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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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Quarterly Report pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

for the Quarterly Period Ended
March 31, 2007,

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)



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EASTERN INSURANCE HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)



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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 ̈Non-accelerated filer  x

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 9, 2007
|COMMON STOCK (No par Value) |  | 11,523,189                                    
|(Title of Class)            |  | (Outstanding Shares)                          



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##### 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 |  | 21
|                                |  |          | 
|                                |  | Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 35
|                                |  |          | 
|                                |  | Item 4.  |  | Controls and Procedures                                                               |  | 36
|                                | 
|PART II - 
OTHER INFORMATION    |  | 37      
|                                |  |          | 
|                                |  | Item 1.  |  | Legal Proceedings                                                                     |  | 37
|                                |  |          | 
|                                |  | Item 1A. |  | Risk Factors                                                                          |  | 37
|                                |  |          | 
|                                |  | Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 37
|                                |  |          | 
|                                |  | Item 3.  |  | Defaults Upon Senior Securities                                                       |  | 37
|                                |  |          | 
|                                |  | Item 4.  |  | Submission of Matters to Vote of Security Holders                                     |  | 37
|                                |  |          | 
|                                |  | Item 5.  |  | Other Information                                                                     |  | 37
|                                |  |          | 
|                                |  | Item 6.  |  | Exhibits                                                                              |  | 37



2



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##### Table of Contents

PART I
FINANCIAL INFORMATION



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

EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In
thousands, except share data)



|                                                                                                                              |  |                           |         |   |                 |   |         |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | --------------- | - | ------- | -
|                                                                                                                              |  | (Unaudited) March 31 2007 |         |   | December 312006 |  
|ASSETS                                                                                                                        |  |                           |         |   |                 |   |         |  
|                                                                                                                              |  |                          
|Investments:                                                                                                                  |  |                           |         |   |                 |   |         |  
|Fixed income securities, at estimated fair value (amortized cost, $201,767; $201,226)                                         |  | $                         | 204,570 |   |                 | $ | 204,444 |  
|Convertible bonds, at estimated fair value (amortized cost, $12,441; $)                                                      |  |                           | 13,850  |   |                 |   |        |  
|Equity securities, at estimated fair value (cost, $16,086; $17,027)                                                           |  |                           | 16,705  |   |                 |   | 18,219  |  
|Equity call options, at estimated fair value (cost, $; $2,230)                                                               |  |                           |        |   |                 |   | 3,318   |  
|Other long-term investments                                                                                                   |  |                           | 10,271  |   |                 |   | 11,604  |  
|                                                                                                                              |  |                           |         |   |                 |   |         |  
|Total investments                                                                                                             |  |                           | 245,396 |   |                 |   | 237,585 |  
|                                                                                                                              |  |                          
|Cash and cash equivalents                                                                                                     |  |                           | 49,195  |   |                 |   | 50,703  |  
|Accrued investment income                                                                                                     |  |                           | 2,376   |   |                 |   | 2,236   |  
|Premiums receivable (net of allowance, $559; $558)                                                                            |  |                           | 34,906  |   |                 |   | 23,225  |  
|Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses                                                |  |                           | 27,995  |   |                 |   | 27,525  |  
|Deferred acquisition costs                                                                                                    |  |                           | 7,308   |   |                 |   | 4,501   |  
|Deferred income taxes, net                                                                                                    |  |                           | 3,643   |   |                 |   | 2,696   |  
|Intangible assets                                                                                                             |  |                           | 7,675   |   |                 |   | 8,110   |  
|Goodwill                                                                                                                      |  |                           | 5,140   |   |                 |   | 5,140   |  
|Other assets                                                                                                                  |  |                           | 6,630   |   |                 |   | 6,485   |  
|                                                                                                                              |  |                           |         |   |                 |   |         |  
|Total assets                                                                                                                  |  | $                         | 390,264 |   |                 | $ | 368,206 |  
|                                                                                                                              |  |                           |         |   |                 |   |         |  
|LIABILITIES                                                                                                                   |  |                           |         |   |                 |   |         |  
|                                                                                                                              |  |                          
|Reserves for unpaid losses and loss adjustment expenses                                                                       |  | $                         | 127,306 |   |                 | $ | 126,467 |  
|Unearned premium reserves                                                                                                     |  |                           | 50,289  |   |                 |   | 34,600  |  
|Advance premium                                                                                                               |  |                           | 1,333   |   |                 |   | 1,755   |  
|Accounts payable and accrued expenses                                                                                         |  |                           | 6,908   |   |                 |   | 7,187   |  
|Ceded reinsurance balances payable                                                                                            |  |                           | 7,303   |   |                 |   | 5,623   |  
|Benefit plan liabilities                                                                                                      |  |                           | 312     |   |                 |   | 324     |  
|Dividends payable                                                                                                             |  |                           | 9,516   |   |                 |   | 8,560   |  
|Federal income taxes payable                                                                                                  |  |                           | 2,734   |   |                 |   | 1,902   |  
|Junior subordinated debentures                                                                                                |  |                           | 8,044   |   |                 |   | 8,044   |  
|                                                                                                                              |  |                           |         |   |                 |   |         |  
|Total liabilities                                                                                                             |  |                           | 213,745 |   |                 | $ | 194,462 |  
|                                                                                                                              |  |                           |         |   |                 |   |         |  
|Commitments and contingencies (Note 11)                                                                                       |  |                           |         |   |                 |   |         |  
|                                                                                                                              |  |                          
|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 and outstanding11,531,310 and 11,351,048,
respectively |  |                           |        |   |                 |   |        |  
|Unearned ESOP compensation                                                                                                    |  |                           | (6,917  | ) |                 |   | (7,101  | )
|Additional paid in capital                                                                                                    |  |                           | 108,890 |   |                 |   | 108,502 |  
|Treasury stock, at cost (66,413 shares)                                                                                       |  |                           | (961    | ) |                 |   |        |  
|Retained earnings                                                                                                             |  |                           | 73,039  |   |                 |   | 69,483  |  
|Accumulated other comprehensive income, net                                                                                   |  |                           | 2,468   |   |                 |   | 2,860   |  
|                                                                                                                              |  |                           |         |   |                 |   |         |  
|Total shareholders equity                                                                                                    |  |                           | 176,519 |   |                 |   | 173,744 |  
|                                                                                                                              |  |                           |         |   |                 |   |         |  
|Total liabilities and shareholders equity                                                                                    |  | $                         | 390,264 |   |                 | $ | 368,206 |  
|                                                                                                                              |  |                           |         |   |                 |   |         |  

See accompanying notes to unaudited consolidated financial statements.



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EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

For the Three Months Ended March 31, 2007 and 2006

(Unaudited, in thousands, except per share data)



|                                                                                               |  |                                     |        |      |   |        |  
|---------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------ | ---- | - | ------ | -
|                                                                                               |  | For the Three MonthsEnded March 31, |       
|                                                                                               |  | 2007                                |        | 2006 |  
|REVENUE                                                                                        |  |                                     |        |      |   |        |  
|Net premiums earned                                                                            |  | $                                   | 29,129 |      | $ | 8,659  |  
|Net investment income                                                                          |  |                                     | 2,980  |      |   | 999    |  
|Net realized investment gains                                                                  |  |                                     | 724    |      |   | 864    |  
|Other revenue                                                                                  |  |                                     | 182    |      |   |       |  
|                                                                                               |  |                                     |        |      |   |        |  
|Total revenue                                                                                  |  |                                     | 33,015 |      |   | 10,522 |  
|                                                                                               |  |                                     |        |      |   |        |  
|EXPENSES                                                                                       |  |                                     |        |      |   |        |  
|Losses and loss adjustment expenses incurred                                                   |  |                                     | 17,940 |      |   | 5,683  |  
|Acquisition and other underwriting expenses                                                    |  |                                     | 3,349  |      |   | 1,322  |  
|Other expenses                                                                                 |  |                                     | 5,456  |      |   | 2,362  |  
|Amortization of intangibles                                                                    |  |                                     | 435    |      |   |       |  
|Policyholder dividend expense                                                                  |  |                                     | 101    |      |   |       |  
|Segregated portfolio dividend expense                                                          |  |                                     | 722    |      |   |       |  
|                                                                                               |  |                                     |        |      |   |        |  
|Total expenses                                                                                 |  |                                     | 28,003 |      |   | 9,367  |  
|                                                                                               |  |                                     |        |      |   |        |  
|Income before income taxes                                                                     |  |                                     | 5,012  |      |   | 1,155  |  
|Income tax expense                                                                             |  |                                     | 1,861  |      |   | 460    |  
|                                                                                               |  |                                     |        |      |   |        |  
|Net income                                                                                     |  | $                                   | 3,151  |      | $ | 695    |  
|                                                                                               |  |                                     |        |      |   |        |  
|Other comprehensive income (loss)                                                              |  |                                     |        |      |   |        |  
|Unrealized holding gains (losses) arising during period, net of tax                            |  |                                     | 627    |      |   | (230   | )
|Amortization of unrecognized benefit plan amounts, net of tax of $3                            |  |                                     | 5      |      |   |       |  
|Less: Reclassification adjustment for gains included in net income, net of tax of $333 and $82 |  |                                     | 619    |      |   | 158    |  
|                                                                                               |  |                                     |        |      |   |        |  
|Other comprehensive income (loss)                                                              |  |                                     | 13     |      |   | (388   | )
|                                                                                               |  |                                     |        |      |   |        |  
|Comprehensive income                                                                           |  | $                                   | 3,164  |      | $ | 307    |  
|                                                                                               |  |                                     |        |      |   |        |  



|                                 |  |                                |      
|-------------------------------- |  | ------------------------------ | -----
|                                 |  | ThreeMonthsEnded March 31,2007
|Earnings per share (See Note 5): |  |                                |      
|Net income                       |  | $                              | 3,151
|Basic earnings per share         |  | $                              | 0.30 
|Diluted earnings per share       |  | $                              | 0.29 

See accompanying notes to unaudited consolidated financial statements.



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EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Three Months Ended March 31, 2007 and 2006

(Unaudited, in thousands, except share data)



|                                       |  |                        |  |                     |                      |  |                           |   |                           |                            |        |                            |  |               |                  |  |                                                    |      |                                                    |       |   |        |  |   |       |   |  |   |         |  
|-------------------------------------- |  | ---------------------- |  | ------------------- | -------------------- |  | ------------------------- | - | ------------------------- | -------------------------- | ------ | -------------------------- |  | ------------- | ---------------- |  | -------------------------------------------------- | ---- | -------------------------------------------------- | ----- | - | ------ |  | - | ----- | - |  | - | ------- | -
|                                       |  | Outstanding Shares     |  |                     | Common Capital Stock |  | Unearned ESOPCompensation |   |                           | Additional Paid-In Capital |        | TreasuryStock              |  |               | RetainedEarnings |  | Accumulated Other Comprehensive Income, Net of
Tax |      |                                                    | Total |  
|                                       |  | Series APreferredStock |  | CommonCapital Stock |                      |  |                           |   |                           |                            |        |                           
|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 |  
|                                       |  |                        |  |                     |                      |  |                           |   |                           |                            |        |                            |  |               |                  |  |                                                    |      |                                                    |       |   |        |  |   |       |   |  |   |         |  
|                                       |  |                        |  |                     |                      |  |                           |   |                          
|                                       |  | Series APreferredStock |  | CommonCapital Stock |                      |  | Common Capital Stock      |   | Unearned ESOPCompensation |                            |        | Additional Paid-In Capital |  | TreasuryStock |                  |  | RetainedEarnings                                   |      | Accumulated Other Comprehensive Income, Net of
Tax |       |   | Total  | 
|Balance, January 1, 2006               |  |                       |  |                    |                      |  | $                         |  |                           | $                          |       |                            |  | $             |                 |  | $                                                  |     |                                                    |       | $ | 61,205 |  | $ | 904   |   |  | $ | 62,109  |  
|                                       |  |                        |  |                     |                      |  |                           |   |                          
|Net income                             |  |                       |  |                    |                      |  |                           |  |                           |                            |       |                            |  |               |                 |  |                                                    |     |                                                    |       |   | 695    |  |   |      |   |  |   | 695     |  
|Other comprehensive income, net of tax |  |                       |  |                    |                      |  |                           |  |                           |                            |        |                            |  |               |                 |  |                                                    |     |                                                    |       |   |       |  |   | (388  | ) |  |   | (388    | )
|                                       |  |                        |  |                     |                      |  |                           |   |                           |                            |        |                            |  |               |                  |  |                                                    |      |                                                    |       |   |        |  |   |       |   |  |   |         |  
|Balance, March 31, 2006                |  |                       |  |                    |                      |  | $                         |  |                           | $                          |       |                            |  | $             |                 |  | $                                                  |     |                                                    |       | $ | 61,900 |  | $ | 516   |   |  | $ | 62,416  |  
|                                       |  |                        |  |                     |                      |  |                           |   |                           |                            |        |                            |  |               |                  |  |                                                    |      |                                                    |       |   |        |  |   |       |   |  |   |         |  

See accompanying notes to unaudited consolidated financial statements



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EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2007 and 2006

(Unaudited, in thousands)



|                                                                                            |  |      |         |   |      |   |        |  
|------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                                                                                            |  | 2007 |         |   | 2006 |  
|Cash flows from operating activities:                                                       |  |      |         |   |      |   |        |  
|Net income                                                                                  |  | $    | 3,151   |   |      | $ | 695    |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |      |         |   |      |   |        |  
|Depreciation and amortization                                                               |  |      | 104     |   |      |   | 37     |  
|Amortization of bond premium/discount                                                       |  |      | 246     |   |      |   | 59     |  
|Gain on sale of investments                                                                 |  |      | (1,021  | ) |      |   | (956   | )
|Unrealized loss on equity call options                                                      |  |      |        |   |      |   | 92     |  
|Unrealized loss on convertible bonds                                                        |  |      | 297     |   |      |   |       |  
|Equity in loss (income) of limited partnerships                                             |  |      | 33      |   |      |   | (105   | )
|Loss on disposal of property and equipment                                                  |  |      |        |   |      |   | 1      |  
|Recognition of deferred gain on sale of building                                            |  |      |        |   |      |   | (29    | )
|Deferred tax (benefit) provision                                                            |  |      | (1,102  | ) |      |   | 143    |  
|Stock compensation                                                                          |  |      | 572     |   |      |   |       |  
|Intangible asset amortization                                                               |  |      | 435     |   |      |   |       |  
|Changes in assets and liabilities:                                                          |  |      |         |   |      |   |        |  
|Accrued investment income                                                                   |  |      | (140    | ) |      |   | 50     |  
|Premiums receivable                                                                         |  |      | (11,681 | ) |      |   | 35     |  
|Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses              |  |      | (470    | ) |      |   | (70    | )
|Deferred acquisition costs                                                                  |  |      | (2,807  | ) |      |   |       |  
|Other assets                                                                                |  |      | (1,052  | ) |      |   | (158   | )
|Reserves for unpaid losses and loss adjustment expenses                                     |  |      | 839     |   |      |   | (603   | )
|Unearned and advance premium                                                                |  |      | 15,267  |   |      |   | (67    | )
|Ceded reinsurance balances payable                                                          |  |      | 1,680   |   |      |   | 19     |  
|Accounts payable and accrued expenses                                                       |  |      | (279    | ) |      |   | 185    |  
|Dividends payable                                                                           |  |      | 956     |   |      |   |       |  
|Benefit plan liabilities                                                                    |  |      | (19     | ) |      |   | (35    | )
|Federal income taxes recoverable/payable                                                    |  |      | 873     |   |      |   | 203    |  
|                                                                                            |  |      |         |   |      |   |        |  
|Net cash provided by (used in) operating activities                                         |  |      | 5,882   |   |      |   | (504   | )
|                                                                                            |  |      |         |   |      |   |        |  
|Cash flows from investing activities:                                                       |  |      |         |   |      |   |        |  
|Purchase of fixed income securities                                                         |  |      | (36,578 | ) |      |   | (4,420 | )
|Purchase of equity securities                                                               |  |      | (1,702  | ) |      |   |       |  
|Purchase of other long-term investments                                                     |  |      | (1,400  | ) |      |   | (800   | )
|Proceeds from sale of fixed income securities                                               |  |      | 22,828  |   |      |   | 2,035  |  
|Proceeds from maturities/calls of fixed income securities                                   |  |      | 4,486   |   |      |   | 2,825  |  
|Proceeds from equity securities                                                             |  |      | 3,349   |   |      |   |       |  
|Purchase of other long-term investments                                                     |  |      | 1,782   |   |      |   |       |  
|Change in unsettled investment purchases and sales                                          |  |      | 888     |   |      |   |       |  
|Principal payments received on mortgage loans                                               |  |      | 3       |   |      |   | 8      |  
|Purchase of equipment, net                                                                  |  |      | (85     | ) |      |   |       |  
|                                                                                            |  |      |         |   |      |   |        |  
|Net cash used in investing activities                                                       |  |      | (6,429  | ) |      |   | (352   | )
|                                                                                            |  |      |         |   |      |   |        |  
|Cash flows from financing activities:                                                       |  |      |         |   |      |   |        |  
|Repurchase of common stock                                                                  |  |      | (961    | ) |      |   |       |  
|                                                                                            |  |      |         |   |      |   |        |  
|Net cash used in financing activities                                                       |  |      | (961    | ) |      |   |       |  
|                                                                                            |  |      |         |   |      |   |        |  
|Net decrease in cash and cash equivalents                                                   |  |      | (1,508  | ) |      |   | (856   | )
|Cash and cash equivalents, beginning of period                                              |  |      | 50,703  |   |      |   | 4,699  |  
|                                                                                            |  |      |         |   |      |   |        |  
|Cash and cash equivalents, end of period                                                    |  | $    | 49,195  |   |      | $ | 3,843  |  
|                                                                                            |  |      |         |   |      |   |        |  
|Supplemental disclosure of cash flow information:                                           |  |      |         |   |      |   |        |  
|Cash paid for income taxes                                                                  |  | $    | 2,000   |   |      | $ | 135    |  
|Cash paid for interest                                                                      |  | $    | 152     |   |      | $ |       |  

See accompanying notes to unaudited consolidated financial statements.



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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) was formed by Eastern Life and Health Insurance Company (ELH), formerly Educators
Mutual Life Insurance Company, for the purpose of converting from a mutual life and health insurance company to a stock life and health insurance company. On June 16, 2006, EIHI completed its common stock offering and ELH completed its
conversion from a mutual company to a stock company and became a wholly-owned subsidiary of EIHI. In the common stock offering, EIHI sold 7,475,000 shares of its common stock at a price of $10.00 per share, raising gross proceeds of $74.8 million.
Direct expenses of the offering were $5.2 million and were recorded as a direct reduction of additional paid-in capital.

Immediately after the common
stock offering and conversion, EIHI purchased all of the outstanding common stock of Eastern Holding Company, Ltd. (EHC) for a purchase price of $78.9 million (See Note 3).

EIHI is an insurance holding company offering workers compensation and group benefits insurance products through its wholly-owned subsidiaries. The accompanying unaudited interim consolidated financial
statements include the accounts of EIHI and its wholly-owned subsidiaries (collectively, the Company), EHC and ELH, and EHCs wholly-owned subsidiaries, 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 Re Ltd.,
S.P.C. (Eastern Re), and Employers Alliance, Inc. (Employers Alliance).

Effective June 16, 2006, EHC was redomesticated from
the Cayman Islands to the United States of America. As a result of the redomestication, EHC and Eastern Re are subject to federal income tax on a prospective basis.

The Company operates in five segments: workers compensation insurance, segregated portfolio cell reinsurance, group benefits insurance, specialty reinsurance, and corporate/other.

Workers Compensation Insurance

Workers compensation
insurance is underwritten through Eastern Alliance and Allied Eastern, both Pennsylvania domiciled insurance companies, which provide workers compensation insurance coverage to small and medium sized businesses in rural and suburban
Pennsylvania, Maryland and Delaware.

Segregated Portfolio Cell Reinsurance

The Company provides a variety of services to self-insured workers compensation plans including program design, fronting, claims adjusting, investment management and cell rental services at Eastern Re. The
primary insurance coverage for the segregated portfolio cell programs is underwritten by Eastern Alliance and Allied Eastern and ceded 100% to Eastern Re.

Group Benefits Insurance

Group benefits insurance, which includes the Companys dental, short and long-term disability, and term life
insurance products are underwritten through ELH. The group benefits insurance products are primarily marketed to small and medium sized businesses. ELH is licensed to write business in 41 jurisdictions in the United States. ELH is currently actively
writing business in 16 jurisdictions, primarily in the Mid-Atlantic, Southeast, and Midwest regions of the United States.

Specialty Reinsurance

Specialty reinsurance is underwritten through Eastern Re, a Cayman domiciled reinsurer. Eastern Re assumes business through its participation in
reinsurance treaties with an unaffiliated insurance company related to an underground storage tank program and a non-hazardous waste transportation product.

Corporate/Other

The corporate/other segment consists of the operating results of Employers Alliance, the Companys third party
administrator, which provides claims adjusting and risk management services to self-insured workers compensation and property and casualty plans. This segment also includes the operations of EIHI, EHC, Eastern Services and Global Alliance and
certain eliminations necessary to reconcile the segment information to the consolidated statements of operations and comprehensive income (loss).



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These segments are more fully described in Note 9.

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, 2006 included in the Companys Annual Report on Form 10-K, which was filed with the U.S. Securities and Exchange Commission on April 2, 2007.

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 obtained through an independent pricing service or independent broker. 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 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. At the time 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 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. Prior to January 1, 2007, the Company accounted for its convertible bond securities in accordance with SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, and bifurcated the equity call option, or embedded derivative, from the convertible bond security, or host contract. Under



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SFAS 133, the change in the fair value of the equity call option was reported as a realized gain in the Companys consolidated statement of operations
and comprehensive income (loss) and the change in the fair value of the convertible bond security was reported as an unrealized gain or loss in accumulated other comprehensive income, net of tax. Upon adoption of SFAS 155, the Company elected
to fair value its convertible bond securities, and future changes in the fair value of the Companys convertible bond securities will be 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 beginning shareholders equity 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.

SFAS 155 prohibits restatement of prior
years financial statements. As a result, the Companys consolidated balance sheet as of December 31, 2006 has not been adjusted to reflect the adoption of SFAS 155. The following table provides the impact to the Companys
consolidated balance sheet as of December 31, 2006 under SFAS 155 (unaudited, in thousands).



|                                            |  |            |         |            |   |         |                      |  |   |        
|------------------------------------------- |  | ---------- | ------- | ---------- | - | ------- | -------------------- |  | - | -------
|                                            |  | AsReported |         | Adjustment |   |         | BalanceUnderSFAS 155
|Fixed income securities                     |  | $          | 204,444 |            | $ | (10,227 | )                    |  | $ | 194,217
|Convertible bonds                           |  | $          |        |            | $ | 13,545  |                      |  | $ | 13,545 
|Equity call options                         |  | $          | 3,318   |            | $ | (3,318  | )                    |  | $ |       
|Retained earnings                           |  | $          | 69,483  |            | $ | 405     |                      |  | $ | 69,888 
|Accumulated other comprehensive income, net |  | $          | 2,860   |            | $ | (405    | )                    |  | $ | 2,455  

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 obtained through an independent pricing service 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. At the time a security is determined to be other-than-temporarily impaired, the Company reduces the
cost of the security to the current estimated fair value 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 of investments in limited partnerships and mortgage loans on real estate.

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).

Mortgage loans on real estate are carried at their unpaid principal balance.

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, 2007 totaled $1.5
million.



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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.

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.

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 $3.1 million as of March 31, 2007.

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 2007 and 2006 was 5.25% and 4.75%, respectively. The liability for
incurred but not reported 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 incurred but not reported 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 incurred but not reported 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 1970 Intercompany Group Life Disability Table. The liability for life premium waiver reserves is discounted using a
rate of 3%, which is built into the valuation table.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 incurred but not reported 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.



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Management believes that its reserve for unpaid losses and LAE is adequate as of March 31, 2007. 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, 2007, 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.

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 loss adjustment expenses 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 totaled $2.9 million for the three months ended March 31,
2007. There were no deferred acquisition costs or related amortization as of an for the three months ended March 31, 2006.

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 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.

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, 2007
and 2006.

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.

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.

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



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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.

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 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, 2007 were as follows (unaudited, in thousands, except share data):



|                                |  |                                                    |        
|------------------------------- |  | -------------------------------------------------- | -------
|                                |  | As of and for theThree Months Ended March 31, 2007
|Suspense shares                 |  |                                                    | 710,125
|Allocated shares                |  |                                                    | 37,375 
|Shares committed to be released |  |                                                    | 18,432 
|Average price per share         |  | $                                                  | 14.77  
|Stock compensation expense      |  | $                                                  | 272    

As of March 31, 2007, the estimated fair value of unearned ESOP shares were $10.2 million.

Recent Accounting Pronouncements

SFAS 159

In February 2007, the Financial Accounting Standards Board (FASB) issued 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



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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 is currently evaluating the impact of adopting SFAS 159 on its consolidated financial condition and results of operations.

SFAS 157

In September 2006, the FASB issued SFAS 157,
Fair Value Measurements. 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. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early application is encouraged, provided an entity has not yet issued financial statements for the
fiscal year, including interim financial statements. Management is currently evaluating the impact of SFAS 157 on its current fair value disclosures. The Company expects that SFAS 157 will not have a material effect on its consolidated financial
condition or results of operations.

FIN 48

In
July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FIN 48), which provides criteria for the recognition,
measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is more likely than not that the position is sustainable based on its technical merits. The
Company adopted FIN 48 on January 1, 2007. The adoption of FIN 48 had no effect on the Companys consolidated financial condition or results of operations. The Company has no uncertain tax positions as of March 31, 2007. All tax years
subsequent to December 31, 2002 remain subject to examination by the Internal Revenue Service.

3. Acquisition of EHC

On June 16, 2006, EIHI acquired all of the outstanding common stock of EHC for a purchase price of $78.9 million, which consisted of EIHI issuing 3,876,048 shares of
its $10.00 common stock and paying cash of $40.2 million to EHCs shareholders. The excess of the purchase price over the net fair value of the assets and liabilities acquired was $14.3 million, consisting of identifiable intangible assets of
$9.2 million and goodwill of $5.1 million. Direct expenses incurred in connection with the acquisition of EHC were $636.

The following table presents
unaudited pro forma income statement information for the three months ended March 31, 2006 as if the stock offering, conversion and acquisition of EHC had taken place on January 1, 2006 (in thousands, except share and per share data):



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|                                             |  |                                                       |           
|-------------------------------------------- |  | ----------------------------------------------------- | ----------
|                                             |  | (Unaudited) Pro Forma Three
MonthsEnded March 31,2006
|                                             |  | 2006                                                 
|Revenue:                                     |  |                                                       |           
|Net premiums earned                          |  | $                                                     | 25,817    
|Net investment income                        |  |                                                       | 2,464     
|Net realized investment gains                |  |                                                       | 1,068     
|Other revenue                                |  |                                                       | 133       
|                                             |  |                                                       |           
|Total revenue                                |  |                                                       | 29,482    
|                                             |  |                                                       |           
|Expenses:                                    |  |                                                       |           
|Losses and loss adjustment expenses incurred |  |                                                       | 18,549    
|Acquisition and other underwriting expenses  |  |                                                       | 1,407     
|Other expenses                               |  |                                                       | 5,651     
|Amortization of intangibles                  |  |                                                       | 501       
|Policyholder dividend expense                |  |                                                       | 85        
|Segregated portfolio dividend expense        |  |                                                       | 574       
|                                             |  |                                                       |           
|Total expenses                               |  |                                                       | 26,767    
|                                             |  |                                                       |           
|Income before income taxes                   |  |                                                       | 2,715     
|Income tax expense                           |  |                                                       | 1,091     
|                                             |  |                                                       |           
|Net income                                   |  | $                                                     | 1,624     
|                                             |  |                                                       |           
|Earnings per share (EPS):                    |  |                                                       |           
|Basic shares outstanding                     |  |                                                       | 10,622,236
|Basis EPS                                    |  | $                                                     | 0.15      
|                                             | 
|Diluted shares outstanding                   |  |                                                       | 10,928,335
|Diluted EPS                                  |  | $                                                     | 0.15      

4. Intangible Assets

The acquisition of EHC resulted in the identification of certain intangible assets. The allocation of the purchase price in excess of the fair value of EHCs net assets acquired to intangible assets totaled $9.2 million. As of
March 31, 2007, intangible assets consisted of the following (unaudited, in thousands):



|                                     |  |         |       |                         |   |                    |  |         
|------------------------------------ |  | ------- | ----- | ----------------------- | - | ------------------ |  | --------
|Intangible Assets with Finite Life   |  | Balance |       | AccumulatedAmortization |   | AmortizationPeriod
|Agency relationships                 |  | $       | 1,513 |                         | $ | 237                |  | 15 years
|Renewal rights                       |  |         | 5,112 |                         |   | 1,275              |  | 15 years
|                                     |  |         |       |                         |   |                    |  |         
|                                     |  | $       | 6,625 |                         | $ | 1,512              |  |         
|                                     |  |         |       |                         |   |                    |  |         
|Intangible Assets with Infinite Life |  |         |       |                         |   |                   
|State insurance licenses             |  |         | 1,050 |                         |   |                    |  |         
|                                     |  |         |       |                         |   |                    |  |         
|Total intangible assets              |  |         | 7,675 |                         |   |                    |  |         
|                                     |  |         |       |                         |   |                    |  |         

Amortization expense totaled $435 and $0 for the three months ended March 31, 2007 and 2006, respectively.

5. Earnings Per Share

Basic earnings per share are
computed by dividing net income for the three months ended March 31, 2007 by the weighted average number of shares outstanding for the respective period. Diluted earnings per share are computed by dividing net income for the three months ended
March 31, 2007 by the weighted average number of shares outstanding for the period, including dilutive potential common shares outstanding for the period. Stock warrants of 306,099 and restricted stock awards of 11,049 have been included as
dilutive potential common shares outstanding. For the three months ended March 31, 2007, there were 848,390 stock options and restricted stock awards 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 and diluted earnings per share for the three months ended March 31, 2007 were as follows (unaudited, in thousands,
except share and per share data):



|                           |  |                                 |           
|-------------------------- |  | ------------------------------- | ----------
|                           |  | Three MonthsEnded March 31,2007
|Consolidated net income    |  | $                               | 3,151     
|Basic shares outstanding   |  |                                 | 10,641,044
|Diluted shares outstanding |  |                                 | 10,958,192
|Basic earnings per share   |  | $                               | 0.30      
|Diluted earnings per share |  | $                               | 0.29      



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6. Share Repurchase

On February 15, 2007, the Companys Board of Directors authorized the repurchase of up to 5 percent of the Companys issued and outstanding shares of common stock. The share repurchases will be held as treasury stock and
are available for issuance in connection with the Companys 2006 Stock Incentive Plan. As of March 31, 2007, the Company repurchased 66,413 shares at a cost of $961,000, representing a weighted average price of $14.47 per share.
Subsequent to March 31, 2007, the Company repurchased an additional 8,121 shares at a cost of $121,923.

7. Stock-Based Compensation

The Company adopted the Eastern Insurance Holdings, Inc. 2006 Stock Incentive Plan (the Plan) on December 18, 2006. Awards under the
Plan may be made in the form of incentive stock options, nonqualified stock options, restricted stock or any combination to employees and non-employee directors. At adoption, the Plan initially limited to 299,000 the number of shares that may be
awarded as restricted stock, and to 500,000 the number of shares for which incentive stock options may be granted. The total number of shares initially authorized in the Plan was 1,046,500 shares, with an annual increase equal to 1% of the shares
outstanding at the end of each year. The Plan provides that stock options and restricted stock awards may include vesting restrictions and performance criteria at the discretion of the Compensation Committee of the Board of Directors. The term of
options may not exceed ten years for incentive stock options, and ten years and one month for nonqualified stock options, and the option price may not be less than fair market value on the date of grant. On January 3, 2007, grants of 355,672
non-qualified stock options, 261,016 incentive stock options and 246,675 restricted stock awards were made to employees and non-employee directors. A total of 3,924 stock options were forfeited during the three months ended March 31, 2007. The
stock options and restricted stock awards granted on January 3, 2007 vest over a five year period and are not subject to performance criteria. No stock options have vested as of March 31, 2007 and, accordingly, no stock options granted under
the Plan have been exercised as of March 31, 2007. Upon exercise, it is anticipated that new shares will be issued to the option holder.

Total
stock-based compensation expense recognized in the consolidated statement of operations for the three months ended March 31, 2007 is shown in the following table (unaudited, in thousands).



|                                        |  |      |      
|--------------------------------------- |  | ---- | -----
|                                        |  | 2007
|Stock compensation expense related to:  |  |      |      
|Stock options                           |  | $    | 131  
|Restricted stock                        |  |      | 169  
|                                        | 
|Total related tax benefit               |  |      | 85   
|                                        | 
|Total unrecognized compensation expense |  | $    | 5,954

The fair values of stock options granted during three months ended March 31, 2007 were determined on the
dates of grant using a lattice-based binomial option valuation model with the following assumptions:



|                                       |  |      |       |  
|-------------------------------------- |  | ---- | ----- | -
|                                       |  | 2007 |      
|Expected terms (years)                 |  |      | 9.76  |  
|Expected stock price volatility        |  |      | 35.00 | %
|Risk-free interest rate                |  |      | 4.52  | %
|Expected dividend yield                |  |      | 3.00  | %
|Weighted average fair value per option |  | $    | 5.06  |  

The expected life shown above was imputed based upon the combination of vesting provisions and the termination,
retirement and early exercise assumptions input to the binomial option valuation model. As trading in the Companys stock began in June 2006, the expected stock price volatility reflects a weighting of the average historical volatility over a
10-year period for 17 comparable companies and the average 6-month implied volatility for those comparable companies with listed options. A yield curve of risk free interest rates was developed for each valuation date based on quoted prices of US
Treasury STRIPs.



15



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##### Table of Contents

The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect
market conditions and the Companys historical experience and future expectations. The calculated fair value is recognized as compensation cost in the Companys financial statements over the requisite service period of the entire award.
Compensation cost is recognized only for those options expected to vest, with forfeitures estimated at the date of grant and evaluated and adjusted periodically to reflect the Companys historical experience and future expectations. Any change
in the forfeiture assumption is accounted for as a change in estimate, with the cumulative effect of the change on periods previously reported being reflected in the financial statements of the period in which the change is made.

The following table summarizes stock option activity for the three months ended March 31, 2007 (unaudited):



|                               |  |                         |   |  |                                       |       |                                                 |      |                                       |   |    
|------------------------------ |  | ----------------------- | - |  | ------------------------------------- | ----- | ----------------------------------------------- | ---- | ------------------------------------- | - | ---
|                               |  | SharesSubject toOptions |   |  | WeightedAverageExercisePrice perShare |       | WeightedAverageRemainingContractualLife (years) |      | AggregateIntrinsicValue (inthousands)
|Outstanding at January 1, 2007 |  |                        |   |  |                                       |      |                                                 |     |                                       |   |   
|Granted                        |  | 616,688                 |   |  | $                                     | 14.35 |                                                 |     |                                       |   |   
|Forfeited                      |  | (3,924                  | ) |  |                                       | 14.35 |                                                 |     |                                       |   |   
|Exercised                      |  |                        |   |  |                                       |      |                                                 |     |                                       |   |   
|Cancelled                      |  |                        |   |  |                                       |      |                                                 |     |                                       |   |   
|                               |  |                         |   |  |                                       |       |                                                 |      |                                       |   |    
|Outstanding at March 31, 2007  |  | 612,764                 |   |  | $                                     | 14.35 |                                                 | 9.76 |                                       | $ | 379
|                               |  |                         |   |  |                                       |       |                                                 |      |                                       |   |    
|Exercisable at March 31, 2007  |  |                        |   |  |                                       |      |                                                 |     |                                       |   |   

The aggregate intrinsic value in the table above is before applicable income taxes, and is based on the
Companys closing stock price of $14.98 on March 31, 2007. As of March 31, 2007, total unrecognized stock-based compensation cost related to non-vested stock options was approximately $2.6 million, which is expected to be
recognized over a weighted average period of approximately 57.0 months. All stock options are unvested as of March 31, 2007.

As of
March 31, 2007, there were 134,736 shares of common stock available for issuance of future share-based awards. The following table presents additional information regarding options outstanding as of March 31, 2007 (unaudited):



|                              |  |                   |  |                                                 |  |                                       |      
|----------------------------- |  | ----------------- |  | ----------------------------------------------- |  | ------------------------------------- | -----
|                              |  | NumberOutstanding |  | WeightedAverageRemainingContractualLife (years) |  | WeightedAverageExercisePrice perShare
|Range of Exercise Prices      |  |                   |  |                                                 |  |                                       |      
|$14.35                        |  | 608,840           |  | 9.76                                            |  | $                                     | 14.35
|$14.50                        |  | 3,924             |  | 9.77                                            |  |                                       | 14.50
|                              |  |                   |  |                                                 |  |                                       |      
|Outstanding at March 31, 2007 |  | 612,764           |  | 9.76                                            |  | $                                     | 14.35
|                              |  |                   |  |                                                 |  |                                       |      



16



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##### Table of Contents

The following table summarizes restricted stock activity for the three months ended March 31, 2007 (unaudited):



|                               |  |                 |  |                                                
|------------------------------ |  | --------------- |  | -----------------------------------------------
|                               |  | Numberof Shares |  | WeightedAverageRemainingContractualLife (years)
|Outstanding at January 1, 2007 |  |                |  |                                               
|Granted                        |  | 246,675         |  |                                               
|Forfeited                      |  |                |  |                                               
|Exercised                      |  |                |  |                                               
|Cancelled                      |  |                |  |                                               
|                               |  |                 |  |                                                
|Outstanding at March 31, 2007  |  | 246,675         |  | 9.76                                           
|                               |  |                 |  |                                                
|Exercisable at March 31, 2007  |  |                |  |                                               

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, 2007 and 2006 (unaudited in thousands):



|                                                                  |  |      |         |   |      |   |        |  
|----------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                                                                  |  | 2007 |         |   | 2006 |  
|Balance, beginning of period                                      |  | $    | 121,396 |   |      | $ | 38,729 |  
|Reinsurance recoverables on unpaid losses and LAE                 |  |      | 24,236  |   |      |   | 23,911 |  
|                                                                  |  |      |         |   |      |   |        |  
|Net balance, beginning of period                                  |  |      | 97,160  |   |      |   | 14,818 |  
|Incurred related to:                                              |  |      |         |   |      |   |        |  
|Current year                                                      |  |      | 19,974  |   |      |   | 6,735  |  
|Prior year                                                        |  |      | (1,892  | ) |      |   | (1,001 | )
|                                                                  |  |      |         |   |      |   |        |  
|Total incurred before purchase accounting adjustments             |  |      | 18,082  |   |      |   | 5,734  |  
|Purchase accounting adjustments                                   |  |      | (269    | ) |      |   |       |  
|                                                                  |  |      |         |   |      |   |        |  
|Total incurred                                                    |  |      | 17,813  |   |      |   | 5,734  |  
|Paid related to:                                                  |  |      |         |   |      |   |        |  
|Current year                                                      |  |      | 5,076   |   |      |   | 3,913  |  
|Prior year                                                        |  |      | 12,409  |   |      |   | 2,581  |  
|                                                                  |  |      |         |   |      |   |        |  
|Total paid                                                        |  |      | 17,485  |   |      |   | 6,494  |  
|                                                                  |  |      |         |   |      |   |        |  
|Net balance, end of period                                        |  |      | 97,488  |   |      |   | 14,058 |  
|Reinsurance recoverables on unpaid losses and LAE                 |  |      | 24,794  |   |      |   | 24,110 |  
|                                                                  |  |      |         |   |      |   |        |  
|Balance, end of period                                            |  | $    | 122,282 |   |      | $ | 38,168 |  
|                                                                  |  |      |         |   |      |   |        |  
|Total reserves for unpaid for losses and loss adjustment expenses |  | $    | 127,306 |   |      | $ | 43,534 |  
|Less: Term life premium waiver reserves                           |  |      | 4,966   |   |      |   | 5,298  |  
|Less: Other                                                       |  |      | 58      |   |      |   | 68     |  
|                                                                  |  |      |         |   |      |   |        |  
|Balance, end of period                                            |  | $    | 122,282 |   |      | $ | 38,168 |  
|                                                                  |  |      |         |   |      |   |        |  



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##### Table of Contents

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



|                                                      |  |                                      |        |   |                                            |   |       |                               |  |   |                             |   |       |   |       |  |   |        |  
|----------------------------------------------------- |  | ------------------------------------ | ------ | - | ------------------------------------------ | - | ----- | ----------------------------- |  | - | --------------------------- | - | ----- | - | ----- |  | - | ------ | -
|                                                      |  | 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 $2.7 million and
$1.0 million for the three months ended March 31, 2007 and 2006, respectively.

The favorable development for the three months ended March 31, 2007
primarily reflects significant claim settlements in 2007 for amounts at, or less than, previously established case and incurred but not reported reserves in the Companys workers compensation insurance segment. In addition, the group
benefits insurance segment experienced better than expected claim results in its dental and short-term disability lines of business, as well as the termination of prior year long-term disability claims, primarily as a result of claimants returning
to work or claimant death.

The favorable development for the three months ended March 31, 2006 primarily reflects better than expected claim experience in
the group benefits insurance segments dental and short-term disability lines.

9. Segment Information

The Companys current operations are organized into the five following business segments. As a result of the acquisition of EHC, the Company has three new business
segments: workers compensation insurance, segregated portfolio cell reinsurance and specialty reinsurance.

Workers Compensation Insurance

Workers compensation insurance is underwritten through Eastern Alliance and Allied Eastern, both Pennsylvania domiciled insurance companies,
which provide insurance coverage to small and medium sized businesses in rural and suburban Pennsylvania, Maryland and Delaware. Eastern Alliance and Allied Eastern distribute their products and services through a network of independent agents.
Fronting fees earned by Eastern Alliance and Allied Eastern on the segregated portfolio cell reinsurance business are reported in the workers compensation insurance segment.

Segregated Portfolio Cell Reinsurance

The Company provides a variety of services to self-insured workers
compensation plans including program design, fronting, claims adjusting, investment management, and cell rental services at Eastern Re. The primary insurance coverage for the segregated portfolio cell program is underwritten by Eastern Alliance and
Allied Eastern and ceded 100% to Eastern Re. Eastern Re currently provides cell rental facilities and Eastern Alliance and Allied Eastern provide fronting services to 12 customers. Fronting fees earned by Eastern Alliance and Allied Eastern on the
segregated portfolio cell reinsurance business are reported in the workers compensation insurance segment. Outstanding loss reserves and unearned premiums under the segregated portfolio cell programs are collateralized by letters of credit
provided by the segregated portfolio dividend participants.

Group Benefits Insurance

Group benefits insurance, which includes dental, short and long-term disability, and term life insurance products are underwritten through ELH. The group benefits insurance products are primarily marketed to small and
medium sized businesses. ELH is licensed to write business in 41 jurisdictions within the United States. ELH is currently actively writing business in 16 jurisdictions, primarily in the Mid-Atlantic, Southeast, and Midwest regions of the United
States. ELH distributes its products through a network of independent producers.

Specialty Reinsurance

Specialty reinsurance is underwritten through Eastern Re. Eastern Re 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.



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##### Table of Contents

Corporate/Other

The
corporate/other segment consists of the operating results of Employers Alliance. This segment also includes the operations of EIHI, EHC, Eastern Services and Global Alliance and certain eliminations necessary to reconcile the segment information to
the consolidated statements of operations and comprehensive income (loss).

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



|                                            |  |                                |         |                                     |   |                        |  |                      |         |                  |   |        |       |   |         |   |  |   |        
|------------------------------------------- |  | ------------------------------ | ------- | ----------------------------------- | - | ---------------------- |  | -------------------- | ------- | ---------------- | - | ------ | ----- | - | ------- | - |  | - | -------
|                                            |  | WorkersCompensation Insurance |         | 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 gains (losses)      |  |                                | 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 loss adjustment expenses 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 before income taxes                  |  |                                | 3,947   |                                     |   |                       |  |                      | 1,508   |                  |   | 510    |       |   | (953    | ) |  |   | 5,012  
|Income tax expense                          |  |                                | 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
|                                            |  |                                |         |                                     |   |                        |  |                      |         |                  |   |        |       |   |         |   |  |   |        

The following table represents the segment results for the three months ended March 31, 2006, which reflects
the results of operations of ELH (unaudited, in thousands):



|                                            |  |                        |         |                  |   |      |       |  |   |        
|------------------------------------------- |  | ---------------------- | ------- | ---------------- | - | ---- | ----- |  | - | -------
|                                            |  | GroupBenefitsInsurance |         | Corporate/ Other |   |      | Total
|Revenue:                                    |  |                        |         |                  |   |      |       |  |   |        
|Net premiums earned                         |  | $                      | 8,659   |                  | $ |     |       |  | $ | 8,659  
|Net investment income                       |  |                        | 999     |                  |   |     |       |  |   | 999    
|Net realized investment gains               |  |                        | 864     |                  |   |     |       |  |   | 864    
|Other revenue                               |  |                        |        |                  |   |     |       |  |   |       
|                                            |  |                        |         |                  |   |      |       |  |   |        
|Total revenue                               |  |                        | 10,522  |                  |   |     |       |  |   | 10,522 
|                                            |  |                        |         |                  |   |      |       |  |   |        
|Expenses:                                   |  |                        |         |                  |   |      |       |  |   |        
|Loss and loss adjustment expenses incurred  |  |                        | 5,684   |                  |   | (1   | )     |  |   | 5,683  
|Acquisition and other underwriting expenses |  |                        | 1,303   |                  |   | 19   |       |  |   | 1,322  
|Other expenses                              |  |                        | 1,742   |                  |   | 620  |       |  |   | 2,362  
|                                            |  |                        |         |                  |   |      |       |  |   |        
|Total expenses                              |  |                        | 8,729   |                  |   | 638  |       |  |   | 9,367  
|                                            |  |                        |         |                  |   |      |       |  |   |        
|Income (loss) before income taxes           |  |                        | 1,793   |                  |   | (638 | )     |  |   | 1,155  
|Income tax expense (benefit)                |  |                        | 588     |                  |   | (128 | )     |  |   | 460    
|                                            |  |                        |         |                  |   |      |       |  |   |        
|Net income (loss)                           |  | $                      | 1,205   |                  | $ | (510 | )     |  | $ | 695    
|                                            |  |                        |         |                  |   |      |       |  |   |        
|Total assets                                |  | $                      | 111,206 |                  | $ |     |       |  | $ | 111,206
|                                            |  |                        |         |                  |   |      |       |  |   |        



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##### Table of Contents

10. Subsequent Event  Quarterly Dividend

On April 11, 2007, the Company announced the payment of a quarterly dividend to shareholders of record at the close of business on April 23, 2007. The dividend will be paid on May 3, 2007 and was
approved by the Pennsylvania Insurance Department. Any future dividends must also be approved by the Insurance Department through June 16, 2009.

11. 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.



20



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##### Table of Contents

|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 April 2, 2007.

The Companys results of operations for the three months ended March 31, 2007 include the financial results of the workers compensation
insurance, segregated portfolio cell reinsurance, group benefits insurance, specialty reinsurance and corporate/other segments. As the acquisition of Eastern Holding Company, Ltd. (EHC) was not consummated until June 16, 2006, the
Companys results of operations for the three months ended March 31, 2006 include only the financial results of the group benefits insurance and corporate/other segments.

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;
| | - |  | ----------------------------------------



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



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



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



| |  |  | financial market conditions, including, but not limited to, changes in interest rates and the stock 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 the Companys investment portfolio or a reduction in the demand for the Companys 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 loss adjustment expenses;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | 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 the Company uses resulting from competitive pressures;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | the Companys inability to obtain regulatory approval of, or to implement, premium rate increases;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | the potential impact on the Companys reported net income that could result from the adoption of future accounting standards issued by the FASB or other
standard setting bodies;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Companys 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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 $3.2 million for the three months ended March 31, 2007, reflecting positive operating results in its workers compensation insurance, group benefits insurance, and specialty reinsurance segments.
The corporate/other segment reported a net loss for the three months ended March 31, 2007, primarily reflecting corporate related expenses, including stock compensation expense of $572,000 related to the Companys ESOP and stock incentive
plans. The results of operations for the three months ended March 31, 2007 were reduced by $368,000 related to the amortization of purchase accounting adjustments.

Workers Compensation Insurance

Direct premiums written for the three months ended March 31, 2007 were
10.1% higher than direct premiums written for the same period in 2006. The increase in direct premiums written primarily reflects new business sales, a favorable renewal retention rate and select new agency appointments. These factors more than
offset renewal rate decreases resulting from current market conditions.

Segregated Portfolio Cell Reinsurance

The segregated portfolio cell reinsurance segment added one new cell program during the first quarter of 2007, bringing the total number of programs to twelve. Of the
twelve programs, two are in run-off as of March 31, 2007. Fee-based revenue generated by this segment for the three months ended March 31, 2007 was consistent with the same period in 2006. This segment also experienced premium renewal rate
decreases as a result of current market conditions.

Group Benefits Insurance

The group benefits insurance segment continued its trend of improving results. New business sales for the three months ended March 31, 2007 were $3.1 million higher than the same period in 2006. The renewal
retention rate improved by 7.6 percentage points from 2006 to 2007. While new business sales and the renewal retention rate improved, net premiums earned were slightly lower than the prior year, which reflects the impact of the lower new business
sales and renewal retention rate the Company experienced during the first half of 2006. The expense ratio in the group benefits insurance segment continues to improve as prior expense reduction efforts are reflected in the financial results.

Specialty Reinsurance

The specialty reinsurance
segments results reflect the activity in the Companys reinsurance contracts with an unaffiliated insurance company. There were no changes in the Companys reinsurance treaties during the first quarter of 2007.

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. Net premiums written is the difference between direct premiums written and premiums ceded or paid to reinsurers
(ceded premiums written). In the specialty reinsurance segment, assumed premiums are premiums that are received from another company under a reinsurance agreement, which are reported to the Company directly from the broker on a quarterly basis. In
the segregated portfolio cell reinsurance segment, assumed premiums are derived from insurance contracts written by EAIG and ceded to the segregated portfolio cells at Eastern Re.

Net premiums earned.Net premiums earned are the earned portion of the Companys net premiums written. Direct premiums written include all premiums billed during a specified policy period.

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



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##### Table of Contents

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, 2006, one-half of the premiums would be earned in 2006 and the other half would be earned in 2007. 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, equity securities, and other long-term investments. Investment income includes interest earned on invested assets. 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.

Other revenue. Other revenue includes claim administration and
risk management fees earned by Employers Alliance and cell rental fees earned by the specialty reinsurance segment. 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 fronting fees paid by the segregated portfolio cells to EAIG, claims administration and risk management fees paid
by the segregated portfolio cells to Employers Alliance and cell rental fees paid by the segregated portfolio cells to Eastern Re. 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.

The Companys expenses consist primarily of:

Losses and loss adjustment expenses.Losses and loss adjustment expenses 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 commission expenses, 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 Pennsylvania Workers
Compensation Security Fund (the Security Fund). The Security Fund assesses workers compensation insurers doing business in Pennsylvania for the purpose of providing funds to cover obligations to policyholders of insolvent insurance
companies. In the specialty reinsurance and segregated portfolio cell reinsurance segments, acquisition and other underwriting expenses consist of ceding commissions earned under the respective reinsurance agreements. Ceding commissions received by
EAIG are netted against 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.

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.



23



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##### Table of Contents

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 and return on average equity.

Loss ratio.The loss ratio is the ratio (expressed as a percentage) of losses and loss adjustment expenses 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 loss
adjustment expenses 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 loss adjustment expenses 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.

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.

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.

Reserve for Losses and Loss Adjustment Expenses

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, 2007, the related adjustments could have a material adverse effect on the Companys financial condition, results of operations or liquidity.



24



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##### Table of Contents

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, 2007 (unaudited) and December 31, 2006 are summarized below (in thousands):



|                                                              |  |                                 |        |   |                                    |   |        |                          |  |                      |        |  |       |        |   |  |   |         |  
|------------------------------------------------------------- |  | ------------------------------- | ------ | - | ---------------------------------- | - | ------ | ------------------------ |  | -------------------- | ------ |  | ----- | ------ | - |  | - | ------- | -
|March 31, 2007                                                |  | Workers Compensation Insurance |        |   | SegregatedPortfolioCellReinsurance |   |        | Group Benefits Insurance |  | SpecialtyReinsurance |        |  | Total |       
|Case/tabular reserves                                         |  | $                               | 18,977 |   |                                    | $ | 8,283  |                          |  | $                    | 13,008 |  | $     | 8,996  |   |  | $ | 49,264  |  
|Case incurred development, IBNR, and unallocated LAE reserves |  |                                 | 25,612 |   |                                    |   | 13,913 |                          |  |                      | 4,138  |  |       | 10,819 |   |  |   | 54,482  |  
|Amount of discount                                            |  |                                 | (1,964 | ) |                                    |   | (1,143 | )                        |  |                      |       |  |       |       |   |  |   | (3,107  | )
|                                                              |  |                                 |        |   |                                    |   |        |                          |  |                      |        |  |       |        |   |  |   |         |  
|Net reserves                                                  |  |                                 | 42,625 |   |                                    |   | 21,053 |                          |  |                      | 17,146 |  |       | 19,815 |   |  |   | 100,639 |  
|Reinsurance recoverables on unpaid losses and LAE             |  |                                 | 2,400  |   |                                    |   | 2,623  |                          |  |                      | 20,018 |  |       |       |   |  |   | 25,041  |  
|Purchase accounting adjustments                               |  |                                 | 1,457  |   |                                    |   | 253    |                          |  |                      |       |  |       | (84    | ) |  |   | 1,626   |  
|                                                              |  |                                 |        |   |                                    |   |        |                          |  |                      |        |  |       |        |   |  |   |         |  
|Reserves for unpaid losses and LAE                            |  | $                               | 46,482 |   |                                    | $ | 23,929 |                          |  | $                    | 37,164 |  | $     | 19,731 |   |  | $ | 127,306 |  
|                                                              |  |                                 |        |   |                                    |   |        |                          |  |                      |        |  |       |        |   |  |   |         |  



|                                                              |  |                                 |        |   |                                    |   |        |                          |  |                      |        |  |       |        |   |  |   |         |  
|------------------------------------------------------------- |  | ------------------------------- | ------ | - | ---------------------------------- | - | ------ | ------------------------ |  | -------------------- | ------ |  | ----- | ------ | - |  | - | ------- | -
|December 31, 2006                                             |  | Workers Compensation Insurance |        |   | SegregatedPortfolioCellReinsurance |   |        | Group Benefits Insurance |  | SpecialtyReinsurance |        |  | Total |       
|Case/tabular reserves                                         |  | $                               | 18,057 |   |                                    | $ | 8,216  |                          |  | $                    | 13,397 |  | $     | 8,985  |   |  | $ | 48,655  |  
|Case incurred development, IBNR, and unallocated LAE reserves |  |                                 | 25,910 |   |                                    |   | 13,991 |                          |  |                      | 4,143  |  |       | 10,523 |   |  |   | 54,568  |  
|Amount of discount                                            |  |                                 | (2,183 | ) |                                    |   | (1,125 | )                        |  |                      |       |  |       |       |   |  |   | (3,308  | )
|                                                              |  |                                 |        |   |                                    |   |        |                          |  |                      |        |  |       |        |   |  |   |         |  
|Net reserves                                                  |  |                                 | 41,784 |   |                                    |   | 21,082 |                          |  |                      | 17,540 |  |       | 19,508 |   |  |   | 99,915  |  
|Reinsurance recoverables on unpaid losses and LAE             |  |                                 | 1,475  |   |                                    |   | 2,893  |                          |  |                      | 20,289 |  |       |       |   |  |   | 24,657  |  
|Purchase accounting adjustments                               |  |                                 | 1,699  |   |                                    |   | 293    |                          |  |                      |       |  |       | (97    | ) |  |   | 1,895   |  
|                                                              |  |                                 |        |   |                                    |   |        |                          |  |                      |        |  |       |        |   |  |   |         |  
|Reserves for unpaid losses and LAE                            |  | $                               | 44,958 |   |                                    | $ | 24,268 |                          |  | $                    | 37,829 |  | $     | 19,411 |   |  | $ | 126,467 |  
|                                                              |  |                                 |        |   |                                    |   |        |                          |  |                      |        |  |       |        |   |  |   |         |  

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, 2007, the Company did not experience any declines in investment securities that were determined
to be other-than-temporary. As of March 31, 2007, the Company held securities with gross unrealized losses of $438,000, of which $184,000 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 three 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



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##### Table of Contents

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, 2007 (unaudited) and December 31, 2006,
deferred policy acquisition costs and the related unearned premium reserves were as follows (in thousands):



|                                               |  |               |        |                  |   |       
|---------------------------------------------- |  | ------------- | ------ | ---------------- | - | ------
|                                               |  | March 31,2007 |        | December 31,2006
|Workers compensation insurance segment:       |  |               |        |                  |   |       
|Deferred policy acquisition costs              |  | $             | 1,471  |                  | $ | 1,232 
|Unearned premium reserves                      |  | $             | 29,317 |                  | $ | 21,336
|                                               |  |              
|Segregated portfolio cell reinsurance segment: |  |               |        |                  |   |       
|Deferred policy acquisition costs              |  | $             | 2,181  |                  | $ | 1,496 
|Unearned premium reserves                      |  | $             | 7,110  |                  | $ | 6,330 
|                                               |  |              
|Group benefits insurance segment:              |  |               |        |                  |   |       
|Deferred policy acquisition costs              |  | $             |       |                  | $ |      
|Unearned premium reserves                      |  | $             | 65     |                  | $ | 80    
|                                               |  |              
|Specialty reinsurance segment:                 |  |               |        |                  |   |       
|Deferred policy acquisition costs              |  | $             | 3,656  |                  | $ | 1,773 
|Unearned premium reserves                      |  | $             | 13,797 |                  | $ | 6,854 

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.

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.



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##### Table of Contents

Recent Accounting Pronouncements

SFAS 159

In February 2007, the Financial Accounting Standards Board (FASB) issued 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 is currently evaluating the impact of adopting SFAS 159 on its consolidated financial condition and results of operations.

SFAS 157

In September 2006, the FASB issued SFAS 157,
Fair Value Measurements. 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. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early application is encouraged, provided an entity has not yet issued financial statements for the
fiscal year, including interim financial statements. Management is currently evaluating the impact of SFAS 157 on its current fair value disclosures. The Company expects that SFAS 157 will not have a material effect on its consolidated financial
condition or results of operations.

FIN 48

In
July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109 (FIN 48), which provides criteria for the recognition,
measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is more likely than not that the position is sustainable based on its technical merits. The
Company adopted FIN 48 on January 1, 2007. The adoption of FIN 48 had no effect on the Companys consolidated financial condition or results of operations. The Company has no uncertain tax positions as of March 31, 2007. All tax years
subsequent to December 31, 2002 remain subject to examination by the Internal Revenue Service.



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##### Table of Contents

THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH 31, 2006

RESULTS OF OPERATIONS

The major components of consolidated revenue
were as follows for the three months ended March 31, 2007 and 2006:



|                              |  |      |        |      |   |       
|----------------------------- |  | ---- | ------ | ---- | - | ------
|                              |  | 2007 |        | 2006
|Net premiums written          |  | $    | 29,920 |      | $ | 8,642 
|                              |  |      |        |      |   |       
|Net premiums earned           |  | $    | 29,129 |      | $ | 8,659 
|Net investment income         |  |      | 2,980  |      |   | 999   
|Net realized investment gains |  |      | 724    |      |   | 864   
|Other revenue                 |  |      | 182    |      |   |      
|                              |  |      |        |      |   |       
|Consolidated revenue          |  | $    | 33,015 |      | $ | 10,522
|                              |  |      |        |      |   |       

The increase in consolidated revenue reflects the acquisition of EHC on June 16, 2006.

The components of consolidated net income, by segment, for the three months ended March 31, 2007 and 2006 were as follows:



|                                      |  |      |       |   |      |   |       |  
|------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                      |  | 2007 |       |   | 2006 |  
|Workers compensation insurance       |  | $    | 2,640 |   |      | $ |      |  
|Segregated portfolio cell reinsurance |  |      |      |   |      |   |      |  
|Group benefits insurance              |  |      | 996   |   |      |   | 1,205 |  
|Specialty reinsurance                 |  |      | 331   |   |      |   |      |  
|Corporate/other                       |  |      | (816  | ) |      |   | (510  | )
|                                      |  |      |       |   |      |   |       |  
|Consolidated net income               |  | $    | 3,151 |   |      | $ | 695   |  
|                                      |  |      |       |   |      |   |       |  

The increase in consolidated net income reflects the acquisition of EHC on June 16, 2006.

WORKERS COMPENSATION INSURANCE

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



|                                            |  |      |         |  
|------------------------------------------- |  | ---- | ------- | -
|                                            |  | 2007 |        
|Revenue:                                    |  |      |         |  
|Direct premiums written                     |  | $    | 33,660  |  
|Reinsurance premiums assumed                |  |      | 223     |  
|Ceded premiums written                      |  |      | (14,871 | )
|                                            |  |      |         |  
|Net premiums written                        |  |      | 19,012  |  
|Change in unearned premiums                 |  |      | (6,992  | )
|                                            |  |      |         |  
|Net premiums earned                         |  |      | 12,020  |  
|Net investment income                       |  |      | 1,222   |  
|Net realized investment gains               |  |      | 303     |  
|                                            |  |      |         |  
|Total revenue                               |  | $    | 13,545  |  
|                                            |  |      |         |  
|Expenses:                                   |  |      |         |  
|Losses and loss adjustment expenses         |  | $    | 6,823   |  
|Acquisition and other underwriting expenses |  |      | 931     |  
|Other expenses                              |  |      | 1,743   |  
|Policyholder dividend expense               |  |      | 101     |  
|                                            |  |      |         |  
|Total expenses                              |  | $    | 9,598   |  
|                                            |  |      |         |  
|Income before income taxes                  |  |      | 3,947   |  
|Income tax expense                          |  |      | 1,307   |  
|                                            |  |      |         |  
|Net income                                  |  | $    | 2,640   |  
|                                            |  |      |         |  



28



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##### Table of Contents

Net Income

Net
income for the three months ended March 31, 2007 primarily reflects favorable reserve development on prior accident periods and an after-tax charge of $362,000 related to the amortization of purchase accounting adjustments.

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



|                              |  |      |  
|----------------------------- |  | ---- | -
|                              |  | 2007 |  
|Loss and LAE ratio            |  | 56.8 | %
|Expense ratio                 |  | 22.3 | %
|Policyholders dividend ratio |  | 0.8  | %
|Combined ratio                |  | 79.9 | %

Premiums

Direct premiums written for traditional business and alternative markets were $20.7 million and $13.0 million, respectively, for the three months ended March 31, 2007. Direct written premiums include the impact of 2007 renewal rate
decreases of 2.6%, a premium renewal retention rate of 88.7%, the amortization of purchase accounting adjustments totaling $988,000, and audit premiums of $361,000.

Losses and Loss Adjustment Expenses

Losses and LAE for the three months ended March 31, 2007 include a
reduction of $242,000 related to the amortization of purchase accounting adjustments. The accident period loss and LAE ratio was 62.0% for the three months ended March 31, 2007. The calendar period loss and LAE ratio includes 2.5 points related
to the amortization of purchase accounting adjustments impacting net premiums earned and losses and LAE. Favorable reserve development on prior accident periods of $1.0 million was recorded for the three months ended March 31, 2007. 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 2007 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, 2007. For the three months ended
March 31, 2007, the Company closed 87, or 17.6%, of the 495 open lost time claims as of December 31, 2006. 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 2005, 2006, and 2007 enabled it to record loss and LAE that were lower than the amount reserved for claim
settlements. For the three months ended March 31, 2007, there were no claims that exceeded the Companys $500,000 reinsurance retention.

Acquisition and Other Underwriting Expenses

Acquisition and other underwriting expenses for the three months ended March 31, 2007
include estimated premium taxes and the estimated Security Fund assessment equal to 2.0% and 1.0% of direct premiums written, respectively, and a reduction of $189,000 related to the amortization of purchase accounting adjustments. Fee based revenue
from the segregated portfolio cell segment is netted against acquisition and other underwriting expenses.

Policyholder Dividends

Policyholder dividends represent payments to customers who purchased participating policies that produced favorable loss ratios. For the three months ended March 31,
2007, 10.4% of all policies were written on a dividend policy basis.

Net Investment Income

Net investment income was $1.2 million for the three months ended March 31, 2007. The average yield on the fixed income portfolio was 4.45% as of March 31,
2007.

Net Realized Gains

Net realized gains primarily
reflect sales activity on equity securities.



29



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##### Table of Contents

Tax Expense

The
effective tax rate for the three months ended March 31, 2007 was 33.1%. The primary difference between the statutory tax rate of 35% and the effective tax rate relates to tax exempt income on municipal securities.

SEGREGATED PORTFOLIO CELL REINSURANCE

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



|                                            |  |      |        |  
|------------------------------------------- |  | ---- | ------ | -
|                                            |  | 2007 |       
|Revenue:                                    |  |      |        |  
|Reinsurance premiums assumed                |  | $    | 12,458 |  
|Ceded premiums written                      |  |      | (507   | )
|                                            |  |      |        |  
|Net premiums written                        |  |      | 11,951 |  
|Change in unearned premiums                 |  |      | (6,594 | )
|                                            |  |      |        |  
|Net premiums earned                         |  |      | 5,357  |  
|Net investment income                       |  |      | 251    |  
|Net realized investment gains               |  |      | 92     |  
|                                            |  |      |        |  
|Total revenue                               |  | $    | 5,700  |  
|                                            |  |      |        |  
|Expenses:                                   |  |      |        |  
|Losses and loss adjustment expenses         |  | $    | 3,208  |  
|Acquisition and other underwriting expenses |  |      | 1,479  |  
|Other expenses                              |  |      | 80     |  
|Segregated portfolio dividend expense (1)   |  |      | 933    |  
|                                            |  |      |        |  
|Total expenses                              |  | $    | 5,700  |  
|                                            |  |      |        |  
|Net income (1)                              |  | $    | 0      |  
|                                            |  |      |        |  

---

|(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, 2007:



|                   |  |      |  
|------------------ |  | ---- | -
|                   |  | 2007 |  
|Loss and LAE ratio |  | 59.9 | %
|Expense ratio      |  | 29.1 | %
|                   |  |      |  
|Combined ratio     |  | 89.0 | %
|                   |  |      |  

Premiums

Reinsurance premiums assumed include the impact of 2007 renewal rate decreases of 1.8%, a premium renewal retention rate of 88.8%, a reduction of $503,000 related to the amortization of purchase accounting adjustments, and audit premiums of
$115,000.

Net premiums written for the three months ended March 31, 2007 include an increase of $212,000 related to the amortization of purchase
accounting adjustments.



30



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##### Table of Contents

Losses and Loss Adjustment Expenses

Losses and LAE for the three months ended March 31, 2007 include a reduction of $40,000 related to the amortization of purchase accounting adjustments. The calendar period loss and LAE ratio includes 2.4 points
related to the amortization of purchase accounting adjustments impacting net premiums earned and losses and LAE.

Acquisition and Other Underwriting
Expenses

Acquisition and other underwriting expenses include a reduction of $304,000 related to the amortization of purchase accounting adjustments.
The expense ratio for the three months ended March 31, 2007 includes a reduction of 3.9 points related to the amortization of purchase accounting adjustments. The expense ratio, without regards to the aforementioned purchase accounting
adjustments, is consistent with the contractual ceding commissions for the three months ended March 31, 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, 2007 and 2006 (unaudited, in thousands):



|                                            |  |      |       |   |      |   |        |  
|------------------------------------------- |  | ---- | ----- | - | ---- | - | ------ | -
|                                            |  | 2007 |       |   | 2006 |  
|Revenue:                                    |  |      |       |   |      |   |        |  
|Direct premiums written                     |  | $    | 9,302 |   |      | $ | 9,255  |  
|Ceded premiums written                      |  |      | (678  | ) |      |   | (613   | )
|                                            |  |      |       |   |      |   |        |  
|Net premiums written                        |  |      | 8,624 |   |      |   | 8,642  |  
|Change in unearned premiums                 |  |      |      |   |      |   | 17     |  
|                                            |  |      |       |   |      |   |        |  
|Net premiums earned                         |  |      | 8,624 |   |      |   | 8,659  |  
|Net investment income                       |  |      | 848   |   |      |   | 999    |  
|Net realized investment gains               |  |      | 302   |   |      |   | 864    |  
|                                            |  |      |       |   |      |   |        |  
|Total revenues                              |  |      | 9,774 |   |      |   | 10,522 |  
|                                            |  |      |       |   |      |   |        |  
|Expenses:                                   |  |      |       |   |      |   |        |  
|Losses and loss adjustment expenses         |  |      | 5,563 |   |      |   | 5,684  |  
|Acquisition and other underwriting expenses |  |      | 1,332 |   |      |   | 1,303  |  
|Other expenses                              |  |      | 1,371 |   |      |   | 1,742  |  
|                                            |  |      |       |   |      |   |        |  
|Total expenses                              |  |      | 8,266 |   |      |   | 8,729  |  
|                                            |  |      |       |   |      |   |        |  
|Income before income taxes                  |  |      | 1,508 |   |      |   | 1,793  |  
|Income tax expense                          |  |      | 512   |   |      |   | 588    |  
|                                            |  |      |       |   |      |   |        |  
|Net income                                  |  | $    | 996   |   |      | $ | 1,205  |  
|                                            |  |      |       |   |      |   |        |  

Net Income

The decrease in net income primarily reflects lower realized investment gains, partially offset by a decrease in expenses. Realized investment gains for the three months ended March 31, 2006 included a gain of $716,000 related to the
sale of an equity security. The decrease in expenses primarily reflects managements expense reduction efforts.

The group benefits insurance ratios
were as follows for the three months ended March 31, 2007 and 2006:



|                   |  |      |   |  |       |  
|------------------ |  | ---- | - |  | ----- | -
|                   |  | 2007 |   |  | 2006  |  
|Loss and LAE ratio |  | 64.5 | % |  | 65.6  | %
|Expense ratio      |  | 31.3 | % |  | 35.2  | %
|                   |  |      |   |  |       |  
|Combined ratio     |  | 95.8 | % |  | 100.8 | %
|                   |  |      |   |  |       |  



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##### Table of Contents

Premiums

The
increase in direct premiums written reflects an increase in new business sales and an improved renewal retention rate for the three months ended March 31, 2007, compared to the same period in 2006. New business sales totaled $3.8 million for
the three months ended March 31, 2007, compared to new business sales of $677,000 for the same period in 2006. The renewal retention rate improved 7.6 percentage points from 2006 to 2007. Renewal retention through March 31, 2007 totaled
86.5%.

The decrease in net premiums written reflects higher ceded premiums in the long-term disability line of business.

Net premiums earned, by line of business, for the three months ended March 31, 2007 and 2006 were as follows (in thousands):



|                      |  |      |       |      |   |      
|--------------------- |  | ---- | ----- | ---- | - | -----
|                      |  | 2007 |       | 2006
|Dental                |  | $    | 5,162 |      | $ | 5,079
|Short-term disability |  |      | 1,635 |      |   | 1,639
|Long-term disability  |  |      | 417   |      |   | 509  
|Term life             |  |      | 1,410 |      |   | 1,432
|                      |  |      |       |      |   |      
|Total                 |  | $    | 8,624 |      | $ | 8,659
|                      |  |      |       |      |   |      

Net Investment Income

The decrease in net investment income primarily reflects a decline in the equity interest in other long-term investments of $193,000. The decrease primarily reflects the redemption of a partnership interest, resulting in the recognition of
a realized gain totaling $250,000. Excluding the impact of the other long-term investments, net investment income increased slightly, reflecting an increase in the yield from 5.40% for the three months ended March 31, 2006, to 5.51% for the
three months ended March 31, 2007.

Net Realized Investment Gains

The decrease in net realized investment gains primarily reflects the gain recognized in 2006 on the sale of the aforementioned equity security, partially offset by the gain on the partnership interest recognized in
2007.

Losses and Loss Adjustment Expenses

The
decrease in losses and LAE reflects the improvement in the loss ratio from 2006 to 2007. The calendar period loss ratios, by line of business, for the three months ended March 31, 2007 and 2006 were as follows:



|                      |  |      |   |  |       |  
|--------------------- |  | ---- | - |  | ----- | -
|                      |  | 2007 |   |  | 2006  |  
|Dental                |  | 66.9 | % |  | 62.7  | %
|Short-term disability |  | 71.1 | % |  | 59.3  | %
|Long-term disability  |  | -6.9 | % |  | 117.6 | %
|Term life             |  | 72.1 | % |  | 64.7  | %
|Total group benefits  |  | 64.5 | % |  | 65.6  | %

Dental

The increase in the calendar period loss ratio primarily reflects a decrease in favorable development on prior period reserves from 2006 to 2007. Favorable development totaled $304,000 for the three months ended March 31, 2007, or 5.9
percentage points, compared to $480,000, or 9.4 percentage points for the same period in 2006. In addition, the accident period loss ratio increased 0.7 percentage points from 2006 to 2007.

Short-term Disability

The increase in the calendar period
loss ratio primarily reflects a decrease in favorable development on prior period reserves from 2006 to 2007. Favorable development totaled $175,000 for the three months ended March 31, 2007, or 10.7 percentage points, compared to $333,000, or
20.3% percentage points for the same period in 2006. In addition to the impact of favorable development, the accident period loss ratio increased 2.2 percentage points from 2006 to 2007.

Long-term Disability

The improvement in the long-term disability loss ratio primarily reflects lower severity
in reported claims and the termination of prior period claims. The impact of claim activity for the three months ended March 31, 2007 resulted in a net reserve decrease of $444,000, compared to a net reserve increase of $191,000 for the same
period in 2006. The net increase in 2006 included one claim with a reserve of $368,000.



32



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##### Table of Contents

Term Life

The
increase in the term life loss ratio reflects higher severity in reported premium waiver claims, offset by a decline in reported death claims. The impact of premium waiver claim activity for the three months ended March 31, 2007 resulted in a
net reserve increase of $127,000, compared to a net reserve decrease of $51,000 for the same period in 2006. The net increase in 2007 included one claim with a reserve of $77,000. Reported death claim experience improved from 2006 to 2007 as the
loss ratio decreased from 69.9% in 2006 to 61.4% in 2007.

Acquisition and Other Underwriting Expenses

Acquisition and other underwriting expenses as a percentage of direct premiums written totaled 14.3% for the three months ended March 31, 2007, which was consistent
with 2006.

Other Expenses

The decrease in other
expenses reflects managements expense reduction efforts.

Tax Expense

The decrease in tax expense reflects lower pre-tax income, offset by an increase in the effective tax rate from 32.8% in 2006 to 34.0% in 2007. The increase in the effective tax rate primarily reflects the increase in
the statutory tax rate from 34.0% to 35.0%.

SPECIALTY REINSURANCE

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



|                                            |  |      |      
|------------------------------------------- |  | ---- | -----
|                                            |  | 2007
|Revenue:                                    |  |      |      
|Reinsurance premiums assumed                |  | $    | 3,105
|Change in unearned premiums                 |  |      | 23   
|                                            |  |      |      
|Net premiums earned                         |  | $    | 3,128
|Net investment income                       |  |      | 272  
|Other revenue                               |  |      | 337  
|                                            |  |      |      
|Total revenue                               |  | $    | 3,737
|                                            |  |      |      
|Expenses:                                   |  |      |      
|Losses and loss adjustment expenses         |  | $    | 2,346
|Acquisition and other underwriting expenses |  |      | 719  
|Other expenses                              |  |      | 162  
|                                            |  |      |      
|Total expenses                              |  | $    | 3,227
|                                            |  |      |      
|Income before income taxes                  |  |      | 510  
|Income tax expense                          |  |      | 179  
|                                            |  |      |      
|Net income                                  |  | $    | 331  
|                                            |  |      |      

Net Income

Net income for the specialty reinsurance segment includes an after-tax charge of $162,000 related to the amortization of purchase accounting adjustments.

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



|                   |  |       |  
|------------------ |  | ----- | -
|                   |  | 2007  |  
|Loss and LAE ratio |  | 75.0  | %
|Expense ratio      |  | 28.2  | %
|                   |  |       |  
|Combined ratio     |  | 103.2 | %
|                   |  |       |  



33



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##### Table of Contents

Reinsurance premiums assumed, by line of business, were as follows for the three months ended March 31, 2007 (in
thousands):



|                                |  |      |       |  
|------------------------------- |  | ---- | ----- | -
|                                |  | 2007 |      
|EnviroGuard                     |  | $    | 2,600 |  
|EIA liability                   |  |      | 1,156 |  
|Purchase accounting adjustments |  |      | (651  | )
|                                |  |      |       |  
|Total assumed premiums          |  | $    | 3,105 |  
|                                |  |      |       |  

Losses and Loss Adjustment Expenses

Losses and LAE for the three months ended March 31, 2007 include an increase of $13,000 related to the amortization of purchase accounting adjustments. The calendar period loss and LAE ratio includes 13.3 points
related to the amortization of purchase accounting adjustments impacting net premiums earned and losses and LAE.

Acquisition and Other Underwriting
Expenses

Acquisition and other underwriting expenses for the three months ended March 31, 2007 include a reduction of $415,000 related to the
amortization of purchase accounting adjustments. As part of its quota share reinsurance agreement with the primary insurer, Eastern Re pays the primary insurer a ceding commission based on assumed premiums. For the three months ended March 31,
2007, the ceding commission paid to the primary insurer was 30.0%.

Net Investment Income

Net investment income was $272,000 for the three months ended March 31, 2007. The average yield on the fixed income portfolio was 4.64% as of March 31, 2007.

Tax Expense

The effective tax rate for the three
months March 31, 2007 was 35.0%.

CORPORATE/OTHER

The corporate/other segment results for the three months ended March 31, 2007 include the results of operations of the Companys third party administrator and its corporate activities. This segment also includes certain
eliminations necessary to reconcile the segment information to the consolidated statements of operations. For the three months ended March 31, 2006, the corporate/other segment consists of the results of operations of ELH corporate activities.

CONSOLIDATED FINANCIAL POSITION

Consolidated assets
totaled $390.3 million at March 31, 2007, compared to $368.2 million at December 31, 2006. Cash and investments increased $6.3 million and premiums receivable increased $11.7 million. The increase in investments primarily reflects the
investment of cash from operations for the three months ended March 31, 2007. The increase in premiums receivable primarily reflects the high volume of premiums written in the workers compensation segment during the first quarter of each
year.

Consolidated liabilities totaled $213.7 million at March 31, 2007, compared to $194.5 million at December 31, 2006. The increase primarily
reflects an increase in unearned premium reserves due to the high volume of premiums written in the workers compensation insurance segment during the first quarter of each year.

Consolidated equity totaled $176.5 million at March 31, 2007, compared to $173.7 million at December 31, 2006. The increase primarily reflects net income for the three months ended March 31, 2007,
partially offset by the share repurchases.



34



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##### Table of Contents

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 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, 2007 and 2006 were as follows (unaudited, in thousands):



|                                                      |  |      |        |   |      |   |      |  
|----------------------------------------------------- |  | ---- | ------ | - | ---- | - | ---- | -
|                                                      |  | 2007 |        |   | 2006 |  
|Cash flows provided by (used in) operating activities |  | $    | 5,882  |   |      | $ | (504 | )
|Cash flows used in investing activities               |  |      | (6,429 | ) |      |   | (352 | )
|Cash flows used in financing activities               |  |      | (961   | ) |      |   |     |  
|                                                      |  |      |        |   |      |   |      |  
|Net decrease in cash and cash equivalents             |  | $    | (1,508 | ) |      | $ | (856 | )
|                                                      |  |      |        |   |      |   |      |  

The change in cash flows from operating and investing activities primarily reflects the acquisition of EHC.

The cash flows used in financing activities reflects the repurchase of the Companys common stock.

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, 2007, 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 5.0% as of March 31, 2007), 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, 2006. 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 April 2, 2007.



35



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##### Table of Contents

|Item 4. | 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 required by Exchange Act Rule 13a-15(b) 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 these disclosure controls and procedures are effective. There were
no changes in our internal control over financial reporting during the quarter ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



36



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##### Table of Contents

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 Form
10-K, SEC File No. 001-32899.



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

Issuer Purchases of Equity Securities

On February 15, 2007, the Companys Board of Directors authorized the repurchase of up to 5 percent of the Companys issued and
outstanding shares of common stock for the purpose of funding the issuance of stock under the Eastern Insurance Holdings, Inc. 2006 Stock Incentive Plan.

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



|                    |  |                                  |  |                             |       |                                                                              |        |                                                                                                             |        
|------------------- |  | -------------------------------- |  | --------------------------- | ----- | ---------------------------------------------------------------------------- | ------ | ----------------------------------------------------------------------------------------------------------- | -------
|Period              |  | Total number of shares purchased |  | Average pricepaid per share |       | Total number ofshares purchasesas part of publiclyannounced plansor
programs |        | Maximum number (or approximatedollar value) of shares that may yet be purchased under the plans or programs
|January 1-31, 2007  |  |                                 |  |                             | N/A   |                                                                              | N/A    |                                                                                                             | N/A    
|February 1-28, 2007 |  | 10,355                           |  | $                           | 14.46 |                                                                              | 10,355 |                                                                                                             | N/A    
|March 1-31, 2007    |  | 61,868                           |  | $                           | 14.52 |                                                                              | 61,868 |                                                                                                             | 495,329
|                    |  |                                  |  |                             |       |                                                                              |        |                                                                                                             |        
|Total               |  | 72,223                           |  | $                           | 14.51 |                                                                              | 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)                   
|            | 
|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)                                                                         



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##### 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 10, 2007 |  | By:                                           |  | /s/ Bruce M. Eckert                   |  | 
|                    |  |                                               |  | Bruce M. Eckert,                      |  | 
|                    |  |                                               |  | Chief Executive Officer               |  | 
|                    |  |                                               | 
|Dated: May 10, 2007 |  | By:                                           |  | /s/ Kevin M. Shook                    |  | 
|                    |  |                                               |  | Kevin M. Shook,                       |  | 
|                    |  |                                               |  | Treasurer and Chief Financial Officer |  | 



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