SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

              /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 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)

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

Securities registered pursuant to Section 12(b) of the Act:


                                              Name of each exchange
Title of each class                           on which registered
-------------------                           -------------------
Common stock, without par value               New York Stock Exchange, Inc.
Rights to Purchase Depositary Receipts        New York Stock Exchange, Inc.

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark  whether the  registrant  (1) has filed all reports 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........

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K............

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant as of February 15, 2000 was $699,824,639.

Number  of  shares  of  common  stock  outstanding  as  of  February  15,  2000:
29,247,002.

Documents Incorporated by Reference:

Portions of the Proxy  Statement  dated March 16, 2000 for the Annual Meeting of
Shareholders  to be held April 18, 2000 are  incorporated  by reference in Parts
III and IV herein.
<PAGE>


                                     PART I

Item 1.  Business.

A.     GENERAL DEVELOPMENT OF BUSINESS

     HSB  Group,  Inc.  (together  with  its  subsidiaries  referred  to as  the
"Company"  or "HSB"  hereinafter)  was  formed  under  the laws of the  State of
Connecticut  in 1997 to serve as the  holding  company  for The  Hartford  Steam
Boiler  Inspection  and Insurance  Company  (HSBIIC) and its  subsidiaries.  The
Hartford  Steam Boiler  Inspection  and  Insurance  Company was  chartered as an
insurance company by the Connecticut legislature in 1866.

    The Company's operations are divided into four reportable operating segments
- Commercial insurance, Global Special Risk insurance,  Engineering Services and
Investments. The most significant business of the Company is providing insurance
against losses from accidents to boilers,  pressure vessels,  and a wide variety
of mechanical and electrical  machinery and equipment along with a high level of
inspection  and  engineering  services  aimed  at loss  prevention.  Net  earned
premiums  for the  Company's  insurance  segments in the  aggregate  were $381.9
million for 1999, which accounted for  approximately 63 percent of the Company's
revenues. See Note 10 to the Consolidated Financial Statements located in Item 8
of Part II herein for  information  on the  Company's net written and net earned
premiums over the last three years.

     The Company  conducts its business in Canada  through its  subsidiary,  The
Boiler Inspection and Insurance  Company of Canada.  Insurance for risks located
in  countries  other  than the  United  States  and  Canada  is  written  by HSB
Engineering Insurance Limited (HSB EIL).

     The  following is a summary of recent  developments  in the business of the
Company.

     The reinsurance  agreements as discussed  below  effective  January 1, 1998
between  HSBIIC,  Employers  Reinsurance  Corporation  (ERC) and Industrial Risk
Insurers (IRI) were terminated  with respect to loss or liabilities  arising out
of  occurrences  taking place on or after January 1, 2000.  As a result,  HSBIIC
will no longer  retain 85 percent of the  equipment  breakdown  insurance and 15
percent of the property insurance of the combined insurance  portfolio for risks
arising on or after January 1, 2000. The joint underwriting association that was
known as HSB Industrial  Risk Insurers  will,  from January 1, 2000, be known as
Industrial Risk Insurers.

     Concurrent with the termination of the reinsurance agreements,  HSBIIC, ERC
and IRI replaced the operating  agreement for IRI dated January 1, 1998. The new
agreement,  effective  January 1, 2000,  calls for HSBIIC to retain 0.5  percent
membership  share in IRI with the  ability to  increase  its total share up to a
maximum  of 10  percent,  at no cost,  at  HSBIIC's  option.  In  addition,  the
agreement also establishes an arrangement for HSB to perform equipment breakdown
engineering and inspection  services for clients of IRI and provides for a fixed
fronting  fee in the event that IRI  continues  to use  HSBIIC's  licenses.  See
"Participation   in  Industrial   Risk  Insurers"  on  page  13  for  additional
information.

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     On January 6, 1998,  HSBIIC sold its 23.5 percent  share in IRI to 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.  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  that 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. Under the 1998 agreements, HSBIIC wrote the business
for the reconstituted IRI (which was renamed HSB Industrial Risk Insurers) using
its  insurance  licenses and provided  certain  other  management  and technical
services. In addition,  through various reinsurance agreements with ERC and IRI,
HSBIIC transferred its manufacturing book of business to IRI and retained 85% of
the  equipment  breakdown  insurance  and 15% of the  property  insurance of the
HSBIIC/IRI combined portfolio.

     On  December  31,  1997,  to  support  the  Company's  role with HSB IRI, a
business trust formed by HSB sold $300 million of 20-year, 7 percent Convertible
Capital  Securities  in a private  placement  to ERC, of which $250  million was
contributed by the Company to HSBIIC.  The capital  securities  are  convertible
into HSB common stock, at any time, subject to regulatory approval.  See Note 13
to the Consolidated Financial Statements located in Item 8 of Part II herein for
more information on this transaction.

     Effective  July 1, 1998,  HSBIIC  completed an  acquisition of the monoline
boiler and machinery  business and the ASME inspection  services,  which certify
boiler  and  pressure  vessel  compliance  with the codes and  standards  of the
American Society of Mechanical  Engineers,  of the Kemper  Insurance  Companies.
Kemper and HSBIIC also completed an agreement for HSBIIC to reinsure  boiler and
machinery coverage included as part of Kemper's commercial package policies.

     The Company also offers  professional  scientific and technical  consulting
services for industry and  government  on a world-wide  basis  through  HSBIIC's
Engineering   Department  and  its  engineering   subsidiaries.   In  1999,  net
engineering   services  revenues  were  $119.6  million,   which  accounted  for
approximately 19.7 percent of the Company's revenues.

     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 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, at which time an estimated after-tax gain of

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$30.3 million,  net of deferred losses, was realized.  In 1996 and prior to July
1997, the Company's share of the joint venture's results were recorded as equity
in Radian.

     Recently  the  Company  has  been  focusing  on   identifying   acquisition
candidates in the niche  engineering  management  consulting  service  business,
primarily  in  process  or  energy  related  industries,  in order to  expand or
complement its engineering service capabilities.  The Company does not currently
anticipate  that any single  acquisition  within the next twelve  months will be
material to the operations or financial position of the Company,  however,  this
does not rule out the possibility.

     In  July  1999,  HSBIIC  acquired  Structural  Integrity  Associates,  Inc.
(Structural)  based  in  San  Jose,  California.  Structural  is an  engineering
consulting and inspection  services firm  specializing in the analysis,  control
and  prevention  of  structural  and equipment  failures.  Its services  include
inspection and condition  assessment and monitoring and remaining life analysis,
repair,  remediation  and  total  risk  management  of  critical  equipment  and
structures. In April 1998, HSB acquired Solomon Associates,  Inc. (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.  During  1997,  the  Company  completed  the
acquisition of Haughton Engineering Services Limited of England. Haughton offers
a wide  range of  inspection  services  in the  United  Kingdom  to help  ensure
compliance  with regulatory  codes.  During 1997, the Company also acquired a 51
percent interest in Integrated Process  Technologies LLC (IPT). IPT measures and
manages  facility costs and service  performance on an outsource basis for large
businesses with geographically distributed locations.

     The  Company  is a  multi-national  company  operating  primarily  in North
American, European, and Asian markets. Currently, the Company's principal market
for its insurance and engineering  services is the United States.  However,  the
Company  does  desire  to  become a  stronger  competitor  in the  international
machinery  breakdown  insurance and related  engineering  services markets as it
believes that there is significant  opportunity for profitable  growth overseas.
In 1999, the revenues and pre-tax income  associated with operations  outside of
the United States were approximately 13.2 percent and 9.5 percent, respectively.
Identifiable  assets associated with operations outside of the United States are
approximately 19.5 percent of the consolidated  amount. See Note 1 and Note 5 to
the Consolidated  Financial  Statements  located in Item 8 of Part II herein for
more financial data based on geographic location and business segments.


B.     PRODUCTS AND SERVICES

Insurance

     Equipment  breakdown  insurance  provides  for the  indemnification  of the
policyholder  for financial  loss  resulting  from  destruction  or damage to an
insured boiler,  pressure vessel, or other item of machinery or equipment caused
by an accident.  This  financial  loss can include the cost

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<PAGE>

to repair or replace  the  damaged  equipment  (property  damage),  and  product
spoilage,   lost  profits  and   expenses  to  avert  lost   profits   (business
interruption) stemming from an accident.

     The  Company   distinguishes  itself  from  other  insurance  suppliers  by
providing  a  high  level  of  loss  prevention,   failure  analysis  and  other
engineering  services with the insurance  product.  This heavy  emphasis on loss
prevention  historically has had the dual effect of increasing  underwriting and
inspection expenses, while reducing loss and loss adjustment expenses.

     An important  ancillary benefit for the policyholder is that the inspection
performed by the  Company's  inspector on a boiler,  pressure  vessel,  or other
piece of equipment,  as part of the insurance  process,  is normally accepted by
state and other  regulatory  jurisdictions  for  their  certification  purposes.
Without  a  certificate  of  inspection  by the  insurance  carrier  or  another
inspection agency, policyholders cannot legally operate many types of equipment.

     The  Company  also  writes  all risk  property  insurance  for  risks  with
significant  machinery  and  equipment  exposures,   in  addition  to  its  more
traditional  boiler and  machinery  products.  The all risk line is  marketed to
customers with equipment and machinery  exposures,  such as electric  utilities,
where  sophisticated  engineering  services are important to loss prevention and
control.  These  customers are offered  technical  services such as computerized
evaluations  of fire  protection  systems in  addition to fire  inspections  and
boiler and  machinery  inspections.  The Company  also writes all risk  coverage
specifically tailored for data processing systems.

Engineering Services

     HSBIIC's Engineering Services division provides quality assurance services,
inspections  to code standards of the American  Society of Mechanical  Engineers
(ASME) and other organizations, ISO certification and registration services and,
using its proprietary  technologies  and databases,  provides other  specialized
consulting,  condition monitoring,  benchmarking and inspection services related
to the design and  applications  of boilers,  pressure  vessels,  and many other
types  of  equipment  for  domestic  and  foreign  equipment  manufacturers  and
operators.  HSBIIC is the largest Authorized Inspection Agency for ASME codes in
the  world.  The  Engineering   Services   division  also  offers  training  and
educational  services  related to these areas.  In addition the Company has been
developing  and  expanding  its  services  to  respond to the  growing  trend to
outsource the management and maintenance of property, plant and equipment.

    Aside from  HSBIIC,  the  Company's  engineering  affiliates  include  HSB
Reliability  Technologies  Corp. (HSB RT), HSB Professional  Loss Control,  Inc.
(HSB PLC),  Integrated Process Technologies LLC (IPT), Solomon Associates,  Inc.
(SAI),  Structural  Integrity  Associates,  Inc.  (Structural)  and HSB Haughton
Engineering Services Limited (Haughton).  HSB RT maintains an extensive database
on equipment  maintenance and reliability  and provides  preventive  maintenance
consulting  services and programs to a wide range of businesses and  industries.
Such  services  and  programs  are  designed  to  increase  production,

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reduce maintenance, energy and spare parts inventory costs, and extend equipment
life. HSB PLC is a fire protection consulting and engineering firm. Its services
include inspections,  hazards analysis and risk assessment,  engineering design,
code consulting,  research and testing, and training. Structural, SAI, Haughton,
and  Integrated  Process  Technologies,  in which the  Company  holds a majority
interest, are described on page 4.

C.     COMPETITION

Insurance

     The Company is the largest writer of equipment breakdown insurance in North
America and is establishing a significant presence in the engineering  insurance
market outside of North America.  Based on net premiums  written reported in the
1999 edition of Best's Aggregates and Averages,  the Company has approximately a
39 percent  market share and no other single  company has more than a 10 percent
market share of the domestic  equipment  breakdown  market.  The Factory  Mutual
Insurance Company has a market share of approximately 18 percent.

     In general,  the  insurance  market is  influenced  by the total  insurance
capacity  available  based on  policyholder  surplus.  Over the last few  years,
global  capacity to accept  risk has grown as new  insurers  enter the  property
casualty  market and new  financial  products  have been  designed to securitize
catastrophe  risks.  In  addition  to  available  capacity,  competition  in the
equipment  breakdown  insurance  market  is based on price  and  service  to the
insured.  Service includes maintaining customer  relationships,  engineering and
loss  prevention  activities,  and claims  settlement.  The  Company  prices its
product  competitively in the marketplace,  but primarily competes by offering a
high level of service, not by offering the lowest-priced product.

     Competition in the equipment  breakdown  insurance  market,  as well as the
property/casualty market in general, has intensified in recent years as a result
of  continuing  restructuring  and  consolidation  in  the  insurance  industry.
However,  because the Company  primarily  underwrites risks which require unique
engineering  expertise and jurisdictionally  mandated  inspections,  the Company
believes that its products and services will continue to be competitive.

Engineering Services

     The Company provides a wide range of engineering, consulting and inspection
services as  described  on page 5. For most of these  services  it has  numerous
competitors,  some of whom are much larger and have greater financial  resources
than the Company.

     Competition  in these  areas is based on price  and on the  qualifications,
experience  and  availability  of the  individuals  who  perform  the work.  The
Company's force of inspectors,  engineers,  and technicians is spread throughout
the world.  Ongoing  training  programs

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<PAGE>

ensure  that the  Company's  inspectors,  engineers,  and  technicians  are kept
up-to-date on the latest engineering and technical developments.

D.     MARKETING

Insurance

     The Company's various functional operations are aligned to focus on its two
principal  customer  groups,  commercial  risks and global  special  risks.  The
Company  believes that this  organizational  structure  allows it to service its
customers more  effectively  and  efficiently  and at the same time to be a more
aggressive and flexible competitor.

     Currently, the Company's principal market for its insurance business is the
United States.  In 1999, 90 percent of its net written premiums related to risks
located  in the United  States.  Of the  direct  premiums  written in the United
States in 1999 (gross premiums less return premiums and cancellations, excluding
reinsurance  assumed  and  before  deducting  reinsurance  ceded),  less than 10
percent was written in any one state. With the exception of California, Florida,
New York,  Pennsylvania and Texas, no state accounted for more than 5 percent of
such premiums.

     The Company has contracts with independent  insurance agencies in all fifty
states, the District of Columbia,  Puerto Rico and Canada. These agencies market
the  Company's  direct  insurance to its small and medium  commercial  accounts.
Personal contact with these independent insurance agents is accomplished through
the Company's  field sales force which  operates out of various  branch  offices
across the  country  and in Canada.  It is the  Company's  policy in  appointing
agents  to be  selective,  seeking  to  maintain  and  strengthen  its  existing
relationships  and to develop  relationships  with new agents  whom the  Company
believes  will become a continuing  source of profitable  business.  The Company
periodically  reviews its agency contracts and selectively reduces them in order
to retain only those agents who  consistently  produce certain minimum levels of
business for the Company.

     Large, engineering-intensive U.S. and international accounts, most of which
comprise the Global Special Risk segment, are primarily marketed and serviced by
account teams comprised of underwriting, marketing, engineering and claims staff
who have specialized knowledge of particular customer industries. U.S. customers
are serviced primarily by HSBIIC.  Canadian customers are serviced by The Boiler
Inspection and Insurance Company of Canada.  Overseas  customers are serviced by
HSB Engineering  Insurance Limited,  based in London, with additional offices in
Hong Kong, China, Malaysia, Australia, Miami, Spain, Korea and South Africa.

     Additionally,  the  Company  markets  its  insurance  products  through the
distribution  channels of the companies  which it reinsures.  See  discussion of
reinsurance assumed on page 11.

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     Large account  business is brokered  through a small number of brokers as a
result of the significant  consolidation of the international brokerage business
in the late 1990s.  For 1999,  approximately  26 percent of the Company's  gross
written  premium,  which included HSB Industrial Risk Insurers,  was produced by
J&H Marsh & McLennan and Sedgwick Group.

     No other  insured  or  broker  accounts  for more  than 10  percent  of the
consolidated total revenues of the Company.

Engineering Services

     The  Company's  engineering  services  are  marketed  in a variety of ways.
Customized services related to loss prevention,  failure analysis, and equipment
testing are generally  sold in conjunction  with the insurance  contract but are
also available separately. Most other engineering services are marketed on a bid
or proposal basis. While such business is usually price sensitive,  the exacting
standards  and  requirements  set by  industry  and  government  for most of the
services offered by the Company tend to diminish that effect.

     Engineering  services  are  marketed  and  serviced  primarily by personnel
located in the Company's various domestic and international offices.

     While the primary market for engineering services continues to be the U.S.,
the Company has been focusing on expanding its international business, primarily
in Europe,  the Pacific Rim and certain countries in South America as demand for
engineering  services is  expected to grow at a faster rate in these  developing
regions than in the U.S.

     No engineering  services  customer accounts for more than 10 percent of the
Company's consolidated total revenues.

E.     REGULATION

Insurance

     The Company's  domestic insurance  subsidiaries'  operations are subject to
regulation  throughout  the United  States.  Various  aspects  of the  insurance
operations are regulated,  including the type and amount of business that can be
written, the price that can be charged for particular forms of coverage,  policy
forms,  trade and claim settlement  practices,  reserve  requirements and agency
appointments.  Regulations  also  extend to the form and  content  of  financial
statements filed with such regulatory authorities, the type and concentration of
permitted  investments  for insurers,  and the extent and nature of transactions
between  members of a holding  company  system,  including  dividends  involving
insurers.  In general,  such  transactions must be on fair and reasonable terms,
and in some cases,  prior  regulatory  approval is required.  In addition,  many
states require advance  notification,  and in the case of domiciliary  insurers,
require prior  approval of any  acquisition  of control  (generally  presumed to
exist  in the  case of a 10% or  more  ownership  of  voting  securities)  of an

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insurance company. Such laws, while intended to protect policyholder  interests,
may delay or prevent  certain  transactions  effecting a change in control of an
insurer.

     The nature and extent of regulations pertaining to the business the Company
writes  outside  of the U.S.  varies  considerably.  Regulations  cover  various
financial and  operational  areas,  including such matters as amount and type of
reserves,  currency,  policy  language,  repatriation  of assets and  compulsory
cessions of reinsurance.

     In the United States, the National  Association of Insurance  Commissioners
(NAIC) has adopted risk-based capital (RBC) requirements  applicable to property
and casualty insurers.  The RBC formula establishes a required statutory surplus
level for an insurer based on the risks inherent in its overall operations which
are  identified  as  underwriting  risk,  invested  asset risk,  credit risk and
off-balance  sheet risk. The law provides for regulatory  responses ranging from
requiring a plan of corrective  action to placing the insurer  under  regulatory
control for insurers whose surplus is below the prescribed RBC target.  HSBIIC's
adjusted  capital  significantly  exceeded the authorized  control level RBC for
1999.

     NAIC Insurance Regulatory  Information System (IRIS) ratios are part of the
solvency  impairment  early warning  system of the NAIC.  They consist of twelve
categories of financial data with defined acceptable ranges for each.  Companies
with ratios outside of the  acceptable  ranges are selected for closer review by
regulators. HSBIIC's IRIS ratios were within acceptable ranges for 1999 with the
exception of the change in surplus  ratio.  This ratio exceeded the normal range
for surplus  increases or decreases due to $152.7  million of dividends  paid by
HSBIIC to HSB Group,  Inc., net unrealized losses of $92.9 million primarily due
to a decrease in the carrying value of its insurance  subsidiaries and a decline
in the  value  of the  fixed  income  portfolio,  and  other  statutory  surplus
adjustments of $18.0 million, offset by $80.0 million of net income.

     The Company's insurance subsidiaries' operations are subject to examination
by  insurance  regulators  at regular  intervals.  The most  recently  concluded
insurance  examination for HSBIIC was conducted for the years 1995 - 1998 by the
Connecticut Insurance Department,  the HSBIIC's domestic regulator.  No material
findings or  adjustments  were included in the final report of the  examination.
Similar  regulatory  procedures  govern the  Company's  other U.S.  and  foreign
insurance subsidiaries.

     Insurance  guaranty fund laws exist in all states which subject insurers to
assessments  up to  prescribed  limits  for  certain  obligations  of  insolvent
insurers to their  policyholders  and  claimants.  The Company is  permitted  to
recover a portion of these  assessments  through  premium tax offsets and policy
surcharges.

     See Note 6 to the Consolidated  Financial  Statements  located in Item 8 of
Part II herein for additional information on statutory reporting.

     As discussed earlier,  the Company's  insureds receive,  in addition to the
insurance product,  inspections which meet state, county or municipally mandated
requirements.  In

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order for the Company's inspectors to perform these mandated  inspections,  they
must be commissioned. Commissioning is conducted by the National Board of Boiler
and Pressure Vessel Inspectors and the various state jurisdictional authorities.
The  majority of the  Company's  inspectors  are  commissioned,  and the Company
believes that it has an adequate  number of  commissioned  inspectors to conduct
its business affairs.

Engineering Services

     A  portion  of  the  Company's  engineering  services  revenue  comes  from
certifying that boilers and pressure vessels are being constructed  according to
standards adopted by the American Society of Mechanical  Engineers  (ASME).  The
commission  that authorizes  inspectors to conduct  insurance  inspections  also
authorizes  them to perform ASME Code  inspections.  The Company  performs other
certification  and  inspection   services  which  are  governed  by  established
standards, such as ISO 9000.

Other

     The Company and members of its professional and technical staff are subject
to a variety of other state, local and foreign licensing and permit requirements
and other laws generally applicable to corporations and businesses.

F.     INSURANCE OPERATIONS

Policies

     Pricing for the  Company's  insurance  policies is based upon the rates the
Company has developed for use with its various products.  In many  jurisdictions
in which the Company  does  business,  such rates,  as well as the policy  forms
themselves,  must be approved by the jurisdiction's  insurance regulator.  Rates
for the  Company's  products are  developed  based upon  estimated  claim costs,
expenses  related to the acquisition and servicing of the business,  engineering
expenses and a profit component.

     Coverages  for  unique  risks  are  judgment-rated,   taking  into  account
deductibles,  the  condition of the insured's  equipment,  loss  prevention  and
maintenance programs of the insured, and other factors.

     Policies are normally written for a term of one year. Most of the Company's
policies  provide  coverage for property  damage and  business  interruption  to
insured  property  (including  buildings and structures  under the Company's all
risk policy) resulting from covered perils. Property insured under the Company's
equipment breakdown policies includes such equipment as steam boilers, hot water
boilers,  pressure vessels,  refrigerating and air conditioning systems, motors,
generators,  compressors,  pumps,  engines,  fans, blowers, gear sets, turbines,
transformers, electrical switch gear, data processing and business equipment and
a wide variety of production and processing equipment.

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<PAGE>

     The  Company's  policy with  respect to the business it  underwrites  is to
generally  manage its risks to probable  maximum  losses (PMLs) not in excess of
$50 million and maximum foreseeable losses (MFLs) not in excess of $100 million.
The  Company's  current  reinsurance  program  generally  limits  the  Company's
retention  on any one  loss to $1  million,  with  potentially  higher  per risk
retentions  dependent on aggregate losses  experienced by the Company during the
reinsurance period.


Reinsurance Assumed

     The  predominant  practice in the insurance  industry is to combine several
types of insurance  coverages into one policy  referred to as a package  policy.
The  Company  has  reinsurance  agreements  with  approximately  200  multi-line
insurance companies to reach the small to mid-sized customers that purchase such
package  policies.  This  business  primarily  focuses  on small  and  mid-sized
commercial  customers and it offers a significant  opportunity for growth by the
Company because,  based on Company  estimates,  equipment  breakdown coverage is
only provided  currently to less than 15 percent of the over 10 million  insured
companies and institutions in the United States.

     Under the reinsurance  agreements,  the Company's  reinsured  companies may
include equipment  breakdown exposures in their multi-peril  policies,  and such
risks will be assumed by the Company  under the terms of the  agreements.  These
plans generally  provide that the Company will assume 100 percent of each boiler
and machinery risk, subject to the capacity specified in the agreement, and will
receive the entire equipment  breakdown  premium except for a ceding  commission
which will be retained by the reinsured  company for  commissions  to agents and
brokers, premium taxes and handling expenses.

     Although the Company  assumes the role of  reinsurer,  it continues to have
selling and underwriting  responsibilities  as well as involvement in inspecting
and claims  adjusting.  In effect,  the Company becomes the equipment  breakdown
insurance  department of the reinsured company and provides equipment  breakdown
underwriting  (that is, the  examination and evaluation of the risk based on its
engineering  judgments),  claims and engineering  services as if it were part of
that  organization.  Traditionally,  as part of the  underwriting  process,  the
Company retains the right to decline or restrict  coverage in the same manner as
it does for its own  business.  The  Company  also writes a  simplified  program
(referred  to as  ReSource)  under which a reinsured  company  agrees to include
equipment  breakdown  insurance  on a  portfolio  of accounts  meeting  specific
underwriting  guidelines and occupancy  parameters,  which the Company agrees to
reinsure for equipment breakdown losses.

     The  insurance  industry,  in  general,  continues  to undergo  significant
restructuring and consolidation. A considerable amount of merger and acquisition
activity  has  occurred  over the last  several  years  and,  with the advent of
financial services reform, more contraction is possible in the future. Depending
on the specific companies involved in these activities and other market factors,
the level of  reinsured  business  the Company  assumes in the future  under the
arrangements described above could be impacted.

                                       11
<PAGE>

     The Company also assumes reinsurance, primarily on a facultative basis, for
certain large risks and several insurance pools.

     The written premium  generated through  reinsurance  assumed totaled $363.3
million in 1999, representing  approximately 46.6 percent of the Company's gross
written premium.

Reinsurance Ceded

     As a property carrier, the Company is subject to losses that may arise from
catastrophic  events.  The Company  participates in various  facultative,  quota
share  and  excess  of  loss  reinsurance  agreements  to  limit  its  exposure,
particularly  to  catastrophic  losses  and  high  risk  lines,  and to  provide
additional  capacity to write business.  The Company evaluates its exposures and
reinsurance  needs  annually to  implement a program that  corresponds  with the
level of exposure it is willing to retain.  Under the Company's  current  treaty
reinsurance  program, its maximum retention on any one risk is generally limited
to $1  million,  with  potentially  higher  per  risk  retentions  depending  on
aggregate  losses  experienced  by the Company  during the  reinsurance  program
period.  In addition,  the Company uses facultative  reinsurance on certain high
exposure risks and has catastrophe  reinsurance for aggregate net losses greater
than $15 million.

     The  Company   utilizes   well-capitalized   domestic   and   international
reinsurance  companies and syndicates for its  reinsurance  program and monitors
their  financial  condition on an ongoing  basis.  For  reinsurers  that are not
accredited in their state of domicile, the Company typically requires collateral
for reinsurance  recoverable from such carriers.  In the unlikely event that the
Company's  reinsurers  are unable to meet their  obligations,  the Company would
continue  to have  primary  liability  to  policyholders  for  losses  incurred.
Uncollectible  reinsurance  recoverables  have not had,  and are not expected by
management to have in the future,  a material adverse effect on the consolidated
results of operations or financial  position of the Company.  The Company is not
party to any contracts  that do not comply with the risk transfer  provisions of
SFAS 113  "Accounting  and  Reporting  for  Reinsurance  of  Short-Duration  and
Long-Duration Contracts".

     For  additional  information  on  reinsurance,  see  Notes 10 and 11 to the
Consolidated Financial Statements located in Item 8 of Part II herein.

Pools and Joint Underwriting Associations

     With the exception of HSB  Industrial  Risk Insurers as described on page 2
and discussed below, the Company does not participate to any significant  degree
in voluntary  reinsurance pools of other insurance companies because the Company
generally  chooses to insure only those risks which it has  inspected or has the
right to inspect.  From time to time,  the Company is required to participate in
certain joint  underwriting  associations which provide insurance for particular
classes of insureds when insurance in the voluntary market is unavailable.

                                       12
<PAGE>

Participation in Industrial Risk Insurers

     Industrial  Risk  Insurers  (IRI)  is an  unincorporated,  voluntary  joint
underwriting  association  that  provides  property  insurance  for the class of
business known as "highly protected risks" for larger manufacturing,  processing
and industrial businesses which have invested in protection against loss through
the use of sprinklers and other means. As part of the arrangement with Employers
Reinsurance  Corporation  (ERC)  effective  January  1,  1998  (see "A.  GENERAL
DEVELOPMENT  OF  BUSINESS")  HSBIIC wrote the insurance in 1999 and 1998 for IRI
(which did  business  under the name HSB  Industrial  Risk  Insurers)  using its
insurance  licenses and provided  certain other services.  In addition,  through
various  quota  share   reinsurance   agreements   with  Employers   Reinsurance
Corporation and HSB IRI, HSBIIC  transferred its manufacturing  book of business
to HSB IRI and retained 85 percent of the equipment  breakdown  insurance and 15
percent of the property insurance of the combined insurance portfolio.

     In 1998 and 1999,  HSBIIC's  membership interest in HSB IRI was .5 percent.
In 1997 and 1996,  HSBIIC's  membership interest was 23.5 percent and 14 percent
respectively.  In 1996 and prior the shares were .5 percent.  As discussed above
(see "A. GENERAL DEVELOPMENT OF BUSINESS") the reinsurance  agreements effective
January 1, 1998 between HSBIIC, ERC and IRI were terminated with respect to loss
or liabilities  arising out of  occurrences  taking place on or after January 1,
2000. Net earned premium  attributable  to the agreements  with ERC and HSB IRI,
prior to the placement of reinsurance by the Company for its own account, was 11
percent of the Company's total consolidated revenues for 1999 and 15 percent for
1998. Ceding commissions,  which are netted out of expenses,  were 16 percent of
consolidated revenues for 1999 and 11 percent for 1998.

Claims and Claim Adjustment

     Essentially  all claims  under the  Company's  policies  of  insurance  are
handled by the  Company's  own claims  handlers.  Management  believes  that the
Company's  handlers  are  better  able  to  make  the  connection  between  loss
prevention and loss control.  The Company employs claims handlers in its various
offices  throughout the country,  Canada and the U.K. Claims  handlers,  in many
cases, are assigned to particular  customer groups in order to apply specialized
industry knowledge to the adjustment of claims.

     Claims  and  adjustment  expense  reserves  comprise  one  of  the  largest
liabilities of the Company.  Reserves are  established  to reflect  estimates of
total losses and loss  adjustment  expenses  that will  ultimately be paid under
direct  and  assumed  insurance  contracts.  Loss  reserves  include  claims and
adjustment  expenses on claims that have been reported but not settled and those
that have been incurred but not yet  reported.  Loss reserve  estimates  reflect
such variables as past loss  experience and inflation.  In addition,  due to the
nature of much of the  coverages,  complex  engineering  judgments are involved.
Subjective  judgments are an integral  component of the loss reserving  process,
due to the  nature  of  the  variables  involved.  Previously  established  loss
reserves are regularly adjusted as loss experience  develops and new information
becomes available.  Adjustments to previously established

                                       13
<PAGE>

reserves are  reflected in the  financial  statements in the period in which the
estimates are changed.

     The normal  turnaround time in paying small claims is less than six months.
The vast  majority  of claims  are  settled  within one year and very few remain
unsettled  two years after the loss occurs.  This pattern is somewhat  skewed in
terms of claim  dollars (as noted in the schedule on pages 17 - 18) as it is the
larger   claims   that  often   take   longer  to   adjust.   Compared   to  the
property/casualty  industry  as a whole,  the  Company  has a very  "short-tail"
settlement  period.  The Company's claims expenses are based on estimates of the
current  costs of  replacing  productive  capacity.  The Company does not employ
discounting  techniques  in  establishing   liabilities  for  claims  and  claim
adjustment expenses.

     For those relatively few claims involving litigation, the Company uses both
its in-house law department and outside counsel, depending on the issues, costs,
and staffing requirements.

    The following  table provides a  reconciliation  of the beginning and ending
reserves  for net  claims  and claim  adjustment  expenses  for the years  ended
December 31, 1999, 1998 and 1997.

                       RECONCILIATION OF NET LIABILITY FOR
                      CLAIMS AND CLAIM ADJUSTMENT EXPENSES

                                                    1999        1998       1997
                                                 -------------------------------
                                                           (in millions)
Net liability for claims and
Adjustment expenses at January 1,                   $169.7     $190.8     $177.8
Plus:
   Provision for claims and adjustment
     expenses occurring in the current year          165.4      164.0      209.5

   Increase (decrease) in estimated claims and
     adjustment expenses arising in prior years        0.4       10.9        8.4
                                                 -------------------------------
Total incurred claims and adjustment expenses       $165.8     $174.9     $217.9
                                                 -------------------------------
Less:
   Payment for claims arising in:
   Current year                                       80.0       84.2       82.3
   Prior years                                        99.4      111.8      122.6
                                                 -------------------------------
Total payments                                      $179.4     $196.0     $204.9
                                                 -------------------------------
Net liability for claims and adjustment
   expenses at December 31,                         $156.1     $169.7     $190.8
                                                 ===============================


     The loss ratio  improved  0.8  percentage  points in 1999 from  1998.  This
improvement was primarily attributable to increased use of reinsurance. The 1999
results were impacted by $10 million of domestic  weather-related events and the
Taiwan  earthquake as well as $10 million in losses related to medical equipment
insurance contracts.  These insurance contracts  represented less than 1 percent
of the Company's  revenues.  The loss ratio  decreased 0.2 percentage  points in
1998 as  compared  to 1997.  Loss  results in 1998 were

                                       14
<PAGE>


impacted by severe ice storms in Canada, as well as a few significant  losses in
our other  international  businesses.  Prior year loss development in 1999, 1998
and 1997 added 0.1, 2.8 and 1.7 percentage  points to the respective loss ratio.
The  components  of claims  and  adjustment  expenses,  net of  reinsurance  are
displayed above.

     The  following  table shows a  reconciliation  of the net  liability to the
gross  liability for claims and claim  adjustment  expenses based on reinsurance
recoverable on unpaid losses.


               RECONCILIATION OF NET LIABILITY TO GROSS LIABILITY
                    FOR CLAIMS AND CLAIM ADJUSTMENT EXPENSES

                                                     1999       1998      1997
                                                   -----------------------------
                                                          (in millions)

Net liability for claims and
 Adjustment expenses at December 31,                $156.1     $169.7    $190.8

Reinsurance recoverable on unpaid claims
 and adjustment expenses                             626.2      388.5      85.9
                                                   -----------------------------
Gross liability for claims and
  adjustment expenses at December 31,               $782.3     $558.2    $276.7
                                                   =============================

                                       15
<PAGE>


                RECONCILIATION OF GROSS LIABILITY FOR CLAIMS AND
                            CLAIM ADJUSTMENT EXPENSES

                                                     1999       1998      1997
                                                  ------------------------------
                                                          (in millions)
Gross liability for claims and claim adjustment
   expenses at January 1,                           $558.2     $276.7    $302.9

Plus:
   Provision for claims and claim adjustment
     expenses occurring in the current year          653.0      572.7     263.3

   Increase (decrease) in estimated claims and
     claim adjustment expenses arising in prior
     years                                            31.7       46.9      (0.2)
                                                  ------------------------------

   Total incurred claims and claim adjustment
     expenses                                       $684.7     $619.6    $263.1
                                                  ------------------------------
Less:
   Payment for claims arising in:
   Current year                                      164.9      141.0      90.6
   Prior years                                       295.7      197.1     198.7
                                                  ------------------------------
Total payments                                      $460.6     $338.1    $289.3
                                                  ------------------------------
Gross liability for claims and claim adjustment
   expenses at December 31,                         $782.3     $558.2    $276.7
                                                  ==============================

     The claim and claim expense  reserve  runoff table on the  following  pages
shows the amounts of the net  liability for 1989 through 1999 and the amounts of
the gross  liability for 1993 through 1999. The ten-year  development  table for
gross  liabilities  is being  constructed  progressively,  with 1993 as the base
year.  Within the tables for net and gross  liabilities,  each column  shows the
reserve  established at each calendar  year-end as well as cumulative totals for
claims payments and re-estimated liabilities for both that accident year and all
previous  years that  combined  make up that year-end  reserve.  The  redundancy
(deficiency) shown on a gross and net basis is a cumulative number for that year
and all previous years.

                                       16
<PAGE>


             RECONCILIATION OF BEGINNING AND ENDING CLAIMS RESERVES
                   AND EXHIBIT OF REDUNDANCIES (DEFICIENCIES)
                                  (in millions)

                         Net Reserves
<TABLE>
<CAPTION>
YEAR ENDED              1989      1990     1991      1992      1993       1994      1995      1996       1997       1998       1999
----------              ----      ----     ----      ----      ----        ---      ----      ----       ----       ----       ----
<S>                     <C>      <C>      <C>       <C>       <C>        <C>       <C>       <C>        <C>        <C>        <C>
Net Liability for
 Unpaid Claims and
 Claim Adjustment
 Expenses               $139.6   $115.7   $111.4    $132.8    $171.3     $161.3    $145.5    $177.8     $190.8     $169.7     $156.1

Cumulative Amount
 Paid as of:
End of Year                -        -        -         -         -          -         -         -          -          -          -
One Year Later            85.6     86.7     91.2      99.7     108.8     111.7      80.6     122.6      111.8       99.4         -
Two Years Later          104.2    109.7    115.5     134.0     152.1     126.9      99.8     146.3      144.8        -           -
Three Years Later        110.3    120.6    127.0     154.4     153.4     134.5     112.1     160.4        -          -           -
Four Years Later         112.5    127.6    137.7     151.1     157.8     144.1     119.2       -          -          -           -
Five Years Later         118.9    132.7    135.7     151.6     166.1     149.6       -         -          -          -           -
Six Years Later          123.0    131.4    135.7     160.0     166.5        -        -         -          -          -           -
Seven Years Later        121.4    130.9    136.7     160.4       -          -        -         -          -          -           -
Eight Years Later        120.8    131.6    136.9       -         -          -        -         -          -          -           -
Nine Years Later         121.5    131.8      -         -         -          -        -         -          -          -           -
Ten Years Later          121.7      -        -         -         -          -        -         -          -          -           -

Net Liability
 Reestimated as of:
End of Year              139.6    115.7    111.4     132.8     171.3      161.3     145.5     177.8      190.8      169.7      156.1
One Year Later           129.4    135.4    137.5     159.7     172.7      163.9     135.7     186.2      201.7      170.1        -
Two Years Later          127.4    138.0    139.7     166.6     173.9      157.3     128.8     187.5      188.8        -          -
Three Years Later        127.8    136.9    141.1     165.2     170.6      154.2     131.2     179.6        -          -          -
Four Years Later         125.0    137.9    142.0     163.0     169.2      155.3     128.0       -          -          -          -
Five Years Later         125.8    135.7    141.4     161.5     168.0      155.6       -         -          -          -          -
Six Years Later          125.5    136.0    141.3     163.4     168.5        -         -         -          -          -          -
Seven Years Later        125.8    135.8    139.6     163.8       -          -         -         -          -          -          -
Eight Years Later        125.5    134.5    140.2       -         -          -         -         -          -          -          -
Nine Years Later         124.2    134.8      -         -         -          -         -         -          -          -          -
Ten Years Later          124.5      -        -         -         -          -         -         -          -          -          -

Cumulative Redundancy
(Deficiency)              15.1    (19.1)   (28.8)    (31.0)      2.8        5.7      17.5      (1.8)       2.0       (0.4)       -
</TABLE>


     The net  deficiencies  in  1990,  1991 and 1992  were  attributable  to the
settlement of certain large losses for which the Company initially determined it
would not have  liability,  the settlement of some  outstanding  claims for more
than was originally  anticipated,  unusually late notice of loss provided by the
insured for several large losses,  and reserves  established for losses on which
the coverage was being  contested.  The 1995 net redundancy was  attributable to
favorable claim development in the Company's foreign operations.

                                       17
<PAGE>


                                 Gross Reserves

<TABLE>
<CAPTION>
YEAR ENDED                            1993       1994       1995        1996       1997      1998     1999
----------                            ----       ----       ----        ----       ----      ----     ----
<S>                                  <C>        <C>        <C>         <C>        <C>       <C>       <C>
Gross Liability for
 Unpaid Claims and Claim
 Adjustment Expenses                 $214.4     $199.4     $190.9      $302.9     $276.7    $558.2    782.3

Cumulative Amount Paid as of:
End of Year                             -          -          -           -          -         -
One Year Later                        144.2      135.2      108.9       198.8      197.1     295.7
Two Years Later                       189.9      164.1      158.0       284.2      242.3       -
Three Years Later                     200.2      201.1      212.4       301.2        -         -
Four Years Later                      229.8      251.7      218.5         -          -         -
Five Years Later                      277.0      256.2        -           -          -         -
Six Years Later                       277.6

Gross Liability Reestimated as of:
End of year                           214.4      199.4      190.9       302.9      276.7     558.2     782.3
One Year Later                        224.3      212.0      205.5       302.7      323.5     589.9
Two Years Later                       227.0      228.3      194.6       339.8      309.4       -
Three Years Later                     243.4      226.8      234.6       329.9        -         -
Four Years Later                      245.0      264.8      228.8         -          -         -
Five Years Later                      281.4      263.1        -           -          -         -
Six Years Later                       281.8

Cumulative Redundancy
(Deficiency)                          (67.4)     (63.6)    (37.8)       (26.9)     (32.6)    (31.7)
</TABLE>

     The adverse development primarily resulted from the decision rendered under
an  arbitration  proceeding  for a  claim  occurring  in  1992,  adverse  claims
experience in  international  operations  primarily  occurring in accident years
1997 and 1998, and the settlement of some large outstanding claims for more than
originally anticipated.

     The growth in the gross  liability for unpaid claims and claims  adjustment
expenses from 1995 forward reflects the Company's changing  participation in IRI
which was .5 percent through December 1, 1995, 14 percent effective  December 1,
1995, 23.5 percent effective December 1, 1996 as well as the HSB IRI arrangement
effective January 1, 1998. See page 2 for details.

G.     INVESTMENTS

     Income from the Company's investment portfolio contributes significantly to
earnings.  Each year there is a significant  net inflow of cash from  insurance,
engineering  services and investment  operations  into the Company's  investment
portfolio.  In addition,  cash flow is affected by the normal  maturity of fixed
income  investments,  financing  activities  and the purchase and sale of equity
securities.

                                         (in millions)
                               1999     1998     1997     1996     1995
                            -----------------------------------------------
Net Investment Income        $ 64.1    $ 64.2    $ 36.8    $ 32.3   $ 28.9
Realized Investment Gains      40.6      25.4      14.1      12.1      2.8
                            -----------------------------------------------
 Income from
  Investment Operations      $104.7    $ 89.6    $ 50.9    $ 44.4   $ 31.7


Net Unrealized Gains         $  4.7    $113.1    $ 95.3    $ 81.4   $ 65.4

Statutory Surplus (HSBIIC)   $428.8    $612.6    $550.8    $292.4   $280.6

                                       18
<PAGE>

     The  Company's  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
fluctuations  in income from  investment  operations from 1995 through 1997 were
largely driven by the amount of realized gains  generated in each of such years.
In 1995 the Company curtailed its realized gains in order to take advantage of a
strongly  performing market and to build statutory surplus.  In 1996 the Company
continued to build statutory surplus,  however,  high valuations towards the end
of the year  caused the  Company to realize  gains.  Realized  investment  gains
increased in 1997 over 1996 as the Company  managed its  portfolio to respond to
changing market  conditions and tax planning  opportunities,  and as a result of
calls of fixed income and convertible  securities.  Realized investment gains in
1998 were  significantly  impacted by call premiums on fixed income  instruments
and sales of certain  convertible  securities  and common  stocks in response to
market conditions.  Realized investment gains increased $15.2 million in 1999 as
a result of repositioning  the investment  portfolio due to market  fluctuations
and to keep the  absolute  amount of common  equities  from  exceeding a certain
targeted  percentage  of the  Company's  GAAP  capital.  During 1999 bond yields
continued  to move up,  the  impact  of which  has  caused  a  reduction  in the
Company's   unrealized  gains  with  respect  to  fixed  income   securities  by
approximately $64.5 million.

     Net  investment  income  increased 11.8 percent in 1996 due to an increased
level of investable  assets and to a lesser extent by dividend  increases on the
Company's  common stock  investments.  Net investment  income for 1997 increased
13.9 percent  compared to 1996.  The increase is  attributable  to calls of high
yielding  preferred stocks early in the year the proceeds of which were invested
in fully taxable  securities,  and more investable funds as the Company invested
the proceeds from its capital  securities  issued in the second half of 1997. In
1998 net investment income increased  significantly due to the investment of the
capital  securities  proceeds and from the January  1998 sales of the  Company's
interests in IRI and Radian  International  LLC. Net investment  income for 1999
remained flat compared to 1998.

     The significant  increase in statutory  surplus of HSBIIC for 1997 resulted
from a  contribution  to capital of $250 million of the $300 million in proceeds
received by the Company from the sale of its convertible  capital  securities to
Employers Reinsurance  Corporation on December 31, 1997. The increase in surplus
for 1998 resulted  from the January 1998 sales of HSBIIC's  interests in IRI and
Radian  International  LLC. The decrease in surplus for 1999 primarily  resulted
from  $152.7  million  of  dividends  paid by HSBIIC  to HSB  Group,  Inc.,  net
unrealized  losses of $92.9 million  primarily due to a decrease in the carrying
value of its  insurance  subsidiaries  and a  decline  in the value of the fixed
income  portfolio,  and other  statutory  surplus  adjustments of $18.0 million,
offset by $80.0 million of net income.

     In December 1996, HSBIIC entered into three "zero cost collar" contracts to
mitigate the effects of market risk on its U.S.  common stock  portfolio  (which
for management
                                       19
<PAGE>

purposes  included  certain  convertible  preferreds).  In the fourth quarter of
1997,  HSBIIC  settled all of its  outstanding  contracts  resulting in realized
losses  of  $30.7  million  for  the  year,  all of  which  were  offset  by and
represented portfolio  appreciation and returns that were realized. In 1997, the
Company's U.S. common stock portfolio  experienced a total return of $57 million
(which included price  appreciation of approximately $54 million) since December
31, 1996,  and had a price movement  correlation  with the S&P 500 Index well in
excess of 80 percent.

      The Company's  investment  portfolio  consists of high-grade  domestic and
foreign  investments.  Excluding short-term  investments,  HSB's investments are
primarily  comprised of publicly traded,  highly liquid securities.  At December
31, 1999, the Company had  approximately  52.9 percent of its invested assets in
fixed  maturities  as compared to 53.6 percent at year-end  1998.  In the period
1991-1996 the Company gradually reduced its investments in common stocks as part
of its overall capital management strategy. At year-end 1999, the carrying value
of the equity securities  portfolio  represented 41.3 percent of invested assets
compared to 40.6 percent at year-end 1998.

     The Company  does not engage in  cash-flow  underwriting;  it seeks to have
underwriting  profit  each  year.  None  of the  Company's  claim  reserves  are
discounted as most claims settle, on average,  within one year.  Therefore,  the
Company  does not use  duration  measurements  in  managing  its  interest  rate
exposure.  Instead,  the Company  manages its  portfolio  on a segmented  basis.
Approximately  $300  million  (cost  basis)  of the  Company's  invested  assets
(comprised of perpetual and redeemable preferred stocks and corporate bonds) are
utilized to provide interest coverage and potential principal repayment over the
life of the  convertible  capital  securities  issued on December 31, 1997.  The
remainder  of  the  Company's  invested  assets,  exclusive  of  cash  and  cash
equivalents,  short-term  securities  and common  stocks are invested to provide
income for the  future.  There are three  portfolio  areas with quite  different
maturity/call   characteristics.   The   portfolio  of   traditional   bonds  of
approximately $245 million has an average life of 22 years, with over 50 percent
of that  portfolio  callable in less than ten years.  The sinking fund preferred
portfolio  of $43 million,  based on expected  calls,  has an estimated  life of
three years. The $52 million adjustable rate preferred stock portfolio, based on
expected calls, has an estimated life of five years.

     The Company believes the expected cash flows from the Company's operations,
maturities  and calls are  adequate  to enable  the  Company  to  respond to the
previously  discussed  parameters  that  impact  its  investment  strategy.  See
"Investment   Operations"  in  the  Management's   Discussion  and  Analysis  of
Consolidated Financial Condition and Results of Operations located in Item 7 and
Note 7 to  Consolidated  Financial  Statements  in Item 8 of Part II herein  for
additional information.

                                       20
<PAGE>

     The following  table  summarizes  the  investment  results of the Company's
investment portfolio:



<TABLE>
<CAPTION>


                                               Annualized Rate              Investment
                             Net Invest-       of Return (2)            Gains (Losses) (3)
        Cash and             ment Income     ------------------------------------------------
        Invested               Less          Before     After
        Assets, Less         Interest        Income     Income                     Change in
        Borrowed Money       Expense (1)     Taxes      Taxes         Realized     Unrealized
---------------------------------------------------------------------------------------------
                 (in millions)                                            (in millions)
<S>     <C>                  <C>             <C>          <C>           <C>        <C>

1999    $   931.5            $61.8           6.4%         5.0%          $40.6      $(108.4)
1998      1,048.7             63.4           6.6**        5.1**          25.4         17.8
1997        629.2*            35.5           6.1          5.1            14.1         13.9
</TABLE>

* Does not include $300 million in proceeds from the sale of convertible capital
securities on December 31, 1997.

** For the  calculation of Annualized  Rate of Return "Cash and Invested  Assets
Less Borrowed  Money"  includes the $300 million in proceeds in the beginning of
the year.

(1) Net investment income excludes  realized  investment gains and is reduced by
investment expenses, but is before the deduction for income taxes.

(2) The rates of return on  investments  shown  above  have been  determined  in
accordance  with rules  prescribed  by the  National  Association  of  Insurance
Commissioners. These rates have been determined by the following formula:

                                  2I
                                  --
                               A + B - I

I is equal to net investment income, before taxes, earned on investment assets.

A+B is equal to the sum of the beginning and end of the year amounts shown under
"Cash and Invested Assets,  Less Borrowed Money".  The after tax rates of return
are computed in the same manner,  but net investment income is reduced by income
taxes.

(3) Realized and unrealized investment gains (losses) are before income taxes.

H.     EMPLOYEES

     At year-end 1999, the Company, including its wholly-owned subsidiaries, had
2,471 full and part-time employees.  Management believes that its relations with
its employees are satisfactory.

                                       21
<PAGE>

I.     FORWARD-LOOKING STATEMENTS

     For a summary of factors that may  materially  affect the Company's  future
business,  see  "Forward-Looking  Statements"  in  Management's  Discussion  and
Analysis of Consolidated  Financial  Condition and Results of Operations in Item
7.

Item 2.  Properties.

     The  Hartford  Steam  Boiler   Inspection  and  Insurance   Company  leases
approximately  221,516  square  feet for its home  office at One  State  Street,
Hartford,  Connecticut  under a long-term  capital  lease with One State  Street
Limited Partnership. In addition to its home office facility, the Company leases
facilities for its branch offices and subsidiaries  throughout the United States
and  Canada,  and in a small  number of other  foreign  locations.  The  Company
considers the office facilities and other operating resources to be suitable and
adequate for its current and anticipated level of operations.

     See Notes 8 and 9 to Consolidated Financial Statements located in Item 8 of
Part II herein for additional information.

Item 3.  Legal Proceedings.

     The  Company is involved  in various  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.

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

     None.

Item 4(a).  Executive Officers of the Registrant.

     All executive officers are elected by the Board of Directors to hold office
until the next Annual Meeting of Shareholders.  An officer may be removed at any
time by the Board of  Directors.  Gordon W. Kreh  retired  from his  position as
President and Chief Executive Officer effective December 31, 1999.

Richard H. Booth, 52, Chairman since 3/00;  President,  Chief Executive  Officer
and  Director  since 1/00;  Director  since 7/96;  Executive  Vice  President of
Phoenix Home Life Mutual  Insurance  Company 10/94 - 12/99;  director of Phoenix
Home Life Mutual Insurance Company 6/98 - 12/99.

                                       22
<PAGE>

Saul L. Basch, 53, Senior Vice President,  Treasurer and Chief Financial Officer
since 10/95;  Partner,  Coopers & Lybrand L.L.P.  9/73 - 10/95, most recently as
Partner-in-Charge of Coopers & Lybrand's New York Insurance Industry Practice.

Michael L. Downs,  50, Senior Vice  President  since 2/94;  Managing  Director -
Engineering  Insurance Co., Ltd. 1/91 - 2/94; Second Vice President 7/87 - 1/91;
Assistant Vice President 2/85 - 7/87; Assistant Secretary 4/80 - 2/85.

John J. Kelley,  54, Senior Vice President since 2/94;  Corporate  Secretary and
Special  Assistant to the President  5/87 - 2/94;  Assistant  Vice President and
Special Assistant to the President 9/83 - 5/87;  Assistant Vice President 9/79 -
9/83; Assistant Secretary 4/77 - 9/79.

William A. Kerr,  62,  Senior Vice  President  -  Engineering  since 9/95;  Vice
President and General Manager,  Pratt & Whitney Turbo Power and Marine Division,
United  Technologies  Corporation  8/95 - 9/95;  Vice  President of  Aftermarket
Operations, Pratt & Whitney 4/92 - 8/95.

Normand Mercier, 54, Senior Vice President - Commercial Risks - Operations since
9/98; Senior Vice President, HSBIIC since 4/98; President, The Boiler Inspection
and Insurance Company 1/90-4/98.

R. Kevin Price,  53, Senior Vice President and Corporate  Secretary  since 2/94;
Second Vice President 4/89 - 2/94; Assistant Vice President 1/84 - 4/89.

William Stockdale,  54, Senior Vice President since 9/95;  Managing Director and
Chief Executive Officer of HSB Engineering Insurance Ltd., London, since 9/94.

Robert C. Walker,  56, Senior Vice  President-Claims  and General  Counsel since
1/95; Senior Vice President - Claims 3/94 - 1/95.


                                     PART II

Item 5.  Market for Registrant's Common Equity and Related
         Stockholder Matters.

     The Company's  common stock is traded on the New York Stock  Exchange under
the symbol HSB.  As of  February  15,  2000,  the  Company had 4,826  holders of
record.

     Dividends  paid by The  Hartford  Steam  Boiler  Inspection  and  Insurance
Company,  HSB  Group's  principal  subsidiary,  are  limited by state  insurance
regulations.  Approval from the Connecticut  Insurance  Commissioner is required
for dividend  distributions  within a twelve-month period which would exceed the
greater of (i) 10 percent of an insurer's  statutory  surplus or (ii) net income
calculated as of the December 31st last preceding.  Regulatory  approval was not
required  for the  payment  of 1999  dividends.  Approximately  $80  million  of
HSBIIC's  statutory  surplus is available for distribution to HSB Group, Inc. in
2000 without prior regulatory approval.

                                       23
<PAGE>

     Quarterly  dividends  declared  for the 1999 and 1998 fiscal  years were as
follows:

                 First     Second     Third       Fourth         Year
                ------    ------     -----        ------         ----
1999            $.42       $.42       $.44        $.44           $1.72
1998            $.40       $.40       $.42        $.42           $1.64

     Quarterly  market prices for the Company's common stock were as follows for
the two most recent years:

                First      Second     Third       Fourth         Year
                ------     ------     -----       ------         ----
1999 High       $41.31     $41.88     $41.94      $38.38         $41.94
1999 Low        $35.50     $35.50     $34.19      $31.88         $31.88

1998 High       $44.92     $53.50     $57.63      $42.00         $57.63
1998 Low        $36.45     $43.17     $40.38      $36.00         $36.00

                                       24
<PAGE>



Item 6.  Selected Financial Data.
(in millions, except per share amounts)
<TABLE>
<CAPTION>

                                                     1999          1998           1997           1996         1995
--------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>           <C>           <C>              <C>           <C>

Summary of Consolidated Statements
 of Operations
   Revenues:
      Gross earned premiums                       $  823.8      $  770.5      $   609.3        $  556.5      $455.0
      Ceded premiums                                 441.9         374.4          118.1           107.9        65.9
                                                  ------------------------------------------------------------------------------
      Insurance premiums                             381.9         396.1          491.2           448.6       389.1
      Engineering services                           119.6          93.5           61.3            55.8        49.9
      Income from investment operations              104.7          89.6           50.9            44.4        31.7
                                                  ------------------------------------------------------------------------------
         Total revenues (1)                       $  606.2      $  579.2      $   603.4        $  548.8      $470.7
                                                  ------------------------------------------------------------------------------
   Income from continuing operations              $   72.8      $  104.1      $    66.3        $   54.6      $ 52.7
   Income from continuing operations
     per common share - basic                     $    2.51     $    3.55     $     2.21       $    1.81     $  1.72
   Income from continuing operations
     per common share - assuming dilution              2.50          3.35           2.20            1.81        1.72
   Dividends declared per common share                 1.72          1.64           1.56            1.52        1.49
--------------------------------------------------------------------------------------------------------------------------------
Summary of Consolidated Statements
 of Financial Position
   Total assets                                   $2,263.2      $2,138.6      $ 1,537.2        $1,112.3      $951.9
   Long-term borrowings and
      capital lease obligations                       52.9          53.0           53.0            53.0        53.4
   Convertible redeemable preferred stock             --            --             --              20.0        --
   Company obligated mandatorily
      Redeemable capital securities                  409.0         408.9          408.9            --          --
   Shareholders' equity:
      Common                                         376.5         419.3          345.3           345.6       341.1
      Per common share                                12.95         14.53          11.75           11.50       11.21
      Return on average equity                        18.3%         35.2%(2)       19.1%           15.6%       19.5%
   Stock price per share:
      High                                        $   41.94     $   57.63     $    37.67       $   34.83     $ 33.50
      Low                                             31.88         36.00          29.58           28.58       26.50
      Close                                           33.81         41.06          36.80           30.92       33.33
   Common shares outstanding
    at end of year (3)                                29.1          28.9           29.4            30.0        30.5
---------------------------------------------------------------------------------------------------------------------------------
Insurance
   Underwriting gain                              $   21.3      $   41.2      $    39.8        $   21.8      $ 34.2
      Loss ratio                                      43.4%         44.2%          44.4%           45.6%       39.8%
      Expense ratio                                   51.0%         45.4%          47.3%           49.1%       50.9%
                                                  -------------------------------------------------------------------------------
      Combined ratio                                  94.4%         89.6%          91.7%           94.7%       90.7%
---------------------------------------------------------------------------------------------------------------------------------
Engineering Services
   Operating gain                                 $    3.0      $    7.3      $     4.3        $    7.3      $  6.7
   Engineering services margin                         2.5%          7.8%           7.1%           13.2%       13.3%
Investments
   Net investment income                          $   64.1      $   64.2      $    36.8        $   32.3      $ 28.9
   Realized investment gains                          40.6          25.4           14.1            12.1         2.8
                                                  -------------------------------------------------------------------------------
      Income from investment operations           $  104.7      $   89.6      $    50.9        $   44.4      $ 31.7
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Excludes  revenues from investments  accounted for under the equity method.
(2) Includes gain on sale of IRI and Radian LLC.
(3) Reflects the repurchase of approximately  0.1, 1.2, 1.5, 0.4 and 0.2 million
shares in 1999, 1998, 1997, 1996 and 1995, respectively.

                                       25
<PAGE>



Item 7. Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations

(dollar amounts in millions, except per share amounts)

Summary of Results of Operations


Consolidated Overview

For the years ended December 31,             1999       1998       1997
------------------------------------------------------------------------
Revenues:

Gross earned premiums                     $ 823.8    $ 770.5    $ 609.3
Ceded premiums                              441.9      374.4      118.1
                                         -------------------------------
Insurance premiums                          381.9      396.1      491.2

Engineering services                        119.6       93.5       61.3

Net investment income                        64.1       64.2       36.8

Realized investment gains                    40.6       25.4       14.1
                                         -------------------------------

Total revenues                            $ 606.2    $ 579.2    $ 603.4

Income from continuing
   operations (excluding the
   gain on sale of IRI)                   $  72.8    $  80.3    $  66.3

Gain on sale of IRI (after-tax)                --       23.8         --
                                         -------------------------------

Income from continuing
   operations                                72.8      104.1       66.3

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

Net income                                $  72.8    $ 134.4    $  66.3
                                         -------------------------------

Earnings per share:
Income from continuing
   operations (excluding
   the gain on sale of IRI)
      Assuming dilution                   $   2.50   $   2.67   $   2.20

Income from continuing
   operations:
      Basic                               $   2.51   $   3.55   $   2.21
      Assuming dilution                       2.50       3.35       2.20

Net income:
      Basic                               $   2.51   $   4.59   $   2.21
      Assuming dilution                       2.50       4.21       2.20
------------------------------------------------------------------------


The table above  presents  consolidated  results of HSB Group,  Inc. (HSB or the
Company).


Overview of Results of Operations

Income from continuing  operations for 1999,  excluding the 1998 gain on sale of
Industrial  Risk Insurers (IRI) discussed  below,  decreased $7.5 million or 9.3
percent  from 1998.  The decline in  after-tax  earnings  was  primarily  due to
reduced  underwriting  profits as well as a decline in the engineering  services
operating gain. The impact of these items was partially  offset by higher income
from investment  operations,  virtually all of which resulted from increased net
realized  gains  in  1999.  Excluding  the  gain on sale  of  IRI,  income  from
continuing  operations per common share on a diluted basis decreased 6.4 percent
in 1999 as compared to 1998.

                                       26
<PAGE>

In  comparison  to 1998,  the major  contributors  to the  reduction  in pre-tax
earnings (exclusive of realized gains) were: increased information systems costs
(including Year 2000 remediation costs) of $8 million;  reduced profits from HSB
Industrial Risk Insurers of $7 million;  change in management and other expenses
related to consolidation and relocation of certain businesses of $5 million; and
$3 million of reduced margins in certain engineering businesses.

Net income for 1998 included  after-tax  gains on the sale of HSB's  interest in
IRI of $23.8 million and Radian International LLC (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
Company's after-tax earnings,  excluding the after-tax gains on sales of IRI and
Radian LLC,  increased  21.1 percent in 1998 compared with 1997 due to increased
underwriting  profits,  improved  engineering  results  and higher net  realized
gains. Income from continuing operations, excluding the gain on sale of IRI, per
common share on a diluted basis increased 21.4 percent in 1998 from 1997.

Total  revenues grew 4.7 percent in 1999 as compared to a decline of 4.0 percent
in 1998. The increase in 1999 was attributable to growth in engineering services
as well as strong realized  investment gains offset by a reduction in net earned
premiums.  Gross  earned  premiums  grew 6.9 percent in 1999 and 26.5 percent in
1998. In 1999, much of this increase was attributable to the continued growth in
our commercial book of business as well as a full year's earnings related to the
1998 acquisition of the Kemper book noted in the Other  Developments  section of
this Management's Discussion and Analysis (MD&A).

Ceded premiums increased 18.0 and 217.0 percent in 1999 and 1998,  respectively,
resulting  from  the  HSB  Industrial  Risk  Insurers  arrangement  and  related
reinsurance  with  Employers  Reinsurance  Corporation  (ERC),  as  well  as the
increasing  effect  of  the  Company's   reinsurance   programs  which  utilized
significantly  more quota share reinsurance on certain of our books of business.
The  Company   anticipates  that  quota  share  reinsurance  will  not  have  as
significant a role as 2000 progresses.

The combined  ratio for the Company  increased to 94.4 percent in 1999 from 89.6
percent in 1998. In 1997,  the combined  ratio was 91.7 percent.  The 1999 ratio
was adversely impacted by the increase in the expense ratio from 45.4 percent in
1998 to 51.0 percent in 1999.

Engineering  services revenue increased 27.9 percent in 1999 and 52.5 percent in
1998.  The growth in both 1999 and 1998 was led by additional  revenues from our
recent acquisitions. Operating margins decreased to 2.5 percent from 7.8 percent
in 1998. The investment of operating funds to develop new products and establish
start-up  operations,  and the consolidation of certain  businesses coupled with
reduced volume and profits in certain of our traditional  engineering businesses
caused margins to contract from 1998.

Income from investment  operations increased 16.9 percent in 1999 primarily as a
result of increased realized  investment gains from repositioning the investment
portfolio due to market  fluctuations  and to keep the absolute amount of common
equities from exceeding a certain targeted percentage of the Company's Generally
Accepted Accounting  Principles (GAAP) capital.  Net investment income grew 74.5
percent in 1998 from the investment of proceeds from the sales of IRI and Radian
LLC and the issuance of capital securities in the second half of 1997.

The effective tax rate on income from continuing operations before distributions
on capital  securities  for 1999 was 28.2  percent  compared to 29.6 percent and
26.8 percent for 1998 and 1997, respectively. Tax rate fluctuations occur as the
levels of  underwriting  and  engineering  services  results and realized  gains
change  the  mix of  pre-tax  income  between  fully  taxable  earnings  and tax
preferred  earnings.  Various tax credits  (primarily  foreign tax credits) also
impact  the  effective  rate.  The  Company  continues  to manage its use of tax
advantageous investments in an attempt to maximize after-tax earnings.

                                       27
<PAGE>

HSB Industrial Risk Insurers

The reinsurance  agreements effective January 1, 1998 between The Hartford Steam
Boiler  Inspection  and Insurance  Company  (HSBIIC),  ERC and IRI, as discussed
below,  were  terminated  with  respect to loss or  liabilities  arising  out of
occurrences  taking place on or after January 1, 2000. As a result,  HSBIIC will
no longer retain 85 percent of the equipment  breakdown insurance and 15 percent
of the property insurance of the combined insurance  portfolio for risks arising
on or after January 1, 2000. The joint  underwriting  association that was known
as HSB  Industrial  Risk  Insurers  will,  from  January  1,  2000,  be known as
Industrial Risk Insurers (IRI).

Concurrent with the termination of the reinsurance  agreements,  HSBIIC, ERC and
IRI replaced the operating  agreement  dated January 1, 1998. The new agreement,
effective  January 1, 2000,  calls for HSBIIC to retain 0.5  percent  membership
share in IRI with the ability to increase  its total share up to a maximum of 10
percent,  at no cost,  at HSBIIC's  option.  In  addition,  the  agreement  also
establishes an arrangement for HSB to perform  equipment  breakdown  engineering
and inspection services for clients of IRI and provides for a fixed fronting fee
in the event  that IRI  continues  to use  HSBIIC's  licenses.  HSBIIC  received
payments of $27 million in December  1999 related to the partial  settlement  of
unearned  reinsurance  premiums and ceding  commissions  due to HSBIIC under the
prior  agreement.  Final  settlement  is expected to occur in the second half of
2000.

On January 6, 1998,  HSBIIC sold its interest in IRI to ERC in accordance with a
previously   announced  purchase  and  sale  agreement  between  ERC  and  IRI's
twenty-three  member insurers.  HSBIIC received gross proceeds of $49.1 million,
prior to transaction  costs,  for its 23.5 percent share in IRI. The gain on the
sale of IRI was $36.6 million pre-tax and $23.8 million  after-tax.  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.

IRI  is  an  unincorporated,  voluntary  joint  underwriting  association  which
provides property  insurance for the class of business known as Highly Protected
Risks (HPR) for larger  manufacturing,  processing  and  industrial  businesses,
which have invested in protection against loss through the use of sprinklers and
other means.  IRI primarily  writes policies on a syndicate basis that specifies
to the  insured  the  percentage  share of risk  accepted  by each member of the
association.  Each member  company,  therefore,  operates as a direct insurer or
reinsurer on such policies and participates in the premiums and losses generated
thereunder in proportion to its membership interest.  In 1997 and 1996, HSBIIC's
membership shares were 23.5 and 14 percent  respectively;  in 1995 and prior the
shares were 0.5 percent.

In essence,  IRI facilitates the  proportional  sharing of risk under one policy
where  each  member  is  essentially  considered  to be the  direct  writer  for
reporting, premium tax and other regulatory purposes. Liability on such policies
is several and not joint, and therefore,  members are not responsible for policy
liabilities of the other  members.  An increased  participation  does not expose
HSBIIC to the effect of adverse loss development on claims incurred prior to the
effective date of the increase;  conversely a decrease in participation does not
release HSBIIC from the effect of adverse development.

Contemporaneous  with the close of the 1998 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 was renamed HSB Industrial Risk Insurers.  In 1999
and 1998,  HSBIIC wrote the business for HSB Industrial  Risk Insurers using its
insurance  licenses and provided  certain other 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  in 1998 and  retained  85 percent  of the  equipment
breakdown  insurance  and 15 percent of the  property  insurance of the combined
insurance  portfolio.  This agreement was the largest contributing factor in the
growth of both gross earned premium and ceded premium. As a result, in both 1999
and 1998 transactions arising from this agreement comprise a significant

                                       28
<PAGE>

portion  of  the  reinsurance  asset,  unearned  insurance  premiums  and  ceded
reinsurance  payables  reflected  in the  Consolidated  Statements  of Financial
Position.

In  contemplation  of HSB's  expanded role in HSB Industrial  Risk Insurers,  on
December 31, 1997 a business trust formed by HSB sold $300 million of 20 year, 7
percent  Convertible  Capital Securities in a private placement to ERC (see note
13). The  Convertible  Capital  Securities  are  convertible  into shares of HSB
common stock, at any time, subject to regulatory approval, at a conversion price
of $56.67 per share. $250 million of the proceeds were contributed to HSBIIC and
$50 million were retained by HSB.


Discontinued Operations

On January 2, 1998,  HSBIIC  exercised its option to put its 40 percent share in
Radian LLC to 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 worldwide.  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 to
Radian LLC. The results of Radian LLC were classified as discontinued operations
following  ratification in July 1997 by HSB's Board of Directors of management's
decision to exercise its put. The after-tax gain of $30.3 million  recognized in
1998 is net of deferred losses  previously noted.  Prior to July 1997,  HSBIIC's
share of the joint venture's results was recorded as equity in Radian.


Recent Accounting Developments

The  Accounting  Standards  Executive  Committee  of the  American  Institute of
Certified Public Accountants  (AcSEC) issued three Statements of Position (SOPs)
that 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  already  in
compliance with these SOPs, the implementation of these statements 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  Standards  (SFAS) No. 133,  "Accounting for Derivative
Instruments and Hedging Activities"  subsequently  amended by SFAS No. 137. 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. This statement is effective for the Company for
the first quarter of 2001. Based on the Company's  current  investment  policies
and practices,  the Company  anticipates  that the adoption of the provisions of
SFAS No.  133 will not have a  significant  effect  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  became  effective  for  financial
statements for fiscal years beginning after June 15, 1999. Currently the Company
is not  party  to any  contracts  that 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.

                                       29
<PAGE>


Other Developments

In July 1999, HSBIIC acquired Structural Integrity Associates, Inc. (Structural)
based in San Jose,  California.  Structural  is an  engineering  consulting  and
inspection services firm specializing in the analysis, control and prevention of
structural  and  equipment  failures.  It offers a full array of services,  from
inspection and condition assessment,  to monitoring and remaining life analysis,
repair,  remediation  and  total  risk  management  of  critical  equipment  and
structures.

HSBIIC completed an acquisition of the monoline boiler and machinery business of
Kemper  Insurance  Companies  (Kemper) and  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,  effective  July 1,
1998.  The two  companies  also  completed an  agreement  for HSBIIC to reinsure
boiler and machinery  coverage  written as part of Kemper's  commercial  package
policies.

On April 21, 1998, the Board of Directors  approved a three-for-two  stock split
for shares of record on May 1, 1998. The additional  shares were  distributed on
May 22,  1998.  In  accordance  with SFAS No.  128,  "Earnings  per  Share," all
earnings per share presentations have been adjusted to reflect the impact of the
stock split, including retroactive restatement of prior periods.

In April 1998,  HSB acquired  Solomon  Associates,  Inc.  (SAI) based in Dallas,
Texas.  SAI  is  an  engineering   management   consulting  firm  that  provides
comparative performance  benchmarking consulting to the refining,  petrochemical
and power  generation  industries.  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.


Insurance Operations

For the years ended December 31,        1999         1998        1997
------------------------------------------------------------------------
Gross earned premiums               $  823.8      $ 770.5      $609.3
Ceded premiums                         441.9        374.4       118.1
                                    ------------------------------------
Insurance premiums                  $  381.9      $ 396.1      $491.2

Claims and adjustment
   expenses                            165.8        174.9       217.9
Underwriting, acquisition
   and other expenses                  194.8        180.0       233.5
                                    ------------------------------------
Underwriting gain                   $   21.3      $  41.2      $ 39.8

Loss ratio                              43.4%        44.2%       44.4%
Expense ratio                           51.0%        45.4%       47.3%
Combined ratio                          94.4%        89.6%       91.7%
------------------------------------------------------------------------

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

Gross earned  premiums in 1999  increased  6.9 percent  over 1998.  Much of this
growth  was  attributable  to the  integration  of certain  commercial  books of
business acquired in mid-1998;  growth in our client company business and a full
year of writing HSB Industrial  Risk Insurers  policies  utilizing the Company's
licenses.  In 1998, a portion of HSB Industrial Risk Insurers  policies in-force
were written/renewed  utilizing the licenses of other insurers. The increases in
gross  premiums  were offset by premium  declines in certain  operations  within
Global  Special Risks.  In some areas of the Company's  direct  businesses,  the
market  continued to experience  price erosion in 1999 as the number of insurers
offering  capacity  expanded.  HSB

                                       30
<PAGE>

will not write business at rates that do not provide  sufficient  opportunity to
earn a profit. As a result, the Company  anticipates that premiums in the Global
Special Risks areas may continue to experience  revenue  declines.  In addition,
the new January 1, 2000  agreement  with IRI,  previously  discussed,  will also
result in a decrease in gross earned  premiums.  In 1998,  gross earned premiums
increased  26.5 percent  primarily as a result of HSB  Industrial  Risk Insurers
($155.4  million)  as  well  as the  addition  of the  Kemper  portfolio  to our
commercial business.

Domestically,  exclusive of HSB Industrial Risk Insurers,  gross earned premiums
increased  $34.8  million or 9.3 percent in 1999 due to the  integration  of the
Kemper  portfolio  and  growth in our  client  company  business.  Gross  earned
premiums  representing  coverage  outside the U.S.,  exclusive of HSB Industrial
Risk Insurers,  decreased 12.5 percent to $116.8 from $133.5 million in 1998 due
to price erosion and maintenance of strict underwriting standards.

In 1998, domestic gross earned premiums,  excluding the impact of HSB Industrial
Risk Insurers, remained flat as a result of the combination of growth in written
premiums from our client  companies offset by reductions in our domestic special
risk premiums.  Gross earned premiums  representing  coverage  outside the U.S.,
exclusive  of HSB  Industrial  Risk  Insurers,  increased  5.4 percent to $133.5
million.

The  insurance   industry,   in  general,   continues  to  undergo   significant
restructuring and consolidation.  Considerable  merger and acquisition  activity
has  occurred  over the last  several  years and,  with the advent of  financial
services reform,  more  contraction is possible in the future.  Depending on the
specific  companies  involved in these activities and other market factors,  the
level of reinsured business the Company assumes in the future could be impacted.
HSB is  positioned  to benefit from these  changes over the long term due to its
strong market  position and reinsurance  relationships  with  approximately  200
multi-line carriers;  while over the shorter term, there is both opportunity and
challenge.

The  increase  in ceded  premiums  of 18.0 and 217.0  percent  in 1999 and 1998,
respectively,  was primarily due to the HSB Industrial Risk Insurers arrangement
and  related  reinsurance  with  ERC,  as well as the  increasing  effect of the
Company's  reinsurance  programs  which over the past three years have  utilized
significantly  more quota share reinsurance on certain of our books of business.
Due to  changing  reinsurance  market  conditions  and the impact of the new IRI
agreement effective January 1, 2000, the Company is in the process of evaluating
and redesigning its current  reinsurance  programs that will place less reliance
on quota share reinsurance.  The Company anticipates this will lead to a reduced
level of ceded premiums.

Due to the new agreement with IRI,  coupled with a decline in our Global Special
Risks segment,  gross earned premiums are expected to decline in 2000.  However,
anticipated  changes in the  utilization of reinsurance may cause ceded premiums
to decline at a higher rate than gross earned premiums for 2000.

The Company participates in various facultative,  quota share and excess of loss
reinsurance  agreements  to limit its  exposure,  particularly  to  catastrophic
losses and high-risk lines and to provide additional capacity to write business.
The Company  evaluates its exposures and reinsurance needs annually to implement
a program that  corresponds  with the level of exposure it is willing to retain.
Because  the  Company  has primary  responsibility  to its  insureds,  a careful
evaluation of the financial strength of those reinsurers it cedes business to is
performed.  HSB's  reinsurance  costs  continue to be impacted by its prior loss
experience and business growth, as well as the design of its program.

                                       31
<PAGE>


For the years ended December 31,       1999         1998         1997
------------------------------------------------------------------------
Provision for claims and
   adjustment expenses
   occurring in the
   current year                    $  165.4     $  164.0     $  209.5
Increase in estimated
   claims and adjustment
   expenses arising in
   prior years                          0.4         10.9          8.4
                                   -------------------------------------
Total incurred claims and
   adjustment expenses*            $  165.8     $  174.9     $  217.9
Loss ratio                             43.4%        44.2%        44.4%
------------------------------------------------------------------------
* Includes approximately $2.0, $5.0 and $3.3 million of subrogation  recoveries,
respectively.

Claims and adjustment  expense reserves comprise one of the largest  liabilities
on the Company's  Consolidated  Statements of Financial  Position.  Reserves are
established  to  record  the  Company's  estimates  of  total  losses  and  loss
adjustment  expenses  that will  ultimately  be paid under  direct  and  assumed
insurance  contracts.  Loss reserves  include claims and adjustment  expenses on
claims  that have been  reported  but not yet  settled  and those that have been
incurred but not yet reported to the Company.  The length of time that  reserves
are carried on the Consolidated  Statements of Financial  Position is a function
of the pay-out  patterns  associated  with the types of coverage  involved.  The
majority of claims the Company incurs are  short-tailed  in nature,  relative to
the property-casualty industry as a whole, meaning they generally settle shortly
after claims are reported.  The Company's  loss reserve  estimates  reflect such
variables as past loss experience and inflation.  In addition, due to the nature
of much of the Company's types of coverage,  complex  engineering  judgments are
involved.  Previously  established loss reserves are regularly  adjusted as loss
experience  develops  and new  information  becomes  available.  Adjustments  to
previously established reserves are reflected in the financial statements in the
period in which the  estimates  are  changed.  The Company does not discount its
loss reserves.

The  loss  ratio  improved  0.8  percentage  points  in  1999  from  1998.  This
improvement was primarily attributable to increased use of reinsurance. The 1999
results were impacted by $10 million of domestic  weather-related events and the
Taiwan  earthquake as well as $10 million in losses related to medical equipment
insurance contracts.  These insurance contracts  represented less than 1 percent
of the Company's  revenues.  The loss ratio  decreased 0.2 percentage  points in
1998 as  compared  to 1997.  Loss  results in 1998 were  impacted  by severe ice
storms in Canada, as well as a few significant losses in our other international
businesses.  Prior year loss  development in 1999,  1998 and 1997 added 0.1, 2.8
and 1.7 percentage points to the respective loss ratio. The components of claims
and adjustment expenses, net of reinsurance, are displayed above.

Gross claims and adjustment  expenses were $684.7 million in 1999 as compared to
$619.6 million in 1998 and $263.1 million in 1997.  This increase was the result
of weather-related  events domestically,  the Taiwan earthquake and large losses
in our Global Special Risks business,  all of which were largely reinsured.  The
significant  increases in claim reserves and  reinsurance  assets since December
31, 1998 largely  relate to these events.  In 1998, the increase in gross claims
was largely due to the Company's  role as direct writer of HSB  Industrial  Risk
Insurers'  policies and  included  approximately  $154  million  from  Hurricane
Georges on exposures written by HSB Industrial Risk Insurers. On a net basis the
impact on HSB from such hurricane  losses after cessions to HSB Industrial  Risk
Insurers and reinsurance recoveries was $1.9 million.

Although   reported   claim   activity  has  been   negligible   at  this  time,
quantification of the Company's exposure to Year 2000 losses and loss adjustment
expenses are not  reasonably  estimable  as  applicable  policy and  reinsurance
contract wordings have not been legally tested in the context of such losses.

                                       32
<PAGE>

The expense  ratio  increased  to 51.0 percent in 1999 from 45.4 percent in 1998
and 47.3  percent in 1997. A portion of the 1999  increase in the expense  ratio
was  attributable  to  increases  in  policy  acquisition  costs.  Increases  in
commission  rates that reflect changes in the mix of business,  primarily in the
commercial  segment,  increased the expense ratio  approximately  1.9 percentage
points.  In 1999, the Company's  results were  negatively  impacted by increased
information  systems costs of $8 million (including Year 2000 remediation costs)
and $5  million  of  charges  related  to a  change  in  management  at HSB  and
consolidation and relocation of certain businesses. Approximately $11 million of
these amounts were allocated to the insurance operations, thereby increasing the
expense ratio by 2.9 percentage points.

The 1998  expense  ratio  improvement  of 1.9  percentage  points  over 1997 was
primarily  related to the new quota  share  reinsurance  agreements  and the HSB
Industrial Risk Insurers  arrangement with ERC, both of which resulted in ceding
commissions  to  HSBIIC  that  positively  impacted  our  expense  ratio  by 3.9
percentage points. A portion of such ceding commission was intended to reimburse
HSBIIC for the additional  costs of managing HSB Industrial Risk Insurers and to
offset the reduction in net earned premiums.

The  following  information  summarizes  key  financial  results  by  reportable
insurance segment:

For the years ended December 31,             1999       1998       1997
------------------------------------------------------------------------
Commercial:
   Net earned premiums                    $ 335.2    $ 306.3    $ 269.0
   Net income                                12.8       14.8       13.4
   Income taxes                               7.2        4.6        6.1

Global Special Risks:
   Net earned premiums                    $  45.6    $  83.6    $ 217.1
   Net income                                 6.7        9.8       10.7
   Income taxes                               2.3        7.7        6.2
------------------------------------------------------------------------

The  Commercial  business has shown strong revenue growth year over year despite
significant  price  competition  as HSB continues to focus on its client company
strategy.  Net earned  premiums in the  Commercial  segment rose $28.9 and $37.3
million in 1999 and 1998, respectively,  due primarily to the integration of the
Kemper portfolio and growth in our client company  business,  offset by declines
in direct writings.  In 1999, domestic operations posted an underwriting gain at
a lower  margin  than 1998 due to the  increased  expense  ratio.  International
operations  posted  an  improved  underwriting  gain as 1998 was  more  severely
impacted by  weather-related  claims.  In 1998,  domestic  operations  posted an
underwriting  gain  that  was  partially  offset  by  a  difficult  claims  year
internationally,  particularly  due to severe ice storms that  affected  over 30
percent of Canada. The high tax benefit recognized on Canadian losses caused the
effective tax rate to decline from 1997.

Global Special Risks net earned  premiums  declined $38.0 million in 1999.  This
decrease  relates  primarily  to  increased  ceded  premiums  related to the HSB
Industrial Risk Insurers business. In addition, price erosion and maintenance of
strict  underwriting  standards,  coupled with changes in reinsurance  programs,
contributed  to the  decline in 1999.  In 1998,  net earned  premiums  decreased
$133.5  million  primarily  due to the  increased  use of  reinsurance  and  the
arrangement  with HSB Industrial Risk Insurers.  Global Special Risks net income
decreased in 1999  primarily as a result of the  declining  book.  In 1998,  the
international  businesses were impacted by adverse claims experience as compared
to 1997.  In 1998,  income  taxes as a percentage  of net income  increased as a
result of a decreased use of foreign tax credits.

As part of the arrangement  with HSB Industrial Risk Insurers,  HSBIIC wrote all
direct policies for HSB Industrial Risk Insurers and then ceded back these risks
100 percent to HSB Industrial  Risk Insurers.  HSBIIC then reinsured  ERC's 99.5
percent share of the business  resulting in the  assumption of 85 percent of the
equipment  breakdown  business  and 15 percent of the  property  business.  As a
result of the termination of the ERC  reinsurance  agreement and the replacement
of the IRI agreement  effective  January 1, 2000, as

                                       33
<PAGE>

previously  discussed,  the Company anticipates that Global Special Risks' gross
earned and ceded premiums, as well as the fees/expense  reimbursement  generated
from managing the IRI business will continue to decline.


Engineering Services Operations

For the years ended December 31,         1999        1998        1997
------------------------------------------------------------------------
Engineering services
   Revenues                            $119.6      $ 93.5      $ 61.3
Engineering services
   Expenses                             116.6        86.2        57.0
                                     -----------------------------------
Operating gain                         $  3.0      $  7.3      $  4.3
Operating margin                          2.5%        7.8%        7.0%
------------------------------------------------------------------------

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,  SAI, Structural and the Company's
interest in Integrated Process Technologies, LLC (IPT).

Engineering  services revenues increased 27.9 percent in comparison to 1998. The
growth in revenues is primarily due to significant  increases  related to IPT, a
full year's integration of the SAI acquisition which occurred in April 1998, the
Structural  acquisition  in July 1999 and EIL's  engineering  services  revenues
generated through other acquisitions. In 1998, revenue increases of 52.5 percent
were generated by HSBRT; EIL's acquisition of Haughton's engineering in the last
quarter of 1997; and the addition of SAI in April 1998.

Operating margins decreased to 2.5 percent from 7.8 percent in 1998. The decline
in operating  margin from the previous year reflects the investment of operating
funds to develop new products and  establish  start-up  operations  coupled with
reduced volume and profits in certain of our traditional engineering businesses,
particularly  HSBRT. In addition,  the Company recorded a charge of $0.7 million
related  to costs  associated  with the  consolidation  of  certain  engineering
activities.  Margins  increased  0.8  percentage  points  in 1998 as a result of
improved  field  service staff  utilization  and cost  efficiencies,  which were
offset somewhat by the start-up costs of integrating certain acquisitions.

In  July  1999,  HSBIIC  acquired  Structural  based  in San  Jose,  California.
Structural is an  engineering  consulting  firm that  specializes in prevention,
control and repair of structural and mechanical failures.  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

For the years ended December 31,                1999       1998       1997
---------------------------------------------------------------------------
Net investment income                       $   64.1   $   64.2    $  36.8
Realized investment gains                       40.6       25.4       14.1
                                         ----------------------------------
Income from investment
   operations                               $  104.7   $   89.6    $  50.9
Total cash and invested
   assets, at fair value                    $  998.1   $1,094.8    $ 996.7
Unrealized gains, pre-tax                   $    4.7   $  113.1    $  95.3
---------------------------------------------------------------------------

The Company's  investment strategy is 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,  servicing  requirements  of capital  securities and
market  conditions.  The

                                       34
<PAGE>

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  in an attempt to  maximize  after-tax
investment earnings.  The Company does not engage in cash flow underwriting;  it
seeks to have underwriting profit each year.

None of the Company's  claim reserves are  discounted as most claims settle,  on
average,  within  one  year.  Therefore,  the  Company  does  not  use  duration
measurements  in managing its interest rate exposure.  Instead,  HSB manages its
portfolio on a segmented basis.  Approximately  $300 million (cost basis) of the
Company's  invested  assets  (comprised  of perpetual and  redeemable  preferred
stocks and  corporate  bonds) are  utilized  to provide  interest  coverage  and
potential   principal  repayment  over  the  life  of  the  convertible  capital
securities issued on December 31, 1997. The remainder of the Company's  invested
assets, exclusive of cash and cash equivalents, short-term securities and common
stocks are invested to provide income for the future.  There are three portfolio
areas with quite  different  maturity/call  characteristics.  The  portfolio  of
traditional bonds of approximately $245 million has an average life of 22 years,
with over 50  percent of that  portfolio  callable  in less than ten years.  The
sinking fund preferred portfolio of $43 million, based on expected calls, has an
estimated life of three years.  The $52 million  adjustable rate preferred stock
portfolio, based on expected calls, has an estimated life of five years.

The Company  believes the  expected  cash flows from the  Company's  operations,
maturities  and calls are  adequate  to enable  the  Company  to  respond to the
previously discussed parameters that impact its investment strategy.

Net  investment  income for 1999  remained  flat  compared to 1998 and increased
$27.4 million in 1998 as compared to 1997 due to the investment of proceeds from
capital securities issued during the second half of 1997. In addition,  proceeds
from  the  January  1998  sale  of  HSB's   interests  in  IRI  and  Radian  LLC
significantly  increased  investable  funds.  Declining  yields available on new
fixed maturities relative to higher yields on maturing investments over the past
few years have also moderated  investment  income growth.  Net investment income
has also been impacted by calls of high yielding preferred stocks.

Realized  investment  gains  increased  $15.2  million  in 1999 as a  result  of
repositioning  the investment  portfolio due to market  fluctuations and to keep
the  absolute  amount of  common  equities  from  exceeding  a certain  targeted
percentage of the Company's  GAAP capital.  In 1998,  realized  gains  increased
$11.3 million as a result of call premiums on fixed income investments and sales
of certain  convertible  securities  and  common  stocks in  response  to market
conditions.

In 1997,  realized gains were reduced by $30.7 million (all of which were offset
by and  represented  portfolio  appreciation  and returns that were realized) to
reflect the estimated fair value of three "zero cost collar  contracts"  entered
into at the end of 1996 to mitigate the effects of market risk on the  Company's
U.S. common stock portfolio (which,  for management  purposes,  included certain
convertible  preferreds).  Each contract had a notional value of $50 million and
maturity  dates ranging from November 1997 to January 1998.  The contracts  were
European  style,  which means they only settled upon  maturity.  The  contracts,
which were entered into when the Standard & Poor's 500 Index (S&P 500 Index) was
744.3,  allowed HSBIIC to recover from the  counterparty  if the index was below
695.2 at the time of maturity, and required HSBIIC to reimburse the counterparty
if the index was above a range of 811.3 to 818.7 at the time of maturity.

Through its U.K. subsidiary, EIL, the Company writes business in Malaysia and is
required  to  maintain  ringgit  denominated  investments  based on the level of
premiums written in Malaysia. At December 31, 1999, 1998 and 1997, the Company's
deposits  were 20, 29 and 50 million  ringgits,  respectively.  This  equated to
$5.1, $7.1 and $12.8 million at December 31, 1999, 1998 and 1997,  respectively.
In 1997, due to currency  fluctuation  in Southeast  Asia,  realized  investment
gains were negatively impacted by $7.4 million.

HSB's  investment  portfolio  continues  to consist of  high-grade  domestic and
foreign  investments.  Excluding short-term  investments,  HSB's investments are
primarily comprised of publicly traded, highly liquid

                                       35
<PAGE>

securities.  At the end of 1999, HSB's fixed maturities portfolio comprised 52.9
percent of the value of the invested  assets.  The credit  quality of HSB's bond
investments at December 31, 1999, averaged an A rating. HSB's portfolio does not
include any bonds in default as to either  principal or interest.  Bonds held at
December  31,  1999 had a fair  value of $299.8  million.  Redeemable  preferred
stocks averaged a BBB rating.  During 1999 bond yields continued to move up, the
impact of which has caused a reduction in the  Company's  unrealized  gains with
respect to fixed income securities by approximately $64.5 million pre-tax.

The carrying value of the equity securities  portfolio  represented 41.3 percent
of the  investments at December 31, 1999. This included $65.3 million of pre-tax
unrealized  investment  gains of which $92.6 million related to common equities,
offset by $27.3 million of preferred unrealized investment losses. The Company's
common  equities,  which are  comprised of primarily  Standard & Poor's 500 (S&P
500) "large cap"  stocks,  essentially  modeled the  performance  of the S&P 500
Index in 1999. HSB also recorded $22.1 million of dividends and $43.5 million of
net pre-tax  realized gains from this  portfolio in 1999. The Company's  largest
single holding accounted for less than 1 percent of total  consolidated  assets.
Realized  investment  gains  increased  in 1999 over 1998 (and in 1998 over 1997
taking into account the $30.7 million loss on the "zero cost collar  contracts")
as HSB managed its portfolio to respond to changing  market  conditions  and tax
planning opportunities.


Market Risk

Market risk generally  encompasses systemic risks or risks associated with macro
factors  relating to economic losses due to adverse changes in the fair value of
a financial instrument.  Market risk relates to the variability of market prices
and/or cash flows associated with changes in interest rates,  securities prices,
market indices,  yield curves or currency  exchange rates and is inherent to all
financial  instruments.  The Company's  investment strategy is to maximize total
return  on the  investment  portfolio  through  investment  income  and  capital
appreciation  and  is  based  on  such  factors  as  operational   results,  tax
implications,    regulatory   requirements,   interest   rates,   dividends   to
stockholders,   servicing   requirements   of  capital   securities  and  market
conditions.

The focus of this  disclosure is on one element of market risk - price risk. For
the  Company,  price risk relates to changes in the level of prices of financial
instruments due to changes in interest rates,  equity prices or foreign exchange
rates.  The primary price risk  exposures of the Company relate to interest rate
and equity price risk.

For  purposes  of  this  disclosure   market  risk  sensitive   instruments  are
categorized as  instruments  entered into for trading  purposes and  instruments
entered  into for  purposes  other than  trading.  The Company does not hold any
financial  instruments entered into for trading purposes and, therefore,  market
risk  sensitive  instruments  are  classified  as held for  purposes  other than
trading.


Interest Rate Risk

Interest  rate risk is the major price risk facing the  Company's  fixed  income
portfolio.  Such  exposure  can subject  the  Company to economic  losses due to
changes  in the level or  volatility  of  interest  rates.  Bond  prices  change
inversely  with the direction of interest  rates.  Generally,  as interest rates
rise,  prices for fixed  income  instruments  will fall.  As rates  decline  the
inverse is true. The Company attempts to mitigate this risk by investing in high
quality issues using a buy and hold approach.


Equity Market Risk

Equity market risk is defined as the chance that market  influences  will affect
the expected  returns of all equities.  Returns are  influenced  not only by the
fundamental attributes of investment  securities,  but by the price movements of
the  general  marketplace.  Much  of  this  depends  on the  sensitivity  of the
individual issue

                                       36
<PAGE>

to the  overall  market.  The  Company  attempts  to reduce  this  risk  through
diversification and a focus on high quality, blue chip investments.


Foreign Exchange Risk

Foreign  exchange  risk  arises  from the  possibility  that  changes in foreign
currency   exchange  rates  will   adversely   impact  the  value  of  financial
instruments.  The Company has foreign  exchange  exposure  when it buys or sells
foreign currencies or financial  instruments  denominated in a foreign currency.
The  Company's  foreign  transactions  are  primarily  denominated  in  Canadian
dollars.


Sensitivity Analysis

The following  analysis  illustrates  the sensitivity of the market value of the
Company's financial  instruments to selected changes in market rates and prices.
The range of changes selected 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  analysis  assumes  that the  composition  of the  Company's  interest  rate
sensitive assets and liabilities existing at the beginning of the period remains
constant  over the period  being  measured  and also  assumes  that a particular
change  in  interest  rates  is  reflected  uniformly  across  the  yield  curve
regardless of the time to maturity. Also, the interest rates on certain types of
assets and  liabilities  may fluctuate in advance of changes in market  interest
rates,  while  interest  rates on other  types may lag behind  changes in market
rates.  Accordingly,  the analysis may not be indicative  of, is not intended to
provide  and does not  provide a precise  forecast  of the  effect of changes of
market interest rates on the Company's income or stockholders' equity.  Further,
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 and decreasing 100 and 150
basis  points  from their  levels at  December  31, 1999 and 1998 with all other
variables held constant. The analysis assumes the yield to worst methodology.  A
100 and 150 basis point increase in the market  interest rates would result in a
pre-tax  decrease in the net  financial  instrument  position of $50.1 and $38.1
million  for 1999 and  1998 and  $67.4  and  $55.1  million  for 1999 and  1998,
respectively.  Similarly,  a 100 and 150 basis point decrease in market interest
rates  would  result  in a  pre-tax  increase  in the net  financial  instrument
position  of $50.1  and  $38.1  million  for 1999 and 1998 and  $67.4  and $55.1
million for 1999 and 1998, respectively.

Portfolio  sensitivity  to these  variables  tends to  change  over  time due to
changes in  portfolio  composition  and changes in market  environment.  For the
fixed maturity portfolio,  sensitivity, as measured by duration,  increased from
5.48 at  December  31,  1998 to 8.37 at  December  31,  1999.  This  increase in
duration  is due  primarily  to  changes  that  occurred  in the  interest  rate
environment  during the period. The Company uses a yield to worst methodology to
calculate  duration.  This  assumes  that an  issuer,  given  the  current  rate
environment,  will call higher  coupon debt if  appropriate.  As interest  rates
increased   during  the  year,   the  call   feature  on  many   issues   became
non-applicable.  This change in the  environment  caused  portfolio  duration to
increase and a corresponding increase in sensitivity to interest rates.

The Company's long-term debt and 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 fixed rate debt would  result in a  decrease  in the market  value of the
debt by $0.3  million in 1999 and 1998 and $0.5  million  in 1999 and 1998.  The
effect  of 100 and 150  basis  point  increases  in  interest  rates on the $300
million convertible capital securities would result in an estimated market value
of $247.6 and $296.4  million in 1999 and 1998, and $237.0 and $289.4 million in
1999 and 1998, respectively,  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 impact of 100 and 150 basis point

                                       37
<PAGE>

increases in interest rates on the variable rate capital securities would result
in an additional  charge to pre-tax  income of $1.1 million in 1999 and 1998 and
$1.6 million in 1999 and 1998, respectively, per year. A 100 and 150 basis point
decrease in interest rates would increase pre-tax income by $1.1 million in 1999
and 1998 and $1.6 million in 1999 and 1998, respectively, per year.

Equity  price risk was  measured  assuming  an  instantaneous  10 percent and 25
percent change in the S&P 500 Index from its level at December 31, 1999 and 1998
with all other variables held constant. The Company's equity holdings (comprised
of common stocks and  non-redeemable  preferreds) were assumed to be 100 percent
correlated  to this index.  A 10 percent and 25 percent  increase or decrease in
the S&P 500 Index would result in a $21.4 and $24.9 million increase or decrease
in 1999 and 1998 and $53.4 and $62.4  million  increase  or decrease in 1999 and
1998,  respectively,  in the net financial  instrument  position.  The Company's
equity instruments'  sensitivity to equity market risk, as measured by portfolio
beta,  decreased  from 1.02 at December  31, 1998 to 0.98 at December  31, 1999.
This  change is  generally  attributed  to  portfolio  repositioning  during the
period.

The sensitivity analysis also assumes an instantaneous 10 percent and 20 percent
change in the foreign currency  exchange rates versus the U.S. dollar from their
levels at December 31, 1999 and 1998 with all other  variables held constant.  A
10 percent  and 20 percent  strengthening  of the U.S.  dollar  would  result in
decreases of $6.1 and $6.4 million in 1999 and 1998 and $12.2 and $12.4  million
in 1999  and  1998,  respectively,  in the net  financial  instrument  position.
Weakening of the U.S.  dollar versus all other  currencies  would result in like
increases in the net financial instrument position.

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




Held For Other Than Trading Purposes

                               Market     Interest   Currency    Equity
 At December 31, 1999          Value      Rate Risk    Risk       Risk
--------------------------------------------------------------------------
Fixed maturity
   securities                  $ 489.8    $  (37.3)   $  (2.6)   $   --
Equity securities                381.8       (12.1)      (2.0)     (21.4)
Short-term investments            53.5        (0.7)      (1.5)       --
                            ----------------------------------------------
      Total all securities     $ 925.1    $  (50.1)   $  (6.1)   $ (21.4)
--------------------------------------------------------------------------

Held For Other Than Trading Purposes

                               Market    Interest    Currency    Equity
At December 31, 1998           Value    Rate Risk     Risk       Risk
-------------------------------------------------------------------------
Fixed maturity
   securities                  $  577.1   $  (27.1)   $  (2.1)   $   --
Equity securities                 437.1      (10.1)      (1.9)     (24.9)
Short-term investments             62.3       (0.9)      (2.4)       --
                              --------------------------------------------
      Total all securities     $1,076.5   $  (38.1)   $  (6.4)   $ (24.9)
--------------------------------------------------------------------------

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 25  percent  decline  in the S&P 500 Index and a decline of 20
percent in foreign currency exchange rates.


                                       38
<PAGE>

Held For Other Than Trading Purposes

                              Market      Interest    Currency    Equity
At December 31, 1999          Value       Rate Risk     Risk       Risk
-------------------------------------------------------------------------
Fixed maturity
   securities                  $ 489.8    $  (49.1)   $  (5.2)   $   --
Equity securities                381.8       (17.2)      (4.1)     (53.4)
Short-term investments            53.5        (1.1)      (2.9)       --
                             ---------------------------------------------
      Total all securities     $ 925.1    $  (67.4)   $ (12.2)   $ (53.4)
--------------------------------------------------------------------------

Held For Other Than Trading Purposes

                               Market    Interest    Currency    Equity
At December 31, 1998           Value     Rate Risk     Risk       Risk
-------------------------------------------------------------------------
Fixed maturity
   securities                  $  577.1   $  (39.4)   $  (4.2)   $   --
Equity securities                 437.1      (14.4)      (3.7)     (62.4)
Short-term investments             62.3       (1.3)      (4.5)       --
                              --------------------------------------------
      Total all securities     $1,076.5   $  (55.1)   $ (12.4)   $ (62.4)
--------------------------------------------------------------------------


Statement of Comprehensive Income

In  addition  to the impact of HSB's  results of  operations,  the  Consolidated
Statements of  Comprehensive  Income  display the effects of price  movements on
HSB's  invested  assets.  In 1999,  the impact of rising  interest  rates on the
carrying values of the Company's fixed income  investments  more than offset the
strong  performance  of its common  equities such that 1999  cumulative  holding
gains,  net of taxes,  decreased  $45.2  million as compared to the  increase of
$28.1 million in 1998 and $21.3 million in 1997.


Liquidity and Capital Resources

At December 31,                                        1999        1998
------------------------------------------------------------------------
Total assets                                       $2,263.2    $2,138.6
Short-term investments                                 53.5        62.3
Cash and cash equivalents                              73.0        18.3
Short-term borrowings                                  41.5        21.0
Long-term borrowings                                   25.1        25.1
Capital securities of subsidiary Trust I              109.0       108.9
Capital securities of subsidiary Trust II             300.0       300.0
Common shareholders' equity                        $  376.5    $  419.3
------------------------------------------------------------------------

Liquidity refers to the Company's  ability to generate  sufficient funds to meet
the cash requirements of its business operations and financing obligations.  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 cash  equivalents  and a highly liquid
short-term portfolio to provide for immediate cash needs and to offset a portion
of interest rate risk  relating to $110 million of Global  Floating Rate Capital
Securities.  During 1999,  HSB received  $152.7 million in dividends from HSBIIC
and at  December  31, 1999 the  holding  company had $143.2  million of cash and
invested  assets as compared  to $92.8  million at December  31,  1998.  Current
estimates are that HSBIIC has the capacity to dividend to HSB  approximately $80
million in 2000 without regulatory approval.

                                       39
<PAGE>

On July 15, 1997, a trust  sponsored and wholly owned by the Company issued $110
million  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 $113.4 million 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 equal to the 90 day LIBOR plus 0.91
percent 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  equal to the 90 day LIBOR  plus 0.91  percent  of the  stated
liquidation  amount of $1,000 per Capital  Security.  The current  coupon is 7.1
percent.  HSB has the right to defer payment of  distributions on the securities
at any time or from  time to time  for a period  not  exceeding  20  consecutive
quarterly  periods with  respect to each  deferral  period.  During an extension
period,  interest  will  continue to accrue and the amount of  distributions  to
which holders of the Capital  Securities are entitled will  accumulate,  and the
Company will be prohibited from paying any cash dividends on its common stock.

The Capital  Securities  are generally  non-callable  for ten years,  but may be
called earlier by HSB upon the  occurrence of certain tax events  including loss
of  deductibility  of interest on the  securities.  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.

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 of amounts due on the Capital Securities.  The Capital Securities
are  currently  rated BBB- by Standard & Poor's and BBB+ by Duff & Phelps credit
rating agencies.

On December 31, 1997, HSB Group,  Inc. sold $300 million of 20 year  Convertible
Capital  Securities  in a private  placement  to ERC.  The  Convertible  Capital
Securities are callable by the Company at its option (i) at any time after seven
years;  (ii)  upon the  occurrence  of  certain  tax  events  including  loss of
deductibility  of the  interest on the  securities;  (iii) in the event that HSB
vetoes a prospective purchaser of the Convertible Capital Securities; or (iv) in
the event of a change in control of ERC. The Convertible  Capital Securities are
mandatorily  redeemable  on December 31, 2017 and are  redeemable  at par plus a
redemption premium, at the option of ERC, in the event of a change in control of
HSB within five years following issuance of the securities.

The  Convertible  Capital  Securities are  convertible,  in whole or in part, at
ERC's option at any time,  subject to  regulatory  approval,  into shares of HSB
common stock at a conversion  price of $56.67 per share,  subject to adjustment.
HSB has  provided  certain  registration  rights to ERC in  connection  with the
common  stock into which the  Convertible  Capital  Securities  are  convertible
pursuant to a Registration Rights Agreement dated December 31, 1997. If ERC were
to exercise its conversion  rights in total, it would hold at December 31, 1999,
on a fully  diluted  basis,  approximately  15.4 percent of HSB's common  stock.
Pursuant  to  certain  provisions  contained  in the  Purchase  Agreement  dated
December 31, 1997, ERC has agreed to certain "standstill" arrangements which for
a period of five years will  preclude  ERC from  purchasing  any common

                                       40
<PAGE>

stock of HSB,  other than by exercise of its conversion  rights,  and will limit
its  ability to take  certain  other  actions  with  respect to HSB during  that
period.

The  securities  were  issued  through  HSB  Capital  II (Trust  II), a Delaware
business trust created by HSB, at a 7 percent coupon, payable semi-annually. The
Convertible  Capital  Securities  rank pari passu with the Global  Floating Rate
Capital  Securities  issued in July  1997.  Holders of the  Convertible  Capital
Securities   will  be  entitled   to  receive   preferential   cumulative   cash
distributions  accumulating  from  the date of  original  issuance  and  payable
semi-annually in arrears.  HSB has the right to defer payment of interest at any
time or from time to time for a period not exceeding 10 consecutive  semi-annual
periods  with  respect to each  deferral  period.  During an  extension  period,
interest  will  continue  to accrue  and the  amount of  distributions  to which
holders of the Convertible Capital Securities are entitled will accumulate,  and
HSB will be prohibited  from paying any cash dividends on its common stock.  HSB
has irrevocably  and  unconditionally  guaranteed all of Trust II's  obligations
under the Convertible Capital Securities.

Cash provided from operations  decreased to $43.2 million in 1999 as compared to
$55.6 million in 1998. The decrease was primarily  attributable to a $22 million
decline in net cash flows from HSBIIC's  participation  in HSB  Industrial  Risk
Insurers,  offset by an increase in  insurance  operating  cash flows.  Net cash
flows from HSB Industrial Risk Insurers were favorably impacted by a $27 million
accelerated  collection of  receivables  pursuant to the  termination of certain
reinsurance  agreements  between HSBIIC,  ERC and IRI, as previously  discussed.
Operating cash flows from  insurance,  excluding HSB  Industrial  Risk Insurers,
were  positively  impacted by a decline in net claims paid of 10.3  percent,  as
well as, a decrease in payments to reinsurers  for ceded premiums of 9.1 percent
offset by a decrease in premiums collected of 5.5 percent.

Cash provided  from  operations  increased  $29.5 million in 1998 as compared to
1997. Insurance  operations cash flows,  excluding HSB Industrial Risk Insurers,
were  impacted  by a decline in net claims paid of 2.9  percent  while  premiums
collected  increased  6.5 percent.  Payments to  reinsurers  for ceded  premiums
increased 70.5 percent from 1997. HSBIIC's  participation in HSB Industrial Risk
Insurers positively impacted cash flow from operations $35.3 million.

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 $376.5 million at
December 31, 1999 decreased  $42.8 million since December 31, 1998. The decrease
primarily  reflects net income of $72.8  million and net stock  issuance of $7.7
million,  offset by a decrease in unrealized  investment  gains,  net of tax, of
$69.8  million and  dividends  of $49.9  million.  The  decrease  in  unrealized
investment  gains of $69.8 million  results  principally  from realized gains of
$26.4 million and unrealized depreciation of fixed maturities and non-redeemable
preferreds  of  $63.2  million,  the sum of which is  offset  by net  unrealized
appreciation of common stocks and convertible preferreds of $18.0 million.

On January 24, 2000, the Board renewed the  authorization  to repurchase up to 3
million shares of common stock. HSB repurchased  approximately  0.1, 1.2 and 1.5
million shares at a cost of $4.4,  $47.7 and $54.0 million during 1999, 1998 and
1997, respectively.

At December 31, 1999,  HSBIIC had  significant  short-term  borrowing  capacity.
HSBIIC is currently  authorized to issue up to $75 million of commercial  paper.
Commercial  paper  outstanding at December 31, 1999 and 1998 was $38.6 and $20.0
million,  respectively.  The weighted-average  interest rate was 6.0 percent and
5.2 percent at December  31, 1999 and 1998,  respectively.  In 1999,  Standard &
Poor's and Duff & Phelps credit rating services reaffirmed their highest ratings
for the commercial paper.

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 did not result
in a substantial  change in the business or a significant  increase in costs. In
part,  this is due to the  fact  that  much of  EIL's  business  is U.S.  dollar
denominated.  Also, the U.K. is not a

                                       41
<PAGE>

first wave euro country.  The Company will continue to monitor  developments and
assess impacts on markets, pricing and reporting.


Year 2000

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.
Year 2000  problems  could  result  in  system  failures,  product  failures  or
miscalculations  causing  disruptions  of operations.  If the computer  systems,
software  products and devices do not correctly process dates after December 31,
1999, business could be adversely affected.

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 has  evaluated and
continues to evaluate its potential  insurance coverage exposures arising out of
the Year 2000 and its impact on insured equipment.

The Company has completed all stages of its Year 2000  Program:  (i)  assessment
and   analysis;   (ii)   development,    renovation   and   replacement;   (iii)
implementation;  (iv) testing and validation; (v) contingency planning; and (vi)
audit and review.

The Company continues to monitor information systems and transaction  processing
with the  objective of  identifying  and  correcting  any  undetected  errors of
omission or commission which may have occurred in the execution of its Year 2000
Program.

Subsequent  to January 1,  2000,  HSB has not  encountered  any  disruptions  or
anomalies  that  affected  any  critical  internal  system nor  experienced  any
material  disruption  in its  business  due to the  inability  of any of its key
business partners and suppliers to deliver  information and services due to Year
2000 problems.

Costs

The Company's  aggregate  spending in connection  with the Year 2000 Program was
approximately $28 million.  Certain of these costs were expensed as incurred and
funded through operating cash flow. The Company has expensed $6.9, $5.1 and $1.5
million in 1999, 1998 and 1997,  respectively.  The remainder of the $28 million
related 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 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 expensed amounts.


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  had
filed with the various  jurisdictions an endorsement to its equipment  breakdown
forms which reiterated that coverage was 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 was included in policies in all
states that approved the  endorsement.  In the four  jurisdictions  that did not
approve the endorsement, a notice reiterating the Company's coverage intent with
respect to Year 2000  exposures was sent to  policyholders.  The Company filed a
similar  endorsement for use with its all-risk policy. Many of the insurers that
the  Company   reinsures  for  equipment   breakdown   coverage  issued  similar
endorsements to their policies.

                                       42
<PAGE>

Although   reported   claim   activity  has  been   negligible   at  this  time,
quantification of the Company's exposure to Year 2000 losses and loss adjustment
expenses are not  reasonably  estimable  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, in particular the passage of financial  services reform  legislation;
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;  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 new  agreement  with IRI;  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.


Item 7A.  Quantitative and Qualitative Disclosures about Market Risk.

See "Market  Risk" in  Management's  Discussion  and  Analysis  of  Consolidated
Financial Condition and Results of Operations in Item 7.

Item 8.  Financial Statements and Supplementary Data.

                          INDEX TO FINANCIAL STATEMENTS
                        AND FINANCIAL STATEMENT SCHEDULES

                                                                    Page No.

Report of Independent Accountants                                     45

Financial Statements                                                  46

     Consolidated Statements of Operations
       for the years ended December 31, 1999,
       1998 and 1997.                                                 46

     Consolidated Statements of Comprehensive Income
       for the years ended December 31, 1999,
       1998 and 1997.                                                 47

     Consolidated  Statements of Financial Position -
     December 31, 1999 and 1998.                                      48

     Consolidated Statements of Cash Flows
       for the years ended December 31, 1999,
       1998 and 1997.                                                 49

                                       43
<PAGE>


     Consolidated Statements of Changes in
       Shareholders' Equity for the years ended
       December 31, 1999, 1998 and 1997.                              51

Notes to Consolidated Financial Statements                            52

Schedule  I -  Summary of investments-
                 other than investments in related parties            77

Schedule II - Condensed Financial Information of
                 HSB Group, Inc.                                      78

Schedule III - Supplementary Insurance Information                    81

Schedule  IV - Reinsurance                                            82

Schedule V - Valuation and Qualifying Accounts                        83

Schedule VI - Supplemental Information Concerning
                 Property-Casualty Insurance Operations               84

Schedules  other than the ones listed above are omitted for the reason that they
are not required or are not  applicable or the required  information is shown in
the financial statements or notes thereto.

                                       44
<PAGE>



REPORT OF INDEPENDENT ACCOUNTANTS



To the Shareholders and Board of Directors of HSB Group, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material  respects,  the financial  position of HSB
Group,  Inc. and its subsidiaries at December 31, 1999 and 1998, and the results
of their  operations  and their  cash  flows for each of the three  years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles.  In addition,  in our opinion,  the  financial  statement  schedules
listed in the accompanying index present fairly, in all material  respects,  the
information  set  forth  therein  when  read in  conjunction  with  the  related
consolidated  financial  statements.  These  financial  statements and financial
statement  schedules are the  responsibility  of the Company's  management;  our
responsibility  is to  express  an opinion  on these  financial  statements  and
financial  statement  schedules based on our audits.  We conducted our audits of
these statements in accordance with generally  accepted auditing standards which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for the opinion expressed above.



PricewaterhouseCoopers LLP
Hartford, Connecticut
January 24, 2000

                                       45
<PAGE>


Financial Statements
Consolidated Statements of Operations
For the years ended December 31, (in millions, except per share amounts)
<TABLE>
<CAPTION>

                                                                  1999         1998         1997
-------------------------------------------------------------------------------------------------
<S>                                                            <C>          <C>          <C>
Revenues:
   Gross earned premiums                                       $  823.8     $  770.5     $  609.3
   Ceded premiums                                                 441.9        374.4        118.1
                                                             -------------------------------------
   Insurance premiums                                             381.9        396.1        491.2
   Engineering services                                           119.6         93.5         61.3
   Net investment income                                           64.1         64.2         36.8
   Realized investment gains                                       40.6         25.4         14.1
                                                             -------------------------------------
      Total revenues                                              606.2        579.2        603.4
                                                             -------------------------------------
Expenses:
   Claims and adjustment                                          165.8        174.9        217.9
   Policy acquisition                                              89.2         66.3         90.7
   Underwriting and inspection                                    105.6        113.7        142.8
   Engineering services                                           116.6         86.2         57.0
   Interest                                                         2.3          0.8          1.3
                                                             -------------------------------------
      Total expenses                                              479.5        441.9        509.7
                                                             -------------------------------------
Gain on sale of IRI                                                  --         36.6           --
Income from continuing operations before income taxes
   and distributions on capital securities                        126.7        173.9         93.7
Income taxes:
   Current                                                         35.1         45.0         23.8
   Deferred                                                         0.6          6.4          1.3
                                                             -------------------------------------
      Total income taxes                                           35.7         51.4         25.1
                                                             -------------------------------------
Distributions on capital securities of subsidiary trusts,
   net of income tax benefits of $9.8; $9.9; and $1.2              18.2         18.4          2.3
                                                             -------------------------------------
Income from continuing operations                                  72.8        104.1         66.3
                                                             -------------------------------------
Discontinued operations:
   Loss from operations, net of income tax
    benefits of $-; $3.2; and $0.1                                   --        (6.6)           --
   Gain on disposal, net of income taxes
    of $-; $23.7; and $-                                             --         36.9           --
                                                             -------------------------------------
      Total discontinued operations                                  --         30.3           --
                                                             -------------------------------------
Net income                                                     $   72.8     $  134.4     $   66.3
                                                             -------------------------------------
Earnings per common share - basic:
   Income from continuing operations                           $   2.51     $   3.55     $   2.21
   Discontinued operations                                           --         1.04           --
                                                             -------------------------------------
   Net income                                                  $   2.51     $   4.59     $   2.21
                                                             -------------------------------------
Weighted-average common shares outstanding                         29.0         29.3         29.5
Earnings per common share - assuming dilution:
   Income from continuing operations                           $   2.50     $   3.35     $   2.20
   Discontinued operations                                           --         0.86           --
                                                             -------------------------------------
   Net income                                                  $   2.50     $   4.21     $   2.20
                                                             -------------------------------------
Diluted weighted-average common shares outstanding                 34.6         35.2         30.2
--------------------------------------------------------------------------------------------------
</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       46
<PAGE>




Consolidated Statements of Comprehensive Income
For the years ended December 31, (in millions)
<TABLE>
<CAPTION>
                                                                              1999         1998         1997
-------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>         <C>          <C>
Net income:                                                               $  72.8     $  134.4     $   66.3
Other comprehensive income, net of tax:
   Unrealized (losses) gains on securities:
      Unrealized holding (losses) gains arising
       during the period,net of income (benefit)
          taxes of $(24.5); $16.6; and $15.7                                (45.2)        28.1         21.3
      Add: reclassification adjustments for gains
       included in net income                                               (26.4)       (16.0)       (13.5)
                                                                        -------------------------------------
            Total unrealized (losses) gains on securities                   (71.6)        12.1          7.8
   Minimum pension liability adjustments, net of income taxes                 1.1         (0.1)        (0.3)
   Foreign currency translation adjustments, net of income taxes              1.8         (1.1)        (0.8)
                                                                        -------------------------------------
   Other comprehensive (loss) income                                        (68.7)        10.9          6.7
                                                                        -------------------------------------
   Comprehensive income                                                   $   4.1     $  145.3     $   73.0
-------------------------------------------------------------------------------------------------------------
</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       47
<PAGE>



Consolidated Statements of Financial Position
At December 31, (in millions, except per share amounts)

                                                            1999          1998
--------------------------------------------------------------------------------
Assets:
   Cash and cash equivalents                           $    73.0     $    18.3
   Short-term investments, at cost                          53.5          62.3
   Fixed maturities, at fair value
    (cost - $545.7; $568.5)                                489.8         577.1
   Equity securities, at fair value
    (cost - $316.5; $326.3)                                381.8         437.1
                                                     --------------------------
      Total cash and invested assets                       998.1       1,094.8
   Reinsurance assets                                      850.3         625.0
   Insurance premiums receivable                           104.4         146.7
   Engineering services receivable                          39.1          26.1
   Fixed assets                                             58.2          54.9
   Prepaid acquisition costs                                52.9          46.6
   Capital lease                                            13.8          14.6
   Other assets                                            146.4         129.9
                                                     --------------------------
      Total assets                                     $ 2,263.2     $ 2,138.6
                                                     --------------------------
Liabilities:
   Unearned insurance premiums                         $   420.1     $   464.6
   Claims and adjustment expenses                          782.3         558.2
   Short-term borrowings                                    41.5          21.0
   Long-term borrowings                                     25.1          25.1
   Capital lease                                            27.8          27.9
   Deferred income taxes                                     2.8          42.7
   Dividends and distributions
    on capital securities                                   24.0          23.2
   Ceded reinsurance payable                                66.3          64.1
   Other liabilities                                        87.8          83.6
                                                     --------------------------
      Total liabilities                                  1,477.7       1,310.4
                                                     --------------------------
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 $1.0; $1.1                                           109.0         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                               36.2          33.5
   Accumulated other comprehensive income                   (1.9)         66.8
   Retained earnings                                       339.1         311.2
   Benefit plans                                            (6.9)         (2.2)
                                                     --------------------------
      Total shareholders' equity                           376.5         419.3
                                                     --------------------------
      Total                                            $ 2,263.2     $ 2,138.6
                                                     --------------------------
   Common shareholders' equity per common share        $    12.95     $    14.53
--------------------------------------------------------------------------------
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       48
<PAGE>



Consolidated Statements of Cash Flows
For the years ended December 31, (in millions)
<TABLE>
<CAPTION>
                                                                          1999         1998          1997
----------------------------------------------------------------------------------------------------------
<S>                                                                  <C>          <C>           <C>
Operating activities:
Net income                                                           $    72.8    $   134.4     $    66.3
Adjustments to reconcile net income to
   cash provided by operating activities:
   Depreciation and amortization                                          20.9         15.9           9.5
   Deferred income taxes                                                   0.6          6.4           1.3
   Realized investment gains, including
      market adjustments for collar contracts                            (40.6)       (25.4)        (14.1)
   Distributions on capital securities                                    28.0         28.3           3.5
   Gain from disposition of Radian,
      net of income taxes                                                   --        (30.3)           --
   Gain from disposition of IRI,
      net of income taxes                                                   --        (23.8)           --
   Change in balances, net of effects
      from purchases and sales of subsidiaries:
      Insurance premiums receivable                                       42.3         (8.7)        (31.6)
      Engineering services receivable                                     (9.6)       (11.2)         (0.5)
      Prepaid acquisition costs                                           (6.3)        (4.1)         (4.9)
      Reinsurance assets                                                (225.3)      (500.5)         38.4
      Unearned insurance premiums                                        (44.5)       177.3          19.7
      Ceded reinsurance payable                                            2.2         60.2          (1.5)
      Claims and adjustment expenses                                     224.1        281.5         (26.2)
      Investment in Radian                                                  --           --          (3.7)
      Other                                                              (21.4)       (44.4)        (30.1)
                                                                 -----------------------------------------
         Cash provided by operating activities                            43.2         55.6          26.1
                                                                 -----------------------------------------
Investing activities:
Fixed asset additions, net                                               (13.3)       (20.8)        (10.4)
Investments:
   Sale (purchase) of short-term investments, net                          8.8         69.0         (78.7)
   Purchase of fixed maturities                                         (186.7)      (423.5)        (60.6)
   Proceeds from sale of fixed maturities                                192.5         66.5          27.9
   Redemption of fixed maturities                                         19.2         30.8          14.4
   Purchase of equity securities                                        (304.9)      (326.7)       (252.9)
   Proceeds from sale of equity securities                               359.5        251.8         254.1
   Proceeds from disposition of Radian                                      --        128.9          --
   Proceeds from disposition of IRI                                         --         49.1          --
   Purchase of Solomon Associates Inc.,
     net of cash acquired                                                   --         (2.1)         --
   Purchase of Kemper books of business                                     --        (27.5)         --
   Purchase of Structural Integrity Associates,
     Inc., net of cash acquired                                           (5.3)         --           --
   Settlement of collar contracts                                           --          --          (30.7)
                                                                 -----------------------------------------
         Cash provided by (used in) investment activities                 69.8       (204.5)       (136.9)
                                                                 -----------------------------------------
Financing activities:
Proceeds from Company obligated mandatorily redeemable
   capital securities of subsidiary Trust I                                 --         --           108.9
Proceeds from Company obligated mandatorily redeemable
   convertible capital securities of subsidiary Trust II                    --         --           300.0
Increase (decrease) in short-term borrowings                              19.2        (21.4)         39.1
Dividends and distribution on capital securities                         (77.1)       (66.2)        (46.7)
Reacquisition of stock                                                    (4.4)       (47.7)        (54.0)
Exercise of stock options                                                  4.0          9.3           7.0
                                                                 -----------------------------------------
         Cash (used in) provided by financing activities                 (58.3)      (126.0)        354.3
                                                                 -----------------------------------------
         Net increase (decrease) in cash and cash equivalents             54.7       (274.9)        243.5
         Cash and cash equivalents at beginning of period                 18.3        293.2          49.7
                                                                 -----------------------------------------
         Cash and cash equivalents at end of period                  $    73.0    $    18.3      $  293.2
                                                                 -----------------------------------------
Interest paid                                                        $     4.1    $     2.5      $    3.2
                                                                 -----------------------------------------
Federal income tax paid                                              $    28.3    $    52.4      $   33.8
                                                                 -----------------------------------------
</TABLE>

                                       49
<PAGE>

Non-cash investing and financing activities:
Conversion of HSB convertible  preferred stock into HSB common stock in 1997 and
issuance  of HSB common  stock in  connection  with the  acquisition  of Solomon
Associates, Inc. in 1998 (see note 3).
--------------------------------------------------------------------------------
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       50
<PAGE>


Consolidated Statements of Changes in Shareholders' Equity
For the years ended December 31, (in millions)
<TABLE>
<CAPTION>
                                                  Total                                  Accumulated
                                                  Share-                   Additional      Other
                                                  holders'        Common      Paid-in    Comprehensive   Retained   Benefit
                                                  Equity           Stock      Capital      Income        Earnings    Plans
----------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>            <C>          <C>            <C>          <C>         <C>

Balances at December 31, 1996                   $    345.6     $   10.0     $   32.0       $ 49.2       $   255.1   $  (0.7)
----------------------------------------------------------------------------------------------------------------------------
Net income                                            66.3          --           --           --             66.3        --
Dividends declared                                   (47.0)         --           --           --            (47.0)       --
Change in accumulated other
 comprehensive income, net of tax                      6.7          --           --           6.7             --         --
Benefit plans                                         (0.3)         --           --           --              --       (0.3)
Reacquisition of stock                               (54.0)         --          (1.8)         --            (52.2)       --
Conversion of redeemable preferred stock              20.0          --           0.7          --             19.3        --
Exercise of stock options                              7.0          --           0.5          --              6.5        --
Issuance of reacquired stock,
 net of forfeitures                                    1.0          --           0.2          --              0.8        --
-----------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997                   $    345.3     $   10.0     $   31.6       $ 55.9        $  248.8   $  (1.0)
-----------------------------------------------------------------------------------------------------------------------------
Net income                                           134.4          --           --           --            134.4        --
Dividends declared                                   (47.9)         --           --           --            (47.9)       --
Change in accumulated other
 comprehensive income, net of tax                     10.9          --           --          10.9             --         --
Benefit plans                                         (1.2)         --           --           --              --       (1.2)
Reacquisition of stock                               (47.7)         --          (5.0)         --            (42.7)       --
Exercise of stock options                              9.3          --           1.8          --              7.5        --
Issuance of reacquired stock,
 net of forfeitures                                   16.2          --           5.1          --             11.1        --
-----------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998                   $    419.3     $   10.0     $   33.5       $ 66.8        $  311.2   $  (2.2)
-----------------------------------------------------------------------------------------------------------------------------
Net income                                            72.8          --           --           --             72.8        --
Dividends declared                                   (49.9)         --           --           --            (49.9)       --
Change in accumulated other
 comprehensive income, net of tax                    (68.7)         --           --         (68.7)            --         --
Benefit plans                                         (4.7)         --           --           --              --       (4.7)
Reacquisition of stock                                (4.4)         --          (1.2)         --             (3.2)       --
Exercise of stock options                              4.0          --           1.5          --              2.5        --
Issuance of reacquired stock,
 net of forfeitures                                    8.1          --           2.4          --              5.7        --
-----------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999                   $    376.5     $   10.0     $   36.2       $ (1.9)       $  339.1   $  (6.9)
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

                                       51
<PAGE>



Notes to Consolidated Financial Statements
(in millions, except per share amounts)


1. Accounting Policies


Consolidation

The accompanying  financial statements present the consolidated  accounts of HSB
Group,  Inc.  and its  subsidiaries  (collectively,  HSB or the Company) and are
prepared in accordance  with Generally  Accepted  Accounting  Principles  (GAAP)
within the U.S.  Significant  intercompany  transactions  and balances have been
eliminated  in  consolidation.   The  preparation  of  financial  statements  in
accordance  with GAAP requires the use of estimates in reporting  certain assets
and  liabilities.  Actual  results  could differ from those  estimates.  Certain
amounts  for 1998 and 1997  have  been  reclassified  to  conform  with the 1999
presentation.


Insurance

Insurance premium revenues are net of reinsurance ceded and are generally earned
on a pro rata basis over the  contract  period.  The portion of gross  insurance
premiums  not earned at the end of the period is recorded as unearned  insurance
premiums on the Consolidated Statements of Financial Position.

Prepaid acquisition costs, consisting principally of commissions,  premium taxes
and  certain  underwriting  expenses  are  amortized  as the  related  insurance
premiums are earned. Unearned ceded commissions arising from certain reinsurance
transactions  are netted in prepaid  acquisition  costs.  All other  acquisition
costs are charged to operations as incurred.

Liabilities  for  claims and  adjustment  expenses  for  boiler  and  machinery,
property  and  other  coverages  represent  estimated  reserves  on  claims  and
adjustment  expenses  reported  but not yet  settled  and the cost of claims and
adjustment  expenses  incurred  but not yet  reported.  Reserves  for claims and
adjustment  expenses are undiscounted and are gross of amounts  recoverable from
reinsurers.   Reserves  are  reduced  for  estimated   amounts  of  salvage  and
subrogation  and  deductibles  from  customers.  HSB  records  subrogation  when
recoverability  is probable,  such as when a judgment is returned,  liability is
admitted or settlement  is reached.  The length of time that reserves for claims
and adjustment expenses are carried on the Consolidated  Statements of Financial
Position  is a function  of the pay-out  patterns  associated  with the types of
coverages involved.  Estimates for these reserves reflect such variables as past
loss experience,  changes in judicial interpretation of legal liability,  policy
coverage and inflation.  The establishment of such reserves  frequently requires
complex engineering  judgements.  Due to the nature of the variables involved in
the  reserving  process,   subjective   judgments  are  an  integral  component.
Previously estimated reserves are regularly adjusted as loss experience develops
and new information  becomes  available.  Since reserves are based on estimates,
the ultimate  liability may be more or less than such  reserves.  The effects of
changes in estimated  reserves are included in the results of  operations in the
period in which the estimates change (see note 11).

Reinsurance  assets  represent  amounts due from  reinsurers for paid and unpaid
claims,  paid and unpaid loss  adjustment  expenses and the unearned  portion of
premiums ceded through reinsurance agreements.


Engineering Services

HSB recognizes the majority of its engineering  services revenues as the service
is provided.  Costs on such  contracts  are included in  operations as incurred.
Provisions  are made for  losses on  contracts  at the time such  losses  become
known.

                                       52
<PAGE>


Investments

Cash and cash  equivalents  include cash on hand and  short-term  highly  liquid
investments with maturities of three months or less. Short-term investments have
a maturity  of one year or less and are  carried at cost  which,  together  with
accrued interest  thereon,  approximates  fair value.  Fixed maturities  include
bonds, notes and redeemable  preferred stocks.  Equity securities include common
and non-redeemable  preferred stocks. All fixed maturities and equity securities
are classified as available for sale. Accordingly, these investments are carried
at estimated  fair value.  Estimated  fair values of  securities  classified  as
available for sale are based  principally upon quoted market prices.  Unrealized
gains and losses on  investments  classified  as available  for sale and foreign
exchange gains and losses on certain investments in foreign operations where the
U.S.  dollar is not the  functional  currency  are included net of income tax in
shareholders' equity.

Investment income is net of investment  expenses.  Realized investment gains and
losses are  determined on the basis of costs related to those  investments  sold
and are recorded on the trade date. Also,  included in realized investment gains
and  losses  are  losses  arising  from  declines  in the  realizable  value  of
investments considered to be other than temporary.

The carrying  values of short-term  investments,  investment  income accrued and
securities transactions in the course of settlement approximate their fair value
because  of the  relatively  short  period of time  between  origination  of the
instruments and their expected realization.

Financial  instruments which qualify for hedge accounting are recorded at market
with gains and losses  reflected  in  shareholders'  equity.  To the extent such
instruments  do not qualify for hedge  accounting,  related gains and losses are
reflected in results of operations.


Income Taxes

Deferred  tax assets  and  liabilities  are  generally  determined  based on the
difference  between  financial  statement  and tax basis for certain  assets and
liabilities  using tax rates in effect for the year in which the differences are
expected to reverse.  Deferred tax assets are allowed if future  realization  is
more  likely  than not.  Deferred  income  taxes  are  provided  for  unrealized
appreciation/depreciation  on fixed maturities and equity  securities  available
for  sale,  prepaid  acquisition  costs,  loss  reserve  discounting,   unearned
premiums, certain employee benefit costs and other items which are the result of
temporary  differences  in the  treatment  of such  items for tax and  financial
statement purposes (see note 12).


Fixed Assets

Fixed assets include real and personal property and certain eligible capitalized
system  development  costs.  Fixed  assets are carried at cost less  accumulated
depreciation  and  amortization.  Depreciation and amortization is calculated on
the basis of estimated useful lives using straight-line and accelerated methods.
Upon  retirement  or  replacement,  any gain or loss is  included  in results of
operations.


Goodwill and Other Intangible Assets

Goodwill  represents  the cost of acquiring a business which is in excess of the
fair value of its net assets. Goodwill is generally amortized over 3 to 20 years
and other intangible assets over their estimated useful lives.  These assets are
included in other assets on the  Consolidated  Statements of Financial  Position
and amounted to $56.7 and $57.7  million  (net of  accumulated  amortization  of
$12.5  and $5.5  million)  at  December  31,  1999 and 1998,  respectively.  HSB
evaluates the  realizability  of goodwill based upon projections of undiscounted
cash flows.

                                       53
<PAGE>


2. Changes in Accounting Principles

The  Accounting  Standards  Executive  Committee  of the  American  Institute of
Certified Public Accountants  (AcSEC) issued three Statements of Position (SOPs)
that 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  already  in
compliance with these SOPs, the implementation of these statements 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  Standards  (SFAS) No. 133,  "Accounting for Derivative
Instruments and Hedging Activities"  subsequently  amended by SFAS No. 137. 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. This statement is effective for the Company for
the first quarter of 2001. Based on the Company's  current  investment  policies
and practices,  the Company  anticipates  that the adoption of the provisions of
SFAS No.  133 will not have a  significant  effect  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  became  effective  for  financial
statements for fiscal years beginning after June 15, 1999. Currently the Company
is not  party  to any  contracts  that 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.


3. Corporate Activity

Acquisitions / Divestitures

Structural Integrity Associates

In July 1999,  The  Hartford  Steam  Boiler  Inspection  and  Insurance  Company
(HSBIIC) acquired Structural Integrity  Associates,  Inc.  (Structural) based in
San Jose,  California.  Structural is an  engineering  consulting and inspection
services firm specializing in the analysis, control and prevention of structural
and equipment failures. It offers a full array of services,  from inspection and
condition  assessment,  to  monitoring  and  remaining  life  analysis,  repair,
remediation and total risk management of critical equipment and structures.


HSB Industrial Risk Insurers

The reinsurance  agreements effective January 1, 1998 between HSBIIC,  Employers
Reinsurance  Corporation  (ERC) and Industrial Risk Insurers (IRI), as discussed
below,  were  terminated  with  respect to loss or  liabilities  arising  out of
occurrences  taking place on or after January 1, 2000. As a result,  HSBIIC will
no longer retain 85 percent of the equipment  breakdown insurance and 15 percent
of the property insurance of the combined insurance  portfolio for risks arising
on or after January 1, 2000. The joint  underwriting  association that was known
as HSB  Industrial  Risk  Insurers  will,  from  January  1,  2000,  be known as
Industrial Risk Insurers (IRI).

                                       54
<PAGE>

Concurrent with the termination of the reinsurance  agreements,  HSBIIC, ERC and
IRI replaced the operating  agreement  dated January 1, 1998. The new agreement,
effective  January 1, 2000,  calls for HSBIIC to retain 0.5  percent  membership
share in IRI with the ability to increase  its total share up to a maximum of 10
percent,  at no cost,  at HSBIIC's  option.  In  addition,  the  agreement  also
establishes  an  arrangement  for  HSB to  perform  engineering  and  inspection
services for clients of IRI and  provides for a fixed  fronting fee in the event
that IRI continues to use HSBIIC's  licenses.  HSBIIC  received  payments of $27
million  in  December  1999  related  to  the  partial  settlement  of  unearned
reinsurance  premiums and ceding  commissions due to HSBIIC under the agreement.
Final settlement is expected to occur in the second half of 2000.

On January 6, 1998,  HSBIIC sold its interest in IRI to ERC in accordance with a
previously   announced  purchase  and  sale  agreement  between  ERC  and  IRI's
twenty-three  member insurers.  HSBIIC received gross proceeds of $49.1 million,
prior to transaction  costs,  for its 23.5 percent share in IRI. The gain on the
sale of IRI was $36.6 million pre-tax and $23.8 million  after-tax.  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.

IRI  is  an  unincorporated,  voluntary  joint  underwriting  association  which
provides property  insurance for the class of business known as Highly Protected
Risks (HPR) for larger  manufacturing,  processing  and  industrial  businesses,
which have invested in protection against loss through the use of sprinklers and
other means.  IRI primarily  writes policies on a syndicate basis that specifies
to the  insured  the  percentage  share of risk  accepted  by each member of the
association.  Each member  company,  therefore,  operates as a direct insurer or
reinsurer on such policies and participates in the premiums and losses generated
thereunder in proportion to its membership interest.  In 1997 and 1996, HSBIIC's
membership shares were 23.5 and 14 percent  respectively;  in 1995 and prior the
shares were 0.5 percent.

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  had been renamed HSB Industrial Risk Insurers.  In 1999 and
1998,  HSBIIC wrote the  business for HSB  Industrial  Risk  Insurers  using its
insurance licenses and provided 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  retained  85 percent  of the  equipment
breakdown  insurance  and 15 percent of the  property  insurance of the combined
insurance portfolio.

To support HSB's expanded role, on December 31, 1997, a business trust formed by
HSB sold $300 million of 20 year, 7 percent  Convertible Capital Securities in a
private placement to ERC (see note 13). These capital securities are convertible
into HSB  common  stock,  at any time,  subject  to  regulatory  approval,  at a
conversion  price of  $56.67  per  share.  $250  million  of the  proceeds  were
contributed to HSBIIC and $50 million were retained by HSB.


Radian LLC

On January 2, 1998,  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 worldwide. 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 to Radian LLC. The results of
Radian LLC were classified as discontinued  operations following ratification on
July 28, 1997 by HSB's Board of Directors of  management's  decision to exercise
its put.  HSBIIC'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 approximately  $36.9 million,  which was recorded in the

                                       55
<PAGE>

first quarter of 1998. Prior to July 1997, HSBIIC's share of the joint venture's
results were recorded as equity in Radian LLC.

As of December 31, 1997, Radian LLC had assets of $159.7 million, liabilities of
$88.4 million,  revenues of $288.0 million and expenses of $314.0 million. As of
December 31, 1997, HSBIIC's interest in Radian LLC was 40 percent.


Kemper

HSBIIC completed an acquisition of the monoline boiler and machinery business of
Kemper  Insurance  Companies  (Kemper) and  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,  effective  July 1,
1998.  The two  companies  also  completed an  agreement  for HSBIIC to reinsure
boiler and machinery  coverage  written as part of Kemper's  commercial  package
policies.


Solomon Associates, Inc.

In April 1998,  HSB acquired  Solomon  Associates,  Inc.  (SAI) based in Dallas,
Texas.  SAI  is  an  engineering   management   consulting  firm  that  provides
comparative performance  benchmarking consulting to the refining,  petrochemical
and power generation industries.


Stock Split

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 of HSB's  stock
resulting from the split were  distributed  on May 22, 1998. In accordance  with
SFAS No. 128 "Earnings per Share"  (EPS),  all earnings per share  presentations
have  been  adjusted  to  reflect  the  impact  of the  stock  split,  including
retroactive  restatement  of prior  periods.  Shares have also been restated for
comparative purposes.


Capital Securities

On July 15, 1997, HSB sold $110 million of 30 year Global  Floating Rate Capital
Securities in a private placement. On December 31, 1997, HSB issued $300 million
of 20 year fixed rate Convertible Capital Securities to ERC (see note 13).

                                       56
<PAGE>


4. Earnings per Share

The following table presents a  reconciliation  of the numerator and denominator
of the  calculation  of  basic  and  diluted  EPS  for  income  from  continuing
operations:

                                                1999      1998     1997
------------------------------------------------------------------------
Income from continuing
   Operations                                $  72.8   $ 104.1   $ 66.3
Dividends on preferred shares                     --        --    (1.1)
                                           -----------------------------
Income applicable to
   common stock                                 72.8     104.1     65.2
Convertible preferred stock                       --        --      1.1
After-tax distributions on
   convertible capital securities (1)           13.7      13.7       --
                                           -----------------------------
Adjusted for diluted
   Computation                               $  86.5   $ 117.8   $ 66.3
------------------------------------------------------------------------
Weighted-average common
   shares outstanding (2)                       29.0      29.3     29.5
Convertible capital securities                   5.3       5.3       --
Convertible preferred stock                       --        --      0.5
Stock options (3)                                0.3       0.6      0.2
                                           -----------------------------
Adjusted for diluted
   Computation                                  34.6      35.2     30.2
------------------------------------------------------------------------
From continuing operations:
Earnings per share - basic (4)               $   2.51  $   3.55  $  2.21
Earnings per share - assuming
   Dilution                                  $   2.50  $   3.35  $  2.20
------------------------------------------------------------------------

(1)  See note 13.
(2)  Weighted-average  shares reflect the repurchase of  approximately  0.1, 1.2
     and 1.5 million shares in 1999, 1998 and 1997, respectively.
(3)  Includes the dilutive  effect of stock options  computed using the treasury
     stock method and shares issuable under deferred stock awards (see note 15).
(4)  Represents  income  applicable to common stock divided by  weighted-average
     common shares outstanding.

5. Segment Information

HSB has four reportable  segments - Commercial  insurance,  Global Special Risks
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 Risks 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 offer 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 the same as those  described  in
"Accounting  Policies"  (see note 1), except for certain  benefit  charges which
comprise the Corporate  Account.  HSB evaluates the  performance of its

                                       57
<PAGE>

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.

HSB's foreign operations (primarily insurance) are widely dispersed such that no
country or logical  aggregation  of countries in a geographic  area  comprises a
significant  concentration  with  respect  to either  revenues  or  identifiable
assets.  Export  sales from HSB's  domestic  operations  are  minimal due to the
existence  of the  Company's  foreign  subsidiaries  which are  responsible  for
virtually all of the Company's foreign sales.

The  following  presents  financial  data of the  Company  based  on  geographic
location:

For the years ended December 31,             1999        1998        1997
--------------------------------------------------------------------------
Revenues from continuing operations:
U.S.                                    $   526.1   $   491.0   $   483.1
Non-U.S.                                     80.1        88.2       120.3
                                       -----------------------------------
      Total                             $   606.2   $   579.2   $   603.4
                                       -----------------------------------

Income from  continuing  operations
before taxes and  distributions
on capital securities:
U.S.                                    $   114.7   $   168.2   $    78.4
Non-U.S.                                     12.0         5.7        15.3
                                        ----------------------------------
      Total                             $   126.7   $   173.9   $    93.7
--------------------------------------------------------------------------

At December 31,                             1999        1998        1997
--------------------------------------------------------------------------
Identifiable assets:
U.S.                                    $ 1,822.8   $ 1,755.9   $ 1,244.7
Non-U.S.                                    440.4       382.7       292.5
                                  ----------------------------------------
      Total                             $ 2,263.2   $ 2,138.6   $ 1,537.2
--------------------------------------------------------------------------


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

For the years ended December 31,                    1999       1998       1997
--------------------------------------------------------------------------------
Revenues from continuing operations:
Insurance premiums:
      Commercial                                  $ 335.2    $ 306.3   $  269.0
      Global Special Risks                           45.6       83.6      217.1
Engineering services                                119.6       93.5       61.3
Net investment income and realized
   investment gains                                 104.7       89.6       50.9
                                                 -------------------------------
      Total revenues from reportable segments       605.1      573.0      598.3
      Other segments                                  1.1        6.2        5.1
                                                 -------------------------------
         Total revenues                           $ 606.2    $ 579.2   $  603.4
                                                 -------------------------------

Net income (loss):
Commercial                                        $  12.8    $  14.8   $   13.4
Global Special Risks                                  6.7        9.8       10.7
Engineering services                                  0.7        4.6        3.0
Investments                                          73.8       65.1       37.7
                                                 -------------------------------
      Total net income from reportable segments      94.0       94.3       64.8
Other segments (1)                                   (9.4)      (0.3)      (1.3)
Corporate account                                     6.4        4.7        5.1
Distributions on capital securities                 (18.2)     (18.4)      (2.3)
Discontinued operations                                --       30.3         --
Gain on sale of IRI, net of income taxes               --       23.8         --
                                                 -------------------------------
      Net income                                  $  72.8    $ 134.4   $   66.3
--------------------------------------------------------------------------------

                                       58
<PAGE>

(1)  In 1999,  other segments  includes an after-tax  charge of $6.5 million for
     losses related to medical equipment insurance contracts.


Specified  items included in the measure of net income for  reportable  segments
are as follows:


For the years ended December 31,                   1999       1998       1997
------------------------------------------------------------------------------
Depreciation and amortization expense:
   Commercial                                   $   9.9    $   7.3   $    3.4
   Global Special Risks                             2.1        2.2        3.2
   Engineering services                             8.1        5.9        2.7
   Investments                                      0.4        0.3         --

Income tax expense:
   Commercial                                       7.2        4.6        6.1
   Global Special Risks                             2.3        7.7        6.2
   Engineering services                             0.4        1.6        0.1
   Investments                                     27.6       22.5       10.3
------------------------------------------------------------------------------


6. Statutory Financial Information

HSBIIC is a Connecticut domiciled insurance company which is licensed to conduct
business in all 50 states,  the District of  Columbia,  Puerto Rico and the U.S.
Virgin Islands. The annual statements for state insurance regulatory authorities
are currently  prepared using accounting methods prescribed or permitted by such
authorities  (statutory  basis) and are not consolidated.  Statutory  accounting
practices (SAP) also differ in certain other respects from GAAP. With respect to
HSBIIC,  these differences are primarily comprised of the accounting for prepaid
acquisition costs, deferred income taxes, fixed maturity investments,  valuation
of certain non-insurance  affiliates and employee benefit plans. At December 31,
1999 and 1998, policyholders' surplus on a statutory basis was $428.8 and $612.6
million, respectively. Statutory net income, adjusted to include the earnings of
all HSBIIC domestic  insurance  subsidiaries  for 1999, 1998 and 1997 was $81.1,
$202.5 and $42.9 million, respectively.

HSBIIC  and  its  insurance   subsidiaries  are  currently  subject  to  various
regulations  that limit the maximum  amount of  dividends  available to HSBIIC's
parent company without prior approval of insurance regulatory authorities. Under
SAP,   approximately   $80  million  of  statutory   surplus  is  available  for
distribution to HSB Group, Inc. in 2000 without prior regulatory approval.

In 1998, the National Association of Insurance  Commissioners (NAIC) adopted the
Codification of Statutory Accounting Principles guidance, which will replace the
current  Accounting  Practices  and  Procedures  manual  as the  NAIC's  primary
guidance on statutory accounting.  The NAIC is now considering amendments to the
Codification guidance that would be effective upon implementation.  The NAIC has
recommended  an effective date of January 1, 2001. The Company has not estimated
the potential  effect of the  Codification  guidance  adopted by the Connecticut
Insurance Department.

                                       59
<PAGE>


7. Investments

For the years ended December 31,                  1999       1998       1997
-----------------------------------------------------------------------------
Income from Investment Operations:
Net investment income:
   Short-term interest                        $   5.0    $   8.7   $   6.7
   Fixed maturities:
      Taxable interest                           24.7       31.9       9.6
      Tax exempt interest                         2.0        2.5       2.1
      Redeemable preferred dividends             17.3        5.9       7.2
   Equity securities:
      Common dividends                            6.5        6.4       4.7
      Non-redeemable preferred dividends         15.6       14.0       8.3
   Other                                          2.0        0.2       2.1
                                             ------------------------------
         Total investment income                 73.1       69.6      40.7
         Investment expenses                     (9.0)      (5.4)     (3.9)
                                             ------------------------------
            Net investment income             $  64.1    $  64.2   $  36.8

Realized investment gains (losses):
   Fixed maturities:
      Bonds:
         Gains                                $   0.3    $   2.1   $   0.5
         Losses                                  (1.3)      (0.2)     (0.3)
                                             ------------------------------
            Net (losses) gains                   (1.0)       1.9       0.2
      Redeemable preferred stocks:
         Gains                                    0.7        2.3       0.4
         Losses                                  (2.6)      (0.1)     (0.3)
                                             ------------------------------
            Net (losses) gains                   (1.9)       2.2       0.1
   Equity securities:
      Common stocks:
         Gains                                   50.7       20.5      48.1
         Losses                                 (12.2)      (7.0)     (5.1)
                                             ------------------------------
            Net gains                            38.5       13.5      43.0
      Non-redeemable preferred stocks:
         Gains                                    7.8       10.3       7.7
         Losses                                  (2.8)      (3.1)     (0.2)
                                             ------------------------------
            Net gains                             5.0        7.2       7.5
   Foreign exchange (losses) gains               (0.1)       0.3      (7.4)
   Collar contracts losses                         --         --     (30.7)
   Other gains                                    0.1        0.3       1.4
                                             ------------------------------
            Realized investment gains         $  40.6    $  25.4   $  14.1
---------------------------------------------------------------------------

There  were  no  material  declines  in  the  realizable  value  of  investments
considered to be other than temporary for 1999, 1998 and 1997.

                                       60
<PAGE>


At December 31,                                    1999       1998       1997
-------------------------------------------------------------------------------
Unrealized Investment Gains, Net of Tax
 Fixed maturities:
    Gains                                       $   2.7    $  13.0   $    7.9
    Losses                                        (58.6)      (4.4)      (0.6)
                                                -------------------------------
       Net (losses) gains                         (55.9)       8.6        7.3
 Equity securities:
    Gains                                         103.7      122.9       94.3
    Losses                                        (38.4)     (12.1)      (1.8)
                                                -------------------------------
       Net gains                                   65.3      110.8       92.5
 Foreign exchange losses                           (4.7)      (6.3)      (4.5)
                                                -------------------------------
       Total unrealized investment gains            4.7      113.1       95.3
 Income taxes                                      (3.7)     (42.3)     (35.5)
                                                -------------------------------
       Unrealized investment gains,
         net of tax                             $   1.0    $  70.8   $   59.8
-------------------------------------------------------------------------------



Fixed Maturities
The amortized cost,  estimated fair values (based principally upon quoted market
prices) and gross  unrealized  gains and losses of fixed  maturities at December
31, were as follows:

                                                        1999
------------------------------------------------------------------------------
Category                         Amortized   Estimated     Gross       Gross
                                   Cost        Fair     Unrealized  Unrealized
                                              Value       Gains       Losses
------------------------------------------------------------------------------
Redeemable preferred stocks       $214.8       $190.0        $1.6      $26.4
States and municipalities           37.7         36.6         0.6        1.7
Foreign governments                 16.5         16.6         0.3        0.2
Corporate and other                276.7        246.6         0.2       30.3
                                 ---------------------------------------------
   Total fixed maturities         $545.7       $489.8        $2.7      $58.6
------------------------------------------------------------------------------

                                                      1998
--------------------------------------------------------------------------------
Category                         Amortized   Estimated       Gross      Gross
                                   Cost        Fair       Unrealized  Unrealized
                                               Value         Gains      Losses
-------------------------------------------------------------------------------
Redeemable preferred stocks       $215.5       $219.2       $ 5.0       $1.3
States and municipalities           47.4         49.3         2.1        0.2
Foreign governments                 21.0         21.3         0.4        0.1
Corporate and other                284.6        287.3         5.5        2.8
                                -----------------------------------------------
   Total fixed maturities         $568.5       $577.1       $13.0       $4.4
-------------------------------------------------------------------------------

                                       61
<PAGE>


The amortized cost and estimated fair value of fixed  maturities at December 31,
by contractual  years-to-maturity  is as follows  (actual  maturities may differ
from  contractual  maturities  because  borrowers  may have the  right to prepay
obligations):

                                                      1999
---------------------------------------------------------------------
Maturity                                      Amortized    Estimated
                                                Cost          Fair
                                                             Value
----------------------------------------------------------------------
One year or less                             $     39.2    $    38.1
Over one year through five years                   51.0         50.5
Over five years through ten years                  53.8         52.0
Over ten years                                    401.7        349.2
                                           --------------------------
   Total fixed maturities                    $    545.7    $   489.8
---------------------------------------------------------------------

Equity Securities

The cost,  estimated fair values (based  principally  upon quoted market prices)
and gross unrealized gains and losses of equity  securities at December 31, were
as follows:

                                                               1999
--------------------------------------------------------------------------------
                                                           Gross        Gross
                                            Estimated    Unrealized  Unrealized
                                   Cost     Fair Value    Gains        Losses
--------------------------------------------------------------------------------
Common stocks                     $128.6       $221.2      $100.5      $ 7.9
Non-redeemable preferred stocks    187.9        160.6         3.2       30.5
                                 -----------------------------------------------
   Total equity securities        $316.5       $381.8      $103.7      $38.4
--------------------------------------------------------------------------------

                                                           1998
--------------------------------------------------------------------------------
                                                           Gross        Gross
                                            Estimated    Unrealized   Unrealized
                                   Cost     Fair Value     Gains       Losses
--------------------------------------------------------------------------------
Common stocks                    $141.3        $249.3      $112.3      $ 4.3
Non-redeemable preferred stocks   185.0         187.8        10.6        7.8
                                ------------------------------------------------
   Total equity securities       $326.3        $437.1      $122.9      $12.1
--------------------------------------------------------------------------------

On December 19, 1996,  HSBIIC entered into three "zero cost collar contracts" to
mitigate the effects of market risk on its U.S. common stock  portfolio  (which,
for management purposes, included certain convertible preferreds). In the fourth
quarter of 1997,  HSBIIC settled all of its outstanding  contracts  resulting in
realized  losses of $30.7 million for the year,  all of which were offset by and
represented  portfolio  appreciation and returns that were realized.  During the
year ended  December 31, 1997,  the Company's  U.S.  common stock  portfolio had
experienced a total return of $57 million (which included price  appreciation of
approximately $54 million) and had a price movement correlation with the S&P 500
Index well in excess of 80 percent.

The collar  subjected the Company to market and  counterparty  credit risk.  The
Company  managed this exposure by  frequently  modeling the effects of potential
future  price  movements on the value of the collar and HSB's  portfolio  and by
entering into contracts with internationally  recognized financial institutions,
which  were  expected  to  perform  under  the  terms  of the  contract,  and by
evaluating  the credit  worthiness of such  institutions  by taking into account
credit ratings and other factors.

                                       62
<PAGE>

8. Fixed Assets

Fixed assets are summarized as follows:

At December 31,                                               1999       1998
------------------------------------------------------------------------------
Land and buildings                                         $   4.9    $   5.1
Furniture, equipment, leasehold improvements and other        72.8       68.0
Systems development costs                                     32.5       23.9
                                                         ---------------------
                                                             110.2       97.0
Less accumulated depreciation and amortization               (52.0)     (42.1)
                                                         ---------------------
   Total fixed assets                                      $  58.2    $  54.9
------------------------------------------------------------------------------

Property  and  equipment  are stated at cost.  Depreciation  expense is computed
using  straight-line and accelerated  methods over the estimated useful lives of
31.5  years  for  buildings  and 3 to 10  years  for  equipment  and  furniture.
Leasehold  improvements  are  amortized  over the shorter of the assets'  useful
lives or their remaining contractual lease terms.

The Company has a policy of  capitalizing  certain  systems  development  costs.
Systems  development  costs are amortized over estimated useful lives of 3 to 10
years. In 1998,  approximately $6.5 million of systems development costs related
to the allocation of purchase price for SAI.

In 1996, the Company began a  comprehensive  effort to assess and address issues
relating to the ability of its policy processing and other  operational  systems
to properly recognize calendar dates beginning in the year 2000. As part of this
effort,  the  Company  established  a Year 2000  Program to address the areas of
applications  software,  infrastructures,  embedded  technology and key business
partners and suppliers.  The Company's aggregate spending in connection with the
Year 2000 Program was  approximately  $28  million.  Certain of these costs were
expensed as incurred and funded  through  operating  cash flow.  The Company has
expensed $6.9, $5.1 and $1.5 million in 1999, 1998 and 1997,  respectively.  The
remainder  of the $28 million  related 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 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,  and are being  capitalized in accordance
with the Company's existing capitalization policy.


9. Leases

The  Company  leases  its home  office  facility  at One  State  Street  under a
long-term   capital  lease  with  the  One  State  Street  Limited   Partnership
(Partnership).  The lease  obligation  of $26.1  million was recorded at July 1,
1983 at an  interest  rate of 15  percent.  An asset of $26.1  million  was also
recorded  in 1983.  Accumulated  amortization  on the  asset was $12.3 and $11.5
million at December 31, 1999 and 1998, respectively.  Terms of the lease require
annual minimum lease payments of approximately  $4.2 million a year through June
30,  2018.  In  addition,  the  Company is required to pay over the lease term a
proportional share of the facility's variable operating expenses.  This amounted
to approximately  $2.7, $2.9 and $2.6 million for the years ended 1999, 1998 and
1997, respectively.

The Company owns the One State Street land and leases it to the Partnership. The
Company  receives a base rent for the land and a  participation  in the net cash
flow of the  Partnership.  If the facility is sold,  the Company will receive 50
percent or more of the sales proceeds in excess of the mortgages,  all operating
expenses  and  costs of sale and the  rental  obligations  pursuant  to the land
lease.  Under certain  circumstances,  the Company has the right to purchase the
facility.

                                       63
<PAGE>

In addition to its home office  facility,  the  Company  leases  facilities  and
certain  equipment which are accounted for as operating  leases.  Lease expenses
amounted to $12.0, $10.2 and $8.4 million in 1999, 1998 and 1997, respectively.

At December 31, 1999,  future minimum  rental  commitments  under  noncancelable
leases accounted for as operating leases with initial or remaining terms of more
than one year were as follows:

2000                       $ 6.9
2001                         6.3
2002                         5.7
2003                         5.1
2004                         3.7
2005 and thereafter          2.1
                         --------
Total                      $29.8
                         --------

10. Reinsurance

The components of net written and net earned insurance premiums were as follows:

For the years ended December 31,            1999        1998        1997
-------------------------------------------------------------------------
Written premiums:
   Direct                               $  416.6    $  478.2    $  361.4
   Assumed                                 363.3       318.5       257.1
   Ceded                                  (413.2)     (444.1)     (120.0)
                                      -----------------------------------
      Net written premiums              $  366.7    $  352.6    $  498.5
Earned premiums:
   Direct                               $  452.8    $  408.8    $  370.1
   Assumed                                 371.0       361.7       239.2
   Ceded                                  (441.9)     (374.4)     (118.1)
                                      -----------------------------------
      Insurance premiums                $  381.9    $  396.1    $  491.2
-------------------------------------------------------------------------

In 1999 and 1998,  HSBIIC was the direct writer of business written on behalf of
HSB  Industrial  Risk  Insurers.  This  business  was ceded to that  entity  and
HSBIIC's share of the equipment breakdown and property business was assumed back
in accordance  with the  reinsurance  agreements in place with ERC (see note 3).
This has  resulted  in  growth  in gross  and  ceded  premiums  and  claims  and
adjustment expenses.

The  Company  writes  direct  business,  which  in 1999 and  1998  included  HSB
Industrial  Risk Insurers  business,  through  agencies and brokerage  firms. In
addition,  the Company assumes boiler and machinery exposures from approximately
200  insurance  companies and several  insurance  pools.  Under the  reinsurance
agreements,  the Company's  reinsured  companies may include equipment breakdown
exposures in their multi-peril  policies,  and such risks will be assumed by the
Company under the terms of the agreement.  These  agreements  generally  provide
that the Company  will assume 100  percent of each  boiler and  machinery  risk,
subject to the capacity specified in the agreement,  and will receive the entire
equipment  breakdown  premium  except  for a ceding  commission,  which  will be
retained by the reinsured company for commissions to agents and brokers, premium
taxes and handling expenses.

Although the Company assumes the role of reinsurer, it continues to have selling
and  underwriting  responsibilities  as well as  involvement  in inspecting  and
claims  adjusting.  In effect,  the  Company  becomes  the  equipment  breakdown
insurance  department  of the  reinsured  company  and  provides  all  equipment
breakdown  underwriting  (that is, the  examination  and  evaluation of the risk
based on its engineering  judgments),  claims and engineering  services as if it
were  part  of that  organization.  Traditionally,  as part of the  underwriting
process,  the Company  retains the right to decline or restrict  coverage in the
same manner as it does for its own business. In 1996, the Company began to write
a simplified  program  (referred to as ReSource) under which a reinsured company
agrees

                                       64
<PAGE>

to include  equipment  breakdown  insurance  on an entire  portfolio of accounts
meeting specific  underwriting  guidelines and occupancy  parameters,  which the
Company agrees to reinsure for equipment breakdown losses.

The  insurance   industry,   in  general,   continues  to  undergo   significant
restructuring and consolidation.  Considerable  merger and acquisition  activity
has  occurred  over the last  several  years and,  with the advent of  financial
services reform,  more  contraction is possible in the future.  Depending on the
specific  companies  involved in these activities and other market factors,  the
level of reinsured business the Company assumes in the future could be impacted.

For 1999 approximately 26 percent of the Company's gross written premium,  which
includes HSB Industrial Risk Insurers,  was produced by J&H Marsh & McLennan and
Sedgwick Group.

As a property  insurer,  the  Company  is subject to losses  that may arise from
catastrophic  events.  The Company  participates in various  facultative,  quota
share  and  excess  of  loss  reinsurance  agreements  to  limit  its  exposure,
particularly to catastrophic losses, and to provide additional capacity to write
business.  In the unlikely event that ceded  reinsurers are unable to meet their
obligations,   the  Company  would   continue  to  have  primary   liability  to
policyholders for losses incurred.  Reinsurance recoverable on unpaid claims and
the  unearned  portion of ceded  reinsurance  premiums  are  reported as assets,
rather than netted against the related  liability  accounts.  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." The Company recorded $503.4, $444.7 and $45.2 million
of reinsurance  recoveries as a reduction of its claims and adjustment  expenses
for the years ended December 31, 1999, 1998 and 1997, respectively.  Reinsurance
recoverable on paid claims and  adjustment  expenses was $22.9 and $14.6 million
at December 31, 1999 and 1998, respectively.


11. Reconciliation of Liability for Claims and Adjustment Expenses

The  following  tables  provide  reconciliations  of the  beginning  and  ending
reserves for claims and  adjustment  expenses on both a gross  liability and net
(of reinsurance) liability basis:


Reconciliation of Gross Liability for Claims and Adjustment Expenses

<TABLE>
<CAPTION>

                                                             1999       1998       1997
-------------------------------------------------------------------------------------------
<S>                                                        <C>        <C>        <C>
Gross liability for claims and adjustment
 expenses at January 1,                                    $ 558.2    $ 276.7    $ 302.9
Plus:
 Provision for claims and adjustment
    expenses occurring in the current year                   653.0      572.7      263.3
 Increase (decrease) in estimated claims and
    adjustment expenses arising in prior years (1)            31.7       46.9       (0.2)
                                                         --------------------------------
       Total incurred claims and adjustment expenses       $ 684.7    $ 619.6    $ 263.1
                                                         --------------------------------
Less:
 Payment for claims arising in:
    Current year                                             164.9      141.0       90.6
    Prior years                                              295.7      197.1      198.7
                                                         --------------------------------
       Total payments                                      $ 460.6    $ 338.1    $ 289.3
                                                         --------------------------------
Gross liability for claims and adjustment
 expenses at December 31,                                  $ 782.3    $ 558.2    $ 276.7
------------------------------------------------------------------------------------------
</TABLE>
(1)  The 1998 increase  primarily  resulted from the decision  rendered under an
     arbitration  proceeding  and adverse  claims  experience  in  international
     operations.

                                       65
<PAGE>


Reconciliation of Net Liability for Claims and Adjustment Expenses
<TABLE>
<CAPTION>

                                                             1999       1998       1997
----------------------------------------------------------------------------------------
<S>                                                       <C>        <C>        <C>
Net liability for claims and adjustment
 expenses at January 1,                                   $ 169.7    $ 190.8    $ 177.8
Plus:
   Provision for claims and adjustment expenses
      occurring in the current year                         165.4      164.0      209.5
   Increase (decrease) in estimated claims and
      adjustment expenses arising in prior years              0.4       10.9        8.4
                                                        --------------------------------
         Total incurred claims and adjustment expenses    $ 165.8    $ 174.9    $ 217.9
                                                        --------------------------------
Less:
   Payment for claims arising in:
      Current year                                           80.0       84.2       82.3
      Prior years                                            99.4      111.8      122.6
                                                        --------------------------------
         Total payments                                   $ 179.4    $ 196.0    $ 204.9
                                                        --------------------------------
Net liability for claims and adjustment
 expenses at December 31,                                 $ 156.1    $ 169.7    $ 190.8
----------------------------------------------------------------------------------------
</TABLE>

1999,  1998 and 1997 net  claims  and  adjustment  expenses  incurred  have been
reduced by subrogation  recoveries of approximately $2.0, $5.0 and $3.3 million,
respectively.

A  reconciliation  of the net  liability to the gross  liability  for claims and
adjustment expenses is as follows:

At December 31,                                1999       1998       1997
--------------------------------------------------------------------------
Net liability for claims and
 adjustment expenses                        $ 156.1    $ 169.7    $ 190.8
Reinsurance recoverable on unpaid
 claims and adjustment expenses               626.2      388.5       85.9
                                           -------------------------------
Gross liability for claims and
 adjustment expenses                        $ 782.3    $ 558.2    $ 276.7
--------------------------------------------------------------------------

The Company utilizes  well-capitalized  domestic and  international  reinsurance
companies  and  syndicates  for  its  reinsurance  program  and  monitors  their
financial condition on an on-going basis. For reinsurers that are not accredited
in their state of domicile,  the Company  requires  collateral  for  reinsurance
recoverable from such carriers.  Uncollectible reinsurance recoverables have not
had,  and are not  expected  by  management  to have in the  future,  a material
adverse effect on the consolidated  results of operations or financial  position
of the Company.

The following table displays information  concerning the primary participants in
the Company's current reinsurance program as of December 31, 1999:

Reinsurer                             Ceded
                                      Written      Reinsurance  1999 A.M. Best's
                                      Premium        Asset         Rating
--------------------------------------------------------------------------------
Employers Reinsurance Corporation*    $  141.5   $     292.6    A++ (Superior)
General Reinsurance Corporation           39.7          83.5    A++ (Superior)
Scottsdale Insurance Company               5.3          29.1    A+  (Superior)
Gerling-Konzern Globale                   10.9          22.4             n/a
Hartford Fire Insurance Company           10.6          21.8    A+  (Superior)
Terra Nova Insurance Company LTD           7.7          18.4             n/a
Mid Ocean Reinsurance Company              7.8          17.3             n/a
NAC Reinsurance Corporation                7.0          16.5    A+  (Superior)
Frankona Ruckversicherungs AG              6.4          15.7             n/a
Lloyds 376 JHV                             9.9          15.6             n/a
-----------------------------------------------------------------------------
* Net of business assumed by HSB from ERC


As of December  31,  1999,  no other  reinsurance  asset of the Company from any
single reinsurer exceeded 3.0 percent of shareholders'  equity.  Certain Lloyd's
syndicates  participate in the excess of loss reinsurance program,  primarily in
the excess  layers.  The  highest  aggregate  percentage  participation  of such
syndicates, at 32.4 percent,

                                       66
<PAGE>

is in the $50 million excess of $100 million layer. No individual  syndicate has
more than 7.2 percent  participation  in any of the excess layers.  In addition,
certain syndicates participate in three of our quota share treaties, aggregating
10.6, 12.7 and 82.9 percent in each of the three treaties. Lloyd's participation
in our catastrophe cover is 71.4 percent with no individual  syndicate retaining
more than 6.7 percent.  The Company's  reinsurance  asset in the aggregate  from
over 100 Lloyd's  syndicates,  excluding the syndicate  disclosed  above,  is 12
percent of shareholders'  equity at December 31, 1999.  Lloyd's has historically
participated more heavily in the higher treaty layers.

The  Company  is  involved  in  various  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.


12. Income Taxes


Tax Provision

A reconciliation of income taxes at U.S.  statutory rates to the income taxes as
reported is as follows:

<TABLE>
<CAPTION>
                                                           1999                1998                  1997
                                                              % of                 % of                  % of
                                                            Pre-tax               Pre-tax               Pre-tax
                                                    Amount   Income      Amount   Income      Amount     Income
------------------------------------------------------------------------------------------------------------------
<S>                                               <C>         <C>       <C>         <C>      <C>         <C>
Income from continuing operations
   before income taxes and distributions
   on capital securities                          $  126.7    100%      $ 173.9     100%     $   93.7    100%
                                                 -----------------------------------------------------------------
Tax at statutory rates                            $   44.3     35%      $  60.9      35%     $   32.8     35%
Income (loss) taxed at foreign rates                   0.4     --          (0.6)      --          1.0      1
Dividends received deduction                          (4.0)    (3)         (4.3)     (2)         (4.9)    (5)
Tax exempt interest                                   (0.7)    (1)         (0.9)     (1)         (0.8)    (1)
Tax credits and other                                 (4.3)    (3)         (3.7)     (2)         (3.0)    (3)
                                                 -----------------------------------------------------------------
Total income taxes and effective tax rate         $   35.7     28%      $  51.4      30%     $   25.1     27%
------------------------------------------------------------------------------------------------------------------
</TABLE>

Income taxes consisted of the following:
                                                1999      1998     1997
------------------------------------------------------------------------
Current provision (benefit):
   U.S.                                      $  31.1   $  45.3   $ 16.8
   Foreign                                       4.0      (0.3)     7.0
                                           -----------------------------
      Total current provision                   35.1      45.0     23.8
Deferred provision (benefit):
   U.S.                                         (0.4)      6.2      1.1
   Foreign                                       1.0       0.2      0.2
                                           -----------------------------
      Total deferred provision                   0.6       6.4      1.3
                                           -----------------------------
Total income taxes                           $  35.7   $  51.4   $ 25.1
------------------------------------------------------------------------

                                       67
<PAGE>


Deferred Income Taxes

Deferred  income  taxes  reflect  the net tax  effect of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
purposes  and the  amounts  used for  income  tax  purposes.  Components  of the
Company's  deferred tax  liabilities and assets as of December 31, 1999 and 1998
are as follows:
                                                           1999     1998
-------------------------------------------------------------------------
Deferred tax liabilities:
   Prepaid acquisition costs                            $  19.4   $ 17.1
   Depreciation and amortization                            9.6      6.2
   Pension asset                                           16.0     14.4
   Unrealized investment gains                              3.7     42.3
   Other                                                    5.1      8.3
                                                       ------------------
      Total deferred tax liabilities                       53.8     88.3
                                                       ------------------
Deferred tax assets:
   Benefit plans                                            9.0      9.2
   Capital lease                                            4.9      4.7
   Unearned insurance premiums                             11.8     12.1
   Loss reserve discounting and subrogation                 7.7      7.0
   Other                                                   17.6     12.6
                                                       ------------------
      Total deferred tax assets                            51.0     45.6
                                                       ------------------
         Net deferred tax liabilities                   $   2.8   $ 42.7
-------------------------------------------------------------------------

Other Information

U.S. federal tax return examinations have been completed for years through 1995.
The Company believes  adequate  provisions for income tax have been recorded for
all years.


13. Capital Structure

HSB's capital structure is as follows at December 31:

                                                        1999     1998
------------------------------------------------------------------------
Short-term borrowings                                  $  41.5   $ 21.0
Long-term borrowings *                                 $  25.1   $ 25.1
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 $1.0; $1.1          $ 109.0   $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
Common shareholders' equity                            $ 376.5   $419.3
------------------------------------------------------------------------
*  Excludes capital lease (see note 9).

Short-term and Long-term Borrowings

HSBIIC has a commercial  paper  program with a limit of $75 million.  Commercial
paper  outstanding  at December  31, 1999 and 1998 was $38.6 and $20.0  million,
respectively. The weighted-average interest rate was 6.0 percent and 5.2 percent
at December 31, 1999 and 1998,  respectively.  Commercial  paper  outstanding at
year end 1999

                                       68
<PAGE>

matures on or before March 14, 2000.  Long-term  debt includes  $25.1 million of
senior  notes due May 15,  2000 at an  interest  rate of 6.83  percent.  Current
market value is estimated to be $25.3 million.


Capital Securities

On July 15, 1997, a trust  sponsored and wholly owned by the Company issued $110
million  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 $113.4 million 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 equal to the 90 day LIBOR plus 0.91
percent 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  equal to the 90 day LIBOR  plus 0.91  percent  of the  stated
liquidation  amount of $1,000 per Capital  Security.  The current  coupon is 7.1
percent.  HSB has the right to defer payment of  distributions on the securities
at any time or from  time to time  for a period  not  exceeding  20  consecutive
quarterly  periods with  respect to each  deferral  period.  During an extension
period,  interest  will  continue to accrue and the amount of  distributions  to
which holders of the Capital  Securities are entitled will  accumulate,  and the
Company will be prohibited from paying any cash dividends on its common stock.

The Capital  Securities  are generally  non-callable  for ten years,  but may be
called earlier by HSB upon the  occurrence of certain tax events  including loss
of  deductibility  of interest on the  securities.  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.

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 of amounts due on the Capital Securities.  The Capital Securities
are  currently  rated BBB- by Standard & Poor's and BBB+ by Duff & Phelps credit
rating agencies.

On December 31, 1997, HSB Group,  Inc. sold $300 million of 20 year  Convertible
Capital  Securities  in a private  placement  to ERC.  The  Convertible  Capital
Securities are callable by the Company at its option (i) at any time after seven
years;  (ii)  upon the  occurrence  of  certain  tax  events  including  loss of
deductibility  of the  interest on the  securities;  (iii) in the event that HSB
vetoes a prospective purchaser of the Convertible Capital Securities; or (iv) in
the event of a change in control of ERC. The Convertible  Capital Securities are
mandatorily  redeemable  on December 31, 2017 and are  redeemable  at par plus a
redemption premium, at the option of ERC, in the event of a change in control of
HSB within five years following issuance of the securities.

The  Convertible  Capital  Securities are  convertible,  in whole or in part, at
ERC's option at any time,  subject to  regulatory  approval,  into shares of HSB
common stock at a conversion  price of $56.67 per share,  subject to adjustment.
HSB has  provided  certain  registration  rights to ERC in  connection  with the
common  stock into which the  Convertible  Capital  Securities  are  convertible
pursuant to a Registration Rights Agreement dated December 31,

                                       69
<PAGE>

1997. If ERC were to exercise its conversion  rights in total,  it would hold at
December 31, 1999, on a fully diluted basis, approximately 15.4 percent of HSB's
common stock. Pursuant to certain provisions contained in the Purchase Agreement
dated  December 31, 1997,  ERC has agreed to certain  "standstill"  arrangements
which for a period of five years will  preclude ERC from  purchasing  any common
stock of HSB,  other than by exercise of its conversion  rights,  and will limit
its  ability to take  certain  other  actions  with  respect to HSB during  that
period.

The  securities  were  issued  through  HSB  Capital  II (Trust  II), a Delaware
business trust created by HSB, at a 7 percent coupon, payable semi-annually. The
Convertible  Capital  Securities  rank pari passu with the Global  Floating Rate
Capital  Securities  issued  July  1997.  Holders  of  the  Convertible  Capital
Securities   will  be  entitled   to  receive   preferential   cumulative   cash
distributions  accumulating  from  the date of  original  issuance  and  payable
semi-annually in arrears.  HSB has the right to defer payment of interest at any
time or from time to time for a period not exceeding 10 consecutive  semi-annual
periods  with  respect to each  deferral  period.  During an  extension  period,
interest  will  continue  to accrue  and the  amount of  distributions  to which
holders of the Convertible Capital Securities are entitled will accumulate,  and
HSB will be prohibited  from paying any cash dividends on its common stock.  HSB
has irrevocably  and  unconditionally  guaranteed all of Trust II's  obligations
under the Convertible Capital Securities.

The estimated fair value of the Capital Securities issued by Trust I is equal to
their  carrying  value.  The  estimated  fair value of the  Convertible  Capital
Securities issued by Trust II is $272.2 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.


Other Comprehensive Income

The components of accumulated other  comprehensive  income (net of income taxes)
are as follows:

                                      Total
                                   Accumulated  Unrealized   Minimum
                                      Other        Gains     Pension    Foreign
                                  Comprehensive     on      Liability  Exchange
                                      Income    Securities  Adjustment   Losses
--------------------------------------------------------------------------------
Balances at December 31, 1997       $  55.9      $ 62.4      $ (3.9)      $(2.6)
Current period change                  10.9        12.1        (0.1)       (1.1)
-------------------------------------------------------------------------------
Balances at December 31, 1998       $  66.8      $ 74.5      $ (4.0)      $(3.7)
Current period change                 (68.7)      (71.6)        1.1         1.8
-------------------------------------------------------------------------------
Balances at December 31, 1999       $  (1.9)     $  2.9      $ (2.9)      $(1.9)
-------------------------------------------------------------------------------

14. Pension and Other Benefit Programs

HSB maintains various types of pension and postretirement medical plans covering
employees  of the  Company  and  certain  subsidiaries.  The  pension  plans are
non-contributory  and benefits are based upon an employee's years of service and
final average pay based upon the highest three out of five years. Vesting occurs
after five years of service in compliance  with the provisions of the Tax Reform
Act of 1986.

Under  the  terms of the HSB  Group,  Inc.  Thrift  Incentive  Plan,  a  defined
contribution  plan, covered employees are allowed to contribute up to 15 percent
of their pay, on a pre-tax basis,  limited by the maximum allowed under Internal
Revenue  Service  regulations.  The Company makes a matching  contribution of 50
percent of employee contributions up to 6 percent of compensation. Total expense
for the plan  was  $2.4,  $2.1  and  $1.7  million  for  1999,  1998  and  1997,
respectively.

The Company makes available health care and life insurance  benefits for retired
employees  of  the  Company  and  certain   subsidiaries.   The  Company   makes
contributions  to the plans as claims are incurred.  Retirees'

                                       70
<PAGE>

contributions  to these plans vary,  based upon  retiree's age, years of service
and coverage  elected.  The Company  periodically  amends the plan  changing the
contribution rate of retirees and amounts of coverage.

The following chart summarizes the balance sheet impact,  as well as the benefit
obligations, assets, funded status and rate assumptions associated with the U.S.
pension and postretirement medical benefit plans:

<TABLE>
<CAPTION>
                                                           Pension Benefits           Other Benefits
-------------------------------------------------------------------------------------------------------
                                                             1999        1998         1999        1998
-------------------------------------------------------------------------------------------------------
<S>                                                     <C>         <C>            <C>         <C>
Change in benefit obligation:
   Benefit obligation at beginning of year              $   180.2   $   156.0      $  28.7     $  29.9
   Service cost                                               6.9         5.3          0.4         0.3
   Interest cost                                             12.7        11.9          1.8         1.9
   Net benefit payments                                     (10.8)      (10.3)        (2.1)       (1.9)
   Liability loss (gain)                                      5.3         0.7         (1.9)       (2.7)
   Assumption changes                                       (16.8)        9.6         (1.4)        1.2
   Acquisitions                                                --         4.2           --          --
   Amendments                                                  --         2.8           --          --
                                                      -------------------------------------------------
   Benefit obligation at end of year                    $   177.5   $   180.2      $  25.5     $  28.7
Change in plan assets:
   Fair value of plan assets at beginning of year       $   249.1   $   213.0      $    --     $    --
   Actual return on plan assets                              29.2        40.8           --          --
   Acquisitions                                                --         3.5           --          --
   Employer contributions                                     0.4         0.4          1.8         1.5
   Participants' contributions                                 --          --          0.4         0.4
   Benefits paid                                             (8.9)       (8.6)        (2.2)       (1.9)
                                                      -------------------------------------------------
   Fair value of plan assets at end of year             $   269.8   $   249.1      $    --     $    --
Funded status:
   Funded status at end of year                         $    92.3   $    68.9      $ (25.5)    $ (28.7)
   Unrecognized actuarial (gain) loss                       (44.4)      (25.6)         0.8         4.0
   Unrecognized transition amount                            (3.1)       (4.7)          --          --
   Unrecognized prior service cost                            3.6         4.2           --          --
                                                      -------------------------------------------------
   Net amount recognized                                $    48.4   $    42.8      $ (24.7)    $ (24.7)
Amounts recognized in the consolidated statements
of financial position consist of:
   Prepaid benefit cost                                 $    42.6   $    34.6      $    --     $    --
   Accrued benefit liability                                   --          --        (24.7)      (24.7)
   Intangible asset                                           1.3         2.0           --          --
   Accumulated other comprehensive income                     4.5         6.2           --          --
                                                      -------------------------------------------------
   Net amount recognized                                $    48.4   $    42.8      $ (24.7)    $ (24.7)
Weighted-average assumptions as of December 31:
   Discount rate                                              7.75%       6.75%        7.75%       6.75%
   Long-term rate of return on assets                        11.00%      11.00%        n/a         n/a
   Rate of increase in future compensation levels             5.25%       4.25%        n/a         n/a
   Current year health care cost trend rate                   n/a         n/a          5.00%       6.00%
   Ultimate health care cost trend rate                       n/a         n/a          4.25%       4.25%
-------------------------------------------------------------------------------------------------------
</TABLE>
For measurement purposes,  the annual rate of increase in the per capita cost of
covered  health  care  benefits  ranges  from  5.0  percent  in 1999  decreasing
gradually to 4.25 percent by the year 2001 and remaining level thereafter.

Assets available for pension plan benefits include approximately $25.2 and $24.2
million of Company stock at December 31, 1999 and 1998, respectively.

                                       71
<PAGE>

The following chart  summarizes the cost components  associated with the pension
and postretirement medical benefit plans:

<TABLE>
<CAPTION>

                                              Pension Benefits                       Other Benefits
------------------------------------------------------------------------------------------------------------
For the years ended December 31,         1999        1998        1997         1999        1998        1997
------------------------------------------------------------------------------------------------------------
<S>                                   <C>         <C>          <C>           <C>        <C>         <C>
Components of net periodic
 benefit (credit) cost
Service cost                          $    6.9    $    5.3     $   4.1       $  0.4     $   0.3     $   0.3
Interest cost                             12.7        11.9        10.7          1.8         1.9         2.1
Expected return on plan assets           (23.0)      (18.5)      (16.8)          --          --          --
Amortization of transition amount         (1.8)       (1.9)       (1.8)          --          --          --
Amortization of prior service cost         0.7         0.8         0.5           --          --          --
Recognized actuarial loss                  1.0         1.0         0.5           --          --         0.1
                                     -----------------------------------------------------------------------
Net periodic benefit (credit) cost    $   (3.5)    $  (1.4)     $ (2.8)      $  2.2     $   2.2     $   2.5
------------------------------------------------------------------------------------------------------------
</TABLE>

The projected benefit obligation,  accumulated benefit obligation and fair value
of plan assets for the pension  plan with  accumulated  benefit  obligations  in
excess of plan assets were $37.7,  $30.1 and $2.8 million,  respectively,  as of
December  31,  1999 and  $36.6,  $29.7  and $3.2  million,  respectively,  as of
December 31, 1998.

The Company's  acquisition of SAI in April 1998, resulted in the increase of the
pension  benefit  obligation  by $4.2  million and  pension  plan assets by $3.5
million.

Assumed health care cost trend rates have an effect on the amounts  reported for
the health care plan. A one  percentage  point change in the assumed health care
cost trend rates would have the following effects:

                                                               1%          1%
                                                             Point       Point
                                                            Increase    Decrease
--------------------------------------------------------------------------------
Effect on total of service and interest cost components     $   0.1    $  (0.1)
Effect on postretirement benefit obligation                     1.2       (1.1)
--------------------------------------------------------------------------------

15.  Stock Compensation Plans

HSB has a Stock Option Plan under which key employees may be granted  restricted
stock and stock options.

HSB's Long-Term  Incentive Plan grants senior  management awards contingent upon
achievement of specified performance  objectives over a three year period, which
may be paid out in cash or shares  of  common  stock  (which  may be  restricted
shares).  The number of shares subject to issuance under this plan cannot exceed
375,000.

HSB's  restricted  stock is an award of  common  shares  that may not be sold or
transferred during the restriction  period,  usually three years under the Stock
Option Plan and five years under the Long-Term  Incentive Plan, from the date on
which the award is granted.  During the restriction  period, the employee is the
registered  owner,  receives  dividends  and may  vote  the  restricted  shares.
Compensation  expense is based on the market value of the Company's common stock
at the date of grant  and is  recognized  over the  period  of the  restriction.
Compensation  expense for this benefit was $3.7,  $1.0 and $0.6 million in 1999,
1998 and 1997,  respectively.  The unamortized  compensation  expense related to
this plan is included in benefit plans as a component of  shareholders'  equity.
These amounts were $6.9 and $2.2 million in 1999 and 1998, respectively.

A summary of grants follows:

                                            1999         1998         1997
---------------------------------------------------------------------------
Restricted shares awarded                222,227       54,434       30,594
Weighted-average fair value
 of shares on grant date               $   36.08     $  39.86     $  31.93
---------------------------------------------------------------------------

A stock  option  award under the HSB's Stock Option Plan allows for the purchase
of HSB  common  stock at no less  than the  market  price on the date of  grant.
Options granted to date are exercisable no earlier than one year after the

                                       72
<PAGE>

grant date and expire no more than ten years from the date of grant.  The number
of shares available for delivery under this plan cannot exceed 4.2 million.

A summary of the status of HSB's stock options as of December 31, 1999, 1998 and
1997 and changes during the years ended on those dates is presented below:

<TABLE>
<CAPTION>

                                                       1999                     1998                     1997
--------------------------------------------------------------------------------------------------------------------------
                                                            Weighted-                 Weighted-                Weighted-
                                                             Average                   Average                    Average
                                                            Exercise                  Exercise                   Exercise
                                               Shares         Price       Shares       Price      Shares         Price
--------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>            <C>         <C>            <C>        <C>             <C>
Outstanding at beginning of year             2,730,225      $  33.92    2,227,125      $ 32.03    1,979,475       $ 32.44
   Granted                                   1,046,000         36.52      814,500        39.34      558,750         32.55
   Exercised                                  (139,400)        33.99     (279,450)       34.21     (235,500)        31.12
   Forfeited                                   (14,450)        36.84      (31,950)       37.81      (75,600)        33.49
                                           -------------------------------------------------------------------------------
Outstanding at end of year                   3,622,375      $  34.66    2,730,225      $ 33.92    2,227,125       $ 32.03
                                           -------------------------------------------------------------------------------
Options exercisable at end of year           2,588,875      $  33.92    1,923,225      $ 31.65    1,681,875       $ 32.51
Weighted-average fair value of options
   granted during the year                                  $   6.05                   $  4.68                    $  4.24
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

The following table summarizes information about stock options outstanding as of
December 31, 1999:

<TABLE>
<CAPTION>

                                     Options Outstanding                             Options Exercisable
------------------------------------------------------------------------------------------------------------------
 Range of                             Weighted-               Weighted                           Weighted-
 Exercise           Number             Average                 Average           Number           Average
  Prices         Outstanding          Remaining            Exercise Price      Exercisable    Exercise Price
                                   Contractual Life
------------------------------------------------------------------------------------------------------------------
<S>                 <C>                  <C>                   <C>               <C>              <C>
$27-$30.99          1,077,750            5.09                  $29.98            1,077,750        $29.98
$31-$34.99            789,000            6.48                  $33.43              619,000        $33.16
$35-$38.99          1,605,625            8.16                  $37.72              742,125        $38.63
$39-$42.99            150,000            8.11                  $42.02              150,000        $42.02
                    ---------                                                    ---------
                    3,622,375                                                    2,588,875
------------------------------------------------------------------------------------------------------------------
</TABLE>

SFAS No. 123, "Accounting for Stock Based Compensation" allows the use of a fair
value based method of accounting  for an employee stock option or similar equity
instruments  or the  intrinsic  value  based  method  prescribed  by  Accounting
Principals Board Opinion No. 25, "Accounting for Stock Issued to Employees" with
pro forma  disclosures of net income and earnings per share as if the fair value
based method of accounting had been applied. The Company has elected to continue
using the  intrinsic  value based method.  Had the Company  elected to recognize
compensation  cost using the fair value based  method,  compensation  would have
been measured at date of grant and recognized over the service period. Pro forma
net income and earnings per share would have been imputed as follows:


                                                   1999       1998       1997
-------------------------------------------------------------------------------
Net income                      As Reported      $  72.8    $ 134.4    $  66.3
                                  Pro Forma         68.0      131.4       64.5
Earnings per common share -
 basic                          As Reported      $   2.51   $   4.59   $   2.21
                                  Pro Forma          2.35       4.49       2.15
Earnings per common share -
 assuming dilution              As Reported      $   2.50   $   4.21   $   2.20
                                  Pro Forma          2.32       4.12       2.13
-------------------------------------------------------------------------------

                                       73
<PAGE>

These pro forma  disclosure  amounts  derived by the use of SFAS No. 123 are not
indicative of future amounts.  SFAS No. 123 is not applicable to options granted
prior to 1995, and additional options may be granted in future years.

The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:

                                  1999       1998       1997
-------------------------------------------------------------
Risk-free interest rate           5.0%       4.9%       6.3%
Expected life                  6 years    6 years    6 years
Expected volatility              22.2%      15.7%      15.8%
Expected dividend yield           4.7%       4.7%       5.0%
-------------------------------------------------------------


16. Stock Purchase Rights

On  September  21, 1998,  the Board of Directors  approved the adoption of a new
shareholder  rights  plan to replace the plan that was set to expire on November
28, 1998.  Pursuant to the new plan, which is  substantially  similar to the old
plan, the Board declared a dividend of one right for each  outstanding  share of
common stock to shareholders of record on November 28, 1998.

The rights  will  separate  from the common  stock and become  exercisable  if a
person or group  acquires  ownership  of 15 percent  or more of the  outstanding
common stock of the Company or  commences a tender or exchange  offer to acquire
15 percent or more of the outstanding shares.

Each right entitles a holder to purchase one  two-hundredth of a share of Series
A Junior  Participating  Preferred Stock, without par value at an exercise price
of $162.00 per share,  subject to adjustment.  If an acquirer obtains 15 percent
or more of the Company's common stock and the Board of Directors determines that
such acquisition is not in the best interest of the shareholders,  the rights of
shareholders  other than the acquirer will entitle the holder to purchase common
shares of the Company (or, under certain circumstances, of the acquirer) at a 50
percent discount. Under the plan ERC will not be deemed an acquirer in the event
of the  conversion of the  Convertible  Capital  Securities it holds into common
stock of the Company unless it acquires one percent or more additional shares.

The rights  expire on  November  28, 2008 and may be redeemed by the Company for
$.01  per  right  any  time  until  the  tenth  business  day  following  public
announcement that a 15 percent position has been acquired.

                                       74
<PAGE>


17. Consolidated Quarterly Data (unaudited)

<TABLE>
<CAPTION>
1999                                          First    Second    Third     Fourth
                                              Quarter  Quarter   Quarter   Quarter     Year
--------------------------------------------------------------------------------------------
<S>                                         <C>       <C>       <C>       <C>       <C>
Gross earned premiums                       $ 208.9   $ 206.8   $ 200.6   $ 207.5   $823.8
Ceded premiums                                112.4     113.1     107.9     108.5    441.9
                                          -------------------------------------------------
Insurance premiums                             96.5      93.7      92.7      99.0    381.9
Engineering services                           27.6      27.8      30.6      33.6    119.6
Net investment income                          15.7      16.6      16.5      15.3     64.1
Realized investment gains                       7.1      10.2      13.5       9.8     40.6
                                          -------------------------------------------------
   Total revenues                           $ 146.9   $ 148.3   $ 153.3   $ 157.7   $606.2
                                          -------------------------------------------------
Income from continuing operations
 before income taxes and distributions
 on capital securities (1)                  $  36.4   $  38.7   $  32.7   $  18.9   $126.7
Income taxes                                   10.9      11.4       9.3       4.1     35.7
Distributions on capital securities
 of subsidiary trusts, net of income tax        4.5       4.5       4.6       4.6     18.2
                                          -------------------------------------------------
Net income                                  $  21.0   $  22.8   $  18.8   $  10.2   $ 72.8
                                          -------------------------------------------------
Earnings per common share - basic           $   0.72  $   0.79  $   0.65  $   0.35  $  2.51
                                          -------------------------------------------------
Earnings per common share -
 assuming dilution(2)                       $   0.71  $   0.76  $   0.64  $   0.35  $  2.50
                                          -------------------------------------------------
Dividends declared per common share         $   0.42  $   0.42  $   0.44  $   0.44  $  1.72
                                          -------------------------------------------------
Common stock price ranges:
   High                                     $  41.31  $  41.88  $  41.94  $  38.38  $ 41.94
   Low                                      $  35.50  $  35.50  $  34.19  $  31.88  $ 31.88
   Close                                    $  37.13  $  41.19  $  35.19  $  33.81  $ 33.81

Shareholders at December 31,                                                         4,864
------------------------------------------------------------------------------------------
</TABLE>

(1) Fourth quarter  results  reflect  pre-tax  charges of $5 million  related to
change  in  management  costs  and   consolidation  and  relocation  of  certain
businesses  as well  as $7  million  in  losses  related  to  medical  equipment
insurance contracts.

(2) In the fourth quarter,  the assumed conversion of the Company's  convertible
capital  securities is not used in the  computation  of earnings per share since
such inclusion  would be  antidilutive.  Therefore,  the quarterly  earnings per
share will not equal the full year earnings per share.


<TABLE>
<CAPTION>

                                       75
<PAGE>

1998                                                  First    Second    Third     Fourth
                                                     Quarter   Quarter   Quarter   Quarter   Year
----------------------------------------------------------------------------------------------------
<S>                                                 <C>       <C>       <C>       <C>       <C>
Gross earned premiums                               $ 179.7   $ 175.7   $ 212.5   $ 202.6   $770.5
Ceded premiums                                         80.3      85.3     113.0      95.8    374.4
                                                  -------------------------------------------------
Insurance premiums                                     99.4      90.4      99.5     106.8    396.1
Engineering services                                   19.7      22.7      25.3      25.8     93.5
Net investment income                                  15.2      15.9      15.5      17.6     64.2
Realized investment gains                               3.2       7.3       7.9       7.0     25.4
                                                  -------------------------------------------------
   Total revenues                                   $ 137.5   $ 136.3   $ 148.2   $ 157.2   $579.2
                                                  -------------------------------------------------
Income from continuing operations
   before income taxes and
   distributions on capital securities              $  69.6   $  34.8   $  36.1   $  33.4   $173.9
Income taxes                                           22.5       9.3       9.3      10.3     51.4
Distributions on capital securities
   of subsidiary trusts, net of income tax              4.5       4.7       4.6       4.6     18.4
                                                  -------------------------------------------------
Income from continuing operations                   $  42.6   $  20.8   $  22.2   $  18.5   $104.1
Discontinued operations:
   Loss from operations,
    net of income tax benefits                      $  (6.6)  $    --   $    --   $    --   $ (6.6)
   Gain on disposal, net of income taxes               36.9        --        --        --     36.9
                                                  -------------------------------------------------
      Total discontinued operations                 $  30.3   $    --   $    --   $    --   $ 30.3
                                                  -------------------------------------------------
Net income                                          $  72.9   $  20.8   $  22.2   $  18.5   $134.4
                                                  -------------------------------------------------
Earnings per common share - basic:
   Income from continuing operations                $   1.45  $   0.71  $   0.75  $   0.64  $  3.55
   Discontinued operations                              1.04       --        --        --      1.04
                                                  -------------------------------------------------
   Net income                                       $   2.49  $   0.71  $   0.75  $   0.64  $  4.59
                                                  -------------------------------------------------
Earnings per common share - assuming dilution:
   Income from continuing operations                $   1.31  $   0.68  $   0.72  $   0.63  $  3.35
   Discontinued operations                              0.86        --        --        --     0.86
                                                  -------------------------------------------------
   Net income                                       $   2.17  $   0.68  $   0.72  $   0.63  $  4.21
                                                  -------------------------------------------------
Dividends declared per common share                 $   0.40  $   0.40  $   0.42  $   0.42  $  1.64
                                                  -------------------------------------------------
Common stock price ranges:
   High                                             $  44.92  $  53.50  $  57.63  $  42.00  $ 57.63
   Low                                              $  36.45  $  43.17  $  40.38  $  36.00  $ 36.00
   Close                                            $  44.92  $  53.50  $  40.38  $  41.06  $ 41.06

Shareholders at December 31,                                                                 5,045
---------------------------------------------------------------------------------------------------
</TABLE>

                                       76
<PAGE>





                                   Schedule I
                                 HSB Group, Inc.
       Summary of investments - other than investments in related parties
                          At December 31, (in millions)
<TABLE>
<CAPTION>
                                                        1999                                           1998
                                    -------------------------------------------------  ------------------------------------------

              Column A                  Column B         Column C         Column D         Column E      Column F      Column G
--------------------------------    -----------------  --------------  --------------  --------------  ------------- ------------

                                                                           Amount                                       Amount
                                                                            Shown                                       Shown
                                                                           In The                                       In The
                                                          Market           Balance                       Market        Balance
Type of Investment                         Cost            Value            Sheet            Cost         Value         Sheet
---------------------------------------------------  --------------   --------------   ------------- ------------  -------------
<S>                                       <C>             <C>              <C>             <C>          <C>            <C>
Fixed Maturities:
 Bonds:
    U.S. government and government
        agencies and authorities          $  0.0          $  0.0           $  0.0          $  0.0       $  0.0         $  0.0
    States, municipalities and
        political subdivisions              37.7            36.6             36.6            47.4         49.3           49.3
    Foreign governments                     16.5            16.6             16.6            21.0         21.3           21.3
    Public utilities                         0.0             0.0              0.0             0.0          0.0            0.0
    Convertibles and bonds with
       warrants attached                     0.0             0.0              0.0             0.0          0.0            0.0
    All other corporate bonds              265.9           235.8            235.8           273.5        276.2          276.2
 Certificates of deposit                     0.0             0.0              0.0             0.0          0.0            0.0
 Mortgage receivable                        10.8            10.8             10.8            11.1         11.1           11.1
 Redeemable preferred stocks               214.8           190.0            190.0           215.5        219.2          219.2
                                      ----------------------------------------------   -----------------------------------------
       Total fixed maturities             $545.7          $489.8           $489.8          $568.5       $577.1         $577.1

Equity securities:
 Common stocks:
    Public utilities                        24.2            23.5             23.5            16.6         19.1           19.1
    Banks and insurance                     13.3            19.1             19.1            39.9         48.7           48.7
    Industrial and other                    91.1           178.6            178.6            84.8        181.5          181.5
 Non-Redeemable preferred stocks           187.9           160.6            160.6           185.0        187.8          187.8
                                      ----------------------------------------------   -----------------------------------------
       Total equity securities            $316.5          $381.8           $381.8          $326.3       $437.1         $437.1

Short-term investments and cash:          $126.5          $126.5           $126.5           $80.6        $80.6          $80.6

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

       Total investments                  $988.7          $998.1           $998.1          $975.4     $1,094.8       $1,094.8
                                      ==============================================   =========================================
</TABLE>

                                       77
<PAGE>




                                   Schedule II
                          HSB Group, Inc. (Registrant)
               Condensed Financial Information of HSB Group, Inc.
                            Balance Sheet Information
                          At December 31, (in millions)


<TABLE>
<CAPTION>
                                                                      1999           1998
                                                             ------------------------------
<S>                                                                 <C>            <C>
Assets
Cash                                                                $  0.1         $  0.1
Short-term investments, at cost                                        7.4            2.1
Investment in subsidiaries                                           664.3          780.2
Fixed maturities, at fair value (cost-$90.1; $47.9)                   79.4           47.2
Equity securities, at fair value (cost-$70.1; $45.2)                  56.4           43.4
Other assets                                                          15.1            2.9
                                                             -------------------------------
     Total assets                                                   $822.7         $875.9
                                                             ==============================

Liabilities
Dividends and distributions on capital securities                   $ 24.0         $ 23.2
Other liabilities                                                     13.2           24.5

                                                             ------------------------------
     Total liabilities                                                37.2           47.7
                                                             ------------------------------

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 $1.0 and $1.1                                           109.0          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                                                          10.0           10.0
Additional paid-in capital                                            36.2           33.5
Accumulated other comprehensive income                                (1.9)          66.8
Retained earnings                                                    339.1          311.2
Benefit plans                                                         (6.9)          (2.2)
                                                             ------------------------------
     Total shareholders' equity                                      376.5          419.3
                                                             ------------------------------
     Total liabilities and shareholders' equity               $      822.7         $875.9
                                                             ==============================
</TABLE>


These  condensed  financial  statements  should be read in conjunction  with the
consolidated  financial statements and accompanying footnotes of HSB Group, Inc.
(see pages 46 through 76).

                                       78
<PAGE>

                             Schedule II (continued)
                          HSB Group, Inc. (Registrant)
               Condensed Financial Information of HSB Group, Inc.
                    Condensed Statement of Income Information
                 For the years ended December 31, (in millions)



                                                     1999          1998
                                                  ------------------------
Revenues:
Net investment income                              $  9.6       $   6.4
Realized investment (losses) gains                   (0.4)          1.0
                                                  ------------------------

Income before income taxes and
distributions on capital securities                   9.2           7.4

Income taxes                                          3.2           2.5


Distributions on capital securities
 of subsidiary trusts, net of
 income taxes of $9.8 and $9.9                       18.2          18.4

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

Net Loss - Parent only                              (12.2)        (13.5)


Equity in net income of subsidiaries                 85.0         147.9
                                                  ------------------------

Net income                                         $ 72.8       $ 134.4
                                                  ========================

These  condensed  financial  statements  should be read in conjunction  with the
consolidated  financial statements and accompanying footnotes of HSB Group, Inc.
(see pages 46 through 76).

                                       79
<PAGE>





                            Schedule II (continued)
                          HSB Group, Inc. (Registrant)
               Condensed Financial Information of HSB Group, Inc.
                  Condensed Statement of Cash Flows Information
                 For the years ended December 31, (in millions)

<TABLE>
<CAPTION>

                                                                  1999         1998
                                                            -------------------------
<S>                                                           <C>          <C>
Operating Activities:
      Net income                                              $    72.8    $   134.4
      Adjustments to reconcile Net Income
       to cash provided by operating activities:
        Amortization                                                0.1         -
        Deferred income taxes                                       0.2         -
        Undistributed earnings loss (earnings)
         of subsidiaries *                                         67.7        (91.8)
        Distributions on capital securities                        28.0         28.3
        Realized investment losses (gains)                          0.4         (1.0)
        Change in balances, net of effects from
         purchases of subsidiary:
         Decrease in other assets                                  (0.1)         9.2
         (Decrease) increase in other liabilities                 (18.8)        22.2
                                                            -------------------------
      Cash provided by operating activities                       150.3        101.3
                                                            -------------------------

Investing Activities:
      (Purchase) sale of short-term investments, net               (5.3)        58.4
      Purchase of fixed maturities                                (80.2)       (48.0)
      Proceeds from sale of fixed maturities                       37.3         12.3
      Purchase of equity securities                               (28.2)       (26.6)
      Proceeds from sale of equity securities                       3.6          8.7
      Purchase of Solomon Associates, Inc.,
       net of cash acquired                                          -          (2.1)
                                                            -------------------------
      Cash (used in) provided by investing activities             (72.8)         2.7
                                                            -------------------------

Financing Activities:
      Dividends and distributions on capital securities           (77.1)       (66.2)
      Exercise of stock options                                     4.0          9.3
      Reacquisition of stock                                       (4.4)       (47.7)
                                                            -------------------------
      Cash used in financing activities                           (77.5)      (104.6)
                                                            -------------------------

Change in cash
                                                                    -           (0.6)

Cash at beginning of period
                                                                    0.1          0.7

Cash at end of period                                         $     0.1      $   0.1

                                                            =========================
</TABLE>



*    Dividends  received from The Hartford Steam Boiler Inspection and Insurance
     Company  were  $152.7   million  and  $56.1   million  in  1999  and  1998,
     respectively.

These  condensed  financial  statements  should be read in conjunction  with the
consolidated  financial statements and accompanying footnotes of HSB Group, Inc.
(see pages 46 through 76).

                                       80
<PAGE>



<TABLE>
<CAPTION>
                                                              Schedule III
                                                            HSB Group, Inc.
                                                  Supplementary Insurance Information
                                         At December 31 and for the years then ended (in millions)


   Column A    Column B*   Column C*  Column D*   Column E*    Column F  Column G**  Column H     Column I      Column J   Column K
------------ ------------ ---------- ----------- ----------- ----------- ---------- ----------- -------------- ----------- --------

Segment        Deferred     Future     Unearned    Other       Premium     Net        Benefits,   Amortization     Other    Premiums
              acquisition   policy     premiums    policy      revenue  investment    claims,     of prepaid     operating  written
                costs       Benefits              Claims and             income      losses and     policy        expense
                            and                   Benefits                           settlement   acquisition
                            Losses,               Payable                            expenses       claims
                            And loss
                            Expenses
------------------------------------------------------------------------------------------------------------------------------------
<S>          <C>           <C>          <C>        <C>        <C>         <C>          <C>           <C>          <C>         <C>
1999:
 Commercial  $  -          $  -         $  -       $  -       $ 335.2     $ -          $130.0        $ 78.1       $ 107.1     $351.7

 Global
  Special
  Risk          -             -            -          -          45.6       -            24.0          12.8         (0.5)       11.8
 Other
  Segments      -             -            -          -           1.1       -            11.8          (1.7)        (1.0)        3.2
             ---------- ------------ --------- ------------ ---------- ----------- ---------- -------------  ------------ ----------
    Total    $  -          $  -         $  -       $  -       $ 381.9     $ -          $165.8        $ 89.2       $105.6      $366.7
             ========== ============ ========= ============ ========== =========== ========== =============  ============ ==========

1998:
 Commercial  $  -          $  -         $  -       $  -       $ 306.3    $  -          $124.6        $ 67.6       $ 95.6      $327.5

 Global
  Special
  Risk          -             -            -          -          83.6       -            46.6           0.9         18.1        20.3
 Other
  Segments      -             -            -          -           6.2       -             3.7          (2.2)          -          4.8
            ---------- ------------- --------- ------------ ---------- ----------- ---------- -------------  ------------ ----------
    Total    $  -          $  -         $  -       $  -       $ 396.1    $  -          $174.9        $ 66.3       $113.7      $352.6
            ========== ============= ========= ============ ========== =========== ========== =============  ===========  ==========

1997:

 Commercial  $  -          $  -         $  -        $ -       $ 269.0    $  -          $103.9        $ 59.5       $ 83.2      $277.4

 Global
  Special
  Risk          -             -            -          -         217.1       -           111.4          31.0         58.3       217.3
 Other
  Segments      -             -            -          -           5.1       -             2.6           0.2          1.3         3.8
            ---------- ------------- --------- ------------  ---------- ---------- ---------- -------------  ------------ ----------
   Total     $  -          $  -         $  -        $ -       $ 491.2    $  -          $217.9        $ 90.7       $142.8      $498.5
            ========== ============= ========== ============ ========== ========== =========== =============  =========== ==========
</TABLE>


* Segment assets are not included in  management's  evaluation and allocation of
resources to segments.

** Investment  assets are managed by and  investment  income is allocated to the
Company's Investment segment.

                                       81
<PAGE>






<TABLE>
<CAPTION>
                                                         Schedule IV
                                                       HSB Group, Inc.
                                                        Reinsurance
                                       For the years ended December 31, (in millions)




Column A              Column B           Column C             Column D           Column E          Column F
Insurance              Gross             Ceded to             Assumed            Net            Percentage of
Premiums               Amount             Other               From Other         Amount             Amount
                                         Companies            Companies                         Assumed to Net
-------------------------------------------------------------------------------------------------------------------------
<S>                  <C>                 <C>                   <C>              <C>                 <C>
1999
Property and
Liability
Insurance            $452.8              $441.9                $371.0           $381.9              97.1%

1998
Property and
Liability
Insurance            $408.8              $374.4                $361.7           $396.1              91.3%


1997
Property and
Liability
Insurance            $370.1              $118.1                $239.2           $491.2              48.7%

</TABLE>


                                       82
<PAGE>




<TABLE>
<CAPTION>

                                                           Schedule V
                                                         HSB Group, Inc.
                                                Valuation and Qualifying Accounts
                                                  At December 31, (in millions)


Column A                                    Column B            Column C         Column D           Column E         Column F
----------------------------------------------------------------------------------------------------------------------------------
                                            Balance at          Charged to       Charged to                          Balance
                                            Beginning of        Costs and        Other              Deductions       At End of
Description                                 Period              Expenses         Accounts           Describe (a)     Period
----------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>                <C>             <C>                 <C>            <C>
1999
Reserve for Accounts Receivable                $3.9               $2.0            $0.0                $1.0           $4.9

1998
Reserve for Accounts Receivable                $3.6               $0.5            $0.0                $0.2           $3.9

1997
Reserve for Accounts Receivable                $3.0               $0.9            $0.0                $0.3           $3.6

</TABLE>

(a)  Engineering  Services  and  Insurance  Premium  Receivables  written off as
uncollectible.


                                       83
<PAGE>


<TABLE>
<CAPTION>


                                                              Schedule VI
                                                            HSB Group, Inc.
                               Supplemental Information Concerning Property-Casualty Insurance Operations
                                         At December 31 and for the years then ended (in millions)

   Column A   Column B     Column C     Column D    Column E  Column F Column G      Column H         Column I     Column J Column K
------------ ----------- ------------ ------------ ---------- -------- --------- ----------------- -------------- --------- --------

                         Reserves for                                            Claims and Claims  Amortization
                         Unpaid Claims    Discount                        Net   Adjustment Expenses  of Prepaid  Paid Claims
Affiliation     Prepaid   And Claim       if any,                       Invest- Incurred Related to   Policy      and Claim
with          Acquisition  Adjustment    deducted    Unearned   Earned   ment   Current    Prior    Acquisition  Adjustment Premiums
Registrant(a)    Costs      Expenses     in Column C Premiums   Premiums Income   Year      Year      Costs      Expenses   Written
------------------------------------------------------------------------------------------------------------------------------------
    <S>         <C>          <C>             <C>      <C>        <C>     <C>      <C>        <C>         <C>      <C>         <C>

    1999        52.9         782.3           -        420.1      381.9   64.1     165.4       0.4        89.2     179.4       366.7


    1998        46.6         558.2           -        464.6      396.1   64.2     164.0      10.9        66.3     196.0       352.6


    1997        42.5         276.7           -        287.3      491.2   36.8     209.5       8.4        90.7     204.9       498.5

</TABLE>
(a) Consolidated property-casualty entities

                                       84
<PAGE>


Item 9.  Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure.


         None.

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant.

     "Nominees  for  Election  to the Board of  Directors  for  Three-Year  Term
Expiring in 2003" and "Members of the Board of Directors  Continuing  in Office"
on  pages  2-4 of the  Company's  Proxy  Statement  dated  March  16,  2000  are
incorporated herein by reference. Also see pages 22 -- 23 herein.

Item 11.  Executive Compensation.

     "Meetings and Remuneration of the Directors" on pages 5-6, "Human Resources
Committee Report on Executive Compensation" on pages 8-11, "Summary Compensation
Table" on page 12, "Stock Option and Long-Term  Incentive  Plan Tables" on pages
13-14,  "Retirement  Plans" on pages 14-15,  "Employment  Arrangements" on pages
15-17, "Compensation Committee Interlocks and Insider Participation" on page 17,
and "Performance  Graph" on page 17 of the Company's Proxy Statement dated March
16, 2000 are incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners
          and Management.

     "Security  Ownership of Certain  Beneficial Owners and Management" on pages
6-8 of the Company's Proxy Statement dated March 16, 2000 is incorporated herein
by reference.

Item 13.  Certain Relationships and Related Transactions.

     "Compensation Committee Interlocks and Insider Participation" on page 17 of
the Company's Proxy  Statement  dated March 16, 2000 is  incorporated  herein by
reference.

                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules, and
          Reports on Form 8-K.

     (a)  The  financial  statements  and  schedules  listed  in  the  Index  to
          Financial  Statements  and  Financial  Statement  Schedules on page 43
          herein are filed as part of this report.

     (b) Reports on Form 8-K -

          (i)  Form 8-K dated  October 25,  1999 to report  third  quarter  1999
               results of Registrant;
          (ii) Form 8-K dated  November  29, 1999 to report  election of Richard
               Booth as President and Chief Executive  Officer and retirement of
               Gordon W. Kreh;
          (iii)Form  8-K  dated  November  30,  1999 to  report  declaration  of
               dividend by Registrant;
          (iv) Form  8-K  dated  January  18,  2000  to  announce   Registrant's
               anticipated 1999 net income;

                                       85
<PAGE>

          (v)  Form 8-K dated  January 24, 2000 to report  fourth  quarter  1999
               results of Registrant and declaration of dividend by Registrant;
          (vi) Form 8-K dated  March 6, 2000 to  announce  election  of  Richard
               Booth as Chairman.


     (c)  The exhibits listed in the accompanying Index to Exhibits are filed as
          part of this report.


                                       86
<PAGE>

                                   SIGNATURES

     Pursuant to the  requirements of Section 13 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.
       (Registrant)


By:  /s/ Richard H. Booth
      Richard H. Booth
      Chairman, President and Chief
      Executive Officer
      March 29, 2000

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.

       (Signature)                                     (Title)

By:/s/  Richard H. Booth
    Richard H. Booth                              Chairman, President,
    March 29, 2000                               Chief Executive Officer
                                                    and Director

  /s/ Saul L. Basch                          Senior Vice President, Treasurer
    Saul L. Basch                              and Chief Financial Officer
    March 29, 2000                           (Principal Financial Officer and
                                               Principal Accounting Officer)

  /s/ Robert C. Walker
      Robert C. Walker                      Senior Vice President and General
      March 29, 2000                        Counsel

(Joel B Alvord)*                                       Director


(Colin G. Campbell)*                                   Director


(Richard G. Dooley)*                                   Director


(William B. Ellis)*                                    Director


(Henrietta Holsman Fore)*                              Director

                                       87
<PAGE>


(E. James Ferland)*                                    Director


(Simon W. Leathes)*                                    Director



*By:  /s/ Robert C. Walker
     Robert C. Walker
     (Attorney-in-Fact)
     March 29, 2000


                                       88
<PAGE>





                                INDEX TO EXHIBITS

Exhibit
Number      Description

**(3)(i)       Certificate of Incorporation of HSB Group, Inc.,  incorporated by
               reference to Exhibit 3(i) to the  Registrant's  Form 10-K for the
               year ended December 31, 1997, File Number 001-13135.

  (3)(ii)      By-laws of HSB Group, Inc.

**(4)(i)       Rights Agreement dated as of November 28, 1998 between HSB Group,
               Inc. and  BankBoston,  N.A.,  as Rights  Agent,  incorporated  by
               reference to the Registrant's  Report on Form 8-K dated September
               21, 1998, File Number 001-13135.

**(4)(ii)      Documents related to HSB Capital I:

               (a)    Indenture   of   Registrant   relating   to   the   Junior
                      Subordinated  Debentures,  incorporated  by  reference  to
                      Exhibit 4 to  Registrant's  Quarterly  Report on Form 10-Q
                      for the quarter ended June 30, 1997, File No. 001-13135.

               (b)    First Supplemental  Indenture of Registrant,  incorporated
                      by reference to Exhibit 4 to Registrant's Quarterly Report
                      on Form 10-Q for the quarter ended June 30, 1997, File No.
                      001-13135.

               (c)    Form  of  Certificate  of  Exchange  Junior   Subordinated
                      Debentures,  incorporated  by  reference to Exhibit 4.3 to
                      Registrant's and HSB Capital I's Registration Statement on
                      Form S-4 filed with the  Commission  on October 10,  1997,
                      Registration No. 333-37581.

               (d)    Certificate  of Trust of HSB  Capital I,  incorporated  by
                      reference to Exhibit 4.4 to  Registrant's  and HSB Capital
                      I's  Registration  Statement  on Form S-4  filed  with the
                      Commission   on  October  10,   1997,   Registration   No.
                      333-37581.

               (e)    Amended and  Restated  Trust  Agreement  of HSB Capital I,
                      incorporated  by  reference  to Exhibit 4 to  Registrant's
                      Quarterly  Report on Form 10-Q for the quarter  ended June
                      30, 1997, File No. 001-13135.

               (f)    Form of  Exchange  Capital  Security  Certificate  for HSB
                      Capital I,  incorporated  by  reference  to Exhibit 4.6 to
                      Registrant's and HSB Capital I's Registration Statement on
                      Form S-4 filed with the  Commission  on October 10,  1997,
                      Registration No. 333-37581.

               (g)    Form of Exchange  Guarantee of Registrant  relating to the
                      Exchange Capital Securities,  incorporated by reference to
                      Exhibit   4.7  to   Registrant's   and  HSB   Capital  I's
                      Registration   Statement   on  Form  S-4  filed  with  the
                      Commission   on  October  10,   1997,   Registration   No.
                      333-37581.

                                       89
<PAGE>


               Documents related to HSB Capital II:

               (a)  Purchase  Agreement as of December 31, 1997 among  Employers
                    Reinsurance  Corporation,  ERC Life Reinsurance  Corporation
                    and  Registrant,  incorporated  by reference to Registrant's
                    Current  Report  on Form  8-K.  File  No.  001-13135,  filed
                    January 12, 1998 (the "January 12, 1998 8-K).

               (b)  Indenture  of  Registrant  relating to the 7.0%  Convertible
                    Subordinated Deferrable Interest Debentures Due December 31,
                    2017, incorporated by reference to the January 12, 1998 8-K.

               (c)  Form  of  Certificate  of  7.0%   Convertible   Subordinated
                    Deferrable   Interest  Debentures  due  December  31,  2017,
                    incorporated by reference to the January 12, 1998 8-K.

               (d)  Certificate  of Trust of HSB  Capital  II,  incorporated  by
                    reference to the January 12, 1998 8-K.

               (e)  Trust   Agreement  dated  as  of  December  31,  1997  among
                    Registrant,  The  First  National  Bank  of  Chicago,  First
                    Chicago Delaware Inc. and The Administrative  Trustees named
                    therein,  incorporated  by reference to the January 12, 1998
                    8-K.

               (f)  Form of Capital  Securities  Certificate  of HSB Capital II,
                    incorporated by reference to the January 12, 1998 8-K.

               (g)  Guarantee   Agreement  between   Registrant  and  The  First
                    National  Bank of  Chicago  dated as of  December  31,  1997
                    relating to HSB Capital II, incorporated by reference to the
                    January 12, 1998 8-K.

               (h)  Registration  Rights Agreement dated as of December 31, 1997
                    among   Employers   Reinsurance   Corporation,    ERC   Life
                    Reinsurance  Corporation  and  Registrant,  incorporated  by
                    reference to the January 12, 1998 8-K.

**(10)(i)      (a)  Lease Agreement between HSBIIC and One State Street
                    Limited  Partnership;  incorporated  by reference to Exhibit
                    (10)(i) to HSBIIC's Form 10. File No.  0-13300,  filed March
                    18, 1985.

  (10)(iii)  **(a)  Employment  Agreement  dated  February  3, 1997
                    between HSBIIC and various  executive  officers,  assumed by
                    Registrant;  incorporated by reference to HSBIIC's Form 10-K
                    for the  year  ended  December  31,  1996,  filed  with  the
                    Commission on March 31, 1997, File No.  001-10527 (the "1996
                    10-K").*

               (b)  Employment   Agreement   dated  November  29,  1999  between
                    Registrant and Richard H. Booth.*

             **(c)  HSB Group,  Inc.  Long-Term  Incentive  Plan, as amended and
                    restated  effective  September  21,  1998,  incorporated  by
                    reference  to  Exhibit   10(iii)(c)   to  the   Registrant's
                    Quarterly   Report  on  Form  10-Q  for  the  quarter  ended
                    September 30, 1998, File Number 001-13135.*

             **(d)  HSB Group,  Inc.  Short-Term  Incentive Plan, as amended and
                    restated   effective   January  1,  1998,   incorporated  by
                    reference to Exhibit (iii)(b) to the Registrant's  Quarterly
                    Report on Form 10-Q for the quarter  ended  March 31,  1998,
                    File Number 001-13135.*

                                       90
<PAGE>

             **(e)  HSB Group,  Inc.  1985 Stock  Option  Plan,  as amended  and
                    restated as of September 21, 1998, incorporated by reference
                    to Exhibit  10(iii)(a) to the Registrant's  Quarterly Report
                    on Form 10-Q for the quarter ended  September 30, 1998, File
                    Number 001-13135.*

               (f)  HSB Group,  Inc.  1995 Stock  Option  Plan,  as amended  and
                    restated effective April 20, 1999. *

            ** (g)  Pre-Retirement   Death  Benefit  and  Supplemental   Pension
                    Agreement between HSBIIC and various executive officers,  as
                    amended and restated  effective  March 14, 1997,  assumed by
                    Registrant, incorporated by reference to the 1996 10-K. *

             **(h)  Pre-Retirement   Death  Benefit  and  Supplemental   Pension
                    Agreement  between  HSBIIC and William A. Kerr,  dated March
                    14, 1997,  assumed by Registrant,  incorporated by reference
                    to the 1996 10-K. *

             **(i)  Pre-Retirement   Death  Benefit  and  Supplemental   Pension
                    Agreement  between HSBIIC and Robert C. Walker,  dated March
                    14, 1997,  assumed by Registrant,  incorporated by reference
                    to the 1996 10-K.*

               (j)  Pre-Retirement   Death  Benefit  and  Supplemental   Pension
                    Agreement  between  Registrant  and Richard H. Booth,  dated
                    November 29, 1999.*

               (k)  Continuing   Services  and  Retirement   Agreement   between
                    Registrant and Gordon W. Kreh dated March 3, 2000.*

             **(l)  HSB Group,  Inc.  Directors Stock and Deferred  Compensation
                    Plan, as amended and restated effective  September 21, 1998,
                    incorporated  by  reference  to  Exhibit  10(iii)(b)  to the
                    Registrant's  Quarterly  Report on Form 10-Q for the quarter
                    ended September 30, 1998, File Number 001-13135.*

             **(m)  Description  of  certain  arrangements  not set forth in any
                    formal documents, as described on pages 5 - 6 , with respect
                    to directors' compensation, and on pages 8 -16, with respect
                    to  executive  officer's   compensation,   which  pages  are
                    incorporated  by reference to  Registrant's  Proxy Statement
                    dated and filed March 16, 2000. *

(21) Subsidiaries of the Registrant.

(23) Consent of experts and counsel - consent of PricewaterhouseCoopers LLP.

(24) Power of attorney.

(27) Financial Data Schedule.

* Management contract,  compensatory plan or arrangement required to be filed as
an exhibit pursuant to Item 14(c) of this report.

** Previously filed.
                                       91