<PAGE>
                                       1


                                                                     Exhibit 13



Selected Financial Data

<TABLE>
<CAPTION>

In millions   For the Years Ended December 31, 1998          1997         1996         1995       1994
<S>                                            <C>          <C>          <C>          <C>        <C> 

STATEMENT OF OPERATIONS DATA
Premiums:
   Workers compensation                        $  115.6        $  140.6   $  129.5     $  176.7    $   240.2
   Other insurance                                 22.9         24.3          32.2         31.4         39.5
-------------------------------------------------------------------------------------------------------------------
                                                  138.5        164.9         161.7        208.1        279.7
Net investment income                              77.4         87.2          89.5        102.0        110.7
Gains on sales of investments                      51.2          4.5          21.6          3.1          3.8
-------------------------------------------------------------------------------------------------------------------
Total revenue                                  $  267.1       $  256.6    $  272.8     $  313.2     $  394.2
===================================================================================================================

Underwriting gain (loss) before income taxes:
   Workers compensation                       $   (24.1)       $(21.2)     $  (5.3)  $      3.3    $     7.7
   Other continuing lines                          (7.1)        (8.4)       (124.6)       (35.6)       (24.3)
   Run off lines                                    0.6          2.4        (127.4)         -           12.0
-------------------------------------------------------------------------------------------------------------------
                                              $   (30.6)       $   (27.2) $ (257.3)   $   (32.3)  $     (4.6)
===================================================================================================================

Income (loss) before income taxes             $    93.5        $61.3      $ (149.0)      $ 69.7   $   106.0
Provision for income taxes                         30.8         12.8         (55.0)        12.8         29.3
-------------------------------------------------------------------------------------------------------------------
Net income (loss)                             $    62.7        $    48.5    $(94.0)   $    56.9    $    76.7
===================================================================================================================

Net income (loss) per common share:
   Basic                                      $    2.62        $    2.04     $(3.92)   $    2.34     $ 3.00
===================================================================================================================
   Diluted                                    $    2.61        $    2.02     $(3.92)   $    2.32     $ 2.97
===================================================================================================================

BALANCE SHEET DATA
Portfolio investments                          $1,372.8        $1,369.1   $1,395.5     $1,489.2     $1,484.8
===================================================================================================================
Total assets                                   $1,780.6        $1,860.5   $1,944.4     $1,977.5     $2,058.8
===================================================================================================================

Reserves for losses and loss
   adjustment expenses                         $  895.9        $1,024.9   $1,158.8     $1,026.1     $1,161.5
===================================================================================================================
Shareholders' equity                           $  754.4        $  717.9  $  665.3     $  810.8     $  745.6
===================================================================================================================

Cash dividends declared per
   common share                              $    1.64        $    1.60   $1.44       $ 1.28        $ 1.12
===================================================================================================================
</TABLE>



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



                                                         13-1

<PAGE>
                                       2




                                                                      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, 1998 and 1997,
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, 1998. 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, 1998 and 1997,  and their  results of
operations,  comprehensive  income and cash flows for each of the three years in
the period ended  December 31,  1998,  in  conformity  with  generally  accepted
accounting principles.


ARTHUR ANDERSEN LLP

San Francisco, California
January 7, 1999

























                                                       13-2





<PAGE>
                                       3
                                                                 Exhibit 13
<TABLE>
<CAPTION>

Consolidated Balance Sheets

In millions except per share amounts December 31,                                    1998           1997
<S>                                                                                 <C>           <C>    

ASSETS
Investments:
   Fixed maturities, available for sale, at fair value                              $  942.8      $  857.6
     (cost: 1998-$915.5; 1997-$845.8)
   Equity securities, available for sale, at fair value                               408.5          440.1
     (cost: 1998-$197.4; 1997-$227.4)
   Short-term investments, available for sale, at fair value                             19.9         80.9
   Securities in transit                                                                  1.6         (9.5)
-------------------------------------------------------------------------------------------------------------------
                                                                                      1,372.8        1,369.1
Cash and cash equivalents                                                                24.5           59.0
Accrued investment income                                                                18.7           20.3
Receivables:
   Reinsurance                                                                          196.1          210.2
   Agents' balances                                                                      63.8           74.2
   Accrued retrospective premiums                                                        52.8           61.8
Cost in excess of net assets purchased                                                   35.5           38.3
Unearned premiums on ceded reinsurance                                                    0.9            0.8
Deferred federal income taxes receivable, net                                             -             11.5
Other assets                                                                             15.5           15.3
-------------------------------------------------------------------------------------------------------------------
                                                                                     $1,780.6       $1,860.5
===================================================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss adjustment expenses                                     $  895.9       $1,024.9
Unearned premiums                                                                        36.8           40.2
Accrued policyholder dividends                                                           (2.5)          (2.4)
Deferred federal income taxes payable, net                                               14.2            -
Other liabilities                                                                        81.8           79.9
-------------------------------------------------------------------------------------------------------------------
                                                                                      1,026.2        1,142.6
===================================================================================================================

Shareholders' equity:
   Common  stock -- $.10  par,  35,000,000  shares  authorized,  24,077,792  and
     23,854,720 shares issued and outstanding
     at December 31, 1998 and December 31, 1997, respectively                             2.4            2.4
   Additional paid-in capital                                                           102.9           98.3
   Retained earnings                                                                    494.1          471.2
   Net unrealized appreciation on securities                                            155.0          146.0
   ---------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
                                                                                        754.4          717.9
-------------------------------------------------------------------------------------------------------------------
                                                                                     $1,780.6       $1,860.5
===================================================================================================================
</TABLE>


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


                                                       13-3
<PAGE>
                                       4



                                                                     Exhibit 13
<TABLE>
<CAPTION>

Consolidated Statements of Operations


In millions except per share amounts    For the Years Ended December 31,    1998         1997         1996
<S>                                                                        <C>          <C>          <C>





Premiums and other revenue:
   Premiums, net                                                           $ 138.5       $164.9      $ 161.7
   Net investment income                                                      77.4         87.2         89.5
   Gains on sales of investments                                              51.2          4.5         21.6
   ---------------------------------------------------------------------------------------------------------
Total revenue                                                                267.1        256.6        272.8
------------------------------------------------------------------------------------------------------------
Expenses:
   Losses and loss adjustment expenses                                        95.1        112.8        346.2
   Underwriting, acquisition, and insurance expenses                          74.9         80.6         64.1
   Amortization of cost in excess of net assets purchased                      2.8          2.8          2.8
   Policyholder dividends                                                      0.8         (0.9)         8.7
   ---------------------------------------------------------------------------------------------------------
Total expenses                                                               173.6        195.3        421.8
------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                                             93.5         61.3       (149.0)
Provision for income taxes                                                    30.8         12.8        (55.0)
-------------------------------------------------------------------------------------------------------------
Net income (loss)                                                         $   62.7      $  48.5     $  (94.0)
===================================================================================================================

Net income (loss) per common share:
  Basic                                                                    $   2.62      $  2.04     $  (3.92)
===================================================================================================================
  Diluted                                                                  $   2.61      $  2.02     $  (3.92)
===================================================================================================================
</TABLE>


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





                                                       13-4
<PAGE>
                                       5




                                                                      Exhibit 13


<TABLE>
<CAPTION>

Consolidated Statements of Comprehensive Income



In millions except amounts per share                                        1998         1997         1996
(Unaudited)
<S>                                                                        <C>           <C>        <C> 


Net income (loss)                                                            $62.7        $48.5      $ (94.0)

Other comprehensive income:
   Unrealized gain on securities:
     Gain arising during the year                                             65.0         67.7         11.0
     Reclassification adjustment for gains included in net income            (51.2)        (4.5)       (21.6)
     --------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) before tax                                  13.8         63.2        (10.6)
Income tax expense related to other comprehensive income (loss)                4.8         22.1         (3.7)
-------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax                                  9.0         41.1         (6.9)
-------------------------------------------------------------------------------------------------------------
Comprehensive income (loss)                                                  $71.7        $89.6      $(100.9)
===================================================================================================================
</TABLE>

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





                                                       13-5


<PAGE>
                                       6


                                                                   Exhibit 13
<TABLE>
<CAPTION>

Consolidated Statements of Shareholders' Equity



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

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

Balance, December 31, 1995                         $2.4      $  97.7        $598.9       $111.8       $810.8
   Net loss                                                                  (94.0)                    (94.0)
   Change in net unrealized
     appreciation on securities                                                            (6.9)        (6.9)
   Retirement of common stock                                   (1.4)         (9.4)                    (10.8)
   Cash dividends ($1.44 per share)                                          (34.6)                    (34.6)
   Stock options exercised                                       0.8                                     0.8
-------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996                          2.4         97.1         460.9        104.9        665.3
   Net income                                                                 48.5                      48.5
   Change in net unrealized
     appreciation on securities                                                            41.1         41.1
   Cash dividends ($1.60 per share)                                          (38.2)                    (38.2)
   Stock options exercised                                       1.2                                     1.2
-------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997                          2.4         98.3         471.2        146.0        717.9
   Net income                                                                 62.7                      62.7
   Change in net unrealized
     appreciation on securities                                                             9.0          9.0
   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
===================================================================================================================

</TABLE>


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







                                                       13-6

                                                                      Exhibit 13
<PAGE>
                                       7

<TABLE>
<CAPTION>

Consolidated Statements of Cash Flow



In millions                      For the Years Ended December 31,           1998         1997         1996
<S>                                                                      <C>          <C>           <C>    


Cash flows from operating activities:
   Net income (loss)                                                      $   62.7     $   48.5      $ (94.0)
   Adjustments to reconcile net income (loss) to
     net cash used by operations:
     Amortization and depreciation                                             8.6         12.1         12.1
     Decrease in accrued investment income                                     1.6          2.1          1.5
     Decrease (increase) in reinsurance receivables                           14.1         24.4        (36.0)
     Decrease (increase) in agents' balances                                  10.4          2.3         (2.5)
     Decrease in accrued retrospective premiums                                9.0         18.8         11.9
     Decrease (increase) in unearned premiums on ceded reinsurance            (0.1)         0.2          1.6
     Decrease (increase) in deferred federal income taxes receivable          20.8         13.4        (27.6)
     Increase (decrease) in reserves for losses and loss adjustment expenses(129.0)      (134.0)       132.8
     Increase (decrease) in unearned premiums                                 (3.4)       (25.1)         1.3
     Increase (decrease) in accrued policyholder dividends                    (0.1)        (3.7)         6.2
     Increase (decrease) in income taxes payable                               6.8         38.6        (36.8)
     Increase (decrease) in other assets and liabilities                      (6.9)       (15.0)         4.4
     --------------------------------------------------------------------------------------------------------
                                                                              (5.5)       (17.4)       (25.1)
------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
   Sales of fixed maturity investments                                        13.0         13.0         35.7
   Maturities and mandatory calls of fixed maturity investments               45.1        392.0        165.1
   Sales of equity securities                                                248.3         76.0         28.5
   Purchases of fixed maturity investments                                  (335.1)      (319.2)      (112.6)
   Purchases of equity securities                                            (15.0)       (15.0)       (64.4)
   Decrease (increase) in short-term investments                              61.0        (74.8)        28.8
   Other, net                                                                (11.1)        10.7         (4.1)
   ----------------------------------------------------------------------------------------------------------
                                                                               6.2         82.7         77.0
------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
   Repurchase of common stock                                                 (0.5)         -          (10.8)
   Payment of cash dividend                                                  (39.3)       (38.1)       (34.6)
   Exercise of stock options                                                   4.6          1.2          0.8
   ---------------------------------------------------------------------------------------------------------
                                                                             (35.2)       (36.9)       (44.6)
-------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents                             (34.5)        28.4          7.3
Cash and cash equivalents, beginning of period                                59.0         30.6         23.3
------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period                                  $   24.5     $   59.0      $  30.6
===================================================================================================================

Additional disclosure:
   Income taxes paid                                                     $     1.7      $        -     $    9.2
===================================================================================================================
</TABLE>



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

                                                       13-7
<PAGE>
                                       8



                                                                      Exhibit 13

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.  BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

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

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

INVESTMENTS  Investments  in fixed  maturities  at  December  31,  1998 and 1997
include bonds, notes, and redeemable preferred stocks. Equity securities include
common and nonredeemable  preferred stocks.  Short-term  investments  consist of
funds which are in excess of the Company's near-term operating and claims-paying
needs and are invested in repurchase  agreements,  commercial  paper,  and money
market funds. All investments are considered  available for sale and are carried
at fair value. Fair values for fixed maturity  investments and equity securities
are based on quoted market prices or dealer quotes.  Unrealized  appreciation or
depreciation on fixed maturity  investments  and equity  securities is included,
net of applicable  deferred income taxes,  in  shareholders'  equity.  Gains and
losses on sales of  investments  are  computed  on the  specific  identification
method and are reflected in total revenue.

RECEIVABLES  Agents'  balances are presented net of a reserve for  uncollectible
accounts  of $1.7  million  and  $1.4  million  at  December  31,  1998 and 1997
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 the difference will have
a material  effect,  either adversely or favorably,  on the Company's  financial
position and results of operations.

COST IN EXCESS OF NET ASSETS PURCHASED Cost in excess of net assets purchased of
$35.5  million at December  31, 1998 and $38.3  million at  December  31,  1997,
relate to Teledyne,  Inc.'s  acquisition of Argonaut  Insurance Company in 1969,
and is net of  accumulated  amortization  of $34.1  million  and $31.3  million,
respectively.  Cost in excess of net assets  purchased  is being  amortized on a
straight-line  basis over a 25-year  period  beginning  October 1, 1986. At each
balance  sheet date,  the Company  evaluates the  recoverability  of its cost in
excess of net assets  purchased in relation to anticipated  future cash flows on
an undiscounted basis. If the carrying value of the cost in excess of net assets
purchased exceeds  anticipated future cash flows on an undiscounted  basis, then
the cost in excess of net assets  purchased is deemed to be impaired and written
down to the value of the  anticipated  future cash  flows.  Based on this annual
assessment, the Company expects its cost in excess of net assets purchased to be
fully recovered.
                                                         13-8
<PAGE>
                                       9


                                                                     Exhibit 13

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

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

   For the Year Ended December 31,


                                 Income                Shares       Per-Share
                            (Numerator)         (Denominator)          Amount
                              (Millions)                             (Dollars)
<S>                         <C>                 <C>                <C>    
                             
   Basic EPS:
     Income available to
       common stockholders
       1998                        $ 62.7          23,954,443             $ 2.62
       1997                        $ 48.5          23,827,934             $ 2.04
       1996                        $(94.0)         23,984,543             $(3.92)
   Effect of Dilutive Securities:
     Options issued
       1998                                            77,000
       1997                                           231,850
       1996                                           247,421
   Diluted EPS:
     Income available to common
       stockholders +
       assumed conversions
       1998                        $ 62.7          24,031,443             $ 2.61
       1997                        $ 48.5          24,059,784             $ 2.02
       1996                        $(94.0)         24,231,964             $(3.92)
</TABLE>

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

















                                                         13-9

<PAGE>
                                       10




                                                                    Exhibit 13

2.  Investments

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

<TABLE>
<CAPTION>

   In millions             1998     1997    1996

<S>                       <C>       <C>     <C>   
   Fixed maturities      $  0.2     $0.4    $  0.3
   Equity securities       51.0      4.1      21.3
   ------------------------------------------------
                           $51.2    $4.5    $21.6
</TABLE>
=============================================================================



The amortized cost and fair value of fixed  maturity  investments as of December
31, were as follows.

<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>

=============================================================================


<TABLE>
<CAPTION>

In millions                                           1997


                      Amortized    Gross    Gross     Fair
                           CostUnrealizedUnrealized  Value
                                   Gains   Losses

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

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

=============================================================================


















                                                       13-10
                                                                       


<PAGE>
                                       11
                                                                  Exhibit 13


The  amortized  cost and  market  values  of fixed  maturity  investments  as of
December 31, 1998 by contractual maturity, are shown below.

<TABLE>
<CAPTION>

   In millions

                                      Amortized       Fair
                                           Cost      Value

<S>                                        <C>       <C>   

Due in one year or less                    $119.1     $120.1
   Due after one year to five years         124.5      128.9
   Due after five years to ten years        671.9      693.8
   ---------------------------------------------------------
                                           $915.5     $942.8
</TABLE>

===============================================================================


The  expected  maturities  may differ from the  contractual  maturities  because
debtors  may have the right to call or  prepay  obligations  without  penalties.
Proceeds from sales of fixed  maturity  investments  were $13.3  million,  $13.0
million, and $35.7 million in 1998, 1997, and 1996, respectively. Gross gains of
$0.2 million,  $0.3 million,  and $0.4 million and no gross losses were realized
on those sales in 1998, 1997, and 1996,  respectively.  At December 31, 1998 the
fair  value  and  amortized  cost of bonds on  deposit  with  various  insurance
regulatory  agencies  were  $422.9  million  and $409.6  million,  respectively.
Additionally,  U.S.  Treasury  Notes with an amortized  cost of $6.8 million and
fair value of $7.0  million were  pledged as  collateral  for surety bonds which
were issued to various states in lieu of depositing  bonds. At December 31, 1998
and  1997,  there  were no  investments  in any one  investee  exceeding  10% of
shareholders' equity.







































                                                       13-11



<PAGE>
                                       12





                                                                     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 $9.3 million as of December
31, 1998 and 1997,  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 $18.1  million and $25.8  million at  December  31,
1998 and 1997,  respectively.  Estimated losses  recoverable from reinsurers and
the ceded portion of unearned  premiums are reported as assets.  Losses and loss
adjustment expenses of $95.1 million, $112.8 million, and $346.2 million for the
years  ending  December  31,  1998,  1997,  and 1996,  respectively,  are net of
cessions of $19.1 million, $27.1 million, and $72.9 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).  Premiums for the years ended December 31,
were as follows.

<TABLE>
<CAPTION>

   In millions                      1998             1997              1996
<S>                                <C>              <C>               <C>   


   Direct written premiums          $160.4           $165.7            $187.8
   Reinsurance ceded to
     other companies                 (18.6)          (15.8)            (15.6)
   Reinsurance assumed from
     other companies                   2.3           8.3                 4.0
     ------------------------------------------------------------------------------
   Net written premiums             $144.1           $158.2               $176.2
===================================================================================================================

   Direct earned premiums            154.0           176.6                $172.2

   Reinsurance ceded to
     other companies                 (18.5)          (16.0)            (17.4)
   Reinsurance assumed from
     other companies                   3.0           4.3                   6.9
     -------------------------------------------------------------------------
   Net earned premiums              $138.5           $164.9              $161.7
===================================================================================================================

   Percentage of reinsurance
  assumed to net earned premiums       2.2%          2.6%                 4.3%

</TABLE>

























                                                       13-12


<PAGE>
                                       13







                                                                   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, 1998, 1997, and 1996.

<TABLE>
<CAPTION>

   In millions                               1998             1997              1996
<S>                                          <C>              <C>              <C> 


   Reserves for losses and loss
     adjustment expenses at
     beginning of year                         $1,024.9         $1,158.8          $1,026.1
   Losses and loss adjustment expenses:
     Provision for losses and loss
       adjustment expenses for claims
       occurring in the current year               128.2           132.6             178.8
     Increase (decrease) in estimated
       losses and loss adjustment expenses
       for claims occurring in prior years         (14.0)           7.3             240.3
       -------------------------------------------------------------------------------------------------
                                                  114.2         139.9               419.1
-----------------------------------------------------------------------------------------------
   Losses and loss adjustment
     expense payments for claims
     occurring during:
     Current year                                 45.4             39.7              42.1
     Prior years                                  197.8           234.1             244.3
     -----------------------------------------------------------------------------------------
                                                  243.2           273.8             286.4
----------------------------------------------------------------------------------------------
Reserves for losses and loss
     adjustment xpenses at end of year       $   895.9        $1,024.9           $1,158.8
</TABLE>

==============================================================================


Reserves  for  losses  and loss  adjustment  expenses  represent  the  estimated
indemnity cost and related  adjustment  expenses  necessary to  investigate  and
settle  claims.  Such  estimates are based upon  individual  case  estimates for
reported claims,  estimates from ceding companies for reinsurance  assumed,  and
actuarial  estimates for losses which have been incurred but not yet reported to
the insurer. Any change in probable ultimate liabilities is reflected in current
operating results. The ultimate cost of claims,  particularly  liability claims,
is difficult to predict for several reasons including: the uncertain time period
for reporting claims, changes in the legal environment and court decisions,  and
federal and state  legislation  which may  dramatically  increase the  liability
between  the time a policy is  written  and  associated  claims  are  ultimately
resolved.  As an  example,  liability  for  exposure  to  toxic  substances  and
environmental  impairment,  which did not  appear  likely or even exist when the
policies  were   written,   has  been  imposed  by   legislators   and  judicial
interpretation.  Tort liability has been expanded by some jurisdictions to cover
defective workmanship.  Liabilities assumed from other insurance companies under
reinsurance  contracts are subject to the same factors,  and further complicated
by long  periods  of time  between  the date of  occurrence  and the date of the
Company's  notification of the claim. 1996 reserves were substantially  affected
by a $229 million  increase of loss  reserves,  principally  relating to certain
general  liability and  reinsurance  policies  written in the 1970s.  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 1998 and 1997.  The  amount of  unamortized  discount  was $35.5  million  at
December 31, 1998 and $38.7 million at December 31, 1997.







                                                       13-13

<PAGE>
                                       14



                                                                   Exhibit 13

5.  Income Taxes

The Company's income tax provision includes the following components.
<TABLE>
<CAPTION>


   In millions                       1998            1997                 1996
<S>                                  <C>            <C>               <C>  


   Current tax provision             $ 10.0           $ (0.3)          $(27.6)
   Deferred tax provision related to:
     Future tax deductions             16.4          18.9                (6.7)
     Net operating loss carryforward   16.2          (5.1)              (18.8)
     Deferred alternative minimum
tax provision                        (11.8)            (0.7)            (1.9)
-------------------------------------------------------------------------
Income tax provision                $ 30.8               $12.8         $(55.0)
=================================================================================================================
</TABLE>


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


   In millions                       1998            1997               1996
<S>                                 <C>            <C>              <C> 


   Income tax provision at statutory
     tax rates (35%)                  $32.3           $21.1            $(52.6)
   Tax effect of:
     Tax exempt interest               (1.4)         (1.7)             (1.9)
     Dividends received deduction      (1.7)         (6.1)             (5.0)
     Other permanent adjustments, net   0.6          (1.6)              3.4
   State income tax provision           1.0          1.1                 1.1
   -------------------------------------------------------------------------
     Income tax provision             $30.8           $12.8         $(55.0)
</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, 1998,  1997,  and 1996 result from the  following
tax-effected temporary differences.  Tax benefit of $1.5 million associated with
the exercise of employee stock options was allocated to equity in 1998.

<TABLE>
<CAPTION>

   In millions                       1998            1997     1996
<S>                                  <C>             <C>      <C>  


   Deferred liability on unrealized 
     gains
     Unrealized gains                $(83.5)         $(78.6)  $(56.5)
     Other, net                        (5.8)         5.6        3.3
   Deferred tax assets:
     Reserve discounting               44.9          53.8       74.9
     Alternative minimum tax           15.0          6.8         6.3
     Net operating loss carryforward   15.2          23.9       18.8
     ----------------------------------------------------------------
  Deferred tax asset(liability), net $(14.2)        $11.5      $46.8
</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 $26.9  million  which will  expire  after 2011 and $16.5  million  which will
expire in 2012.


                                                       13-14
<PAGE>
                                       15



                                                                     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, 1998.
During 1998,  the Company  retired  22,577  shares of its common stock  acquired
through  exercise of employee stock options,  or forfeited in the employee stock
purchase  plan. No shares were  reacquired  during 1997 and 360,245  shares were
reacquired  during 1996. 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                       1998   1997   1996

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

   Net income (loss)                 $70.9  $ 61.6  $(122.6)
   Surplus                           $643.1 $564.8  $ 487.1
</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, 1998,  $20.5 million was available for
dividends to Argonaut  Group without  prior  regulatory  approval.  During 1998,
dividends of $40.5 million were paid to Argonaut Group.







































                                                       13-15
<PAGE>
                                       16





                                                                     Exhibit 13

7.  Net Investment Income


Investment income and expenses for the years ended December 31, were as follows.

<TABLE>
<CAPTION>

   In millions                           1998            1997            1996
<S>                                     <C>            <C>               <C>    

   Investment income:
     Interest and dividends on
       fixed maturities                 $60.0           $62.0            $69.2
     Dividends on equity securities      13.0            20.7             24.2
     Interest on short-term investments   2.0             2.8              1.6
     Other                                3.5             2.1              1.2
     --------------------------------------------------------------------------
                                         78.5            87.6             96.2
   Investment expenses                   (1.1)           (0.4)            (1.0)
   Interest relating to Prop 103          -                 -             (5.7)
   --------------------------------------------------------------------------------------
   Net investment income                 $77.4          $87.2            $89.5
===================================================================================================================
</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                       1998            1997              1996
<S>                                 <C>              <C>              <C>    


   Commissions                        $14.6           $15.8            $13.0
   General expenses                    50.7            45.1             44.3
   State assessments                    4.4            12.5              2.2
   Taxes, licenses, and bureau fees     5.9             6.0              5.2
   ----------------------------------------------------------------------------
                                       75.6            79.4             64.7
   Amortization (deferral) of policy
     acquisition costs                 (0.7)            1.2             (0.6)
     --------------------------------------------------------------------------
                                      $74.9           $80.6            $64.1
</TABLE>

===============================================================================


























                                                       13-16
<PAGE>
                                       17



                                                                   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                               1998    1997
<S>                                          <C>    <C>    

   CHANGE IN BENEFIT OBLIGATION
   Benefit obligation at beginning of year    $25.5 $21.9
   Service cost                                 1.7  1.5
   Interest cost                                1.8  1.6
   Plan participant's contributions
   Amendments                                   -    0.1
   Actuarial gain                               2.6  1.1
   Benefits paid                               (1.0) (0.6)
   -------------------------------------------------------
   Benefit obligation at end of year           30.6  25.6
===================================================================================================================

   CHANGE IN PLAN ASSETS
   Fair value of plan assets at beginning 
   of year                                     30.6 27.1
   Actual return on plan assets                 2.3  1.7
   Employer contribution                        0.1  2.4
   Plan participants' contributions
   Benefits paid                               (1.0) (0.6)
   Fair value of plan assets at end of year    32.0  30.6
===================================================================================================================

   Funded status                                1.4  5.0
   Unrecognized actuarial loss                 (0.8)(3.0)
   Unrecognized prior service cost              1.3  1.4
   Unrecognized net transit obligation         (0.3)(0.4)
   -------------------------------------------------------
   Net amount recognized                       $1.6 $3.0
===================================================================================================================

   Amounts recognized in the statement of
   Financial position consist of:
        Prepaid benefit cost                   $2.6  $4.0
        Accrued benefit liability              (1.4) (1.3)
        Intangible asset                        0.4  0.3
        Accumulated other comprehensive income  -     -
Net amount recognized                          $1.6  $3.0
</TABLE>

==============================================================================
<TABLE>
<CAPTION>

   In millions                               1998     1997
<S>                                         <C>      <C> 

   ASSUMPTIONS AS OF DECEMBER 31
   Weighted average discount rate               6.5% 7.0%
   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>
<TABLE>
<CAPTION>


   In millions                               1998    1997
<S>                                          <C>     <C>    


   COMPONENTS OF NET PERIODIC BENEFIT COST
   Service cost                               $ 1.7  $ 1.5
   Interest cost                                1.8  1.6
   Expected return on plan assets              (1.8) (1.6)
   Amortization of:
     Transition asset                          (0.1) (0.1)
     Prior service cost                         0.2  0.1
     Loss                                      (0.2) (0.3)
     -----------------------------------------------------
   Total                                       (0.1) (0.3)
   -------------------------------------------------------
   Net periodic benefit cost                  $ 1.6  $ 1.2
</TABLE>

==============================================================================

                                               13-17
<PAGE>
                                       18


                                                                    Exhibit 13
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 $1.8 million,  $1.5 million, and $0 respectively,  as
of December 31, 1998 and $1.6 million, $1.3 million, and $0, respectively, as of
December 31, 1997.

STOCK  OPTIONS In August 1986,  the Board of Directors of Argonaut  Group,  Inc.
adopted the 1986 Stock  Option Plan  covering an aggregate  1,500,000  shares of
Argonaut  Group,  Inc.  Common Stock.  An amendment to the Plan  increasing  the
number of  shares of common  stock  issuable  under the Plan from  1,500,000  to
2,000,000 was approved on April 23, 1996 at the Company's Annual Meeting.  Under
the 1986 Stock Option Plan,  options to purchase shares of Argonaut Group,  Inc.
common  stock may be  granted to  certain  key  employees.  The  options  may be
incentive stock options or nonqualified stock options.  If incentive options are
granted,  the exercise price of the options will be the fair market value of the
shares  on  the  date  that  the  option  is  granted.  The  exercise  price  of
nonqualified  stock  options to be granted can be below the fair market value of
the shares on the grant date. To date all options  granted have been at the fair
market value of the shares on the date of grant,  and as such,  no  compensation
expense  has been  recognized  as  accounted  for under APB  Opinion No. 25. The
options are  nontransferable  and are exercisable in  installments.  In October,
1995 the  Financial  Accounting  Standards  Board issued  Statement of Financial
Accounting Standard No. 123 "Accounting for Stock-Based Compensation" (FAS 123).
As permitted  by FAS 123,  the Company will not change its method of  accounting
for stock options but has provided the  additional  required  disclosures in the
tables below. The additional compensation costs that would have been recorded if
the Company had adopted FAS 123 are not material.  At December 31, 1998, 468,140
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,  1998,  1997,  and 1996 is  presented  in the table
below.

<TABLE>
<CAPTION>
                                           1998                            1997                          1996


                                         NumberWeighted-Average          NumberWeighted-Average        NumberWeighted-Average
                                      of Shares Exercise Price        of SharesExercise Price       of SharesExercise Price

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

   Outstanding at beginning of the year1,080,940           $24.63     1,036,170           $23.79      970,860           $22.32
     Granted                            160,500             34.35       151,900            29.01      168,250            32.86
     Exercised                         (244,400)            12.97       (64,880)           17.84      (43,440)           17.39
     Cancelled                          (99,700)            30.74       (42,250)           30.05      (59,500)           30.23
                                        --------                        --------                      --------
   Outstanding at end of the year       897,340            $28.87     1,080,940           $24.63    1,036,170           $23.79
   Exercisable at end of year           416,230             26.20       560,560            19.91      521,040            18.13
   Weighted-average fair value of options
     granted during the year                               $ 4.67                          $4.26                       $  4.69

</TABLE>

The following table summarizes  information  about stock options  outstanding at
December 31, 1998.

<TABLE>
<CAPTION>

   Range of                             Number  Weighted-Average       Weighted-Average         Number    Weighted-Average
   Exercise Price               Outstanding at          Remaining        Exercise Price     Exercisable      Exercise Price
   12/31/98                   Contractual Life                                    at 12/31/98

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

   $12.58 to $23.75                    112,440                   1.98 yrs.          $21.16      112,440                 $21.16
   $26.25 to $35.50                    784,900                   7.46 yrs.          $29.97      303,790                 $28.07
                                       -------                                                  -------
                                       897,340                                                  416,230
</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 1998,  1997 and 1996,  respectively:  risk-free
rates of 5.56% and 5.64% for options issued in 1998, 6.32% and 6.73% for options
issued in 1997, and 6.00%, 6.04% and 6.31% for options issued in 1996;  expected
dividend yields of 5.43%,  5.10%,  and 4.62%;  expected lives of 6.00, 6.15, and
5.51 years; and expected volatility of 19.01%, 16.65%, and 15.39%.

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 $0.7  million in 1998 and $0.6
million per year in 1997 and 1996.
                                                  13-18
<PAGE>
                                       19




                                                                     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                      1998             1997              1996
<S>                                 <C>              <C>              <C>    

   Net earned premiums:
     Workers compensation           $115.6           $140.6            $ 129.5
     Other lines                      22.9             24.3               32.2
     Run off lines                     -                    -               -
     ----------------------------------------------------------------------------------------
   Net earned premiums              $138.5           $164.9            $ 161.7
===================================================================================================================

   Pre-tax underwriting income (loss):
     Workers compensation           $(24.1)          $ (20.9)          $    (5.3)
     Other lines                      (7.1)               (8.7)           (124.6)
     Run off lines                     0.6                 2.4            (127.4)
     ------------------------------------------------------------------------------------
   Total pre-tax underwriting (loss) (30.6)              (27.2)           (257.3)
   General corporate expenses         (4.5)               (3.2)             (2.8)
   Net investment income              77.4                87.2              89.5
   Gains on sales of investments      51.2                 4.5              21.6
   Provision for income taxes         30.8                12.8             (55.0)
   -------------------------------------------------------------------------------------------------------------
   Net Income (loss)                $ 62.7           $  48.5           $  (94.0)
</TABLE>

==============================================================================



















                                                         13-19


<PAGE>
                                       20


                                                                     Exhibit 13

11.  Commitments and Contingencies

Rental  expenses  for  operating  leases,  principally  for  offices,  were $4.2
million,  $4.0 million, and $3.8 million in 1998, 1997, and 1996,  respectively.
As  of  December  31,  1998,  future  minimum  noncancellable   operating  lease
commitments  are as follows:  $3.8 million in 1999,  $3.6 million in 2000,  $2.8
million in 2001, $2.0 million in 2002, $1.7 million in 2003 and thereafter for a
total of $13.9 million. The Company's insurance  subsidiaries are members of the
statutorily created insolvency  guarantee  associations in all states where they
are  authorized to transact  business.  These  associations  were formed for the
purpose of paying the claims of insolvent companies. The Company is assessed its
pro rata  share of such  claims  based on its  premium  writings,  subject  to a
maximum  annual  assessment  per line of insurance.  Such costs can generally be
recovered  through  surcharges on future premiums.  The Company does not believe
that  assessments  on current  insolvencies  will have a material  effect on its
financial  condition  or results of  operations.  On August  30,  1996,  the Los
Angeles County Metropolitan  Transportation Authority (MTA) filed a civil action
against the Company alleging breach of contract,  breach of the covenant of good
faith  and fair  dealing,  and  requesting  ancillary  relief  in the form of an
accounting,  an  injunction  and  restitution  in  connection  with  allegations
regarding  failures to perform  under certain  contracts of  insurance.  The MTA
contends  that it has been  damaged by an  unspecified  amount.  The Company has
responded to the Complaint,  and brought certain  counterclaims against the MTA,
and possibly others,  in connection with the facts  underlying the lawsuit.  The
Company believes it has meritorious defenses,  and intends to vigorously contest
these claims.  The Company is unable,  with any degree of certainty,  to comment
upon the range of any potential  loss, or whether such an outcome is probable or
remote,  in light of the lack of any  discovery  conducted in the case,  and the
preliminary  investigation  conducted  thus far.  The  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

<PAGE>
                                       21


                                                                      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 hospital  liability and medical  malpractice  claims.  The
following  tables present the Company's  reserves for losses and loss adjustment
expenses and their  underwriting loss,  including  detailed  information for the
years ended December 31.

<TABLE>
<CAPTION>

RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES


   In millions                  1998        1997          1996
<S>                            <C>        <C>         <C> 


   Run off lines:
     Reinsurance assumed        $213.0      $217.8      $229.4
     Medical malpractice          29.0        54.4        57.8
     -------------------------------------------------------------------------------------
                                 242.0       272.2       287.2
   Continuing lines              653.9       752.7       871.6
   -----------------------------------------------------------
   Total reserves               $895.9    $1,024.9    $1,158.8
</TABLE>

=============================================================================

<TABLE>
<CAPTION>

UNDERWRITING INCOME (LOSS)


   In millions                  1998       1997      1996
<S>                            <C>        <C>       <C> 


   Run off lines:
     Reinsurance assumed       $  (1.3)   $   0.4   $(127.5)
     Medical malpractice           1.9        2.0       0.1
     --------------------------------------------------------------------------------------
                                   0.6        2.4    (127.4)
   Continuing lines              (31.2)     (29.6)   (129.9)
   ------------------------------------------------------------
   Total underwriting loss      $(30.6)    $(27.2)  $(257.3)
</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


<PAGE>
                                       22


                                                                    Exhibit 13
Quarterly Financial Data - unaudited

The following table represents  unaudited quarterly financial data for the years
ended December 31, 1998 and 1997. In the opinion of management,  all adjustments
necessary to present fairly the results of operations for such periods have been
made.  Total revenues and net income  include gains on the sale of  investments.
The Company cannot  anticipate when or if similar gains may occur in the future.
Since  financial  results rely heavily on estimates,  caution  should be used in
drawing specific conclusions from quarterly consolidated results.

<TABLE>
<CAPTION>

   In millions except per share amounts Three Months Ended


                       March 31  June 30 Sept. 30  Dec. 31
<S>                         <C>      <C>     <C>     <C>  


   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


   1997
   Total revenues           $67.9    $60.7   $ 60.3   $ 67.7
   Underwriting loss         (0.1)    (4.7)   (10.0)   (12.4)
   Net income                15.5     12.8      9.3     10.9
   Net income per common
   share
     Basic*                   0.65     0.54     0.39     0.46
     Diluted*                 0.65     0.53     0.39     0.45

   Comprehensive income       9.1     43.6     29.1      7.8
</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.


Common Stock Market Prices - unaudited


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


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

   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


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

</TABLE>













                                                        13-22
<PAGE>
                                       23


                                                                      Exhibit 13


MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF

OPERATIONS AND FINANCIAL CONDITION





RESULTS OF OPERATIONS  Earned premium income decreased to $138.5 million for the
year ended  December  31,  1998,  from $164.9  million in 1997,  and from $161.7
million  recorded in 1996. This decline  resulted in part from  significant rate
decreases over the past several years,  and from the Company's  unwillingness to
compete against unrealistic  pricing in the marketplace,  which has continued to
affect  underwriting  results.  Premiums were also  impacted,  by  discontinuing
workers  compensation  coverage  for  businesses  providing  temporary or leased
employees; the reduction in mid-market workers compensation accounts at Argonaut
Great  Central;  and the increase in premiums  ceded to reinsurers for providing
increased  coverage in 1998. The impact of large deductible  programs on inforce
premium  remained  virtually the same as 1997 at $95.3  million.  Net investment
income was $77.4 million,  $87.2 million,  and $89.5 million for 1998, 1997, and
1996,  respectively.  Lower interest rates, some restructuring of the investment
portfolio, and negative cash flow related to claims payments on run off lines of
business contributed to the decrease. Pre-tax gains on sales of investments were
$51.2  million,  $4.5  million,  and $21.6  million  for 1998,  1997,  and 1996,
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. The 1996 gain resulted
primarily  from  Federal  Paper  Board's  sale  to  International  Paper  for  a
combination of cash and International  Paper stock. We cannot anticipate when or
if similar gains or losses may occur in the future.  Losses and loss  adjustment
expenses were $95.1 million,  $112.8  million and $346.2 million in 1998,  1997,
and 1996,  respectively.  1996  results  were  substantially  affected by a $229
million increase of loss reserves, principally relating to certain liability and
reinsurance  policies written in the 1970s. The Company's loss ratio,  including
our run off lines of business,  was 69% in 1998,  68% in 1997, and 214% in 1996.
The loss ratio in our workers  compensation line of business was 65% in 1998 and
1997, and 63% in 1996. The loss ratio in other  continuing lines of business was
87%,  94%, and 427% in 1998,  1997,  and 1996,  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 $74.9 million in 1998, $80.6 million in
1997,  and $64.1  million in 1996.  Underwriting  expenses  are composed of four
components:  general  expenses,  commissions,  premium taxes, and state fees and
assessments.  The $5.7 million decrease results from lower commissions and taxes
on the decreased  premiums.  General expenses increased in 1998,  however,  from
non-recurring  costs for upgrading  systems for Year 2000 compliance,  and costs
related  to the  review  of  strategic  alternatives  and the  related  employee
retention plan.  Policyholder  dividend expense  (recapture) was $0.8 million in
1998,  $(0.9) million in 1997, and $8.7 million in 1996.  These charges  reflect
the loss  experience  of  participating  policyholders,  the basis for  dividend
payments.  Particularly  in California,  with the advent of open rating in 1995,
fewer participating policies are being written. After-tax income from operations
was $62.7 million in 1998 compared with income of $48.5 million in 1997,  and an
operating  loss of $94.0 million in 1996.  Operations  for the current year were
impacted  primarily by the realized gain from  investments  discussed above. The
after-tax  loss in 1996  was a  result  of the  strengthening  of loss  reserves
discussed above.







                                                         13-23
<PAGE>
                                       24






                                                                      Exhibit 13

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,  1998,  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. In addition to its investment portfolio,  subsidiaries of Argonaut
Group also 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 $5.2 million, their original cost less accumulated  depreciation.  The market
value for these  properties  is estimated at between $75 and $95 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.  Under  these  provisions,  as  of  December  31,  1998,  Argonaut
Insurance could pay to Argonaut Group,  Inc. a maximum dividend of $20.5 million
without the Insurance Commissioner's  approval.  During 1998, Argonaut Insurance
paid the Company dividends of $40.5 million. The quarterly dividend for 1998 was
$0.41 per common share. During 1998, total cash dividends paid by the Company to
its  shareholders  were $1.64 per share.  On July 27, 1989,  the Argonaut  Group
Board of Directors  authorized the repurchase of up to six million shares of its
outstanding common stock, of which 5,390,213 have been reacquired to date. It is
presently expected that dividends received from the Company's  subsidiaries will
be the primary source of funds for the stock repurchase  program and to meet any
other capital requirements the Company may develop.

NEW ACCOUNTING  STANDARDS In February 1998, the Financial  Accounting  Standards
Board ("FASB") issued Statement of Financial  Accounting  Standard  ("SFAS") No.
132, "Employers' Disclosures about Pensions and Other Postretirement  Benefits,"
which  amended FASB  Statements  No. 87, 88, and 106 and revised the  disclosure
requirements for pensions and other postretirement  benefits.  In 1997, the FASB
issued SFAS No. 131,  "Disclosures  about  Segments of an Enterprise and Related
Information", which establishes new requirements on the reporting of information
about  operating  segments,  products and  services,  geographic  area and major
customers,   and,  SFAS  No.  130,  "Reporting   Comprehensive   Income",  which
establishes  standards for reporting and display of comprehensive income and its
components.  Comprehensive income includes all changes in equity during a period
except those resulting from  investments by owners and  distributions to owners.
The  Company  has  implemented  SFAS No.  132,  131,  and 130 for the year ended
December 31, 1998.  Statement of Position ("SOP") 97-3,  Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments was also issued in 1997.
The Company's  required  adoption date is January 1, 1999.  The Company does not
anticipate  SOP 97-3 to have an impact on its results of operations or financial
position.  SFAS No.  133,  Accounting  for  Derivative  Instruments  and Hedging
Activities, was issued on June 16, 1998. The Company's required adoption date is
January 1, 2000. The Company does not anticipate  SFAS No. 133 to have an impact
on its results of operations or financial position.














                                                         13-24
<PAGE>
                                       25




                                                                     Exhibit 13




YEAR 2000 On October 19, 1998,  the Year 2000  Information  and Readiness  
Disclosure Act ("Y2K  Act")(Pub.  L. No.
105-271,  12 Stat.  2386 (1998) to be codified at 15 U.S.C.  ss. 1) was enacted 
into law by President  Clinton.  The following disclosure is defined by section
3(9) of the Y2K Act. The Company  established a Year 2000 project team in 
November of 1996 to prepare its computer hardware,  operating system software,  
computer programs, and voice
and data  communications to address Year 2000 compliance and remediation issues.
The Company's  external Year 2000 plan covers the information  exchange  process
with vendors and business  partners,  and  includes  validating  and testing the
readiness of its outsource data center service  providers.  It is the opinion of
management  that as of April  30,  1998,  the  Company's  client  server  policy
management, policy rating and claims processing systems are Year 2000 compliant.
These computer systems use a four-position field to store and process all dates.
In addition,  it is the opinion of management that effective September 30, 1998,
the Company's mission critical  mainframe legacy systems have been remediated to
process  dates  beyond the Year 2000.  The  Company  has  completed  testing its
mission critical business processing client server and mainframe legacy systems,
computer  hardware,   computer   infrastructure   systems  software  and  office
automation  software to assure  continuity of service  beyond the Year 2000. The
Company  will  continue  the testing of  non-mission  critical  user systems and
validating    the   above    mission    critical    systems    for   Year   2000
compliance/remediation  into 1999.  The Company will prepare a contingency  plan
that will  include a designated  team to resolve any  unforeseen  problems  that
arise  beyond  the  Year  2000.  The  total  project  cost  is  estimated  to be
approximately  $4.4  million.  All costs  associated  with the project have been
expensed as incurred.

























                                                         13-25