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SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





Quarterly
Report pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

for the Quarterly Period Ended March 31, 2010,

or

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

for the Transition Period from              to

No. 001-32899

(Commission File Number)





EASTERN
INSURANCE HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)







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

(717)
396-7095

(Registrants telephone number, including area code)



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





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):



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

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

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



|                            |  |                                                         
|--------------------------- |  | --------------------------------------------------------
|COMMON STOCK (No par Value) |  | Number of Shares Outstanding as of May 5, 2010
9,691,257
|(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 |  | 17
|                               |  |          | 
|                               |  | Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 30
|                               |  |          | 
|                               |  | Item 4.  |  | Controls and Procedures                                                               |  | 30
|                               | 
|PART II - OTHER INFORMATION    |  | 30      
|                               |  |          | 
|                               |  | Item 1.  |  | Legal Proceedings                                                                     |  | 30
|                               |  |          | 
|                               |  | Item 1A. |  | Risk Factors                                                                          |  | 30
|                               |  |          | 
|                               |  | Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 30
|                               |  |          | 
|                               |  | Item 3.  |  | Defaults Upon Senior Securities                                                       |  | 31
|                               |  |          | 
|                               |  | Item 4.  |  | Submission of Matters to Vote of Security Holders                                     |  | 31
|                               |  |          | 
|                               |  | Item 5.  |  | Other Information                                                                     |  | 31
|                               |  |          | 
|                               |  | Item 6.  |  | Exhibits                                                                              |  | 31



2



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PART I  FINANCIAL INFORMATION



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

EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except share data)



|                                                                                                           |  |              |         |   |                 |   |         |  
|---------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | --------------- | - | ------- | -
|                                                                                                           |  | March 312010 |         |   | December 312009 |  
|ASSETS                                                                                                     |  |              |         |   |                 |   |         |  
|Investments:                                                                                               |  |              |         |   |                 |   |         |  
|Fixed income securities, at estimated fair value (amortized cost, $143,173; $154,828)                      |  | $            | 147,708 |   |                 | $ | 159,101 |  
|Convertible bonds, at estimated fair value (amortized cost, $16,889; $3,641)                               |  |              | 17,469  |   |                 |   | 4,134   |  
|Equity securities, at estimated fair value (cost, $15,291; $16,438)                                        |  |              | 19,636  |   |                 |   | 20,332  |  
|Other long-term investments, at estimated fair value (cost, $7,896; $7,879)                                |  |              | 8,456   |   |                 |   | 8,197   |  
|                                                                                                           |  |              |         |   |                 |   |         |  
|Total investments                                                                                          |  |              | 193,269 |   |                 |   | 191,764 |  
|                                                                                                           |  |             
|Cash and cash equivalents                                                                                  |  |              | 52,263  |   |                 |   | 50,841  |  
|Accrued investment income                                                                                  |  |              | 1,500   |   |                 |   | 1,444   |  
|Premiums receivable (net of allowance, $631; $631)                                                         |  |              | 39,465  |   |                 |   | 32,404  |  
|Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses                             |  |              | 12,861  |   |                 |   | 12,354  |  
|Deferred acquisition costs                                                                                 |  |              | 7,610   |   |                 |   | 6,487   |  
|Deferred income taxes, net                                                                                 |  |              | 929     |   |                 |   | 1,343   |  
|Federal income taxes recoverable                                                                           |  |              | 499     |   |                 |   | 1,549   |  
|Intangible assets                                                                                          |  |              | 7,126   |   |                 |   | 7,448   |  
|Goodwill                                                                                                   |  |              | 10,752  |   |                 |   | 10,752  |  
|Other assets                                                                                               |  |              | 9,095   |   |                 |   | 8,203   |  
|Discontinued operations  group benefits insurance                                                         |  |              | 66,649  |   |                 |   | 66,935  |  
|                                                                                                           |  |              |         |   |                 |   |         |  
|Total assets                                                                                               |  | $            | 402,018 |   |                 | $ | 391,524 |  
|                                                                                                           |  |              |         |   |                 |   |         |  
|                                                                                                           |  |             
|LIABILITIES                                                                                                |  |              |         |   |                 |   |         |  
|Reserves for unpaid losses and loss adjustment expenses                                                    |  | $            | 119,069 |   |                 | $ | 121,093 |  
|Unearned premium reserves                                                                                  |  |              | 57,090  |   |                 |   | 46,016  |  
|Advance premium                                                                                            |  |              | 138     |   |                 |   | 657     |  
|Accounts payable and accrued expenses                                                                      |  |              | 10,828  |   |                 |   | 11,853  |  
|Ceded reinsurance balances payable                                                                         |  |              | 7,160   |   |                 |   | 5,900   |  
|Segregated portfolio cell dividend payable                                                                 |  |              | 16,773  |   |                 |   | 16,684  |  
|Loan payable                                                                                               |  |              | 1,747   |   |                 |   | 1,986   |  
|Discontinued operations  group benefits insurance                                                         |  |              | 32,341  |   |                 |   | 33,470  |  
|                                                                                                           |  |              |         |   |                 |   |         |  
|Total liabilities                                                                                          |  |              | 245,146 |   |                 |   | 237,659 |  
|                                                                                                           |  |              |         |   |                 |   |         |  
|                                                                                                           |  |             
|Commitments and contingencies (Note 10)                                                                    |  |              |         |   |                 |   |         |  
|SHAREHOLDERS EQUITY                                                                                       |  |              |         |   |                 |   |         |  
|Series A preferred stock, par value $0, auth. shares  5,000,000; no shares issued and outstanding         |  |              |        |   |                 |   |        |  
|Common capital stock, par value $0, auth. shares  20,000,000; issued  11,783,014; outstanding
9,691,257 |  |              |        |   |                 |   |        |  
|Unearned ESOP compensation                                                                                 |  |              | (4,675  | ) |                 |   | (4,859  | )
|Additional paid in capital                                                                                 |  |              | 113,442 |   |                 |   | 113,049 |  
|Treasury stock, at cost (2,091,757 shares)                                                                 |  |              | (32,666 | ) |                 |   | (32,666 | )
|Retained earnings                                                                                          |  |              | 74,262  |   |                 |   | 73,038  |  
|Accumulated other comprehensive income, net                                                                |  |              | 6,509   |   |                 |   | 5,303   |  
|                                                                                                           |  |              |         |   |                 |   |         |  
|Total shareholders equity                                                                                 |  |              | 156,872 |   |                 |   | 153,865 |  
|                                                                                                           |  |              |         |   |                 |   |         |  
|Total liabilities and shareholders equity                                                                 |  | $            | 402,018 |   |                 | $ | 391,524 |  
|                                                                                                           |  |              |         |   |                 |   |         |  

See accompanying notes to unaudited consolidated financial statements.



3



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EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

For the Three Months Ended March 31, 2010 and 2009

(Unaudited, in thousands, except per share data)



|                                                                                                                  |  |                                      |        |                               |   |        |  
|----------------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------ | ----------------------------- | - | ------ | -
|                                                                                                                  |  | For the Three 
MonthsEnded March 31, |       
|                                                                                                                  |  | 2010                                 |        | 2009                          |  
|REVENUE                                                                                                           |  |                                      |        |                               |   |        |  
|Net premiums earned                                                                                               |  | $                                    | 25,346 |                               | $ | 24,847 |  
|Net investment income                                                                                             |  |                                      | 1,352  |                               |   | 1,486  |  
|Change in equity interest in limited partnerships                                                                 |  |                                      | 259    |                               |   | (94    | )
|Net realized investment gains (losses)                                                                            |  |                                      | 997    |                               |   | (2,061 | )
|Other revenue                                                                                                     |  |                                      | 146    |                               |   | 239    |  
|                                                                                                                  |  |                                      |        |                               |   |        |  
|Total revenue                                                                                                     |  |                                      | 28,100 |                               |   | 24,417 |  
|                                                                                                                  |  |                                      |        |                               |   |        |  
|EXPENSES                                                                                                          |  |                                      |        |                               |   |        |  
|Losses and loss adjustment expenses incurred                                                                      |  |                                      | 17,151 |                               |   | 15,939 |  
|Acquisition and other underwriting expenses                                                                       |  |                                      | 3,286  |                               |   | 3,216  |  
|Other expenses                                                                                                    |  |                                      | 5,094  |                               |   | 5,135  |  
|Amortization of intangibles                                                                                       |  |                                      | 321    |                               |   | 433    |  
|Policyholder dividend expense                                                                                     |  |                                      | 178    |                               |   | 185    |  
|Segregated portfolio dividend expense                                                                             |  |                                      | 183    |                               |   | (739   | )
|                                                                                                                  |  |                                      |        |                               |   |        |  
|Total expenses                                                                                                    |  |                                      | 26,213 |                               |   | 24,169 |  
|                                                                                                                  |  |                                      |        |                               |   |        |  
|Income from continuing operations before income taxes                                                             |  |                                      | 1,887  |                               |   | 248    |  
|Income tax expense from continuing operations                                                                     |  |                                      | 520    |                               |   | 1,053  |  
|                                                                                                                  |  |                                      |        |                               |   |        |  
|Net income (loss) from continuing operations                                                                      |  | $                                    | 1,367  |                               | $ | (805   | )
|                                                                                                                  |  |                                      |        |                               |   |        |  
|Discontinued operations  group benefits insurance (Note 3):                                                      |  |                                      |        |                               |   |        |  
|Income from discontinued operations before income taxes                                                           |  |                                      | 797    |                               |   | 330    |  
|Income tax expense                                                                                                |  |                                      | 262    |                               |   | 80     |  
|                                                                                                                  |  |                                      |        |                               |   |        |  
|Net income from discontinued operations                                                                           |  |                                      | 535    |                               |   | 250    |  
|                                                                                                                  |  |                                      |        |                               |   |        |  
|Net income (loss)                                                                                                 |  | $                                    | 1,902  |                               | $ | (555   | )
|                                                                                                                  |  |                                      |        |                               |   |        |  
|Other comprehensive income (loss):                                                                                |  |                                      |        |                               |   |        |  
|Unrealized holding gains (losses) arising during period, net of tax of $957 and $(444)                            |  |                                      | 1,778  |                               |   | (824   | )
|Amortization of unrecognized benefit plan amounts, net of tax of $1 and $1                                        |  |                                      | 3      |                               |   | 3      |  
|Less: Reclassification adjustment for gains (losses) included in net income (loss), net of tax of $310 and $(398) |  |                                      | 575    |                               |   | (739   | )
|                                                                                                                  |  |                                      |        |                               |   |        |  
|Other comprehensive income (loss)                                                                                 |  |                                      | 1,206  |                               |   | (82    | )
|                                                                                                                  |  |                                      |        |                               |   |        |  
|Comprehensive income (loss)                                                                                       |  | $                                    | 3,108  |                               | $ | (637   | )
|                                                                                                                  |  |                                      |        |                               |   |        |  
|                                                                                                                  |  |                                     
|                                                                                                                  |  | ThreeMonthsEndedMarch 31,2010        |        | ThreeMonthsEndedMarch 31,2009 |  
|Earnings per share (See Note 5):                                                                                  |  |                                      |        |                               |   |        |  
|Basic earnings per share:                                                                                         |  |                                      |        |                               |   |        |  
|Income (loss) from continuing operations                                                                          |  | $                                    | 0.15   |                               | $ | (0.09  | )
|Income from discontinued operations                                                                               |  | $                                    | 0.06   |                               | $ | 0.03   |  
|Diluted earnings per share:                                                                                       |  |                                      |        |                               |   |        |  
|Income (loss) from continuing operations                                                                          |  | $                                    | 0.15   |                               | $ | (0.09  | )
|Income from discontinued operations                                                                               |  | $                                    | 0.06   |                               | $ | 0.03   |  

See accompanying notes
to unaudited consolidated financial statements.



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EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Three Months Ended March 31, 2010 and 2009

(Unaudited, in thousands, except share data)



|                                                |  |                        |  |                    |                    |  |                          |  |                          |                           |   |                                |               |         |               |                  |   |                  |                   |  |                                              |        |   |       |   |        |   |  |   |         |  
|----------------------------------------------- |  | ---------------------- |  | ------------------ | ------------------ |  | ------------------------ |  | ------------------------ | ------------------------- | - | ------------------------------ | ------------- | ------- | ------------- | ---------------- | - | ---------------- | ----------------- |  | -------------------------------------------- | ------ | - | ----- | - | ------ | - |  | - | ------- | -
|                                                |  | Outstanding Shares     |  |                    | CommonCapitalStock |  | UnearnedESOPCompensation |  |                          | AdditionalPaid-In
Capital |   |                                | TreasuryStock |         |               | RetainedEarnings |   |                  | Accumulated
Other |  |                                              | Total  |  
|                                                |  | Series
APreferredStock |  | CommonCapitalStock |                    |  |                          |  |                          |                           |   | ComprehensiveIncome,Net of Tax |               |        
|Balance, January 1, 2010                        |  |                       |  | 9,691,257          |                    |  |                         |  | $                        | (4,859                    | ) |                                | $             | 113,049 |               |                  | $ | (32,666          | )                 |  | $                                            | 73,038 |   |       | $ | 5,303  |   |  | $ | 153,865 |  
|ESOP shares released                            |  |                       |  |                   |                    |  |                         |  |                          | 184                       |   |                                |               | (11     | )             |                  |   |                 |                   |  |                                              |       |   |       |   |       |   |  |   | 173     |  
|Stock compensation expense                      |  |                       |  |                   |                    |  |                         |  |                          |                          |   |                                |               | 368     |               |                  |   |                 |                   |  |                                              |       |   |       |   |       |   |  |   | 368     |  
|Excess tax expense from vested restricted stock |  |                       |  |                   |                    |  |                         |  |                          |                          |   |                                |               | 36      |               |                  |   |                 |                   |  |                                              |       |   |       |   |       |   |  |   | 36      |  
|Shareholder dividend                            |  |                       |  |                   |                    |  |                         |  |                          |                          |   |                                |               |        |               |                  |   |                 |                   |  |                                              | (678   | ) |       |   |       |   |  |   | (678    | )
|Net income                                      |  |                       |  |                   |                    |  |                         |  |                          |                          |   |                                |               |        |               |                  |   |                 |                   |  |                                              | 1,902  |   |       |   |       |   |  |   | 1,902   |  
|Other comprehensive loss, net of tax            |  |                       |  |                   |                    |  |                         |  |                          |                          |   |                                |               |        |               |                  |   |                 |                   |  |                                              |       |   |       |   | 1,206  |   |  |   | 1,206   |  
|                                                |  |                        |  |                    |                    |  |                          |  |                          |                           |   |                                |               |         |               |                  |   |                  |                   |  |                                              |        |   |       |   |        |   |  |   |         |  
|Balance, March 31, 2010                         |  |                       |  | 9,691,257          |                    |  |                         |  | $                        | (4,675                    | ) |                                | $             | 113,442 |               |                  | $ | (32,666          | )                 |  | $                                            | 74,262 |   |       | $ | 6,509  |   |  | $ | 156,872 |  
|                                                |  |                        |  |                    |                    |  |                          |  |                          |                           |   |                                |               |         |               |                  |   |                  |                   |  |                                              |        |   |       |   |        |   |  |   |         |  
|                                                |  |                        |  |                    |                    |  |                          |  |                         
|                                                |  | Series
APreferredStock |  | CommonCapitalStock |                    |  | CommonCapitalStock       |  | UnearnedESOPCompensation |                           |   | AdditionalPaid-InCapital       |               |         | TreasuryStock |                  |   | RetainedEarnings |                   |  | AccumulatedOtherComprehensiveLoss,Net of Tax |        |   | Total |  
|Balance, January 1, 2009                        |  |                       |  | 9,512,366          |                    |  |                         |  | $                        | (5,606                    | ) |                                | $             | 111,772 |               |                  | $ | (32,655          | )                 |  | $                                            | 66,492 |   |       | $ | (1,866 | ) |  | $ | 138,137 |  
|ESOP shares released                            |  |                       |  |                   |                    |  |                         |  |                          | 184                       |   |                                |               | (39     | )             |                  |   |                 |                   |  |                                              |       |   |       |   |       |   |  |   | 145     |  
|Stock compensation expense                      |  |                       |  | 180,291            |                    |  |                         |  |                          |                          |   |                                |               | 319     |               |                  |   |                 |                   |  |                                              |       |   |       |   |       |   |  |   | 319     |  
|Excess tax expense from vested restricted stock |  |                       |  |                   |                    |  |                         |  |                          |                          |   |                                |               | (93     | )             |                  |   |                 |                   |  |                                              |       |   |       |   |       |   |  |   | (93     | )
|Repurchase of common stock                      |  |                       |  | (1,400             | )                  |  |                         |  |                          |                          |   |                                |               |        |               |                  |   | (11              | )                 |  |                                              |       |   |       |   |       |   |  |   | (11     | )
|Shareholder dividend                            |  |                       |  |                   |                    |  |                         |  |                          |                          |   |                                |               |        |               |                  |   |                 |                   |  |                                              | (626   | ) |       |   |       |   |  |   | (626    | )
|Net loss                                        |  |                       |  |                   |                    |  |                         |  |                          |                          |   |                                |               |        |               |                  |   |                 |                   |  |                                              | (555   | ) |       |   |       |   |  |   | (555    | )
|Other comprehensive loss, net of tax            |  |                       |  |                   |                    |  |                         |  |                          |                          |   |                                |               |        |               |                  |   |                 |                   |  |                                              |       |   |       |   | (82    | ) |  |   | (82     | )
|                                                |  |                        |  |                    |                    |  |                          |  |                          |                           |   |                                |               |         |               |                  |   |                  |                   |  |                                              |        |   |       |   |        |   |  |   |         |  
|Balance, March 31, 2009                         |  |                       |  | 9,691,257          |                    |  |                         |  | $                        | (5,422                    | ) |                                | $             | 111,959 |               |                  | $ | (32,666          | )                 |  | $                                            | 65,311 |   |       | $ | (1,948 | ) |  | $ | 137,234 |  
|                                                |  |                        |  |                    |                    |  |                          |  |                          |                           |   |                                |               |         |               |                  |   |                  |                   |  |                                              |        |   |       |   |        |   |  |   |         |  

See accompanying notes to unaudited consolidated financial statements



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EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2010 and 2009

(Unaudited, in thousands)



|                                                                                                                    |  |      |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                                    |  | 2010 |         |   | 2009 |  
|Cash flows from operating activities:                                                                               |  |      |         |   |      |   |         |  
|Net income (loss) from continuing operations                                                                        |  | $    | 1,367   |   |      | $ | (805    | )
|Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating
activities: |  |      |         |   |      |   |         |  
|Depreciation and amortization                                                                                       |  |      | 172     |   |      |   | 144     |  
|Amortization of bond premium/discount                                                                               |  |      | 220     |   |      |   | 9       |  
|Net realized investment (gains) losses                                                                              |  |      | (997    | ) |      |   | 2,061   |  
|Change in equity interest in limited partnerships                                                                   |  |      | (259    | ) |      |   | 94      |  
|Deferred tax (benefit) expense                                                                                      |  |      | 272     |   |      |   | 382     |  
|Stock compensation                                                                                                  |  |      | 541     |   |      |   | 464     |  
|Intangible asset amortization                                                                                       |  |      | 321     |   |      |   | 433     |  
|Changes in assets and liabilities:                                                                                  |  |      |         |   |      |   |         |  
|Accrued investment income                                                                                           |  |      | (56     | ) |      |   | 200     |  
|Premiums receivable                                                                                                 |  |      | (7,061  | ) |      |   | (8,216  | )
|Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses                                      |  |      | (506    | ) |      |   | (798    | )
|Deferred acquisition costs                                                                                          |  |      | (1,123  | ) |      |   | (1,143  | )
|Other assets                                                                                                        |  |      | (996    | ) |      |   | (1,837  | )
|Reserves for unpaid losses and loss adjustment expenses                                                             |  |      | (2,024  | ) |      |   | (403    | )
|Unearned and advance premium                                                                                        |  |      | 10,555  |   |      |   | 8,749   |  
|Ceded reinsurance balances payable                                                                                  |  |      | 1,260   |   |      |   | 3,953   |  
|Accounts payable and accrued expenses                                                                               |  |      | (1,014  | ) |      |   | 267     |  
|Segregated portfolio cell dividend payable                                                                          |  |      | 431     |   |      |   | (1,188  | )
|Federal income taxes recoverable/payable                                                                            |  |      | 1,050   |   |      |   | 196     |  
|                                                                                                                    |  |      |         |   |      |   |         |  
|Net cash provided by operating activities  continuing operations                                                   |  |      | 2,153   |   |      |   | 2,562   |  
|Net cash used in operating activities  discontinued operations                                                     |  |      | (394    | ) |      |   | (1,257  | )
|                                                                                                                    |  |      |         |   |      |   |         |  
|Net cash provided by operating activities                                                                           |  |      | 1,759   |   |      |   | 1,305   |  
|                                                                                                                    |  |      |         |   |      |   |         |  
|Cash flows from investing activities:                                                                               |  |      |         |   |      |   |         |  
|Purchase of fixed income securities                                                                                 |  |      | (26,735 | ) |      |   | (18,291 | )
|Purchase of equity securities                                                                                       |  |      | (1,115  | ) |      |   | (2,668  | )
|Purchase of other long-term investments                                                                             |  |      |        |   |      |   |        |  
|Proceeds from sale of fixed income securities                                                                       |  |      | 17,648  |   |      |   | 30,463  |  
|Proceeds from maturities/calls of fixed income securities                                                           |  |      | 8,095   |   |      |   | 6,615   |  
|Proceeds from sale of equity securities                                                                             |  |      | 2,583   |   |      |   | 774     |  
|Proceeds from sale of other long-term investments                                                                   |  |      |        |   |      |   | 371     |  
|Principal payments received on mortgage loans                                                                       |  |      |        |   |      |   |        |  
|Purchase of equipment, net                                                                                          |  |      | (71     | ) |      |   | (195    | )
|                                                                                                                    |  |      |         |   |      |   |         |  
|Net cash provided by investing activities  continuing operations                                                   |  |      | 405     |   |      |   | 17,069  |  
|Net cash (used in) provided by investing activities  discontinued operations                                       |  |      | (7,201  | ) |      |   | 14,361  |  
|                                                                                                                    |  |      |         |   |      |   |         |  
|Net cash (used in) provided by investing activities                                                                 |  |      | (6,796  | ) |      |   | 31,430  |  
|                                                                                                                    |  |      |         |   |      |   |         |  
|Cash flows from financing activities:                                                                               |  |      |         |   |      |   |         |  
|Repurchase of common stock                                                                                          |  |      |        |   |      |   | (11     | )
|Shareholder dividend                                                                                                |  |      | (678    | ) |      |   | (626    | )
|Repayment of loan principal                                                                                         |  |      | (250    | ) |      |   | (250    | )
|Income taxes related to stock compensation                                                                          |  |      | 36      |   |      |   | (93     | )
|                                                                                                                    |  |      |         |   |      |   |         |  
|Net cash used in financing activities                                                                               |  |      | (892    | ) |      |   | (980    | )
|                                                                                                                    |  |      |         |   |      |   |         |  
|Net (decrease) increase in cash and cash equivalents                                                                |  |      | (5,929  | ) |      |   | 31,755  |  
|Cash and cash equivalents, beginning of period                                                                      |  |      | 50,841  |   |      |   | 52,090  |  
|Reclassification to discontinued operations                                                                         |  |      | 7,351   |   |      |   | (454    | )
|                                                                                                                    |  |      |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                                                            |  | $    | 52,263  |   |      | $ | 83,391  |  
|                                                                                                                    |  |      |         |   |      |   |         |  

See accompanying notes to unaudited consolidated financial statements.



6



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##### Table of Contents

Eastern Insurance Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

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

1. Background and Nature of Operations

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

On May 4, 2010, EIHI entered into a definitive a definitive agreement to sell Eastern Life (Note 3). As a result of this agreement, Eastern
Lifes operations have been reflected as discontinued operations in the accompanying consolidated financial statements. Eastern Lifes net premiums earned and revenue totaled $9,176 and $9,872, respectively, for the three months ended
March 31, 2010 and $8,891 and $9,739, respectively, for the three months ended March 31, 2009.

The Company currently operates in
four segments: workers compensation insurance, segregated portfolio cell reinsurance, specialty reinsurance, and corporate/other. The specialty reinsurance segment was placed into run-off effective July 1, 2008. See Note 9 for a
description of each segment.

2. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Act of 1934, as amended. Accordingly, they do not include all of the
information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, being normal, recurring adjustments, necessary for a fair statement of the financial position and results of operations of the
Company for the periods presented have been included. The results of operations for an interim period are not necessarily indicative of the results for an entire year. These financial statements should be read in conjunction with the Companys
audited financial statements and notes thereto as of and for the year ended December 31, 2009 included in the Companys Annual Report on Form 10-K, which was filed with the U.S. Securities and Exchange Commission on March 5, 2010.

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. The consolidated
balance sheet as of December 31, 2009, and the consolidated statements of operations and comprehensive income (loss) and consolidated statement of cash flows for the three months ended March 31, 2009 have been restated to reflect the sale
of Eastern Life.

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 (LAE), earned but unbilled premium, deferred acquisition costs, return premiums under
reinsurance contracts, and current and deferred income taxes. Actual results could differ from these estimates.

Recent
Accounting Pronouncements

Fair Value Measurements

In January 2010, the Financial Accounting Standards Board (FASB) issued new accounting guidance related to disclosures about fair value
measurements. The new guidance requires the following new or enhanced disclosures: 1) details of significant transfers in and out of Level 1 and Level 2 measurements and the reasons for the transfers, 2) a gross presentation of activity within the
Level 3 rollforward, presenting separately information about purchases, sales, issuances, and settlements, and 3) fair value disclosures must be presented by class of assets and liabilities rather than by major category. The new guidance was
effective for the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 rollforward information, which is required for annual reporting periods beginning after
December 15, 2010 and for interim periods within those years. The Company adopted the new accounting guidance effective January 1, 2010. The adoption of the new guidance resulted in enhanced disclosures related to the Companys
investment fair value measurements.



7



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##### Table of Contents

Eastern Insurance Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements(Continued)

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



Variable Interest Entities

In June 2009, the FASB issued new accounting guidance related to variable interest entities. The new guidance 1) replaces the quantitative-based
risks and rewards calculation for determining whether an enterprise is the primary beneficiary in a variable interest entity with an approach that is primarily qualitative, 2) requires ongoing assessments of whether an enterprise is the primary
beneficiary of a variable interest entity, and 3) requires additional disclosures about an enterprises involvement in variable interest entities. The new guidance was effective for financial statements issued for fiscal years beginning
after November 15, 2009. The Company adopted the new accounting guidance effective January 1, 2010. The adoption of the new guidance had no impact on the Companys consolidated financial statements.

3. Definitive Agreement to Sell Eastern Life

On May 4, 2010, EIHI announced that it has entered into a definitive agreement to sell its wholly-owned group benefits insurance subsidiary, Eastern
Life, to Security Life Insurance Company of America (Security). The agreement effects a statutory merger of Eastern Life into Security, with Security continuing as the surviving corporation. Total transaction consideration to EIHI will
be equal to Eastern Lifes shareholders equity, plus $250. Shareholders equity will be determined in accordance with generally accepted accounting principles (GAAP) for the month end immediately preceding the close of
the transaction. Eastern Lifes GAAP shareholders equity was $33,856 as of March 31, 2010. The consideration payable to EIHI consists principally of cash and includes a $1,750 promissory note from Securitys parent. The note
will bear interest at 4.0%, payable quarterly, and will be due in full 36 months after the closing of the transaction.

The merger agreement
contains customary representations, covenants and conditions to closing, including required regulatory approval. Closing is not conditioned on external financing, the receipt of any rating or any material consent of a third party. The transaction
requires approvals from the Insurance Departments of Pennsylvania and Minnesota, the domiciles of Eastern Life and Security, respectively. Subject to the receipt of those approvals, the transaction is expected to close by mid-summer.

The Companys group benefits insurance segment, which consists of the business of Eastern Life, has been recorded in the consolidated financial
statements as discontinued operations. The Company has also included transaction expenses of $119 ($77 net of tax) in discontinued operations. Certain corporate expenses previously reported in the group benefits insurance segment were reclassified
to continuing operations. The reclassification of these corporate expenses totaled $125 for three months ended March 31, 2010 and 2009.

The group benefits insurance segments assets and liabilities as of March 31, 2010 and December 31, 2009 are as follows:



|                                                          |  |               |        |                   |   |       
|--------------------------------------------------------- |  | ------------- | ------ | ----------------- | - | ------
|                                                          |  | March 31,2010 |        | December 
31,2009
|ASSETS                                                    |  |               |        |                   |   |       
|Investments:                                              |  |               |        |                   |   |       
|Fixed income securities                                   |  | $             | 37,759 |                   | $ | 30,173
|Equity securities                                         |  |               | 947    |                   |   | 941   
|Other long-term investments                               |  |               | 2,147  |                   |   | 2,118 
|                                                          |  |               |        |                   |   |       
|Total investments                                         |  |               | 40,853 |                   |   | 33,232
|                                                          |  |              
|Cash and cash equivalents                                 |  |               | 8,825  |                   |   | 16,176
|Accrued investment income                                 |  |               | 353    |                   |   | 220   
|Premiums receivable                                       |  |               | 37     |                   |   | 53    
|Reinsurance recoverable on paid and unpaid losses and LAE |  |               | 15,646 |                   |   | 16,167
|Deferred income taxes, net                                |  |               | 340    |                   |   | 6     
|Federal income taxes recoverable                          |  |               | 56     |                   |   | 685   
|Other assets                                              |  |               | 539    |                   |   | 396   
|                                                          |  |               |        |                   |   |       
|Total assets                                              |  | $             | 66,649 |                   | $ | 66,935
|                                                          |  |               |        |                   |   |       
|                                                          |  |              
|LIABILITIES                                               |  |               |        |                   |   |       
|Reserves for unpaid losses and LAE                        |  | $             | 29,155 |                   | $ | 30,419
|Unearned premium reserves                                 |  |               | 78     |                   |   | 83    
|Advance premium                                           |  |               | 1,386  |                   |   | 1,063 
|Accounts payable and accrued expenses                     |  |               | 1,192  |                   |   | 1,392 
|Reinsurance premiums payable                              |  |               | 214    |                   |   | 202   
|Benefit plan liabilities                                  |  |               | 316    |                   |   | 311   
|                                                          |  |               |        |                   |   |       
|Total liabilities                                         |  | $             | 32,341 |                   | $ | 33,470
|                                                          |  |               |        |                   |   |       



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##### Table of Contents

Eastern Insurance Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements(Continued)

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



4. Goodwill

Management tests goodwill for impairment annually as of September 30 and more frequently if an event occurs or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its carrying amount. The Companys goodwill is allocated 100% to the workers compensation insurance segment. We did not evaluate goodwill for impairment as of March 31,
2010 as no events occurred or circumstances changed that would have more likely than not reduced the fair value of the workers compensation insurance segment below its carrying amount since September 30, 2009.

5. Earnings Per Share

Basic earnings
per share are computed by dividing net (loss) income by the weighted average number of shares outstanding for the respective period. Diluted earnings per share are computed by dividing net (loss) income by the weighted average number of shares
outstanding for the period, including dilutive potential common shares outstanding for the period. For the three months ended March 31, 2010, there were 827,659 stock options and restricted stock awards that were not included in the
Companys earnings per share calculation because to do so would have been anti-dilutive. For the three months ended March 31, 2010, dilutive potential common shares outstanding included 36,539 restricted stock awards. For the three months
ended March 31, 2009, there were 1,098,072 stock options and restricted stock awards that were not included in the Companys earnings per share calculation because to do so would have been anti-dilutive. Of the shares excluded from the
diluted earnings per share calculation for the three months ended March 31, 2009, 233,874 shares were considered anti-dilutive because of the Companys net loss for the period.

Consolidated net (loss) income, basic shares outstanding, diluted shares outstanding, basic earnings per share, diluted earnings per share and cash
dividends per share for the three months ended March 31, 2010 and 2009 were as follows (unaudited, in thousands, except share and per share data):



|                                                                      |  |                                  |           |   |                                  |   |           |  
|--------------------------------------------------------------------- |  | -------------------------------- | --------- | - | -------------------------------- | - | --------- | -
|                                                                      |  | Three 
MonthsEndedMarch 31, 2010 |           |   | Three 
MonthsEndedMarch 31, 2009 |  
|Net income (loss) for basic and diluted earnings per share            |  | $                                | 1,902     |   |                                  | $ | (555      | )
|                                                                      |  |                                 
|Less: Dividends declared  common and unvested restricted share units |  |                                  | (678      | ) |                                  |   | (626      | )
|                                                                      |  |                                  |           |   |                                  |   |           |  
|                                                                      |  |                                 
|Undistributed earnings                                                |  |                                  | 1,224     |   |                                  |   | (1,181    | )
|                                                                      |  |                                 
|Percent allocated to common shareholders                              |  |                                  | 98.3      | % |                                  |   | 98.3      | %
|                                                                      |  |                                  |           |   |                                  |   |           |  
|                                                                      |  |                                 
|                                                                      |  |                                  | 1,204     |   |                                  |   | (1,161    | )
|                                                                      |  |                                 
|Add: Dividends declared  common shares                               |  |                                  | 667       |   |                                  |   | 615       |  
|                                                                      |  |                                  |           |   |                                  |   |           |  
|                                                                      |  |                                 
|                                                                      |  | $                                | 1,871     |   |                                  | $ | (546      | )
|                                                                      |  |                                  |           |   |                                  |   |           |  
|                                                                      |  |                                 
|Denominator for basic earnings per share                              |  |                                  | 9,065,183 |   |                                  |   | 8,851,588 |  
|                                                                      |  |                                 
|Effect of dilutive securities                                         |  |                                  | 36,539    |   |                                  |   |          |  
|                                                                      |  |                                  |           |   |                                  |   |           |  
|                                                                      |  |                                 
|Denominator for diluted earnings per common share                     |  |                                  | 9,101,722 |   |                                  |   | 8,851,588 |  
|                                                                      |  |                                  |           |   |                                  |   |           |  
|                                                                      |  |                                 
|Basic earnings per share:                                             |  |                                  |           |   |                                  |   |           |  
|Income (loss) from continuing operations                              |  | $                                | 0.15      |   |                                  | $ | (0.09     | )
|Income from discontinued operations                                   |  | $                                | 0.06      |   |                                  | $ | 0.03      |  
|Diluted earnings per share:                                           |  |                                  |           |   |                                  |   |           |  
|Income (loss) from continuing operations                              |  | $                                | 0.15      |   |                                  | $ | (0.09     | )
|Income from discontinued operations                                   |  | $                                | 0.06      |   |                                  | $ | 0.03      |  
|Cash dividends per share                                              |  | $                                | 0.07      |   |                                  | $ | 0.07      |  



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##### Table of Contents

Eastern Insurance Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements(Continued)

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



6. Fair Value Measurements

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

The following is a description of the
Companys categorization of the inputs used in the recurring fair value measurements of its financial assets included in its consolidated balance sheet as of March 31, 2010:

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

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

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

The following table provides a summary of the fair value measurements of the Companys fixed income securities, convertible bonds,
and equity securities, as of March 31, 2010 and December 31, 2009, excluding the segregated portfolio cell reinsurance segment (unaudited, in thousands):



|                                                   |  |         |         |                                                 |   |         |  |         |         |  |   |  
|-------------------------------------------------- |  | ------- | ------- | ----------------------------------------------- | - | ------- |  | ------- | ------- |  | - | -
|                                                   |  |         |         | Fair Value Measurements at 
ReportingDate Using
|                                                   |  | 3/31/10 |         | Level 1                                         |   | Level 2 |  | Level 3
|Fixed income securities  available for sale:      |  |         |         |                                                 |   |         |  |         |         |  |   |  
|U.S. Treasuries and government agencies            |  | $       | 15,373  |                                                 | $ | 8,515   |  | $       | 6,858   |  | $ | 
|States, municipalities, and political subdivisions |  |         | 35,696  |                                                 |   |        |  |         | 35,696  |  |   | 
|Corporate securities                               |  |         | 25,123  |                                                 |   |        |  |         | 25,123  |  |   | 
|Residential mortgage-backed securities             |  |         | 24,107  |                                                 |   |        |  |         | 24,107  |  |   | 
|Commercial mortgage-backed securities              |  |         | 6,217   |                                                 |   |        |  |         | 6,217   |  |   | 
|Collateralized mortgage obligations                |  |         | 13,364  |                                                 |   |        |  |         | 13,364  |  |   | 
|Other structured securities                        |  |         | 387     |                                                 |   |        |  |         | 387     |  |   | 
|Convertible bonds                                  |  |         | 17,469  |                                                 |   |        |  |         | 17,469  |  |   | 
|Equity securities  available for sale             |  |         | 15,226  |                                                 |   | 15,226  |  |         |        |  |   | 
|                                                   |  |         |         |                                                 |   |         |  |         |         |  |   |  
|Total                                              |  | $       | 152,962 |                                                 | $ | 23,741  |  | $       | 129,221 |  | $ | 
|                                                   |  |         |         |                                                 |   |         |  |         |         |  |   |  



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##### Table of Contents

Eastern Insurance Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements(Continued)

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



|                                                   |  |          |         |                                                 |   |         |  |         |         |  |   |  
|-------------------------------------------------- |  | -------- | ------- | ----------------------------------------------- | - | ------- |  | ------- | ------- |  | - | -
|                                                   |  |          |         | Fair Value Measurements at 
ReportingDate Using
|                                                   |  | 12/31/09 |         | Level 1                                         |   | Level 2 |  | Level 3
|Fixed income securities  available for sale:      |  |          |         |                                                 |   |         |  |         |         |  |   |  
|U.S. Treasuries and government agencies            |  | $        | 16,206  |                                                 | $ | 8,989   |  | $       | 7,217   |  | $ | 
|States, municipalities, and political subdivisions |  |          | 39,811  |                                                 |   |        |  |         | 39,811  |  |   | 
|Corporate securities                               |  |          | 24,332  |                                                 |   |        |  |         | 24,332  |  |   | 
|Residential mortgage-backed securities             |  |          | 26,592  |                                                 |   |        |  |         | 26,592  |  |   | 
|Commercial mortgage-backed securities              |  |          | 6,725   |                                                 |   |        |  |         | 6,725   |  |   | 
|Collateralized mortgage obligations                |  |          | 14,585  |                                                 |   |        |  |         | 14,585  |  |   | 
|Other structured securities                        |  |          | 390     |                                                 |   |        |  |         | 390     |  |   | 
|Convertible bonds                                  |  |          | 4,134   |                                                 |   |        |  |         | 4,134   |  |   | 
|Equity securities  available for sale             |  |          | 16,767  |                                                 |   | 15,826  |  |         |        |  |   | 
|                                                   |  |          |         |                                                 |   |         |  |         |         |  |   |  
|Total                                              |  | $        | 148,601 |                                                 | $ | 24,815  |  | $       | 123,786 |  | $ | 
|                                                   |  |          |         |                                                 |   |         |  |         |         |  |   |  

The estimated fair values of the Companys investments in fixed
income securities, convertible bonds, and equity securities are based on prices provided by an independent, nationally recognized pricing service. Approximately 99.0% of the Companys fixed income and equity security prices are obtained from
the independent pricing service. The prices provided by the independent pricing service are based on quoted market prices, when available, non-binding broker quotes, or matrix pricing. The independent pricing service provides a single price or quote
per security and the Company does not adjust security prices. The Company obtains an understanding of the methods, models and inputs, used by the independent pricing service, and has controls in place to validate that amounts provided represent
current exit values. The Companys controls include, but are not limited to, initial and ongoing evaluation of the methodologies used by the independent pricing service as well as comparing the fair value estimates to the Companys
knowledge of the current market. Fixed income securities include U.S. Treasuries, agencies backed by the U.S. Government, municipal bonds, mortgage-backed securities, collateralized mortgage obligations, asset-backed securities, and corporate bonds.

The Companys fixed income securities and convertible bonds consist primarily of publicly traded securities for which there are
observable inputs and/or broker quotes. Most fixed income security prices provided by the independent pricing service are based on observable inputs and, therefore, are classified as Level 2 securities. The Company does not hold any fixed income
securities, for which pricing was based on significant unobservable inputs; therefore, the Company has not classified any of its fixed income securities as Level 3 securities.

The Companys equity securities consist primarily of mutual fund instruments for which there is an active market and quoted market prices;
therefore, the Company has classified its equity securities as Level 1 securities.

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

As of March 31, 2010 (unaudited) and
December 31, 2009, the estimated fair values of the Companys limited partnership investments, by investment strategy, were as follows (in thousands):



|                                    |  |         |       |          |   |      
|----------------------------------- |  | ------- | ----- | -------- | - | -----
|                                    |  | 3/31/10 |       | 12/31/09
|Multi-strategy fund of funds        |  | $       | 4,044 |          | $ | 3,923
|Natural resources                   |  |         | 1,297 |          |   | 1,291
|Structured finance opportunity fund |  |         | 2,524 |          |   | 2,410
|Open-ended investment fund          |  |         | 591   |          |   | 573  
|Real estate                         |  |         |      |          |   |     
|                                    |  |         |       |          |   |      
|Total                               |  | $       | 8,456 |          | $ | 8,197
|                                    |  |         |       |          |   |      



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##### Table of Contents

Eastern Insurance Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements(Continued)

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



The activity in the Companys limited partnership investments for the three months ended
March 31, 2010 and 2009 was as follows (unaudited, in thousands):



|                              |  |         |       |         |   |       |  
|----------------------------- |  | ------- | ----- | ------- | - | ----- | -
|                              |  | 3/31/10 |       | 3/31/09 |  
|Balance, beginning of period  |  | $       | 8,197 |         | $ | 7,592 |  
|Contributions                 |  |         |      |         |   |      |  
|Withdrawals                   |  |         |      |         |   | (371  | )
|Unrealized change in interest |  |         | 259   |         |   | (94   | )
|                              |  |         |       |         |   |       |  
|Balance, end of period        |  | $       | 8,456 |         | $ | 7,127 |  
|                              |  |         |       |         |   |       |  

The change in interest in the Companys limited partnership investments is included in the change in equity interest in
limited partnerships in the consolidated statements of operations and comprehensive income (loss).

7. Investments

The following tables provide the amortized cost and estimated fair value of the Companys fixed income and equity securities as of March 31,
2010 and December 31, 2009 (unaudited, in thousands):



|                                                   |  |                      |         |                      |   |                       |  |   |                      |   |  |   |        
|-------------------------------------------------- |  | -------------------- | ------- | -------------------- | - | --------------------- |  | - | -------------------- | - |  | - | -------
|March 31, 2010                                     |  | Cost
orAmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair 
Value
|U.S. Treasuries and government agencies            |  | $                    | 17,765  |                      | $ | 395                   |  | $ | (3                   | ) |  | $ | 18,157 
|States, municipalities, and political subdivisions |  |                      | 33,984  |                      |   | 1,734                 |  |   | (22                  | ) |  |   | 35,696 
|Corporate securities                               |  |                      | 48,223  |                      |   | 1,584                 |  |   | (27                  | ) |  |   | 49,780 
|Residential mortgage-backed securities             |  |                      | 23,350  |                      |   | 772                   |  |   | (15                  | ) |  |   | 24,107 
|Commercial mortgage-backed securities              |  |                      | 6,126   |                      |   | 147                   |  |   | (56                  | ) |  |   | 6,217  
|Collateralized mortgage obligations                |  |                      | 13,310  |                      |   | 214                   |  |   | (160                 | ) |  |   | 13,364 
|Other structured securities                        |  |                      | 415     |                      |   | 17                    |  |   | (45                  | ) |  |   | 387    
|                                                   |  |                      |         |                      |   |                       |  |   |                      |   |  |   |        
|Total fixed income securities                      |  |                      | 143,173 |                      |   | 4,863                 |  |   | (328                 | ) |  |   | 147,708
|Equity securities                                  |  |                      | 15,291  |                      |   | 4,351                 |  |   | (6                   | ) |  |   | 19,636 
|                                                   |  |                      |         |                      |   |                       |  |   |                      |   |  |   |        
|Total fixed income and equity securities           |  | $                    | 158,464 |                      | $ | 9,214                 |  | $ | (334                 | ) |  | $ | 167,344
|                                                   |  |                      |         |                      |   |                       |  |   |                      |   |  |   |        
|                                                   |  |                      |         |                     
|December 31, 2009                                  |  | Cost
orAmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair 
Value
|U.S. Treasuries and government agencies            |  | $                    | 20,547  |                      | $ | 358                   |  | $ | (39                  | ) |  | $ | 20,866 
|States, municipalities, and political subdivisions |  |                      | 38,002  |                      |   | 1,865                 |  |   | (56                  | ) |  |   | 39,811 
|Corporate securities                               |  |                      | 48,285  |                      |   | 1,910                 |  |   | (63                  | ) |  |   | 50,132 
|Residential mortgage-backed securities             |  |                      | 25,947  |                      |   | 654                   |  |   | (9                   | ) |  |   | 26,592 
|Commercial mortgage-backed securities              |  |                      | 6,925   |                      |   | 59                    |  |   | (259                 | ) |  |   | 6,725  
|Collateralized mortgage obligations                |  |                      | 14,672  |                      |   | 180                   |  |   | (267                 | ) |  |   | 14,585 
|Other structured securities                        |  |                      | 450     |                      |   | 16                    |  |   | (76                  | ) |  |   | 390    
|                                                   |  |                      |         |                      |   |                       |  |   |                      |   |  |   |        
|Total fixed income securities                      |  |                      | 154,828 |                      |   | 5,042                 |  |   | (769                 | ) |  |   | 159,101
|Equity securities                                  |  |                      | 16,438  |                      |   | 3,907                 |  |   | (13                  | ) |  |   | 20,332 
|                                                   |  |                      |         |                      |   |                       |  |   |                      |   |  |   |        
|Total fixed income and equity securities           |  | $                    | 171,266 |                      | $ | 8,949                 |  | $ | (782                 | ) |  | $ | 179,433
|                                                   |  |                      |         |                      |   |                       |  |   |                      |   |  |   |        

Other structured securities include other asset-backed securities
collateralized by home equity loans, credit card receivables and manufactured homes.



12



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##### Table of Contents

Eastern Insurance Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements(Continued)

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



The gross unrealized losses and estimated fair value of fixed income and equity securities, excluding
those securities in the segregated portfolio cell reinsurance segment, classified as a available-for-sale by category and length of time an individual security has been in a continuous unrealized position as of March 31, 2010 (unaudited, in
thousands) and December 31, 2009 are as follows (in thousands):



|                                                   |  |                     |        |                       |                   |     |                    |       |                       |       |  |                    |      |                       |  |   |        |  |   |      |  
|-------------------------------------------------- |  | ------------------- | ------ | --------------------- | ----------------- | --- | ------------------ | ----- | --------------------- | ----- |  | ------------------ | ---- | --------------------- |  | - | ------ |  | - | ---- | -
|                                                   |  | Less Than 12 Months |        |                       | 12 Months or More |     |                    | Total |                      
|March 31, 2010                                     |  | EstimatedFairValue  |        | GrossUnrealizedLosses |                   |     | EstimatedFairValue |       | GrossUnrealizedLosses |       |  | EstimatedFairValue |      | GrossUnrealizedLosses | 
|U.S. Treasuries and government agencies            |  | $                   | 2,397  |                       | $                 | (3  | )                  |       | $                     |      |  | $                  |     |                       |  | $ | 2,397  |  | $ | (3   | )
|States, municipalities, and political subdivisions |  |                     | 1,928  |                       |                   | (21 | )                  |       |                       | 243   |  |                    | (2   | )                     |  |   | 2,171  |  |   | (23  | )
|Corporate securities                               |  |                     | 3,339  |                       |                   | (21 | )                  |       |                       | 124   |  |                    | (1   | )                     |  |   | 3,463  |  |   | (22  | )
|Residential mortgage-backed securities             |  |                     | 2,067  |                       |                   | (15 | )                  |       |                       |      |  |                    |     |                       |  |   | 2,067  |  |   | (15  | )
|Commercial mortgage-backed securities              |  |                     |       |                       |                   |    |                    |       |                       | 1,549 |  |                    | (56  | )                     |  |   | 1,549  |  |   | (56  | )
|Collateralized mortgage obligations                |  |                     | 1,257  |                       |                   | (26 | )                  |       |                       | 1,668 |  |                    | (133 | )                     |  |   | 2,925  |  |   | (159 | )
|Other structured securities                        |  |                     |       |                       |                   |    |                    |       |                       | 315   |  |                    | (45  | )                     |  |   | 315    |  |   | (45  | )
|                                                   |  |                     |        |                       |                   |     |                    |       |                       |       |  |                    |      |                       |  |   |        |  |   |      |  
|Total fixed income securities                      |  |                     | 10,988 |                       |                   | (86 | )                  |       |                       | 3,899 |  |                    | (237 | )                     |  |   | 14,887 |  |   | (323 | )
|Equity securities                                  |  |                     |       |                       |                   |    |                    |       |                       |      |  |                    |     |                       |  |   |       |  |   |     |  
|                                                   |  |                     |        |                       |                   |     |                    |       |                       |       |  |                    |      |                       |  |   |        |  |   |      |  
|Total fixed income and equity securities           |  | $                   | 10,988 |                       | $                 | (86 | )                  |       | $                     | 3,899 |  | $                  | (237 | )                     |  | $ | 14,887 |  | $ | (323 | )
|                                                   |  |                     |        |                       |                   |     |                    |       |                       |       |  |                    |      |                       |  |   |        |  |   |      |  

Note: The Company has excluded the segregated portfolio cell reinsurance segments gross unrealized losses from the
above table because changes in the estimated fair value of the segregated portfolio cell reinsurance segments fixed income and equity securities inures to the segregated portfolio cell dividend participant and, accordingly, is included in the
segregated portfolio cell dividend payable and the related segregated portfolio dividend expense in the Companys consolidated balance sheet and consolidated statement of operations, respectively. Management believes the exclusion of the
segregated portfolio cell reinsurance segment from this disclosure provides a more transparent understanding of gross unrealized losses in the Companys fixed income and equity security portfolios that could impact its consolidated financial
position or results of operations.



|                                                   |  |                     |        |                       |                   |      |                    |       |                       |       |  |                    |      |                       |  |   |        |  |   |      |  
|-------------------------------------------------- |  | ------------------- | ------ | --------------------- | ----------------- | ---- | ------------------ | ----- | --------------------- | ----- |  | ------------------ | ---- | --------------------- |  | - | ------ |  | - | ---- | -
|                                                   |  | Less Than 12 Months |        |                       | 12 Months or More |      |                    | Total |                      
|December 31, 2009                                  |  | EstimatedFairValue  |        | GrossUnrealizedLosses |                   |      | EstimatedFairValue |       | GrossUnrealizedLosses |       |  | EstimatedFairValue |      | GrossUnrealizedLosses | 
|U.S. Treasuries and government agencies            |  | $                   | 6,715  |                       | $                 | (39  | )                  |       | $                     |      |  | $                  |     |                       |  | $ | 6,715  |  | $ | (39  | )
|States, municipalities, and political subdivisions |  |                     | 2,757  |                       |                   | (56  | )                  |       |                       |      |  |                    |     |                       |  |   | 2,757  |  |   | (56  | )
|Corporate securities                               |  |                     | 4,059  |                       |                   | (36  | )                  |       |                       | 124   |  |                    | (2   | )                     |  |   | 4,183  |  |   | (38  | )
|Residential mortgage-backed securities             |  |                     | 903    |                       |                   | (9   | )                  |       |                       |      |  |                    |     |                       |  |   | 903    |  |   | (9   | )
|Commercial mortgage-backed securities              |  |                     | 1,017  |                       |                   | (2   | )                  |       |                       | 3,248 |  |                    | (258 | )                     |  |   | 4,265  |  |   | (260 | )
|Collateralized mortgage obligations                |  |                     | 1,327  |                       |                   | (44  | )                  |       |                       | 1,771 |  |                    | (223 | )                     |  |   | 3,098  |  |   | (267 | )
|Other structured securities                        |  |                     |       |                       |                   |     |                    |       |                       | 315   |  |                    | (76  | )                     |  |   | 315    |  |   | (76  | )
|                                                   |  |                     |        |                       |                   |      |                    |       |                       |       |  |                    |      |                       |  |   |        |  |   |      |  
|Total fixed income securities                      |  |                     | 16,778 |                       |                   | (186 | )                  |       |                       | 5,458 |  |                    | (559 | )                     |  |   | 22,236 |  |   | (745 | )
|Equity securities                                  |  |                     |       |                       |                   |     |                    |       |                       |      |  |                    |     |                       |  |   |       |  |   |     |  
|                                                   |  |                     |        |                       |                   |      |                    |       |                       |       |  |                    |      |                       |  |   |        |  |   |      |  
|Total fixed income and equity securities           |  | $                   | 16,778 |                       | $                 | (186 | )                  |       | $                     | 5,458 |  | $                  | (559 | )                     |  | $ | 22,236 |  | $ | (745 | )
|                                                   |  |                     |        |                       |                   |      |                    |       |                       |       |  |                    |      |                       |  |   |        |  |   |      |  

As of March 31, 2010, the Company held 31 fixed income securities with gross unrealized losses totaling $323.
Management has evaluated the unrealized losses related to those fixed income securities and determined that they are primarily due to the current liquidity issues in the fixed income markets or to a fluctuation in interest rates and not to credit
issues of the issuer or the underlying assets in the case of asset-backed securities. The Company does not intend to sell the fixed income securities and it is not more likely than not that the Company will be required to sell the fixed income
securities before recovery of their amortized cost bases, which may be maturity; therefore, management does not consider the fixed income securities to be other-than-temporarily impaired as of March 31, 2010.

As of March 31, 2010, the Company did not hold any equity securities with gross unrealized losses.

The Company recognized other-than-temporary impairments of $15 for the three months ended March 31, 2010. The Company recognized
other-than-temporary impairments of $2,369 for the three months ended March 31, 2009.

The following table provides a rollforward of the
Companys other-than-temporary impairments related to credit losses for which a portion of the other-than-temporary impairment was recognized in other comprehensive income for the three months ended March 31, 2010.



|                                                                                                                     |  |   |   
|-------------------------------------------------------------------------------------------------------------------- |  | - | --
|Balance, January 1, 2010                                                                                             |  | $ | 29
|Credit loss impairment recognized in current period on securities not previously impaired                            |  |   | 6 
|Credit loss impairments previously recognized on securities which matured, paid down, or were sold during the
period |  |   |  
|                                                                                                                     |  |   |   
|Balance, March 31, 2010                                                                                              |  | $ | 35
|                                                                                                                     |  |   |   



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##### Table of Contents

Eastern Insurance Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements(Continued)

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



8. Reserves for Unpaid Losses and Loss Adjustment Expenses

The following table provides a summary of the activity in the Companys reserves for unpaid losses and LAE for the three months ended March 31,
2010 and 2009 (unaudited, in thousands):



|                                                      |  |      |         |   |      |   |         |  
|----------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                      |  | 2010 |         |   | 2009 |  
|Balance, beginning of period                          |  | $    | 121,093 |   |      | $ | 126,532 |  
|Reinsurance recoverables on unpaid losses and LAE     |  |      | 8,512   |   |      |   | 7,835   |  
|                                                      |  |      |         |   |      |   |         |  
|Net balance, beginning of period                      |  |      | 112,581 |   |      |   | 118,697 |  
|Incurred related to:                                  |  |      |         |   |      |   |         |  
|Current year                                          |  |      | 16,278  |   |      |   | 16,294  |  
|Prior year                                            |  |      | 712     |   |      |   | (197    | )
|                                                      |  |      |         |   |      |   |         |  
|Total incurred before purchase accounting adjustments |  |      | 16,990  |   |      |   | 16,097  |  
|Purchase accounting adjustments                       |  |      | (78     | ) |      |   | (158    | )
|                                                      |  |      |         |   |      |   |         |  
|Total incurred                                        |  |      | 16,912  |   |      |   | 15,939  |  
|Paid related to:                                      |  |      |         |   |      |   |         |  
|Current year                                          |  |      | 3,063   |   |      |   | 1,744   |  
|Prior year                                            |  |      | 15,542  |   |      |   | 15,029  |  
|                                                      |  |      |         |   |      |   |         |  
|Total paid                                            |  |      | 18,605  |   |      |   | 16,773  |  
|                                                      |  |      |         |   |      |   |         |  
|Net balance, end of period                            |  |      | 110,888 |   |      |   | 117,863 |  
|Reinsurance recoverables on unpaid losses and LAE     |  |      | 8,181   |   |      |   | 8,266   |  
|                                                      |  |      |         |   |      |   |         |  
|Balance, end of period                                |  | $    | 119,069 |   |      | $ | 126,129 |  
|                                                      |  |      |         |   |      |   |         |  

Incurred losses by segment were as follows for the three months ended March 31, 2010 and 2009, respectively (unaudited,
in thousands):



|                                                      |  |                                      |        |   |                                             |   |       |                             |  |       |     |  |   |        |  
|----------------------------------------------------- |  | ------------------------------------ | ------ | - | ------------------------------------------- | - | ----- | --------------------------- |  | ----- | --- |  | - | ------ | -
|March 31, 2010                                        |  | WorkersCompensationInsuranceSegment |        |   | SegregatedPortfolio 
CellReinsuranceSegment |   |       | SpecialtyReinsuranceSegment |  | Total |    
|Incurred related to:                                  |  |                                      |        |   |                                             |   |       |                             |  |       |     |  |   |        |  
|Current year, gross of discount                       |  | $                                    | 12,602 |   |                                             | $ | 4,526 |                             |  | $     |    |  | $ | 17,128 |  
|Current period discount                               |  |                                      | (634   | ) |                                             |   | (216  | )                           |  |       |    |  |   | (850   | )
|Prior year, gross of discount                         |  |                                      |       |   |                                             |   | (733  | )                           |  |       |    |  |   | (733   | )
|Accretion of prior period discount                    |  |                                      | 704    |   |                                             |   | 741   |                             |  |       |    |  |   | 1,445  |  
|                                                      |  |                                      |        |   |                                             |   |       |                             |  |       |     |  |   |        |  
|Total incurred before purchase accounting adjustments |  |                                      | 12,672 |   |                                             |   | 4,318 |                             |  |       |    |  |   | 16,990 |  
|Purchase accounting adjustments                       |  |                                      | (71    | ) |                                             |   | (11   | )                           |  |       | 4   |  |   | (78    | )
|                                                      |  |                                      |        |   |                                             |   |       |                             |  |       |     |  |   |        |  
|Total incurred                                        |  | $                                    | 12,601 |   |                                             | $ | 4,307 |                             |  | $     | 4   |  | $ | 16,912 |  
|                                                      |  |                                      |        |   |                                             |   |       |                             |  |       |     |  |   |        |  
|                                                      |  |                                      |        |  
|March 31, 2009                                        |  | WorkersCompensationInsuranceSegment |        |   | SegregatedPortfolio 
CellReinsuranceSegment |   |       | SpecialtyReinsuranceSegment |  | Total |    
|Incurred related to:                                  |  |                                      |        |   |                                             |   |       |                             |  |       |     |  |   |        |  
|Current year, gross of discount                       |  | $                                    | 11,853 |   |                                             | $ | 4,450 |                             |  | $     | 613 |  | $ | 16,916 |  
|Current period discount                               |  |                                      | (452   | ) |                                             |   | (170  | )                           |  |       |    |  |   | (622   | )
|Prior year, gross of discount                         |  |                                      | (549   | ) |                                             |   | (206  | )                           |  |       |    |  |   | (755   | )
|Accretion of prior period discount                    |  |                                      | 406    |   |                                             |   | 152   |                             |  |       |    |  |   | 558    |  
|                                                      |  |                                      |        |   |                                             |   |       |                             |  |       |     |  |   |        |  
|Total incurred before purchase accounting adjustments |  |                                      | 11,258 |   |                                             |   | 4,226 |                             |  |       | 613 |  |   | 16,097 |  
|Purchase accounting adjustments                       |  |                                      | (149   | ) |                                             |   | (13   | )                           |  |       | 4   |  |   | (158   | )
|                                                      |  |                                      |        |   |                                             |   |       |                             |  |       |     |  |   |        |  
|Total incurred                                        |  | $                                    | 11,109 |   |                                             | $ | 4,213 |                             |  | $     | 617 |  | $ | 15,939 |  
|                                                      |  |                                      |        |   |                                             |   |       |                             |  |       |     |  |   |        |  



14



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##### Table of Contents

Eastern Insurance Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements(Continued)

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



The Companys results of operations include favorable development of $733 for the three months
ended March 31, 2010, compared to favorable development of $755 for the same period in 2009. The 2010 favorable development was reported in the segregated portfolio cell reinsurance, which primarily reflects the impact of claim settlements for
amounts at, or less than, previously established case and IBNR reserves.

9. Segment Information

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

Workers Compensation Insurance

The Company offers traditional workers compensation insurance coverage to employers, primarily in the Mid-Atlantic, Southeast and Midwest regions of
the continental United States. The Companys workers compensation products include guaranteed cost policies, policyholder dividend policies, retrospectively-rated policies and large deductible policies.

Segregated Portfolio Cell Reinsurance

The Company offers alternative market workers compensation solutions to individual companies, groups and associations (referred to as
segregated portfolio cell dividend participants) through the creation of segregated portfolio cells. The segregated portfolio cells are segregated pools of assets that function as insurance companies within an insurance company. The pool
of assets and associated liabilities of each segregated portfolio cell are solely for the benefit of the segregated portfolio cell dividend participants, and the pool of assets of one segregated portfolio cell are statutorily protected from the
creditors of the others. This permits the Company to provide customers with a turn-key alternative markets solution that includes program design, fronting, claims administration, risk management, segregated portfolio cell rental, investment and
segregated portfolio management services. The segregated portfolio cell structure provides dividend participants the opportunity to share in both underwriting profit and investment income derived from their respective segregated portfolio
cells financial results. The segregated portfolio cell reinsurance segment generated fee revenue to the Companys workers compensation, run-off specialty reinsurance, and corporate/other segments totaling $1,411 and $1,521 for the
three months ended March 31, 2010 and 2009, respectively.

Run-Off Specialty Reinsurance

Prior to July 1, 2008, the Company assumed business through its participation in reinsurance treaties with an unaffiliated insurance company related
to an underground storage tank insurance program, referred to as EnviroGuard, and a non-hazardous waste transportation product, referred to as EIA liability (EIA). The EnviroGuard program provided coverage to
underground tank owners for third party off-site bodily injury and property damage claims as well as clean-up coverage and first party on-site claims. The EIA program provided commercial automobile liability coverage for non-hazardous waste haulers.
Net premiums earned, by program, for the three months ended March 31, 2010 and 2009 were as follows (unaudited, in thousands):



|            |  |      |   |      |   |    
|----------- |  | ---- | - | ---- | - | ---
|            |  | 2010 |   | 2009
|EnviroGuard |  | $    | 6 |      | $ | 630
|EIA         |  |      |  |      |   | 269
|            |  |      |   |      |   |    
|Total       |  | $    | 6 |      | $ | 899
|            |  |      |   |      |   |    



15



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##### Table of Contents

Eastern Insurance Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements(Continued)

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



Corporate/Other

The corporate/other segment includes the holding company and third party administration activities of the Company, as well as certain eliminations
necessary to reconcile the segment information to the consolidated statements of operations and comprehensive income (loss). The corporate/other segment also includes the Companys 10.0% interest in a segregated portfolio cell with an
unaffiliated primary carrier that writes insurance coverage for sprinkler contractors.

The following table represents the segment results for
the three months ended March 31, 2010 (unaudited, in thousands):



|                                                             |  |                               |         |                                      |   |                             |  |   |                 |   |  |       |         |   |  |   |        
|------------------------------------------------------------ |  | ----------------------------- | ------- | ------------------------------------ | - | --------------------------- |  | - | --------------- | - |  | ----- | ------- | - |  | - | -------
|                                                             |  | WorkersCompensationInsurance |         | SegregatedPortfolio 
CellReinsurance |   | Run-OffSpecialtyReinsurance |  |   | Corporate/Other |   |  | Total
|Revenue:                                                     |  |                               |         |                                      |   |                             |  |   |                 |   |  |       |         |   |  |   |        
|Net premiums earned                                          |  | $                             | 19,455  |                                      | $ | 5,885                       |  | $ | 6               |   |  | $     |        |   |  | $ | 25,346 
|Net investment income                                        |  |                               | 830     |                                      |   | 151                         |  |   | 305             |   |  |       | 66      |   |  |   | 1,352  
|Change in equity interest in limited partnerships            |  |                               | 205     |                                      |   |                            |  |   | 54              |   |  |       |        |   |  |   | 259    
|Net realized investment gains                                |  |                               | 450     |                                      |   | 565                         |  |   | 185             |   |  |       | (203    | ) |  |   | 997    
|Other revenue                                                |  |                               |        |                                      |   |                            |  |   | 237             |   |  |       | (91     | ) |  |   | 146    
|                                                             |  |                               |         |                                      |   |                             |  |   |                 |   |  |       |         |   |  |   |        
|Total revenue                                                |  |                               | 20,940  |                                      |   | 6,601                       |  |   | 787             |   |  |       | (228    | ) |  |   | 28,100 
|                                                             |  |                               |         |                                      |   |                             |  |   |                 |   |  |       |         |   |  |   |        
|                                                             |  |                               |         |                                      |  
|Expenses:                                                    |  |                               |         |                                      |   |                             |  |   |                 |   |  |       |         |   |  |   |        
|Losses and LAE incurred                                      |  |                               | 12,840  |                                      |   | 4,307                       |  |   | 4               |   |  |       |        |   |  |   | 17,151 
|Acquisition and other underwriting expenses                  |  |                               | 1,970   |                                      |   | 1,792                       |  |   | 2               |   |  |       | (478    | ) |  |   | 3,286  
|Other expenses                                               |  |                               | 3,511   |                                      |   | 66                          |  |   | 90              |   |  |       | 1,427   |   |  |   | 5,094  
|Amortization of intangibles                                  |  |                               |        |                                      |   |                            |  |   |                |   |  |       | 321     |   |  |   | 321    
|Policyholder dividend expense                                |  |                               | 178     |                                      |   |                            |  |   |                |   |  |       |        |   |  |   | 178    
|Segregated portfolio dividend expense                        |  |                               |        |                                      |   | 436                         |  |   |                |   |  |       | (253    | ) |  |   | 183    
|                                                             |  |                               |         |                                      |   |                             |  |   |                 |   |  |       |         |   |  |   |        
|Total expenses                                               |  |                               | 18,499  |                                      |   | 6,601                       |  |   | 96              |   |  |       | 1,017   |   |  |   | 26,213 
|                                                             |  |                               |         |                                      |   |                             |  |   |                 |   |  |       |         |   |  |   |        
|Income (loss) from continuing operations before income taxes |  |                               | 2,441   |                                      |   |                            |  |   | 691             |   |  |       | (1,245  | ) |  |   | 1,887  
|Income tax expense from continuing operations                |  |                               | 715     |                                      |   |                            |  |   | (1              | ) |  |       | (194    | ) |  |   | 520    
|                                                             |  |                               |         |                                      |   |                             |  |   |                 |   |  |       |         |   |  |   |        
|Net income (loss) from continuing operations                 |  | $                             | 1,726   |                                      | $ |                            |  | $ | 692             |   |  | $     | (1,051  | ) |  | $ | 1,367  
|                                                             |  |                               |         |                                      |   |                             |  |   |                 |   |  |       |         |   |  |   |        
|Total assets                                                 |  | $                             | 252,544 |                                      | $ | 61,731                      |  | $ | 55,782          |   |  | $     | (34,641 | ) |  | $ | 335,416
|                                                             |  |                               |         |                                      |   |                             |  |   |                 |   |  |       |         |   |  |   |        



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##### Table of Contents

Eastern Insurance Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements(Continued)

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



The following table represents the segment results for the three months ended March 31, 2009
(unaudited, in thousands):



|                                                             |  |                               |         |   |                                      |   |        |                             |  |   |                 |   |  |       |         |   |  |   |         |  
|------------------------------------------------------------ |  | ----------------------------- | ------- | - | ------------------------------------ | - | ------ | --------------------------- |  | - | --------------- | - |  | ----- | ------- | - |  | - | ------- | -
|                                                             |  | WorkersCompensationInsurance |         |   | SegregatedPortfolio 
CellReinsurance |   |        | Run-OffSpecialtyReinsurance |  |   | Corporate/Other |   |  | Total |        
|Revenue:                                                     |  |                               |         |   |                                      |   |        |                             |  |   |                 |   |  |       |         |   |  |   |         |  
|Net premiums earned                                          |  | $                             | 17,906  |   |                                      | $ | 6,042  |                             |  | $ | 899             |   |  | $     |        |   |  | $ | 24,847  |  
|Net investment income                                        |  |                               | 958     |   |                                      |   | 182    |                             |  |   | 258             |   |  |       | 88      |   |  |   | 1,486   |  
|Change in equity interest in limited partnerships            |  |                               | (94     | ) |                                      |   |       |                             |  |   |                |   |  |       |        |   |  |   | (94     | )
|Net realized investment (losses) gains                       |  |                               | (10     | ) |                                      |   | (1,095 | )                           |  |   | (1,201          | ) |  |       | 245     |   |  |   | (2,061  | )
|Other revenue                                                |  |                               | 99      |   |                                      |   |       |                             |  |   | 113             |   |  |       | 27      |   |  |   | 239     |  
|                                                             |  |                               |         |   |                                      |   |        |                             |  |   |                 |   |  |       |         |   |  |   |         |  
|Total revenue                                                |  |                               | 18,859  |   |                                      |   | 5,129  |                             |  |   | 69              |   |  |       | 360     |   |  |   | 24,417  |  
|                                                             |  |                               |         |   |                                      |   |        |                             |  |   |                 |   |  |       |         |   |  |   |         |  
|                                                             |  |                               |         |   |                                     
|Expenses:                                                    |  |                               |         |   |                                      |   |        |                             |  |   |                 |   |  |       |         |   |  |   |         |  
|Losses and LAE incurred                                      |  |                               | 11,109  |   |                                      |   | 4,213  |                             |  |   | 617             |   |  |       |        |   |  |   | 15,939  |  
|Acquisition and other underwriting expenses                  |  |                               | 1,472   |   |                                      |   | 1,833  |                             |  |   | 270             |   |  |       | (359    | ) |  |   | 3,216   |  
|Other expenses                                               |  |                               | 3,564   |   |                                      |   | (30    | )                           |  |   | 136             |   |  |       | 1,465   |   |  |   | 5,135   |  
|Amortization of intangibles                                  |  |                               |        |   |                                      |   |       |                             |  |   |                |   |  |       | 433     |   |  |   | 433     |  
|Policyholder dividend expense                                |  |                               | 185     |   |                                      |   |       |                             |  |   |                |   |  |       |        |   |  |   | 185     |  
|Segregated portfolio dividend expense                        |  |                               |        |   |                                      |   | (887   | )                           |  |   |                |   |  |       | 148     |   |  |   | (739    | )
|                                                             |  |                               |         |   |                                      |   |        |                             |  |   |                 |   |  |       |         |   |  |   |         |  
|Total expenses                                               |  |                               | 16,330  |   |                                      |   | 5,129  |                             |  |   | 1,023           |   |  |       | 1,687   |   |  |   | 24,169  |  
|                                                             |  |                               |         |   |                                      |   |        |                             |  |   |                 |   |  |       |         |   |  |   |         |  
|Income (loss) from continuing operations before income taxes |  |                               | 2,529   |   |                                      |   |       |                             |  |   | (954            | ) |  |       | (1,327  | ) |  |   | 248     |  
|Income tax expense from continuing operations                |  |                               | 765     |   |                                      |   |       |                             |  |   | 3               |   |  |       | 285     |   |  |   | 1,053   |  
|                                                             |  |                               |         |   |                                      |   |        |                             |  |   |                 |   |  |       |         |   |  |   |         |  
|Net income (loss) from continuing operations                 |  | $                             | 1,764   |   |                                      | $ |       |                             |  | $ | (957            | ) |  | $     | (1,612  | ) |  | $ | (805    | )
|                                                             |  |                               |         |   |                                      |   |        |                             |  |   |                 |   |  |       |         |   |  |   |         |  
|Total assets                                                 |  | $                             | 233,277 |   |                                      | $ | 56,914 |                             |  | $ | 62,284          |   |  | $     | (30,763 | ) |  | $ | 321,712 |  
|                                                             |  |                               |         |   |                                      |   |        |                             |  |   |                 |   |  |       |         |   |  |   |         |  

10. Commitments and Contingencies

Legal Proceedings

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

11. Subsequent
Events

Management performed an evaluation of subsequent events and determined there were no recognized or unrecognized subsequent events
that would require an adjustment and/or additional disclosure in the consolidated financial statements.



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

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the unaudited interim
consolidated financial statements of Eastern Insurance Holdings, Inc. (the Company) and the related notes thereto included in Item 1 of this Part 1. The information contained in this quarterly report is not a complete
description of the Companys business or the risks associated with an investment in the Companys common stock. You should carefully review and consider the various disclosures made by the Company in this quarterly report and in the
Companys Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 5, 2010.



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##### Table of Contents

Forward-looking Statements

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

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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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

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



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##### Table of Contents

Overview

The Companys results of operations for the three months ended March 31, 2010 improved significantly when compared to the same period in 2009.
The 2010 results primarily reflect an improvement in the fixed income and equity security markets. The Companys results of operations included net realized investment gains of $997,000 for the three months ended March 31, 2010, compared
to net realized investment losses of $2.1 million for the same period in 2009. The 2009 net realized investment losses included other-than-temporary impairments of $1.8 million (excluding impairments in the segregated portfolio cell reinsurance
segment). Other-than-temporary impairments were de minimis in 2010.

The workers compensation insurance segment reported a combined
ratio of 95.1% for the three months ended March 31, 2010, compared to a combined ratio of 91.2% for the same period in 2009. The increase in the combined ratio primarily reflects an increase in the calendar period loss ratio due to no favorable
development being recorded in the first quarter of 2010. The segments results were also impacted by return premium to insureds as a result of premium audits for the three months ended March 31, 2010, compared to additional premium to the
Company for the same period in 2009.

The segregated portfolio cell reinsurance segment reported a combined ratio of 104.8% for the three
months ended March 31, 2010, compared to a combined ratio of 99.5% for the same period in 2009. The increase in the combined ratio primarily reflects an increase in the calendar period loss ratio. The calendar period loss ratio was impacted by
an increase in the accident period loss ratio from 2009 to 2010, partially offset by an increase in favorable loss reserve development. The increase in the accident period loss ratio was primarily driven by an increase in reported claims in certain
segregated cells during the first quarter of 2010.

Principal Revenue and Expense Items

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

Direct and net premiums written. Direct premiums written is the sum of both direct premiums and assumed premiums before the
effect of ceded reinsurance. Direct premiums written include all premiums billed during a specific policy period. Net premiums written is the difference between direct premiums written and premiums ceded or paid to reinsurers (ceded premiums
written). In the segregated portfolio cell reinsurance segment, assumed premiums are derived from insurance contracts written by the Company and ceded to the segregated portfolio cells.

Net premiums earned.Net premiums earned are the earned portion of the Companys net premiums written. Premiums are earned over the term of
the related policies. At the end of each accounting period, the portion of the premiums that are not yet earned are included in unearned premiums and are realized as revenue in subsequent periods over the remaining term of the policy. The
Companys workers compensation policies typically have a term of twelve months. Workers compensation premiums are determined based upon the payroll of the insured, the applicable premium rates and, where applicable, an
experience based modification factor. An audit of the policyholders records is conducted after policy expiration, to make a final determination of applicable premiums. Included with net premiums earned is an estimate for earned but unbilled
final audit premiums. The Company can estimate earned but unbilled premiums because it keeps track, by policy, of how much additional premium is billed in final audit invoices as a percentage to estimate the probable additional amount that it has
earned but not yet billed as of the balance sheet date.

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

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



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##### Table of Contents

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

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

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

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

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

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

Key Financial Measures

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

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

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

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

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

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

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



20



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##### Table of Contents

Critical Accounting Policies and Estimates

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

Reserves for Unpaid Losses and LAE

The Company establishes reserves for unpaid losses and LAE for its workers compensation, segregated portfolio cell reinsurance and
run-off specialty reinsurance products, which are estimates of future payments of reported and unreported claims for losses and related expenses. The adequacy of the Companys reserves for unpaid losses and LAE are inherently uncertain because
the ultimate amount that the Company may pay under many of the claims incurred as of the balance sheet date will not be known for many years. Establishing reserves continues to be a complex and imprecise process, requiring the use of informed
estimates and judgments. The Companys estimates and judgments may be revised as additional experience and other data becomes available and are reviewed, as new or improved methodologies are developed, or as current laws change. Any such
revisions could result in future changes in estimates of losses or reinsurance recoverable and would be reflected in the Companys results of operations in the period in which the estimates are changed. Estimating the ultimate claims liability
is necessarily a complex and judgmental process inasmuch as the amounts are based on managements informed estimates and judgments using data currently available. If ultimate losses, net of reinsurance, prove to be substantially higher than the
amounts recorded as of March 31, 2010, the related adjustments could have a material adverse effect on the Companys financial condition, results of operations or liquidity.

The Company discounts its workers compensation reserves, using a discount rate of approximately 3.0%. As of March 31, 2010 and
December 31, 2009, the Companys reserves for unpaid losses and LAE were reduced by $4,194 and $4,256, respectively, related to the effects of discounting.

The reserves for unpaid losses and LAE in the run-off specialty reinsurance segment are based on claim information received from the ceding company on a
quarterly basis. Each quarter, the Company 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 the Company increasing its losses and LAE, and its corresponding loss reserves it that quarter. The Company did not record any loss reserve development for the three months ended March 31, 2010 or 2009. Management recently commenced a claims
audit at the ceding company with the intention of reviewing the open claims inventory. The run-off specialty reinsurance segment historically has been volatile with unfavorable development in 2008 and prior years. The results of this claims audit
will be incorporated in our reserve evaluation process.

The Companys reserves for unpaid losses and LAE in its workers
compensation insurance, segregated portfolio cell reinsurance and run-off specialty reinsurance segments as of March 31, 2010 (unaudited) and December 31, 2009 are summarized below (in thousands):



|                                                              |  |                               |        |   |                                    |   |        |                      |  |   |        |   |  |   |         |  
|------------------------------------------------------------- |  | ----------------------------- | ------ | - | ---------------------------------- | - | ------ | -------------------- |  | - | ------ | - |  | - | ------- | -
|March 31, 2010                                                |  | WorkersCompensationInsurance |        |   | SegregatedPortfolioCellReinsurance |   |        | SpecialtyReinsurance |  |   | Total  |  
|Case/tabular reserves                                         |  | $                             | 35,622 |   |                                    | $ | 12,093 |                      |  | $ | 16,613 |   |  | $ | 64,328  |  
|Case incurred development, IBNR, and unallocated LAE reserves |  |                               | 24,854 |   |                                    |   | 11,244 |                      |  |   | 14,198 |   |  |   | 50,296  |  
|Amount of discount                                            |  |                               | (3,027 | ) |                                    |   | (1,167 | )                    |  |   |       |   |  |   | (4,194  | )
|                                                              |  |                               |        |   |                                    |   |        |                      |  |   |        |   |  |   |         |  
|Net reserves                                                  |  |                               | 57,449 |   |                                    |   | 22,170 |                      |  |   | 30,811 |   |  |   | 110,430 |  
|Reinsurance recoverables on unpaid losses and LAE             |  |                               | 4,221  |   |                                    |   | 3,960  |                      |  |   |       |   |  |   | 8,181   |  
|Purchase accounting adjustments                               |  |                               | 442    |   |                                    |   | 30     |                      |  |   | (14    | ) |  |   | 458     |  
|                                                              |  |                               |        |   |                                    |   |        |                      |  |   |        |   |  |   |         |  
|Reserves for unpaid losses and LAE                            |  | $                             | 62,112 |   |                                    | $ | 26,160 |                      |  | $ | 30,797 |   |  | $ | 119,069 |  
|                                                              |  |                               |        |   |                                    |   |        |                      |  |   |        |   |  |   |         |  



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|                                                              |  |                               |        |   |                                    |   |        |                      |  |   |        |   |  |   |         |  
|------------------------------------------------------------- |  | ----------------------------- | ------ | - | ---------------------------------- | - | ------ | -------------------- |  | - | ------ | - |  | - | ------- | -
|December 31, 2009                                             |  | WorkersCompensationInsurance |        |   | SegregatedPortfolioCellReinsurance |   |        | SpecialtyReinsurance |  |   | Total  |  
|Case/tabular reserves                                         |  | $                             | 33,073 |   |                                    | $ | 10,978 |                      |  | $ | 15,761 |   |  | $ | 59,812  |  
|Case incurred development, IBNR, and unallocated LAE reserves |  |                               | 27,451 |   |                                    |   | 12,196 |                      |  |   | 16,841 |   |  |   | 56,488  |  
|Amount of discount                                            |  |                               | (3,097 | ) |                                    |   | (1,159 | )                    |  |   |       |   |  |   | (4,256  | )
|                                                              |  |                               |        |   |                                    |   |        |                      |  |   |        |   |  |   |         |  
|Net reserves                                                  |  |                               | 57,427 |   |                                    |   | 22,015 |                      |  |   | 32,602 |   |  |   | 112,044 |  
|Reinsurance recoverables on unpaid losses and LAE             |  |                               | 4,909  |   |                                    |   | 3,603  |                      |  |   |       |   |  |   | 8,512   |  
|Purchase accounting adjustments                               |  |                               | 514    |   |                                    |   | 41     |                      |  |   | (18    | ) |  |   | 537     |  
|                                                              |  |                               |        |   |                                    |   |        |                      |  |   |        |   |  |   |         |  
|Reserves for unpaid losses and LAE                            |  | $                             | 62,850 |   |                                    | $ | 25,659 |                      |  | $ | 32,584 |   |  | $ | 121,093 |  
|                                                              |  |                               |        |   |                                    |   |        |                      |  |   |        |   |  |   |         |  

Other Than Temporary Investment Impairments

Unrealized investment gains or losses on investments carried at fair value, net of applicable income taxes, are reflected directly in shareholders
equity as a component of comprehensive income (loss) and, accordingly, have no effect on net income. When, in the opinion of management, a decline in the fair value of an investment below its cost or amortized cost is considered to be
other-than-temporary, such investment is written down to its fair value. The amount written down is recorded in earnings as a realized loss on investments. Generally, the determination of other-than-temporary impairment includes, in
addition to other relevant factors, a presumption that if the market value is below cost by a significant amount for a period of time, a write down is necessary. Notwithstanding this presumption, the determination of other-than-temporary impairment
requires judgment about future prospects for an investment and is therefore a matter of inherent uncertainty. For the three months ended March 31, 2010, the Company recognized other-than-temporary impairments of $15 compared to $2.4 million for
the same period in 2009. As of March 31, 2010, the Company held securities with gross unrealized losses of $323,000, excluding those securities in the segregated portfolio cell reinsurance segment, of which $237,000 were in an unrealized loss
position for more than 12 months. Adverse investment market conditions, poor operating results of underlying investments, or the passage of time with respect to equity securities in an unrealized loss position, could result in impairment charges in
the future. The Company generally applies the following standards in determining whether the decline in fair value of an investment is other-than-temporary:

Equity securities. An equity security is considered impaired when one of the following conditions exist: 1) an equity securitys market value
is less than 80.0% of its cost for a continuous period of six months, 2) an equitys securitys market value is less than 50.0% of its cost, regardless of the amount of time the securitys market value has been below cost, and 3) an
equity securitys market value has been less than cost for a continuous period of 12 months, regardless of the magnitude of the decline in market value. Equity securities that are in an unrealized loss position, but do not meet the above
quantitative thresholds, are evaluated to determine if the decline in market value is other than temporary.

The Company did not recognized
any other-than-temporary impairments related to its equity securities for the three months ended March 31, 2010.

Fixed income
securities. A fixed income security is considered to be other-than-temporarily impaired when the securitys fair value is less than its amortized cost basis and 1) the Company intends to sell the security, 2) it is more likely than not that
the Company will be required to sell the security before recovery of the securitys amortized cost basis, or 3) the Company believes it will be unable to recover the entire amortized cost basis of the security (i.e., a credit loss has
occurred). When the Company determines a credit loss has been incurred, but the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery of the
securitys amortized cost basis, the portion of the other-than-temporary impairment that is credit related is recorded as a realized loss in the consolidated statements of operations and comprehensive income (loss), and the portion of the
other-than-temporary impairment that is not credit related is included in other comprehensive income (loss). A fixed income security is reviewed for potential credit loss 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 80.0% of amortized cost due to deterioration in credit quality.
| | - |  | -----------------------------------------------------------------------------------------------------

For the three months ended March 31, 2010, the Company recognized an other-than-temporary impairment of $6 related to an asset-backed security for
which management determined a credit loss had occurred.



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Limited partnerships.A limited partnership investment is generally written down if the Company is
unable to hold or otherwise intends to sell its interest in the limited partnership at a loss, or if management has received information that suggests the Company will be unable to recover its original investment in the limited partnership. The
amount written down is recorded in the change in equity interest in other long-term investments in the consolidated statement of operations. There were no other-than-temporary impairments related to the Companys limited partnership interests
for the three months ended March 31, 2010 or 2009.

Goodwill

In accordance with the requirements of ASC 350, Intangibles  Goodwill and Other, goodwill is not amortized but is tested for impairment at the
reporting unit level, which is at the operating segment level or one level below an operating segment. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. Goodwill is required to be tested for
impairment annually and between annual tests if events or circumstances change, such as adverse changes in the business climate, that would more likely than not reduce the fair value of the reporting unit below its carrying value.

Goodwill is assigned to one or more reporting units at the date of acquisition. The Company has allocated 100% of the goodwill recorded on its
consolidated balance sheet as of September 30, 2009 to its workers compensation insurance segment. The goodwill impairment test, performed as of September 30 of each year, is a two-step test. The first step identifies whether there
is potential impairment by comparing the fair value of a reporting unit to the carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, the second step of the impairment test is required to measure
the amount of any impairment loss.

We did not evaluate goodwill for impairment as of March 31, 2010, as no events occurred or
circumstances changed that would have more likely than not reduced the fair value of the workers compensation insurance segment below its carrying amount since September 30, 2009.

In the event the operating results of the Companys workers compensation insurance segment were to be adversely impacted by a significant loss
of business or higher than expected losses and LAE, managements internal forecast may need to be re-evaluated, which could result in a fair value that is less than the carrying value of the workers compensation insurance segment and the
need to recognize a goodwill impairment.

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. As of March 31, 2010, the Company recorded a net deferred tax asset of
$1.5 million. Management expects that the net deferred tax asset is fully recoverable. If this assumption were to change, any amount of the net deferred tax asset that the Company could not expect to recover would be provided for as an allowance and
would be reflected as an increase in income tax expense in the period in which it was established.

Reinsurance
Recoverables

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

Recent Accounting Pronouncements

Fair Value Measurements

In January 2010, the Financial Accounting Standards Board (FASB) issued new accounting guidance related to disclosures about fair value
measurements. The new guidance requires the following new or enhanced disclosures: 1) details of significant transfers in and out of Level 1 and Level 2 measurements and the reasons for the transfers, 2) a gross presentation of activity within the
Level 3 rollforward, presenting separately information about purchases, sales, issuances, and settlements, and 3) fair value disclosures must be presented by class of assets and liabilities rather than by major category. The new guidance was
effective for the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 rollforward information, which is required for annual reporting periods beginning after
December 15, 2010 and for interim periods within those years. The Company adopted the new accounting guidance effective January 1, 2010. The adoption of the new guidance resulted in enhanced disclosures related to the Companys
investment fair value measurements.



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##### Table of Contents

Variable Interest Entities

In June 2009, the FASB issued new accounting guidance related to variable interest entities. The new guidance 1) replaces the quantitative-based
risks and rewards calculation for determining whether an enterprise is the primary beneficiary in a variable interest entity with an approach that is primarily qualitative, 2) requires ongoing assessments of whether an enterprise is the primary
beneficiary of a variable interest entity, and 3) requires additional disclosures about an enterprises involvement in variable interest entities. The new guidance was effective for financial statements issued for fiscal years beginning
after November 15, 2009. The Company adopted the new accounting guidance effective January 1, 2010. The adoption of the new guidance had no impact on the Companys consolidated financial statements.

THREE MONTHS ENDED MARCH 31, 2010 COMPARED TO THREE MONTHS ENDED MARCH 31, 2009

RESULTS OF OPERATIONS

The major components of consolidated revenue were as follows for the three months ended March 31, 2010 and 2009 (unaudited, in thousands):



|                                                  |  |      |        |      |   |        |  
|------------------------------------------------- |  | ---- | ------ | ---- | - | ------ | -
|                                                  |  | 2010 |        | 2009 |  
|Net premiums written                              |  | $    | 36,420 |      | $ | 34,027 |  
|                                                  |  |      |        |      |   |        |  
|Net premiums earned                               |  | $    | 25,346 |      | $ | 24,847 |  
|Net investment income                             |  |      | 1,352  |      |   | 1,486  |  
|Change in equity interest in limited partnerships |  |      | 259    |      |   | (94    | )
|Net realized investment gains (losses)            |  |      | 997    |      |   | (2,061 | )
|Other revenue                                     |  |      | 146    |      |   | 239    |  
|                                                  |  |      |        |      |   |        |  
|Consolidated revenue                              |  | $    | 28,100 |      | $ | 24,417 |  
|                                                  |  |      |        |      |   |        |  

The increase in consolidated revenue from 2009 to 2010 primarily reflects the improvement in the fixed income and equity
security markets and an increase in net premiums earned in the workers compensation insurance segment. Net realized investment losses for the three months ended March 31, 2009 include other-than-temporary impairments of $2.4 million,
including $618,000 related to the segregated portfolio cell reinsurance segment. The increase in net premiums earned in the workers compensation insurance segment primarily reflects new business sales and an improvement in the renewal
retention rate.

The components of consolidated net (loss) income, by segment, for the three months ended March 31, 2010 and 2009 were as
follows (unaudited, in thousands):



|                                                          |  |      |        |   |      |   |        |  
|--------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                          |  | 2010 |        |   | 2009 |  
|Workers compensation insurance                           |  | $    | 1,726  |   |      | $ | 1,764  |  
|Segregated portfolio cell reinsurance                     |  |      |       |   |      |   |       |  
|Run-off specialty reinsurance                             |  |      | 692    |   |      |   | (957   | )
|Corporate/other                                           |  |      | (1,051 | ) |      |   | (1,612 | )
|                                                          |  |      |        |   |      |   |        |  
|Consolidated net income (loss) from continuing operations |  | $    | 1,367  |   |      | $ | (805   | )
|                                                          |  |      |        |   |      |   |        |  

The increase in consolidated net income from 2009 to 2010 primarily reflects the aforementioned improvement in the fixed
income and equity security markets.



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##### Table of Contents

WORKERS COMPENSATION INSURANCE

The following table represents the operations of the workers compensation insurance segment for the three months ended March 31, 2010 and 2009
(unaudited, in thousands):



|                                                  |  |      |         |   |      |   |         |  
|------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                  |  | 2010 |         |   | 2009 |  
|Revenue:                                          |  |      |         |   |      |   |         |  
|Direct premiums written                           |  | $    | 38,874  |   |      | $ | 36,159  |  
|Reinsurance premiums assumed                      |  |      | 265     |   |      |   | 275     |  
|Ceded premiums written                            |  |      | (11,640 | ) |      |   | (12,510 | )
|                                                  |  |      |         |   |      |   |         |  
|Net premiums written                              |  |      | 27,499  |   |      |   | 23,924  |  
|Change in unearned premiums                       |  |      | (8,044  | ) |      |   | (6,018  | )
|                                                  |  |      |         |   |      |   |         |  
|Net premiums earned                               |  |      | 19,455  |   |      |   | 17,906  |  
|Net investment income                             |  |      | 830     |   |      |   | 958     |  
|Change in equity interest in limited partnerships |  |      | 205     |   |      |   | (94     | )
|Net realized investment gains (losses)            |  |      | 450     |   |      |   | (10     | )
|Other revenue                                     |  |      |        |   |      |   | 99      |  
|                                                  |  |      |         |   |      |   |         |  
|Total revenue                                     |  | $    | 20,940  |   |      | $ | 18,859  |  
|                                                  |  |      |         |   |      |   |         |  
|                                                  |  |     
|Expenses:                                         |  |      |         |   |      |   |         |  
|Losses and LAE incurred                           |  | $    | 12,840  |   |      | $ | 11,109  |  
|Acquisition and other underwriting expenses       |  |      | 1,970   |   |      |   | 1,472   |  
|Other expenses                                    |  |      | 3,511   |   |      |   | 3,564   |  
|Policyholder dividend expense                     |  |      | 178     |   |      |   | 185     |  
|                                                  |  |      |         |   |      |   |         |  
|Total expenses                                    |  |      | 18,499  |   |      |   | 16,330  |  
|                                                  |  |      |         |   |      |   |         |  
|Income before income taxes                        |  |      | 2,441   |   |      |   | 2,529   |  
|Income tax expense                                |  |      | 715     |   |      |   | 765     |  
|                                                  |  |      |         |   |      |   |         |  
|Net income                                        |  | $    | 1,726   |   |      | $ | 1,764   |  
|                                                  |  |      |         |   |      |   |         |  

The workers compensation insurance ratios were as follows for the three months ended March 31, 2010 and 2009:



|                              |  |      |   |  |      |  
|----------------------------- |  | ---- | - |  | ---- | -
|                              |  | 2010 |   |  | 2009 |  
|Loss and LAE ratio            |  | 66.0 | % |  | 62.0 | %
|Expense ratio                 |  | 28.2 | % |  | 28.2 | %
|Policyholders dividend ratio |  | 0.9  | % |  | 1.0  | %
|                              |  |      |   |  |      |  
|Combined ratio                |  | 95.1 | % |  | 91.2 | %
|                              |  |      |   |  |      |  

Premiums

The increase in direct premiums written primarily reflects new business sales of $9.7 million and an increase in the renewal retention rate, partially
offset by renewal rate decreases of 3.0% and return premiums to insureds as a result of payroll audits. The renewal retention rate increased from 84.1% in 2009 to 88.0% in 2010. For the three months ended March 31, 2010, the Company recognized
return premium of $490,000, compared to additional premium from insureds of $283,000 for the same period in 2009.

Net
Investment Income

The decrease in net investment income primarily reflects the current interest rate environment. The average yield on the
fixed income portfolio was 3.46% as of March 31, 2010, compared to 3.97% as of March 31, 2009.

Net Realized
Investment Losses

The increase in net realized investment gains primarily reflects a decline in other-than-temporary investment
impairments. The Company recognized impairments of $6,000 for the three months ended March 31, 2010, compared to impairments of $208,000 for the same period in 2009.



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##### Table of Contents

Losses and LAE

The increase in the calendar period loss and LAE ratio primarily reflects a decrease in favorable loss reserve development, partially offset by a decrease
in the accident period loss ratio. There was no favorable development recorded for the three months ended March 31, 2010. Favorable loss reserve development totaled $549,000 for the three months ended March 31, 2009. The accident period
loss ratio was 65.1% for the three months ended March 31, 2010, compared to an accident period loss ratio of 66.0% for the same period in 2009.

Acquisition and Other Underwriting Expenses

The acquisition and other underwriting expense ratio increased from 8.2% in 2009 to 10.1% in 2010. The increase primarily reflects the impact of the
aforementioned return premium to customers as a result of premium audits in 2010 and purchase accounting adjustments of $293,000, which decreased acquisition and other underwriting expenses in 2009.

Other Expenses

The
other expense ratio decreased from 19.9% in 2009 to 18.0% in 2010. The decrease primarily reflects growth in the Companys Southeast operations, partially offset by the aforementioned return premium in 2010.

Policyholder Dividends

For the three months ended March 31, 2010 and 2009, 12.4% and 10.0%, respectively, of all policies were written on a dividend policy basis.

Tax Expense

The effective tax rate for the three months ended March 31, 2010 and 2009 was 29.3% and 30.2%, respectively. The primary difference between the
statutory rate of 35.0% and the effective tax rate primarily reflects tax-exempt income on municipal bond securities.

SEGREGATED PORTFOLIO CELL REINSURANCE

The following table represents the operations of the segregated portfolio cell reinsurance segment for the three months ended March 31, 2010 and 2009
(unaudited, in thousands):



|                                            |  |      |        |   |      |   |        |  
|------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                            |  | 2010 |        |   | 2009 |  
|Revenue:                                    |  |      |        |   |      |   |        |  
|Reinsurance premiums assumed                |  | $    | 9,702  |   |      | $ | 10,973 |  
|Ceded premiums written                      |  |      | (787   | ) |      |   | (792   | )
|                                            |  |      |        |   |      |   |        |  
|Net premiums written                        |  |      | 8,915  |   |      |   | 10,181 |  
|Change in unearned premiums                 |  |      | (3,030 | ) |      |   | (4,139 | )
|                                            |  |      |        |   |      |   |        |  
|Net premiums earned                         |  |      | 5,885  |   |      |   | 6,042  |  
|Net investment income                       |  |      | 151    |   |      |   | 182    |  
|Net realized investment gains (losses)      |  |      | 565    |   |      |   | (1,095 | )
|                                            |  |      |        |   |      |   |        |  
|Total revenue                               |  | $    | 6,601  |   |      | $ | 5,129  |  
|                                            |  |      |        |   |      |   |        |  
|                                            |  |     
|Expenses:                                   |  |      |        |   |      |   |        |  
|Losses and LAE incurred                     |  | $    | 4,307  |   |      | $ | 4,213  |  
|Acquisition and other underwriting expenses |  |      | 1,792  |   |      |   | 1,833  |  
|Other expenses                              |  |      | 66     |   |      |   | (30    | )
|Segregated portfolio dividend expense (1)   |  |      | 436    |   |      |   | (887   | )
|                                            |  |      |        |   |      |   |        |  
|Total expenses                              |  |      | 6,601  |   |      |   | 5,129  |  
|                                            |  |      |        |   |      |   |        |  
|Net income (1)                              |  | $    |       |   |      | $ |       |  
|                                            |  |      |        |   |      |   |        |  



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



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##### Table of Contents

The segregated portfolio cell reinsurance ratios were as follows for the three months ended March 31,
2010 and 2009:



|                   |  |       |   |  |      |  
|------------------ |  | ----- | - |  | ---- | -
|                   |  | 2010  |   |  | 2009 |  
|Loss and LAE ratio |  | 73.2  | % |  | 69.7 | %
|Expense ratio      |  | 31.6  | % |  | 29.8 | %
|                   |  |       |   |  |      |  
|Combined ratio     |  | 104.8 | % |  | 99.5 | %
|                   |  |       |   |  |      |  

Reinsurance Premiums Assumed

The decrease in reinsurance premiums assumed primarily reflects an increase in return premium to insureds related to premium audits and renewal rate
decreases of 2.7%, partially offset by new business sales and an increase in the renewal retention rate. Premium audits resulted in return premium of $208,000 for the three months ended March 31, 2010, compared to return premium of $97,000 for
the same period in 2009. The renewal retention rate increased from 84.1% in 2009 to 90.0% in 2010.

Net Investment Income

The decrease in net investment income primarily reflects the current interest rate environment.

Net Realized Investment Gains (Losses)

The increase in net realized investment gains primarily reflects a decline in other-than-temporary investment impairments. The Company recognized
impairments of $9,000 for the three months ended March 31, 2010, compared to impairments of $618,000. The 2009 net realized investment losses also reflect the impact of reducing the segregated cells exposure to investments in financial
institutions.

Losses and LAE

The increase in the calendar period loss and LAE ratio primarily reflects an increase in the accident period loss ratio, partially offset by an increase
in favorable loss reserve development on prior accident periods. The accident period loss ratio was 85.8% and 73.4% for the three months ended March 31, 2010 and 2009, respectively. The increase in the accident period loss ratio primarily
reflects an increase in reported claims in certain segregated cells during the first quarter of 2010. Favorable loss reserve development totaled $733,000 and $206,000 for the three months ended March 31, 2010 and 2009, respectively.

Acquisition and Other Underwriting Expenses

The expense ratios are consistent with the contractual ceding commissions for the three months ended March 31, 2010 and 2009.

Segregated Portfolio Dividend Expense

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



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##### Table of Contents

RUN-OFF SPECIALTY REINSURANCE

The following table represents the operations of the run-off specialty reinsurance segment for the three months ended March 31, 2010 and 2009
(unaudited, in thousands):



|                                                  |  |      |     |   |      |   |        |  
|------------------------------------------------- |  | ---- | --- | - | ---- | - | ------ | -
|                                                  |  | 2010 |     |   | 2009 |  
|Revenue:                                          |  |      |     |   |      |   |        |  
|Reinsurance premiums assumed                      |  | $    | 6   |   |      | $ | (79    | )
|Change in unearned premiums                       |  |      |    |   |      |   | 978    |  
|                                                  |  |      |     |   |      |   |        |  
|Net premiums earned                               |  |      | 6   |   |      |   | 899    |  
|Net investment income                             |  |      | 305 |   |      |   | 258    |  
|Change in equity interest in limited partnerships |  |      | 54  |   |      |   |       |  
|Net realized investment gains (losses)            |  |      | 185 |   |      |   | (1,201 | )
|Other revenue                                     |  |      | 237 |   |      |   | 113    |  
|                                                  |  |      |     |   |      |   |        |  
|Total revenue                                     |  | $    | 787 |   |      | $ | 69     |  
|                                                  |  |      |     |   |      |   |        |  
|                                                  |  |     
|Expenses:                                         |  |      |     |   |      |   |        |  
|Losses and LAE incurred                           |  | $    | 4   |   |      | $ | 617    |  
|Acquisition and other underwriting expenses       |  |      | 2   |   |      |   | 270    |  
|Other expenses                                    |  |      | 90  |   |      |   | 136    |  
|                                                  |  |      |     |   |      |   |        |  
|Total expenses                                    |  |      | 96  |   |      |   | 1,023  |  
|                                                  |  |      |     |   |      |   |        |  
|Income (loss) before income taxes                 |  |      | 691 |   |      |   | (954   | )
|Income tax (benefit) expense                      |  |      | (1  | ) |      |   | 3      |  
|                                                  |  |      |     |   |      |   |        |  
|Net income (loss)                                 |  | $    | 692 |   |      | $ | (957   | )
|                                                  |  |      |     |   |      |   |        |  

Net Income (Loss)

The results of operations are reflective of the run-off nature of the segment.

Reinsurance Premiums Assumed

Reinsurance premiums assumed, by line of business, were as follows for the three months ended March 31, 2010 and 2009 (unaudited, in thousands):



|                       |  |      |   |      |   |     |  
|---------------------- |  | ---- | - | ---- | - | --- | -
|                       |  | 2010 |   | 2009 |  
|EnviroGuard            |  | $    | 6 |      | $ | (35 | )
|EIA liability          |  |      |  |      |   | (44 | )
|                       |  |      |   |      |   |     |  
|Total assumed premiums |  | $    | 6 |      | $ | (79 | )
|                       |  |      |   |      |   |     |  

Net Investment Income

The increase in net investment income primarily reflects the increase in fixed income securities.

Net Realized Investment (Losses) Gains

The increase in net realized investment gains primarily reflects a decline in other-than-temporary investment impairments. There were no impairments for
the three months ended March 31, 2010. The Company recognized impairments of $1.5 million for the three months ended March 31, 2009.

CORPORATE/OTHER

The corporate/other segment reported a net loss of $1.1 million for the three months ended March 31, 2010, compared to a net loss of $1.6 million for
the same period in 2009. The improvement in the net loss primarily reflects the Companys equity investment in certain of the segregated portfolio cells, which resulted in income of $253,000 in 2010, compared to a loss of $148,000 in 2009. The
2009 net loss was also impacted by a deferred tax valuation allowance, which increased income taxes by $678,000.



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CONSOLIDATED FINANCIAL POSITION

Consolidated assets totaled $402.0 million at March 31, 2010, compared to $391.2 million at December 31, 2009. The increase in consolidated
assets primarily reflects an increase in premiums receivable and deferred acquisition costs, which are higher as of March 31 as a result of the high volume of workers compensation business with a January 1 effective date. The
increase is also attributable to an increase in investments related to purchases and an increase in estimated fair value during the first quarter of 2010. These increases were partially offset by a decrease in cash and federal income taxes
recoverable. The decrease in cash primarily reflects the purchase of investments, while the decrease in taxes recoverable primarily reflects the estimated tax liability based on the Companys results of operations for the three months ended
March 31, 2010 and the receipt of a tax refund related to the carryback of capital losses to prior tax years.

Consolidated liabilities
totaled $245.1 million at March 31, 2010, compared to $237.4 million at December 31, 2009. The increase in consolidated liabilities primarily reflects an increase in unearned premiums and ceded reinsurance balances payable, which are
higher as of March 31 as a result of the high volume of workers compensation business with a January 1 effective date. These increases were partially offset by a decrease in reserves and accounts payable and accrued expenses. The
decrease in reserves primarily reflects claim payments in the run-off specialty reinsurance segment. The decrease in accounts payable and accrued expenses primarily reflects the payment of the Security Fund assessment related to 2008 and the payment
of premium taxes related to 2009.

Consolidated equity totaled $156.9 million at March 31, 2010, compared to $153.4 million at
December 31, 2009. The increase in consolidated equity primarily reflects net income for the three months ended March 31, 2010 and the increase in the estimated fair value of the Companys investments.

LIQUIDITY AND CAPITAL RESOURCES

The Companys principal sources of funds are premiums, investment income, and proceeds from sales and maturities of investments. The Companys
primary use of funds is to pay claims and operating expenses and to purchase investments.

The Companys investment portfolio is
structured so that investments mature periodically over time in reasonable relation to current expectations of future claim payments. Currently, claim payments are made from operating cash flows, with excess cash invested in investment securities.
As securities mature, management intends to invest excess cash with appropriate durations to fund anticipated future claim payments. Management does not anticipate having to sell securities in its investment portfolios to fund claims or operating
expenses. In the event the sale of securities becomes necessary, the Company may incur losses on those sales, which would adversely affect its results of operations and could reduce net investment income.

The Company has a $2.6 million line of credit available to provide additional liquidity if needed. In addition to the line of credit, the Company has
obtained letters of credit totaling $45.8 million for the purpose of securing obligations to reinsurers, if necessary. As of March 31, 2010, there was approximately $5.9 million still available under the Companys letter of credit
facilities.

Our domestic insurance subsidiaries ability to pay dividends to EIHI is limited by the insurance laws and regulations of
Pennsylvania and Indiana. The maximum annual dividends that the domestic insurance entities may pay without prior approval from the Pennsylvania Insurance Department and the Indiana Insurance Department is limited to the greater of 10.0% of
statutory surplus or 100% of statutory net income for the most recently filed annual statement. Eastern Re must receive approval from the Cayman Islands Monetary Authority before it can pay any dividend to the Company.

CASH FLOWS

Cash
flows for the three months ended March 31, 2010 and 2009 were as follows (unaudited, in thousands):



|                                                      |  |      |        |   |      |   |        |  
|----------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                      |  | 2010 |        |   | 2009 |  
|Cash flows provided by operating activities           |  | $    | 1,759  |   |      | $ | 1,305  |  
|Cash flows (used in) provided by investing activities |  |      | (6,796 | ) |      |   | 31,430 |  
|Cash flows used in financing activities               |  |      | (892   | ) |      |   | (980   | )
|                                                      |  |      |        |   |      |   |        |  
|Net (decrease) increase in cash and cash equivalents  |  | $    | (5,929 | ) |      | $ | 31,755 |  
|                                                      |  |      |        |   |      |   |        |  



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The decrease in cash flows from 2009 to 2010 primarily reflects the impact of investing activities. During
the first quarter of 2010, the Company reported net purchases of investments, which primarily reflects the purchase of investments in the run-off specialty reinsurance segment. During the first quarter of 2009, the Company reported net sales of
investments, which primarily reflects the sale of investments in the workers compensation insurance and group benefits insurance segments to fund the capital contribution that was made to Eastern Re in March 2009.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or, as of March 31, 2010, future effect on the
Companys financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.



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

The Company is subject to market risk with respect to its fixed income investment portfolio. The most significant components of market risk affecting the
Company are credit risk and interest rate risk. The Company is also subject to equity risk with respect to its investment in equity securities.

There have been no material changes in the Companys market risk since December 31, 2009. Additional disclosures related to the Companys
market risk are discussed under Quantitative and Qualitative Disclosures About Market Risk in Managements Discussion and Analysis of Consolidated Financial Condition and Results of Operations in the Companys Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March 5, 2010.



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

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

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

PART II  OTHER INFORMATION



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

None



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

There are no material
changes from the risk factors previously disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2009, SEC File No. 001-32899.



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

Issuer Purchases of Equity Securities

On February 15, 2007, the Companys Board of Directors authorized the repurchase of up to 5.0% of the Companys issued and outstanding
shares of common stock for the purpose of funding the issuance of stock under the Eastern Insurance Holdings, Inc. 2006 Stock Incentive Plan. On August 2, 2007, the Companys Board of Directors authorized the repurchase of additional
shares of the Companys outstanding common stock up to an aggregate of 1,046,500 shares, which represented the total number of shares of common stock for which awards may be granted under the Companys Stock Incentive Plan at that time. On
September 27, 2007, the Companys Board of Directors increased the share repurchase authorization to 2,046,500 shares. On March 24, 2008, the Company received approval from the Pennsylvania Insurance Department to repurchase up to $10
million of the Companys issued and outstanding common stock, which is in addition to the 2,046,500 shares authorized in 2007. As of March 31, 2010, the Company has repurchased 2,091,757 shares, and has approximately $9.6 million
authorized for future repurchases.



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There were no purchases of our common stock during the three months ended March 31, 2010 and 2009,
respectively.



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

None



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

None



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

None



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

Exhibits



|           |  |                                                                                                                                                                                                     
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Title                                                                                                                                                                                               
|           | 
|3.1        |  | Articles of Incorporation of Eastern Insurance Holdings, Inc. (Incorporated by reference from Exhibit 3.1 to the Eastern Insurance Holdings, Inc. Registration Statement No.
333-128913 on Form S-1)
|           | 
|3.2        |  | Bylaws of Eastern Insurance Holdings, Inc. (Incorporated by reference from Exhibit 3.2 to the Eastern Insurance Holdings, Inc. Registration Statement No. 333-128913 on Form S-1)                   
|           | 
|10.12      |  | Eastern Insurance Holdings, Inc. 2006 Stock Incentive Plan (Incorporated by reference from Exhibit 4.1 to EIHIs Registration Statement on Form S-8 filed on April 2, 2007)                         
|           | 
|21.1       |  | Subsidiaries of Eastern Insurance Holdings, Inc. (Incorporated by reference from Exhibit 21 to the Eastern Insurance Holdings, Inc. Registration Statement No. 333-128913 on Form
S-1)              
|           | 
|31.1       |  | Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002, (filed herewith)                                                                         
|           | 
|31.2       |  | Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002, (filed herewith)                                                                         
|           | 
|32.1       |  | Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002, (filed herewith)                                                                         
|           | 
|32.2       |  | Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002, (filed herewith)                                                                         



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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: May 6, 2010 |  | By:                                           |  | /S/    BRUCE M.
ECKERT               
|                   |  |                                               |  | Bruce M. Eckert,                     
|                   |  |                                               |  | Chief Executive Officer              
|                   |  |                                              
|Dated: May 6, 2010 |  | By:                                           |  | /S/    KEVIN M.
SHOOK                
|                   |  |                                               |  | Kevin M. Shook,                      
|                   |  |                                               |  | Treasurer and Chief Financial Officer



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