##### Table of Contents





SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





Quarterly Report pursuant to Section 13 or 15(d)

of the Securities
Exchange Act of 1934

for the Quarterly Period Ended March 31, 2008,

or

Transition report pursuant to
Section 13 or 15(d) Of the Exchange Act

for the Transition Period from
 to

No. 001-32899

(Commission File Number)





EASTERN INSURANCE HOLDINGS, INC.

(Exact name of Registrant as specified in
its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|PENNSYLVANIA                                                   |  | 20-2653793                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|25 Race Avenue, Lancaster, Pennsylvania                        |  | 17603                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

(717) 396-7095

(Registrants telephone number, including area code)



(Former name, former address and former fiscal year, if changed since last report)





Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer
and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   ̈    Accelerated filer  x    Non-accelerated filer   ̈    Smaller
reporting company   ̈

Indicate by check mark if the Registrant is a shell company (as defined in Rule 12b-2 of
the Act).    Yes   ̈    No  x

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



|                            |  |                                               
|--------------------------- |  | ----------------------------------------------
|                            |  | Number of Shares Outstanding as of May 7, 2008
|COMMON STOCK (No par Value) |  | 9,615,827                                     
|(Title of Class)            |  | (Outstanding Shares)                          









---

##### Table of Contents

TABLE OF CONTENTS



|                                |  |                                                                                       |  |     
|------------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                                |  |                                                                                       |  | Page
|PART I - 
FINANCIAL INFORMATION |  | 3                                                                                    
|                                |  |                                                                                      
|Item 1.                         |  | Financial Statements (Unaudited)                                                      |  | 3   
|                                |  |                                                                                      
|Item 2.                         |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 18  
|                                |  |                                                                                      
|Item 3.                         |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 34  
|                                |  |                                                                                      
|Item 4.                         |  | Controls and Procedures                                                               |  | 34  
|                                | 
|PART II - 
OTHER INFORMATION    |  | 35                                                                                   
|                                |  |                                                                                      
|Item 1.                         |  | Legal Proceedings                                                                     |  | 35  
|                                |  |                                                                                      
|Item 1A.                        |  | Risk Factors                                                                          |  | 35  
|                                |  |                                                                                      
|Item 2.                         |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 35  
|                                |  |                                                                                      
|Item 3.                         |  | Defaults Upon Senior Securities                                                       |  | 36  
|                                |  |                                                                                      
|Item 4.                         |  | Submission of Matters to Vote of Security Holders                                     |  | 36  
|                                |  |                                                                                      
|Item 5.                         |  | Other Information                                                                     |  | 36  
|                                |  |                                                                                      
|Item 6.                         |  | Exhibits                                                                              |  | 36  



2



---

##### Table of Contents

PART I  FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

EASTERN INSURANCE
HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except share data)



|                                                                                                                                         |  |              |         |   |                 |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | --------------- | - | ------- | -
|                                                                                                                                         |  | March 312008 |         |   | December 312007 |  
|ASSETS                                                                                                                                   |  |              |         |   |                 |   |         |  
|Investments:                                                                                                                             |  |              |         |   |                 |   |         |  
|Fixed income securities, at estimated fair value (amortized cost, $193,810; $202,039)                                                    |  | $            | 200,058 |   |                 | $ | 205,785 |  
|Convertible bonds, at estimated fair value (amortized cost, $13,283; $14,232)                                                            |  |              | 13,936  |   |                 |   | 15,478  |  
|Equity securities, at estimated fair value (cost, $25,400; $19,578)                                                                      |  |              | 24,432  |   |                 |   | 20,541  |  
|Other long-term investments, at estimated fair value (cost, $11,359; $10,386)                                                            |  |              | 12,363  |   |                 |   | 11,317  |  
|                                                                                                                                         |  |              |         |   |                 |   |         |  
|Total investments                                                                                                                        |  |              | 250,789 |   |                 |   | 253,121 |  
|                                                                                                                                         |  |             
|Cash and cash equivalents                                                                                                                |  |              | 41,548  |   |                 |   | 45,940  |  
|Accrued investment income                                                                                                                |  |              | 2,275   |   |                 |   | 2,290   |  
|Premiums receivable (net of allowance, $559; $558)                                                                                       |  |              | 35,397  |   |                 |   | 26,846  |  
|Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses                                                           |  |              | 27,971  |   |                 |   | 26,303  |  
|Deferred acquisition costs                                                                                                               |  |              | 7,458   |   |                 |   | 6,257   |  
|Deferred income taxes, net                                                                                                               |  |              | 2,209   |   |                 |   | 1,229   |  
|Federal income taxes recoverable                                                                                                         |  |              |        |   |                 |   | 846     |  
|Intangible assets                                                                                                                        |  |              | 6,044   |   |                 |   | 6,372   |  
|Goodwill                                                                                                                                 |  |              | 7,992   |   |                 |   | 7,992   |  
|Other assets                                                                                                                             |  |              | 9,634   |   |                 |   | 8,322   |  
|                                                                                                                                         |  |              |         |   |                 |   |         |  
|Total assets                                                                                                                             |  | $            | 391,317 |   |                 | $ | 385,518 |  
|                                                                                                                                         |  |              |         |   |                 |   |         |  
|                                                                                                                                         |  |             
|LIABILITIES                                                                                                                              |  |              |         |   |                 |   |         |  
|Reserves for unpaid losses and loss adjustment expenses                                                                                  |  | $            | 132,961 |   |                 | $ | 129,788 |  
|Unearned premium reserves                                                                                                                |  |              | 50,636  |   |                 |   | 39,826  |  
|Advance premium                                                                                                                          |  |              | 1,582   |   |                 |   | 1,380   |  
|Accounts payable and accrued expenses                                                                                                    |  |              | 7,490   |   |                 |   | 8,422   |  
|Ceded reinsurance balances payable                                                                                                       |  |              | 8,196   |   |                 |   | 6,762   |  
|Benefit plan liabilities                                                                                                                 |  |              | 328     |   |                 |   | 334     |  
|Segregated portfolio cell dividend payable                                                                                               |  |              | 13,775  |   |                 |   | 13,168  |  
|Federal income taxes payable                                                                                                             |  |              | 810     |   |                 |   |        |  
|Junior subordinated debentures                                                                                                           |  |              | 8,007   |   |                 |   | 8,007   |  
|                                                                                                                                         |  |              |         |   |                 |   |         |  
|Total liabilities                                                                                                                        |  | $            | 223,785 |   |                 | $ | 207,687 |  
|                                                                                                                                         |  |              |         |   |                 |   |         |  
|Commitments and contingencies (Note 10)                                                                                                  |  |              |         |   |                 |   |         |  
|                                                                                                                                         |  |             
|SHAREHOLDERS EQUITY                                                                                                                     |  |              |         |   |                 |   |         |  
|Series A preferred stock, par value $0, auth. shares  5,000,000; no shares issued and outstanding                                       |  |              |        |   |                 |   |        |  
|Common capital stock, par value $0, auth. shares  20,000,000; issued  11,597,723; outstanding  9,841,645 and 10,580,858,
respectively |  |              |        |   |                 |   |        |  
|Unearned ESOP compensation                                                                                                               |  |              | (6,167  | ) |                 |   | (6,354  | )
|Additional paid in capital                                                                                                               |  |              | 110,614 |   |                 |   | 110,166 |  
|Treasury stock, at cost (1,756,078 and 1,016,865 shares, respectively)                                                                   |  |              | (27,703 | ) |                 |   | (15,589 | )
|Retained earnings                                                                                                                        |  |              | 88,213  |   |                 |   | 86,363  |  
|Accumulated other comprehensive income, net                                                                                              |  |              | 2,575   |   |                 |   | 3,245   |  
|                                                                                                                                         |  |              |         |   |                 |   |         |  
|Total shareholders equity                                                                                                               |  |              | 167,532 |   |                 |   | 177,831 |  
|                                                                                                                                         |  |              |         |   |                 |   |         |  
|Total liabilities and shareholders equity                                                                                               |  | $            | 391,317 |   |                 | $ | 385,518 |  
|                                                                                                                                         |  |              |         |   |                 |   |         |  

See accompanying notes to unaudited consolidated financial statements.



3



---

##### Table of Contents

EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

For the Three Months Ended March 31, 2008 and 2007

(Unaudited, in thousands, except per share data)



|                                                                                               |  |                                     |        |   |                               |   |       
|---------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------ | - | ----------------------------- | - | ------
|                                                                                               |  | For the Three MonthsEnded
March 31,
|                                                                                               |  | 2008                                |        |   | 2007                         
|REVENUE                                                                                        |  |                                     |        |   |                               |   |       
|Net premiums earned                                                                            |  | $                                   | 33,003 |   |                               | $ | 29,129
|Net investment income                                                                          |  |                                     | 2,614  |   |                               |   | 2,980 
|Net realized investment (losses) gains                                                         |  |                                     | (293   | ) |                               |   | 724   
|Other revenue                                                                                  |  |                                     | 216    |   |                               |   | 182   
|                                                                                               |  |                                     |        |   |                               |   |       
|Total revenue                                                                                  |  |                                     | 35,540 |   |                               |   | 33,015
|                                                                                               |  |                                     |        |   |                               |   |       
|EXPENSES                                                                                       |  |                                     |        |   |                               |   |       
|Losses and loss adjustment expenses incurred                                                   |  |                                     | 19,715 |   |                               |   | 17,940
|Acquisition and other underwriting expenses                                                    |  |                                     | 4,920  |   |                               |   | 3,349 
|Other expenses                                                                                 |  |                                     | 6,063  |   |                               |   | 5,456 
|Amortization of intangibles                                                                    |  |                                     | 328    |   |                               |   | 435   
|Policyholder dividend expense                                                                  |  |                                     | (63    | ) |                               |   | 101   
|Segregated portfolio dividend expense                                                          |  |                                     | 934    |   |                               |   | 722   
|                                                                                               |  |                                     |        |   |                               |   |       
|Total expenses                                                                                 |  |                                     | 31,897 |   |                               |   | 28,003
|                                                                                               |  |                                     |        |   |                               |   |       
|Income before income taxes                                                                     |  |                                     | 3,643  |   |                               |   | 5,012 
|Income tax expense                                                                             |  |                                     | 1,069  |   |                               |   | 1,861 
|                                                                                               |  |                                     |        |   |                               |   |       
|Net income                                                                                     |  | $                                   | 2,574  |   |                               | $ | 3,151 
|                                                                                               |  |                                     |        |   |                               |   |       
|Other comprehensive (loss) income                                                              |  |                                     |        |   |                               |   |       
|Unrealized holding (losses) gains arising during period, net of tax of $(278) and $218         |  |                                     | (517   | ) |                               |   | 405   
|Amortization of unrecognized benefit plan amounts, net of tax of $2 and $3                     |  |                                     | 4      |   |                               |   | 5     
|Less: Reclassification adjustment for gains included in net income, net of tax of $84 and $214 |  |                                     | 157    |   |                               |   | 397   
|                                                                                               |  |                                     |        |   |                               |   |       
|Other comprehensive (loss) income                                                              |  |                                     | (670   | ) |                               |   | 13    
|                                                                                               |  |                                     |        |   |                               |   |       
|Comprehensive income                                                                           |  | $                                   | 1,904  |   |                               | $ | 3,164 
|                                                                                               |  |                                     |        |   |                               |   |       
|                                                                                               |  |                                    
|                                                                                               |  | ThreeMonthsEndedMarch 31,2008       |        |   | ThreeMonthsEndedMarch 31,2007
|Earnings per share (See Note 4):                                                               |  |                                     |        |   |                               |   |       
|Net income                                                                                     |  | $                                   | 2,574  |   |                               | $ | 3,151 
|Basic earnings per share                                                                       |  | $                                   | 0.27   |   |                               | $ | 0.30  
|Diluted earnings per share                                                                     |  | $                                   | 0.26   |   |                               | $ | 0.29  

See accompanying notes to unaudited consolidated financial statements.



4



---

##### Table of Contents

EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Three Months Ended March 31, 2008 and 2007

(Unaudited, in thousands, except share data)



|                                                |  |                        |  |                    |                    |  |                          |   |                          |                          |        |                          |  |               |                  |  |                  |                                                |   |                                                |       |        |       |  |   |       |   |  |   |         |  
|----------------------------------------------- |  | ---------------------- |  | ------------------ | ------------------ |  | ------------------------ | - | ------------------------ | ------------------------ | ------ | ------------------------ |  | ------------- | ---------------- |  | ---------------- | ---------------------------------------------- | - | ---------------------------------------------- | ----- | ------ | ----- |  | - | ----- | - |  | - | ------- | -
|                                                |  | Outstanding Shares     |  |                    | CommonCapitalStock |  | UnearnedESOPCompensation |   |                          | AdditionalPaid-InCapital |        | TreasuryStock            |  |               | RetainedEarnings |  |                  | AccumulatedOtherComprehensiveIncome,Net of Tax |   |                                                | Total |       
|                                                |  | Series APreferredStock |  | CommonCapitalStock |                    |  |                          |   |                          |                          |        |                         
|Balance, January 1, 2008                        |  |                       |  | 10,580,858         |                    |  | $                        |  |                          | $                        | (6,354 | )                        |  | $             | 110,166          |  | $                | (15,589                                        | ) |                                                | $     | 86,363 |       |  | $ | 3,245 |   |  | $ | 177,831 |  
|ESOP shares released                            |  |                       |  |                   |                    |  |                          |  |                          |                          | 187    |                          |  |               | 102              |  |                  |                                               |   |                                                |       |       |       |  |   |      |   |  |   | 289     |  
|Stock compensation expense                      |  |                       |  |                   |                    |  |                          |  |                          |                          |       |                          |  |               | 314              |  |                  |                                               |   |                                                |       |       |       |  |   |      |   |  |   | 314     |  
|Excess tax benefit from vested restricted stock |  |                       |  |                   |                    |  |                          |  |                          |                          |       |                          |  |               | 32               |  |                  |                                               |   |                                                |       |       |       |  |   |      |   |  |   | 32      |  
|Repurchase of common stock                      |  |                       |  | (739,213           | )                  |  |                          |  |                          |                          |       |                          |  |               |                 |  |                  | (12,114                                        | ) |                                                |       |       |       |  |   |      |   |  |   | (12,114 | )
|Shareholder dividend                            |  |                       |  |                   |                    |  |                          |  |                          |                          |       |                          |  |               |                 |  |                  |                                               |   |                                                |       | (724   | )     |  |   |      |   |  |   | (724    | )
|Net income                                      |  |                       |  |                   |                    |  |                          |  |                          |                          |       |                          |  |               |                 |  |                  |                                               |   |                                                |       | 2,574  |       |  |   |      |   |  |   | 2,574   |  
|Other comprehensive loss, net of tax            |  |                       |  |                   |                    |  |                          |  |                          |                          |       |                          |  |               |                 |  |                  |                                               |   |                                                |       |       |       |  |   | (670  | ) |  |   | (670    | )
|                                                |  |                        |  |                    |                    |  |                          |   |                          |                          |        |                          |  |               |                  |  |                  |                                                |   |                                                |       |        |       |  |   |       |   |  |   |         |  
|Balance, March 31, 2008                         |  |                       |  | 9,841,645          |                    |  | $                        |  |                          | $                        | (6,167 | )                        |  | $             | 110,614          |  | $                | (27,703                                        | ) |                                                | $     | 88,213 |       |  | $ | 2,575 |   |  | $ | 167,532 |  
|                                                |  |                        |  |                    |                    |  |                          |   |                          |                          |        |                          |  |               |                  |  |                  |                                                |   |                                                |       |        |       |  |   |       |   |  |   |         |  
|                                                |  |                        |  |                    |                    |  |                          |   |                         
|                                                |  | Series APreferredStock |  | CommonCapitalStock |                    |  | CommonCapitalStock       |   | UnearnedESOPCompensation |                          |        | AdditionalPaid-InCapital |  | TreasuryStock |                  |  | RetainedEarnings |                                                |   | AccumulatedOtherComprehensiveIncome,Net of Tax |       |        | Total | 
|Balance, January 1, 2007                        |  |                       |  | 11,351,048         |                    |  | $                        |  |                          | $                        | (7,101 | )                        |  | $             | 108,502          |  | $                |                                               |   |                                                | $     | 69,483 |       |  | $ | 2,860 |   |  | $ | 173,744 |  
|Adoption of SFAS 155                            |  |                       |  |                   |                    |  |                          |  |                          |                          |       |                          |  |               |                 |  |                  |                                               |   |                                                |       | 405    |       |  |   | (405  | ) |  |   |        |  
|ESOP shares released                            |  |                       |  |                   |                    |  |                          |  |                          |                          | 184    |                          |  |               | 88               |  |                  |                                               |   |                                                |       |       |       |  |   |      |   |  |   | 272     |  
|Issuance of stock awards                        |  |                       |  | 246,675            |                    |  |                          |  |                          |                          |       |                          |  |               | 300              |  |                  |                                               |   |                                                |       |       |       |  |   |      |   |  |   | 300     |  
|Repurchase of common stock                      |  |                       |  | (66,413            | )                  |  |                          |  |                          |                          |       |                          |  |               |                 |  |                  | (961                                           | ) |                                                |       |       |       |  |   |      |   |  |   | (961    | )
|Net income                                      |  |                       |  |                   |                    |  |                          |  |                          |                          |       |                          |  |               |                 |  |                  |                                               |   |                                                |       | 3,151  |       |  |   |      |   |  |   | 3,151   |  
|Other comprehensive income, net of tax          |  |                       |  |                   |                    |  |                          |  |                          |                          |       |                          |  |               |                 |  |                  |                                               |   |                                                |       |       |       |  |   | 13    |   |  |   | 13      |  
|                                                |  |                        |  |                    |                    |  |                          |   |                          |                          |        |                          |  |               |                  |  |                  |                                                |   |                                                |       |        |       |  |   |       |   |  |   |         |  
|Balance, March 31, 2007                         |  |                       |  | 11,531,310         |                    |  | $                        |  |                          | $                        | (6,917 | )                        |  | $             | 108,890          |  | $                | (961                                           | ) |                                                | $     | 73,039 |       |  | $ | 2,468 |   |  | $ | 176,519 |  
|                                                |  |                        |  |                    |                    |  |                          |   |                          |                          |        |                          |  |               |                  |  |                  |                                                |   |                                                |       |        |       |  |   |       |   |  |   |         |  

See accompanying notes to unaudited consolidated financial statements



5



---

##### Table of Contents

EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended
March 31, 2008 and 2007

(Unaudited, in thousands)



|                                                                                  |  |      |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | 2008 |         |   | 2007 |  
|Cash flows from operating activities:                                             |  |      |         |   |      |   |         |  
|Net income                                                                        |  | $    | 2,574   |   |      | $ | 3,151   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |      | 97      |   |      |   | 104     |  
|Amortization of bond premium/discount                                             |  |      | 152     |   |      |   | 246     |  
|Net realized investment losses (gains)                                            |  |      | 293     |   |      |   | (724    | )
|Equity in (income) loss of limited partnerships                                   |  |      | (49     | ) |      |   | 33      |  
|Deferred tax benefit                                                              |  |      | (619    | ) |      |   | (1,102  | )
|Stock compensation                                                                |  |      | 603     |   |      |   | 572     |  
|Intangible asset amortization                                                     |  |      | 328     |   |      |   | 435     |  
|Changes in assets and liabilities:                                                |  |      |         |   |      |   |         |  
|Accrued investment income                                                         |  |      | 15      |   |      |   | (140    | )
|Premiums receivable                                                               |  |      | (8,551  | ) |      |   | (11,681 | )
|Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses    |  |      | (1,668  | ) |      |   | (470    | )
|Deferred acquisition costs                                                        |  |      | (1,201  | ) |      |   | (2,807  | )
|Other assets                                                                      |  |      | (1,004  | ) |      |   | (1,052  | )
|Reserves for unpaid losses and loss adjustment expenses                           |  |      | 3,173   |   |      |   | 839     |  
|Unearned and advance premium                                                      |  |      | 11,012  |   |      |   | 15,267  |  
|Ceded reinsurance balances payable                                                |  |      | 1,434   |   |      |   | 1,680   |  
|Accounts payable and accrued expenses                                             |  |      | (932    | ) |      |   | (279    | )
|Segregated portfolio cell dividend payable                                        |  |      | 678     |   |      |   | 956     |  
|Benefit plan liabilities                                                          |  |      | (12     | ) |      |   | (19     | )
|Federal income taxes recoverable/payable                                          |  |      | 1,656   |   |      |   | 873     |  
|                                                                                  |  |      |         |   |      |   |         |  
|Net cash provided by operating activities                                         |  |      | 7,979   |   |      |   | 5,882   |  
|                                                                                  |  |      |         |   |      |   |         |  
|Cash flows from investing activities:                                             |  |      |         |   |      |   |         |  
|Purchase of fixed income securities                                               |  |      | (7,219  | ) |      |   | (36,578 | )
|Purchase of equity securities                                                     |  |      | (6,863  | ) |      |   | (1,702  | )
|Purchase of other long-term investments                                           |  |      | (1,000  | ) |      |   | (1,400  | )
|Proceeds from sale of fixed income securities                                     |  |      | 5,367   |   |      |   | 22,828  |  
|Proceeds from maturities/calls of fixed income securities                         |  |      | 9,493   |   |      |   | 4,486   |  
|Proceeds from sale of equity securities                                           |  |      | 1,060   |   |      |   | 3,349   |  
|Proceeds from sale of other long-term investments                                 |  |      |        |   |      |   | 1,782   |  
|Change in unsettled investment purchases and sales                                |  |      | 146     |   |      |   | 888     |  
|Principal payments received on mortgage loans                                     |  |      | 2       |   |      |   | 3       |  
|Purchase of equipment, net                                                        |  |      | (551    | ) |      |   | (85     | )
|                                                                                  |  |      |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                               |  |      | 435     |   |      |   | (6,429  | )
|                                                                                  |  |      |         |   |      |   |         |  
|Cash flows from financing activities:                                             |  |      |         |   |      |   |         |  
|Repurchase of common stock                                                        |  |      | (12,114 | ) |      |   | (961    | )
|Shareholder dividend                                                              |  |      | (724    | ) |      |   |        |  
|Excess tax benefit from vested restricted stock                                   |  |      | 32      |   |      |   |        |  
|                                                                                  |  |      |         |   |      |   |         |  
|Net cash used in financing activities                                             |  |      | (12,806 | ) |      |   | (961    | )
|                                                                                  |  |      |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                         |  |      | (4,392  | ) |      |   | (1,508  | )
|Cash and cash equivalents, beginning of period                                    |  |      | 45,940  |   |      |   | 50,703  |  
|                                                                                  |  |      |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                          |  | $    | 41,548  |   |      | $ | 49,195  |  
|                                                                                  |  |      |         |   |      |   |         |  
|Supplemental disclosure of cash flow information:                                 |  |      |         |   |      |   |         |  
|Cash paid for income taxes                                                        |  | $    |        |   |      | $ | 2,000   |  
|Cash paid for interest                                                            |  | $    | 152     |   |      | $ | 152     |  

See accompanying notes to unaudited consolidated financial statements.



6



---

##### Table of Contents

Eastern Insurance Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited, dollars in thousands except share and per share data)

1. Background and Nature of Operations

Eastern Insurance Holdings, Inc. (EIHI) is an insurance holding company offering workers compensation and group benefits insurance
products and reinsurance products through its direct and indirect wholly-owned subsidiaries, Eastern Holding Company, Ltd. (EHC), Eastern Services Corporation (Eastern Services), Global Alliance Holdings, Ltd. (Global
Alliance), Global Alliance Statutory Trust I (Trust I), Eastern Alliance Insurance Company (Eastern Alliance), Allied Eastern Indemnity Company (Allied Eastern), Eastern Advantage Assurance Company
(Eastern Advantage), Eastern Re Ltd., S.P.C. (Eastern Re), Eastern Life and Health Insurance Company (ELH), and Employers Alliance, Inc. (Employers Alliance), collectively referred to as the Company.

The Company operates in five segments: workers compensation insurance, segregated portfolio cell reinsurance, group benefits insurance, specialty
reinsurance, and corporate/other. See Note 9 for a description of each segment.

2. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, being normal,
recurring adjustments, necessary for a fair presentation of the financial position and results of operations of the Company for the periods presented have been included. The results of operations for an interim period are not necessarily indicative
of the results for an entire year. These financial statements should be read in conjunction with the Companys audited financial statements and notes thereto as of and for the year ended December 31, 2007 included in the Companys
Annual Report on Form 10-K, which was filed with the U.S. Securities and Exchange Commission on March 14, 2008.

All inter-company transactions and
related account balances have been eliminated in consolidation.

Certain amounts in the prior year consolidated financial statements have been reclassified
to conform to the current year presentation.

Use of Estimates

The preparation of the unaudited interim consolidated financial statements requires management to make estimates and assumptions that affect the amount of reported assets and liabilities and disclosures of contingent assets and liabilities
as of the date of the unaudited interim consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates in the unaudited interim consolidated financial statements include
reserves for unpaid losses and loss adjustment expenses, earned but unbilled premium, deferred acquisition costs, return premiums under reinsurance contracts, and current and deferred income taxes. Actual results could differ from these estimates.

Cash and Cash Equivalents

The Company considers all
investments with original maturity dates of three months or less to be cash equivalents for purposes of the consolidated statements of cash flows. The carrying amount of cash equivalents approximates their fair value.

Investments

Fixed Income Securities

The Companys investments in fixed income securities are classified as available-for-sale and are carried at estimated fair value, with unrealized gains and losses
reported in accumulated other comprehensive income (loss), net of tax. Fixed income securities include publicly traded and private placement bonds. The estimated fair value of publicly traded bonds is determined based on quoted market prices or, in
the absence of quoted market prices, dealer quotes or matrix pricing, all of which are based on observable market-based inputs when available. Adverse credit market conditions during the second half of 2007 caused some markets to become relatively
illiquid, thus reducing the availability of certain data used by the independent pricing services and dealers. The estimated fair value of private placement bonds is determined using valuation models, taking into consideration the securities
coupon rate, maturity date, and other pertinent features.

Premiums or discounts are amortized using the effective interest method. Realized gains or
losses are based on amortized cost and are computed using the specific identification method. The Company monitors its fixed income securities for unrealized losses that



7



---

##### Table of Contents

appear to be other-than-temporary. The Company performs a detailed review of these securities to determine the underlying cause of the unrealized loss and
whether the security is impaired. When a security is determined to be other-than- temporarily impaired, the Company reduces the book value of the security to the current estimated fair value at the balance sheet date and records a realized loss in
the consolidated statements of operations and comprehensive income (loss). Any subsequent increase in the securitys estimated fair value would be reported as an unrealized gain.

Convertible Bond Securities

The Company adopted Statement of Financial Accounting Standards No. 155
(SFAS 155), Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140, on January 1, 2007. Under SFAS 155, the change in fair value of the Companys convertible
bond securities, which meet the definition of a hybrid financial instrument under SFAS 155, is reported as a realized gain or loss in the consolidated statement of operations and comprehensive income (loss). The adoption of SFAS 155 was
reported as a cumulative effect adjustment to shareholders equity, as of January 1, 2007, and resulted in a reclassification between retained earnings and accumulated other comprehensive income of $405. The carrying value of the
Companys convertible bond securities did not change as a result of adopting SFAS 155.

Equity Securities

The Companys investments in equity securities are classified as available-for-sale and are carried at estimated fair value, with unrealized gains and losses
reported in accumulated other comprehensive income (loss), net of tax. The estimated fair value of equity securities is determined based on quoted market prices or independent broker.

Realized gains or losses are based on cost and are computed using the specific identification method. The Company monitors its equity securities for unrealized losses that appear to be other-than-temporary. The
Company performs a detailed review of these securities to determine the underlying cause of the unrealized loss and whether the security is impaired. When a security is determined to be other-than-temporarily impaired, the Company reduces the cost
of the security to the current estimated fair value at the balance sheet date and records a realized loss in the consolidated statements of operations and comprehensive income (loss). Any subsequent increase in the securitys estimated fair
value would be reported as an unrealized gain.

Other Long-Term Investments

Other long-term investments consist primarily of investments in limited partnerships. Investments in limited partnerships are reported in the consolidated financial statements using the equity method. Changes in the
value of the Companys proportionate share of its limited partnership investments are included in net investment income in the consolidated statements of operations and comprehensive income (loss). The Company reports changes in the value of
its limited partnership investments on a month lag (quarter lag for one investment) as a result of the timing of statements being received from the limited partnership.

Premiums

Premiums generated by the Companys workers compensation insurance segment, including estimates
of additional premiums resulting from audits of insureds records, are generally recognized as written upon inception of the policy. Premiums written are primarily earned on a daily pro rata basis over the terms of the policies to which they
relate. Accordingly, unearned premiums represent the portion of premiums written which is applicable to the unexpired portion of the policies in force. Workers compensation premiums are determined based upon the payroll of the insured, the
applicable premium rates and, where applicable, an experience based modification factor. An audit of the policyholders records is conducted after policy expiration, to make a final determination of applicable premiums. Included in net premiums
earned is an estimate for earned but unbilled final audit premiums. The Company estimates earned but unbilled premiums by tracking, by policy, how much additional premium is billed in final audit invoices as a percentage of payroll exposure to
estimate the probable additional amount that it has earned, but not yet billed, as of the balance sheet date. Earned but unbilled premiums accrued as of March 31, 2008 and December 31, 2007 and included in net premiums earned, totaled
$1,500.

Premiums generated by the Companys group benefits insurance segment are generally billed on a monthly basis with premiums being earned in
the month in which the coverage is provided. Unearned premiums represent those premiums that have been received but for which the coverage period has not expired. Advance premiums represent those premiums that have been received in advance of the
coverage period. Premiums receivable represent only those premiums that have been billed to policyholders for coverage periods through the balance sheet date.

Reinsurance premiums assumed by the Companys specialty reinsurance segment are estimated based on information provided by the ceding company. The information used in establishing these estimates is reviewed and subsequent adjustments
are recorded in the period in which they are reported. These premiums are earned over the terms of the related reinsurance contracts.



8



---

##### Table of Contents

Other Revenue

Other
revenue primarily consists of service revenues related to claims adjusting and risk management services. Claims adjusting and risk management service revenue is earned over the term of the related contracts in proportion to the actual services
rendered.

Losses and Loss Adjustment Expenses

A
liability is established for the estimated unpaid losses and loss adjustment expenses (LAE) of the Companys workers compensation insurance segment under the terms of, and with respect to, its policies and agreements and
includes amounts determined on the basis of claims adjusters evaluations and an amount based on past experience for losses incurred but not reported (IBNR).

The Company discounts its reserves for unpaid losses and LAE for workers compensation claims on a non-tabular basis, using a discount rate of 3%, based upon regulatory guidelines. The reserves for unpaid losses
and LAE have been reduced for the effects of discounting by approximately $3,428 and $3,474 as of March 31, 2008 and December 31, 2007, respectively.

A liability is established for the estimated unpaid losses and LAE of the Companys group benefits insurance segment as follows:



| |  |  | The liability for reported but unpaid long-term disability claims is calculated using the 1987 Commissioners Group Disability Table. The long-term disability
reserves are discounted based on the expected rate of return of ELHs fixed income portfolio in the year that the claim was incurred. The discount rate for claims incurred in 2008 and 2007 is 3.85% and 5.25%, respectively. The liability for
IBNR claims is estimated on a policy-by-policy basis, taking into consideration average monthly premium, policy elimination periods, and an expected loss ratio.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The liability for reported but unpaid and IBNR dental and short-term disability claims is estimated using statistical claim development models, taking into
consideration historical claim severity and frequency patterns and changes in benefit structures that may impact the amount at which claims are ultimately settled. For the most recent incurral months, which usually consist of the last three months,
the liability is estimated by applying an expected loss ratio to net premiums earned, less claim payments through the balance sheet date.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The liability for reported but unpaid term life claims represent those claims reported to the Company as of the balance sheet date for which payment has not yet
been made. Term life IBNR claims are estimated based on historical patterns of claims incurred as a percent of in-force premium as of the balance sheet date.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The liability for life premium waiver reserves represents the present value of future life insurance benefits under those term life insurance policies for which
premium has been waived due to the insureds disability. The liability for life premium waiver reserves is calculated using the 2005 Group Term Life Waiver Reserve Table for claims reported on or after October 1, 2007 and the 1970
Intercompany Group Life Disability Table for claims reported prior to October 1, 2007.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A liability is established for the estimated
unpaid losses and LAE of the Companys specialty reinsurance segment based on information provided by the ceding company. Premiums and reported claims data provided by the ceding company is utilized by management to estimate the ultimate losses
and LAE, including an amount for IBNR claims.

The methods used to estimate the reserve for unpaid losses and LAE are reviewed periodically and any
adjustments resulting therefrom are reflected in current operations.

Management believes that its reserve for unpaid losses and LAE is adequate as of
March 31, 2008. However, estimating the ultimate liability is necessarily a complex and judgmental process inasmuch as the amounts are based on managements informed estimates and judgments using data currently available. If the
Companys ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded as of March 31, 2008, the related adjustments could have a material adverse effect on the Companys financial condition, results of
operations or liquidity.

Reinsurance

In the ordinary
course of business, the Company assumes and cedes reinsurance with other insurance companies. These arrangements provide greater diversification of business and minimize the net loss potential arising from large claims. Ceded reinsurance contracts
do not relieve the Company of its obligation to its insureds. Premiums and claims under the Companys reinsurance contracts are accounted for on a basis consistent with those used in accounting for the underlying policies reinsured and the
terms of the reinsurance contracts. The Company has certain reinsurance contracts that provide for return premium based on the actual loss experience of the written and reinsured business. The Company estimates the amounts to be recorded for return
premium based on the terms set forth in the reinsurance agreements and the expected loss experience.

The reinsurance recoverable for unpaid losses and LAE
includes the balances due from reinsurance companies for unpaid losses and LAE that are expected to be recovered from reinsurers, based on contracts in force.



9



---

##### Table of Contents

Policy Acquisition Costs

Policy acquisition costs consist primarily of commissions and premium taxes that vary with and are primarily related to the production of premium. Acquisition costs are deferred and amortized over the period in which the related premiums
are earned. Deferred acquisition costs are limited to the estimated amounts recoverable after providing for losses and LAE that are expected to be incurred based upon historical and current experience. Anticipated investment income is considered in
determining recoverability.

The Companys group benefits insurance policies are cancelable and are not guaranteed renewable. In addition, the group
benefits insurance policies provide coverage on a month-to-month basis with most policies coverage effective on the first of each month. As a result, most of the Companys group benefits insurance premiums are earned as of the balance
sheet date. Based on the nature of the Companys group benefits insurance policies, costs related to the acquisition of new and renewal business are expensed as incurred.

Amortization of policy acquisition costs, before the impact of purchase accounting, totaled $1,795 and $1,887 for the three months ended March 31, 2008 and 2007, respectively.

Income Taxes

Deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the difference is reversed. A valuation allowance is recorded
against gross deferred tax assets if it is more likely than not that all or some portion of the benefits related to the deferred tax assets will not be realized.

Eastern Alliance, Allied Eastern, Eastern Advantage and ELH are generally not subject to state income taxes; rather, they are subject to state premium tax in the jurisdictions in which they write business. Employers Alliance and Eastern
Services are subject to Pennsylvania state income tax.

Eastern Re is an exempt entity under the Companies Law of the Cayman Islands; however, Eastern
Res earnings and profits are subject to federal income tax subsequent to June 16, 2006, as a result of the redomestication of EHC.

The Company
includes income tax-related interest and penalties as a component of income tax expense. The Company did not incur any income tax-related interest or penalties during the three months ended March 31, 2008 and 2007.

The Companys federal income tax returns for tax years subsequent to December 31, 2003 are subject to examination by the Internal Revenue Service.

Policyholder Dividends

The Company issues certain workers
compensation insurance policies with dividend payment features. These policyholders share in the operating results of their respective policies in the form of dividends. Dividends to policyholders are accrued during the period in which the related
premiums are earned and are determined based on the terms of the individual policies. As of March 31, 2008 and December 31, 2007, the Company accrued dividends payable of $808 and $989, respectively, which are included in accounts payable
and accrued expenses on the consolidated balance sheets.

Assessments

The Company is subject to state guaranty fund assessments in the Commonwealth of Pennsylvania, which provide for the payment of covered claims or to meet other insurance obligations from insurance company
insolvencies. The Companys assessments consist primarily of charges from the Workers Compensation Security Fund of Pennsylvania (Security Fund). The Security Fund serves as a guaranty fund to provide claim payments for those
workers entitled to workers compensation benefits when the insurance company originally providing the benefits was placed into liquidation by a court. Security Fund assessments are established on an actuarial basis to provide an amount
sufficient to pay the outstanding and anticipated claims in a timely manner, to meet the costs of the Pennsylvania Insurance Department (the Insurance Department) to administer the fund and to maintain a minimum balance in the fund of
$500 million. If the Security Fund determines that the balance in the Security Fund is less than $500 million based on the actuarial study, then an assessment equal to one percent of direct premiums written is made to all companies licensed to write
workers compensation in Pennsylvania. The Company recognizes a liability and the related expense for the assessments when premiums covered under the Security Fund are written; when an assessment from the Security Fund has been imposed or it is
probable that an assessment will be imposed; and the amount of the assessment is reasonably estimable. As of March 31, 2008 and December 31, 2007, the Company accrued $388 and $0 related to the Security Fund assessment.

Goodwill and Intangible Assets

Goodwill represents the excess of
cost over the fair value of net assets of businesses acquired. Goodwill and other intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but are instead



10



---

##### Table of Contents

tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.

Treasury Stock

The Company records the repurchase of shares of its common stock using the cost method. Under
the cost method, treasury stock is recorded based on the actual cost of the shares repurchased.

Stock-Based Compensation

The Company adopted the Eastern Insurance Holdings, Inc. 2006 Stock Incentive Plan on December 18, 2006. Under the terms of the Plan, stock awards may be made in the
form of incentive stock options, non-qualified stock options or restricted stock. The Company accounts for stock-based compensation in accordance with SFAS 123R, Share-Based Payment. In accordance with SFAS 123R, the Company
records compensation expense based on the fair value of the stock award on the grant date using the straight-line attribution method.

Employee Stock
Ownership Plan

The Company recognizes compensation expense related to its employee stock ownership plan (ESOP) equal to the product of the
number of shares earned, or committed to be released, during the period, and the average price of the Companys common stock during the period. The estimated fair value of unearned ESOP shares is calculated based on the average price of the
Companys common stock for the period. For purposes of calculating earnings per share, the Company includes the weighted average of ESOP shares committed to be released for the period.

Suspense shares, allocated shares, shares committed to be released, average price per share and stock compensation expense as of and for the three months ended
March 31, 2008 and 2007 were as follows (unaudited, in thousands, except share data):



|                                |  |                                                   |         |                                                   |   |        
|------------------------------- |  | ------------------------------------------------- | ------- | ------------------------------------------------- | - | -------
|                                |  | As of and for theThree Months EndedMarch 31, 2008 |         | As of and for theThree Months EndedMarch 31, 2007
|Suspense shares                 |  |                                                   | 635,375 |                                                   |   | 710,125
|Allocated shares                |  |                                                   | 112,125 |                                                   |   | 37,375 
|Shares committed to be released |  |                                                   | 18,636  |                                                   |   | 18,432 
|Average price per share         |  | $                                                 | 15.50   |                                                   | $ | 14.77  
|Stock compensation expense      |  | $                                                 | 289     |                                                   | $ | 272    

As of March 31, 2008 and 2007, the estimated fair value of unearned ESOP shares were $9,848 and $10,489,
respectively.

Recent Accounting Pronouncements

SFAS 159

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 159 (SFAS 159), The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115. SFAS 159 permits entities to elect to measure certain financial
instruments at fair value with changes in fair value being reported in earnings. SFAS 159 can be applied on an instrument-by-instrument basis and is effective for all eligible financial instruments as of the beginning of an entitys first
fiscal year that begins after November 15, 2007. Retrospective application to prior years financial statements is not permitted. For eligible financial instruments existing at the effective date, and for which an entity elects the fair
value option, the first remeasurement to fair value must be recorded as a cumulative effect adjustment to beginning retained earnings. The Company adopted SFAS 159 effective January 1, 2008; however, no election was made to measure the
Companys financial instruments at fair value. The adoption of SFAS 159 had no effect on the Companys consolidated financial condition and results of operations.

SFAS 141R

In December 2007, the FASB issued Statement No. 141R, Business Combinations
(SFAS 141R), which revises the accounting for business combination transactions previously accounted for under SFAS No. 141, Business Combinations (SFAS 141), and broadens the scope of transactions which
should be accounted for under this standard. SFAS 141R retains the fundamental requirements of SFAS 141 in that the acquisition method of accounting is still used, and an acquirer must be identified in all business combinations. SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity is prohibited from applying SFAS 141R prior to that date.
The Company is currently in the process of evaluating the impact of SFAS 141R.



11



---

##### Table of Contents

SFAS 160

In
December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements  an amendment of ARB No. 51 (SFAS 160), which establishes accounting and reporting standards for
the non-controlling interests in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 requires that the ownership interests and the net income of the non-controlling interest be equally identified from that of the parent on the face of
the financial statements. SFAS 160 also provides consistent accounting principles for changes in a parent controlling ownership interest in a subsidiary, and that any retained non-controlling financial interests in a deconsolidated subsidiary be
measured initially at fair value. SFAS 160 applies to fiscal years beginning on or after December 15, 2008, and is applied prospectively, except for presentation and disclosure requirements, which are applied retrospectively for all periods
presented. The Company is currently in the process of evaluating the impact of SFAS 160.

3. Intangible Assets

The acquisition of EHC resulted in the identification of certain intangible assets, totaling $9,197. As of March 31, 2008 and December 31, 2007, intangible
assets consisted of the following (unaudited, in thousands):



|                                                   |  |                |       |                         |   |              |  |                         |       |  |   |      
|-------------------------------------------------- |  | -------------- | ----- | ----------------------- | - | ------------ |  | ----------------------- | ----- |  | - | -----
|                                                   |  | March 31, 2008 |       | December 31, 2007      
|Intangible Assets with Finite Life                 |  | GrossBalance   |       | AccumulatedAmortization |   | GrossBalance |  | AccumulatedAmortization
|Agency relationships (15 year amortization period) |  | $              | 1,750 |                         | $ | 506          |  | $                       | 1,750 |  | $ | 447  
|Renewal rights (15 year amortization period)       |  |                | 6,397 |                         |   | 2,647        |  |                         | 6,397 |  |   | 2,378
|                                                   |  |                |       |                         |   |              |  |                         |       |  |   |      
|                                                   |  | $              | 8,147 |                         | $ | 3,153        |  | $                       | 8,147 |  | $ | 2,825
|                                                   |  |                |       |                         |   |              |  |                         |       |  |   |      
|                                                   |  |                |       |                        
|Intangible Assets with Indefinite Life             |  |                |       |                         |   |              |  |                        
|State insurance licenses                           |  |                | 1,050 |                         |   |             |  |                         | 1,050 |  |   |     
|                                                   |  |                |       |                         |   |              |  |                         |       |  |   |      
|Total intangible assets                            |  | $              | 9,197 |                         | $ | 3,153        |  | $                       | 9,197 |  | $ | 2,825
|                                                   |  |                |       |                         |   |              |  |                         |       |  |   |      

Amortization expense totaled $328 and $435 for the three months ended March 31, 2008 and 2007, respectively.

4. Earnings Per Share

Basic earnings per share are
computed by dividing net income for the period by the weighted average number of shares outstanding for the respective period. Diluted earnings per share are computed by dividing net income for the period by the weighted average number of shares
outstanding for the period, including dilutive potential common shares outstanding for the period. For the three months ended March 31, 2008 and 2007, stock warrants of 306,099 and restricted stock awards of 40,123 and 11,049, respectively,
have been included as dilutive potential common shares outstanding. For the three months ended March 31, 2008 and 2007, there were 836,816 and 848,390 stock options and restricted stock awards, respectively, that were not included in the
Companys earnings per share calculation because to do so would have been anti-dilutive. Consolidated net income, basic shares outstanding, diluted shares outstanding, basic earnings per share, diluted earnings per share and cash dividends per
share for the three months ended March 31, 2008 and 2007 were as follows (unaudited, in thousands, except share and per share data):



|                           |  |                                |           |                                |   |           
|-------------------------- |  | ------------------------------ | --------- | ------------------------------ | - | ----------
|                           |  | Three MonthsEndedMarch 31,2008 |           | Three MonthsEndedMarch 31,2007
|Consolidated net income    |  | $                              | 2,574     |                                | $ | 3,151     
|Basic shares outstanding   |  |                                | 9,426,830 |                                |   | 10,641,044
|Diluted shares outstanding |  |                                | 9,773,052 |                                |   | 10,958,192
|Basic earnings per share   |  | $                              | 0.27      |                                | $ | 0.30      
|Diluted earnings per share |  | $                              | 0.26      |                                | $ | 0.29      
|Cash dividends per share   |  | $                              | 0.07      |                                |   |          

5. Share Repurchase

During 2007, the Companys Board of Directors authorized the repurchase of up to 2,046,500 shares of the Companys issued and outstanding shares of common stock. The share repurchases are held as treasury stock and are
available for issuance in connection with the Companys 2006 Stock Incentive Plan. On March 24, 2008, the Company received approval from the Insurance Department to repurchase up to $10 million of the Companys issued and
outstanding common stock, which is in addition to the 2,046,500 shares authorized in 2007. The Company repurchased 739,213 and 66,413 shares, at a cost of $12,114 and $961, for the three months ended March 31, 2008 and 2007,
respectively. The Company purchased an additional 225,818 shares, at a cost of $3,531, through May 7, 2008.



12



---

##### Table of Contents

6. Fair Value Measurements

The Company adopted SFAS 157, Fair Value Measurements effective January 1, 2008. SFAS 157 clarifies the definition of fair value for purposes of financial reporting, specifies the methods to be used to measure fair value,
and requires expanded disclosures related to fair value and financial instruments measured at fair value. The adoption of SFAS 157 had no impact on the Companys consolidated financial condition or results of operation.

On February 12, 2008, SFAS 157 was amended by FASB Staff Position No. FAS 157-2 (FSP FAS 157-2). FSP FAS 157-2 delayed the effective date of SFAS 157
for non-financial assets and non-financial liabilities which are measured at fair value on a nonrecurring basis. Non-financial assets and non-financial liabilities which are measured at fair value on a recurring basis (i.e. at least annually) are
not subject to this deferral. This deferral is effective until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. At that time, provisions of SFAS 157 will apply to non-financial assets and
non-financial liabilities which are measured at fair value on a non-recurring basis.

As of March 31, 2008, the Company has no non-financial assets or
non-financial liabilities that are measured at fair value on a recurring basis. The Company is currently evaluating the impact of measuring non-financial assets and non-financial liabilities on a non-recurring basis.

SFAS 157 requires assets and liabilities measured at fair value on a recurring basis to be segregated between those assets and liabilities that are valued based on
quoted prices (unadjusted) in active markets for identical assets or liabilities, which the reporting entity can access at the measurement date (Level 1), direct or indirect observable inputs other than Level 1 quoted prices (Level 2), or
unobservable inputs to the extent that observable inputs are not available (Level 3).

The following is a description of the Companys categorization
of the inputs used in the recurring fair value measurements of its financial assets included in its consolidated balance sheet as of March 31, 2008:

Level 1  Represents financial assets whose fair value is determined based upon observable unadjusted quoted market prices for identical financial assets in active markets that the Company has the ability to
access. An example of a Level 1 input utilized to measure fair value includes the closing price of one share of common stock on an active exchange market. The Company considers U.S. Treasuries and equity securities as Level 1 assets.

Level 2  Represents financial assets whose fair value is determined based upon: quoted market prices for similar assets in active
markets; quoted market prices for identical assets in inactive markets; inputs other than quoted market prices that are observable for the asset such as interest rates or yield curves; or other inputs derived principally from or corroborated from
other observable market information. An example of a Level 2 input utilized to measure fair value, specifically for the Companys fixed income portfolio, is matrix pricing. Matrix pricing relies on observable inputs from
active markets other than quoted market prices including, but not limited to, benchmark securities and yields, latest reported trades, quotes from brokers or dealers, issuer spreads, bids, offers, and other relevant reference data to determine fair
value. Matrix pricing is used to measure the fair value of fixed income securities where obtaining individual quoted market prices is impractical. The Company considers U.S. Government agencies, municipal bonds, mortgage-backed
securities, collateralized mortgage obligations, asset-backed securities, corporate bonds, and convertible bonds as Level 2 assets.

Level 3  Represents financial assets whose fair value is determined based upon inputs that are unobservable, including the Companys own determinations of the assumptions that a market participant would use in pricing the asset.
The Company considers its limited partnership investments as Level 3 assets.

The following table provides a summary of the fair value measurements of
the Companys fixed income securities, convertible bonds, and equity securities, as of March 31, 2008, excluding the segregated portfolio cell segment (in thousands):



|                                             |  |         |         |                                                |   |         |  |         |         |  |   |  
|-------------------------------------------- |  | ------- | ------- | ---------------------------------------------- | - | ------- |  | ------- | ------- |  | - | -
|                                             |  |         |         | Fair Value Measurements at ReportingDate Using
|                                             |  | 3/31/08 |         | Level 1                                        |   | Level 2 |  | Level 3
|Fixed income securities  available for sale |  | $       | 177,905 |                                                | $ | 8,106   |  | $       | 169,799 |  | $ | 
|Convertible bonds                            |  |         | 14,481  |                                                |   |        |  |         | 14,481  |  |   | 
|Equity securities  available for sale       |  |         | 20,020  |                                                |   | 20,020  |  |         |        |  |   | 
|                                             |  |         |         |                                                |   |         |  |         |         |  |   |  
|Total                                        |  | $       | 212,406 |                                                | $ | 28,126  |  | $       | 184,280 |  | $ | 
|                                             |  |         |         |                                                |   |         |  |         |         |  |   |  

The Level 2 fixed income securities in the above table include cash equivalents of $3,796 and the
Level 2 convertible bonds include cash equivalents of $545.

The Companys investments in fixed income securities, convertible bonds, and equity
securities are valued through the use of a nationally recognized pricing service. Where independent pricing services provide fair values, the Company has obtained an understanding of the methods, models and inputs used in pricing, and has controls
in place to validate that amounts provided represent current exit values. Fixed income securities include U.S. Treasuries, agencies backed by the U.S. Government, municipal bonds, mortgage-backed securities, collateralized mortgage obligations,
asset-backed securities, and corporate bonds.



13



---

##### Table of Contents

Other long-term investments include the Companys interest in various limited partnerships, including a low
volatility multi-strategy fund of funds, two natural resource limited partnerships, a municipal bond based limited partnership, an open-ended investment fund and a real estate limited partnership. The Company records its investment in the limited
partnerships using the equity method. Changes in the Companys investments are based on statements received directly from the limited partnership and/or the limited partnerships administrator. The estimated fair values of the underlying
investments in the limited partnerships may be based on Level 1, Level 2, or Level 3 inputs, or a combination thereof.

As of March 31, 2008 and
December 31, 2007, the estimated fair values of the Companys limited partnership investments, by investment strategy, were as follows (unaudited, in thousands):



|                             |  |         |        |          |   |       
|---------------------------- |  | ------- | ------ | -------- | - | ------
|                             |  | 3/31/08 |        | 12/31/07
|Multi-strategy fund of funds |  | $       | 5,749  |          | $ | 5,809 
|Natural resources            |  |         | 3,713  |          |   | 3,312 
|Municipal bond arbitrage     |  |         | 2,220  |          |   | 1,484 
|Open-ended investment fund   |  |         | 597    |          |   | 622   
|Real estate                  |  |         | 70     |          |   | 73    
|                             |  |         |        |          |   |       
|Total                        |  | $       | 12,349 |          | $ | 11,300
|                             |  |         |        |          |   |       

The activity in the Companys limited partnership investments for the three months ended March 31, 2008
and 2007 was as follows (unaudited, in thousands):



|                              |  |         |        |         |   |        |  
|----------------------------- |  | ------- | ------ | ------- | - | ------ | -
|                              |  | 3/31/08 |        | 3/31/07 |  
|Balance, beginning of period  |  | $       | 11,300 |         | $ | 11,572 |  
|Contributions                 |  |         | 1,000  |         |   |       |  
|Withdrawals                   |  |         |       |         |   | (1,531 | )
|Unrealized change in interest |  |         | 49     |         |   | 202    |  
|                              |  |         |        |         |   |        |  
|Balance, end of period        |  | $       | 12,349 |         | $ | 10,243 |  
|                              |  |         |        |         |   |        |  

The change in interest in the Companys limited partnership investments is included in net investment income
in the consolidated statements of operations and comprehensive income.



14



---

##### Table of Contents

7. Other Long-Term Investments

The Company reports the change in equity interest in its investment in the municipal bond arbitrage limited partnership on a quarter lag as a result of the timing of quarterly statements received from the limited
partnership. The estimated fair value of $2,220 reported in the Companys consolidated balance sheet as of March 31, 2008 reflects the Companys investment in the limited partnership as of December 31, 2007. During the
first quarter of 2008, the limited partnership experienced a significant decline in value as a result of the municipal bond market conditions. The estimated fair value of the Companys investment in the limited partnership was $1,649 as of
March 31, 2008, which reflects the estimated fair value that will be reported in the Companys consolidated balance sheet as of June 30, 2008. As a result of the decline in the limited partnerships estimated fair value, the Company
will report a pre-tax loss of approximately $571 in the quarter ended June 30, 2008. This loss will be reported as a reduction to net investment income.

8. Reserves for Unpaid Losses and Loss Adjustment Expenses

The following table provides a summary of the activity in the Companys
reserves for unpaid losses and LAE, excluding term life premium waiver reserves, for the three months ended March 31, 2008 and 2007 (unaudited, in thousands):



|                                                      |  |      |         |   |      |   |         |  
|----------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                      |  | 2008 |         |   | 2007 |  
|Balance, beginning of period                          |  | $    | 125,249 |   |      | $ | 121,396 |  
|Reinsurance recoverables on unpaid losses and LAE     |  |      | 23,429  |   |      |   | 24,236  |  
|                                                      |  |      |         |   |      |   |         |  
|Net balance, beginning of period                      |  |      | 101,820 |   |      |   | 97,160  |  
|Incurred related to:                                  |  |      |         |   |      |   |         |  
|Current year                                          |  |      | 21,841  |   |      |   | 19,974  |  
|Prior year                                            |  |      | (1,791  | ) |      |   | (1,892  | )
|                                                      |  |      |         |   |      |   |         |  
|Total incurred before purchase accounting adjustments |  |      | 20,050  |   |      |   | 18,082  |  
|Purchase accounting adjustments                       |  |      | (155    | ) |      |   | (269    | )
|                                                      |  |      |         |   |      |   |         |  
|Total incurred                                        |  |      | 19,895  |   |      |   | 17,813  |  
|Paid related to:                                      |  |      |         |   |      |   |         |  
|Current year                                          |  |      | 4,560   |   |      |   | 5,076   |  
|Prior year                                            |  |      | 13,475  |   |      |   | 12,409  |  
|                                                      |  |      |         |   |      |   |         |  
|Total paid                                            |  |      | 18,035  |   |      |   | 17,485  |  
|                                                      |  |      |         |   |      |   |         |  
|Net balance, end of period                            |  |      | 103,680 |   |      |   | 97,488  |  
|Reinsurance recoverables on unpaid losses and LAE     |  |      | 24,960  |   |      |   | 24,794  |  
|                                                      |  |      |         |   |      |   |         |  
|Balance, end of period                                |  | $    | 128,640 |   |      | $ | 122,282 |  
|                                                      |  |      |         |   |      |   |         |  
|Total reserves for unpaid for losses and LAE          |  | $    | 132,961 |   |      | $ | 127,306 |  
|Less: Term life premium waiver reserves               |  |      | 4,277   |   |      |   | 4,966   |  
|Less: Other                                           |  |      | 44      |   |      |   | 58      |  
|                                                      |  |      |         |   |      |   |         |  
|Balance, end of period                                |  | $    | 128,640 |   |      | $ | 122,282 |  
|                                                      |  |      |         |   |      |   |         |  

Incurred losses by segment were as follows for the three months ended March 31, 2008 and 2007, respectively
(unaudited, in thousands):



|                                                      |  |                                      |        |   |                                            |   |       |                               |  |   |                             |   |       |   |       |  |   |        |  
|----------------------------------------------------- |  | ------------------------------------ | ------ | - | ------------------------------------------ | - | ----- | ----------------------------- |  | - | --------------------------- | - | ----- | - | ----- |  | - | ------ | -
|                                                      |  | WorkersCompensationInsuranceSegment |        |   | SegregatedPortfolio CellReinsuranceSegment |   |       | GroupBenefitsInsuranceSegment |  |   | SpecialtyReinsuranceSegment |   | Total |  
|Incurred related to:                                  |  |                                      |        |   |                                            |   |       |                               |  |   |                             |   |       |   |       |  |   |        |  
|Current year, gross of discount                       |  | $                                    | 9,088  |   |                                            | $ | 3,729 |                               |  | $ | 7,499                       |   |       | $ | 1,988 |  | $ | 22,304 |  
|Current period discount                               |  |                                      | (328   | ) |                                            |   | (135  | )                             |  |   |                            |   |       |   |      |  |   | (463   | )
|Prior year, gross of discount                         |  |                                      | (1,500 | ) |                                            |   | (615  | )                             |  |   | (886                        | ) |       |   | 653   |  |   | (2,348 | )
|Accretion of prior period discount                    |  |                                      | 395    |   |                                            |   | 162   |                               |  |   |                            |   |       |   |      |  |   | 557    |  
|                                                      |  |                                      |        |   |                                            |   |       |                               |  |   |                             |   |       |   |       |  |   |        |  
|Total incurred before purchase accounting adjustments |  |                                      | 7,655  |   |                                            |   | 3,141 |                               |  |   | 6,613                       |   |       |   | 2,641 |  |   | 20,050 |  
|Purchase accounting adjustments                       |  |                                      | (137   | ) |                                            |   | (26   | )                             |  |   |                            |   |       |   | 8     |  |   | (155   | )
|                                                      |  |                                      |        |   |                                            |   |       |                               |  |   |                             |   |       |   |       |  |   |        |  
|Total incurred                                        |  | $                                    | 7,518  |   |                                            | $ | 3,115 |                               |  | $ | 6,613                       |   |       | $ | 2,649 |  | $ | 19,895 |  
|                                                      |  |                                      |        |   |                                            |   |       |                               |  |   |                             |   |       |   |       |  |   |        |  



15



---

##### Table of Contents

|                                                      |  |                                      |        |   |                                            |   |       |                               |  |   |                             |   |       |   |       |  |   |        |  
|----------------------------------------------------- |  | ------------------------------------ | ------ | - | ------------------------------------------ | - | ----- | ----------------------------- |  | - | --------------------------- | - | ----- | - | ----- |  | - | ------ | -
|                                                      |  | WorkersCompensationInsuranceSegment |        |   | SegregatedPortfolio CellReinsuranceSegment |   |       | GroupBenefitsInsuranceSegment |  |   | SpecialtyReinsuranceSegment |   | Total |  
|Incurred related to:                                  |  |                                      |        |   |                                            |   |       |                               |  |   |                             |   |       |   |       |  |   |        |  
|Current year, gross of discount                       |  | $                                    | 7,874  |   |                                            | $ | 3,620 |                               |  | $ | 6,857                       |   |       | $ | 2,102 |  | $ | 20,453 |  
|Current period discount                               |  |                                      | (328   | ) |                                            |   | (151  | )                             |  |   |                            |   |       |   |      |  |   | (479   | )
|Prior year, gross of discount                         |  |                                      | (1,048 | ) |                                            |   | (482  | )                             |  |   | (1,421                      | ) |       |   | 231   |  |   | (2,720 | )
|Accretion of prior period discount                    |  |                                      | 567    |   |                                            |   | 261   |                               |  |   |                            |   |       |   |      |  |   | 828    |  
|                                                      |  |                                      |        |   |                                            |   |       |                               |  |   |                             |   |       |   |       |  |   |        |  
|Total incurred before purchase accounting adjustments |  |                                      | 7,065  |   |                                            |   | 3,248 |                               |  |   | 5,436                       |   |       |   | 2,333 |  |   | 18,082 |  
|Purchase accounting adjustments                       |  |                                      | (242   | ) |                                            |   | (40   | )                             |  |   |                            |   |       |   | 13    |  |   | (269   | )
|                                                      |  |                                      |        |   |                                            |   |       |                               |  |   |                             |   |       |   |       |  |   |        |  
|Total incurred                                        |  | $                                    | 6,823  |   |                                            | $ | 3,208 |                               |  | $ | 5,436                       |   |       | $ | 2,346 |  | $ | 17,813 |  
|                                                      |  |                                      |        |   |                                            |   |       |                               |  |   |                             |   |       |   |       |  |   |        |  

The Companys results of operations include favorable development on prior year reserves of $1,791 and $1,892
for the three months ended March 31, 2008 and 2007, respectively. The favorable development for the three months ended March 31, 2008 primarily reflects significant claim settlements related to accident years 2007, 2006, 2005, and 2004 in
the workers compensation and segregated portfolio cell reinsurance segments at amounts less than previously established case and IBNR reserves and favorable claim results on prior accident periods in the dental and short-term disability lines,
offset by unfavorable development in the specialty reinsurance segment. The unfavorable development in the specialty reinsurance segment reflects an increase in reported claims from the ceding company.

9. Segment Information

The Companys current operations are
organized into the five following business segments.

Workers Compensation Insurance

The Company offers workers compensation insurance coverage to employers, primarily in Pennsylvania, Maryland and Delaware. The Company offers a complete line of
workers compensation products, including guaranteed cost and loss sensitive products.

Segregated Portfolio Cell Reinsurance

The Company offers alternative market workers compensation solutions to individual companies, groups and associations (referred to as segregated portfolio
cell dividend participants) through the creation of segregated portfolio cells. The segregated portfolio cells are segregated pools of assets that function as insurance companies within an insurance company. The pool of assets and associated
liabilities of each segregated portfolio cell are solely for the benefit of the segregated portfolio cell dividend participants, and the pool of assets of one segregated portfolio cell are statutorily protected from the creditors of the others. This
permits the Company to provide customers with a turn-key alternative markets solution that includes program design, fronting, claims administration, risk management, segregated portfolio cell rental, investment and segregated portfolio management
services. The segregated portfolio cell structure provides dividend participants the opportunity to share in both underwriting profit and investment income derived from their respective segregated portfolio cells financial results. The
segregated portfolio cell reinsurance segment generated fee revenue to the Companys workers compensation, specialty reinsurance, and corporate/other segments totaling approximately $1,694 and $1,887 for the three months ended
March 31, 2008 and 2007, respectively.

Group Benefits Insurance

The Companys group benefits insurance products include dental, short and long-term disability, and term life insurance. The group benefits insurance products are marketed to employers, primarily in the
Mid-Atlantic, Southeast, and Midwest regions of the United States. Net premiums earned, by product, for the three months ended March 31, 2008 and 2007 were as follows (unaudited in thousands):



|                      |  |      |       |      |   |      
|--------------------- |  | ---- | ----- | ---- | - | -----
|                      |  | 2008 |       | 2007
|Dental                |  | $    | 5,649 |      | $ | 5,162
|Short-term disability |  |      | 1,681 |      |   | 1,635
|Long-term disability  |  |      | 441   |      |   | 417  
|Term life             |  |      | 1,461 |      |   | 1,410
|                      |  |      |       |      |   |      
|Total                 |  | $    | 9,232 |      | $ | 8,624
|                      |  |      |       |      |   |      



16



---

##### Table of Contents

Specialty Reinsurance

The Company assumes business through its participation in reinsurance treaties with an unaffiliated insurance company related to an underground storage tank insurance program, referred to as EnviroGuard, and a non-hazardous
waste transportation product, referred to as EIA liability (EIA). The EnviroGuard program provides coverage to underground tank owners for third party off-site bodily injury and property damage claims as well as clean-up
coverage and first party on-site claims. The EIA program provides commercial automobile liability coverage for non-hazardous waste haulers. Net premiums earned, by program, for the three months ended March 31, 2008 and 2007 were as follows
(unaudited in thousands):



|                    |  |      |       |      |   |       |  
|------------------- |  | ---- | ----- | ---- | - | ----- | -
|                    |  | 2008 |       | 2007 |  
|EnviroGuard         |  | $    | 2,562 |      | $ | 2,715 |  
|EIA                 |  |      | 932   |      |   | 1,064 |  
|Other               |  |      | 6     |      |   |      |  
|Purchase accounting |  |      |      |      |   | (651  | )
|                    |  |      |       |      |   |       |  
|Total               |  | $    | 3,500 |      | $ | 3,128 |  
|                    |  |      |       |      |   |       |  

Corporate/Other

The corporate/other segment includes the holding company and third party administration activities of the Company, as well as certain eliminations necessary to reconcile the segment information to the consolidated statements of operations
and comprehensive income (loss). The corporate/other segment also includes the Companys 10% interest in a segregated portfolio cell with an unaffiliated primary carrier that writes insurance coverage for sprinkler contractors.

The following table represents the segment results for the three months ended March 31, 2008 (unaudited, in thousands):



|                                            |  |                               |         |   |                                     |   |                        |  |   |                      |   |                 |   |        |       |   |         |   |  |   |         |  
|------------------------------------------- |  | ----------------------------- | ------- | - | ----------------------------------- | - | ---------------------- |  | - | -------------------- | - | --------------- | - | ------ | ----- | - | ------- | - |  | - | ------- | -
|                                            |  | WorkersCompensationInsurance |         |   | SegregatedPortfolio CellReinsurance |   | GroupBenefitsInsurance |  |   | SpecialtyReinsurance |   | Corporate/Other |   |        | Total |  
|Revenue:                                    |  |                               |         |   |                                     |   |                        |  |   |                      |   |                 |   |        |       |   |         |   |  |   |         |  
|Net premiums earned                         |  | $                             | 14,767  |   |                                     | $ | 5,504                  |  | $ | 9,232                |   |                 | $ | 3,500  |       | $ |        |   |  | $ | 33,003  |  
|Net investment income                       |  |                               | 912     |   |                                     |   | 293                    |  |   | 859                  |   |                 |   | 323    |       |   | 227     |   |  |   | 2,614   |  
|Net realized investment (losses) gains      |  |                               | (111    | ) |                                     |   | 48                     |  |   | (351                 | ) |                 |   | 120    |       |   | 1       |   |  |   | (293    | )
|Other revenue                               |  |                               |        |   |                                     |   |                       |  |   |                     |   |                 |   | 303    |       |   | (87     | ) |  |   | 216     |  
|                                            |  |                               |         |   |                                     |   |                        |  |   |                      |   |                 |   |        |       |   |         |   |  |   |         |  
|Total revenue                               |  |                               | 15,568  |   |                                     |   | 5,845                  |  |   | 9,740                |   |                 |   | 4,246  |       |   | 141     |   |  |   | 35,540  |  
|                                            |  |                               |         |   |                                     |   |                        |  |   |                      |   |                 |   |        |       |   |         |   |  |   |         |  
|Expenses:                                   |  |                               |         |   |                                     |   |                        |  |   |                      |   |                 |   |        |       |   |         |   |  |   |         |  
|Loss and LAE incurred                       |  |                               | 7,518   |   |                                     |   | 3,115                  |  |   | 6,433                |   |                 |   | 2,649  |       |   |        |   |  |   | 19,715  |  
|Acquisition and other underwriting expenses |  |                               | 1,201   |   |                                     |   | 1,709                  |  |   | 1,489                |   |                 |   | 1,049  |       |   | (528    | ) |  |   | 4,920   |  
|Other expenses                              |  |                               | 2,579   |   |                                     |   | 13                     |  |   | 1,452                |   |                 |   | 147    |       |   | 1,872   |   |  |   | 6,063   |  
|Amortization of intangibles                 |  |                               |        |   |                                     |   |                       |  |   |                     |   |                 |   |       |       |   | 328     |   |  |   | 328     |  
|Policyholder dividend expense               |  |                               | (63     | ) |                                     |   |                       |  |   |                     |   |                 |   |       |       |   |        |   |  |   | (63     | )
|Segregated portfolio dividend expense       |  |                               |        |   |                                     |   | 1,008                  |  |   |                     |   |                 |   |       |       |   | (74     | ) |  |   | 934     |  
|                                            |  |                               |         |   |                                     |   |                        |  |   |                      |   |                 |   |        |       |   |         |   |  |   |         |  
|Total expenses                              |  |                               | 11,235  |   |                                     |   | 5,845                  |  |   | 9,374                |   |                 |   | 3,845  |       |   | 1,598   |   |  |   | 31,897  |  
|                                            |  |                               |         |   |                                     |   |                        |  |   |                      |   |                 |   |        |       |   |         |   |  |   |         |  
|Income (loss) before income taxes           |  |                               | 4,333   |   |                                     |   |                       |  |   | 366                  |   |                 |   | 401    |       |   | (1,457  | ) |  |   | 3,643   |  
|Income tax expense (benefit)                |  |                               | 1,339   |   |                                     |   |                       |  |   | 54                   |   |                 |   | 143    |       |   | (467    | ) |  |   | 1,069   |  
|                                            |  |                               |         |   |                                     |   |                        |  |   |                      |   |                 |   |        |       |   |         |   |  |   |         |  
|Net income (loss)                           |  | $                             | 2,994   |   |                                     | $ |                       |  | $ | 312                  |   |                 | $ | 258    |       | $ | (990    | ) |  | $ | 2,574   |  
|                                            |  |                               |         |   |                                     |   |                        |  |   |                      |   |                 |   |        |       |   |         |   |  |   |         |  
|Total assets                                |  | $                             | 212,257 |   |                                     | $ | 56,095                 |  | $ | 102,759              |   |                 | $ | 50,829 |       | $ | (30,623 | ) |  | $ | 391,317 |  
|                                            |  |                               |         |   |                                     |   |                        |  |   |                      |   |                 |   |        |       |   |         |   |  |   |         |  



17



---

##### Table of Contents

The following table represents the segment results for the three months ended March 31, 2007 (unaudited, in
thousands):



|                                            |  |                               |         |                                     |   |                        |  |                      |         |                 |   |        |       |   |         |   |  |   |        
|------------------------------------------- |  | ----------------------------- | ------- | ----------------------------------- | - | ---------------------- |  | -------------------- | ------- | --------------- | - | ------ | ----- | - | ------- | - |  | - | -------
|                                            |  | WorkersCompensationInsurance |         | SegregatedPortfolio CellReinsurance |   | GroupBenefitsInsurance |  | SpecialtyReinsurance |         | Corporate/Other |   |        | Total
|Revenue:                                    |  |                               |         |                                     |   |                        |  |                      |         |                 |   |        |       |   |         |   |  |   |        
|Net premiums earned                         |  | $                             | 12,020  |                                     | $ | 5,357                  |  | $                    | 8,624   |                 | $ | 3,128  |       | $ |        |   |  | $ | 29,129 
|Net investment income                       |  |                               | 1,222   |                                     |   | 251                    |  |                      | 848     |                 |   | 272    |       |   | 387     |   |  |   | 2,980  
|Net realized investment (losses) gains      |  |                               | 303     |                                     |   | 92                     |  |                      | 302     |                 |   |       |       |   | 27      |   |  |   | 724    
|Other revenue                               |  |                               |        |                                     |   |                       |  |                      |        |                 |   | 337    |       |   | (155    | ) |  |   | 182    
|                                            |  |                               |         |                                     |   |                        |  |                      |         |                 |   |        |       |   |         |   |  |   |        
|Total revenue                               |  |                               | 13,545  |                                     |   | 5,700                  |  |                      | 9,774   |                 |   | 3,737  |       |   | 259     |   |  |   | 33,015 
|                                            |  |                               |         |                                     |   |                        |  |                      |         |                 |   |        |       |   |         |   |  |   |        
|Expenses:                                   |  |                               |         |                                     |   |                        |  |                      |         |                 |   |        |       |   |         |   |  |   |        
|Loss and LAE incurred                       |  |                               | 6,823   |                                     |   | 3,208                  |  |                      | 5,563   |                 |   | 2,346  |       |   |        |   |  |   | 17,940 
|Acquisition and other underwriting expenses |  |                               | 931     |                                     |   | 1,479                  |  |                      | 1,332   |                 |   | 719    |       |   | (1,112  | ) |  |   | 3,349  
|Other expenses                              |  |                               | 1,743   |                                     |   | 80                     |  |                      | 1,371   |                 |   | 162    |       |   | 2,100   |   |  |   | 5,456  
|Amortization of intangibles                 |  |                               |        |                                     |   |                       |  |                      |        |                 |   |       |       |   | 435     |   |  |   | 435    
|Policyholder dividend expense               |  |                               | 101     |                                     |   |                       |  |                      |        |                 |   |       |       |   |        |   |  |   | 101    
|Segregated portfolio dividend expense       |  |                               |        |                                     |   | 933                    |  |                      |        |                 |   |       |       |   | (211    | ) |  |   | 722    
|                                            |  |                               |         |                                     |   |                        |  |                      |         |                 |   |        |       |   |         |   |  |   |        
|Total expenses                              |  |                               | 9,598   |                                     |   | 5,700                  |  |                      | 8,266   |                 |   | 3,227  |       |   | 1,212   |   |  |   | 28,003 
|                                            |  |                               |         |                                     |   |                        |  |                      |         |                 |   |        |       |   |         |   |  |   |        
|Income (loss) before income taxes           |  |                               | 3,947   |                                     |   |                       |  |                      | 1,508   |                 |   | 510    |       |   | (953    | ) |  |   | 5,012  
|Income tax expense (benefit)                |  |                               | 1,307   |                                     |   |                       |  |                      | 512     |                 |   | 179    |       |   | (137    | ) |  |   | 1,861  
|                                            |  |                               |         |                                     |   |                        |  |                      |         |                 |   |        |       |   |         |   |  |   |        
|Net income (loss)                           |  | $                             | 2,640   |                                     | $ |                       |  | $                    | 996     |                 | $ | 331    |       | $ | (816    | ) |  | $ | 3,151  
|                                            |  |                               |         |                                     |   |                        |  |                      |         |                 |   |        |       |   |         |   |  |   |        
|Total assets                                |  | $                             | 194,761 |                                     | $ | 50,857                 |  | $                    | 109,351 |                 | $ | 47,083 |       | $ | (11,788 | ) |  | $ | 390,264
|                                            |  |                               |         |                                     |   |                        |  |                      |         |                 |   |        |       |   |         |   |  |   |        

10. Commitments and Contingencies

Legal Proceedings

The Company is subject to legal proceedings and claims that arise in the ordinary course of its
business and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition of these matters, it is the opinion of the Companys management, based upon the information available at this time, that the
expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on the Companys results of operations or financial condition.



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the unaudited interim consolidated financial statements of Eastern Insurance Holdings, Inc.
(the Company) and the related notes thereto included in Item 1 of this Part 1. The information contained in this quarterly report is not a complete description of the Companys business or the risks associated with an
investment in the Companys common stock. You should carefully review and consider the various disclosures made by the Company in this quarterly report and in the Companys Annual Report on Form 10-K filed with the U.S. Securities and
Exchange Commission on March 14, 2008.

Forward-looking Statements

The Company may from time to time make written or oral forward-looking statements, including statements contained in the Companys filings with the U.S. Securities and Exchange Commission (including
this Quarterly Report on Form 10-Q and the exhibits hereto), in its reports to shareholders and in other communications by the Company, which are made in good faith by the Company pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995.

These forward-looking statements include statements with respect to the Companys beliefs, plans,
objectives, goals, expectations, anticipations, estimates and intentions, that are subject to significant risks and uncertainties, and are subject to change based on various factors (some of which are beyond the Companys control). The words
may, could, should, would, believe, anticipate, estimate, expect, intend, plan and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause the Companys financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking
statements:



| |  |  | the ability to carry out business plans;
| | - |  | ----------------------------------------



18



---

##### Table of Contents

| |  |  | future economic conditions in the regional and national markets in which we compete that are less favorable than expected;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | the effect of legislative, judicial, economic, demographic and regulatory events in the states in which we do business;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | the ability to obtain licenses and enter new markets successfully and capitalize on growth opportunities either through mergers or the expansion of our producer
network;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | financial market conditions, including, but not limited to, changes in interest rates and the credit and equity markets causing a reduction of investment income or
investment gains, an acceleration of the amortization of deferred policy acquisition costs, reduction in the value of our investment portfolio or a reduction in the demand for our products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the impact of acts of terrorism and acts of war;
| | - |  | ------------------------------------------------



| |  |  | the effects of terrorist related insurance legislation and laws;
| | - |  | ----------------------------------------------------------------



| |  |  | changes in general economic conditions, including inflation, unemployment, interest rates and other factors;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | the cost, availability and collectibility of reinsurance;
| | - |  | ---------------------------------------------------------



| |  |  | estimates and adequacy of loss reserves and trends in losses and LAE;
| | - |  | ---------------------------------------------------------------------



| |  |  | heightened competition, including specifically the intensification of price competition, increased underwriting capacity and the entry of new competitors and the
development of new products by new and existing competitors;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effects of mergers, acquisitions and dispositions;
| | - |  | ------------------------------------------------------



| |  |  | changes in the coverage terms selected by insurance customers, including higher deductibles and lower limits;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | changes in the underwriting criteria that we use resulting from competitive pressures;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | our inability to obtain regulatory approval of, or to implement, premium rate increases;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | the potential impact on our reported earnings that could result from the adoption of future accounting standards issued by the FASB or other standard setting
bodies;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our inability to carry out marketing and sales plans, including, among others, development of new products or changes to existing products and acceptance of the new
or revised products in the market;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | adverse litigation or arbitration results; and
| | - |  | ----------------------------------------------



| |  |  | adverse changes in applicable laws, regulations or rules governing insurance holding companies and insurance companies, and tax or accounting matters including
limitations on premium levels, increases in minimum capital and reserves, and other financial viability requirements, and changes that affect the cost of, or demand for our products.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company cautions that the foregoing list of important factors is not exclusive. Readers are also cautioned not to place undue reliance on these forward-looking
statements, which reflect managements analysis only as of the date of this report. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the
Company.

Overview

The Company reported net income of
$2.6 million for the three months ended March 31, 2008, compared to net income of $3.2 million for the same period in 2007. Purchase accounting adjustments increased net income $255,000 in 2008, compared to a decrease of $327,000 for the same
period in 2007.

Workers Compensation Insurance

The workers compensation insurance segment reported net income of $3.0 million for the three months ended March 31, 2008, compared to $2.6 million for the same period in 2007. The increase in net income primarily reflects the
impact of purchase accounting adjustments, which increased net income $137,000 in 2008 and decreased net income $362,000 in 2007. The decrease in the combined ratio from 2007 to 2008 primarily reflects the impact of purchase accounting adjustments,
which increased the 2007 combined ratio by 2.8 percentage points. The expense ratio increased as a result of costs associated with the opening of a regional office in North Carolina. The workers compensation insurance segments results
were also impacted by a decline in net investment income, primarily reflecting a decline in the fair value of a limited partnership investment.

Segregated Portfolio Cell Reinsurance

The Company added one additional segregated cell in the first quarter of 2008. Fees related to the
segregated portfolio cell reinsurance segment decreased from $1.9 million in 2007 to $1.7 million in 2008, primarily reflecting a decline in the segments direct premiums written.



19



---

##### Table of Contents

Group Benefits Insurance

The group benefits insurance segment reported net income of $312,000 for the three months ended March 31, 2008, compared to $996,000 for the same period in 2007. The decrease in net income primarily reflects an increase in the loss
ratio, from 64.5% in 2007 to 69.7% in 2008. The increase in the loss ratio is being driven primarily by the dental line, which increased from 66.9% in 2007 to 73.8% in 2008, primarily reflecting the impact of new business written in 2007.

Specialty Reinsurance

The specialty reinsurance
segment reported net income of $258,000 for the three months ended March 31, 2008, compared to net income of $331,000 for the same period in 2007. The decrease in net income primarily reflects an increase in the expense ratio from 2007 to 2008.
Effective January 1, 2008, the Company reduced its participation percentage in the reinsurance treaty related to EnviroGuard and EIA from 25.0% to 15.0%.

Principal Revenue and Expense Items

The Company derives its revenue primarily from net premiums earned, including assumed premiums earned,
net investment income and net realized investment gains.

Direct and net premiums written. Direct premiums written is the sum of both direct
premiums and assumed premiums before the effect of ceded reinsurance. Direct premiums written include all premiums billed during a specific policy period. Net premiums written is the difference between direct premiums written and premiums ceded or
paid to reinsurers (ceded premiums written). In the segregated portfolio cell reinsurance segment, assumed premiums are derived from insurance contracts written by the Company and ceded to the segregated portfolio cells. In the specialty reinsurance
segment, assumed premiums are premiums that are received from a third party under a reinsurance agreement, which are reported to the Company directly from the broker one quarter in arrears.

Net premiums earned.Net premiums earned are the earned portion of the Companys net premiums written. Premiums are earned over the term of the related
policies. At the end of each accounting period, the portion of the premiums that are not yet earned are included in unearned premiums and are realized as revenue in subsequent periods over the remaining term of the policy. The Companys
workers compensation policies typically have a term of twelve months. Thus, for example, for a policy that is written on July 1, 2007, one-half of the premiums would be earned in 2007 and the other half would be earned in 2008.
Workers compensation premiums are determined based upon the payroll of the insured, the applicable premium rates and, where applicable, an experience based modification factor. An audit of the policyholders records is conducted after
policy expiration, to make a final determination of applicable premiums. Included with net premiums earned is an estimate for earned but unbilled final audit premiums. The Company can estimate earned but unbilled premiums because it keeps track, by
policy, of how much additional premium is billed in final audit invoices as a percentage to estimate the probable additional amount that it has earned but not yet billed as of the balance sheet date. The majority of the Companys group benefits
insurance policies are billed on a monthly basis with premiums being earned in the month in which coverage is provided. As a result, there is minimal unearned premium related to the group benefits insurance policies as of the balance sheet date.

Net investment income and realized gains and losses on investments. The Company invests its surplus and the funds supporting its insurance
liabilities (including unearned premiums and unpaid losses and loss adjustment expenses) in cash, cash equivalents, fixed income securities, convertible bonds, equity securities, and other long-term investments. Investment income includes interest
earned on invested assets and the change in equity interest of limited partnerships included in other long-term investments. Realized gains and losses on invested assets are reported separately from net investment income. The Company recognizes
realized gains when invested assets are sold for an amount greater than their cost or amortized cost (in the case of fixed income securities) and recognizes realized losses when investment securities are written down as a result of an other than
temporary impairment or sold for an amount less than their cost or amortized cost. Realized gains and losses also include the change in fair value of convertible bonds.

Other revenue. Other revenue includes claim administration, risk management, and cell rental fees earned. There are other revenue items that the Company recognizes on a segmental basis that are eliminated in
consolidation. Such items consist primarily of fees paid by the segregated portfolio cells to other entities within the consolidated group. The segregated portfolio cells recognize an expense for such items (included as part of its ceding
commission) and a corresponding revenue item is recognized by the affiliate providing the service. For segment reporting purposes, such revenue items primarily include claims administration, risk management, and cell rental fees. Fronting fees are
included in acquisition and other underwriting expenses as an offset to the direct costs incurred. For segment reporting purposes, such fees are recognized ratably over the period in which the service is provided, which generally corresponds to the
earned portion of net premiums written for the underlying policies.



20



---

##### Table of Contents

The Companys expenses consist primarily of losses and LAE, acquisition and other underwriting expenses,
policyholder dividends, other expenses, and income taxes:

Losses and loss adjustment expenses.Losses and LAE represent the largest expense item
and include: (1) claim payments made, (2) estimates for future claim payments and changes in those estimates for prior periods, and (3) costs associated with investigating, defending and adjusting claims.

Acquisition and other underwriting expenses.In the workers compensation and group benefits insurance segments, expenses incurred to underwrite risks are
referred to as acquisition and other underwriting expenses, which consist of commissions, premium taxes and fees and other underwriting expenses incurred in acquiring, writing and administering the Companys business as well as required
payments to the Security Fund. In the segregated portfolio cell reinsurance and specialty reinsurance segments, acquisition and other underwriting expenses consist of ceding commissions earned under the respective reinsurance agreements. Ceding
commissions received are netted against acquisition and other underwriting expenses.

Other expenses.Other expenses consist of general
administrative expenses such as salaries, rent, office supplies, depreciation and all other operating expenses not otherwise classified separately. Other expenses also include interest expense related primarily to the Companys junior
subordinated debt.

Policyholder dividend expense.Policyholder dividends represent the amount of dividends incurred during the period that are
expected to be returned to policyholders. The dividend expense is based on the loss experience of the underlying workers compensation insurance policy.

Income tax expense. EIHI and certain of its subsidiaries pay federal, state and local income taxes. Income tax expense includes an amount for both current and deferred income taxes. Current income tax expense includes an amount for
the Companys current year federal income tax liability and any adjustments related to differences between the prior year federal income tax estimate and the actual income tax expense reported in the tax return. Deferred tax expense represents
the change in the Companys net deferred tax asset, exclusive of the tax effect related to changes in unrealized gains and losses in the Companys investment portfolio and changes in the unrecognized amounts related to the Companys
benefit plan liabilities.

Key Financial Measures

The
Company evaluates its insurance operations by monitoring certain key measures of growth and profitability. The Company measures growth by monitoring changes in direct premiums written and net premiums written. The Company measures underwriting
profitability by examining loss, expense and combined ratios. On a segmental basis, the Company measures a segments operating results by examining net income, diluted earnings per share, and return on average equity.

Loss ratio.The loss ratio is the ratio (expressed as a percentage) of losses and LAE incurred to net premiums earned and measures the underwriting profitability
of a companys insurance business. The Company measures the loss ratio on an accident year and calendar year loss basis to measure underwriting profitability. An accident year loss ratio measures losses and LAE for insured events occurring in a
particular year, regardless of when they are reported, as a percentage of net premiums earned during that year. A calendar year loss ratio measures losses and LAE for insured events occurring during a particular year and the change in loss reserves
from prior accident years as a percentage of net premiums earned during that year.

Expense ratio. The expense ratio is the ratio (expressed as a
percentage) of the sum of the acquisition and other underwriting expenses and other expenses to net premiums earned and measures the Companys operational efficiency in producing, underwriting and administering its insurance business.

Policyholder dividend expense ratio.The policyholder dividend expense ratio is the ratio (expressed as a percentage) of policyholder dividend
expense to net premiums earned and measures the impact of the Companys policyholder dividend policies on its workers compensation segment.

Combined ratio.The combined ratio is the sum of the loss ratio and the expense ratio and measures the Companys overall underwriting profit. If the combined ratio is below 100%, the Company is making an underwriting profit. If
the Companys combined ratio is at or above 100%, the Company is not profitable without investment income and may not be profitable if investment income is insufficient.

Net premiums written to statutory surplus ratio.The net premiums written to statutory surplus ratio represents the ratio of net premiums written to statutory surplus. This ratio measures the Companys
insurance subsidiaries exposure to pricing errors in its current book of business. The higher the ratio, the greater the impact on surplus should pricing prove inadequate.

Net income and return on average equity.The Company uses net income to measure its profits and return on average equity to measure its effectiveness in utilizing shareholders equity to generate net
income. In determining return on average equity for a given year, net income is divided by the average of the beginning and ending shareholders equity for that year.



21



---

##### Table of Contents

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. GAAP requires both the use of estimates and judgment relative to the application of appropriate accounting policies. The Company is required to make
estimates and assumptions in certain circumstances that affect amounts reported in the consolidated financial statements and related footnotes. The Company evaluates these estimates and assumptions on an on-going basis based on historical
developments, market conditions, industry trends and other information that is believed to be reasonable under the circumstances. There can be no assurance that actual results will conform to the estimates and assumptions and that reported results
of operations will not be materially adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. The Company believes the following policies are the most sensitive to
estimates and judgments.

Reserves for Unpaid Losses and LAE

The Company establishes reserves for unpaid losses and LAE for its workers compensation, segregated portfolio cell reinsurance, group benefits insurance, and specialty reinsurance products, which are estimates
of future payments of reported and unreported claims for losses and related expenses. The adequacy of the Companys reserves for unpaid losses and LAE are inherently uncertain because the ultimate amount that the Company may pay under many of
the claims incurred as of the balance sheet date will not be known for many years. Establishing reserves continues to be a complex and imprecise process, requiring the use of informed estimates and judgments. The Companys estimates and
judgments may be revised as additional experience and other data becomes available and are reviewed, as new or improved methodologies are developed, or as current laws change. Any such revisions could result in future changes in estimates of losses
or reinsurance recoverable and would be reflected in the Companys results of operations in the period in which the estimates are changed. Estimating the ultimate claims liability is necessarily a complex and judgmental process inasmuch as the
amounts are based on managements informed estimates and judgments using data currently available. If ultimate losses, net of reinsurance, prove to be substantially higher than the amounts recorded as of March 31, 2008, the related
adjustments could have a material adverse effect on the Companys financial condition, results of operations or liquidity.

The Company discounts its
workers compensation reserves, using a discount rate of 3%, which is based on regulatory guidelines. As of March 31, 2008 and December 31, 2007, the Companys reserves for unpaid losses and LAE were reduced by $3,428 and $3,474,
respectively, related to the effects of discounting.

The Companys reserves for unpaid losses and LAE in its workers compensation insurance,
segregated portfolio cell reinsurance, group benefits insurance, and specialty reinsurance segments as of March 31, 2008 (unaudited) and December 31, 2007 are summarized below (in thousands):



|                                                              |  |                               |        |   |                                    |   |        |                        |  |                      |        |  |       |        |   |  |   |         |  
|------------------------------------------------------------- |  | ----------------------------- | ------ | - | ---------------------------------- | - | ------ | ---------------------- |  | -------------------- | ------ |  | ----- | ------ | - |  | - | ------- | -
|March 31, 2008                                                |  | WorkersCompensationInsurance |        |   | SegregatedPortfolioCellReinsurance |   |        | GroupBenefitsInsurance |  | SpecialtyReinsurance |        |  | Total |       
|Case/tabular reserves                                         |  | $                             | 22,462 |   |                                    | $ | 10,533 |                        |  | $                    | 11,459 |  | $     | 12,355 |   |  | $ | 56,809  |  
|Case incurred development, IBNR, and unallocated LAE reserves |  |                               | 23,863 |   |                                    |   | 11,907 |                        |  |                      | 4,501  |  |       | 13,283 |   |  |   | 53,554  |  
|Amount of discount                                            |  |                               | (2,306 | ) |                                    |   | (1,122 | )                      |  |                      |       |  |       |       |   |  |   | (3,428  | )
|                                                              |  |                               |        |   |                                    |   |        |                        |  |                      |        |  |       |        |   |  |   |         |  
|Net reserves                                                  |  |                               | 44,019 |   |                                    |   | 21,318 |                        |  |                      | 15,960 |  |       | 25,638 |   |  |   | 106,935 |  
|Reinsurance recoverables on unpaid losses and LAE             |  |                               | 2,984  |   |                                    |   | 3,222  |                        |  |                      | 18,928 |  |       |       |   |  |   | 25,134  |  
|Purchase accounting adjustments                               |  |                               | 804    |   |                                    |   | 135    |                        |  |                      |       |  |       | (47    | ) |  |   | 892     |  
|                                                              |  |                               |        |   |                                    |   |        |                        |  |                      |        |  |       |        |   |  |   |         |  
|Reserves for unpaid losses and LAE                            |  | $                             | 47,807 |   |                                    | $ | 24,675 |                        |  | $                    | 34,888 |  | $     | 25,591 |   |  | $ | 132,961 |  
|                                                              |  |                               |        |   |                                    |   |        |                        |  |                      |        |  |       |        |   |  |   |         |  
|                                                              |  |                               |        |   |                                   
|December 31, 2007                                             |  | WorkersCompensationInsurance |        |   | SegregatedPortfolioCellReinsurance |   |        | GroupBenefitsInsurance |  | SpecialtyReinsurance |        |  | Total |       
|Case/tabular reserves                                         |  | $                             | 19,915 |   |                                    | $ | 8,906  |                        |  | $                    | 12,131 |  | $     | 10,873 |   |  | $ | 51,825  |  
|Case incurred development, IBNR, and unallocated LAE reserves |  |                               | 25,295 |   |                                    |   | 13,083 |                        |  |                      | 4,251  |  |       | 14,117 |   |  |   | 56,746  |  
|Amount of discount                                            |  |                               | (2,375 | ) |                                    |   | (1,099 | )                      |  |                      |       |  |       |       |   |  |   | (3,474  | )
|                                                              |  |                               |        |   |                                    |   |        |                        |  |                      |        |  |       |        |   |  |   |         |  
|Net reserves                                                  |  |                               | 42,835 |   |                                    |   | 20,890 |                        |  |                      | 16,382 |  |       | 24,990 |   |  |   | 105,097 |  
|Reinsurance recoverables on unpaid losses and LAE             |  |                               | 2,709  |   |                                    |   | 2,033  |                        |  |                      | 18,900 |  |       |       |   |  |   | 23,642  |  
|Purchase accounting adjustments                               |  |                               | 941    |   |                                    |   | 161    |                        |  |                      |       |  |       | (53    | ) |  |   | 1,049   |  
|                                                              |  |                               |        |   |                                    |   |        |                        |  |                      |        |  |       |        |   |  |   |         |  
|Reserves for unpaid losses and LAE                            |  | $                             | 46,485 |   |                                    | $ | 23,084 |                        |  | $                    | 35,282 |  | $     | 24,937 |   |  | $ | 129,788 |  
|                                                              |  |                               |        |   |                                    |   |        |                        |  |                      |        |  |       |        |   |  |   |         |  



22



---

##### Table of Contents

Other Than Temporary Investment Impairments

Unrealized investment gains or losses on investments carried at fair value, net of applicable income taxes, are reflected directly in shareholders equity as a
component of comprehensive income (loss) and, accordingly, have no effect on net income. When, in the opinion of management, a decline in the fair value of an investment below its cost or amortized cost is considered to be
other-than-temporary, such investment is written-down to its fair value. The amount written-down is recorded in earnings as a realized loss on investments. Generally, the determination of other-than-temporary impairment includes, in
addition to other relevant factors, a presumption that if the market value is below cost by a significant amount for a period of time, a write-down is necessary. Notwithstanding this presumption, the determination of other-than-temporary impairment
requires judgment about future prospects for an investment and is therefore a matter of inherent uncertainty. For the three months ended March 31, 2008 and 2007, the Company did not experience any declines in investment securities that were
determined to be other-than-temporary. As of March 31, 2008, the Company held securities with gross unrealized losses of $2,393, of which $261 were in an unrealized loss position for more than 12 months. Adverse investment market conditions, or
poor operating results of underlying investments, could result in impairment charges in the future. The Company generally applies the following standards in determining whether the decline in fair value of an investment is other-than-temporary:

Equities. If an equity security has a market value below 80% of cost and remains below 80% of cost for more than six months, a review of the
financial condition and prospects of the company is performed to determine if the decline in market value is other-than-temporary. A specific determination is made for any such security. Other equity securities in an unrealized loss position not
meeting these quantitative thresholds are evaluated considering, among other things, the magnitude and reasons for the decline and the prospects for the fair value of the securities to recover in the near term. If the decline in market value is
judged to be other-than-temporary, then the cost basis of the security is written down to realizable value and the amount of the write down is accounted for as a realized loss. Realizable value is defined as the quoted market price of the security.

Fixed income securities. A fixed income security generally is written down if the Company is unable to hold or otherwise intends to sell a security
with an unrealized loss, or if it is probable that it will be unable to collect all amounts due according to the contracted terms of a debt security not impaired at acquisition. A fixed maturity security review for collectibility is done if any of
the following situations occur:



| |  |  | A review of the financial condition and prospects of the issuer indicates that the security should be evaluated;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | Moodys or Standard & Poors rate the security below investment grade; or
| | - |  | -------------------------------------------------------------------------



| |  |  | The security has a market value below 80% of amortized cost due to deterioration in credit quality.
| | - |  | ---------------------------------------------------------------------------------------------------

Deferred Acquisition Costs

Certain direct policy acquisition
costs consisting of commissions, premium taxes, fronting fees and certain other direct underwriting costs are deferred and amortized as the underlying policy premiums are earned. As of March 31, 2008 (unaudited) and December 31, 2007,
deferred policy acquisition costs and the related unearned premium reserves were as follows (in thousands):



|                                               |  |               |        |                  |   |       
|---------------------------------------------- |  | ------------- | ------ | ---------------- | - | ------
|                                               |  | March 31,2008 |        | December 31,2007
|Workers compensation insurance segment:       |  |               |        |                  |   |       
|Deferred policy acquisition costs              |  | $             | 1,945  |                  | $ | 1,924 
|Unearned premium reserves                      |  | $             | 31,061 |                  | $ | 24,707
|                                               |  |              
|Segregated portfolio cell reinsurance segment: |  |               |        |                  |   |       
|Deferred policy acquisition costs              |  | $             | 3,667  |                  | $ | 2,137 
|Unearned premium reserves                      |  | $             | 13,350 |                  | $ | 7,716 
|                                               |  |              
|Group benefits insurance segment:              |  |               |        |                  |   |       
|Deferred policy acquisition costs              |  | $             |       |                  | $ |      
|Unearned premium reserves                      |  | $             | 73     |                  | $ | 83    
|                                               |  |              
|Specialty reinsurance segment:                 |  |               |        |                  |   |       
|Deferred policy acquisition costs              |  | $             | 1,846  |                  | $ | 2,196 
|Unearned premium reserves                      |  | $             | 6,152  |                  | $ | 7,320 

Deferred Income Taxes

The temporary differences between the tax and book bases of assets and liabilities are recorded as deferred income taxes. Management evaluates the recoverability of the net deferred tax asset based on historical
trends of generating taxable income or losses, as well as expectations of future taxable income or loss. Management expects that the net deferred tax asset is fully recoverable. If this assumption were to change, any amount of the net deferred tax
asset that the Company could not expect to recover would be provided for as an allowance and would be reflected as an increase in income tax expense in the period in which it was established.



23



---

##### Table of Contents

Reinsurance Recoverables

Amounts recoverable from the Company reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Amounts paid for reinsurance contracts are expensed over the contract
period during which insured events are covered by the reinsurance contracts. Reinsurance balances recoverable on paid and unpaid loss and loss adjustment expenses are reported separately as assets, instead of being netted with the appropriate
liabilities, because reinsurance does not relieve the Company of its legal liability to its policyholders. Reinsurance balances recoverable are subject to credit risk associated with the particular reinsurer. Additionally, the same uncertainties
associated with estimating unpaid losses and loss adjustment expenses affect the estimates for the ceded portion of these liabilities. The Company continually monitors the financial condition of its reinsurers.

Recent Accounting Pronouncements

SFAS 159

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 159 (SFAS 159),
The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115. SFAS 159 permits entities to elect to measure certain financial instruments at fair value with changes in fair
value being reported in earnings. SFAS 159 can be applied on an instrument-by-instrument basis and is effective for all eligible financial instruments as of the beginning of an entitys first fiscal year that begins after November 15,
2007. Retrospective application to prior years financial statements is not permitted. For eligible financial instruments existing at the effective date, and for which an entity elects the fair value option, the first remeasurement to fair
value must be recorded as a cumulative effect adjustment to beginning retained earnings. The Company adopted SFAS 159 effective January 1, 2008; however, no election was made to measure the Companys financial instruments at fair value.
The adoption of SFAS 159 had no effect on the Companys consolidated financial condition and results of operations.

SFAS 141R

In December 2007, the FASB issued Statement No. 141R, Business Combinations (SFAS 141R), which revises the accounting
for business combination transactions previously accounted for under SFAS No. 141, Business Combinations (SFAS 141), and broadens the scope of transactions which should be accounted for under this standard. SFAS 141R
retains the fundamental requirements of SFAS 141 in that the acquisition method of accounting is still used, and an acquirer must be identified in all business combinations. SFAS 141R applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity is prohibited from applying SFAS 141R prior to that date. The Company is currently in the process of
evaluating the impact of SFAS 141R.

SFAS 160

In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements  an amendment of ARB No. 51 (SFAS 160), which establishes accounting and reporting
standards for the non-controlling interests in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 requires that the ownership interests and the net income of the non-controlling interest be equally identified from that of the parent
on the face of the financial statements. SFAS 160 also provides consistent accounting principles for changes in a parent controlling ownership interest in a subsidiary, and that any retained non-controlling financial interests in a deconsolidated
subsidiary be measured initially at fair value. SFAS 160 applies to fiscal years beginning on or after December 15, 2008, and is applied prospectively, except for presentation and disclosure requirements, which are applied retrospectively for
all periods presented. The Company is currently in the process of evaluating the impact of SFAS 160.



24



---

##### Table of Contents

THREE MONTHS ENDED MARCH 31, 2008 COMPARED TO THREE MONTHS ENDED MARCH 31, 2007

RESULTS OF OPERATIONS

The major components of consolidated revenue
were as follows for the three months ended March 31, 2008 and 2007 (unaudited, in thousands):



|                                       |  |      |        |   |      |   |       
|-------------------------------------- |  | ---- | ------ | - | ---- | - | ------
|                                       |  | 2008 |        |   | 2007
|Net premiums written                   |  | $    | 43,821 |   |      | $ | 42,692
|                                       |  |      |        |   |      |   |       
|Net premiums earned                    |  | $    | 33,003 |   |      | $ | 29,129
|Net investment income                  |  |      | 2,614  |   |      |   | 2,980 
|Net realized investment (losses) gains |  |      | (293   | ) |      |   | 724   
|Other revenue                          |  |      | 216    |   |      |   | 182   
|                                       |  |      |        |   |      |   |       
|Consolidated revenue                   |  | $    | 35,540 |   |      | $ | 33,015
|                                       |  |      |        |   |      |   |       

The increase in consolidated revenue reflects an increase in net premiums earned, offset by a decrease in net
investment income and net realized investment gains. Net premiums earned were reduced by $1.9 million for the three months ended March 31, 2007 as a result of purchase accounting adjustments. There were no such adjustments for the
same period in 2008. Net investment income was negatively impacted by the results of the Companys investment in a municipal bond arbitrage fund, which decreased approximately $264,000 in the first quarter of 2008. Net realized
investment (losses) gains reflect a decline in the fair value of the Companys convertible bond portfolio of $583,000 in 2008, compared to a decrease of $297,000 in 2007. In addition, the Company recognized a gain of $250,000 on the
liquidation of a limited partnership interest in 2007.

The components of consolidated net income, by segment, for the three months ended March 31,
2008 and 2007 were as follows (unaudited, in thousands):



|                                      |  |      |       |   |      |   |       |  
|------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                      |  | 2008 |       |   | 2007 |  
|Workers compensation insurance       |  | $    | 2,994 |   |      | $ | 2,640 |  
|Segregated portfolio cell reinsurance |  |      |      |   |      |   |      |  
|Group benefits insurance              |  |      | 312   |   |      |   | 996   |  
|Specialty reinsurance                 |  |      | 258   |   |      |   | 331   |  
|Corporate/other                       |  |      | (990  | ) |      |   | (816  | )
|                                      |  |      |       |   |      |   |       |  
|Consolidated net income               |  | $    | 2,574 |   |      | $ | 3,151 |  
|                                      |  |      |       |   |      |   |       |  

The decrease in consolidated net income primarily reflects the decline in net investment income and net realized
investment gains, as well as an increase in the group benefits insurance loss ratio. The group benefits insurance loss ratio increased 5.2 percentage points from 2007 to 2008, primarily reflecting an increase in the dental line. The
increased loss ratio in the dental line primarily reflects claim inflation and an increase in claim utilization from 2007 to 2008.



25



---

##### Table of Contents

WORKERS COMPENSATION INSURANCE

The following table represents the operations of the workers compensation insurance segment for the three months ended March 31, 2008 and 2007 (unaudited, in thousands):



|                                            |  |      |         |   |      |   |         |  
|------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                            |  | 2008 |         |   | 2007 |  
|Revenue:                                    |  |      |         |   |      |   |         |  
|Direct premiums written                     |  | $    | 34,138  |   |      | $ | 33,660  |  
|Reinsurance premiums assumed                |  |      | 187     |   |      |   | 223     |  
|Ceded premiums written                      |  |      | (13,204 | ) |      |   | (14,871 | )
|                                            |  |      |         |   |      |   |         |  
|Net premiums written                        |  |      | 21,121  |   |      |   | 19,012  |  
|Change in unearned premiums                 |  |      | (6,354  | ) |      |   | (6,992  | )
|                                            |  |      |         |   |      |   |         |  
|Net premiums earned                         |  |      | 14,767  |   |      |   | 12,020  |  
|Net investment income                       |  |      | 912     |   |      |   | 1,222   |  
|Net realized investment (losses) gains      |  |      | (111    | ) |      |   | 303     |  
|                                            |  |      |         |   |      |   |         |  
|Total revenue                               |  | $    | 15,568  |   |      | $ | 13,545  |  
|                                            |  |      |         |   |      |   |         |  
|Expenses:                                   |  |      |         |   |      |   |         |  
|Losses and LAE                              |  | $    | 7,518   |   |      | $ | 6,823   |  
|Acquisition and other underwriting expenses |  |      | 1,201   |   |      |   | 931     |  
|Other expenses                              |  |      | 2,579   |   |      |   | 1,743   |  
|Policyholder dividend expense               |  |      | (63     | ) |      |   | 101     |  
|                                            |  |      |         |   |      |   |         |  
|Total expenses                              |  | $    | 11,235  |   |      | $ | 9,598   |  
|                                            |  |      |         |   |      |   |         |  
|Income before income taxes                  |  |      | 4,333   |   |      |   | 3,947   |  
|Income tax expense                          |  |      | 1,339   |   |      |   | 1,307   |  
|                                            |  |      |         |   |      |   |         |  
|Net income                                  |  | $    | 2,994   |   |      | $ | 2,640   |  
|                                            |  |      |         |   |      |   |         |  

Net Income

The increase in net income primarily reflects a decrease in the calendar period loss and LAE ratio and a decrease in the impact of purchase accounting adjustments, partially offset by an increase in the expense ratio and a decrease in net
investment income. Net income for the three months ended March 31, 2008 includes purchase accounting adjustments that resulted in an increase to net income of $137,000, compared to purchase accounting adjustments that resulted in an increase to
net income of $362,000 for the same period in 2007.

The workers compensation insurance ratios were as follows for the three months ended
March 31, 2008 and 2007:



|                              |  |      |    |  |      |  
|----------------------------- |  | ---- | -- |  | ---- | -
|                              |  | 2008 |    |  | 2007 |  
|Loss and LAE ratio            |  | 50.9 | %  |  | 56.8 | %
|Expense ratio                 |  | 25.6 | %  |  | 22.3 | %
|Policyholders dividend ratio |  | (0.4 | )% |  | 0.8  | %
|                              |  |      |    |  |      |  
|Combined ratio                |  | 76.1 | %  |  | 79.9 | %
|                              |  |      |    |  |      |  

Premiums

The
increase in direct premiums written primarily reflects an improved premium renewal retention rate and a decrease in the impact of purchase accounting adjustments, partially offset by a decrease in new business production and renewal rate decreases
of 6.2%. Direct premiums written for traditional business and alternative markets were $22.3 million and $11.8 million, respectively, for the three months ended March 31, 2008. Direct premiums written include the impact of premium renewal
retention rates of 89.8% and 88.7%, respectively, for the three months ended March 31, 2008 and 2007. New business sales totaled $4.3 million and $5.8 million for the three months ended March 31, 2008 and 2007, respectively. Direct
premiums written for the three months ended March 31, 2007 includes a reduction of $988,000 related to the amortization of purchase accounting adjustments compared to no purchase accounting amortization in 2008.



26



---

##### Table of Contents

Net Investment Income

The decrease in net investment income primarily reflects a decline in value on the municipal bond arbitrage fund and a slight decrease in the portfolio yield. The average yield on the fixed income portfolio was 4.36% as of March 31,
2008, compared to 4.48% as of March 31, 2007.

Net Realized Investment (Losses) Gains

The net realized investment losses for the three months ended March 31, 2008 include a loss of $148,000 related to the change in fair value of convertible bonds,
compared to a gain of $58,000 for the same period in 2007. The net realized investment gains in 2007 also include gains recognized on the sale of an equity security portfolio.

Losses and LAE

The decrease in the calendar period loss and LAE ratio primarily reflects an increase in favorable
loss reserve development on prior accident periods and the impact of purchase accounting adjustments. Favorable loss reserve development on prior accident periods of $1.5 million and $1.0 million was recorded for the three months ended
March 31, 2008 and 2007, respectively. The favorable reserve development relates primarily to a decrease in the prior accident period loss development factors used to estimate losses and LAE. The decrease in prior accident period loss
development factors relates primarily to significant prior year claim settlements during 2008 for amounts at, or less than, previously established case and IBNR reserves. This decrease had the effect of lowering loss development factors as of
March 31, 2008. For the three months ended March 31, 2008, the Company closed 99, or 17.4%, of the 570 open lost time claims as of December 31, 2007. In the aggregate, the claims were closed at amounts lower than the provision
established for IBNR claims. Management believes that the realization of the benefits of its return-to-work controls coupled with strong economies in its underwriting territories during 2006, 2007, and 2008 enabled it to record losses and LAE that
were lower than the amount reserved for claim settlements. For the three months ended March 31, 2008 and 2007, there were no claims that exceeded the Companys $500,000 reinsurance retention. Purchase accounting adjustments decreased the
calendar period loss and LAE ratio by 0.9 percentage points in 2008, compared to an increase of 2.5 percentage points for the same period in 2007. The 2007 calendar period loss ratio was impacted by purchase accounting adjustments that decreased
both net premiums earned and losses and LAE. The accident period loss and LAE ratio was 62.0% for the three months ended March 31, 2008 and 2007.

Acquisition and Other Underwriting Expenses

The increase in the expense ratio primarily reflects start up costs incurred in conjunction
with the Companys expansion into the Southeast and a decrease in fee based revenue from the segregated portfolio cell reinsurance segment due to a decrease in direct premiums written.

Policyholder Dividends

The decrease in the policyholders
dividend ratio is due to an increase in the loss ratio of participating policies. For the three months ended March 31, 2008 and 2007, 11.3% and 10.4%, respectively, of all policies were written on a dividend policy basis.

Tax Expense

The effective tax rate for the three months ended
March 31, 2008 and 2007 was 30.9% and 33.1%, respectively. The decrease in the effective tax rate primarily reflects an increase in tax exempt investment income on municipal securities.



27



---

##### Table of Contents

SEGREGATED PORTFOLIO CELL REINSURANCE

The following table represents the operations of the segregated portfolio cell reinsurance segment for the three months ended March 31, 2008 and 2007 (unaudited, in thousands):



|                                            |  |      |        |   |      |   |        |  
|------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                            |  | 2008 |        |   | 2007 |  
|Revenue:                                    |  |      |        |   |      |   |        |  
|Reinsurance premiums assumed                |  | $    | 11,845 |   |      | $ | 12,458 |  
|Ceded premiums written                      |  |      | (707   | ) |      |   | (507   | )
|                                            |  |      |        |   |      |   |        |  
|Net premiums written                        |  |      | 11,138 |   |      |   | 11,951 |  
|Change in unearned premiums                 |  |      | (5,634 | ) |      |   | (6,594 | )
|                                            |  |      |        |   |      |   |        |  
|Net premiums earned                         |  |      | 5,504  |   |      |   | 5,357  |  
|Net investment income                       |  |      | 293    |   |      |   | 251    |  
|Net realized investment gains               |  |      | 48     |   |      |   | 92     |  
|                                            |  |      |        |   |      |   |        |  
|Total revenue                               |  | $    | 5,845  |   |      | $ | 5,700  |  
|                                            |  |      |        |   |      |   |        |  
|Expenses:                                   |  |      |        |   |      |   |        |  
|Losses and LAE                              |  | $    | 3,115  |   |      | $ | 3,208  |  
|Acquisition and other underwriting expenses |  |      | 1,709  |   |      |   | 1,479  |  
|Other expenses                              |  |      | 13     |   |      |   | 80     |  
|Segregated portfolio dividend expense (1)   |  |      | 1,008  |   |      |   | 933    |  
|                                            |  |      |        |   |      |   |        |  
|Total expenses                              |  | $    | 5,845  |   |      | $ | 5,700  |  
|                                            |  |      |        |   |      |   |        |  
|Net income (1)                              |  | $    |       |   |      | $ |       |  
|                                            |  |      |        |   |      |   |        |  



|(1) | The workers compensation insurance, specialty reinsurance and corporate/other segments provide services to the segregated portfolio cell reinsurance segment. The fees paid by
the segregated portfolio cell reinsurance segment for these services are included in the revenue of the segment providing the service. The segregated portfolio cell reinsurance segment records the fees associated with these services as ceding
expense, which is included in its underwriting expenses. The difference between total revenue for the segregated portfolio cell reinsurance segment for each period and the sum of losses and loss adjustment expenses, underwriting expenses,
policyholder dividend expenses and other expenses is accrued as a segregated portfolio dividend expense. As a result, the segregated portfolio cell reinsurance segment has no net income for the period presented in this table.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The segregated portfolio cell reinsurance ratios were as follows for the three months ended March 31, 2008 and 2007:



|                   |  |      |   |  |      |  
|------------------ |  | ---- | - |  | ---- | -
|                   |  | 2008 |   |  | 2007 |  
|Loss and LAE ratio |  | 56.6 | % |  | 59.9 | %
|Expense ratio      |  | 31.3 | % |  | 29.1 | %
|                   |  |      |   |  |      |  
|Combined ratio     |  | 87.9 | % |  | 89.0 | %
|                   |  |      |   |  |      |  

Reinsurance Premiums Assumed

The decrease in reinsurance premiums assumed primarily reflects a decrease in audit premiums and continued renewal rate decreases, partially offset by a decrease in the impact of purchase accounting adjustments.
Reinsurance premiums assumed for the three months ended March 31, 2008 and 2007 include the impact of renewal rate decreases of 2.3% and 1.8%, respectively, and premium renewal retention rates of 88.3% and 88.8%, respectively. Audit premiums
for the three months ended March 31, 2008 include return premium to customers of $110,000, compared to additional premium to the Company of $115,000 for the same period in 2007. Reinsurance premiums assumed for the three months ended
March 31, 2007 includes a reduction of $503,000 related to the amortization of purchase accounting adjustments compared to no purchase accounting amortization in 2008.

Losses and LAE

The decrease in the calendar period loss ratio reflects favorable loss reserve development recorded
on prior accident periods of $615,000 for the three months ended March 31, 2008, compared to $482,000 for the three months ended March 31, 2007, which lowered loss ratios for the three months ended March 31, 2008 and 2007 by 11.2
percentage points and 9.0 percentage points, respectively. The favorable loss reserve development on prior accident periods relates primarily to a decrease in the prior year loss development factors used to estimate losses and loss adjustment
expenses. The decrease in accident period loss development factors relates primarily to significant prior year claim settlements during 2008 for amounts at, or less than, previously established case and IBNR reserves. This decrease had the effect of
lowering loss development factors as of March 31, 2008. Purchase accounting adjustments recorded in 2007 increased the calendar period loss ratio by 2.4 percentage points compared to negligible purchase accounting adjustments in 2008.



28



---

##### Table of Contents

Acquisition and Other Underwriting Expenses

The increase in the expense ratio from 2007 to 2008 relates primarily to purchase accounting adjustments recorded for the three months ended March 31, 2007 that reduced the expense ratio by 3.9 percentage points
compared to no purchase accounting adjustments in 2008. The expense ratios, without regard to the aforementioned purchase accounting adjustments in 2007, are consistent with the contractual ceding commissions for the three months ended
March 31, 2008 and 2007.

Segregated Portfolio Dividend Expense

The segregated portfolio dividend expense represents the amount of net income or loss in a specific period that may be payable to the segregated portfolio dividend participants.

GROUP BENEFITS INSURANCE

The following table represents the
operations of the group benefits insurance segment for the three months ended March 31, 2008 and 2007 (unaudited, in thousands):



|                                            |  |      |       |   |      |   |       |  
|------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                            |  | 2008 |       |   | 2007 |  
|Revenue:                                    |  |      |       |   |      |   |       |  
|Direct premiums written                     |  | $    | 9,800 |   |      | $ | 9,302 |  
|Ceded premiums written                      |  |      | (571  | ) |      |   | (678  | )
|                                            |  |      |       |   |      |   |       |  
|Net premiums written                        |  |      | 9,229 |   |      |   | 8,624 |  
|Change in unearned premiums                 |  |      | 3     |   |      |   |      |  
|                                            |  |      |       |   |      |   |       |  
|Net premiums earned                         |  |      | 9,232 |   |      |   | 8,624 |  
|Net investment income                       |  |      | 859   |   |      |   | 848   |  
|Net realized investment (losses) gains      |  |      | (351  | ) |      |   | 302   |  
|                                            |  |      |       |   |      |   |       |  
|Total revenues                              |  |      | 9,740 |   |      |   | 9,774 |  
|                                            |  |      |       |   |      |   |       |  
|Expenses:                                   |  |      |       |   |      |   |       |  
|Losses and LAE                              |  |      | 6,433 |   |      |   | 5,563 |  
|Acquisition and other underwriting expenses |  |      | 1,489 |   |      |   | 1,332 |  
|Other expenses                              |  |      | 1,452 |   |      |   | 1,371 |  
|                                            |  |      |       |   |      |   |       |  
|Total expenses                              |  |      | 9,374 |   |      |   | 8,266 |  
|                                            |  |      |       |   |      |   |       |  
|Income before income taxes                  |  |      | 366   |   |      |   | 1,508 |  
|Income tax expense                          |  |      | 54    |   |      |   | 512   |  
|                                            |  |      |       |   |      |   |       |  
|Net income                                  |  | $    | 312   |   |      | $ | 996   |  
|                                            |  |      |       |   |      |   |       |  

Net Income

The decrease in net income primarily reflects an increase in the calendar period loss ratio from 2007 to 2008 and a net realized investment loss in 2008, compared to a net realized investment gain in 2007. The increase in the calendar
period loss ratio primarily reflects a 6.9 percentage point increase in the dental line of business. The increase in the loss ratio primarily reflects claim cost inflation and an increase in claim utilization from 2007 to 2008. The net realized loss
in 2008 primarily reflects a decrease in the fair value of the group benefits segments convertible bond portfolio. The decrease in fair value is a result of the equity market conditions during the first three months of 2008.



29



---

##### Table of Contents

The group benefits insurance ratios were as follows for the three months ended March 31, 2008 and 2007:



|                   |  |       |   |  |      |  
|------------------ |  | ----- | - |  | ---- | -
|                   |  | 2008  |   |  | 2007 |  
|Loss and LAE ratio |  | 69.7  | % |  | 64.5 | %
|Expense ratio      |  | 31.8  | % |  | 31.3 | %
|                   |  |       |   |  |      |  
|Combined ratio     |  | 101.5 | % |  | 95.8 | %
|                   |  |       |   |  |      |  

Premiums

Direct premiums written, by line of business, for the three months ended March 31, 2008 and 2007 were as follows (in thousands):



|                      |  |      |       |      |   |      
|--------------------- |  | ---- | ----- | ---- | - | -----
|                      |  | 2008 |       | 2007
|Dental                |  | $    | 5,648 |      | $ | 5,160
|Short-term disability |  |      | 1,678 |      |   | 1,637
|Long-term disability  |  |      | 955   |      |   | 1,017
|Term life             |  |      | 1,519 |      |   | 1,488
|                      |  |      |       |      |   |      
|Total                 |  | $    | 9,800 |      | $ | 9,302
|                      |  |      |       |      |   |      

The increase in direct premiums written reflects a 3.0% increase in certificates in-force from 2007 to
2008. The increase in certificates in-force reflects the increase in new business sales and the improvement in the renewal retention rate during 2007. New business sales totaled $2.5 million for the three months ended March 31, 2008,
compared to $3.8 million for the same period in 2007. Sales in 2007 reflect the Companys effort to increase premium volume in order to offset operating expenses and reduce the expense ratio.

The decrease in ceded premiums written primarily reflects a change in the Companys reinsurance rate under its term life reinsurance contract.

Net Investment Income

Net investment income for the three months
ended March 31, 2008 includes an increase of $185,000 related to the change in interest in limited partnership investments, compared to a decrease of $89,000 for the same period in 2007. Excluding the increase in net investment income related
to the limited partnership investments, net investment income decreased from 2007 to 2008. The decrease reflects a decrease in the average cash and invested asset balance, the purchase of municipal bonds at a premium during 2007, which have had the
effect of lowering investment income for the three months ended March 31, 2008, and a lower interest rate on cash and cash equivalents. The average yield on the fixed income portfolio as of March 31, 2008 was 5.39%, compared to an average
yield of 5.51% as of March 31, 2007.

Net Realized Investment (Losses) Gains

The net realized investment loss in 2008 primarily reflects the aforementioned decrease in fair value of the convertible bond portfolio. The net realized investment gain in 2007 primarily reflects a gain of $250,000
recognized on the liquidation of an interest in a limited partnership.

Losses and LAE

The increase in losses and LAE primarily reflects an increase in the dental and long-term disability loss ratios. The calendar period loss ratios, by line of business, for the three months ended March 31, 2008
and 2007 were as follows:



|                      |  |      |   |  |      |  
|--------------------- |  | ---- | - |  | ---- | -
|                      |  | 2008 |   |  | 2007 |  
|Dental                |  | 73.8 | % |  | 66.9 | %
|Short-term disability |  | 68.3 | % |  | 71.1 | %
|Long-term disability  |  | 57.4 | % |  | -6.9 | %
|Term life             |  | 58.4 | % |  | 72.1 | %
|Total group benefits  |  | 69.7 | % |  | 64.5 | %



30



---

##### Table of Contents

Dental

The
increase in the dental loss ratio reflects an increase in the accident period loss ratio from 72.8% in 2007 to 79.0% in 2008. Favorable development on prior accident year reserves reduced the loss ratio by 5.2 percentage points in 2008, compared to
5.9 percentage points in 2007. The increase in the accident period loss ratio primarily reflects claim cost inflation of 4.6% and an increase in claim utilization.

Short-term Disability

The decrease in the short-term disability loss ratio reflects a decrease in the accident period loss ratio
from 81.8% in 2007 to 75.3% in 2008. Favorable development on prior accident year reserves reduced the loss ratio by 7.0 percentage points in 2008, compared to 10.7 percentage points in 2007. The decrease in the accident period loss ratio primarily
reflects lower claim frequency and severity.

Long-term Disability

The increase in the long-term disability loss ratio primarily reflects the impact of prior year claim terminations in 2007.

Term Life

The decrease in the term life loss ratio primarily reflects a decrease in premium waiver reserves during the first quarter
of 2008, compared to an increase in premium waiver reserves for the same period in 2007. Premium waiver claims decreased the loss ratio by 1.6 percentage points in 2008, compared to an increase of 13.0 percentage points in 2007, reflecting a
decrease in both claim frequency and severity. The death benefit loss ratio increased slightly, from 59.1% in 2007 to 59.9% in 2008. Reported claims increased from 2007 to 2008, but were offset by a decrease in claim severity.

Acquisition and Other Underwriting Expenses

The increase in
acquisition and other underwriting expenses reflects the increase in direct premiums written. The increase in acquisition and other underwriting expenses as a percent of direct premiums written primarily reflects the impact of overrides paid to
general agents.

Other Expenses

The increase in other
expenses reflects higher direct premiums written. Other expenses as a percent of direct premiums written were consistent from 2007 to 2008.

Tax Expense

The effective tax rate was 14.8% for the three months ended March 31, 2008, compared to 34.0% for the same period in 2007. The decrease in the
effective tax rate reflects the decrease in pre-tax income and an increase in tax-exempt interest. The increase in tax-exempt interest reflects the purchase of tax-exempt fixed income securities.



31



---

##### Table of Contents

SPECIALTY REINSURANCE

The following table represents the operations of the specialty reinsurance segment for the three months ended March 31, 2008 and 2007 (unaudited, in thousands):



|                                            |  |      |       |      |   |      
|------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                            |  | 2008 |       | 2007
|Revenue:                                    |  |      |       |      |   |      
|Reinsurance premiums assumed                |  | $    | 2,332 |      | $ | 3,105
|Change in unearned premiums                 |  |      | 1,168 |      |   | 23   
|                                            |  |      |       |      |   |      
|Net premiums earned                         |  | $    | 3,500 |      | $ | 3,128
|Net investment income                       |  |      | 323   |      |   | 272  
|Net realized investment gains               |  |      | 120   |      |   |     
|Other revenue                               |  |      | 303   |      |   | 337  
|                                            |  |      |       |      |   |      
|Total revenue                               |  | $    | 4,246 |      | $ | 3,737
|                                            |  |      |       |      |   |      
|Expenses:                                   |  |      |       |      |   |      
|Losses and LAE                              |  | $    | 2,649 |      | $ | 2,346
|Acquisition and other underwriting expenses |  |      | 1,049 |      |   | 719  
|Other expenses                              |  |      | 147   |      |   | 162  
|                                            |  |      |       |      |   |      
|Total expenses                              |  | $    | 3,845 |      | $ | 3,227
|                                            |  |      |       |      |   |      
|Income before income taxes                  |  |      | 401   |      |   | 510  
|Income tax expense                          |  |      | 143   |      |   | 179  
|                                            |  |      |       |      |   |      
|Net income                                  |  | $    | 258   |      | $ | 331  
|                                            |  |      |       |      |   |      

Net Income

The decrease in net income primarily reflects an increase in the loss and LAE ratio, partially offset by purchase accounting charges incurred in 2007. Net income for the three months ended March 31, 2007 includes an after-tax charge of
$162,000 related to the amortization of purchase accounting adjustments compared to negligible purchase accounting adjustments in 2008.

The specialty
reinsurance ratios were as follows for the three months ended March 31, 2008 and 2007:



|                   |  |       |   |  |       |  
|------------------ |  | ----- | - |  | ----- | -
|                   |  | 2008  |   |  | 2007  |  
|Loss and LAE ratio |  | 75.7  | % |  | 75.0  | %
|Expense ratio      |  | 34.2  | % |  | 28.2  | %
|                   |  |       |   |  |       |  
|Combined ratio     |  | 109.9 | % |  | 103.2 | %
|                   |  |       |   |  |       |  

Reinsurance Premiums Assumed

The decrease in reinsurance premiums assumed reflects a decrease in the quota share participation percentage to 15%, effective January 1, 2008, from 25% on the previously in-force quota share treaty. Reinsurance
premiums assumed, by line of business, were as follows for the three months ended March 31, 2008 and 2007 (in thousands):



|                                |  |      |       |      |   |       |  
|------------------------------- |  | ---- | ----- | ---- | - | ----- | -
|                                |  | 2008 |       | 2007 |  
|EnviroGuard                     |  | $    | 1,547 |      | $ | 2,600 |  
|EIA liability                   |  |      | 779   |      |   | 1,156 |  
|Other                           |  |      | 6     |      |   |      |  
|Purchase accounting adjustments |  |      |      |      |   | (651  | )
|                                |  |      |       |      |   |       |  
|Total assumed premiums          |  | $    | 2,332 |      | $ | 3,105 |  
|                                |  |      |       |      |   |       |  

Net Investment Income

The increase in net investment income reflects the impact of an interest adjustment in the first quarter of 2007, which reduced net investment income, offset by a decrease in the fixed income portfolio yield. The interest adjustment
related to an overpayment of interest of $138,000 by the bank in 2006 which was not communicated to the Company until the first quarter of 2007. The average yield on the fixed income portfolio was 4.25% as of March 31, 2008, compared to
4.64% as of March 31, 2007.



32



---

##### Table of Contents

Losses and LAE

The
increase in the calendar period loss and LAE ratio reflects an increase in unfavorable loss reserve development on prior accident years of $653,000 and $231,000 for the three months ended March 31, 2008 and 2007, respectively, which increased
the loss ratios for the three months ended March 31, 2008 and 2007 by 18.7 percentage points and 7.4 percentage points, respectively, partially offset by a decrease in the impact of purchase accounting adjustments recorded in 2008 compared to
2007. The unfavorable loss reserve development in 2008 relates to an increase in reported claims from the ceding company. The calendar year period loss ratio for the three months ended March 31, 2007 includes 13.3 percentage points related to
purchase accounting adjustments recorded to net premiums earned and losses and LAE. Purchase accounting adjustments in 2008 had a negligible impact on the 2008 calendar period loss ratio. The 2008 accident period loss and LAE ratio for EnviroGuard
and EIA liability were 52.0% and 75.0%, respectively.

Acquisition and Other Underwriting Expenses

The increase in the expense ratio is related to a reduction in the impact of purchase accounting adjustments in 2008 compared to 2007. Purchase accounting adjustments
reduced acquisition and other underwriting expenses by $415,000 in 2007 compared to no purchase accounting adjustments in 2008. As part of its quota share reinsurance agreement with the primary insurer, the Company pays the primary insurer a ceding
commission based on assumed premiums. For the three months ended March 21, 2008 and 2007, the ceding commission paid to the primary insurer was 30.0%.

Tax Expense

The effective tax rate for the three months ended March 31, 2008 was 35.7% compared to 35.1% in 2007.

CORPORATE/OTHER

The net loss in the corporate/other segment totaled
$990,000 for the three months ended March 31, 2008, compared to a net loss of $816,000 for the same period in 2007. The increase in the net loss primarily reflects a reduction in net investment income and an increase in acquisition and other
underwriting expenses, partially offset by an increase in the income tax benefit. The reduction in net investment income reflects a lower average cash balance and a decrease in interest rates from 2007 to 2008. The increase in acquisition and other
underwriting expenses reflects the impact of purchase accounting adjustment in 2007. There were no purchase accounting adjustments in 2008 that impacted acquisition and other underwriting expenses.

The results of the corporate/other segment for the three months ended March 31, 2008 include stock compensation expense of $603,000 and intangible asset
amortization of $328,000, compared to stock compensation expense of $572,000 and intangible asset amortization of $435,000 for the same period in 2007. The effective tax rate was 32.1% in 2008, compared to 14.4% in 2007. The 2008 effective tax rate
reflects the impact of the current period amortization of a purchase accounting adjustment recorded in the fourth quarter of 2007.

CONSOLIDATED
FINANCIAL POSITION

Consolidated assets totaled $391.3 million at March 31, 2008, compared to $385.5 million at December 31, 2007. The
increase in consolidated assets primarily reflects an increase in premiums receivable, offset by a decrease in cash and investments. The increase in premiums receivable primarily reflects the Companys renewal of workers compensation
policies with effective dates at the beginning of January. The decrease in cash and investments primarily reflects the Companys stock buyback activity for the three months ended March 31, 2008 and the decline in fair value of the
Companys fixed income and equity securities as a result of the current market conditions.

Consolidated liabilities totaled $223.8 million at
March 31, 2008, compared to $207.7 million at December 31, 2007. The increase in consolidated liabilities primarily reflects an increase in unearned premiums and ceded reinsurance balances payable, both of which are higher in the first
quarter as a result of the volume of workers compensation business that renews at the beginning of January.

Consolidated equity totaled $167.5
million at March 31, 2008, compared to $177.8 million at December 31, 2007. The decrease in consolidated equity primarily reflects the Companys stock buyback activity and the decline in fair value of the Companys investments,
partially offset by net income for the three months ended March 31, 2008.

LIQUIDITY AND CAPITAL RESOURCES

The Companys principal sources of funds are underwriting operations, investment income, and proceeds from the sale and maturity of investments. The Companys
primary use of funds is to pay claims and operating expenses and to purchase investments.

The Companys investment portfolio is structured so that
investments mature periodically over time in reasonable relation to current expectations of future claim payments. Currently, claim payments are made from operating cash flows, with excess cash invested in investment securities. As securities
mature, management intends to invest excess cash with appropriate durations to fund anticipated



33



---

##### Table of Contents

future claim payments. Management does not anticipate having to sell securities in its investment portfolios to fund claims or operating expenses. In the
event the sale of securities becomes necessary, the Company may incur losses on those sales, which would adversely affect its results of operations and could reduce net investment income.

The Company has a $2.6 million line of credit available to provide additional liquidity, if needed. Eastern Re has a $30.0 million letter of credit facility to secure
its obligations, if needed.

EIHIs domestic insurance subsidiaries ability to pay dividends to EIHI is limited by the insurance laws and
regulations of Pennsylvania. The maximum annual dividends that the domestic insurance entities may pay without prior approval from the Insurance Department is limited to the greater of 10% of statutory surplus or 100% of statutory net income for the
most recently filed annual statement. In addition, EIHI and its subsidiaries are prohibited from declaring or paying any dividends or other forms of distribution for the three years after June 16, 2006, the effective date of the
conversion/merger transaction, without the prior approval of the Pennsylvania Insurance Commissioner. Eastern Re must receive approval from the Cayman Islands Monetary Authority before it can pay any dividend to EIHI.

CASH FLOWS

Cash flows for the three months ended March 31, 2008
and 2007 were as follows (unaudited, in thousands):



|                                                      |  |      |         |   |      |   |        |  
|----------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                                                      |  | 2008 |         |   | 2007 |  
|Cash flows provided by operating activities           |  | $    | 7,979   |   |      | $ | 5,882  |  
|Cash flows provided by (used in) investing activities |  |      | 435     |   |      |   | (6,429 | )
|Cash flows used in financing activities               |  |      | (12,806 | ) |      |   | (961   | )
|                                                      |  |      |         |   |      |   |        |  
|Net decrease in cash and cash equivalents             |  | $    | (4,392  | ) |      | $ | (1,508 | )
|                                                      |  |      |         |   |      |   |        |  

The increase in cash flows from operating activities primarily reflects an increase in the Companys net
premiums written for the three months ended March 31, 2008, compared to the same period in 2007.

The Company recognized cash inflows from investing
activities for the three months ended March 31, 2008, compared to cash outflows for the same period in 2007, which primarily reflects the sale of investments to fund the Companys stock buyback program, partially offset by the purchase of
equipment.

Cash flows from financing activities reflect the Companys stock buyback activity and shareholder dividends. The Companys stock
buyback activity increased significantly for the three months ended March 31, 2008, compared to the same period in the prior year.

OFF-BALANCE
SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or, as of March 31,
2008, future effect on the Companys financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

The
Company is subject to market risk with respect to its fixed income investment portfolios. The most significant components of market risk affecting the Company are credit risk and interest rate risk. The Company is also subject to equity risk with
respect to its investment in equity securities; however, since only a small percentage of the Companys invested assets are invested in equity securities (approximately 9.7% as of March 31, 2008), the Company does not believe that its
exposure to equity risk is significant.

There have been no material changes in the Companys market risk since December 31, 2007. Additional
disclosures related to the Companys market risk are discussed under Quantitative and Qualitative Disclosures About Market Risk in Managements Discussion and Analysis of Consolidated Financial Condition and Results of
Operations in the Companys Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2008.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

Under the supervision and with the participation of our management, including the President, the Chief Executive Officer, the Chief
Financial Officer and the Vice President of Finance, we have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a  15(e) and 15 d  15(e) under the Securities Exchange Act of 1934, as
amended) as of the end of the period covered by this report. Based on that evaluation, the President, the Chief Executive Officer, the Chief Financial Officer and the Vice President of Finance have concluded that, as of the end of such period, these
disclosure controls and procedures are effective.



34



---

##### Table of Contents

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a  15(f) and 15d  15(f) under the Exchange Act) during the fiscal quarter to which this
report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II  OTHER INFORMATION



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

None



|Item 1A. | Risk Factors
|-------- | ------------

There are no material changes from the risk factors
previously disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2007, SEC File No. 001-32899.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

Issuer Purchases of Equity Securities

During 2007, the Companys Board of Directors authorized the repurchase of up to 2,046,500
shares of the Companys issued and outstanding shares of common stock. The share repurchases are held as treasury stock and are available for issuance in connection with the Companys 2006 Stock Incentive Plan. On March 24,
2008, the Company received approval from the Insurance Department to repurchase up to $10 million of the Companys issued and outstanding common stock, which is in addition to the 2,046,500 shares authorized in 2007.



35



---

##### Table of Contents

The following table presents information with respect to those purchases of our common stock made during the three months
ended March 31, 2008 and 2007:



|                    |  |                                 |  |                             |       |                                                                              |         |                                                                                                       |         |    
|------------------- |  | ------------------------------- |  | --------------------------- | ----- | ---------------------------------------------------------------------------- | ------- | ----------------------------------------------------------------------------------------------------- | ------- | ---
|Period              |  | Total number ofshares purchased |  | Average pricepaid per share |       | Total number ofshares purchasesas part of publiclyannounced plansor
programs |         | Maximum number(or approximatedollar value)of shares thatmay yet
bepurchasedunder the plansor programs |        
|January 1-31, 2008  |  | 113,757                         |  | $                           | 16.23 |                                                                              | 113,757 |                                                                                                       | 915,878 |    
|February 1-28, 2008 |  | 540,271                         |  | $                           | 16.50 |                                                                              | 540,271 |                                                                                                       | 375,607 |    
|March 1-31, 2008    |  | 156,193                         |  | $                           | 15.38 |                                                                              | 156,193 |                                                                                                       | 219,414 | (a)
|                    |  |                                 |  |                             |       |                                                                              |         |                                                                                                       |         |    
|Total               |  | 810,221                         |  | $                           | 16.24 |                                                                              | 810,221 |                                                                                                       |         |    
|                    |  |                                 |  |                             |       |                                                                              |         |                                                                                                       |         |    



|(a) | The maximum number of remaining shares represents the difference between the 2,046,500 authorized shares and the number
of shares repurchased as of March 31, 2008. The approval to repurchase an additional $10 million of the Companys common stock is not included in this amount.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                    |  |                                 |  |                             |       |                                                                              |        |                                                                                                       |        
|------------------- |  | ------------------------------- |  | --------------------------- | ----- | ---------------------------------------------------------------------------- | ------ | ----------------------------------------------------------------------------------------------------- | -------
|Period              |  | Total number ofshares purchased |  | Average pricepaid per share |       | Total number ofshares purchasesas part of publiclyannounced plansor
programs |        | Maximum number(or approximatedollar value)of shares thatmay yet
bepurchasedunder the plansor programs
|January 1-31, 2007  |  |                                |  |                             | N/A   |                                                                              | N/A    |                                                                                                       | N/A    
|February 1-28, 2007 |  | 10,355                          |  | $                           | 14.40 |                                                                              | 10,355 |                                                                                                       | 557,197
|March 1-31, 2007    |  | 61,868                          |  | $                           | 14.46 |                                                                              | 61,868 |                                                                                                       | 495,329
|                    |  |                                 |  |                             |       |                                                                              |        |                                                                                                       |        
|Total               |  | 72,223                          |  | $                           | 14.45 |                                                                              | 72,223 |                                                                                                       |        
|                    |  |                                 |  |                             |       |                                                                              |        |                                                                                                       |        



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None



|Item 4. | Submission of Matters to Vote of Security Holders
|------- | -------------------------------------------------

None



|Item 5. | Other Information
|------- | -----------------

None



|Item 6. | Exhibits
|------- | --------

Exhibits



|            |  |                                                                                                                                                                                                     
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Title                                                                                                                                                                                               
|3.1         |  | Articles of Incorporation of Eastern Insurance Holdings, Inc. (Incorporated by reference from Exhibit 3.1 to the Eastern Insurance Holdings, Inc. Registration Statement No. 333-128913 on Form
S-1)
|            | 
|3.2         |  | Bylaws of Eastern Insurance Holdings, Inc. (Incorporated by reference from Exhibit 3.2 to the Eastern Insurance Holdings, Inc. Registration Statement No. 333-128913 on Form S-1)                   
|            | 
|10.12       |  | Eastern Insurance Holdings, Inc. 2006 Stock Incentive Plan (Incorporated by reference from Exhibit 4.1 to EIHIs Registration Statement on Form S-8 filed on April 2,
2007)                         



36



---

##### Table of Contents

|            |  |                                                                                                                                                                                       
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Title                                                                                                                                                                                 
|21.1        |  | Subsidiaries of Eastern Insurance Holdings, Inc. (Incorporated by reference from Exhibit 21 to the Eastern Insurance Holdings, Inc. Registration Statement No. 333-128913 on Form
S-1)
|            | 
|31.1        |  | Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002, (filed herewith)                                                           
|            | 
|31.2        |  | Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002, (filed herewith)                                                           
|            | 
|32.1        |  | Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002, (filed herewith)                                                           
|            | 
|32.2        |  | Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002, (filed herewith)                                                           



37



---

##### Table of Contents

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                   |  |                                               |  |                                      
|------------------ |  | --------------------------------------------- |  | -------------------------------------
|                   |  | EASTERN INSURANCE HOLDINGS, INC. (Registrant)
|                   |  |                                              
|Dated: May 8, 2008 |  | By:                                           |  | /s/ Bruce M. Eckert                  
|                   |  |                                               |  | Bruce M. Eckert,                     
|                   |  |                                               |  | Chief Executive Officer              
|                   |  |                                              
|Dated: May 8, 2008 |  | By:                                           |  | /s/ Kevin M. Shook                   
|                   |  |                                               |  | Kevin M. Shook,                      
|                   |  |                                               |  | Treasurer and Chief Financial Officer



38