
in the past two years.


Quarter Ended       March 31  June 30  Sept. 30   Dec. 31
<S>                <C>        <C>      <C>        <C>    
-------------------------------------------------------------------------------

1997
High                31 1/2     31 3/8    36 3/8    38 1/8
Low                 27 1/4     26 3/4    29 1/2    29 5/8
Close               28         29 1/2    34 7/8    33 7/8

1996
High                35         34 1/4    31 1/2    32 1/4
Low                 30 1/4     30 1/2    28 3/8    27 1/4
Close               31         31 1/4    29 1/2    30 3/4

------------------------------------------------------------
</TABLE>

                                                       13-20


                                       21
<PAGE>


                                                                    Exhibit 13


MANAGEMENTS' DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL 
CONDITION

RESULTS OF OPERATIONS Earned premium income increased slightly to $164.9 million
in 1997 from  $161.7  million  in 1996,  and down from  $208.1  million in 1995.
Despite new business activity and better retention of renewal accounts,  premium
continues to be impacted by  significant  rate decreases in several areas of the
country,  aggressive  competition,  and a large  percentage  of  accounts  being
written  with lower  premiums as a result of large  deductible  provisions.  The
impact of large deductible  programs on inforce premium,  however,  decreased to
approximately $86.6 million at December 31, 1997 from approximately $100 million
in 1996 and 1995.
   Net investment  income was $87.2 million,  $89.5 million,  and $102.0 million
for 1997, 1996, and 1995, respectively. Lower interest rates, some restructuring
of the investment portfolio,  and negative cash flow as claims from discontinued
lines of business are paid contribute to the decrease.
   Pre-tax gains on sales of investments were $4.5 million,  $21.6 million,  and
$3.1 million for 1997,  1996,  and 1995,  respectively.  The 1996 gain  resulted
primarily  from  Federal  Paper  Board's  sale  to  International  Paper  for  a
combination of cash and International  Paper stock. We cannot anticipate when or
if similar gains or losses may occur in the future.
   Losses and loss adjustment  expenses were $112.8 million,  $346.2 million and
$152.8  million  in 1997,  1996,  and  1995,  respectively.  1996  results  were
substantially affected by a $229 million increase of loss reserves,  principally
relating to certain  liability and  reinsurance  policies.  The  Company's  loss
ratio,  including our run off lines of business,  was 68% in 1997, 214% in 1996,
and 81% in 1995. The loss ratio in our workers compensation line of business was
65% in 1997 and 63% in 1996 and 1995. The loss ratio in other  continuing  lines
of business was 94%, 427%, and 173% in 1997, 1996, and 1995, respectively.
   In the opinion of management,  the Company's reserves represent the Company's
best  estimate of its  ultimate  liabilities,  based on  currently  known facts,
current law, current  technology,  and assumptions  considered  reasonable where
facts are not known.  Due to significant  uncertainties  and related  management
judgments,  however,  there can be no  assurance  that future loss  development,
favorable or unfavorable, will not occur.
   Underwriting  expenses  totaled $80.6 million in 1997, $64.1 million in 1996,
and  $67.3  million  in  1995.   Underwriting  expenses  are  composed  of  four
components:  general  expenses,  commissions,  premium taxes, and state fees and
assessments.  The $16.5  million  increase  is due  primarily  to an increase in
assessments  related  to  mandatory  assigned  risk  pools and a  provision  for
nonrecoverable ceded reinsurance.
   Policyholder  dividend  expense  (recapture) was $(0.9) million in 1997, $8.7
million in 1996,  and $20.6  million in 1995.  These  charges  reflect  the loss
experience  of  participating  policyholders,  the basis for dividend  payments.
Particularly  in  California,  with the  advent of open  rating  in 1995,  fewer
participating policies are being written.
   After-tax  income from  operations  was $48.5 million in 1997 compared with a
loss of $94.0 million in 1996,  and income of $56.9 million in 1995.  Operations
for the  current  year were  impacted  primarily  by the  increased  charges  in
assessments related to mandatory assigned risk pools. The after-tax loss in 1996
was a result of the strengthening of loss reserves discussed above.

LIQUIDITY AND CAPITAL RESOURCES The Company's insurance  subsidiaries  require a
significant degree of liquidity and adequate capital to meet ongoing obligations
to policyholders and claimants and to cover ordinary operating expenses.  During
the three years ended  December  31,  1997,  the  Company  generated  sufficient
capital from operating and investment income to meet all of its obligations. The
Company  maintains  adequate levels of liquidity and surplus  capacity to manage
the risks inherent with any differences  between the duration of its liabilities
and invested assets.  Management believes that the Company continues to maintain
sufficient liquidity to pay claims and expenses,  as well as to cover unforeseen
events such as reinsurer  insolvencies,  inadequate  premium  rates,  or reserve
deficiencies.
   Under provisions of the California  Insurance Code, there is a maximum amount
of  dividends  which  can be  paid  without  prior  approval  of  the  Insurance
Commissioner.  Under  these  provisions,  as  of  December  31,  1997,  Argonaut
Insurance could pay to Argonaut Group,  Inc. a maximum  dividend of $9.8 million
without the Insurance Commissioner's  approval.  During 1997, Argonaut Insurance
paid the Company dividends of $38.3 million.


                                                        13-21


                                       22
<PAGE>


                                                                     Exhibit 13

   On April 22, 1997, the Company's  Board of Directors  increased the quarterly
dividend  from $0.37 per common  share to $0.41 per common  share.  During 1997,
total cash  dividends  paid by the  Company to its  shareholders  were $1.60 per
share.
   On July 27,  1989,  the  Argonaut  Group Board of  Directors  authorized  the
repurchase of up to six million shares of its outstanding common stock, of which
5,367,636 have been reacquired to date. It is presently  expected that dividends
received from the Company's subsidiaries will be the primary source of funds for
the stock  repurchase  program and to meet any other  capital  requirements  the
Company may develop.

ACCOUNTING CHANGE In February of 1997, the Financial  Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(FAS 128). The Company has provided the additional  required  disclosures on the
Statement of Operations and in Note 1 to the financial statements.
   In October,  1995, the Financial  Accounting Standards Board issued Statement
of  Financial   Accounting   Standards  No.  123   "Accounting  for  Stock-Based
Compensation"  (FAS 123).  As  permitted by FAS 123, the Company will not change
its method of  accounting  for stock  options but has  provided  the  additional
required  disclosures  in Note 9 to the  financial  statements.  The  additional
compensation  costs that would have been recorded if the Company had adopted FAS
123 are not material.

LEGISLATION  Historically,  over 30% of Argonaut's premium has been generated in
California.  As part of  workers  compensation  reform  legislation,  California
became an "open rating" state on January 1, 1995. This means that, as is already
the case in many  other  states,  workers  compensation  policies  are no longer
priced  on the  basis of  uniform  rates  and  rating  plans  adhered  to by all
insurance  companies.  Instead,  each company  files its own rate  schedules and
rating plans.






                                                       13-22