1
<PAGE>

                                                                      Exhibit 13
                     ARGONAUT GROUP, INC. AND SUBSIDIARIES
                            Selected Financial Data

<TABLE>
<CAPTION>
In millions  For the Years Ended December 31,          1999      1998        1997        1996         1995
<S>                                             <C>            <C>         <C>        <C>           <C>
Statement of Operations Data

Premiums:
   Workers compensation                         $     65.7     $  115.6    $  140.6    $  129.5     $  176.7
   Other insurance                                    27.3         22.9        24.3        32.2         31.4
------------------------------------------------------------------------------------------------------------
                                                      93.0        138.5       164.9       161.7        208.1
Net investment income                                 68.5         77.4        87.2        89.5        102.0
Gains on sales of investments                          2.8         51.2         4.5        21.6          3.1
------------------------------------------------------------------------------------------------------------
Total revenue                                    $   164.3     $  267.1    $  256.6   $   272.8     $  313.2
============================================================================================================

Underwriting gain (loss) before income taxes:

   Workers compensation                          $   (80.6)   $   (24.1)    $ (21.2) $     (5.3)       $ 3.3
   Other continuing lines                            (10.6)        (7.1)       (8.4)     (124.6)       (35.6)
   Run off lines                                      (0.9)         0.6         2.4      (127.4)         --
-------------------------------------------------------------------------------------------------------------
                                                 $   (92.1)   $   (30.6)    $ (27.2) $ (257.3)      $  (32.3)
=============================================================================================================

Income (loss) before income taxes                $   (25.5)   $    93.5       $ 61.3   $ (149.0)     $  69.7
Provision (benefit) for income taxes                 (10.3)        30.8        12.8       (55.0)        12.8
------------------------------------------------------------------------------------------------------------
Net income (loss)                                $   (15.2)   $    62.7   $    48.5   $   (94.0)     $  56.9
============================================================================================================

Net income (loss) per common share:
   Basic                                          $   (0.64)   $    2.62   $    2.04    $  (3.92)    $  2.34
============================================================================================================
   Diluted                                        $   (0.64)   $    2.61   $    2.02   $   (3.92)    $  2.32
============================================================================================================


Balance Sheet Data
Portfolio investments                            $1,175.9     $1,372.8  $1,369.1    $1,395.5     $1,489.2
==========================================================================================================
Total assets                                     $1,625.1     $1,823.0  $1,898.8    $1,944.4     $1,977.5
==========================================================================================================
Reserves for losses and loss
   adjustment expenses                           $  897.4     $  935.8  $1,063.2    $1,158.8     $1,026.1
==========================================================================================================
Shareholders' equity                             $  628.4     $  754.4   $ 717.9    $  665.3     $  810.8
==========================================================================================================
Cash dividends declared per
   common share                                  $   1.64     $   1.64   $  1.60      $ 1.44       $ 1.28
==========================================================================================================
</TABLE>

The accompanying notes are an integral part of these financial 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, 1999 and 1998,
and the related  consolidated  statements of operations,  comprehensive  income,
shareholders'  equity,  and cash flows for each of the three years in the period
ended December 31, 1999. 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, 1999 and 1998,  and their  results of
operations,  comprehensive  income and cash flows for each of the three years in
the period ended  December 31,  1999,  in  conformity  with  generally  accepted
accounting principles.

ARTHUR ANDERSEN LLP

San Francisco, California
January 21, 2000

                                      13-2




                                       3
<PAGE>


                                                                      Exhibit 13
                     ARGONAUT GROUP, INC. AND SUBSIDIARIES
                          Consolidated Balance Sheets
<TABLE>
<CAPTION>
In millions                                                       December 31,         1999           1998
<S>                                                                                 <C>            <C>
Assets
Investments:
   Fixed maturities, available for sale, at fair value                              $   745.4      $   942.8
     (cost: 1999-- $775.8; 1998-- $915.5)
   Equity securities, available for sale, at fair value                                 427.1          408.5
     (cost: 1999-- $202.2; 1998-- $197.4)
   Short-term investments, available for sale, at fair value                              0.8           19.9
   Securities in transit                                                                  2.6            1.6
------------------------------------------------------------------------------------------------------------
                                                                                      1,175.9        1,372.8
Cash and cash equivalents                                                                31.2           24.5
Accrued investment income                                                                16.2           18.7
Receivables:
   Due from insureds                                                                     92.8          103.7
   Due from reinsurance                                                                 218.3          196.1
   Accrued retrospective premiums                                                        31.0           52.8
Cost in excess of net assets purchased                                                   32.7           35.5
Unearned premiums on ceded reinsurance                                                    1.2            0.9
Accrued policyholder dividends recaptures                                                 3.0            2.5
Deferred federal income tax asset, net                                                   10.3          --
Other assets                                                                             12.5           15.5
------------------------------------------------------------------------------------------------------------
                                                                                     $1,625.1       $1,823.0
============================================================================================================

Liabilities and Shareholders' Equity

Reserves for losses and loss adjustment expenses                                    $   897.4      $   935.8
Unearned premiums                                                                        43.9           36.8
Deferred federal income tax liability, net                                               --             14.2
Other liabilities                                                                        55.4           81.8
------------------------------------------------------------------------------------------------------------
                                                                                        996.7        1,068.6
------------------------------------------------------------------------------------------------------------

Shareholders' equity:
   Common  stock -- $.10  par,  35,000,000  shares  authorized,  22,359,816  and
     24,077,792 shares issued and outstanding

     at December 31, 1999 and December 31, 1998, respectively                             2.2            2.4
   Additional paid-in capital                                                            96.8          102.9
   Retained earnings                                                                    403.0          494.1
   Accumulated other comprehensive income                                               126.4          155.0
------------------------------------------------------------------------------------------------------------
                                                                                        628.4          754.4
------------------------------------------------------------------------------------------------------------
                                                                                     $1,625.1       $1,823.0
============================================================================================================
</TABLE>

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

                                                                     13-3


                                       4
<PAGE>


                                                                      Exhibit 13
                     ARGONAUT GROUP, INC. AND SUBSIDIARIES
                     Consolidated Statements of Operations

                       ----------------------------------
<TABLE>
<CAPTION>
In millions except per share amounts    For the Years Ended December 31,    1999         1998         1997

<S>                                                                        <C>           <C>          <C>
Premiums and other revenue:
   Premiums, net                                                           $  93.0       $138.5       $164.9
   Net investment income                                                      68.5         77.4         87.2
   Gains on sales of investments                                               2.8         51.2          4.5
------------------------------------------------------------------------------------------------------------
Total revenue                                                                164.3        267.1        256.6
------------------------------------------------------------------------------------------------------------
Expenses:
   Losses and loss adjustment expenses                                       121.4         95.1        112.8
   Underwriting, acquisition, and insurance expenses                          64.6         74.9         80.6
   Amortization of cost in excess of net assets purchased                      2.8          2.8          2.8
   Policyholder dividends                                                      1.0          0.8         (0.9)
-------------------------------------------------------------------------------------------------------------
Total expenses                                                               189.8        173.6        195.3
-------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                                            (25.5)        93.5         61.3
Provision (benefit) for income taxes                                         (10.3)        30.8         12.8
-------------------------------------------------------------------------------------------------------------
Net income (loss)                                                           $(15.2)       $  62.7    $  48.5
============================================================================================================
Net income (loss) per common share:
   Basic                                                                     $(0.64)      $  2.62     $  2.04
=============================================================================================================
   Diluted                                                                   $(0.64)      $  2.61     $  2.02
=============================================================================================================
</TABLE>


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

                                                                     13-4


                                       5
<PAGE>

                                                                     Exhibit 13
ARGONAUT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------

In millions                                                                 1999         1998         1997
(Unaudited)

<S>                                                                         <C>          <C>           <C>
Net income (loss)                                                           $(15.2)      $ 62.7        $48.5
Other comprehensive income (loss):
   Unrealized gain (loss) on securities:

   Gains (losses) arising during the year                                    (41.2)        65.0         67.7
   Reclassification adjustment for gains included in net income or loss       (2.8)       (51.2)        (4.5)
-------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) before tax                                 (44.0)        13.8         63.2
Income tax expense (recoverable) related to other comprehensive income       (15.4)         4.8         22.1
-------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax                                (28.6)         9.0         41.1
-------------------------------------------------------------------------------------------------------------
Comprehensive income (loss)                                                 $(43.8)      $ 71.7        $89.6
=============================================================================================================
</TABLE>

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

                                                                     13-5


                                       6
<PAGE>


                                                                      Exhibit 13
                     ARGONAUT GROUP, INC. AND SUBSIDIARIES
                Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
In millions                                     Common        Additional   Retained    Accumulated   Shareholders'
                                                 Stock        Paid-In      Earnings    Other         Equity
                                                              Capital                  Comprehensive
                                                                                       Income
-------------------------------------------------------------------------------------------------------------
<S>                                                <C>         <C>          <C>          <C>          <C>
Balance, December 31, 1996                         $2.4        $97.1        $460.9       $104.9       $665.3
   Net income                                                                 48.5                      48.5
   Other comprehensive income                                                              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
   Net income                                                                 62.7                      62.7
   Other comprehensive income                                                               9.0          9.0
   Repurchase and retirement of
     common stock                                                             (0.5)                     (0.5)
   Cash dividends ($1.64 per share)                                          (39.3)                    (39.3)
   Stock options exercised                                       4.6                                     4.6
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998                          2.4        102.9         494.1        155.0        754.4
   Net loss                                                                  (15.2)                    (15.2)
   Other comprehensive loss                                                               (28.6)       (28.6)
   Repurchase and retirement of
     common stock                                  (0.2)        (6.9)        (37.0)                    (44.1)
   Cash dividends ($1.64 per share)                                          (38.9)                    (38.9)
   Stock options exercised                                       0.8                                     0.8
-------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999                         $2.2        $96.8        $403.0       $126.4       $628.4
-------------------------------------------------------------------------------------------------------------
</TABLE>

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

                                                                     13-6


                                       7
<PAGE>



                      ARGONAUT GROUP, INC. AND SUBSIDIARIES           Exhibit 13
                      Consolidated Statements of Cash Flow
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
In millions                         For the Years Ended December 31,        1999         1998         1997
<S>                                                                       <C>          <C>          <C>
Cash flows from operating activities:

   Net income (loss)                                                      $  (15.2)    $   62.7     $   48.5
   Adjustments to reconcile net income (loss) to
   net cash used by operations:
     Amortization and depreciation                                             6.8          8.6         12.1
     Deferred federal income tax provision (benefit)                          (9.2)        20.8         13.4
     Gains on sales of investments                                            (2.8)       (51.2)        (4.5)
   Decrease in accrued investment income                                       2.5          1.6          2.1
   Decrease (increase) in receivables from insureds                           10.9          8.8        (36.0)
   Decrease (increase) in reinsurance receivables                            (22.2)        14.1         24.4
   Decrease in accrued retrospective premiums                                 21.8          9.0         18.8
   Decrease (increase) in unearned premiums on ceded reinsurance              (0.3)        (0.1)         0.2
   Decrease in reserves for losses and loss
     adjustment expenses                                                     (38.4)      (127.4)       (95.7)
   Increase (decrease) in unearned premiums                                    7.1         (3.4)       (25.1)
   Increase in accrued policyholder dividends                                 (0.5)        (0.1)        (3.7)
   Increase (decrease) in income taxes payable                               (11.1)         6.8         38.6
   Decrease in other assets and liabilities                                  (14.2)        (6.9)       (15.0)
-------------------------------------------------------------------------------------------------------------
                                                                             (64.8)       (56.7)       (21.9)
-------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:

   Sales of fixed maturity investments                                        61.0         13.3         13.0
   Maturities and mandatory calls of fixed maturity investments              107.9        248.3        392.0
   Sales of equity securities                                                 18.4         96.0         80.5
   Purchases of fixed maturity investments                                   (30.7)      (335.1)      (319.2)
   Purchases of equity securities                                            (21.0)       (15.0)       (15.0)
   Decrease (increase) in short-term investments                              19.1         61.0        (74.8)
   Other, net                                                                 (1.0)       (11.1)        10.7
-------------------------------------------------------------------------------------------------------------
                                                                             153.7         57.4         87.2
-------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:

   Repurchase of common stock                                                (44.1)        (0.5)        --
   Payment of cash dividend                                                  (38.9)       (39.3)       (38.1)
   Exercise of stock options                                                   0.8          4.6          1.2
-------------------------------------------------------------------------------------------------------------
                                                                             (82.2)       (35.2)       (36.9)
-------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents                                          6.7        (34.5)        28.4
Cash and cash equivalents, beginning of period                                24.5         59.0         30.6
-------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period                                   $  31.2     $   24.5       $ 59.0
=============================================================================================================

   Additional disclosure:
   Income taxes paid                                                       $   9.7      $   1.7        $  --
=============================================================================================================
</TABLE>
The accompanying notes are an integral part of
these financial statements.

                                      13-7


                                       8
<PAGE>


                                                                      Exhibit 13
ARGONAUT GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements

1. Business and Significant Accounting Policies

Business  Argonaut Group, Inc. (the Company) is a national provider of specialty
insurance products focused on high-quality  customer service for specific niches
of  property-casualty  insurance.  Workers  compensation  is the primary line of
insurance  written  by  Argonaut  Insurance  Company,  the  principal  insurance
subsidiary.   Argonaut  Insurance  Company  also  writes  a  limited  amount  of
complementary  lines of commercial  insurance,  primarily general and automobile
liability, but targets 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,  technology 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 Insurance Company has also recently announced a
partnership with Esurance to provide  personal auto insurance  nationally on the
Internet (www.esurance.com).

Argonaut   Great   Central   Insurance   Company   specializes   in   commercial
multiple-peril,  workers compensation,  and umbrella coverages  specifically for
food merchants, restaurants, churches, and laundry/dry cleaners.

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,  1999 and 1998
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  Receivables  due from  insureds are  presented net of a reserve for
uncollectible accounts of $1.5 million and $1.7 million at December 31, 1999 and
1998 respectively.

Receivables due from  reinsurance of paid loss and loss adjustment  expenses are
presented net of a reserve for  uncollectible  accounts of $4.1 million and $2.6
million at December 31, 1999 and December 31, 1998 respectively.

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 this difference will have a
material  effect,  either  adversely or favorably,  on the  Company's  financial
position and results of operations.

                                                         13-8

                                       9
<PAGE>




                                                                     Exhibit 13

Cost in Excess of Net Assets Purchased Cost in excess of net assets purchased of
$32.7  million at December  31, 1999 and $35.9  million at  December  31,  1998,
relate to Teledyne,  Inc.'s  acquisition of Argonaut  Insurance Company in 1969,
and is net of  accumulated  amortization  of $36.9  million  and $34.1  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.

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, and investment income.

Recently Issued Accounting Pronouncements In June 1998, the Financial Accounting
Standards  Board  ("FASB")  issued  Statement of Financial  Accounting  Standard
("SFAS")  No.  133,   "Accounting   for  Derivative   Instruments   and  Hedging
Activities."  SFAS No.  133  requires  companies  to record  derivatives  on the
balance sheet as assets or liabilities,  measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending  on the use of the  derivative  and  whether  it  qualifies  for hedge
accounting.  The  key  criterion  for  hedge  accounting  is  that  the  hedging
relationship  must be highly effective in achieving  offsetting  changes in fair
value or cash flows.  SFAS No. 133 was to have been  effective  for fiscal years
beginning  after June 15,  1999.  In May 1999,  the FASB  issued  SFAS No.  137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective  Date of SFAS No.  133",  that  amends  SFAS No.  133 and  defers  the
effective date to fiscal years beginning after June 15, 2000.  Management of the
Company  does not  believe  the  adoption  of SFAS No.  133 will have a material
impact on the  Company's  results  of  operations  or  financial  position  when
adopted.

                                                         13-9


                                       10
<PAGE>





                                                                     Exhibit 13

2. INVESTMENTS

Gains on sales and calls of investments for the years ended December 31, were as
follows.
<TABLE>
<CAPTION>
 millions                             1999      1998      1997
----------------------------------------------------------------
<S>                                   <C>     <C>           <C>
Fixed maturities                      $0.6    $  0.2        $  -
Equity securities                      2.2      51.0         4.5
----------------------------------------------------------------
                                      $2.8    $ 51.2        $4.5
================================================================
</TABLE>


The amortized cost and fair value of fixed  maturity  investments as of December
31, were as follows.
<TABLE>
<CAPTION>
In millions                                                             1999
-------------------------------------------------------------------------------

                                Amortized    Gross        Gross         Fair
                                Cost         Unrealized   Unrealized    Value
                                             Gains        Losses
<S>                             <C>           <C>          <C>          <C>
U.S. Treasury securities        $139.9        $  -         $  1.4       $138.5
U.S. Government agencies         595.9           -           29.3        566.6
Obligations of states and
  political subdivisions          26.3           0.2          0.1         26.4
Redemptive preferred stock        13.7           0.4          0.2         13.9
-------------------------------------------------------------------------------
                                $775.8          $0.6        $31.0       $745.4
===============================================================================
</TABLE>

<TABLE>
<CAPTION>
In millions                                                              1998
-------------------------------------------------------------------------------

                                 Amortized    Gross        Gross         Fair
                                 Cost         Unrealized   Unrealized    Value
                                              Gains        Losses
<S>                             <C>             <C>         <C>          <C>
U.S. Treasury securities        $237.6          $11.0       $  -         $248.6
U.S. Government agencies         585.9           14.1          0.1        599.9
Obligations of states and
  political subdivisions          78.3            1.7          -           80.0
Redemptive preferred stock        13.7            0.8          0.2         14.3
-------------------------------------------------------------------------------
                                $915.5          $27.6         $0.3       $942.8
===============================================================================
</TABLE>


The  amortized  cost and  market  values  of fixed  maturity  investments  as of
December 31, 1999 by contractual maturity, are shown below.

<TABLE>
<CAPTION>
In millions
-------------------------------------------------------------------------------

                                            Amortized       Fair
                                            Cost            Value
<S>                                        <C>           <C>
Due in one year or less                    $  13.9       $  13.9
Due after one year to five years              84.1          83.5
Due after five years to ten years            677.8         648.0
-------------------------------------------------------------------------------
                                            $775.8        $745.4
===============================================================================
</TABLE>


                                      13-10


                                       11
<PAGE>
                                                                     Exhibit 13

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 $61.0  million,  $13.3
million, and $13.0 million in 1999, 1998, and 1997, respectively. Gross gains of
$0.6 million,  $0.2  million,  and $0 and no gross losses were realized on those
sales in 1999, 1998, and 1997, respectively.

At December 31, 1999 the amortized  cost and fair value of bonds on deposit with
various  insurance  regulatory  agencies were $381.4 million and $367.3 million,
respectively.

Additionally,  U.S.  Treasury  Notes with an amortized  cost of $6.8 million and
fair value of $6.5  million were  pledged as  collateral  for surety bonds which
were issued to various states in lieu of depositing bonds.

At December 31, 1999 the  Company's  investment in  International  Paper Company
common stock with a market value of $66.8  million,  was 10.6% of  shareholder's
equity.  At December 31,  1998,  there were no  investments  in any one investee
exceeding 10% of shareholders' equity.

                                      13-11


                                       12
<PAGE>


                                                                     Exhibit 13
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 $11.2  million and $8.6 million as of December
31, 1999 and 1998,  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 $17.6  million and $18.1  million at  December  31,
1999 and 1998, respectively.

Estimated  losses  recoverable from reinsurers and the ceded portion of unearned
premiums are reported as assets.

Losses and loss adjustment expenses of $121.4 million, $95.1 million, and $112.8
million for the years ending  December 31, 1999,  1998, and 1997,  respectively,
are net of  cessions  of  $54.1  million,  $20.7  million,  and  $65.4  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                         1999          1998           1997
------------------------------------------------------------------------------
<S>                                 <C>           <C>            <C>
Direct written premiums             $139.6        $160.4         $165.7
Reinsurance ceded to
  other companies                    (18.1)        (18.6)         (15.8)
Reinsurance assumed from

  other companies                      0.7           2.3            8.3
------------------------------------------------------------------------------
Net written premiums                $122.2        $144.1         $158.2
==============================================================================

Direct earned premiums               109.8         154.0         $176.6
Reinsurance ceded to
  other companies                    (17.8)        (18.5)         (16.0)
Reinsurance assumed from

  other companies                      1.0           3.0            4.3
------------------------------------------------------------------------------
Net earned premiums                 $ 93.0        $138.5         $164.9
==============================================================================
Percentage of reinsurance
assumed to net earned premiums         1.1%          2.2%           2.6%
</TABLE>



                                      13-12




                                       13
<PAGE>
                                                                     Exhibit 13

4.  Reserves for Losses and Loss Adjustment Expenses

The following  table provides a  reconciliation  of reserves for losses and loss
adjustment expenses for the years ended December 31, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
In millions                                 1999         1998          1997
-------------------------------------------------------------------------------
<S>                                         <C>        <C>           <C>
Reserves for losses and loss
  adjustment expenses at
  beginning of year*                        $935.8     $1,063.2      $1,158.9

Losses and loss adjustment expenses:
  Provision for losses and loss
    adjustment expenses for claims
    occurring in the current year            118.0        128.2         132.6

  Increase (decrease) in estimated
    losses and loss adjustment expenses
    for claims occurring in prior years       57.5        (12.4)         45.6
-------------------------------------------------------------------------------
                                             175.5        115.8         178.2
-------------------------------------------------------------------------------

Losses and loss adjustment expense payments for claims occurring during:

  Current year                                36.4         45.4          39.7
  Prior years                                177.5        197.8         234.2
-------------------------------------------------------------------------------
                                             213.9        243.2         273.9
-------------------------------------------------------------------------------
Reserves for losses and loss
  adjustment expenses at end of year        $897.4       $935.8      $1,063.2
===============================================================================
</TABLE>
*Restated

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.

As a result of  changes  in  estimates  of insured  events in prior  years,  the
provision for losses and loss adjustment expenses (net of estimated  reinsurance
recoveries of $48.6 million) increased by $57.5 million in 1999 primarily due to
higher than  anticipated  losses and related  expenses for workers  compensation
claims.

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.

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 1999 and 1998.  The  amount of  unamortized
discount was $41.4  million at December  31, 1999 and $35.5  million at December
31, 1998.

                                     13-13


                                       14
<PAGE>


                                                                     Exhibit 13

5. Income Taxes

The Company's income tax provision includes the following components.
<TABLE>
<CAPTION>
In millions                                   1999          1998       1997
-------------------------------------------------------------------------------
<S>                                           <C>           <C>         <C>
Current tax provision (benefit)               $ (1.1)       $ 10.0      $(0.3)
Deferred tax provision (benefit) related to:
  Future tax deductions                         (0.7)         16.4       18.9
  Net operating loss carryforward               (8.5)         16.2       (5.1)
  Deferred alternative minimum

    tax provision                                -           (11.8)      (0.7)
-------------------------------------------------------------------------------
Income tax provision (benefit)                $(10.3)       $ 30.8      $12.8
===============================================================================
</TABLE>


A  reconciliation  of the  Company's  income  tax  provision  or  benefit to the
provision or benefit  which would have  resulted if the tax had been computed at
the statutory rate is as follows.
<TABLE>
<CAPTION>
In millions                                     1999         1998       1997
-------------------------------------------------------------------------------
<S>                                             <C>           <C>        <C>
Income tax provision (benefit) at statutory
  tax rates (35%)                               $ (9.5)       $32.3      $21.1
Tax effect of:
  Tax exempt interest                             (0.8)        (1.4)      (1.7)
  Dividends received deduction                    (2.4)        (1.7)      (6.1)
  Other permanent adjustments, net                 0.8         (0.6)      (1.6)
State income tax provision                         1.6          1.0        1.1
-------------------------------------------------------------------------------
  Income tax provision (benefit)                $(10.3)       $30.8      $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
(liabilities)  at December 31, 1999,  1998,  and 1997 result from the  following
tax-effected  temporary differences shown in the following table. Tax benefit of
$146,000 associated with the exercise of employee stock options was allocated to
equity in 1999.
<TABLE>
<CAPTION>
In millions                                1999         1998         1997
-------------------------------------------------------------------------------
<S>                                        <C>          <C>          <C>
Deferred liability on unrealized gains
  Unrealized gains                         $(68.1)      $(83.4)      $(78.6)
  Other, net                                 (4.7)        (5.9)         5.6
Deferred tax assets:
  Reserve discounting                        43.4         44.9         53.8
  Alternative minimum tax                    12.2         15.0          6.8
  Net operating loss carryforward            27.5         15.2         23.9
-------------------------------------------------------------------------------
Deferred tax asset (liability), net        $ 10.3       $(14.2)      $ 11.5
===============================================================================
</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 $38.0  million to expire  after 2011,  $16.5  million to expire in 2012,  and
$24.2 million to expire after 2019.

                                      13-14


                                       15
<PAGE>

                                                                     Exhibit 13

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, 1999.

During 1999, the Company  reacquired and retired  1,735,300 shares of its common
stock.  The Company also retired 25,475 shares,  during 1999, that were acquired
through  exercise of employee stock options,  or forfeited in the employee stock
purchase plan. During 1998, there were 22,577 shares reacquired through exercise
of employee stock options,  or forfeited in the employee stock purchase plan. 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                         1999           1998            1997
-------------------------------------------------------------------------------
<S>                                <C>             <C>            <C>
Net income (loss)                  $ (14.3)        $  68.8        $  61.6
Surplus                            $ 579.5         $ 657.4        $ 564.8
-------------------------------------------------------------------------------
</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, 1999,  $633,000  was  available  for
dividends to Argonaut  Group without  prior  regulatory  approval.  During 1999,
dividends of $66.4 million were paid to Argonaut Group.

7. Net Investment Income

Investment income and expenses for the years ended December 31, were as follows.
<TABLE>
<CAPTION>
In millions                            1999        1998       1997
-------------------------------------------------------------------------------
<S>                                     <C>         <C>        <C>
Investment income:
  Interest and dividends on
    fixed maturities                    $54.7       $60.0      $62.0
  Dividends on equity securities         11.6        13.0       20.7
  Interest on short-term investments      0.3         2.0        2.8
  Other                                   3.5         3.5        2.1
-------------------------------------------------------------------------------
                                         70.1        78.5       87.6
Investment expenses                      (1.6)       (1.1)      (0.4)
-------------------------------------------------------------------------------
Net investment income                   $68.5       $77.4      $87.2
===============================================================================
</TABLE>

8. Underwriting, Acquisition, and Insurance Expenses

Underwriting,  acquisition,  and insurance expenses for the years ended December
31, were as follows.
<TABLE>
<CAPTION>
In millions                             1999       1998        1997
-------------------------------------------------------------------------------
<S>                                      <C>        <C>         <C>
Commissions                              $11.6      $14.6       $15.8
General expenses                          40.5       50.7        45.1
State assessments                          5.9        4.4        12.5
Taxes, licenses, and bureau fees           5.1        5.9         6.0
-------------------------------------------------------------------------------
                                          63.1       75.6        79.4
Amortization (deferral) of policy
  acquisition costs                        1.5       (0.7)        1.2
-------------------------------------------------------------------------------
                                         $64.6      $74.9       $80.6
===============================================================================
</TABLE>

                                      13-15


                                       16
<PAGE>



                                                                     Exhibit 13

9. Benefit Plans

Pension  The  Company   sponsors  a  qualified   defined   benefit  plan  and  a
non-qualified  unfunded  supplemental  defined benefit plan. The following table
sets forth change in benefit obligation, change in plan assets, weighted-average
assumptions  and components of net periodic  benefit cost as of December 31 with
respect to the qualified and non-qualified pension plans.
<TABLE>
<CAPTION>
In millions                                            1999         1998
<S>                                                  <C>           <C>
Change in benefit obligation
Benefit obligation at beginning of year              $30.6         $25.5
Service cost                                           1.8           1.7
Interest cost                                          1.9           1.8
Plan participant's contributions
Amendments                                             -             -
Actuarial (gain) loss                                 (5.4)          2.6
Benefits paid                                         (1.0)         (1.0)
-------------------------------------------------------------------------------
Benefit obligation at end of year                     27.9          30.6
===============================================================================

Change in plan assets
Fair value of plan assets at beginning of year        34.0          30.6
Actual return on plan assets                          (1.1)          2.3
Employer contribution                                  0.1           2.1
Plan participants' contributions
Benefits paid                                         (1.0)         (1.0)
-------------------------------------------------------------------------------
Fair value of plan assets at end of year              32.0          34.0
===============================================================================

Funded status                                          4.0           3.4
Unrecognized actuarial loss                           (2.9)         (0.8)
Unrecognized prior service cost                        1.2           1.3
Unrecognized net transition obligation                (0.3)         (0.3)
-------------------------------------------------------------------------------
Net amount recognized                                $ 2.0         $ 3.5
===============================================================================


Amounts recognized in the statement of financial position consist of:

  Prepaid benefit cost                              $  3.2        $  4.6
  Accrued benefit liability                           (1.4)         (1.5)
  Intangible asset                                     0.2           0.4
  Accumulated other comprehensive income               -             -
-------------------------------------------------------------------------------
Net amount recognized                               $  2.0        $  3.5
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
In millions                                                1999       1998
-------------------------------------------------------------------------------
<S>                                                       <C>         <C>
assumptions as of December 31
Weighted average discount rate                             7.5%       6.5%
Long term rate of return on plan assets                    6.0%       6.0%
Expected rate of increase in future compensation levels    4.5%       4.5%
-------------------------------------------------------------------------------
</TABLE>




                                                         13-16


                                       17
<PAGE>



                                                                     Exhibit 13
<TABLE>
<CAPTION>
In millions                                                  1999            1998
----------------------------------------------------------------------------------
<S>                                                         <C>            <C>
Components of net periodic benefit cost
Service cost                                                $ 1.8          $ 1.7
Interest cost                                                 1.9            1.8
Expected return on plan assets                               (2.0)          (1.8)
Amortization of:
Transition asset                                             (0.1)          (0.1)
Prior service cost                                            0.1            0.2
(Gain) loss                                                   -             (0.2)
-----------------------------------------------------------------------------------
Total                                                         -             (0.1)
-----------------------------------------------------------------------------------
Net periodic benefit cost                                   $ 1.7          $ 1.6
===================================================================================
</TABLE>

The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension  plan with  accumulated  benefit  obligations  in
excess of plan assets were $1.7 million,  $1.4 million, and $0 respectively,  as
of December 31, 1999 and $1.8 million, $1.5 million, and $0, respectively, as of
December 31, 1998.

Stock  Options In August 1986,  the Board of Directors of Argonaut  Group,  Inc.
adopted the Stock Option Plan covering an aggregate 1,500,000 shares of Argonaut
Group,  Inc.  Common Stock.  An amendment to 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.  A second amendment
to the Plan  increasing  the number of shares of common stock issuable under the
Plan from 2,000,000 to 2,500,000 was approved on April 27, 1999 at the Company's
Annual  Meeting.  Under the 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.

At December  31, 1999,  971,090  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, 1999,
1998, and 1997 is presented in the table below.
<TABLE>
<CAPTION>

                                                          1999                             1998                          1997
-----------------------------------------------------------------------------------------------------------------------------------


                                         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    896,440            $28.87       1,080,040           $24.63   1,035,270            $23.79
  Granted                               124,000             25.60        160,500             34.35     151,900             29.01
  Exercised                             (41,600)            17.71       (244,400)            12.97     (64,880)            17.84
  Cancelled                            (125,450)            31.05        (99,700)            30.74     (42,250)            30.05
Outstanding at end of the year          853,390            $28.62        896,440            $28.87   1,080,040            $24.63
Exercisable at end of year              428,800             27.36        416,230             26.20     560,560             19.91
Weighted-average fair value of options
  granted during the year                                  $ 2.71                           $ 4.67                       $  4.26
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                                                    13-17


                                       18
<PAGE>

                                                                    Exhibit 13

The following table summarizes  information  about stock options  outstanding
at December 31, 1999.
<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
12/31/99                       Contractual Life                             at 12/31/99
<S>                                    <C>                   <C>                  <C>            <C>                   <C>
$22.67 to $27.13                       487,540               5.72 yrs.            $26.01         302,640               $25.93
$29.25 to $35.50                       365,850               7.48 yrs.            $32.10         126,160               $30.78
                                       -------                                                   -------
                                       853,390                                                   428,800
------------------------------------------------------------------------------------------------------------------------------
</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 1999, 1998 and 1997, respectively: risk-free
rates of 4.58% and 5.12% for options issued in 1999, 5.56% and 5.64% for
options issued in 1998, 6.32% and 6.73% for options issued in 1997; expected
dividend yields of 6.66%, 5.43%, and 5.10%; expected lives of 6.21, 6.00, and
6.15 years; and expected volatility of 20.45%, 19.01%, and 16.65%.

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 in 1999, $0.7 million in 1998, and $0.6 million in 1997.

                                                         13-18


                                       19
<PAGE>



                                                                     Exhibit 13

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.  On June 30, 1997 the  Financial  Accounting  Standards  Board  issued
Statement of Financial  Accounting  Standard ("SFAS") No. 131 "Disclosures About
Segments of an Enterprise  and Related  Information"  effective for fiscal years
beginning  after  December 15, 1997. In accordance  with the selection  criteria
established  by SFAS 131, the Company has  identified  and disclosed as business
segments the lines of business considered significant to the company as a whole.
Net pre-tax  underwriting  loss  represents  net earned  premium less  operating
expenses for each segment,  and excludes  general  corporate  expenses and other
income  and  expenses  of a  general  corporate  nature.  Depreciation,  capital
expenditures, and other assets are not identifiable with any particular segment.
Other  general  corporate  assets  consist  principally  of  investments  (fixed
maturities and equity securities) and receivables (reinsurance,  agents balances
and accrued retrospective premiums).

There are no major  customers  from whom the Company  derives 10% or more of its
revenue.

Information on the Company's  business  segments for the years ended December 31
is as follows.
<TABLE>
<CAPTION>
In millions                             1999          1998         1997
-------------------------------------------------------------------------------
<S>                                     <C>           <C>          <C>
Net earned premiums:
  Workers compensation                  $ 65.7        $115.6       $140.6
  Other lines                             27.3          22.9         24.3
  Run off lines                            -            -                 -
-------------------------------------------------------------------------------
Net earned premiums                     $ 93.0        $138.5       $164.9
===============================================================================

Pre-tax underwriting income (loss):

  Workers compensation                  $(80.6)       $(24.1)      $(20.9)
  Other lines                            (10.6)         (7.1)        (8.7)
  Run off lines                           (0.9)          0.6          2.4
-------------------------------------------------------------------------------
Total pre-tax underwriting loss          (92.1)        (30.6)       (27.2)
General corporate expenses                (4.7)         (4.5)        (3.2)
Net investment income                     68.5          77.4         87.2
Gains on sales of investments              2.8          51.2          4.5
Provision for income taxes                   (10.3)     30.8         12.8
-------------------------------------------------------------------------------
Net (loss) income                       $(15.2)      $  62.7      $  48.5
===============================================================================
</TABLE>

















                                                         13-19


                                       20
<PAGE>


                                                                     Exhibit 13

11. Commitments and Contingencies

Rental  expenses  for  operating  leases,  principally  for  offices,  were $4.0
million, $4.2 million, and $4.0 million in 1999, 1998, and 1997, respectively.

As  of  December  31,  1999,  future  minimum  noncancellable   operating  lease
commitments  are as follows:  $3.8 million in 2000,  $3.1 million in 2001,  $2.3
million in 2002, $1.3 million in 2003, $2.3 million in 2004 and thereafter for a
total of $12.7 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 limited  discovery  conducted in
the case, and the preliminary investigation conducted thus far.

The  Company  has been sued in  sixteen  lawsuits  brought  on behalf of alleged
classes of purchasers of retrospectively  rated workers compensation  insurance,
alleging that the defendants, including other compensation insurers, charged the
purported class unlawful  premiums.  Plaintiffs have threatened to bring similar
claims  against the Companies in several other states.  The Companies  intend to
vigorously  defend  these  lawsuits.  Management  is  unable  to  determine  the
potential financial impact of these lawsuits at this time.

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.

                                      13-20


                                       21
<PAGE>



                                                                    Exhibit 13

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  claims  related to these run off  lines.  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.
<TABLE>
<CAPTION>
Reserves for Losses and Loss Adjustment Expenses

In millions                       1999            1998             1997
-------------------------------------------------------------------------------
<S>                               <C>             <C>            <C>
Run off lines:
  Reinsurance assumed             $201.4          $213.0         $  217.8
  Medical malpractice               27.5            29.0             54.4
-------------------------------------------------------------------------------
                                   228.9           242.0            272.2
Continuing lines                   668.5           693.8            791.0
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Total reserves                    $897.4          $935.8         $1,063.2
-------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
underwriting income (loss)

In millions                        1999            1998            1997
-------------------------------------------------------------------------------
<S>                               <C>            <C>            <C>
Run off lines:
  Reinsurance assumed             $  (1.3)        $(1.3)        $  0.4
  Medical malpractice                 0.4           1.9            2.0
-------------------------------------------------------------------------------
                                     (0.9)          0.6            2.4
Continuing lines                    (91.2)        (31.2)         (29.6)
-------------------------------------------------------------------------------
Total underwriting loss            $(92.1)       $(30.6)        $(27.2)
-------------------------------------------------------------------------------
</TABLE>

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.

                                      13-21


                                       22
<PAGE>





                                                                      Exhibit 13
Quarterly Financial Data -- Unaudited

The following table represents  unaudited quarterly financial data for the years
ended December 31, 1999 and 1998. 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

1999
<S>                                  <C>            <C>          <C>          <C>
Total revenues                       $ 46.1         $51.4        $ 45.3       $ 21.5
Underwriting loss                      (3.6)         (5.8)        (10.6)       (72.1)
Net income (loss)                       9.5           7.2           5.0        (36.9)
Net income (loss) per common share
  Basic*                                0.40          0.30          0.21        (1.63)
  Diluted*                              0.40          0.30          0.21        (1.63)

Comprehensive income (loss)            (7.1)         10.8         (17.6)       (29.9)

1998

Total revenues                        $98.0         $56.3        $ 60.4        $52.4
Underwriting loss                      (7.6)         (5.0)        (10.5)        (7.5)
Net income                             36.7           8.8          10.4          6.8
Net income per common share
  Basic*                                1.54          0.37          0.43         0.28
  Diluted*                              1.52          0.36          0.43         0.28

Comprehensive income                   23.5          14.5          14.1         19.6
-------------------------------------------------------------------------------------

</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>

   1999
   High                27 1/2    27 15/16 26 5/8    26
   Low                 23 3/4    23       23 9/16   18 11/16
   Close               25 11/16  24       25 1/8    19 7/8


   1998
   High                37 1/2    37       33 1/8    27 7/8
   Low                 31        30       24        21 1/4
   Close               36 1/8    31 5/8   25 1/2    24 1/2
</TABLE>






                                      13-22


                                       23
<PAGE>



                                                                     Exhibit 13

Management's Discussion and Analysis of Results of Operations and Financial
Condition

Results of Operations  Earned premium income  decreased to $93.0 million for the
year ended  December  31,  1999,  from $138.5  million in 1998,  and from $164.9
million recorded in 1997. This decline resulted from two primary factors: During
the fourth  quarter,  an  actuarial  review  determined  that the  estimate  for
additional premiums accrued under  retrospectively rated policies was overstated
for older policy years by  approximately  $20 million.  The  adjustment  of this
estimate is a decrease to earned  premiums for the quarter and the current year.
Also, severe price competition for workers compensation insurance, the Company's
primary line of business  continued to make many accounts less attractive during
1999.  The impact of large  deductible  programs  on inforce  premium  was $62.0
million in 1999 as compared with $95.3 million in 1998.

Net investment  income was $68.5 million,  $77.4 million,  and $87.2 million for
1999, 1998, and 1997, respectively. This decline reflects fluctuations in market
values  and the  reduction  of  portfolio  assets as claim  reserves  from prior
periods are paid out,  and as funds have been used to  repurchase  shares of the
Company's common stock.

Pre-tax gains on sales of investments were $2.8 million, $51.2 million, and $4.5
million for 1999, 1998, and 1997, respectively. The 1998 gain resulted primarily
from the  call of  Navistar  International  Series D  preferred  stock  and from
resolution  of class action  litigation  related to  investment  trades in prior
years. Management cannot anticipate when or if similar gains or losses may occur
in the future.

Losses and loss  adjustment  expenses  were $121.4  million,  $95.1  million and
$112.8 million in 1999, 1998, and 1997,  respectively.  Incurred losses for 1999
include an increase to workers  compensation  reserves during the fourth quarter
of $31.7  million,  reflecting  higher than  anticipated  loss  development  for
accident years 1998 and 1999,  particularly  in  California.  The Company's loss
ratio,  including the run off lines of business,  was 132% in 1999, 69% in 1998,
and 68% in 1997. The loss ratio in the workers compensation line of business was
143% in 1999 and 65% in both 1998 and 1997.  The loss ratio in other  continuing
lines of business was 102%, 87%, and 94% in 1999, 1998, and 1997, 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 $64.6 million in 1999, $74.9 million in 1998, and
$80.6 million in 1997.  Underwriting  expenses are composed of four  components:
general  expenses,  commissions,  premium taxes, and state fees and assessments.
The $10.3 million  decrease in expenses from the prior year is attributed to the
reduction in compensation  and fringe  benefits paid in 1999, and  non-recurring
expenses related to Year 2000 remediation incurred in 1998.

Policyholder dividend expense (recapture) was $1.0 million in 1999, $0.8 million
in 1998, and $(0.9) million in 1997.  These charges  reflect the loss experience
of  participating  policyholders,  the basis for  dividend  payments.  Since the
advent of open rating in 1995 in California,  fewer  participating  policies are
being written.

After-tax  operating loss was $15.2 million in 1999 compared to operating income
of $62.7 million in 1998 and $48.5 million in 1997.  The after-tax  loss in 1999
was a result  of the  reduction  in earned  premium  and  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,  1999,  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.

                                                         13-23


                                       24
<PAGE>



                                                                     Exhibit 13

In addition to its investment portfolio, subsidiaries of Argonaut Group own real
property for use as Home Office facilities for Argonaut Insurance Company and
Argonaut Great Central, as well as three commercial properties in California.
These real properties are included in "Other Assets" at $5 million; their
original cost less accumulated depreciation. The market  value for these
properties  is  estimated  at between  $98 and $113 million.

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,  reduced by dividends  declared  during the prior  twelve  months.
Under these provisions, as of December 31, 1999, Argonaut Insurance could pay to
Argonaut  Group,  Inc. a maximum  dividend  of $600,000  without  the  Insurance
Commissioner's  approval.  During  1999,  Argonaut  Insurance  paid the  Company
dividends of $66.4 million.

The quarterly  dividend to shareholders of Argonaut Group for 1999 was $0.41 per
common  share.  During  1999,  total cash  dividends  paid by the Company to its
shareholders were $1.64 per share. On January 22, 2000, the Argonaut Group, Inc.
Board of  Directors  declared a  quarterly  common  stock  dividend of $0.41 per
common share, payable February 23 to shareholders of record February 8, 2000.

During 1999 under its previously  announced stock repurchase program the Company
purchased an additional  1,735,300 shares bringing the total shares  repurchased
to 7,150,988 out of an aggregate  authorization  of eight million shares.  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.

Recently Issued Accounting Pronouncements  As discussed in Note 1 to the
Consolidated Financial Statements, the Company has  reviewed  Statement  of
Financial  Accounting  Standards  (SFAS) No. 133,  "Accounting  for  Derivatives
and Hedging Activities".  The  statement  will not have a material  effect on
the  Company's  results of  operations  or  financial  condition.  An amendment
to the statement, SFAS No. 137 defers the effective date of SFAS no. 133 for the
Company to January 1, 2001.

Market Risk The primary  market risk  exposures  that result in an impact to the
Company's investment portfolio relates to equity price changes and interest rate
changes. The Company does not have any foreign currency risk, debt or derivative
instruments.

The Company holds a well  diversified  portfolio of  investments in common stock
representing  U.S.  firms in industries and market  segments  ranging from small
market  capitalization  stocks to the Standard & Poors 500 stocks.  Equity price
risk is managed primarily through the daily monitoring of funds committed to the
various  types  securities  owned by the Company and by limiting the exposure in
any one investment or type of  investment.  At December 31, 1999 the fair market
value of the Company's  common stock was $427.1  million.  The potential loss in
fair value at December 31, 1999 using a 10% hypothetical  decline in prices,  is
estimated to be approximately $42.7 million.

The  Company's  primary  exposure  to  interest  rate risk  relates to its fixed
maturity  investments  including  redeemable  preferred stock. Changes in market
interest rates directly impact the market value of the fixed maturity securities
and preferred stocks. The following interest rate sensitivity  analysis measures
the potential change in fair value for the Company's fixed maturity  investments
and preferred  stock as of December 31, 1999  resulting from changes in the rate
of 100 and 200 basis points.

                                                         13-24


                                       25
<PAGE>



                                                                     Exhibit 13

Interest Rate Sensitivity Analysis
               Fair          Yield         Modified
               Value         To            Duration
               (Millions)    Maturity      (Years)
-200bp         867.3         5.5%          6.4
-100bp         871.8         6.1%          6.3
Base Case      806.7         7.1%          6.1
+100bp         761.3         8.1%          5.7
+200bp         717.1         9.1%          5.5

Argonaut  adheres  to  certain  specific  guidelines  to manage  its  investment
portfolio.  The Company invests only in high investment grade bonds ("AAA" rated
U.S.  treasury  notes and  government  agencies and "A" or better for  municipal
bonds and preferred  stocks) with a short horizon (10 year maximum) for treasury
notes, municipal bonds, and government agencies.

Year 2000 The  Company  is  pleased to report  that it has not  experienced  any
significant  systems  or  other  Year  2000  (Y2K)  problems  at the turn of the
millennium.  During the first hours of  January,  2000,  the systems  department
successfully  completed  a turn  of  century  date  check  out  of all  systems,
applications,  connections,  hardware and software.  All systems continued to be
functional and there were no crisis shutdowns.

As of the business week  starting  January 3, 2000 all systems were and continue
to be monitored for any Y2K exceptions. The Company has implemented an extensive
Year 2000 contingency plan that identifies  pre-planned courses of action in the
event  that Y2K  problems  interrupt  its  internal  processes  or its  business
partners'  processes.  As of mid-1999 all third party  vendors and customers had
declared themselves to the Company to be Y2K compliant. As a result there are no
third  parties that are currently  unable to transact  business with the Company
due to Y2K systems  problems.  The  contingency  plan will continue  through the
quarter end of March 2000.

There has been no material  change in total project cost for  upgrading  systems
for Y2K compliance from the approximately $4.4 million previously disclosed. All
costs  associated  with  the  project  have  been  expensed  as  incurred.   The
postponement of known systems projects or other capital spending does not appear
to have any  material  impact on the  company's  liquidity  as the result of the
devotion of company resources to preparing for Y2K compliance.

                                                         13-25