SECURITIES AND EXCHANGE COMMISSION
                     Washington, D.C. 20549
                     ----------------------

                            FORM 10-Q
                                
                                
(Mark One)
          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
 X        OF THE SECURITIES EXCHANGE ACT OF 1934
-----
          For the quarterly period ended June 30, 1997
                               or
          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
          OF THE SECURITIES EXCHANGE ACT OF 1934
-----
          For the transition period from          to
                                        ------    ------

                     Commission File Number
                             1-14028
                 -------------------------------

                 HIGHLANDS INSURANCE GROUP, INC.
-----------------------------------------------------------------
     (Exact name of Registrant as specified in its charter)

            Delaware                              75-2370945
--------------------------------------  -------------------------
   (State or other jurisdiction of           (I.R.S. Employer
    incorporated or organization)           Identification No.)


   10370 Richmond Avenue, Houston, Texas                    77042
--------------------------------------  -------------------------
  (Address of principal executive              (Zip Code)
        offices)


Registrant's telephone number, including area code (713) 952-9555
                                                    -------------

Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such filing requirements for the past 90 days.

Yes  X  No
   ----    ----

The number of shares of the Registrant's Common Stock, par value
$.01 per share, outstanding at June 30, 1997 was 13,108,321

                 HIGHLANDS INSURANCE GROUP, INC.
                                
                        TABLE OF CONTENTS
                        -----------------

                 Part I - Financial Information


Item 1.   Financial Statements:                        Page No.
                                                       --------

     Consolidated Balance Sheets
       June 30, 1997 (Unaudited) and
       December 31, 1996                                 3

     Consolidated Statements of Operations
       (Unaudited) - Three and Six Months Ended
       June 30, 1997 and 1996                            5

     Consolidated Statements of Stockholders' Equity
       Six Months Ended June 30, 1997 (Unaudited)
       and Year Ended December 31, 1996                  6

     Consolidated Statements of Cash Flows
       (Unaudited) - Six Months Ended June 30,
       1997 and 1996                                     7

     Condensed Notes to Unaudited Consolidated
       Financial Statements                              9
                                
Item 2.Management's Discussion and Analysis of
       Financial Condition and Results of Operations    14
                                
                                
                   Part II - Other Information

Item 1. Legal Proceedings                               24

Item 6. Exhibits and Reports on Form 8-K                24

Signatures                                              26









<TABLE>


                 HIGHLANDS INSURANCE GROUP, INC.

                   CONSOLIDATED BALANCE SHEETS

                         (In Thousands)
<CAPTION>


                                                June 30,    December 31,
                   ASSETS                         1997          1996
                  --------                     ----------   -----------
                                                (Unaudited)  
<S>                                             <C>         <C>
Investments:                                                  
  Fixed income securities:                                    
   Available for sale, at fair value                          
     (amortized cost of $1,099,031 at                         
     6/30/97 and $320,909 at 12/31/96)          $1,111,526     324,905
   Held to maturity, at amortized cost                       
     (fair value of $0 at 6/30/97 and                         
     $367,446 at 12/31/96)                            -        355,492
 Equity securities, at fair value                                     
     (cost of $21,816 at 6/30/97 and
     $26,293 at 12/31/96)                           22,932      26,967
 Other invested assets, at cost                      4,144       3,770
                                                 ---------   ---------
          Total investments                      1,138,602     711,134
                                                                      
Cash and cash equivalents                          124,395      49,484
                                                                      
Premiums in course of collection                    93,096      24,048
                                                                      
Premiums due under retrospective arrangements      120,930     121,276
                                                                       
Receivable from reinsurers                         679,492     556,900
                                                                       
Prepaid reinsurance premiums                        28,486       2,829
                                                                       
Funds on deposit with reinsurers                    19,994      14,456
                                                                       
Receivable from former affiliate                       250         250
                                                                       
Deferred taxes                                      41,254      37,126
                                                                       
Accrued investment income                           17,732      12,600
                                                                       
Deferred policy acquisition costs                   34,311       6,436
                                                                       
Cost of acquired business in excess of net                             
 assets                                              3,972           -
                                                                       
Other assets                                        62,156      29,492
                                                  ---------   ---------
                                                                       
          Total assets                          $2,364,670   1,566,031
                                                 ==========  =========
                                
                                
                                
See Condensed Notes to Unaudited Consolidated Financial Statements.

</TABLE>
<TABLE>
                     HIGHLANDS INSURANCE GROUP, INC.

                 CONSOLIDATED BALANCE SHEETS, Continued
                                    
                             (In Thousands)

<CAPTION>

                                                June 30,    December 31,
     LIABILITIES AND STOCKHOLDERS' EQUITY         1997          1996
    -------------------------------------      -----------  -----------
                                               (Unaudited)  
<S>                                             <C>          <C>
                                                             
Loss and loss adjustment expense reserves       $1,643,507   1,156,824
                                                            
Unearned premiums                                  196,556      31,474
                                                            
Senior bank debt                                    65,000        -
                                                             
Convertible subordinated debentures                 55,839      55,452
                                                             
Funds held                                          21,649      16,475
                                                             
Accounts payable and accrued liabilities            79,780      42,331
                                                 ---------   ---------
       Total liabilities                         2,062,331   1,302,556
                                                 ---------   ---------
                                                             
                                                            
Stockholders' equity:                                         
  Common stock, $.01 par value; 50,000,000                    
    shares authorized; 13,108,321 issued and                    
    outstanding in 1997, 11,448,208 issued and                  
    outstanding in 1996                                131        114
  Additional paid-in capital                       221,523    192,273
  Net unrealized gain on investments                11,944      3,036
  Retained earnings                                 68,741     68,052
                                                 ---------  ---------
       Total stockholders' equity                  302,339    263,475
                                                 ---------  ---------
       Total liabilities and stockholders'                  
         equity                                 $2,364,670  1,566,031
                                                 =========  =========



  See Condensed Notes to Unaudited Consolidated Financial Statements.
</TABLE>
<TABLE>
                     HIGHLANDS INSURANCE GROUP, INC.

                  CONSOLIDATED STATEMENTS OF OPERATIONS
                                    
                               (Unaudited)
                                    
                              (In Thousands)
<CAPTION>
                                       Three Months          Six Months
                                      Ended June 30,       Ended June 30,
                                    -----------------   ------------------
                                     1997       1996     1997       1996
                                    -------   -------   -------    -------
<S>                                <C>        <C>       <C>       <C>
Revenues:                                                          
  Net premiums earned               $78,675   40,018    108,390     86,854
  Net investment income              18,428   12,705     31,285     25,375
  Net realized investment gains         620      209      1,104        666
                                    -------- -------   --------    -------
            Total revenues           97,723   52,932    140,779    112,895
                                    -------- -------   --------    -------
                                                                   
Expenses:                                                          
  Losses and loss adjustment                                       
    expenses incurred                66,499   40,223     94,330     82,243
  Underwriting expenses              31,253   14,336     40,777     29,734
  Interest expense and debt                                        
    amortization                      2,612    1,824      4,410      3,254
  Other expenses                        180      775        534      1,626
                                   --------  --------  --------   --------
            Total expenses          100,544   57,158    140,051    116,857
                                   --------  --------  --------    -------
                                                                  
Income (loss) before income tax      (2,821)  (4,226)       728    (3,962)
Income tax expense (benefit)           (553)    (720)        39      (670)
                                   --------  --------   --------   -------
                                                                  
  Net income (loss)                 $(2,268)  (3,506)       689    (3,292)
                                   ========  ========  ========   =======

Net income (loss) per common                                   
  share and common
  stock equivalents - primary         $(.18)    (.31)       .06      (.29)
                                   ========  ========  ========   =======
                                                               
Weighted average number of                                     
  outstanding:
   Common shares                     12,556    11,448    12,004    11,448
   Common share equivalents             -         -        -          -
                                   --------  --------  --------   -------
                                  
     Primary shares                  12,556    11,448    12,004    11,448
  Conversion of convertible                                    
   subordinated debentures              -         -        -          -
                                   --------  --------   -------   -------
                                  
     Fully diluted shares            12,556    11,448    12,004    11,448
                                   ========  ========  ========   =======
                                    
                                    
   See Condensed Notes to Unaudited Consolidated Financial Statements.
</TABLE>
<TABLE>

                    
                   HIGHLANDS INSURANCE GROUP, INC.
                                    
             CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             (In Thousands)
<CAPTION>
                                    
                                    
                                                  June 30,    December 31,
                                                    1997         1996
                                                  ---------    ---------
                                                 (Unaudited)   
                                                             
<S>                                              <C>           <C>     
Common stock                                                 
                                                            
 Balance, beginning of year                      $    114        1,000
  Change in par value of common stock                  -          (886)
  Issuance of Company common stock, par value          17         -
                                                 --------     --------
 Balance, end of period                               131          114
                                                 --------     --------
                                                            
Additional paid-in capital:                                  
 Balance, beginning of year                       192,273      184,168
   Change in par value of common stock                -            886
   Addition resulting from issuance of                       
    convertible subordinated debentures            
    with detachable common stock warrants             -          7,439
   Contribution from former parent:                          
    Net current tax asset                             -          7,723
    Net deferred tax asset                            -         (7,943)
   Issuance of company common stock, paid in                 
    capital                                        29,250          -
                                                 --------     --------
 Balance, end of period                           221,523      192,273
                                                 --------     --------
                                                            
Net unrealized gain on investments:                          
                                                    3,036        8,547
Balance, beginning of year
  Changes in net unrealized gain, net of the                
    applicable federal income tax                   8,908       (5,511)
                                                 --------     --------
Balance, end of period                             11,944        3,036
                                                 --------     --------
Retained earnings:                                          
 Balance, beginning of year                        68,052       73,395
  Net income (loss)                                   689       (5,343)
                                                 --------     --------
 Balance, end of period                            68,741       68,052
                                                 --------     --------
Total stockholders' equity                       $302,339      263,475
                                                 ========     ========
                                    
                                    
                                    
  See Condensed Notes to Unaudited Consolidated Financial Statements.
                                    
</TABLE>
<TABLE>
                                    
                     HIGHLANDS INSURANCE GROUP, INC.
                                    
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                                    
                               (Unaudited)
                                    
                             (In Thousands)
<CAPTION>
                                                     Six Months Ended
                                                         June 30,
                                                   -------------------
                                                      1997       1996
                                                    --------    -------
<S>                                                <C>         <C>
Cash flows from operating activities:                         
  Net income (loss)                                $   689      (3,292)
                                                    --------    --------
Adjustment to reconcile net income to net                     
  cash used in operating activities:
     Depreciation and amortization                     142         (59)
     Change in deferred policy acquisition costs     1,625       2,431
     Gain on sale of investments                    (1,106)       (607)
     Decrease in premiums in course of collection   52,663      12,897
     Decrease in receivables from reinsurers        11,898      20,680
     Decrease in loss and loss adjustment expense              
      reserves                                     (36,247)    (64,062)
     (Increase) decrease in funds on deposit with              
      reinsurer                                     (5,538)      4,280
     Decrease in deferred taxes                        (63)        -
     Decrease (increase) in premiums due under                 
      retrospective arrangements                       346      (6,688)
     Decrease in unearned premiums                 (12,873)    (11,902)
     Increase in funds held                          5,174       7,932
     Advances from former affiliates, net              -         9,427
     Change in other operating assets and          (13,250)       (845)
      liabilities                                 --------    --------
        Total adjustments                           2,771     (26,516)
                                                 --------    --------
        Net cash (used in) provided by operating               
          activities                                3,460     (29,808)
                                                 --------    --------
                                                            
Cash flows from investing activities:                       
 Proceeds from sales:                                       
  Fixed income securities available for sale       14,700        -
  Equity securities                                 4,717       3,539
  Other invested assets                             1,341        -
 Maturities or calls:                                       
  Fixed maturity securities available for sale     68,077      15,100
  Fixed maturity securities held to maturity        5,972      21,245
 Investment purchases:                                      
  Fixed maturity securities available for sale    (53,938)    (54,896)
  Fixed maturity securities held to maturity         -         (1,894)
  Equity securities                                  -         (2,282)
 Net sales (purchase) of property and                       
  equipment                                           652        (697)
 Purchase of subsidiary, net of acquired cash       5,124      
 Payment of acquisition expenses                   (3,631)    
 Proceeds from management notes                        92         -
 Proceeds from disposal of subsidiary, net           -             22
 Cash returned by former affiliates, net             -          3,860
                                                 --------    --------
     Net cash provided by (used in) investing               
       activities                                  43,106     (16,003)
                                                 --------    --------
Cash flows from financing activities:                       
 Proceeds from senior bank debt                    65,000        -
 Payment to bank to pay ARI notes payable         (35,638)       -
 Payment of senior bank debt issuance expense      (1,017)       -
 Proceeds from issuance of convertible                      
  subordinated debentures                            -         60,000
 Payment of debt issuance expense                    -         (5,705)
                                                 --------    --------
                                                            
     Net cash provided by financing activities     28,345      54,295
                                                 --------    --------
Net increase in cash and cash equivalents          74,911       8,484
                                                            
Cash and cash equivalents at beginning of period   49,484      85,176
                                                 --------    --------
Cash and cash equivalents at end of period       $124,395      93,660
                                                 ========    ========
                                                            
Supplemental disclosure of cash flow                        
 information:
                                                            
  Interest paid                                    $3,365       2,620
                                                 ========    ========
                                    
 Reclassification from held to maturity to                  
  available for sale                             $348,130       -
                                                 ========    ========
                                    
                                    
                                    
   See Condensed Notes to Unaudited Consolidated Financial Statements.
</TABLE>

                
                  HIGHLANDS INSURANCE GROUP, INC.
                                
 CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                
                          JUNE 30, 1997
                                





1.   Basis of Presentation
     ---------------------

The accompanying consolidated financial statements as of June 30,
1997 and for both the three and six months periods ended June 30,
1997 and 1996 are unaudited and include the accounts of Highlands
Insurance Group, Inc., (Highlands Group) and its subsidiaries
(the Company). In the opinion of management, all adjustments,
consisting of normal recurring adjustments necessary for a fair
presentation, have been reflected.  The results for the period are
not necessarily indicative of the results to be expected for the
entire year.  The accompanying consolidated financial statements
should be read in conjunction with the consolidated financial
statements and related notes included in the Company's Form 10-K
for the year ended December 31, 1996 and Form 8-KA Report,
Amendment No. 2 dated April, 30, 1997.

Highlands Group is an insurance holding company for Highlands
Insurance Company and its subsidiaries (Highlands), American
Reliance, Inc. and its subsidiaries (American Reliance) beginning
April 30, 1997, and Highlands Holdings (U.K.) Limited and its
subsidiaries (Highlands UK) (a foreign reinsurance holding company
located in the United Kingdom) and certain other immaterial
companies (collectively, the Insurance Subsidiaries).

Certain financial information that is normally included in annual
financial statements prepared in accordance with generally
accepted accounting principles but is not required for interim
reporting purposes has been condensed or omitted.  Certain
reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.

Highlands Group was wholly owned by Halliburton Company
(Halliburton) until January 23, 1996 when Halliburton distributed
all of the outstanding shares of common stock of Highlands Group
(the Distribution) to holders of record of common stock of
Halliburton on January 4, 1996.  Holders of record received one
share of common stock of HIC for every ten shares of common stock
of Halliburton held on that date.  Approximately 11.4 million
common shares of Highlands Group were issued in conjunction with
the Distribution.

2.   Acquisition
     -----------

On April 30, 1997, Highlands Group acquired Vik Brothers Insurance,
Inc.(VBI) and its subsidiaries.  Immediately after the consummation of
the acquisition, VBI was renamed American Reliance, Inc.  The
acquisition was treated as a purchase and, accordingly, the
financial results of American Reliance, Inc. and subsidiaries
(American Reliance) are included in these consolidated financial
statements effective April 30, 1997.

The acquisition was financed with a combination of common stock,
bank debt, preferred stock and cash.  In connection with the
acquisition, Highlands Group paid approximately $55.4 million in
cash (including $35.6 million to repay American Reliance's
outstanding bank debt) and issued 1,656,700 shares of its common
stock (representing approximately 12.6% of Highlands Group's then
outstanding common stock) and 21,366 shares of newly issued
preferred stock to the holders of the common stock warrants,
preferred stockholders and creditors of American Reliance.  The
closing price of Highlands Group's common stock was $17.625 on
April 30, 1997.  The preferred stock is currently owned by a
subsidiary of American Reliance and has a preference value of
$1,000 per share. Simultaneously with the closing, Highlands
Group contributed approximately $41.5 million to the capital of
the insurance companies within the American Reliance organization.
At April 30, 1997, American Reliance had $886.6 million in total
fair value assets and $884.3 million of total liabilities.  The
excess of the purchase price paid over the fair value of net
assets acquired is being amortized over thirty years.

In connection with the acquisition, Highlands Group obtained a $65
million senior revolving credit facility from a consortium of
banks led by the Chase Manhattan Bank.  Highlands Group funded
the cash portion of the acquisition by utilizing the credit
facility and available working capital.

American Reliance is an insurance holding company for the
following property and casualty insurance companies.  State
Capital Insurance Company (SCI); American Professionals Insurance
Company; LMI Insurance Company (LMI); and Northwestern National
Holding Company, Inc. (NNHC) and its subsidiaries, including
Northwestern National Casualty Company (NNCC) and its
subsidiaries, and Pacific National Insurance Company (PNIC) and
its subsidiary, Pacific Automobile Insurance Company (PAIC)
(collectively, the American Reliance Companies).

3. American Reliance Acquisition - Pro Forma Results of
   Operations
   ----------------------------------------------------

The following unaudited proforma information presents the results
of operations of the Company and American Reliance for the six
months ended June 30, 1997 and 1996, with proforma adjustments as
if the acquisition and transactions related to the funding of the
acquisition had been consummated as of the beginning of the
periods presented.  This proforma information is not necessarily
indicative of what would have occurred had the acquisition and
related transactions been made on the dates indicated, or of
future results of the Company.
<TABLE>
<CAPTION>
                                            Six Months Ended
                                                June 30,
                                          --------------------
                                            1997         1996
                                           ------       ------
                                                     
(In thousands, except per share data)                
                                                     
<S>                                     <C>             <C>
Revenues                                $  255,856      305,482
Net income (loss)                       $    2,084       (8,289)
Net income (loss) per share             $      .17         (.63)
</TABLE>
4.   Income Tax
     ----------

The Company provides for income taxes on its statements of income
pursuant to Statement of Financial Accounting Standards 109,
"Accounting for Income Taxes" (SFAS 109).

5.   Net Income Per Share
     --------------------

Primary net income per share amounts are based upon the weighted
average number of common stock shares and common stock
equivalents (common stock warrants and options) outstanding
during the period.  Common stock warrants and stock options are
antidilutive for primary earnings per share calculations for the
three and six months ended June 30, 1997.  Fully diluted earnings
per share is not presented as the effects of the convertible
subordinated debentures are antidilutive for all periods
presented.

6. Debt Outstanding
   ----------------

As discussed in Note 2, during the second quarter of 1997, the
Company entered into a $65 million Senior Revolving Credit
Facility, dated April 30, 1997 (the "Credit Agreement"), with the
Chase Manhattan Bank, as administrative agent for the lenders
party thereto.  The Credit Agreement, which contains customary
terms and restrictions, currently provides for an interest rate
of LIBOR plus 75 to 150 basis points based upon a performance
grid with the full principal amount thereunder due on April 30,
2002.  The Credit Agreement was used to finance the purchase of
American Reliance.

7.  Warrant Price Adjustment
    ------------------------
The exercise price of the Series A, A-2, B and B-2 common stock
purchase warrants which are attached to the convertible
subordinated debentures are subject to adjustment related to
adverse loss reserve and uncollectible reinsurance development.
Such adjustment reduced the exercise price by $.95 and $1.80 per
share for six months ended June 30, 1997 and the year ended
December 31, 1996, respectively.

8.  Contingent Liabilities:
    -----------------------

 Loss and Loss Adjustment Expense Reserves
 -----------------------------------------

The Company establishes loss reserves which are estimates of
future payments of reported and unreported claims for losses and
the related expenses with respect to insured events that have
occurred.  The process of establishing loss reserves is subject
to uncertainties that are normal, recurring and inherent in the
property and casualty business.  The process requires reliance
upon estimates based on available data that reflect past
experience, current trends and other information and the exercise
of informed judgment.  As information develops that varies from
experience, provides additional data or, in some cases, augments
data that previously was not considered sufficient for use in
determining reserves, changes in the Company's estimate of
ultimate liabilities may be required.  The effect of these
changes, net of reinsurance, is charged or credited to income for
the periods in which they are determined.

Reserving for asbestos, environmental-related and certain other
long-term exposure claims is subject to significant additional
uncertainties that are not generally present for other types of
claims.  Developed case law and adequate claim history do not
exist for such claims.  Highlands and the insurance industry
dispute coverage for certain environmental, pollution and
asbestos liabilities of their policyholders.  These claims differ
from almost all others in that it is not often clear that an
insurable event has occurred and which, if any, multiple policy
years and insurers will be liable.  These uncertainties prevent
identification of applicable policy and policy limits until after
a claim is reported and substantial time is spent (many years in
some cases) resolving contract issues and determining facts
necessary to evaluate the claim.  If the courts continue in the
future to expand the intent of the policies and the scope of the
coverage as they have in the past, additional liabilities could
emerge for amounts in excess of the current reserves held.

The Company uses methods and assumptions that are consistent with
prevailing actuarial practice and are modified periodically based
on changes in circumstances.  However, estimation of loss
reserves for  asbestos, environmental related and other long-term
exposure claims is one of the most difficult aspects of
establishing reserves, especially given the above uncertainties.
Reference is made to the Company's Annual report on Form 10-K for 
the year ended December 31, 1996 for a discussion of the
Company's asbestos-related and environmental pollution claims.
Because of the significant uncertainties involved and the
likelihood that these uncertainties will not be resolved in
the near future, the Company believes that no meaningful range of
loss and loss adjustment expense reserves beyond recorded
reserves can be established.

In management's judgment, information currently available has
been appropriately considered in estimating the Company's loss
reserves.  However, future changes in estimates of the Company's
liability for insured events may adversely affect results in
future periods although such effects cannot be reasonably
estimated.

   Other
   -----

The information set forth in Item 1 of Part II of this report is
incorporated herein by reference.

The Company is a party to various claims and legal actions
arising in the ordinary course of its insurance business which,
in the opinion of management, will not have a material effect on
the Company's financial position or results of operations.

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




The Results of Operations reflect the consolidated results of
operations of Highlands Insurance Group, Inc. (Highlands Group)
and its subsidiaries (the Company).

As discussed in Note 2 of the Condensed Notes to Unaudited
Consolidated Financial Statements, on April 30, 1997, Highlands
Group completed the acquisition of American Reliance, Inc.
(American Reliance)   The acquisition was accounted for under
the purchase method of accounting and, accordingly, the
consolidated financial statements include the results of
American Reliance's operations only from date of acquisition.

For reporting purposes, the Company has three segments: (a)
business produced by Highlands Insurance Company excluding its
discontinued lines (Highlands), (b) business produced by American
Reliance and (c) the Highlands discontinued business
(Discontinued Lines).  Discontinued Lines consist of (i)
business originated by the Highlands' London reinsurance
operations (Highlands (UK)), (ii) an umbrella/excess liability
policy program and (iii) assumed casualty and property
reinsurance contracts.  Highlands has ceased to write these
Discontinued Lines.  Although Highlands has exited other lines of
business, primarily its Florida and Texas personal lines and
probate bonding business, the Company has included the financial
results of those lines in underwriting results excluding
Discontinued Lines for consistency purposes. (Please refer to the
Company's 1996 Annual Report Form 10-K for a more complete
description of the Discontinued Lines.)

The results of the Company's consolidated operations for the
periods indicated are set forth below:
<TABLE>
<CAPTION>
                                Three Months Ended   Six Months Ended
                                     June 30,            June 30,
                                ------------------  -------------------
                                   1997      1996      1997       1996
                                 -------   -------   -------   -------
                                         (Dollars in millions)


<S>                             <C>         <C>      <C>        <C>      
Consolidated Results:                                          
                                                               
Gross premiums written          $  86.3     32.8      117.3      84.7
Net premiums written            $  69.4     32.3       97.3      76.5
                                =======  =======    =======   =======
                                                               
Net premiums earned:                                           
  Highlands                     $  28.4     37.1       57.9      81.0
  American Reliance                49.9      -         49.9       -
  Discontinued Lines                 .4      2.9         .6       5.9
                                -------  -------    -------   -------
                                $  78.7     40.0      108.4      86.9
                                =======  =======    =======   =======
                                                               
Underwriting loss:                                             
  Highlands                     $ (15.6)   (13.9)     (21.6)    (23.1)
  American Reliance                (2.1)     -         (2.1)      -
  Discontinued Lines               (1.4)     (.6)      (3.0)     (2.0)
                                -------  -------    -------    ------
                                $ (19.1)   (14.5)     (26.7)    (25.1)
                                =======  =======    =======   =======
                                                               
Net investment income           $  18.4     12.7       31.3      25.4
                                =======  =======    =======   =======
                                                               
Net realized investment gains   $    .6       .2        1.1        .6
                                =======  =======    =======   =======
                                                               
Interest expense and debt                                      
  amortization                  $   2.6      1.8        4.4       3.3
                                =======  =======    =======   =======
Other (income) expense          $   (.4)      .1         .6        .9
                                =======  =======    =======   =======
                                                               
Net income (loss)               $  (2.3)    (3.5)        .7      (3.3)
                                =======  =======    =======    =======

Ratios:                                                         
  Loss                             84.5%   100.5%     87.0%     94.7%
  Expense                          39.7%    35.8%     37.6%     34.2%
                                -------- --------   -------   -------
   Combined                       124.2%   136.3%    124.6%    128.9%
                                ======== ========   =======   =======
</TABLE>
Net premiums earned amounted to $78.7 million and $108.4 million
for the second quarter and six months ended June 30, 1997,
respectively, an increase of $38.7 million and $21.5 million,
compared with the same 1996 periods.  The increases result from
the additional earned premium from American Reliance.  The
increase in net premiums earned was partially offset by continued
declines in the Highlands business.

Underwriting losses of $19.1 million and $26.7 million in the
second quarter and six months ended June 30, 1997 increased $4.6
million and $1.6 million compared to the same 1996 periods due to
loss reserve increases related to California construction defect
claims, accrued expenses related to the Texas Workers'
Compensation Facility's (Facility) final industry assessment and
industry litigation involving surpluses from the Facility and the
acquisition of American Reliance.  The six months ended June 30,
1996 included write-offs of $6.9 million of accrued premiums.

Net investment income for the three months and six months ended
June 30, 1997 and 1996 amounted to $18.4 million and $12.7
million and $31.3 million and $25.4 million, respectively.  Net
investment income for the second quarter and year to date 1997
increased $5.7 million and $5.9 million, respectively, from 1996
primarily due to the acquisition of American Reliance.  Net
realized investment gains have not been a significant portion of
revenue for the Company.

Interest expense and debt amortization for the three months and
six months ended June 30, 1997 compared with the same period for
1996 increased $.8 million and $1.1 million, respectively, as a
result of the $65 million Credit Agreement with a bank. The
Credit Agreement was used to finance the acquisition of
American Reliance.

Other expenses for the three months and six months ended June 30,
1997 compared to the same periods in 1996 decreased due to
offsetting miscellaneous income from American Reliance.

Gross premiums written and net premiums written have been
redefined for 1996 to include the effects of changes in premiums
due under retrospective policies.  Such changes were previously
recorded only as net premiums earned.
<TABLE>
Highlands
---------
<CAPTION>
                                 Three Months Ended   Six Months Ended
                                      June 30,            June 30,
                                 ------------------  ------------------
                                   1997      1996      1997      1996
                                  ------    ------    ------    ------
                                         (Dollars in millions)
                                                               
   <S>                           <C>        <C>     <C>       <C>
   Gross premiums written        $ 27.8      30.6    58.2      79.4
   Net premiums written          $ 25.1      30.2    53.0      72.3
                                =======   ======= =======   =======
                                                               
   Net premiums earned           $ 28.4      37.1    57.9      81.0
   Losses and loss adjustment                                  
     expenses incurred            (31.2)    (37.9)  (57.5)    (76.8)
   Underwriting expenses          (12.8)    (13.1)  (22.0)    (27.3)
                                -------   ------- -------   -------
                                                               
     Underwriting loss           $(15.6)    (13.9)  (21.6)    (23.1)
                                =======   ======= =======   =======
   Ratios:                                                     
     Loss                         109.9%    102.2%   99.3%     94.8%
     Expense                       45.1%     35.3%   38.0%     33.7%
                                 -------   ------- -------   -------
      Combined                    155.0%    137.5%  137.3%    128.5%
                                 =======   ======= =======   =======
</TABLE>
The Highlands underwriting results primarily consist of
relatively large commercial accounts (Special Accounts), medium
to small commercial accounts (Commercial Insurance) insurance for
Halliburton (Insurance Services), commercial marine products
(Marine Division) and surety products (Surety Division).

Period to Period Comparisons of Highlands Underwriting Results

Gross Premiums Written. Gross premiums written for the three
months and six months ended June 30, 1997 and 1996 amounted to
$27.8 million and $30.6 million and $58.2 million and $79.4
million, respectively.  The decrease of $2.8 million and $21.2
million or 9% and 27% for the three months and the six months
ended June 30, respectively, is attributable to several factors.
The Company began its underwriting initiatives in March 1996 and
continues to focus on stricter underwriting standards and price
increases both of which have contributed to declines in gross
premiums written.  Also contributing to declines in gross
premiums written is the continued highly competitive pricing
environment as insurers compete to retain business.  The Company
remains more selective in its initial underwriting as well as
renewal activity.

Gross premiums written for the three months ended June 30, 1996
declined by $6.9 million as a result of writing-off accrued
premium in the second quarter of 1996.

Gross premiums written for retrospectively rated policies may be
adjusted up or down, subject to certain limitations contained in
the policy, based on the estimated loss experience of the insured
during the policy period. The Company estimates ultimate losses
for retrospectively rated policies and then adjusts gross
premiums written and premiums due from policyholders under
retrospectively rated policies for changes in estimated ultimate
losses and loss adjustment expenses from the date of the prior
valuation. These adjustments may cause gross premiums written to
fluctuate significantly from period to period. Experience rated
contracts reduce but do not eliminate risk to the insurer.

Net Premiums Written. Net premiums written for the three months
and six months ended June 30, 1997 and 1996 amounted to $25.1
million and $30.2 million and $53.0 million and $72.3 million,
respectively.  The decrease of $5.1 million and $19.3 million or
17% and 27% for the three months and the six months ended June
30, respectively, is primarily related to the same issues
affecting gross premiums written.

Net premiums written for the three months ended June 30, 1996
were increased by an adjustment to ceded premiums written of $3.2
million related to prior years reinsurance treaties.

Net Premiums Earned.  Net premiums earned for the three months and
six months ended June 30, 1997 and 1996 amounted to $28.4 million
and $37.1 million and $57.9 million and $81.0 million,
respectively.  The decrease of $8.7 million and $23.1 million or
23% and 29% for the three months and six months ended June 30,
respectively, is also related to the same issues affecting gross
premiums written.

Losses and Loss Adjustment Expenses Incurred. Losses and loss
adjustment expenses incurred for the three months and six months
ended June 30, 1997 and 1996 amounted to $31.2 million and $37.9
million and $57.5 million and $76.8 million, respectively.  The
decrease of $6.7 million and $19.3 million or 18% and 25% for the
three months and six months ended June 30, respectively, is
related to the declining premium volume.  The second quarter 1997
decrease of $6.7 million was offset by increased loss and loss
adjustment expenses incurred of $6.1 million related to
California construction defect claims.

Underwriting Expenses. Underwriting expenses for the three months
and six months ended June 30, 1997 and 1996 amounted to $12.8
million and $13.1 million and $22.0 million and $27.3 million,
respectively.  The second quarter 1997 expenses include accrued
expenses of $3.5 million related to the Facility's final industry
assessments and industry litigation involving surpluses from the
Facility that were previously received by the Company.  The
additional expense accruals were offset by previous expense
saving initiatives and lower expenses due to declining premium
volume.

The six months ended June 30, 1996 underwriting expenses were
negatively impacted by charges of $1.1 million for underaccrued
premium taxes and $1.3 million for restructuring charges.
<TABLE>
American Reliance
-----------------
<CAPTION>
                                 Three Months Ended    Six Months Ended
                                      June 30,             June 30,
                                -------------------  -------------------
                                  1997       1996       1997      1996
                                 -------    -------   -------    -------
                                          (Dollars in millions)
                                                                
                                                                
<S>                             <C>            <S>      <C>        <S>
Gross premiums written          $  57.8        -         57.8       -
Net Premiums written            $  43.8        -         43.8       -
                                =======    =======    =======  =======
                                                                
Net premiums earned             $  49.9        -         49.9       -
Loss and loss adjustment                   
 expenses incurred                (34.4)       -        (34.4)      -
Underwriting expenses             (17.6)       -        (17.6)      -
                                -------    -------    -------   -------
   Underwriting loss            $  (2.1)       -         (2.1)      -
                                =======    =======    =======   =======
                                                                

Ratios:                                                         
  Loss                             68.9%       -         68.9%       -
  Expense                          35.3%       -         35.3%       -  
                                 -------   -------     -------   -------
  Combined                        104.2%       -        104.2%       -
                                 =======   =======     =======   =======
</TABLE>
American Reliance was acquired on April 30, 1997.  The above
results are for the two months ended June 30, 1997 and are
included in the consolidated results of the Company.

The American Reliance's subsidiaries (the "American Reliance
Companies") primarily write commercial property and casualty
insurance policies for small to medium-sized businesses, and
also write certain personal lines.  The American Reliance
Companies' commercial insurance policyholders are primarily
located in suburban and rural areas, consist of customers
in the habitational sector (such as apartments, condominiums,
motels and hotels), retailers, wholesalers, service businesses,
funeral homes, lumber yards, woodworking operations, office
building, religious institutions, franchise and family-style
restaurants, artisan contractors, municipalities, golf courses
and auto dealers.  The American Reliance Companies' personal
lines focus on homeowners multiple peril and fire coverages
and standard and nonstandard automobile insurance.  For the
period ended June 30, 1997, commercial lines business
represented 70% of the American Reliance Companies' direct
written premiums, and the remaining 30% was personal lines
insurance.  The American Reliance Companies hold licenses to
operate in 44 states and the District of Columbia and actively
write commercial business in 30 states and the District of
Columbia and personal lines business in 12 states through a
network of approximately 3,400 independent agents.
<TABLE>
Discontinued Lines
------------------
<CAPTION>
                                Three Months Ended   Six Months Ended
                                     June 30,            June 30,
                                -----------------    ----------------
                                  1997      1996     1997      1996
                                 ------    ------   ------    ------
                                        (Dollars in millions)
                                                             
   <S>                          <C>         <C>      <C>       <C>
   Gross premiums written       $   .7       2.2      1.3       5.3
   Net premiums written         $   .4       2.1       .5       4.1
                               =======   =======  =======   =======
                                                             
   Net premiums earned          $   .4       2.9       .6       5.9
   Losses and loss adjustment                                
     expenses incurred             (.9)     (2.3)    (2.4)     (5.4)
   Underwriting expenses           (.9)     (1.2)    (1.2)     (2.5)
                               -------    -------  -------    ------
                                                             
     Underwriting loss          $ (1.4)      (.6)    (3.0)     (2.0)
                               =======    =======  =======   =======
</TABLE>
For reporting purposes, Highlands Group has three lines of business
which are considered Discontinued Lines, specifically business
originated by the Highlands Group's London operations, an umbrella/excess
liability policy program and assumed casualty and property
reinsurance contracts.  The Company has ceased to write these
Discontinued Lines and canceled all remaining voluntary assumed
casualty and property reinsurance contracts during 1996.

Period to Period Comparisons of Underwriting Results of
Discontinued Lines

Net Premiums Earned. Net premiums earned were $.4 million and
$2.9 million and $.6 million and $5.9 million for the three
months and six months ended June 30, 1997 and 1996, respectively.
The decline is due to the cancellation of all remaining voluntary
assumed reinsurance contracts in 1996.  Due to the nature of the
Company's reinsurance contracts, small premium adjustments can
continue long after cancellation of such agreements.

Loss and Loss Adjustment Expense Incurred. Loss and loss
adjustment expense for the three months and six months ended June
30, 1997 compared to 1996 decreased by $1.4 million and $3.0
million, respectively.  Although the loss and loss adjustment
expenses decreased for the second quarter 1997, the Company
experienced adverse development on prior year loss reserves.

Liquidity and Capital Resources

The Company is a holding company, the principal assets of
which at June 30, 1997 are all of the capital stock of
Highlands and American Reliance.  The Company's property and
casualty insurance business is conducted by its indirect
wholly-owned insurance subsidiaries. The liquidity and
capital resource considerations for the Company are different
than those of its insurance operations.

  Holding Company (Highlands Group)

On April 30, 1997, HIC acquired Vik Brothers Insurance, Inc.
(VBI) and its subsidiaries.  Immediately after the consummation of
the acquisition, VBI was renamed American Reliance, Inc.
(American Reliance).  American Reliance is a holding company and
has no direct operations.  American Reliance's principal assets
are the capital stock of its insurance subsidiaries.

The acquisition was financed with a combination of common stock,
bank debt, preferred stock and cash.  In connection with the
acquisition, Highlands Group paid approximately $55.4 million
in cash (including $35.6 million to repay American Reliance's
outstanding bank debt) and issued 1,656,700 shares of its
common stock (representing approximately 12.6% of Highlands
Group then outstanding common stock) and 21,366 shares of
newly issued preferred stock to the holders of the common
stock warrants, preferred stockholders and creditors of
American Reliance.  The closing price of Highlands Group's
common stock was $17.625 on April 30, 1997.  The preferred
stock is currently owned by a subsidiary of American Reliance
and has a preference value of $1,000 per share. Simultaneously
with the closing, Highlands Group contributed approximately
$41.5 million to the capital of the insurance subsidiaries of
American Reliance.

In connection with the acquisition, Highlands Group obtained
a $65 million senior revolving credit facility from a
consortium of banks led by the Chase Manhattan Bank.
Highlands Group funded the cash portion of the acquisition 
by utilizing the credit facility and available working capital.

As a holding company, Highlands Group's principal requirements
for funds are to pay operating expenses, franchise and other
taxes, debt service and dividends. Operating expenses and 
franchise and other taxes imposed on the Company are not
expected to be material.  The annual cash interest
requirements relating to the Debentures and the Credit Agreement
are approximately $10.7 million. Highlands Group does not currently
intend to pay dividends on the its Common Stock. In light of
the Company's corporate strategy, an additional use of funds may
be to invest in other insurance companies or other insurance
operations.

The Company's principal sources of funds are dividend and tax
sharing payments from Highlands and American Reliance, if any,
and funds that may be raised from time to time from the issuance
of additional debt or equity securities. The payment of dividends
by the insurance subsidiaries is subject to restrictions and
limitations imposed by the insurance regulatory authorities.
Dividend payments to Highlands Group from its insurance
subsidiaries are limited to $22.0 million in 1997 without prior
regulatory approval.  Both the issuance of additional debt
and the issuance of additional equity securities at a price
less than current market price would require the consent of
the holders of a majority in interest of the Debentures
pursuant to the covenants contained in the Debentures.

Management believes that Highlands Group liquid assets and
access to the capital markets enable it to meet its liquidity
needs.

  Insurance Subsidiaries

Insurance Operations. The principal sources of funds for the
Insurance Subsidiaries are premiums and amounts earned from the
investment of such premiums. The principal uses of funds by these
subsidiaries are the payment of losses and related expenses,
underwriting expenses, other operating expenses and dividends and
tax sharing payments to the Company.

In the insurance industry, liquidity refers to the ability of an
enterprise to generate adequate amounts of cash from its
operations, including from its investment portfolio, in order to
meet its financial commitments, which are principally obligations
under the insurance policies it has written. Liquidity
requirements of insurance companies are influenced significantly
by product mix. Future catastrophe claims, the timing and amount
of which are inherently unpredictable, may create increased
liquidity requirements for the Insurance Subsidiaries.  The
liquidity requirements of the Insurance Subsidiaries are met by
that portion of the investment portfolio that is held in cash and
highly liquid securities.

Various regulatory and legal actions are currently pending
involving the Insurance Subsidiaries and specific aspects of the
conduct of their business. See Part II:  "Other Information".
While the aggregate dollar amounts involved in such regulatory
and legal matters cannot be determined with certainty, the
amounts at issue could have a significant effect on the Company's
consolidated results of operations. In the opinion of management,
however, the ultimate liability in one or more of these actions
in excess of amounts currently reserved is not expected to have a
material effect on the Company's liquidity or capital resources.

Statutory Surplus.  Maintenance of appropriate levels of
statutory surplus of the Company's U.S. Insurance Subsidiaries is
a primary objective of the Company and is also important to
regulatory authorities and U.S. insurance rating agencies.  In
addition, increased public and regulatory concerns regarding the
financial stability of participants in the insurance industry
have caused greater emphasis to be placed by current and
potential customers upon the ratings assigned to property and
casualty insurance companies.  Highlands has been assigned as "A-
" (Excellent) rating by A.M. Best.  The principal insurance
subsidiaries of American Reliance have been assigned an A.M.
Best rating of "B+" (Very Good).  One other insurance subsidiary
has been rated "B" (Fair) and LMI Insurance Company (LMI), 
which has ceased current operations, has been rated "D" (Poor).

The National Association of Insurance Commissioners (NAIC) has
adopted risk based capital ("RBC") requirements that require
insurance companies to calculate and report information under a
risk-based formula which measures statutory capital and surplus
needs based on a regulatory definition of risk with respect to a
company's mix of products and its balance sheet.  Regulatory
compliance is determined by a ratio of the company's regulatory
adjusted capital, as defined by the NAIC, to its authorized
control level RBC as defined by the NAIC.  Companies below
specified ratios are classified within certain levels, each of
which requires corrective action.  All of the Insurance
Subsidiaries have an RBC amount above the authorized control
level RBC as defined by the NAIC except for LMI.

At December 31, 1996, LMI's surplus fell below the required RBC
level and was at the "authorized control" level.  Accordingly, it
was required to file a plan with the Ohio Insurance Department
setting forth its plan to attain the required level of regulatory
capital.  The plan, which contemplated the acquisition of
American Reliance by Highlands Group, included commuting
reinsurance agreements and implementing numerous affiliated
transactions.  The plan was approved by the Ohio Insurance
Department and transactions which required approval of other
insurance departments received the required approval.  On
April 30, 1997, in compliance with the plan, Highlands Group
made a capital contribution through American Reliance of $27.5
million to LMI.  Highlands Group is not committed to make
future additional contributions.

The NAIC's Insurance Regulatory Information System ("IRIS") was
developed by a committee of state insurance regulators primarily
to assist state insurance departments in executing their
statutory mandate to oversee the financial condition of insurance
companies operating in their respective states.  IRIS helps to
identify those companies that merit the highest priority in the
allocation of the regulators' resources on the basis of eleven
financial ratios which are calculated annually from financial
information obtained from insurers' statutory annual statements.
A "usual range" of results for each ratio is used as a benchmark.
The ratios and benchmark comparisons are calculated within
defined parameters and are not intended to replace the Insurance
Commissioners' own in-depth financial analysis or on-site
examinations.  Departure from the usual range on three or more of
the ratios could lead to inquiries from individual Commissioners.

Companies that receive financial ratio values outside the usual
range generally are analyzed in order to identify those companies
that appear to require immediate regulatory attention.  If an
insurer's situation should be accorded the highest surveillance
priority in the Insurance Commissioners' surveillance process,
the insurer receives a "first priority" designation.  The "second
priority" and "third priority" designations signify
recommendations for lower levels of increased regulatory
attention.  Due primarily to their recent underwriting results
LMI, State Capital Insurance Company and Pacific Automobile
Insurance Company received "first priority" designations,
Highlands and Pacific National Insurance Company received
"second priority" designations and Northwestern National
Casualty Company received a "third priority" designation.
The Company will fully respond to any regulatory inquiries
and does not expect that these designations will materially
impact its insurance operations.

Reinsurance Receivables. The Company monitors the financial
condition of the reinsurance companies with which it places
significant reinsurance coverage and strives to place current
reinsurance coverages with financially sound reinsurance
companies. In the past, the Company has placed reinsurance
coverage with several hundred reinsurance companies. It monitors
the financial condition of many of such companies only on a
periodic basis. A number of such companies are in run-off or have
ceased writing reinsurance and some have become insolvent. The
Company's ability to monitor the financial condition of some
reinsurance companies is limited because of the difficulty of
acquiring accurate information.

Part II Other Information
        -----------------

Item 1. Legal Proceedings
        -----------------

The Company is a defendant in two lawsuits brought by insureds
seeking to require Highlands to refund the surplus that existed
in the Texas Workers Compensation Insurance Facility (the
"Facility") for 1991, 1992, 1993 and 1994. The first suit is
a proposed class action against the insurance companies
participating in the Facility and is pending in Travis County,
Texas (Travelers Indemnity Company v. Texas Workers Compensation
Facility and Sandwich Chef of Texas, Inc. v. Reliance National
Indemnity Insurance Company (the "Sandwich Chef Litigation"). 
The Company is also a defendant in Bryan Construction Company
v. Highlands Insurance Company in Milan County, Texas ("Bryan 
Construction"), which involves a claim by a single insured
against the Company and one other defendant.  The plantiff
in this proceeding is seeking to have it certified as a class
action.  The Company has joined as a plaintiff, along with
a large number of other companies, in a suit against the Texas
Department of Insurance ("TDI") in Travis County, attacking
the enforceability of the rule (the "Rule") issued by the
TDI on July 11, 1997, under which the refunds from the Facility
surplus would be paid (the "AIA Litigation").  The plaintiffs
in the AIA Litigation and the TDI are seeking to stay or 
consolidate the Sandwich Chef Litigation pending resolution
of the AIA Litigation, which should resolve the issues in 
that case, and the Company is also seeking to stay Bryan
Construction.

The plaintiffs in the AIA litigation are not challenging the 
Rule as it pertains to 1993 and 1994 and, therefore, the 
Company will be refunding the amounts for those years in
accordance with the requirements of the Rule.  The amounts
claimed in Bryan Construction are for 1993; therefore,
the refund for 1993 should dispose of that case.  The AIA 
Litigation challenges the Rule as it applies to 1991 and
1992.  Management believes, after consultation with its 
counsel in the AIA Litigation, that there are substantial
legal bases to challenge the Rule's application to 1991 and
1992.  Management has established what it considers to be
adequate reserves for its liabitity under the Rule, 
accordingly, the resolution of this matter should not have
a material adverse effect on the financial position of the 
Company.

Item 6:   Exhibits and Reports on Form 8-K.
     
     a)   Exhibits

          (12) Computation of Earnings Per Share

          (27) Financial Data Schedule (Filed Electronically)

     b) The Registrant filed a Form 8-K Current Report, dated
        February 25, 1997, pertaining to the Registrant's press
        release reporting the results of operations for the 
        three months and twelve months ended December 31, 1996,
        and certain other selected financial data.

        The Registrant filed a Form 8-K Current Report, dated
        March 31, 1997, pertaining to the Registrant's press
        release on the status of the Registrant's acquisition of
        Vik Brothers Insurance Inc.

        The Registrant filed a Form 8-K Current Report, dated
        April 30, 1997, pertaining to the Registrant's press
        release of the Registrant's completion of the
        acquisition of Vik Brothers Insurance, Inc.

        The Registrant filed a Form 8-K Current Report, dated
        April 30, 1997, pertaining to the Registrant's
        acquisition of Vik Brothers Insurance, Inc.

        The Registrant filed a Form 8-KA Amendment No. 1 Current
        Report, dated April 30, 1997, pertaining to the
        Registrants acquisition of Vik Brothers Insurance, Inc.

        The Registrant filed a Form 8-KA Amendment No. 2 Current
        Report dated April 30, 1997, filing certain additional
        financial information related to Vik Brothers Insurance,
        Inc., which was acquired by the Registrant.

        The Registrant filed a Form 8-K Current Report, dated
        May 7, 1997, pertaining to the Registrant's press
        release reporting the results of operations for the
        three months ended March 31, 1997, and certain other
        selected financial data.

SIGNATURES

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

HIGHLANDS INSURANCE GROUP, INC.
(Registrant)




Date:       August 14, 1997    By   /s/  Richard M. Haverland
                          --------------------
                          Richard M. Haverland
                          Chairman, President and Chief
                          Executive Officer
                          (Authorized Signatory)

Date:       August 14, 1997    By   /s/  Charles J. Bachand
                          ------------------
                          Charles J. Bachand
                          Vice President, Treasurer and
                          Principal Accounting Officer
                          (Authorized Signatory)












                                
                                
                                
<TABLE>
                                
                                
        HIGHLANDS INSURANCE GROUP, INC. AND SUBSIDIARIES
                COMPUTATION OF EARNINGS PER SHARE
                                
           (In millions, except for per share amounts)
<CAPTION>
                                       Three Months        Six Months
                                           Ended              Ended
                                         June 30,            June 30
                                     -----------------  ----------------
                                      1997      1996     1997      1996
                                     -------  -------   -------  -------
<S>                                <C>         <C>       <C>       <C>
EARNINGS:                                                            
                                              
Primary:                   
Net income (loss), as reported      $(2,268)   (3,506)      689    (3,292)
After tax interest adjustment for                                
  excess stock warrant and option                                
  proceeds                              -         -          -        -
                                    -------   -------   -------   -------
  Net income (loss), as adjusted     (2,268)   (3,506)      689    (3,292)
                                    =======   =======   =======   =======
Fully diluted:                                                   
Net income (loss), as reported          -         -          -        -
After tax interest adjustment for                                
  excess stock warrant and option                                
  proceeds                              -         -          -        -
After tax interest expense                                       
  applicable to Convertible                                      
  Subordinated Debentures               -         -          -        -
                                    -------   -------   -------  -------
                                                                                     
  Net income (loss), as adjusted        -         -          -        -
                                    =======   =======   =======  =======
                                                                               =        =        =
SHARES:                                                          
Primary:                                                         
Weighted average number of common                                
  shares outstanding, per                                        
  consolidated financial statements  12,556    11,448    11,448   12,004
Additional dilutive effect of                                    
  outstanding stock warrants and                                 
  options (based on treasury stock                               
  method)                               -         -         -        -
                                    -------   -------   -------  -------
                                                                                                         
  Weighted average, as adjusted      12,556    11,448    12,004   11,448
                                    =======   =======   =======  =======
Fully diluted:                                                   
Weighted average number of common                                
  shares outstanding, per                                        
  consolidated financial statements     -         -        -        -
Additional dilutive effect of:                                   
  Outstanding stock warrants and                                 
   options (based on treasury stock                              
   method)                              -         -        -        -
  Common shares from conversion of                               
   the convertible subordinated                                  
   debentures                           -         -        -        -
                                    -------   -------  -------  -------
                                                                                                           
  Weighted average, as adjusted         -         -        -        -
                                    =======   =======  =======  =======
                                           
EARNINGS PER COMMON SHARE:                                       
  Primary                            $ (.18)    (.31)      .06    (.29)
  Fully diluted                          -         -        -       -
</TABLE>
Common stock warrants and stock options are antidilutive for all
periods presented.  Fully diluted earnings per share is not
presented as the effects of the convertible subordinated
debentures are antidilutive for all periods presented.