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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, 2009,

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.



|                            |  |                                               
|--------------------------- |  | ----------------------------------------------
|                            |  | Number of Shares Outstanding as of May 6, 2009
|COMMON STOCK (No par Value) |  | 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 |  | 21
|                               |  |                                                                                      
|Item 3.                        |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 37
|                               |  |                                                                                      
|Item 4.                        |  | Controls and Procedures                                                               |  | 37
|                               | 
|PART II - OTHER INFORMATION    |  | 37                                                                                   
|                               |  |                                                                                      
|Item 1.                        |  | Legal Proceedings                                                                     |  | 37
|                               |  |                                                                                      
|Item 1A.                       |  | Risk Factors                                                                          |  | 38
|                               |  |                                                                                      
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 38
|                               |  |                                                                                      
|Item 3.                        |  | Defaults Upon Senior Securities                                                       |  | 38
|                               |  |                                                                                      
|Item 4.                        |  | Submission of Matters to Vote of Security Holders                                     |  | 38
|                               |  |                                                                                      
|Item 5.                        |  | Other Information                                                                     |  | 38
|                               |  |                                                                                      
|Item 6.                        |  | Exhibits                                                                              |  | 38



2



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##### Table of Contents

PART I  FINANCIAL INFORMATION



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

EASTERN INSURANCE
HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except share data)



|                                                                                                                                                                     |  |              |         |   |                 |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | --------------- | - | ------- | -
|                                                                                                                                                                     |  | March 312009 |         |   | December 312008 |  
|ASSETS                                                                                                                                                               |  |              |         |   |                 |   |         |  
|Investments:                                                                                                                                                         |  |              |         |   |                 |   |         |  
|Fixed income securities, at estimated fair value (amortized cost, $147,140; $180,102)                                                                                |  | $            | 149,829 |   |                 | $ | 183,136 |  
|Convertible bonds, at estimated fair value (amortized cost, $14,176; $13,783)                                                                                        |  |              | 13,127  |   |                 |   | 12,346  |  
|Equity securities, at estimated fair value (cost, $21,481; $22,287)                                                                                                  |  |              | 17,000  |   |                 |   | 17,162  |  
|Other long-term investments, at estimated fair value (cost, $10,606; $10,586)                                                                                        |  |              | 8,978   |   |                 |   | 9,519   |  
|                                                                                                                                                                     |  |              |         |   |                 |   |         |  
|Total investments                                                                                                                                                    |  |              | 188,934 |   |                 |   | 222,163 |  
|                                                                                                                                                                     |  |             
|Cash and cash equivalents                                                                                                                                            |  |              | 84,630  |   |                 |   | 52,875  |  
|Accrued investment income                                                                                                                                            |  |              | 1,719   |   |                 |   | 2,058   |  
|Premiums receivable (net of allowance, $582; $581)                                                                                                                   |  |              | 37,811  |   |                 |   | 29,615  |  
|Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses                                                                                       |  |              | 29,146  |   |                 |   | 29,637  |  
|Deferred acquisition costs                                                                                                                                           |  |              | 6,903   |   |                 |   | 5,760   |  
|Deferred income taxes, net                                                                                                                                           |  |              | 5,955   |   |                 |   | 6,281   |  
|Federal income taxes recoverable                                                                                                                                     |  |              |        |   |                 |   | 16      |  
|Intangible assets                                                                                                                                                    |  |              | 8,746   |   |                 |   | 9,179   |  
|Goodwill                                                                                                                                                             |  |              | 10,752  |   |                 |   | 10,752  |  
|Other assets                                                                                                                                                         |  |              | 10,891  |   |                 |   | 8,975   |  
|                                                                                                                                                                     |  |              |         |   |                 |   |         |  
|Total assets                                                                                                                                                         |  | $            | 385,487 |   |                 | $ | 377,311 |  
|                                                                                                                                                                     |  |              |         |   |                 |   |         |  
|                                                                                                                                                                     |  |             
|LIABILITIES                                                                                                                                                          |  |              |         |   |                 |   |         |  
|Reserves for unpaid losses and loss adjustment expenses                                                                                                              |  | $            | 156,243 |   |                 | $ | 159,117 |  
|Unearned premium reserves                                                                                                                                            |  |              | 51,606  |   |                 |   | 42,365  |  
|Advance premium                                                                                                                                                      |  |              | 1,522   |   |                 |   | 1,594   |  
|Accounts payable and accrued expenses                                                                                                                                |  |              | 12,790  |   |                 |   | 13,136  |  
|Ceded reinsurance balances payable                                                                                                                                   |  |              | 10,848  |   |                 |   | 6,886   |  
|Federal income taxes payable                                                                                                                                         |  |              | 125     |   |                 |   |        |  
|Benefit plan liabilities                                                                                                                                             |  |              | 498     |   |                 |   | 497     |  
|Segregated portfolio cell dividend payable                                                                                                                           |  |              | 12,420  |   |                 |   | 13,140  |  
|Loan payable                                                                                                                                                         |  |              | 2,201   |   |                 |   | 2,439   |  
|                                                                                                                                                                     |  |              |         |   |                 |   |         |  
|Total liabilities                                                                                                                                                    |  | $            | 248,253 |   |                 | $ | 239,174 |  
|                                                                                                                                                                     |  |              |         |   |                 |   |         |  
|Commitments and contingencies (Note 14)                                                                                                                              |  |              |         |   |                 |   |         |  
|                                                                                                                                                                     |  |             
|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 and 11,602,723, respectively; outstanding 
9,691,257 and 9,512,366, respectively |  |              |        |   |                 |   |        |  
|Unearned ESOP compensation                                                                                                                                           |  |              | (5,422  | ) |                 |   | (5,606  | )
|Additional paid in capital                                                                                                                                           |  |              | 111,959 |   |                 |   | 111,772 |  
|Treasury stock, at cost (2,091,757 and 2,090,357 shares, respectively)                                                                                               |  |              | (32,666 | ) |                 |   | (32,655 | )
|Retained earnings                                                                                                                                                    |  |              | 65,311  |   |                 |   | 66,492  |  
|Accumulated other comprehensive loss, net                                                                                                                            |  |              | (1,948  | ) |                 |   | (1,866  | )
|                                                                                                                                                                     |  |              |         |   |                 |   |         |  
|Total shareholders equity                                                                                                                                           |  |              | 137,234 |   |                 |   | 138,137 |  
|                                                                                                                                                                     |  |              |         |   |                 |   |         |  
|Total liabilities and shareholders equity                                                                                                                           |  | $            | 385,487 |   |                 | $ | 377,311 |  
|                                                                                                                                                                     |  |              |         |   |                 |   |         |  

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, 2009 and 2008

(Unaudited, in thousands, except per share data)



|                                                                                                                 |  |                                     |        |   |                               |   |        |  
|---------------------------------------------------------------------------------------------------------------- |  | ----------------------------------- | ------ | - | ----------------------------- | - | ------ | -
|                                                                                                                 |  | For the Three MonthsEnded March 31, |       
|                                                                                                                 |  | 2009                                |        |   | 2008                          |  
|REVENUE                                                                                                          |  |                                     |        |   |                               |   |        |  
|Net premiums earned                                                                                              |  | $                                   | 33,738 |   |                               | $ | 33,003 |  
|Net investment income                                                                                            |  |                                     | 1,945  |   |                               |   | 2,565  |  
|Change in equity interest in limited partnerships                                                                |  |                                     | (167   | ) |                               |   | 49     |  
|Net realized investment losses                                                                                   |  |                                     | (1,599 | ) |                               |   | (293   | )
|Other revenue                                                                                                    |  |                                     | 239    |   |                               |   | 216    |  
|                                                                                                                 |  |                                     |        |   |                               |   |        |  
|Total revenue                                                                                                    |  |                                     | 34,156 |   |                               |   | 35,540 |  
|                                                                                                                 |  |                                     |        |   |                               |   |        |  
|EXPENSES                                                                                                         |  |                                     |        |   |                               |   |        |  
|Losses and loss adjustment expenses incurred                                                                     |  |                                     | 22,587 |   |                               |   | 19,715 |  
|Acquisition and other underwriting expenses                                                                      |  |                                     | 4,580  |   |                               |   | 4,920  |  
|Other expenses                                                                                                   |  |                                     | 6,532  |   |                               |   | 6,063  |  
|Amortization of intangibles                                                                                      |  |                                     | 433    |   |                               |   | 328    |  
|Policyholder dividend expense                                                                                    |  |                                     | 185    |   |                               |   | (63    | )
|Segregated portfolio dividend expense                                                                            |  |                                     | (739   | ) |                               |   | 934    |  
|                                                                                                                 |  |                                     |        |   |                               |   |        |  
|Total expenses                                                                                                   |  |                                     | 33,578 |   |                               |   | 31,897 |  
|                                                                                                                 |  |                                     |        |   |                               |   |        |  
|Income before income taxes                                                                                       |  |                                     | 578    |   |                               |   | 3,643  |  
|Income tax expense                                                                                               |  |                                     | 1,133  |   |                               |   | 1,069  |  
|                                                                                                                 |  |                                     |        |   |                               |   |        |  
|Net (loss) income                                                                                                |  | $                                   | (555   | ) |                               | $ | 2,574  |  
|                                                                                                                 |  |                                     |        |   |                               |   |        |  
|Other comprehensive loss:                                                                                        |  |                                     |        |   |                               |   |        |  
|Unrealized holding losses arising during period, net of tax of $(444) and $(278)                                 |  |                                     | (824   | ) |                               |   | (517   | )
|Amortization of unrecognized benefit plan amounts, net of tax of $1 and $2                                       |  |                                     | 3      |   |                               |   | 4      |  
|Less: Reclassification adjustment for (losses) gains included in net (loss) income, net of tax of $(398) and $84 |  |                                     | (739   | ) |                               |   | 157    |  
|                                                                                                                 |  |                                     |        |   |                               |   |        |  
|Other comprehensive loss                                                                                         |  |                                     | (82    | ) |                               |   | (670   | )
|                                                                                                                 |  |                                     |        |   |                               |   |        |  
|Comprehensive (loss) income                                                                                      |  | $                                   | (637   | ) |                               | $ | 1,904  |  
|                                                                                                                 |  |                                     |        |   |                               |   |        |  
|                                                                                                                 |  |                                    
|                                                                                                                 |  | ThreeMonthsEndedMarch 31,2009       |        |   | ThreeMonthsEndedMarch 31,2008 |  
|Earnings per share (See Note 5):                                                                                 |  |                                     |        |   |                               |   |        |  
|Net income                                                                                                       |  | $                                   | (555   | ) |                               | $ | 2,574  |  
|Basic earnings per share                                                                                         |  | $                                   | (0.06  | ) |                               | $ | 0.27   |  
|Diluted earnings per share                                                                                       |  | $                                   | (0.06  | ) |                               | $ | 0.26   |  

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, 2009 and 2008

(Unaudited, in thousands, except share data)



|                                                |  |                        |  |                    |                    |  |                          |   |                          |                          |        |                              |               |   |               |                  |  |                  |                  |   |                                                |       |        |       |  |   |        |   |  |   |         |  
|----------------------------------------------- |  | ---------------------- |  | ------------------ | ------------------ |  | ------------------------ | - | ------------------------ | ------------------------ | ------ | ---------------------------- | ------------- | - | ------------- | ---------------- |  | ---------------- | ---------------- | - | ---------------------------------------------- | ----- | ------ | ----- |  | - | ------ | - |  | - | ------- | -
|                                                |  | Outstanding Shares     |  |                    | CommonCapitalStock |  | UnearnedESOPCompensation |   |                          | AdditionalPaid-InCapital |        |                              | TreasuryStock |   |               | RetainedEarnings |  |                  | AccumulatedOther |   |                                                | Total |       
|                                                |  | Series APreferredStock |  | CommonCapitalStock |                    |  |                          |   |                          |                          |        | ComprehensiveLoss,Net of Tax |               |  
|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 |  
|                                                |  |                        |  |                    |                    |  |                          |   |                          |                          |        |                              |               |   |               |                  |  |                  |                  |   |                                                |       |        |       |  |   |        |   |  |   |         |  
|                                                |  |                        |  |                    |                    |  |                          |   |                         
|                                                |  | Series APreferredStock |  | CommonCapitalStock |                    |  | CommonCapitalStock       |   | UnearnedESOPCompensation |                          |        | AdditionalPaid-InCapital     |               |   | TreasuryStock |                  |  | RetainedEarnings |                  |   | AccumulatedOtherComprehensiveIncome,Net of Tax |       |        | Total | 
|Balance, January 1, 2008                        |  |                       |  | 10,580,858         |                    |  | $                        |  |                          | $                        | (6,354 | )                            |               | $ | 110,166       |                  |  | $                | (15,589          | ) |                                                | $     | 86,363 |       |  | $ | 3,245  |   |  | $ | 177,831 |  
|ESOP shares released                            |  |                       |  |                   |                    |  |                          |  |                          |                          | 187    |                              |               |   | 102           |                  |  |                  |                 |   |                                                |       |       |       |  |   |       |   |  |   | 289     |  
|Stock compensation expense                      |  |                       |  |                   |                    |  |                          |  |                          |                          |       |                              |               |   | 314           |                  |  |                  |                 |   |                                                |       |       |       |  |   |       |   |  |   | 314     |  
|Excess tax benefit from vested restricted stock |  |                       |  |                   |                    |  |                          |  |                          |                          |       |                              |               |   | 32            |                  |  |                  |                 |   |                                                |       |       |       |  |   |       |   |  |   | 32      |  
|Repurchase of common stock                      |  |                       |  | (739,213           | )                  |  |                          |  |                          |                          |       |                              |               |   |              |                  |  |                  | (12,114          | ) |                                                |       |       |       |  |   |       |   |  |   | (12,114 | )
|Shareholder dividend                            |  |                       |  |                   |                    |  |                          |  |                          |                          |       |                              |               |   |              |                  |  |                  |                 |   |                                                |       | (724   | )     |  |   |       |   |  |   | (724    | )
|Net income                                      |  |                       |  |                   |                    |  |                          |  |                          |                          |       |                              |               |   |              |                  |  |                  |                 |   |                                                |       | 2,574  |       |  |   |       |   |  |   | 2,574   |  
|Other comprehensive loss, net of tax            |  |                       |  |                   |                    |  |                          |  |                          |                          |       |                              |               |   |              |                  |  |                  |                 |   |                                                |       |       |       |  |   | (670   | ) |  |   | (670    | )
|                                                |  |                        |  |                    |                    |  |                          |   |                          |                          |        |                              |               |   |               |                  |  |                  |                  |   |                                                |       |        |       |  |   |        |   |  |   |         |  
|Balance, March 31, 2008                         |  |                       |  | 9,841,645          |                    |  | $                        |  |                          | $                        | (6,167 | )                            |               | $ | 110,614       |                  |  | $                | (27,703          | ) |                                                | $     | 88,213 |       |  | $ | 2,575  |   |  | $ | 167,532 |  
|                                                |  |                        |  |                    |                    |  |                          |   |                          |                          |        |                              |               |   |               |                  |  |                  |                  |   |                                                |       |        |       |  |   |        |   |  |   |         |  

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, 2009 and 2008

(Unaudited, in thousands)



|                                                                                         |  |      |         |   |      |   |         |  
|---------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                         |  | 2009 |         |   | 2008 |  
|Cash flows from operating activities:                                                    |  |      |         |   |      |   |         |  
|Net (loss) income                                                                        |  | $    | (555    | ) |      | $ | 2,574   |  
|Adjustments to reconcile net (loss) income to net cash provided by operating activities: |  |      |         |   |      |   |         |  
|Depreciation and amortization                                                            |  |      | 153     |   |      |   | 97      |  
|Amortization of bond premium/discount                                                    |  |      | 82      |   |      |   | 152     |  
|Net realized investment losses                                                           |  |      | 1,599   |   |      |   | 293     |  
|Change in equity interest in limited partnerships                                        |  |      | 167     |   |      |   | (49     | )
|Deferred tax expense (benefit)                                                           |  |      | 473     |   |      |   | (619    | )
|Stock compensation                                                                       |  |      | 464     |   |      |   | 603     |  
|Intangible asset amortization                                                            |  |      | 433     |   |      |   | 328     |  
|Changes in assets and liabilities:                                                       |  |      |         |   |      |   |         |  
|Accrued investment income                                                                |  |      | 339     |   |      |   | 15      |  
|Premiums receivable                                                                      |  |      | (8,196  | ) |      |   | (8,551  | )
|Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses           |  |      | 491     |   |      |   | (1,668  | )
|Deferred acquisition costs                                                               |  |      | (1,143  | ) |      |   | (1,201  | )
|Other assets                                                                             |  |      | (1,871  | ) |      |   | (1,004  | )
|Reserves for unpaid losses and loss adjustment expenses                                  |  |      | (2,874  | ) |      |   | 3,173   |  
|Unearned and advance premium                                                             |  |      | 9,169   |   |      |   | 11,012  |  
|Ceded reinsurance balances payable                                                       |  |      | 3,962   |   |      |   | 1,434   |  
|Accounts payable and accrued expenses                                                    |  |      | (346    | ) |      |   | (932    | )
|Segregated portfolio cell dividend payable                                               |  |      | (1,188  | ) |      |   | 678     |  
|Benefit plan liabilities                                                                 |  |      | 5       |   |      |   | (12     | )
|Federal income taxes recoverable/payable                                                 |  |      | 141     |   |      |   | 1,656   |  
|                                                                                         |  |      |         |   |      |   |         |  
|Net cash provided by operating activities                                                |  |      | 1,305   |   |      |   | 7,979   |  
|                                                                                         |  |      |         |   |      |   |         |  
|Cash flows from investing activities:                                                    |  |      |         |   |      |   |         |  
|Purchase of fixed income securities                                                      |  |      | (19,754 | ) |      |   | (7,073  | )
|Purchase of equity securities                                                            |  |      | (2,668  | ) |      |   | (6,863  | )
|Purchase of other long-term investments                                                  |  |      |         |   |      |   | (1,000  | )
|Proceeds from sale of fixed income securities                                            |  |      | 43,884  |   |      |   | 5,367   |  
|Proceeds from maturities/calls of fixed income securities                                |  |      | 8,974   |   |      |   | 9,493   |  
|Proceeds from sale of equity securities                                                  |  |      | 820     |   |      |   | 1,060   |  
|Proceeds from sale of other long-term investments                                        |  |      | 371     |   |      |   |        |  
|Principal payments received on mortgage loans                                            |  |      | 1       |   |      |   | 2       |  
|Purchase of equipment, net                                                               |  |      | (198    | ) |      |   | (551    | )
|                                                                                         |  |      |         |   |      |   |         |  
|Net cash provided by investing activities                                                |  |      | 31,430  |   |      |   | 435     |  
|                                                                                         |  |      |         |   |      |   |         |  
|Cash flows from financing activities:                                                    |  |      |         |   |      |   |         |  
|Repurchase of common stock                                                               |  |      | (11     | ) |      |   | (12,114 | )
|Shareholder dividend                                                                     |  |      | (626    | ) |      |   | (724    | )
|Repayment of loan principal                                                              |  |      | (250    | ) |      |   |        |  
|Excess tax expense from vested restricted stock                                          |  |      | (93     | ) |      |   | 32      |  
|                                                                                         |  |      |         |   |      |   |         |  
|Net cash used in financing activities                                                    |  |      | (980    | ) |      |   | (12,806 | )
|                                                                                         |  |      |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                                     |  |      | 31,755  |   |      |   | (4,392  | )
|Cash and cash equivalents, beginning of period                                           |  |      | 52,875  |   |      |   | 45,940  |  
|                                                                                         |  |      |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                                 |  | $    | 84,630  |   |      | $ | 41,548  |  
|                                                                                         |  |      |         |   |      |   |         |  

See accompanying notes to unaudited consolidated financial statements.



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##### Table of Contents

Eastern Insurance Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

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

1. Background and Nature of Operations

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

On September 29,
2008, EIHI acquired all of the outstanding stock of ESHC and its wholly-owned subsidiaries, ESIC and Affinity (See Note 3). ESIC is an Indiana-domiciled workers compensation insurance company licensed to write business in Indiana, Illinois and
Missouri. Affinity is a third party administrator offering claims administration and risk management services to self-insured property/casualty customers.

The Company currently operates in four segments: workers compensation insurance, segregated portfolio cell reinsurance, group benefits insurance, and corporate/other. The specialty reinsurance segment was placed into run-off effective
July 1, 2008. See Note 12 for a description of each segment.

2. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, being normal,
recurring adjustments, necessary for a fair presentation of the financial position and results of operations of the Company for the periods presented have been included. The results of operations for an interim period are not necessarily indicative
of the results for an entire year. These financial statements should be read in conjunction with the Companys audited financial statements and notes thereto as of and for the year ended December 31, 2008 included in the Companys
Annual Report on Form 10-K, which was filed with the U.S. Securities and Exchange Commission on March 13, 2009.

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 Company reclassified the change in equity interest in its limited partnership investments from net investment income to the change in equity interest in limited partnerships in the consolidated
statements of operations. The reclassification did not have any impact on prior year revenues, expenses, or net income.

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.

Cash and Cash Equivalents

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

Investments

Fixed Income Securities

The Companys investments in
fixed income securities are classified as available-for-sale and are carried at estimated fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), net of tax. Fixed income securities include



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publicly traded and private placement bonds. The estimated fair value of publicly traded bonds is determined based on quoted market prices or, in the absence
of quoted market prices, dealer quotes or matrix pricing, all of which are based on observable market-based inputs when available. Adverse credit market conditions have caused some markets to become relatively illiquid, thus reducing the
availability of certain data used by the independent pricing services and dealers. The estimated fair value of private placement bonds is determined using valuation models, taking into consideration the securities coupon rate, maturity date,
and other pertinent features.

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

Convertible Bond Securities

The Company
accounts for its convertible bond securities in accordance with Statement of Financial Accounting Standards No. 155 (SFAS 155), Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133
and 140. Under SFAS 155, the change in fair value of the Companys convertible bond securities, which meet the definition of a hybrid financial instrument under SFAS 155, is reported as a realized gain or loss in the consolidated
statement of operations and comprehensive income (loss).

Equity Securities

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

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

Other Long-Term Investments

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

Premiums

Premiums generated by the Companys workers
compensation insurance segment, including estimates of additional premiums resulting from audits of insureds records, are generally recognized as written upon inception of the policy. Premiums written are primarily earned on a daily pro rata
basis over the terms of the policies to which they relate. Accordingly, unearned premiums represent the portion of premiums written which is applicable to the unexpired portion of the policies in force. Workers compensation premiums are
determined based upon the payroll of the insured, the applicable premium rates and, where applicable, an experience based modification factor. An audit of the policyholders records is conducted after policy expiration, to make a final
determination of applicable premiums. Included in net premiums earned is an estimate for earned but unbilled final audit premiums. The Company estimates earned but unbilled premiums by tracking, by policy, how much additional premium is billed in
final audit invoices as a percentage of payroll exposure to estimate the probable additional amount that it has earned, but not yet billed, as of the balance sheet date. Earned but unbilled premiums accrued as of March 31, 2009 and
December 31, 2008 totaled $1,800.

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



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

Other Revenue

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

Losses and Loss Adjustment Expenses

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

The Company discounts
its reserves for unpaid losses and LAE for workers compensation claims on a non-tabular basis, using a discount rate of approximately 3.0%. The reserves for unpaid losses and LAE have been reduced for the effects of discounting by
approximately $4,141 and $4,145 as of March 31, 2009 and December 31, 2008, respectively.

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



| |  |  | The liability for reported but unpaid long-term disability claims is calculated using the 1987 Commissioners Group Disability Table. The long-term disability
reserves are discounted based on the expected rate of return of ELHs fixed income portfolio in the year that the claim was incurred. The discount rate for claims incurred in 2009 and 2008 is 3.85%. The liability for IBNR claims is estimated on
a policy-by-policy basis, taking into consideration average monthly premium, policy elimination periods, and an expected loss ratio.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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

A liability is established for the estimated
unpaid losses and LAE of the Companys run-off specialty reinsurance segment based on information provided by the ceding company. Premiums and reported claims data provided by the ceding company is utilized by management to estimate the
ultimate losses and LAE, including an amount for IBNR claims. As a result of a lag in receiving quarterly premium and reported claim data from the ceding company, the estimated unpaid losses and LAE are based on claim data one quarter in arrears.

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

Management believes that its reserves for unpaid losses and LAE is adequate as of March 31, 2009. However, estimating the
ultimate liability is necessarily a complex and judgmental process inasmuch as the amounts are based on managements informed estimates and judgments using data currently available. If the Companys ultimate losses, net of reinsurance,
prove to differ substantially from the amounts recorded as of March 31, 2009, the related adjustments could have a material adverse effect on the Companys financial condition, results of operations or liquidity.

Reinsurance

In the ordinary course of business, the Company assumes
and cedes reinsurance with other insurance companies. These arrangements provide greater diversification of business and minimize the net loss potential arising from large claims. Ceded reinsurance contracts do not relieve the Company of its
obligation to its insureds. Premiums and claims under the Companys reinsurance contracts are accounted for on a basis consistent with those used in accounting for the underlying policies reinsured and the terms of the reinsurance



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contracts. The Company has certain reinsurance contracts that provide for return premium based on the actual loss experience of the written and reinsured
business. The Company estimates the amounts to be recorded for return premium based on the terms set forth in the reinsurance agreements and the expected loss experience.

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

Policy Acquisition Costs

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

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

Amortization of policy acquisition costs, before the impact of purchase accounting, totaled $2,076 and $1,795 for the three months ended March 31, 2009 and 2008, respectively.

Income Taxes

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

EIHIs insurance subsidiaries are generally not subject to state income taxes; rather, they are subject to state premium tax in the jurisdictions in which they write business. Employers Alliance, Eastern Services and Affinity are
subject to state income tax in the states in which they operate.

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

The
Company includes income tax-related interest and penalties as a component of income tax expense. The Company did not incur any income tax-related interest or penalties during the three months ended March 31, 2009 and 2008.

The Companys federal income tax returns for tax years subsequent to December 31, 2004 are subject to examination by the Internal Revenue Service.

Policyholder Dividends

The Company issues certain workers
compensation insurance policies with dividend payment features. These policyholders share in the operating results of their respective policies in the form of dividends. Dividends to policyholders are accrued during the period in which the related
premiums are earned and are determined based on the terms of the individual policies. As of March 31, 2009 and December 31, 2008, the Company accrued dividends payable of $1,268 and $1,311, respectively, which are included in accounts
payable and accrued expenses on the consolidated balance sheets.

Assessments

The Company is subject to state guaranty fund assessments in the states in which it is licensed, which provide for the payment of covered claims or to meet other insurance obligations from insurance company
insolvencies. The Companys assessments consist primarily of charges from the Workers Compensation Security Fund of Pennsylvania (Security Fund). The Security Fund serves as a guaranty fund to provide claim payments for those
workers entitled to workers compensation benefits when the insurance company originally providing the benefits was placed into liquidation by a court. Security Fund assessments are established on an actuarial basis to provide an amount
sufficient to pay the outstanding and anticipated claims in a timely manner, to meet the costs of the Pennsylvania Insurance Department to administer the fund and to maintain a minimum balance in the fund of $500 million. If the Security Fund
determines that the balance in the Security Fund is less than $500 million based on the actuarial study, then an assessment equal to one percent of direct premiums written is made to all companies licensed to write workers compensation in
Pennsylvania. The Company recognizes a liability and the related expense for the assessments when premiums covered under the Security Fund are written; when an assessment from the Security Fund has been imposed or it is probable that an assessment
will be imposed; and the amount of the assessment is reasonably estimable. As of March 31, 2009 and December 31, 2008, the Company accrued $1,384 and $1,052 related to the Security Fund assessment.



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Goodwill and Intangible Assets

Goodwill represents the excess of cost over the fair value of net assets of businesses acquired. Goodwill and other intangible assets acquired in a purchase business combination and determined to have an indefinite
useful life are not amortized, but are instead tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets.

Goodwill is assigned to one or
more reporting units at the date of acquisition. The goodwill reported by the Company has been allocated 100% to the workers compensation insurance segment, which is considered a reporting unit for goodwill purposes. The annual goodwill
impairment test, performed as of December 31, each year, consists of a two-step process. The first step identifies whether potential impairment exists by comparing the fair value of the reporting unit to its carrying value, including goodwill.
If the fair value of a reporting unit is less than its carrying amount, the second step is required to measure the amount of any impairment loss.

Treasury Stock

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

Stock-Based Compensation

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

Employee Stock Ownership Plan

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

Suspense shares, allocated shares, shares committed to be released, average price per share and stock
compensation expense as of and for the three months ended March 31, 2009 and 2008 were as follows (unaudited, in thousands, except share data):



|                                |  |                                                   |         |                                                   |   |        
|------------------------------- |  | ------------------------------------------------- | ------- | ------------------------------------------------- | - | -------
|                                |  | As of and for theThree Months EndedMarch 31, 2009 |         | As of and for theThree Months EndedMarch 31, 2008
|Suspense shares                 |  |                                                   | 560,625 |                                                   |   | 635,375
|Allocated shares                |  |                                                   | 186,875 |                                                   |   | 112,125
|Shares committed to be released |  |                                                   | 18,432  |                                                   |   | 18,636 
|Average price per share         |  | $                                                 | 7.90    |                                                   | $ | 15.50  
|Stock compensation expense      |  | $                                                 | 145     |                                                   | $ | 289    

As of March 31, 2009 and 2008, the estimated fair value of unearned ESOP shares were $4,283 and $9,559,
respectively.

Recent Accounting Pronouncements

FSP FAS 115-2 and FAS 124-2

In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position (FSP) FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2/124-2). FSP FAS 115-2/124-2 requires entities to separate an other-than-temporary
impairment of a debt security into two components when there are credit related losses associated with the impaired debt security for which management asserts that it does not have the intent to sell the security, and it is more likely than not that
it will not be required to sell the security before recovery of its cost basis. The amount of the other-than-temporary impairment related to a credit loss is recorded as a net realized investment loss in the statements of operations and
comprehensive income (loss), and the amount of the other-than-temporary impairment related to other factors is recorded as an other



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comprehensive loss. FSP FAS 115-2/124-2 is effective for periods ending after June 15, 2009, with early adoption permitted for periods
ending after March 15, 2009. Management is currently evaluating the impact of adopting FSP FAS 115-2/124-2 and has elected not to early adopt.

FSP FAS 157-4

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions that are Not Orderly (FSP FAS 157-4). Under FSP FAS 157-4, if an entity determines that there has been a significant decrease in the volume and level
of activity for the asset or the liability in relation to the normal market activity for the asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair value. In addition, if there
is evidence that the transaction for the asset or liability is not orderly, the entity shall place little, if any weight on that transaction price as an indicator of fair value. FSP FAS 157-4 is effective for periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15, 2009. Management is currently evaluating the impact of adopting FSP FAS 157-4 and has elected not to early adopt.

FSP FAS 107-1 and APB 28-1

In April 2009, the FASB issued FSP
FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1/APB 28-1). FSP FAS 107-1/APB 28-1 require disclosures about fair value of financial instruments in interim and annual
financial statements. FSP FAS 107-1/APB 28-1 is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Management is currently evaluating the impact of adopting FSP FAS
107-1/APB 28-1 and has elected not to early adopt.

3. Business Combinations

On September 29, 2008, EIHI acquired all of the outstanding stock of ESHC in a transaction valued at $14,820, including the assumption of $2,650 in debt. The acquisition of ESHC resulted in the recognition of
certain intangible assets totaling $4,180 and goodwill totaling $2,760. Direct costs related to the acquisition totaling $107 were capitalized and included in goodwill.

4. Intangible Assets

As of March 31, 2009 and December 31, 2008, intangible assets consisted of the
following (unaudited, in thousands):



|                                                   |  |                |        |                         |   |              |  |                         |        |  |   |      
|-------------------------------------------------- |  | -------------- | ------ | ----------------------- | - | ------------ |  | ----------------------- | ------ |  | - | -----
|                                                   |  | March 31, 2009 |        | December 31, 2008      
|Intangible Assets with Finite Life                 |  | GrossBalance   |        | AccumulatedAmortization |   | GrossBalance |  | AccumulatedAmortization
|Agency relationships (15 year amortization period) |  | $              | 3,564  |                         | $ | 859          |  | $                       | 3,564  |  | $ | 715  
|Renewal rights (15 year amortization period)       |  |                | 8,238  |                         |   | 3,772        |  |                         | 8,238  |  |   | 3,483
|                                                   |  |                |        |                         |   |              |  |                         |        |  |   |      
|                                                   |  | $              | 11,802 |                         | $ | 4,631        |  | $                       | 11,802 |  | $ | 4,198
|                                                   |  |                |        |                         |   |              |  |                         |        |  |   |      
|                                                   |  |                |        |                        
|Intangible Assets with Indefinite Life             |  |                |        |                         |   |              |  |                        
|State insurance licenses                           |  |                | 1,575  |                         |   |             |  |                         | 1,575  |  |   |     
|                                                   |  |                |        |                         |   |              |  |                         |        |  |   |      
|Total intangible assets                            |  | $              | 13,377 |                         | $ | 4,631        |  | $                       | 13,377 |  | $ | 4,198
|                                                   |  |                |        |                         |   |              |  |                         |        |  |   |      

Amortization expense totaled $433 and $328 for the three months ended March 31, 2009 and 2008, respectively.

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, 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. For the three months ended March 31, 2008, dilutive potential common shares outstanding included 306,099 stock warrants and 40,123 restricted stock awards, and there were 836,816 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.

In
June 2008, the FASB issued FSP Emerging Issues Task Force (EITF) 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities. This FSP provides that unvested share-based
payment awards that contain non-forfeitable rights to dividends are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method described in Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings per Share. The



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two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for common stock and any participating
securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Our nonvested stock (time-vested restricted stock rights, market-based restricted stock rights and restricted stock units) are
considered participating securities since the share-based awards contain a non-forfeitable right to dividends irrespective of whether the awards ultimately vest. This FSP is effective for financial statements issued for fiscal years beginning after
December 15, 2008 and interim periods within those years. Upon adoption, we are required to retrospectively adjust earnings per share data to conform to the provisions in this FSP. Accordingly, the Company adopted the provisions of FSP EITF
03-6-1 effective January 1, 2009 and computed earnings per common share using the two-class method for all periods presented. FSP EITF 03-6-1 had no impact on our earnings per common share for the three months ended March 31, 2009 or 2008.

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, 2009 and 2008 were as follows (unaudited, in thousands, except share and per share data):



|                                                                      |  |                                 |           |   |                                 |   |           |  
|--------------------------------------------------------------------- |  | ------------------------------- | --------- | - | ------------------------------- | - | --------- | -
|                                                                      |  | Three MonthsEndedMarch 31, 2009 |           |   | Three MonthsEndedMarch 31, 2008 |  
|Net (loss) income for basic and diluted earnings per share            |  | $                               | (555      | ) |                                 | $ | 2,574     |  
|                                                                      |  |                                
|Less: Dividends declared  common and unvested restricted share units |  |                                 | (626      | ) |                                 |   | (724      | )
|                                                                      |  |                                 |           |   |                                 |   |           |  
|                                                                      |  |                                
|Undistributed earnings                                                |  |                                 | (1,181    | ) |                                 |   | (1,850    | )
|                                                                      |  |                                
|Percent allocated to common shareholders                              |  |                                 | 98.3      | % |                                 |   | 97.9      | %
|                                                                      |  |                                 |           |   |                                 |   |           |  
|                                                                      |  |                                
|                                                                      |  |                                 | (1,161    | ) |                                 |   | 1,811     |  
|                                                                      |  |                                
|Add: Dividends declared  common shares                               |  |                                 | 615       |   |                                 |   | 709       |  
|                                                                      |  |                                 |           |   |                                 |   |           |  
|                                                                      |  |                                
|                                                                      |  | $                               | 546       |   |                                 | $ | 2,520     |  
|                                                                      |  |                                 |           |   |                                 |   |           |  
|                                                                      |  |                                
|Denominator for basic earnings per share                              |  |                                 | 8,851,588 |   |                                 |   | 9,426,830 |  
|                                                                      |  |                                
|Effect of dilutive securities                                         |  |                                 | 233,873   |   |                                 |   | 346,222   |  
|                                                                      |  |                                 |           |   |                                 |   |           |  
|                                                                      |  |                                
|Denominator for diluted earnings per common share                     |  |                                 | 9,085,461 |   |                                 |   | 9,773,052 |  
|                                                                      |  |                                 |           |   |                                 |   |           |  
|                                                                      |  |                                
|Basic earnings per share                                              |  | $                               | (0.06     | ) |                                 | $ | 0.27      |  
|Diluted earnings per share                                            |  | $                               | (0.06     | ) |                                 | $ | 0.26      |  
|Cash dividends per share                                              |  | $                               | 0.07      |   |                                 | $ | 0.07      |  

6. Exercise of Outstanding Warrants

As of January 1, 2009, contingent warrants to purchase 306,099 common shares of EIHI stock at an exercise price of $1.63 were outstanding. These warrants were awarded in 1999 as compensation to a Director of the
Company who acted as the insurance broker for premium production in the Companys run-off specialty reinsurance segment. The number of warrants ultimately earned was contingent upon achievement of predetermined direct premiums written
thresholds. As of January 1, 2009, 244,879 warrants were earned. The remaining 61,220 warrants will not be earned because the specialty reinsurance segment was placed into run-off on July 1, 2008 and, therefore, there is no additional
premium production. On March 10, 2009, the Director notified the Company that he was exercising the 244,879 earned warrants. Furthermore, as provided in the terms of the warrant, the Director instructed the Company to retain 64,588 shares in
payment of the exercise price. Accordingly, on March 31, 2009, 180,291 shares of EIHI common stock were issued to the Director in full satisfaction of the 244,879 warrants earned. This was a non-cash transaction that had no impact on cash flows
from operating or financing activities.

7. Share Repurchase

The Company recognized the repurchase of 1,400 shares, at a cost of $11, for the three months ended March 31, 2009. The Company recognized the repurchase of 739,213 shares, at a cost of $12,114, for the three months ended
March 31, 2008.

8. Fair Value Measurements

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



13



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On February 12, 2008, SFAS 157 was amended by FASB Staff Position No. FAS 157-2 (FSP FAS 157-2). FSP FAS
157-2 delayed the effective date of SFAS 157 for non-financial assets and non-financial liabilities which are measured at fair value on a non-recurring basis until fiscal years beginning after November 15, 2008 and interim periods within those
fiscal years. The Company adopted FSP FAS 157-2 effective January 1, 2009.

As of March 31, 2009, the Company has no non-financial assets or
non-financial liabilities that are measured at fair value on a recurring or non-recurring basis.

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

The following is a description of the Companys categorization of the inputs used in the recurring fair value measurements of its financial assets included in its consolidated balance sheet as of March 31,
2009:

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, 2009, excluding the segregated portfolio cell segment (unaudited, in thousands):



|                                             |  |         |         |                                                |   |         |  |         |         |  |   |  
|-------------------------------------------- |  | ------- | ------- | ---------------------------------------------- | - | ------- |  | ------- | ------- |  | - | -
|                                             |  |         |         | Fair Value Measurements at ReportingDate
Using
|                                             |  | 3/31/09 |         | Level 1                                        |   | Level 2 |  | Level 3
|Fixed income securities  available for sale |  | $       | 123,750 |                                                | $ | 12,296  |  | $       | 111,454 |  | $ | 
|Convertible bonds                            |  |         | 13,127  |                                                |   |        |  |         | 13,127  |  |   | 
|Equity securities  available for sale       |  |         | 13,103  |                                                |   | 13,103  |  |         |        |  |   | 
|                                             |  |         |         |                                                |   |         |  |         |         |  |   |  
|Total                                        |  | $       | 149,980 |                                                | $ | 25,399  |  | $       | 124,581 |  | $ | 
|                                             |  |         |         |                                                |   |         |  |         |         |  |   |  

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

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



14



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As of March 31, 2009 (unaudited) and December 31, 2008, the estimated fair values of the Companys limited
partnership investments, by investment strategy, were as follows (in thousands):



|                                    |  |         |       |          |   |      
|----------------------------------- |  | ------- | ----- | -------- | - | -----
|                                    |  | 3/31/09 |       | 12/31/08
|Multi-strategy fund of funds        |  | $       | 4,338 |          | $ | 4,421
|Natural resources                   |  |         | 2,009 |          |   | 2,130
|Structured finance opportunity fund |  |         | 1,979 |          |   | 1,958
|Municipal bond arbitrage            |  |         | 93    |          |   | 466  
|Open-ended investment fund          |  |         | 490   |          |   | 470  
|Real estate                         |  |         | 64    |          |   | 66   
|                                    |  |         |       |          |   |      
|Total                               |  | $       | 8,973 |          | $ | 9,511
|                                    |  |         |       |          |   |      

The activity in the Companys limited partnership investments for the three months ended March 31, 2009
and 2008 was as follows (unaudited, in thousands):



|                              |  |         |       |   |         |   |       
|----------------------------- |  | ------- | ----- | - | ------- | - | ------
|                              |  | 3/31/09 |       |   | 3/31/08
|Balance, beginning of period  |  | $       | 9,511 |   |         | $ | 11,300
|Contributions                 |  |         |      |   |         |   | 1,000 
|Withdrawals                   |  |         | (371  | ) |         |   |      
|Unrealized change in interest |  |         | (167  | ) |         |   | 49    
|                              |  |         |       |   |         |   |       
|Balance, end of period        |  | $       | 8,973 |   |         | $ | 12,349
|                              |  |         |       |   |         |   |       

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.

9. 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, 2009 and
December 31, 2008 (unaudited, in thousands):



|                                                   |  |                      |         |                      |   |                       |  |   |                     |   |  |   |        
|-------------------------------------------------- |  | -------------------- | ------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------
|March 31, 2009                                     |  | Cost orAmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|U.S. Treasuries and government agencies            |  | $                    | 27,598  |                      | $ | 1,482                 |  | $ |                    |   |  | $ | 29,080 
|States, municipalities, and political subdivisions |  |                      | 41,002  |                      |   | 1,977                 |  |   | (72                 | ) |  |   | 42,907 
|Corporate securities                               |  |                      | 40,522  |                      |   | 1,195                 |  |   | (458                | ) |  |   | 41,259 
|Mortgage-backed securities                         |  |                      | 10,835  |                      |   | 738                   |  |   |                    |   |  |   | 11,573 
|Collateralized mortgage obligations                |  |                      | 18,133  |                      |   | 367                   |  |   | (1,591              | ) |  |   | 16,909 
|Other structured securities                        |  |                      | 9,050   |                      |   | 15                    |  |   | (964                | ) |  |   | 8,101  
|                                                   |  |                      |         |                      |   |                       |  |   |                     |   |  |   |        
|Total fixed income securities                      |  |                      | 147,140 |                      |   | 5,774                 |  |   | (3,085              | ) |  |   | 149,829
|Equity securities                                  |  |                      | 21,481  |                      |   | 156                   |  |   | (4,637              | ) |  |   | 17,000 
|                                                   |  |                      |         |                      |   |                       |  |   |                     |   |  |   |        
|Total fixed income and equity securities           |  | $                    | 168,621 |                      | $ | 5,930                 |  | $ | (7,722              | ) |  | $ | 166,829
|                                                   |  |                      |         |                      |   |                       |  |   |                     |   |  |   |        
|                                                   |  |                      |         |                     
|December 31, 2008                                  |  | Cost orAmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|U.S. Treasuries and government agencies            |  | $                    | 26,463  |                      | $ | 2,170                 |  | $ | (3                  | ) |  | $ | 28,630 
|States, municipalities, and political subdivisions |  |                      | 45,109  |                      |   | 1,611                 |  |   | (183                | ) |  |   | 46,537 
|Corporate securities                               |  |                      | 60,480  |                      |   | 991                   |  |   | (854                | ) |  |   | 60,617 
|Mortgage-backed securities                         |  |                      | 16,349  |                      |   | 1,265                 |  |   |                    |   |  |   | 17,614 
|Collateralized mortgage obligations                |  |                      | 20,195  |                      |   | 336                   |  |   | (1,503              | ) |  |   | 19,028 
|Other structured securities                        |  |                      | 11,506  |                      |   | 7                     |  |   | (803                | ) |  |   | 10,710 
|                                                   |  |                      |         |                      |   |                       |  |   |                     |   |  |   |        
|Total fixed income securities                      |  |                      | 180,102 |                      |   | 6,380                 |  |   | (3,346              | ) |  |   | 183,136
|Equity securities                                  |  |                      | 22,287  |                      |   | 50                    |  |   | (5,175              | ) |  |   | 17,162 
|                                                   |  |                      |         |                      |   |                       |  |   |                     |   |  |   |        
|Total fixed income and equity securities           |  | $                    | 202,389 |                      | $ | 6,430                 |  | $ | (8,521              | ) |  | $ | 200,298
|                                                   |  |                      |         |                      |   |                       |  |   |                     |   |  |   |        



15



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##### Table of Contents

Other structured securities primarily include commercial mortgage-backed securities and other asset-backed securities.

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, 2009 (unaudited, in thousands) and December 31, 2008 are as follows
(in thousands):



|                                                   |  |                     |        |                       |                   |        |                    |       |                       |       |  |                    |        |                       |  |   |        |  |   |        |  
|-------------------------------------------------- |  | ------------------- | ------ | --------------------- | ----------------- | ------ | ------------------ | ----- | --------------------- | ----- |  | ------------------ | ------ | --------------------- |  | - | ------ |  | - | ------ | -
|                                                   |  | Less Than 12 Months |        |                       | 12 Months or More |        |                    | Total |                      
|March 31, 2009                                     |  | EstimatedFairValue  |        | GrossUnrealizedLosses |                   |        | EstimatedFairValue |       | GrossUnrealizedLosses |       |  | EstimatedFairValue |        | GrossUnrealizedLosses | 
|U.S. Treasuries and government agencies            |  | $                   |       |                       | $                 |       |                    |       | $                     |      |  | $                  |       |                       |  | $ |       |  | $ |       |  
|States, municipalities, and political subdivisions |  |                     | 2,839  |                       |                   | (38    | )                  |       |                       | 916   |  |                    | (26    | )                     |  |   | 3,755  |  |   | (64    | )
|Corporate securities                               |  |                     | 2,406  |                       |                   | (64    | )                  |       |                       | 830   |  |                    | (93    | )                     |  |   | 3,236  |  |   | (157   | )
|Collateralized mortgage obligations                |  |                     | 2,751  |                       |                   | (56    | )                  |       |                       | 4,696 |  |                    | (1,534 | )                     |  |   | 7,447  |  |   | (1,590 | )
|Other structured securities                        |  |                     | 3,398  |                       |                   | (222   | )                  |       |                       | 3,236 |  |                    | (742   | )                     |  |   | 6,634  |  |   | (964   | )
|                                                   |  |                     |        |                       |                   |        |                    |       |                       |       |  |                    |        |                       |  |   |        |  |   |        |  
|Total fixed income securities                      |  |                     | 11,394 |                       |                   | (380   | )                  |       |                       | 9,678 |  |                    | (2,395 | )                     |  |   | 21,072 |  |   | (2,775 | )
|Equity securities                                  |  |                     | 10,927 |                       |                   | (4,169 | )                  |       |                       |      |  |                    |       |                       |  |   | 10,927 |  |   | (4,169 | )
|                                                   |  |                     |        |                       |                   |        |                    |       |                       |       |  |                    |        |                       |  |   |        |  |   |        |  
|Total fixed income and equity securities           |  | $                   | 22,321 |                       | $                 | (4,549 | )                  |       | $                     | 9,678 |  | $                  | (2,395 | )                     |  | $ | 31,999 |  | $ | (6,944 | )
|                                                   |  |                     |        |                       |                   |        |                    |       |                       |       |  |                    |        |                       |  |   |        |  |   |        |  



16



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##### Table of Contents

|                                                   |  |                     |        |                       |                   |        |                    |       |                       |       |  |                    |        |                       |  |   |        |  |   |        |  
|-------------------------------------------------- |  | ------------------- | ------ | --------------------- | ----------------- | ------ | ------------------ | ----- | --------------------- | ----- |  | ------------------ | ------ | --------------------- |  | - | ------ |  | - | ------ | -
|                                                   |  | Less Than 12 Months |        |                       | 12 Months or More |        |                    | Total |                      
|December 31, 2008                                  |  | EstimatedFairValue  |        | GrossUnrealizedLosses |                   |        | EstimatedFairValue |       | GrossUnrealizedLosses |       |  | EstimatedFairValue |        | GrossUnrealizedLosses | 
|U.S. Treasuries and government agencies            |  | $                   | 200    |                       | $                 | (3     | )                  |       | $                     |      |  | $                  |       |                       |  | $ | 200    |  | $ | (3     | )
|States, municipalities, and political subdivisions |  |                     | 6,631  |                       |                   | (169   | )                  |       |                       | 246   |  |                    | (14    | )                     |  |   | 6,877  |  |   | (183   | )
|Corporate securities                               |  |                     | 15,506 |                       |                   | (552   | )                  |       |                       | 1,398 |  |                    | (67    | )                     |  |   | 16,904 |  |   | (619   | )
|Collateralized mortgage obligations                |  |                     | 6,853  |                       |                   | (756   | )                  |       |                       | 2,279 |  |                    | (747   | )                     |  |   | 9,132  |  |   | (1,503 | )
|Other structured securities                        |  |                     | 6,817  |                       |                   | (232   | )                  |       |                       | 2,747 |  |                    | (571   | )                     |  |   | 9,564  |  |   | (803   | )
|                                                   |  |                     |        |                       |                   |        |                    |       |                       |       |  |                    |        |                       |  |   |        |  |   |        |  
|Total fixed income securities                      |  |                     | 36,007 |                       |                   | (1,712 | )                  |       |                       | 6,670 |  |                    | (1,399 | )                     |  |   | 42,677 |  |   | (3,111 | )
|Equity securities                                  |  |                     | 9,047  |                       |                   | (4,184 | )                  |       |                       |      |  |                    |       |                       |  |   | 9,047  |  |   | (4,184 | )
|                                                   |  |                     |        |                       |                   |        |                    |       |                       |       |  |                    |        |                       |  |   |        |  |   |        |  
|Total fixed income and equity securities           |  | $                   | 45,054 |                       | $                 | (5,896 | )                  |       | $                     | 6,670 |  | $                  | (1,399 | )                     |  | $ | 51,724 |  | $ | (7,295 | )
|                                                   |  |                     |        |                       |                   |        |                    |       |                       |       |  |                    |        |                       |  |   |        |  |   |        |  

As of March 31, 2009, the Company held 58 fixed income securities with gross unrealized losses totaling
$2,775. 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 collateralized mortgage obligations and other structured securities. For investments in fixed income securities, losses in the estimated fair values are viewed as temporary if the
Company has the intent and ability to hold the security recovery, which may be maturity, and management expects that the issuer will be able to service the debt, both as to principal and interest in accordance with contractual terms. Management
believes that the current carrying value of these investments will be realized and that the Company has the ability and intent to hold them until that time.

As of March 31, 2009, the Company held 38 equity securities with gross unrealized losses totaling $4,169. All of the equity securities have been in an unrealized loss position for less than twelve months and management has determined,
based on an evaluation of these securities, that the decline in value is temporary as of March 31, 2009.

The Company recognized other-than-temporary
impairments of $2,369 for the three months ended March 31, 2009. There were no impairments recognized for the three months ended March 31, 2008. Of the impairments recorded, $2,210 related to equity securities that had been in an
unrealized loss position for 12 months or more as of March 31, 2009 and $159 related to a fixed income security that was sold at a loss in April 2009.

10. Reserves for Unpaid Losses and Loss Adjustment Expenses

The following table provides a summary of the activity in the Companys
reserves for unpaid losses and LAE, excluding term life premium waiver reserves, for the three months ended March 31, 2009 and 2008 (unaudited, in thousands):



|                                                      |  |      |         |   |      |   |         |  
|----------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                      |  | 2009 |         |   | 2008 |  
|Balance, beginning of period                          |  | $    | 155,314 |   |      | $ | 125,249 |  
|Reinsurance recoverables on unpaid losses and LAE     |  |      | 25,636  |   |      |   | 23,429  |  
|                                                      |  |      |         |   |      |   |         |  
|Net balance, beginning of period                      |  |      | 129,678 |   |      |   | 101,820 |  
|Incurred related to:                                  |  |      |         |   |      |   |         |  
|Current year                                          |  |      | 23,638  |   |      |   | 21,841  |  
|Prior year                                            |  |      | (877    | ) |      |   | (1,791  | )
|                                                      |  |      |         |   |      |   |         |  
|Total incurred before purchase accounting adjustments |  |      | 22,761  |   |      |   | 20,050  |  
|Purchase accounting adjustments                       |  |      | (158    | ) |      |   | (155    | )
|                                                      |  |      |         |   |      |   |         |  
|Total incurred                                        |  |      | 22,603  |   |      |   | 19,895  |  
|Paid related to:                                      |  |      |         |   |      |   |         |  
|Current year                                          |  |      | 5,850   |   |      |   | 4,560   |  
|Prior year                                            |  |      | 18,355  |   |      |   | 13,475  |  
|                                                      |  |      |         |   |      |   |         |  
|Total paid                                            |  |      | 24,205  |   |      |   | 18,035  |  
|                                                      |  |      |         |   |      |   |         |  
|Net balance, end of period                            |  |      | 128,076 |   |      |   | 103,680 |  
|Reinsurance recoverables on unpaid losses and LAE     |  |      | 24,386  |   |      |   | 24,960  |  
|                                                      |  |      |         |   |      |   |         |  
|Balance, end of period                                |  | $    | 152,462 |   |      | $ | 128,640 |  
|                                                      |  |      |         |   |      |   |         |  
|Total reserves for unpaid for losses and LAE          |  | $    | 156,243 |   |      | $ | 132,961 |  



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##### Table of Contents

|                                        |  |      |         |      |   |        
|--------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                        |  | 2009 |         | 2008
|Less: Term life premium waiver reserves |  |      | 3,748   |      |   | 4,277  
|Less: Other                             |  |      | 33      |      |   | 44     
|                                        |  |      |         |      |   |        
|Balance, end of period                  |  | $    | 152,462 |      | $ | 128,640
|                                        |  |      |         |      |   |        

Incurred losses by segment were as follows for the three months ended March 31, 2009 and 2008, respectively
(unaudited, in thousands):



|                                                      |  |                                      |        |   |                                            |   |       |                               |  |   |                             |   |       |   |       |  |   |        |  
|----------------------------------------------------- |  | ------------------------------------ | ------ | - | ------------------------------------------ | - | ----- | ----------------------------- |  | - | --------------------------- | - | ----- | - | ----- |  | - | ------ | -
|                                                      |  | WorkersCompensationInsuranceSegment |        |   | SegregatedPortfolio CellReinsuranceSegment |   |       | GroupBenefitsInsuranceSegment |  |   | SpecialtyReinsuranceSegment |   | Total |  
|Incurred related to:                                  |  |                                      |        |   |                                            |   |       |                               |  |   |                             |   |       |   |       |  |   |        |  
|Current year, gross of discount                       |  | $                                    | 11,853 |   |                                            | $ | 4,450 |                               |  | $ | 7,344                       |   |       | $ | 613   |  | $ | 24,260 |  
|Current period discount                               |  |                                      | (452   | ) |                                            |   | (170  | )                             |  |   |                            |   |       |   |      |  |   | (622   | )
|Prior year, gross of discount                         |  |                                      | (549   | ) |                                            |   | (206  | )                             |  |   | (680                        | ) |       |   |      |  |   | (1,435 | )
|Accretion of prior period discount                    |  |                                      | 406    |   |                                            |   | 152   |                               |  |   |                            |   |       |   |      |  |   | 558    |  
|                                                      |  |                                      |        |   |                                            |   |       |                               |  |   |                             |   |       |   |       |  |   |        |  
|Total incurred before purchase accounting adjustments |  |                                      | 11,258 |   |                                            |   | 4,226 |                               |  |   | 6,664                       |   |       |   | 613   |  |   | 22,761 |  
|Purchase accounting adjustments                       |  |                                      | (149   | ) |                                            |   | (13   | )                             |  |   |                            |   |       |   | 4     |  |   | (158   | )
|                                                      |  |                                      |        |   |                                            |   |       |                               |  |   |                             |   |       |   |       |  |   |        |  
|Total incurred                                        |  | $                                    | 11,109 |   |                                            | $ | 4,213 |                               |  | $ | 6,664                       |   |       | $ | 617   |  | $ | 22,603 |  
|                                                      |  |                                      |        |   |                                            |   |       |                               |  |   |                             |   |       |   |       |  |   |        |  
|                                                      |  |                                      |        |   |                                           
|                                                      |  | WorkersCompensationInsuranceSegment |        |   | SegregatedPortfolio CellReinsuranceSegment |   |       | GroupBenefitsInsuranceSegment |  |   | SpecialtyReinsuranceSegment |   | Total |  
|Incurred related to:                                  |  |                                      |        |   |                                            |   |       |                               |  |   |                             |   |       |   |       |  |   |        |  
|Current year, gross of discount                       |  | $                                    | 9,088  |   |                                            | $ | 3,729 |                               |  | $ | 7,499                       |   |       | $ | 1,988 |  | $ | 22,304 |  
|Current period discount                               |  |                                      | (328   | ) |                                            |   | (135  | )                             |  |   |                            |   |       |   |      |  |   | (463   | )
|Prior year, gross of discount                         |  |                                      | (1,500 | ) |                                            |   | (615  | )                             |  |   | (886                        | ) |       |   | 653   |  |   | (2,348 | )
|Accretion of prior period discount                    |  |                                      | 395    |   |                                            |   | 162   |                               |  |   |                            |   |       |   |      |  |   | 557    |  
|                                                      |  |                                      |        |   |                                            |   |       |                               |  |   |                             |   |       |   |       |  |   |        |  
|Total incurred before purchase accounting adjustments |  |                                      | 7,655  |   |                                            |   | 3,141 |                               |  |   | 6,613                       |   |       |   | 2,641 |  |   | 20,050 |  
|Purchase accounting adjustments                       |  |                                      | (137   | ) |                                            |   | (26   | )                             |  |   |                            |   |       |   | 8     |  |   | (155   | )
|                                                      |  |                                      |        |   |                                            |   |       |                               |  |   |                             |   |       |   |       |  |   |        |  
|Total incurred                                        |  | $                                    | 7,518  |   |                                            | $ | 3,115 |                               |  | $ | 6,613                       |   |       | $ | 2,649 |  | $ | 19,895 |  
|                                                      |  |                                      |        |   |                                            |   |       |                               |  |   |                             |   |       |   |       |  |   |        |  

The Companys results of operations include favorable development on prior year reserves of $1,435 and $2,348
for the three months ended March 31, 2009 and 2008, respectively. The favorable development in the workers compensation insurance and segregated portfolio cell reinsurance segments for the three months ended March 31, 2009 and 2008
primarily reflects the impact of claim settlements for amounts at, or less than, previously established case and IBNR reserves. The favorable development in the group benefits insurance segment for the three months ended March 31, 2009 and 2008
primarily reflects lower claims experience than anticipated at the time the reserves were established in the dental and short-term disability lines of business and the termination of prior year long-term disability claims. The unfavorable
development in the run-off specialty reinsurance segment for the three months ended March 31, 2008 primarily reflects an increase in reported claims from the ceding company.

11. Income Taxes

As a result of the continued decline in the fixed income and equity security markets during the
three months ended March 31, 2009, the Company experienced additional realized and unrealized capital losses related to its investment portfolio. As of March 31, 2009, management performed an assessment and concluded that the Company may
be unable to generate sufficient future capital gains to offset capital losses in the foreseeable future, which is generally considered to be twelve months from the balance sheet date, and recorded a valuation allowance against its deferred tax
assets related to realized and unrealized capital losses of $904, of which $678 was reported as an increase to income tax expense and $226 was reported as a reduction to the accumulated other comprehensive loss, net of tax. Under United States
federal income tax rules and regulations, capital losses can only be utilized to offset taxable income generated by capital gains. Capital losses can be carried back to offset capital gains reported in the three prior tax periods and can be carried
forward for five tax periods.

12. Segment Information

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



18



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##### Table of Contents

Workers Compensation Insurance

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

Segregated Portfolio Cell Reinsurance

The Company offers alternative market workers compensation solutions to individual companies, groups and associations (referred to as segregated portfolio
cell dividend participants) through the creation of segregated portfolio cells. The segregated portfolio cells are segregated pools of assets that function as insurance companies within an insurance company. The pool of assets and associated
liabilities of each segregated portfolio cell are solely for the benefit of the segregated portfolio cell dividend participants, and the pool of assets of one segregated portfolio cell are statutorily protected from the creditors of the others. This
permits the Company to provide customers with a turn-key alternative markets solution that includes program design, fronting, claims administration, risk management, segregated portfolio cell rental, investment and segregated portfolio management
services. The segregated portfolio cell structure provides dividend participants the opportunity to share in both underwriting profit and investment income derived from their respective segregated portfolio cells financial results. The
segregated portfolio cell reinsurance segment generated fee revenue to the Companys workers compensation, run-off specialty reinsurance, and corporate/other segments totaling $1,521 and $1,694 for the three months ended March 31,
2009 and 2008, respectively.

Group Benefits Insurance

The Companys group benefits insurance products include dental, short and long-term disability, and term life insurance. The group benefits insurance products are marketed to employers, primarily in the Mid-Atlantic, Southeast, and
Midwest regions of the United States. Net premiums earned, by product, for the three months ended March 31, 2009 and 2008 were as follows (unaudited, in thousands):



|                      |  |      |       |      |   |      
|--------------------- |  | ---- | ----- | ---- | - | -----
|                      |  | 2009 |       | 2008
|Dental                |  | $    | 5,502 |      | $ | 5,649
|Short-term disability |  |      | 1,560 |      |   | 1,681
|Long-term disability  |  |      | 377   |      |   | 441  
|Term life             |  |      | 1,452 |      |   | 1,461
|                      |  |      |       |      |   |      
|Total                 |  | $    | 8,891 |      | $ | 9,232
|                      |  |      |       |      |   |      

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, 2009 and 2008 were as follows (unaudited, in thousands):



|            |  |      |     |      |   |      
|----------- |  | ---- | --- | ---- | - | -----
|            |  | 2009 |     | 2008
|EnviroGuard |  | $    | 630 |      | $ | 2,562
|EIA         |  |      | 269 |      |   | 932  
|Other       |  |      |    |      |   | 6    
|            |  |      |     |      |   |      
|Total       |  | $    | 899 |      | $ | 3,500
|            |  |      |     |      |   |      

Corporate/Other

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



19



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##### Table of Contents

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



|                                                  |  |                               |         |   |                                     |   |        |                        |  |   |                             |   |  |                 |        |   |       |   |         |   |  |   |         |  
|------------------------------------------------- |  | ----------------------------- | ------- | - | ----------------------------------- | - | ------ | ---------------------- |  | - | --------------------------- | - |  | --------------- | ------ | - | ----- | - | ------- | - |  | - | ------- | -
|                                                  |  | WorkersCompensationInsurance |         |   | SegregatedPortfolio CellReinsurance |   |        | GroupBenefitsInsurance |  |   | Run-OffSpecialtyReinsurance |   |  | Corporate/Other |        |   | Total |  
|Revenue:                                          |  |                               |         |   |                                     |   |        |                        |  |   |                             |   |  |                 |        |   |       |   |         |   |  |   |         |  
|Net premiums earned                               |  | $                             | 17,906  |   |                                     | $ | 6,042  |                        |  | $ | 8,891                       |   |  | $               | 899    |   |       | $ |        |   |  | $ | 33,738  |  
|Net investment income                             |  |                               | 958     |   |                                     |   | 182    |                        |  |   | 459                         |   |  |                 | 258    |   |       |   | 88      |   |  |   | 1,945   |  
|Change in equity interest in limited partnerships |  |                               | (94     | ) |                                     |   |       |                        |  |   | (73                         | ) |  |                 |       |   |       |   |        |   |  |   | (167    | )
|Net realized investment (losses) gains            |  |                               | (10     | ) |                                     |   | (1,095 | )                      |  |   | 462                         |   |  |                 | (1,201 | ) |       |   | 245     |   |  |   | (1,599  | )
|Other revenue                                     |  |                               | 99      |   |                                     |   |       |                        |  |   |                            |   |  |                 | 113    |   |       |   | 27      |   |  |   | 239     |  
|                                                  |  |                               |         |   |                                     |   |        |                        |  |   |                             |   |  |                 |        |   |       |   |         |   |  |   |         |  
|Total revenue                                     |  |                               | 18,859  |   |                                     |   | 5,129  |                        |  |   | 9,739                       |   |  |                 | 69     |   |       |   | 360     |   |  |   | 34,156  |  
|                                                  |  |                               |         |   |                                     |   |        |                        |  |   |                             |   |  |                 |        |   |       |   |         |   |  |   |         |  
|                                                  |  |                               |         |   |                                     |  
|Expenses:                                         |  |                               |         |   |                                     |   |        |                        |  |   |                             |   |  |                 |        |   |       |   |         |   |  |   |         |  
|Losses and LAE incurred                           |  |                               | 11,109  |   |                                     |   | 4,213  |                        |  |   | 6,648                       |   |  |                 | 617    |   |       |   |        |   |  |   | 22,587  |  
|Acquisition and other underwriting expenses       |  |                               | 1,472   |   |                                     |   | 1,833  |                        |  |   | 1,364                       |   |  |                 | 270    |   |       |   | (359    | ) |  |   | 4,580   |  
|Other expenses                                    |  |                               | 3,564   |   |                                     |   | (30    | )                      |  |   | 1,522                       |   |  |                 | 136    |   |       |   | 1,340   |   |  |   | 6,532   |  
|Amortization of intangibles                       |  |                               |        |   |                                     |   |       |                        |  |   |                            |   |  |                 |       |   |       |   | 433     |   |  |   | 433     |  
|Policyholder dividend expense                     |  |                               | 185     |   |                                     |   |       |                        |  |   |                            |   |  |                 |       |   |       |   |        |   |  |   | 185     |  
|Segregated portfolio dividend expense             |  |                               |        |   |                                     |   | (887   | )                      |  |   |                            |   |  |                 |       |   |       |   | 148     |   |  |   | (739    | )
|                                                  |  |                               |         |   |                                     |   |        |                        |  |   |                             |   |  |                 |        |   |       |   |         |   |  |   |         |  
|Total expenses                                    |  |                               | 16,330  |   |                                     |   | 5,129  |                        |  |   | 9,534                       |   |  |                 | 1,023  |   |       |   | 1,562   |   |  |   | 33,578  |  
|                                                  |  |                               |         |   |                                     |   |        |                        |  |   |                             |   |  |                 |        |   |       |   |         |   |  |   |         |  
|Income (loss) before income taxes                 |  |                               | 2,529   |   |                                     |   |       |                        |  |   | 205                         |   |  |                 | (954   | ) |       |   | (1,202  | ) |  |   | 578     |  
|Income tax expense                                |  |                               | 765     |   |                                     |   |       |                        |  |   | 36                          |   |  |                 | 3      |   |       |   | 329     |   |  |   | 1,133   |  
|                                                  |  |                               |         |   |                                     |   |        |                        |  |   |                             |   |  |                 |        |   |       |   |         |   |  |   |         |  
|Net income (loss)                                 |  | $                             | 1,764   |   |                                     | $ |       |                        |  | $ | 169                         |   |  | $               | (957   | ) |       | $ | (1,531  | ) |  | $ | (555    | )
|                                                  |  |                               |         |   |                                     |   |        |                        |  |   |                             |   |  |                 |        |   |       |   |         |   |  |   |         |  
|Total assets                                      |  | $                             | 233,277 |   |                                     | $ | 56,914 |                        |  | $ | 63,775                      |   |  | $               | 62,284 |   |       | $ | (30,763 | ) |  | $ | 385,487 |  
|                                                  |  |                               |         |   |                                     |   |        |                        |  |   |                             |   |  |                 |        |   |       |   |         |   |  |   |         |  



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##### Table of Contents

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



|                                                  |  |                               |         |   |                                     |   |                        |  |   |                             |   |  |                 |        |   |       |   |         |   |  |   |         |  
|------------------------------------------------- |  | ----------------------------- | ------- | - | ----------------------------------- | - | ---------------------- |  | - | --------------------------- | - |  | --------------- | ------ | - | ----- | - | ------- | - |  | - | ------- | -
|                                                  |  | WorkersCompensationInsurance |         |   | SegregatedPortfolio CellReinsurance |   | GroupBenefitsInsurance |  |   | Run-OffSpecialtyReinsurance |   |  | Corporate/Other |        |   | Total |  
|Revenue:                                          |  |                               |         |   |                                     |   |                        |  |   |                             |   |  |                 |        |   |       |   |         |   |  |   |         |  
|Net premiums earned                               |  | $                             | 14,767  |   |                                     | $ | 5,504                  |  | $ | 9,232                       |   |  | $               | 3,500  |   |       | $ |        |   |  | $ | 33,003  |  
|Net investment income                             |  |                               | 987     |   |                                     |   | 293                    |  |   | 674                         |   |  |                 | 384    |   |       |   | 227     |   |  |   | 2,565   |  
|Change in equity interest in limited partnerships |  |                               | (75     | ) |                                     |   |                       |  |   | 185                         |   |  |                 | (61    | ) |       |   |        |   |  |   | 49      |  
|Net realized investment (losses) gains            |  |                               | (111    | ) |                                     |   | 48                     |  |   | (351                        | ) |  |                 | 120    |   |       |   | 1       |   |  |   | (293    | )
|Other revenue                                     |  |                               |        |   |                                     |   |                       |  |   |                            |   |  |                 | 303    |   |       |   | (87     | ) |  |   | 216     |  
|                                                  |  |                               |         |   |                                     |   |                        |  |   |                             |   |  |                 |        |   |       |   |         |   |  |   |         |  
|Total revenue                                     |  |                               | 15,568  |   |                                     |   | 5,845                  |  |   | 9,740                       |   |  |                 | 4,246  |   |       |   | 141     |   |  |   | 35,540  |  
|                                                  |  |                               |         |   |                                     |   |                        |  |   |                             |   |  |                 |        |   |       |   |         |   |  |   |         |  
|                                                  |  |                               |         |   |                                     |  
|Expenses:                                         |  |                               |         |   |                                     |   |                        |  |   |                             |   |  |                 |        |   |       |   |         |   |  |   |         |  
|Losses and LAE incurred                           |  |                               | 7,518   |   |                                     |   | 3,115                  |  |   | 6,433                       |   |  |                 | 2,649  |   |       |   |        |   |  |   | 19,715  |  
|Acquisition and other underwriting expenses       |  |                               | 1,201   |   |                                     |   | 1,709                  |  |   | 1,489                       |   |  |                 | 1,049  |   |       |   | (528    | ) |  |   | 4,920   |  
|Other expenses                                    |  |                               | 2,579   |   |                                     |   | 13                     |  |   | 1,452                       |   |  |                 | 147    |   |       |   | 1,872   |   |  |   | 6,063   |  
|Amortization of intangibles                       |  |                               |        |   |                                     |   |                       |  |   |                            |   |  |                 |       |   |       |   | 328     |   |  |   | 328     |  
|Policyholder dividend expense                     |  |                               | (63     | ) |                                     |   |                       |  |   |                            |   |  |                 |       |   |       |   |        |   |  |   | (63     | )
|Segregated portfolio dividend expense             |  |                               |        |   |                                     |   | 1,008                  |  |   |                            |   |  |                 |       |   |       |   | (74     | ) |  |   | 934     |  
|                                                  |  |                               |         |   |                                     |   |                        |  |   |                             |   |  |                 |        |   |       |   |         |   |  |   |         |  
|Total expenses                                    |  |                               | 11,235  |   |                                     |   | 5,845                  |  |   | 9,374                       |   |  |                 | 3,845  |   |       |   | 1,598   |   |  |   | 31,897  |  
|                                                  |  |                               |         |   |                                     |   |                        |  |   |                             |   |  |                 |        |   |       |   |         |   |  |   |         |  
|Income (loss) before income taxes                 |  |                               | 4,333   |   |                                     |   |                       |  |   | 366                         |   |  |                 | 401    |   |       |   | (1,457  | ) |  |   | 3,643   |  
|Income tax expense (benefit)                      |  |                               | 1,339   |   |                                     |   |                       |  |   | 54                          |   |  |                 | 143    |   |       |   | (467    | ) |  |   | 1,069   |  
|                                                  |  |                               |         |   |                                     |   |                        |  |   |                             |   |  |                 |        |   |       |   |         |   |  |   |         |  
|Net income (loss)                                 |  | $                             | 2,994   |   |                                     | $ |                       |  | $ | 312                         |   |  | $               | 258    |   |       | $ | (990    | ) |  | $ | 2,574   |  
|                                                  |  |                               |         |   |                                     |   |                        |  |   |                             |   |  |                 |        |   |       |   |         |   |  |   |         |  
|Total assets                                      |  | $                             | 212,257 |   |                                     | $ | 56,095                 |  | $ | 102,759                     |   |  | $               | 50,829 |   |       | $ | (30,623 | ) |  | $ | 391,317 |  
|                                                  |  |                               |         |   |                                     |   |                        |  |   |                             |   |  |                 |        |   |       |   |         |   |  |   |         |  

13. Eastern Re Capital Contribution

As a result of Eastern Res net loss for the year ended December 31, 2008, EIHI made a capital contribution of $23.0 million to Eastern Re on March 6, 2009 to improve Eastern Res capital position
and to maintain Eastern Res current A.M. Best financial strength rating of A- (Excellent). The capital contribution was funded by dividends paid to EIHI from Eastern Alliance, Allied Eastern and ELH in the amount of $10.0 million,
$2.0 million and $13.0 million, respectively, on March 6, 2009, of which $2.0 million was retained by EIHI. The dividends were approved by the Pennsylvania Insurance Department.

14. Commitments and Contingencies

Legal Proceedings

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



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

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the unaudited interim consolidated financial statements of Eastern Insurance Holdings, Inc.
(the Company) and the related notes thereto included in Item 1 of this Part 1. The information contained in this quarterly report is not a complete description of the Companys business or the risks associated with an
investment in the Companys common stock. You should carefully review and consider the various disclosures made by the Company in this quarterly report and in the Companys Annual Report on Form 10-K filed with the U.S. Securities and
Exchange Commission on March 13, 2009.



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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.

Overview

The Company reported a net loss of
$555,000 for the three months ended March 31, 2009, compared to net income of $2.6 million for the same period in 2008. The Companys results of operations were adversely impacted by other-than-temporary investment impairments of $1.8
million (excluding impairments related to investments in the segregated portfolio cell reinsurance segment) and



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the recording of a valuation allowance against the net deferred tax asset related to realized and unrealized capital losses totaling $678,000. Management
concluded that a valuation allowance was necessary as of March 31, 2009, which reflects the increase in realized and unrealized capital losses during the first quarter of 2009 and managements assessment that the Company may be unable to
generate sufficient capital gains to offset the capital losses in the foreseeable future, which is generally considered to be twelve months from the balance sheet date. There were no impairments recognized for the three months ended March 31,
2008.

The workers compensation insurance segment reported net income of $1.8 million for the three months ended March 31, 2009, compared to net
income of $3.0 million for the same period in 2008. The segments results reflect an increase in the loss and LAE ratio, primarily reflecting the impact of the current economic environment on the workers compensation book of business. The
increase in the loss ratio was partially offset by an increase in net premiums earned, primarily reflecting the acquisition of ESHC.

The segregated
portfolio cell reinsurance segments loss ratio increased from 2008 to 2009 for the same reasons as the workers compensation insurance segment. The reduction in the segregated portfolio dividend expense reflects the higher loss ratio and
the impact of net realized investment losses recognized in 2009.

The group benefits insurance segment reported net income of $169,000 for the three months
ended March 31, 2009, compared to net income of $312,000 for the same period in 2008. The segment reported a combined ratio of 107.2% in 2009, compared to a combined ratio of 101.5% in 2008, primarily reflecting an increase in the dental and
life loss ratios. The increase in the dental loss ratio primarily reflects the impact of the competitive environment on the Companys ability to obtain premium rate increases on new and renewal business, while the increase in the life loss
ratio primarily reflects claim severity related to reported death claims. The increase in death claim severity is reflective of the small size of the Companys book of business. The Company has not increased its underwriting limits with respect
to death benefits.

The specialty reinsurance segment results for the three months ended March 31, 2009 primarily reflect the run-off of the
quota-share reinsurance treaties and the impact of other-than-temporary investment impairments of $1.5 million.

Principal Revenue and Expense Items

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

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

Net premiums earned.Net premiums earned are the earned portion of the Companys net premiums written. Premiums are earned over the term of the related policies. At the end of each accounting period, the portion of the premiums
that are not yet earned are included in unearned premiums and are realized as revenue in subsequent periods over the remaining term of the policy. The Companys workers compensation policies typically have a term of twelve months.
Thus, for example, for a policy that is written on July 1, 2008, one-half of the premiums would be earned in 2008 and the other half would be earned in 2009. Workers compensation premiums are determined based upon the payroll of the
insured, the applicable premium rates and, where applicable, an experience based modification factor. An audit of the policyholders records is conducted after policy expiration, to make a final determination of applicable premiums. Included
with net premiums earned is an estimate for earned but unbilled final audit premiums. The Company can estimate earned but unbilled premiums because it keeps track, by policy, of how much additional premium is billed in final audit invoices as a
percentage to estimate the probable additional amount that it has earned but not yet billed as of the balance sheet date. The majority of the Companys group benefits insurance policies are billed on a monthly basis with premiums being earned
in the month in which coverage is provided. As a result, there is minimal unearned premium related to the group benefits insurance policies as of the balance sheet date.

Net investment income and realized gains and losses on investments. The Company invests its surplus and the funds supporting its insurance liabilities (including unearned premiums and unpaid losses and loss
adjustment expenses) in cash, cash equivalents, fixed income securities, convertible bonds, equity securities, and other long-term investments. Investment income includes interest earned on invested assets, 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.



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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.

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 and group benefits insurance segments, expenses incurred to underwrite risks are referred to as acquisition and other underwriting expenses, which consist of commissions, premium taxes and
fees and other underwriting expenses incurred in acquiring, writing and administering the Companys business. 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.



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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.

Critical Accounting Policies and Estimates

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

Reserves for Unpaid Losses and LAE

The Company establishes reserves for unpaid losses and LAE for its workers compensation, segregated portfolio cell reinsurance, group benefits insurance, and
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, 2009, 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, 2009 and December 31, 2008, the Companys reserves for unpaid losses and LAE
were reduced by $4,141 and $4,145, respectively, related to the effects of discounting.

The Companys reserves for unpaid losses and LAE in its
workers compensation insurance, segregated portfolio cell reinsurance, group benefits insurance, and run-off specialty reinsurance segments as of March 31, 2009 (unaudited) and December 31, 2008 are summarized below (in thousands):



|                                                              |  |                               |        |   |                                    |   |        |                        |  |                      |        |  |       |        |   |  |   |         |  
|------------------------------------------------------------- |  | ----------------------------- | ------ | - | ---------------------------------- | - | ------ | ---------------------- |  | -------------------- | ------ |  | ----- | ------ | - |  | - | ------- | -
|March 31, 2009                                                |  | WorkersCompensationInsurance |        |   | SegregatedPortfolioCellReinsurance |   |        | GroupBenefitsInsurance |  | SpecialtyReinsurance |        |  | Total |       
|Case/tabular reserves                                         |  | $                             | 34,471 |   |                                    | $ | 13,074 |                        |  | $                    | 10,277 |  | $     | 14,982 |   |  | $ | 72,804  |  
|Case incurred development, IBNR, and unallocated LAE reserves |  |                               | 24,776 |   |                                    |   | 10,169 |                        |  |                      | 3,583  |  |       | 23,652 |   |  |   | 62,180  |  
|Amount of discount                                            |  |                               | (2,979 | ) |                                    |   | (1,162 | )                      |  |                      |       |  |       |       |   |  |   | (4,141  | )
|                                                              |  |                               |        |   |                                    |   |        |                        |  |                      |        |  |       |        |   |  |   |         |  
|Net reserves                                                  |  |                               | 56,268 |   |                                    |   | 22,081 |                        |  |                      | 13,860 |  |       | 38,634 |   |  |   | 130,843 |  
|Reinsurance recoverables on unpaid losses and LAE             |  |                               | 5,063  |   |                                    |   | 3,203  |                        |  |                      | 16,255 |  |       |       |   |  |   | 24,521  |  
|Purchase accounting adjustments                               |  |                               | 837    |   |                                    |   | 69     |                        |  |                      |       |  |       | (27    | ) |  |   | 879     |  
|                                                              |  |                               |        |   |                                    |   |        |                        |  |                      |        |  |       |        |   |  |   |         |  
|Reserves for unpaid losses and LAE                            |  | $                             | 62,168 |   |                                    | $ | 25,353 |                        |  | $                    | 30,115 |  | $     | 38,607 |   |  | $ | 156,243 |  
|                                                              |  |                               |        |   |                                    |   |        |                        |  |                      |        |  |       |        |   |  |   |         |  



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|                                                              |  |                               |        |   |                                    |   |        |                        |  |                      |        |  |       |        |   |  |   |         |  
|------------------------------------------------------------- |  | ----------------------------- | ------ | - | ---------------------------------- | - | ------ | ---------------------- |  | -------------------- | ------ |  | ----- | ------ | - |  | - | ------- | -
|December 31, 2008                                             |  | WorkersCompensationInsurance |        |   | SegregatedPortfolioCellReinsurance |   |        | GroupBenefitsInsurance |  | SpecialtyReinsurance |        |  | Total |       
|Case/tabular reserves                                         |  | $                             | 34,897 |   |                                    | $ | 11,808 |                        |  | $                    | 10,690 |  | $     | 15,632 |   |  | $ | 73,027  |  
|Case incurred development, IBNR, and unallocated LAE reserves |  |                               | 23,320 |   |                                    |   | 11,210 |                        |  |                      | 3,956  |  |       | 24,938 |   |  |   | 63,424  |  
|Amount of discount                                            |  |                               | (2,994 | ) |                                    |   | (1,151 | )                      |  |                      |       |  |       |       |   |  |   | (4,145  | )
|                                                              |  |                               |        |   |                                    |   |        |                        |  |                      |        |  |       |        |   |  |   |         |  
|Net reserves                                                  |  |                               | 55,223 |   |                                    |   | 21,867 |                        |  |                      | 14,646 |  |       | 40,570 |   |  |   | 132,306 |  
|Reinsurance recoverables on unpaid losses and LAE             |  |                               | 4,932  |   |                                    |   | 2,903  |                        |  |                      | 17,939 |  |       |       |   |  |   | 25,774  |  
|Purchase accounting adjustments                               |  |                               | 986    |   |                                    |   | 82     |                        |  |                      |       |  |       | (31    | ) |  |   | 1,037   |  
|                                                              |  |                               |        |   |                                    |   |        |                        |  |                      |        |  |       |        |   |  |   |         |  
|Reserves for unpaid losses and LAE                            |  | $                             | 61,141 |   |                                    | $ | 24,852 |                        |  | $                    | 32,585 |  | $     | 40,539 |   |  | $ | 159,117 |  
|                                                              |  |                               |        |   |                                    |   |        |                        |  |                      |        |  |       |        |   |  |   |         |  

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, 2009, the Company recognized other-than-temporary impairments of $2.4 million, compared to no
impairments for the same period in 2008. As of March 31, 2009, the Company held securities with gross unrealized losses of $7.0 million, excluding those securities in the segregated portfolio cell reinsurance segment, of which $2.4 million 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% of its cost for a continuous period of six
months, 2) an equitys securitys market value is less than 50% 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.

For the three months ended March 31, 2009, the Company recognized other-than-temporary impairments of $2.2
million related to its equity security portfolio. The impaired securities had been in an unrealized loss position for 12 months as of March 31, 2009.

Fixed income securities. A fixed income security generally is written down if the Company is unable to hold or otherwise intends to sell a security with an unrealized loss, or if it is probable that it will be unable to collect all
amounts due according to the contractual terms of the security. A fixed income security is reviewed for collectibility if any of the following situations occur:



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



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



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

For the three months ended March 31, 2009, the Company recognized an other-than-temporary impairment of $159,000 related to a fixed income security that was sold at
a loss in April 2009.

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 it 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, 2009 or 2008.



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Goodwill

In
accordance with the requirements of SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), 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 March 31, 2009 to its workers
compensation insurance segment. The goodwill impairment test, performed as of December 31 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.

As of March 31, 2009, management evaluated the workers compensation insurance segments operating results for the three months ended March 31, 2009
and the Companys current stock price to determine if events or circumstances had changed that would require an update to its impairment analysis performed as of December 31, 2008. Based on managements analysis, there were no changes
in events or circumstances, therefore, an updated impairment analysis was not necessary.

Deferred Acquisition Costs

Certain direct policy acquisition costs consisting of commissions, premium taxes, fronting fees and certain other direct underwriting costs are deferred and amortized as
the underlying policy premiums are earned. As of March 31, 2009 (unaudited) and December 31, 2008, deferred policy acquisition costs and the related unearned premium reserves were as follows (in thousands):



|                                               |  |               |        |                  |   |       
|---------------------------------------------- |  | ------------- | ------ | ---------------- | - | ------
|                                               |  | March 31,2009 |        | December 31,2008
|Workers compensation insurance segment:       |  |               |        |                  |   |       
|Deferred policy acquisition costs              |  | $             | 2,997  |                  | $ | 2,617 
|Unearned premium reserves                      |  | $             | 37,027 |                  | $ | 30,941
|                                               |  |              
|Segregated portfolio cell reinsurance segment: |  |               |        |                  |   |       
|Deferred policy acquisition costs              |  | $             | 3,906  |                  | $ | 2,849 
|Unearned premium reserves                      |  | $             | 14,506 |                  | $ | 10,367
|                                               |  |              
|Group benefits insurance segment:              |  |               |        |                  |   |       
|Deferred policy acquisition costs              |  | $             |       |                  | $ |      
|Unearned premium reserves                      |  | $             | 73     |                  | $ | 79    
|                                               |  |              
|Run-off specialty reinsurance segment:         |  |               |        |                  |   |       
|Deferred policy acquisition costs              |  | $             |       |                  | $ | 294   
|Unearned premium reserves                      |  | $             |       |                  | $ | 978   

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, 2009, management recorded a valuation allowance of $904,000 as a result of the Companys recognition of additional
realized and unrealized capital losses related to its investment portfolio. Management performed an assessment of the recoverability of its net deferred tax asset related to capital losses and concluded that the Company may be unable to generate
sufficient future capital gains to offset capital losses in the foreseeable future, which is generally considered to be twelve months from the balance sheet date. Under United States federal income tax rules and regulations, capital losses can only
be utilized to offset taxable income generated by capital gains. Capital losses can be carried back to offset capital gains reported in the three prior tax periods and can be carried forward for five tax periods.

Reinsurance Recoverables

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



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Recent Accounting Pronouncements

FSP FAS 115-2 and FAS 124-2

In April 2009, the Financial Accounting Standards Board (FASB)
issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2/124-2). FSP FAS 115-2/124-2 requires entities to separate an other-than-temporary impairment of a debt
security into two components when there are credit related losses associated with the impaired debt security for which management asserts that it does not have the intent to sell the security, and it is more likely than not that it will not be
required to sell the security before recovery of its cost basis. The amount of the other-than-temporary impairment related to a credit loss is recorded as a net realized investment loss in the statements of operations and comprehensive income
(loss), and the amount of the other-than-temporary impairment related to other factors is recorded as an other comprehensive loss. FSP FAS 115-2/124-2 is effective for periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. Management is currently evaluating the impact of adopting FSP FAS 115-2/124-2 and has elected not to early adopt.

FSP FAS 157-4

In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are Not Orderly (FSP FAS 157-4). Under FSP FAS 157-4, if an entity determines that there has been a significant
decrease in the volume and level of activity for the asset or the liability in relation to the normal market activity for the asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair
value. In addition, if there is evidence that the transaction for the asset or liability is not orderly, the entity shall place little, if any weight on that transaction price as an indicator of fair value. FSP FAS 157-4 is effective for
periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Management is currently evaluating the impact of adopting FSP FAS 157-4 and has elected not to early adopt.

FSP FAS 107-1 and APB 28-1

In April 2009, the FASB issued FSP
FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1/APB 28-1). FSP FAS 107-1/APB 28-1 require disclosures about fair value of financial instruments in interim and annual
financial statements. FSP FAS 107-1/APB 28-1 is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Management is currently evaluating the impact of adopting FSP FAS
107-1/APB 28-1 and has elected not to early adopt.

THREE MONTHS ENDED MARCH 31, 2009 COMPARED TO THREE MONTHS ENDED MARCH 31, 2008

RESULTS OF OPERATIONS

The major components of consolidated revenue
were as follows for the three months ended March 31, 2009 and 2008 (unaudited, in thousands):



|                                                         |  |      |        |   |      |   |        |  
|-------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                         |  | 2009 |        |   | 2008 |  
|Net premiums written                                     |  | $    | 42,918 |   |      | $ | 43,821 |  
|                                                         |  |      |        |   |      |   |        |  
|Net premiums earned                                      |  | $    | 33,738 |   |      | $ | 33,003 |  
|Net investment income                                    |  |      | 1,945  |   |      |   | 2,565  |  
|Change in equity interest in other long-term investments |  |      | (167   | ) |      |   | 49     |  
|Net realized investment losses                           |  |      | (1,599 | ) |      |   | (293   | )
|Other revenue                                            |  |      | 239    |   |      |   | 216    |  
|                                                         |  |      |        |   |      |   |        |  
|Consolidated revenue                                     |  | $    | 34,156 |   |      | $ | 35,540 |  
|                                                         |  |      |        |   |      |   |        |  

The decrease in consolidated revenue primarily reflects a decrease in net investment income and an increase in net
realized investment losses, partially offset by an increase in net premiums earned. The decrease in net investment income primarily reflects a lower invested asset base and a decline in short-term interest rates. Net realized investment losses
include other-than-temporary impairments of $2.4 million for the three months ended March 31, 2009, compared to no impairments for the same period in 2008. The increase in net premiums earned primarily reflects the acquisition of ESHC,
partially offset by a decline in net premiums earned in the group benefits insurance and run-off specialty reinsurance segments.



28



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##### Table of Contents

The components of consolidated net (loss) income, by segment, for the three months ended March 31, 2009 and 2008
were as follows (unaudited, in thousands):



|                                      |  |      |        |   |      |   |       |  
|------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | -
|                                      |  | 2009 |        |   | 2008 |  
|Workers compensation insurance       |  | $    | 1,764  |   |      | $ | 2,994 |  
|Segregated portfolio cell reinsurance |  |      |       |   |      |   |      |  
|Group benefits insurance              |  |      | 169    |   |      |   | 312   |  
|Run-off specialty reinsurance         |  |      | (957   | ) |      |   | 258   |  
|Corporate/other                       |  |      | (1,531 | ) |      |   | (990  | )
|                                      |  |      |        |   |      |   |       |  
|Consolidated net (loss) income        |  | $    | (555   | ) |      | $ | 2,574 |  
|                                      |  |      |        |   |      |   |       |  

The consolidated net loss for the three months ended March 31, 2009 primarily reflects the aforementioned
investment impairments and the deferred tax asset valuation allowance of $678,000, as well as an increase in the consolidated combined ratio, from 93.8% in 2008 to 101.7% in 2009. The increase in the combined ratio primarily reflects a higher loss
and LAE ratio in the workers compensation insurance and segregated portfolio cell reinsurance segments reflecting managements expectation of the impact of the current economic environment on the Companys book of business, and an
increase in the group benefits insurance loss ratio due to the aforementioned competitive rate environment and claim severity in the life line of business. The decline in net investment income from 2008 to 2009 also contributed to the decrease in
the Companys consolidated results of operations.

WORKERS COMPENSATION INSURANCE

The following table represents the operations of the workers compensation insurance segment for the three months ended March 31, 2009 and 2008 (unaudited, in
thousands):



|                                                  |  |      |         |   |      |   |         |  
|------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                  |  | 2009 |         |   | 2008 |  
|Revenue:                                          |  |      |         |   |      |   |         |  
|Direct premiums written                           |  | $    | 36,159  |   |      | $ | 34,138  |  
|Reinsurance premiums assumed                      |  |      | 275     |   |      |   | 187     |  
|Ceded premiums written                            |  |      | (12,510 | ) |      |   | (13,204 | )
|                                                  |  |      |         |   |      |   |         |  
|Net premiums written                              |  |      | 23,924  |   |      |   | 21,121  |  
|Change in unearned premiums                       |  |      | (6,018  | ) |      |   | (6,354  | )
|                                                  |  |      |         |   |      |   |         |  
|Net premiums earned                               |  |      | 17,906  |   |      |   | 14,767  |  
|Net investment income                             |  |      | 958     |   |      |   | 987     |  
|Change in equity interest in limited partnerships |  |      | (94     | ) |      |   | (75     | )
|Net realized investment losses                    |  |      | (10     | ) |      |   | (111    | )
|Other revenue                                     |  |      | 99      |   |      |   |        |  
|                                                  |  |      |         |   |      |   |         |  
|Total revenue                                     |  | $    | 18,859  |   |      | $ | 15,568  |  
|                                                  |  |      |         |   |      |   |         |  
|Expenses:                                         |  |      |         |   |      |   |         |  
|Losses and LAE incurred                           |  | $    | 11,109  |   |      | $ | 7,518   |  
|Acquisition and other underwriting expenses       |  |      | 1,472   |   |      |   | 1,201   |  
|Other expenses                                    |  |      | 3,564   |   |      |   | 2,579   |  
|Policyholder dividend expense                     |  |      | 185     |   |      |   | (63     | )
|                                                  |  |      |         |   |      |   |         |  
|Total expenses                                    |  | $    | 16,330  |   |      | $ | 11,235  |  
|                                                  |  |      |         |   |      |   |         |  
|Income before income taxes                        |  |      | 2,529   |   |      |   | 4,333   |  
|Income tax expense                                |  |      | 765     |   |      |   | 1,339   |  
|                                                  |  |      |         |   |      |   |         |  
|Net income                                        |  | $    | 1,764   |   |      | $ | 2,994   |  
|                                                  |  |      |         |   |      |   |         |  



29



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##### Table of Contents

Net Income

The
decrease in net income primarily reflects an increase in the loss and expense ratios. The increase in the loss ratio from 2008 to 2009 reflects an increase in the accident period loss ratio and a reduction in favorable development on prior year
reserves.

The workers compensation insurance ratios were as follows for the three months ended March 31, 2009 and 2008:



|                              |  |      |   |  |      |  
|----------------------------- |  | ---- | - |  | ---- | -
|                              |  | 2009 |   |  | 2008 |  
|Loss and LAE ratio            |  | 62.0 | % |  | 50.9 | %
|Expense ratio                 |  | 28.2 | % |  | 25.6 | %
|Policyholders dividend ratio |  | 1.0  | % |  | -0.4 | %
|                              |  |      |   |  |      |  
|Combined ratio                |  | 91.2 | % |  | 76.1 | %
|                              |  |      |   |  |      |  

Premiums

The
increase in direct premiums written primarily reflects the acquisition of ESHC and new business production of $6.9 million, partially offset by a decline in the renewal retention rate and renewal rate decreases of 1.9%. Direct premiums written for
traditional business and alternative markets were $25.2 million and $11.0 million, respectively, for the three months ended March 31, 2009. The renewal retention rate declined from 89.8% in 2008 to 84.1% in 2009, primarily reflecting the
competitive market and the loss of a large account in the Midwest region.

Net Investment Income

The decrease in net investment income primarily reflects a lower invested asset base and a decline in short-term interest rates, partially offset by net investment income
related to the acquisition of ESHC. The average yield on the fixed income portfolio was 3.97% as of March 31, 2009, compared to 4.36% as of March 31, 2008.

Net Realized Investment Losses

Net realized investment losses for the three months ended March 31, 2009 include
other-than temporary impairments of $208,000. There were no impairments recorded for the three months ended March 31, 2008. Net realized investment losses include an increase of $47,000 related to the change in fair value of convertible bonds
for the three months ended March 31, 2009, compared to a decrease of $148,000 for the same period in 2008.

Losses and LAE

The increase in the calendar period loss and LAE ratio primarily reflects an increase the accident period loss ratio and a decrease in favorable loss reserve development
on prior accident periods. The accident period loss ratio was 66.0% and 62.0% for the three months ended March 31, 2009 and 2008, respectively. The increase in the accident period loss ratio primarily reflects managements estimate of the
impact of the current economic environment on the Companys workers compensation book of business, including the impact of rising unemployment on managements return to work controls. Favorable loss reserve development totaled
$549,000 and $1.5 million for the three months ended March 31, 2009 and 2008, respectively. The favorable loss reserve development relates primarily to a decrease in the prior accident period loss development factors used to estimate losses and
LAE. The decrease in prior accident period loss development factors primarily reflects prior year claim settlements during 2009 for amounts at, or less than, previously established case and IBNR reserves. This decrease had the effect of lowering
loss development factors as of March 31, 2009. For the three months ended March 31, 2009, the Company closed 105, or 16.6%, of the 634 open lost time claims as of December 31, 2008. In the aggregate, the claims were closed at amounts
lower than the provision established for IBNR claims. Management believes that the realization of the benefits of its return-to-work controls enabled it to record losses and LAE that were lower than the amount reserved for claim settlements.

Acquisition and Other Underwriting Expenses

The
increase in acquisition and other expenses primarily reflects the increase in net premiums written.



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##### Table of Contents

Other Expenses

The
increase in other expenses as a percent of net premiums earned from 2008 to 2009 primarily reflects the impact of the lower renewal retention rate and expenses associated with the Companys Southeast operations, which commenced business in the
first quarter of 2008.

Policyholder Dividends

The
increase in the policyholders dividend ratio reflects a decrease in incurred losses under participating policies from 2008 to 2009. For the three months ended March 31, 2009 and 2008, 10.0% and 11.3%, respectively, of all policies were
written on a dividend policy basis.

Tax Expense

The
effective tax rate for the three months ended March 31, 2009 and 2008 was 30.2% and 30.9%, respectively. The 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, 2009 and 2008 (unaudited, in thousands):



|                                            |  |      |        |   |      |   |        |  
|------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                            |  | 2009 |        |   | 2008 |  
|Revenue:                                    |  |      |        |   |      |   |        |  
|Reinsurance premiums assumed                |  | $    | 10,974 |   |      | $ | 11,845 |  
|Ceded premiums written                      |  |      | (792   | ) |      |   | (707   | )
|                                            |  |      |        |   |      |   |        |  
|Net premiums written                        |  |      | 10,182 |   |      |   | 11,138 |  
|Change in unearned premiums                 |  |      | (4,139 | ) |      |   | (5,634 | )
|                                            |  |      |        |   |      |   |        |  
|Net premiums earned                         |  |      | 6,042  |   |      |   | 5,504  |  
|Net investment income                       |  |      | 182    |   |      |   | 293    |  
|Net realized investment (losses) gains      |  |      | (1,095 | ) |      |   | 48     |  
|                                            |  |      |        |   |      |   |        |  
|Total revenue                               |  | $    | 5,129  |   |      | $ | 5,845  |  
|                                            |  |      |        |   |      |   |        |  
|Expenses:                                   |  |      |        |   |      |   |        |  
|Losses and LAE incurred                     |  | $    | 4,213  |   |      | $ | 3,115  |  
|Acquisition and other underwriting expenses |  |      | 1,833  |   |      |   | 1,709  |  
|Other expenses                              |  |      | (30    | ) |      |   | 13     |  
|Segregated portfolio dividend expense (1)   |  |      | (887   | ) |      |   | 1,008  |  
|                                            |  |      |        |   |      |   |        |  
|Total expenses                              |  | $    | 5,129  |   |      | $ | 5,845  |  
|                                            |  |      |        |   |      |   |        |  
|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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The segregated portfolio cell reinsurance ratios were as follows for the three months ended March 31, 2009 and 2008:



|                   |  |      |   |  |      |  
|------------------ |  | ---- | - |  | ---- | -
|                   |  | 2009 |   |  | 2008 |  
|Loss and LAE ratio |  | 69.7 | % |  | 56.6 | %
|Expense ratio      |  | 29.8 | % |  | 31.3 | %
|                   |  |      |   |  |      |  
|Combined ratio     |  | 99.5 | % |  | 87.9 | %
|                   |  |      |   |  |      |  



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##### Table of Contents

Reinsurance Premiums Assumed

The decrease in reinsurance premiums assumed primarily reflects a decline in the renewal retention rate, partially offset by new business production of $1.2 million and renewal rate increases of 1.4%. The renewal retention rate declined
from 88.3% in 2008 to 84.1% in 2009. In addition audit premiums for the three months ended March 31, 2009 resulted in return premium to customers of $97,000, compared to additional premium to the Company of $110,000 for the same period in 2008.

Net Investment Income

The decrease in net investment
income primarily reflects a decline in short-term interest rates.

Net Realized Investment (Losses) Gains

The net realized investment losses for the three months ended March 31, 2009 reflect other-than-temporary impairments of $619,000 and net realized losses on the sale
of investments of $476,000, which primarily reflect the impact of reducing the segments exposure to investments in financial institutions.

Losses
and LAE

The increase in the calendar period loss and LAE ratio primarily reflects an increase the accident period loss ratio and a decrease in
favorable loss reserve development on prior accident periods. The accident period loss ratio was 73.4% and 68.2% for the three months ended March 31, 2009 and 2008, respectively. The increase in the accident period loss ratio primarily reflects
managements estimate of the impact of the current economic environment on the Companys workers compensation book of business, including the impact of rising unemployment on managements return to work controls. Favorable loss
reserve development totaled $206,000 and $615,000 for the three months ended March 31, 2009 and 2008, respectively. The favorable loss reserve development relates primarily to a decrease in the prior accident period loss development factors
used to estimate losses and LAE. The decrease in prior accident period loss development factors primarily reflects prior year claim settlements during 2009 for amounts at, or less than, previously established case and IBNR reserves. This decrease
had the effect of lowering loss development factors as of March 31, 2009.

Acquisition and Other Underwriting Expenses

The expense ratios are consistent with the contractual ceding commissions for the three months ended March 31, 2009 and 2008.

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

GROUP BENEFITS INSURANCE

The following table represents the operations of the group benefits insurance segment for the three months ended March 31, 2009 and 2008 (unaudited, in thousands):



|                                                  |  |      |       |   |      |   |       |  
|------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                                  |  | 2009 |       |   | 2008 |  
|Revenue:                                          |  |      |       |   |      |   |       |  
|Direct premiums written                           |  | $    | 9,528 |   |      | $ | 9,800 |  
|Ceded premiums written                            |  |      | (637  | ) |      |   | (571  | )
|                                                  |  |      |       |   |      |   |       |  
|Net premiums written                              |  |      | 8,891 |   |      |   | 9,229 |  
|Change in unearned premiums                       |  |      |      |   |      |   | 3     |  
|                                                  |  |      |       |   |      |   |       |  
|Net premiums earned                               |  |      | 8,891 |   |      |   | 9,232 |  
|Net investment income                             |  |      | 459   |   |      |   | 674   |  
|Change in equity interest in limited partnerships |  |      | (73   | ) |      |   | 185   |  
|Net realized investment gains (losses)            |  |      | 462   |   |      |   | (351  | )
|                                                  |  |      |       |   |      |   |       |  
|Total revenues                                    |  |      | 9,739 |   |      |   | 9,740 |  
|                                                  |  |      |       |   |      |   |       |  
|Expenses:                                         |  |      |       |   |      |   |       |  
|Losses and LAE incurred                           |  |      | 6,648 |   |      |   | 6,433 |  
|Acquisition and other underwriting expenses       |  |      | 1,364 |   |      |   | 1,489 |  
|Other expenses                                    |  |      | 1,522 |   |      |   | 1,452 |  
|                                                  |  |      |       |   |      |   |       |  
|Total expenses                                    |  |      | 9,534 |   |      |   | 9,374 |  
|                                                  |  |      |       |   |      |   |       |  
|Income before income taxes                        |  |      | 205   |   |      |   | 366   |  
|Income tax expense                                |  |      | 36    |   |      |   | 54    |  
|                                                  |  |      |       |   |      |   |       |  
|Net income                                        |  | $    | 169   |   |      | $ | 312   |  
|                                                  |  |      |       |   |      |   |       |  

Net Income

The decrease in net income from 2008 to 2009 primarily reflects a reduction in net premiums earned, a higher combined ratio and lower net investment income, partially offset by net realized investment gains in 2009, compared to net realized
investment losses in 2008.

The group benefits insurance ratios were as follows for the three months ended March 31, 2009 and 2008:



|                   |  |       |   |  |       |  
|------------------ |  | ----- | - |  | ----- | -
|                   |  | 2009  |   |  | 2008  |  
|Loss and LAE ratio |  | 74.8  | % |  | 69.7  | %
|Expense ratio      |  | 32.4  | % |  | 31.8  | %
|                   |  |       |   |  |       |  
|Combined ratio     |  | 107.2 | % |  | 101.5 | %
|                   |  |       |   |  |       |  

Premiums

Direct premiums written, by line of business, for the three months ended March 31, 2009 and 2008 were as follows (unaudited, in thousands):



|                      |  |      |       |      |   |      
|--------------------- |  | ---- | ----- | ---- | - | -----
|                      |  | 2009 |       | 2008
|Dental                |  | $    | 5,503 |      | $ | 5,648
|Short-term disability |  |      | 1,560 |      |   | 1,678
|Long-term disability  |  |      | 945   |      |   | 955  
|Term life             |  |      | 1,520 |      |   | 1,519
|                      |  |      |       |      |   |      
|Total                 |  | $    | 9,528 |      | $ | 9,800
|                      |  |      |       |      |   |      

The decrease in direct premiums written primarily reflects a decline in the renewal retention rate, partially
offset by new business sales.



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##### Table of Contents

Net Investment Income

The decrease in net investment income primarily reflects a lower average invested asset base and a decrease in short-term interest rates. The average yield on the fixed income portfolio as of March 31, 2009 was 5.49%, compared to an
average yield of 5.39% as of March 31, 2008.

Net Realized Investment Gains (Losses)

Net realized investment gains for the three months ended March 31, 2009 primarily reflect the change in fair value of convertible bond securities, which increased
net realized investment gains $341,000, compared to a decrease of $435,000 for the same period in 2008.

Losses and LAE

The increase in losses and LAE primarily reflects an increase in the dental and life loss ratios. The calendar period loss ratios, by line of business, for the three
months ended March 31, 2009 and 2008 were as follows:



|                      |  |      |   |  |      |  
|--------------------- |  | ---- | - |  | ---- | -
|                      |  | 2009 |   |  | 2008 |  
|Dental                |  | 79.6 | % |  | 73.8 | %
|Short-term disability |  | 64.8 | % |  | 68.3 | %
|Long-term disability  |  | 14.6 | % |  | 57.4 | %
|Term life             |  | 83.3 | % |  | 58.4 | %
|Total group benefits  |  | 74.8 | % |  | 69.7 | %

Dental

The increase in the dental loss ratio primarily reflects an increase in the accident period loss ratio from 79.0% in 2008 to 81.3% in 2009. Favorable development on prior accident year reserves reduced the loss ratio by 1.8 percentage
points in 2009, compared to 5.2 percentage points in 2008. The increase in the accident period loss ratio primarily reflects the impact of the competitive rate environment, which has resulted in the Company being unable to achieve appropriate rate
increases in its primary markets.

Short-term Disability

The decrease in the short-term disability loss ratio primarily reflects a decrease in the accident period loss ratio from 75.3% in 2008 to 70.3% in 2009. Favorable development on prior accident year reserves reduced the loss ratio by 5.5
percentage points in 2009, compared to 7.0 percentage points in 2008. The decrease in the accident period loss ratio primarily reflects lower claim frequency and severity.

Long-term Disability

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

Term Life

The
increase in the term life loss ratio primarily reflects the impact of death claims with higher benefits for the three months ended March 31, 2009, compared to the same period in 2008.

Acquisition and Other Underwriting Expenses

Acquisition and other
underwriting expenses as a percent of direct premiums written totaled 14.3% and 15.2% for the three months ended March 31, 2009 and 2008, respectively. The decrease primarily reflects lower commissions paid to general agents, primarily IBSi,
the Companys former general agent in the Southeast.

Other Expenses

Other expenses as a percent of direct premiums written totaled 16.0% and 14.8% for the three months ended March 31, 2009 and 2008, respectively. The increase primarily reflects the impact of the decline in direct
premiums written.

Tax Expense

The effective tax rate
17.6% and 14.8% for the three months ended March 31, 2009 and 2008, respectively. The difference between the statutory rate of 35.0% and the effective tax rate primarily reflects tax-exempt income on municipal bond securities.



34



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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, 2009 and 2008 (unaudited, in thousands):



|                                                  |  |      |        |   |      |   |       |  
|------------------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | -
|                                                  |  | 2009 |        |   | 2008 |  
|Revenue:                                          |  |      |        |   |      |   |       |  
|Reinsurance premiums assumed                      |  | $    | (79    | ) |      | $ | 2,332 |  
|Change in unearned premiums                       |  |      | 978    |   |      |   | 1,168 |  
|                                                  |  |      |        |   |      |   |       |  
|Net premiums earned                               |  | $    | 899    |   |      | $ | 3,500 |  
|Net investment income                             |  |      | 258    |   |      |   | 384   |  
|Change in equity interest in limited partnerships |  |      |       |   |      |   | (61   | )
|Net realized investment (losses) gains            |  |      | (1,201 | ) |      |   | 120   |  
|Other revenue                                     |  |      | 113    |   |      |   | 303   |  
|                                                  |  |      |        |   |      |   |       |  
|Total revenue                                     |  | $    | 69     |   |      | $ | 4,246 |  
|                                                  |  |      |        |   |      |   |       |  
|Expenses:                                         |  |      |        |   |      |   |       |  
|Losses and LAE incurred                           |  | $    | 617    |   |      | $ | 2,649 |  
|Acquisition and other underwriting expenses       |  |      | 270    |   |      |   | 1,049 |  
|Other expenses                                    |  |      | 136    |   |      |   | 147   |  
|                                                  |  |      |        |   |      |   |       |  
|Total expenses                                    |  | $    | 1,023  |   |      | $ | 3,845 |  
|                                                  |  |      |        |   |      |   |       |  
|(Loss) income before income taxes                 |  |      | (954   | ) |      |   | 401   |  
|Income tax expense                                |  |      | 3      |   |      |   | 143   |  
|                                                  |  |      |        |   |      |   |       |  
|Net (loss) income                                 |  | $    | (957   | ) |      | $ | 258   |  
|                                                  |  |      |        |   |      |   |       |  

Net (Loss) Income

The decrease in net income primarily reflects the impact of other-than-temporary impairments of $1.5 million. Effective July 1, 2008, this segment was placed into run-off.

The run-off specialty reinsurance ratios were as follows for the three months ended March 31, 2009 and 2008:



|                   |  |       |   |  |       |  
|------------------ |  | ----- | - |  | ----- | -
|                   |  | 2009  |   |  | 2008  |  
|Loss and LAE ratio |  | 68.6  | % |  | 75.7  | %
|Expense ratio      |  | 45.2  | % |  | 34.2  | %
|                   |  |       |   |  |       |  
|Combined ratio     |  | 113.8 | % |  | 109.9 | %
|                   |  |       |   |  |       |  

Reinsurance Premiums Assumed

The decrease in reinsurance premiums assumed reflects the termination of the quota-share reinsurance treaty effective July 1, 2008. Reinsurance premiums assumed, by line of business, were as follows for the three
months ended March 31, 2009 and 2008 (unaudited, in thousands):



|                       |  |      |     |   |      |   |      
|---------------------- |  | ---- | --- | - | ---- | - | -----
|                       |  | 2009 |     |   | 2008
|EnviroGuard            |  | $    | (35 | ) |      | $ | 1,547
|EIA liability          |  |      | (44 | ) |      |   | 779  
|Other                  |  |      |    |   |      |   | 6    
|                       |  |      |     |   |      |   |      
|Total assumed premiums |  | $    | (79 | ) |      | $ | 2,332
|                       |  |      |     |   |      |   |      

Net Investment Income

The decrease in net investment income primarily reflects a decline in short-term interest rates. The average yield on the fixed income portfolio was 1.49% as of March 31, 2009, compared to 4.25% as of March 31, 2008. The
decrease in the average yield reflects a higher concentration of assets in cash and cash equivalents as a result of the run-off of the segment.



35



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##### Table of Contents

Net Realized Investment (Losses) Gains

Net realized investment losses for the three months ended March 31, 2009 primarily reflect the aforementioned other-than-temporary impairments of $1.5 million. There were no impairments recognized during the same
period in 2008.

Losses and LAE

The decrease in losses
and LAE reflects the run-off of the segment.

Acquisition and Other Underwriting Expenses

The decrease in acquisition and other underwriting expenses reflects termination of the quota-share reinsurance treaty. The expenses for the three months ended
March 31, 2009 primarily reflect the amortization of deferred acquisition costs as of December 31, 2008.

Tax Expense

The effective tax rate was 0.3% and 35.7% for the three months ended March 31, 2009 and 2008, respectively. The 2009 effective tax rate reflects the tax impact of
purchase accounting adjustments related to the run-off specialty reinsurance segment for the three months ended March 31, 2009. The Company has not recognized any tax expense or benefit related to the operating results of the run-off specialty
reinsurance segment during the first quarter of 2009 as a result of the net operating losses incurred by the segment in the fourth quarter of 2008.

CORPORATE/OTHER

The net loss in the corporate/other segment totaled $1.5 million for the three months ended March 31, 2009, compared
to $990,000 for the same period in 2008. The increase in the net loss from 2008 to 2009 primarily reflects the impact of the aforementioned deferred tax asset valuation allowance of $678,000 and a reduction in net investment income, partially offset
by a decrease in other expenses. The reduction in net investment income primarily reflects a lower cash balance and a decline in short-term interest rates. The decrease in other expenses primarily reflects a reduction in legal and compliance costs.

CONSOLIDATED FINANCIAL POSITION

Consolidated assets
totaled $385.5 million at March 31, 2009, compared to $377.3 million at December 31, 2008. The increase in consolidated assets primarily reflects an increase in premiums receivable. The increase in premiums receivable primarily
reflects the Companys renewal of workers compensation policies with effective dates at the beginning of January.

Consolidated liabilities
totaled $244.4 million at March 31, 2009, compared to $239.2 million at December 31, 2008. The increase in consolidated liabilities primarily reflects an increase in unearned premiums and ceded reinsurance balances payable, both of which
are higher in the first quarter as a result of the volume of workers compensation business that renews at the beginning of January. The increase in unearned premiums and ceded reinsurance payable was partially offset by a decrease in
segregated portfolio cell dividend payable, which reflects the underwriting results and net realized investment losses in the segregated portfolio cell reinsurance segment.

Consolidated equity totaled $137.2 million at March 31, 2009, compared to $138.1 million at December 31, 2007. The decrease in consolidated equity primarily reflects the net loss for the three months ended
March 31, 2009 and the decline in 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 $44.9 million for the purpose
of securing obligations to reinsurers, if necessary. As of March 31, 2009, there was approximately $6.6 million still available under the Companys letter of credit facilities.



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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% of statutory surplus or 100% of statutory net income for the most recently filed annual statement. In addition, EIHI and its Pennsylvania-domiciled subsidiaries are prohibited from declaring or paying any dividends or other forms of distribution
for the three years after June 16, 2006, the effective date of the conversion/merger transaction, without the prior approval of the Pennsylvania Insurance Commissioner. Eastern Re must receive approval from the Cayman Islands Monetary Authority
before it can pay any dividend to the Company.

CASH FLOWS

Cash flows for the three months ended March 31, 2009 and 2008 were as follows (unaudited, in thousands):



|                                                     |  |      |        |   |      |   |         |  
|---------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------- | -
|                                                     |  | 2009 |        |   | 2008 |  
|Cash flows provided by operating activities          |  | $    | 1,305  |   |      | $ | 7,979   |  
|Cash flows provided by investing activities          |  |      | 31,430 |   |      |   | 435     |  
|Cash flows used in financing activities              |  |      | (980   | ) |      |   | (12,806 | )
|                                                     |  |      |        |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents |  | $    | 31,755 |   |      | $ | (4,392  | )
|                                                     |  |      |        |   |      |   |         |  

The increase in cash and cash equivalents primarily reflects the liquidation of investments to fund the $23
million capital contribution to Eastern Re, as well as the liquidation of the Companys investment exposures to financial institutions. The decrease in net cash flows from operations from 2008 to 2009 primarily reflects the reduction in net
premiums written and an increase in the loss and expense ratios. Cash flows from financing activities for the three months ended March 31, 2009 primarily reflect shareholder dividends and the semi-annual principal payment on the outstanding
loan, while cash flows from financing activities for same period in 2008 primarily reflect shareholder dividends and the repurchase of the Companys common stock.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements that have or are reasonably likely
to have a current or, as of March 31, 2009, 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, 2008.
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 13, 2009.



|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



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##### Table of Contents

|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, 2008, SEC File No. 001-32899.



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

Issuer Purchases of Equity Securities

On February 15, 2007, the Companys Board of Directors authorized the repurchase of up to 5
percent of the Companys issued and outstanding shares of common stock for the purpose of funding the issuance of stock under the Eastern Insurance Holdings, Inc. 2006 Stock Incentive Plan. 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, 2009, the Company has repurchased 2,091,757
shares, and has approximately $9.6 million authorized for future repurchases.

The following table presents information with respect to those purchases of
our common stock made during the three months ended March 31, 2008. There were no purchases of our common stock during the three months ended March 31, 2009.



|                    |  |                               |  |                          |       |                                                                          |         |                                                                                                     |        
|------------------- |  | ----------------------------- |  | ------------------------ | ----- | ------------------------------------------------------------------------ | ------- | --------------------------------------------------------------------------------------------------- | -------
|Period              |  | Totalnumberof sharespurchased |  | Averagepricepaidpershare |       | Totalnumber ofsharespurchasesas part ofpubliclyannouncedplans orprograms |         | Maximumnumber (orapproximatedollar value)of sharesthat may yetbe purchasedunder theplans
orprograms
|January 1-31, 2008  |  | 113,757                       |  | $                        | 16.23 |                                                                          | 113,757 |                                                                                                     | 915,878
|February 1-28, 2008 |  | 540,271                       |  | $                        | 16.50 |                                                                          | 540,271 |                                                                                                     | 375,607
|March 1-31, 2008    |  | 156,193                       |  | $                        | 15.38 |                                                                          | 156,193 |                                                                                                     | 219,414
|                    |  |                               |  |                          |       |                                                                          |         |                                                                                                     |        
|Total               |  | 810,221                       |  | $                        | 16.24 |                                                                          | 810,221 |                                                                                                     |        
|                    |  |                               |  |                          |       |                                                                          |         |                                                                                                     |        



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

None



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

None



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

None



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

Exhibits



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



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##### Table of Contents

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



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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 7, 2009 |  |  |  | By:                                           |  | /s/ Bruce M. Eckert                  
|                   |  |  |  |                                               |  | Bruce M. Eckert,                     
|                   |  |  |  |                                               |  | Chief Executive Officer              
|                   |  |  | 
|Dated: May 7, 2009 |  |  |  | By:                                           |  | /s/ Kevin M. Shook                   
|                   |  |  |  |                                               |  | Kevin M. Shook,                      
|                   |  |  |  |                                               |  | Treasurer and Chief Financial Officer



40