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 September 30, 1998

                                       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 September 30, 1998: 29,369,779


<PAGE>


                                 HSB GROUP, INC.

                                      INDEX


PART I   FINANCIAL INFORMATION                                           PAGE

      Item 1 - Financial Statements

      Consolidated Statements of Operations for the 
      Quarters ended September 30, 1998 and 1997 and 
      the Nine Months ended September 30, 1998 and 1997
      (unaudited).......................................................  3

      Consolidated Statement of Comprehensive Income for the Quarters 
      ended September 30, 1998 and 1997 and the Nine Months 
      ended September 30, 1998 and 1997 (unaudited).....................  4

      Consolidated Statements of Financial Position as 
      of September 30, 1998 (unaudited) and December 31, 1997 ..........  5

      Consolidated Statements of Cash Flows for the Nine 
      Months ended September 30, 1998 and 1997 (unaudited)..............  6

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

      Item 2 - Management's Discussion and Analysis of Consolidated 
      Financial Condition and Results of Operations..................... 11

PART II  OTHER INFORMATION

      Item 1 - Legal Proceedings........................................ 21
      Item 6 - Exhibits and Reports on Form 8-K......................... 22

SIGNATURES.............................................................. 23

                                       2
<PAGE>

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

<TABLE>
<CAPTION>


                                                             Quarter                     Nine Months
                                                        Ended September 30           Ended September 30

                                                         1998           1997          1998           1997
                                                      ----------      --------      --------       --------
<S>                                                   <C>           <C>           <C>              <C>   
Revenues:   
  Insurance premiums                                  $     99.5    $    121.3    $    289.3       $  360.9                         
  Engineering services                                      25.3          15.5          67.7           45.2
  Net investment income                                     15.5           9.1          46.6           25.8
  Realized investment gains                                  7.9           2.3          18.4            6.2
                                                      ----------      --------      --------       --------
     Total revenues                                        148.2         148.2         422.0          438.1
                                                      ----------      --------      --------       --------
Expenses:
  Claims and adjustment                                     44.2          54.1         129.1          157.0
  Policy acquisition                                        18.0          23.5          45.3           67.5
  Underwriting and inspection                               26.4          34.2          83.5          105.5
  Engineering services                                      23.4          14.5          62.1           42.3
  Interest                                                   0.2           0.4           0.5            0.9
                                                      ----------       --------      --------      --------
                                                        
     Total expenses                                        112.2         126.7         320.5          373.2
                                                      ----------       --------      --------      --------

Gain on sale of IRI                                         -             -             39.0             -

Income from continuing operations 
   before income taxes and 
   distributions on capital securities                $     36.0    $     21.5    $    140.5       $   64.9


Income taxes (benefit):
   Current                                                   9.8          14.2          39.1           26.8
   Deferred                                                 (0.5)         (8.9)          2.0          (10.3)
                                                      -----------     ---------      --------       --------
     Total income taxes                               $      9.3    $      5.3    $     41.1       $   16.5                         

Distribution on capital securities 
   of subsidiary trust, net of income 
   tax benefits of $2.5; $0.4;
   $7.4; and $0.4.                                           4.6           1.0          13.8            1.0
                                                      ----------       --------         -----           ---
Income from continuing operations                     $     22.1    $     15.2    $     85.6       $   47.4

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

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

Total discontinued operations                         $       -     $       -     $     30.3       $     -                         
                                                      ----------      --------      --------       --------

Net income                                            $     22.1    $     15.2    $    115.9       $   47.4                        
                                                       =========     =========     =========       ========

Per share data:

Net income per common share-basic:

    Income from continuing operations                 $      0.75    $     0.51   $      2.91     $     1.57                       
    Net income                                        $      0.75    $     0.51   $      3.95     $     1.57                       

Net income per common share-assuming dilution:

    Income from continuing operations                 $      0.72    $     0.51   $      2.71     $     1.56
    Net income                                        $      0.72    $     0.51   $      3.57     $     1.56

Dividends declared per share                          $      0.42    $     0.40   $      1.22     $     1.16
Average shares outstanding and 
   common stock equivalents                                 35.3          29.9          35.3           30.2

See Notes to Consolidated Financial Statements.
</TABLE>

                                       3
<PAGE>

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



<TABLE>
<CAPTION>


                                                                           Quarter Ended                      Nine Months
                                                                         Ended September 30               Ended September  30
                                                                        1998             1997               1998            1997
                                                                    ------------   -------------     -------------    ------------
<S>                                                                 <C>             <C>              <C>              <C>  
Net income                                                          $      22.1     $     15.2       $     115.9      $     47.4
Other comprehensive income, net of tax:

     Unrealized gains (losses) on securities:
         Unrealized holding gains (losses) arising 
           during the period (net of taxes (benefits) 
           of ($11.8); $0.5; $2.9 and $7.7)                               (21.9)           1.0               5.4            14.4

         Add : reclassification adjustments for gains
                  included in net income                                   (5.1)          (1.3)            (11.9)           (3.6)
                                                                    ------------      -----------       -----------     -----------
                                                                          (27.0)          (0.3)             (6.5)           10.8

     Foreign currency translation adjustments                              (1.0)            -               (1.7)           (0.2)
                                                                    ------------      -----------       -----------     -----------

     Other comprehensive income                                           (28.0)          (0.3)             (8.2)           10.6

                                                                    ------------      -----------      ------------     -----------
     Comprehensive income                                           $      (5.9)    $     14.9       $     107.7      $     58.0
                                                                    ============      ===========       ===========     ===========

     See Notes to Consolidated Financial Statements

</TABLE>

                                       4
<PAGE>


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

<TABLE>
<CAPTION>
                                                            September 30,      December 31,
                                                               1998                1997
                                                            (Unaudited)
                                                          -------------       --------------
<S>                                                     <C>                 <C>    
Assets:
           Cash                                         $          11.8     $           45.3
           Short-term investments, at cost                         92.4                379.2
           Fixed maturities, at fair value
             (cost - $546.5; $241.1)                              555.9                248.4
           Equity securities, at fair value
             (cost - $329.2;  $231.3 )                            409.4                323.8
                                                          -------------       --------------
             Total cash and invested assets                     1,069.5                996.7

           Reinsurance assets                                     595.6                124.5
           Insurance premiums receivable                          155.1                138.0
           Engineering services receivable                         26.9                 12.2
           Fixed assets                                            42.8                 36.4
           Prepaid acquisition costs                               38.8                 42.5
           Capital lease                                           14.7                 15.3
           Investment in Radian                                     -                   83.4
           Other assets                                           165.8                 88.2
                                                          -------------       --------------
               Total assets                             $       2,109.2     $        1,537.2
                                                          =============       ==============

Liabilities:
           Unearned insurance premiums                  $         473.6     $          287.3
           Claims and adjustment expenses                         522.8                276.7
           Short-term borrowings                                    4.4                 42.4
           Long-term borrowings                                    25.1                 25.1
           Capital lease                                           27.9                 27.9
           Deferred income taxes                                   30.7                 31.5
           Dividends and distributions on capital securities       18.3                 13.3
           Ceded reinsurance payables                              88.1                  3.9
           Other liabilities                                       96.1                 74.9
                                                          -------------       --------------
               Total liabilities                                1,287.0                783.0
                                                          -------------       --------------

Company obligated  mandatorily  redeemable  capital  
          securities of subsidiary Trust  I  holding 
          solely  junior  subordinated  deferrable  
          interest debentures of the Company, net 
          of unamortized discount of $1.1 and 
          $1.1 million, respectively                             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 32.0; shares
             outstanding 29.4; 29.4)                               10.0                 10.0
           Additional paid-in capital                              34.3                 31.6
           Accumulated other comprehensive income                  51.6                 59.8
           Retained earnings                                      323.8                248.8
           Benefit plans                                           (6.4)                (4.9)
                                                          -------------       --------------
                 Total shareholders' equity                       413.3                345.3
                                                          -------------       --------------
                 Total                                  $       2,109.2     $        1,537.2
                                                          =============       ==============

             Shareholders' equity per common share 
                 (restated for stock split)                        14.08                11.75

See Notes to Consolidated Financial Statements.
</TABLE>

                                       5
<PAGE>

                              HSB Group, Inc.
                   Consolidated Statements of Cash Flows
                                 Unaudited
                               (In Millions)
                                                          Nine Months Ended
                                                             September 30,
                                                        ----------------------
                                                            1998         1997
                                                        ---------    ----------
Operating Activities:
Net income                                             $   115.9      $   47.4
Adjustments to reconcile net income to
  net cash provided by operating activities:
    Depreciation and amortization                            6.3           5.1
    Deferred  income taxes (benefit)                         2.0         (10.0)
    Realized investment gains, including market
      adjustment for derivative instruments                (18.4)         (6.2)
    Gain from the disposition of Radian (after tax)        (30.3)          -
    Gain from the disposition of IRI (after tax)           (25.2)          -
    Change in balances net of effects from purchases and
     sales of subsidiaries:
       Insurance premiums receivable                       (17.1)        (20.4)
       Engineering services receivable                     (12.1)         (1.2)
       Prepaid acquisition costs                             3.7          (4.9)
       Reinsurance assets                                 (471.1)         16.5
       Unearned insurance premiums                         186.3          25.2
       Claims and adjustment expenses                      246.1         (24.1)
       Ceded reinsurance payable                            84.2           8.1
       Investment in Radian                                  -            (5.3)
       Other                                               (27.3)        (12.0)
                                                        ---------    ----------

          Cash provided by operating activities             43.0          18.2
                                                        ---------    ----------

Investing Activities:
Fixed asset additions, net                                 (12.6)          0.1

Investments:
    Sale (purchase) of short-term investments, net         286.8         (35.4)
    Purchase of fixed maturities                          (378.3)        (51.4)
    Proceeds from sale of fixed maturities                  44.1          26.0
    Redemption of fixed maturities                          29.8          13.1
    Purchase of equity securities                         (275.6)       (178.1)
    Proceeds from disposition of Radian                    128.9           -
    Proceeds from disposition of IRI                        49.1           -
    Proceeds from sale of equity securities                191.4         167.0
    Purchase of Solomon Associates, net of cash acquired    (2.1)          -
    Purchase of Kemper books of business                   (29.5)          -
                                                         ---------    ---------

          Cash provided by (used in) investment activities  32.0         (58.7)
                                                         ---------    ---------

Financing Activities:
Proceeds from Company-obligated mandatorily redeemable
    capital securities of subsidiary trust                   -           108.9
Increase (decrease) in short-term borrowings               (38.0)         14.8
Dividends and distributions on capital securities          (52.0)        (33.4)
Reacquisition of stock                                     (27.8)        (51.6)
Exercise of stock options                                    9.3           4.0
                                                        ---------    ----------

          Cash provided by (used) in financing 
             activities                                   (108.5)         42.7
                                                        ---------    ----------

    Net increase (decrease) in cash                        (33.5)          2.2

    Cash at beginning of period                             45.3           4.5
                                                        ---------    ----------

    Cash at end of period                              $    11.8      $    6.7
                                                        =========    ==========

Interest paid                                          $     1.9      $    2.0
                                                        ---------    ----------

Federal income tax paid                                $    41.7      $   25.7
                                                        ---------    ----------

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 1997  Annual  Report.
         Certain amounts for 1997 have been  reclassified or restated to conform
         with the 1998 presentation.

2.       Discontinued Operations

         On January  2, 1998,  the  Company  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, the Company contributed substantially all of the assets of its
         wholly-owned subsidiary,  Radian Corporation to Radian LLC. The results
         of Radian LLC were  classified  as  discontinued  operations  following
         ratification  in July 1997 by the 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 until the closing of the sale on January
         2, 1998. The after-tax gain of $30.3 million  recognized in 1998 is net
         of deferred  losses  noted above.  In 1996 and prior to June 1997,  the
         Company's share of the joint venture's  results were recorded as equity
         in Radian.

3.       Industrial Risk Insurers

         On January 6, 1998, The Hartford Steam Boiler  Inspection and Insurance
         Company  (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  $39.0
         million  pre-tax  and  $25.2  million  after-tax.  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. Contemporaneous with the close of the sale,
         IRI was  reconstituted  with ERC (with a 99.5 percent share) and HSBIIC
         (with a .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 will retain 85% of the
         equipment  breakdown insurance and 15% of the property insurance of the
         combined insurance portfolio.

                                       7
<PAGE>


4.       Recent Accounting Developments

         In June 1997 the  Financial  Accounting  Standards  Board (FASB) issued
         Statement of Financial  Accounting Standards (SFAS) No. 130 " Reporting
         Comprehensive Income" which requires items that comprise  comprehensive
         income be  reported  in a  financial  statement  display  with the same
         prominence  as  other  financial  statements.  This  presentation  will
         include such items as market value  adjustments of securities,  foreign
         currency  translation,  and certain adjustments made for benefit plans,
         which  are   currently   reported  as  components  of  the  changes  in
         shareholders'  equity.  This  statement is effective  beginning in 1998
         with retroactive restatement of prior periods required.

         Also in June of 1997 the FASB  issued 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.   It   includes   disclosure
         requirements  relating to products and services,  geographic  areas and
         major  customers.  This statement will be effective  beginning year end
         1998.

5.       Legal Proceedings

         HSBIIC  is  involved  in  two  arbitration  or  litigation  proceedings
         regarding  the extent to which  certain  explosion  events are  insured
         under  boiler and  machinery  policies of HSBIIC or under the  all-risk
         property  insurance  policies  issued  by other  companies.  Management
         believes HSBIIC's policies do not provide coverage for losses resulting
         from the explosion events that are the subject of these proceedings.


         HSBIIC  has  accrued  $6.5  million  with  respect  to these  cases for
         potential loss  adjustment  expenses,  including legal costs, to defend
         HSBIIC's position. One case is on appeal; the other case is involved in
         both arbitration and litigation  proceedings.  The final hearing in the
         arbitration  proceeding  has  concluded  and the  Company is  currently
         awaiting a decision.  A trial date has not been set for either case. In
         the event that HSBIIC is held  liable for one or both of the  remaining
         claims,  amounts in excess of HSBIIC's net maximum aggregate  retention
         of  $8.5  million  is  recoverable  from   reinsurers.   Claim  amounts
         potentially  recoverable  from  reinsurers  in the event of a  possible
         adverse outcome in these cases could range, in the aggregate,  from $40
         million to $195 million.


         The obligations of HSBIIC's  reinsurers with respect to these cases are
         not  in  dispute.  Therefore,  management  believes  that  any  adverse
         outcomes  in these cases will not,  in the  aggregate,  have a material
         effect on either the results of  operations  or financial  condition of
         the Company.  HSBIIC's  reinsurance  contracts do not require HSBIIC to
         reimburse its  reinsurers  for any losses such  reinsurers  might incur
         should  these  cases not be decided in  HSBIIC's  favor.  Nevertheless,
         reinsurers  often quote rates for future  coverages based upon their or
         other reinsurers' experience on a particular account. Therefore, in the
         event  HSBIIC's   reinsurers  pay  significant  sums  pursuant  to  the
         arbitration or litigation  proceedings  described  above,  it is likely
         HSBIIC's  reinsurance rates would increase in future periods.  However,
         given  the  insured   capacity  that  exists  in  reinsurance   markets
         worldwide,  coupled  with  HSBIIC's  ability to negotiate a redesign or
         restructuring of its reinsurance  program, it does not necessarily mean
         that such an increase would be material.

                                       8
<PAGE>

         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
         such litigation  will have a material  adverse impact on the results of
         operations or the financial position of the Company.

6.       Earnings per share

         In February 1997, FASB issued SFAS No. 128, "Earnings per Share".  This
         statement  established  standards for computing and presenting earnings
         per share  (EPS).  It replaced the  presentation  of primary EPS with a
         presentation of basic EPS. It also requires dual  presentation of basic
         and   diluted  EPS  on  the  face  of  the  income   statement   and  a
         reconciliation  of the  numerator  and  denominator  of the  basic  EPS
         computation  to  the  numerator  and  denominator  of the  diluted  EPS
         computation.  The  requirements of this statement  became effective for
         year end 1997 financial  statements  with prior  restatement  required.
         Accordingly,  comparative  information  presented  in the  Consolidated
         Statements of Operations have been restated in compliance with SFAS No.
         128. On April 21, 1998 the Board of Directors  approved a three-for-two
         stock split for shares held of record on May 1, 1998. Additional shares
         resulting  from  the  split  were  distributed  on  May  22,  1998.  In
         accordance with SFAS No. 128, all earnings per share presentations have
         been  adjusted  to  reflect  the impact of the stock  split,  including
         retroactive  restatement  of prior  periods.  Previously,  the  Company
         reported  EPS of $ 0.76 and $2.35 per  share for the  quarter  and nine
         months ended September 30,1997, respectively .


                                       9
<PAGE>


Computation of Earnings per Share

<TABLE>
<CAPTION>
                                               Quarter Ended                         Nine Months Ended
                                              September 30, 1998                    September 30, 1998


                                       ---------------------------------------------------------------------------------------------
                                      Income         Shares            Per Share       Income             Shares          Per Share
<S>                                 <C>               <C>            <C>             <C>                  <C>              <C>

Income from continuing operations   $   22.1                                         $    85.6
Basic EPS:
Income available to common
shareholders                            22.1(A)                                      $    85.6(E)
Weighted Average Common Shares
Outstanding                                           29.3(B)                                             29.3(F)
Income from continuing operations
   per common share-basic:                                           $    0.75(A/B)                                        2.91(E/F)
   Effect of dilutive securities:

     After-tax interest on convertible 
      capital securities            $    3.4                                         $    10.2

     Convertible capital securities                    5.3                                                 5.3
      Stock options                                    0.7                                                 0.7

Diluted EPS:

   Income available to common and   $   25.5(C)       35.3 (D)                       $    95.8(G)         35.3(H)
     assumed conversions:

Income from continuing operations
   per common share-assuming

   dilution:                                                         $    0.72(C/D)                                    $   2.71(G/H)

</TABLE>

<TABLE>
<CAPTION>


                                                         Quarter Ended                       Nine Months Ended
                                                      September 30, 1997                              September 30, 1997

                                      ---------------------------------------------------------------------------------------------
                                         Income           Shares         Per Share       Income          Shares          Per Share
<S>                                    <C>                 <C>         <C>              <C>               <C>            <C>

Income from continuing operations      $   15.2                                         $ 47.4
Less:  convertible preferred stock
dividends                              $    0.3                                         $  1.0
Basic EPS:
Income available to common
shareholders                               14.9(A)                                      $ 46.4(E)
Weighted Average Common Shares
Outstanding                                                29.0(B)                                        29.4(F)
Income from continuing operations
   per common share-basic:                                             $  0.51(A/B)                                      $1.57(E/F)*
   Effect of dilutive securities:
     Preferred stock dividends         $    0.3                                         $  1.0
     Convertible preferred stock                            0.6                                            0.6
     Stock options                                          0.3                                            0.2
Diluted EPS:
   Income available to common and
     assumed conversions:              $   15.2(C)         29.9(D)                      $ 47.4(G)         30.2(H)
Income from continuing operations
   per common share-assuming
   dilution:                                                           $  0.51(C/D)                                      $1.56(G/H)*

* Computation excludes rounding.

</TABLE>

                                       10
<PAGE>


                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                       OF CONSOLIDATED FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS
                               SEPTEMBER 30, 1998

RESULTS OF OPERATIONS
Consolidated Overview
(dollar amounts in millions)


<TABLE>
<CAPTION>


                                                                Quarter Ended               Nine Months Ended
                                                                 September 30                September 30
                                                             ------------------           --------------------

                                                              1998             1997             1998               1997
                                                              ----             ----             ----               ----
<S>                                                       <C>              <C>              <C>               <C>   

Gross earned premium                                      $  212.5         $   151.6        $   567.8         $    456.6

Ceded premium                                                113.0              30.3            278.5               95.7
                                                          --------         ---------          -------           --------

Insurance premium                                         $   99.5         $   121.3        $   289.3         $    360.9

Engineering services revenue                                  25.3              15.5             67.7               45.2

Net investment income                                         15.5               9.1             46.6               25.8

Realized investment gains                                      7.9               2.3             18.4                6.2
                                                          --------         ---------        ---------         ----------

    Total revenues                                        $  148.2         $   148.2        $   422.0         $    438.1
                                                          ========         =========         ========        ===========

Pre-tax Income from continuing operations:

  Pre-tax income excluding sale of IRI                    $   36.0         $    21.5        $   101.5         $     64.9

  Pre-tax gain on sale of IRI                                  --               --               39.0                -- 
                                                          -----------      ---------         ---------       -----------

  Pre-tax income                                              36.0              21.5            140.5               64.9

Income taxes on continuing operations                          9.3               5.3             41.1               16.5

Distributions on Capital Securities, net of tax                4.6               1.0             13.8                1.0
                                                          -----------     ----------        ---------       ------------

Income From continuing operations                             22.1              15.2             85.6               47.4

After-tax gain on Radian Disposal                              --                --              30.3               -- 
                                                          ----------       ---------        ---------      -------------

Net income                                                $   22.1         $    15.2        $   115.9         $    47.4
                                                           =======          ========          =======     ==============

Net income per common share:

  Basic                                                   $     .75         $     .51       $     3.95       $      1.57
  Diluted                                                 $     .72         $     .51       $     3.57       $      1.56

</TABLE>


Net income for the nine months ended September 30, 1998 included after-tax gains
on the sale of HSB's  interests  in  Industrial  Risk  Insurers  (IRI) of $ 25.2
million and Radian International LLC of $ 30.3 million. The Radian International
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 

                                       11
<PAGE>

put the  Company's  interest to The Dow  Chemical  Company.  As a result,  HSB's
interest in Radian International LLC was classified as a discontinued operation.
HSB's after-tax  earnings  increased 45.4 percent from the third quarter of 1997
and, excluding the above sales,  increased 26.4 percent in the first nine months
of 1998  compared to 1997 due to improved  engineering  revenues and margins and
higher net realized gains.

Gross earned  premiums grew 40.2 percent in the quarter and 24.4 percent year to
date  compared to the prior year.  Much of this  growth is  attributable  to HSB
Industrial  Risk  Insurers.  Contemporaneous  with  the  sale  of  IRI,  the IRI
association was reconstituted with Employers Reinsurance Corporation (ERC) (with
a 99.5 percent  share) and The Hartford  Steam Boiler  Inspection  and Insurance
Company (HSBIIC) (with a .5 percent share) as 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 services. HSBIIC transferred its highly protected risk (HPR) manufacturing
book of business to HSB Industrial Risk Insurers and through various quota share
reinsurance  arrangements  with ERC,  HSBIIC retains 85 percent of the equipment
breakdown  business  and 15 percent of the  property  business  of the  combined
insurance portfolio.  This arrangement is the largest contributing factor in the
growth of both the gross earned premium and the ceded premium.  As a result, the
unearned insurance  premiums,  the reinsurance assets, and the ceded reinsurance
payables  reflected in the  Consolidated  Statements of Financial  Position have
increased  significantly.  The third  quarter  combined  ratio  improved to 87.9
percent in 1998 from 92.0  percent in 1997 and the year to date  combined  ratio
improved to 88.7 percent in 1998 from 91.3 percent in 1997. Engineering services
revenue  increased  63.0 percent for the third  quarter and 49.6 percent year to
date and margins in this  business  grew to 7.6 percent  from 6.3 percent in the
third quarter of 1997 and to 8.3 percent from 6.5 percent year to date.

The  effective  tax rate on  income  from  continuing  operations  for the third
quarter and year to date were 23.5 percent and 28.2 percent for 1998 compared to
24.4 percent and 25.4 percent for 1997. 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.  In  1998  the  taxes
associated with the sale of IRI contributed to a higher first quarter  effective
tax  rate.  The  Company  continues  to  manage  its  use  of  tax  advantageous
investments to maximize after tax earnings.

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

In June of 1997 the FASB issued 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.  It
includes disclosure  requirements relating to products and services,  geographic
areas and major  customers.  This statement will be effective with calendar year
1998,  however  application is not required for interim financial  statements in
the initial  year.  It is possible  that this  standard may redefine our segment
information.  However,  the Company has not yet determined how SFAS No. 131 will
be applied.

                                       12
<PAGE>


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

Insurance  operations  include the insurance results of HSBIIC,  HSB Engineering
Insurance  Limited  (HSB-EIL),  The Boiler  Inspection and Insurance  Company of
Canada (BI&I) The Allen Insurance  Company,  Ltd, HSB of Connecticut and HSB of
Texas.




<TABLE>
<CAPTION>

                                                  Quarter Ended                         Nine Months Ended
                                                   September 30                           September 30
                                                  ----------------                     ------------------
                                                                        (in millions)

                                                1998             1997                    1998            1997
                                                ----             ----                    ----            ----
<S>                                         <C>               <C>                     <C>              <C>    

Gross earned premium                        $   212.5         $   151.6               $    567.8       $   456.6



Ceded premium                                   113.0              30.3                    278.5            95.7
                                            ---------         ---------                 --------        ---------

Insurance premium                                99.5             121.3                    289.3           360.9

Claims and adjustment expenses                   44.2              54.1                    129.1           157.0

Underwriting, acquisition
     and other expenses                          44.4              57.7                    128.8           173.0
                                            ---------         ---------                 --------        --------
Underwriting gain                           $    10.9         $     9.5               $     31.4       $    30.9
                                            =========         =========                 ========        ========



Loss ratio                                      44.4%             44.6%                    44.6%            43.5%
Expense ratio (Excluding Goodwill
 Amortization)                                  43.5%             47.4%                    44.1%            47.8%
                                                -----             -----                    -----           -----

Combined ratio                                  87.9%             92.0%                    88.7%            91.3%
                                                =====             =====                ==========        ========
</TABLE>

Gross  earned  premiums  in the third  quarter and year to date  increased  40.2
percent and 24.4 percent from the comparable  periods in 1997. This increase was
primarily attributable to the new arrangement with HSB Industrial Risk Insurers.
Gross earned  premiums from IRI increased $ 51.7 million in the third quarter of
1998 and $ 118.4 million year to date 1998 compared to the respective periods in
1997. Gross earned premiums  representing  coverage outside the U.S. for non HSB
Industrial  Risk Insurers  business  increased 11.3 percent in the third quarter
and 6.2 percent  year to date from the  comparable  periods in 1997.  In certain
areas of our direct  domestic and foreign  business,  the market is experiencing
price  erosion.  HSB will not write  business at rates  which  would  lessen our
ability to maintain underwriting profit.

Increases  in ceded  premium  of 272.9  percent in the third  quarter  and 191.0
percent  year to date  were  the  result  of both  the new HSB  Industrial  Risk
Insurers arrangement  previously discussed and related reinsurance with ERC, and
changes in the Company's reinsurance programs which now utilize more quota share
reinsurance  on  certain  of our  books of  business.  We  anticipate 

                                       13
<PAGE>


these new reinsurance contracts and the HSB Industrial Risk Insurers arrangement
will continue to result in high growth in gross earned  premium but lower growth
in net earned premium.

The loss ratio  declined  from 44.6 percent in the third quarter of 1997 to 44.4
percent in the current quarter and increased from 43.5 percent in the first nine
months of 1997 to 44.6  percent in the first nine  months of 1998.  Year to date
1998 results were impacted by severe ice storms in Canada. In 1997 flood related
losses  impacted the loss ratio.  Gross claims and  adjustment  expenses for the
first nine  months of 1998 and 1997 were $ 478.5  million  and $ 216.6  million,
respectively.  Gross  claims in 1998  include  approximately  $ 130 million from
Hurricane Georges on exposures written by HSB Industrial Risk Insurers. On a net
basis the impact on losses for the third quarter and year was $ 1.7 million. The
significant  increase  in  claims  reserves,  reinsurance  assets  and  unearned
insurance  premium  reserves  from prior years are primarily due to HSBIIC's new
relationship with HSB Industrial Risk Insurers as discussed above.

The expense  ratio  improved to 43.5  percent in the third  quarter of 1998 from
47.4 percent in the third  quarter of 1997 and to 44.1 percent year to date 1998
from 47.8 percent year to date 1997. The new quota share reinsurance  agreements
and the HSB Industrial Risk Insurers  arrangement with ERC, both of which result
in ceding  commissions to HSBIIC have  positively  impacted our expense ratio by
approximately  12  percentage  points  year to date.  A portion  of such  ceding
commission is intended to reimburse HSB for the additional costs of managing HSB
Industrial  Risk  Insurers.  Ceding  commissions  should  continue to positively
impact the expense ratio throughout 1998.

HSBIIC completed an acquisition of the monoline boiler and machinery business of
Kemper  Insurance  Companies,  effective  July 1, 1998.  The two companies  also
completed an arrangement  for HSBIIC to reinsure  boiler and machinery  coverage
written  as  part  of  Kemper's  commercial  package  policies.  Kemper's  total
estimated boiler and machinery premiums were $ 80 million in 1997.

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

<TABLE>
<CAPTION>

                                                 Quarter Ended                   Nine Months Ended
                                                  September 30                      September 30
                                              ------------------                 --------------------

                                           1998              1997               1998              1997
                                          -----              ----               ----              ----
<S>                                    <C>                 <C>                <C>               <C>   

Net engineering services revenue       $    25.3           $  15.5            $  67.7           $  45.2
Net engineering services expenses           23.4              14.5               62.1              42.3
                                         -------           -------            -------           -------

Operating gain                         $     1.9           $   1.0            $   5.6           $   2.9
                                         =======           ========           =======           =======

Net margin                                   7.6%              6.3%               8.3%              6.5%

</TABLE>


Engineering  services  operations  include the results of HSBIIC's,  BI&I's, and
HSB-EIL's engineering services,  HSB Reliability  Technologies (HSBRT),  Solomon
Associates, Inc (SAI) and the Company's other engineering services subsidiaries.

                                       14
<PAGE>

In April 1998 HSB acquired  SAI based in Dallas,  Texas.  SAI is an  engineering
management  consulting firm that provides comparative  performance  benchmarking
consulting to the refining,  petro-chemical and power generation industries.  In
1997,  SAI had  gross  sales of $13  million.  SAI  establishes  efficiency  and
productivity  benchmarks  for 80 percent  of the  worldwide  petroleum  refining
industry.  This  acquisition  expands HSB's  engineering  management  consulting
services and benchmarking capability.

Engineering  services revenues  increased $ 9.8 million in the third quarter and
$22.5 million year to date  compared to the same periods in 1997.  The growth in
revenues year to date was primarily due to increases generated by HSBRT as their
revenues  increased 20.2 percent,  HSB-EIL's revenues of $ 7.8 million generated
through recent acquisitions,  SAI revenues of $ 3.7 million, as well as revenues
generated by some recent small  acquisitions.  The improvement in operating gain
from the prior year reflects efforts to improve staff  utilization and a refocus
in certain areas on pricing strategies.  We are still incurring costs to develop
new products which have the objective of increasing growth rates.

On July 1, 1998, HSB purchased  Kemper's ASME inspection  services business that
certifies boiler and pressure vessel  compliance with the codes and standards of
the American Society of Mechanical Engineers. Total estimated 1997 revenues were
approximately $ 7.5 million.

The Company has been focusing on identifying acquisition candidates in the niche
engineering  management  consulting  service  business,   primarily  in  process
industries, in order to grow the engineering service segment of the business.



Investment Operations
---------------------
<TABLE>
<CAPTION>

                                           Quarter Ended                      Nine Months Ended
                                            September 30                        September 30
                                            ---------------                --------------------

                                       1998              1997              1998          1997
                                     --------          --------            ----          ----
<S>                                 <C>               <C>              <C>            <C>   

Net investment income               $   15.5          $     9.1        $     46.6     $    25.8
Realized investment gains                7.9                2.3              18.4           6.2
                                   -----------        ---------        ----------      --------

Pretax income from                                                                                              
  investment operations             $   23.4           $   11.4        $     65.0     $    32.0
                                 =============         ========        ==========     =========

</TABLE>

                                       15
<PAGE>



Net  investment  income  for the  third  quarter  and  year  to  date  increased
significantly  compared  to the same  periods in 1997 due to the  investment  of
proceeds  from  capital  securities  issued  during the second half of 1997.  In
addition,  proceeds from the January sales of HSB's  interests in IRI and Radian
International LLC significantly  increased investable funds. Realized investment
gains were  significantly  impacted  in 1998 by call  premiums  on fixed  income
investments.  In the third quarter of 1997 realized gains were reduced by $ 10.1
million and year to date 1997 by $ 29.5  million to reflect the  estimated  fair
value of three  "zero cost"  collar  contracts  entered  into at the end of 1996
which were used to mitigate the effects of market risk on the U.S.  common stock
portfolio. These collars were closed out by year end 1997.

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 shareholders 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.


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

In addition  to the impact of HSB's  results of  operations,  the  Statement  of
Comprehensive  Income  displays the effects of price movements on HSB's invested
assets.  During  the third  quarter  of 1998 the  stock  market  went  through a
correction,  resulting in HSB's  cumulative  holding  gains  decreasing by $21.9
million as  compared to a gain of $1.0  million in 1997.  Year to date change in
cumulative  holding gains in 1998 was an increase of $5.4 million as compared to
an increase of $14.4 million in 1997.


Liquidity and Capital Resources
-------------------------------
                                                    Balances at
                                       September 30          December 31
                                          1998                  1997
                                       ------------          ----------

Total assets                           $   2,109.2          $   1,537.2
Short-term investments                        92.4                379.2
Cash                                          11.8                 45.3
All other invested assets                    965.3                572.2
Short-term borrowing                           4.4                 42.4
Common shareholder's equity                  413.3                345.3

Liquidity refers to the Company's  ability to generate  sufficient funds to meet
the cash requirements of its business operations. The Company receives a regular
inflow of cash from maturing  investments and engineering services and insurance
operations.  The mix of the  investment  portfolio  is  managed  to  respond  to
expected claim pay-out  patterns and other cash  requirements.  The Company 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 certain  capital
securities.

                                       16
<PAGE>

Cash  provided  from  operations  was $ 43.0 million in the first nine months of
1998 compared to $18.2 million for the same period in 1997.  Premiums  collected
increased in the first nine months of 1998  compared to the first nine months of
1997 while claims paid declined.

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 and investment  activities.  Common  shareholders'
equity of $ 413.3  million at  September  30, 1998  increased  by $ 68.0 million
since December 31, 1997. The increase  primarily  reflects net income of $ 115.9
million  year to date;  offset by common  dividends of $ 35.7 million and common
stock repurchases of $ 27.9 million offset by issuances of $ 23.4 million.

At September  30, 1998,  the Company had  significant  short-term  and long-term
borrowing  capacity.  The Company is  currently  authorized  to issue up to $ 75
million of commercial paper.  Commercial paper outstanding at September 30, 1998
was $ 3 million.

The Company is involved in two arbitration or litigation  proceedings  regarding
the extent to which  certain  explosion  events  are  insured  under  boiler and
machinery  policies of HSBIIC or under the all-risk property  insurance policies
issued by other  companies.  Management  believes the Company's  policies do not
provide  coverage for losses  resulting  from the explosion  events that are the
subject of these proceedings.  In the opinion of management any adverse outcomes
in these cases will not, in the aggregate,  have a material effect on either the
results of operations or financial  condition of the Company.  More  information
pertaining to these legal  proceedings may be found under note 5 of the Notes to
Consolidated Financial Statements herein.

The  Company  writes  business in European  markets  primarily  through its U.K.
subsidiary, HSB Engineering Insurance Limited. 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 UK is
not a first wave euro  country and as such the  primary  impact will be in Spain
and the Irish  Republic.  Over time,  as and 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,
etc.

Year 2000
---------

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

                                       17
<PAGE>

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 IT staff as
well as  external  consultants  and  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, and financial  recording and reporting,  and human resource
systems and  engineering  databases  and  systems.  The Company  expects to have
largely completed the development,  renovation,  replacement and  implementation
phases for all of these  applications  by year-end  1998 with the  exception  of
human  resource and certain  non-critical  financial  reporting and  engineering
systems which are expected to be compliant by mid-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 during the first half of 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 is  currently  in the process of  identifying  and  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.  The Company expects to compile the assessment
of the  potential  impact on the  Company  of such  parties'  Year 2000 state of
readiness  and  remediation  plans by the end of the first  quarter  of 1999 and
conduct renovation 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 $26  million  of which
approximately  $14.9  million has been  expended  through  September  30,  1998.
Certain of these  costs are being  expensed as they are

                                       18
<PAGE>

incurred  and are being  funded  through  operating  cash flow.  The Company has
expensed $.2 million for 1996,  $1.5 million for 1997,  and $3.6 million for the
first nine months of 1998. It is estimated that expenditures of $1.4 million for
the  fourth  quarter  of 1998 and $4.8  million  for 1999  will be  expensed  as
incurred.  The remainder of the $26 million estimate 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  which  would  have  occurred  in the normal  course of  business
without the advent of Year 2000 are  excluded  from these  amounts.  The current
estimate also does not include any costs associated with the  implementation  of
contingency plans which 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.   An
immaterial portion of the Company's  portfolio is invested in non-public issuers
where 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.

                                       19
<PAGE>

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
filed with the various  jurisdictions an endorsement to its equipment  breakdown
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. The endorsement is being included in policies in
all states which have approved the endorsement.  In the four jurisdictions which
have not approved the endorsement,  a notice  reiterating the Company's coverage
intent with respect to Year 2000 exposures is being sent to  policyholders.  The
Company  has  recently  filed a similar  endorsement  for use with its  all-risk
policy and expects to receive  approvals  consistent with those received for its
equipment breakdown endorsement. Many 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  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; adverse development on losses and
loss  adjustment  expenses  related  to claims  arising  in prior  periods;  new
insurance and reinsurance  contract  interpretations,  including coverage issues
related to Year 2000  events;  changes in asset  valuations;  consolidation  and
restructuring  in the  financial  services  industry;  changes in the  Company's
participation in joint underwriting associations, and in particular IRI; changes
in the demand and customer base for engineering and inspection  services offered
by the

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<PAGE>

Company,  whether resulting from changes in the law or otherwise; the ability of
the Company and key  suppliers and business  partners to  adequately  and timely
address  issues  relating  to the Year  2000  event;  and other  general  market
conditions.

PART II - OTHER INFORMATION

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

         HSBIIC  is  involved  in  two  arbitration  or  litigation  proceedings
         regarding  the extent to which  certain  explosion  events are  insured
         under  boiler and  machinery  policies of HSBIIC or under the  all-risk
         property  insurance  policies  issued  by other  companies.  Management
         believes HSBIIC's policies do not provide coverage for losses resulting
         from the explosion events that are the subject of these proceedings.

         HSBIIC  has  accrued  $6.5  million  with  respect  to these  cases for
         potential loss  adjustment  expenses,  including  legal costs to defend
         HSBIIC's position. One case is on appeal; the other case is involved in
         both arbitration and litigation  proceedings.  The final hearing in the
         arbitration  proceeding has been concluded and the Company is currently
         awaiting a decision.  A trial date has not been set for either case. In
         the event that HSBIIC is held  liable for one or both of the  remaining
         claims,  amounts in excess of HSBIIC's net maximum aggregate  retention
         of  $8.5  million  is  recoverable  from   reinsurers.   Claim  amounts
         potentially  recoverable  from  reinsurers  in the event of a  possible
         adverse outcome in these cases could range, in the aggregate,  from $40
         million to $195 million.

         The obligations of HSBIIC's  reinsurers with respect to these cases are
         not  in  dispute.  Therefore,  management  believes  that  any  adverse
         outcomes  in these cases will not,  in the  aggregate,  have a material
         effect on either the results of  operations  or financial  condition of
         the Company.  HSBIIC's  reinsurance  contracts do not require HSBIIC to
         reimburse its  reinsurers  for any losses such  reinsurers  might incur
         should  these  cases not be decided in  HSBIIC's  favor.  Nevertheless,
         reinsurers  often quote rates for future  coverages based upon their or
         other reinsurers' experience on a particular account. Therefore, in the
         event  HSBIIC's   reinsurers  pay  significant  sums  pursuant  to  the
         arbitration or litigation  proceedings  described  above,  it is likely
         HSBIIC's  reinsurance rates would increase in future periods.  However,
         given  the  insured   capacity  that  exists  in  reinsurance   markets
         worldwide,  coupled  with  HSBIIC's  ability to negotiate a redesign or
         restructuring of its reinsurance  program, it does not necessarily mean
         that such an increase would be material.

         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
         such litigation  will have a material  adverse impact on the results of
         operations or the financial position of the Company.

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

(a)  Exhibits

     Exhibit 10(ii) - Limited Liability Company Agreement of HSB Industrial Risk
     Insurers, L.L.C.

     Exhibit  10(iii)(a) - HSB Group,  Inc. 1985 Stock Option Plan,  amended and
     restated as of September 21, 1998

     Exhibit   10(iii)(b)  -  HSB  Group,  Inc.  Directors  Stock  and  Deferred
     Compensation Plan, amended and restated effective September 21, 1998

     Exhibit 10(iii)(c) - HSB Group, Inc.  Long-Term  Incentive Plan, as amended
     and restated effective September 21, 1998

     Exhibit 10(iii)(d) - HSB Group, Inc. 1995 Stock Option Plan, as amended and
     restated effective September 21, 1998
     
     Exhibit 27.1 - Financial Data Schedule

     Exhibit 27.2 - Financial Data Schedule

(b)  Reports on Form 8-K

     (i) Form 8-K dated July 13, 1998 announcing the completion of the Company's
     acquisition  of the  monoline  boiler  and  machinery  business  of  Kemper
     Insurance Companies, effective July 1, 1998.

     (ii) Form 8-K dated July 20, 1998 reporting the second quarter earnings and
     announcing  the  declaration of a dividend of 42 cents per share payable on
     October 29, 1998.

     (iii)  Form 8-K  dated  July 23,  1998  announcing  the  election  of a new
     director.

     (iv) Form 8-K dated September 24, 1998 announcing the election of Gordon W.
     Kreh to the position of chairman of the board of directors of the Company.


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                                   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:    November 13, 1998          By:      /s/  Saul L. Basch
                                                  Saul L. Basch
                                                  Senior Vice President,
                                                  Treasurer and
                                                  Chief Financial Officer


Date:    November 13, 1998          By:      /s/  Robert C. Walker
                                                  Robert C. Walker
                                                  Senior Vice President and 
                                                  General Counsel
                                       23