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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
September 30, 2006,

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.



|                            |  |                                                               
|--------------------------- |  | --------------------------------------------------------------
|COMMON STOCK (No par Value) |  | Number of Shares Outstanding as of November 9, 2006 11,350,407
|(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 |  | 26  
|                                |  |                                                                                      
|Item 3.                         |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 53  
|                                |  |                                                                                      
|Item 4.                         |  | Controls and Procedures                                                               |  | 53  
|                                | 
|PART II - 
OTHER INFORMATION    |  | 53                                                                                   
|                                |  |                                                                                      
|Item 1.                         |  | Legal Proceedings                                                                     |  | 53  
|                                |  |                                                                                      
|Item 1A.                        |  | Risk Factors                                                                          |  | 53  
|                                |  |                                                                                      
|Item 2.                         |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 53  
|                                |  |                                                                                      
|Item 3.                         |  | Defaults Upon Senior Securities                                                       |  | 53  
|                                |  |                                                                                      
|Item 4.                         |  | Submission of Matters to Vote of Security Holders                                     |  | 54  
|                                |  |                                                                                      
|Item 5.                         |  | Other Information                                                                     |  | 54  
|                                |  |                                                                                      
|Item 6.                         |  | Exhibits                                                                              |  | 54  

Eastern Insurance Holdings, Inc. is an insurance holding company formed by Eastern Life and Health Insurance
Company (formerly Educators Mutual Life Insurance Company) as part of Eastern Life and Health Insurance Companys conversion from a mutual insurance company to a stock insurance company. The stock offering of Eastern Insurance Holdings, Inc.
and the conversion of Eastern Life and Health Insurance Company was completed on June 16, 2006. Immediately following the completion of the stock offering and conversion, Eastern Insurance Holdings, Inc. and its subsidiaries acquired all of the
outstanding common stock of Eastern Holding Company, Ltd.

The financial statements of Eastern Insurance Holdings, Inc., included in Item 1 of Part I,
Financial Information, reflect the following:



| |  |  | The unaudited consolidated balance sheet as of September 30, 2006 represents the accounts of Eastern Insurance Holdings, Inc. and its wholly-owned subsidiaries, Eastern Holding
Company, Ltd. and its subsidiaries and Eastern Life and Health Insurance Company. The consolidated balance sheet as of December 31, 2005 represents the accounts of Eastern Life and Health Insurance Company.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The unaudited consolidated statements of operations for the three and nine months ended September 30, 2006 reflect the results of operations of Eastern Insurance Holdings, Inc.
and Eastern Life and Health Insurance Company for the three and nine months ended September 30, 2006 and the results of operations of Eastern Holding Company, Ltd. and its subsidiaries for the period from June 17, 2006 to
September 30, 2006. The unaudited consolidated statements of operations for the three and nine months ended September 30, 2005 reflect the results of operations of Eastern Life and Health Insurance Company.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 and per share data)



|                                                                                                   |  |                               |         |   |                  |   |        
|-------------------------------------------------------------------------------------------------- |  | ----------------------------- | ------- | - | ---------------- | - | -------
|                                                                                                   |  | (Unaudited) September 30 2006 |         |   | December 31 2005
|ASSETS                                                                                             |  |                               |         |   |                  |   |        
|                                                                                                   |  |                              
|Investments:                                                                                       |  |                               |         |   |                  |   |        
|Fixed income securities, at estimated fair value (amortized cost, $181,636; $72,608)               |  | $                             | 204,843 |   |                  | $ | 73,979 
|Equity securities, at estimated fair value (cost, $4,415)                                          |  |                               | 7,467   |   |                  |   |       
|Equity call options, at estimated fair value (cost, $2,201; $1,086)                                |  |                               | 2,779   |   |                  |   | 1,308  
|Other invested assets                                                                              |  |                               | 11,195  |   |                  |   | 2,333  
|                                                                                                   |  |                               |         |   |                  |   |        
|Total investments                                                                                  |  |                               | 226,284 |   |                  |   | 77,620 
|                                                                                                   |  |                              
|Cash and cash equivalents                                                                          |  |                               | 52,406  |   |                  |   | 4,699  
|Accrued investment income                                                                          |  |                               | 2,117   |   |                  |   | 930    
|Premiums receivable                                                                                |  |                               | 33,579  |   |                  |   | 87     
|Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses                     |  |                               | 28,114  |   |                  |   | 24,461 
|Deferred acquisition costs                                                                         |  |                               | 3,526   |   |                  |   |       
|Deferred income taxes, net                                                                         |  |                               | 2,443   |   |                  |   | 946    
|Intangible assets                                                                                  |  |                               | 8,609   |   |                  |   |       
|Goodwill                                                                                           |  |                               | 5,140   |   |                  |   |       
|Other assets                                                                                       |  |                               | 6,160   |   |                  |   | 2,482  
|                                                                                                   |  |                               |         |   |                  |   |        
|Total assets                                                                                       |  | $                             | 368,378 |   |                  | $ | 111,225
|                                                                                                   |  |                               |         |   |                  |   |        
|LIABILITIES                                                                                        |  |                               |         |   |                  |   |        
|                                                                                                   |  |                              
|Reserves for unpaid losses and loss adjustment expenses                                            |  | $                             | 125,302 |   |                  | $ | 44,136 
|Unearned premium reserves                                                                          |  |                               | 40,359  |   |                  |   | 95     
|Advance premium                                                                                    |  |                               | 990     |   |                  |   | 1,241  
|Accounts payable and accrued expenses                                                              |  |                               | 17,476  |   |                  |   | 2,689  
|Benefit plan liabilities                                                                           |  |                               | 704     |   |                  |   | 777    
|Dividends payable                                                                                  |  |                               | 6,541   |   |                  |   |       
|Loans payable                                                                                      |  |                               | 26      |   |                  |   |       
|Federal income taxes payable                                                                       |  |                               | 448     |   |                  |   | 178    
|Junior subordinated debentures                                                                     |  |                               | 8,044   |   |                  |   |       
|                                                                                                   |  |                               |         |   |                  |   |        
|Total liabilities                                                                                  |  |                               | 199,890 |   |                  | $ | 49,116 
|                                                                                                   |  |                               |         |   |                  |   |        
|Commitments and contingencies (Note 10)                                                            |  |                               |         |   |                  |   |        
|                                                                                                   |  |                              
|SHAREHOLDERS EQUITY                                                                               |  |                               |         |   |                  |   |        
|                                                                                                   |  |                              
|Series A preferred stock, par value $0, auth. shares  5,000,000; no shares issued and outstanding |  |                               |        |   |                  |   |       
|Common capital stock, par value $0, auth. shares  20,000,000; issued and outstanding - 11,350,407 |  |                               |        |   |                  |   |       
|Unearned ESOP compensation                                                                         |  |                               | (7,258  | ) |                  |   |       
|Additional paid in capital                                                                         |  |                               | 108,428 |   |                  |   |       
|Retained earnings                                                                                  |  |                               | 64,954  |   |                  |   | 61,205 
|Accumulated other comprehensive income, net                                                        |  |                               | 2,364   |   |                  |   | 904    
|                                                                                                   |  |                               |         |   |                  |   |        
|Total shareholders equity                                                                         |  |                               | 168,488 |   |                  |   | 62,109 
|                                                                                                   |  |                               |         |   |                  |   |        
|Total liabilities and shareholders equity                                                         |  | $                             | 368,378 |   |                  | $ | 111,225
|                                                                                                   |  |                               |         |   |                  |   |        

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

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



|                                                                                                                             |  |                                          |        |      |                                         |        |      |  |      |        |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------ | ---- | --------------------------------------- | ------ | ---- |  | ---- | ------ |  | - | ------ | -
|                                                                                                                             |  | For the Three Months Ended September 30, |        |      | For the Nine Months Ended September 30, |       
|                                                                                                                             |  | 2006                                     |        | 2005 |                                         |        | 2006 |  | 2005 |       
|REVENUE                                                                                                                      |  |                                          |        |      |                                         |        |      |  |      |        |  |   |        |  
|Net premiums earned                                                                                                          |  | $                                        | 26,678 |      | $                                       | 9,683  |      |  | $    | 45,859 |  | $ | 29,342 |  
|Net investment income                                                                                                        |  |                                          | 2,974  |      |                                         | 954    |      |  |      | 5,269  |  |   | 2,816  |  
|Net realized investment gains                                                                                                |  |                                          | 711    |      |                                         | 423    |      |  |      | 1,632  |  |   | 336    |  
|Other revenue                                                                                                                |  |                                          | 179    |      |                                         | 327    |      |  |      | 202    |  |   | 874    |  
|                                                                                                                             |  |                                          |        |      |                                         |        |      |  |      |        |  |   |        |  
|Total revenue                                                                                                                |  |                                          | 30,542 |      |                                         | 11,387 |      |  |      | 52,962 |  |   | 33,368 |  
|                                                                                                                             |  |                                          |        |      |                                         |        |      |  |      |        |  |   |        |  
|EXPENSES                                                                                                                     |  |                                          |        |      |                                         |        |      |  |      |        |  |   |        |  
|Losses and loss adjustment expenses incurred                                                                                 |  |                                          | 17,432 |      |                                         | 5,916  |      |  |      | 29,820 |  |   | 20,805 |  
|Acquisition and other underwriting expenses                                                                                  |  |                                          | 1,709  |      |                                         | 1,705  |      |  |      | 4,141  |  |   | 5,151  |  
|Other expenses                                                                                                               |  |                                          | 5,241  |      |                                         | 2,551  |      |  |      | 10,223 |  |   | 7,627  |  
|Amortization of intangibles                                                                                                  |  |                                          | 511    |      |                                         |       |      |  |      | 588    |  |   |       |  
|Policyholder dividend expense                                                                                                |  |                                          | 113    |      |                                         |       |      |  |      | 184    |  |   |       |  
|Segregated portfolio dividend expense                                                                                        |  |                                          | 1,521  |      |                                         |       |      |  |      | 1,646  |  |   |       |  
|                                                                                                                             |  |                                          |        |      |                                         |        |      |  |      |        |  |   |        |  
|Total expenses                                                                                                               |  |                                          | 26,527 |      |                                         | 10,172 |      |  |      | 46,602 |  |   | 33,583 |  
|                                                                                                                             |  |                                          |        |      |                                         |        |      |  |      |        |  |   |        |  
|Income (loss) before income taxes                                                                                            |  |                                          | 4,015  |      |                                         | 1,215  |      |  |      | 6,360  |  |   | (215   | )
|Income tax expense                                                                                                           |  |                                          | 1,713  |      |                                         | 604    |      |  |      | 2,611  |  |   | 287    |  
|                                                                                                                             |  |                                          |        |      |                                         |        |      |  |      |        |  |   |        |  
|Net income (loss)                                                                                                            |  | $                                        | 2,302  |      | $                                       | 611    |      |  | $    | 3,749  |  | $ | (502   | )
|                                                                                                                             |  |                                          |        |      |                                         |        |      |  |      |        |  |   |        |  
|Other comprehensive income (loss)                                                                                            |  |                                          |        |      |                                         |        |      |  |      |        |  |   |        |  
|Unrealized holding gains (losses) arising during period, net of tax                                                          |  |                                          | 2,474  |      |                                         | (975   | )    |  |      | 1,906  |  |   | (864   | )
|Less: Reclassification adjustment for gains (losses) included in net income (loss), net of tax of $129, $130, $230, and $235 |  |                                          | 251    |      |                                         | (254   | )    |  |      | 446    |  |   | 456    |  
|                                                                                                                             |  |                                          |        |      |                                         |        |      |  |      |        |  |   |        |  
|Other comprehensive income (loss)                                                                                            |  |                                          | 2,223  |      |                                         | (721   | )    |  |      | 1,460  |  |   | (1,320 | )
|                                                                                                                             |  |                                          |        |      |                                         |        |      |  |      |        |  |   |        |  
|Comprehensive income (loss)                                                                                                  |  | $                                        | 4,525  |      | $                                       | (110   | )    |  | $    | 5,209  |  | $ | (1,822 | )
|                                                                                                                             |  |                                          |        |      |                                         |        |      |  |      |        |  |   |        |  



|                                                            |  |                                      |       |                                                         |   |      
|----------------------------------------------------------- |  | ------------------------------------ | ----- | ------------------------------------------------------- | - | -----
|                                                            |  | Three Months EndedSeptember 30, 2006 |       | For the Period from June 17, 2006 to September 30, 2006
|Earnings per share (See Note 6):                            |  |                                      |       |                                                         |   |      
|Net income after conversion and acquisition                 |  | $                                    | 2,302 |                                                         | $ | 2,613
|Basic earnings per share after conversion and acquisition   |  | $                                    | 0.22  |                                                         | $ | 0.25 
|Diluted earnings per share after conversion and acquisition |  | $                                    | 0.21  |                                                         | $ | 0.24 

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 and Nine Months Ended September 30, 2006

(Unaudited, in thousands)

Three Months Ended September 30, 2006



|                                       |  |                      |   |                            |   |        |                            |  |                   |         |                                                    |   |        |  |   |       |  |   |         |  
|-------------------------------------- |  | -------------------- | - | -------------------------- | - | ------ | -------------------------- |  | ----------------- | ------- | -------------------------------------------------- | - | ------ |  | - | ----- |  | - | ------- | -
|                                       |  | Common Capital Stock |   | Unearned ESOP Compensation |   |        | Additional Paid-In Capital |  | Retained Earnings |         | Accumulated Other Comprehensive Income, Net of
Tax |   | Total  | 
|Balance, July 1, 2006                  |  | $                    |  |                            | $ | (7,446 | )                          |  | $                 | 108,355 |                                                    | $ | 62,652 |  | $ | 141   |  | $ | 163,702 |  
|ESOP shares released                   |  |                      |  |                            |   | 188    |                            |  |                   | 73      |                                                    |   |       |  |   |      |  |   | 261     |  
|Net income                             |  |                      |  |                            |   |       |                            |  |                   |        |                                                    |   | 2,302  |  |   |      |  |   | 2,302   |  
|Other comprehensive income, net of tax |  |                      |  |                            |   |       |                            |  |                   |        |                                                    |   |       |  |   | 2,223 |  |   | 2,223   |  
|                                       |  |                      |   |                            |   |        |                            |  |                   |         |                                                    |   |        |  |   |       |  |   |         |  
|Balance, September 30, 2006            |  | $                    |  |                            | $ | (7,258 | )                          |  | $                 | 108,428 |                                                    | $ | 64,954 |  | $ | 2,364 |  | $ | 168,488 |  
|                                       |  |                      |   |                            |   |        |                            |  |                   |         |                                                    |   |        |  |   |       |  |   |         |  
|                                      
|Nine Months Ended September 30, 2006   | 
|                                       |  |                      |   |                            |   |       
|                                       |  | Common Capital Stock |   | Unearned ESOP Compensation |   |        | Additional Paid-In Capital |  | Retained Earnings |         | Accumulated Other Comprehensive Income, Net of
Tax |   | Total  | 
|Balance, January 1, 2006               |  | $                    |  |                            | $ |       |                            |  | $                 |        |                                                    | $ | 61,205 |  | $ | 904   |  | $ | 62,109  |  
|Net proceeds from stock offering       |  |                      |  |                            |   |       |                            |  |                   | 69,597  |                                                    |   |       |  |   |      |  |   | 69,597  |  
|Unearned ESOP compensation             |  |                      |  |                            |   | (7,475 | )                          |  |                   |        |                                                    |   |       |  |   |      |  |   | (7,475  | )
|ESOP shares released                   |  |                      |  |                            |   | 217    |                            |  |                   | 77      |                                                    |   |       |  |   |      |  |   | 294     |  
|Issuance of common stock               |  |                      |  |                            |   |       |                            |  |                   | 38,754  |                                                    |   |       |  |   |      |  |   | 38,754  |  
|Net income                             |  |                      |  |                            |   |       |                            |  |                   |        |                                                    |   | 3,749  |  |   |      |  |   | 3,749   |  
|Other comprehensive income, net of tax |  |                      |  |                            |   |       |                            |  |                   |        |                                                    |   |       |  |   | 1,460 |  |   | 1,460   |  
|                                       |  |                      |   |                            |   |        |                            |  |                   |         |                                                    |   |        |  |   |       |  |   |         |  
|Balance, September 30, 2006            |  | $                    |  |                            | $ | (7,258 | )                          |  | $                 | 108,428 |                                                    | $ | 64,954 |  | $ | 2,364 |  | $ | 168,488 |  
|                                       |  |                      |   |                            |   |        |                            |  |                   |         |                                                    |   |        |  |   |       |  |   |         |  

See accompanying notes to unaudited consolidated financial statements.



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##### Table of Contents

EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Three and Nine Months Ended September 30, 2005

(Unaudited, in thousands)

Three Months Ended September 30, 2005



|                                     |  |                   |        |                                                    |   |       |       |  |   |        |  
|------------------------------------ |  | ----------------- | ------ | -------------------------------------------------- | - | ----- | ----- |  | - | ------ | -
|                                     |  | Retained Earnings |        | Accumulated Other Comprehensive Income, Net of
Tax |   |       | Total | 
|Balance, July 1, 2005                |  | $                 | 58,964 |                                                    | $ | 1,864 |       |  | $ | 60,828 |  
|Net income                           |  |                   | 611    |                                                    |   |      |       |  |   | 611    |  
|Other comprehensive loss, net of tax |  |                   |       |                                                    |   | (721  | )     |  |   | (721   | )
|                                     |  |                   |        |                                                    |   |       |       |  |   |        |  
|Balance, September 30, 2005          |  | $                 | 59,575 |                                                    | $ | 1,143 |       |  | $ | 60,718 |  
|                                     |  |                   |        |                                                    |   |       |       |  |   |        |  

Nine Months Ended September 30, 2005



|                                     |  |                   |        |   |                                                    |   |        |       |  |   |        |  
|------------------------------------ |  | ----------------- | ------ | - | -------------------------------------------------- | - | ------ | ----- |  | - | ------ | -
|                                     |  | Retained Earnings |        |   | Accumulated Other Comprehensive Income, Net of
Tax |   |        | Total | 
|Balance, January 1, 2005             |  | $                 | 60,077 |   |                                                    | $ | 2,463  |       |  | $ | 62,540 |  
|Net loss                             |  |                   | (502   | ) |                                                    |   |       |       |  |   | (502   | )
|Other comprehensive loss, net of tax |  |                   |       |   |                                                    |   | (1,320 | )     |  |   | (1,320 | )
|                                     |  |                   |        |   |                                                    |   |        |       |  |   |        |  
|Balance, September 30, 2005          |  | $                 | 59,575 |   |                                                    | $ | 1,143  |       |  | $ | 60,718 |  
|                                     |  |                   |        |   |                                                    |   |        |       |  |   |        |  

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 Nine Months Ended September 30, 2006 and 2005

(Unaudited, in thousands)



|                                                                                                   |  |      |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                   |  | 2006 |         |   | 2005 |  
|Cash flows from operating activities:                                                              |  |      |         |   |      |   |         |  
|Net income (loss)                                                                                  |  | $    | 3,749   |   |      | $ | (502    | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |      |         |   |      |   |         |  
|Amortization of bond premium/discount                                                              |  |      | 361     |   |      |   | 132     |  
|Gain on sale of investments                                                                        |  |      | (1,390  | ) |      |   | (692    | )
|Unrealized loss on equity call options                                                             |  |      | (242    | ) |      |   | 356     |  
|Equity in income of limited partnerships                                                           |  |      | (169    | ) |      |   | (67     | )
|Recognition of deferred gain on sale of building                                                   |  |      | (87     | ) |      |   | (87     | )
|Deferred tax provision                                                                             |  |      | 132     |   |      |   | 99      |  
|Stock compensation                                                                                 |  |      | 294     |   |      |   |        |  
|Intangible asset amortization                                                                      |  |      | 588     |   |      |   |         |  
|Changes in assets and liabilities:                                                                 |  |      |         |   |      |   |         |  
|Accrued investment income                                                                          |  |      | 219     |   |      |   | 97      |  
|Premiums receivable                                                                                |  |      | (4,456  | ) |      |   | (11     | )
|Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses                     |  |      | 2,955   |   |      |   | (723    | )
|Deferred acquisition costs                                                                         |  |      | (3,526  | ) |      |   |        |  
|Other assets                                                                                       |  |      | (162    | ) |      |   | (1,382  | )
|Reserve for unpaid losses and loss adjustment expenses                                             |  |      | (181    | ) |      |   | 582     |  
|Unearned and advance premium                                                                       |  |      | 9,422   |   |      |   | 153     |  
|Accounts payable and accrued expenses                                                              |  |      | 2,788   |   |      |   | 552     |  
|Benefit plan liabilities                                                                           |  |      | (72     | ) |      |   | 49      |  
|Federal income taxes recoverable/payable                                                           |  |      | 367     |   |      |   | 187     |  
|Dividends payable                                                                                  |  |      | (1,566  | ) |      |   |        |  
|                                                                                                   |  |      |         |   |      |   |         |  
|Net cash provided by (used in) operating activities                                                |  |      | 9,024   |   |      |   | (1,257  | )
|                                                                                                   |  |      |         |   |      |   |         |  
|Cash flows from investing activities:                                                              |  |      |         |   |      |   |         |  
|Purchase of investments                                                                            |  |      | (48,309 | ) |      |   | (11,518 | )
|Proceeds from sale of fixed income securities                                                      |  |      | 27,884  |   |      |   | 5,214   |  
|Proceeds from maturities/calls of fixed income securities                                          |  |      | 12,844  |   |      |   | 4,422   |  
|Acquisition of Eastern Holding Company, Ltd., net of cash received                                 |  |      | (14,149 | ) |      |   |        |  
|Principal payments received on mortgage loans                                                      |  |      | 14      |   |      |   | 107     |  
|                                                                                                   |  |      |         |   |      |   |         |  
|Net cash used in investing activities                                                              |  |      | (21,716 | ) |      |   | (1,775  | )
|                                                                                                   |  |      |         |   |      |   |         |  
|Cash flows from financing activities:                                                              |  |      |         |   |      |   |         |  
|Proceeds from initial public offering, net of expenses                                             |  |      | 62,122  |   |      |   |        |  
|Repayment of long-term debt                                                                        |  |      | (1,723  | ) |      |   |        |  
|                                                                                                   |  |      |         |   |      |   |         |  
|Net cash provided by financing activities                                                          |  |      | 60,399  |   |      |   |        |  
|                                                                                                   |  |      |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                                               |  |      | 47,707  |   |      |   | (3,032  | )
|Cash and cash equivalents, beginning of period                                                     |  |      | 4,699   |   |      |   | 10,960  |  
|                                                                                                   |  |      |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                                           |  | $    | 52,406  |   |      | $ | 7,928   |  
|                                                                                                   |  |      |         |   |      |   |         |  
|Supplemental disclosure of cash flow information:                                                  |  |      |         |   |      |   |         |  
|Cash paid for income taxes                                                                         |  | $    | 485     |   |      | $ |        |  

See accompanying notes to unaudited consolidated financial statements.



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##### Table of Contents

Eastern Insurance Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

(Unaudited, dollars in thousands except 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 in the accompanying unaudited consolidated balance sheet as of September 30, 2006.

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, EIHI or 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 is subject to federal income tax on a prospective basis.

EIHI operates in five segments: workers compensation insurance, group benefits insurance, specialty reinsurance, segregated portfolio cell
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.

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 42 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.

Segregated Portfolio
Cell Reinsurance

EIHI 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.

Corporate/Other

The corporate/other segment consists of the
operating results of Employers Alliance, EIHI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, the run-off operations of ELHs group medical insurance operations, and certain eliminations necessary to reconcile the segment information to the consolidated statements of
operations and comprehensive income (loss). Prior to January 1, 2006, the corporate/other segment included the operating results of ELHs general agency operations, IBSi. IBSi was sold by ELH on October 31, 2005 (See
Note 9).



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##### Table of Contents

These segments are more fully described in Note 8.

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 EIHI 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. For further information, refer to the consolidated financial statements and notes thereto of ELH
and EHC included in EIHIs Registration Statement on Form S-1, filed with the U.S. Securities and Exchange Commission, effective April 27, 2006.

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, current and
deferred income taxes, and benefit plan liabilities. Actual results could differ from these estimates.

Cash and Cash Equivalents

EIHI 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

EIHI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,
including convertible 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. EIHI monitors its fixed income securities for unrealized losses that appear
to be other-than-temporary. EIHI 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, EIHI reduces the book value of the security to the 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.

Equity Securities

EIHI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.



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##### Table of Contents

Realized gains or losses are based on cost and are computed using the specific identification method. EIHI monitors its
equity securities for unrealized losses that appear to be other-than-temporary. EIHI 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, EIHI reduces the cost of the security to the 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.

Equity Call Options

Equity call options represent the estimated fair value of the stock options embedded in EIHIs convertible bond portfolio. The estimated fair value of the fixed
income component of the convertible bond is included in fixed income securities. The estimated fair value of equity call options is determined by deducting the theoretical bond value (which is determined using spread information on non-convertible
issues from the same issuer) from the estimated fair value of the convertible bond (which is determined based on quoted market prices obtained through an independent pricing service). The equity call option is considered an embedded derivative and
changes in the estimated fair value of the equity call options are reported as realized gains or losses in the consolidated statements of operations and comprehensive income (loss).

Other Invested Assets

Other invested assets consist of investments in limited partnerships, equity
securities, 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 EIHIs proportionate share of its limited partnership investments are included in net investment income in the consolidated statements of operations and comprehensive income (loss).

Equity securities included in other invested assets consist of securities of a company in the banking industry that are traded on the Over-the-Counter Bulletin Board on
a limited basis. Quoted market values are readily available for these securities, and the securities are recorded in the consolidated balance sheet at estimated fair value.

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

Premiums

Premiums generated by EIHI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.

Premiums generated by EIHI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 EIHIs specialty reinsurance segment are
estimated based on information provided by the ceding companies. 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 for the three and nine months ended September 30, 2006 primarily consists of service revenues related to claims handling and risk management services provided by Employers Alliance. Claims handling and risk management
service revenue is earned over the term of the related contracts in proportion to the actual services rendered.



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##### Table of Contents

Other revenue for the three and nine months ended September 30, 2005 consists of sales and marketing fees earned by
IBSiunder contracts with unaffiliated insurance carriers. Prior to the sale of IBSion October 31, 2005, sales and marketing fees were generally recognized as revenue in the period in which the insurance policy was effective.
IBSi also earned bonus revenue for meeting agreed-upon production levels with certain external carriers. Bonus revenue was estimated and accrued in the period in which the agreed-upon production levels were met.

Losses and Loss Adjustment Expenses

A liability is established for
the estimated unpaid losses and loss adjustment expenses (LAE) of EIHI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.

A liability is established for the
estimated unpaid losses and LAE of EIHI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.

A liability is established for the estimated unpaid losses and loss adjustment
expenses of EIHI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 2006 and 2005 was 4.75% and 4.25%, respectively. The liability for incurred but not reported
claims is estimated based on historical patterns of claims incurred as a percent of in-force premium at the balance sheet date.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 a 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 EIHI 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 at 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Management believes that its reserve for unpaid losses and loss
adjustment expenses is adequate at September 30, 2006. 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 EIHIs ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded at September 30, 2006, the related adjustments could have a material adverse effect on EIHIs financial
condition, results of operations or liquidity.

Reinsurance

In the ordinary course of business, EIHI 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 EIHI of its obligation to its insureds. Premiums and claims under EIHI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. EIHI has certain reinsurance contracts that provide for return premium based on the actual loss experience of the written and reinsured business. EIHI 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.



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##### Table of Contents

Policy Acquisition Costs

Policy acquisition costs consist 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.

EIHIs group insurance policies written by the group benefits insurance segment 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 EIHIs group benefits insurance
premiums are earned at the balance sheet date. Based on the nature of EIHIs group benefits insurance policies, costs related to the acquisition of new and renewal business are expensed as incurred.

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

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

Policyholder
Dividends

Eastern Alliance and Allied Eastern issue 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

Eastern Alliance and
Allied Eastern are 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. EIHIs assessments
consist primarily of charges from the Workers Compensation Security Fund of Pennsylvania (Security Fund). The Security Fund serves as a guaranty fund to provide claim payments for those workers entitled to workers
compensation benefits when the insurance company originally providing the benefits was placed into liquidation by a court. Security Fund assessments are established on an actuarial basis to provide an amount sufficient to pay the outstanding and
anticipated claims in a timely manner, to meet the costs of the Pennsylvania Insurance Department 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 written premium is made to all companies licensed to write workers compensation in Pennsylvania. Eastern Alliance and Allied Eastern
recognize 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 Statement of Financial Accounting Standards (SFAS) No. 144. (SFAS 144), Accounting for Impairment or Disposal of Long-Lived Assets.



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Employee Stock Ownership Plan

EIHI 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 EIHIs
common stock during the period. The estimated fair value of unearned ESOP shares is calculated based on the average price of EIHIs common stock for the period. For purposes of calculating earnings per share, EIHI includes the weighted average
of ESOP shares committed to be released for the period.

Recent Accounting Pronouncements

SFAS 158

In September 2006, the Financial Accounting Standards
Board (FASB) issued SFAS 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment to FASB Statements No. 87, 88, 106, and 132(R). SFAS 158 requires employers to recognize
the funded status of a benefit plan in its statement of financial position, with changes in the funded status occurring during the year reported as a component of other comprehensive income or loss. The funded status of a benefit plan represents the
difference between plan assets at fair value and the benefit obligation. For defined benefit pension plans and postretirement benefit plans, the benefit obligation is the projected benefit obligation and accumulated postretirement benefit
obligation, respectively. In addition to the above changes, SFAS 158 requires that plan assets and benefit obligations be measured as of the date of an employers fiscal year-end. The recognition and disclosure provisions of SFAS 158 is
effective for fiscal years ending December 31, 2006. The requirement to measure plan assets and benefit obligations as of the end of an employers fiscal year-end is effective for fiscal years ending after December 31, 2008.
Management has not completed its evaluation of the impact of SFAS 158 on our consolidated financial condition at December 31, 2006. If SFAS 158 had been effective December 31, 2005, the prepaid asset related to our defined benefit pension
plan would have decreased $26,000 and our liability related to our defined benefit postretirement plan would have decreased $307,000, resulting in a net increase to accumulated other comprehensive income of $281,000.

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. We expect that SFAS 157 will not have a material effect on our consolidated financial condition or
results of operations.

SFAS 155

In February
2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140. SFAS 155 amends the accounting requirements for certain financial instruments covered by FASB
Statements No. 133 and 140, including financial instruments containing embedded derivatives. SFAS 155 amends FASB Statement No. 133 by permitting fair value remeasurement of any hybrid financial instrument that contains an embedded
derivative. Under current accounting guidance contained in FASB Statement No. 133, embedded derivatives must be bifurcated from their host contract and accounted for separately. SFAS 155 is effective for all financial instruments acquired,
issued or subject to a remeasurement event occurring after the beginning of an entitys first fiscal year that begins after September 15, 2006. The fair value election for hybrid financial instruments may also be applied upon adoption of
SFAS 155 to those hybrid financial instruments held by an entity and bifurcated under FASB Statement No. 133 prior to the adoption of SFAS 155. Any difference between the total carrying amount of the individual components of an existing
bifurcated hybrid financial instrument and the fair value of the combined hybrid financial instrument must be recognized as a cumulative effect adjustment to beginning retained earnings. Restatement of prior periods is prohibited. EIHI currently
holds convertible debt securities that require bifurcation under FASB Statement No. 133. Management is currently evaluating the impact to its consolidated financial statements of adopting the fair value provisions of SFAS 155 as they relate to
EIHIs convertible bond portfolio.

SOP 05-1

In September 2005, the American Institute of Certified Public Accountants (AICPA) released Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or
Exchanges of Insurance Contracts (SOP 05-1). SOP 05-1 requires identification of transactions that result in a substantial change in an insurance contract. Transactions subject to review include internal contract exchanges,
contract modifications via amendment, rider or endorsement, and elections of benefits, features or rights contained within the contract. If determined that a substantial change has occurred, the related unamortized deferred policy acquisition costs,
unearned premiums and other related balances must be written off. The Company will adopt SOP 05-1 on January 1, 2007. We expect that SOP 05-1 will not have a material effect on our consolidated financial condition or results of operations.



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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
provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. Management has not completed its evaluation of the impact of FIN 48 on EIHIs consolidated financial condition or results of operations.

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 3,875,407 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 $636,000.
In connection with the acquisition of EHC, the purchase price was allocated to the estimated fair values of the acquired assets and liabilities as follows (in thousands):



|                                                                                             |  |                           |        
|-------------------------------------------------------------------------------------------- |  | ------------------------- | -------
|                                                                                             |  | (Unaudited) June 16, 2006
|ASSETS                                                                                       |  |                           |        
|                                                                                             | 
|Investments and cash                                                                         |  | $                         | 162,251
|Accrued investment income                                                                    |  |                           | 1,405  
|Premiums receivable                                                                          |  |                           | 28,391 
|Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses               |  |                           | 7,253  
|Deferred income taxes, net                                                                   |  |                           | 2,317  
|Deferred acquisition costs                                                                   |  |                           |       
|Prepaid reinsurance                                                                          |  |                           |       
|Other assets                                                                                 |  |                           | 4,879  
|                                                                                             |  |                           |        
|Total assets                                                                                 |  | $                         | 206,496
|                                                                                             |  |                           |        
|LIABILITIES                                                                                  |  |                           |        
|                                                                                             | 
|Reserves for unpaid losses and loss adjustment expenses                                      |  | $                         | 81,346 
|Unearned premium reserves                                                                    |  |                           | 30,004 
|Accounts payable and accrued expenses                                                        |  |                           | 12,017 
|Dividends payable                                                                            |  |                           | 4,585  
|Shareholder dividend payable                                                                 |  |                           | 3,522  
|Loans payable                                                                                |  |                           | 1,750  
|Junior subordinated debentures                                                               |  |                           | 8,044  
|                                                                                             |  |                           |        
|Total liabilities                                                                            |  | $                         | 141,268
|                                                                                             |  |                           |        
|Estimated fair value of net assets acquired                                                  |  | $                         | 65,228 
|                                                                                             |  |                           |        
|Purchase price for EHC                                                                       |  | $                         | 78,929 
|Direct acquisition expenses                                                                  |  |                           | 636    
|                                                                                             |  |                           |        
|Adjusted purchase price for EHC                                                              |  |                           | 79,565 
|                                                                                             | 
|Estimated fair value of net assets acquired                                                  |  |                           | 65,228 
|                                                                                             |  |                           |        
|Excess of adjusted purchase price over the net fair value of assets and liabilities acquired |  | $                         | 14,337 
|                                                                                             |  |                           |        

The transaction was accounted for using the purchase method of accounting in accordance with SFAS 141,
Business Combinations.

In connection with the acquisition of EHC, the assets and liabilities acquired by EIHI were adjusted to fair value. The
most significant adjustments were as follows:



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The fair value of the reserve for unpaid losses and loss adjustment expenses was estimated by discounting the gross
reserves and applying a risk margin to the gross reserves. EHC discounted the reserve for unpaid losses and loss adjustment expenses based on the present value of the expected underlying cash flows using a risk-free interest rate, which approximated
the U.S. Treasury rate on the acquisition date. The discounting pattern was developed by EHCs actuarial department based on historical loss data. A risk margin was applied to the discounted reserve for unpaid losses and loss adjustment
expenses to reflect managements estimate of the cost EHC would incur to reinsure the full amount of its unpaid losses and loss adjustment expenses with a third-party reinsurer. This risk margin was based upon managements assessment of
the inherent uncertainty in reserving for unpaid losses and loss adjustment expenses and their knowledge of the reinsurance marketplace. As a result of these adjustments, the reserve for unpaid losses and loss adjustment expenses was increased by
$2.4 million as of June 16, 2006.

As of the acquisition date, EHC adjusted its net unearned premium reserves to fair value by
(1) discounting the unearned premium reserves and (2) applying a risk margin to the unearned premium reserves. EHC discounted the unearned premium reserves based on the present value of the expected underlying cash flows using a risk-free
interest rate, which approximated the U.S. Treasury rate on the acquisition date. The discounting pattern was developed by EHCs actuarial department based on historical loss data. As a result of these adjustments, unearned premium
reserves were reduced by $12.9 million as of June 16, 2006.

Acquisition and other underwriting expenses were decreased by $6.8 million to
exclude deferred acquisition costs. Deferred acquisition costs consisting primarily of commissions and premium taxes, which vary with and are primarily related to the production of new business, are deferred and amortized to achieve a matching of
revenue and expenses.

The following tables present unaudited pro forma income statement information for the three and nine months ended September 30,
2006 and 2005 as if the stock offering, conversion and acquisition of EHC had taken place on January 1, 2006 and 2005, respectively (in thousands, except share and per share data):



|                                             |  |                                                                      |            |                                                                     |   |            |  |      |            |  |   |           
|-------------------------------------------- |  | -------------------------------------------------------------------- | ---------- | ------------------------------------------------------------------- | - | ---------- |  | ---- | ---------- |  | - | ----------
|                                             |  | (Unaudited) Pro Forma Three Months
Ended September 30, 2006 and 2005 |            | (Unaudited) Pro Forma Nine Months
Ended September 30, 2006 and 2005
|                                             |  | 2006                                                                 |            | 2005                                                                |   | 2006       |  | 2005
|Revenue:                                     |  |                                                                      |            |                                                                     |   |            |  |      |            |  |   |           
|Net premiums earned                          |  | $                                                                    | 29,749     |                                                                     | $ | 28,389     |  | $    | 81,277     |  | $ | 79,444    
|Net investment income                        |  |                                                                      | 2,395      |                                                                     |   | 2,174      |  |      | 7,340      |  |   | 6,072     
|Net realized investment gains                |  |                                                                      | 711        |                                                                     |   | 355        |  |      | 2,053      |  |   | 476       
|Other revenue                                |  |                                                                      | 179        |                                                                     |   | 499        |  |      | 470        |  |   | 1,357     
|                                             |  |                                                                      |            |                                                                     |   |            |  |      |            |  |   |           
|Total revenue                                |  |                                                                      | 33,034     |                                                                     |   | 31,417     |  |      | 91,140     |  |   | 87,349    
|                                             |  |                                                                      |            |                                                                     |   |            |  |      |            |  |   |           
|Expenses:                                    |  |                                                                      |            |                                                                     |   |            |  |      |            |  |   |           
|Losses and loss adjustment expenses incurred |  |                                                                      | 17,432     |                                                                     |   | 12,861     |  |      | 51,966     |  |   | 52,912    
|Acquisition and other underwriting expenses  |  |                                                                      | 3,446      |                                                                     |   | 3,872      |  |      | 6,908      |  |   | 6,876     
|Other expenses                               |  |                                                                      | 4,941      |                                                                     |   | 5,129      |  |      | 17,433     |  |   | 16,190    
|Amortization of intangibles                  |  |                                                                      | 501        |                                                                     |   | 501        |  |      | 1,503      |  |   | 1,503     
|Policyholder dividend expense                |  |                                                                      | 113        |                                                                     |   | 99         |  |      | 351        |  |   | 190       
|Segregated portfolio dividend expense        |  |                                                                      | 1,503      |                                                                     |   | 269        |  |      | 3,067      |  |   | 544       
|                                             |  |                                                                      |            |                                                                     |   |            |  |      |            |  |   |           
|Total expenses                               |  |                                                                      | 27,936     |                                                                     |   | 22,731     |  |      | 81,228     |  |   | 78,215    
|                                             |  |                                                                      |            |                                                                     |   |            |  |      |            |  |   |           
|Income before income taxes                   |  |                                                                      | 5,098      |                                                                     |   | 8,686      |  |      | 9,912      |  |   | 9,134     
|Income tax expense                           |  |                                                                      | 2,173      |                                                                     |   | 3,301      |  |      | 4,430      |  |   | 4,050     
|                                             |  |                                                                      |            |                                                                     |   |            |  |      |            |  |   |           
|Net income                                   |  | $                                                                    | 2,925      |                                                                     | $ | 5,385      |  | $    | 5,482      |  | $ | 5,084     
|                                             |  |                                                                      |            |                                                                     |   |            |  |      |            |  |   |           
|Pro forma earnings per share (EPS):          |  |                                                                      |            |                                                                     |   |            |  |      |            |  |   |           
|Basic shares outstanding                     |  |                                                                      | 10,649,626 |                                                                     |   | 10,649,626 |  |      | 10,630,938 |  |   | 10,630,938
|Basis EPS                                    |  | $                                                                    | 0.27       |                                                                     | $ | 0.51       |  | $    | 0.52       |  | $ | 0.48      
|                                             |  |                                                                      |            |                                                                    
|Diluted shares outstanding                   |  |                                                                      | 10,955,725 |                                                                     |   | 10,955,725 |  |      | 10,937,037 |  |   | 10,937,037
|Diluted EPS                                  |  | $                                                                    | 0.27       |                                                                     | $ | 0.49       |  | $    | 0.50       |  | $ | 0.46      



15



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##### Table of Contents

Unaudited proforma segment results, as if the conversion, stock offering and acquisition of EHC had taken place on
January 1, 2006, for the three months ended September 30, 2006 were as follows (in thousands):

Unaudited Proforma Segment Results

For the Three Months Ended September 30, 2006



|                                             |  |                                 |        |                          |   |                       |  |                                       |       |                  |   |       |       |   |       |   |  |   |       
|-------------------------------------------- |  | ------------------------------- | ------ | ------------------------ | - | --------------------- |  | ------------------------------------- | ----- | ---------------- | - | ----- | ----- | - | ----- | - |  | - | ------
|                                             |  | Workers Compensation Insurance |        | Group Benefits Insurance |   | Specialty Reinsurance |  | Segregated Portfolio Cell Reinsurance |       | Corporate/ Other |   |       | Total
|Revenue:                                     |  |                                 |        |                          |   |                       |  |                                       |       |                  |   |       |       |   |       |   |  |   |       
|Net premiums earned                          |  | $                               | 12,527 |                          | $ | 8,263                 |  | $                                     | 3,150 |                  | $ | 5,809 |       | $ |      |   |  | $ | 29,749
|Net investment income                        |  |                                 | 956    |                          |   | 790                   |  |                                       | 351   |                  |   | 234   |       |   | 64    |   |  |   | 2,395 
|Net realized investment gains                |  |                                 | 9      |                          |   | 367                   |  |                                       | 23    |                  |   | 315   |       |   | (3    | ) |  |   | 711   
|Other revenue                                |  |                                 |       |                          |   |                      |  |                                       | 136   |                  |   |      |       |   | 43    |   |  |   | 179   
|                                             |  |                                 |        |                          |   |                       |  |                                       |       |                  |   |       |       |   |       |   |  |   |       
|Total revenue                                |  |                                 | 13,492 |                          |   | 9,420                 |  |                                       | 3,660 |                  |   | 6,358 |       |   | 104   |   |  |   | 33,034
|                                             |  |                                 |        |                          |   |                       |  |                                       |       |                  |   |       |       |   |       |   |  |   |       
|Expenses:                                    |  |                                 |        |                          |   |                       |  |                                       |       |                  |   |       |       |   |       |   |  |   |       
|Losses and loss adjustment expenses incurred |  |                                 | 7,663  |                          |   | 5,009                 |  |                                       | 1,938 |                  |   | 2,823 |       |   | (1    | ) |  |   | 17,432
|Acquisition and other underwriting expenses  |  |                                 | 802    |                          |   | 1,251                 |  |                                       | 725   |                  |   | 1,620 |       |   | (952  | ) |  |   | 3,446 
|Other expenses                               |  |                                 | 1,602  |                          |   | 1,513                 |  |                                       | 167   |                  |   | 66    |       |   | 1,593 |   |  |   | 4,941 
|Amortization of intangibles                  |  |                                 |       |                          |   |                      |  |                                       |      |                  |   |       |       |   | 501   |   |  |   | 501   
|Policyholder dividend expense                |  |                                 | 113    |                          |   |                      |  |                                       |      |                  |   |      |       |   |      |   |  |   | 113   
|Segregated portfolio dividend expense        |  |                                 |       |                          |   |                      |  |                                       |      |                  |   | 1,849 |       |   | (346  | ) |  |   | 1,503 
|                                             |  |                                 |        |                          |   |                       |  |                                       |       |                  |   |       |       |   |       |   |  |   |       
|Total expenses                               |  |                                 | 10,180 |                          |   | 7,773                 |  |                                       | 2,830 |                  |   | 6,358 |       |   | 795   |   |  |   | 27,936
|                                             |  |                                 |        |                          |   |                       |  |                                       |       |                  |   |       |       |   |       |   |  |   |       
|Income (loss) before income taxes            |  |                                 | 3,312  |                          |   | 1,647                 |  |                                       | 830   |                  |   |      |       |   | (691  | ) |  |   | 5,098 
|Income tax expense                           |  |                                 | 1,269  |                          |   | 613                   |  |                                       | 290   |                  |   |      |       |   | 1     |   |  |   | 2,173 
|                                             |  |                                 |        |                          |   |                       |  |                                       |       |                  |   |       |       |   |       |   |  |   |       
|Net income (loss)                            |  | $                               | 2,043  |                          | $ | 1,034                 |  | $                                     | 540   |                  | $ |      |       | $ | (692  | ) |  | $ | 2,925 
|                                             |  |                                 |        |                          |   |                       |  |                                       |       |                  |   |       |       |   |       |   |  |   |       



16



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##### Table of Contents

Unaudited proforma segment results, as if the conversion, stock offering and acquisition of EHC had taken place on
January 1, 2005, for the three months ended September 30, 2005 were as follows (in thousands):

Unaudited Proforma Segment Results

For the Three Months Ended September 30, 2005



|                                             |  |                                 |        |                          |   |                       |  |   |                                       |   |                  |   |       |       |   |       |   |  |   |       
|-------------------------------------------- |  | ------------------------------- | ------ | ------------------------ | - | --------------------- |  | - | ------------------------------------- | - | ---------------- | - | ----- | ----- | - | ----- | - |  | - | ------
|                                             |  | Workers Compensation Insurance |        | Group Benefits Insurance |   | Specialty Reinsurance |  |   | Segregated Portfolio Cell Reinsurance |   | Corporate/ Other |   |       | Total
|Revenue:                                     |  |                                 |        |                          |   |                       |  |   |                                       |   |                  |   |       |       |   |       |   |  |   |       
|Net premiums earned                          |  | $                               | 9,230  |                          | $ | 9,683                 |  | $ | 3,118                                 |   |                  | $ | 6,359 |       | $ | (1    | ) |  | $ | 28,389
|Net investment income                        |  |                                 | 726    |                          |   | 860                   |  |   | 283                                   |   |                  |   | 171   |       |   | 134   |   |  |   | 2,174 
|Net realized investment gains (losses)       |  |                                 | 122    |                          |   | 418                   |  |   | (187                                  | ) |                  |   |      |       |   | 2     |   |  |   | 355   
|Other revenue                                |  |                                 |       |                          |   |                      |  |   | 186                                   |   |                  |   |      |       |   | 313   |   |  |   | 499   
|                                             |  |                                 |        |                          |   |                       |  |   |                                       |   |                  |   |       |       |   |       |   |  |   |       
|Total revenue                                |  |                                 | 10,078 |                          |   | 10,961                |  |   | 3,400                                 |   |                  |   | 6,530 |       |   | 448   |   |  |   | 31,417
|                                             |  |                                 |        |                          |   |                       |  |   |                                       |   |                  |   |       |       |   |       |   |  |   |       
|Expenses:                                    |  |                                 |        |                          |   |                       |  |   |                                       |   |                  |   |       |       |   |       |   |  |   |       
|Losses and loss adjustment expenses incurred |  |                                 | 1,575  |                          |   | 5,926                 |  |   | 1,154                                 |   |                  |   | 4,217 |       |   | (11   | ) |  |   | 12,861
|Acquisition and other underwriting expenses  |  |                                 | 486    |                          |   | 1,705                 |  |   | 774                                   |   |                  |   | 1,795 |       |   | (888  | ) |  |   | 3,872 
|Other expenses                               |  |                                 | 1,466  |                          |   | 1,735                 |  |   | 142                                   |   |                  |   | 2     |       |   | 1,784 |   |  |   | 5,129 
|Amortization of intangibles                  |  |                                 |       |                          |   |                      |  |   |                                      |   |                  |   |       |       |   | 501   |   |  |   | 501   
|Policyholder dividend expense                |  |                                 | 85     |                          |   |                      |  |   |                                      |   |                  |   | 14    |       |   |      |   |  |   | 99    
|Segregated portfolio dividend expense        |  |                                 |       |                          |   |                      |  |   |                                      |   |                  |   | 502   |       |   | (233  | ) |  |   | 269   
|                                             |  |                                 |        |                          |   |                       |  |   |                                       |   |                  |   |       |       |   |       |   |  |   |       
|Total expenses                               |  |                                 | 3,612  |                          |   | 9,366                 |  |   | 2,070                                 |   |                  |   | 6,530 |       |   | 1,153 |   |  |   | 22,731
|                                             |  |                                 |        |                          |   |                       |  |   |                                       |   |                  |   |       |       |   |       |   |  |   |       
|Income (loss) before income taxes            |  |                                 | 6,466  |                          |   | 1,595                 |  |   | 1,330                                 |   |                  |   |      |       |   | (705  | ) |  |   | 8,686 
|Income tax expense (benefit)                 |  |                                 | 2,226  |                          |   | 633                   |  |   | 465                                   |   |                  |   |      |       |   | (23   | ) |  |   | 3,301 
|                                             |  |                                 |        |                          |   |                       |  |   |                                       |   |                  |   |       |       |   |       |   |  |   |       
|Net income (loss)                            |  | $                               | 4,240  |                          | $ | 962                   |  | $ | 865                                   |   |                  | $ |      |       | $ | (682  | ) |  | $ | 5,385 
|                                             |  |                                 |        |                          |   |                       |  |   |                                       |   |                  |   |       |       |   |       |   |  |   |       



17



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##### Table of Contents

Unaudited proforma segment results, as if the conversion, stock offering and acquisition of EHC had taken place on
January 1, 2006, for the nine months ended September 30, 2006 were as follows (in thousands):

Unaudited Proforma Segment Results

For the Nine Months Ended September 30, 2006



|                                             |  |                                 |        |                          |   |                       |  |   |                                       |   |                  |   |        |       |   |        |   |  |   |       
|-------------------------------------------- |  | ------------------------------- | ------ | ------------------------ | - | --------------------- |  | - | ------------------------------------- | - | ---------------- | - | ------ | ----- | - | ------ | - |  | - | ------
|                                             |  | Workers Compensation Insurance |        | Group Benefits Insurance |   | Specialty Reinsurance |  |   | Segregated Portfolio Cell Reinsurance |   | Corporate/ Other |   |        | Total
|Revenue:                                     |  |                                 |        |                          |   |                       |  |   |                                       |   |                  |   |        |       |   |        |   |  |   |       
|Net premiums earned                          |  | $                               | 30,511 |                          | $ | 25,242                |  | $ | 8,970                                 |   |                  | $ | 16,554 |       | $ |       |   |  | $ | 81,277
|Net investment income                        |  |                                 | 2,738  |                          |   | 2,734                 |  |   | 1,028                                 |   |                  |   | 642    |       |   | 198    |   |  |   | 7,340 
|Net realized investment gains (losses)       |  |                                 | 394    |                          |   | 1,318                 |  |   | (22                                   | ) |                  |   | 363    |       |   |       |   |  |   | 2,053 
|Other revenue                                |  |                                 |       |                          |   |                      |  |   | 586                                   |   |                  |   |       |       |   | (116   | ) |  |   | 470   
|                                             |  |                                 |        |                          |   |                       |  |   |                                       |   |                  |   |        |       |   |        |   |  |   |       
|Total revenue                                |  |                                 | 33,643 |                          |   | 29,294                |  |   | 10,562                                |   |                  |   | 17,559 |       |   | 82     |   |  |   | 91,140
|                                             |  |                                 |        |                          |   |                       |  |   |                                       |   |                  |   |        |       |   |        |   |  |   |       
|Expenses:                                    |  |                                 |        |                          |   |                       |  |   |                                       |   |                  |   |        |       |   |        |   |  |   |       
|Losses and loss adjustment expenses incurred |  |                                 | 20,255 |                          |   | 15,959                |  |   | 6,375                                 |   |                  |   | 9,409  |       |   | (32    | ) |  |   | 51,966
|Acquisition and other underwriting expenses  |  |                                 | 1,177  |                          |   | 3,824                 |  |   | 1,693                                 |   |                  |   | 4,029  |       |   | (3,815 | ) |  |   | 6,908 
|Other expenses                               |  |                                 | 4,743  |                          |   | 4,758                 |  |   | 506                                   |   |                  |   | 172    |       |   | 7,254  |   |  |   | 17,433
|Amortization of intangibles                  |  |                                 |       |                          |   |                      |  |   |                                      |   |                  |   |       |       |   | 1,503  |   |  |   | 1,503 
|Policyholder dividend expense                |  |                                 | 351    |                          |   |                      |  |   |                                      |   |                  |   |       |       |   |       |   |  |   | 351   
|Segregated portfolio dividend expense        |  |                                 |       |                          |   |                      |  |   |                                      |   |                  |   | 3,949  |       |   | (882   | ) |  |   | 3,067 
|                                             |  |                                 |        |                          |   |                       |  |   |                                       |   |                  |   |        |       |   |        |   |  |   |       
|Total expenses                               |  |                                 | 26,526 |                          |   | 24,541                |  |   | 8,574                                 |   |                  |   | 17,559 |       |   | 4,028  |   |  |   | 81,228
|                                             |  |                                 |        |                          |   |                       |  |   |                                       |   |                  |   |        |       |   |        |   |  |   |       
|Income (loss) before income taxes            |  |                                 | 7,117  |                          |   | 4,753                 |  |   | 1,988                                 |   |                  |   |       |       |   | (3,946 | ) |  |   | 9,912 
|Income tax expense (benefit)                 |  |                                 | 2,446  |                          |   | 1,683                 |  |   | 696                                   |   |                  |   |       |       |   | (395   | ) |  |   | 4,430 
|                                             |  |                                 |        |                          |   |                       |  |   |                                       |   |                  |   |        |       |   |        |   |  |   |       
|Net income (loss)                            |  | $                               | 4,671  |                          | $ | 3,070                 |  | $ | 1,292                                 |   |                  | $ |       |       | $ | (3,551 | ) |  | $ | 5,482 
|                                             |  |                                 |        |                          |   |                       |  |   |                                       |   |                  |   |        |       |   |        |   |  |   |       



18



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##### Table of Contents

Unaudited proforma segment results, as if the conversion, stock offering and acquisition of EHC had taken place on
January 1, 2005, for the nine months ended September 30, 2005 were as follows:

Unaudited Proforma Segment Results

For the Nine Months Ended September 30, 2005



|                                             |  |                                 |        |   |                          |   |                       |  |   |                                       |   |                  |   |        |       |   |        |   |  |   |       
|-------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------ | - | --------------------- |  | - | ------------------------------------- | - | ---------------- | - | ------ | ----- | - | ------ | - |  | - | ------
|                                             |  | Workers Compensation Insurance |        |   | Group Benefits Insurance |   | Specialty Reinsurance |  |   | Segregated Portfolio Cell Reinsurance |   | Corporate/ Other |   |        | Total
|Revenue:                                     |  |                                 |        |   |                          |   |                       |  |   |                                       |   |                  |   |        |       |   |        |   |  |   |       
|Net premiums earned                          |  | $                               | 24,854 |   |                          | $ | 29,342                |  | $ | 7,761                                 |   |                  | $ | 17,487 |       | $ |       |   |  | $ | 79,444
|Net investment income                        |  |                                 | 2,052  |   |                          |   | 2,607                 |  |   | 705                                   |   |                  |   | 347    |       |   | 361    |   |  |   | 6,072 
|Net realized investment gains (losses)       |  |                                 | 333    |   |                          |   | 332                   |  |   | (190                                  | ) |                  |   |       |       |   | 1      |   |  |   | 476   
|Other revenue                                |  |                                 |       |   |                          |   |                      |  |   | 770                                   |   |                  |   |       |       |   | 587    |   |  |   | 1,357 
|                                             |  |                                 |        |   |                          |   |                       |  |   |                                       |   |                  |   |        |       |   |        |   |  |   |       
|Total revenue                                |  |                                 | 27,239 |   |                          |   | 32,281                |  |   | 9,046                                 |   |                  |   | 17,834 |       |   | 949    |   |  |   | 87,349
|                                             |  |                                 |        |   |                          |   |                       |  |   |                                       |   |                  |   |        |       |   |        |   |  |   |       
|Expenses:                                    |  |                                 |        |   |                          |   |                       |  |   |                                       |   |                  |   |        |       |   |        |   |  |   |       
|Losses and loss adjustment expenses incurred |  |                                 | 14,747 |   |                          |   | 20,811                |  |   | 5,090                                 |   |                  |   | 12,270 |       |   | (6     | ) |  |   | 52,912
|Acquisition and other underwriting expenses  |  |                                 | (366   | ) |                          |   | 5,151                 |  |   | 1,371                                 |   |                  |   | 4,340  |       |   | (3,620 | ) |  |   | 6,876 
|Other expenses                               |  |                                 | 4,132  |   |                          |   | 5,197                 |  |   | 402                                   |   |                  |   | 236    |       |   | 6,223  |   |  |   | 16,190
|Amortization of intangibles                  |  |                                 |       |   |                          |   |                      |  |   |                                      |   |                  |   |        |       |   | 1,503  |   |  |   | 1,503 
|Policyholder dividend expense                |  |                                 | 176    |   |                          |   |                      |  |   |                                      |   |                  |   | 14     |       |   |       |   |  |   | 190   
|Segregated portfolio dividend expense        |  |                                 |       |   |                          |   |                      |  |   |                                      |   |                  |   | 974    |       |   | (430   | ) |  |   | 544   
|                                             |  |                                 |        |   |                          |   |                       |  |   |                                       |   |                  |   |        |       |   |        |   |  |   |       
|Total expenses                               |  |                                 | 18,689 |   |                          |   | 31,159                |  |   | 6,863                                 |   |                  |   | 17,834 |       |   | 3,670  |   |  |   | 78,215
|                                             |  |                                 |        |   |                          |   |                       |  |   |                                       |   |                  |   |        |       |   |        |   |  |   |       
|Income (loss) before income taxes            |  |                                 | 8,550  |   |                          |   | 1,122                 |  |   | 2,183                                 |   |                  |   |       |       |   | (2,721 | ) |  |   | 9,134 
|Income tax expense                           |  |                                 | 2,734  |   |                          |   | 473                   |  |   | 764                                   |   |                  |   |       |       |   | 79     |   |  |   | 4,050 
|                                             |  |                                 |        |   |                          |   |                       |  |   |                                       |   |                  |   |        |       |   |        |   |  |   |       
|Net income (loss)                            |  | $                               | 5,816  |   |                          | $ | 649                   |  | $ | 1,419                                 |   |                  | $ |       |       | $ | (2,800 | ) |  | $ | 5,084 
|                                             |  |                                 |        |   |                          |   |                       |  |   |                                       |   |                  |   |        |       |   |        |   |  |   |       

4. Non-Cash Investing and Financing Activities

EIHI issued 747,500 shares of its common stock to the ESOP for $7.5 million. EIHI issued a loan to the ESOP in the amount of $7.5 million for the purchase of the common
stock. The issuance of the loan to the ESOP and the related purchase of EIHIs common stock by the ESOP are considered non-cash transactions for purposes of the statement of cash flows. As such, the net proceeds received as a result of
EIHIs stock offering of $69.6 million is reflected net of the proceeds from the shares purchased by the ESOP of $7.5 million, or $62.1 million, in the statement of cash flows for the nine months ended September 30, 2006.

5. 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 September 30, 2006, intangible assets consisted of
the following (in thousands):



|                                     |  |         |       |                     |         
|------------------------------------ |  | ------- | ----- | ------------------- | --------
|Intangible Assets with Finite Life   |  | Balance |       | Amortization Period
|Agency relationships                 |  | $       | 1,659 |                     | 15 years
|Renewal rights                       |  |         | 5,900 |                     | 15 years
|                                     |  |         |       |                     |         
|                                     |  | $       | 7,559 |                     |         
|                                     |  |         |       |                     |         
|                                     |  |        
|Intangible Assets with Infinite Life |  |         |       |                    
|State insurance licenses             |  |         | 1,050 |                     |         
|                                     |  |         |       |                     |         
|Total intangible assets              |  |         | 8,609 |                     |         
|                                     |  |         |       |                     |         

Amortization expense totaled $511,000 and $588,000 for the three months ended September 30, 2006 and for the
period from June 17, 2006 to September 30, 2006, respectively.



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##### Table of Contents

6. Earnings Per Share

The conversion, stock offering and the acquisition of EHC resulted in the issuance of common shares of EIHI on June 16, 2006. Basic earnings per share are computed by dividing the net income for the period from July 1, 2006 to
September 30, 2006 and from June 17, 2006 to September 30, 2006 by the weighted average number of shares outstanding for the respective period. Diluted earnings per share are computed by dividing net income for the period from
July 1, 2006 to September 30, 2006 and from June 17, 2006 to September 30, 2006 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 have been included as dilutive potential common shares outstanding. There were no anti-dilutive stock warrants or options as of September 30, 2006. Consolidated net income, basic shares outstanding, diluted shares
outstanding, basic earnings per share and diluted earnings per share for the three months ended September 30, 2006 and for the period from June 17, 2006 to September 30, 2006 were as follows (in thousands, except share and per share
data):



|                           |  |                                      |            |                                                         |   |           
|-------------------------- |  | ------------------------------------ | ---------- | ------------------------------------------------------- | - | ----------
|                           |  | Three Months EndedSeptember 30, 2006 |            | For the Period from June 17, 2006 to September 30, 2006
|Consolidated net income    |  | $                                    | 2,302      |                                                         | $ | 2,613     
|Basic shares outstanding   |  |                                      | 10,615,195 |                                                         |   | 10,613,761
|Diluted shares outstanding |  |                                      | 10,921,294 |                                                         |   | 10,919,860
|Basic earnings per share   |  | $                                    | 0.22       |                                                         | $ | 0.25      
|Diluted earnings per share |  | $                                    | 0.21       |                                                         | $ | 0.24      

7. Employee Benefit Plans

ESOP

EIHI sponsors an ESOP, which was established as a result
of the conversion of ELH from a mutual company to a stock company. Eligible employees generally include those employees who have reached the age of 21 and have completed one year of service. All employees that were employed by ELH or EHC on
June 16, 2006 were determined to have met the eligibility requirements on that date. ESOP shares are allocated to participants based on the ratio of their individual compensation during the plan year to the total compensation of eligible
employees during the plan year.

EIHI issued 747,500 shares of its common stock to the ESOP on June 16, 2006, and the ESOP signed a promissory note in
the amount of $7.5 million for the purchase of the shares, which is due in ten equal installments, with interest accruing annually at 4%. Shares purchased are held in a suspense account for allocation among participating employees as the loan is
repaid.

Shares committed to be released, average price per share and stock compensation expense for the three months ended September 30, 2006 and for
the period from June 17, 2006 to June 30, 2006 were as follows:



|                                |  |                                      |         |                                                    |   |       
|------------------------------- |  | ------------------------------------ | ------- | -------------------------------------------------- | - | ------
|                                |  | Three Months EndedSeptember 30, 2006 |         | For the Period from June 17, 2006 to June 30, 2006
|Shares committed to be released |  |                                      | 18,841  |                                                    |   | 2,867 
|Average price per share         |  | $                                    | 13.87   |                                                    | $ | 11.40 
|Stock compensation expense      |  | $                                    | 261,000 |                                                    | $ | 33,000

As of September 30, 2006, the estimated fair value of unearned ESOP shares
were $10.8 million.

Other Benefit Plans

ELH
sponsors a non-contributory defined benefit pension plan (the pension plan) covering substantially all of its employees. On May 17, 2005, ELHs Board of Directors approved the freezing of the pension plan effective
December 31, 2005. ELH also sponsors a defined benefit postretirement plan (the postretirement plan), which provides certain health care and life insurance benefits for retired employees. Current employees of ELH may become eligible
for these benefits if they reach retirement age while working for ELH and meet certain years of service levels prior to January 1, 2015. Life insurance benefits are set at 100% of an employees annual salary at the time of retirement, up
to a maximum of $175,000, and are reduced to $10,000 by age 70.



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##### Table of Contents

Net periodic benefit (income) expense related to the pension plan and postretirement plan for the three and nine months
ended September 30, 2006 and 2005 is shown in the following table:



|                                            |  |                                                |      |   |                                               |   |      |   |  |   |      |   |  |   |      |  
|------------------------------------------- |  | ---------------------------------------------- | ---- | - | --------------------------------------------- | - | ---- | - |  | - | ---- | - |  | - | ---- | -
|                                            |  | Pension Plan                                   |     
|                                            |  | Three Months Ended September 30, 2006 and 2005 |      |   | Nine Months Ended September 30, 2006 and 2005 |  
|Service cost                                |  | $                                              |     |   |                                               | $ | 101  |   |  | $ |     |   |  | $ | 303  |  
|Interest cost                               |  |                                                | 128  |   |                                               |   | 148  |   |  |   | 383  |   |  |   | 444  |  
|Expected return on plan assets              |  |                                                | (158 | ) |                                               |   | (149 | ) |  |   | (473 | ) |  |   | (447 | )
|Recognized loss                             |  |                                                |     |   |                                               |   | 6    |   |  |   |     |   |  |   | 17   |  
|Amortization of transition asset/obligation |  |                                                | (1   | ) |                                               |   | (1   | ) |  |   | (2   | ) |  |   | (2   | )
|Amortization of prior service cost          |  |                                                |     |   |                                               |   | 3    |   |  |   |     |   |  |   | 9    |  
|                                            |  |                                                |      |   |                                               |   |      |   |  |   |      |   |  |   |      |  
|Net periodic benefit (income) expense       |  | $                                              | (31  | ) |                                               | $ | 108  |   |  | $ | (92  | ) |  | $ | 324  |  
|                                            |  |                                                |      |   |                                               |   |      |   |  |   |      |   |  |   |      |  



|                               |  |                                                |    |                                              |  |   |    |  |   |     |   |  |   |    
|------------------------------ |  | ---------------------------------------------- | -- | -------------------------------------------- |  | - | -- |  | - | --- | - |  | - | ---
|                               |  | Postretirement Plan                           
|                               |  | Three Months Ended September 30, 2006 and 2005 |    | Nine Months EndedSeptember 30, 2006 and 2005
|Service cost                   |  | $                                              |   |                                              |  | $ | 5  |  | $ |    |   |  | $ | 16 
|Interest cost                  |  |                                                | 5  |                                              |  |   | 40 |  |   | 16  |   |  |   | 121
|Expected return on plan assets |  |                                                |   |                                              |  |   |   |  |   |    |   |  |   |   
|Recognized (gain) loss         |  |                                                | (5 | )                                            |  |   | 18 |  |   | (16 | ) |  |   | 53 
|                               |  |                                                |    |                                              |  |   |    |  |   |     |   |  |   |    
|Net periodic benefit expense   |  | $                                              |   |                                              |  | $ | 63 |  | $ |    |   |  | $ | 190
|                               |  |                                                |    |                                              |  |   |    |  |   |     |   |  |   |    

The assumptions used in the measurement of EIHIs net periodic benefit cost for the pension plan and the
postretirement plan are shown in the following table for the three and nine months ended September 30, 2006 and 2005:



|                                                 |  |                                                        |   |  |                                                               |   |  |      |   |  |      |  
|------------------------------------------------ |  | ------------------------------------------------------ | - |  | ------------------------------------------------------------- | - |  | ---- | - |  | ---- | -
|                                                 |  | Pension Plan Three and Nine Months Ended September 30, |   |  | Postretirement Plan Three and Nine Months Ended September 30, |  
|                                                 |  | 2006                                                   |   |  | 2005                                                          |   |  | 2006 |   |  | 2005 |  
|Weighted average discount rate                   |  | 5.50                                                   | % |  | 5.75                                                          | % |  | 5.50 | % |  | 5.75 | %
|Expected long-term rate of return on plan assets |  | 6.75                                                   | % |  | 6.50                                                          | % |  | N/A  |   |  | N/A  |  
|Rate of increase in compensation levels          |  | N/A                                                    |   |  | 4.50                                                          | % |  | 3.50 | % |  | 4.50 | %

8. Segment Information

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

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 offer a complete line of workers compensation products, including guaranteed cost and loss
sensitive products. Under the guaranteed cost program, the prospective workers compensation policy premium is determined at the beginning of the policy period based on estimated payroll. The loss sensitive products offer the opportunity of
returning a portion of the policyholders premium in the form of a dividend based upon loss experience. 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.

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 42 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. ELH distributes its products through a network of independent producers.



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##### Table of Contents

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 insurance program, referred to as EnviroGuard, and a non-hazardous waste transportation product, which provides commercial automobile liability coverage for non-hazardous waste haulers. 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.

Segregated Portfolio Cell Reinsurance

EIHI 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. The cell rental structure provides the segregated portfolio dividend participants the opportunity to retain control of both underwriting profit and investment income derived from the insurance programs. Eastern Re currently provides
cell rental facilities and Eastern Alliance and Allied Eastern provide fronting services to 11 customers. Upon termination of the respective agreements with the customers and after settlement of the ultimate liabilities due under the various
programs, the segregated portfolio dividend participants are entitled to receive a profit participation dividend payment from Eastern Re for the remaining underwriting profit, if any, under the cell rental programs. 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.

Corporate/Other

The corporate/other segment consists of the operating results of Employers Alliance, EIHI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, the run-off operations of ELHs group medical
insurance operations, and certain eliminations necessary to reconcile the segment information to the consolidated statements of operations and comprehensive income (loss). Prior to January, 1, 2006, the corporate/other segment also included the
operating results of ELHs general agency operations, IBSi.



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##### Table of Contents

The following table represents the segment results for the three months ended September 30, 2006 (unaudited, in
thousands):

For the Three Months Ended September 30, 2006



|                                            |  |                                 |         |                          |   |                       |  |                                       |        |                  |   |        |       |   |        |   |  |   |        
|------------------------------------------- |  | ------------------------------- | ------- | ------------------------ | - | --------------------- |  | ------------------------------------- | ------ | ---------------- | - | ------ | ----- | - | ------ | - |  | - | -------
|                                            |  | Workers Compensation Insurance |         | Group Benefits Insurance |   | Specialty Reinsurance |  | Segregated Portfolio Cell Reinsurance |        | Corporate/ Other |   |        | Total
|Revenue:                                    |  |                                 |         |                          |   |                       |  |                                       |        |                  |   |        |       |   |        |   |  |   |        
|Net premiums earned                         |  | $                               | 10,726  |                          | $ | 8,263                 |  | $                                     | 2,285  |                  | $ | 5,404  |       | $ |       |   |  | $ | 26,678 
|Net investment income                       |  |                                 | 956     |                          |   | 790                   |  |                                       | 351    |                  |   | 234    |       |   | 643    |   |  |   | 2,974  
|Net realized investment gains (losses)      |  |                                 | 9       |                          |   | 367                   |  |                                       | 23     |                  |   | 315    |       |   | (3     | ) |  |   | 711    
|Other revenue                               |  |                                 |        |                          |   |                      |  |                                       | 136    |                  |   |       |       |   | 43     |   |  |   | 179    
|                                            |  |                                 |         |                          |   |                       |  |                                       |        |                  |   |        |       |   |        |   |  |   |        
|Total revenue                               |  |                                 | 11,691  |                          |   | 9,420                 |  |                                       | 2,795  |                  |   | 5,953  |       |   | 683    |   |  |   | 30,542 
|                                            |  |                                 |         |                          |   |                       |  |                                       |        |                  |   |        |       |   |        |   |  |   |        
|Expenses:                                   |  |                                 |         |                          |   |                       |  |                                       |        |                  |   |        |       |   |        |   |  |   |        
|Loss and loss adjustment expenses incurred  |  |                                 | 7,663   |                          |   | 5,009                 |  |                                       | 1,938  |                  |   | 2,823  |       |   | (1     | ) |  |   | 17,432 
|Acquisition and other underwriting expenses |  |                                 | 458     |                          |   | 1,251                 |  |                                       | 194    |                  |   | 1,197  |       |   | (1,391 | ) |  |   | 1,709  
|Other expenses                              |  |                                 | 1,602   |                          |   | 1,513                 |  |                                       | 167    |                  |   | 66     |       |   | 1,893  |   |  |   | 5,241  
|Amortization of intangibles                 |  |                                 |        |                          |   |                      |  |                                       |       |                  |   |       |       |   | 511    |   |  |   | 511    
|Policyholder dividend expense               |  |                                 | 113     |                          |   |                      |  |                                       |       |                  |   |       |       |   |       |   |  |   | 113    
|Segregated portfolio dividend expense       |  |                                 |        |                          |   |                      |  |                                       |       |                  |   | 1,867  |       |   | (346   | ) |  |   | 1,521  
|                                            |  |                                 |         |                          |   |                       |  |                                       |        |                  |   |        |       |   |        |   |  |   |        
|Total expenses                              |  |                                 | 9,836   |                          |   | 7,773                 |  |                                       | 2,299  |                  |   | 5,953  |       |   | 666    |   |  |   | 26,527 
|                                            |  |                                 |         |                          |   |                       |  |                                       |        |                  |   |        |       |   |        |   |  |   |        
|Income before income taxes                  |  |                                 | 1,855   |                          |   | 1,647                 |  |                                       | 496    |                  |   |       |       |   | 17     |   |  |   | 4,015  
|Income tax expense                          |  |                                 | 759     |                          |   | 613                   |  |                                       | 173    |                  |   |       |       |   | 168    |   |  |   | 1,713  
|                                            |  |                                 |         |                          |   |                       |  |                                       |        |                  |   |        |       |   |        |   |  |   |        
|Net income (loss)                           |  | $                               | 1,096   |                          | $ | 1,034                 |  | $                                     | 323    |                  | $ |       |       | $ | (151   | ) |  | $ | 2,302  
|                                            |  |                                 |         |                          |   |                       |  |                                       |        |                  |   |        |       |   |        |   |  |   |        
|Total assets                                |  | $                               | 143,703 |                          | $ | 111,934               |  | $                                     | 42,914 |                  | $ | 44,176 |       | $ | 25,651 |   |  | $ | 368,378
|                                            |  |                                 |         |                          |   |                       |  |                                       |        |                  |   |        |       |   |        |   |  |   |        



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##### Table of Contents

The following table represents the segment results for the nine months ended September 30, 2006, which reflects the
results of operations of EIHI and ELH for the nine months ended September 30, 2006 and the results of operations of EHC for the period from June 17, 2006 to September 30, 2006. (unaudited, in thousands):

For the Nine Months Ended September 30, 2006



|                                            |  |                                 |         |                          |   |                       |  |   |                                       |   |                  |   |         |       |   |        |   |  |   |        
|------------------------------------------- |  | ------------------------------- | ------- | ------------------------ | - | --------------------- |  | - | ------------------------------------- | - | ---------------- | - | ------- | ----- | - | ------ | - |  | - | -------
|                                            |  | Workers Compensation Insurance |         | Group Benefits Insurance |   | Specialty Reinsurance |  |   | Segregated Portfolio Cell Reinsurance |   | Corporate/ Other |   |         | Total
|Revenue:                                    |  |                                 |         |                          |   |                       |  |   |                                       |   |                  |   |         |       |   |        |   |  |   |        
|Net premiums earned                         |  | $                               | 11,825  |                          | $ | 25,243                |  | $ | 2,611                                 |   |                  | $ | 6,180   |       | $ |       |   |  | $ | 45,859 
|Net investment income                       |  |                                 | 1,110   |                          |   | 2,734                 |  |   | 430                                   |   |                  |   | 277     |       |   | 718    |   |  |   | 5,269  
|Net realized investment gains (losses)      |  |                                 | 9       |                          |   | 1,318                 |  |   | (7                                    | ) |                  |   | 315     |       |   | (3     | ) |  |   | 1,632  
|Other revenue                               |  |                                 |        |                          |   |                      |  |   | 147                                   |   |                  |   |        |       |   | 55     |   |  |   | 202    
|                                            |  |                                 |         |                          |   |                       |  |   |                                       |   |                  |   |         |       |   |        |   |  |   |        
|Total revenue                               |  |                                 | 12,944  |                          |   | 29,295                |  |   | 3,181                                 |   |                  |   | 6,772   |       |   | 770    |   |  |   | 52,962 
|                                            |  |                                 |         |                          |   |                       |  |   |                                       |   |                  |   |         |       |   |        |   |  |   |        
|Expenses:                                   |  |                                 |         |                          |   |                       |  |   |                                       |   |                  |   |         |       |   |        |   |  |   |        
|Loss and loss adjustment expenses incurred  |  |                                 | 8,418   |                          |   | 15,959                |  |   | 2,180                                 |   |                  |   | 3,295   |       |   | (32    | ) |  |   | 29,820 
|Acquisition and other underwriting expenses |  |                                 | 443     |                          |   | 3,824                 |  |   | 190                                   |   |                  |   | 1,379   |       |   | (1,695 | ) |  |   | 4,141  
|Other expenses                              |  |                                 | 1,820   |                          |   | 4,758                 |  |   | 192                                   |   |                  |   | 69      |       |   | 3,384  |   |  |   | 10,223 
|Amortization of intangibles                 |  |                                 |        |                          |   |                      |  |   |                                      |   |                  |   |        |       |   | 588    |   |  |   | 588    
|Policyholder dividend expense               |  |                                 | 184     |                          |   |                      |  |   |                                      |   |                  |   |        |       |   |       |   |  |   | 184    
|Segregated portfolio dividend expense       |  |                                 |        |                          |   |                      |  |   |                                      |   |                  |   | 2,029   |       |   | (383   | ) |  |   | 1,646  
|                                            |  |                                 |         |                          |   |                       |  |   |                                       |   |                  |   |         |       |   |        |   |  |   |        
|Total expenses                              |  |                                 | 10,865  |                          |   | 24,541                |  |   | 2,562                                 |   |                  |   | 6,772   |       |   | 1,862  |   |  |   | 46,602 
|                                            |  |                                 |         |                          |   |                       |  |   |                                       |   |                  |   |         |       |   |        |   |  |   |        
|Income (loss) before income taxes           |  |                                 | 2,079   |                          |   | 4,754                 |  |   | 619                                   |   |                  |   |        |       |   | (1,092 | ) |  |   | 6,360  
|Income tax expense (benefit)                |  |                                 | 828     |                          |   | 1,684                 |  |   | 216                                   |   |                  |   |        |       |   | (117   | ) |  |   | 2,611  
|                                            |  |                                 |         |                          |   |                       |  |   |                                       |   |                  |   |         |       |   |        |   |  |   |        
|Net income (loss)                           |  | $                               | 1,251   |                          | $ | 3,070                 |  | $ | 403                                   |   |                  | $ |        |       | $ | (975   | ) |  | $ | 3,749  
|                                            |  |                                 |         |                          |   |                       |  |   |                                       |   |                  |   |         |       |   |        |   |  |   |        
|Total assets                                |  | $                               | 143,703 |                          | $ | 111,934               |  | $ | 42,914                                |   |                  | $ | $44,176 |       | $ | 25,651 |   |  | $ | 368,378
|                                            |  |                                 |         |                          |   |                       |  |   |                                       |   |                  |   |         |       |   |        |   |  |   |        

The following table represents the segment results for the three months ended September 30, 2005, which
reflects the results of operations of ELH (unaudited, in thousands):

For the Three Months Ended September 30, 2005



|                                            |  |                          |         |                  |   |       |       |  |   |        
|------------------------------------------- |  | ------------------------ | ------- | ---------------- | - | ----- | ----- |  | - | -------
|                                            |  | Group Benefits Insurance |         | Corporate/ Other |   |       | Total
|Revenue:                                    |  |                          |         |                  |   |       |       |  |   |        
|Net premiums earned                         |  | $                        | 9,683   |                  | $ |      |       |  | $ | 9,683  
|Net investment income                       |  |                          | 860     |                  |   | 94    |       |  |   | 954    
|Net realized investment gains               |  |                          | 418     |                  |   | 5     |       |  |   | 423    
|Other revenue                               |  |                          |        |                  |   | 327   |       |  |   | 327    
|                                            |  |                          |         |                  |   |       |       |  |   |        
|Total revenue                               |  |                          | 10,961  |                  |   | 426   |       |  |   | 11,387 
|                                            |  |                          |         |                  |   |       |       |  |   |        
|Expenses:                                   |  |                          |         |                  |   |       |       |  |   |        
|Loss and loss adjustment expenses incurred  |  |                          | 5,926   |                  |   | (10   | )     |  |   | 5,916  
|Acquisition and other underwriting expenses |  |                          | 1,705   |                  |   |      |       |  |   | 1,705  
|Other expenses                              |  |                          | 1,735   |                  |   | 816   |       |  |   | 2,551  
|                                            |  |                          |         |                  |   |       |       |  |   |        
|Total expenses                              |  |                          | 9,366   |                  |   | 806   |       |  |   | 10,172 
|                                            |  |                          |         |                  |   |       |       |  |   |        
|Income (loss) before income taxes           |  |                          | 1,595   |                  |   | (380  | )     |  |   | 1,215  
|Income tax expense (benefit)                |  |                          | 633     |                  |   | (29   | )     |  |   | 604    
|                                            |  |                          |         |                  |   |       |       |  |   |        
|Net income (loss)                           |  | $                        | 962     |                  | $ | (351  | )     |  | $ | 611    
|                                            |  |                          |         |                  |   |       |       |  |   |        
|Total assets                                |  | $                        | 105,672 |                  | $ | 5,631 |       |  | $ | 111,303
|                                            |  |                          |         |                  |   |       |       |  |   |        



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##### Table of Contents

The following table represents the segment results for the nine months ended September 30, 2005, which reflects the
results of operations of ELH (unaudited, in thousands):

For the Nine Months Ended September 30, 2005



|                                            |  |                          |         |                  |   |        |       |  |   |         |  
|------------------------------------------- |  | ------------------------ | ------- | ---------------- | - | ------ | ----- |  | - | ------- | -
|                                            |  | Group Benefits Insurance |         | Corporate/ Other |   |        | Total | 
|Revenue:                                    |  |                          |         |                  |   |        |       |  |   |         |  
|Net premiums earned                         |  | $                        | 29,342  |                  | $ |       |       |  | $ | 29,342  |  
|Net investment income                       |  |                          | 2,607   |                  |   | 209    |       |  |   | 2,816   |  
|Net realized investment losses              |  |                          | 332     |                  |   | 4      |       |  |   | 336     |  
|Other revenue                               |  |                          |        |                  |   | 874    |       |  |   | 874     |  
|                                            |  |                          |         |                  |   |        |       |  |   |         |  
|Total revenue                               |  |                          | 32,281  |                  |   | 1,087  |       |  |   | 33,368  |  
|                                            |  |                          |         |                  |   |        |       |  |   |         |  
|Expenses:                                   |  |                          |         |                  |   |        |       |  |   |         |  
|Loss and loss adjustment expenses incurred  |  |                          | 20,811  |                  |   | (6     | )     |  |   | 20,805  |  
|Acquisition and other underwriting expenses |  |                          | 5,151   |                  |   |       |       |  |   | 5,151   |  
|Other expenses                              |  |                          | 5,197   |                  |   | 2,430  |       |  |   | 7,627   |  
|                                            |  |                          |         |                  |   |        |       |  |   |         |  
|Total expenses                              |  |                          | 31,159  |                  |   | 2,424  |       |  |   | 33,583  |  
|                                            |  |                          |         |                  |   |        |       |  |   |         |  
|Income (loss) before income taxes           |  |                          | 1,122   |                  |   | (1,337 | )     |  |   | (215    | )
|Income tax expense (benefit)                |  |                          | 473     |                  |   | (186   | )     |  |   | 287     |  
|                                            |  |                          |         |                  |   |        |       |  |   |         |  
|Net income (loss)                           |  | $                        | 649     |                  | $ | (1,151 | )     |  | $ | (502    | )
|                                            |  |                          |         |                  |   |        |       |  |   |         |  
|Total assets                                |  | $                        | 105,672 |                  | $ | 5,631  |       |  | $ | 111,303 |  
|                                            |  |                          |         |                  |   |        |       |  |   |         |  

9. Sale of IBSiInterest

On October 31, 2005, ELH entered into a Membership Purchase Agreement (the Agreement) for the sale of its interest in IBSi to IBSis Vice President of Sales, an IBSi Regional
Sales Director, and an unaffiliated third party (collectively referred to as the purchasers). The sale was completed through a cash purchase of $300,000, subject to certain purchase price adjustments. Prior to the sale, all inter-company
balances between ELH and IBSi were settled, and any remaining assets and liabilities of IBSi, excluding certain furniture and equipment, became the property of ELH. As a result of the sale, ELH recognized a net gain totaling $210,000.
Under the terms of the Agreement, the purchasers received certain furniture and equipment owned by IBSi, totaling $5,000, and have the exclusive right to market ELHs group benefits products in North and South Carolina and Virginia from
October 31, 2005 through December 31, 2006. ELH may market its group benefits products directly to independent producers in the aforementioned states beginning on January 1, 2007; however, ELH is prohibited from marketing its products
through IBSis top twenty producers in 2007, and in 2008, subject to IBSi meeting certain production goals. IBSi also has the right to market ELHs products in other states in which IBSi operates, with the
exception of Pennsylvania and Maryland. Subsequent to the sale, ELH markets and sells its group benefits products through direct relationships with its independent producers in Pennsylvania and Maryland. The net assets transferred from IBSi
to ELH, as a result of the sale, totaled $4.7 million.

10. Commitments and Contingencies

Lease Commitments

In February 2002, Eastern Alliance entered into a
15 year, non-cancelable lease for office space in Lancaster, PA, with a related party. Eastern Alliance occupied the building on November 1, 2002. The base monthly lease payment is fixed for a period of five years. Monthly lease payments for
years 6 through 15 will be negotiated at the end of year five and will be based on current market conditions at that time. Monthly lease payments for 2006 total $31,939.

Prior to October 31, 2006, ELH leased its office building under a multi-year sale-leaseback agreement entered into in June 2001. The term of the lease was seven years, ending on June 30, 2008. On
March 20, 2006, in anticipation of its move to EHCs office, ELH entered into a Lease Termination Agreement with the landlord of its office building to terminate the current operating lease upon ELH vacating the building and moving to its
new office space. ELH moved to its new office space on October 27, 2006. Under the terms of the Lease Termination Agreement, ELH paid the landlord $394,000. The impact of the termination payment on ELHs results of operations was reduced
by the recognition of the remaining deferred gain, related to the sale-leaseback agreement, on October 31, 2006, totaling $191,000. As of September 30, 2006, ELH recorded a liability and related expense totaling $203,000. This expense is
included in other expenses in the consolidated statement of operations and comprehensive income (loss) for the three and nine months ended September 30, 2006. As a result of ELHs move to EHCs office, the monthly lease payments have
increased from $31,939 per month to approximately $58,000 per month beginning in November 2006.



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Legal Proceedings

EIHI 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 EIHI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 results of operations or financial
condition of EIHI.

Other

EIHI has issued 306,099
warrants to purchase its common stock to a related party broker. The options are exercisable at a price of $1.63 per share. The options are non-forfeitable and were fully vested at the date of grant.

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 EIHI 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 EIHIs business or the risks associated with an investment in EIHIs common stock. You should carefully review and consider the various disclosures made by
us in this quarterly report and in our Registration Statement on Form S-1, filed with the U.S. Securities and Exchange Commission, effective April 27, 2006.

Forward-looking Statements

EIHI may from time to time make written or oral forward-looking statements,
including statements contained in EIHI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 EIHI, which
are made in good faith by EIHI pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

These
forward-looking statements include statements with respect to EIHI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 EIHI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 EIHI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, including specifically the ability to integrate the operations of EHC and ELH and cross sell their respective product lines through the
distribution system of the other party;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the ability of EIHI to improve the results and increase the premium volume of its group benefits business;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | the ability of EIHI to reorganize and effectively manage its group benefits distribution system after the disposition of IBSi;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | the ability to obtain licenses and enter new markets successfully and capitalize on growth opportunities either through mergers or the expansion of EIHI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 EIHIs investment portfolio or a reduction in the demand for EIHI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;
| | - |  | ------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | 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 EIHI uses resulting from competitive pressures;
| | - |  | -----------------------------------------------------------------------------------------



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



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



| |  |  | EIHI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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

EIHI 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. EIHI 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 EIHI.

Overview

EIHI is an insurance holding company offering workers compensation and group benefits insurance
products through its wholly-owned subsidiaries. As a result of the acquisition of EHC on June 16, 2006, EIHIs consolidated results of operations for the nine months ended September 30, 2006 include the results of operations of
EIHIs workers compensation insurance, specialty reinsurance, and segregated portfolio cell reinsurance segments since June 17, 2006 and the results of operations of EIHIs group benefits insurance segment for the nine months
ended September 30, 2006. EIHIs results of operations for the three and nine months ended September 30, 2005 represent the results of operations of EIHIs group benefits insurance segment and ELHs former general agency
operations segment, which is included in corporate/other. The corporate/other segment for the nine months ended September 30, 2006 includes the results of operations of EIHI, EHC, Eastern Services, Global Alliance, and EIHIs third party
administration operations since June 17, 2006 and the results of operations of ELHs corporate activity and group medical run-off operations for the nine months ended September 30, 2006.

Workers Compensation Insurance

The property and casualty
insurance industry is affected by recurring industry cycles known as hard and soft markets. Since EHC began operations in 1997 and continuing into 2001, EHC operated in a soft market cycle, which is generally considered an
adverse industry cycle in the property and casualty insurance industry. A soft cycle is characterized by intense competition resulting in lower pricing and increased commissions paid to distribution sources in order to compete for business. EHC
believes that a hard market began in 2001. A hard market, generally considered a beneficial industry trend, is characterized by reduced competition that results in higher pricing and lower commissions paid to acquire business. The hard market
conditions significantly intensified after the September 11, 2001 terrorist attacks. Management believes that a soft market commenced in 2005, as evidenced by increased competition. During 2006, the workers compensation insurance segment
experienced renewal rate decreases of 5.7%.

Although 2001 signified the beginning of the hard market, it also was the beginning of an economic downturn.
The economic downturn increased unemployment, which generally has a negative impact on workers compensation loss results. The two components of a workers compensation claim are medical and indemnity. The medical component of a claim is
the amount paid to treat work-related injuries, while the indemnity portion of a claim is the amount of lost time wages that are paid to an employee as a result of work absenteeism related to an injury that was sustained while operating in the scope
of employment. In a favorable economy, an employer may have a better chance of offering an injured worker modified duty, relieving the workers compensation insurer of some or all of the indemnity exposure. If an employer is unable to take an
injured employee back to work or offer modified duty positions, the indemnity portion of the workers compensation claim will result in an increased expense to the insurer.



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Group Benefits Insurance

The group benefits insurance segment produced net income of $1.0 million for the three months ended September 30, 2006, compared to net income of $962,000 for the same period in 2005. The increase in net income reflects improving loss and
expense ratios, offset by the decrease in net premiums earned.

For the nine months ended September 30, 2006, net income totaled $3.1 million,
compared to net income of $649,000 for the same period in 2005, reflecting the improving loss and expense ratios and an increase in net realized gains, offset by the decrease in net premiums earned.

The improvement in the loss ratio primarily reflects lower claim trends in the dental, long-term disability and term life lines of business, and favorable development on
prior year long-term disability and premium waiver tabular reserves.

The improvement in the expense ratio reflects managements expense reduction
efforts and a reduction in sales and marketing fees as a result of the sale of IBSi, which was partially offset by the decline in net premiums earned. Prior to the sale of IBSi, sales and marketing fees were paid to IBSi for
business sold in Pennsylvania, Maryland, and Delaware. Subsequent to the sale, IBSi no longer markets EIHIs group benefits products in these territories.

The decline in net premiums earned reflects a decline in new business sales and the renewal retention rate during 2006. New business sales have declined from $5.8 million for the nine months ended September 30,
2005, to $2.6 million for the nine months ended September 30, 2006. The renewal retention rate decreased from 78.0% in 2005 to 76.8% in 2006. New sales and the renewal retention rate both improved during the third quarter of 2006, compared to
the first two quarters of 2006. New sales totaled $1.1 million for the three months ended September 30, 2006, compared to new sales of $1.5 million for the first six months of 2006. The renewal retention rate totaled 81.9% for the three months
ended September 30, 2006, compared to a retention rate of 73.7% for the first six months of 2006.

New business sales and the renewal retention rate
continue to be a primary focus of management. In order to generate new sales, management has implemented new business rate decreases in its dental line of business and the manual rates have been reduced in its long-term disability line of business.
While the loss ratio has improved as the result of termination of unprofitable business and renewal rate increases during 2006, the rate decreases could have a negative impact on the loss ratio in the event significant new sales are generated as a
result of the rate actions. Conversely, an increase in new business sales, along with the focus on renewal retention, could have a positive impact on the expense ratio. The expense ratio will continue to deteriorate if premiums decline. Management
is closely monitoring the impact of these rate actions on both the loss and expense ratios.

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. EIHI is required to make estimates and assumptions in certain circumstances that affect amounts reported in the consolidated financial statements and related footnotes. EIHI 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. EIHI believes the following policies
are the most sensitive to estimates and judgments.

Reserve for Losses and Loss Adjustment Expenses

Workers Compensation/Specialty Reinsurance/Segregated Portfolio Cell Reinsurance

The adequacy of loss reserve estimates are inherently uncertain because the ultimate amount that EIHI may pay under many of the claims incurred as of the balance sheet date will not be known for many years. EIHI
establishes reserves for unpaid losses and loss adjustment expenses, which are estimates of future payments of reported and unreported claims for losses and related expenses. Establishing reserves for property and casualty claims continues to be a
complex and imprecise process, requiring the use of informed estimates and judgments. EIHI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 recoverables and would be reflected in EIHIs results of operations in the period in which the estimates are changed.

On a quarterly basis, EIHI prepares actuarial analyses to assess the reasonableness of the recorded reserves for unpaid losses and loss adjustment
expenses. These actuarial analyses incorporate various methodologies, including paid loss development,



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incurred loss development and a combination of other actuarial methodologies that incorporate characteristics of incurred
and paid methodologies combined with a review of EIHIs exposure base. The recorded amount in each accident year is then compared to the results of these methodologies, with consideration being given to the age of the accident year. As accident
years mature, the various methodologies generally produce consistent loss estimates. For more recent accident years, the methodologies produce results that are not as consistent. Accordingly, more emphasis is placed on supplementing the
methodologies in more recent accident years with trends in exposure base, medical expense inflation, general inflation, severity, and claim counts, among other things. 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. As additional experience and data become available regarding claim payments and reporting patterns, legislative
developments, regulatory trends on benefit levels for both medical and indemnity payments, and economic conditions, the estimates are revised accordingly. If ultimate losses, net of reinsurance, prove to be substantially higher than the amounts
recorded as of September 30, 2006, the related adjustments could have a material adverse effect on EIHIs financial condition, results of operations or liquidity.

With respect to the specialty reinsurance segment, numerous internal and external factors will affect the ultimate settlements of future claims including, but not necessarily limited to: changes in the cost of
environmental remediation, impacts of relevant federal or state legislation, changes in technology and the resulting impact on costs, and reliance on ceding companies to handle claims and remit proper loss information in a timely manner. Reserving
for assumed reinsurance requires evaluating loss information received from the ceding company. On a quarterly basis, Eastern Re receives a statement from the ceding company which includes premium and loss settlement activity for the period with
corresponding reserves as established by the ceding company. Claims reported to the ceding company by insureds are entered into its claim system and ceded to Eastern Re on a quarterly basis. The claim information received from the ceding company is
compiled into loss development triangles. Generally accepted actuarial methodologies, supplemented by judgment where appropriate, are used to develop the appropriate incurred but not reported (IBNR) reserves for Eastern Re. Each quarter
EIHI compares its actual reported losses for the quarter, and cumulative reported losses since the most recently completed reserve study, to expected reported losses for the respective period, which may result in EIHI increasing its loss and loss
adjustment expense, and its corresponding loss reserves in that quarter. This information is used as a tool in the judgmental process by which management assesses the overall adequacy of the reserve for unpaid losses and loss adjustment expenses at
Eastern Re. The evaluation of the reserve for unpaid losses and loss adjustment expenses related to EIHIs specialty reinsurance programs requires that loss development be estimated over an extended period of time. Because the primary insurer
under this program changed in 1999 and the claims management philosophy of the two primary insurers differed, historical loss data for years prior to 1999 is not very useful. Therefore, reliance has been placed on industry loss development patterns,
judgmentally adjusted to reflect considerations particular to the exposure. The reliance on external benchmarks, while necessary, creates an additional element of uncertainty.

EIHIs reserves for unpaid losses and loss adjustment expenses in its workers compensation insurance, segregated portfolio cell reinsurance, and specialty reinsurance segments as of September 30, 2006
are summarized below (in thousands):



|                                                                                 |  |                                 |        |   |                                       |   |        |                       |  |       |        |  |   |        |  
|-------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------------- | - | ------ | --------------------- |  | ----- | ------ |  | - | ------ | -
|                                                                                 |  | Workers Compensation Insurance |        |   | Segregated Portfolio Cell Reinsurance |   |        | Specialty Reinsurance |  | TOTAL |       
|Case reserves                                                                    |  | $                               | 17,417 |   |                                       | $ | 8,104  |                       |  | $     | 8,072  |  | $ | 33,593 |  
|Case incurred development, IBNR and unallocated loss adjustment expense reserves |  |                                 | 27,032 |   |                                       |   | 13,858 |                       |  |       | 9,200  |  |   | 50,090 |  
|Amount of discount                                                               |  |                                 | (2,106 | ) |                                       |   | (1,104 | )                     |  |       |       |  |   | (3,210 | )
|                                                                                 |  |                                 |        |   |                                       |   |        |                       |  |       |        |  |   |        |  
|Net reserves                                                                     |  |                                 | 42,343 |   |                                       |   | 20,858 |                       |  |       | 17,272 |  |   | 80,473 |  
|Reinsurance recoverables                                                         |  |                                 | 3,034  |   |                                       |   | 2,005  |                       |  |       |       |  |   | 5,039  |  
|                                                                                 |  |                                 |        |   |                                       |   |        |                       |  |       |        |  |   |        |  
|Reserves for unpaid losses and loss adjustment expenses                          |  | $                               | 45,377 |   |                                       | $ | 22,863 |                       |  | $     | 17,272 |  | $ | 85,512 |  
|                                                                                 |  |                                 |        |   |                                       |   |        |                       |  |       |        |  |   |        |  

In its workers compensation insurance and segregated portfolio cell reinsurance segments, EIHI records
reserves for estimated losses under insurance policies and for loss adjustment expenses related to the investigation and settlement of policy claims. EIHIs reserves for unpaid losses and loss adjustment expenses represent the estimated cost of
reported and unreported loss and loss adjustment expenses incurred and unpaid at a given point in time. In establishing its workers compensation reserves, EIHI uses loss discounting, which involves recognizing the time value of money and
offsetting estimates of future payments by future expected investment income. For claims reported in the workers compensation insurance and segregated portfolio cell reinsurance segments, claims are administered by EIHIs wholly owned
third party administrator, Employers Alliance.



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When a claim is reported, EIHIs claims adjusters establish a case reserve, which consists of anticipated medical
costs, indemnity costs and certain defense and cost containment expenses that EIHI refers to as allocated loss adjustment expenses, or ALAE. At any point in time, the amount paid on a claim, plus the case reserve for future amounts to be paid,
represents the claims adjusters estimate at that time of the total cost of the claim, or the case incurred amount. The case reserve for each reported claim is based upon various factors, including:



| |  |  | type of loss;
| | - |  | -------------



| |  |  | severity of the injury or damage;
| | - |  | ---------------------------------



| |  |  | age and occupation of the injured employee;
| | - |  | -------------------------------------------



| |  |  | estimated length of temporary disability;
| | - |  | -----------------------------------------



| |  |  | anticipated permanent disability;
| | - |  | ---------------------------------



| |  |  | expected medical procedures, costs and duration;
| | - |  | ------------------------------------------------



| |  |  | knowledge of the circumstances surrounding the claim;
| | - |  | -----------------------------------------------------



| |  |  | insurance policy provisions, including coverage, related to the claim;
| | - |  | ----------------------------------------------------------------------



| |  |  | jurisdiction of the occurrence; and
| | - |  | -----------------------------------



| |  |  | other benefits defined by applicable statute.
| | - |  | ---------------------------------------------

The case incurred amount
can vary over time due to changes in expectations with respect to medical treatment and outcome, length and degree of disability, employment availability and wage levels and judicial determinations. As changes occur, the case incurred amount is
adjusted. The initial estimate of the case incurred amount can vary significantly from the amount ultimately paid, especially in circumstances involving severe injuries with comprehensive medical treatment. Changes in case incurred amounts, or case
incurred development, is an important component of EIHIs historical claim data.

In addition to case reserves, EIHI establishes loss and ALAE
reserves on an aggregate basis for case incurred development and claims that have been incurred but not reported, or IBNR. Case incurred development and IBNR reserves are primarily intended to provide for aggregate changes in preexisting case
incurred amounts and, secondarily, as the unpaid cost of IBNR claims for which an initial case reserve has not been established.

The third component of
EIHIs reserves for unpaid losses and loss adjustment expenses is unallocated loss adjustment expense, or ULAE. EIHIs ULAE reserve is established for the costs of future unallocated loss adjustment expenses for known and unknown claims.
EIHIs ULAE reserve covers primarily the estimated cost of administering claims.

In estimating case incurred development and IBNR reserves, EIHI
performs most of its detailed analysis on a net of reinsurance basis, and then considers expected recoveries in arriving at its recorded amounts for unpaid losses and loss adjustment expenses. To estimate such reserves, EIHI relies primarily on the
analysis of claims in its 9-year workers compensation insurance history. Using standard actuarial methods, EIHI estimates reserves based on historical patterns of case development, payment patterns, mix of business, premium rates charged, case
reserving adequacy, operational changes, adjustment philosophy and severity and duration trends. However, the number of variables and judgments involved in establishing reserve estimates, combined with some random variation in loss development
patterns, results in uncertainty regarding projected ultimate losses. As a result, EIHIs ultimate liability for loss and loss adjustment expenses may be more or less than its reserve estimate.

To estimate reserves, EIHI stratifies its data using variations of the following different categorization of claims:



| |  |  | All loss and loss adjustment expense data developed together;
| | - |  | -------------------------------------------------------------



| |  |  | Lost time claims developed independently;
| | - |  | -----------------------------------------



| |  |  | Medical only claims developed independently;
| | - |  | --------------------------------------------



| |  |  | The indemnity portion of lost time claims developed independently;
| | - |  | ------------------------------------------------------------------



| |  |  | The medical portion of a lost time claim and medical only claims developed together; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | Loss adjustment expenses developed independently.
| | - |  | -------------------------------------------------

The term
developed together refers to the summation of the claims data for a particular data stratification. For example, All loss and loss adjustment expense data developed together represents all loss and loss adjustment expense
claims data of EIHI, regardless of medical, indemnity or expense components, developed together using the historical data for this particular data stratification. The term developed independently refers to a specific data element. For
example, The indemnity portion of lost time claims developed independently represents the development of the indemnity portion of a claim



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separately using historical data for this particular type of claim. Developing claims using different data
stratifications allows EIHI to identify trends for a specific group of claims that would not necessarily be readily identifiable if the data were included with other types of claim information. For example, developing the medical portion of a claim
separately may allow EIHI to identify a medical inflation trend that may not have been evident if it had been included with indemnity claim information. The combination of the different data stratifications and standard actuarial methods, including
the following, produce different actuarial indications for EIHI to evaluate:

Incurred Loss Development Method. The Incurred (case incurred) Loss
Development Method relies on the assumption that, at any given state of maturity, ultimate losses can be predicted by multiplying cumulative reported losses (paid losses plus case reserves) by a cumulative development factor. The validity of the
results of this method depends on the stability of claim reporting and settlement rates, as well as the consistency of case reserve levels. Case reserves do not have to be adequately stated for this method to be effective; they only need to have a
fairly consistent level of adequacy at all stages of maturity. Age-to-age loss development factors (LDFs) are calculated to measure the relative development of an accident year from one maturity point to the next.

Paid Loss Development Method. The Paid Loss Development Method is mechanically identical to the Incurred Loss Development Method described above. The paid
method does not rely on case reserves or claim reporting patterns in making projections. The validity of the results from using a paid loss development approach can be affected by many conditions, such as internal claim department processing
changes, legal changes or variations in a companys mix of business from one year to the next. Also, since the percentage of losses paid for immature years is often low, development factors are more volatile. A small variation in the number of
claims paid can have a leveraging effect that can lead to significant changes in estimated ultimate liability for losses and loss adjustment expenses. Therefore, ultimate values for immature accident years are often based on alternative estimation
techniques.

Bornhuetter-Ferguson Methodology. The Bornhuetter-Ferguson Expected Loss Projection Method based on reported loss data relies on the
assumption that remaining unreported losses are a function of the total expected ultimate losses rather than a function of the currently reported losses. The expected ultimate losses in this analysis are based on historical results, adjusted for
known pricing changes and inflationary trends. The expected ultimate losses are multiplied by the unreported percentage to produce expected unreported losses. The unreported percentage is calculated as one minus the reciprocal of the selected
cumulative incurred LDFs. Finally, the unreported losses are added to the current reported losses to produce ultimate losses. The Bornhuetter-Ferguson method is most useful as an alternative to other models for immature accident years. For these
immature accident years, the amounts reported or paid may be small and unstable and therefore not predictive of future development. Therefore, future development is assumed to follow an expected pattern that is supported by more stable historical
data or by emerging trends. This method is also useful when changing reporting patterns distort historical development of losses.

The Bornhuetter-Ferguson Method can also be applied with paid losses.

In estimating ULAE reserves, EIHI reviews past adjustment expenses in
relation to paid claims and estimated future costs based on expected claims activity and duration. The sum of EIHIs net loss and ALAE reserve, and ULAE reserves is its total net reserve for unpaid losses and loss adjustment expenses.

In determining managements best estimate, EIHI considers the various accident year loss indications produced by the actuarial methods. Considering
the results of the methods, the inherent strengths and weaknesses of each method as described above, as well as other statistical information such as ultimate loss ratios, ultimate loss to exposure ratios and average ultimate claim values, EIHI
determines and records its best estimate of unpaid losses and ALAE. Management believes its best estimate of recorded reserves for unpaid losses and loss adjustment expenses is representative of the inherent uncertainty surrounding reserving for a
long-tail line of business such as workers compensation as well as the relative immature accident year historical experience of its workers compensation insurance segment, which completed its first full year of operations in 1998.

The reporting and paid loss development patterns in the segregated portfolio cell reinsurance segment are consistent with that of the workers
compensation insurance segment. Accordingly, the tail factors used to project actual current losses to ultimate losses for claims covered in our segregated portfolio cell reinsurance segment require considerable judgment that could be material to
consolidated loss and loss adjustment expense reserves. The difference between total revenue for the segregated portfolio cell reinsurance segment for each period and the sum of the losses and loss adjustment expenses, underwriting expenses,
policyholder dividend expenses and other expenses is accrued as a segregated portfolio dividend expense. As a result, any change in the reserve for unpaid losses and loss adjustment expenses is recorded to the segregated portfolio dividend
payable/receivable account and would have no impact on EIHIs net income or shareholders equity.



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In its specialty reinsurance segment, EIHI categorizes unpaid losses and loss adjustment expenses into two types of
reserves: reported outstanding loss reserves, or case reserves, and IBNR reserves. Case reserves represent unpaid losses reported by EIHIs cedants and recorded by EIHI. Similar to the workers compensation insurance and segregated
portfolio cell reinsurance segments, IBNR reserves represent a provision for claims that have been incurred but not yet reported, as well as future loss development on losses already reported, in excess of the case reserves. EIHI updates its
estimates for each of the aforementioned categories on a quarterly basis using information received from its cedants.

EIHI analyzes its ultimate losses
and loss adjustment expenses for specialty reinsurance after consideration of the loss experience on each treaty for every underwriting year on a quarterly basis. The methodologies that EIHI employs include, but may not be limited to, paid loss
development methods and incurred loss development methods similar to those described in the workers compensation insurance and segregated portfolio cell reinsurance segments above.

In applying these methods, EIHI evaluates loss development trends by underwriting year to determine various assumptions that are required as inputs in the actuarial methodologies it employs. These typically involve
the analysis of historical loss development trends by underwriting year. In addition, EIHI utilizes external or internal benchmark sources of information for which it does not have sufficient loss development data to calculate credible trends. The
evaluation of the reserve for unpaid losses and loss adjustment expenses related to the specialty reinsurance segment requires that loss development be estimated over an extended period of time.

For its specialty reinsurance segment, EIHI relies on information provided by ceding companies regarding premiums and reported claims, and then uses that data as a key
input to estimate unpaid losses and loss adjustment expenses. Since EIHI relies on claims information reported by ceding companies, the estimation of unpaid losses and loss adjustment expenses for specialty reinsurance includes certain risks and
uncertainties that do not exist with its other segments, and include, but are not necessarily limited to, the following:



| |  |  | The reported claims information could be inaccurate, and/or could be subject to significant reporting lags. Such potential inaccuracies or reporting lags would increase the risk of
reserve estimation error.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A significant amount of time can lapse between the assumption of risk, occurrence of a loss event, the reporting of the event to an insurance company, often referred to as the
primary company or cedant, the subsequent reporting to the reinsurance company, referred to as the reinsurer, and the ultimate payment of the claim on the loss event by the reinsurer.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Because the primary insurer under these programs changed in 1999, historical loss data is insufficiently developed. Therefore, reliance has been placed on industry loss development
patterns adjusted, based on EIHIs judgment, to reflect considerations particular to the exposure. The reliance on external benchmarks, while necessary, creates an additional element of uncertainty.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Claims reported to the ceding company by insureds are entered into the ceding companys claim system and ceded to the specialty reinsurance segment on a quarterly
basis. EIHI mitigates the above risk by performing periodic claims reviews of the ceding companies claims detailed reports to ensure reported claims information appears to be reasonably accurate and timely.

Group Benefits Insurance

The reserve for unpaid losses and
loss adjustment expenses includes an estimate of future amounts for reported but unpaid and incurred but not reported claims related to EIHIs dental, long-term disability, short-term disability and term life products, as well as an estimate of
the costs associated with investigating, processing and paying the related claims.

EIHI estimates its reserve for unpaid losses and loss adjustment
expenses on a quarterly basis, based on claim data available at that time. EIHIs reserve for loss adjustment expenses is calculated as a percentage of the unpaid losses, based on historical costs to settle such claims. Estimating the reserve
for unpaid losses and loss adjustment expenses is an inherently uncertain process.

EIHI utilizes a number of methodologies, explained below, to estimate
its reserve for unpaid losses. These methods include the lag factor development, loss ratio, and tabular reserve methods.

Lag Factor Development
Method. The lag factor development method is used to estimate the reserve for insurance products that are short-tail by nature, in which claims related to the products are settled shortly after they are reported by the insured. This
method uses historical paid claims data to estimate the reserve for claims in the course of settlement (reported claims) and incurred but not reported claims. This method involves the use of a claim model, or a loss triangle, in which paid claims
data is aggregated into categories based on the dates on which the claims in question were incurred and paid. Data in the loss triangle is reviewed to evaluate historical claim payment patterns. A point estimate is then determined based on the
historical claim payment patterns.



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Loss Ratio Method. The loss ratio method involves the use of historical loss ratios to estimate the reserve for
unpaid losses. Under the loss ratio method, the reserve is determined by multiplying the selected loss ratio, which is based on historical loss ratio trends, by the amount of net premiums earned or in-force premium at the balance sheet date, less
claim payments through the balance sheet date.

Tabular Reserve Method. The tabular reserve method is used to estimate the reserve for insurance
products that are longer tail by nature and for which the claim payment patterns are relatively predictable. Under the tabular reserve method, the reserve for reported but unpaid claims is estimated using industry-standard valuation tables (for
long-term disability claims, EIHI uses the 1987 Commissioners Group Disability Table; for term life premium waiver claims, EIHI uses the 1970 Intercompany Group Life Disability Table). These tables incorporate expected death and recovery rate
assumptions (based on an insureds age and length of disability) that impact the reserve for unpaid claims.

EIHIs reserve for unpaid losses and
loss adjustment expenses in its group benefits insurance segment consisted of the following amounts as of September 30, 2006 and December 31, 2005 (in thousands):



|                                                                      |  |                    |         |   |                   |   |         |  
|--------------------------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -
|                                                                      |  | September 30, 2006 |         |   | December 31, 2005 |  
|Long-term disability tabular reserve                                  |  | $                  | 29,114  |   |                   | $ | 32,112  |  
|Long-term disability IBNR reserve                                     |  |                    | 1,527   |   |                   |   | 2,293   |  
|                                                                      |  |                    |         |   |                   |   |         |  
|Total long-term disability reserves                                   |  |                    | 30,641  |   |                   |   | 34,405  |  
|                                                                      |  |                    |         |   |                   |   |         |  
|Short-term disability reserve                                         |  |                    | 1,100   |   |                   |   | 1,155   |  
|                                                                      |  |                   
|Term life reported claim reserve                                      |  |                    | 60      |   |                   |   | 136     |  
|Term life IBNR claim reserve                                          |  |                    | 760     |   |                   |   | 801     |  
|                                                                      |  |                    |         |   |                   |   |         |  
|Total term life claim reserves                                        |  |                    | 820     |   |                   |   | 937     |  
|                                                                      |  |                    |         |   |                   |   |         |  
|Term life premium waiver tabular reserve                              |  |                    | 4,192   |   |                   |   | 4,413   |  
|Term life premium waiver IBNR reserve                                 |  |                    | 920     |   |                   |   | 920     |  
|                                                                      |  |                    |         |   |                   |   |         |  
|Total term life premium waiver reserves                               |  |                    | 5,112   |   |                   |   | 5,333   |  
|                                                                      |  |                    |         |   |                   |   |         |  
|Other                                                                 |  |                    | 193     |   |                   |   | 74      |  
|Dental reserves                                                       |  |                    | 1,679   |   |                   |   | 1,976   |  
|Medical reserves                                                      |  |                    | 245     |   |                   |   | 256     |  
|                                                                      |  |                    |         |   |                   |   |         |  
|Total reserve for unpaid losses and loss adjustment expenses          |  |                    | 39,790  |   |                   |   | 44,136  |  
|Reinsurance recoverable on unpaid losses and loss adjustment expenses |  |                    | (21,360 | ) |                   |   | (24,123 | )
|                                                                      |  |                    |         |   |                   |   |         |  
|Net reserve for unpaid losses and loss adjustment expenses            |  | $                  | 18,430  |   |                   | $ | 20,013  |  
|                                                                      |  |                    |         |   |                   |   |         |  

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 and nine months ended September 30, 2006, EIHI did not experience any declines in investment securities that were
determined to be other-than-temporary. Adverse investment market conditions, or poor operating results of underlying investments, could result in impairment charges in the future. EIHI 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 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



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##### Table of Contents

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 EIHI 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 September 30, 2006 deferred policy acquisition costs and the related unearned premium reserves were as
follows (in thousands):



|                                   |  |                    |       
|---------------------------------- |  | ------------------ | ------
|                                   |  | September 30, 2006
|Workers compensation segment:     |  |                    |       
|Deferred policy acquisition costs  |  | $                  | 1,052 
|Unearned premium reserves          |  | $                  | 25,052
|                                   | 
|Specialty reinsurance segment:     |  |                    |       
|Deferred policy acquisition costs  |  | $                  | 1,084 
|Unearned premium reserves          |  | $                  | 5,455 
|                                   | 
|Segregated portfolio cell segment: |  |                    |       
|Deferred policy acquisition costs  |  | $                  | 1,390 
|Unearned premium reserves          |  | $                  | 9,775 

Benefit Plan Liabilities

ELH sponsors a defined benefit pension plan and a defined benefit postretirement life and health plan (collectively referred to as the benefit plans) for its eligible
employees. The estimated liability related to the benefit plans is developed using various assumptions selected by management. Management utilizes the services of external consulting actuaries for purposes of calculating the liability. The
assumptions used in estimating the liability include the discount rate, expected rate of return on underlying plan assets, expected future salary increases, and the expected healthcare cost trend. Management evaluates these assumptions on an annual
basis, and adjusts them, if necessary, based on current and historical trends in interest rates, investment returns, salary levels, and healthcare costs. Managements assumptions for the measurement of net periodic benefit cost for the three
and nine months ended September 30, 2006 and 2005 were as follows:



|                                        |  |              |   |  |                     |   |  |      |   |  |      |  
|--------------------------------------- |  | ------------ | - |  | ------------------- | - |  | ---- | - |  | ---- | -
|                                        |  | Pension Plan |   |  | Postretirement Plan |  
|                                        |  | 2006         |   |  | 2005                |   |  | 2006 |   |  | 2005 |  
|Discount rate                           |  | 5.50         | % |  | 5.75                | % |  | 5.50 | % |  | 5.75 | %
|Expected rate of return on assets       |  | 6.75         | % |  | 6.50                | % |  | N/A  |   |  | N/A  |  
|Rate of increase in compensation levels |  | N/A          |   |  | 4.50                | % |  | 3.50 | % |  | 4.50 | %

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 EIHI 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.



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Reinsurance Recoverables

Amounts recoverable from EIHI 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 EIHI 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. EIHI continually monitors the financial condition of its reinsurers.

Recent Accounting Pronouncements

SFAS 158

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment to FASB Statements No. 87, 88, 106, and 132(R). SFAS 158 requires employers to recognize the funded status of a benefit plan in its statement of financial position, with changes in the funded status
occurring during the year reported as a component of other comprehensive income or loss. The funded status of a benefit plan represents the difference between plan assets at fair value and the benefit obligation. For defined benefit pension plans
and postretirement benefit plans, the benefit obligation is the projected benefit obligation and accumulated postretirement benefit obligation, respectively. In addition to the above changes, SFAS 158 requires that plan assets and benefit
obligations be measured as of the date of an employers fiscal year-end. The recognition and disclosure provisions of SFAS 158 is effective for fiscal years ending December 31, 2006. The requirement to measure plan assets and benefit
obligations as of the end of an employers fiscal year-end is effective for fiscal years ending after December 31, 2008. Management has not completed its evaluation of the impact of SFAS 158 on our consolidated financial condition at
December 31, 2006. If SFAS 158 had been effective December 31, 2005, the prepaid asset related to our defined benefit pension plan would have decreased $26,000 and our liability related to our defined benefit postretirement plan would have
decreased $307,000, resulting in a net increase to accumulated other comprehensive income of $281,000.

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. We expect that SFAS 157 will not have a material effect on our consolidated financial condition or results of operations.

SFAS 155

In February 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 155 (SFAS 155), Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140. SFAS 155 amends the accounting requirements for certain financial instruments
covered by FASB Statements No. 133 and 140, including financial instruments containing embedded derivatives. SFAS 155 amends FASB Statement No. 133 by permitting fair value remeasurement of any hybrid financial instrument that contains an
embedded derivative. Under current accounting guidance contained in FASB Statement No. 133, embedded derivatives must be bifurcated from their host contract and accounted for separately. SFAS 155 is effective for all financial instruments
acquired, issued or subject to a remeasurement event occurring after the beginning of an entitys first fiscal year that begins after September 15, 2006. The fair value election for hybrid financial instruments may also be applied upon
adoption of SFAS 155 to those hybrid financial instruments held by an entity and bifurcated under FASB Statement No. 133 prior to the adoption of SFAS 155. Any difference between the total carrying amount of the individual components of an
existing bifurcated hybrid financial instrument and the fair value of the combined hybrid financial instrument must be recognized as a cumulative effect adjustment to beginning retained earnings. Restatement of prior periods is prohibited. EIHI
currently holds convertible debt securities that require bifurcation under FASB Statement No. 133. Management is currently evaluating the impact to its consolidated financial statements of adopting the fair value provisions of SFAS 155 as they
relate to EIHIs convertible bond portfolio.



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##### Table of Contents

SOP 05-1

In
September 2005, the American Institute of Certified Public Accountants (AICPA) released Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of
Insurance Contracts (SOP 05-1). SOP 05-1 requires identification of transactions that result in a substantial change in an insurance contract. Transactions subject to review include internal contract exchanges, contract
modifications via amendment, rider or endorsement, and elections of benefits, features or rights contained within the contract. If determined that a substantial change has occurred, the related unamortized deferred policy acquisition costs, unearned
premiums and other related balances must be written off. The Company will adopt SOP 05-1 on January 1, 2007. We expect that SOP 05-1 will not have a material effect on our consolidated financial position 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 provisions of FIN 48 are
effective for fiscal years beginning after December 15, 2006. Management has not completed its evaluation of the impact of FIN 48 on EIHIs consolidated financial condition or results of operations.

THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2005

RESULTS OF OPERATIONS

The major components of consolidated revenue were as follows
for the three months ended September 30, 2006 and 2005:



|                              |  |      |        |      |   |       
|----------------------------- |  | ---- | ------ | ---- | - | ------
|                              |  | 2006 |        | 2005
|Net premiums written          |  | $    | 29,920 |      | $ | 9,686 
|                              |  |      |        |      |   |       
|Net premiums earned           |  | $    | 26,678 |      | $ | 9,683 
|Net investment income         |  |      | 2,974  |      |   | 954   
|Net realized investment gains |  |      | 711    |      |   | 423   
|Other revenue                 |  |      | 179    |      |   | 327   
|                              |  |      |        |      |   |       
|Consolidated revenue          |  | $    | 30,542 |      | $ | 11,387
|                              |  |      |        |      |   |       

The increase in consolidated revenue reflects the acquisition of EHC on June 16, 2006. The increase in net
investment income reflects the increase in cash and investments, which increased from $82.2 million at September 30, 2005 to $278.7 million at September 30, 2006, as a result of the acquisition. Other revenue for the three months ended
September 30, 2006 represents fees from EIHIs third party administration operations and cell rental fees from EIHIs specialty reinsurance segment. Other revenue for the three months ended September 30, 2005 represents sales and
marketing fees earned by ELHs former general agency operations segment.

The components of consolidated net income, by segment, for the three months
ended September 30, 2006 and 2005 were as follows:



|                                      |  |      |       |   |      |   |      |  
|------------------------------------- |  | ---- | ----- | - | ---- | - | ---- | -
|                                      |  | 2006 |       |   | 2005 |  
|Workers compensation insurance       |  | $    | 1,096 |   |      | $ |     |  
|Group benefits insurance              |  |      | 1,034 |   |      |   | 962  |  
|Specialty reinsurance                 |  |      | 323   |   |      |   |     |  
|Segregated portfolio cell reinsurance |  |      |      |   |      |   |     |  
|Corporate/other                       |  |      | (151  | ) |      |   | (351 | )
|                                      |  |      |       |   |      |   |      |  
|Consolidated net income               |  | $    | 2,302 |   |      | $ | 611  |  
|                                      |  |      |       |   |      |   |      |  

The increase in consolidated net income reflects the acquisition of EHC on June 16, 2006. The corporate/other
segment results for the three months ended September 30, 2006 include the results of operations of EIHI, EIHIs third party administration operations and corporate activities, and ELHs group medical insurance run-off operations. The
corporate/other segment for the three months ended September 30, 2005 include the results of operations of ELHs former general agency operations and corporate activities, and the group medical insurance run-off operations.



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##### Table of Contents

WORKERS COMPENSATION INSURANCE

The workers compensation insurance segment consists of the operating results of Eastern Alliance and Allied Eastern. Summarized financial results of the workers compensation insurance segment are as
follows for the three months ended September 30, 2006 (in thousands):



|                                            |  |      |        |  
|------------------------------------------- |  | ---- | ------ | -
|                                            |  | 2006 |       
|Revenue:                                    |  |      |        |  
|Direct premiums written                     |  | $    | 22,546 |  
|Reinsurance premiums assumed                |  |      | 48     |  
|Ceded premiums written                      |  |      | (8,125 | )
|                                            |  |      |        |  
|Net premiums written                        |  |      | 14,469 |  
|Change in unearned premiums                 |  |      | (3,743 | )
|                                            |  |      |        |  
|Net premiums earned                         |  |      | 10,726 |  
|                                            | 
|Net investment income                       |  |      | 956    |  
|Net realized investment gains               |  |      | 9      |  
|                                            |  |      |        |  
|Total revenue                               |  | $    | 11,691 |  
|                                            |  |      |        |  
|Expenses:                                   |  |      |        |  
|Loss and loss adjustment expenses           |  | $    | 7,663  |  
|Acquisition and other underwriting expenses |  |      | 458    |  
|Other expenses                              |  |      | 1,602  |  
|Policyholder dividend expense               |  |      | 113    |  
|                                            |  |      |        |  
|Total expenses                              |  | $    | 9,836  |  
|                                            |  |      |        |  
|Income before income taxes                  |  |      | 1,855  |  
|                                            | 
|Income tax expense                          |  |      | 759    |  
|                                            |  |      |        |  
|Net income                                  |  | $    | 1,096  |  
|                                            |  |      |        |  

Net Income

Net income for the workers compensation insurance segment was $1.1 million for the three months ended September 30, 2006 and includes an after-tax charge of $1.3 million related to the amortization of the estimated fair value
adjustments (purchase accounting adjustments) for the assets and liabilities acquired by EIHI from EHC on June 16, 2006.

Premiums

Direct premiums written for the three months ended September 30, 2006 were $22.5 million. Direct premiums written for traditional business and
alternative markets were $17.3 million and $5.2 million for the three months ended September 30, 2006, respectively. Direct written premiums include the impact of 2006 renewal rate decreases of 5.7%, a premium renewal retention rate of 86.0%
and a reduction for purchase accounting adjustments of $2.8 million. Audit premiums of $1.3 million were also included in direct premiums written for the three months ended September 30, 2006.

Net premiums written for the three months ended September 30, 2006 were $14.5 million. Net premiums written include traditional production, net of external
reinsurance, because alternative markets business is ceded 100% to the segregated portfolio cell reinsurance segment.

Losses and Loss Adjustment
Expenses

The workers compensation ratios were as follows for the three months ended September 30, 2006:



|                                       |  |      |  
|-------------------------------------- |  | ---- | -
|                                       |  | 2006 |  
|Loss and loss adjustment expense ratio |  | 71.4 | %
|Expense ratio                          |  | 19.2 | %
|Policyholders dividend ratio          |  | 1.1  | %
|                                       |  |      |  
|Combined ratio                         |  | 91.7 | %
|                                       |  |      |  



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Loss and loss adjustment expenses were $7.7 million for the three months ended September 30, 2006 and include a
reduction for purchase accounting adjustments of $242,000. The accident period loss and loss adjustment expense ratio was 62.0% for the three months ended September 30, 2006. The calendar period loss and loss adjustment expense ratio was 71.4%
in 2006, including 12.9 points related to purchase accounting adjustments recorded to net premiums earned and loss and loss adjustment expenses. Favorable loss reserve development on prior accident years of $600,000 was recorded for the three months
ended September 30, 2006. The favorable loss and loss adjustment expense reserve development relates primarily to a decrease in the prior accident period loss development factors used to estimate loss and loss adjustment expenses. The decrease
in prior accident period loss development factors relates primarily to significant prior year claim settlements during 2006 for amounts at, or less than, previously established case and IBNR reserves. This decrease had the effect of lowering loss
development factors as of September 30, 2006. EHC utilizes loss development factors in a variety of actuarial methodologies to estimate its reserves for unpaid losses and loss adjustment expenses in the current accident period and to monitor
its recorded ultimate loss and loss adjustment expenses in prior accident periods. For the period from July 1, 2006 to September 30, 2006, EIHI closed 46, or 10.9%, of the 423 open lost time claims as of December 31, 2005. In the
aggregate, the claims were closed at amounts lower than the provision established for claims incurred but not reported. Management believes that the realization of the benefits of its return-to-work controls implemented in 2003 coupled with strong
economies in its underwriting territories during 2005 and 2006 enabled it to record loss and loss adjustment expenses that were lower than the amount reserved for claim settlements. For the three months ended September 30, 2006, there were no
claims that exceeded EIHIs $500,000 reinsurance retention.

Acquisition and Other Underwriting Expenses

Acquisition and other underwriting expenses for the three months ended September 30, 2006 were $458,000 and include a reduction for purchase accounting adjustments
of $533,000. Acquisition and other underwriting expenses consist of primarily of agent commissions, premium taxes and an assessment accrual equal to one percent of direct written premium for the Security Fund of Pennsylvania. Partially
offsetting acquisition and other underwriting expenses are fee-based revenue from the segregated portfolio cell reinsurance segment. Fee based revenue from the alternative markets segment is netted against acquisition and other underwriting
expenses. Other expenses were $1.6 million for the three months ended September 30, 2006. The expense ratio was 19.2% for the three months ended September 30, 2006.

Policyholder Dividends

Policyholder dividends were $113,000 for the three months ended September 30, 2006.
Dividends represent payments to customers who purchased participating policies that produced favorable loss ratios. In 2006, 9.7% of all policies were written on a dividend policy basis.

Net Investment Income

Net investment income was $1.0 million for the three months ended September 30, 2006.

Net Realized Gains

For the three months ended
September 30, 2006, net realized gains were $9,000.

Tax Expense

Income tax expense was $759,000 for the three months ended September 30, 2006. The effective tax rate for the three months ended September 30, 2006 was 40.9%. The primary difference between the statutory tax
rate of 35% and the effective tax rate relates to a prior tax return adjustment of $195,000 recorded in the third quarter of 2006.



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##### Table of Contents

GROUP BENEFITS INSURANCE

The following table represents the results of operations of the group benefits insurance segment for the three months ended September 30, 2006 and 2005 (in thousands):



|                                            |  |      |       |      |   |       
|------------------------------------------- |  | ---- | ----- | ---- | - | ------
|                                            |  | 2006 |       | 2005
|Revenue:                                    |  |      |       |      |   |       
|Net premiums earned                         |  | $    | 8,263 |      | $ | 9,683 
|Net investment income                       |  |      | 790   |      |   | 860   
|Net realized investment gains               |  |      | 367   |      |   | 418   
|                                            |  |      |       |      |   |       
|Total revenues                              |  |      | 9,420 |      |   | 10,961
|                                            |  |      |       |      |   |       
|Expenses:                                   |  |      |       |      |   |       
|Loss and loss adjustment expenses           |  |      | 5,009 |      |   | 5,926 
|Acquisition and other underwriting expenses |  |      | 1,251 |      |   | 1,705 
|Other expenses                              |  |      | 1,513 |      |   | 1,735 
|                                            |  |      |       |      |   |       
|Total expenses                              |  |      | 7,773 |      |   | 9,366 
|                                            |  |      |       |      |   |       
|Income before income taxes                  |  |      | 1,647 |      |   | 1,595 
|                                            |  |     
|Income tax expense                          |  |      | 613   |      |   | 633   
|                                            |  |      |       |      |   |       
|Net income                                  |  | $    | 1,034 |      | $ | 962   
|                                            |  |      |       |      |   |       

Net Income

The increase in net income primarily reflects the improving loss and expense ratios, offset by the decrease in net premiums earned.

Premiums

Net premiums earned, by line of business, for the three months ended September 30, 2006 and 2005 were as follows (in thousands):



|                      |  |      |       |      |   |      
|--------------------- |  | ---- | ----- | ---- | - | -----
|                      |  | 2006 |       | 2005
|Dental                |  | $    | 4,810 |      | $ | 5,900
|Short-term disability |  |      | 1,602 |      |   | 1,683
|Long-term disability  |  |      | 468   |      |   | 590  
|Term life             |  |      | 1,383 |      |   | 1,510
|                      |  |      |       |      |   |      
|Total                 |  | $    | 8,263 |      | $ | 9,683
|                      |  |      |       |      |   |      

The decrease in net premiums earned reflects the decline in new business sales and a decrease in the renewal
retention rate. New business sales during the third quarter of 2006 totaled $1.1 million, compared to sales of $1.3 million for the same period in 2005; however, new business sales in the first six months of 2006 declined $3.1 million, compared to
sales for the same period in 2005. The decrease in net premiums earned during the third quarter of 2006, compared to the same period in 2005, also reflects the impact of the decline in sales during the first six months of 2006. The 2006 year-to-date
retention rate of 76.8% is 1.2 percentage points lower than the same period in 2005. The lapse rate has continued to improve as the year has progressed, but the impact of higher lapses during the first half of 2006 has negatively impacted net
premiums earned in the third quarter.

Net Investment Income

The decrease in net investment income primarily reflects a loss related to limited partnership investments, totaling $50,000.

Net Realized
Investment Gains

The net realized gain for the three months ended September 30, 2006 primarily reflects an increase in the fair value of equity
call options, totaling $332,000, whereas, the net realized gain for the same period in 2005 primarily reflects investment sale activity.



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##### Table of Contents

Losses and Loss Adjustment Expenses

The decrease in losses and loss adjustment expenses reflects the decrease in net premiums earned, the improving loss experience in the dental line of business and favorable claim development in the long-term
disability line. The calendar period loss ratios for the three months ended September 30, 2006 and 2005, by line of business, were as follows:



|                      |  |       |   |  |       |  
|--------------------- |  | ----- | - |  | ----- | -
|                      |  | 2006  |   |  | 2005  |  
|Dental                |  | 62.6  | % |  | 66.3  | %
|Short-term disability |  | 82.9  | % |  | 88.7  | %
|Long-term disability  |  | -23.4 | % |  | -32.7 | %
|Term life             |  | 54.0  | % |  | 45.7  | %
|                      |  |      
|Total group benefits  |  | 60.6  | % |  | 61.2  | %

Dental

The dental loss ratio continues to improve as a result of renewal rate increases and lower claim frequency. Renewal rate increases have averaged 8.4% during 2006. The renewal rate actions have also contributed to the loss of existing
business with higher loss ratios. On a year-to-date basis, the loss ratio on lapsed business totaled 82.9%, compared to the loss ratio on retained business of 65.9%.

The accident period loss ratio totaled 69.7% for the three months ended September 30, 2006, compared to 76.1% for the same period in 2005. The third quarter 2005 accident period loss ratio, based on claims paid
through September 30, 2006, totaled 67.7%. Premiums per certificate per month (PCPM) increased 5.4% from 2005 to 2006, whereas claims incurred PCPM decreased 0.4%. The accident period loss ratio of 69.7% for the three months ended
September 30, 2006 reflects an expected loss ratio of 67.0%, plus a provision for adverse development.

Short-term Disability

The improvement in the short-term disability calendar period loss ratio reflects an improvement in the accident period loss ratio, which decreased
from 87.7% for the three months ended September 30, 2005, to 84.7% for the three months ended September 30, 2006. The third quarter 2005 accident period loss ratio, based on claims paid through September 30, 2006, totaled 70.4%. The third quarter
2006 accident period loss ratio reflects increased claim frequency and severity, offset by premium rate increases. The increase in claim frequency primarily reflects the decrease in certificates related to the decline in net premiums earned.
Premiums PCPM increased 6.4% from 2005 to 2006, reflecting premium rate increases.

Long-term Disability

The long-term disability loss ratio for the three months ended September 30, 2006 reflects favorable development related to the termination of a prior year claim
totaling approximately $400,000. Excluding the impact of this claim, the loss ratio would have been 62.1%.

The negative loss ratio for the three months
ended September 30, 2005 reflects the impact of a refinement in the calculation of the long-term disability tabular reserves. Effective July 1, 2005, ELHs management outsourced the long-term disability claim management function to a
third party, including the calculation of the long-term disability tabular reserves. For purposes of calculating the long-term disability tabular reserves, ELH utilized the 1987 Commissioners Group Disability Table (1987 CGDT). The third
party, however, utilizes a modified version of the 1987 CGDT, which takes certain factors into account earlier in the life of the claim, such as social security offsets and special conditions related to specific claims. As a result of the
outsourcing of the long-term disability claim management function and the refinement in the calculation of the long-term disability tabular reserves, ELH management transitioned to the third partys tabular reserve calculation in the third
quarter of 2005. The refinement in the reserve calculation resulted in a decrease in the long-term disability tabular reserves and reduced loss and loss adjustment expenses incurred, by $550,000, for the three months ended September 30, 2005.

Term Life

The increase in the term life loss
ratio reflects a 28.3% increase in claim frequency. The increase in claim frequency primarily reflects the decline in exposure, or certificates, from 2005 to 2006.

Acquisition and Other Underwriting Expenses

The decrease in acquisition and other underwriting expenses reflects the decline in direct
written premiums and the decrease in sales and marketing fees related to the sale of IBSi.

Other Expenses

The decrease in other expenses reflects managements expense reduction efforts; however, other expenses increased as a percent of net premiums earned, from 17.9% in
2005 to 18.3% in 2006, reflecting the impact of the decline in net premiums earned.



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##### Table of Contents

Tax Expense

The
decrease in income tax expense reflects a decrease in the effective tax rate from 39.7% in 2005 to 37.2% in 2006. The effective tax rate in 2006 and 2005 reflects a provision to return adjustment totaling $92,000 and $90,000, respectively.

SPECIALTY REINSURANCE

The specialty reinsurance
segment consists primarily of the core operating results of Eastern Re. Summarized financial results of the specialty reinsurance segment are as follows for the three months ended September 30, 2006 (in thousands):



|                                            |  |      |      
|------------------------------------------- |  | ---- | -----
|                                            |  | 2006
|Revenue:                                    |  |      |      
|Reinsurance premiums assumed                |  | $    | 2,163
|                                            | 
|Change in unearned premiums                 |  |      | 122  
|                                            |  |      |      
|Net premiums earned                         |  | $    | 2,285
|                                            | 
|Net investment income                       |  |      | 351  
|Net realized investment gains               |  |      | 23   
|Other revenue                               |  |      | 136  
|                                            |  |      |      
|Total revenue                               |  | $    | 2,795
|                                            |  |      |      
|Expenses:                                   |  |      |      
|Loss and loss adjustment expenses           |  | $    | 1,938
|Acquisition and other underwriting expenses |  |      | 194  
|Other expenses                              |  |      | 167  
|                                            |  |      |      
|Total expenses                              |  | $    | 2,299
|                                            |  |      |      
|Income before income taxes                  |  |      | 496  
|Income tax expense                          |  |      | 173  
|                                            |  |      |      
|Net income                                  |  | $    | 323  
|                                            |  |      |      

Net Income

Net income for the specialty reinsurance segment was $323,000 for the three months ended September 30, 2006 and includes an after-tax charge of $379,000 related to the amortization of the estimated fair value adjustments
(purchase accounting adjustments) for the assets and liabilities acquired by EIHI from EHC on June 16, 2006.

Premiums

Reinsurance premiums assumed are generated in the specialty reinsurance segment by Eastern Res participation in quota share reinsurance agreements with an
unaffiliated large primary insurer, pursuant to which the specialty reinsurance segment assumes premiums from such insurer in an amount equal to Eastern Res 25% quota share participation percentage. The two programs in the specialty
reinsurance segment with such insurer are EnviroGuard and a non-hazardous waste service liability product. The EnviroGuard program provides coverage to underground storage tank owners, as required by the Environmental Protection Agency, for
third-party off-site bodily injury and property damage claims as well as clean-up coverage and first party on-site claims. The second program is sponsored by the Environmental Industry Association (EIA), and offers an automobile
liability program for companies engaged in non-hazardous waste service activity.

Reinsurance premiums assumed by program were as follows for the three
months ended September 30, 2006 (in thousands):



|                                |  |      |        |  
|------------------------------- |  | ---- | ------ | -
|                                |  | 2006 |       
|EnviroGuard                     |  | $    | 2,655  |  
|EIA liability                   |  |      | 1,004  |  
|Purchase accounting adjustments |  |      | (1,496 | )
|                                |  |      |        |  
|Total assumed premiums          |  | $    | 2,163  |  
|                                |  |      |        |  



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##### Table of Contents

Losses and Loss Adjustment Expenses

EHCs specialty reinsurance ratios were as follows for the three months ended September 30, 2006:



|                                       |  |       |  
|-------------------------------------- |  | ----- | -
|                                       |  | 2006  |  
|Loss and loss adjustment expense ratio |  | 84.8  | %
|Expense ratio                          |  | 15.8  | %
|                                       |  |       |  
|Combined ratio                         |  | 100.6 | %
|                                       |  |       |  

Loss and loss adjustment expenses were $1.9 million for the three months ended September 30, 2006. The
calendar period loss and loss adjustment expense ratio was 84.8% in 2006, including 34.2 points related to purchase accounting adjustments recorded to net premiums earned for the amortization of the unearned premium reserve.

Acquisition and Other Underwriting Expenses

Acquisition and other
underwriting expenses for the three months ended September 30, 2006 were $194,000 and include a reduction for purchase accounting adjustments of $946,000, or 18.6 points on the expense ratio. 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 September 30, 2006, the ceding commission paid to the primary insurer was 30.0%. Other expenses of $167,000
were incurred for the three months ended September 30, 2006. Other expenses consist primarily of accounting, banking, management services and legal fees.

Net Investment Income

Net investment income was $351,000 for the three months ended September 30, 2006.

Net Realized Gains

For the three months ended September 30,
2006, net realized gains were $23,000.

Tax Expense

Income tax expense was $173,000 for the three months ended September 30, 2006. The effective tax rate for the three months ended September 30, 2006 was 34.9%. Specialty reinsurance is underwritten by Eastern Re, a Cayman domiciled
reinsurer. Eastern Re has received an undertaking from the Cayman Islands government exempting them from all local income, profits and capital gains taxes until February 14, 2026. Eastern Re has remained a Cayman Islands corporation after the
purchase of EHC by EIHI, however, it is now controlled indirectly by EIHI, which is a Pennsylvania corporation. As a result, under applicable federal income tax laws and regulations, Eastern Re is deemed a controlled foreign corporation and its
earnings subsequent to June 16, 2006 are subject to United States federal income taxes.



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##### Table of Contents

SEGREGATED PORTFOLIO CELL REINSURANCE

Summarized financial results of the segregated portfolio cell reinsurance segment are as follows for the three months ended September 30, 2006 (in thousands):



|                                            |  |      |       |  
|------------------------------------------- |  | ---- | ----- | -
|                                            |  | 2006 |      
|Revenue:                                    |  |      |       |  
|Reinsurance premiums assumed                |  | $    | 5,293 |  
|Ceded premiums written                      |  |      | (268  | )
|                                            |  |      |       |  
|Net premiums written                        |  |      | 5,025 |  
|Change in unearned premiums                 |  |      | 379   |  
|                                            |  |      |       |  
|Net premiums earned                         |  |      | 5,404 |  
|Net investment income                       |  |      | 234   |  
|Net realized investment gains               |  |      | 315   |  
|                                            |  |      |       |  
|Total revenue                               |  | $    | 5,953 |  
|                                            |  |      |       |  
|Expenses:                                   |  |      |       |  
|Loss and loss adjustment expenses           |  | $    | 2,823 |  
|Acquisition and other underwriting expenses |  |      | 1,197 |  
|Other expenses                              |  |      | 66    |  
|Segregated portfolio dividend expense (1)   |  |      | 1,867 |  
|                                            |  |      |       |  
|Total expenses                              |  | $    | 5,953 |  
|                                            |  |      |       |  
|Net income (1)                              |  | $    |      |  
|                                            |  |      |       |  

---

|(1) | The workers compensation insurance, specialty reinsurance and corporate/third party administration 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 any period presented in this table.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Premiums

Reinsurance premiums assumed
were $5.3 million for the three months ended September 30, 2006. Reinsurance premiums assumed include the impact of 2006 renewal rate decreases of 4.1%, a premium renewal retention rate of 84.8% and a reduction for purchase accounting
adjustments of $1.2 million. Audit premiums of $230,000 were also included in direct premiums written for the three months ended September 30, 2006.

Net premiums written for the three months ended September 30, 2006 were $5.0 million and include an increase of $508,000 related to purchase accounting adjustments.

Losses and Loss Adjustment Expenses

EHCs segregated portfolio cell operating ratios were as follows for the
three months ended September 30, 2006:



|                                       |  |      |  
|-------------------------------------- |  | ---- | -
|                                       |  | 2006 |  
|Loss and loss adjustment expense ratio |  | 52.2 | %
|Expense ratio                          |  | 23.4 | %
|                                       |  |      |  
|Combined ratio                         |  | 75.6 | %
|                                       |  |      |  

Loss and loss adjustment expenses were $2.8 million for the three months ended September 30, 2006. The
calendar period loss and loss adjustment expense ratio was 52.2% in 2006, including 5.3 points related to purchase accounting adjustments recorded to net premiums earned.



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##### Table of Contents

Acquisition and Other Underwriting Expenses

Acquisition and other underwriting expenses were $1.2 million for the three months ended September 30, 2006 and include a reduction of $726,000 for purchase accounting adjustments. Underwriting expenses
consist of the ceding commissions due under the reinsurance agreements with Eastern Alliance and/or Allied Eastern. Other expenses consist primarily of accounting, banking and legal fees. The expense ratio of 23.4% for the three months ended
September 30, 2006 includes a reduction of 9.2 points related to purchase accounting adjustments. The expense ratio, without regard to the aforementioned purchase accounting adjustments, is consistent with the contractual ceding commissions for
this period.

Segregated Portfolio Dividend Expense

Segregated portfolio dividend expense was $1.9 million for the three months ended September 30, 2006. 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.

CORPORATE/OTHER

The corporate/other segment consists of the results of operations of EIHI, EIHIs third party administration operations, Eastern Services, Global Alliance, and ELHs group medical insurance run-off operations for the three months
ended September 30, 2006. This segment also includes certain eliminations necessary to reconcile the segment information to the consolidated statements of operations. For the three months ended September 30, 2005, the corporate/other
segment consists of the results of operations of ELHs former general agency operations, group medical insurance run-off operations, and certain corporate activities of ELH.

NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2005

RESULTS OF OPERATIONS

The major components of consolidated revenue were as follows for the nine months ended September 30, 2006 and 2005:



|                              |  |      |        |      |   |       
|----------------------------- |  | ---- | ------ | ---- | - | ------
|                              |  | 2006 |        | 2005
|Net premiums written          |  | $    | 48,043 |      | $ | 29,351
|                              |  |      |        |      |   |       
|Net premiums earned           |  | $    | 45,859 |      | $ | 29,342
|Net investment income         |  |      | 5,269  |      |   | 2,816 
|Net realized investment gains |  |      | 1,632  |      |   | 336   
|Other revenue                 |  |      | 202    |      |   | 874   
|                              |  |      |        |      |   |       
|Consolidated revenue          |  | $    | 52,962 |      | $ | 33,368
|                              |  |      |        |      |   |       

The increase in consolidated revenue reflects the acquisition of EHC on June 16, 2006. The increase in net
investment income reflects the increase in cash and investments, which increased from $82.2 million at September 30, 2005 to $278.7 million at September 30, 2006, as a result of the acquisition. Other revenue for the nine months ended
September 30, 2006 represents fees from EIHIs third party administration operations and cell rental fees from EIHIs specialty reinsurance segment for the period from June 17, 2006 to September 30, 2006. Other revenue for
the nine months ended September 30, 2005 represents sales and marketing fees earned by ELHs former general agency operations segment.

The
components of consolidated net income (loss) by segment, for the nine months ended September 30, 2006 and 2005 were as follows:



|                                      |  |      |       |   |      |   |        |  
|------------------------------------- |  | ---- | ----- | - | ---- | - | ------ | -
|                                      |  | 2006 |       |   | 2005 |  
|Workers compensation insurance       |  | $    | 1,251 |   |      | $ |       |  
|Group benefits insurance              |  |      | 3,070 |   |      |   | 649    |  
|Specialty reinsurance                 |  |      | 403   |   |      |   |       |  
|Segregated portfolio cell reinsurance |  |      |      |   |      |   |       |  
|Corporate/other                       |  |      | (975  | ) |      |   | (1,151 | )
|                                      |  |      |       |   |      |   |        |  
|Consolidated net income (loss)        |  | $    | 3,749 |   |      | $ | (502   | )
|                                      |  |      |       |   |      |   |        |  

The increase in consolidated net income reflects the acquisition of EHC on June 16, 2006. The corporate/other
segment results for the nine months ended September 30, 2006 include the results of operations of EIHI and EIHIs third party administration operations and corporate activities for the period from June 17, 2006 to September 30,
2006, and ELHs group



44



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##### Table of Contents

medical insurance run-off operations and corporate activities for the nine months ended September 30, 2006. The
corporate/other segment for the nine months ended September 30, 2005 include the results of operations of ELHs former general agency operations and corporate activities, and the group medical insurance run-off operations.

WORKERS COMPENSATION INSURANCE

The workers compensation
insurance segment consists of the operating results of Eastern Alliance and Allied Eastern. Summarized financial results of the workers compensation insurance segment are as follows for the period from June 17, 2006 to September 30,
2006 (in thousands):



|                                            |  |      |        |  
|------------------------------------------- |  | ---- | ------ | -
|                                            |  | 2006 |       
|Revenue:                                    |  |      |        |  
|Direct premiums written                     |  | $    | 24,071 |  
|Reinsurance premiums assumed                |  |      | 51     |  
|Ceded premiums written                      |  |      | (8,783 | )
|                                            |  |      |        |  
|Net premiums written                        |  |      | 15,339 |  
|                                            | 
|Change in unearned premiums                 |  |      | (3,514 | )
|                                            |  |      |        |  
|Net premiums earned                         |  |      | 11,825 |  
|                                            | 
|Net investment income                       |  |      | 1,110  |  
|Net realized investment gains               |  |      | 9      |  
|                                            |  |      |        |  
|Total revenue                               |  | $    | 12,944 |  
|                                            |  |      |        |  
|Expenses:                                   |  |      |        |  
|Loss and loss adjustment expenses           |  | $    | 8,418  |  
|Acquisition and other underwriting expenses |  |      | 443    |  
|Other expenses                              |  |      | 1,820  |  
|Policyholder dividend expense               |  |      | 184    |  
|                                            |  |      |        |  
|Total expenses                              |  | $    | 10,865 |  
|                                            |  |      |        |  
|Income before income taxes                  |  |      | 2,079  |  
|                                            | 
|Income tax expense                          |  |      | 828    |  
|                                            |  |      |        |  
|Net income                                  |  | $    | 1,251  |  
|                                            |  |      |        |  

Net Income

Net income for the workers compensation insurance segment was $1.3 million for the period from June 17, 2006 to September 30, 2006 and includes an after-tax charge of $1.5 million related to the amortization of the estimated
fair value adjustments (purchase accounting adjustments) for the assets and liabilities acquired by EIHI from EHC on June 16, 2006.

Premiums

Direct premiums written for the period from June 17, 2006 to September 30, 2006 were $24.1 million. Direct premiums
written for traditional business and alternative markets were $18.6 million and $5.5 million for the period from June 17, 2006 to September 30, 2006, respectively. Direct written premiums include the impact of 2006 renewal rate decreases
of 5.7%, a premium renewal retention rate of 86.0% and a reduction for purchase accounting adjustments of $3.2 million. Audit premiums of $1.3 million were also included in direct premiums written for the period from June 17, 2006 to
September 30, 2006.

Net premiums written for the period from June 17, 2006 to September 30, 2006 were $15.3 million. Net premiums written
include traditional production, net of external reinsurance, because alternative markets business is ceded 100% to the segregated portfolio cell reinsurance segment.

Losses and Loss Adjustment Expenses

The workers compensation ratios were as follows for the period from
June 17, 2006 to September 30, 2006:



|                                       |  |      |  
|-------------------------------------- |  | ---- | -
|                                       |  | 2006 |  
|Loss and loss adjustment expense ratio |  | 71.2 | %
|Expense ratio                          |  | 19.1 | %
|Policyholders dividend ratio          |  | 1.6  | %
|                                       |  |      |  
|Combined ratio                         |  | 91.9 | %
|                                       |  |      |  



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##### Table of Contents

Loss and loss adjustment expenses were $8.4 million for the period from June 17, 2006 to September 30, 2006 and
include a reduction for purchase accounting adjustments of $280,000. The accident period loss and loss adjustment expense ratio was 62.0% for the period from June 17, 2006 to September 30, 2006. The calendar period loss and loss adjustment
expense ratio was 71.2% in 2006, including 12.9 points related to purchase accounting adjustments recorded to net premiums earned and loss and loss adjustment expenses. Favorable loss reserve development on prior accident years of $600,000 was
recorded for the period from June 17, 2006 to September 30, 2006. The favorable loss and loss adjustment expense reserve development relates primarily to a decrease in the prior accident period loss development factors used to estimate
loss and loss adjustment expenses. The decrease in prior accident period loss development factors relates primarily to significant prior year claim settlements during 2006 for amounts at, or less than, previously established case and IBNR reserves.
This decrease had the effect of lowering loss development factors as of September 30, 2006. EHC utilizes loss development factors in a variety of actuarial methodologies to estimate its reserves for unpaid losses and loss adjustment expenses in
the current accident period and to monitor its recorded ultimate loss and loss adjustment expenses in prior accident periods. For the period from July 1, 2006 to September 30, 2006, EIHI closed 46, or 10.9%, of the 423 open lost time
claims as of December 31, 2005. In the aggregate, the claims were closed at amounts lower than the provision established for claims incurred but not reported. Management believes that the realization of the benefits of its return-to-work
controls implemented in 2003 coupled with strong economies in its underwriting territories during 2005 and 2006 enabled it to record loss and loss adjustment expenses that were lower than the amount reserved for claim settlements. For the period
from June 17, 2006 to September 30, 2006, there were no claims that exceeded EIHIs $500,000 reinsurance retention.

Acquisition and
Other Underwriting Expenses

Acquisition and other underwriting expenses for the period from June 17, 2006 to September 30, 2006 were $443,000
and include a reduction for purchase accounting adjustments of $616,000. Acquisition and other underwriting expenses consist of primarily of agent commissions, premium taxes and an assessment accrual equal to one percent of direct written premium
for the Security Fund of Pennsylvania. Partially offsetting acquisition and other underwriting expenses are fee-based revenue from the segregated portfolio cell reinsurance segment. Fee based revenue from the alternative markets segment is
netted against acquisition and other underwriting expenses. Other expenses were $1.8 million for the period from June 17, 2006 to September 30, 2006. The expense ratio was 19.1% for the period from June 17, 2006 to September 30,
2006.

Policyholder Dividends

Policyholder dividends
were $184,000 for the period from June 17, 2006 to September 30, 2006. Dividends represent payments to customers who purchased participating policies that produced favorable loss ratios. In 2006, 9.7% of all policies were written on a
dividend policy basis.

Net Investment Income

Net
investment income was $1.1 million for the period from June 17, 2006 to September 30, 2006.

Net Realized Gains

For the period from June 17, 2006 to September 30, 2006, net realized gains were $9,000.

Tax Expense

For the period from June 17, 2006 to September 30, 2006, tax expense totaled $828,000.



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##### Table of Contents

GROUP BENEFITS INSURANCE

The following table represents the results of operations of the group benefits insurance segment for the nine months ended September 30, 2006 and 2005 (in thousands):



|                                            |  |      |        |      |   |       
|------------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                            |  | 2006 |        | 2005
|Revenue:                                    |  |      |        |      |   |       
|Net premiums earned                         |  | $    | 25,243 |      | $ | 29,342
|Net investment income                       |  |      | 2,734  |      |   | 2,607 
|Net realized investment gains               |  |      | 1,318  |      |   | 332   
|                                            |  |      |        |      |   |       
|Total revenue                               |  |      | 29,295 |      |   | 32,281
|                                            |  |      |        |      |   |       
|Expenses:                                   |  |      |        |      |   |       
|Loss and loss adjustment expenses           |  |      | 15,959 |      |   | 20,811
|Acquisition and other underwriting expenses |  |      | 3,824  |      |   | 5,151 
|Other expenses                              |  |      | 4,758  |      |   | 5,197 
|                                            |  |      |        |      |   |       
|Total expenses                              |  |      | 24,541 |      |   | 31,159
|                                            |  |      |        |      |   |       
|Income before income taxes                  |  |      | 4,754  |      |   | 1,122 
|Income tax expense                          |  |      | 1,684  |      |   | 473   
|                                            |  |      |        |      |   |       
|Net income                                  |  | $    | 3,070  |      | $ | 649   
|                                            |  |      |        |      |   |       

Net Income

The increase in net income reflects an improvement in the loss ratio, a decrease in the expense ratio from 35.3% to 34.0%, and an increase in net realized investment gains, offset by the decrease in net premiums earned.

Premiums

Net premiums earned, by line of business, for the nine
months ended September 30, 2006 and 2005 were as follows ( in thousands):



|                      |  |      |        |      |   |       
|--------------------- |  | ---- | ------ | ---- | - | ------
|                      |  | 2006 |        | 2005
|Dental                |  | $    | 14,699 |      | $ | 17,970
|Short-term disability |  |      | 4,865  |      |   | 4,974 
|Long-term disability  |  |      | 1,456  |      |   | 1,832 
|Term life             |  |      | 4,223  |      |   | 4,566 
|                      |  |      |        |      |   |       
|Total                 |  | $    | 25,243 |      | $ | 29,342
|                      |  |      |        |      |   |       

The decrease in net premiums earned reflects the decline in new business sales and the decrease in the renewal
retention rate.

Net Investment Income

Net investment
income remained relatively consistent from 2005 to 2006. The change primarily reflects a gain from limited partnership investments, totaling $146,000, for the nine months ended September 30, 2006, compared a gain of $67,000 for the nine months
ended September 30, 2005.

Net Realized Investment Gains

The increase in net realized investment gains primarily reflects a gain recognized on the sale of a common stock security, totaling $716,000, and a gain on equity call options, totaling $241,000, for the nine months ended September 30,
2006, compared to a loss on equity call options of $356,000 for the nine months ended September 30, 2005.

Losses and Loss Adjustment Expenses

The decrease in losses and loss adjustment expenses primarily reflects improving loss experience in the dental line of business, favorable claim
development in the long-term disability line, and lower severity and frequency in the term life line. The calendar period loss ratios for the nine months ended September 30, 2006 and 2005, by line of business, were as follows:



47



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##### Table of Contents

|                      |  |      |   |  |      |  
|--------------------- |  | ---- | - |  | ---- | -
|                      |  | 2006 |   |  | 2005 |  
|Dental                |  | 64.1 | % |  | 70.7 | %
|Short-term disability |  | 75.3 | % |  | 78.3 | %
|Long-term disability  |  | 32.9 | % |  | 56.8 | %
|Term life             |  | 55.4 | % |  | 68.1 | %
|                      |  |     
|Total group benefits  |  | 63.2 | % |  | 70.9 | %

Dental

The improvement in the calendar period dental loss ratio reflects an improvement in the accident period loss ratio and the release of prior year reserves totaling $535,000, which reduced the loss ratio by 3.6%.

The accident period loss ratio for the nine months ended September 30, 2006 totaled 67.8%, compared to 73.9% for the same period in 2005. The 2005 accident period
loss ratio, based on claims paid through September 30, 2006, totaled 71.0%. The improvement in the accident period loss ratio reflects average renewal rate increases of 8.4% and a reduction in claim frequency of 4.9%.

Short-term Disability

The improvement in the calendar period
short-term disability loss ratio reflects favorable development on prior year reserves totaling $340,000, which reduced the loss ratio by 7.0%, offset by an increase in the accident period loss ratio.

The accident period loss ratio for the nine months ended September 30, 2006 totaled 82.2%, compared to 80.0% for the same period in 2005. The 2005 accident period
loss ratio, based on claims paid through September 30, 2006, totaled 75.3%. The increase in the accident period loss ratio reflects an increase in claim frequency and severity of 4.3% and 4.9%, respectively. The increase in claim frequency
primarily reflects the decrease in certificates related to the decline in net premiums earned. The increase in claim frequency and severity was partially offset by premium rate increases, which increased premiums PCPM 6.9% from 2005 to 2006.

Long-term Disability

The improvement in the
long-term disability loss ratio reflects favorable development on prior year tabular reserves, primarily related to claim terminations, and a decrease in new claims. There were 60 claim terminations for the nine months ended September 30, 2006,
compared to 41 terminations for the same period in 2005. There were 51 new claims for the nine months ended September 30, 2006, compared to 65 new claims for the same period in 2005.

Term Life

The improvement in the term life loss ratio
reflects a decrease in premium waiver claim frequency, prior year waiver claim terminations, and a decrease in life claim severity. Premium waiver claim frequency decreased 62.4% from 2005 to 2006. New waiver claims decreased from 29 in 2005 to 10
in 2006. There were 18 terminated waiver claims (representing reserves totaling $357,000) for the nine months ended September 30, 2006, compared to 12 terminated claims (representing reserves totaling $145,000) for the same period in 2005.

Acquisition and Other Underwriting Expenses

The
decrease in acquisition and other underwriting expenses reflects the decline in direct premiums written and a decrease in sales and marketing fees totaling $655,000 related to the sale of IBSi.

Other Expenses

The decrease in other expenses reflects
managements expense reduction efforts; however, other expenses increased as a percent of net premiums earned, from 17.7% in 2005 to 18.9% in 2006, reflecting the impact of the decline in net premiums earned.

Tax Expense

The increase in income tax expense reflects the increase
in pre-tax income, offset by a decrease in the effective tax rate from 42.2% in 2005 to 35.4% in 2006. The effective tax rate in 2006 and 2005 reflects a provision to return adjustment totaling $92,000 and $90,000, respectively.



48



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##### Table of Contents

SPECIALTY REINSURANCE

The specialty reinsurance segment consists primarily of the core operating results of Eastern Re. Summarized financial results of the specialty reinsurance segment are as follows for the period from June 17, 2006 to September 30,
2006 (in thousands):



|                                            |  |      |       |  
|------------------------------------------- |  | ---- | ----- | -
|                                            |  | 2006 |      
|Revenue:                                    |  |      |       |  
|Reinsurance premiums assumed                |  | $    | 2,430 |  
|                                            | 
|Change in unearned premiums                 |  |      | 181   |  
|                                            |  |      |       |  
|Net premiums earned                         |  | $    | 2,611 |  
|                                            | 
|Net investment income                       |  |      | 430   |  
|Net realized investment losses              |  |      | (7    | )
|Other revenue                               |  |      | 147   |  
|                                            |  |      |       |  
|Total revenue                               |  | $    | 3,181 |  
|                                            |  |      |       |  
|Expenses:                                   |  |      |       |  
|Loss and loss adjustment expenses           |  | $    | 2,180 |  
|Acquisition and other underwriting expenses |  |      | 190   |  
|Other expenses                              |  |      | 192   |  
|                                            |  |      |       |  
|Total expenses                              |  | $    | 2,562 |  
|                                            |  |      |       |  
|Income before income taxes                  |  |      | 619   |  
|Income tax expense                          |  |      | 216   |  
|                                            |  |      |       |  
|Net income                                  |  | $    | 403   |  
|                                            |  |      |       |  

Net Income

Net income for the specialty reinsurance segment was $403,000 for the period from June 17, 2006 to September 30, 2006 and includes an after-tax charge of $384,000 related to the amortization of the estimated fair value adjustments
(purchase accounting adjustments) for the assets and liabilities acquired by EIHI from EHC on June 16, 2006.

Premiums

Reinsurance premiums assumed are generated in the specialty reinsurance segment by Eastern Res participation in quota share reinsurance agreements with an
unaffiliated large primary insurer, pursuant to which the specialty reinsurance segment assumes premiums from such insurer in an amount equal to Eastern Res 25% quota share participation percentage. The two programs in the specialty
reinsurance segment with such insurer are EnviroGuard and a non-hazardous waste service liability product. The EnviroGuard program provides coverage to underground storage tank owners, as required by the Environmental Protection Agency, for
third-party off-site bodily injury and property damage claims as well as clean-up coverage and first party on-site claims. The second program is sponsored by the Environmental Industry Association (EIA), and offers an automobile
liability program for companies engaged in non-hazardous waste service activity.

Reinsurance premiums assumed by program were as follows for the period
from June 17, 2006 to September 30, 2006 (in thousands):



|                                |  |      |        |  
|------------------------------- |  | ---- | ------ | -
|                                |  | 2006 |       
|EnviroGuard                     |  | $    | 2,972  |  
|EIA liability                   |  |      | 1,124  |  
|Purchase accounting adjustments |  |      | (1,666 | )
|                                |  |      |        |  
|Total assumed premiums          |  | $    | 2,430  |  
|                                |  |      |        |  



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##### Table of Contents

Losses and Loss Adjustment Expenses

EHCs specialty reinsurance ratios were as follows for the period from June 17, 2006 to September 30, 2006:



|                                       |  |      |  
|-------------------------------------- |  | ---- | -
|                                       |  | 2006 |  
|Loss and loss adjustment expense ratio |  | 83.5 | %
|Expense ratio                          |  | 14.6 | %
|                                       |  |      |  
|Combined ratio                         |  | 98.1 | %
|                                       |  |      |  

Loss and loss adjustment expenses were $2.2 million for the period from June 17, 2006 to September 30,
2006. The calendar period loss and loss adjustment expense ratio was 83.5% in 2006, including 34.2 points related to purchase accounting adjustments recorded to net premiums earned.

Acquisition and Other Underwriting Expenses

Acquisition and other underwriting expenses for the period from
June 17, 2006 to September 30, 2006 were $190,000 and include a reduction for purchase accounting adjustments of $1.1 million. 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 period from June 17, 2006 to September 30, 2006, the ceding commission paid to the primary insurer was 30.0%. Other expenses of $192,000 were incurred for the period from June 17,
2006 to September 30, 2006. Other expenses consist primarily of accounting, banking, management services and legal fees.

Net Investment Income

Net investment income was $430,000 for the period from June 17, 2006 to September 30, 2006.

Net Realized Losses

For the period from June 17, 2006 to
September 30, 2006, net realized losses were $7,000.

Tax Expense

Income tax expense was $216,000 for the period from June 17, 2006 to September 30, 2006. The effective tax rate for the period from June 17, 2006 to September 30, 2006
was 34.9%. Specialty reinsurance is underwritten by Eastern Re, a Cayman domiciled reinsurer. Eastern Re has received an undertaking from the Cayman Islands government exempting them from all local income, profits and capital gains taxes until
February 14, 2026. Eastern Re has remained a Cayman Islands corporation after the purchase of EHC by EIHI, however, it is now controlled indirectly by EIHI, which is a Pennsylvania corporation. As a result, under applicable federal income tax laws
and regulations, Eastern Re is deemed a controlled foreign corporation and its earnings subsequent to June 16, 2006 are subject to United States federal income taxes.



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##### Table of Contents

SEGREGATED PORTFOLIO CELL REINSURANCE

Summarized financial results of the segregated portfolio cell reinsurance segment are as follows for the period from June 17, 2006 to September 30, 2006 (in thousands):



|                                            |  |      |       |  
|------------------------------------------- |  | ---- | ----- | -
|                                            |  | 2006 |      
|Revenue:                                    |  |      |       |  
|Reinsurance premiums assumed                |  | $    | 5,437 |  
|Ceded premiums written                      |  |      | (382  | )
|                                            |  |      |       |  
|Net premiums written                        |  |      | 5,055 |  
|                                            | 
|Change in unearned premiums                 |  |      | 1,125 |  
|                                            |  |      |       |  
|Net premiums earned                         |  |      | 6,180 |  
|                                            | 
|Net investment income                       |  |      | 277   |  
|                                            | 
|Net realized investment gains               |  |      | 315   |  
|                                            |  |      |       |  
|Total revenue                               |  | $    | 6,772 |  
|                                            |  |      |       |  
|Expenses:                                   |  |      |       |  
|Loss and loss adjustment expenses           |  | $    | 3,295 |  
|Acquisition and other underwriting expenses |  |      | 1,379 |  
|Other expenses                              |  |      | 69    |  
|Segregated portfolio dividend expense (1)   |  |      | 2,029 |  
|                                            |  |      |       |  
|Total expenses                              |  | $    | 6,772 |  
|                                            |  |      |       |  
|Net income (1)                              |  | $    |      |  
|                                            |  |      |       |  

---

|(1) | The workers compensation insurance, specialty reinsurance and corporate/third party administration 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 any period presented in this table.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Premiums

Reinsurance premiums assumed
were $5.4 million for the period from June 17, 2006 to September 30, 2006. Reinsurance premiums assumed include the impact of 2006 renewal rate decreases of 4.1%, a premium renewal retention rate of 84.8% and a reduction for purchase
accounting adjustments of $1.3 million. Audit premiums of $230,000 were also included in direct premiums written for the period from June 17, 2006 to September 30, 2006.

Net premiums written for the period from June 17, 2006 to September 30, 2006 were $5.1 million and include an increase of $508,000 related to purchase accounting adjustments.

Losses and Loss Adjustment Expenses

EHCs segregated portfolio
cell operating ratios were as follows for the period from June 17, 2006 to September 30, 2006:



|                                       |  |      |  
|-------------------------------------- |  | ---- | -
|                                       |  | 2006 |  
|Loss and loss adjustment expense ratio |  | 53.3 | %
|Expense ratio                          |  | 23.4 | %
|                                       |  |      |  
|Combined ratio                         |  | 76.7 | %
|                                       |  |      |  

Loss and loss adjustment expenses were $3.3 million for the period from June 17, 2006 to September 30,
2006. The calendar period loss and loss adjustment expense ratio was 53.3% in 2006, including 5.3 points related to purchase accounting adjustments recorded to net premiums earned.



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##### Table of Contents

Acquisition and Other Underwriting Expenses

Acquisition and other underwriting expenses were $1.4 million for the period from June 17, 2006 to September 30, 2006 and include a reduction of $839,000 for purchase accounting adjustments.
Underwriting expenses consist of the ceding commissions due under the reinsurance agreements with Eastern Alliance and/or Allied Eastern. Other expenses consist primarily of accounting, banking and legal fees. The expense ratio of 23.4% for the
period from June 17, 2006 to September 30, 2006 includes a reduction of 9.2 points related to purchase accounting adjustments. The expense ratio, without regards to the aforementioned purchase accounting adjustments, is consistent with the
contractual ceding commissions for this period.

Segregated Portfolio Dividend Expense

Segregated portfolio dividend expense was $2.0 million for the period from June 17, 2006 to September 30, 2006. 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.

CORPORATE/OTHER

The corporate/other segment for the nine months ended September 30, 2006 consists of the results of operations of EIHI, EIHIs third party administration
operations, Eastern Services, and Global Alliance for the period from June 17, 2006 to September 30, 2006, and ELHs group medical insurance run-off operations and corporate activities for the nine months ended September 30,
2006. This segment also includes certain eliminations necessary to reconcile the segment information to the consolidated statements of operations. For the nine months ended September 30, 2005, the corporate/other segment consists of the results
of operations of ELHs former general agency operations, group medical insurance run-off operations, and certain corporate activities of ELH.

Consolidated Financial Position

The consolidated financial position at September 30, 2006 reflects the financial position of EIHI and
its wholly-owned subsidiaries, whereas the consolidated financial position at December 31, 2005 reflects the financial position of EIHI prior to its acquisition of EHC.

Consolidated assets totaled $368.4 million at September 30, 2006, compared to $111.2 million at December 31, 2005. The increase primarily reflects the acquisition of EHC on June 16, 2006 and the
proceeds from the initial public offering.

Consolidated liabilities totaled $199.9 million at September 30, 2006, compared to $49.1 million at
December 31, 2005. The increase primarily reflects the acquisition of EHC on June 16, 2006.

Consolidated equity totaled $168.5 million at
September 30, 2006, compared to $62.1 million at December 31, 2005. The increase reflects the acquisition of EHC on June 16, 2006, proceeds from the initial public offering, and net income of $3.5 million for the nine months ended
September 30, 2006, offset by the unearned ESOP compensation.

Liquidity and Capital Resources

EIHIs principal sources of cash are premiums, investment income, and proceeds from the sale and maturity of investments. EIHIs primary uses of cash are
claims, commissions, operating expenses, and the purchase of investments.

The investment portfolios of EIHIs insurance subsidiaries are structured
so that investments mature periodically over time in reasonable relation to current expectations of future claim payments. As of September 30, 2006, the effective duration of EHCs and ELHs investment portfolios was 3.62 years and
2.43 years, respectively. Currently, claim payments are made from operating cash flows, with excess cash invested in investment securities with maturity dates that match anticipated future claim payments. As securities mature, management intends to
invest excess cash with appropriate durations to match 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
became necessary, EIHI may incur losses on those sales, which would adversely affect its results of operations and could reduce net investment income.

EIHI has lines of credit available to provide additional liquidity, if needed. EHC has a $2.3 million line of credit, and Employers Alliance has a $50,000 line of credit. Eastern Re has a $30.0 million letter of credit facility if needed to
secure obligations to reinsurers.



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##### Table of Contents

EIHIs domestic insurance subsidiaries ability to pay dividends to EIHI is limited by the insurance laws and
regulations of Pennsylvania. The maximum dividend that the domestic insurance entities may pay without prior approval from the Department is limited to the greater of 10% of statutory surplus or 100% of statutory net income for the most recently
filed annual statement.

Cash Flows

Cash flows for the
nine months ended September 30, 2006 and 2005 were as follows (in thousands):



|                                                     |  |      |         |   |      |   |        |  
|---------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                                                     |  | 2006 |         |   | 2005 |  
|Cash flows from (used in) operating activities       |  | $    | 9,024   |   |      | $ | (1,257 | )
|Cash flows used in investing activities              |  |      | (21,716 | ) |      |   | (1,775 | )
|Cash flows from financing activities                 |  |      | 60,399  |   |      |   |       |  
|                                                     |  |      |         |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents |  | $    | 47,707  |   |      | $ | (3,032 | )
|                                                     |  |      |         |   |      |   |        |  

The improvement in cash flow from 2005 to 2006 reflects the proceeds from the initial public offering and the
acquisition of EHC. Cash flows for the nine months ended September 30, 2005 reflect the results of EIHI prior to the initial public offering and the acquisition of EHC.

Cash flows from operating activities, excluding intercompany transactions, for the nine months ended September 30, 2006 reflect positive cash flows at EHC and ELH totaling $5.7 million and $704,000, respectively.

Cash flows from investing activities primarily reflect the reinvestment of investment income and proceeds from maturities and the investment of excess
cash from operating activities.

Cash flows from financing activities reflect the proceeds from the initial public offering totaling $62.1 million, offset
by the paydown of EHCs outstanding loan payable, totaling $1.7 million.

Off-Balance Sheet Arrangements

EIHI has no off-balance sheet arrangements that have or are reasonably likely to have a current or, as of September 30, 2006, future effect on EIHIs financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

EIHI is subject to market risk with respect to its
fixed income investment portfolios. The most significant components of market risk affecting EIHI are credit risk and interest rate risk. EIHI is also subject to equity risk with respect to its investment in equity securities; however, since only a
small percentage of EIHIs invested assets are invested in equity securities (approximately 3.3% as of September 30, 2006), EIHI does not believe that its exposure to equity risk is significant.

There have been no material changes in EIHIs (including EHCs investment portfolio) market risk since December 31, 2005. Additional disclosures related
to EIHIs market risk are discussed under Quantitative and Qualitative Disclosures About Market Risk in ELH and EHCs Managements Discussion and Analysis of Consolidated Financial Condition and Results of Operations in
EIHIs Registration Statement on Form S-1 filed with the Securities and Exchange Commission, effective April 27, 2006.

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 September 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

There are no material changes from the risk factors previously disclosed in the EIHIs
Registration Statement on Form S-1, SEC File No. 333-128913.

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

None

Item 3. Defaults Upon Senior Securities

None



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##### Table of Contents

Item 4. Submission of Matters to Vote of Security Holders

None

Item 5. Other Information

None

Item 6. Exhibits

Exhibits



|            |  |                                                                                                                                                                                                                                                                                                             
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Title                                                                                                                                                                                                                                                                                                       
|2.1         |  | Second Amended Plan of Conversion from Mutual to Stock Organization of Eastern Life and Health Insurance Company adopted March 17, 2005, as amended June 9, 2005 and
November 17, 2005. (incorporated by reference herein to the Companys Registration Statement on Form S-1, SEC File No. 333-128913.)    
|            | 
|2.2         |  | Agreement and Plan of Reorganization dated March 17, 2005, between and among Eastern Life and Health Insurance Company, Eastern Insurance Holdings, Inc., and Eastern Holding Company,
Ltd. (incorporated by reference herein to the Companys Registration Statement on Form S-1, SEC File No. 333-128913.)
|            | 
|3.1         |  | Articles of Incorporation of Eastern Insurance Holdings, Inc. (incorporated by reference herein to the Companys Registration Statement on Form S-1, SEC File No.
333-128913.)                                                                                                                              
|            | 
|3.2         |  | Bylaws of Eastern Insurance Holdings, Inc. (incorporated by reference herein to the Companys Registration Statement on Form S-1, SEC File No. 333-128913.)                                                                                                                                                 
|            | 
|31.1        |  | Certification of President and Chief Operating 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 President and Chief Operating 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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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: November 9, 2006 |  | By:                                           |  | /s/ Michael L. Boguski               
|                        |  |                                               |  | Michael L. Boguski,                  
|                        |  |                                               |  | President and Chief Operating Officer
|                        |  |                                              
|Dated: November 9, 2006 |  | By:                                           |  | /s/ Kevin M. Shook                   
|                        |  |                                               |  | Kevin M. Shook,                      
|                        |  |                                               |  | Treasurer and Chief Financial Officer



55