SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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

For the quarterly period ended June 30, 1999

                                       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 001-13135

                                 HSB GROUP, INC.
             (Exact name of registrant as specified in its charter)

          CONNECTICUT                               06-1475343
 (State or other jurisdiction of                 (I.R.S. Employer
  incorporation or organization)                Identification No.)


P.O. BOX 5024, ONE STATE STREET,
HARTFORD, CONNECTICUT                                06102-5024
(Address of principal executive offices)             (Zip Code)

                                 (860) 722-1866
              (Registrant's telephone number, including area code)

                                 Not applicable
              (Former name, former address and former fiscal year,
                        if changed since the last report)

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

The number of shares  outstanding of the  registrant's  common stock without par
value, as of July 31, 1999: 28,893,207.


<PAGE>


                                 HSB GROUP, INC.

                                      INDEX


PART I   FINANCIAL STATEMENTS                                            PAGE

      Item 1 - Financial Statements

      Consolidated Statements of Operations for the
      Quarters ended June 30, 1999 and
      1998 and the Six Months ended June 30, 1999 and 1998
      (unaudited)................................................          3

      Consolidated Statements of Comprehensive Income for
      the Quarters ended June 30, 1999 and 1998 and the
       Six Months ended June 30, 1999 and
      1998 (unaudited).............................................        4

      Consolidated Statements of Financial Position as
      of June 30, 1999 (unaudited) and December 31, 1998 ..........        5


      Consolidated Statements of Cash Flows for the
      Six Months ended June 30, 1999 and
      1998 (unaudited) ............................................        6

      Notes to Consolidated Financial Statements (unaudited).......        7

      Item 2 - Management's Discussion and Analysis
      of Consolidated Financial Condition and Results
      of Operations................................................       13


PART II  OTHER INFORMATION

      Item 1 - Legal Proceedings...................................       26
      Item 4 - Submission of Matters to a Vote of
               Security Holders....................................       26
      Item 6 - Exhibits and Reports on Form 8-K....................       27

SIGNATURES.........................................................       28


                                       2
<PAGE>
Part I
Item 1 - Financial Statements
                                                 HSB GROUP, INC.
                                      Consolidated Statements of Operations
                                                    Unaudited
                                       (in millions, except per share data)


<TABLE>
<CAPTION>
                                                                  Quarter                     Six Months
                                                               Ended June 30                 Ended June 30
                                                             1999          1998          1999           1998
                                                         ----------------------------------------------------------
<S>                                                      <C>            <C>           <C>          <C>
Revenues:
  Gross earned premium                                   $   206.8      $   175.7     $   415.7    $   355.4
  Ceded premiums                                             113.1           85.3         225.5        165.6
                                                        -----------------------------------------------------------
  Insurance premiums                                          93.7           90.4         190.2        189.8
  Engineering services                                        27.8           22.7          55.4         42.4
  Net investment income                                       16.6           15.9          32.3         31.1
  Realized investment gains                                   10.2            7.3          17.3         10.5
                                                        -----------------------------------------------------------
     Total revenues                                          148.3          136.3         295.2        273.8
                                                        -----------------------------------------------------------

Expenses:
  Claims and adjustment                                       37.9           40.4          76.2         85.0
  Policy acquisition                                          21.3           12.8          43.9         27.4
  Underwriting and inspection                                 24.2           27.5          48.2         57.2
  Engineering services                                        25.6           20.7          50.8         38.6
  Interest                                                     0.6            0.1           1.0          0.2
                                                         -----------------------------------------------------------
     Total expenses                                          109.6          101.5         220.1        208.4
                                                        -----------------------------------------------------------

Gain on sale of IRI                                            -              -             -           39.0


Income from continuing operations before income taxes
   and distributions on capital securities               $    38.7      $    34.8     $    75.1    $   104.4

Income taxes (benefit):
   Current                                                    11.1            1.7          19.3         29.3
   Deferred                                                    0.3            7.6           3.0          2.5
                                                        -----------------------------------------------------------
     Total income taxes                                  $    11.4      $     9.3     $    22.3    $    31.8

Distribution on capital securities of subsidiary
   trust, net of income tax benefits of $2.4; $2.5;
   $4.8; and $4.9.                                             4.5            4.7           9.0          9.2
                                                        -----------------------------------------------------------
Income from continuing operations                        $    22.8       $   20.8     $    43.8    $    63.4

Discontinued operations:
     Loss from operations, net of income tax benefits
       of $3.2                                                 -               -             -          (6.6)

     Gain on disposal, net of income taxes of $23.7            -               -             -          36.9

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

Total discontinued operations                            $     -         $     -      $      -     $    30.3

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

Net income                                               $    22.8       $   20.8     $    43.8    $    93.7
                                                        -----------------------------------------------------------

Per share data:

Net income per common share-basic:
    Income from continuing operations                    $     0.79      $    0.71    $     1.51   $     2.16
    Discontinued operations                                     -              -             -           1.04
    Net income                                           $     0.79      $    0.71    $     1.51   $     3.20

Net income per common share-assuming dilution:
    Income from continuing operations                    $     0.76      $    0.68    $     1.46   $     1.99
    Discontinued operations                                    -               -             -           0.86
    Net income                                           $     0.76      $    0.68    $     1.46   $     2.85

Dividends declared per share                             $     0.42      $    0.40    $     0.84   $     0.80
Average shares outstanding and common stock equivalents       34.8           35.4          34.6         35.3
</TABLE>

See Notes to Consolidated Financial Statements.

                                       3
<PAGE>




                                                HSB GROUP, INC.
                                Consolidated Statements of Comprehensive Income
                                                   Unaudited
                                                 (in millions)


<TABLE>
<CAPTION>
                                                                 Quarter Ended               Six Months
                                                                 Ended June 30              Ended June 30
                                                               1999          1998         1999         1998
                                                           -----------------------------------------------------
<S>                                                             <C>           <C>          <C>          <C>

Net income                                                      $22.8         $20.8        $43.8        $93.7
Other comprehensive income, net of tax:

 Unrealized gains (losses) on securities:

  Unrealized holding gains (losses) arising during the
   period (net of taxes (benefits) of ($0.2); $4.2;
   ($4.4); and $14.9)                                            (0.3)          7.8         (8.3)        27.3

  Add: reclassification adjustments for gains included in
   net income                                                    (6.6)         (4.7)       (11.2)        (6.8)
                                                           -----------------------------------------------------

    Total unrealized gains (losses) on securities                (6.9)          3.1        (19.5)        20.5

 Foreign currency translation adjustments                         0.6          (0.9)         0.9         (0.7)
                                                           -----------------------------------------------------

 Other comprehensive income                                      (6.3)          2.2        (18.6)        19.8

                                                           =====================================================
 Comprehensive income                                           $16.5         $23.0        $25.2       $113.5
                                                           =====================================================

</TABLE>

See Notes to Consolidated Financial Statements.





                                       4
<PAGE>





                                            HSB GROUP, INC.
                             Consolidated Statements of Financial Position
                                  (in millions, except per share data)

                                                     June 30,      December 31,
                                                       1999            1998
                                                    (Unaudited)
                                                    ----------     ------------
Assets:
 Cash and cash equivalents                             $   47.5        $   18.3
 Short-term investments, at cost                           49.4            62.3

 Fixed maturities, at fair value
  (cost - $561.5; $568.5)                                 544.9           577.1

 Equity securities, at fair value
  (cost - $333.9;  $326.3)                                441.6           437.1
                                                        -------         -------
  Total cash and invested assets                        1,083.4         1,094.8

 Reinsurance assets                                       660.8           630.4
 Insurance premiums receivable                            121.7           146.7
 Engineering services receivable                           29.4            26.1
 Fixed assets                                              56.3            54.9
 Prepaid acquisition costs                                 50.6            46.6
 Capital lease                                             14.2            14.6
 Other assets                                             146.4           129.9
                                                       --------        --------
  Total assets                                         $2,162.8        $2,144.0
                                                       ========        ========
Liabilities:
 Unearned insurance premiums                           $  426.8        $  477.9
 Claims and adjustment expenses                           592.2           550.3
 Short-term borrowings                                     55.0            21.0
 Long-term borrowings                                      25.1            25.1
 Capital lease                                             27.8            27.9
 Deferred income taxes                                     35.2            42.7
 Dividends and distributions on capital securities         23.2            23.2
 Ceded reinsurance payable                                 61.1            64.1
 Other liabilities                                         84.7            83.6
                                                        -------         -------
  Total liabilities                                     1,331.1         1,315.8
                                                        -------         -------
Company obligated mandatorily redeemable
    preferred exchange capital
    securities of subsidiary Trust I
    holding solely junior subordinated
    deferrable interest debentures of the
    Company, net of unamortized
    discount of $1.1 in 1999 and 1998                    108.9           108.9

Company obligated mandatorily redeemable
   convertible capital securities
   of subsidiary Trust II holding solely
   junior subordinated deferrable
   interest debentures of the Company                    300.0           300.0

Shareholders' equity:


 Common stock (stated value; shares authorized
   50.0; shares issued and outstanding 29.1; 28.9)        10.0            10.0

 Additional paid-in capital                               35.8            33.5
 Accumulated other comprehensive income                   48.2            66.8
 Retained earnings                                       335.3           311.2
 Benefit plans                                            (6.5)           (2.2)
                                                       --------        --------
   Total shareholders' equity                            422.8           419.3
                                                       --------        --------
   Total                                              $2,162.8        $2,144.0
                                                       ========        ========
 Common shareholders' equity per common share         $   14.52       $   14.53

See Notes to Consolidated Financial Statements.

                                       5
<PAGE>





                                           HSB GROUP, INC.
                                Consolidated Statements of Cash Flows
                                              Unaudited
                                            (in millions)

<TABLE>
<CAPTION>

                                                                Six Months Ended
                                                                   June 30,
                                                       ----------------------------------
                                                           1999               1998
                                                       --------------   -----------------
<S>                                                       <C>                <C>
Operating Activities:
Net income                                                $ 43.8             $ 93.7
Adjustments  to  reconcile   net  income  to  net
   cash  provided  by  operating
   activities:
   Depreciation and amortization                            10.2                5.9
   Deferred  income taxes                                    3.0                2.5
   Realized investment gains                               (17.3)             (10.5)
   Distributions on capital securities                      13.8               14.1
   Gain from the disposition of Radian,
    net of income taxes                                      -                (30.3)
   Gain from the disposition of IRI,
    net of income taxes                                      -                (25.2)
   Change in balances, net of effects from
    purchases and sales of subsidiaries:
    Insurance premiums receivable                           25.0              (26.8)
    Engineering services receivable                         (3.3)             (10.2)
    Prepaid acquisition costs                               (4.0)              16.0
    Reinsurance assets                                     (30.4)            (278.5)
    Unearned insurance premiums                            (51.1)             143.4
    Claims and adjustment expenses                          41.9               60.4
    Ceded reinsurance payable                               (3.0)              94.7
    Other                                                  (18.4)             (39.7)
                                                          --------           --------
        Cash provided by operating activities               10.2                9.5
                                                          --------           --------

Investing Activities:
Fixed asset additions, net                                  (7.4)              (7.6)

Investments:
   Sale of short-term investments, net                      12.9               71.6
   Purchase of fixed maturities                            (86.6)            (342.4)
   Proceeds from sale of fixed maturities                   84.6               23.5
   Redemption of fixed maturities                            8.3               17.9
   Purchase of equity securities                          (168.0)            (209.5)
   Proceeds from disposition of Radian                       -                128.9
   Proceeds from disposition of IRI                          -                 49.1
   Proceeds from sale of equity securities                 180.3              109.0
   Purchase of Solomon Associates,
    net of cash acquired                                     -                 (2.1)
                                                          ---------          -------
     Cash provided by (used in)
      investment activities                                 24.1             (161.6)
                                                          ---------          -------
Financing Activities:
Increase (decrease) in short-term borrowings                31.4              (35.3)
Dividends and distributions on capital securities          (38.2)             (27.9)
Reacquisition of stock                                      (2.2)             (24.1)
Exercise of stock options                                    3.9                8.4
                                                          ----------         -------
       Cash used in financing activities                    (5.1)             (78.9)
                                                          ----------         -------
     Net increase (decrease) in cash and
      cash equivalents                                      29.2             (231.0)

     Cash and cash equivalents
      at beginning of period                                18.3              293.2

                                                          ----------         --------
     Cash and cash equivalents at end of period           $ 47.5               62.2
                                                          ==========         ========
Interest paid                                             $  1.8             $  1.1
                                                          ----------         --------
Federal income tax paid                                   $ 12.2             $ 25.5
                                                          ----------         --------
</TABLE>
See Notes to Consolidated Financial Statements.

                                       6
<PAGE>





                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
1.       General

         The interim  consolidated  financial  statements in this report include
         adjustments   based  on  management's  best  estimates  and  judgments,
         including  estimates of future loss  payments,  which are  necessary to
         present  a fair  statement  of the  results  for  the  interim  periods
         reported.  These  adjustments are of a normal,  recurring  nature.  The
         financial  statements  are prepared on the basis of generally  accepted
         accounting  principles  and  should  be read in  conjunction  with  the
         financial  statements  and  related  notes in the 1998  Annual  Report.
         Certain  amounts for 1998 have been  reclassified  to conform  with the
         1999 presentation.

2.       Discontinued Operations

         On January 2, 1998, The Hartford Steam Boiler  Inspection and Insurance
         Company  (HSBIIC)  exercised  its option to put its 40 percent share in
         Radian  International  LLC  (Radian  LLC) to The Dow  Chemical  Company
         (Dow), for approximately $129 million, net of expenses.  Radian LLC was
         formed  in  January  1996  as a  joint  venture  with  Dow  to  provide
         environmental,  engineering,  information  technology,  remediation and
         strategic  chemical  management  services to industries and governments
         world-wide. In connection with the formation of the new company, HSBIIC
         contributed  substantially  all of the  assets and  liabilities  of its
         wholly-owned  subsidiary,  Radian  Corporation  at  historical  cost to
         Radian  LLC. No gain was  recognized  on the  transfer.  The results of
         Radian  LLC  were  classified  as  discontinued   operations  following
         ratification  on July  28,  1997 by the  HSB's  Board of  Directors  of
         management's  decision  to exercise  its put.  The  Company's  share of
         Radian  LLC's  losses   incurred   subsequent   to  such   decision  of
         approximately $6.6 million after-tax was deferred and recognized at the
         time the gain was recognized in 1998. This  transaction  resulted in an
         after-tax gain of $36.9 million which was recorded in the first quarter
         of 1998.

3.       Industrial Risk Insurers

         On January 6, 1998,  HSBIIC sold its 23.5 percent  share in  Industrial
         Risk Insurers (IRI) to Employers Reinsurance  Corporation (ERC), one of
         the  world's  largest  reinsurance  companies,  in  accordance  with  a
         previously  announced purchase and sale agreement between ERC and IRI's
         twenty-three  member  insurers.  The gain on the sale of IRI was  $36.6
         million  pre-tax and $23.8  million  after-tax,  of which $39.0 million
         pre-tax and $25.2 million after-tax was recognized in the first quarter
         of 1998. In the fourth  quarter of 1998,  adjustments  were made to the
         costs  associated  with the sale.  IRI is a  voluntary,  unincorporated
         joint underwriting  association,  which provides property insurance for
         the class of business known as "highly protected risks" (HPR) -- larger
         manufacturing,   processing,   and  industrial  businesses  which  have
         invested in protection  against loss through the use of sprinklers  and
         other means. HSBIIC received gross proceeds of $49.1 million,  prior to
         transaction  costs, for its 23.5 percent share in IRI. Because the sale
         was  structured  in part as a  reinsurance  transaction,  a portion  of
         HSBIIC's gross proceeds was utilized to reinsure in-force policies with
         ERC.

         Contemporaneous  with the close of the sale, IRI was reconstituted with
         ERC (with a 99.5 percent  share) and HSBIIC (with a 0.5 percent  share)
         as  the  sole  members.  The  new  association  has  been  renamed  HSB
         Industrial Risk Insurers. HSBIIC writes the business for HSB Industrial
         Risk Insurers using its insurance  licenses and provides  certain other
         management and technical services.  In addition,  through various quota
         share reinsurance agreements with ERC and HSB Industrial Risk Insurers,
         HSBIIC transferred its manufacturing book of business to HSB Industrial
         Risk  Insurers  and  retains  85  percent  of the  equipment  breakdown
         insurance  and 15 percent of the  property  insurance  of the  combined
         insurance portfolio. The agreements are of indefinite duration, but ERC
         has an option to purchase  HSB's  interest in the business in the event
         of a 50 percent or more change in the control of HSB.

                                       7
<PAGE>


4.       Recent Accounting Developments

         The Accounting  Standards Executive Committee of the American Institute
         of  Certified   Public   Accountants   (AcSEC)  recently  issued  three
         Statements  of Position  (SOP) which became  effective for fiscal years
         beginning  after December 15, 1998; SOP 97-3,  "Accounting by Insurance
         and Other  Enterprises for  Insurance-Related  Assessments",  SOP 98-1,
         "Accounting  for the Costs of Computer  Software  Developed or Obtained
         for Internal  Use",  and SOP 98-5,  "Reporting on the Costs of Start-Up
         Activities".   Because  the  Company's   accounting  policies  were  in
         compliance with the provisions of the SOP's, the  implementation of the
         SOP's had no impact upon the results of operations, financial condition
         or cash flows.

         In June 1998, the Financial  Accounting  Standards  Board (FASB) issued
         Statement of Financial  Accounting Standard (SFAS) No. 133, "Accounting
         for  Derivative  Instruments  and Hedging  Activities".  This statement
         establishes   accounting   and  reporting   standards  for   derivative
         instruments, including certain derivative instruments embedded in other
         contracts, and for hedging activities. It requires that all derivatives
         be  recognized  as either  assets or  liabilities  in the  statement of
         financial position and that such instruments be measured at fair value.
         In addition,  all hedging relationships must be designated,  reassessed
         and  documented  pursuant to the  provisions  of SFAS No. 133. In June,
         1999 SFAS No. 137 was issued.  This statement defers the effective date
         of SFAS No. 133 to fiscal quarters of fiscal years beginning after June
         15, 2000. The Company  anticipates  that the adoption of the provisions
         of SFAS  No.  133  will  not  have a  material  impact  on  results  of
         operations, financial condition or cash flows.

         In October 1998, AcSEC issued SOP 98-7, "Deposit Accounting: Accounting
         for Insurance and Reinsurance  Contracts That Do Not Transfer Insurance
         Risk." The SOP  identifies  several  methods of deposit  accounting and
         provides  guidance  on the  application  of each  method.  This  SOP is
         effective for financial  statements  for fiscal years  beginning  after
         June 15,  1999.  Currently  the  Company is not party to any  contracts
         which do not comply with the risk transfer  provisions of SFAS No. 113,
         "Accounting  and  Reporting  for  Reinsurance  of  Short-Duration   and
         Long-Duration  Contracts,"  and,  therefore,  does not  anticipate  the
         adoption  of SOP  98-7  will  have a  material  impact  on  results  of
         operations, financial condition or cash flows.

5.       Legal Proceedings

         HSBIIC has been involved in three  significant  claim-related  disputes
         concerning  the extent to which certain  explosion  events were insured
         under boiler and machinery coverages of HSBIIC.  Information  regarding
         these  disputes has been  provided in previous  10-K and 10-Q  reports.
         Current  rulings  in all three  cases  confirm  HSBIIC's  long-standing
         position that HSBIIC  policies do not cover the  explosion  events that
         occurred in those cases.  In one case the parties settled their dispute
         following  Summary  Judgment  rulings of the Federal District Court for
         the State of Illinois;  in a second case, a decision of an  arbitration
         panel  has  been  confirmed  by the  Superior  Court  of the  State  of
         Connecticut;  and in a third case, the Federal Court of Appeals for the
         Seventh  Circuit  has  remanded  the matter for entry of a judgment  in
         HSBIIC's favor.

         The Company is also  involved in various  other  legal  proceedings  as
         defendant or co-defendant  that have arisen in the normal course of its
         business.  In the  judgment  of  management,  after  consultation  with
         counsel,  it is improbable that any liabilities which may arise from or
         with respect to the disputes  above or any other  litigation  will have
         material  adverse  impact on the results of operations or the financial
         position of the Company.


                                       8
<PAGE>

6.       Earnings per share

         Computation of Earnings Per Share:

<TABLE>
<CAPTION>
                                                        Quarter Ended                       Six Months Ended
                                                        June 30, 1999                        June 30, 1999
                                                        -------------                       ----------------
                                              Income       Shares      Per      Income          Shares         Per
                                              ------       ------     Share     ------          ------         Share
                                                                      -----                                   -----
          <S>                                 <C>           <C>      <C>         <C>               <C>          <C>

          Income from continuing
                operations                    $ 22.8                             $ 43.8
           Basic EPS:
           Income available to common
                shareholders                  $ 22.8                             $ 43.8
           Weighted Average Common
                Shares Outstanding                          29.0                                   29.0
           Income from continuing
                operations per common
                share - basic                                        $ 0.79                                     $ 1.51

           Effect of dilutive securities:
             After-tax interest on
              convertible capital
              securities                      $  3.5                             $  6.8
             Convertible capital
              securities                                     5.3                                    5.3
              Stock options                                  0.5                                    0.3
           Diluted EPS:
           Income from continuing
              operations available to
              common and assumed
              conversions                     $ 26.3        34.8                 $ 50.6            34.6

           Income from continuing
              operations per common
              share - assuming dilution                              $ 0.76                                      $ 1.46

</TABLE>

                                       9
<PAGE>





<TABLE>
<CAPTION>
                                                   Quarter Ended                           Six Months Ended
                                                   June 30, 1998                            June 30, 1998
                                                   -------------                           ----------------

                                            Income       Shares        Per        Income          Shares       Per
                                            ------       ------       Share       ------          ------       Share
                                                                      -----                                    -----

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

           Income from continuing
                operations                   $ 20.8                               $ 63.4
           Basic EPS:
           Income available to common
                shareholders                 $ 20.8                               $ 63.4
           Weighted Average Common
                Shares Outstanding                          29.3                                    29.3
           Income from continuing
                operations per common
                share - basic                                         $ 0.71                                   $ 2.16

           Effect of dilutive securities:
             After-tax interest on
              convertible capital
              securities                     $  3.4                               $  6.8
             Convertible capital
              securities                                     5.3                                     5.3
              Stock options                                  0.8                                     0.7
           Diluted EPS:
           Income from continuing
              operations available to
              common and assumed
              conversions                    $ 24.2         35.4                  $ 70.2            35.3

           Income from continuing
              operations per common
              share - assuming dilution                               $ 0.68                                   $ 1.99

</TABLE>

7.       Segment Information

         In 1998, HSB implemented the provisions of SFAS No. 131,  "Disclosures
         about  Segments  of  an  Enterprise  and  Related  Information".  This
         standard  requires  companies  to  report  financial  and  descriptive
         information  about  reportable   operating   segments   utilizing  the
         management  approach  to  defining  operating  segments.  It  includes
         disclosure requirements relating to products and services,  geographic
         areas and major customers. The adoption of SFAS No. 131 did not affect
         consolidated  results of  operations  or  financial  position  but did
         affect the disclosure of segment information.

         HSB has four reportable  segments--Commercial insurance, Global Special
         Risk  insurance,   Engineering  services  and  Investments.  HSB  is  a
         multi-national company operating primarily in North American, European,
         and Asian  markets.  Through its  Commercial  segment  operations,  HSB
         provides risk modification services,  equipment breakdown insurance and
         loss recovery  services to commercial  businesses.  The Global  Special
         Risk  operating  segment  focuses  on the needs of  equipment-intensive
         industries by offering all risk coverage  with  customized  engineering
         consulting and risk management.  HSB's Engineering  services operations
         offers  professional  scientific and technical  consulting for industry
         and government on a worldwide  basis. The Company's  investment  assets
         are managed by its Investment operating segment.

         The accounting  policies of the segments are consistent  with generally
         accepted accounting principles except for certain benefit charges which
         comprise the Corporate  Account.  HSB evaluates the  performance of its
         segments and  allocates  resources to them based on net income  (loss).
         Segment assets are not included in this  evaluation  process.  Interest
         income  and  expense  are   included  in  the  results  of   Investment
         operations.

                                       10
<PAGE>

         The  following  presents  revenue  and net  income  from the  Company's
         reportable  segments and reconciles these amounts to the  corresponding
         consolidated totals:

<TABLE>
<CAPTION>
                                                               Quarter Ended                Six Months Ended
                                                                   June 30                      June 30
                                                              ---------------               ----------------
                                                            1999             1998           1999            1998
           -------------------------------------------------------------------------------------------------------
           <S>                                           <C>              <C>             <C>             <C>
           Revenues from continuing operations
           Insurance premiums:
           Commercial                                    $   82.2         $   68.9        $ 162.5         $ 137.0
           Global Special Risks                              11.1             19.3           26.8            49.3
           Engineering services                              27.8             22.7           55.4            42.4
           Net investment income and realized
            investment gains                                 26.8             23.2           49.6            41.6
                                                         -----------      -----------     -----------     ---------
           Total revenues from reportable segments          147.9            134.1          294.3           270.3
           Other segments                                     0.4              2.2            0.9             3.5
                                                         -----------      -----------     -----------     ----------
           Total revenues                                $  148.3         $  136.3        $ 295.2         $ 273.8
                                                         ==========       ===========     ===========     ==========

           Net income (loss):
           Commercial                                    $    4.5         $    2.6        $   5.9         $   3.9
           Global Special Risks                               2.7              3.0            7.9             7.2
           Engineering services                               1.2              1.1            2.5             2.1
           Investment                                        18.6             16.9           34.6            30.3
                                                         -----------      -----------     -----------     ----------
           Total net income from reportable segments         27.0             23.6           50.9            43.5
           Other segments                                    (1.5)             0.5           (1.5)            1.2
           Corporate account                                  1.8              1.4            3.4             2.7
           Distributions on capital securities               (4.5)            (4.7)          (9.0)           (9.2)
           Discontinued operations                            -                -              -              30.3
           Gain on sale of IRI, net of income taxes           -                -              -              25.2
                                                         -----------      -----------     -----------     ----------
            Net income                                   $   22.8         $   20.8        $  43.8         $  93.7
                                                         ===========      ===========     ===========     ==========
</TABLE>

8.       Global Floating Rate Capital Securities

         On July 15,  1997,  a trust  sponsored  and wholly owned by the Company
         issued $110,000,000  aggregate liquidation amount of capital securities
         in a private  placement  and 3,403 shares of common  securities  to the
         Company,   the  proceeds  of  which  were  invested  by  the  trust  in
         $113,403,000   aggregate   principal   amount  of  the  Company's  debt
         securities.  On November  5, 1997,  an  exchange  offer was  commenced,
         pursuant  to which  the  capital  securities  originally  issued in the
         private  placement  were  exchanged  for capital  securities  that were
         registered  with the Securities and Exchange  Commission  (the "Capital
         Securities"  )  and  the  debt   securities  were  exchanged  for  debt
         securities  that  were  registered  with the  Securities  and  Exchange
         Commission (the "Debt Securities" ).

         The Debt  Securities  represent  all of the  assets of the  trust.  The
         proceeds  from the  issuance  of the Debt  Securities  were used by the
         Company for general corporate purposes. The Debt Securities and related
         income statement  effects are eliminated in the Company's  consolidated
         financial  statements.  The  $113.4  million  principal  amount of Debt
         Securities accrue and pay cash distributions  quarterly in arrears at a
         variable  rate of LIBOR plus .91% of the stated  liquidation  amount of
         $1,000 per Debt Security, and are scheduled to mature on July 15, 2027.

         The Capital Securities accrue and pay cash distributions  quarterly in
         arrears  at  a  variable  rate  of  LIBOR  plus  .91%  of  the  stated
         liquidation  amount of $1,000 per Capital  Security.  The terms of the
         Debt  Securities,  the  guarantee  of the Company  with respect to the
         Capital  Securities,  the Indenture and the Trust  Agreement  together
         provide a full  guarantee  by HSB Group,  Inc.  of amounts  due on the
         Capital Securities.

                                       11
<PAGE>

         The Capital Securities are mandatorily  redeemable upon the maturity of
         the Debt  Securities  on July 15, 2027, or earlier to the extent of any
         redemption by the Company of any Debt Securities.  The redemption price
         in either  such case will be $1,000 per share plus  accrued  and unpaid
         distributions to the date fixed for redemption.

                                       12
<PAGE>


                  ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
                      OF CONSOLIDATED FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
                                  JUNE 30,1999

RESULTS OF OPERATIONS
---------------------
(dollar amounts in millions)

Consolidated Overview
---------------------
<TABLE>
<CAPTION>

                                                         Quarter Ended                Six Months Ended
                                                            June 30                       June 30
                                                            -------                       -------
                                                      1999          1998           1999            1998
                                                      ----          ----           ----            ----
<S>                                                  <C>           <C>            <C>             <C>
Revenues:
Gross earned premiums                                $206.8        $175.7         $415.7          $355.4
Ceded premiums                                        113.1          85.3          225.5           165.6
                                                     --------      ---------      --------        -------

Insurance premiums                                     93.7          90.4          190.2           189.8

Engineering services                                   27.8          22.7           55.4            42.4

Net investment income                                  16.6          15.9           32.3            31.1

Realized investment gains                              10.2           7.3           17.3            10.5
                                                     --------      ---------      ---------       -------

   Total revenues                                    $148.3        $136.3         $295.2          $273.8
                                                     ==========    =========      =========       =======

Pre-tax Income from Continuing Operations:

   Pre-tax income excluding sale of IRI              $ 38.7        $ 34.8         $ 75.1          $ 65.4
   Pre-tax gain on sale of IRI                          -             -              -              39.0
                                                     ----------    ---------      ---------       -------

   Pre-tax income                                      38.7          34.8           75.1           104.4

Income taxes on continuing operations                  11.4           9.3           22.3            31.8

Distributions on capital securities                     4.5           4.7            9.0             9.2
                                                   ------------- -----------      ---------       -------

Income from continuing operations                      22.8          20.8           43.8            63.4

Discontinued operations                                 -             -              -              30.3
                                                   ------------- -----------       --------       -------

Net income                                           $ 22.8        $ 20.8         $ 43.8          $ 93.7
                                                   ============= ===========       ========       =======

Net income per common share:

Basic                                                $  0.79       $  0.71        $  1.51         $  3.20
Assuming dilution                                    $  0.76       $  0.68        $  1.46         $  2.85

</TABLE>

                                       13
<PAGE>


Absent the sales of Industrial Risk Insurers (IRI) and Radian  International LLC
(Radian LLC) discussed  below, the Company's 1999 after-tax  earnings  increased
9.6 percent from the second  quarter of 1998 and  increased  14.7 percent in the
first six months of 1999 compared to 1998 due to higher realized gains, improved
underwriting  results and higher engineering gains. Net income for the first six
months of 1998 included  after-tax gains on the sale of HSB's interest in IRI of
$25.2  million  and Radian LLC of $30.3  million.  The Radian LLC gain is net of
after-tax  operating  losses of $6.6 million that were deferred in 1997 when the
decision was made to exercise HSB's option to put the Company's  interest to The
Dow  Chemical  Company  (Dow).  As a result,  HSB's  interest  in Radian LLC was
classified as a discontinued operation in 1997.

The effective tax rate on income from continuing operations,  excluding the sale
of IRI,  for the  second  quarter  and the year to date were 29  percent  and 30
percent  compared to 27 percent and 28 percent for the comparable prior periods.
Typically tax rate fluctuations  occur as underwriting and engineering  services
results  and  realized  gains  change the mix of pre-tax  income  between  fully
taxable earnings and tax preferred earnings that can be obtained by investing in
certain  instruments.  The taxes  associated with the sale of IRI contributed to
the higher taxes in the six month period of 1998  compared to 1999.  The Company
continues to manage its use of tax  advantageous  investments  to maximize after
tax earnings.

Recent Accounting Developments
------------------------------

The  Accounting  Standards  Executive  Committee  of the  American  Institute of
Certified  Public  Accountants  (AcSEC)  recently  issued  three  Statements  of
Position (SOP) which became  effective for fiscal years beginning after December
15,  1998;  SOP  97-3,  "Accounting  by  Insurance  and  Other  Enterprises  for
Insurance-Related  Assessments", SOP 98-1, "Accounting for the Costs of Computer
Software  Developed or Obtained for Internal Use",  and SOP 98-5,  "Reporting on
the Costs of Start-Up  Activities".  Because the Company's  accounting  policies
were in compliance with the provisions of the SOP's, the  implementation  of the
SOP's had no impact upon the results of operations,  financial condition or cash
flows.

In June 1998, the Financial  Accounting  Standards Board (FASB) issued Statement
of Financial  Accounting  Standard  (SFAS) No. 133,  "Accounting  for Derivative
Instruments and Hedging Activities".  This statement establishes  accounting and
reporting  standards for derivative  instruments,  including certain  derivative
instruments embedded in other contracts, and for hedging activities. It requires
that all  derivatives  be  recognized  as either  assets or  liabilities  in the
statement of financial  position and that such  instruments  be measured at fair
value. In addition, all hedging relationships must be designated, reassessed and
documented  pursuant to the  provisions of SFAS No. 133. In June 1999,  SFAS No.
137 was issued.  This  statement  defers the  effective  date of SFAS No. 133 to
fiscal  quarters of fiscal  years  beginning  after June 15,  2000.  The Company
anticipates  that the adoption of the provisions of SFAS No. 133 will not have a
material impact on results of operations, financial condition or cash flows.

                                       14
<PAGE>

In October 1998,  AcSEC issued SOP 98-7,  "Deposit  Accounting:  Accounting  for
Insurance and Reinsurance  Contracts That Do Not Transfer  Insurance  Risk." The
SOP identifies  several methods of deposit  accounting and provides  guidance on
the application of each method.  This SOP is effective for financial  statements
for fiscal years  beginning  after June 15, 1999.  Currently  the Company is not
party to any contracts which do not comply with the risk transfer  provisions of
SFAS No. 113,  "Accounting and Reporting for Reinsurance of  Short-Duration  and
Long-Duration  Contracts," and,  therefore,  does not anticipate the adoption of
SOP 98-7 will  have a  material  impact  on  results  of  operations,  financial
condition or cash flows.

Insurance Operations
--------------------

Insurance  operations include the insurance results of The Hartford Steam Boiler
Inspection and Insurance  Company  (HSBIIC),  HSB Engineering  Insurance Limited
(EIL), The Boiler Inspection and Insurance  Company of Canada (BI&I),  The Allen
Insurance  Company,  Ltd.,  HSB of  Connecticut,  HSB  of  Texas,  and  HSBIIC's
participation in HSB Industrial Risk Insurers and various other pools.

<TABLE>
<CAPTION>

                                     Quarter Ended                   Six Months Ended
                                        June 30                           June 30
                                        -------                           -------

                                  1999            1998             1999           1998
                                  ----            ----             ----            ----
<S>                               <C>            <C>               <C>            <C>

Gross earned premiums             $206.8         $ 175.7           $415.7         $355.4
Ceded premiums                     113.1            85.3            225.5          165.6
                                   -----           -----            -----          -----
Insurance premiums                  93.7            90.4            190.2          189.8
Claims and adjustment expenses      37.9            40.4             76.2           85.0
Underwriting, acquisition and
  other expenses                    45.5            40.3             92.1           84.6
                                    ----            ----             ----           ----
Underwriting gain                 $ 10.3          $  9.7           $ 21.9         $ 20.2
                                   =====           =====            =====          =====
Loss ratio                          40.5%           44.7%            40.1%          44.8%
Expense ratio                       48.6%           44.6%            48.4%          44.5%
                                    -----          ------            -----          -----
Combined ratio                      89.1%           89.3%            88.5%          89.3%
                                    =====          ======            =====          =====
</TABLE>

Gross  earned  premiums in the second  quarter and year to date  increased  17.7
percent and 17.0 percent from the comparable periods in 1998. This was primarily
attributable  to an increase in premiums  from HSB  Industrial  Risk Insurers of
$13.7 million and $26.7 million,  respectively, for the quarter and year to date
reflecting the Company's  role as

                                       15
<PAGE>

direct  writer of that  business.  Other  growth  includes the impact of certain
commercial  books of  business  acquired  in mid  1998.  Gross  earned  premiums
representing  coverage  outside the U.S. for non HSB  Industrial  Risk  Insurers
business  decreased 5 percent in the first six months from the comparable period
in 1998.  In certain areas of the Company's  direct  domestic and  international
businesses,  the market is experiencing  price erosion as the number of insurers
offering capacity has expanded. HSB will not write business at rates which would
lessen our ability to maintain underwriting profit. As a result, premiums in the
Global  Special Risk areas may continue to  experience  revenue  declines  until
pricing in these markets begins to improve.

Increases  in ceded  premium of 32.6  percent in the  current  quarter  and 36.2
percent year to date were the result of both the HSB  Industrial  Risk  Insurers
arrangement and related reinsurance with ERC, and the timing of instituting some
of the Company's reinsurance programs which now utilize significantly more quota
share  reinsurance on certain of our books of business.  We anticipate these new
reinsurance  contracts and the HSB Industrial Risk Insurers  arrangement,  along
with growth in our commercial business, will likely continue to result in growth
in gross earned premium but lower growth in net earned premium.

The loss ratio decreased from 44.7 percent in the second quarter of 1998 to 40.5
percent in the current quarter.  For the six months year to date, the loss ratio
decreased from 44.8 percent in 1998 to 40.1 percent in 1999.  First quarter 1998
results  were  impacted  by  severe  ice  storms in  Canada.  Gross  claims  and
adjustment  expenses  for the  first six  months  of 1999 and 1998  were  $249.3
million and $220.7 million, respectively. This increase was primarily the result
of  large  losses  in our  Global  Special  Risk  business  which  were  largely
reinsured.

The expense ratio  increased  from 44.6 percent in the second quarter of 1998 to
48.6 percent in the current quarter,  and from 44.5 percent year to date in 1998
to 48.4  percent  year to date in 1999.  Prepaid  acquisition  costs  have grown
largely  due  to  growth  in  gross  premiums  and  different  commission  rates
reflecting  changes in the mix of business.  The expense ratio was also affected
by the increased level of reinsurance  purchased and related ceding commissions.
In addition,  the expense  ratio has been  impacted more heavily in 1999 by Year
2000 systems remediation costs.

                                       16
<PAGE>

The  following  information  summarizes  net earned  premiums  and net income by
reportable insurance segment:

                                Quarter Ended            Six Months Ended
                                  June 30                    June 30
                                  -------                    -------

                             1999          1998         1999          1998
                             ----          ----         ----          ----
Commercial:
   Net earned premiums     $  82.2       $  68.9       $ 162.5      $  137.0
   Net income                  4.5           2.6           5.9           3.9

Global Special Risks:
   Net earned premiums     $  11.1       $  19.3       $  26.8      $   49.3
   Net income                  2.7           3.0           7.9           7.2

Net earned  premiums in the Commercial  segment rose $13.3 million in the second
quarter and $25.5  million for the first six months of 1999 over the  comparable
periods in 1998 due to strong growth in client company  billings and integration
of the Kemper  portfolio.  1998  results  were  impacted by severe ice storms in
Canada  during  the first  quarter.  Profits in 1999 have been  depressed  by an
adjustment to commission expense,  expected higher systems costs related to Year
2000 and increased frequency of small claims.

Global Special Risks net earned premiums declined $8.2 million and $22.5 million
for the  quarter  and year to date,  respectively,  in 1999 from the  comparable
periods in 1998 due to price erosion and the maintenance of strict  underwriting
standards, coupled with changes in reinsurance programs. Year to date net income
increased,  however,  due to favorable claims  experience in comparison to 1998,
particularly in international business. In addition,  current period results are
higher  due to  fees/expense  reimbursement  generated  from  managing  the  IRI
business.  The  level  of  fees/expense  reimbursement  in the  future  will  be
dependent  upon pricing in these markets and the volume of business  which meets
our underwriting standards.

Engineering Services Operations
-------------------------------

                                   Quarter Ended          Six Months Ended
                                       June 30                June 30
                                       -------           ----------------
                                   1999       1998        1999        1998
                                   -----      -----      ------       -----
Engineering services revenues      $27.8     $22.7       $55.4       $42.4
Engineering services expenses       25.6      20.7        50.8        38.6
                                    ----      ----        ----        ----
Operating gain                     $ 2.2     $ 2.0       $ 4.6       $ 3.8
                                    ====      ====        ====        ====
Net margin                           8.2%      8.9%        8.3%        8.9%

                                       17
<PAGE>


Engineering  services  operations  include  the results of  HSBIIC's,  EIL's and
BI&I's  engineering   services,   HSB  Reliability   Technologies  (HSBRT),  HSB
Professional Loss Control, HSB International, Solomon Associates, Inc. (SAI) and
the Company's interest in Integrated Process Technologies, LLC.

Engineering  services  revenues  increased in 1999 by $5.1 million in the second
quarter and $13.0 million year to date compared to the same periods in 1998. The
growth in revenues was primarily due to SAI which was acquired in April 1998 and
EIL's engineering services revenues generated through recent  acquisitions.  The
decline in operating margin from the previous  periods reflects  operating costs
incurred  to develop  new  products  and in new start up  operations,  delays in
starting  certain  contracts  and the  closing  of plants in the steel  industry
serviced by a higher margin business unit.

The  Company  continues  to  focus on  identifying  and  evaluating  acquisition
candidates in the niche  engineering  management  consulting  service  business,
primarily  in  process  industries,   in  order  to  expand  or  complement  its
engineering service capabilities.

Investment Operations
---------------------
                                 Quarter Ended          Six Months Ended
                                     June 30                June 30
                                    -------                 -------
                                 1999        1998        1999        1998
                                 ----        ----        ----        ----
Net investment income           $16.6       $15.9      $32.3        $31.1
Realized investment gains        10.2         7.3       17.3         10.5
                                 ----         ---       ----         ----
Pretax income from
 investment operations          $26.8       $23.2      $49.6        $41.6
                                =====       =====      =====        =====


Income  from  investment  operations  for the  second  quarter  and year to date
increased $3.6 million and $8.0 million, respectively, primarily due to realized
investment gains resulting from  repositioning  the investment  portfolio due to
market fluctuations.

The Company's  investment  strategy  continues to be to maximize total return on
the investment  portfolio through  investment  income and capital  appreciation.
Investment  strategies  for any given year are  developed  based on many factors
including  operational  results,  tax  implications,   regulatory  requirements,
interest rates, dividends to stockholders and market conditions.  The investment
portfolio  includes a wide variety of high quality  equity  securities  and both
domestic and foreign fixed  maturities.  The Company continues to manage its use
of tax advantageous  investments to maximize after-tax investment earnings.  The
Company does not engage in cash flow underwriting; it seeks to have underwriting
profit each year.

Market Risk
-----------

The value of the Company's  financial  instruments  reacts to changes in various
macro variables.  These changes are thought of as systemic risks or market risks
and are  quantified  as equity  market  risk,  interest  rate  risk and  foreign
currency  risk.  Equity

                                       18
<PAGE>

market  risk is the chance  that  market  influences  will  affect the  expected
returns on equity  investments.  Interest  rate risk  relates  the  effect  that
changes in the level of  interest  rates  will have on the  return on  financial
instruments,  fixed income  investments in particular.  Foreign currency risk is
the chance that  fluctuations in foreign currency exchange rates will impact the
value of financial instruments.

Portfolio  sensitivity  to these  variables  tends to  change  over  time due to
changes in portfolio  composition and changes in market environment.  During the
first half of 1999 the Company's equity instruments sensitivity to equity market
risk, as measured by portfolio beta, decreased from 1.02 to 0.97. This change is
generally attributed to portfolio repositioning during the period.

For  the  fixed  maturity  portfolio,  sensitivity,  as  measured  by  duration,
increased  from 5.48 to 7.85  during the first  half of 1999.  The  increase  in
duration  is due to the  interest  rate  environment  that  occurred  during the
period.  The  Company  uses a yield  to  worst  call  methodology  to  calculate
duration. This assumes that an issuer, given the current rate environment,  will
call higher  coupon debt if  appropriate.  Given that interest  rates  increased
during the year,  the call feature on many issues  became  non-applicable.  This
caused the  portfolio  to show an increase in duration  and  correspondingly  an
increase in sensitivity to interest rates.

The following  analysis  illustrates  the sensitivity of the market value of the
financial  instruments to selected changes in market rates and prices. The range
reflects the Company's view of reasonably  possible market  movements over a one
year  period.  The range of values  selected  should not be  interpreted  as the
Company's  prediction of future market events, but rather an illustration of the
impact of such  events.  The  computations  do not  contemplate  any actions the
Company would undertake in response to changes in interest rates.

The  sensitivity  analysis  assumes an  instantaneous  shift in market  interest
rates, with scenarios of interest rates increasing 100 and 150 basis points from
their levels at June 30, 1999, and all other  variables held constant.  Currency
risk assumes an  instantaneous  10 percent and 20 percent  change in the foreign
currency  exchange rates versus the US dollar from their levels at June 30, 1999
with all other variables held constant.  Equity price risk is measured  assuming
an  instantaneous  10 percent and 25 percent  change in the S & P 500 Index from
its level at June 30, 1999 with all other variables held constant.

The Company's  convertible  capital  securities have been issued at fixed rates,
and as such interest expense would not be impacted by interest rate shifts.  The
impact of 100 and 150 basis point increases in interest rates on the convertible
capital  securities  would be an  estimated  decrease  in market  value of $27.3
million and $39.4  million and is  calculated  without  giving any effect to the
relationship  of the conversion  price to the current market price of HSB Group,
Inc. common stock.

The following  table  reflects the estimated  effects on the market value of the
Company's  financial  instruments  due to an increase  in interest  rates of 100
basis points,  a 10 percent

                                       19
<PAGE>

decline in foreign currency exchange rates, and a decline of 10 percent in the S
& P 500 Index.

Held For Other Than Trading Purposes

                                  Market     Interest        Currency    Equity
At June 30, 1999                  Value      Rate Risk        Risk        Risk
--------------------------------------------------------------------------------

Fixed maturity securities       $  544.9     $(35.7)         $(2.3)      $  -
Equity securities                  441.6      (12.8)          (1.8)       (23.0)
Short term investments              49.4       (0.6)          (2.2)         -
                                ------------------------------------------------

     Total all securities       $1,035.9     $(49.1)         $(6.3)      $(23.0)
                                ------------------------------------------------

The following  table  reflects the estimated  effects on the market value of the
Company's  financial  instruments  due to an increase  in interest  rates of 150
basis points,  a 20 percent decline in foreign  currency  exchange rates,  and a
decline of 25 percent in the S& P 500 Index.

Held For Other Than Trading Purposes

                              Market      Interest      Currency      Equity
At June 30, 1999              Value       Rate Risk      Risk          Risk
--------------------------------------------------------------------------------

Fixed maturity securities   $  544.9     $(51.1)       $ (4.5)     $  -
Equity securities              441.6      (18.2)         (3.7)      (57.5)
Short term investments          49.4       (0.9)         (4.1)        -
                         ------------------------------- -----------------------

     Total all securities   $1,035.9     $(70.2)       $(12.3)     $(57.5)
                         ------------------------------- -----------------------


Statement of Comprehensive Income
---------------------------------

In  addition  to the impact of HSB's  results of  operations,  the  Consolidated
Statements of  Comprehensive  Income  displays the effects of price movements on
HSB's  invested  assets.  As a result of the market  corrections  and subsequent
rebounds,  cumulative  holding gains,  net of taxes, for the first six months of
1999 decreased $18.6 million as compared to the increase of $19.8 million in the
same period in 1998. Exclusive of realized gains, the decrease in 1999 is mainly
in fixed maturities due to rising interest rates.

                                       20
<PAGE>

Liquidity and Capital Resources
-------------------------------
                                                       Balances at
                                                June 30           December 31
                                                 1999                 1998
                                                --------          -------------
Total assets                                  $ 2,162.8           $ 2,144.0
Short-term investments                             49.4                62.3
Cash and cash equivalents                          47.5                18.3
Short-term borrowings                              55.0                21.0
Capital securities of subsidiary Trust I          108.9               108.9
Capital securities of subsidiary Trust II         300.0               300.0
Common shareholder's equity                       422.8               419.3

Liquidity refers to the Company's  ability to generate  sufficient funds to meet
the cash requirements of its business operations. HSB is a holding company whose
principal  subsidiary is HSBIIC. HSB relies on investment  income,  primarily in
the form of  dividends  from  HSBIIC,  in order to meet its short and  long-term
liquidity  requirements  including  the  service  requirements  for its  capital
securities.  The  Company  receives  a  regular  inflow  of cash  from  maturing
investments,  engineering  services  and  insurance  operations.  The mix of the
investment  portfolio is managed to respond to expected  claim pay-out  patterns
and the service  requirements  of the  Company's  capital  securities.  HSB also
maintains a highly liquid  short-term  portfolio to provide for  immediate  cash
needs and to offset a portion of  interest  rate risk  relating  to the  Capital
Securities of subsidiary Trust I.

Cash provided from  operations was $10.2 million in the first six months of 1999
compared to $9.5 million for the same period in 1998. Overall cash flows in 1998
were  significantly  impacted by the investment of proceeds from the convertible
capital  securities issued in late December 1997 and the sales of Radian and IRI
in 1998.

Capital resources consist of shareholders'  equity,  capital securities and debt
outstanding,  and represent  those funds deployed or available to be deployed to
support business  operations.  Common  shareholders' equity of $422.8 million at
June 30, 1999,  increased by $3.5 million since  December 31, 1998. The increase
primarily reflects comprehensive income of $25.2 million and option exercises of
$3.9  million,  less  dividends of $24.4 million and share  repurchases  of $2.2
million.

At June 30, 1999,  HSBIIC had  significant  short-term  and long-term  borrowing
capacity.  HSBIIC  is  currently  authorized  to  issue  up to  $75  million  of
commercial   paper.   Commercial   paper   outstanding  at  June  30,  1999  was
approximately $50 million.

HSBIIC has been involved in three significant  claim-related disputes concerning
the extent to which  certain  explosion  events were  insured  under  boiler and
machinery  coverages of HSBIIC.  Information  regarding  these disputes has been
provided in previous 10-K and 10-Q reports.  Current  rulings in all three cases
confirm  HSBIIC's

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<PAGE>

long-standing  position that HSBIIC  policies do not cover the explosion  events
that  occurred in those cases.  In one case the parties  settled  their  dispute
following  Summary  Judgment rulings of the Federal District Court for the State
of  Illinois;  in a second  case,  a decision of an  arbitration  panel has been
confirmed  by the  Superior  Court of the State of  Connecticut;  and in a third
case,  the Federal  Court of Appeals for the Seventh  Circuit has  remanded  the
matter for entry of a judgment in HSBIIC's favor.

The  Company  writes  business in European  markets  primarily  through its U.K.
subsidiary,  EIL. The adoption of a common  currency (the euro) by eleven of the
fifteen  member  countries  of the  European  Union on  January  1,  1999 is not
expected to result in a  substantial  change in the  business  or a  significant
increase in costs in the short term. In part,  this is due to the fact that much
of the business is U.S.  dollar  denominated.  The U.K. is not a first wave euro
country  and as such the  impact is  primarily  limited  to the  small  overseas
offices located in Spain and the Irish  Republic.  Over time, if the U.K. adopts
the euro as its currency, there may be more of an impact, however, the number of
affected  transactions are such that a manual backup system is practicable.  The
Company will  continue to monitor  developments  and assess  impacts on markets,
pricing, and reporting.

Year 2000
---------

The following Year 2000 statements  constitute a Year 2000 Readiness  Disclosure
within the meaning of the Year 2000 Information and Readiness  Disclosure Act of
1998.

Year 2000 Plan and State of Readiness
-------------------------------------

In 1996, the Company began a  comprehensive  effort to assess and address issues
affecting the Company,  which related to the inability of computer equipment and
embedded computer chips to distinguish  between the year 1900 and the year 2000.
As has been well publicized, many computer systems and date controlled equipment
may cease to function or may  function in a different  manner when the year 2000
arrives because they are programmed to recognize only the last two digits of the
year.

As a part of this effort, the Company established a Year 2000 Program to address
four key areas: (i) applications software, primarily consisting of the Company's
policy management,  claims,  financial  recording and reporting,  human resource
systems, and engineering databases and systems;  (ii)  infrastructures,  such as
mainframe and corporate servers,  workstations and networking components;  (iii)
embedded  technology in facilities in which the Company  conducts its operations
and in testing equipment used by the Company's  engineering  staff; and (iv) key
business  partners  and  suppliers.  In  addition,  the  Company  is  evaluating
potential  coverage  exposures  arising  out of the Year 2000 and its  impact on
insured  equipment.  The Company's  Year 2000 Program  consists of six partially
overlapping  stages for the key areas listed above: (i) assessment and analysis;
(ii) development, renovation and replacement; (iii) implementation; (iv) testing
and  certification;  (v) contingency  planning;  and (vi) audit and review.  The
Company is using members of its internal information technology staff as well as
external  consultants  and

                                       22
<PAGE>

programmers to complete  various tasks in connection  with its Year 2000 Program
and is currently on schedule.

The Company has  completed  the  assessment  and  analysis  phase for its policy
management,  claims,  financial recording and reporting,  human resource systems
and engineering databases and systems. The development,  renovation, replacement
and  implementation  phases are  largely  complete  for these  systems.  We have
substantially  completed  Year 2000 testing for our current  policy  management,
financial  application  and engineering  systems.  We will continue to Year 2000
test our  claims,  human  resource  systems  and other  supporting  applications
throughout the third quarter of 1999.

The Company has  completed  the  assessment  and analysis  phase with respect to
infrastructure  items.  The  mainframe  is Year 2000  compliant  and the Company
expects to complete the migration to Year 2000 compliant  servers and supporting
hardware and software by September 1999.  Replacement of the various  components
of non-compliant  workstations  and peripheral  equipment also is expected to be
completed by  September  1999.  Many of the  third-party  software  applications
utilized  by the  Company  in its  desktop  environment  are  already  Year 2000
compliant.  The Company  expects to complete the  installation of such compliant
programs on virtually all of its workstations by September 1999.

In the area of  embedded  chip  technology,  the  Company's  principal  exposure
relates to the  prevalence of such  technology in office  buildings in which the
Company  leases space for conducting  its business  operations.  The Company has
sent  questionnaires to the leasing vendors for all of its principal  facilities
with respect to Year 2000  readiness  and has received  assurances  of readiness
from most of its vendors.

The Company has  identified  and is currently in the process of  contacting  key
suppliers of services and business  partners,  such as client companies,  agents
and brokers,  with whom the Company has significant  business  relations and who
may either  electronically  provide to, or receive  from,  the  Company  certain
financial and other  information.  As the Company  receives  responses  from its
suppliers and business partners,  it will update its assessment of the potential
impact  on the  Company  of such  parties'  Year  2000  state of  readiness  and
remediation  plans and conduct  renovations  and/or  replacement  and compliance
testing, as appropriate.

The Company is relying upon Year 2000 readiness statements of other entities and
has not independently verified the accuracy of such statements.

Costs
-----

It is currently  estimated that the Company's  aggregate  spending in connection
with  the  Year  2000  Program  will be in the  range  of $27  million  of which
approximately  $24.6 million has been expended through June 30, 1999. Certain of
these costs are being expensed as they are incurred and are being funded through
operating  cash flow.  The

                                       23
<PAGE>

Company has expensed $5.1 million,  $1.5 million and $0.2 million in 1998,  1997
and 1996, respectively, and $4.2 million for the first six months of 1999. It is
estimated  that  expenditures  of $2.4 million for the remainder of 1999 will be
expensed as incurred.  The remainder of the $27 million  estimate  which has not
been expensed relates to systems that the Company  anticipated  replacing in the
normal course of information  technology development but the timetable for which
was accelerated in  contemplation  of the Year 2000 event.  Costs of replacement
and  renovation  of  information  systems  and  infrastructure  that  would have
occurred in the normal  course of  business  without the advent of the Year 2000
event are  excluded  from these  amounts.  The  current  estimate  also does not
include any costs associated with the  implementation  of contingency plans that
are in the process of being developed.

The Company does not expect the costs  relating to its Year 2000 Program to have
a  material  effect  on  its  results  of  operations,  liquidity  or  financial
condition.  However,  the  Year  2000  Program  is an  ongoing  process  and the
estimated costs, as well as the estimated completion dates for various phases of
the program, are subject to change.

Risks
-----

The failure of one or more critical  software  applications or components of the
Company's  infrastructure  to be Year  2000  compliant  could  cause a  material
disruption in the normal business  operations of the Company.  Such  disruptions
could include the inability to process  policies,  register and collect premiums
and  engineering  receivables,   process  claims  or  schedule  inspections  and
engineering services. Due to the difficulty in estimating the scope and duration
of such  failures,  the Company is unable to  determine at this time whether the
consequences  of such  failures  will have a  material  impact on the  Company's
results  of  operations,   liquidity,  or  financial  condition.  Moreover,  the
Company's  operations are  interdependent  with systems of business partners and
service  providers,  such  as  financial  institutions,   communication  service
providers and utilities,  over which the Company has no control.  The failure of
one or more of such  business  partners  or  service  providers  to be Year 2000
compliant  could have a material  adverse  impact on the Company.  However,  the
Company  believes  that  with the  implementation  of its Year 2000  Program  as
scheduled, including the contingency plans discussed below, the risk of material
disruptions to its normal business operations should be significantly reduced.

As an  insurance  company,  the Company  maintains a  significant  portfolio  of
investments in cash, short-term fixed income, and equity securities. Inasmuch as
the advent of the Year 2000 may cause events, business interruptions and altered
economic facts and circumstances,  the value of the Company's investments may be
affected  favorably or  unfavorably.  The Company is selectively  monitoring the
Year 2000  compliant  status of the corporate  issuers of the  securities in its
investment  portfolio  primarily through reviewing public disclosure  documents.
State government and municipal bonds held by the Company are general obligations
and/or are  credit-enhanced and therefore the Company does not perceive there to
be a  significant  credit risk with these  securities in the absence of a severe
Year 2000 disruption affecting governments and businesses  generally.  A portion
of the  Company's  portfolio  is  invested in  non-public  issues  where

                                       24
<PAGE>

public disclosure documents are unavailable. Due to the difficulty in estimating
the scope and  duration of such  events,  the Company is unable to  determine at
this time whether the  consequences  of such  developments  will have a material
impact on the Company's  investment  portfolio and  therefore,  on the Company's
results of operations, liquidity or financial condition.

Contingency Plans
-----------------

As a component of the Year 2000 Program, the Company is concurrently  developing
contingency  plans  intended to mitigate  the  possible  disruption  of business
operations  arising out of the Year 2000 event. These plans will be continuously
refined during 1999 as the Company completes  compliance testing on its internal
applications  software  and  infrastructure  and further  assesses the Year 2000
readiness  status  of its  business  partners.  Contingency  plans  may  include
securing  back-up  power  for the  Company's  data  center,  manual  processing,
short-term  fixes to non-compliant  programs or business partner  interfaces and
modifying the Company's asset selection criteria for its investment activities.

Insurance Coverage Issues
-------------------------

The Company continues to evaluate the potential  coverage  exposures arising out
of the Year 2000 event and its  impact on insured  equipment.  The  Company  has
prepared an  endorsement  to its equipment  breakdown  and all-risk  forms which
reiterates that coverage is not provided for the inherent inability of computers
and computerized equipment to properly recognize a particular date or time, such
as the year 2000.  It is Company  policy to include the  endorsement  on new and
renewal  equipment  breakdown  and  all-risk  policies.  In  addition,  a notice
reiterating  the Company's  coverage  intent with respect to Year 2000 exposures
has been sent to all new and renewal equipment breakdown policyholders.  Most of
the insurers that the Company  reinsures for  equipment  breakdown  coverage are
issuing similar  endorsements  to their  policies.  The Company is conducting an
on-going  communications  program with its client company insurers and agents to
disseminate to the ultimate policyholders its Year 2000 loss control suggestions
and policy coverage position.

Quantification of the Company's exposure to Year 2000 losses and loss adjustment
expenses  are not  reasonably  estimable at this time as  applicable  policy and
reinsurance  contract  wordings  have not been legally  tested in the context of
such losses.

Forward-Looking Statements
--------------------------

Certain statements contained in this report are forward-looking and are based on
management's  current  expectations.  Actual results may differ  materially from
such  expectations  depending on the outcome of certain  factors  described with
such forward-looking statements and other factors including: significant natural
disasters  and severe  weather  conditions;  changes in  interest  rates and the
performance  of the financial  markets;  changes in the  availability,  cost and
collectibility of reinsurance; changes in domestic and foreign laws, regulations
and taxes; the entry of new or stronger

                                       25
<PAGE>

competitors and the intensification of pricing competition;  the loss of current
customers  or the  inability  to obtain new  customers;  changes in the coverage
terms selected by insurance  customers,  including higher  deductibles and lower
limits;   the  adequacy  of  loss   reserves;   changes  in  asset   valuations;
consolidation  and  restructuring  in the  insurance  industry;  changes  in the
Company's  participation in joint underwriting  associations,  and in particular
its  arrangement  with HSB Industrial  Risk Insurers;  changes in the demand and
customer base for  engineering and inspection  services  offered by the Company,
whether resulting from changes in the law or otherwise, and other general market
conditions.


PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

         See Note 5 to Consolidated Financial Statements, Part I, Item 1.


Item 4 - Submission of Matters to a Vote of Security Holders

         (a)      The Annual Meeting of Shareholders was held on April 20, 1999.

         (b)      Four  directors  were  nominated  for  election  at the Annual
                  Meeting.   Proxies  for  such   meeting   were   solicited  by
                  Registrant's  management  pursuant to Regulation 14A under the
                  Securities  Exchange Act of 1934; there was no solicitation in
                  opposition  to  management's  nominees  as listed in the proxy
                  statement;  and  all  of  such  nominees  were  elected  for a
                  three-year term.

          (c)  The following  matters were voted upon at the Annual Meeting with
               the voting results indicated.

                  1.       Election of directors

                           Nominee                  Votes for     Votes Withheld
                           Joel B. Alvord          24,872,065        528,203
                           Richard G. Dooley       25,109,084        291,184
                           Gordon W. Kreh          25,153,132        247,136
                           Lois D. Rice            25,091,709        308,559

                  2.       Proposal to amend and restate the 1995 Stock Option
                           Plan

                           Votes for                 Against         Abstain
                           22,719,558                2,422,700       258,010

                                       26
<PAGE>

                  3.       Appointment of PricewaterhouseCoopers L.L.P. as
                           Independent Public Accountants

                           Votes for                 Against         Abstain
                           25,105,358                97,076          197,835

Item 6 - Exhibits and Reports on Form 8-K

(a)  Exhibits

     Exhibit 27 - Financial Data Schedule

(b)  Reports on Form 8-K

Form 8-K dated  April 20,  1999  reporting  on the first  quarter  results,  the
declaration of a dividend and the Company's  Annual Meeting.  (See  Consolidated
Statements of Operations for corrected 1999  year-to-date Net Income per share -
assuming dilution.)


                                       27
<PAGE>

                                   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.


                                                 HSB GROUP, INC.

Date:    August 16, 1999                By:      /s/  Saul L. Basch
                                                 Saul L. Basch
                                                 Senior Vice President,
                                                 Treasurer and Chief
                                                 Financial Officer


Date:    August 16, 1999                By:      /s/  Robert C. Walker
                                                 Robert C. Walker
                                                 Senior Vice President and
                                                 General Counsel

                                       28