##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K







|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2008

Commission file number 001-32899

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from              to





EASTERN INSURANCE HOLDINGS,
INC.







|                                                                  |  |                                   
|----------------------------------------------------------------- |  | ----------------------------------
|Incorporated in Pennsylvania                                      |  | I.R.S. Employer Identification No.
|25 Race Avenue, Lancaster, Pennsylvania 17603-3179 (717) 396-7095 |  | 20-2653793                        





Securities registered pursuant
to Section 12(b) of the Act:



|                           |  |                                          
|-------------------------- |  | -----------------------------------------
|Title of Each Class        |  | Name of Each Exchange on Which Registered
|Common Stock, No Par Value |  | NASDAQ National Market                   

Securities registered pursuant to Section 12(g) of the Act: None.





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act:    Yes   ̈    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act:    Yes   ̈    No  x

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 of 1934 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ̈

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 whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):    Yes   ̈    No  x

The aggregate market value of the common stock held by non-affiliates of the registrant, based on the
closing price of the registrant on June 30, 2008, as reported by the NASDAQ National Market, was $127,073,747.

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



|                           |  |                                                  
|-------------------------- |  | -------------------------------------------------
|Title of Each Class        |  | Number of Shares Outstanding as of March 11, 2009
|Common Stock, No Par Value |  | 9,510,966 (Outstanding Shares)                   

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement in connection with the 2009 Annual Meeting of StockholdersPart III.









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##### Table of Contents

Table of Contents

Eastern Insurance Holdings, Inc. and Subsidiaries



|         |  |                                                                                                              |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|Item     |  | Description                                                                                                  |  | Page
|Part I   |  |                                                                                                              |  |     
|         |  |                                                                                                             
|Item 1   |  | Business                                                                                                     |  | 1   
|         |  |                                                                                                             
|Item 1A  |  | Risk Factors                                                                                                 |  | 22  
|         |  |                                                                                                             
|Item 1B  |  | Unresolved Staff Comments                                                                                    |  | 28  
|         |  |                                                                                                             
|Item 2   |  | Properties                                                                                                   |  | 28  
|         |  |                                                                                                             
|Item 3   |  | Legal Proceedings                                                                                            |  | 28  
|         |  |                                                                                                             
|Item 4   |  | Submission of Matters to a Vote of Security Holders                                                          |  | 29  
|         |  |                                                                                                             
|Part II  |  |                                                                                                              |  |     
|         |  |                                                                                                             
|Item 5   |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 30  
|         |  |                                                                                                             
|Item 6   |  | Selected Financial Data                                                                                      |  | 33  
|         |  |                                                                                                             
|Item 7   |  | Managements Discussion and Analysis of Consolidated Financial Condition and Results of
Operations           |  | 35  
|         |  |                                                                                                             
|Item 7A  |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 66  
|         |  |                                                                                                             
|Item 8   |  | Financial Statements and Supplementary Data                                                                  |  | 68  
|         |  |                                                                                                             
|Item 9   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 103 
|         |  |                                                                                                             
|Item 9A  |  | Controls and Procedures                                                                                      |  | 103 
|         |  |                                                                                                             
|Item 9B  |  | Other Information                                                                                            |  | 103 
|         |  |                                                                                                             
|Part III |  |                                                                                                              |  |     
|         |  |                                                                                                             
|Item 10  |  | Directors and Officers of the Registrant                                                                     |  | 104 
|         |  |                                                                                                             
|Item 11  |  | Executive Compensation                                                                                       |  | 104 
|         |  |                                                                                                             
|Item 12  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 104 
|         |  |                                                                                                             
|Item 13  |  | Certain Relationships and Related Transactions                                                               |  | 104 
|         |  |                                                                                                             
|Item 14  |  | Principal Accountant Fees and Services                                                                       |  | 104 
|         |  |                                                                                                             
|Part IV  |  |                                                                                                              |  |     
|         |  |                                                                                                             
|Item 15  |  | Exhibits, Financial Statement Schedules                                                                      |  | 105 



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##### Table of Contents

PART I

Item 1Business

Our History and Overview

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

EIHI was formed by ELH, formerly Educators Mutual Life Insurance Company, for the purpose of converting from a mutual life and health insurance company to a stock life and health insurance company. On June 16, 2006, EIHI completed its
common stock offering and ELH completed its conversion from a mutual company to a stock company and became a wholly-owned subsidiary of EIHI. In the common stock offering, EIHI sold 7,475,000 shares of its common stock at a price of $10.00 per
share, raising gross proceeds of $74.8 million.

Immediately after the common stock offering and conversion, EIHI purchased all of the
outstanding common stock of EHC for a purchase price of $78.9 million.

On September 29, 2008, EIHI acquired all of the outstanding
stock of ESHC and its wholly-owned subsidiaries, ESIC and AMS. ESIC is an Indiana-domiciled, mono-line workers compensation insurance company licensed to write business in Indiana, Illinois and Missouri.

The following provides a brief description of EIHIs direct and indirect wholly-owned subsidiaries:



| |  |  | EHC is a holding company domiciled in the Commonwealth of Pennsylvania;
| | - |  | -----------------------------------------------------------------------



| |  |  | Eastern Alliance, Allied Eastern and Eastern Advantage are stock property/casualty insurance companies domiciled in the Commonwealth of Pennsylvania and do business
as Eastern Alliance Insurance Group (EAIG). The three insurance companies provide EAIG with increased underwriting flexibility through the use of a tiered rating structure;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Eastern Re is a segregated portfolio cell reinsurance company domiciled in the Cayman Islands;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | ESHC is a holding company domiciled in the State of Indiana;
| | - |  | ------------------------------------------------------------



| |  |  | ESIC is a stock property/casualty insurance company domiciled in the State of Indiana;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | ELH is a stock life and accident and health insurance company domiciled in the Commonwealth of Pennsylvania;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | Employers Alliance is a Pennsylvania corporation offering claims administration and risk management services to self-insured property/casualty customers;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | AMS is an Indiana corporation offering claims administration and risk management services to self-insured property casualty customers;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Global Alliance is a holding company domiciled in the Commonwealth of Pennsylvania. Global Alliance Statutory Trust I, which was formed by Global Alliance solely
for the purpose of issuing the $8.0 million of fixed/floating rate trust preferred securities, was effectively dissolved upon the repayment of the junior subordinated debentures in May 2008; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Eastern Services is a Pennsylvania corporation that provides management services to EAIG, ELH, and Employers Alliance.
| | - |  | ----------------------------------------------------------------------------------------------------------------------

The Company currently operates in four business segments: workers compensation insurance, segregated portfolio cell reinsurance, group benefits
insurance, and corporate/other. Effective July 1, 2008, the specialty reinsurance segment was placed into run-off.



1



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##### Table of Contents

Overview of Business Segments

The following discussion provides information on each of our business segments:

Workers
Compensation Insurance. The Company offers traditional workers compensation insurance coverage to employers, generally with 300 employees or less, primarily in Pennsylvania, Delaware, North Carolina, Maryland and Indiana. The
Companys workers compensation products include guaranteed cost policies, policyholder dividend policies, retrospectively-rated policies and large deductible policies.

Workers compensation insurance coverage is also underwritten through the Companys alternative markets business unit and ceded 100% to the
segregated portfolio cell reinsurance segment. The Company receives a fronting fee generally based upon a percentage of direct premiums written, a segregated portfolio cell rental fee, which is also based on a percentage of direct premiums written,
and fees for claims administration and risk management services. As of December 31, 2008, the segregated portfolio cells and dividend participants provided $48.0 million of irrevocable, unconditional letters of credit to secure unfunded
liabilities and collateralize reserves for unpaid losses and loss adjustment expenses (LAE) and unearned premiums.

Group
Benefits Insurance.The Company offers group benefits insurance products to employer groups, generally with 300 employees or less, primarily in the Mid-Atlantic, Southeast and Midwest regions of the continental United States. The Companys
group benefits insurance products consist of dental, short-term and long-term disability, and term life.

Run-off Specialty
Reinsurance. Prior to July 1, 2008, the Company wrote 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 storage 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. Prior to terminating its participation in the
reinsurance treaties effective July 1, 2008, the Company had reduced its participation in the EnviroGuard and EIA programs from a 25% quota share participation to a 15% quota share participation effective January 1, 2008.

Products

Workers Compensation Insurance

The Company offers a complete line of workers compensation products including guaranteed cost policies, policyholder dividend
policies, retrospectively-rated policies, large deductible policies, and alternative market products. Direct premiums written in the workers compensation insurance segment totaled $101.9 million for the year ended December 31, 2008.



| |  |  | Guaranteed cost policies. Guaranteed cost policies charge a fixed premium, which does not increase or decrease based upon loss experience during the policy
period. For the year ended December 31, 2008, 55.9% of direct premiums written in the workers compensation insurance segment were derived from guaranteed cost policies.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Policyholder dividend policies. Policyholder dividend policies charge a fixed premium, but the customer may receive a dividend in the event of favorable loss
experience during the policy period. Policyholder dividend plans are generally restricted to accounts with minimum annual premiums in excess of $20,000. For the year ended December 31, 2008, 9.6% of direct premiums written in the workers
compensation insurance segment were derived from policyholder dividend policies.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Retrospectively-rated policies. Retrospectively-rated policies charge an initial premium that is subject to adjustment after the policy period expires, based
upon the insureds actual loss experience incurred during the policy period, subject to a minimum and maximum premium. These policies are typically subject to annual adjustment until all claims related to the policy year are closed.
Retrospectively-rated policies are generally offered to employers with minimum annual premiums in excess of $150,000. For the year ended December 31, 2008, 3.7% of direct premiums written in the workers compensation insurance segment were
derived from retrospectively-rated policies.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Large deductible policies. Large deductible policies generally result in a lower premium; however, the insured retains a greater share of the underwriting
risk than under guaranteed cost or dividend paying policies, which reduces the risk to the Company and further encourages loss control by the insured. The customer is contractually obligated to pay its own losses up to the amount of the deductible
for each occurrence. The deductibles under these policies generally range from $250,000 to $300,000. Large deductible policies are generally offered to employers with annual premiums of $500,000 or higher. For the year ended December 31, 2008,
1.5% of direct premiums written in the workers compensation insurance segment were derived from large deductible policies.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



2



---

##### Table of Contents

| |  |  | Alternative market products. Alternative market products are offered to individual customers and trade associations. As described above in Overview of
Business SegmentsWorkers Compensation Insurance a policy is issued to an insured and 100% of the premium written, less a ceding commission, is ceded to a segregated portfolio cell. For the year ended December 31, 2008, 29.2%
of direct premiums written in the workers compensation insurance segment were derived from alternative market products.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Segregated Portfolio Cell Reinsurance

Segregated portfolio cells, or segregated cells or rent-a-captives, are all
referred to as alternative market programs or products. The Company provides a variety of products to this marketplace, including program design, fronting, claims administration, risk management, segregated portfolio cell rental, investment and
segregated portfolio management services. Direct premiums written in the segregated portfolio cell reinsurance segment totaled $29.1 million for the year ended December 31, 2008. The segregated portfolio cell reinsurance segment generated fee
revenue to the Companys workers compensation insurance, run-off specialty reinsurance, and corporate/other segments totaling $4.2 million for the year ended December 31, 2008.

Group Benefits Insurance

The Companys
group benefits insurance products include dental insurance, short-term disability insurance, long-term disability insurance, and term life insurance.



| |  |  | Dental Insurance.Dental plans include fee for service and managed care plans. Multiple variations of these products are available which offer different
degrees of coverage, affordability and flexibility. Managed care plans utilize the networks of two unaffiliated dental Preferred Provider Organizations. Direct premiums written in the dental line totaled $22.7 million for the year ended
December 31, 2008.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Short-Term Disability Insurance. Short-term disability plans pay flat weekly benefit amounts or a percentage of an individual claimants weekly earnings
in the event of disability. Direct premiums written in the short-term disability line totaled $6.6 million for the year ended December 31, 2008.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Long-Term Disability Insurance. Long-term disability plans provide preset amounts or a preset percentage of an individual claimants monthly earnings in
the event of disability. Direct premiums written in the long-term disability line totaled $3.8 million for the year ended December 31, 2008.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Term Life Insurance. Term life plans pay flat amounts or a multiple of an individuals salary. Direct premiums written in the term life line totaled
$6.1 million for the year ended December 31, 2008.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Run-off Specialty Reinsurance

Prior to July 1, 2008, the Company participated as a reinsurer in treaties with a large primary insurer for the EnviroGuard program and the EIA
program. Assumed premiums written in the run-off specialty reinsurance operations totaled $3.3 million for the year ended December 31, 2008.

Marketing and Distribution

Workers Compensation Insurance

The Company distributes its workers compensation products and services primarily in Pennsylvania, Delaware, North Carolina, Maryland and Indiana
through a network of carefully chosen independent insurance producers. The following table provides direct premiums written, before purchase accounting adjustments, by state, for the year ended December 31, 2008 (dollars in thousands):



|               |  |                        |         |            |       |  
|-------------- |  | ---------------------- | ------- | ---------- | ----- | -
|State          |  | Direct PremiumsWritten |         | Percentage |      
|Pennsylvania   |  | $                      | 93,023  |            | 90.8  | %
|Delaware       |  |                        | 2,418   |            | 2.4   | %
|North Carolina |  |                        | 2,097   |            | 2.0   | %
|Maryland       |  |                        | 2,094   |            | 2.0   | %
|Indiana        |  |                        | 1,717   |            | 1.7   | %
|Other          |  |                        | 1,071   |            | 1.1   | %
|               |  |                        |         |            |       |  
|Total          |  | $                      | 102,420 |            | 100.0 | %
|               |  |                        |         |            |       |  



3



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##### Table of Contents

The Company has its greatest representation and largest workers compensation premium volume in
central Pennsylvania. The direct premiums written in Indiana reflect business written during the fourth quarter of 2008 as a result of the acquisition of ESHC.

Producers are compensated through a fixed base commission plan with an opportunity for profit sharing depending on the producers premium volume and loss experience.

The Company proactively manages its valued relationships with producers through a detailed producer management process. The process is driven by regular
interaction and strong relationships between senior management of the Company and the principals of each producer. The primary components of the producer management process are as follows:



| |  |  | The Company carefully selects producers through a process that assesses financial results, market potential, business philosophy and reputation of the producer and
its staff. Senior management of the Company approves all producer appointments following extensive meetings with the producers principals. Following the agreement to appoint, the Companys Senior Vice President of Marketing and other key
personnel conduct a formal orientation process focusing on the Companys workers compensation products and services, dedicated service team and the joint business objectives of the Company and the producer.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Companys senior management team conducts annual business planning meetings with the producers principals to mutually agree upon the producers
financial goals for the following year. Senior management and the underwriting staff conduct regular visits to monitor results and build relationships.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company has established an Agency Advisory Council to promote an active dialogue between the Company and its producer group. The Agency Advisory Council is
comprised of six experienced insurance agency professionals. The Council meets twice a year to discuss such topics as market conditions, customer service, products, competition and areas of opportunity. In addition to the Agency Advisory Council,
the Company has established a Select Business Focus Group with its producers. This group meets once a year to concentrate on issues that impact small workers compensation clients (under $20,000 in annual premium).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Producer management reports are distributed on a monthly basis, providing the producer with the data necessary to manage its relationship with the Company.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

The Company attempts to optimize the franchise value of a workers compensation producer appointment by limiting
the number of appointments in identified marketing territories. As a result of this producer management strategy, the average direct premiums written per agency contract was $1.4 million for the year ended December 31, 2008.

The Companys ten largest producers in its workers compensation insurance segment accounted for 60.7% of its direct premiums written for
the year ended December 31, 2008. The Companys largest producer in its workers compensation insurance segment accounted for 18.2% of its direct premiums written for the year ended December 31, 2008. No other producer accounted
for more than 10% of the Companys direct premiums written in its workers compensation insurance segment for the year ended December 31, 2008.

Segregated Portfolio Cell Reinsurance

The distribution of policies that may be submitted for consideration for
reinsurance is substantially the same as that of the workers compensation insurance segment. The Companys independent producers market the products to potential customer groups within the Companys geographic target markets.

Group Benefits Insurance

The
Company markets its group benefits insurance products through direct relationships with independent producers and general agencies, primarily in the Mid-Atlantic, Southeast, and Midwest regions of the continental United States.

Prior to December 31, 2008, the Company had an agreement with IBSi Holdings, Inc. (IBSi), a general agent, under which IBSi marketed the
Companys group benefits insurance products to independent producers. IBSis primary marketing territory was North Carolina, South Carolina, and Georgia. These states accounted for approximately 38.7% of the Companys direct premiums
written in its group benefits insurance segment for the year ended December 31, 2008. Effective January 1, 2009, IBSi no longer markets the Companys group benefits insurance products. See Item 1ARisk FactorsOur
premium revenue in the group benefits insurance segment may be adversely affected as a result of our termination of our relationship with IBSi.



4



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##### Table of Contents

The following table provides direct premiums written, by state, for the year ended December 31, 2008
(dollars in thousands):



|               |  |                       |        |            |       |  
|-------------- |  | --------------------- | ------ | ---------- | ----- | -
|State          |  | DirectPremiumsWritten |        | Percentage |      
|Pennsylvania   |  | $                     | 14,630 |            | 37.3  | %
|North Carolina |  |                       | 12,586 |            | 32.1  | %
|Maryland       |  |                       | 3,077  |            | 7.9   | %
|South Carolina |  |                       | 2,371  |            | 6.0   | %
|Virginia       |  |                       | 1,844  |            | 4.7   | %
|Delaware       |  |                       | 1,522  |            | 3.9   | %
|Other          |  |                       | 3,166  |            | 8.1   | %
|               |  |                       |        |            |       |  
|Total          |  | $                     | 39,196 |            | 100.0 | %
|               |  |                       |        |            |       |  

The Company provides sales, technical and educational training to its producers. Through its
website, the Company provides its producers with online access to enrollment forms, product information, and online rate information for smaller groups (less than 10 people). These marketing efforts are further supported by the group benefits
insurance segments claims and administrative philosophy, which emphasizes prompt and efficient service.

The Company provides its
group benefits insurance producers with competitive compensation packages consisting of multiple commission levels, varying by product line and level of premium produced. As cost savings to the Company result when multiple product types are sold to
a single group, incentive bonuses are offered to producers that reward such sales.

Underwriting, Risk Management and Pricing

Workers Compensation Insurance

The
Companys workers compensation insurance segment is committed to an individual account underwriting strategy that is focused on selecting quality accounts. The goal of the workers compensation underwriting professionals is to select
a diverse book of business with respect to risk classification, hazard level and geographic location. The Company expects to remain a rural underwriter focusing on territories, accounts and producers that generate acceptable underwriting margins.

The workers compensation underwriting strategy is focused on accounts with strong return to work and safety programs and low to
middle hazard levels such as clerical office, light manufacturing, auto dealers and service industries.

For the year ended
December 31, 2008, the average annual workers compensation traditional premium per policy was $17,500.

Within the workers
compensation underwriting operation, the Company operates a risk management unit, which delivers loss consulting services to the Companys staff, producers and customers. The objective of the risk management operation is to protect the Company
from catastrophic loss, reduce claims frequency and provide value added consulting services to insureds. The Company has expanded consulting services to include health and wellness, which supports injury prevention and mitigates claim expense. These
services are provided at no additional cost to the insured and are services that differentiate the Companys workers compensation products from its competitors. The risk management unit also provides risk pre-screening in support of the
underwriting selection process.

Segregated Portfolio Cell Reinsurance

Underwriting and risk management services for the segregated portfolio cell reinsurance segment are substantially the same as the workers
compensation insurance segment, although a separate alternative markets unit has been formed for the delivery of services on a group program basis. The independent producers knowledge of the Companys workers compensation product
offerings is an important component in the offering of different product proposals to customers, including the alternative market option. After successful completion of the underwriting process, if the risk is deemed to be an appropriate candidate
for the alternative market, the risk is submitted for consideration of intercompany reinsurance. In general, a pool of risks such as a trade group, or for similarly situated customers of an agency, are most appropriate for submission to the
alternative markets unit. If a pool of risks is accepted, reinsurance agreements and dividend participant agreements are executed, external reinsurance is bound and a segregated portfolio cell is established and presented to the Cayman Islands
Monetary Authority for approval.



5



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##### Table of Contents

Group Benefits Insurance

The group benefits insurance underwriting department is responsible for managing the Companys group benefits insurance book of business within established policies and procedures. The Company primarily
underwrites small to medium size employer groups generally with 300 or less employees that fall within a low to moderate risk classification. Additionally, adequate levels of employee participation are required in order to underwrite a group.

Pricing levels for the group benefits insurance products are developed based on the Companys historical experience, as well as
industry experience, and are periodically assessed for adequacy. Dental rates are evaluated on a quarterly basis, whereas short-term disability and term life rates are generally evaluated on an annual basis. Pricing for the long-term disability
product is developed by the Companys long-term disability reinsurers.

Account pricing is determined by the individual underwriter
based on the level of risk, taking into consideration a groups demographics and selected plan design.

Claims

Workers Compensation Insurance

Workers compensation claims management focuses on early intervention and aggressive disability management, utilizing the professional services of medical case managers to supplement the expertise of in-house claims professionals when
appropriate.

The Company believes in thorough education of its clients and their employees regarding the workers compensation law
and workplace safety. The Company utilizes frequent communication with all parties as a means to maintain control of claims and minimize the influence of factors that increase costs such as attorney involvement and doctor shopping. The
Company provides assistance and support to its clients in the implementation of physician panels and return to work programs.

The Company
utilizes strategic vendor relationships rather than in-house personnel for services such as legal representation, private investigation, vocational rehabilitation and medical case management.

Medical cost management initiatives have been implemented with strategic vendors to reduce claim costs. Medical cost management services include
preferred provider networks, physical therapy networks and a prescription drug program.

The Company attempts to aggressively achieve final
resolution of, and close, claims from prior accident years. The table below shows the number of prior years workers compensation claims received and closed and open claims, by accident year, as of December 31, 2008.

Traditional Business

(Exclusive of
Alternative Markets)

Open Claims (1)



|              |  |              |  |      |  |        |  |          |  
|------------- |  | ------------ |  | ---- |  | ------ |  | -------- | -
|Accident Year |  | Total Claims |  | Open |  | Closed |  | % Closed |  
|1998          |  | 65           |  | 0    |  | 65     |  | 100.0    | %
|1999          |  | 205          |  | 1    |  | 204    |  | 99.5     | %
|2000          |  | 382          |  | 0    |  | 382    |  | 100.0    | %
|2001          |  | 596          |  | 0    |  | 596    |  | 100.0    | %
|2002          |  | 691          |  | 4    |  | 687    |  | 99.4     | %
|2003          |  | 689          |  | 5    |  | 684    |  | 99.3     | %
|2004          |  | 834          |  | 16   |  | 818    |  | 98.1     | %
|2005          |  | 742          |  | 20   |  | 722    |  | 97.3     | %
|2006          |  | 928          |  | 42   |  | 886    |  | 95.5     | %
|2007          |  | 974          |  | 122  |  | 852    |  | 87.5     | %
|2008          |  | 990          |  | 424  |  | 566    |  | 57.2     | %
|              |  |              |  |      |  |        |  |          |  
|              |  | 7,096        |  | 634  |  | 6,462  |  | 91.1     | %
|              |  |              |  |      |  |        |  |          |  



|(1) | Excludes claims for medical only expenses because such claims are opened and closed in a short period of time. Excludes reinsured claims.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------



6



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##### Table of Contents

The table below shows the number of open lost time claims for accident years 2007 and prior as of
December 31, 2008 and 2007:

Traditional Business

(Exclusive of Alternative Markets)

Open Claims (1)



|              |  |              |  |              |  |                                        |  |                                         |  
|------------- |  | ------------ |  | ------------ |  | -------------------------------------- |  | --------------------------------------- | -
|Accident Year |  | 12-31-08Open |  | 12-31-07Open |  | 2007 and PriorClaims ClosedDuring 2008 |  | % of 2007 Open ClaimsClosed During 2008 |  
|1999          |  | 1            |  | 1            |  | 0                                      |  | 0.0                                     | %
|2002          |  | 4            |  | 5            |  | 1                                      |  | 20.0                                    | %
|2003          |  | 5            |  | 8            |  | 3                                      |  | 37.5                                    | %
|2004          |  | 16           |  | 21           |  | 5                                      |  | 23.8                                    | %
|2005          |  | 20           |  | 46           |  | 26                                     |  | 56.5                                    | %
|2006          |  | 42           |  | 133          |  | 91                                     |  | 68.4                                    | %
|2007          |  | 122          |  | 356          |  | 234                                    |  | 65.7                                    | %
|              |  |              |  |              |  |                                        |  |                                         |  
|              |  | 210          |  | 570          |  | 360                                    |  | 63.2                                    | %
|              |  |              |  |              |  |                                        |  |                                         |  



|(1) | Excludes claims for medical only expenses because such claims are opened and closed in a short period of time. Excludes reinsured claims.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

Segregated Portfolio Cell Reinsurance

The
claims administration strategy for the alternative market programs is consistent with the workers compensation insurance segment.

Group
Benefits Insurance

The group benefits insurance claims staff is responsible for investigating, processing and paying claims.
Authority levels have been established for all individuals involved in the settlement of claims.



| |  |  | Dental Claims. The Companys dental claims department is comprised of experienced personnel who function within designated areas of expertise. The
Company utilizes an independent dental peer review firm for claims outside of its employees areas of clinical expertise and to assist with benefit determination appeals. The Companys dental claim examiners are able to review claimant
x-rays and provider treatment notes online, reducing the time and expense associated with manual claims processing. In addition, the Companys administrative software provides automated batch processing for basic claims, which allows examiners
to devote greater attention to complex claims. Quality technicians are utilized to assess the accuracy of benefit determinations, with all examiners and analysts randomly audited on claims that exceed a set dollar amount. On average, dental claims
are processed within two weeks of receipt by the Company.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Short-Term Disability Claims.Short-term disability claims are reviewed within 3 to 5 business days of their receipt. Lump sum benefit payments are offered
for maternity claims. The short term disability claims review process may be supplemented by outside physicians who conduct independent medical examinations and provide peer review services to determine if claims are medically accurate. Following
such a medical examination, the Companys short-term disability claim examiners make the ultimate decision as to whether or not a claimant is disabled by measuring the results of the medical examination against the appropriate provisions in the
disability insurance policy.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Long-Term Disability Claims. The Companys long term disability claims processing is outsourced to its long-term disability partners, Disability
Reinsurance Management Services, Inc. (DRMS) and Custom Disability Solutions (CDS). Management believes these outsourcing arrangements provide the Company with more experienced claim personnel and resources in a more
cost-effective manner than handling claims internally.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Term Life and Accidental Death & Dismemberment (AD&D) Claims.The manager of the life and disability claim department is
responsible for the timely and accurate payment of term life and AD&D claims. Whenever death proceeds from an individual claimants policy exceed reinsurance limits, the Companys life reinsurer participates in the benefit
determination.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



7



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##### Table of Contents

Run-off Specialty Reinsurance

Claims management in the run-off specialty reinsurance segment is performed by the primary insurer. When the primary insurer sustains a loss, the Company receives an invoice on a quarterly basis for its pro rata share
of the loss. The Companys claims administration is limited to verification that the claim is a covered claim under the reinsurance contract between the Company and the primary insurer. The Companys claim personnel conduct an annual audit
of the primary insurers claim administration function.

Reinsurance

The Companys insurance subsidiaries reinsure a portion of their loss exposure and pay to the reinsurers a portion of the premiums received on all
policies reinsured. Insurance policies written by the Companys insurance subsidiaries are reinsured with other insurance companies principally to:



| |  |  | reduce net liability on individual risks;
| | - |  | -----------------------------------------



| |  |  | mitigate the effect of individual loss occurrences (including catastrophic losses);
| | - |  | -----------------------------------------------------------------------------------



| |  |  | stabilize underwriting results; and
| | - |  | -----------------------------------



| |  |  | decrease leverage and, accordingly, increase underwriting capacity.
| | - |  | -------------------------------------------------------------------

Reinsurance does not legally discharge the Company from primary liability for the full amount due under the reinsured policies. However, the assuming reinsurer is obligated to reimburse the Company to the extent of
the coverage ceded. As of December 31, 2008, the Companys reinsurance recoverables, by segment and before purchase accounting adjustments, were as follows (in thousands):



|                                      |  |        |       
|------------------------------------- |  | ------ | ------
|Segment                               |  | Amount
|Workers compensation insurance       |  | $      | 8,309 
|Segregated portfolio cell reinsurance |  |        | 3,160 
|Group benefits insurance              |  |        | 18,157
|Run-off specialty reinsurance         |  |        |      
|                                      |  |        |       
|Total                                 |  | $      | 29,626
|                                      |  |        |       

The Company determines the amount and scope of reinsurance coverage to purchase each year based on
a number of factors, including the evaluation of the risks accepted, consultations with reinsurance representatives and a review of market conditions, including the availability and pricing of reinsurance.

The Company monitors the solvency of its reinsurers on an annual basis, at a minimum, through review of their financial statements and, if available,
their A.M. Best financial strength ratings. The Company has not experienced difficulty collecting amounts due from reinsurers; however, the insolvency or inability of any reinsurer to meet its obligations could have a material adverse effect on the
Companys financial condition and results of operations.

Workers Compensation Insurance

The Companys workers compensation traditional business is reinsured under an excess of loss arrangement with Lloyds of London and Aspen
Insurance UK, Ltd., under which the Company retains the first $500,000 on each loss occurrence. Loss occurrences in excess of $500,000 are covered up to a maximum of $39.5 million per claim.



8



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##### Table of Contents

The following table sets forth the amounts recoverable from reinsurers for the workers compensation
insurance segment as of December 31, 2008 (dollars in thousands):



|                                      |  |                        |       |                 |         |                                  |     |   |                                     |      |  
|------------------------------------- |  | ---------------------- | ----- | --------------- | ------- | -------------------------------- | --- | - | ----------------------------------- | ---- | -
|Name                                  |  | ReinsuranceRecoverable |       | A.M. BestRating |         | Percentage ofShareholdersEquity |     |   | Percentage ofReinsuranceRecoverable |     
|Lloyds of London                     |  | $                      | 4,114 |                 | A       |                                  | 3.0 | % |                                     | 13.9 | %
|Aspen Insurance UK, Ltd.              |  |                        | 1,750 |                 | A       |                                  | 1.3 | % |                                     | 5.9  | %
|Swiss Reinsurance America Corporation |  |                        | 1,128 |                 | A(1)    |                                  | 0.8 | % |                                     | 3.8  | %
|General Reinsurance Corporation       |  |                        | 521   |                 | A++     |                                  | 0.4 | % |                                     | 1.7  | %
|Max Bermuda, Ltd.                     |  |                        | 286   |                 | A-      |                                  | 0.2 | % |                                     | 1.0  | %
|Alea London, Ltd.                     |  |                        | 160   |                 | NR-3(2) |                                  | 0.1 | % |                                     | 0.5  | %
|Alea Bermuda, Ltd.                    |  |                        | 129   |                 | NR-5(3) |                                  | 0.1 | % |                                     | 0.4  | %
|Reliastar Life Insurance Company      |  |                        | 111   |                 | A+      |                                  | 0.1 | % |                                     | 0.4  | %
|St. Paul Reinsurance Company Ltd.     |  |                        | 65    |                 | NR-3(2) |                                  | 0.0 | % |                                     | 0.2  | %
|Hannover Rueckversicherung AG         |  |                        | 30    |                 | A       |                                  | 0.0 | % |                                     | 0.1  | %
|Fairfield Insurance Company           |  |                        | 15    |                 | A+      |                                  | 0.0 | % |                                     | 0.1  | %
|                                      |  |                        |       |                 |         |                                  |     |   |                                     |      |  
|                                      |  | $                      | 8,309 |                 |         |                                  | 6.0 | % |                                     | 28.0 | %
|                                      |  |                        |       |                 |         |                                  |     |   |                                     |      |  



|(1) | Swiss Reinsurance America Corporation was downgraded by A.M. Best from A+ (Superior) to A (Excellent) with a stable outlook on February 27, 2009.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Rating assigned to companies that are not rated by A.M. Best.
|--- | -------------------------------------------------------------

|(3) | Rating assigned to companies that are not formally followed by A.M. Best.
|--- | -------------------------------------------------------------------------

Segregated Portfolio Cell Reinsurance

Intercompany Reinsurance Structure.Intercompany reinsurance agreements
are the mechanisms by which premiums paid by alternative markets customers are ceded to the segregated portfolio cells. Each segregated portfolio cell has the following reinsurance agreements:



| |  |  | 100% Quota Share Reinsurance AgreementsUnder this reinsurance agreement, all premiums received from the specific customer are ceded to the respective
segregated portfolio cell, net of a ceding commission. As with any reinsurance arrangement, the ultimate liability for the payment of claims resides with the primary insurance company. The ceding commission paid by the segregated portfolio cell
consists of charges customary to such arrangements including fronting fees, external reinsurance, producers commissions, premium taxes and assessments, claims administration and risk management services and segregated portfolio cell rental
fees. In addition, the ceding commission includes the risk assumed under the aggregate excess reinsurance agreement described directly below.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Aggregate Excess Reinsurance AgreementsAn aggregate excess reinsurance agreement exists for each respective segregated portfolio cell whereby the
Company assumes 100% of aggregate losses over an aggregate attachment point (expressed as a percentage of direct premiums written), with a maximum loss limit of $100,000. The attachment points for the aggregate excess reinsurance agreements average
89.0% of direct premiums written. For example, in the case of a segregated portfolio cell with $1.0 million in assumed premium and an 89.0% attachment point, the segregated portfolio cell pays the first $890,000 in net losses and LAE, the
Company pays the next $100,000 in net losses and LAE and the external aggregate reinsurer (as described below) pays net losses and LAE beyond the initial $990,000 covered by the segregated portfolio cell and the Company.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

External Reinsurance.Each segregated portfolio cell purchases external reinsurance coverage directly from
Lloyds of London. The segregated portfolio cell purchases per occurrence coverage to cover severity of claims and aggregate reinsurance coverage to cover frequency of claims on its segregated portfolio cell business.

Per Occurrence Reinsurance Agreements.Per occurrence reinsurance agreements cover each segregated portfolio cell for a catastrophic claim
resulting from one event with respect to its segregated portfolio cell business. The specific retentions for per occurrence coverage for segregated portfolio cells range from $250,000 to $350,000, with limits ranging from $39.75 million to $39.65
million. For example, in the case of a segregated portfolio cell with a $300,000 retention that has a $3.0 million claim relating to the injury and/or death of a covered employee, the segregated portfolio cell would cover the first $300,000 of
the claim with the third party reinsurer paying the remaining $2.7 million in claims.



9



---

##### Table of Contents

Aggregate Reinsurance Coverage.Aggregate reinsurance agreements cover the segregated portfolio
cells for losses and LAE beyond the $100,000 aggregate coverage provided by the Company. The need for this coverage would arise in the event of a series of losses as opposed to a single, catastrophic event. Aggregate reinsurance coverage purchased
through Lloyds has ultimate loss limits of $1.0 million or $2.0 million, depending on the underlying risks. This external reinsurance combined with the aggregate coverage provided by the Company provides aggregate loss limits for
each segregated portfolio cell ranging from $1.1 million to $2.1 million.

In addition to the reinsurance coverage on the
segregated portfolio cell business, the dividend participants of each segregated portfolio cell provide a letter of credit that is equal to the difference between the loss fund (amount of funds available to pay losses after deduction of ceding
commission) and the aggregate attachment point of the reinsurance. This is sometimes called the GAP, or unfunded liability. As an example, if a program has $1.0 million of assumed premiums, a 40% ceding commission and a 90% aggregate attachment
point, the letter of credit amount is $300,000 calculated as follows:



|                                              |  |   |        
|--------------------------------------------- |  | - | -------
|Aggregate attachment point ($1,000,000 x .90) |  | $ | 900,000
|Loss fund ($1,000,000  ($1,000,000 x .40))   |  | $ | 600,000
|GAP                                           |  | $ | 300,000

The difference between the premium and the ceding commission is deposited in each respective
segregated portfolio cells Cayman Island bank account to create the loss fund.

The following table sets forth the amounts
recoverable from reinsurers for the segregated portfolio cell reinsurance segment as of December 31, 2008 (dollars in thousands):



|                                  |  |                        |       |                 |      |     |                                  |     |   |                                     |      |  
|--------------------------------- |  | ---------------------- | ----- | --------------- | ---- | --- | -------------------------------- | --- | - | ----------------------------------- | ---- | -
|Name                              |  | ReinsuranceRecoverable |       | A.M. BestRating |      |     | Percentage ofShareholdersEquity |     |   | Percentage ofReinsuranceRecoverable |     
|Lloyds of London                 |  | $                      | 1,854 |                 | A    |     |                                  | 1.3 | % |                                     | 6.3  | %
|Aspen Insurance UK, Ltd.          |  |                        | 1,087 |                 | A    |     |                                  | 0.8 | % |                                     | 3.7  | %
|Alea London, Ltd.                 |  |                        | 214   |                 | NR-3 | (1) |                                  | 0.2 | % |                                     | 0.7  | %
|St. Paul Reinsurance Company Ltd. |  |                        | 5     |                 | NR-3 | (1) |                                  | 0.0 | % |                                     | 0.0  | %
|                                  |  |                        |       |                 |      |     |                                  |     |   |                                     |      |  
|                                  |  | $                      | 3,160 |                 |      |     |                                  | 2.3 | % |                                     | 10.7 | %
|                                  |  |                        |       |                 |      |     |                                  |     |   |                                     |      |  



|(1) | Rating assigned to companies that are not rated by A.M. Best.
|--- | -------------------------------------------------------------

Group Benefits Insurance

The Company reinsures a portion of its long-term disability and term life business. There
is currently no reinsurance coverage on the dental and short-term disability business.

The Companys long-term disability business is
reinsured on a quota-share basis, under which the Company retains 20% of the first $6,000 in monthly disability benefits. Monthly benefits in excess of $6,000 are 100% reinsured. The long-term disability business is reinsured with Union Security
Insurance Company and Reliance Standard Life Insurance Company.

The Companys term life business is reinsured on an excess of loss
basis, under which the Company retains the first $100,000 of each covered death claim and the first $50,000 of each covered accidental death or dismemberment claim. Effective August 1, 2007, the term life business was reinsured under an excess
of loss arrangement with Reliastar Life Insurance Company. Prior to August 1, 2007, the term life business was reinsured by Swiss Re Life and Health America, Inc.

The Company has a block of active disability claims that it has completely ceded to The Hartford Life and Accident Insurance Company. These claims arose out of long term disability policies that ELH formerly offered
to selected professional associations. The largest of these policies terminated in April 1997 and all but two of the remaining active claims pursuant to such policies were acquired by The Hartford in 1999. The Hartford manages and pays all such
claims without any involvement from the Company and provides all financial information required for the Companys financial reporting purposes. Under the terms of the reinsurance agreement, if The Hartfords Standard & Poors
credit rating falls below A, The Hartford, at the written request of the Company, must provide the Company with collateral in the form of a letter of credit equal to 103% of the statutory reserves associated with the reinsured claims
covered by the reinsurance agreement or establish a trust with assets having a market value equal to at least the statutory reserves associated with the reinsured claims.



10



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##### Table of Contents

The following table sets forth the amounts recoverables from reinsurers for the group benefits insurance
segment as of December 31, 2008 (dollars in thousands):



|                                             |  |                        |        |                |       |                                  |      |   |                                     |      |  
|-------------------------------------------- |  | ---------------------- | ------ | -------------- | ----- | -------------------------------- | ---- | - | ----------------------------------- | ---- | -
|Carrier                                      |  | ReinsuranceRecoverable |        | A.M BestRating |       | Percentage ofShareholdersEquity |      |   | Percentage ofReinsuranceRecoverable |     
|Hartford Life and Accident Insurance Company |  | $                      | 9,034  |                | A(1)  |                                  | 6.6  | % |                                     | 30.5 | %
|Union Security Insurance Company             |  |                        | 8,453  |                | A-(2) |                                  | 6.1  | % |                                     | 28.5 | %
|Swiss Re Life and Health America, Inc.       |  |                        | 547    |                | A(3)  |                                  | 0.4  | % |                                     | 1.9  | %
|Reliastar Life Insurance Company             |  |                        | 61     |                | A+    |                                  | 0.0  | % |                                     | 0.2  | %
|United Teacher Associates Insurance Company  |  |                        | 37     |                | A-    |                                  | 0.0  | % |                                     | 0.1  | %
|Combined Insurance Company of America        |  |                        | 21     |                | A     |                                  | 0.0  | % |                                     | 0.1  | %
|Reliance Standard Life Insurance Company     |  |                        | 4      |                | A(4)  |                                  | 0.0  | % |                                     | 0.0  | %
|                                             |  |                        |        |                |       |                                  |      |   |                                     |      |  
|                                             |  | $                      | 18,157 |                |       |                                  | 13.1 | % |                                     | 61.3 | %
|                                             |  |                        |        |                |       |                                  |      |   |                                     |      |  



|(1) | Hartford Life and Accident Insurance Company was downgraded by A.M. Best from A+ (Superior) to A (Excellent) with a negative outlook on February 27,
2009.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Union Security Insurance Company was downgraded by A.M. Best from A (Excellent) to A- (Excellent) with a stable outlook on November 25, 2008.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Swiss Re Life and Health America was downgraded by A.M. Best from A+ (Superior) to A (Excellent) with a stable outlook on February 27, 2009.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Reliance Standard Life Insurance Company was put on a negative outlook by A.M. Best on December 22, 2008.
|--- | ---------------------------------------------------------------------------------------------------------

Run-off Specialty Reinsurance

The Company
acts as a reinsurer in the run-off specialty reinsurance operations. None of the risks assumed in this segment are further reinsured.

Loss and LAE
Reserves

The Company estimates its reserves for unpaid losses and LAE as of the balance sheet date. The adequacy of the Companys
reserves is inherently uncertain and represents a significant risk to the business. The Company attempts to mitigate the uncertainty inherent in its reserves by continually reviewing loss cost trends, attempting to set premium rates that are
adequate to cover anticipated future costs, and by professionally managing its claims administration function. Additionally, the Company attempts to minimize the estimation risk inherent in its reserves by employing actuarial techniques on a
quarterly basis. Significant judgment is required in actuarial estimation to ascertain the relevance of historical payment and claim settlement patterns under current facts and circumstances. No assurance can be given as to whether the ultimate
liability for unpaid losses and LAE will be more or less than the Companys current estimates. While management believes that the assumptions underlying the amounts recorded for the reserves for unpaid losses and LAE as of December 31,
2008 are reasonable, the ultimate net liability may differ materially from the amount provided.



11



---

##### Table of Contents

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. The 2008 activity related to ESICs reserves for unpaid losses and LAE is for the period from October 1, 2008 to December 31, 2008. The 2006 activity related to the workers
compensation insurance, segregated portfolio cell reinsurance and run-off specialty reinsurance operations is for the period from June 17, 2006 to December 31, 2006 (in thousands).



|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                      |  | 2008 |         |   | 2007 |   |         | 2006 | 
|Balance, beginning of period                          |  | $    | 125,249 |   |      | $ | 121,396 |      |  | $ | 38,729  |  
|Reinsurance recoverables on unpaid losses and LAE     |  |      | 23,429  |   |      |   | 24,236  |      |  |   | 23,911  |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Net balance, beginning of period                      |  |      | 101,820 |   |      |   | 97,160  |      |  |   | 14,818  |  
|Net reserves acquired as a result of acquisition      |  |      | 7,004   |   |      |   |        |      |  |   | 73,554  |  
|Purchase accounting adjustments on acquisition date   |  |      | 537     |   |      |   |        |      |  |   | 2,432   |  
|Incurred related to:                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Current year                                          |  |      | 85,404  |   |      |   | 80,946  |      |  |   | 54,104  |  
|Prior year                                            |  |      | 15,009  |   |      |   | (6,189  | )    |  |   | (5,296  | )
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Total incurred before purchase accounting adjustments |  |      | 100,413 |   |      |   | 74,757  |      |  |   | 48,808  |  
|Purchase accounting adjustments                       |  |      | (548    | ) |      |   | (848    | )    |  |   | (538    | )
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Total incurred                                        |  |      | 99,865  |   |      |   | 73,909  |      |  |   | 48,270  |  
|Paid related to:                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Current year                                          |  |      | 40,570  |   |      |   | 37,019  |      |  |   | 28,609  |  
|Prior year                                            |  |      | 38,978  |   |      |   | 32,230  |      |  |   | 13,305  |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Total paid                                            |  |      | 79,548  |   |      |   | 69,249  |      |  |   | 41,914  |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Net balance, end of period                            |  |      | 129,678 |   |      |   | 101,820 |      |  |   | 97,160  |  
|Reinsurance recoverables on unpaid losses and LAE     |  |      | 25,636  |   |      |   | 23,429  |      |  |   | 24,236  |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Balance, end of period                                |  | $    | 155,314 |   |      | $ | 125,249 |      |  | $ | 121,396 |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Total reserves for unpaid losses and LAE              |  | $    | 159,117 |   |      | $ | 129,788 |      |  | $ | 126,467 |  
|Less: Term life premium waiver reserves               |  |      | 3,766   |   |      |   | 4,481   |      |  |   | 4,815   |  
|Less: Other                                           |  |      | 37      |   |      |   | 58      |      |  |   | 256     |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Balance, end of period                                |  | $    | 155,314 |   |      | $ | 125,249 |      |  | $ | 121,396 |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  

Incurred losses by segment were as follows for the year ended December 31, 2008 (in thousands):



|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |        |  |   |         |  
|----------------------------------------------------- |  | ------------------------------------ | ------ | - | ------------------------------------------ | - | ------ | ----------------------------- |  | - | --------------------------- | - | ----- | - | ------ |  | - | ------- | -
|                                                      |  | WorkersCompensationInsuranceSegment |        |   | SegregatedPortfolio CellReinsuranceSegment |   |        | GroupBenefitsInsuranceSegment |  |   | SpecialtyReinsuranceSegment |   | Total |  
|Incurred related to:                                  |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |        |  |   |         |  
|Current year, gross of discount                       |  | $                                    | 39,880 |   |                                            | $ | 15,274 |                               |  | $ | 26,114                      |   |       | $ | 5,746  |  | $ | 87,014  |  
|Current period discount                               |  |                                      | (1,078 | ) |                                            |   | (532   | )                             |  |   |                            |   |       |   |       |  |   | (1,610  | )
|Prior year, gross of discount                         |  |                                      | (2,703 | ) |                                            |   | (1,960 | )                             |  |   | (993                        | ) |       |   | 19,257 |  |   | 13,601  |  
|Accretion of prior period discount                    |  |                                      | 928    |   |                                            |   | 480    |                               |  |   |                            |   |       |   |       |  |   | 1,408   |  
|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |        |  |   |         |  
|Total incurred before purchase accounting adjustments |  |                                      | 37,027 |   |                                            |   | 13,262 |                               |  |   | 25,121                      |   |       |   | 25,003 |  |   | 100,413 |  
|Purchase accounting adjustments                       |  |                                      | (492   | ) |                                            |   | (80    | )                             |  |   |                            |   |       |   | 24     |  |   | (548    | )
|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |        |  |   |         |  
|Total incurred                                        |  | $                                    | 36,535 |   |                                            | $ | 13,182 |                               |  | $ | 25,121                      |   |       | $ | 25,027 |  | $ | 99,865  |  
|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |        |  |   |         |  

Incurred losses by segment were as follows for the year ended December 31, 2007 (in
thousands):



|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |        |  |   |        |  
|----------------------------------------------------- |  | ------------------------------------ | ------ | - | ------------------------------------------ | - | ------ | ----------------------------- |  | - | --------------------------- | - | ----- | - | ------ |  | - | ------ | -
|                                                      |  | WorkersCompensationInsuranceSegment |        |   | SegregatedPortfolio CellReinsuranceSegment |   |        | GroupBenefitsInsuranceSegment |  |   | SpecialtyReinsuranceSegment |   | Total |  
|Incurred related to:                                  |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |        |  |   |        |  
|Current year, gross of discount                       |  | $                                    | 34,962 |   |                                            | $ | 14,800 |                               |  | $ | 24,536                      |   |       | $ | 8,163  |  | $ | 82,461 |  
|Current period discount                               |  |                                      | (979   | ) |                                            |   | (536   | )                             |  |   |                            |   |       |   |       |  |   | (1,515 | )
|Prior year, gross of discount                         |  |                                      | (8,398 | ) |                                            |   | (3,023 | )                             |  |   | (961                        | ) |       |   | 4,844  |  |   | (7,538 | )
|Accretion of prior period discount                    |  |                                      | 787    |   |                                            |   | 562    |                               |  |   |                            |   |       |   |       |  |   | 1,349  |  
|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |        |  |   |        |  
|Total incurred before purchase accounting adjustments |  |                                      | 26,372 |   |                                            |   | 11,803 |                               |  |   | 23,575                      |   |       |   | 13,007 |  |   | 74,757 |  
|Purchase accounting adjustments                       |  |                                      | (758   | ) |                                            |   | (132   | )                             |  |   |                            |   |       |   | 42     |  |   | (848   | )
|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |        |  |   |        |  
|Total incurred                                        |  | $                                    | 25,614 |   |                                            | $ | 11,671 |                               |  | $ | 23,575                      |   |       | $ | 13,049 |  | $ | 73,909 |  
|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |        |  |   |        |  



12



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##### Table of Contents

Incurred losses by segment were as follows for the year ended December 31, 2006 (in thousands):



|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |       |  |   |        |  
|----------------------------------------------------- |  | ------------------------------------ | ------ | - | ------------------------------------------ | - | ------ | ----------------------------- |  | - | --------------------------- | - | ----- | - | ----- |  | - | ------ | -
|                                                      |  | WorkersCompensationInsuranceSegment |        |   | SegregatedPortfolio CellReinsuranceSegment |   |        | GroupBenefitsInsuranceSegment |  |   | SpecialtyReinsuranceSegment |   | Total |  
|Incurred related to:                                  |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |       |  |   |        |  
|Current year, gross of discount                       |  | $                                    | 17,941 |   |                                            | $ | 8,184  |                               |  | $ | 23,487                      |   |       | $ | 5,372 |  | $ | 54,984 |  
|Current period discount                               |  |                                      | (568   | ) |                                            |   | (312   | )                             |  |   |                            |   |       |   |      |  |   | (880   | )
|Prior year, gross of discount                         |  |                                      | (2,050 | ) |                                            |   | (2,088 | )                             |  |   | (2,563                      | ) |       |   | 894   |  |   | (5,807 | )
|Accretion of prior period discount                    |  |                                      | 323    |   |                                            |   | 188    |                               |  |   |                            |   |       |   |      |  |   | 511    |  
|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |       |  |   |        |  
|Total incurred before purchase accounting adjustments |  |                                      | 15,646 |   |                                            |   | 5,972  |                               |  |   | 20,924                      |   |       |   | 6,266 |  |   | 48,808 |  
|Purchase accounting adjustments                       |  |                                      | (484   | ) |                                            |   | (80    | )                             |  |   |                            |   |       |   | 26    |  |   | (538   | )
|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |       |  |   |        |  
|Total incurred                                        |  | $                                    | 15,162 |   |                                            | $ | 5,892  |                               |  | $ | 20,924                      |   |       | $ | 6,292 |  | $ | 48,270 |  
|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |       |  |   |        |  

The Companys results of operations include a decrease of $13.6 million related to
unfavorable loss reserve development on prior accident year reserves, prior to the impact of discount accretion, for the year ended December 31, 2008, compared to an increase of $7.5 million related to favorable development for the same period
in 2007. The 2008 unfavorable development primarily reflects reserve strengthening in the run-off specialty reinsurance segment, while the 2007 favorable development primarily relates to the workers compensation insurance segment.

The following provides a summary, by segment, of the impact of prior year reserve development on the Companys losses and LAE:

Workers Compensation Insurance.The favorable loss reserve development in the workers compensation insurance segment for the year ended
December 31, 2008 primarily reflects the impact of claim settlements in 2008 for amounts at, or less than, previously established case and IBNR reserves. For the year ended December 31, 2008, the Company closed 360, or 63.2%, of the 570
open lost time claims as of December 31, 2007. In the aggregate, the claims were closed at amounts lower than the provision established for IBNR claims. The favorable loss reserve development in the workers compensation insurance segment
for the year ended December 31, 2007 primarily reflects the impact of claim settlements in 2007 for amounts at, or less than, previously established case and IBNR reserves. For the year ended December 31, 2007, the Company closed 281, or
56.8%, of the 490 open lost time claims as of December 31, 2006. In the aggregate, the claims were closed at amounts lower than the provision established for IBNR claims.

Segregated Portfolio Cell Reinsurance.The favorable loss reserve development in the workers compensation insurance segment for the years
ended December 31, 2008 and 2007 primarily reflects the impact of claim settlements in each respective year for amounts at, or less than, previously established case and IBNR reserves.

Group Benefits Insurance.The favorable loss reserve development in the group benefits insurance segment primarily reflects better than expected
claim results in the dental, short-term disability and term life lines.

Run-off Specialty Reinsurance.The unfavorable loss reserve
development in the run-off specialty reinsurance segment for the year ended December 31, 2008 primarily reflects the impact of reserve strengthening related to the EnviroGuard program. Of the $19.3 million in unfavorable development, $13.9
million was recorded in the fourth quarter of 2008 and reflects additional information acquired by the Company during the annual claim audit conducted in January 2009. The claim audit revealed several factors which contributed to the increased case
reserves reported to the Company by the primary insurer and, therefore, resulted in management increasing the loss development factors utilized in estimating the IBNR reserves. Those factors include 1) an improvement in the ceding companys
ability to estimate loss costs earlier in the claims process, including the receipt of damage estimates from contractors and consultants, 2) jurisdictions becoming more aggressive in requiring quicker, more extensive clean-up and an increase in
construction costs related to the clean-up, and 3) courts limiting the ability of insurance companies to enforce policy coverage limitations as the courts are more interested in an expeditious clean up due to environmental concerns. The unfavorable
loss reserve development for the year ended December 31, 2007 primarily reflects the result of changes in estimates as losses emerged at a higher rate than had been originally anticipated when the reserves were estimated with respect to
accident periods 2006, 2005, 2004 and 2003.

The analysis in the following table presents the development of the Companys reserves
for unpaid losses and LAE from December 31, 1998 to December 31, 2007. The first line in the table shows the liability for unpaid losses and LAE, net of reinsurance, as estimated at the end of each calendar year. The first section below
that line shows the cumulative actual payments of losses and LAE, net of reinsurance, that relate to each year-end liability as they were paid at the end of



13



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##### Table of Contents

subsequent annual periods. The next section shows revised estimates of the original unpaid amounts, net of reinsurance, that are based on the subsequent
payments and re-estimates of the remaining unpaid liabilities. The next line shows the favorable or unfavorable development of the original estimates, net of reinsurance. Loss reserve development in this table is cumulative, the estimated favorable
or unfavorable development for a particular year represents the cumulative amount by which all previous liabilities are currently estimated to have been over- or under-estimated. The cumulative redundancy/(deficiency) is as of
December 31, 2008, which represents the difference between the latest re-estimated liability and the amounts as originally estimated. A redundancy means the original estimate was higher than the current estimate; a deficiency means that the
current estimate is higher than the original estimate (in thousands).



|                                                                                   |  |                    |        |   |         |   |        |         |  |   |         |   |  |         |         |   |         |   |         |         |  |   |         |   |  |         |         |   |         |   |         |   |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ------- | - | ------ | ------- |  | - | ------- | - |  | ------- | ------- | - | ------- | - | ------- | ------- |  | - | ------- | - |  | ------- | ------- | - | ------- | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                   |  | As of December 31, |       
|                                                                                   |  | 1998(2)            |        |   | 1999(2) |   |        | 2000(2) |  |   | 2001(2) |   |  | 2002(2) |         |   | 2003(2) |   |         | 2004(2) |  |   | 2005(2) |   |  | 2006(1) |         |   | 2007(1) |  
|Reserve for unpaid losses and LAE, net of reinsurance                              |  | $                  | 31,883 |   |         | $ | 34,279 |         |  | $ | 38,156  |   |  | $       | 43,363  |   |         | $ | 49,871  |         |  | $ | 58,500  |   |  | $       | 74,430  |   |         | $ | 83,389  |   |  | $ | 94,361  |   |  | $ | 99,801  |  
|Cumulative amount of liability paid through:                                       |  |                    |        |   |         |   |        |         |  |   |         |   |  |         |         |   |         |   |         |         |  |   |         |   |  |         |         |   |         |   |         |   |  |   |         |   |  |   |         |  
|One year later                                                                     |  |                    | 13,913 |   |         |   | 18,460 |         |  |   | 21,248  |   |  |         | 23,111  |   |         |   | 23,399  |         |  |   | 23,449  |   |  |         | 24,178  |   |         |   | 27,598  |   |  |   | 31,968  |   |  |   | 40,739  |  
|Two years later                                                                    |  |                    | 15,745 |   |         |   | 20,344 |         |  |   | 25,890  |   |  |         | 30,462  |   |         |   | 34,122  |         |  |   | 34,882  |   |  |         | 37,688  |   |         |   | 43,235  |   |  |   | 53,278  |   |  |   |        |  
|Three years later                                                                  |  |                    | 16,555 |   |         |   | 21,799 |         |  |   | 29,330  |   |  |         | 35,030  |   |         |   | 39,742  |         |  |   | 41,609  |   |  |         | 47,480  |   |         |   | 54,897  |   |  |   |        |   |  |   |        |  
|Four years later                                                                   |  |                    | 17,201 |   |         |   | 23,050 |         |  |   | 31,022  |   |  |         | 37,812  |   |         |   | 43,186  |         |  |   | 46,805  |   |  |         | 53,115  |   |         |   |        |   |  |   |        |   |  |   |        |  
|Five years later                                                                   |  |                    | 17,860 |   |         |   | 23,904 |         |  |   | 32,834  |   |  |         | 39,806  |   |         |   | 46,026  |         |  |   | 50,429  |   |  |         |        |   |         |   |        |   |  |   |        |   |  |   |        |  
|Six years later                                                                    |  |                    | 18,443 |   |         |   | 24,833 |         |  |   | 34,194  |   |  |         | 40,842  |   |         |   | 48,227  |         |  |   |        |   |  |         |        |   |         |   |        |   |  |   |        |   |  |   |        |  
|Seven years later                                                                  |  |                    | 19,028 |   |         |   | 25,580 |         |  |   | 34,615  |   |  |         | 42,373  |   |         |   |        |         |  |   |        |   |  |         |        |   |         |   |        |   |  |   |        |   |  |   |        |  
|Eight years later                                                                  |  |                    | 19,578 |   |         |   | 26,127 |         |  |   | 35,818  |   |  |         |        |   |         |   |        |         |  |   |        |   |  |         |        |   |         |   |        |   |  |   |        |   |  |   |        |  
|Nine years later                                                                   |  |                    | 20,037 |   |         |   | 27,052 |         |  |   |        |   |  |         |        |   |         |   |        |         |  |   |        |   |  |         |        |   |         |   |        |   |  |   |        |   |  |   |        |  
|Ten years later                                                                    |  |                    | 20,841 |   |         |   |       |         |  |   |        |   |  |         |        |   |         |   |        |         |  |   |        |   |  |         |        |   |         |   |        |   |  |   |        |   |  |   |        |  
|                                                                                   |  |                    |        |   |         |   |        |         |  |  
|Liability estimated as of:                                                         |  |                    |        |   |         |   |        |         |  |   |         |   |  |         |         |   |         |   |         |         |  |   |         |   |  |         |         |   |         |   |         |   |  |   |         |   |  |   |         |  
|One year later                                                                     |  |                    | 20,676 |   |         |   | 27,881 |         |  |   | 34,382  |   |  |         | 39,782  |   |         |   | 49,166  |         |  |   | 57,373  |   |  |         | 66,374  |   |         |   | 77,420  |   |  |   | 87,984  |   |  |   | 114,955 |  
|Two years later                                                                    |  |                    | 21,725 |   |         |   | 29,004 |         |  |   | 36,372  |   |  |         | 43,030  |   |         |   | 50,596  |         |  |   | 57,462  |   |  |         | 66,237  |   |         |   | 75,531  |   |  |   | 98,448  |   |  |   |        |  
|Three years later                                                                  |  |                    | 22,050 |   |         |   | 28,406 |         |  |   | 37,044  |   |  |         | 44,741  |   |         |   | 51,934  |         |  |   | 57,854  |   |  |         | 67,652  |   |         |   | 82,761  |   |  |   |        |   |  |   |        |  
|Four years later                                                                   |  |                    | 22,261 |   |         |   | 28,604 |         |  |   | 38,018  |   |  |         | 45,931  |   |         |   | 53,131  |         |  |   | 59,845  |   |  |         | 71,610  |   |         |   |        |   |  |   |        |   |  |   |        |  
|Five years later                                                                   |  |                    | 22,346 |   |         |   | 29,133 |         |  |   | 39,441  |   |  |         | 46,466  |   |         |   | 54,885  |         |  |   | 62,670  |   |  |         |        |   |         |   |        |   |  |   |        |   |  |   |        |  
|Six years later                                                                    |  |                    | 22,710 |   |         |   | 29,827 |         |  |   | 38,918  |   |  |         | 46,363  |   |         |   | 56,707  |         |  |   |        |   |  |         |        |   |         |   |        |   |  |   |        |   |  |   |        |  
|Seven years later                                                                  |  |                    | 23,325 |   |         |   | 29,894 |         |  |   | 38,987  |   |  |         | 47,786  |   |         |   |        |         |  |   |        |   |  |         |        |   |         |   |        |   |  |   |        |   |  |   |        |  
|Eight years later                                                                  |  |                    | 23,121 |   |         |   | 29,221 |         |  |   | 39,519  |   |  |         |        |   |         |   |        |         |  |   |        |   |  |         |        |   |         |   |        |   |  |   |        |   |  |   |        |  
|Nine years later                                                                   |  |                    | 22,337 |   |         |   | 29,503 |         |  |   |        |   |  |         |        |   |         |   |        |         |  |   |        |   |  |         |        |   |         |   |        |   |  |   |        |   |  |   |        |  
|Ten years later                                                                    |  |                    | 22,610 |   |         |   |       |         |  |   |        |   |  |         |        |   |         |   |        |         |  |   |        |   |  |         |        |   |         |   |        |   |  |   |        |   |  |   |        |  
|Cumulative total redundancy (deficiency)                                           |  | $                  | 9,273  |   |         | $ | 4,776  |         |  | $ | (1,363  | ) |  | $       | (4,423  | ) |         | $ | (6,836  | )       |  | $ | (4,470  | ) |  | $       | 2,820   |   |         | $ | 628     |   |  | $ | (4,087  | ) |  | $ | (15,154 | )
|                                                                                   |  |                    |        |   |         |   |        |         |  |   |         |   |  |         |         |   |         |   |         |         |  |   |         |   |  |         |         |   |         |   |         |   |  |   |         |   |  |   |         |  
|Gross liabilityend of year                                                        |  |                    | 35,593 |   |         |   | 39,041 |         |  |   | 44,141  |   |  |         | 49,327  |   |         |   | 57,955  |         |  |   | 67,549  |   |  |         | 84,555  |   |         |   | 97,755  |   |  |   | 107,048 |   |  |   | 113,065 |  
|Reinsurance recoverables                                                           |  |                    | 3,710  |   |         |   | 4,762  |         |  |   | 5,985   |   |  |         | 5,964   |   |         |   | 8,084   |         |  |   | 9,049   |   |  |         | 10,125  |   |         |   | 14,366  |   |  |   | 12,687  |   |  |   | 13,264  |  
|                                                                                   |  |                    |        |   |         |   |        |         |  |   |         |   |  |         |         |   |         |   |         |         |  |   |         |   |  |         |         |   |         |   |         |   |  |   |         |   |  |   |         |  
|Net liabilityend of year                                                          |  | $                  | 31,883 |   |         | $ | 34,279 |         |  | $ | 38,156  |   |  | $       | 43,363  |   |         | $ | 49,871  |         |  | $ | 58,500  |   |  | $       | 74,430  |   |         | $ | 83,389  |   |  | $ | 94,361  |   |  | $ | 99,801  |  
|                                                                                   |  |                    |        |   |         |   |        |         |  |   |         |   |  |         |         |   |         |   |         |         |  |   |         |   |  |         |         |   |         |   |         |   |  |   |         |   |  |   |         |  
|Gross re-estimated liabilitylatest                                                |  |                    | 25,015 |   |         |   | 33,753 |         |  |   | 47,643  |   |  |         | 56,891  |   |         |   | 68,232  |         |  |   | 74,931  |   |  |         | 84,544  |   |         |   | 96,764  |   |  |   | 112,832 |   |  |   | 127,948 |  
|Re-estimated reinsurance recoverableslatest                                       |  |                    | 2,405  |   |         |   | 4,250  |         |  |   | 8,124   |   |  |         | 9,105   |   |         |   | 11,525  |         |  |   | 11,961  |   |  |         | 12,934  |   |         |   | 14,003  |   |  |   | 14,384  |   |  |   | 12,993  |  
|                                                                                   |  |                    |        |   |         |   |        |         |  |   |         |   |  |         |         |   |         |   |         |         |  |   |         |   |  |         |         |   |         |   |         |   |  |   |         |   |  |   |         |  
|Net reestimated liabilitylatest                                                   |  | $                  | 22,610 |   |         | $ | 29,503 |         |  | $ | 39,519  |   |  | $       | 47,786  |   |         | $ | 56,707  |         |  | $ | 62,970  |   |  | $       | 71,610  |   |         | $ | 82,761  |   |  | $ | 98,448  |   |  | $ | 114,955 |  
|                                                                                   |  |                    |        |   |         |   |        |         |  |   |         |   |  |         |         |   |         |   |         |         |  |   |         |   |  |         |         |   |         |   |         |   |  |   |         |   |  |   |         |  
|Gross cumulative redundancy (deficiency), including run-off group medical business |  | $                  | 10,851 |   |         | $ | 5,570  |         |  | $ | (2,970  | ) |  | $       | (6,141  | ) |         | $ | (8,455  | )       |  | $ | (4,257  | ) |  | $       | 3,969   |   |         | $ | 8,221   |   |  | $ | 4,637   |   |  | $ | (15,103 | )
|Less: Gross cumulative redundancy related to run-off group medical business        |  |                    | (8,010 | ) |         |   | (5,201 | )       |  |   | (4,311  | ) |  |         | (6,314  | ) |         |   | (5,508  | )       |  |   | (1,937  | ) |  |         | (87     | ) |         |   | (45     | ) |  |   |        |   |  |   |        |  
|                                                                                   |  |                    |        |   |         |   |        |         |  |   |         |   |  |         |         |   |         |   |         |         |  |   |         |   |  |         |         |   |         |   |         |   |  |   |         |   |  |   |         |  
|Gross cumulative redundancy (deficiency), excluding run-off group medical business |  | $                  | 2,841  |   |         | $ | 369    |         |  | $ | (7,281  | ) |  | $       | (12,455 | ) |         | $ | (13,963 | )       |  | $ | (6,194  | ) |  | $       | 3,882   |   |         | $ | 8,176   |   |  | $ | 4,637   |   |  | $ | (15,103 | )
|                                                                                   |  |                    |        |   |         |   |        |         |  |   |         |   |  |         |         |   |         |   |         |         |  |   |         |   |  |         |         |   |         |   |         |   |  |   |         |   |  |   |         |  
|Gross liability, end of year                                                       |  | $                  | 35,593 |   |         | $ | 39,041 |         |  | $ | 44,141  |   |  | $       | 49,327  |   |         | $ | 57,955  |         |  | $ | 67,549  |   |  | $       | 84,555  |   |         | $ | 97,755  |   |  | $ | 107,048 |   |  | $ | 113,065 |  
|Professional group long-term disability reserves                                   |  |                    | 29,884 |   |         |   | 27,443 |         |  |   | 24,285  |   |  |         | 21,843  |   |         |   | 19,082  |         |  |   | 18,921  |   |  |         | 17,152  |   |         |   | 16,330  |   |  |   | 12,453  |   |  |   | 11,135  |  
|Term life premium waiver reserves                                                  |  |                    | 3,257  |   |         |   | 3,868  |         |  |   | 4,474   |   |  |         | 4,458   |   |         |   | 4,305   |         |  |   | 4,661   |   |  |         | 4,783   |   |         |   | 5,333   |   |  |   | 4,815   |   |  |   | 4,481   |  
|Other                                                                              |  |                    | 125    |   |         |   | 109    |         |  |   | 74      |   |  |         | 73      |   |         |   | 52      |         |  |   | 39      |   |  |         | 41      |   |         |   | 74      |   |  |   | 256     |   |  |   | 58      |  
|                                                                                   |  |                    |        |   |         |   |        |         |  |   |         |   |  |         |         |   |         |   |         |         |  |   |         |   |  |         |         |   |         |   |         |   |  |   |         |   |  |   |         |  
|Total reserves for unpaid losses and LAE                                           |  | $                  | 68,859 |   |         | $ | 70,461 |         |  | $ | 72,974  |   |  | $       | 75,701  |   |         | $ | 81,394  |         |  | $ | 91,170  |   |  | $       | 106,531 |   |         | $ | 119,492 |   |  | $ | 124,572 |   |  | $ | 128,739 |  
|                                                                                   |  |                    |        |   |         |   |        |         |  |   |         |   |  |         |         |   |         |   |         |         |  |   |         |   |  |         |         |   |         |   |         |   |  |   |         |   |  |   |         |  



14



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##### Table of Contents



|(1) | The reserves for unpaid losses and LAE as of December 31, 2007 and 2006 are reflected before the impact of purchase accounting adjustments of $1,049 and $1,895, respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The reserves for unpaid losses and LAE for December 31, 1998 through December 31, 2005 have been restated to reflect the workers compensation insurance, segregated
portfolio cell reinsurance, and run-off specialty reinsurance operations.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | For purposes of understanding the Companys reserve estimation results for its current lines of business, the gross cumulative redundancy related to the Companys
discontinued group medical business has been deducted from the total gross cumulative redundancy (deficiency) for all years presented.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A.M. Best Rating

A.M. Best rates insurance companies based on factors of concern to policyholders. In evaluating
a companys financial and operating performance, A.M. Best reviews the companys profitability, leverage and liquidity, its book of business, the adequacy and soundness of its reinsurance programs, the quality and estimated fair value of
its investments, the adequacy of its reserves and surplus, its capital structure, the experience and competence of its management, and its marketing presence. A.M. Best ratings are intended to provide an independent opinion of an insurers
ability to meet its obligations to its policyholders. Their evaluation is not directed at investors. As of December 31, 2008, Eastern Alliance, Allied Eastern and Eastern Advantage had a financial strength rating of A- (Excellent)
with a positive outlook and Eastern Re had a financial strength rating of A- (Excellent) with a stable outlook. As of December 31, 2008, ELH had a financial strength rating of A- (Excellent) with a stable outlook.
Effective September 30, 2008, A.M. Best assigned a financial strength rating of A- (Excellent) with a positive outlook to ESIC. Prior to the EIHIs acquisition of ESIC, ESIC was not rated by A.M. Best. An A-
(Excellent) financial strength rating is the fourth highest out of 16 rating classifications.

The financial strength ratings assigned by
A.M. Best to the Companys insurance subsidiaries are subject to periodic review and may be upgraded or downgraded by A.M. Best as a result of changes in the views of the rating agency or positive or adverse developments in the
insurance subsidiaries financial conditions or results of operations.

Competition

The Companys ability to compete successfully in its principal markets is dependent upon a number of factors, many of which are outside its control.
Many of the Companys business segments are subject to significant price competition. In addition to price, competition in the Companys lines of insurance is based on quality of the products, quality and delivery of service, financial
strength, ratings, distribution systems and technical expertise.

The property and casualty insurance market is highly competitive. The
Company competes with stock insurance companies, mutual companies, local cooperatives and other underwriting organizations. In its workers compensation insurance segment, the Company considers its principal competitors to be PMA Capital
Insurance Group, Erie Insurance Group, Guard Insurance Group, Penn National Insurance Company, Selective Insurance Group, Cincinnati Insurance Company, Lackawanna Insurance Group, and the Pennsylvania State Workers Insurance Fund.

Group benefits insurance products are relatively inexpensive to develop and market, and as such are offered by hundreds of insurance carriers,
including a number of financial services companies which are not considered members of the insurance industry. In its group benefits insurance segment, the Companys principal competitors include Aetna, Inc., Assurant, Inc., Guardian Life
Insurance Company and Metropolitan Life Insurance Company.

Certain of the Companys competitors have higher A.M. Best financial
strength ratings and substantially greater financial, technical and operating resources than the Company.

Investments

The Companys investment portfolio consists of fixed income securities, equity securities, convertible bonds, and other long-term investments in
various limited partnerships. The management and accounting for the Companys investment function is outsourced to third parties. The Company has established an investment policy, approved by the Finance/Investment Committee of the Board of
Directors, which has been communicated to the Companys external investment managers. In addition, the Company has hired an independent investment consultant to oversee the Companys investment managers and to assist the Company in setting
and monitoring its investment policy.

The Companys investment objectives are:



| |  |  | to meet insurance regulatory requirements;
| | - |  | ------------------------------------------



| |  |  | to maintain adequate liquidity in its insurance subsidiaries;
| | - |  | -------------------------------------------------------------



15



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##### Table of Contents

| |  |  | to preserve capital through a well diversified, high quality investment portfolio; and
| | - |  | --------------------------------------------------------------------------------------



| |  |  | to maximize after tax income while generating competitive after tax total rates of return.
| | - |  | ------------------------------------------------------------------------------------------

The Company evaluates the performance of its investments through the use of various industry benchmarks. Benchmarks have been selected for each
investment manager and/or portfolio and are reviewed on a quarterly basis by management and the Companys Finance/Investment Committee of the Board of Directors. For the year ended December 31, 2008, the Companys taxable equivalent
total return, net of management fees, was (4.33%), compared to the composite benchmark return of (4.26%).

The Companys investments
in fixed income and equity securities are classified as available for sale and are reported at estimated fair value, with changes in fair value reported as a component of accumulated other comprehensive income (loss), net of applicable
taxes. The Companys convertible bonds are considered hybrid financial instruments and are reported at estimated fair value, with changes in fair value reported as a realized gain or loss in the consolidated statements of operations and
comprehensive income (loss). The Company periodically evaluates its investments for other-than-temporary impairment. At the time an investment is determined to be other-than-temporarily impaired, the Company records a realized loss in the
consolidated statements of operations and comprehensive income (loss). Any subsequent increase in the investments market value would be reported as an unrealized gain.

The Companys other long-term investments include interests in various limited partnerships. The Company accounts for its limited partnership
investments under the equity method, with changes in the Companys interest in the limited partnerships recorded in the change in equity interest in other long-term investments. As of December 31, 2008 and 2007, the estimated fair values
of the Companys limited partnership investments, by investment strategy, were as follows (in thousands):



|                                    |  |          |       |          |   |       
|----------------------------------- |  | -------- | ----- | -------- | - | ------
|                                    |  | 12/31/08 |       | 12/31/07
|Multi-strategy fund of funds        |  | $        | 4,421 |          | $ | 5,809 
|Natural resources                   |  |          | 2,130 |          |   | 3,312 
|Structured finance opportunity fund |  |          | 1,958 |          |   |      
|Municipal bond arbitrage            |  |          | 466   |          |   | 1,484 
|Open-ended investment fund          |  |          | 470   |          |   | 622   
|Real estate                         |  |          | 66    |          |   | 73    
|                                    |  |          |       |          |   |       
|Total                               |  | $        | 9,511 |          | $ | 11,300
|                                    |  |          |       |          |   |       

The following table sets forth consolidated information concerning the Companys investments
as of December 31, 2008 and 2007 (in thousands).



|                                                 |  |                       |         |                           |   |                       |  |                           |         |  |   |        
|------------------------------------------------ |  | --------------------- | ------- | ------------------------- | - | --------------------- |  | ------------------------- | ------- |  | - | -------
|                                                 |  | At December 31,      
|                                                 |  | 2008                  |         | 2007                     
|                                                 |  | AmortizedCost or Cost |         | EstimatedFair MarketValue |   | AmortizedCost or Cost |  | EstimatedFair MarketValue
|U.S. Treasuries and government agencies          |  | $                     | 26,463  |                           | $ | 28,630                |  | $                         | 20,658  |  | $ | 21,561 
|State, municipalities and political subdivisions |  |                       | 45,109  |                           |   | 46,537                |  |                           | 51,884  |  |   | 53,012 
|Corporate securities                             |  |                       | 60,480  |                           |   | 60,617                |  |                           | 59,478  |  |   | 60,388 
|Mortgage-backed securities                       |  |                       | 16,349  |                           |   | 17,614                |  |                           | 22,134  |  |   | 22,880 
|Other structured securities                      |  |                       | 31,701  |                           |   | 29,738                |  |                           | 47,885  |  |   | 47,944 
|                                                 |  |                       |         |                           |   |                       |  |                           |         |  |   |        
|Total fixed income securities                    |  |                       | 180,102 |                           |   | 183,136               |  |                           | 202,039 |  |   | 205,785
|                                                 |  |                       |         |                           |   |                       |  |                           |         |  |   |        
|Equity securities                                |  |                       | 22,287  |                           |   | 17,162                |  |                           | 19,578  |  |   | 20,541 
|Convertible bonds                                |  |                       | 13,783  |                           |   | 12,346                |  |                           | 14,232  |  |   | 15,478 
|Other long-term investments                      |  |                       | 10,586  |                           |   | 9,519                 |  |                           | 10,386  |  |   | 11,317 
|                                                 |  |                       |         |                           |   |                       |  |                           |         |  |   |        
|Total investments                                |  | $                     | 226,758 |                           | $ | 222,163               |  | $                         | 246,235 |  | $ | 253,121
|                                                 |  |                       |         |                           |   |                       |  |                           |         |  |   |        

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

As of December 31, 2008, the Companys mortgage-backed securities include subprime and Alt-A exposures
with estimated fair values of $1.4 million and $514,000, respectively. During 2008, the Company recorded other-than-temporary impairments on these exposures of $2.3 million.



16



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##### Table of Contents

The following table shows the ratings distribution of the Companys fixed income securities and
convertible bonds, excluding fixed income securities of the segregated portfolio cell reinsurance segment, as a percentage of the total market value of the fixed income portfolio as of December 31, 2008 (dollars in thousands).



|                       |  |       |         |                                |       |  
|---------------------- |  | ----- | ------- | ------------------------------ | ----- | -
|                       |  | Total |         | Percentage ofTotal MarketValue |      
|AAA                  |  | $     | 98,602  |                                | 56.6  | %
|AA                   |  |       | 37,636  |                                | 21.6  | %
|A                    |  |       | 28,411  |                                | 16.3  | %
|BBB                  |  |       | 5,596   |                                | 3.2   | %
|Below Investment Grade |  |       | 2,627   |                                | 1.5   | %
|Not Rated              |  |       | 1,421   |                                | 0.8   | %
|                       |  |       |         |                                |       |  
|Total                  |  | $     | 174,293 |                                | 100.0 | %
|                       |  |       |         |                                |       |  

The amortized cost and estimated fair value of fixed income securities and convertible bonds as of
December 31, 2008, by contractual maturity, are shown below. Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties (in
thousands).



|                           |  |               |         |                     |   |        
|-------------------------- |  | ------------- | ------- | ------------------- | - | -------
|                           |  | AmortizedCost |         | EstimatedFair Value
|Less than one year         |  | $             | 17,768  |                     | $ | 17,838 
|One through five years     |  |               | 75,510  |                     |   | 77,064 
|Five through ten years     |  |               | 30,256  |                     |   | 31,054 
|Greater than ten years     |  |               | 54,002  |                     |   | 51,912 
|Mortgage-backed securities |  |               | 16,349  |                     |   | 17,614 
|                           |  |               |         |                     |   |        
|Total                      |  | $             | 193,885 |                     | $ | 195,482
|                           |  |               |         |                     |   |        

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 available-for-sale by category and length of time an individual security is in a continuous unrealized loss position as of December 31, 2008 were as
follows (in thousands):



|                                                   |                    |                     |                       |  |                   |                    |   |                       |   |       |                    |   |                       |   |  |   |        |  |   |        |  
|-------------------------------------------------- | ------------------ | ------------------- | --------------------- |  | ----------------- | ------------------ | - | --------------------- | - | ----- | ------------------ | - | --------------------- | - |  | - | ------ |  | - | ------ | -
|2008                                               |                    | Less Than 12 Months |                       |  | 12 Months or More |                    |   | Total                 |  
|                                                   | 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   | )
|Other structured securities                        |                    |                     | 13,670                |  |                   | (988               | ) |                       |   | 5,026 |                    |   | (1,318                | ) |  |   | 18,696 |  |   | (2,306 | )
|                                                   |                    |                     |                       |  |                   |                    |   |                       |   |       |                    |   |                       |   |  |   |        |  |   |        |  
|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 December 31, 2008, the Company held 105 fixed income securities with gross unrealized
losses totaling $3,111. 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 mortgage-backed 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 to 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 December 31, 2008, the Company held 33 equity securities with gross unrealized losses totaling $4,184. 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 December 31, 2008.



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##### Table of Contents

Company Web Sites

The Company operates three Web sites. The Companys Corporate Web site (www.easterninsuranceholdings.com) provides investor relations information and news. EAIGs Web site (www.eains.com)
provides information and news regarding workers compensation products and services, in addition to secured content accessible to producers and insureds. The secured sections include a risk management library that allows EAIGs risk
management personnel to disseminate safety information quickly and effectively to producers and insureds. ELHs Web site (www.elhins.com) provides information and news regarding group benefits products as well as access to an online
group administration system.

Employees

As of December 31, 2008, the Company had 207 full time employees. The Companys employees are not represented by a union. The Company considers its relationship with its employees to be excellent.

Regulation

General

Insurance companies are subject to supervision and regulation in the jurisdictions in which they do business. Insurance authorities in each jurisdiction
have broad administrative powers to administer statutes and regulations with respect to all aspects of the insurance business, including:



| |  |  | licensing of insurers and their producers;
| | - |  | ------------------------------------------



| |  |  | approval of policy forms and premium rates;
| | - |  | -------------------------------------------



| |  |  | mandating certain insurance benefits;
| | - |  | -------------------------------------



| |  |  | standards of solvency, including establishing statutory and risk-based capital requirements for statutory surplus;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | classifying assets as admissible for purposes of determining statutory surplus;
| | - |  | -------------------------------------------------------------------------------



| |  |  | regulating unfair trade and claim practices, including through the imposition of restrictions on marketing and sales practices, distribution arrangements and
payment of inducements;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | restrictions on the nature, quality and concentration of investments;
| | - |  | ---------------------------------------------------------------------



| |  |  | assessments by guaranty and other associations;
| | - |  | -----------------------------------------------



| |  |  | restrictions on the ability of insurance companies to pay dividends;
| | - |  | --------------------------------------------------------------------



| |  |  | restrictions on transactions between insurance companies and their affiliates;
| | - |  | ------------------------------------------------------------------------------



| |  |  | restrictions on acquisitions and dispositions of insurance companies;
| | - |  | ---------------------------------------------------------------------



| |  |  | restrictions on the size of risks insurable under a single policy;
| | - |  | ------------------------------------------------------------------



| |  |  | requiring deposits for the benefit of policyholders;
| | - |  | ----------------------------------------------------



| |  |  | requiring certain methods of accounting;
| | - |  | ----------------------------------------



| |  |  | periodic examinations of insurance company operations and finances;
| | - |  | -------------------------------------------------------------------



| |  |  | reviewing claims administration practices;
| | - |  | ------------------------------------------



| |  |  | prescribing the form and content of records of financial condition required to be filed; and
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | requiring reserves for unearned premiums, losses and other purposes.
| | - |  | --------------------------------------------------------------------

State insurance laws and regulations require insurance companies to file financial statements with insurance departments everywhere they do business, and
the operations of insurance companies are subject to examination by those departments at any time. Eastern Alliance, Allied Eastern, Eastern Advantage, ESIC, and ELH prepare statutory financial statements in accordance with accounting practices and
procedures prescribed or permitted by these departments.

Examinations

Examinations of the Companys insurance subsidiaries are conducted by the domiciliary insurance department every three to five years. The
Pennsylvania Insurance Departments most recent examinations of Eastern Alliance, Allied Eastern and ELH for which a report was issued were as of December 31, 2006. The Indiana Insurance Departments most recent



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##### Table of Contents

examination of ESIC for which a report was issued was as of December 31, 2004. These examinations did not result in any adjustments to the financial
position of the insurance companies. In addition, there were no substantive qualitative matters indicated in the examination reports that had a material adverse impact on the Companys operations. The Pennsylvania Insurance Department conducted
an organizational examination of Eastern Advantage as of October 24, 2007.

Risk-Based Capital Requirements

Pennsylvania and Indiana impose the NAIC risk-based capital requirements that require insurance companies to calculate and report information under a
risk-based formula. These risk-based capital requirements attempt to measure statutory capital and surplus needs based on the risks in an insurance companys mix of products and investment portfolio. Under the formula, a company first
determines its authorized control level risk-based capital. This authorized control level takes into account (i) the risk with respect to the insurers assets; (ii) the risk of adverse insurance experience with respect to
the insurers liabilities and obligations; (iii) the interest rate risk with respect to the insurers business; and (iv) all other business and other relevant risks as are set forth in the risk-based capital instructions. As of
December 31, 2008, the capital levels of EIHIs insurance subsidiaries exceeded risk-based capital requirements.

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. 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. Subsequent to
these dividend payments, the statutory capital and surplus levels of Eastern Alliance, Allied Eastern and ELH continued to exceed statutory risk-based capital requirements.

Market Conduct Regulation

State insurance laws and regulations include numerous provisions
governing trade practices and the marketplace activities of insurers, including provisions governing the form and content of disclosure to consumers, illustrations, advertising, sales practices and complaint handling. State regulatory authorities
generally enforce these provisions through periodic market conduct examinations. To our knowledge, the Company is currently in compliance with these provisions.

Sarbanes-Oxley Act of 2002

The Company is subject to the Sarbanes-Oxley Act of 2002, which implemented legislative
reforms intended to address corporate and accounting fraud. Among other reforms, the Sarbanes-Oxley Act requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with
the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement. The Sarbanes-Oxley Act also increases the oversight of, and codifies, certain requirements relating to audit committees of public
companies and how they interact with the companys auditors. Audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the company. In addition, companies must disclose
whether at least one member of the committee is a financial expert, as such term is defined by the SEC, and if not, why not. Pursuant to the Sarbanes-Oxley Act, the SEC has adopted rules requiring inclusion of an internal control report
and assessment by management in the annual report to shareholders. The Sarbanes-Oxley Act requires the auditor that issues the audit report to attest to and report on managements assessment of the companys internal controls.

Insurance Guaranty Funds

Almost all states
have guaranty fund laws under which insurers doing business in the state can be assessed to fund policyholder liabilities of insolvent insurance companies. Pennsylvania, Indiana and the other states in which our insurance companies do business have
such laws. Under these laws, an insurer is subject to assessment depending upon its market share in the state of a given line of business. The most significant assessment fund to which the Company is subject is the Pennsylvania Workers
Compensation Security Fund (the Security Fund), which assesses workers compensation insurers doing business in Pennsylvania for the purpose of providing funds to cover obligations to policyholders of insolvent insurance companies.
The maximum assessment the Security Fund can impose is equal to 1.0% of the Companys net workers compensation premiums written in Pennsylvania in the year of assessment. The Company establishes reserves relating to specific insurance
company insolvencies upon notification of an assessment by the respective state guaranty association. We cannot predict the amount or timing of any future assessments under these laws.



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##### Table of Contents

Cayman Islands Regulation

Eastern Re is organized and licensed as a Cayman Islands unrestricted Class B insurance company and is subject to regulation by the Cayman Islands Monetary Authority. Applicable laws and regulations govern the
types of policies that the Company can insure or reinsure, the amount of capital that it must maintain and the way it can be invested, and the payment of dividends without approval by the Cayman Islands Monetary Authority. Eastern Re is required to
maintain minimum capital of $120,000.

As a result of the unfavorable loss reserve development recorded at Eastern Re for the year ended
December 31, 2008, Eastern Re had negative shareholders equity of $(2.6) million as of December 31, 2008. On March 6, 2009, EIHI made a capital contribution of $23.0 million to Eastern Re. For additional information related to
the capital contribution, refer to Item 7Managements Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.

Holding Company Regulation

EIHI is registered as an insurance holding company under the
Insurance Holding Company Act amendments to the Pennsylvania Insurance Code of 1921, as amended, and is subject to regulation and supervision by the Pennsylvania Insurance Department. EIHI is required to annually file a report of its operations
with, and is subject to examination by, the Pennsylvania Insurance Department.

Each insurance company in a holding company system is
required to register with the insurance supervisory agency of its state of domicile and furnish certain information. This includes information concerning the operations of companies within the holding company system that may materially affect the
operations, management or financial condition of the insurers within the system. Pursuant to these laws, the respective insurance departments may examine insurance companies and their holding companies at any time, require disclosure of material
transactions by insurance companies and their holding companies and require prior notice or approval of certain transactions, such as extraordinary dividends distributed by insurance companies.

All transactions within the holding company system affecting insurance companies and their holding companies must be fair and equitable. Notice of
certain material transactions between insurance companies and any person or entity in their holding company system will be required to be given to the applicable insurance commissioner. In some states, certain transactions cannot be completed
without the prior approval of the insurance commissioner.

Approval by the state insurance commissioner is required prior to any
transaction affecting the control of an insurer domiciled in that state. In Pennsylvania, the acquisition of 10% or more of the outstanding capital stock of an insurer or its holding company is presumed to be a change in control. Pennsylvania law
also prohibits any person from (i) making a tender offer for, or a request or invitation for tenders of, or seeking to acquire or acquiring any voting security of a Pennsylvania insurer if, after the acquisition, the person would be in control
of the insurer, or (ii) effecting or attempting to effect an acquisition of control of or merger with a Pennsylvania insurer, unless the offer, request, invitation, acquisition, effectuation or attempt has received the prior approval of the
Insurance Department.

Dividend Restrictions

EIHIs ability to declare and pay dividends will depend in part on dividends received from its insurance subsidiaries. Our domestic insurance subsidiaries ability to pay dividends to the Company 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 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 insurance subsidiaries
are prohibited from declaring or paying any dividends or other forms of distribution for the three years after June 16, 2006, the effective date of the conversion/merger transaction, without the prior approval of the Pennsylvania Insurance
Commissioner. Eastern Re must receive approval from the Cayman Islands Monetary Authority before it can pay any dividend to EIHI.

During
2008, the Pennsylvania Insurance Commissioner approved dividends of $7.0 million and $21.5 million from Eastern Alliance and ELH, respectively, to EIHI. The proceeds from the dividends were used primarily to fund EIHIs stock repurchase
program, the acquisition of ESHC and the repayment of the junior subordinated debentures. In addition, the Pennsylvania Insurance Commissioner approved EIHIs four quarterly shareholder dividends of $0.07 per share.



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##### Table of Contents

On March 6, 2009, the Pennsylvania Insurance Commissioner approved the payment of extraordinary
dividends to EIHI from Eastern Alliance, Allied Eastern and ELH in the amount of $10.0 million, $2.0 million and $13.0 million, respectively. The $13.0 million dividend from ELH includes $8.0 million previously approved by the Pennsylvania Insurance
Commissioner in 2008, for which ELH had not made payment to EIHI. The proceeds from the dividends were used to fund EIHIs capital contribution to Eastern Re of $23.0 million.

Note on Forward-Looking Statements

This document contains forward-looking statements, which can be
identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking
statements include:



| |  |  | statements of goals, intentions and expectations;
| | - |  | -------------------------------------------------



| |  |  | statements regarding prospects and business strategy; and
| | - |  | ---------------------------------------------------------



| |  |  | estimates of future costs, benefits and results.
| | - |  | ------------------------------------------------

These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the factors discussed under the heading Risk Factors that could affect the
actual outcome of future events.

All of these factors are difficult to predict and many are beyond our control. These important factors
include those discussed under Risk Factors and those listed below:



| |  |  | 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 Financial Accounting Standards Board
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
| | - |  | ----------------------------------------------



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| |  |  | 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Because forward-looking information is subject to various risks and uncertainties, actual results may differ materially from that expressed or implied by
the forward-looking information. Therefore, we caution you not to place undue reliance on this forward-looking information.

All subsequent
written and oral forward-looking information attributable to the Company or any person acting on our behalf is expressly qualified in its entirety by the cautionary statements contained or referred to in this section. We do not undertake any
obligation to publicly release any revisions that may be made to any forward-looking statements.

Because of these and other uncertainties,
our actual future results may be materially different from the results indicated by these forward-looking statements. The Company has no obligation to update or revise any forward-looking statements to reflect any changed assumptions, any
unanticipated events or any changes in the future.

Item 1ARisk Factors

Our business is subject to numerous risks and uncertainties, the outcome of which may impact future results of operations and financial condition. These risks are as
follows:

Risk Factors Relating to Our Business

Our results may be adversely affected if our actual losses exceed our loss reserves.

The Company maintains loss
reserves to cover estimated amounts needed to pay for insured losses and for the LAE necessary to settle claims with respect to insured events that have occurred, including events that have not yet been reported to us. Estimating the reserves for
unpaid losses and LAE is a difficult and complex process involving many variables and subjective judgments; reserves do not represent an exact measure of liability. Accordingly, our loss reserves may prove to be inadequate to cover our actual
losses. We regularly review our reserving techniques and our overall amount of reserves. We review historical data and consider the impact of various factors such as:



| |  |  | trends in claim frequency and severity;
| | - |  | ---------------------------------------



| |  |  | information regarding each claim for losses;
| | - |  | --------------------------------------------



| |  |  | legislative enactments, judicial decisions and legal developments regarding damages; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | trends in general economic conditions, including inflation and levels of employment.
| | - |  | ------------------------------------------------------------------------------------

If we determine that our reserves for unpaid losses and LAE are inadequate, we will have to increase them. This adjustment would reduce income during the
period in which the adjustment is made, which could have a material adverse impact on our financial condition and results of operations. For additional information, see Item 1Business, Loss and LAE Reserves.

If we do not accurately establish our premium rates, our results of operations may be adversely affected.

In general, the premium rates for our insurance policies are established when coverage is initiated and therefore, before all of the underlying costs are
known. Like other insurance companies, we rely on estimates and assumptions in setting our premium rates. Establishing adequate rates is necessary, together with investment income, to generate sufficient revenue to offset losses, LAE and other
underwriting expenses and to earn a profit. If we fail to accurately assess the risks that we assume, we may fail to charge adequate premium rates to cover our losses and expenses, which could reduce income and cause us to become unprofitable. As a
result, our actual costs for providing insurance coverage to our policyholders may be significantly higher than our premiums.

In order to
set premium rates accurately, we must collect and properly analyze a substantial volume of data; develop, test, and apply appropriate rating formulae; closely monitor and recognize changes in trends; project both severity and frequency of losses
with reasonable accuracy; and estimate customer retention. Customer retention represents the amount of exposure a policyholder retains on any one risk or group of risks. The term may apply to an insurance policy, where the



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policyholder is an individual, family or business, or a reinsurance policy, where the policyholder is an insurance company. We must also implement our
pricing accurately in accordance with our assumptions. For example, as we expand the geographic market in which we offer our workers compensation insurance products we may not price these products accurately or adequately. Our ability to
undertake these efforts successfully, and as a result set premium rates accurately, is subject to a number of risks and uncertainties, including:



| |  |  | inaccurate assessment of new markets in which we have little or no prior experience;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | insufficient or unreliable data;
| | - |  | --------------------------------



| |  |  | incorrect or incomplete analysis of available data;
| | - |  | ---------------------------------------------------



| |  |  | uncertainties generally inherent in estimates and assumptions;
| | - |  | --------------------------------------------------------------



| |  |  | our inability to implement appropriate rating formulae or other pricing methodologies;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | costs of ongoing medical treatment;
| | - |  | -----------------------------------



| |  |  | our inability to accurately estimate customer retention, investment yields and the duration of our liability for losses and LAE; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unanticipated court decisions, legislation or regulatory action.
| | - |  | ----------------------------------------------------------------

Consequently, we could set our premium rates too low, which could negatively affect our results of operations and our profitability, or we could set our premium rates too high, which could reduce our ability to obtain
new or retain existing business and lead to lower net premiums earned.

If we do not effectively manage the growth of our operations we may not be
able to compete or operate profitably.

Our growth strategy includes enhancing our market share in our existing markets, entering
new geographic markets, introducing new insurance products and programs, further developing our agency relationships, and pursuing merger and acquisition opportunities. Our strategy is subject to various risks, including risks associated with our
ability to:



| |  |  | identify profitable new geographic markets to enter;
| | - |  | ----------------------------------------------------



| |  |  | obtain licenses in new states in which we wish to market and sell our products;
| | - |  | -------------------------------------------------------------------------------



| |  |  | successfully implement our underwriting, pricing, claims management, and product strategies over a larger operating region;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | properly design and price new and existing products and programs and reinsurance facilities;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | identify, train and retain qualified employees;
| | - |  | -----------------------------------------------



| |  |  | identify, recruit and integrate new independent producers;
| | - |  | ----------------------------------------------------------



| |  |  | formulate and execute a merger and acquisition strategy; and
| | - |  | ------------------------------------------------------------



| |  |  | augment our internal monitoring and control systems as we expand our business.
| | - |  | ------------------------------------------------------------------------------

We also may encounter difficulties in the implementation of our growth strategies, including unanticipated expenditures. In addition, our growth
strategies may result in us entering into markets or product lines in which we have little or no prior experience. Any such difficulties could result in diversion of senior management time and adversely affect our financial results.

Our ability to manage our exposure to underwriting risks depends on the availability and cost of reinsurance coverage.

We use reinsurance arrangements to limit and manage the amount of risk we retain, to stabilize our underwriting results and to increase our underwriting
capacity. Although we have not recently experienced difficulty in obtaining reinsurance at reasonable prices, the availability and cost of reinsurance is subject to current market conditions and may vary significantly over time. Any decrease in the
amount of our reinsurance will increase our risk of loss. We may be unable to maintain our desired reinsurance coverage or to obtain other reinsurance coverage in adequate amounts and at favorable rates. If we are unable to renew our expiring
coverage or obtain new coverage, it will be difficult for us to manage our underwriting risks and operate our business profitably.

It is
also possible that the losses we experience on insured risks for which we have obtained reinsurance will exceed the coverage limits of the reinsurance. If the amount of our reinsurance coverage is insufficient, our insurance losses could increase
substantially.



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If our reinsurers do not pay our claims in a timely manner, we may incur losses.

We are subject to credit risk with respect to the reinsurers with whom we deal because buying reinsurance does not relieve us of our liability to
policyholders. The Company had net reinsurance recoverables of $29.6 million as of December 31, 2008. For example, some of our reinsurers have been adversely impacted by the current economic crisis and deterioration in the investment markets
and, as a result, have been downgraded by A.M. Best, which could negatively impact the reinsurers results of operations or financial condition. If our reinsurers are not capable of fulfilling their financial obligations to us, including the
inability to secure the necessary collateral provided under the reinsurance agreements, our insurance losses would increase, which would negatively affect our financial condition and results of operations.

Our investment performance may suffer as a result of adverse capital market developments, which may affect our financial results and ability to conduct business.

We invest the premiums we receive from policyholders until cash is needed to pay insured claims or other expenses. As of
December 31, 2008, the Company had investments of $222.1 million. For the year ended December 31, 2008, the Company had $9.6 million of net investment income, representing 7.3% of its total revenues. Our investments are subject
to a variety of investment risks, including risks relating to general economic conditions, market volatility, interest rate fluctuations, liquidity risk and credit risk. In particular, an unexpected increase in the volume or severity of claims may
force us to liquidate securities, which may cause us to incur capital losses. If we do not structure the duration of our investments to match our insurance and reinsurance liabilities, we may be forced to liquidate investments prior to maturity at a
significant loss to cover such payments. Investment losses could significantly decrease our asset base and statutory surplus, thereby affecting our ability to conduct business.

Further deterioration in the fixed income and equity security markets could lead to additional investment losses.

The prolonged and severe disruptions in the fixed income and equity security markets, including among other things, widening of credit spreads, bankruptcies and government intervention in a number of large financial
institutions, have resulted in significant realized and unrealized losses in our investment portfolio. For the year ended December 31, 2008, we incurred $11.1 million of realized and $5.4 million of unrealized investment losses. Depending on
market conditions, we could incur substantial additional realized and unrealized losses in future periods, which could have a material adverse impact on our results of operations and financial condition.

Our revenues may fluctuate with changes in interest rates.

Our investment portfolio contains a significant amount of fixed income securities, including bonds, mortgage-backed securities (MBSs), collateralized mortgage obligations (CMOs), and other
asset-backed securities. The market values of all of our investments fluctuate depending on economic and political conditions and other factors beyond our control. The market values of our fixed income securities are particularly sensitive to
changes in interest rates.

For example, if interest rates rise, fixed income securities generally will decrease in value. If interest
rates decline, these securities generally will increase in value, except for MBSs, which may decline due to higher prepayments on the mortgages underlying the securities.

As of December 31, 2008, MBSs, including CMOs, constituted 18.9% of the market value of the Companys investment portfolio. MBSs and CMOs are subject to prepayment risks that vary with, among other things,
interest rates. During periods of declining interest rates, MBSs generally prepay faster as the underlying mortgages are prepaid and/or refinanced by the borrowers in order to take advantage of lower interest rates. MBSs that have an amortized cost
that is greater than par (i.e., purchased at a premium) may incur a reduction in yield or a loss as a result of prepayments. In addition, during such periods, we generally will be unable to reinvest the proceeds of any prepayment at comparable
yields. Conversely, during periods of rising interest rates, the frequency of prepayments generally decreases, and we may receive interest payments that are below the then prevailing interest rate for longer than expected. MBSs that have an
amortized cost that is less than par (i.e., purchased at a discount) may incur a decrease in yield or a loss as a result of slower prepayments.

If
we fail to comply with insurance industry regulations, or if those regulations become more burdensome, we may not be able to operate profitably.

Our insurance subsidiaries are regulated by government agencies in the states in which we do business, and we must comply with a number of state and federal laws and regulations. Most insurance regulations are
intended to protect the interests of insureds rather than those of shareholders and other investors.



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If we fail to comply with these laws and regulations, state insurance departments can exercise a range of
remedies from the imposition of fines to being placed in rehabilitation or liquidation. State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating
to financial condition, holding company issues and other matters. These regulatory requirements may adversely affect or inhibit our ability to achieve some or all of our business objectives.

Part of our strategy includes expanded licensing and product filings for the Company. Regulatory authorities, however, have broad discretion to deny or
revoke licenses for various reasons, including the violation of regulations. If we do not have or obtain the requisite licenses and approvals or do not comply with applicable regulatory requirements, insurance regulatory authorities could preclude
or temporarily suspend us from carrying on some or all of our activities, including our expansion objectives, or otherwise penalize us. Furthermore, changes in the level of regulation of the insurance industry or changes in laws or regulations or
interpretations of such laws and regulations by regulatory authorities could adversely affect our ability to operate our business.

We are
subject to various accounting and financial requirements established by the NAIC. Eastern Re is subject to the laws of the Cayman Islands and regulations promulgated by the Cayman Islands Monetary Authority. Failure to comply with these laws,
regulations and requirements could result in consequences ranging from a regulatory examination to a regulatory takeover of one or more of our insurance subsidiaries. This would make our business less profitable. In addition, state regulators and
the NAIC continually re-examine existing laws and regulations, with an emphasis on insurance company solvency issues and fair treatment of policyholders. Insurance laws and regulations could change or additional restrictions could be imposed that
are more burdensome and make our business less profitable. Because these laws and regulations are for the protection of policyholders, any changes may not be in your best interest as a shareholder.

Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations may materially
increase our direct and indirect compliance and other expenses of doing business, thus adversely affecting our financial condition and results of operations.

The group benefits insurance and workers compensation insurance markets in which we operate are highly competitive.

Competition in these markets is based on many factors. These factors include the perceived financial strength of the insurer, premiums charged, policy terms and conditions, services provided, reputation, financial ratings assigned by
independent rating agencies and the experience of the insurer in the line of insurance to be written. The Companys insurance subsidiaries compete with stock insurance companies, mutual companies, local cooperatives and other underwriting
organizations. Our principal competitors in the group benefits market include Aetna, Inc., Assurant, Inc., Guardian Life Insurance Company, and Metropolitan Life Insurance Company. Our principal competitors in the workers compensation
insurance market include PMA Capital Insurance Group, Erie Insurance Group, Guard Insurance Group, Penn National Insurance Company, Selective Insurance Group, Cincinnati Insurance Company, Lackawanna Insurance Group, and the Pennsylvania State
Workers Insurance Fund. Many of these competitors have higher ratings and substantially greater financial, technical and operating resources than we have. The group benefits and workers compensation lines of insurance are subject to
significant price competition. If competitors price their products aggressively, our ability to grow or renew our business may be adversely affected. We pay producers on a commission basis to produce business. Some competitors may offer higher
commissions to independent producers or offer insurance at lower premium rates through the use of salaried personnel or other distribution methods that do not rely on independent producers. Increased competition could adversely affect our ability to
attract and retain business and thereby reduce our profits from operations.

We could be adversely affected by the loss of our key personnel.

The success of our business is dependent, to a large extent, on the efforts of certain key personnel, in particular, Bruce M.
Eckert, our Chief Executive Officer, Michael L. Boguski, our President and Chief Operating Officer, Kevin M. Shook, our Treasurer and Chief Financial Officer, Robert A. Gilpin, our Senior Vice President of Marketing, and Suzanne M.
Emmet, our Senior Vice President of Claims. We have employment agreements with each of Messrs. Eckert, Boguski, Shook, Gilpin, and Ms. Emmet, which contain covenants not to compete. We do not maintain key man life insurance on any of these
executives. The loss of key personnel could prevent us from fully implementing our business strategy and could significantly and negatively affect our financial condition and results of operations. As we continue to grow, we will need to recruit and
retain additional qualified management personnel, and our ability to do so will depend upon a number of factors, such as our results of operations and prospects and the level of competition then prevailing in the market for qualified personnel. The
current market for qualified insurance personnel is highly competitive.



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Our results of operations may be adversely affected by any loss of business from key producers and by the
creditworthiness of our producers.

Our products are marketed by independent producers. Other insurance companies compete with the
Company for the services and allegiance of these producers. Because they are independent, these producers are not obligated to direct business to the Company and may choose to direct business to our competitors, or may direct less desirable risks to
us. The Companys ten largest producers in its workers compensation insurance segment accounted for 60.7% of its direct premiums written for the year ended December 31, 2008. The Companys largest producer in its
workers compensation insurance segment accounted for 18.2% of direct premiums written for the year ended December 31, 2008. No other producer accounted for more than 10.0% of direct premiums written in the Companys workers
compensation insurance segment for the year ended December 31, 2008. No independent producer accounted for more than 10.0% of the Companys group benefits insurance direct premiums written for the year ended December 31, 2008. If
premium volume produced by any of the Companys large producers were to decrease significantly, it would have a material adverse effect on us.

In addition, in accordance with industry practice, our customers sometimes pay the premiums for their policies to producers for payment to us. These premiums are considered paid when received by the producer and, thereafter, the customer is
no longer liable to us for those amounts, whether or not we have actually received the premiums from the producer. Consequently, we assume a degree of credit risk associated with our reliance on producers in connection with the collection of
insurance premiums.

Our premium revenue in the group benefits insurance segment may be adversely affected as a result of the termination of our
relationship with IBSi.

On September 2, 2008, we terminated our relationship with IBSi, a key general agent for our
group benefits insurance segment in our Southeast market, primarily North Carolina, South Carolina, and Georgia. Direct premiums written in North Carolina, South Carolina, and Georgia totaled approximately $15.2 million for the year ended
December 31, 2008. The termination is effective for all new and renewal business written on or after January 1, 2009; however, IBSiis still entitled to override payments related to renewals on existing business as of
December 31, 2008 for a period of 24 months. As a result of the termination, we will no longer rely on IBSi to manage producer relationships in the Southeast market. Those relationships will be handled directly by our internal sales
personnel. The termination of our relationship with IBSirequires our sales personnel to develop direct relationships with IBSis key producers. In the event we are unable to develop and maintain these relationships, we could
experience a decrease in retention of this business upon renewal and/or our ability to generate new sales in the Southeast territory could be adversely impacted, which could result in a decrease in premium revenue in the group benefits insurance
segment.

Because the Companys workers compensation insurance business is concentrated in Pennsylvania, the Company is subject to local
economic risks as well as to changes in the regulatory and legal climate in Pennsylvania.

For the year ended December 31,
2008, 90.8% of the Companys workers compensation premium was written in Pennsylvania. The Companys workers compensation insurance business is affected by the economic health of Pennsylvania for two principal reasons. First,
premium growth is dependent upon payroll growth, which, in turn, is affected by economic conditions. Second, losses and LAE can increase in weak economic conditions because it is more difficult to return injured workers to the job when employers are
otherwise reducing payrolls. Finally, as predominantly a single state insurer, the Company can be adversely affected by any material change in Pennsylvania law or regulation or any Pennsylvania court decision affecting workers compensation
carriers generally.

Future changes in financial accounting standards or practices or existing tax laws may adversely affect our reported results of
operations.

Financial accounting standards in the United States are constantly under review and may be changed from time to time.
We would be required to apply these changes when adopted. Once implemented, these changes could materially affect our results of operations and/or the way in which such results of operations are reported. Similarly, we are subject to taxation in the
United States and a number of state jurisdictions. Rates of taxation, definitions of income, exclusions from income, and other tax policies are subject to change over time. Eastern Re is domiciled in the Cayman Islands. Changes in Cayman Islands tax
laws could have a material impact on our consolidated results of operations.

Proposals to federally regulate the insurance business could affect our
business.

Currently, the U.S. federal government does not directly regulate the insurance business. However, federal legislation
and administrative policies in several areas can significantly and adversely affect insurance companies. These areas include



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financial services regulation, securities regulation, pension regulation, privacy, tort reform legislation and taxation. In addition, various forms of direct
federal regulation of insurance have been proposed. These proposals include the State Modernization and Regulatory Transparency Act, which would maintain state-based regulation of insurance but would affect state regulation of certain aspects of the
insurance business, including rates, producer and company licensing, and market conduct examinations, and the National Insurance Act of 2007, which would provide for optional federal charters for insurance companies. We cannot predict whether this
or other proposals will be adopted, or what impact, if any, such proposals or, if enacted, such laws may have on our business, financial condition or results of operations.

Risk Factors Relating to Our Common Stock

Directors and management could effectively control certain
situations that may be viewed as contrary to your interests.

The extent of managements control over the Company is related to
the following factors:



| |  |  | Directors and management owned approximately 15.6% of the Companys outstanding stock as of December 31, 2008.
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | The employee stock ownership plan (ESOP) owns 7.9%, or 747,500 shares, of the Companys outstanding stock as of December 31, 2008. The shares
held by the ESOP will be voted in the manner directed by the ESOP participants.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have implemented a stock compensation plan pursuant to which shares of restricted stock and stock options have been issued to certain of our directors, officers
and employees.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result of these factors, the Companys directors and management, directly or indirectly, hold a
substantial equity interest in the Company. If all members of management were to act together as a group, they could have a significant influence over the outcome of the election of directors and any other shareholder vote. Therefore, management
might have the power to take actions that nonaffiliated shareholders may deem to be contrary to the shareholders best interests.

Provisions in
our articles and bylaws and statutory provisions may serve to entrench management and also may discourage takeover attempts that you may believe are in your best interests.

We are subject to provisions of Pennsylvania corporate and insurance law that hinder a change of control. Pennsylvania law requires the Pennsylvania
Insurance Departments prior approval of a change of control of an insurance holding company. Under Pennsylvania law, the acquisition of 10% or more of the outstanding capital stock of an insurer or its holding company is presumed to be a
change in control. Approval by the Pennsylvania Insurance Department may be withheld even if the transaction would be in the shareholders best interest if, among other things, the Pennsylvania Insurance Department determines that the
transaction would be detrimental to policyholders.

Our articles of incorporation and bylaws also contain provisions that may discourage a
change in control. These provisions include:



| |  |  | the prohibition of ownership and voting of shares having in excess of 10% of the total voting power of the outstanding stock of the Company for a period of three
years after the conversion/merger;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a classified Board of Directors divided into three classes serving for successive terms of three years each;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | a provision that the Board of Directors has the authority to issue shares of authorized but unissued common stock and preferred stock and to establish the
terms of any one or more series of preferred stock, including voting rights, without additional shareholder approval;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the prohibition of cumulative voting in the election of directors;
| | - |  | ------------------------------------------------------------------



| |  |  | the requirement that nominations for the election of directors made by shareholders and any shareholder proposals for inclusion on the agenda at any annual meeting
must be made by notice (in writing) delivered or mailed to us not less than 90 days or more than 120 days prior to the meeting;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the provision that, for a period of three years, any merger, consolidation, sale of assets or similar transaction
involving the Company requires the affirmative vote of shareholders entitled to cast at least 662/3% of the votes which all shareholders are entitled to cast, unless the transaction is approved in advance by 662/3% of the members of the Board of Directors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the prohibition of shareholder action without a meeting and the prohibition of shareholders being able to call a special meeting;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



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| |  |  | the requirement that certain provisions of our articles of incorporation can only be amended by an affirmative vote of shareholders entitled to cast at least 80% of
all votes that shareholders are entitled to cast, unless approved by an affirmative vote of at least 80% of the members of the Board of Directors; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the requirement that certain provisions of our bylaws can only be amended by an affirmative vote of shareholders
entitled to cast at least 662/3%, or in certain cases 80%, of all votes that shareholders are entitled to cast.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These provisions may
serve to entrench management and may discourage a takeover attempt that you may consider to be in your best interest or in which you would receive a substantial premium over the current market price. These provisions may make it extremely difficult
for any one person or group of affiliated persons to acquire voting control of the Company, with the result that it may be extremely difficult to bring about a change in the Board of Directors or management. Some of these provisions also may
perpetuate present management because of the additional time required to cause a change in the control of the board. Other provisions make it difficult for shareholders owning less than a majority of the voting stock to be able to elect even a
single director.

Provisions of the Pennsylvania Business Corporation Law, which we refer to as the PBCL, that are applicable to publicly
traded companies provide, among other things, that we may not engage in a business combination with an interested shareholder during the five-year period after the interested shareholder became such, except under certain specified
circumstances. Under the PBCL an interested shareholder is generally a holder of 20% or more of our voting stock. The PBCL also contains provisions providing for the ability of shareholders to object to the acquisition by a person, or group of
persons acting in concert, of 20% or more of our outstanding voting securities and to demand that they be paid a cash payment for the fair value of their shares from the controlling person or group.

If our insurance subsidiaries are not sufficiently profitable, our ability to pay dividends will be limited by regulatory restrictions.

Our domestic insurance subsidiaries ability to pay dividends to the Company is limited by the insurance laws and regulations of Pennsylvania and
Indiana. The maximum dividend 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 insurance 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. Furthermore, any dividends paid in excess of Eastern Res cumulative earnings and profits subsequent to June 16, 2006
would be subject to U.S. federal income tax.

Item 1BUnresolved Staff Comments

Not applicable.

Item 2Properties

The Companys corporate headquarters are located at 25 Race
Avenue in Lancaster, Pennsylvania. The Company leases its home office building under a 15-year, non-cancelable lease through February 2017. The annual base rent is subject to an annual increase based upon the consumer price index at the end of each
preceding calendar year. In addition to the base rent, the Company is responsible for its proportionate share of expenses related to the building including, but not limited to, utilities, maintenance, real estate taxes, and insurance. The Company
has a 5% interest in the limited partnership that owns the building.

The Company also has regional offices in Charlotte, North Carolina
and Indianapolis, Indiana and leases office space in each of these locations under multi-year operating leases expiring in January 2013 and January 2010, respectively.

Item 3Legal Proceedings

The Company is, from time to time,
involved in legal proceedings that arise in the ordinary course of business. We believe we have sufficient loss reserves and reinsurance to cover claims under insurance policies issued by us. Although there can be no assurance as to the ultimate
disposition of these matters, we do not believe, based upon the information



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available at this time, that any current pending legal proceedings, individually or in the aggregate, will have a material adverse effect on our business,
financial condition, or results of operations.

Item 4Submission of Matters to a Vote of Security Holders

We did not submit any matters to a vote of the holders of our common stock during the fourth quarter of 2008.



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##### Table of Contents

PART II

Item 5Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The no par value common stock trades on the NASDAQ National Market under the symbol EIHI. As of March 11, 2009, there were 575 registered holders of record of our common stock.

During 2008, the Company paid four quarterly dividends of $0.07/share. Any payment of dividends in the future on the common stock is subject to
determination and declaration by the Companys Board of Directors, who will take into consideration the Companys financial condition, results of operations and future prospects. Additionally, the Company is prohibited from declaring or
paying any dividends for the three years following the conversion/merger transaction in 2006, unless such dividends are approved by the Pennsylvania Insurance Department.

The table below sets forth information with respect to the amount and frequency of dividends declared on our common stock. It is currently expected that cash dividends will continue to be paid in the future.



|                                  |  |                                |  |                         |  |                    |  |                   
|--------------------------------- |  | ------------------------------ |  | ----------------------- |  | ------------------ |  | ------------------
|Date of Declaration by EIHI Board |  | Type of and Amount of Dividend |  | Record Date for Payment |  | Payment Date      
|February 14, 2008                 |  | Regular                        |  | $0.07 cash per share    |  | March 14, 2008     |  | March 28, 2008    
|May 13, 2008                      |  | Regular                        |  | $0.07 cash per share    |  | June 13, 2008      |  | June 27, 2008     
|August 14, 2008                   |  | Regular                        |  | $0.07 cash per share    |  | September 12, 2008 |  | September 26, 2008
|November 13, 2008                 |  | Regular                        |  | $0.07 cash per share    |  | December 12, 2008  |  | December 29, 2008 

Information regarding restrictions and limitations on the payment of cash dividends can be found
in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations in the Financial Condition, Liquidity and Capital Resources section.

The table below sets forth the high and low sales prices of our common stock for each quarterly period as reported by the NASDAQ for the years ended
December 31, 2008 and 2007.



|           |  |      |       |      |   |       |  |      |       |  |   |      
|---------- |  | ---- | ----- | ---- | - | ----- |  | ---- | ----- |  | - | -----
|           |  | 2008 |       | 2007
|           |  | Low  |       | High |   | Low   |  | High
|1stquarter |  | $    | 13.41 |      | $ | 17.10 |  | $    | 14.19 |  | $ | 14.99
|2ndquarter |  | $    | 14.25 |      | $ | 16.99 |  | $    | 14.51 |  | $ | 16.01
|3rdquarter |  | $    | 12.77 |      | $ | 16.00 |  | $    | 13.78 |  | $ | 16.00
|4thquarter |  | $    | 6.25  |      | $ | 14.72 |  | $    | 15.15 |  | $ | 17.66

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 following table provides
the total number of stock awards outstanding, including the weighted average exercise price, as of December 31, 2008:

Equity
Compensation Plan Information



|                                                           |  |                                                                                          |  |                                                                          |       |                                                                                                                                        |         |    
|---------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | ----- | -------------------------------------------------------------------------------------------------------------------------------------- | ------- | ---
|Plan category                                              |  | Number of securities to beissued upon exercise ofoutstanding options,warrants and
rights |  | Weightedaverageexercise price ofoutstanding options,warrants and rights |       | Number of securitiesremaining available forfuture issuance
underequity compensation plans(excluding securitiesreflected in column (a)) |        
|                                                           |  | (a)                                                                                      |  | (b)                                                                      |       | (c)                                                                                                                                    |        
|Equity compensation plans approved by security holders     |  | 612,523                                                                                  |  | $                                                                        | 14.36 |                                                                                                                                        | 288,111 | (1)
|Equity compensation plans not approved by security holders |  |                                                                                         |  |                                                                          |      |                                                                                                                                        |        |    
|Total                                                      |  | 612,523                                                                                  |  | $                                                                        | 14.36 |                                                                                                                                        | 288,111 | (1)



|(1) | Beginning with calendar year 2008, the number of securities available for future issuance under the Stock Incentive Plan is automatically increased on January 1 by
an amount equal to 1.0% of the total outstanding common shares on the last trading day of December of the immediately preceding calendar year. The number of securities available for future
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | issuance can be in the form of stock options or restricted stock; however, the maximum number of shares of restricted stock available for issuance under the
Stock Incentive Plan is limited to 299,000. As of December 31, 2008, 251,675 shares of restricted stock have been issued under the Stock Incentive Plan.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Set forth below is a line graph comparing the dollar change in the cumulative total shareholder return on the Companys common stock for the year ended December 31, 2008 compared to the cumulative total
return of the NASDAQ Composite Index and the cumulative total return of the SNL Insurance Underwriter Index. The chart depicts the value on December 31, 2008 of a $100 investment made on June 19, 2006.

LOGO



|                                 |  |               |  |          |  |          |  |          |  |          |  |         
|-------------------------------- |  | ------------- |  | -------- |  | -------- |  | -------- |  | -------- |  | --------
|                                 |  | Period Ending
|Index                            |  | 06/19/06      |  | 12/31/06 |  | 06/30/07 |  | 12/31/07 |  | 06/30/08 |  | 12/31/08
|Eastern Insurance Holdings, Inc. |  | 100.00        |  | 127.61   |  | 140.17   |  | 146.38   |  | 139.75   |  | 72.88   
|NASDAQ Composite                 |  | 100.00        |  | 114.45   |  | 123.35   |  | 125.68   |  | 108.65   |  | 74.73   
|SNL Insurance Underwriter Index  |  | 100.00        |  | 116.30   |  | 120.76   |  | 116.88   |  | 83.93    |  | 60.74   



31



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##### Table of Contents

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.

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



|                     |  |                                 |  |                             |       |                                                                              |           |                                                                                                        |         |    
|-------------------- |  | ------------------------------- |  | --------------------------- | ----- | ---------------------------------------------------------------------------- | --------- | ------------------------------------------------------------------------------------------------------ | ------- | ---
|Period               |  | Total number ofshares purchased |  | Average pricepaid per share |       | Total number ofshares purchases aspart of publiclyannounced plansor programs |           | Maximum number(or approximatedollar value) ofshares that may yetbe purchased underthe plans 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 |    
|April 1-30, 2008     |  | 74,610                          |  | $                           | 15.76 |                                                                              | 74,610    |                                                                                                        | 144,804 |    
|May 1-31, 2008       |  | 81,800                          |  | $                           | 15.99 |                                                                              | 81,800    |                                                                                                        | 63,004  |    
|June 1-30, 2008      |  | 31,797                          |  | $                           | 15.82 |                                                                              | 31,797    |                                                                                                        | 31,207  | (a)
|July 1-31 2008       |  | 21,563                          |  | $                           | 15.05 |                                                                              | 21,563    |                                                                                                        | 9,644   | (a)
|August 1-31, 2008    |  | 10,826                          |  | $                           | 15.18 |                                                                              | 10,826    |                                                                                                        |        | (a)
|September 1-30, 2008 |  | 3,472                           |  | $                           | 15.16 |                                                                              | 3,472     |                                                                                                        |        | (a)
|October 1-31, 2008   |  | 8,290                           |  | $                           | 9.42  |                                                                              | 8,290     |                                                                                                        |        | (a)
|November 1-30, 2008  |  | 21,057                          |  | $                           | 8.81  |                                                                              | 21,057    |                                                                                                        |        | (a)
|December 1-31, 2008  |  | 11,256                          |  | $                           | 8.23  |                                                                              | 11,256    |                                                                                                        |        | (a)
|                     |  |                                 |  |                             |       |                                                                              |           |                                                                                                        |         |    
|Total                |  | 1,074,892                       |  | $                           | 15.86 |                                                                              | 1,074,892 |                                                                                                        |         |    
|                     |  |                                 |  |                             |       |                                                                              |           |                                                                                                        |         |    



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



|                     |  |                                 |  |                             |       |                                                                              |           |                                                                                                        |          
|-------------------- |  | ------------------------------- |  | --------------------------- | ----- | ---------------------------------------------------------------------------- | --------- | ------------------------------------------------------------------------------------------------------ | ---------
|Period               |  | Total number ofshares purchased |  | Average pricepaid per share |       | Total number ofshares purchased aspart of publiclyannounced plansor programs |           | Maximum number(or approximatedollar value)
ofshares that may yetbe purchased underthe plans orprograms
|January 1-31, 2007   |  |                                |  |                             | N/A   |                                                                              | N/A       |                                                                                                        | N/A      
|February 1-28, 2007  |  | 10,355                          |  | $                           | 14.40 |                                                                              | 10,355    |                                                                                                        | 557,197  
|March 1-31,2007      |  | 61,868                          |  | $                           | 14.46 |                                                                              | 61,868    |                                                                                                        | 495,329  
|April 1-30, 2007     |  | 1,100                           |  | $                           | 15.00 |                                                                              | 1,100     |                                                                                                        | 494,229  
|May 1-31, 2007       |  | 29,319                          |  | $                           | 14.73 |                                                                              | 29,319    |                                                                                                        | 464,910  
|June 1-30, 2007      |  | 262,578                         |  | $                           | 15.22 |                                                                              | 262,578   |                                                                                                        | 202,332  
|July 1-31, 2007      |  | 128,088                         |  | $                           | 15.18 |                                                                              | 128,088   |                                                                                                        | 74,244   
|August 1-31, 2007    |  | 243,004                         |  | $                           | 15.18 |                                                                              | 243,004   |                                                                                                        | 310,188  
|September 1-30, 2007 |  | 135,689                         |  | $                           | 15.49 |                                                                              | 135,689   |                                                                                                        | 1,174,499
|October 1-31, 2007   |  | 99,700                          |  | $                           | 15.96 |                                                                              | 99,700    |                                                                                                        | 1,074,799
|November 1-30, 2007  |  | 38,933                          |  | $                           | 16.17 |                                                                              | 38,933    |                                                                                                        | 1,035,866
|December 1-31, 2007  |  | 6,231                           |  | $                           | 16.17 |                                                                              | 6,231     |                                                                                                        | 1,029,635
|                     |  |                                 |  |                             |       |                                                                              |           |                                                                                                        |          
|Total                |  | 1,016,865                       |  | $                           | 15.33 |                                                                              | 1,016,865 |                                                                                                        |          
|                     |  |                                 |  |                             |       |                                                                              |           |                                                                                                        |          



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##### Table of Contents

Item 6Selected Financial Data

The following table sets forth selected historical financial information for the Company for the years ended and as of the dates indicated. This
information is derived from the Companys consolidated financial statements. You should read the following selected financial information along with the information contained in this annual report, including Part II, Item 7 of this
annual report entitled Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes and the reports of the independent registered public accounting
firm included in Part II, Item 8 and elsewhere in this report. These historical results are not necessarily indicative of results to be expected from any future period (in thousands, except per share and share amounts).



|                                                         |          |                                        |           |      |  |   |            |   |  |          |            |   |          |   |         |   |  |   |         |  
|-------------------------------------------------------- | -------- | -------------------------------------- | --------- | ---- |  | - | ---------- | - |  | -------- | ---------- | - | -------- | - | ------- | - |  | - | ------- | -
|                                                         |          | At or for the Years Ended December 31, |          
|                                                         | 2008 (1) |                                        |           | 2007 |  |   | 2006 (2)   |   |  | 2005 (3) |            |   | 2004 (3) |  
|Income Statement Data:                                   |          |                                        |           |      |  |   |            |   |  |          |            |   |          |   |         |   |  |   |         |  
|Direct premiums written                                  |          | $                                      | 111,999   |      |  | $ | 101,761    |   |  | $        | 65,935     |   |          | $ | 40,994  |   |  | $ | 40,790  |  
|Reinsurance premiums assumed                             |          |                                        | 33,106    |      |  |   | 43,183     |   |  |          | 17,836     |   |          |   |        |   |  |   |        |  
|Net premiums written                                     |          |                                        | 134,712   |      |  |   | 131,889    |   |  |          | 67,529     |   |          |   | 38,700  |   |  |   | 39,070  |  
|Net premiums earned                                      |          | $                                      | 135,807   |      |  | $ | 129,495    |   |  | $        | 74,919     |   |          | $ | 38,702  |   |  | $ | 39,057  |  
|Investment income, net of expenses                       |          |                                        | 9,631     |      |  |   | 11,669     |   |  |          | 8,678      |   |          |   | 3,715   |   |  |   | 3,659   |  
|Change in equity interest in other long-term investments |          |                                        | (3,970    | )    |  |   | 759        |   |  |          | 314        |   |          |   | 100     |   |  |   | 65      |  
|Net realized investment gains                            |          |                                        | (11,117   | )    |  |   | 2,888      |   |  |          | 2,757      |   |          |   | 445     |   |  |   | 1,271   |  
|Other revenue                                            |          |                                        | 853       |      |  |   | 683        |   |  |          | 313        |   |          |   | 1,066   |   |  |   | 946     |  
|                                                         |          |                                        |           |      |  |   |            |   |  |          |            |   |          |   |         |   |  |   |         |  
|Total revenue                                            |          | $                                      | 131,204   |      |  | $ | 145,494    |   |  | $        | 86,981     |   |          | $ | 44,028  |   |  | $ | 44,998  |  
|                                                         |          |                                        |           |      |  |   |            |   |  |          |            |   |          |   |         |   |  |   |         |  
|Expenses:                                                |          |                                        |           |      |  |   |            |   |  |          |            |   |          |   |         |   |  |   |         |  
|Losses and LAE incurred                                  |          | $                                      | 99,188    |      |  | $ | 73,588     |   |  | $        | 47,913     |   |          | $ | 27,090  |   |  | $ | 25,932  |  
|Acquisition and other underwriting expenses              |          |                                        | 18,918    |      |  |   | 17,056     |   |  |          | 7,242      |   |          |   | 5,452   |   |  |   | 5,670   |  
|Other expenses                                           |          |                                        | 25,338    |      |  |   | 21,801     |   |  |          | 14,390     |   |          |   | 9,674   |   |  |   | 10,601  |  
|Amortization of intangibles                              |          |                                        | 1,373     |      |  |   | 1,738      |   |  |          | 1,087      |   |          |   |        |   |  |   |        |  
|Policyholder dividend expense                            |          |                                        | 551       |      |  |   | 543        |   |  |          | 239        |   |          |   |        |   |  |   |        |  
|Segregated portfolio dividend expense (4)                |          |                                        | 2,155     |      |  |   | 4,423      |   |  |          | 2,890      |   |          |   |        |   |  |   |        |  
|                                                         |          |                                        |           |      |  |   |            |   |  |          |            |   |          |   |         |   |  |   |         |  
|Total expenses                                           |          | $                                      | 147,523   |      |  | $ | 119,149    |   |  | $        | 73,761     |   |          | $ | 42,216  |   |  | $ | 42,203  |  
|                                                         |          |                                        |           |      |  |   |            |   |  |          |            |   |          |   |         |   |  |   |         |  
|(Loss) income before income taxes                        |          | $                                      | (16,319   | )    |  | $ | 26,345     |   |  | $        | 13,220     |   |          | $ | 1,812   |   |  | $ | 2,795   |  
|Income tax expense                                       |          |                                        | 1,064     |      |  |   | 7,662      |   |  |          | 4,942      |   |          |   | 685     |   |  |   | 1,012   |  
|                                                         |          |                                        |           |      |  |   |            |   |  |          |            |   |          |   |         |   |  |   |         |  
|Net (loss) income                                        |          | $                                      | (17,383   | )    |  | $ | 18,683     |   |  | $        | 8,278      |   |          | $ | 1,127   |   |  | $ | 1,783   |  
|                                                         |          |                                        |           |      |  |   |            |   |  |          |            |   |          |   |         |   |  |   |         |  
|Selected Balance Sheet Data (at period end):             |          |                                        |           |      |  |   |            |   |  |          |            |   |          |   |         |   |  |   |         |  
|Total investments and cash and cash equivalents          |          | $                                      | 275,038   |      |  | $ | 299,061    |   |  | $        | 288,288    |   |          | $ | 82,319  |   |  | $ | 85,168  |  
|Total assets                                             |          |                                        | 377,311   |      |  |   | 385,518    |   |  |          | 368,206    |   |          |   | 111,225 |   |  |   | 111,673 |  
|Reserves for unpaid losses and LAE                       |          |                                        | 159,117   |      |  |   | 129,788    |   |  |          | 126,467    |   |          |   | 44,137  |   |  |   | 43,384  |  
|Unearned premiums                                        |          |                                        | 42,365    |      |  |   | 39,826     |   |  |          | 34,600     |   |          |   | 95      |   |  |   | 98      |  
|Total liabilities                                        |          |                                        | 239,174   |      |  |   | 207,687    |   |  |          | 194,462    |   |          |   | 49,116  |   |  |   | 49,132  |  
|Total shareholders equity                               |          |                                        | 138,137   |      |  |   | 177,831    |   |  |          | 173,744    |   |          |   | 62,109  |   |  |   | 62,541  |  
|                                                         |          |                                        |           |      | 
|U.S. GAAP Ratios:                                        |          |                                        |           |      |  |   |            |   |  |          |            |   |          |   |         |   |  |   |         |  
|Loss and LAE ratio (5)                                   |          |                                        | 73.0      | %    |  |   | 56.8       | % |  |          | 64.0       | % |          |   | 70.0    | % |  |   | 66.4    | %
|Expense ratio (6)                                        |          |                                        | 33.6      | %    |  |   | 31.4       | % |  |          | 30.3       | % |          |   | 39.1    | % |  |   | 41.7    | %
|Policyholder dividend expense ratio (7)                  |          |                                        | 0.4       | %    |  |   | 0.4        | % |  |          | 0.3        | % |          |   |        |   |  |   |        |  
|Combined ratio (8)                                       |          |                                        | 107.0     | %    |  |   | 88.6       | % |  |          | 94.6       | % |          |   | 109.1   | % |  |   | 108.1   | %
|                                                         |          |                                        |           |      | 
|Per-share Data:                                          |          |                                        |           |      |  |   |            |   |  |          |            |   |          |   |         |   |  |   |         |  
|Basic earnings per share                                 |          | $                                      | (1.94     | )    |  | $ | 1.82       |   |  | $        | 0.67       |   |          |   | N/A     |   |  |   | N/A     |  
|Diluted earnings per share                               |          | $                                      | (1.94     | )    |  | $ | 1.76       |   |  | $        | 0.65       |   |          |   | N/A     |   |  |   | N/A     |  
|Cash dividends per share                                 |          | $                                      | 0.28      |      |  | $ | 0.20       |   |  | $        |           |   |          |   | N/A     |   |  |   | N/A     |  
|                                                         |          |                                        |           |      | 
|Weighted Average Shares:                                 |          |                                        |           |      |  |   |            |   |  |          |            |   |          |   |         |   |  |   |         |  
|Basic                                                    |          |                                        | 8,954,097 |      |  |   | 10,264,369 |   |  |          | 10,623,182 |   |          |   | N/A     |   |  |   | N/A     |  
|Diluted                                                  |          |                                        | 8,954,097 |      |  |   | 10,604,349 |   |  |          | 10,929,281 |   |          |   | N/A     |   |  |   | N/A     |  



|(1) | Includes ESHCs results of operations for the period from October 1, 2008 to December 31, 2008.
|--- | -----------------------------------------------------------------------------------------------

|(2) | Includes ELHs results of operations for the year ended December 31, 2006 and the results of operations of EHC and its subsidiaries for the period from June 17, 2006
to December 31, 2006.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(3) | Represents the financial condition and results of operations for ELH.
|--- | ---------------------------------------------------------------------

|(4) | The net income of the segregated portfolio cell reinsurance segment is recorded as a segregated portfolio dividend expense, which represents the dividend earned by the segregated
portfolio dividend participants during the period.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Calculated by dividing losses and LAE incurred by net premiums earned.
|--- | ----------------------------------------------------------------------

|(6) | Calculated by dividing the sum of acquisition and other underwriting expenses, other expenses and amortization of intangibles by net premiums earned.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Calculated by dividing the policyholder dividend expense by net premiums earned.
|--- | --------------------------------------------------------------------------------

|(8) | The sum of the loss and LAE ratio, expense ratio and the policyholder dividend expense ratio.
|--- | ---------------------------------------------------------------------------------------------



34



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##### Table of Contents

Item 7Managements Discussion and Analysis of Financial Condition and Results
of Operations

Overview

The
Companys results of operations for the year ended December 31, 2008 were adversely impacted by unfavorable loss reserve development in the run-off specialty reinsurance operations of $19.3 million, the current economic crisis in the
United States and the continued deterioration in the fixed income and equity security markets.

The losses generated by the run-off
specialty reinsurance operations and the Companys investment portfolio offset profitable results in the Companys core insurance operations. The workers compensation insurance segment and the group benefits insurance segment
generated combined ratios of 80.2% and 97.4%, respectively, for the year ended December 31, 2008.

In addition to the unfavorable loss
reserve development in the run-off specialty reinsurance segment, the Company has not recognized future tax benefits of $7.2 million, which represents the outside basis difference between financial statement and tax purposes of Eastern Re as of
December 31, 2008. The outside basis difference primarily arises from losses at Eastern Re recognized for financial statement purposes, which are not recognized for tax purposes. Management presently believes that the Company will not be able
to recognize these benefits in the foreseeable future and, therefore, has not recognized these tax benefits as of December 31, 2008.

The turmoil in the fixed income and equity security markets had an adverse impact on the Companys investment portfolio. As a result of the deterioration in its investment portfolio, the Company incurred net realized investment losses
of $11.1 million for the year ended December 31, 2008, including other-than-temporary impairments of $9.5 million. In addition, the Companys other long-term investments, which consist primarily of interests in limited partnerships,
experienced a decline in value of $4.0 million during 2008, including a permanent impairment of $1.4 million related to one limited partnership that was in liquidation as of December 31, 2008.

Purchase accounting adjustments of $790,000 and $480,000 favorably impacted the Companys result of operations for the years ended December 31,
2008 and 2007, respectively.

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 specified 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 operations, assumed premiums represent
premiums that were received under the quota-share reinsurance treaties and were 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 LAE) in cash, cash equivalents, fixed income securities, convertible bonds and equity securities. Investment income includes interest earned on invested assets,



35



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##### Table of Contents

including the impacts of premium amortization and discount accretion. Realized gains and losses on invested assets are reported separately from net
investment income. The Company recognizes realized gains when invested assets are sold for an amount greater than their cost or amortized cost (in the case of fixed income securities) and recognizes realized losses when investment securities are
written down as a result of an other than temporary impairment or sold for an amount less than their cost or amortized cost. Realized gains and losses also include the change in fair value of convertible bonds.

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

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 primarily of commissions, premium taxes, assessments 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 junior subordinated debt and 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 federal income 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, policyholder dividend 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



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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, other expenses and amortization of intangibles 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 insurance segment.

Combined ratio.The combined ratio is the sum of the loss ratio, expense ratio and policyholder dividend 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 is an 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 recoverables 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 the Companys ultimate losses, net of reinsurance, prove to differ
substantially from the amounts recorded as of December 31, 2008, the related adjustments could have a material adverse effect on the Companys financial condition, results of operations or liquidity.

Workers Compensation Insurance

On a quarterly
basis, the Company prepares actuarial analyses to assess the reasonableness of the recorded reserves for unpaid losses and LAE in its workers compensation insurance segment. These actuarial analyses incorporate various methodologies, including
paid loss development, incurred loss development and a combination of other actuarial



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methodologies that incorporate characteristics of incurred and paid methodologies combined with a review of the Companys exposure base. The recorded
amount in each accident year is then compared to the results of these methodologies, with consideration being given to the age of the accident year. As accident years mature, the various methodologies generally produce consistent loss estimates. For
more recent accident years, the methodologies produce results that are not as consistent. Accordingly, more emphasis is placed on supplementing the methodologies in more recent accident years with trends in exposure base, medical expense inflation,
general inflation, severity, and claim counts, among other things.

The Companys reserves for unpaid losses and LAE in its
workers compensation insurance segment as of December 31, 2008 and 2007 are summarized below (in thousands):



|                                                                     |  |      |        |   |      |   |        |  
|-------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                     |  | 2008 |        |   | 2007 |  
|Case reserves                                                        |  | $    | 34,897 |   |      | $ | 19,915 |  
|Case incurred development, IBNR and unallocated LAE reserves         |  |      | 23,320 |   |      |   | 25,295 |  
|Amount of discount                                                   |  |      | (2,994 | ) |      |   | (2,375 | )
|                                                                     |  |      |        |   |      |   |        |  
|Net reserves before reinsurance recoverables and purchase accounting |  |      | 55,223 |   |      |   | 42,835 |  
|Reinsurance recoverables on unpaid losses and LAE                    |  |      | 4,932  |   |      |   | 2,709  |  
|Purchase accounting adjustments                                      |  |      | 986    |   |      |   | 941    |  
|                                                                     |  |      |        |   |      |   |        |  
|Reserves for unpaid losses and LAE                                   |  | $    | 61,141 |   |      | $ | 46,485 |  
|                                                                     |  |      |        |   |      |   |        |  

In its workers compensation segment, the Company records reserves for estimated losses under
insurance policies and for LAE related to the investigation and settlement of policy claims. The Companys reserves for unpaid losses and LAE represent the estimated cost of reported and unreported losses and LAE incurred and unpaid at a given
point in time. In establishing its workers compensation reserves, the Company uses loss discounting, which involves recognizing the time value of money and offsetting estimates of future payments by future expected investment income.

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



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



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



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



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



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



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



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



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



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



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

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

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



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

In estimating case incurred development and IBNR reserves, the Company performs most of its detailed analysis on a
net of reinsurance basis, and then considers expected recoveries in arriving at its recorded amounts for unpaid losses and LAE. To estimate such reserves, the Company relies primarily on the historical claim data and trends from its workers
compensation book of business. Using standard actuarial methods, the Company estimates reserves based on historical patterns of case development, payment patterns, mix of business, premium rates charged, case reserving adequacy, operational changes,
adjustment philosophy and severity and duration trends. However, the number of variables and judgments involved in establishing reserve estimates, combined with some random variation in loss development patterns, results in uncertainty regarding
projected ultimate losses.

To estimate reserves, the Company stratifies its data using variations of the following different
categorizations of claims:



| |  |  | All loss and LAE data developed together;
| | - |  | -----------------------------------------



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



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



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



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



| |  |  | LAE developed independently.
| | - |  | ----------------------------

The
term developed together refers to the summation of the claims data for a particular data stratification. For example, All loss and LAE data developed together represents all loss and LAE data of the Company, regardless of
medical, indemnity or expense components, developed together using the historical data for this particular data stratification. The term developed independently refers to a specific data element. For example, The indemnity portion
of lost time claims developed independently represents the development of the indemnity portion of a claim separately using historical data for this particular type of claim. Developing claims using different data stratifications allows the
Company to identify trends for a specific group of claims that would not necessarily be readily identifiable if the data were included with other types of claim information. For example, developing the medical portion of a claim separately may allow
the Company to identify a medical inflation trend that may not have been evident if it had been included with indemnity claim information. The combination of the different data stratifications and standard actuarial methods, including the following,
produce different actuarial indications for the Company to evaluate:

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

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

Bornhuetter-Ferguson Methodology. The Bornhuetter-Ferguson expected loss projection method based on reported
loss data relies on the assumption that remaining unreported losses are a function of the total expected ultimate losses rather than a function of the currently reported losses. The expected ultimate losses in this analysis are based on historical
results, adjusted for known pricing changes and inflationary trends. The expected ultimate losses are multiplied by the unreported percentage to produce expected unreported losses. The unreported percentage is calculated as one minus the reciprocal
of the selected cumulative incurred LDFs. Finally, the unreported losses are added to the current reported



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losses to produce ultimate losses. The Bornhuetter-Ferguson method is most useful as an alternative to other models for immature accident years. For these
immature accident years, the amounts reported or paid may be small and unstable and therefore not predictive of future development. Therefore, future development is assumed to follow an expected pattern that is supported by more stable historical
data or by emerging trends. This method is also useful when changing reporting patterns distort historical development of losses.

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

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

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

As of December 31, 2008, the Companys best estimate of its ultimate liability for losses and LAE, net of amounts recoverable
from reinsurers and before purchase accounting adjustments, for its workers compensation insurance segment was $55.2 million.

Given the long reporting and paid development patterns, the tail factors used to project actual current losses to ultimate losses for claims covered by the Companys workers compensation policies require considerable judgment.
Management believes that its selected tail factors represent the most likely loss development based on historical loss payment patterns as well as the current legal and economic environment. The actual tail factor could vary from the tail factor
selected. Following is a sensitivity analysis of the Companys workers compensation reserves to reasonably likely changes in the tail factors used to project actual current losses to ultimate losses (dollars in thousands):



|                                 |  |                                    |        |   |                     |   |        |                                  |  |      |  
|-------------------------------- |  | ---------------------------------- | ------ | - | ------------------- | - | ------ | -------------------------------- |  | ---- | -
|Change in Tail Factor Assumption |  | Increase (Decrease)in Net Reserves |        |   | Impact on NetIncome |   |        | Percentage ofShareholdersEquity | 
|2 basis point increase           |  | $                                  | 3,475  |   |                     | $ | (2,259 | )                                |  | -1.6 | %
|1 basis point increase           |  | $                                  | 1,746  |   |                     | $ | (1,135 | )                                |  | -0.8 | %
|1 basis point decrease           |  | $                                  | (1,764 | ) |                     | $ | 1,146  |                                  |  | 0.8  | %
|2 basis point decrease           |  | $                                  | (3,544 | ) |                     | $ | 2,304  |                                  |  | 1.7  | %

The estimates above rely on substantial judgment. There is inherent uncertainty in estimating
reserves for unpaid losses and LAE. It is possible that the actual losses and LAE incurred may vary significantly from the Companys estimates.

Segregated Portfolio Cell Reinsurance

The Companys reserves for unpaid losses and LAE in its segregated portfolio
cell reinsurance segment as of December 31, 2008 and 2007 are summarized below (in thousands):



|                                                                     |  |      |        |   |      |   |        |  
|-------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                     |  | 2008 |        |   | 2007 |  
|Case reserves                                                        |  | $    | 11,808 |   |      | $ | 8,906  |  
|Case incurred development, IBNR and unallocated LAE reserves         |  |      | 11,210 |   |      |   | 13,083 |  
|Amount of discount                                                   |  |      | (1,151 | ) |      |   | (1,099 | )
|                                                                     |  |      |        |   |      |   |        |  
|Net reserves before reinsurance recoverables and purchase accounting |  |      | 21,867 |   |      |   | 20,890 |  
|Reinsurance recoverables on unpaid losses and LAE                    |  |      | 2,903  |   |      |   | 2,033  |  
|Purchase accounting adjustments                                      |  |      | 82     |   |      |   | 161    |  
|                                                                     |  |      |        |   |      |   |        |  
|Reserves for unpaid losses and loss adjustment expenses              |  | $    | 24,852 |   |      | $ | 23,084 |  
|                                                                     |  |      |        |   |      |   |        |  



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The Company estimates and records reserves for its segregated portfolio cell reinsurance segment in the
same manner as for its workers compensation insurance segment.

The reporting and paid loss development patterns in the segregated
portfolio cell reinsurance segment are also consistent with that of the workers compensation insurance segment. Accordingly, the tail factors used to project actual current losses to ultimate losses for claims covered in the Companys
segregated portfolio cell reinsurance segment require considerable judgment. The difference between total revenue for the segregated portfolio cell reinsurance segment for each period and the sum of losses and LAE, acquisition and other underwriting
expenses, policyholder dividend expense and other expenses is accrued as a segregated portfolio dividend expense. Accordingly, any change in the reserve for unpaid losses and LAE is recorded to the segregated portfolio dividend payable/receivable
account and would only impact the Companys net income or shareholders equity if it were a segregated portfolio cell dividend participant.

Group Benefits

The reserves for unpaid losses and LAE in the group benefits insurance segment include an estimate of future
amounts for reported but unpaid and IBNR claims related to the Companys dental, long-term disability, short-term disability and term life products, as well as an estimate of the costs associated with investigating, processing and paying the
related claims.

The Company utilizes a number of methodologies, explained below, to estimate its reserves for unpaid losses in its group
benefits insurance segment. These methods include the lag factor development, loss ratio, and tabular reserve methods.

Lag Factor
Development Method. The lag factor development method is used to estimate the reserve for insurance products that are short-tail by nature, in which claims related to the products are settled shortly after they are reported by the
insured. The method uses historical paid claims data to estimate the reserve for claims in the course of settlement (reported claims) and IBNR claims. The method involves the use of a claim model, or a loss triangle, in which paid claims data is
aggregated into categories based on the dates on which the claims in question were incurred and paid. Data in the loss triangle is reviewed to evaluate historical claim payment patterns. A point estimate is then determined based on the historical
claim payment patterns.

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

Tabular Reserve Method. The tabular reserve method is used to estimate the reserve for insurance products that are longer tail by
nature and for which the claim payment patterns are relatively predictable. Under the tabular reserve method, the reserve for reported but unpaid claims is estimated using industry-standard valuation tables. These tables incorporate expected death
and recovery rate assumptions (based on an insureds age and length of disability) that impact the reserve for unpaid claims.

The
Companys reserves for unpaid losses and LAE in its group benefits insurance segment, by line business, as of December 31, 2008 and 2007, were as follows (in thousands):



|                                                 |  |      |        |      |   |       
|------------------------------------------------ |  | ---- | ------ | ---- | - | ------
|                                                 |  | 2008 |        | 2007
|Dental                                           |  | $    | 1,852  |      | $ | 2,075 
|Short-term disability                            |  |      | 899    |      |   | 1,005 
|Long-term disability                             |  |      | 7,577  |      |   | 8,165 
|Term life                                        |  |      | 4,318  |      |   | 4,892 
|Other                                            |  |      |       |      |   | 245   
|                                                 |  |      |        |      |   |       
|Net reserves for unpaid losses and LAE           |  |      | 14,646 |      |   | 16,382
|Reinsurance recoverable on unpaid losses and LAE |  |      | 17,939 |      |   | 18,900
|                                                 |  |      |        |      |   |       
|Reserves for unpaid losses and LAE               |  | $    | 32,585 |      | $ | 35,282
|                                                 |  |      |        |      |   |       

Dental Reserves

The dental reserves represent the Companys estimate of future amounts due on in-process and IBNR dental claims. The Company estimates its dental reserves using a combination of the lag factor development method
and the loss ratio method, which results in the development of a point estimate. The loss ratio method is generally applied to the last three months (or most recent quarter), based on recent loss ratio trends.



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Short-Term Disability Reserves

The short-term disability reserves represent the Companys estimate of future amounts due on in-process and IBNR short-term disability claims. The
Companys methodology for estimating its short-term disability reserves is consistent with the methodology for estimating dental reserves.

Long-Term Disability Reserves

The long-term disability tabular reserve represents the Companys estimate of
future amounts due on reported long-term disability claims. The Company establishes a reserve at the time a long-term disability claim is reported using the 1987 Commissioners Group Disability Table. Due to the long-term nature of long-term
disability claims, management discounts the liability using an interest rate that reflects the estimated investment return in the Companys group benefits insurance segment that will be earned over the expected life of the claim. In
establishing the discount rate, the Companys management evaluates the current interest rate environment at the end of each year and, if necessary, adjusts the interest rate for the following year based on the expected rate of return on new
investments. The discount rates for claims incurred in 2008, 2007 and 2006 were 3.85%, 5.25%, and 4.75%, respectively. A lower discount rate results in a higher claim reserve and an increase in losses and LAE, whereas a higher discount rate results
in a lower claim reserve and a decrease in losses and LAE. The reserve established represents the present value of expected future claim payments based on the terms of the underlying long-term disability insurance contract. With the exception of the
discount rate, the assumptions that impact the reserve amount, such as recovery, morbidity and mortality rates, are embedded in the table. The long-term disability IBNR reserve is estimated on a policy-by-policy basis, taking into consideration the
average monthly premium, the policy elimination period, and an expected loss ratio.

Term Life Reserves

Term life reserves consist of reported but unpaid and IBNR claims on the Companys term life product, as well as a life premium waiver reserve.
Reported but unpaid 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 losses incurred as a percent of
in-force premium as of the balance sheet date.

The term life reported claim reserve represents the Companys liability for reported
but unpaid death benefits and accidental death or dismemberment (AD&D) claims. The reserve is based on the death or dismemberment benefit of the underlying term life insurance contract.

The term life IBNR claim reserve represents the Companys estimate of future amounts to be paid under existing term life insurance contracts for
insured deaths and dismemberments that have occurred but not yet been reported. The Company estimates the term life IBNR claim reserve by applying a reserve factor to the current in-force volume of life insurance and AD & D benefits,
resulting in the development of a point estimate. The reserve factor is based on past experience and is evaluated against actual results on an annual basis for reasonableness.

Life premium waiver reserves represent the present value of future life insurance benefits under those term life policies for which the premiums have
been waived due to the insureds disability and are calculated using the tabular reserve method. The Company establishes a reserve at the time the insureds disability is reported using the 2005 Group Term Life Waiver Reserve Table for
claims reported on and after October 1, 2007 and the 1970 Intercompany Group Life Disability Table for claims reported prior to October 1, 2007.

The term life premium waiver IBNR reserve represents the Companys estimate of unreported premium waiver claims. The Company utilizes the lag factor development method to estimate the number of unreported premium
waiver claims and then applies the number of estimated outstanding claims to an average reserve amount, resulting in the development of a point estimate.

Run-off Specialty Reinsurance

With respect to the run-off specialty reinsurance segment, numerous internal and external
factors will affect the ultimate settlements of future claims including, but not necessarily limited to, changes in the cost of environmental remediation, impacts of relevant federal or state legislation, changes in technology and the resulting
impact on costs, and reliance on ceding companies to handle claims and remit proper loss information in a timely manner. Reserving for assumed reinsurance requires evaluating loss information received from the ceding company. On a quarterly basis,
the Company receives a



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statement from the ceding company which includes premium and loss settlement activity for the period with corresponding reserves as established by the ceding
company. Claims reported to the ceding company by insureds are entered into its claim system and ceded to the Company on a quarterly basis. The claim information received from the ceding company is compiled into loss development triangles. Generally
accepted actuarial methodologies, supplemented by judgment where appropriate, are used to develop the appropriate IBNR reserves for the Company. Each quarter the Company compares its actual reported losses for the quarter, and cumulative reported
losses since the most recently completed reserve study, to expected reported losses for the respective period, which may result in the Company increasing its losses and LAE, and its corresponding loss reserves in that quarter. This information is
used as a tool in the judgmental process by which management assesses the overall adequacy of the reserves for unpaid losses and LAE at the Company. The evaluation of the reserves for unpaid losses and LAE related to the Companys run-off
specialty reinsurance segment requires that loss development be estimated over an extended period of time. Because the primary insurer under the reinsurance program changed in 1999 and the claims management philosophy of the two primary insurers
differed, historical loss data for years prior to 1999 has limited relevance. Therefore, reliance has been placed on a blend of historical loss development data and industry loss development patterns, adjusted to reflect considerations particular to
the exposure. The reliance on external benchmarks, while necessary, creates an additional element of uncertainty.

The Companys
reserves for unpaid losses and LAE in its run-off specialty reinsurance segment as of December 31, 2008 and 2007 are summarized below (in thousands):



|                                                             |  |      |        |   |      |   |        |  
|------------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | -
|                                                             |  | 2008 |        |   | 2007 |  
|Case reserves                                                |  | $    | 15,632 |   |      | $ | 10,873 |  
|Case incurred development, IBNR and unallocated LAE reserves |  |      | 24,938 |   |      |   | 14,117 |  
|                                                             |  |      |        |   |      |   |        |  
|Net reserves before purchase accounting                      |  |      | 40,570 |   |      |   | 24,990 |  
|Purchase accounting adjustments                              |  |      | (31    | ) |      |   | (53    | )
|                                                             |  |      |        |   |      |   |        |  
|Reserves for unpaid losses and loss adjustment expenses      |  | $    | 40,539 |   |      | $ | 24,937 |  
|                                                             |  |      |        |   |      |   |        |  

In its run-off specialty reinsurance segment, the Company categorizes unpaid losses and LAE into
case reserves and IBNR reserves. Case reserves represent unpaid losses reported by the ceding company. The Company updates its reserve estimates on a quarterly basis using information received from the ceding companies.

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

In applying these methods, the Company evaluates loss
development trends by underwriting year to determine various assumptions that are required as inputs in the actuarial methodologies it employs. These typically involve the analysis of historical loss development trends by underwriting year. In
addition to the use of historical loss development data, the Company utilizes external or internal benchmark sources of information for which it has limited loss development data to calculate credible trends. The evaluation of the reserve for unpaid
losses and LAE related to the run-off specialty reinsurance segment requires that loss development be estimated over an extended period of time.

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



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



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



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



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Claims reported to the ceding company by insureds are entered into the ceding companys claim system
and ceded to Eastern Re on a quarterly basis. In order to mitigate the above risk, Company claim personnel perform annual reviews of the ceding companies detailed claim reports to ensure reported claims information appears to be reasonably
accurate and timely.

As of December 31, 2008, the Companys best estimate of its ultimate liability for unpaid losses and LAE,
before purchase accounting adjustments, for its run-off specialty reinsurance segment was $40.6 million.

The evaluation of the reserves
for unpaid losses and LAE in the run-off specialty reinsurance segment requires that loss development be estimated over an extended period of time using historical loss development data with limited relevance. As the historical loss development data
has limited relevance, reliance has been placed on loss development patterns based on a blend of historical loss development data and industry loss development patterns, judgmentally adjusted to reflect considerations particular to the exposure. The
reliance on external benchmarks, while necessary, creates an additional element of uncertainty. Following is a sensitivity analysis of the reserves for unpaid losses and LAE to reasonably likely changes in the blend of historical loss development
data and industry loss development factors used to project current losses to ultimate losses (dollars in thousands):



|                                                           |  |                                         |        |   |                     |   |        |                                  |  |      |  
|---------------------------------------------------------- |  | --------------------------------------- | ------ | - | ------------------- | - | ------ | -------------------------------- |  | ---- | -
|Change in Actual Loss Development as a Percentage of Total |  | Increase (Decrease)in Net Loss Reserves |        |   | Impact on NetIncome |   |        | Percentage ofShareholdersEquity | 
|30 basis point increase                                    |  | $                                       | 5,738  |   |                     | $ | (5,738 | )                                |  | -4.2 | %
|20 basis point increase                                    |  | $                                       | 3,675  |   |                     | $ | (3,675 | )                                |  | -2.7 | %
|10 basis point increase                                    |  | $                                       | 1,772  |   |                     | $ | (1,772 | )                                |  | -1.3 | %
|10 basis point decrease                                    |  | $                                       | (1,664 | ) |                     | $ | 1,664  |                                  |  | 1.2  | %
|20 basis point decrease                                    |  | $                                       | (3,239 | ) |                     | $ | 3,239  |                                  |  | 2.3  | %
|30 basis point decrease                                    |  | $                                       | (4,737 | ) |                     | $ | 4,737  |                                  |  | 3.4  | %

While management believes that the assumptions underlying the amounts recorded for the reserves
for unpaid losses and LAE as of December 31, 2008 are reasonable, the ultimate net liability may differ materially from the amount recorded.

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 year ended December 31, 2008, the
Company recorded other-than-temporary impairments of $9.5 million related to its fixed income and equity securities. The Company did not record any impairments in 2007 or 2006. As of December 31, 2008, the Company held fixed income and equity
securities, excluding the segregated portfolio cell reinsurance segment, with gross unrealized losses of $7.3 million, of which $1.4 million were in an unrealized loss position for more than twelve months. Adverse investment market conditions, or
poor operating results of underlying investments, could result in impairment charges in the future. The Company generally applies the following standards in determining whether the decline in fair value of an investment is other-than-temporary:

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 6 months, 2) an equity 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 or more, 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 year
ended December 31, 2008, the Company recorded other-than-temporary impairments of $5.0 million related to its equity portfolio. The securities impaired included an international equity mutual fund that experienced a decline in value of more
than 50% of cost as of December 31, 2008 and two international equity mutual funds that experienced a decline in value of more than 40% of cost as of December 31, 2008.



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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 year ended December 31, 2008, the Company recorded other-than-temporary impairments of $4.5 million related to its fixed income portfolio.
The securities impaired included $1.2 million related to Lehman Brothers securities and certain other mortgage-backed securities for which management determined an impairment existed as a result of a significant and prolonged decline in value due to
illiquidity in the credit markets. The mortgage-backed securities continue to remain current on principal and interest payments; however, due to the significant and prolonged decline in value and the continued uncertainty surrounding the credit
markets, management determined that an impairment write-down was appropriate.

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.

For the year ended December 31, 2008, the Company recorded a permanent impairment of $1.4 million related to one of its limited partnership
investments. As a result of the current credit market conditions, the limited partnership experienced a permanent decline in value during 2008 and will be dissolved. The estimated fair value of the Companys interest in the limited partnership
as of December 31, 2008 reflects managements best estimate of the proceeds the Company is expected to receive upon dissolution of the fund.

At the time a security is determined to be other-than-temporarily impaired, the cost or amortized cost is written down to market value at the balance sheet date and the impairment is recorded as a realized loss in the
consolidated statement of operations.

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 December 31, 2008 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.

For the 2008 annual impairment test, the fair value of the workers compensation insurance segment
was calculated using a discounted cash flow analysis, a form of the income approach, using managements internal four-year forecast for the workers compensation insurance segment and a terminal value calculated using a growth rate of 5%,
which is reflective of the historical growth rate of the segment and a discount rate of 13%, which is reflective of risks inherent in the segment. Cash flows were adjusted as necessary in order to maintain adequate capital requirements.

In addition to the discounted cash flow analysis, management assessed its stock price relative to the book value of the workers compensation
insurance segment. Due to market conditions, the Companys stock price experienced a significant decline in value in 2008 and was trading below book value as of December 31, 2008. Management considered an estimate of the Companys
value in a potential transaction and allocated that value to its reporting units, including the workers compensation insurance segment.



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Based on the comparison of fair value to carrying amount, as calculated using the methodologies
summarized above, fair value exceeded carrying amount as of December 31, 2008; therefore, goodwill was considered not impaired, and the second step of impairment testing was unnecessary.

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 December 31, 2008 and 2007, deferred
policy acquisition costs and the related unearned premium reserves in the Companys workers compensation insurance, segregated portfolio cell reinsurance, group benefits insurance, and run-off specialty reinsurance segment were as follows
(in thousands):



|                                               |  |      |        |      |   |       
|---------------------------------------------- |  | ---- | ------ | ---- | - | ------
|                                               |  | 2008 |        | 2007
|Workers compensation insurance segment:       |  |      |        |      |   |       
|Deferred policy acquisition costs              |  | $    | 2,617  |      | $ | 1,924 
|Unearned premium reserves                      |  | $    | 30,941 |      | $ | 24,707
|                                               |  |     
|Segregated portfolio cell reinsurance segment: |  |      |        |      |   |       
|Deferred policy acquisition costs              |  | $    | 2,849  |      | $ | 2,137 
|Unearned premium reserves                      |  | $    | 10,367 |      | $ | 7,716 
|                                               |  |     
|Group benefits insurance segment:              |  |      |        |      |   |       
|Deferred policy acquisition costs              |  | $    |       |      | $ |      
|Unearned premium reserves                      |  | $    | 79     |      | $ | 83    
|                                               |  |     
|Run-off specialty reinsurance operations:      |  |      |        |      |   |       
|Deferred policy acquisition costs              |  | $    | 294    |      | $ | 2,196 
|Unearned premium reserves                      |  | $    | 978    |      | $ | 7,320 

Acquisition costs of the group benefits insurance segment are not capitalized and deferred as the
group benefits insurance policies are cancelable and 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 premiums are earned as of the balance sheet date and all direct expenses related to the issuance or renewal of policies are recognized when incurred.

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 December 31, 2008, the Company recorded a net deferred tax asset of $6.3 million. Management expects that the net deferred tax asset is fully recoverable. If this assumption were to change, any amount of the net deferred tax asset that the
Company could not expect to recover would be provided for as an allowance and would be reflected as an increase in income tax expense in the period in which it was established.

As of December 31, 2008, the Company has not recognized a deferred tax asset related to its run-off specialty reinsurance segment of $7.2 million,
which represents the excess of the tax basis over the amount for financial reporting (i.e., outside basis difference) of Eastern Re as of December 31, 2008. The outside basis difference primarily arises from losses at Eastern Re recognized for
financial statement purposes, which have not yet been recognized for tax purposes. Management presently believes that the Company will not be able to recognize these tax benefits in the foreseeable future and, therefore has not recognized these tax
benefits as of December 31, 2008. Under United States federal income tax rules and regulations, tax losses generated by operations outside the United States are generally unable to be utilized to offset taxable income generated by operations
within the United States. Therefore, the Companys ability to utilize these future tax benefits is contingent upon the generation of future taxable income in its operations outside the United States.

As of December 31, 2008, the Company recognized a deferred tax asset of $2.7 million and $715,000 related to other-than-temporary investment
impairments and net unrealized losses on investments, respectively. Under United States federal income tax rules and regulations, capital losses can only be utilized to offset income generated from 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



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periods. Management has determined, based on a review of its investment portfolio and giving consideration to capital gains reported in prior tax periods,
that the Companys deferred tax asset related to other-than-temporary investment impairments and net unrealized losses on investments is recoverable; therefore, a valuation allowance has not been recorded as of December 31, 2008. Due to
the significant volatility in the investment markets, managements conclusion on the recoverability of the deferred tax asset could change in future periods. Further declines in the estimated fair value of the Companys investments may
result in the need for a valuation allowance, which could have an adverse impact of the Companys financial condition and/or results of operations.

Reinsurance Recoverables

Amounts recoverable from Companys reinsurers are estimated in a manner consistent
with the reserves for unpaid losses and LAE 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 LAE 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 LAE affect the estimates for the ceded portion of these liabilities. The
Company continually monitors the financial condition of its reinsurers and where necessary obtains collateral. As of December 31, 2008, the Company had reinsurance recoverables of $29.6 million.

Recent Accounting Pronouncements

SFAS 159

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

SFAS 141R

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

SFAS 160

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



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##### Table of Contents

SFAS 161

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161). SFAS 161 amends and expands the disclosure requirements of
SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and
losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2008. The
adoption of SFAS 161 will not affect the Companys consolidated financial condition or results of operations, but may require additional disclosures if the Company enters into derivative and hedging activities.

SFAS 163

In May 2008, the FASB issued
Statement No. 163, Accounting for Financial Guarantee Insurance Contracts, an interpretation of FASB Statement No. 60 (SFAS 163). SFAS 163 clarifies how FASB Statement No. 60 applies to the recognition and
measurement of premium revenue and claim liabilities under financial guarantee insurance contracts and requires expanded disclosures about financial guarantee insurance contracts. SFAS 163 is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and all interim periods within those fiscal years, except for certain disclosures about an entitys risk management activities. The Company does not currently write financial guarantee insurance
contracts; therefore, the adoption of SFAS 163 will not affect the Companys consolidated financial condition or results of operations.

YEAR ENDED
DECEMBER 31, 2008 COMPARED TO YEAR ENDED DECEMBER 31, 2007

RESULTS OF OPERATIONS

The major components of consolidated revenue were as follows for the years ended December 31, 2008 and 2007 (in thousands):



|                                                         |  |      |         |   |      |   |        
|-------------------------------------------------------- |  | ---- | ------- | - | ---- | - | -------
|                                                         |  | 2008 |         |   | 2007
|Net premiums written                                     |  | $    | 134,712 |   |      | $ | 131,889
|                                                         |  |      |         |   |      |   |        
|Net premiums earned                                      |  | $    | 135,807 |   |      | $ | 129,495
|Net investment income                                    |  |      | 9,631   |   |      |   | 11,669 
|Change in equity interest of other long-term investments |  |      | (3,970  | ) |      |   | 759    
|Net realized investment (losses) gains                   |  |      | (11,117 | ) |      |   | 2,888  
|Other revenue                                            |  |      | 853     |   |      |   | 683    
|                                                         |  |      |         |   |      |   |        
|Consolidated revenue                                     |  | $    | 131,204 |   |      | $ | 145,494
|                                                         |  |      |         |   |      |   |        

The decrease in consolidated revenue reflects the impact of net realized investment losses,
primarily related to other-than-temporary impairments, a decline in the fair value of limited partnership investments and a reduction in net investment income due to a decline in the Companys invested asset base. These declines in revenue were
partially offset by an increase in net premiums earned, primarily in the workers compensation insurance segment.

The components of
consolidated net (loss) income, by segment, for the years ended December 31, 2008 and 2007 were as follows (in thousands):



|                                      |  |      |         |   |      |   |        |  
|------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                                      |  | 2008 |         |   | 2007 |  
|Workers compensation insurance       |  | $    | 6,829   |   |      | $ | 17,118 |  
|Segregated portfolio cell reinsurance |  |      |        |   |      |   |       |  
|Group benefits insurance              |  |      | (1,156  | ) |      |   | 4,777  |  
|Run-off specialty reinsurance         |  |      | (18,673 | ) |      |   | (286   | )
|Corporate/other                       |  |      | (4,383  | ) |      |   | (2,926 | )
|                                      |  |      |         |   |      |   |        |  
|Consolidated net (loss) income        |  | $    | (17,383 | ) |      | $ | 18,683 |  
|                                      |  |      |         |   |      |   |        |  

The consolidated net loss for the year ended December 31, 2008 primarily reflects the
unfavorable loss reserve development and the unrecognized federal income tax benefits in the run-off specialty reinsurance segment, other-than-temporary investment impairments, and a decline in the fair value of limited partnership investments.



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##### Table of Contents

WORKERS COMPENSATION INSURANCE

The following table represents the operations of the workers compensation insurance segment for the years ended December 31, 2008 and 2007 (in thousands). The results of operations for the year ended
December 31, 2008 include the operating results of ESIC for the period from October 1, 2008 to December 31, 2008:



|                                                         |  |      |         |   |      |   |         |  
|-------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                         |  | 2008 |         |   | 2007 |  
|Revenue:                                                 |  |      |         |   |      |   |         |  
|Direct premiums written                                  |  | $    | 101,907 |   |      | $ | 91,466  |  
|Reinsurance premiums assumed                             |  |      | 652     |   |      |   | 1,341   |  
|Ceded premiums written                                   |  |      | (33,996 | ) |      |   | (34,318 | )
|                                                         |  |      |         |   |      |   |         |  
|Net premiums written                                     |  |      | 68,563  |   |      |   | 58,489  |  
|Change in unearned premiums                              |  |      | (2,601  | ) |      |   | (2,170  | )
|                                                         |  |      |         |   |      |   |         |  
|Net premiums earned                                      |  |      | 65,962  |   |      |   | 56,319  |  
|Net investment income                                    |  |      | 4,045   |   |      |   | 4,221   |  
|Change in equity interest of other long-term investments |  |      | (3,051  | ) |      |   | 537     |  
|Net realized investment (losses) gains                   |  |      | (4,174  | ) |      |   | 797     |  
|Other revenue                                            |  |      | 119     |   |      |   |        |  
|                                                         |  |      |         |   |      |   |         |  
|Total revenue                                            |  | $    | 62,901  |   |      | $ | 61,874  |  
|                                                         |  |      |         |   |      |   |         |  
|Expenses:                                                |  |      |         |   |      |   |         |  
|Losses and LAE                                           |  | $    | 36,535  |   |      | $ | 25,614  |  
|Acquisition and other underwriting expenses              |  |      | 4,920   |   |      |   | 2,495   |  
|Other expenses                                           |  |      | 10,915  |   |      |   | 8,300   |  
|Policyholder dividend expense                            |  |      | 551     |   |      |   | 543     |  
|                                                         |  |      |         |   |      |   |         |  
|Total expenses                                           |  | $    | 52,921  |   |      | $ | 36,952  |  
|                                                         |  |      |         |   |      |   |         |  
|Income before income taxes                               |  |      | 9,980   |   |      |   | 24,922  |  
|Income tax expense                                       |  |      | 3,151   |   |      |   | 7,804   |  
|                                                         |  |      |         |   |      |   |         |  
|Net income                                               |  | $    | 6,829   |   |      | $ | 17,118  |  
|                                                         |  |      |         |   |      |   |         |  

Net Income

The decrease in net income primarily reflects the impact of other-than-temporary investment impairments, a decline in the fair value of limited partnership investments, and an increase in the combined ratio.
Other-than-temporary impairments totaled $3.6 million for the year ended December 31, 2008. The increase in the combined ratio primarily reflects a decrease in favorable loss reserve development from 2007 to 2008 and an increase in expenses
related to the Companys Southeast expansion, state licensing initiatives and the integration expenses associated with the acquisition of ESHC.

The workers compensation insurance ratios were as follows for the years ended December 31, 2008 and 2007:



|                                      |  |      |   |  |      |  
|------------------------------------- |  | ---- | - |  | ---- | -
|                                      |  | 2008 |   |  | 2007 |  
|Loss and LAE ratio                    |  | 55.4 | % |  | 45.5 | %
|Expense ratio                         |  | 24.0 | % |  | 19.1 | %
|Policyholders dividend expense ratio |  | 0.8  | % |  | 1.0  | %
|                                      |  |      |   |  |      |  
|Combined ratio                        |  | 80.2 | % |  | 65.6 | %
|                                      |  |      |   |  |      |  

Premiums

The increase in direct premiums written from 2007 to 2008 primarily reflects new business sales of $23.3 million and premium of $1.9 million related to the acquisition of ESIC, partially offset by a reduction in the
renewal retention rate from 88.2% in 2007 to 87.6% in 2008 and renewal rate decreases of 6.9%. Traditional and alternative market direct premiums written were $72.8 million and $29.1 million, respectively, for the year ended December 31, 2008,
compared to $65.4 million and $26.1 million, respectively, for the same period in 2007.

Purchase accounting adjustments reduced direct
premiums written by $513,000 in 2008, compared to a reduction of $1.2 million for the same period in 2007.



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Net Investment Income

The decrease in net investment income primarily reflects a decline in the average yield on the fixed income portfolio and a decline in short-term interest rates from 2007 to 2008. The average yield on the fixed income
portfolio was 4.18% as of December 31, 2008, compared to 4.44% as of December 31, 2007.

Net Realized Investment (Losses) Gains

The net realized investment losses for the year ended December 31, 2008 primarily reflect other-than-temporary impairments of $3.4
million. There were no impairments recorded in 2007. In addition, the change in the fair value of convertible bond securities increased the net realized investment losses by $623,000 in 2008, compared to a decrease in net realized investment gains
of $35,000 in 2007.

Losses and LAE

The increase in the calendar period loss and LAE ratio primarily reflects a decrease in favorable loss reserve development related to prior accident periods. The accident period loss ratio was 58.8% and 60.3% for the years ended
December 31, 2008 and 2007, respectively. Favorable loss reserve development totaled $2.7 million for the year ended December 31, 2008, compared to favorable loss reserve development of $8.4 million for the same period in 2007. The
favorable loss reserve development primarily reflects 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 significant
prior year claim settlements during 2008 for amounts at, or less than, previously established case and IBNR reserves. This decrease had the effect of lowering loss development factors as of December 31, 2008. For the year ended
December 31, 2008, the Company closed 360, or 63.2% of the 570 open lost time claims as of December 31, 2007. In the aggregate, the claims were closed at amounts lower than the provision established for IBNR claims. Management believes
that the realization of the benefits of its return-to-work controls coupled with strong economies in its underwriting territories during 2006, 2007, and the first half of 2008 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 underwriting expenses primarily reflects growth in net premiums earned and a decrease in fee based revenue from the
segregated portfolio cell reinsurance segment during 2008. In addition, the Company recorded an accrual for an expected assessment by the Security Fund on 2008 premiums as of December 31, 2008. No accrual was recorded as of December 31,
2007 due to the Company receiving communication from the Security Fund that no assessment was going to be made on 2007 premium.

Other Expenses

The increase in other expenses primarily reflects start-up costs incurred in conjunction with the Companys expansion into the
Southeast, due diligence and integration expenses associated with the acquisition of ESHC and other state licensing initiatives.

Policyholder Dividends

Policyholder dividend expense remained consistent from 2007 to 2008. As of December 31, 2008 and 2007, approximately 10.0% of the
Companys workers compensation insurance policies were written on a participating basis.

Tax Expense

The effective tax rate was 31.6% and 31.3% for the years ended December 31, 2008 and 2007, respectively. The difference between the statutory tax
rate of 35% and the effective tax rate primarily reflects tax exempt income on municipal bond securities. The 2007 effective tax rate also includes a reduction in income tax expense related to non-recurring rehabilitation tax credits.



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SEGREGATED PORTFOLIO CELL REINSURANCE

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



|                                            |  |      |        |   |      |   |        |  
|------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                            |  | 2008 |        |   | 2007 |  
|Revenue:                                    |  |      |        |   |      |   |        |  
|Reinsurance premiums assumed                |  | $    | 29,113 |   |      | $ | 26,143 |  
|Ceded premiums written                      |  |      | (3,023 | ) |      |   | (2,676 | )
|                                            |  |      |        |   |      |   |        |  
|Net premiums written                        |  |      | 26,090 |   |      |   | 23,467 |  
|Change in unearned premiums                 |  |      | (2,650 | ) |      |   | (606   | )
|                                            |  |      |        |   |      |   |        |  
|Net premiums earned                         |  |      | 23,440 |   |      |   | 22,861 |  
|Net investment income                       |  |      | 1,112  |   |      |   | 1,284  |  
|Net realized investment (losses) gains      |  |      | (1,381 | ) |      |   | 320    |  
|                                            |  |      |        |   |      |   |        |  
|Total revenue                               |  | $    | 23,171 |   |      | $ | 24,465 |  
|                                            |  |      |        |   |      |   |        |  
|Expenses:                                   |  |      |        |   |      |   |        |  
|Losses and LAE                              |  | $    | 13,182 |   |      | $ | 11,671 |  
|Acquisition and other underwriting expenses |  |      | 7,238  |   |      |   | 6,933  |  
|Other expenses                              |  |      | 286    |   |      |   | 463    |  
|Segregated portfolio dividend expense (1)   |  |      | 2,465  |   |      |   | 5,398  |  
|                                            |  |      |        |   |      |   |        |  
|Total expenses                              |  | $    | 23,171 |   |      | $ | 24,465 |  
|                                            |  |      |        |   |      |   |        |  
|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 years ended December 31, 2008 and 2007:



|                   |  |      |   |  |      |  
|------------------ |  | ---- | - |  | ---- | -
|                   |  | 2008 |   |  | 2007 |  
|Loss and LAE ratio |  | 56.2 | % |  | 51.1 | %
|Expense ratio      |  | 32.1 | % |  | 32.4 | %
|                   |  |      |   |  |      |  
|Combined ratio     |  | 88.3 | % |  | 83.5 | %
|                   |  |      |   |  |      |  

Reinsurance Premiums Assumed

The increase in reinsurance premiums assumed from 2007 to 2008 primarily reflects new business sales of $4.7 million, partially offset by a reduction in the renewal retention rate from 88.4% in 2007 to 87.7% in 2008
and renewal rate decreases of 3.9%. Further offsetting the increase in reinsurance premiums assumed were audit premiums, which reduced premiums by $383,000 in 2008, compared to an increase in premiums of $623,000 in 2007.

Purchase accounting adjustments reduced reinsurance premiums assumed by $451,000 in 2007. There were no purchase accounting adjustments in 2008.

Net Investment Income

The decrease in
net investment income primarily reflects a reduction in short-term interest rates from 2007 to 2008.

Net Realized Investment (Losses) Gains

The net realized investment losses for the year ended December 31, 2008 primarily reflect other-than-temporary impairments of $1.2
million. There were no impairments recorded in 2007.



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Losses and LAE

The increase in the calendar period loss and LAE ratio primarily reflects a decrease in favorable loss reserve development related to prior accident periods. The accident period loss ratio was 62.9% and 62.4% for the
years ended December 31, 2008 and 2007, respectively. Favorable loss reserve development totaled $2.0 million for the year ended December 31, 2008, compared to favorable loss reserve development of $3.0 million for the same period in 2007.
The decrease in favorable loss reserve development from 2007 to 2008 primarily reflects managements consideration of the current economic conditions and the potential impact on prior year open claims. As a result, management determined it was
prudent to maintain higher reserve levels in light of the possibility that it could be more difficult to implement return to work initiatives in the current economic conditions. The favorable loss reserve development primarily reflects 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 significant prior year claim settlements during 2008 for amounts at, or less than,
previously established case and IBNR reserves. This decrease had the effect of lowering loss development factors as of December 31, 2008.

Acquisition and Other Underwriting Expenses

The expense ratios are consistent with the contractual ceding commissions for
the years ended December 31, 2008 and 2007.

Segregated Portfolio Dividend Expense

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

GROUP BENEFITS INSURANCE

The following table represents the operations of the group benefits insurance segment for the years ended December 31, 2008 and 2007 (in thousands):



|                                                         |  |      |        |   |      |   |        |  
|-------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                         |  | 2008 |        |   | 2007 |  
|Revenue:                                                 |  |      |        |   |      |   |        |  
|Direct premiums written                                  |  | $    | 39,205 |   |      | $ | 38,519 |  
|Ceded premiums written                                   |  |      | (2,487 | ) |      |   | (2,655 | )
|                                                         |  |      |        |   |      |   |        |  
|Net premiums written                                     |  |      | 36,718 |   |      |   | 35,864 |  
|Change in unearned premiums                              |  |      | 5      |   |      |   | (1     | )
|                                                         |  |      |        |   |      |   |        |  
|Net premiums earned                                      |  |      | 36,723 |   |      |   | 35,863 |  
|Net investment income                                    |  |      | 2,578  |   |      |   | 3,277  |  
|Change in equity interest in other long-term investments |  |      | (430   | ) |      |   | (39    | )
|Net realized investment (losses) gains                   |  |      | (5,366 | ) |      |   | 1,531  |  
|                                                         |  |      |        |   |      |   |        |  
|Total revenues                                           |  |      | 33,505 |   |      |   | 40,632 |  
|                                                         |  |      |        |   |      |   |        |  
|Expenses:                                                |  |      |        |   |      |   |        |  
|Losses and LAE                                           |  |      | 24,444 |   |      |   | 23,253 |  
|Acquisition and other underwriting expenses              |  |      | 5,602  |   |      |   | 5,556  |  
|Other expenses                                           |  |      | 5,698  |   |      |   | 5,073  |  
|                                                         |  |      |        |   |      |   |        |  
|Total expenses                                           |  |      | 35,744 |   |      |   | 33,882 |  
|                                                         |  |      |        |   |      |   |        |  
|(Loss) income before income taxes                        |  |      | (2,239 | ) |      |   | 6,750  |  
|Income tax (benefit) expense                             |  |      | (1,083 | ) |      |   | 1,973  |  
|                                                         |  |      |        |   |      |   |        |  
|Net (loss) income                                        |  | $    | (1,156 | ) |      | $ | 4,777  |  
|                                                         |  |      |        |   |      |   |        |  

Net Income

The net loss in the group benefits insurance segment for the year ended December 31, 2008 primarily reflects the impact of other-than-temporary investment impairments, a decline in net investment income, and an
increase in the combined ratio. Other-than-temporary investment impairments totaled $3.9 million. The decline in net investment income reflects a decrease in the invested asset base, which reflects dividends paid to EIHI during 2008. The
increase in the combined ratio



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##### Table of Contents

primarily reflects an increase in the dental loss ratio and an increase in the expense ratio. The 2007 expense ratio includes the impact of a settlement gain
related to the defined benefit plan, which reduced the expense ratio by 1.1 percentage points.

The group benefits insurance ratios were as
follows for the years ended December 31, 2008 and 2007:



|                   |  |      |   |  |      |  
|------------------ |  | ---- | - |  | ---- | -
|                   |  | 2008 |   |  | 2007 |  
|Loss and LAE ratio |  | 66.6 | % |  | 64.8 | %
|Expense ratio      |  | 30.8 | % |  | 29.6 | %
|                   |  |      |   |  |      |  
|Combined ratio     |  | 97.4 | % |  | 94.4 | %
|                   |  |      |   |  |      |  

Premiums

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



|                      |  |      |        |      |   |       
|--------------------- |  | ---- | ------ | ---- | - | ------
|                      |  | 2008 |        | 2007
|Dental                |  | $    | 22,733 |      | $ | 21,827
|Short-term disability |  |      | 6,567  |      |   | 6,628 
|Long-term disability  |  |      | 3,827  |      |   | 4,049 
|Term life             |  |      | 6,069  |      |   | 6,015 
|                      |  |      |        |      |   |       
|Total                 |  | $    | 39,196 |      | $ | 38,519
|                      |  |      |        |      |   |       

The increase in direct premiums written primarily reflects the impact of new business sales and a
slight increase in renewal rates, partially offset by a decline in the renewal retention rate from 80.8% in 2007 to 78.6% in 2008.

Net Investment
Income

The decrease in net investment income primarily reflects a lower invested asset base. The average yield on the fixed income
portfolio was 4.88% as of December 31, 2008, compared to 5.60% as of December 31, 2007.

Net Realized Investment (Losses) Gains

The net realized investment losses for the year ended December 31, 2008 primarily reflect the aforementioned other-than-temporary
impairments. There were no impairments recorded in 2007. In addition, the change in the fair value of convertible bond securities increased the net realized investment losses by $2.1 million in 2008, compared to a decrease in net realized investment
gains of $422,000 in 2007.

Losses and LAE

The calendar period loss ratios, by line of business, for the years ended December 31, 2008 and 2007 were as follows:



|                      |  |      |   |  |      |  
|--------------------- |  | ---- | - |  | ---- | -
|                      |  | 2008 |   |  | 2007 |  
|Dental                |  | 74.1 | % |  | 69.0 | %
|Short-term disability |  | 63.8 | % |  | 69.3 | %
|Long-term disability  |  | 42.5 | % |  | 22.5 | %
|Term life             |  | 48.8 | % |  | 52.5 | %
|Total group benefits  |  | 66.6 | % |  | 64.8 | %

Dental

The increase in the dental calendar period loss ratio primarily reflects a 1.4% decrease in premiums per certificate per month (PCPM) and a 5.9% increase in claims expense PCPM from 2007 to 2008. The
decrease in the premiums PCPM primarily reflects the impact of premium discounts on new business written in 2007 and early 2008. The accident period loss ratio increased from 70.8% in 2007 to 75.6% in 2008. The increase in the accident period loss
ratio primarily reflects the impact of the aforementioned premium rate discounts. In addition to the increase in the accident period loss ratio, there was a slight decrease in favorable loss reserve development from 2007 to 2008.



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Short-term Disability

The decrease in the short-term disability calendar period loss ratio primarily reflects a reduction in claim frequency and severity from 2007 to 2008. The accident period loss ratio decreased from 71.5% in 2007 to
65.6% in 2008. The decrease in the accident period loss ratio was partially offset by a decline in favorable loss reserve development from $148,000, or 2.2 percentage points, in 2007, to $120,000, or 1.8 percentage points, in 2008.

Long-term Disability

The 2008 long-term
disability loss ratio reflects a net reduction in open claims, which reduced claim reserves by $557,000, compared to a net reduction in claim reserves of $992,000 for the same period in 2007.

Term Life

The decrease in the term life loss
ratio primarily reflects an increase in premium waiver reserve reductions from 2007 to 2008. The loss ratio related to reported death claims increased slightly from 58.2% in 2007 to 60.2% in 2008.

Acquisition and Other Underwriting Expenses

Acquisition and other underwriting expenses as a percent of direct premiums written remained consistent from 2007 to 2008.

Other Expenses

The increase in other expenses from 2007 to 2008 primarily reflects an increase in consulting costs related to actuarial services and costs
associated with the acquisition of software. In addition, the 2007 expenses include a reduction of $384,000 related to the defined benefit plan settlement gain.

Tax Expense

The effective tax rate was 48.4% and 29.2% for the years ended December 31, 2008 and 2007, respectively.
The difference between the statutory tax rate of 35% and the effective tax rate primarily reflects tax exempt income on municipal bond securities. The 2008 effective tax rate also includes a prior year tax return adjustment that increased the income
tax benefit, and the 2007 effective tax rate includes the release of a contingency reserve related to prior tax years that decreased income tax expense.

RUN-OFF SPECIALTY REINSURANCE

The following table represents the operations of the run-off specialty reinsurance segment
for the years ended December 31, 2008 and 2007 (in thousands):



|                                                         |  |      |         |   |      |   |        |  
|-------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                                                         |  | 2008 |         |   | 2007 |  
|Revenue:                                                 |  |      |         |   |      |   |        |  
|Reinsurance premiums assumed                             |  | $    | 3,341   |   |      | $ | 14,069 |  
|Change in unearned premiums                              |  |      | 6,341   |   |      |   | 383    |  
|                                                         |  |      |         |   |      |   |        |  
|Net premiums earned                                      |  | $    | 9,682   |   |      | $ | 14,452 |  
|Net investment income                                    |  |      | 1,343   |   |      |   | 1,298  |  
|Change in equity interest in other long-term investments |  |      | (489    | ) |      |   | 261    |  
|Net realized investment (losses) gains                   |  |      | (440    | ) |      |   | 7      |  
|Other revenue                                            |  |      | 782     |   |      |   | 593    |  
|                                                         |  |      |         |   |      |   |        |  
|Total revenue                                            |  | $    | 10,878  |   |      | $ | 16,611 |  
|                                                         |  |      |         |   |      |   |        |  
|Expenses:                                                |  |      |         |   |      |   |        |  
|Losses and LAE                                           |  | $    | 25,027  |   |      | $ | 13,050 |  
|Acquisition and other underwriting expenses              |  |      | 2,903   |   |      |   | 3,932  |  
|Other expenses                                           |  |      | 637     |   |      |   | 647    |  
|                                                         |  |      |         |   |      |   |        |  
|Total expenses                                           |  | $    | 28,567  |   |      | $ | 17,629 |  
|                                                         |  |      |         |   |      |   |        |  
|Loss before income taxes                                 |  |      | (17,689 | ) |      |   | (1,018 | )
|Income tax expense (benefit)                             |  |      | 984     |   |      |   | (732   | )
|                                                         |  |      |         |   |      |   |        |  
|Net loss                                                 |  | $    | (18,673 | ) |      | $ | (286   | )
|                                                         |  |      |         |   |      |   |        |  



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Net Loss

The increase in the net loss reflects the unfavorable loss reserve development of $19.3 million, the reduction in net premiums earned as a result of terminating participation in the reinsurance treaties, investment losses related to
other-than-temporary impairments and limited partnership interests, and an increase in income tax expense due to the inability to recognize federal income tax benefits generated by the segments operating losses.

The run-off specialty reinsurance ratios were as follows for the years ended December 31, 2008 and 2007:



|                   |  |       |   |  |       |  
|------------------ |  | ----- | - |  | ----- | -
|                   |  | 2008  |   |  | 2007  |  
|Loss and LAE ratio |  | 258.5 | % |  | 90.3  | %
|Expense ratio      |  | 36.6  | % |  | 31.7  | %
|                   |  |       |   |  |       |  
|Combined ratio     |  | 295.1 | % |  | 122.0 | %
|                   |  |       |   |  |       |  

Reinsurance Premiums Assumed

Reinsurance premiums assumed, by line of business, were as follows for the years ended December 31, 2008 and 2007 (in thousands):



|                                |  |      |       |      |   |        |  
|------------------------------- |  | ---- | ----- | ---- | - | ------ | -
|                                |  | 2008 |       | 2007 |  
|EnviroGuard                     |  | $    | 1,855 |      | $ | 11,300 |  
|EIA                             |  |      | 1,477 |      |   | 3,068  |  
|Other                           |  |      | 9     |      |   | 550    |  
|Purchase accounting adjustments |  |      |      |      |   | (849   | )
|                                |  |      |       |      |   |        |  
|Total assumed premiums          |  | $    | 3,341 |      | $ | 14,069 |  
|                                |  |      |       |      |   |        |  

The decrease in reinsurance premiums assumed reflects the termination of the reinsurance treaties.

Purchase accounting adjustments reduced reinsurance premiums assumed by $849,000 in 2007. There were no purchase accounting adjustments in
2008.

Net Investment Income

The
average yield on the fixed income portfolio was 3.97% as of December 31, 2008, compared to 4.64% as of December 31, 2007.

Net Realized
Investment (Losses) Gains

The net realized investment losses for the year ended December 31, 2008 primarily reflect
other-than-temporary impairments of $732,000. There were no impairments recorded in 2007

Losses and LAE

The increase in the calendar period loss and LAE ratio primarily reflects the aforementioned unfavorable loss reserve development. The accident period
loss ratios were 59.3% and 56.5% for the years ended December 31, 2008 and 2007, respectively. The 2008 unfavorable loss reserve development of $19.3 million primarily reflects additional information acquired by the Company during the annual
claims audit in January 2009. The claims audit revealed several factors which contributed to the increased case reserves reported to the Company and, therefore, resulted in management increasing the loss development factors utilized in estimating
the IBNR reserves. Those factors include 1) an improvement in the ceding companys ability to estimate loss costs earlier in the claims process, including the receipt of damage estimates from contractors and consultants, 2) jurisdictions
becoming more aggressive in requiring quicker, more extensive clean-up and an increase in construction costs related to the clean-up, and 3) courts limiting the ability of insurance companies to enforce policy coverage limitations as the courts are
more interested in an expeditious clean up due to environmental concerns.

Acquisition and Other Underwriting Expenses

The increase in the expense ratio is related to a decrease in net earned premium due to the termination of the reinsurance treaties. As part of its
previously in-force quota share reinsurance agreement with the primary insurer, the Company paid the primary insurer a ceding commission of 30.0% based on assumed premiums.



55



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##### Table of Contents

Tax Expense

The effective tax rate was (5.6%) and 71.9% for the years ended December 31, 2008 and 2007, respectively. The 2008 effective tax rate reflects the impact of the unrecognized tax benefits of $7.2 million. The 2007 effective tax
rate reflects a prior year tax return adjustment that increased income tax expense.

CORPORATE/OTHER

The increase in the net loss in the corporate/other segment primarily reflects a decline in net investment income. The decrease in net investment income
reflects the decline in short-term interest rates as well as the decrease in cash related to the stock buyback program and the repayment of the junior subordinated debentures.

YEAR ENDED DECEMBER 31, 2007 COMPARED TO YEAR ENDED DECEMBER 31, 2006

As a result of the acquisition
of EHC on June 16, 2006, the Companys financial results for the year ended December 31, 2006 include the results of operations for the workers compensation insurance, segregated portfolio cell reinsurance, and run-off specialty
reinsurance segment for the period from June 17, 2006 to December 31, 2006.

RESULTS OF OPERATIONS

The major components of consolidated revenue were as follows for the years ended December 31, 2007 and 2006 (in thousands):



|                                                         |  |      |         |      |   |       
|-------------------------------------------------------- |  | ---- | ------- | ---- | - | ------
|                                                         |  | 2007 |         | 2006
|Net premiums written                                     |  | $    | 131,889 |      | $ | 67,529
|                                                         |  |      |         |      |   |       
|Net premiums earned                                      |  | $    | 129,495 |      | $ | 74,919
|Net investment income                                    |  |      | 11,669  |      |   | 8,678 
|Change in equity interest in other long-term investments |  |      | 759     |      |   | 314   
|Net realized investment gains                            |  |      | 2,888   |      |   | 2,757 
|Other revenue                                            |  |      | 683     |      |   | 313   
|                                                         |  |      |         |      |   |       
|Consolidated revenue                                     |  | $    | 145,494 |      | $ | 86,981
|                                                         |  |      |         |      |   |       

The increase in consolidated revenue primarily reflects the acquisition of EHC on June 16,
2006. The increase in net premiums earned also reflects the impact of new business, improved renewal retention, and renewal rate increases in the workers compensation insurance and group benefits insurance segments.

The components of consolidated net income, by segment, for the years ended December 31, 2007 and 2006 were as follows (in thousands):



|                                      |  |      |        |   |      |   |        |  
|------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                      |  | 2007 |        |   | 2006 |  
|Workers compensation insurance       |  | $    | 17,118 |   |      | $ | 5,318  |  
|Segregated portfolio cell reinsurance |  |      |       |   |      |   |       |  
|Group benefits insurance              |  |      | 4,777  |   |      |   | 4,587  |  
|Run-off specialty reinsurance         |  |      | (286   | ) |      |   | (489   | )
|Corporate/other                       |  |      | (2,926 | ) |      |   | (1,138 | )
|                                      |  |      |        |   |      |   |        |  
|Consolidated net income               |  | $    | 18,683 |   |      | $ | 8,278  |  
|                                      |  |      |        |   |      |   |        |  

The increase in consolidated net income primarily reflects the acquisition of EHC on June 16,
2006. The increase in the net loss in the corporate/other segment primarily reflects stock compensation expense related to the Companys stock compensation plan and ESOP of $2.4 million, and intangible asset amortization of $1.8 million for the
year ended December 31, 2007, compared to stock compensation expense and intangible asset amortization of $525,000 and $1.1 million, respectively, for the year ended December 31, 2006.



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##### Table of Contents

WORKERS COMPENSATION INSURANCE

The following table represents the operations of the workers compensation insurance segment for the years ended December 31, 2007 and 2006 (in thousands):



|                                                         |  |      |         |   |      |   |         |  
|-------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                         |  | 2007 |         |   | 2006 |  
|Revenue:                                                 |  |      |         |   |      |   |         |  
|Direct premiums written                                  |  | $    | 91,466  |   |      | $ | 34,031  |  
|Reinsurance premiums assumed                             |  |      | 1,341   |   |      |   | 143     |  
|Ceded premiums written                                   |  |      | (34,318 | ) |      |   | (12,073 | )
|                                                         |  |      |         |   |      |   |         |  
|Net premiums written                                     |  |      | 58,489  |   |      |   | 22,101  |  
|Change in unearned premiums                              |  |      | (2,170  | ) |      |   | 2,047   |  
|                                                         |  |      |         |   |      |   |         |  
|Net premiums earned                                      |  |      | 56,319  |   |      |   | 24,148  |  
|Net investment income                                    |  |      | 4,221   |   |      |   | 2,147   |  
|Change in equity interest in other long-term investments |  |      | 537     |   |      |   | 78      |  
|Net realized investment gains                            |  |      | 797     |   |      |   | 586     |  
|                                                         |  |      |         |   |      |   |         |  
|Total revenue                                            |  | $    | 61,874  |   |      | $ | 26,959  |  
|                                                         |  |      |         |   |      |   |         |  
|Expenses:                                                |  |      |         |   |      |   |         |  
|Losses and LAE                                           |  | $    | 25,614  |   |      | $ | 15,162  |  
|Acquisition and other underwriting expenses              |  |      | 2,495   |   |      |   | (40     | )
|Other expenses                                           |  |      | 8,300   |   |      |   | 3,724   |  
|Policyholder dividend expense                            |  |      | 543     |   |      |   | 239     |  
|                                                         |  |      |         |   |      |   |         |  
|Total expenses                                           |  | $    | 36,952  |   |      | $ | 19,085  |  
|                                                         |  |      |         |   |      |   |         |  
|Income before income taxes                               |  |      | 24,922  |   |      |   | 7,874   |  
|Income tax expense                                       |  |      | 7,804   |   |      |   | 2,556   |  
|                                                         |  |      |         |   |      |   |         |  
|Net income                                               |  | $    | 17,118  |   |      | $ | 5,318   |  
|                                                         |  |      |         |   |      |   |         |  

Net Income

The increase in net income reflects the acquisition of EHC on June 16, 2006, an increase in favorable loss reserve development on prior accident years, and a reduction in the impact of purchase accounting charges
in 2007. Net income for the years ended December 31, 2007 and 2006 includes after-tax favorable loss reserve development on prior accident periods of $5.5 million and $1.4 million, respectively. Net income for the year ended December 31,
2006 includes an after-tax charge of $2.4 million related to the amortization of purchase accounting adjustments compared to negligible purchase accounting charges in 2007.

The workers compensation insurance ratios were as follows for the years ended December 31, 2007 and 2006:



|                                      |  |      |   |  |      |  
|------------------------------------- |  | ---- | - |  | ---- | -
|                                      |  | 2007 |   |  | 2006 |  
|Loss and LAE ratio                    |  | 45.5 | % |  | 62.8 | %
|Expense ratio                         |  | 19.1 | % |  | 15.3 | %
|Policyholders dividend expense ratio |  | 1.0  | % |  | 1.0  | %
|                                      |  |      |   |  |      |  
|Combined ratio                        |  | 65.6 | % |  | 79.1 | %
|                                      |  |      |   |  |      |  

Premiums

The increase in direct premiums written reflects the acquisition of EHC on June 16, 2006. Direct premiums written for traditional business and alternative markets were $65.4 million and $26.1 million,
respectively, for the year ended December 31, 2007. Direct premiums written for the year ended December 31, 2007 include the impact of renewal rate decreases of 3.5%, a premium renewal retention rate of 88.2%, a reduction of $1.2 million
related to the amortization of purchase accounting adjustments and audit premiums of $2.2 million.

Net Investment Income

The increase in net investment income reflects the acquisition of EHC on June 16, 2006. The average yield on the fixed income portfolio was 4.44% as
of December 31, 2007, compared to an average yield of 4.48% as of December 31, 2006.



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Net Realized Investment Gains

Net realized investment gains primarily reflect sales activity on equity securities.

Losses and LAE

The decrease in the calendar period loss ratio primarily reflects an increase in favorable loss reserve development related to prior accident periods, a
decrease in the accident year loss ratio from 71.9% in 2006 to 60.3% in 2007 and a decrease in the impact of purchase accounting adjustments from 2006 to 2007. Favorable loss reserve development totaled $8.4 million for the year ended
December 31, 2007, compared to favorable loss reserve development of $2.1 million for the same period in 2006, which lowered the calendar period loss ratios by 14.9 percentage points and 8.5 percentage points, respectively. The favorable loss
reserve development and the decrease in the accident period loss ratio primarily reflects a decrease in the current and prior accident period loss development factors used to estimate losses and LAE. The decrease in accident year loss development
factors primarily reflects significant prior year claim settlements during 2007 for amounts at, or less than, previously established case and IBNR reserves. This decrease had the effect of lowering loss development factors as of December 31,
2007. For the year ended December 31, 2007, the Company closed 281, or 56.8%, of the 495 open lost time claims as of December 31, 2006. In the aggregate, the claims were closed at amounts lower than the provision established for IBNR
claims. Management believes that the realization of the benefits of its return-to-work controls coupled with strong economies in its underwriting territories during 2005, 2006, and 2007 enabled it to record losses and LAE that were lower than the
amount reserved for claim settlements.

Purchase accounting adjustments decreased the calendar period loss ratio by 0.3 percentage points
for the year ended December 31, 2007, compared to an increase in the calendar period loss ratio of 9.2 percentage points for same period in 2006.

Acquisition and Other Underwriting Expenses

The increase in the expense ratio primarily reflects a reduction in fee based
revenue from the segregated portfolio cell reinsurance segment from 2006 to 2007, and purchase accounting adjustments in 2006, which lowered the expense ratio by 4.0 points compared to negligible purchase accounting adjustments in 2007.

Policyholder Dividends

The increase in
policyholder dividend expense reflects the acquisition of EHC on June 16, 2006. Policyholder dividends represent payments to customers who purchased participating policies that produced favorable loss ratios. For the years ended
December 31, 2007 and 2006, 10.0% and 9.1%, respectively, of all workers compensation policies were written on a dividend policy basis.

Tax
Expense

The effective tax rate was 31.3% and 32.5% for the years ended December 31, 2007 and 2006, respectively. The decrease in
the effective tax rate primarily reflects non-recurring rehabilitation tax credits recognized in 2007. The primary difference between the statutory tax rate of 35% and the effective tax rate relates to tax exempt income on municipal securities in
2007 and 2006, and the non-recurring rehabilitation tax credits in 2007.



58



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##### Table of Contents

SEGREGATED PORTFOLIO CELL REINSURANCE

The following table represents the operations of the segregated portfolio cell reinsurance segment for the years ended December 31, 2007 and 2006 (in
thousands):



|                                            |  |      |        |   |      |   |        |  
|------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                            |  | 2007 |        |   | 2006 |  
|Revenue:                                    |  |      |        |   |      |   |        |  
|Reinsurance premiums assumed                |  | $    | 26,143 |   |      | $ | 6,896  |  
|Ceded premiums written                      |  |      | (2,676 | ) |      |   | (671   | )
|                                            |  |      |        |   |      |   |        |  
|Net premiums written                        |  |      | 23,467 |   |      |   | 6,225  |  
|Change in unearned premiums                 |  |      | (606   | ) |      |   | 5,581  |  
|                                            |  |      |        |   |      |   |        |  
|Net premiums earned                         |  |      | 22,861 |   |      |   | 11,806 |  
|Net investment income                       |  |      | 1,284  |   |      |   | 588    |  
|Net realized investment gains               |  |      | 320    |   |      |   | 365    |  
|                                            |  |      |        |   |      |   |        |  
|Total revenue                               |  | $    | 24,465 |   |      | $ | 12,759 |  
|                                            |  |      |        |   |      |   |        |  
|Expenses:                                   |  |      |        |   |      |   |        |  
|Losses and LAE                              |  | $    | 11,671 |   |      | $ | 5,892  |  
|Acquisition and other underwriting expenses |  |      | 6,933  |   |      |   | 2,746  |  
|Other expenses                              |  |      | 463    |   |      |   | 106    |  
|Segregated portfolio dividend expense (1)   |  |      | 5,398  |   |      |   | 4,015  |  
|                                            |  |      |        |   |      |   |        |  
|Total expenses                              |  | $    | 24,465 |   |      | $ | 12,759 |  
|                                            |  |      |        |   |      |   |        |  
|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 years ended December 31, 2007 and 2006:



|                   |  |      |   |  |      |  
|------------------ |  | ---- | - |  | ---- | -
|                   |  | 2007 |   |  | 2006 |  
|Loss and LAE ratio |  | 51.1 | % |  | 49.9 | %
|Expense ratio      |  | 32.4 | % |  | 24.2 | %
|                   |  |      |   |  |      |  
|Combined ratio     |  | 83.5 | % |  | 74.1 | %
|                   |  |      |   |  |      |  

Reinsurance Premiums Assumed

The increase in reinsurance premiums assumed reflects the acquisition of EHC on June 16, 2006. Reinsurance premiums assumed for the year ended December 31, 2007 include the impact of renewal rate decreases
of 1.5%, a premium renewal retention rate of 88.4%, a reduction of $781,000 related to the amortization of purchase accounting adjustments, and audit premiums of $623,000.

Net premiums written for the year ended December 31, 2007 include an increase of $330,000 related to the amortization of purchase accounting
adjustments.

Net Investment Income

The increase in net investment income reflects the acquisition of EHC on June 16, 2006. The average yield on the fixed income portfolio was 5.11% as of December 31, 2007, compared to an average yield of 5.33% as of
December 31, 2006.

Losses and LAE

The increase in the calendar year loss ratio primarily reflects favorable loss reserve development related to prior accident periods, partially offset by a decrease in the impact of purchase accounting adjustments from 2006 to 2007.



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##### Table of Contents

Favorable loss reserve development totaled $3.0 million for the year ended December 31, 2007 compared to favorable loss reserve development of $2.0
million for the same period in 2006, which lowered loss ratios by 13.2 percentage points and 17.7 percentage points, respectively. The favorable loss reserve development primarily reflects a decrease in the prior year loss development factors used
to estimate losses and LAE. The decrease in prior accident period loss development factors primarily reflects significant prior year claim settlements during 2007 for amounts at, or less than, previously established case and IBNR reserves. This
decrease had the effect of lowering loss development factors as of December 31, 2007.

Purchase accounting adjustments increased the
calendar period loss ratio by 0.5 percentage points for the year ended December 31, 2007, compared to an increase in the calendar period loss ratio of 4.6 points for the same period in 2006.

Acquisition and Other Underwriting Expenses

The
increase in the expense ratio from 2006 to 2007 relates primarily to purchase accounting adjustments recorded for the year ended December 31, 2006 that reduced the expense ratio by 8.4 points compared to negligible purchase accounting
adjustments in 2007. The expense ratios, without regard to the aforementioned purchase accounting adjustments in 2006, are consistent with the contractual ceding commissions for the years ended December 31, 2007 and 2006.

Segregated Portfolio Dividend Expense

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

GROUP BENEFITS INSURANCE

The following table represents the operations of the group benefits insurance segment for the
years ended December 31, 2007 and 2006 (in thousands):



|                                                         |  |      |        |   |      |   |        |  
|-------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                         |  | 2007 |        |   | 2006 |  
|Revenue:                                                 |  |      |        |   |      |   |        |  
|Direct premiums written                                  |  | $    | 38,519 |   |      | $ | 35,913 |  
|Ceded premiums written                                   |  |      | (2,655 | ) |      |   | (2,485 | )
|                                                         |  |      |        |   |      |   |        |  
|Net premiums written                                     |  |      | 35,864 |   |      |   | 33,428 |  
|Change in unearned premiums                              |  |      | (1     | ) |      |   | 23     |  
|                                                         |  |      |        |   |      |   |        |  
|Net premiums earned                                      |  |      | 35,863 |   |      |   | 33,451 |  
|Net investment income                                    |  |      | 3,277  |   |      |   | 3,515  |  
|Change in equity interest in other long-term investments |  |      | (39    | ) |      |   | 154    |  
|Net realized investment gains                            |  |      | 1,531  |   |      |   | 1,972  |  
|                                                         |  |      |        |   |      |   |        |  
|Total revenues                                           |  |      | 40,632 |   |      |   | 39,092 |  
|                                                         |  |      |        |   |      |   |        |  
|Expenses:                                                |  |      |        |   |      |   |        |  
|Losses and LAE                                           |  |      | 23,253 |   |      |   | 20,600 |  
|Acquisition and other underwriting expenses              |  |      | 5,556  |   |      |   | 5,072  |  
|Other expenses                                           |  |      | 5,073  |   |      |   | 6,336  |  
|                                                         |  |      |        |   |      |   |        |  
|Total expenses                                           |  |      | 33,882 |   |      |   | 32,008 |  
|                                                         |  |      |        |   |      |   |        |  
|Income before income taxes                               |  |      | 6,750  |   |      |   | 7,084  |  
|Income tax expense                                       |  |      | 1,973  |   |      |   | 2,497  |  
|                                                         |  |      |        |   |      |   |        |  
|Net income                                               |  | $    | 4,777  |   |      | $ | 4,587  |  
|                                                         |  |      |        |   |      |   |        |  

Net Income

The increase in net income primarily reflects improved underwriting results, as the combined ratio decreased from 95.7% in 2006 to 94.4% in 2007. The improvement in the underwriting results was offset by a decrease in
net investment income and net realized gains on investments.



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##### Table of Contents

The group benefits insurance ratios were as follows for the years ended December 31, 2007 and 2006:



|                   |  |      |   |  |      |  
|------------------ |  | ---- | - |  | ---- | -
|                   |  | 2007 |   |  | 2006 |  
|Loss and LAE ratio |  | 64.8 | % |  | 61.6 | %
|Expense ratio      |  | 29.6 | % |  | 34.1 | %
|                   |  |      |   |  |      |  
|Combined ratio     |  | 94.4 | % |  | 95.7 | %
|                   |  |      |   |  |      |  

Premiums

The increase in net premiums earned reflects an increase in new business sales and a higher renewal retention rate. New business sales totaled $9.1 million in 2007, compared to $3.6 million in 2006. The renewal
retention rate increased from 74.4% in 2006 to 80.8% in 2007. The improvement in the retention rate primarily reflects the increased focus on customer retention by the underwriting department.

Direct premiums written, by line of business, for the years ended December 31, 2007 and 2006 were as follows (in thousands):



|                      |  |      |        |      |   |       
|--------------------- |  | ---- | ------ | ---- | - | ------
|                      |  | 2007 |        | 2006
|Dental                |  | $    | 21,827 |      | $ | 19,468
|Short-term disability |  |      | 6,628  |      |   | 6,458 
|Long-term disability  |  |      | 4,049  |      |   | 4,134 
|Term life             |  |      | 6,015  |      |   | 5,853 
|                      |  |      |        |      |   |       
|Total                 |  | $    | 38,519 |      | $ | 35,913
|                      |  |      |        |      |   |       

Net Investment Income

The decrease in net investment income primarily reflects an increase in investment management expenses. Investment management expenses increased $239,000 from 2006 to 2007 primarily reflecting fees paid related to the
performance of the group benefits insurance segments convertible bond portfolio.

The average yield on the fixed income portfolio was
5.60% as of December 31, 2007, compared to 5.61% as of December 31, 2006.

Net Realized Investment Gains

Net realized investment gains in 2007 includes a gain on the sale of the aforementioned limited partnership interest totaling $344,000, while net realized
investment gains in 2006 includes a gain on the sale of an equity security of $716,000.

Losses and LAE

The increase in losses and loss adjustment expenses primarily reflects the increase in net premiums earned and an increase in the loss ratio from 61.6% in
2006 to 64.8% in 2007. The calendar period loss ratios, by line of business, for the years ended December 31, 2007 and 2006 were as follows:



|                      |  |      |   |  |      |  
|--------------------- |  | ---- | - |  | ---- | -
|                      |  | 2007 |   |  | 2006 |  
|Dental                |  | 69.0 | % |  | 63.4 | %
|Short-term disability |  | 69.3 | % |  | 75.1 | %
|Long-term disability  |  | 22.5 | % |  | 23.4 | %
|Term life             |  | 52.5 | % |  | 52.0 | %
|Total group benefits  |  | 64.8 | % |  | 61.6 | %

Dental

The increase in the dental loss ratio primarily reflects the impact of claim cost inflation, which was 5.6% from 2006 to 2007. The accident period loss ratio increased from 66.2% in 2006 to 70.8% in 2007. In addition
to claim cost inflation, the accident period loss ratio was impacted by the increase in new dental business, which generally has a higher loss ratio in the first year or two after the initial sale. In addition, the impact of favorable loss reserve
development on the calendar period loss ratio decreased from $533,000, or 2.7 percentage points, in 2006 to $340,000, or 1.6 percentage points, in 2007.



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##### Table of Contents

Short-term Disability

The decrease in the short-term disability loss ratio primarily reflects a reduction in claim severity, which decreased 2.4% from 2006 to 2007. The accident period loss ratio decreased from 80.3% in 2006 to 71.5% in
2007. The decrease in the accident period loss ratio was partially offset by a decline in favorable loss reserve development from $337,000, or 5.2 percentage points, in 2006 to $148,000, or 2.2 percentage points, in 2007.

Long-term Disability

The long-term disability
loss ratio was relatively consistent from 2006 to 2007. The loss ratio reflects the continued impact of prior year claim terminations that were covered under the 50/50 coinsurance arrangement.

Term Life

The term life loss ratio was
relatively consistent from 2006 to 2007. The loss ratio related to death benefits decreased from 61.7% in 2006 to 58.2% in 2007, primarily reflecting a decrease in reported life claims. The death benefit loss ratio was offset by a reduction in
outstanding premium waiver claims during 2007 and 2006. The reduction in premium waiver reserves reduced the term life loss ratio by 5.7 points and 9.7 points in 2007 and 2006, respectively.

Acquisition and Other Underwriting Expenses

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

Other Expenses

The decrease in other expenses primarily reflects the impact of expense savings realized as a result integration efforts in the last six months of 2006
and first six months of 2007. In addition, the group benefits insurance segment recognized a gain of $384,000 during the fourth quarter of 2007 related to its defined benefit pension plan. The gain resulted from the purchase of an annuity to fund
the current retiree portion of the pension plan liability.

Tax Expense

The decrease in income tax expense primarily reflects a reduction in the effective tax rate, from 35.2% in 2006 to 29.2% in 2007. The reduction in the
effective tax rate primarily reflects the impact of tax-exempt interest income and the release of a contingency reserve in 2007 related to prior tax years.

RUN-OFF SPECIALTY REINSURANCE

The following table represents the operations of the run-off specialty reinsurance segment
for the years ended December 31, 2007 and 2006 (in thousands):



|                                                         |  |      |        |   |      |   |       |  
|-------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | -
|                                                         |  | 2007 |        |   | 2006 |  
|Revenue:                                                 |  |      |        |   |      |   |       |  
|Reinsurance premiums assumed                             |  | $    | 14,069 |   |      | $ | 5,775 |  
|Change in unearned premiums                              |  |      | 383    |   |      |   | (261  | )
|                                                         |  |      |        |   |      |   |       |  
|Net premiums earned                                      |  | $    | 14,452 |   |      | $ | 5,514 |  
|Net investment income                                    |  |      | 1,298  |   |      |   | 950   |  
|Change in equity interest in other long-term investments |  |      | 261    |   |      |   | 82    |  
|Net realized investment gains                            |  |      | 7      |   |      |   | 15    |  
|Other revenue                                            |  |      | 593    |   |      |   | 177   |  
|                                                         |  |      |        |   |      |   |       |  
|Total revenue                                            |  | $    | 16,611 |   |      | $ | 6,738 |  
|                                                         |  |      |        |   |      |   |       |  
|Expenses:                                                |  |      |        |   |      |   |       |  
|Losses and LAE                                           |  | $    | 13,050 |   |      | $ | 6,292 |  
|Acquisition and other underwriting expenses              |  |      | 3,932  |   |      |   | 789   |  
|Other expenses                                           |  |      | 647    |   |      |   | 411   |  
|                                                         |  |      |        |   |      |   |       |  
|Total expenses                                           |  | $    | 17,629 |   |      | $ | 7,492 |  
|                                                         |  |      |        |   |      |   |       |  
|Loss before income taxes                                 |  |      | (1,018 | ) |      |   | (754  | )
|Income tax benefit                                       |  |      | (732   | ) |      |   | (265  | )
|                                                         |  |      |        |   |      |   |       |  
|Net loss                                                 |  | $    | (286   | ) |      | $ | (489  | )
|                                                         |  |      |        |   |      |   |       |  



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##### Table of Contents

Net Loss

The decrease in the net loss reflects a decrease in the calendar year loss ratio in 2007 compared to 2006 and a reduction of the impact of purchase accounting charges in 2007 compared to 2006. Net income for the year ended December 31,
2006 includes an after-tax charge of $647,000 related to the amortization of purchase accounting adjustments compared to negligible purchase charges in 2007.

The run-off specialty reinsurance ratios were as follows for the years ended December 31, 2007 and 2006:



|                   |  |       |   |  |       |  
|------------------ |  | ----- | - |  | ----- | -
|                   |  | 2007  |   |  | 2006  |  
|Loss and LAE ratio |  | 90.3  | % |  | 114.1 | %
|Expense ratio      |  | 31.7  | % |  | 21.8  | %
|                   |  |       |   |  |       |  
|Combined ratio     |  | 122.0 | % |  | 135.9 | %
|                   |  |       |   |  |       |  

Reinsurance Premiums Assumed

The increase in reinsurance premiums assumed relates to the acquisition of EHC on June 16, 2006. Reinsurance premiums assumed, by line of business, were as follows for the years ended December 31, 2007 and
2006 (in thousands):



|                                |  |      |        |   |      |   |        |  
|------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                |  | 2007 |        |   | 2006 |  
|EnviroGuard                     |  | $    | 11,300 |   |      | $ | 5,972  |  
|EIA                             |  |      | 3,068  |   |      |   | 2,424  |  
|Other                           |  |      | 550    |   |      |   |       |  
|Purchase accounting adjustments |  |      | (849   | ) |      |   | (2,621 | )
|                                |  |      |        |   |      |   |        |  
|Total assumed premiums earned   |  | $    | 14,069 |   |      | $ | 5,775  |  
|                                |  |      |        |   |      |   |        |  

Net Investment Income

The increase in net investment income is related to the acquisition of EHC on June 16, 2006. The average yield on the fixed income portfolio was 4.64% as of December 31, 2007 compared to an average yield of
4.52% as of December 31, 2006.

Losses and LAE

The decrease in the calendar period loss and loss adjustment expense ratio reflects a decrease in the impact of purchase accounting adjustments recorded in 2007 compared to 2006 partially offset by unfavorable loss
reserve development on prior accident years of $4.8 million and $894,000 for the years ended December 31, 2007 and 2006, respectively, which increased the loss ratios for the years ended December 31, 2007 and 2006 by 33.5 points and 16.2
points, respectively. The calendar year period loss ratio for the year ended December 31, 2006 includes 37.1 points related to purchase accounting adjustments recorded to premiums earned and loss and loss adjustment expenses. Purchase
accounting adjustments in 2007 had a negligible impact on the 2007 calendar year loss ratio. Approximately 65.0% of the unfavorable loss reserve development in 2007 relates to the EIA liability product. A review of the EIA liability detailed claim
reports indicated significant case reserve increases on prior year claims. During 2007, EIA liability claim counts with total gross (before application of the applicable quota share percentage) incurred values greater than $1 million increased from
8 claims to 11 claims. EIA liability claim counts with total gross incurred values greater than $100,000 increased from 62 claims to 80 claims during 2007, an increase of 29.0%. The 2007 accident period loss and LAE ratio for EnviroGuard and EIA
liability were 44.9% and 75.9%, respectively. The unfavorable loss reserve development in 2006 relates to an increase in reported claims from the ceding company.

Acquisition and Other Underwriting Expenses

The increase in the expense ratio is related to a reduction in the impact of
purchase accounting adjustments in 2007 compared to 2006. Purchase accounting adjustments reduced acquisition and other underwriting expenses by $1.7 million in 2006 compared to negligible purchase accounting adjustments in 2007. As part of its
quota share reinsurance agreement with the primary insurer, the Company pays the primary insurer a ceding commission based on assumed premiums. For the years ended December 31, 2007 and 2006, the ceding commission paid to the primary insurer
was 30.0%.



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##### Table of Contents

Tax Expense

The effective tax rate for the year ended December 31, 2007 was 71.9% compared to 35.1% in 2006. The difference between the statutory rate of 35.0% and the effective rate relates to a prior year tax return adjustment recorded during
2007.

CORPORATE/OTHER

The
corporate/other segment results for the year ended December 31, 2007 include the impact of stock compensation expense related to the Companys stock incentive plans and ESOP, amortization of intangible assets and costs related to the
implementation of Sarbanes-Oxley. Stock compensation expense and intangible asset amortization totaled $2.4 million and $1.7 million for the year ended December 31, 2007, respectively. Costs related to the implementation of Sarbanes-Oxley
totaled $658,000 for the year ended December 31, 2007. The corporate/other segment results for the year ended December 31, 2006 include the impact of transaction expenses incurred by ELH totaling $303,000, stock compensation expense of
$525,000, and intangible asset amortization of $1.1 million.

Financial Position

December 31, 2008 compared to December 31, 2007.Total assets were $377.3 million as of December 31, 2008, compared to $385.5
million as of December 31, 2007. The acquisition of ESHC resulted in an increase to consolidated assets of $26.0 million, including the recognition of goodwill and intangible assets of $2.8 million and $4.2 million, respectively. The
increase in consolidated assets related to the acquisition of ESHC was partially offset by a decrease in investments, which reflects the sale of investments to fund the acquisition of ESHC, share repurchases, and the repayment of the junior
subordinated debentures, as well as the decrease in the fair value of the Companys investment portfolio. The increase in deferred income taxes primarily reflects the decrease in the fair value of the Companys investment portfolio,
including the recognition of other-than-temporary impairments.

Total liabilities were $239.2 million as of December 31, 2008,
compared to $207.7 million as of December 31, 2007. The acquisition of ESHC resulted in an increase to consolidated liabilities of $18.7 million. In addition to the acquired ESHC liabilities, reserves for losses and LAE increased primarily
as a result of the unfavorable loss reserve development in the run-off specialty reinsurance segment. These increases were partially offset by the repayment of the junior subordinated debentures.

Total shareholders equity was $138.1 million as of December 31, 2008, compared to $177.8 million as of December 31, 2007. The decrease
primarily reflects the net loss of $17.4 million, stock repurchases of $17.1 million, shareholder dividends of $2.5 million, and a decline in the market value of the Companys investments of $4.1 million.

Liquidity and Capital Resources

Liquidity is a
measure of an entitys ability to secure sufficient cash to meet its contractual obligations and operating needs. 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. The Companys investment portfolio as of December 31, 2008 had an effective duration of 2.66 years.

For the years ended December 31, 2008, 2007 and 2006, the Companys cash inflows from premiums and investment activity were sufficient to support the Companys cash outflows related to claims and
operating expenses. Management expects future cash flows from operations in its workers compensation insurance, segregated portfolio cell reinsurance and group benefits insurance segments to be sufficient to cover claims and operating
expenses. However, in the event cash flows from operations are not sufficient, the Company may have to liquidate investments to cover such costs. As of December 31, 2008, the Companys investment portfolio included securities with gross
unrealized gains totaling $6.4 million; therefore, based on current gross unrealized gains in the investment portfolio as of December 31, 2008, management does not believe it would have to sell securities at a loss in the event cash flows from
operations proved insufficient to cover the Companys operating needs.

As a result of the significant losses in the run-off specialty
reinsurance segment for the year ended December 31, 2008, Eastern Res shareholders equity was reduced to $(2.6) million as of December 31, 2008. On March 6, 2009, EIHI made a capital contribution of $23.0 million to
improve Eastern Res capital position and to maintain Eastern Res current A.M. Best financial strength rating of A- (Excellent).



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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 December 31, 2008, there was approximately $6.6 million still available
under the Companys letter of credit facilities.

The Companys ability to manage liquidity results, in part, from the purchase
of reinsurance to protect the Company against severe claims and catastrophic events. See Item 1Business, Reinsurance.

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.

The capital contribution from EIHI to Eastern Re 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 and were considered extraordinary in nature.

Cash Flows

The primary sources of
cash flows for the Company are net premiums written, investment income, and proceeds from the sale or maturity of investments. The major components of cash flow are as follows for the years ended December 31, 2008, 2007, and 2006 (in
thousands):



|                                                |  |              |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                |  | December 31, |        
|                                                |  | 2008         |         |   | 2007 |   |         | 2006 | 
|Cash provided by operating activities           |  | $            | 21,318  |   |      | $ | 23,917  |      |  | $ | 17,831  |  
|Cash provided by (used in) investing activities |  |              | 13,146  |   |      |   | (10,883 | )    |  |   | (32,226 | )
|Cash (used in) provided by financing activities |  |              | (27,529 | ) |      |   | (17,797 | )    |  |   | 60,399  |  

Cash Flows for the Years Ended December 31, 2008 and 2007.The decrease in cash
flows from operating activities from 2007 to 2008 primarily reflects a reduction in net investment income and the termination of the Companys participation in the reinsurance treaties in the run-off specialty reinsurance segment.

The increase in cash flows from investing activities from 2007 to 2008 primarily reflects the use of proceeds from sales and maturities of securities
to fund the Companys stock repurchase program, the acquisition of ESHC and the repayment of the junior subordinated debentures.

The
decrease in cash flows from financing activities for the year ended December 31, 2008 reflects an increase in share repurchases under the Companys stock repurchase program, and increase in the quarterly shareholder dividend from
$0.05/share in 2007 to $0.07/share in 2008, and the repayment of the junior subordinated debentures.

Cash Flows for the Years Ended
December 31, 2007 and 2006.The increase in cash flows from operating activities from 2006 to 2007 primarily reflects the positive operating results in the workers compensation insurance and group benefits insurance segments
during 2007.

The increase in cash flows from investing activities from 2006 to 2007 primarily reflects the use of proceeds from sales and
maturities of securities to fund the Companys stock repurchase program. Also, the acquisition of EHC resulted in a cash outflow of $14.1 million during 2006.

Cash flows from financing activities for the year ended December 31, 2007 reflects the Companys stock repurchase program and the payment of shareholder dividends. Cash flows from financing activities
for the year ended December 31, 2006 primarily reflect the net proceeds from the Companys initial public offering.



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Contractual Commitments

The following table summarizes information about contractual obligations and commercial commitments before the impact of purchase accounting adjustments. The minimum payments under these agreements as of
December 31, 2008 were as follows (in thousands):



|                                 |  |                        |         |                 |   |           |  |           |        |               |   |        |  |   |       
|-------------------------------- |  | ---------------------- | ------- | --------------- | - | --------- |  | --------- | ------ | ------------- | - | ------ |  | - | ------
|                                 |  | Payments Due By Period
|                                 |  | Total                  |         | Less than1 year |   | 1-3 years |  | 4-5 years |        | After 5 years
|Long term debt obligations:      |  |                        |         |                 |   |           |  |           |        |               |   |        |  |   |       
|Loan payable (1)                 |  | $                      | 2,650   |                 | $ | 500       |  | $         | 1,500  |               | $ | 650    |  | $ |      
|                                 |  |                        |         |                 |   |           |  |           |        |               |   |        |  |   |       
|Total long term debt obligations |  | $                      | 2,650   |                 | $ | 500       |  | $         | 1,500  |               | $ | 650    |  | $ |      
|Real estate lease obligation     |  |                        | 7,556   |                 |   | 1,063     |  |           | 2,843  |               |   | 1,755  |  |   | 1,895 
|Loss reserves                    |  |                        | 158,080 |                 |   | 56,330    |  |           | 47,652 |               |   | 20,274 |  |   | 33,824
|                                 |  |                        |         |                 |   |           |  |           |        |               |   |        |  |   |       
|Total contractual obligations    |  | $                      | 168,286 |                 | $ | 57,893    |  | $         | 51,995 |               | $ | 22,679 |  | $ | 35,719
|                                 |  |                        |         |                 |   |           |  |           |        |               |   |        |  |   |       



|(1) | The loan payable balance in the above table represents the remaining principal balance as of December 31, 2008. Interest on the loan is based on the 30-day LIBOR rate plus 165
basis points and resets on the first day of each month, based on the 30-day LIBOR rate as of the last day of the immediately preceding month. The interest rate effective on December 31, 2008 was 2.098%.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The loss reserves payments due by period in the table above are based upon the loss and LAE reserves estimates as of December 31, 2008, and
actuarial estimates of expected payout patterns by line of business. As a result, our calculation of loss reserve payments due by period is subject to the same uncertainties associated with determining the level of reserves and to the additional
uncertainties arising from the difficulty of predicting when claims (including claims that have not yet been reported to us) will be paid. For a discussion of our reserving process, see Item 1Business, Loss and LAE Reserves. Actual
payments of loss and LAE by period will vary, perhaps materially, from the above table to the extent that current estimates of loss reserves vary from actual ultimate claims amounts and as a result of variations between expected and actual payout
patterns.

Off-Balance Sheet Arrangements

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

Item 7AQuantitative and
Qualitative Disclosures About Market Risk

Market risk is the potential economic loss principally arising from adverse changes in the
fair value of financial instruments. The major components of market risk affecting the Company are credit risk, interest rate risk, and equity risk.

Credit Risk. Credit risk is the potential economic loss principally arising from adverse changes in the financial condition of a specific debt issuer. The Company addresses this risk by investing primarily in
fixed-income securities which are rated A or higher by Standard & Poors. The Company also independently, and through the Companys outside investment manager, monitors the financial condition of all of the issuers of
fixed-income securities in the portfolio. To limit the Companys exposure to risk, the Company employs diversification rules that limit the credit exposure to any single issuer or business sector.

Interest Rate Risk.The Company had fixed-income investments with a fair value of $195.5 million at December 31, 2008, that are subject to
interest rate risk. The Company manages the exposure to interest rate risk through an asset/liability matching and capital management process. In the management of this risk, the characteristics of duration, credit and variability of cash flows are
critical elements. These risks are assessed regularly and balanced within the context of the Companys liability and capital position.



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The table below summarizes the Companys interest rate risk. It illustrates the sensitivity of the
fair value of the Companys fixed income and convertible bond portfolio to selected hypothetical changes in interest rates as of December 31, 2008. The selected scenarios are not predictions of future events, but rather illustrate the
effect that such events may have on the fair value of the Companys fixed income and convertible bond portfolio and shareholders equity (dollars in thousands).



|                                      |  |                               |         |   |                     |   |                                                                  |  |      |   
|------------------------------------- |  | ----------------------------- | ------- | - | ------------------- | - | ---------------------------------------------------------------- |  | ---- | --
|Hypothetical Change in Interest Rates |  | Estimated Change inFair Value |         |   | EstimatedFair Value |   | HypotheticalPercentage Increase(Decrease) inShareholders Equity | 
|200 basis point increase              |  | $                             | (12,427 | ) |                     | $ | 183,055                                                          |  | (9.0 | )%
|100 basis point increase              |  |                               | (6,148  | ) |                     |   | 189,334                                                          |  | (4.5 | )%
|50 basis increase                     |  |                               | (3,046  | ) |                     |   | 192,436                                                          |  | (2.2 | )%
|No change                             |  |                               |        |   |                     |   | 195,482                                                          |  |     |   
|50 basis point decrease               |  |                               | 2,969   |   |                     |   | 198,451                                                          |  | 2.1  | % 
|100 basis point decrease              |  |                               | 5,876   |   |                     |   | 201,358                                                          |  | 4.3  | % 
|200 basis point decrease              |  |                               | 11,245  |   |                     |   | 206,727                                                          |  | 8.1  | % 

Equity Risk.Equity risk is the risk that the Company may incur economic loss due to
adverse changes in equity prices. The Companys exposure to changes in equity prices primarily results from its holdings of exchange traded funds and other equities. The Companys portfolio of equity securities is carried on the balance
sheet at fair value.

Impact of Inflation

Inflation rates may impact the Companys financial condition and operating results in several ways. Fluctuations in rates of inflation influence interest rates, which in turn affect the market value of the investment portfolio and
yields on new investments. Inflation also affects the portion of losses and loss reserves that relates to hospital and medical expenses and property claims and loss adjustment expenses, but not the portion of losses and loss reserves that relates to
workers compensation indemnity payments for lost wages, which are fixed by statute. Adjustments for inflationary effects are included as part of the continual review of loss reserve estimates. Increased costs are considered in setting premium
rates, and this is particularly important in the health care area where hospital and medical inflation rates have exceeded general inflation rates. Operating expenses, including payrolls, are affected to a certain degree by the inflation rate.



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##### Table of Contents

Item 8Financial Statements and Supplementary Data

LOGO

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

of Eastern Insurance Holdings,
Inc.:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all
material respects, the financial position of Eastern Insurance Holdings, Inc. and its subsidiaries (the Company) at December 31, 2008 and December 31, 2007, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing
under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Companys management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included under Item 9A in Managements Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedules,
and on the Companys internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.

As discussed in Note 2 to the consolidated financial statements, the Company changed the
manner in which it accounts for convertible bond securities in 2007.

A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys
internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

As described in Managements Report on Internal Control over Financial
Reporting, management has excluded Employers Security Holding Company from its assessment of internal control over financial reporting as of December 31, 2008 because it was acquired by the Company in a purchase business combination during
2008. We have also excluded Employers Security Holding Company from our audit of internal control over financial reporting. Employers Security Holding Company is a wholly-owned subsidiary of the Company whose total assets and total revenues
represent 6.8% and 1.5%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2008.

/s/
PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania

March 12, 2009



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EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In
thousands, except share and per share data)



|                                                                                                                                                                |  |                  |         |   |                  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                |  | December 31,2008 |         |   | December 31,2007 |  
|ASSETS                                                                                                                                                          |  |                  |         |   |                  |   |         |  
|                                                                                                                                                                |  |                 
|Investments:                                                                                                                                                    |  |                  |         |   |                  |   |         |  
|Fixed income securities, at estimated fair value (amortized cost, $180,102; $202,039)                                                                           |  | $                | 183,136 |   |                  | $ | 205,785 |  
|Convertible bonds, at estimated fair value (amortized cost, $13,783; $14,232)                                                                                   |  |                  | 12,346  |   |                  |   | 15,478  |  
|Equity securities, at estimated fair value (cost, $22,287; $19,578)                                                                                             |  |                  | 17,162  |   |                  |   | 20,541  |  
|Other long-term investments at estimated fair value (cost, $10,586; $10,386)                                                                                    |  |                  | 9,519   |   |                  |   | 11,317  |  
|                                                                                                                                                                |  |                  |         |   |                  |   |         |  
|Total investments                                                                                                                                               |  |                  | 222,163 |   |                  |   | 253,121 |  
|                                                                                                                                                                |  |                 
|Cash and cash equivalents                                                                                                                                       |  |                  | 52,875  |   |                  |   | 45,940  |  
|Accrued investment income                                                                                                                                       |  |                  | 2,058   |   |                  |   | 2,290   |  
|Premiums receivable (net of allowance, $581; $558)                                                                                                              |  |                  | 29,615  |   |                  |   | 26,846  |  
|Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses                                                                                  |  |                  | 29,637  |   |                  |   | 26,303  |  
|Deferred acquisition costs                                                                                                                                      |  |                  | 5,760   |   |                  |   | 6,257   |  
|Deferred income taxes, net                                                                                                                                      |  |                  | 6,281   |   |                  |   | 1,229   |  
|Federal income taxes recoverable                                                                                                                                |  |                  | 16      |   |                  |   | 846     |  
|Intangible assets                                                                                                                                               |  |                  | 9,179   |   |                  |   | 6,372   |  
|Goodwill                                                                                                                                                        |  |                  | 10,752  |   |                  |   | 7,992   |  
|Other assets                                                                                                                                                    |  |                  | 8,975   |   |                  |   | 8,322   |  
|                                                                                                                                                                |  |                  |         |   |                  |   |         |  
|Total assets                                                                                                                                                    |  | $                | 377,311 |   |                  | $ | 385,518 |  
|                                                                                                                                                                |  |                  |         |   |                  |   |         |  
|LIABILITIES                                                                                                                                                     |  |                  |         |   |                  |   |         |  
|                                                                                                                                                                |  |                 
|Reserves for unpaid losses and loss adjustment expenses                                                                                                         |  | $                | 159,117 |   |                  | $ | 129,788 |  
|Unearned premium reserves                                                                                                                                       |  |                  | 42,365  |   |                  |   | 39,826  |  
|Advance premium                                                                                                                                                 |  |                  | 1,594   |   |                  |   | 1,380   |  
|Accounts payable and accrued expenses                                                                                                                           |  |                  | 13,136  |   |                  |   | 8,422   |  
|Ceded reinsurance balances payable                                                                                                                              |  |                  | 6,886   |   |                  |   | 6,762   |  
|Benefit plan liabilities                                                                                                                                        |  |                  | 497     |   |                  |   | 334     |  
|Segregated portfolio cell dividend payable                                                                                                                      |  |                  | 13,140  |   |                  |   | 13,168  |  
|Loan payable                                                                                                                                                    |  |                  | 2,439   |   |                  |   |        |  
|Junior subordinated debentures                                                                                                                                  |  |                  |        |   |                  |   | 8,007   |  
|                                                                                                                                                                |  |                  |         |   |                  |   |         |  
|Total liabilities                                                                                                                                               |  |                  | 239,174 |   |                  |   | 207,687 |  
|                                                                                                                                                                |  |                  |         |   |                  |   |         |  
|Commitments and contingencies (Note 17)                                                                                                                         |  |                  |         |   |                  |   |         |  
|                                                                                                                                                                |  |                 
|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11,602,723 and 11,597,723, respectively;
outstanding9,512,366 and 10,580,858, respectively |  |                  |        |   |                  |   |        |  
|Unearned ESOP compensation                                                                                                                                      |  |                  | (5,606  | ) |                  |   | (6,354  | )
|Additional paid in capital                                                                                                                                      |  |                  | 111,772 |   |                  |   | 110,166 |  
|Treasury stock, at cost (2,090,357 and 1,016,865 shares, respectively)                                                                                          |  |                  | (32,655 | ) |                  |   | (15,589 | )
|Retained earnings                                                                                                                                               |  |                  | 66,492  |   |                  |   | 86,363  |  
|Accumulated other comprehensive (loss) income, net                                                                                                              |  |                  | (1,866  | ) |                  |   | 3,245   |  
|                                                                                                                                                                |  |                  |         |   |                  |   |         |  
|Total shareholders equity                                                                                                                                      |  |                  | 138,137 |   |                  |   | 177,831 |  
|                                                                                                                                                                |  |                  |         |   |                  |   |         |  
|Total liabilities and shareholders equity                                                                                                                      |  | $                | 377,311 |   |                  | $ | 385,518 |  
|                                                                                                                                                                |  |                  |         |   |                  |   |         |  

See accompanying notes to consolidated financial statements.



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EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)



|                                                                                                                           |  |                                  |         |   |      |   |         |  |   |       
|-------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- |  | - | ------
|                                                                                                                           |  | For the Years Ended December 31,
|                                                                                                                           |  | 2008                             |         |   | 2007 |   | 2006   
|REVENUE                                                                                                                    |  |                                  |         |   |      |   |         |  |   |       
|Net premiums earned                                                                                                        |  | $                                | 135,807 |   |      | $ | 129,495 |  | $ | 74,919
|Net investment income                                                                                                      |  |                                  | 9,631   |   |      |   | 11,669  |  |   | 8,678 
|Change in equity interest in other long-term investments                                                                   |  |                                  | (3,970  | ) |      |   | 759     |  |   | 314   
|Net realized investment (losses) gains                                                                                     |  |                                  | (11,117 | ) |      |   | 2,888   |  |   | 2,757 
|Other revenue                                                                                                              |  |                                  | 853     |   |      |   | 683     |  |   | 313   
|                                                                                                                           |  |                                  |         |   |      |   |         |  |   |       
|Total revenue                                                                                                              |  |                                  | 131,204 |   |      |   | 145,494 |  |   | 86,981
|                                                                                                                           |  |                                  |         |   |      |   |         |  |   |       
|EXPENSES                                                                                                                   |  |                                  |         |   |      |   |         |  |   |       
|Losses and LAE incurred                                                                                                    |  |                                  | 99,188  |   |      |   | 73,588  |  |   | 47,913
|Acquisition and other underwriting expenses                                                                                |  |                                  | 18,918  |   |      |   | 17,056  |  |   | 7,242 
|Other expenses                                                                                                             |  |                                  | 25,338  |   |      |   | 21,801  |  |   | 14,390
|Amortization of intangibles                                                                                                |  |                                  | 1,373   |   |      |   | 1,738   |  |   | 1,087 
|Policyholder dividend expense                                                                                              |  |                                  | 551     |   |      |   | 543     |  |   | 239   
|Segregated portfolio dividend expense                                                                                      |  |                                  | 2,155   |   |      |   | 4,423   |  |   | 2,890 
|                                                                                                                           |  |                                  |         |   |      |   |         |  |   |       
|Total expenses                                                                                                             |  |                                  | 147,523 |   |      |   | 119,149 |  |   | 73,761
|                                                                                                                           |  |                                  |         |   |      |   |         |  |   |       
|(Loss) income before income taxes                                                                                          |  |                                  | (16,319 | ) |      |   | 26,345  |  |   | 13,220
|Income tax expense                                                                                                         |  |                                  | 1,064   |   |      |   | 7,662   |  |   | 4,942 
|                                                                                                                           |  |                                  |         |   |      |   |         |  |   |       
|Net (loss) income                                                                                                          |  | $                                | (17,383 | ) |      | $ | 18,683  |  | $ | 8,278 
|                                                                                                                           |  |                                  |         |   |      |   |         |  |   |       
|Other comprehensive (loss) income                                                                                          |  |                                  |         |   |      |   |         |  |   |       
|Unrealized holding (losses) gains arising during period, net of tax of $(4,751), $1,209, and $1,217                        |  |                                  | (8,823  | ) |      |   | 1,877   |  |   | 2,261 
|Amortization of unrecognized benefit plan amounts, net of tax of $(558), $58, and $0                                       |  |                                  | (1,037  | ) |      |   | 108     |  |   |      
|Less: Reclassification adjustment for (losses) gains included in net (loss) income, net of tax of $(2,557), $644, and $392 |  |                                  | (4,749  | ) |      |   | 1,195   |  |   | 728   
|                                                                                                                           |  |                                  |         |   |      |   |         |  |   |       
|Other comprehensive (loss) income                                                                                          |  |                                  | (5,111  | ) |      |   | 790     |  |   | 1,533 
|                                                                                                                           |  |                                  |         |   |      |   |         |  |   |       
|Comprehensive (loss) income                                                                                                |  | $                                | (22,494 | ) |      | $ | 19,473  |  | $ | 9,811 
|                                                                                                                           |  |                                  |         |   |      |   |         |  |   |       
|EARNINGS PER SHARE (SEE NOTE 6):                                                                                           |  |                                  |         |   |      |   |         |  |   |       
|Net (loss) income                                                                                                          |  | $                                | (17,383 | ) |      | $ | 18,683  |  | $ | 7,142 
|Basic earnings per share                                                                                                   |  | $                                | (1.94   | ) |      | $ | 1.82    |  | $ | 0.67  
|Diluted earnings per share                                                                                                 |  | $                                | (1.94   | ) |      | $ | 1.76    |  | $ | 0.65  

See accompanying notes to consolidated financial statements.



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EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

For the Years Ended December 31, 2008, 2007 and 2006

(In thousands, except share data)



|                                                |                        |                    |                     |            |   |                    |   |                          |  |   |                          |   |               |   |         |                  |   |         |                                                         |  |   |         |   |  |   |        |   |  |   |         |  
|----------------------------------------------- | ---------------------- | ------------------ | ------------------- | ---------- | - | ------------------ | - | ------------------------ |  | - | ------------------------ | - | ------------- | - | ------- | ---------------- | - | ------- | ------------------------------------------------------- |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                |                        | Outstanding Shares |                     |            |   |                    |   |                          |  |   |                          |   |               |   |         |                  |   |         |                                                         |  |   |        
|                                                | Series APreferredStock |                    | Common CapitalStock |            |   | CommonCapitalStock |   | UnearnedESOPCompensation |  |   | AdditionalPaid-InCapital |   | TreasuryStock |   |         | RetainedEarnings |   |         | AccumulatedOtherComprehensive(Loss) Income,Net of Taxes |  |   | Total   |  
|Balance, January 1, 2006                        |                        |                   |                     |           |   |                    | $ |                         |  | $ |                         |   |               | $ |        |                  | $ |        |                                                         |  | $ | 61,205  |   |  | $ | 904    |   |  | $ | 62,109  |  
|Net proceeds from stock offering                |                        |                   |                     | 7,475,000  |   |                    |   |                         |  |   |                         |   |               |   | 69,597  |                  |   |        |                                                         |  |   |        |   |  |   |       |   |  |   | 69,597  |  
|Unearned ESOP compensation                      |                        |                   |                     |           |   |                    |   |                         |  |   | (7,475                   | ) |               |   |        |                  |   |        |                                                         |  |   |        |   |  |   |       |   |  |   | (7,475  | )
|ESOP shares released                            |                        |                   |                     |            |   |                    |   |                         |  |   | 374                      |   |               |   | 151     |                  |   |        |                                                         |  |   |        |   |  |   |       |   |  |   | 525     |  
|Issuance of common stock                        |                        |                   |                     | 3,876,048  |   |                    |   |                         |  |   |                         |   |               |   | 38,754  |                  |   |        |                                                         |  |   |        |   |  |   |       |   |  |   | 38,754  |  
|Net income                                      |                        |                   |                     |           |   |                    |   |                         |  |   |                         |   |               |   |        |                  |   |        |                                                         |  |   | 8,278   |   |  |   |       |   |  |   | 8,278   |  
|Other comprehensive income, net of tax          |                        |                   |                     |           |   |                    |   |                         |  |   |                         |   |               |   |        |                  |   |        |                                                         |  |   |        |   |  |   | 1,533  |   |  |   | 1,533   |  
|Adoption of SFAS 158                            |                        |                   |                     |           |   |                    |   |                         |  |   |                         |   |               |   |        |                  |   |        |                                                         |  |   |        |   |  |   | 423    |   |  |   | 423     |  
|                                                |                        |                    |                     |            |   |                    |   |                          |  |   |                          |   |               |   |         |                  |   |         |                                                         |  |   |         |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2006                      |                        |                   |                     | 11,351,048 |   |                    |   |                         |  |   | (7,101                   | ) |               |   | 108,502 |                  |   |        |                                                         |  |   | 69,483  |   |  |   | 2,860  |   |  |   | 173,744 |  
|Adoption of SFAS 155                            |                        |                   |                     |           |   |                    |   |                         |  |   |                         |   |               |   |        |                  |   |        |                                                         |  |   | 405     |   |  |   | (405   | ) |  |   |        |  
|ESOP shares released                            |                        |                   |                     |           |   |                    |   |                         |  |   | 747                      |   |               |   | 409     |                  |   |        |                                                         |  |   |        |   |  |   |       |   |  |   | 1,156   |  
|Stock compensation expense                      |                        |                   |                     | 246,675    |   |                    |   |                         |  |   |                         |   |               |   | 1,255   |                  |   |        |                                                         |  |   |        |   |  |   |       |   |  |   | 1,255   |  
|Repurchase of common stock                      |                        |                   |                     | (1,016,865 | ) |                    |   |                         |  |   |                         |   |               |   |        |                  |   | (15,589 | )                                                       |  |   |        |   |  |   |       |   |  |   | (15,589 | )
|Shareholder dividend                            |                        |                   |                     |           |   |                    |   |                         |  |   |                         |   |               |   |        |                  |   |        |                                                         |  |   | (2,208  | ) |  |   |       |   |  |   | (2,208  | )
|Net income                                      |                        |                   |                     |           |   |                    |   |                         |  |   |                         |   |               |   |        |                  |   |        |                                                         |  |   | 18,683  |   |  |   |       |   |  |   | 18,683  |  
|Other comprehensive income, net of tax          |                        |                   |                     |           |   |                    |   |                         |  |   |                         |   |               |   |        |                  |   |        |                                                         |  |   |        |   |  |   | 790    |   |  |   | 790     |  
|                                                |                        |                    |                     |            |   |                    |   |                          |  |   |                          |   |               |   |         |                  |   |         |                                                         |  |   |         |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2007                      |                        |                   |                     | 10,580,858 |   |                    |   |                         |  |   | (6,354                   | ) |               |   | 110,166 |                  |   | (15,589 | )                                                       |  |   | 86,363  |   |  |   | 3,245  |   |  |   | 177,831 |  
|ESOP shares released                            |                        |                   |                     |           |   |                    |   |                         |  |   | 748                      |   |               |   | 297     |                  |   |        |                                                         |  |   |        |   |  |   |       |   |  |   | 1,045   |  
|Stock compensation expense                      |                        |                   |                     | 5,000      |   |                    |   |                         |  |   |                         |   |               |   | 1,277   |                  |   |        |                                                         |  |   |        |   |  |   |       |   |  |   | 1,277   |  
|Excess tax benefit from vested restricted stock |                        |                   |                     |           |   |                    |   |                         |  |   |                         |   |               |   | 32      |                  |   |        |                                                         |  |   |        |   |  |   |       |   |  |   | 32      |  
|Repurchase of common stock                      |                        |                   |                     | (1,073,492 | ) |                    |   |                         |  |   |                         |   |               |   |        |                  |   | (17,066 | )                                                       |  |   |        |   |  |   |       |   |  |   | (17,066 | )
|Shareholder dividend                            |                        |                   |                     |           |   |                    |   |                         |  |   |                         |   |               |   |        |                  |   |        |                                                         |  |   | (2,488  | ) |  |   |       |   |  |   | (2,488  | )
|Net loss                                        |                        |                   |                     |           |   |                    |   |                         |  |   |                         |   |               |   |        |                  |   |        |                                                         |  |   | (17,383 | ) |  |   |       |   |  |   | (17,383 | )
|Other comprehensive loss, net of tax            |                        |                   |                     |           |   |                    |   |                         |  |   |                         |   |               |   |        |                  |   |        |                                                         |  |   |        |   |  |   | (5,111 | ) |  |   | (5,111  | )
|                                                |                        |                    |                     |            |   |                    |   |                          |  |   |                          |   |               |   |         |                  |   |         |                                                         |  |   |         |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2008                      |                        |                   |                     | 9,512,366  |   |                    | $ |                         |  | $ | (5,606                   | ) |               | $ | 111,772 |                  | $ | (32,655 | )                                                       |  | $ | 66,492  |   |  | $ | (1,866 | ) |  | $ | 138,137 |  
|                                                |                        |                    |                     |            |   |                    |   |                          |  |   |                          |   |               |   |         |                  |   |         |                                                         |  |   |         |   |  |   |        |   |  |   |         |  

See accompanying notes to consolidated financial statements.



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EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2008, 2007 and 2006

(In thousands)



|                                                                                                   |  |      |         |   |      |   |          |      |  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | -------- | ---- |  | - | ------- | -
|                                                                                                   |  | 2008 |         |   | 2007 |   |          | 2006 | 
|Cash flows from operating activities:                                                              |  |      |         |   |      |   |          |      |  |   |         |  
|Net (loss) income                                                                                  |  | $    | (17,383 | ) |      | $ | 18,683   |      |  | $ | 8,278   |  
|Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: |  |      |         |   |      |   |          |      |  |   |         |  
|Depreciation and amortization                                                                      |  |      | 561     |   |      |   | 397      |      |  |   | 263     |  
|Net amortization of bond premium/discount                                                          |  |      | 452     |   |      |   | 282      |      |  |   | 517     |  
|Net realized investment losses (gains)                                                             |  |      | 11,117  |   |      |   | (2,888   | )    |  |   | (2,757  | )
|Change in equity interest in other long-term investments                                           |  |      | 3,970   |   |      |   | (759     | )    |  |   | (314    | )
|Loss on disposal of property and equipment                                                         |  |      | 5       |   |      |   | 1        |      |  |   | 19      |  
|Recognition of deferred gain on sale of building                                                   |  |      |        |   |      |   |         |      |  |   | (287    | )
|Deferred tax benefit                                                                               |  |      | (4,355  | ) |      |   | (1,795   | )    |  |   | (243    | )
|Stock compensation                                                                                 |  |      | 2,354   |   |      |   | 2,411    |      |  |   | 525     |  
|Intangible asset amortization                                                                      |  |      | 1,373   |   |      |   | 1,738    |      |  |   | 1,087   |  
|Changes in assets and liabilities:                                                                 |  |      |         |   |      |   |          |      |  |   |         |  
|Accrued investment income                                                                          |  |      | 396     |   |      |   | (54      | )    |  |   | 101     |  
|Premiums receivable                                                                                |  |      | 400     |   |      |   | (3,621   | )    |  |   | 5,084   |  
|Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses                     |  |      | (1,273  | ) |      |   | 1,222    |      |  |   | 4,024   |  
|Deferred acquisition costs                                                                         |  |      | 497     |   |      |   | (1,756   | )    |  |   | (4,501  | )
|Other assets                                                                                       |  |      | (43     | ) |      |   | (2,006   | )    |  |   | (394    | )
|Reserves for unpaid losses and loss adjustment expenses                                            |  |      | 19,741  |   |      |   | 3,321    |      |  |   | 985     |  
|Unearned and advance premium                                                                       |  |      | (389    | ) |      |   | 4,851    |      |  |   | 4,275   |  
|Ceded reinsurance balances payable                                                                 |  |      | 124     |   |      |   | 1,139    |      |  |   | (1,081  | )
|Accounts payable and accrued expenses                                                              |  |      | 3,328   |   |      |   | 345      |      |  |   | 185     |  
|Benefit plan liabilities                                                                           |  |      | (8      | ) |      |   | (52      | )    |  |   | (88     | )
|Federal income taxes recoverable/payable                                                           |  |      | 479     |   |      |   | (2,748   | )    |  |   | 1,703   |  
|Segregated portfolio cell dividend payable                                                         |  |      | (28     | ) |      |   | 5,206    |      |  |   | 450     |  
|                                                                                                   |  |      |         |   |      |   |          |      |  |   |         |  
|Net cash provided by operating activities                                                          |  |      | 21,318  |   |      |   | 23,917   |      |  |   | 17,831  |  
|                                                                                                   |  |      |         |   |      |   |          |      |  |   |         |  
|Cash flows from investing activities:                                                              |  |      |         |   |      |   |          |      |  |   |         |  
|Purchase of fixed income securities                                                                |  |      | (43,355 | ) |      |   | (122,853 | )    |  |   | (64,057 | )
|Purchase of equity securities                                                                      |  |      | (11,239 | ) |      |   | (13,280  | )    |  |   | (15,666 | )
|Purchase of other long-term investments                                                            |  |      | (3,000  | ) |      |   | (500     | )    |  |   | (7,860  | )
|Proceeds from sale of fixed income securities                                                      |  |      | 41,058  |   |      |   | 50,309   |      |  |   | 42,443  |  
|Proceeds from maturities/calls of fixed income securities                                          |  |      | 33,575  |   |      |   | 61,947   |      |  |   | 19,699  |  
|Proceeds from the sale of equity securities                                                        |  |      | 4,699   |   |      |   | 11,956   |      |  |   | 6,855   |  
|Proceeds from sale of other long-term investments                                                  |  |      | 820     |   |      |   | 1,876    |      |  |   | 550     |  
|Acquisition of Employers Security Holding Company, net of cash received                            |  |      | (8,025  | ) |      |   |         |      |  |   |        |  
|Acquisition of Eastern Holding Company, Ltd., net of cash received                                 |  |      |        |   |      |   |         |      |  |   | (14,149 | )
|Principal payments received on mortgage loans                                                      |  |      | 8       |   |      |   | 15       |      |  |   | 18      |  
|Purchase of equipment, net                                                                         |  |      | (1,395  | ) |      |   | (353     | )    |  |   | (59     | )
|                                                                                                   |  |      |         |   |      |   |          |      |  |   |         |  
|Net cash provided by (used in) investing activities                                                |  |      | 13,146  |   |      |   | (10,883  | )    |  |   | (32,226 | )
|                                                                                                   |  |      |         |   |      |   |          |      |  |   |         |  
|Cash flows from financing activities:                                                              |  |      |         |   |      |   |          |      |  |   |         |  
|Repurchase of common stock                                                                         |  |      | (17,066 | ) |      |   | (15,589  | )    |  |   |        |  
|Shareholder dividend                                                                               |  |      | (2,488  | ) |      |   | (2,208   | )    |  |   |        |  
|Repayment of junior subordinated debentures                                                        |  |      | (8,007  | ) |      |   |         |      |  |   |        |  
|Proceeds from initial public offering, net of expenses                                             |  |      |        |   |      |   |         |      |  |   | 62,122  |  
|Repayment of long-term debt                                                                        |  |      |        |   |      |   |         |      |  |   | (1,723  | )
|Excess tax benefit from vested restricted stock                                                    |  |      | 32      |   |      |   |         |      |  |   |        |  
|                                                                                                   |  |      |         |   |      |   |          |      |  |   |         |  
|Net cash (used in) provided by financing activities                                                |  |      | (27,529 | ) |      |   | (17,797  | )    |  |   | 60,399  |  
|                                                                                                   |  |      |         |   |      |   |          |      |  |   |         |  
|Net increase (decrease) in cash and cash equivalents                                               |  |      | 6,935   |   |      |   | (4,763   | )    |  |   | 46,004  |  
|Cash and cash equivalents, beginning of period                                                     |  |      | 45,940  |   |      |   | 50,703   |      |  |   | 4,699   |  
|                                                                                                   |  |      |         |   |      |   |          |      |  |   |         |  
|Cash and cash equivalents, end of period                                                           |  | $    | 52,875  |   |      | $ | 45,940   |      |  | $ | 50,703  |  
|                                                                                                   |  |      |         |   |      |   |          |      |  |   |         |  
|Supplemental disclosure of cash flow information:                                                  |  |      |         |   |      |   |          |      |  |   |         |  
|Cash paid for income taxes                                                                         |  | $    | 4,875   |   |      | $ | 11,800   |      |  | $ | 7,163   |  
|Cash paid for interest                                                                             |  | $    | 468     |   |      | $ | 606      |      |  | $ | 324     |  

See accompanying notes to consolidated financial statements.



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Eastern Insurance Holdings, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollars in thousands except share and per share data)

1. Background and Nature of Operations

Eastern Insurance Holdings, Inc. (EIHI) was formed by Eastern Life and Health Insurance Company (ELH), formerly Educators Mutual
Life Insurance Company, for the purpose of converting from a mutual life and health insurance company to a stock life and health insurance company. On June 16, 2006, EIHI completed its common stock offering and ELH completed its conversion from
a mutual company to a stock company and became a wholly-owned subsidiary of EIHI. In the common stock offering, EIHI sold 7,475,000 shares of its common stock at a price of $10.00 per share, raising gross proceeds of $74,750. Direct expenses of the
offering were $5,153 and were recorded as a direct reduction of additional paid-in capital in the accompanying consolidated balance sheet in 2006.

Immediately after the common stock offering and conversion, EIHI purchased all of the outstanding common stock of Eastern Holding Company, Ltd. (EHC) for a purchase price of $78,929 (See Note 3).

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 Services Corporation (Eastern Services), 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), ELH, and Employers Alliance, Inc. (Employers Alliance),
collectively referred to as the Company.

On September 29, 2008, EIHI acquired all of the outstanding stock of Employers
Security Holding Company (ESHC) and its wholly-owned subsidiaries, Employers Security Insurance Company and Affinity Management Services (See Note 3). Employers Security Insurance Company (ESIC) is an Indiana-domiciled,
mono-line workers compensation insurance company licensed to write business in Indiana, Illinois and Missouri.

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

The Company 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 16 for a description of each segment.

2. Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of
America (GAAP).

The consolidated statements of income and comprehensive income for the year ended December 31, 2006
represent the results of operations of the group benefits insurance segment for the year ended December 31, 2006 and the results of operations of the workers compensation insurance segment, segregated portfolio cell reinsurance segment
and run-off specialty reinsurance operations for the period from June 17, 2006 to December 31, 2006. The corporate/other segment for the year ended December 31, 2006 represents the results of operations of ELHs corporate
activities for the year ended December 31, 2006 and the results of operations of EIHI, EHC, Employers Alliance, Global Alliance, and Eastern Services for the period from June 17, 2006 to December 31, 2006. Basic and diluted earnings
per share for the year ended December 31, 2006 is computed by dividing consolidated net income for the period from June 17, 2006 to December 31, 2006 by the weighted average number of shares outstanding for the period.

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 other long-term investments in the consolidated statements of operations. This reclassification did not
have any impact on prior year revenues, expenses, or net income.



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Use of Estimates

The preparation of the 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates in the 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 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 at the balance sheet date and records a realized loss in the consolidated statements of operations and comprehensive income (loss). Any subsequent increase in the securitys estimated fair value
would be reported as an unrealized gain.

Convertible Bond Securities

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

Equity Securities

The Companys
investments in equity securities, 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 at the balance sheet date and records a realized loss in the consolidated statements of operations and comprehensive income (loss). Any subsequent increase in the securitys estimated
fair value would be reported as an unrealized gain.



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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 other long-term investments in the consolidated statements of operations and comprehensive income (loss). The
Company reports changes in the value of its limited partnership investments on a month lag (quarter lag for one investment) as a result of the timing of statements being received from the limited partnership. The Company monitors its limited
partnership investments for declines in value that may be other-than-temporary. When a limited partnership interest is determined to be other-than-temporarily impaired, the Company reduces its interest in the limited partnership to its current
estimated fair value at the balance sheet date. The impairment is recorded in the change in equity interest in other long-term investments in the consolidated statements of operations and comprehensive income (loss).

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 December 31, 2008 and 2007,
and included in net premiums earned, totaled $1,800 and $1,500, respectively.

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.

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

Other Revenue

Other revenue primarily consists of
service revenue 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 workers compensation claims on a non-tabular basis, using a discount rate of 3.0%, based upon regulatory guidelines. The reserves for unpaid losses and LAE have been reduced for the effects
of discounting by approximately $4,145 and $3,474 as of December 31, 2008 and 2007, respectively.

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



| |  |  | The liability for reported but unpaid long-term disability claims is calculated using the 1987 Commissioners Group Disability Table. The long-term disability
reserves are discounted based on the expected rate of return of ELHs fixed income portfolio in the year that the claim was incurred. The discount rate for claims incurred in 2008, 2007
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | and 2006 was 3.85%, 5.25% and 4.75%, respectively. The liability for IBNR claims is estimated on a policy-by-policy basis, taking into consideration average
monthly premium, policy elimination periods, and an expected loss ratio.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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

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

Reinsurance

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

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

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. Policy acquisition costs are deferred and amortized over the period in which the related premiums are earned. Deferred
acquisition costs are limited to the estimated amounts recoverable after providing for losses and loss adjustment expenses that are expected to be incurred based upon historical and current experience. Anticipated investment income is considered in
determining recoverability.

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



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Amortization of policy acquisition costs, before the impact of purchase accounting, totaled $6,872,
$6,033, and $2,541 for the years ended December 31, 2008, 2007 and 2006, 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 not generally 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 AMS 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 for earnings 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 2008, 2007 or 2006.

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 December 31, 2008 and 2007, the Company recorded accrued dividends payable of $1,311 and $989, respectively, which are included in accounts
payable and accrued expenses on the consolidated balance sheets.

Property and Equipment

Property and equipment, including expenditures for significant improvements and purchased software, is carried at cost less accumulated depreciation and
amortization. Maintenance, repairs and minor improvements are expensed as incurred. When property and equipment is retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain
or loss is included in operations. Depreciation is computed under the straight-line method. The estimated useful lives of property and equipment range from 3-7 years. Accumulated depreciation and amortization expense totaled $7,246 and $6,534 as of
December 31, 2008 and 2007, respectively. Depreciation and amortization expense totaled $561, $397, and $263 for the years ended December 31, 2008, 2007 and 2006, respectively.

Property, equipment and software are reviewed for impairment whenever changes in circumstances indicate that the carrying value of such assets may not be
recoverable. Impairment losses are recognized to the extent the carrying amount of the asset exceeds the undiscounted cash flows expected to result from the use of the asset and its eventual disposal. There were no impairments recorded in 2008, 2007
or 2006.

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 up to one percent of direct written premium is made to all companies licensed to write workers compensation in Pennsylvania. Eastern Alliance, Allied Eastern and Eastern
Advantage recognize a



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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. The Company recorded an assessment related to the Security Fund of $1,052 as of December 31, 2008. No assessment
was recorded for the Security Fund as of December 31, 2007.

Goodwill and Intangible Assets

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

The Company tested goodwill for impairment as of December 31, 2008 using a discounted cash
flow analysis and by comparing the Companys common stock price relative to book value of the workers compensation insurance segment. Management performed the discounted cash flow analysis using its internal four-year forecast for the
workers compensation insurance segment, assuming an annual growth rate of 5.0% and a discount rate of 13.0%. Cash flows were adjusted as necessary to maintain adequate capital requirements. Due to market conditions, the Companys stock
price experienced a significant decline in value during 2008 and was trading below book value as of December 31, 2008; therefore, management considered an estimate of the Companys value in a potential transaction and allocated that value
to the Companys reporting units, including the workers compensation insurance segment. Based on the results of the above tests, the fair value of the workers compensation insurance segment exceeded its carrying value as of
December 31, 2008; therefore, goodwill was considered not impaired.

There were no impairments recorded in 2007 or 2006.

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.

Concentrations of Credit Risk

Financial instruments, which potentially expose the Company to concentrations of credit risk, consist primarily of cash and cash equivalents,
investments, premiums receivable, and amounts recoverable from reinsurers.



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Comprehensive Income (Loss)

Comprehensive income (loss) includes all changes in shareholders equity during the reporting period, net of tax. The components of accumulated other comprehensive income, net of tax, as of December 31, 2008
and 2007 were as follows (in thousands):



|                                               |  |      |        |   |      |   |        |  
|---------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                               |  | 2008 |        |   | 2007 |  
|Unrealized (losses) gains on investments       |  | $    | (1,223 | ) |      | $ | 4,175  |  
|Unrecognized benefit plan (liabilities) assets |  |      | (778   | ) |      |   | 817    |  
|Tax effect                                     |  |      | 135    |   |      |   | (1,747 | )
|                                               |  |      |        |   |      |   |        |  
|Total                                          |  | $    | (1,866 | ) |      | $ | 3,245  |  
|                                               |  |      |        |   |      |   |        |  

Cash Flow Information

Purchases and sales or maturities of short-term investments are recorded net for purposes of the consolidated statements of cash flows and are included with fixed income securities.

Recent Accounting Pronouncements

SFAS 159

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

SFAS 141R

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

SFAS 160

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

SFAS 161

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities (SFAS 161).
SFAS 161 amends and expands the disclosure requirements of SFAS 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 161 requires qualitative disclosures about objectives and strategies



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for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about
credit-risk-related contingent features in derivative agreements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2008. The adoption of SFAS 161 will not affect the Companys
consolidated financial condition or results of operations, but may require additional disclosures if the Company enters into derivative and hedging activities.

SFAS 163

In May 2008, the FASB issued Statement No. 163, Accounting for Financial Guarantee Insurance
Contracts, an interpretation of FASB Statement No. 60 (SFAS 163). SFAS 163 clarifies how FASB Statement No. 60 applies to the recognition and measurement of premium revenue and claim liabilities under financial guarantee
insurance contracts and requires expanded disclosures about financial guarantee insurance contracts. SFAS 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those
fiscal years, except for certain disclosures about an entitys risk management activities. The Company does not currently write financial guarantee insurance contracts; therefore, the adoption of SFAS 163 will not affect the Companys
consolidated financial condition or results of operations.

3. Business Combinations

Acquisition of ESHC

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 (Note 4) and goodwill totaling $2,760. ESHC reported
total assets and total liabilities of $25,856 and $19,203, respectively, on the date of the transaction. ESHCs shareholders equity of $6,653 on the date of the transaction was reduced by $10 as a result of purchase accounting
adjustments to reflect the fair value of certain acquired assets and liabilities. The most significant purchase accounting adjustments related to the elimination of deferred acquisition costs, an increase to reserves for losses and LAE, and a
decrease to unearned premiums. Direct costs related to the acquisition totaling $107 were capitalized and included in goodwill.



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Acquisition of EHC

On June 16, 2006, EIHI acquired all of the outstanding common stock of EHC for a purchase price of $78,929, which consisted of the Company issuing 3,876,048 shares of its $10.00 common stock and paying cash of
$40,175 to EHCs shareholders. The excess of the purchase price over the net fair value of the assets and liabilities acquired was $14,337, consisting of identifiable intangible assets of $9,197 and goodwill of $5,140. Direct expenses incurred
in connection with the acquisition of EHC were $636. In connection with the acquisition of EHC, the purchase price was allocated to the estimated fair values of the acquired assets and liabilities as follows (in thousands):



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

In connection with the acquisition of EHC, the assets and liabilities acquired by EIHI were
adjusted to fair value. The increase (decrease) to EHCs assets and liabilities were as follows (in thousands):



|                                   |  |   |         |  
|---------------------------------- |  | - | ------- | -
|Reserves for unpaid losses and LAE |  | $ | 2,432   |  
|Unearned premium reserves          |  |   | (12,921 | )
|Deferred acquisition costs         |  |   | 6,834   |  
|Other                              |  |   | (888    | )
|                                   |  |   |         |  
|Total                              |  | $ | (4,543  | )
|                                   |  |   |         |  

During 2007, the Company increased the goodwill related to the acquisition of EHC from $5,140 to
$7,992, as a result of recognizing a deferred tax liability against the intangible assets acquired.

4. Non-Cash Investing and Financing Activities

For the years ended December 31, 2008 and 2007, the Company contributed $1,100 to the ESOP, which the ESOP used to make principal and
interest payments to the Company related to the outstanding loan balance. The Companys contributions and the related principal and interest payments are considered non-cash transactions for purposes of the consolidated statements of cash
flows.



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For the year ended December 31, 2006, the net proceeds received as a result of the Companys
stock offering of $69,622 is reflected net of the proceeds from the shares purchased by the ESOP of $7,500 in the statement of cash flows for year ended December 31, 2006.

5. Intangible Assets

The acquisition of EHC resulted in the identification of certain intangible
assets. The allocation of the purchase price in excess of the fair value of the Companys net assets acquired to intangible assets totaled $9,197. The acquisition of ESHC resulted in the recognition of certain intangible assets, including
renewal rights of $1,841, agency relationships of $1,814, and state insurance licenses of $525. The renewal rights and agency relationships will be amortized over their estimated useful lives of 15 years. The state insurance licenses are
considered to have an infinite life and will not be amortized.

As of December 31, 2008 and 2007, intangible assets consisted of the
following (in thousands):



|                                                   |  |                   |        |                         |   |              |  |                         |       |  |   |      
|-------------------------------------------------- |  | ----------------- | ------ | ----------------------- | - | ------------ |  | ----------------------- | ----- |  | - | -----
|                                                   |  | December 31, 2008 |        | December 31, 2007      
|Intangible Assets with Finite Life                 |  | GrossBalance      |        | AccumulatedAmortization |   | GrossBalance |  | AccumulatedAmortization
|Agency relationships (15 year amortization period) |  | $                 | 3,564  |                         | $ | 715          |  | $                       | 1,750 |  | $ | 447  
|Renewal rights (15 year amortization period)       |  |                   | 8,238  |                         |   | 3,483        |  |                         | 6,397 |  |   | 2,378
|                                                   |  |                   |        |                         |   |              |  |                         |       |  |   |      
|                                                   |  | $                 | 11,802 |                         | $ | 4,198        |  | $                       | 8,147 |  | $ | 2,825
|                                                   |  |                   |        |                         |   |              |  |                         |       |  |   |      
|Intangible Assets with Indefinite Life             |  |                   |        |                         |   |              |  |                        
|State insurance licenses                           |  |                   | 1,575  |                         |   |             |  |                         | 1,050 |  |   |     
|                                                   |  |                   |        |                         |   |              |  |                         |       |  |   |      
|Total intangible assets                            |  | $                 | 13,377 |                         | $ | 4,198        |  | $                       | 9,197 |  | $ | 2,825
|                                                   |  |                   |        |                         |   |              |  |                         |       |  |   |      

Amortization expense totaled $1,373, $1,738 and $1,087 for the years ended December 31, 2008,
2007 and 2006, respectively.

The estimated aggregated amortization expense for each of the next five years is as follows (in thousands):



|      |  |   |      
|----- |  | - | -----
|2009  |  | $ | 1,732
|2010  |  |   | 1,284
|2011  |  |   | 1,016
|2012  |  |   | 806  
|2013  |  |   | 640  
|      |  |   |      
|Total |  | $ | 5,478
|      |  |   |      

6. 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 year ended December 31, 2008, there were 1,170,297 stock options, restricted stock awards and
stock warrants that were not included in the Companys earnings per share calculation because to do so would have been anti-dilutive. For the year ended December 31, 2007, dilutive potential common shares outstanding included 33,881
restricted stock awards and 306,099 stock warrants, and there were 843,058 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, 335,541 shares were considered anti-dilutive because of the Companys net loss for the year ended December 31, 2008. There were no stock options or restricted stock awards
outstanding as of December 31, 2006. Consolidated net (loss) income, basic shares outstanding, diluted shares outstanding, basic earnings per share and diluted earnings per share for the years ended December 31, 2008, 2007 and 2006 were as
follows (in thousands, except share and per share data):



|                               |  |                          |           |   |      |   |            |  |   |           
|------------------------------ |  | ------------------------ | --------- | - | ---- | - | ---------- |  | - | ----------
|                               |  | Years Ended December 31,
|                               |  | 2008                     |           |   | 2007 |   | 2006      
|Consolidated net (loss) income |  | $                        | (17,383   | ) |      | $ | 18,683     |  | $ | 7,142     
|Basic shares outstanding       |  |                          | 8,954,097 |   |      |   | 10,264,369 |  |   | 10,623,182
|Diluted shares outstanding     |  |                          | 8,954,097 |   |      |   | 10,604,349 |  |   | 10,929,281
|Basic earnings per share       |  | $                        | (1.94     | ) |      | $ | 1.82       |  | $ | 0.67      
|Diluted earnings per share     |  | $                        | (1.94     | ) |      | $ | 1.76       |  | $ | 0.65      



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7. Share Repurchase

On February 15, 2007, the Companys Board of Directors authorized the repurchase of up to 5 percent, or 567,552 shares, of the Companys issued and outstanding shares of common stock. 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 represents the total number of shares of common stock for which
awards may be granted under the Companys Stock Incentive Plan. On September 27, 2007, the Companys Board of Directors increased the share repurchase authorization to 2,046,500 shares. The share repurchases will be held as treasury
stock and are available for issuance in connection with the Companys Stock Incentive Plan. For the years ended December 31, 2008 and 2007, the Company repurchased 1,073,492 and 1,016,865 shares at a cost of $17,066 and $15,589,
respectively, representing a weighted average cost of $15.90 and $15.33 per share, respectively. The Company repurchased an additional 1,400 shares at a cost of $11 through March 4, 2009.

8. Stock-Based Compensation

Awards under the Stock
Incentive Plan may be made in the form of incentive stock options, nonqualified stock options, restricted stock or any combination to employees and non-employee directors. The Stock Incentive Plan limits the number of shares that may be awarded as
restricted stock to 299,000, and the number of shares for which incentive stock options may be granted to 500,000. The total number of shares initially authorized in the Stock Incentive Plan was 1,046,500 shares, with an annual increase equal to 1%
of the shares outstanding at the end of each year. The Stock Incentive Plan provides that stock options and restricted stock awards may include vesting restrictions and performance criteria at the discretion of the Compensation Committee of the
Board of Directors. The term of options may not exceed ten years for incentive stock options, and ten years and one month for nonqualified stock options, and the option price may not be less than fair market value on the date of grant. During 2008,
grants of 15,000 incentive stock options and 5,000 restricted stock awards were made to employees. During 2007, grants of 17,500 incentive stock options were made to employees. A total of 32,741 and 3,924 stock options were forfeited during the
years ended December 31, 2008 and 2007, respectively. The stock options and restricted stock awards vest over a five year period and are not subject to performance criteria. As of December 31, 2008, 119,505 stock options and 49,335
restricted stock awards have vested and there were no stock options or restricted stock awards exercised during 2008.

Total stock-based
compensation expense recognized in the consolidated statement of operations and comprehensive income for the years ended December 31, 2008 and 2007 is shown in the following table (in thousands):



|                                        |  |      |       |      |   |      
|--------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                        |  | 2008 |       | 2007
|Stock compensation expense related to:  |  |      |       |      |   |      
|Stock options                           |  | $    | 565   |      | $ | 547  
|Restricted stock                        |  |      | 712   |      |   | 708  
|Total related tax benefit               |  |      | 359   |      |   | 356  
|Total unrecognized compensation expense |  | $    | 3,956 |      | $ | 5,095

There was no stock-based compensation expense for the year ended December 31, 2006.

As of December 31, 2008, there were 119,505 and 49,335 vested stock options and restricted stock awards, respectively. There were no
vested stock options or restricted stock awards as of December 31, 2007. The total unrecognized stock compensation expense related to non-vested stock options was $1,766 and $2,263, respectively, and the total unrecognized stock compensation
expense related to non-vested restricted stock awards was $2,190 and $2,832, respectively, as of December 31, 2008 and 2007. The unrecognized stock compensation expense related to the non-vested stock options and restricted stock awards is
expected to be recognized over a weighted average period of approximately 43.0 months and 46.5 months, respectively.

The fair values of
stock options granted during the years ended December 31, 2008 and 2007 were determined on the dates of grant using a lattice-based binomial option valuation model with the following assumptions:



|                                       |  |      |       |   |      |   |       |  
|-------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                       |  | 2008 |       |   | 2007 |  
|Expected terms (years)                 |  |      | 10.00 |   |      |   | 9.76  |  
|Expected stock price volatility        |  |      | 35.00 | % |      |   | 35.00 | %
|Risk-free interest rate                |  |      | 4.52  | % |      |   | 4.52  | %
|Expected dividend yield                |  |      | 3.00  | % |      |   | 3.00  | %
|Weighted average fair value per option |  | $    | 5.06  |   |      | $ | 5.06  |  



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

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

The following table summarizes stock option activity for the year
ended December 31, 2008:



|                                    |  |                         |   |  |                                       |       |                                                 |      |                                       |   |      
|----------------------------------- |  | ----------------------- | - |  | ------------------------------------- | ----- | ----------------------------------------------- | ---- | ------------------------------------- | - | -----
|                                    |  | SharesSubject toOptions |   |  | WeightedAverageExercisePrice perShare |       | WeightedAverageRemainingContractualLife (years) |      | AggregateIntrinsicValue (inthousands)
|Outstanding as of January 1, 2008   |  | 630,264                 |   |  | $                                     | 14.37 |                                                 | 9.02 |                                       | $ | 1,336
|Granted                             |  | 15,000                  |   |  | $                                     | 13.83 |                                                 | 9.75 |                                       |   |      
|Forfeited                           |  | (32,741                 | ) |  | $                                     | 14.35 |                                                 |      |                                       |   |      
|Exercised                           |  |                        |   |  |                                       |      |                                                 |      |                                       |   |      
|Cancelled                           |  |                        |   |  |                                       |      |                                                 |      |                                       |   |      
|                                    |  |                         |   |  |                                       |       |                                                 |      |                                       |   |      
|Outstanding as of December 31, 2008 |  | 612,523                 |   |  | $                                     | 14.36 |                                                 | 8.07 |                                       | $ |     
|                                    |  |                         |   |  |                                       |       |                                                 |      |                                       |   |      
|Exercisable as of December 31, 2008 |  | 119,505                 |   |  | $                                     | 14.37 |                                                 | 8.02 |                                       | $ |     

The aggregate intrinsic value of the stock options in the above table is $0 because the
Companys closing stock price of $8.03 on December 31, 2008 was below the weighted average exercise price of the stock options.

As of December 31, 2008, there were 288,111 shares of common stock available for issuance of future share-based awards. The following table presents additional information regarding options outstanding as of December 31, 2008:



|                                    |  |                   |  |                                                 |  |                                       |      
|----------------------------------- |  | ----------------- |  | ----------------------------------------------- |  | ------------------------------------- | -----
|                                    |  | NumberOutstanding |  | WeightedAverageRemainingContractualLife (years) |  | WeightedAverageExercisePrice perShare
|Range of Exercise Prices            |  |                   |  |                                                 |  |                                       |      
|$14.35                              |  | 576,099           |  | 8.01                                            |  | $                                     | 14.35
|$14.50                              |  | 3,924             |  | 8.01                                            |  | $                                     | 14.35
|$14.86                              |  | 7,500             |  | 8.47                                            |  | $                                     | 14.86
|$15.22                              |  | 5,000             |  | 8.63                                            |  | $                                     | 15.22
|$15.47                              |  | 5,000             |  | 8.67                                            |  | $                                     | 15.47
|$13.83                              |  | 15,000            |  | 9.75                                            |  | $                                     | 13.83
|                                    |  |                   |  |                                                 |  |                                       |      
|Outstanding as of December 31, 2008 |  | 612,523           |  | 8.07                                            |  | $                                     | 14.36
|                                    |  |                   |  |                                                 |  |                                       |      



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The following table summarizes restricted stock activity for the year ended December 31, 2008.



|                                    |  |                 |  |                                                
|----------------------------------- |  | --------------- |  | -----------------------------------------------
|                                    |  | Numberof Shares |  | WeightedAverageRemainingContractualLife (years)
|Outstanding as of January 1, 2008   |  | 246,675         |  | 8.01                                           
|Granted                             |  | 5,000           |  | 9.75                                           
|Forfeited                           |  |                |  |                                                
|Exercised                           |  |                |  |                                                
|Cancelled                           |  |                |  |                                                
|                                    |  |                 |  |                                                
|Outstanding as of December 31, 2008 |  | 251,675         |  | 8.04                                           
|                                    |  |                 |  |                                                
|Exercisable as of December 31, 2008 |  | 49,335          |  | 8.01                                           

9. Statutory Financial Information

The Companys domestic insurance subsidiaries, Eastern Alliance, Allied Eastern, Eastern Advantage, ESIC and ELH, prepare statutory-basis financial
statements in accordance with accounting practices prescribed or permitted by the insurance department in the subsidiaries domiciliary state. The Pennsylvania Insurance Department and the Indiana Insurance Department requires that insurance
companies domiciled in their respective states prepare their statutory-basis financial statements in accordance with the National Association of Insurance Commissioners (NAIC) Accounting Practices and Proceduresmanual,
subject to any deviations prescribed or permitted by domiciliary insurance commissioner (SAP).

Permitted statutory accounting
practices encompass all accounting practices that are not prescribed; such practices differ from state to state, may differ from company to company within a state, and may change in the future. Prior to January 1, 2008, the reserves for unpaid
losses and loss adjustment expenses of Eastern Alliance and Allied Eastern were discounted on both a tabular and non-tabular basis. The discounting of workers compensation indemnity reserves on a tabular basis is a prescribed practice by the
NAIC. The discounting of other workers compensation reserves on a non-tabular basis is a permitted practice by the Pennsylvania Insurance Department. The non-tabular discounting of other workers compensation reserves increased Eastern
Alliances and Allied Easterns statutory surplus by $1,346 and $198, respectively, as of December 31, 2007. The non-tabular discounting of other workers compensation reserves increased Eastern Alliances statutory net
income by $107, and $176 and increased Allied Easterns statutory net income by $18, and $34 for the years ended December 31, 2007, and 2006, respectively. Eastern Alliance, Allied Eastern, Eastern Advantage, ESIC and ELH did not have any
permitted practices for the year ended December 31, 2008. ELH did not have any permitted practices for the years ended December 31, 2007 or 2006.

The principal differences between GAAP and SAP relate to the carrying value of fixed income securities, deferred acquisition costs, deferred income taxes, dividends payable, benefit plan liabilities, the
non-admissibility of certain assets for SAP purposes, and the reporting of reserves for unpaid losses and loss adjustment expenses and the related reinsurance recoverables on a gross versus net basis.

Financial Information

The statutory surplus and
statutory net income (loss) of Eastern Alliance, Allied Eastern, Eastern Advantage, ESIC and ELH as of December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007, and 2006 was as follows (in thousands):



|                  |      |                                     |        |                                                  |      |        |  |      |       |      |  |   |        |  |   |      
|----------------- | ---- | ----------------------------------- | ------ | ------------------------------------------------ | ---- | ------ |  | ---- | ----- | ---- |  | - | ------ |  | - | -----
|                  |      | Statutory Surplus as ofDecember 31, |        | Net Income (Loss) for theYear Ended
December 31,
|                  | 2008 |                                     | 2007   |                                                  | 2008 |        |  | 2007 |       | 2006
|Eastern Alliance  |      | $                                   | 41,665 |                                                  | $    | 49,749 |  | $    | 4,643 |      |  | $ | 14,792 |  | $ | 9,798
|Allied Eastern    |      | $                                   | 10,269 |                                                  | $    | 9,454  |  | $    | 1,013 |      |  | $ | 2,036  |  | $ | 1,336
|Eastern Advantage |      | $                                   | 8,112  |                                                  | $    | 8,400  |  | $    | (583  | )    |  | $ |       |  | $ |     
|ESIC              |      | $                                   | 8,052  |                                                  | $    | 6,807  |  | $    | 1,845 |      |  | $ | 2,226  |  | $ | 1,251
|ELH               |      | $                                   | 37,817 |                                                  | $    | 60,679 |  | $    | (710  | )    |  | $ | 4,581  |  | $ | 2,955



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Risk-Based Capital/Minimum Capital Requirements

Risk-based capital is designed to measure the acceptable amount of capital an insurer should have based on the inherent risks of the insurers
business. Insurers failing to meet adequate capital levels may be subject to insurance department scrutiny and ultimately rehabilitation or liquidation. Based on established standards, Eastern Alliance, Allied Eastern, Eastern Advantage, ESIC and
ELH maintained statutory-basis surplus in excess of minimum prescribed risk-based capital requirements as of December 31, 2008.

Under
Cayman Islands regulations, Eastern Re is required to maintain minimum capital of $120.

On March 6, 2009, Eastern Alliance, Allied
Eastern and ELH received approval from the Pennsylvania Insurance Department to pay dividends in the amount of $10,000, $2,000 and $13,000, respectively, to EIHI (See Note 21). Subsequent to these dividend payments, the statutory capital and surplus
levels of Eastern Alliance, Allied Eastern and ELH continued to exceed statutory risk-based capital requirements.

Dividend Restrictions

The ability of Eastern Alliance, Allied Eastern, Eastern Advantage, ESIC and ELH to pay dividends to EIHI is limited by the laws and regulations of
Pennsylvania and Indiana. The maximum annual dividends that EIHIs insurance subsidiaries may pay without the prior approval from the Pennsylvania Insurance Department and 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. For the three years subsequent to June 16, 2006, the effective date of the common stock offering, conversion of ELH, and acquisition of EHC, Eastern
Alliance, Allied Eastern, Eastern Advantage and ELH are prohibited from declaring or paying any dividends or other forms of distribution without the prior approval of the Pennsylvania Insurance Commissioner.

10. Fair Value Measurements

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

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

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

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

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

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

Level 2Represents financial assets whose fair value is determined based upon:
quoted market prices for similar assets in active markets; quoted market prices for identical assets in inactive markets; inputs other than quoted market prices that are observable for the asset such as interest rates or yield curves; or other
inputs derived principally from or corroborated from other observable market information. An example of a Level 2 input utilized to measure fair value, specifically for the Companys fixed income portfolio, is matrix pricing.
Matrix pricing relies on observable inputs from active markets other than quoted market prices including, but not limited to, benchmark securities and yields, latest reported trades, quotes



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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 a significant level of unobservable inputs, 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 December 31, 2008, excluding the segregated portfolio cell segment (in thousands):



|                                           |  |          |         |                                                |   |         |  |   |         |  |   |  
|------------------------------------------ |  | -------- | ------- | ---------------------------------------------- | - | ------- |  | - | ------- |  | - | -
|                                           |  | 12/31/08 |         | Fair Value Measurements at ReportingDate Using
|                                           |  | Level 1  |         | Level 2                                        |   | Level 3
|Fixed income securitiesavailable for sale |  | $        | 161,948 |                                                | $ | 12,647  |  | $ | 149,301 |  | $ | 
|Convertible bonds                          |  |          | 12,346  |                                                |   |        |  |   | 12,346  |  |   | 
|Equity securitiesavailable for sale       |  |          | 14,128  |                                                |   | 14,128  |  |   |        |  |   | 
|                                           |  |          |         |                                                |   |         |  |   |         |  |   |  
|Total                                      |  | $        | 188,422 |                                                | $ | 26,775  |  | $ | 161,647 |  | $ | 
|                                           |  |          |         |                                                |   |         |  |   |         |  |   |  

The Companys investments in fixed income securities, convertible bonds, and equity
securities are valued through the use of a nationally recognized pricing service. The Company believes the scope of work performed when using data from outside parties is sufficient to validate the prices such that it does not rely upon these
independent pricing services as experts, nor would it seek indemnification from them in the event the prices provided were deemed inappropriate. 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. The Companys controls include, but are not limited to, initial and ongoing evaluation of methodologies used
by outside parties as well as other techniques and assumptions to calculate fair value and comparing the fair value estimates to the Companys knowledge of the current market. Fixed income securities include U.S. Treasuries, agencies backed by
the U.S. Government, municipal bonds, mortgage-backed securities, collateralized mortgage obligations, asset-backed securities, and corporate bonds.

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

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



|                                    |  |          |       |          |   |       
|----------------------------------- |  | -------- | ----- | -------- | - | ------
|                                    |  | 12/31/08 |       | 12/31/07
|Multi-strategy fund of funds        |  | $        | 4,421 |          | $ | 5,809 
|Natural resources                   |  |          | 2,130 |          |   | 3,312 
|Structured finance opportunity fund |  |          | 1,958 |          |   |      
|Municipal bond arbitrage            |  |          | 466   |          |   | 1,484 
|Open-ended investment fund          |  |          | 470   |          |   | 622   
|Real estate                         |  |          | 66    |          |   | 73    
|                                    |  |          |       |          |   |       
|Total                               |  | $        | 9,511 |          | $ | 11,300
|                                    |  |          |       |          |   |       

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



|                              |  |                         |        |   |      |   |        |  
|----------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | -
|                              |  | Year Ended December 31, |       
|                              |  | 2008                    |        |   | 2007 |  
|Balance, beginning of period  |  | $                       | 11,300 |   |      | $ | 11,572 |  
|Contributions                 |  |                         | 3,000  |   |      |   | 500    |  
|Withdrawals                   |  |                         | (820   | ) |      |   | (1,876 | )
|Unrealized change in interest |  |                         | (3,969 | ) |      |   | 1,104  |  
|                              |  |                         |        |   |      |   |        |  
|Balance, end of period        |  | $                       | 9,511  |   |      | $ | 11,300 |  
|                              |  |                         |        |   |      |   |        |  



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The change in interest in the Companys limited partnership investments is included in the change in
equity interest in other long-term investments in the consolidated statements of operations and comprehensive income (loss). As a result of the current credit market conditions, the municipal bond arbitrage fund experienced a permanent decline in
value during 2008 and will be dissolved. The estimated fair value of the Companys interest in the limited partnership as of December 31, 2008 reflects managements best estimate of the proceeds the Company is expected to receive upon
dissolution of the fund. As a result of these events, the Company recorded an impairment write-down of $1,397 for the year ended December 31, 2008. There were no impairments in 2007 or 2006.

11. Investments

The following tables provide the
amortized cost and estimated fair value of the Companys fixed income and equity securities as of December 31, 2008 and 2007 (in thousands):



|                                                   |  |                      |         |                      |   |                       |  |   |                     |   |  |   |        
|-------------------------------------------------- |  | -------------------- | ------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------
|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 
|Other structured securities                        |  |                      | 31,701  |                      |   | 343                   |  |   | (2,306              | ) |  |   | 29,738 
|                                                   |  |                      |         |                      |   |                       |  |   |                     |   |  |   |        
|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
|                                                   |  |                      |         |                      |   |                       |  |   |                     |   |  |   |        



|                                                   |  |                      |         |                      |   |                       |  |   |                     |   |  |   |        
|-------------------------------------------------- |  | -------------------- | ------- | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | -------
|2007                                               |  | Cost orAmortizedCost |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | EstimatedFair Value
|U.S. Treasuries and government agencies            |  | $                    | 20,658  |                      | $ | 910                   |  | $ | (7                  | ) |  | $ | 21,561 
|States, municipalities, and political subdivisions |  |                      | 51,884  |                      |   | 1,128                 |  |   |                    |   |  |   | 53,012 
|Corporate securities                               |  |                      | 59,478  |                      |   | 1,060                 |  |   | (150                | ) |  |   | 60,388 
|Mortgage-backed securities                         |  |                      | 22,134  |                      |   | 748                   |  |   | (2                  | ) |  |   | 22,880 
|Other structured securities                        |  |                      | 47,885  |                      |   | 433                   |  |   | (374                | ) |  |   | 47,944 
|                                                   |  |                      |         |                      |   |                       |  |   |                     |   |  |   |        
|Total fixed income securities                      |  |                      | 202,039 |                      |   | 4,279                 |  |   | (533                | ) |  |   | 205,785
|Equity securities                                  |  |                      | 19,578  |                      |   | 1,257                 |  |   | (294                | ) |  |   | 20,541 
|                                                   |  |                      |         |                      |   |                       |  |   |                     |   |  |   |        
|Total fixed income and equity securities           |  | $                    | 221,617 |                      | $ | 5,536                 |  | $ | (827                | ) |  | $ | 226,326
|                                                   |  |                      |         |                      |   |                       |  |   |                     |   |  |   |        

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

Certain insurance departments in the states in which the Company is licensed to do business require a deposit to
protect the Companys policyholders should the Company become insolvent. In order to satisfy these requirements, the Company had fixed income securities with an estimated fair value of $13,519 and $5,869 on deposit with various insurance
departments as of December 31, 2008 and 2007, respectively.

The amortized cost and estimated fair value of fixed income securities
and convertible bonds as of December 31, 2008, by contractual maturity, are shown below (in thousands). Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or
without call or prepayment penalties.



|                           |  |               |         |                     |   |        
|-------------------------- |  | ------------- | ------- | ------------------- | - | -------
|                           |  | AmortizedCost |         | EstimatedFair Value
|Less than one year         |  | $             | 17,768  |                     | $ | 17,838 
|One through five years     |  |               | 75,510  |                     |   | 77,064 
|Five through ten years     |  |               | 30,256  |                     |   | 31,054 
|Greater than ten years     |  |               | 54,002  |                     |   | 51,912 
|Mortgage-backed securities |  |               | 16,349  |                     |   | 17,614 
|                           |  |               |         |                     |   |        
|Total                      |  | $             | 193,885 |                     | $ | 195,482
|                           |  |               |         |                     |   |        



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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 available-for-sale by category and length of time an individual security has been in a continuous unrealized position as of December 31, 2008 and 2007 are as
follows (in thousands):



|                                                   |  |                     |        |                       |                   |        |                    |       |                       |       |  |                    |        |                       |  |   |        |  |   |        |  
|-------------------------------------------------- |  | ------------------- | ------ | --------------------- | ----------------- | ------ | ------------------ | ----- | --------------------- | ----- |  | ------------------ | ------ | --------------------- |  | - | ------ |  | - | ------ | -
|                                                   |  | Less Than 12 Months |        |                       | 12 Months or More |        |                    | Total |                      
|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   | )
|Other structured securities                        |  |                     | 13,670 |                       |                   | (988   | )                  |       |                       | 5,026 |  |                    | (1,318 | )                     |  |   | 18,696 |  |   | (2,306 | )
|                                                   |  |                     |        |                       |                   |        |                    |       |                       |       |  |                    |        |                       |  |   |        |  |   |        |  
|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 | )
|                                                   |  |                     |        |                       |                   |        |                    |       |                       |       |  |                    |        |                       |  |   |        |  |   |        |  



|                                         |  |                     |        |                       |                   |      |                    |       |                       |       |  |                    |     |                       |  |   |        |  |   |      |  
|---------------------------------------- |  | ------------------- | ------ | --------------------- | ----------------- | ---- | ------------------ | ----- | --------------------- | ----- |  | ------------------ | --- | --------------------- |  | - | ------ |  | - | ---- | -
|                                         |  | Less Than 12 Months |        |                       | 12 Months or More |      |                    | Total |                      
|2007                                     |  | EstimatedFairValue  |        | GrossUnrealizedLosses |                   |      | EstimatedFairValue |       | GrossUnrealizedLosses |       |  | EstimatedFairValue |     | GrossUnrealizedLosses | 
|U.S. Treasuries and government agencies  |  | $                   |       |                       | $                 |     |                    |       | $                     | 1,045 |  | $                  | (7  | )                     |  | $ | 1,045  |  | $ | (7   | )
|Corporate securities                     |  |                     | 4,658  |                       |                   | (85  | )                  |       |                       | 2,958 |  |                    | (31 | )                     |  |   | 7,616  |  |   | (116 | )
|Mortgage-backed securities               |  |                     | 437    |                       |                   | (2   | )                  |       |                       |      |  |                    |    |                       |  |   | 437    |  |   | (2   | )
|Other structured securities              |  |                     | 14,409 |                       |                   | (354 | )                  |       |                       | 1,758 |  |                    | (20 | )                     |  |   | 16,167 |  |   | (374 | )
|                                         |  |                     |        |                       |                   |      |                    |       |                       |       |  |                    |     |                       |  |   |        |  |   |      |  
|Total fixed income securities            |  |                     | 19,504 |                       |                   | (441 | )                  |       |                       | 5,761 |  |                    | (58 | )                     |  |   | 25,265 |  |   | (499 | )
|Equity securities                        |  |                     | 5,972  |                       |                   | (132 | )                  |       |                       |      |  |                    |    |                       |  |   | 5,972  |  |   | (132 | )
|                                         |  |                     |        |                       |                   |      |                    |       |                       |       |  |                    |     |                       |  |   |        |  |   |      |  
|Total fixed income and equity securities |  | $                   | 25,476 |                       | $                 | (573 | )                  |       | $                     | 5,761 |  | $                  | (58 | )                     |  | $ | 31,237 |  | $ | (631 | )
|                                         |  |                     |        |                       |                   |      |                    |       |                       |       |  |                    |     |                       |  |   |        |  |   |      |  

As of December 31, 2008, the Company held 105 fixed income securities with gross unrealized
losses totaling $3,111. 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 mortgage-backed 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 to 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 December 31, 2008, the Company held 33 equity securities with gross unrealized losses totaling $4,184. 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 December 31, 2008.

Proceeds from the sale of fixed income securities totaled $41,058, $50,309, and $42,443 for the years ended December 31, 2008, 2007, and 2006, respectively. Proceeds from the sale of equity securities totaled $4,699, $11,956, and
$6,855 for the years ended December 31, 2008, 2007, and 2006, respectively. Proceeds from the sale of other long-term investments totaled $820, $1,876, and $550 for the years ended December 31, 2008, 2007, and 2006, respectively.

The gross realized gains and gross realized losses recognized by the Company as a result of the sale of investments were as follows for
the years ended December 31, 2008, 2007, and 2006 (in thousands):



|                      |  |                       |       |   |                  |   |      |                     |  |       |   |  |   |       |  
|--------------------- |  | --------------------- | ----- | - | ---------------- | - | ---- | ------------------- |  | ----- | - |  | - | ----- | -
|2008                  |  | FixedIncomeSecurities |       |   | EquitySecurities |   |      | OtherInvestedAssets |  | Total |  
|Gross realized gains  |  | $                     | 1,414 |   |                  | $ | 380  |                     |  | $     |  |  | $ | 1,794 |  
|Gross realized losses |  |                       | (576  | ) |                  |   | (145 | )                   |  |       |  |  |   | (721  | )
|                      |  |                       |       |   |                  |   |      |                     |  |       |   |  |   |       |  
|Net realized gains    |  | $                     | 838   |   |                  | $ | 235  |                     |  | $     |  |  | $ | 1,073 |  
|                      |  |                       |       |   |                  |   |      |                     |  |       |   |  |   |       |  



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|                      |  |                       |       |   |                  |   |       |                     |  |       |     |  |   |       |  
|--------------------- |  | --------------------- | ----- | - | ---------------- | - | ----- | ------------------- |  | ----- | --- |  | - | ----- | -
|                      |  |                       |       |  
|2007                  |  | FixedIncomeSecurities |       |   | EquitySecurities |   |       | OtherInvestedAssets |  | Total |    
|Gross realized gains  |  | $                     | 2,284 |   |                  | $ | 1,116 |                     |  | $     | 344 |  | $ | 3,744 |  
|Gross realized losses |  |                       | (136  | ) |                  |   | (263  | )                   |  |       |    |  |   | (399  | )
|                      |  |                       |       |   |                  |   |       |                     |  |       |     |  |   |       |  
|Net realized gains    |  | $                     | 2,148 |   |                  | $ | 853   |                     |  | $     | 344 |  | $ | 3,345 |  
|                      |  |                       |       |   |                  |   |       |                     |  |       |     |  |   |       |  
|                      |  |                       |       |  
|2006                  |  | FixedIncomeSecurities |       |   | EquitySecurities |   |       | OtherInvestedAssets |  | Total |    
|Gross realized gains  |  | $                     | 655   |   |                  | $ | 1,272 |                     |  | $     | 81  |  | $ | 2,008 |  
|Gross realized losses |  |                       | (65   | ) |                  |   | (23   | )                   |  |       |    |  |   | (88   | )
|                      |  |                       |       |   |                  |   |       |                     |  |       |     |  |   |       |  
|Net realized gains    |  | $                     | 590   |   |                  | $ | 1,249 |                     |  | $     | 81  |  | $ | 1,920 |  
|                      |  |                       |       |   |                  |   |       |                     |  |       |     |  |   |       |  

For the year ended December 31, 2008, the Company recorded other-than-temporary impairments
related to fixed income and equity securities totaling $4,532 and $4,975, respectively. There were no impairments recorded in 2007 or 2006.

For the years ended December 31, 2008, 2007 and 2006, the change in the estimated fair value of convertible bonds included in net realized investment (losses) gains in the consolidated statement of operations and comprehensive income
totaled $(2,674), $(457) and $837, respectively.

The change in the Companys net unrealized gains and losses for the years ended
December 31, 2008, 2007, and 2006 was as follows (in thousands):



|                                                    |  |                       |       |   |                  |   |        |       |  |   |        |  
|--------------------------------------------------- |  | --------------------- | ----- | - | ---------------- | - | ------ | ----- |  | - | ------ | -
|2008                                                |  | FixedIncomeSecurities |       |   | EquitySecurities |   |        | Total | 
|Change in unrealized gains and losses, gross of tax |  | $                     | (647  | ) |                  | $ | (4,751 | )     |  | $ | (5,398 | )
|Tax effect                                          |  |                       | 159   |   |                  |   | 1,165  |       |  |   | 1,324  |  
|                                                    |  |                       |       |   |                  |   |        |       |  |   |        |  
|Change in net unrealized gains and losses           |  | $                     | (488  | ) |                  | $ | (3,586 | )     |  | $ | (4,074 | )
|                                                    |  |                       |       |   |                  |   |        |       |  |   |        |  
|                                                    |  |                       |      
|2007                                                |  | FixedIncomeSecurities |       |   | EquitySecurities |   |        | Total | 
|Change in unrealized gains and losses, gross of tax |  | $                     | 995   |   |                  | $ | 56     |       |  | $ | 1,051  |  
|Tax effect                                          |  |                       | (349  | ) |                  |   | (20    | )     |  |   | (369   | )
|                                                    |  |                       |       |   |                  |   |        |       |  |   |        |  
|Change in net unrealized gains and losses           |  | $                     | 646   |   |                  | $ | 36     |       |  | $ | 682    |  
|                                                    |  |                       |       |   |                  |   |        |       |  |   |        |  
|                                                    |  |                       |      
|2006                                                |  | FixedIncomeSecurities |       |   | EquitySecurities |   |        | Total | 
|Change in unrealized gains and losses, gross of tax |  | $                     | 1,850 |   |                  | $ | 529    |       |  | $ | 2,379  |  
|Tax effect                                          |  |                       | (661  | ) |                  |   | (185   | )     |  |   | (846   | )
|                                                    |  |                       |       |   |                  |   |        |       |  |   |        |  
|Change in net unrealized gains and losses           |  | $                     | 1,189 |   |                  | $ | 344    |       |  | $ | 1,533  |  
|                                                    |  |                       |       |   |                  |   |        |       |  |   |        |  

Net investment income for the years ended December 31, 2008, 2007, and 2006 was as follows
(in thousands):



|                                             |  |      |        |   |      |   |        |      |  |   |       |  
|-------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                             |  | 2008 |        |   | 2007 |   |        | 2006 | 
|Fixed income and convertible bond securities |  | $    | 9,276  |   |      | $ | 10,345 |      |  | $ | 7,114 |  
|Equity securities                            |  |      | 346    |   |      |   | 290    |      |  |   | 36    |  
|Cash and cash equivalents                    |  |      | 896    |   |      |   | 2,277  |      |  |   | 1,865 |  
|                                             |  |      |        |   |      |   |        |      |  |   |       |  
|Other                                        |  |      | 123    |   |      |   | 60     |      |  |   | 30    |  
|Gross investment income                      |  |      | 10,641 |   |      |   | 12,972 |      |  |   | 9,045 |  
|Investment expenses                          |  |      | (1,010 | ) |      |   | (1,303 | )    |  |   | (367  | )
|                                             |  |      |        |   |      |   |        |      |  |   |       |  
|Net investment income                        |  | $    | 9,631  |   |      | $ | 11,669 |      |  | $ | 8,678 |  
|                                             |  |      |        |   |      |   |        |      |  |   |       |  



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The Company accounts for its limited partnership investments under the equity method and reports changes
in its interest in the limited partnerships in the change in equity interest in other long-term investments in the consolidated statements of operations. The change in equity interest of the Companys limited partnership investments totaled
$(3,970), $759 and $314 for the years ended December 31, 2008, 2007 and 2006, respectively. The Companys investment in the municipal bond arbitrage fund and the multi-strategy fund of funds contributed $(2,019) and $(1,387), respectively,
to the total change in equity interest for the year ended December 31, 2008. As of December 31, 2008, the Companys ownership percentage in the municipal bond arbitrage fund and the multi-strategy fund of funds was approximately 2.95%
and 0.71%, respectively.

12. Reserves for Unpaid Losses and LAE

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 years ended December 31, 2008, 2007, and 2006
(in thousands):



|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|----------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                      |  | 2008 |         |   | 2007 |   |         | 2006 | 
|Balance, beginning of period                          |  | $    | 125,249 |   |      | $ | 121,396 |      |  | $ | 38,729  |  
|Reinsurance recoverables on unpaid losses and LAE     |  |      | 23,429  |   |      |   | 24,236  |      |  |   | 23,911  |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Net balance, beginning of period                      |  |      | 101,820 |   |      |   | 97,160  |      |  |   | 14,818  |  
|Net reserves acquired as a result of acquisition      |  |      | 7,004   |   |      |   |        |      |  |   | 73,554  |  
|Purchase accounting adjustments on acquisition date   |  |      | 537     |   |      |   |        |      |  |   | 2,432   |  
|Incurred related to:                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Current year                                          |  |      | 85,404  |   |      |   | 80,946  |      |  |   | 54,104  |  
|Prior year                                            |  |      | 15,009  |   |      |   | (6,189  | )    |  |   | (5,296  | )
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Total incurred before purchase accounting adjustments |  |      | 100,413 |   |      |   | 74,757  |      |  |   | 48,808  |  
|Purchase accounting adjustments                       |  |      | (548    | ) |      |   | (848    | )    |  |   | (538    | )
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Total incurred                                        |  |      | 99,865  |   |      |   | 73,909  |      |  |   | 48,270  |  
|Paid related to:                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Current year                                          |  |      | 40,570  |   |      |   | 37,019  |      |  |   | 28,609  |  
|Prior year                                            |  |      | 38,978  |   |      |   | 32,230  |      |  |   | 13,305  |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Total paid                                            |  |      | 79,548  |   |      |   | 69,249  |      |  |   | 41,914  |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Net balance, end of period                            |  |      | 129,678 |   |      |   | 101,820 |      |  |   | 97,160  |  
|Reinsurance recoverables on unpaid losses and LAE     |  |      | 25,636  |   |      |   | 23,429  |      |  |   | 24,236  |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Balance, end of period                                |  | $    | 155,314 |   |      | $ | 125,249 |      |  | $ | 121,396 |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Total reserves for unpaid for losses and LAE          |  | $    | 159,117 |   |      | $ | 129,788 |      |  | $ | 126,467 |  
|Less: Term life premium waiver reserves               |  |      | 3,766   |   |      |   | 4,481   |      |  |   | 4,815   |  
|Less: Other                                           |  |      | 37      |   |      |   | 58      |      |  |   | 256     |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  
|Balance, end of period                                |  | $    | 155,314 |   |      | $ | 125,249 |      |  | $ | 121,396 |  
|                                                      |  |      |         |   |      |   |         |      |  |   |         |  

Incurred losses by segment were as follows for the year ended December 31, 2008 (in
thousands):



|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |        |  |   |         |  
|----------------------------------------------------- |  | ------------------------------------ | ------ | - | ------------------------------------------ | - | ------ | ----------------------------- |  | - | --------------------------- | - | ----- | - | ------ |  | - | ------- | -
|                                                      |  | WorkersCompensationInsuranceSegment |        |   | SegregatedPortfolio CellReinsuranceSegment |   |        | GroupBenefitsInsuranceSegment |  |   | SpecialtyReinsuranceSegment |   | Total |  
|Incurred related to:                                  |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |        |  |   |         |  
|Current year, gross of discount                       |  | $                                    | 39,880 |   |                                            | $ | 15,274 |                               |  | $ | 26,114                      |   |       | $ | 5,746  |  | $ | 87,014  |  
|Current period discount                               |  |                                      | (1,078 | ) |                                            |   | (532   | )                             |  |   |                            |   |       |   |       |  |   | (1,610  | )
|Prior year, gross of discount                         |  |                                      | (2,703 | ) |                                            |   | (1,960 | )                             |  |   | (993                        | ) |       |   | 19,257 |  |   | 13,601  |  
|Accretion of prior period discount                    |  |                                      | 928    |   |                                            |   | 480    |                               |  |   |                            |   |       |   |       |  |   | 1,408   |  
|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |        |  |   |         |  
|Total incurred before purchase accounting adjustments |  |                                      | 37,027 |   |                                            |   | 13,262 |                               |  |   | 25,121                      |   |       |   | 25,003 |  |   | 100,413 |  
|Purchase accounting adjustments                       |  |                                      | (492   | ) |                                            |   | (80    | )                             |  |   |                            |   |       |   | 24     |  |   | (548    | )
|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |        |  |   |         |  
|Total incurred                                        |  | $                                    | 36,535 |   |                                            | $ | 13,182 |                               |  | $ | 25,121                      |   |       | $ | 25,027 |  | $ | 99,865  |  
|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |        |  |   |         |  



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Incurred losses by segment were as follows for the year ended December 31, 2007 (in thousands):



|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |        |  |   |        |  
|----------------------------------------------------- |  | ------------------------------------ | ------ | - | ------------------------------------------ | - | ------ | ----------------------------- |  | - | --------------------------- | - | ----- | - | ------ |  | - | ------ | -
|                                                      |  | WorkersCompensationInsuranceSegment |        |   | SegregatedPortfolio CellReinsuranceSegment |   |        | GroupBenefitsInsuranceSegment |  |   | SpecialtyReinsuranceSegment |   | Total |  
|Incurred related to:                                  |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |        |  |   |        |  
|Current year, gross of discount                       |  | $                                    | 34,962 |   |                                            | $ | 14,800 |                               |  | $ | 24,536                      |   |       | $ | 8,163  |  | $ | 82,461 |  
|Current period discount                               |  |                                      | (979   | ) |                                            |   | (536   | )                             |  |   |                            |   |       |   |       |  |   | (1,515 | )
|Prior year, gross of discount                         |  |                                      | (8,398 | ) |                                            |   | (3,023 | )                             |  |   | (961                        | ) |       |   | 4,844  |  |   | (7,538 | )
|Accretion of prior period discount                    |  |                                      | 787    |   |                                            |   | 562    |                               |  |   |                            |   |       |   |       |  |   | 1,349  |  
|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |        |  |   |        |  
|Total incurred before purchase accounting adjustments |  |                                      | 26,372 |   |                                            |   | 11,803 |                               |  |   | 23,575                      |   |       |   | 13,007 |  |   | 74,757 |  
|Purchase accounting adjustments                       |  |                                      | (758   | ) |                                            |   | (132   | )                             |  |   |                            |   |       |   | 42     |  |   | (848   | )
|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |        |  |   |        |  
|Total incurred                                        |  | $                                    | 25,614 |   |                                            | $ | 11,671 |                               |  | $ | 23,575                      |   |       | $ | 13,049 |  | $ | 73,909 |  
|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |        |  |   |        |  

Incurred losses by segment were as follows for the year ended December 31, 2006 (in
thousands):



|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |       |  |   |        |  
|----------------------------------------------------- |  | ------------------------------------ | ------ | - | ------------------------------------------ | - | ------ | ----------------------------- |  | - | --------------------------- | - | ----- | - | ----- |  | - | ------ | -
|                                                      |  | WorkersCompensationInsuranceSegment |        |   | SegregatedPortfolio CellReinsuranceSegment |   |        | GroupBenefitsInsuranceSegment |  |   | SpecialtyReinsuranceSegment |   | Total |  
|Incurred related to:                                  |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |       |  |   |        |  
|Current year, gross of discount                       |  | $                                    | 17,941 |   |                                            | $ | 8,184  |                               |  | $ | 23,487                      |   |       | $ | 5,372 |  | $ | 54,984 |  
|Current period discount                               |  |                                      | (568   | ) |                                            |   | (312   | )                             |  |   |                            |   |       |   |      |  |   | (880   | )
|Prior year, gross of discount                         |  |                                      | (2,050 | ) |                                            |   | (2,088 | )                             |  |   | (2,563                      | ) |       |   | 894   |  |   | (5,807 | )
|Accretion of prior period discount                    |  |                                      | 323    |   |                                            |   | 188    |                               |  |   |                            |   |       |   |      |  |   | 511    |  
|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |       |  |   |        |  
|Total incurred before purchase accounting adjustments |  |                                      | 15,646 |   |                                            |   | 5,972  |                               |  |   | 20,924                      |   |       |   | 6,266 |  |   | 48,808 |  
|Purchase accounting adjustments                       |  |                                      | (484   | ) |                                            |   | (80    | )                             |  |   |                            |   |       |   | 26    |  |   | (538   | )
|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |       |  |   |        |  
|Total incurred                                        |  | $                                    | 15,162 |   |                                            | $ | 5,892  |                               |  | $ | 20,924                      |   |       | $ | 6,292 |  | $ | 48,270 |  
|                                                      |  |                                      |        |   |                                            |   |        |                               |  |   |                             |   |       |   |       |  |   |        |  

The Companys results of operations include a decrease of $13.6 million related to
unfavorable loss reserve development on prior accident year reserves, prior to the impact of discount accretion, for the year ended December 31, 2008, compared to an increase of $7.5 million related to favorable development for the same period
in 2007. The 2008 unfavorable development primarily reflects reserve strengthening in the run-off specialty reinsurance segment, while the 2007 favorable development primarily relates to the workers compensation insurance segment.

The following provides a summary, by segment, of the impact of prior year reserve development on the Companys loss and loss adjustment expenses:

Workers Compensation Insurance.The favorable loss reserve development in the workers compensation insurance segment for
the year ended December 31, 2008 primarily reflects the impact of claim settlements in 2008 for amounts at, or less than, previously established case and IBNR reserves. For the year ended December 31, 2008, the Company closed 360, or
63.2%, of the 570 open lost time claims as of December 31, 2007. In the aggregate, the claims were closed at amounts lower than the provision established for IBNR claims. The favorable loss reserve development in the workers compensation
insurance segment for the year ended December 31, 2007 primarily reflects the impact of claim settlements in 2007 for amounts at, or less than, previously established case and IBNR reserves. For the year ended December 31, 2007, the
Company closed 281, or 56.8%, of the 490 open lost time claims as of December 31, 2006. In the aggregate, the claims were closed at amounts lower than the provision established for IBNR claims.

Segregated Portfolio Cell Reinsurance.The favorable loss reserve development in the workers compensation insurance segment for the years
ended December 31, 2008 and 2007 primarily reflects the impact of claim settlements in each respective year for amounts at, or less than, previously established case and IBNR reserves.

Group Benefits Insurance.The favorable loss reserve development in the group benefits insurance segment primarily reflects better than expected
claim results in the dental, short-term disability and term life lines.

Run-off Specialty Reinsurance.The unfavorable loss
reserve development in the run-off specialty reinsurance segment for the year ended December 31, 2008 primarily reflects the impact of reserve strengthening related to the EnviroGuard program. Of the $19.3 million in unfavorable development,
$13.9 million was recorded in the fourth quarter of 2008 and reflects additional information acquired by the Company during the annual claim audit conducted in January 2009. The claim



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audit revealed several factors which contributed to the increased case reserves reported to the Company by the primary insurer and, therefore, resulted in
management increasing the loss development factors utilized in estimating the IBNR reserves. Those factors include 1) an improvement in the ceding companys ability to estimate loss costs earlier in the claims process, including the receipt of
damage estimates from contractors and consultants, 2) jurisdictions becoming more aggressive in requiring quicker, more extensive clean-up and an increase in construction costs related to the clean-up, and 3) courts limiting the ability of insurance
companies to enforce policy coverage limitations as the courts are more interested in an expeditious clean up due to environmental concerns. The unfavorable loss reserve development for the year ended December 31, 2007 primarily reflects the
result of changes in estimates as losses emerged at a higher rate than had been originally anticipated when the reserves were estimated with respect to accident periods 2006, 2005, 2004 and 2003.

13. Reinsurance

The Company purchases reinsurance to
manage its loss exposure. Although reinsurance agreements contractually obligate the Companys reinsurers to reimburse the Company for the agreed upon portion of its gross paid losses, they do not discharge the primary liability of the Company.

The following table provides a summary of the Companys premiums on a direct, assumed, ceded, and net basis for the years ended
December 31, 2008, 2007, and 2006 (in thousands):



|                                        |  |         |         |   |        |   |         |         |  |   |         |   |  |         |         |   |        |   |         |   |  |   |        |  
|--------------------------------------- |  | ------- | ------- | - | ------ | - | ------- | ------- |  | - | ------- | - |  | ------- | ------- | - | ------ | - | ------- | - |  | - | ------ | -
|                                        |  | 2008    |         |   | 2007   |   |         | 2006    | 
|                                        |  | Written |         |   | Earned |   |         | Written |  |   | Earned  |   |  | Written |         |   | Earned |  
|Direct premiums                         |  | $       | 112,512 |   |        | $ | 109,518 |         |  | $ | 104,263 |   |  | $       | 102,260 |   |        | $ | 75,011  |   |  | $ | 67,446 |  
|Assumed premiums                        |  |         | 33,106  |   |        |   | 36,915  |         |  |   | 43,183  |   |  |         | 42,890  |   |        |   | 17,836  |   |  |   | 23,250 |  
|Ceded premiums                          |  |         | (10,393 | ) |        |   | (10,113 | )       |  |   | (13,055 | ) |  |         | (13,153 | ) |        |   | (16,242 | ) |  |   | (6,701 | )
|                                        |  |         |         |   |        |   |         |         |  |   |         |   |  |         |         |   |        |   |         |   |  |   |        |  
|Net premiums before purchase accounting |  |         | 135,225 |   |        |   | 136,320 |         |  |   | 134,391 |   |  |         | 131,997 |   |        |   | 76,605  |   |  |   | 83,995 |  
|Purchase accounting adjustment          |  |         | (513    | ) |        |   | (513    | )       |  |   | (2,502  | ) |  |         | (2,502  | ) |        |   | (9,076  | ) |  |   | (9,076 | )
|                                        |  |         |         |   |        |   |         |         |  |   |         |   |  |         |         |   |        |   |         |   |  |   |        |  
|Net premiums                            |  | $       | 134,712 |   |        | $ | 135,807 |         |  | $ | 131,889 |   |  | $       | 129,495 |   |        | $ | 67,529  |   |  | $ | 74,919 |  
|                                        |  |         |         |   |        |   |         |         |  |   |         |   |  |         |         |   |        |   |         |   |  |   |        |  

The following table provides a summary of the Companys losses and loss adjustment expenses
incurred on a direct, assumed, ceded and net basis for the years ended December 31, 2008, 2007, and 2006 (in thousands):



|                                                       |  |      |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                       |  | 2008 |        |   | 2007 |   |        | 2006 | 
|Direct losses and LAE incurred                         |  | $    | 62,829 |   |      | $ | 52,023 |      |  | $ | 33,510 |  
|Assumed losses and LAE incurred                        |  |      | 39,325 |   |      |   | 25,791 |      |  |   | 12,926 |  
|Ceded losses and LAE incurred                          |  |      | (2,418 | ) |      |   | (3,378 | )    |  |   | 2,015  |  
|                                                       |  |      |        |   |      |   |        |      |  |   |        |  
|Net losses and LAE incurred before purchase accounting |  |      | 99,736 |   |      |   | 74,436 |      |  |   | 48,451 |  
|Purchase accounting adjustment                         |  |      | (548   | ) |      |   | (848   | )    |  |   | (538   | )
|                                                       |  |      |        |   |      |   |        |      |  |   |        |  
|Net losses and LAE                                     |  | $    | 99,188 |   |      | $ | 73,588 |      |  | $ | 47,913 |  
|                                                       |  |      |        |   |      |   |        |      |  |   |        |  

As a result of A.M. Best upgrading ELHs financial strength rating from B++ (Very
Good) to A- (Excellent) in June 2007, the Company terminated its coinsurance agreement with London Life Reinsurance Company (LLRC) and the related stop loss reinsurance agreement with London Life International Reinsurance Corporation
effective June 30, 2007. The termination of these agreements had no effect on the consolidated financial statements.

ELH entered into
a coinsurance agreement in 1999, under which it ceded an existing block of outstanding claims related to a program that provided long-term disability coverage to certain professional associations. The Company recorded a reinsurance recoverable
totaling $9,034 and $10,163 as of December 31, 2008 and 2007, related to this block of ceded claims.

14. Income Taxes

The components of the income tax provision for the years ended December 31, 2008, 2007, and 2006 are as follows (in thousands):



|                                              |  |      |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                              |  | 2008 |        |   | 2007 |   |        | 2006 | 
|Current tax expense                           |  | $    | 5,418  |   |      | $ | 9,458  |      |  | $ | 5,185  |  
|Deferred tax (benefit) expense                |  |      | (4,681 | ) |      |   | (1,066 | )    |  |   | 849    |  
|                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Income tax expense before purchase accounting |  | $    | 737    |   |      | $ | 8,392  |      |  | $ | 6,034  |  
|Purchase accounting adjustment                |  |      | 327    |   |      |   | (730   | )    |  |   | (1,092 | )
|                                              |  |      |        |   |      |   |        |      |  |   |        |  
|Income tax expense                            |  | $    | 1,064  |   |      | $ | 7,662  |      |  | $ | 4,942  |  
|                                              |  |      |        |   |      |   |        |      |  |   |        |  



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In addition to the income tax provision, the net deferred tax asset increased (decreased) by $1,022,
$(696), and $132 in 2008, 2007, and 2006, respectively, as a result of changes in the unrealized gains and losses on the Companys fixed income and equity securities. The net deferred tax asset was also increased (decreased) by $558 and $(58)
in 2008 and 2007, respectively, related to unrecognized benefit plan gains. The tax effect of these items is recorded directly to accumulated other comprehensive income, which is a component of equity.

The provision for income taxes for the years ended December 31, 2008, 2007, and 2006 is as follows (in thousands):



|                                                         |  |      |        |   |      |   |       |      |  |   |        |  
|-------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | ---- |  | - | ------ | -
|                                                         |  | 2008 |        |   | 2007 |   |       | 2006 | 
|Income tax (benefit) expense at statutory rate           |  | $    | (6,099 | ) |      | $ | 8,963 |      |  | $ | 5,719  |  
|Outside basis difference related to Eastern Re           |  |      | 7,155  |   |      |   |      |      |  |   |       |  
|Prior year tax return adjustment                         |  |      | 82     |   |      |   | (384  | )    |  |   | 208    |  
|Non-deductible intangible asset amortization             |  |      |       |   |      |   | 608   |      |  |   | 381    |  
|Non-deductible transaction expenses                      |  |      |       |   |      |   |      |      |  |   | 109    |  
|Tax-exempt interest                                      |  |      | (554   | ) |      |   | (608  | )    |  |   | (174   | )
|Release of contingency reserve                           |  |      |       |   |      |   | (200  | )    |  |   | (162   | )
|Stock compensation expense                               |  |      | 192    |   |      |   | 143   |      |  |   | 53     |  
|Rehabilitation tax credits                               |  |      |       |   |      |   | (131  | )    |  |   |       |  
|Other                                                    |  |      | (39    | ) |      |   | 1     |      |  |   | (100   | )
|                                                         |  |      |        |   |      |   |       |      |  |   |        |  
|Income tax expense before purchase accounting adjustment |  |      | 737    |   |      |   | 8,392 |      |  |   | 6,034  |  
|Purchase accounting adjustment                           |  |      | 327    |   |      |   | (730  | )    |  |   | (1,092 | )
|                                                         |  |      |        |   |      |   |       |      |  |   |        |  
|Income tax expense                                       |  | $    | 1,064  |   |      | $ | 7,662 |      |  | $ | 4,942  |  
|                                                         |  |      |        |   |      |   |       |      |  |   |        |  

The components of the net deferred tax asset as of December 31, 2008 and 2007 are as follows
(in thousands):



|                                                  |  |      |        |      |   |      
|------------------------------------------------- |  | ---- | ------ | ---- | - | -----
|                                                  |  | 2008 |        | 2007
|Deferred tax assets:                              |  |      |        |      |   |      
|Reserve discounting                               |  | $    | 2,256  |      | $ | 2,853
|Unearned/advance premiums                         |  |      | 2,257  |      |   | 2,317
|Other-than-temporary investment impairments       |  |      | 2,687  |      |   |     
|Unrealized loss on investments                    |  |      | 715    |      |   |     
|Limited partnership investments                   |  |      | 1,210  |      |   |     
|Policyholder dividends                            |  |      | 389    |      |   | 289  
|Allowance for doubtful accounts                   |  |      | 69     |      |   | 204  
|Accrued liabilities                               |  |      | 63     |      |   | 233  
|Stock compensation expense                        |  |      | 646    |      |   | 475  
|Net benefit plan liability                        |  |      | 174    |      |   |     
|Other                                             |  |      | 92     |      |   | 180  
|                                                  |  |      |        |      |   |      
|Total deferred tax assets                         |  |      | 10,558 |      |   | 6,551
|                                                  |  |      |        |      |   |      
|                                                  |  |     
|Deferred tax liabilities:                         |  |      |        |      |   |      
|Intangible assets                                 |  |      | 2,845  |      |   | 1,863
|Unrealized gain on investments                    |  |      |       |      |   | 1,244
|Deferred acquisition costs                        |  |      | 898    |      |   | 1,293
|Depreciation and amortization                     |  |      | 181    |      |   | 156  
|Limited partnership investments                   |  |      |       |      |   | 182  
|Subpart F income                                  |  |      | 470    |      |   | 470  
|Net benefit plan asset                            |  |      |       |      |   | 361  
|Other                                             |  |      | 86     |      |   |     
|                                                  |  |      |        |      |   |      
|Total deferred tax liabilities                    |  |      | 4,480  |      |   | 5,569
|                                                  |  |      |        |      |   |      
|Net deferred tax asset before purchase accounting |  |      | 6,078  |      |   | 982  
|Purchase accounting adjustment                    |  |      | 203    |      |   | 247  
|                                                  |  |      |        |      |   |      
|Net deferred tax asset                            |  | $    | 6,281  |      | $ | 1,229
|                                                  |  |      |        |      |   |      



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As of December 31, 2008, the net deferred tax asset of $6,281 has not been reduced by a valuation
allowance because management believes that, while it is not assured, it is more likely than not that the Company will generate sufficient future taxable income to utilize these net future tax deductions. The amount of the net deferred tax asset
considered realizable, however, could be materially reduced in the near term if estimates of future taxable income in the years in which the differences are expected to reverse are decreased.

As of December 31, 2008, the Company has not recognized a deferred tax asset related to its run-off specialty reinsurance segment of $7,155, which
represents the excess of the tax basis over the amount for financial reporting (i.e., outside basis difference) of Eastern Re as of December 31, 2008. The outside basis difference primarily arises from losses at Eastern Re recognized for
financial statement purposes, which have not yet been recognized for tax purposes. Under United States federal income tax rules and regulations, net operating losses generated by a foreign subsidiary can only be used to offset future taxable income
of that subsidiary. There is no expiration date with respect to the ability to utilize the net operating losses; however, management presently believes that the Company will not be able to recognize these tax benefits in the foreseeable future and,
therefore, has not recognized the future tax benefits as of December 31, 2008.

The Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN 48) effective January 1, 2007. The adoption of FIN 48 had no effect on the Companys consolidated financial
statements. As of December 31, 2008, the Company has no tax positions for which management believes a provision for uncertainty is necessary. The Companys federal income tax returns for tax years subsequent to December 31, 2004 are
subject to examination by the Internal Revenue Service.

15. Employee Benefit Plans

ESOP

The Company sponsors an ESOP. Eligible employees generally include those employees who
have reached the age of 21 and have completed one year of service. All employees that were employed by EHC or ELH on June 16, 2006 were determined to have met the eligibility requirements on that date. ESOP shares are allocated to participants
based on the ratio of their individual compensation during the plan year to the total compensation of eligible employees during the plan year.

The Company issued 747,500 shares of its common stock to the ESOP on June 16, 2006, and the ESOP signed a promissory note in the amount of $7,475 for the purchase of the shares, which is due in ten equal installments, with interest
accruing annually at 4%. Shares purchased are held in a suspense account for allocation among participating employees as the loan is repaid.

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



|                                |  |                                           |         |      |   |        
|------------------------------- |  | ----------------------------------------- | ------- | ---- | - | -------
|                                |  | As of and for the YearsEnded December 31,
|                                |  | 2008                                      |         | 2007
|Suspense shares                 |  |                                           | 635,375 |      |   | 710,125
|Allocated shares                |  |                                           | 112,125 |      |   | 37,375 
|Shares committed to be released |  |                                           | 74,750  |      |   | 74,750 
|Average price per share         |  | $                                         | 13.98   |      | $ | 15.46  
|Stock compensation expense      |  | $                                         | 1,045   |      | $ | 1,156  

Suspense shares represent shares held by the ESOP that have not been allocated to participant
accounts. Allocated shares have been earned and allocated to participant accounts, while shares committed to be released have been earned, but have not yet been allocated to participant accounts.

As of December 31, 2008 and 2007, the estimated fair value of unearned ESOP shares were $6,873 and $10,477, respectively.

Other Benefit Plans

ELH sponsors a
non-contributory defined benefit pension plan (the pension plan) covering substantially all of its employees. On May 17, 2005, ELHs Board of Directors approved the freezing of the pension plan effective December 31, 2005.
ELH also sponsors a defined benefit postretirement plan (the postretirement plan), which provides certain health care



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and life insurance benefits for retired employees. Current employees of ELH may become eligible for these benefits if they reach retirement age while working
for ELH and meet certain years of service levels prior to January 1, 2015. Life insurance benefits are set at 100% of an employees annual salary at the time of retirement, up to a maximum of $175, and are reduced to $10 by age 70.

Pension costs are funded to the limits specified by the Employee Retirement Income Security Act of 1974, as amended. From time to time,
the Company may contribute additional amounts to the pension plan as it deems appropriate, subject to funding limitations. Based on the funded status of the pension plan as of December 31, 2008, the Company does not anticipate making a
contribution in 2009. The Company anticipates making a contribution to the postretirement plan in 2009 of approximately $43.

The Company
uses a measurement date of December 31 for its plans.

A reconciliation of changes in the benefit obligation, fair value of plan
assets and funded status of the pension plan and the postretirement plan as of December 31, 2008 and 2007 is as follows (in thousands):



|                                                    |  |              |       |   |                     |   |        |      |  |   |      |   |  |   |      |  
|--------------------------------------------------- |  | ------------ | ----- | - | ------------------- | - | ------ | ---- |  | - | ---- | - |  | - | ---- | -
|                                                    |  | Pension Plan |       |   | Postretirement Plan |  
|                                                    |  | 2008         |       |   | 2007                |   |        | 2008 |  |   | 2007 |  
|Change in benefit obligation:                       |  |              |       |   |                     |   |        |      |  |   |      |   |  |   |      |  
|Benefit obligation at beginning of year             |  | $            | 5,065 |   |                     | $ | 9,335  |      |  | $ | 334  |   |  | $ | 324  |  
|Service cost                                        |  |              |      |   |                     |   |       |      |  |   |     |   |  |   |     |  
|Interest cost                                       |  |              | 327   |   |                     |   | 510    |      |  |   | 19   |   |  |   | 16   |  
|Participant contributions                           |  |              |      |   |                     |   |       |      |  |   | 16   |   |  |   | 94   |  
|Actuarial loss (gain)                               |  |              | 515   |   |                     |   | (576   | )    |  |   | (36  | ) |  |   | 34   |  
|Settlement gain                                     |  |              |      |   |                     |   |       |      |  |   |     |   |  |   |     |  
|Benefits paid                                       |  |              | (234  | ) |                     |   | (424   | )    |  |   | (21  | ) |  |   | (134 | )
|Other                                               |  |              |      |   |                     |   | (3,780 | )    |  |   |     |   |  |   |     |  
|                                                    |  |              |       |   |                     |   |        |      |  |   |      |   |  |   |      |  
|Benefit obligation at end of year                   |  |              | 5,673 |   |                     |   | 5,065  |      |  |   | 312  |   |  |   | 334  |  
|                                                    |  |              |       |  
|Change in plan assets:                              |  |              |       |   |                     |   |        |      |  |   |      |   |  |   |      |  
|Fair value of plan assets at beginning of year      |  |              | 6,431 |   |                     |   | 9,940  |      |  |   |     |   |  |   |     |  
|Actual return on plan assets                        |  |              | (708  | ) |                     |   | 695    |      |  |   |     |   |  |   |     |  
|Employer contributions                              |  |              |      |   |                     |   |       |      |  |   | 5    |   |  |   | 40   |  
|Participant contributions                           |  |              |      |   |                     |   |       |      |  |   | 16   |   |  |   | 94   |  
|Benefits paid                                       |  |              | (234  | ) |                     |   | (424   | )    |  |   | (21  | ) |  |   | (134 | )
|Other                                               |  |              |      |   |                     |   | (3,780 | )    |  |   |     |   |  |   |     |  
|                                                    |  |              |       |   |                     |   |        |      |  |   |      |   |  |   |      |  
|Fair value of plan assets at end of year            |  |              | 5,489 |   |                     |   | 6,431  |      |  |   |     |   |  |   |     |  
|                                                    |  |              |       |  
|Funded status:                                      |  |              |       |   |                     |   |        |      |  |   |      |   |  |   |      |  
|Funded status                                       |  |              | 184   |   |                     |   | (1,366 | )    |  |   | 312  |   |  |   | 334  |  
|Unrecognized net actuarial (gain) loss              |  |              |      |   |                     |   |       |      |  |   |     |   |  |   |     |  
|Unrecognized transition obligation                  |  |              |      |   |                     |   |       |      |  |   |     |   |  |   |     |  
|Unrecognized prior service cost                     |  |              |      |   |                     |   |       |      |  |   |     |   |  |   |     |  
|                                                    |  |              |       |   |                     |   |        |      |  |   |      |   |  |   |      |  
|Accrued (prepaid) benefit plan liabilities (assets) |  | $            | 184   |   |                     | $ | (1,366 | )    |  | $ | 312  |   |  | $ | 334  |  
|                                                    |  |              |       |   |                     |   |        |      |  |   |      |   |  |   |      |  

During 2007, the Company purchased an annuity to satisfy future obligations of the pension plan
related to participants receiving benefits as of December 31, 2007. As a result of this transaction, the benefit obligation and plan assets were reduced by $3,780, which reflects the cost of the annuity.

As of December 31, 2008 and 2007, the following amounts related to the pension plan and postretirement plan have been included in accumulated other
comprehensive income (AOCI) (in thousands):



|                            |  |             |        |   |                    |   |      |      |  |   |      |   |  |   |      |  
|--------------------------- |  | ----------- | ------ | - | ------------------ | - | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                            |  | PensionPlan |        |   | PostretirementPlan |  
|                            |  | 2008        |        |   | 2007               |   |      | 2008 |  |   | 2007 |  
|Net actuarial gain          |  | $           | (1,097 | ) |                    | $ | 510  |      |  | $ | 315  |   |  | $ | 302  |  
|Net transition asset        |  |             | 3      |   |                    |   | 5    |      |  |   |     |   |  |   |     |  
|                            |  |             |        |   |                    |   |      |      |  |   |      |   |  |   |      |  
|Total before taxes          |  |             | (1,094 | ) |                    |   | 515  |      |  |   | 315  |   |  |   | 302  |  
|Tax effect                  |  |             | 383    |   |                    |   | (180 | )    |  |   | (110 | ) |  |   | (106 | )
|                            |  |             |        |   |                    |   |      |      |  |   |      |   |  |   |      |  
|Net amount included in AOCI |  | $           | (711   | ) |                    | $ | 335  |      |  | $ | 205  |   |  | $ | 196  |  
|                            |  |             |        |   |                    |   |      |      |  |   |      |   |  |   |      |  



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The amounts included in AOCI that are expected to be recognized in 2009 are as follows (in thousands):



|                          |  |             |     |   |                    |   |   
|------------------------- |  | ----------- | --- | - | ------------------ | - | --
|                          |  | PensionPlan |     |   | PostretirementPlan
|Net actuarial (loss) gain |  | $           | (42 | ) |                    | $ | 24
|Net transition asset      |  |             | 2   |   |                    |   |  
|                          |  |             |     |   |                    |   |   
|Total                     |  | $           | (40 | ) |                    | $ | 24
|                          |  |             |     |   |                    |   |   

The accumulated benefit obligation of the pension plan at December 31, 2008 and 2007 was
$5,673 and $5,065, respectively, and the accumulated benefit obligation of the postretirement plan was $312 and $334, respectively.

Benefits paid totaled $234, $424, and $522 for the pension plan and $21, $134, and $152 for the postretirement plan for the years ended December 31, 2008, 2007, and 2006, respectively. The estimated future benefits to be paid over the
next ten years are as follows (in thousands):



|          |  |             |       |                    |   |    
|--------- |  | ----------- | ----- | ------------------ | - | ---
|          |  | PensionPlan |       | PostretirementPlan
|2009      |  | $           | 49    |                    | $ | 43 
|2010      |  |             | 46    |                    |   | 34 
|2011      |  |             | 110   |                    |   | 34 
|2012      |  |             | 100   |                    |   | 33 
|2013      |  |             | 230   |                    |   | 25 
|2014-2018 |  |             | 1,360 |                    |   | 120
|          |  |             |       |                    |   |    
|Total     |  | $           | 1,895 |                    | $ | 289
|          |  |             |       |                    |   |    

The pension plans assets were comprised of the following at December 31, 2008 and 2007
(in thousands):



|                        |  |      |       |      |   |      
|----------------------- |  | ---- | ----- | ---- | - | -----
|                        |  | 2008 |       | 2007
|Equity securities       |  | $    | 441   |      | $ | 689  
|Fixed income securities |  |      | 5,048 |      |   | 5,742
|                        |  |      |       |      |   |      
|Total                   |  | $    | 5,489 |      | $ | 6,431
|                        |  |      |       |      |   |      

The primary investment objective of the pension plan is to achieve maximum rates of return
commensurate with safety of principal. The pension plan asset allocation is reviewed annually to determine whether the portfolio mix is within an acceptable range of the target allocation. Target asset allocations are based on asset and liability
studies with the goal to enhance the expected return of the pension plan portfolio while maintaining acceptable levels of risk. As of December 31, 2008 the target asset allocation for the portfolio is 10% equity securities and 90% fixed income
securities.

Historical and future expected returns of multiple asset classes were analyzed to develop a risk-free real rate of return and
risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk-free real rate of return, and the associated risk premium. A weighted average rate was developed based on
those overall rates and the target asset allocation of the pension plan.

The assumptions used in the measurement of the Companys
benefit obligation are shown in the following table:



|                                        |  |              |   |  |                     |   |  |      |   |  |      |  
|--------------------------------------- |  | ------------ | - |  | ------------------- | - |  | ---- | - |  | ---- | -
|                                        |  | Pension Plan |   |  | Postretirement Plan |  
|                                        |  | 2008         |   |  | 2007                |   |  | 2008 |   |  | 2007 |  
|Weighted average discount rate          |  | 6.00         | % |  | 6.50                | % |  | 6.18 | % |  | 6.10 | %
|Rate of increase in compensation levels |  | N/A          |   |  | N/A                 |   |  | 3.50 | % |  | 3.50 | %

The following table provides the components of net periodic benefit cost for the pension plan and
the postretirement plan for the years ending December 31, 2008, 2007, and 2006 (in thousands):



|                                 |  |              |      |   |                     |   |      |      |  |   |      |   |  |      |     |   |      |   |     |   |  |   |     |  
|-------------------------------- |  | ------------ | ---- | - | ------------------- | - | ---- | ---- |  | - | ---- | - |  | ---- | --- | - | ---- | - | --- | - |  | - | --- | -
|                                 |  | Pension Plan |      |   | Postretirement Plan |  
|                                 |  | 2008         |      |   | 2007                |   |      | 2006 |  |   | 2008 |   |  | 2007 |     |   | 2006 |  
|Interest cost                    |  | $            | 327  |   |                     | $ | 510  |      |  | $ | 511  |   |  | $    | 19  |   |      | $ | 16  |   |  | $ | 22  |  
|Expected return on plan assets   |  |              | (384 | ) |                     |   | (656 | )    |  |   | (631 | ) |  |      |    |   |      |   |    |   |  |   |    |  
|Recognized net actuarial gain    |  |              |     |   |                     |   |     |      |  |   |     |   |  |      | (22 | ) |      |   | (28 | ) |  |   | (21 | )
|Amortization of transition asset |  |              | (2   | ) |                     |   | (3   | )    |  |   | (3   | ) |  |      |    |   |      |   |    |   |  |   |    |  
|Other                            |  |              |     |   |                     |   | (384 | )    |  |   |     |   |  |      |    |   |      |   |    |   |  |   |    |  
|                                 |  |              |      |   |                     |   |      |      |  |   |      |   |  |      |     |   |      |   |     |   |  |   |     |  
|Net periodic benefit cost        |  | $            | (59  | ) |                     | $ | (533 | )    |  | $ | (123 | ) |  | $    | (3  | ) |      | $ | (12 | ) |  | $ | 1   |  
|                                 |  |              |      |   |                     |   |      |      |  |   |      |   |  |      |     |   |      |   |     |   |  |   |     |  



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During 2007, the Company recognized a settlement gain of $384 related to the purchase of the annuity to
satisfy the future obligations of the pension plan related to participants receiving benefits as of December 31, 2007.

The
assumptions used in the measurement of the Companys net periodic benefit cost for the pension plan and the postretirement plan are shown in the following table:



|                                                 |  |              |   |  |                     |   |  |      |   |  |      |   |  |      |   |  |      |  
|------------------------------------------------ |  | ------------ | - |  | ------------------- | - |  | ---- | - |  | ---- | - |  | ---- | - |  | ---- | -
|                                                 |  | Pension Plan |   |  | Postretirement Plan |  
|                                                 |  | 2008         |   |  | 2007                |   |  | 2006 |   |  | 2008 |   |  | 2007 |   |  | 2006 |  
|Weighted average discount rate                   |  | 6.50         | % |  | 5.60                | % |  | 5.50 | % |  | 6.10 | % |  | 5.60 | % |  | 5.50 | %
|Expected long-term rate of return on plan assets |  | 6.00         | % |  | 6.75                | % |  | 6.75 | % |  | N/A  |   |  | N/A  |   |  | N/A  |  
|Rate of increase in compensation levels          |  | N/A          |   |  | N/A                 |   |  | N/A  |   |  | 3.50 | % |  | 3.50 | % |  | 3.50 | %

As of December 31, 2008, the assumed healthcare cost trend rate used in the estimate of the
postretirement benefit plan obligation was 6.00%, with the rate decreasing to 4.00% in 2011 and thereafter. An increase or decrease in the assumed healthcare cost trend of one percentage point does not have a material impact on the Companys
benefit obligation or net periodic benefit cost as of December 31, 2008.

The Company also sponsors a defined contribution plan
covering eligible employees. The Companys contributions to the defined contribution plan for the years ended December 31, 2008, 2007, and 2006 totaled $237, $195, and $131, respectively.

16. Segment Information

The Companys current
operates in four business segments. The specialty reinsurance segment was placed into run-off effective July 1, 2008.

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 approximately $4,188 and $3,900 for the years ended December 31, 2008 and 2007, respectively.

Group Benefits
Insurance

The Companys group benefits insurance products include dental, short and long-term disability, and term life insurance.
The group benefits insurance products are marketed to employers, primarily in the Mid-Atlantic, Southeast, and Midwest regions of the United States. Net premiums earned, by product, for the years ended December 31, 2008, 2007, and 2006 were as
follows (in thousands):



|                      |  |      |        |      |   |        |  |   |       
|--------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                      |  | 2008 |        | 2007 |   | 2006  
|Dental                |  | $    | 22,737 |      | $ | 21,819 |  | $ | 19,482
|Short-term disability |  |      | 6,571  |      |   | 6,627  |  |   | 6,459 
|Long-term disability  |  |      | 1,591  |      |   | 1,691  |  |   | 1,906 
|Term life             |  |      | 5,824  |      |   | 5,726  |  |   | 5,604 
|                      |  |      |        |      |   |        |  |   |       
|Total                 |  | $    | 36,723 |      | $ | 35,863 |  | $ | 33,451
|                      |  |      |        |      |   |        |  |   |       



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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. Prior to terminating its participation in the reinsurance treaties
effective July 1, 2008, the Company had reduced its participation in the EnviroGuard and EIA programs from a 25% quota share participation to a 15% quota share participation effective January 1, 2008. Net premiums earned, by program and
before purchase accounting adjustments, for the years ended December 31, 2008 and 2007 were as follows (in thousands):



|            |  |      |       |      |   |        |  |   |      
|----------- |  | ---- | ----- | ---- | - | ------ |  | - | -----
|            |  | 2008 |       | 2007 |   | 2006  
|EnviroGuard |  | $    | 6,697 |      | $ | 11,241 |  | $ | 5,815
|EIA         |  |      | 2,976 |      |   | 3,510  |  |   | 2,320
|Other       |  |      | 9     |      |   | 550    |  |   |     
|            |  |      |       |      |   |        |  |   |      
|Total       |  | $    | 9,682 |      | $ | 15,301 |  | $ | 8,135
|            |  |      |       |      |   |        |  |   |      

Corporate/Other

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

The following table represents the segment results for the year ended December 31, 2008 (in thousands):



|                                                         |  |                               |         |   |                                     |   |        |                        |  |   |                             |   |  |                 |         |   |       |   |         |   |  |   |         |  
|-------------------------------------------------------- |  | ----------------------------- | ------- | - | ----------------------------------- | - | ------ | ---------------------- |  | - | --------------------------- | - |  | --------------- | ------- | - | ----- | - | ------- | - |  | - | ------- | -
|                                                         |  | WorkersCompensationInsurance |         |   | SegregatedPortfolio CellReinsurance |   |        | GroupBenefitsInsurance |  |   | Run-OffSpecialtyReinsurance |   |  | Corporate/Other |         |   | Total |  
|Revenue:                                                 |  |                               |         |   |                                     |   |        |                        |  |   |                             |   |  |                 |         |   |       |   |         |   |  |   |         |  
|Net premiums earned                                      |  | $                             | 65,962  |   |                                     | $ | 23,440 |                        |  | $ | 36,723                      |   |  | $               | 9,682   |   |       | $ |        |   |  | $ | 135,807 |  
|Net investment income                                    |  |                               | 4,045   |   |                                     |   | 1,112  |                        |  |   | 2,578                       |   |  |                 | 1,343   |   |       |   | 553     |   |  |   | 9,631   |  
|Change in equity interest in other long-term investments |  |                               | (3,051  | ) |                                     |   |       |                        |  |   | (430                        | ) |  |                 | (489    | ) |       |   |        |   |  |   | (3,970  | )
|Net realized investment (losses) gains                   |  |                               | (4,174  | ) |                                     |   | (1,381 | )                      |  |   | (5,366                      | ) |  |                 | (440    | ) |       |   | 244     |   |  |   | (11,117 | )
|Other revenue                                            |  |                               | 119     |   |                                     |   |       |                        |  |   |                            |   |  |                 | 782     |   |       |   | (48     | ) |  |   | 853     |  
|                                                         |  |                               |         |   |                                     |   |        |                        |  |   |                             |   |  |                 |         |   |       |   |         |   |  |   |         |  
|Total revenue                                            |  |                               | 62,901  |   |                                     |   | 23,171 |                        |  |   | 33,505                      |   |  |                 | 10,878  |   |       |   | 749     |   |  |   | 131,204 |  
|                                                         |  |                               |         |   |                                     |   |        |                        |  |   |                             |   |  |                 |         |   |       |   |         |   |  |   |         |  
|Expenses:                                                |  |                               |         |   |                                     |   |        |                        |  |   |                             |   |  |                 |         |   |       |   |         |   |  |   |         |  
|Losses and LAE                                           |  |                               | 36,535  |   |                                     |   | 13,182 |                        |  |   | 24,444                      |   |  |                 | 25,027  |   |       |   |        |   |  |   | 99,188  |  
|Acquisition and other underwriting expenses              |  |                               | 4,920   |   |                                     |   | 7,238  |                        |  |   | 5,602                       |   |  |                 | 2,903   |   |       |   | (1,745  | ) |  |   | 18,918  |  
|Other expenses                                           |  |                               | 10,915  |   |                                     |   | 286    |                        |  |   | 5,698                       |   |  |                 | 637     |   |       |   | 7,802   |   |  |   | 25,338  |  
|Amortization of intangibles                              |  |                               |        |   |                                     |   |       |                        |  |   |                            |   |  |                 |        |   |       |   | 1,373   |   |  |   | 1,373   |  
|Policyholder dividend expense                            |  |                               | 551     |   |                                     |   |       |                        |  |   |                            |   |  |                 |        |   |       |   |        |   |  |   | 551     |  
|Segregated portfolio dividend expense                    |  |                               |        |   |                                     |   | 2,465  |                        |  |   |                            |   |  |                 |        |   |       |   | (310    | ) |  |   | 2,155   |  
|                                                         |  |                               |         |   |                                     |   |        |                        |  |   |                             |   |  |                 |         |   |       |   |         |   |  |   |         |  
|Total expenses                                           |  |                               | 52,921  |   |                                     |   | 23,171 |                        |  |   | 35,744                      |   |  |                 | 28,567  |   |       |   | 7,120   |   |  |   | 147,523 |  
|                                                         |  |                               |         |   |                                     |   |        |                        |  |   |                             |   |  |                 |         |   |       |   |         |   |  |   |         |  
|Income (loss) before income taxes                        |  |                               | 9,980   |   |                                     |   |       |                        |  |   | (2,239                      | ) |  |                 | (17,689 | ) |       |   | (6,371  | ) |  |   | (16,319 | )
|Income tax expense (benefit)                             |  |                               | 3,151   |   |                                     |   |       |                        |  |   | (1,083                      | ) |  |                 | 984     |   |       |   | (1,988  | ) |  |   | 1,064   |  
|                                                         |  |                               |         |   |                                     |   |        |                        |  |   |                             |   |  |                 |         |   |       |   |         |   |  |   |         |  
|Net income (loss)                                        |  | $                             | 6,829   |   |                                     | $ |       |                        |  | $ | (1,156                      | ) |  | $               | (18,673 | ) |       | $ | (4,383  | ) |  | $ | (17,383 | )
|                                                         |  |                               |         |   |                                     |   |        |                        |  |   |                             |   |  |                 |         |   |       |   |         |   |  |   |         |  
|Total assets                                             |  | $                             | 230,307 |   |                                     | $ | 51,975 |                        |  | $ | 78,875                      |   |  | $               | 39,706  |   |       | $ | (23,552 | ) |  | $ | 377,311 |  
|                                                         |  |                               |         |   |                                     |   |        |                        |  |   |                             |   |  |                 |         |   |       |   |         |   |  |   |         |  



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The following table represents the segment results for the year ended December 31, 2007 (in
thousands):



|                                                         |  |                               |         |                                     |   |                        |  |   |                             |   |  |                 |        |   |       |   |        |   |  |   |        
|-------------------------------------------------------- |  | ----------------------------- | ------- | ----------------------------------- | - | ---------------------- |  | - | --------------------------- | - |  | --------------- | ------ | - | ----- | - | ------ | - |  | - | -------
|                                                         |  | WorkersCompensationInsurance |         | SegregatedPortfolio CellReinsurance |   | GroupBenefitsInsurance |  |   | Run-OffSpecialtyReinsurance |   |  | Corporate/Other |        |   | Total
|Revenue:                                                 |  |                               |         |                                     |   |                        |  |   |                             |   |  |                 |        |   |       |   |        |   |  |   |        
|Net premiums earned                                      |  | $                             | 56,319  |                                     | $ | 22,861                 |  | $ | 35,863                      |   |  | $               | 14,452 |   |       | $ |       |   |  | $ | 129,495
|Net investment income                                    |  |                               | 4,221   |                                     |   | 1,284                  |  |   | 3,277                       |   |  |                 | 1,298  |   |       |   | 1,589  |   |  |   | 11,669 
|Change in equity interest in other long-term investments |  |                               | 537     |                                     |   |                       |  |   | (39                         | ) |  |                 | 261    |   |       |   |       |   |  |   | 759    
|Net realized investment gains                            |  |                               | 797     |                                     |   | 320                    |  |   | 1,531                       |   |  |                 | 7      |   |       |   | 233    |   |  |   | 2,888  
|Other revenue                                            |  |                               |        |                                     |   |                       |  |   |                            |   |  |                 | 593    |   |       |   | 90     |   |  |   | 683    
|                                                         |  |                               |         |                                     |   |                        |  |   |                             |   |  |                 |        |   |       |   |        |   |  |   |        
|Total revenue                                            |  |                               | 61,874  |                                     |   | 24,465                 |  |   | 40,632                      |   |  |                 | 16,611 |   |       |   | 1,912  |   |  |   | 145,494
|                                                         |  |                               |         |                                     |   |                        |  |   |                             |   |  |                 |        |   |       |   |        |   |  |   |        
|Expenses:                                                |  |                               |         |                                     |   |                        |  |   |                             |   |  |                 |        |   |       |   |        |   |  |   |        
|Losses and LAE incurred                                  |  |                               | 25,614  |                                     |   | 11,671                 |  |   | 23,253                      |   |  |                 | 13,050 |   |       |   |       |   |  |   | 73,588 
|Acquisition and other underwriting expenses              |  |                               | 2,495   |                                     |   | 6,933                  |  |   | 5,556                       |   |  |                 | 3,932  |   |       |   | (1,860 | ) |  |   | 17,056 
|Other expenses                                           |  |                               | 8,300   |                                     |   | 463                    |  |   | 5,073                       |   |  |                 | 647    |   |       |   | 7,318  |   |  |   | 21,801 
|Amortization of intangibles                              |  |                               |        |                                     |   |                       |  |   |                            |   |  |                 |       |   |       |   | 1,738  |   |  |   | 1,738  
|Policyholder dividend expense                            |  |                               | 543     |                                     |   |                       |  |   |                            |   |  |                 |       |   |       |   |       |   |  |   | 543    
|Segregated portfolio dividend expense                    |  |                               |        |                                     |   | 5,398                  |  |   |                            |   |  |                 |       |   |       |   | (975   | ) |  |   | 4,423  
|                                                         |  |                               |         |                                     |   |                        |  |   |                             |   |  |                 |        |   |       |   |        |   |  |   |        
|Total expenses                                           |  |                               | 36,952  |                                     |   | 24,465                 |  |   | 33,882                      |   |  |                 | 17,629 |   |       |   | 6,221  |   |  |   | 119,149
|                                                         |  |                               |         |                                     |   |                        |  |   |                             |   |  |                 |        |   |       |   |        |   |  |   |        
|Income (loss) before income taxes                        |  |                               | 24,922  |                                     |   |                       |  |   | 6,750                       |   |  |                 | (1,018 | ) |       |   | (4,309 | ) |  |   | 26,345 
|Income tax expense (benefit)                             |  |                               | 7,804   |                                     |   |                       |  |   | 1,973                       |   |  |                 | (732   | ) |       |   | (1,383 | ) |  |   | 7,662  
|                                                         |  |                               |         |                                     |   |                        |  |   |                             |   |  |                 |        |   |       |   |        |   |  |   |        
|Net income (loss)                                        |  | $                             | 17,118  |                                     | $ |                       |  | $ | 4,777                       |   |  | $               | (286   | ) |       | $ | (2,926 | ) |  | $ | 18,683 
|                                                         |  |                               |         |                                     |   |                        |  |   |                             |   |  |                 |        |   |       |   |        |   |  |   |        
|Total assets                                             |  | $                             | 189,028 |                                     | $ | 47,118                 |  | $ | 107,470                     |   |  | $               | 51,228 |   |       | $ | (9,326 | ) |  | $ | 385,518
|                                                         |  |                               |         |                                     |   |                        |  |   |                             |   |  |                 |        |   |       |   |        |   |  |   |        

The following table represents the segment results for the year ended December 31, 2006 (in
thousands):



|                                                         |  |                               |         |   |                                     |   |                        |  |                             |         |  |                 |        |   |       |   |        |   |  |   |        
|-------------------------------------------------------- |  | ----------------------------- | ------- | - | ----------------------------------- | - | ---------------------- |  | --------------------------- | ------- |  | --------------- | ------ | - | ----- | - | ------ | - |  | - | -------
|                                                         |  | WorkersCompensationInsurance |         |   | SegregatedPortfolio CellReinsurance |   | GroupBenefitsInsurance |  | Run-OffSpecialtyReinsurance |         |  | Corporate/Other |        |   | Total
|Revenue:                                                 |  |                               |         |   |                                     |   |                        |  |                             |         |  |                 |        |   |       |   |        |   |  |   |        
|Net premiums earned                                      |  | $                             | 24,148  |   |                                     | $ | 11,806                 |  | $                           | 33,451  |  | $               | 5,514  |   |       | $ |       |   |  | $ | 74,919 
|Net investment income                                    |  |                               | 2,147   |   |                                     |   | 588                    |  |                             | 3,515   |  |                 | 950    |   |       |   | 1,478  |   |  |   | 8,678  
|Change in equity interest in other long-term investments |  |                               | 78      |   |                                     |   |                       |  |                             | 154     |  |                 | 82     |   |       |   |       |   |  |   | 314    
|Net realized investment gains (losses)                   |  |                               | 586     |   |                                     |   | 365                    |  |                             | 1,972   |  |                 | 15     |   |       |   | (181   | ) |  |   | 2,757  
|Other revenue                                            |  |                               |        |   |                                     |   |                       |  |                             |        |  |                 | 177    |   |       |   | 136    |   |  |   | 313    
|                                                         |  |                               |         |   |                                     |   |                        |  |                             |         |  |                 |        |   |       |   |        |   |  |   |        
|Total revenue                                            |  |                               | 26,959  |   |                                     |   | 12,759                 |  |                             | 39,092  |  |                 | 6,738  |   |       |   | 1,433  |   |  |   | 86,981 
|                                                         |  |                               |         |   |                                     |   |                        |  |                             |         |  |                 |        |   |       |   |        |   |  |   |        
|Expenses:                                                |  |                               |         |   |                                     |   |                        |  |                             |         |  |                 |        |   |       |   |        |   |  |   |        
|Losses and LAE incurred                                  |  |                               | 15,162  |   |                                     |   | 5,892                  |  |                             | 20,600  |  |                 | 6,292  |   |       |   | (33    | ) |  |   | 47,913 
|Acquisition and other underwriting expenses              |  |                               | (40     | ) |                                     |   | 2,746                  |  |                             | 5,072   |  |                 | 789    |   |       |   | (1,325 | ) |  |   | 7,242  
|Other expenses                                           |  |                               | 3,724   |   |                                     |   | 106                    |  |                             | 6,336   |  |                 | 411    |   |       |   | 3,813  |   |  |   | 14,390 
|Amortization of intangibles                              |  |                               |        |   |                                     |   |                       |  |                             |        |  |                 |       |   |       |   | 1,087  |   |  |   | 1,087  
|Policyholder dividend expense                            |  |                               | 239     |   |                                     |   |                       |  |                             |        |  |                 |       |   |       |   |       |   |  |   | 239    
|Segregated portfolio dividend expense                    |  |                               |        |   |                                     |   | 4,015                  |  |                             |        |  |                 |       |   |       |   | (1,125 | ) |  |   | 2,890  
|                                                         |  |                               |         |   |                                     |   |                        |  |                             |         |  |                 |        |   |       |   |        |   |  |   |        
|Total expenses                                           |  |                               | 19,085  |   |                                     |   | 12,759                 |  |                             | 32,008  |  |                 | 7,492  |   |       |   | 2,417  |   |  |   | 73,761 
|                                                         |  |                               |         |   |                                     |   |                        |  |                             |         |  |                 |        |   |       |   |        |   |  |   |        
|Income (loss) before income taxes                        |  |                               | 7,874   |   |                                     |   |                       |  |                             | 7,084   |  |                 | (754   | ) |       |   | (984   | ) |  |   | 13,220 
|Income tax expense (benefit)                             |  |                               | 2,556   |   |                                     |   |                       |  |                             | 2,497   |  |                 | (265   | ) |       |   | 154    |   |  |   | 4,942  
|                                                         |  |                               |         |   |                                     |   |                        |  |                             |         |  |                 |        |   |       |   |        |   |  |   |        
|Net income (loss)                                        |  | $                             | 5,318   |   |                                     | $ |                       |  | $                           | 4,587   |  | $               | (489   | ) |       | $ | (1,138 | ) |  | $ | 8,278  
|                                                         |  |                               |         |   |                                     |   |                        |  |                             |         |  |                 |        |   |       |   |        |   |  |   |        
|Total assets                                             |  | $                             | 171,662 |   |                                     | $ | 41,451                 |  | $                           | 108,650 |  | $               | 44,999 |   |       | $ | 1,444  |   |  | $ | 368,206
|                                                         |  |                               |         |   |                                     |   |                        |  |                             |         |  |                 |        |   |       |   |        |   |  |   |        



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17. Commitments and Contingencies

Lease Commitments

The Companys corporate headquarters are located at 25 Race Avenue in
Lancaster, Pennsylvania. The Company leases its home office building under a 15-year, non-cancelable lease through February 2017. The annual base rent is subject to an annual increase based upon the consumer price index at the end of each preceding
calendar year. In addition to the base rent, the Company is responsible for its proportionate share of expenses related to the building including, but not limited to, utilities, maintenance, real estate taxes, and insurance. The Company has a 5%
interest in the limited partnership that owns the building.

The Company maintains regional offices in North Carolina and Indiana and
leases office space under multi-year operating leases through January 2013 and January 2010, respectively.

Minimum monthly lease
commitments for the remainder of the office lease terms are as follows (in thousands):



|                |  |   |      
|--------------- |  | - | -----
|2009            |  | $ | 1,063
|2010            |  |   | 952  
|2011            |  |   | 944  
|2012            |  |   | 947  
|2013            |  |   | 881  
|2014 thereafter |  |   | 2,769
|                |  |   |      
|Total           |  | $ | 7,556
|                |  |   |      

Rent expense totaled $953, $748, and $533 for the years ended December 31, 2008, 2007 and
2006, respectively.

Prior to October 31, 2006, ELH leased its office space under a multi-year sale-leaseback agreement. On
March 20, 2006, ELH entered into a Lease Termination Agreement with the landlord to terminate the lease prior to the end of the initial term of the lease. Under the terms of the Lease Termination Agreement, ELH paid the landlord $394. The
impact of the termination payment on the Companys results of operations was reduced by the recognition of the remaining deferred gain related to the sale-leaseback agreement as of October 31, 2006, totaling $191. For the year ended
December 31, 2006, the Company recognized a charge of $203 related to the lease termination, which is included in other expenses in the consolidated statement of operations and comprehensive income (loss).

18. Junior Subordinated Debentures

On May 15,
2008, the Company called its junior subordinated debentures at par. The Company paid cash of $8,400 to satisfy its outstanding obligation related to the debentures, including accrued interest of $253.

For the years ended December 31, 2008 and 2007, the Company incurred interest expense of $468 and $606 related to the junior subordinated
debentures.

19. Loan Payable

As of
December 31, 2008, the Company had a loan payable with an outstanding principal balance of $2,650. Semi-annual principal payments of $250 are due on or before January 1 and July 1 each year through July 1, 2013. Interest on the
loan is based on the 30-day LIBOR rate plus 165 basis points and resets on the first day of each month, based on the LIBOR rate as of the last day of the immediately preceding month. The outstanding loan balance can be prepaid at any time without
penalty. Under the terms of the loan, ESHC must maintain 1) a consolidated debt service coverage ratio of not less than 1.0 calculated annually on December 31, 2) consolidated net equity of $3,000 on December 31, and 3) invested assets
equal to at least 125% of the outstanding principal balance of the loan. As of December 31, 2008 and for the year then ended, ESHC met the financial covenants. The Company incurred interest expense of $30 related to the loan for the year ended
December 31, 2008.

20. Agency Stock Purchase Plan

On June 17, 2008, the Company announced its 2008 Agency Stock Purchase Plan (the Stock Purchase Plan). The purpose of the Stock Purchase Plan is to provide eligible insurance agencies of the Company
with the opportunity to purchase the Companys common stock at a discount from fair market value and is designed to foster the common interests



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of the Company and agencies in achieving long-term profitable growth for the Company. The Company has reserved 125,000 shares of its common stock for
purchase under the Stock Purchase Plan for the five-year period ending June 30, 2013. Common stock issued under the Stock Purchase Plan may be issued from treasury stock.

21. Subsequent Events

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.

Shareholder Dividend

On March 12,
2009, the Company announced that its Board of Directors authorized a $0.07 per share quarterly cash dividend on its issued and outstanding shares of common stock, payable March 27, 2009 to shareholders of record at the close of business on March 13,
2009.

22. Quarterly Financial Data (Unaudited, in thousands, except per share data)



|                              |  |          |        |         |   |              |  |   |             |   |  |   |         |  
|----------------------------- |  | -------- | ------ | ------- | - | ------------ |  | - | ----------- | - |  | - | ------- | -
|2008                          |  | March 31 |        | June 30 |   | September 30 |  |   | December 31 |  
|Total Revenue                 |  | $        | 35,540 |         | $ | 36,052       |  | $ | 29,522      |   |  | $ | 30,090  |  
|Income (loss) from operations |  | $        | 3,643  |         | $ | 2,214        |  | $ | (4,849      | ) |  | $ | (17,327 | )
|Net income (loss)             |  | $        | 2,574  |         | $ | 1,503        |  | $ | (3,089      | ) |  | $ | (18,371 | )
|Basic earnings per share      |  | $        | 0.27   |         | $ | 0.17         |  | $ | (0.35       | ) |  | $ | (2.10   | )
|Diluted earnings per share    |  | $        | 0.26   |         | $ | 0.16         |  | $ | (0.35       | ) |  | $ | (2.10   | )

The net loss for the quarter ended December 31, 2008 primarily reflects the after-tax impact
of other-than-temporary impairments of $4,354, unfavorable loss reserve development of $13,863 related to the run-off specialty reinsurance segment, and income tax expense of $2,126 related to the non-recognition of future tax benefits related to
the run-off specialty reinsurance segment as of December 31, 2008.



|                           |  |          |        |         |   |              |  |             |        |  |   |       
|-------------------------- |  | -------- | ------ | ------- | - | ------------ |  | ----------- | ------ |  | - | ------
|2007                       |  | March 31 |        | June 30 |   | September 30 |  | December 31
|Total Revenue              |  | $        | 33,015 |         | $ | 36,234       |  | $           | 38,915 |  | $ | 38,103
|Income from operations     |  | $        | 5,012  |         | $ | 6,519        |  | $           | 4,824  |  | $ | 9,990 
|Net income                 |  | $        | 3,151  |         | $ | 4,314        |  | $           | 3,561  |  | $ | 7,657 
|Basic earnings per share   |  | $        | 0.30   |         | $ | 0.41         |  | $           | 0.35   |  | $ | 0.78  
|Diluted earnings per share |  | $        | 0.29   |         | $ | 0.40         |  | $           | 0.34   |  | $ | 0.76  



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Item 9Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure

None

Item 9AControls and Procedures



| | a) | Evaluation of Disclosure Controls and Procedures.
| | -- | -------------------------------------------------

Our
disclosure controls and procedures, as that term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act), are designed with the objective of providing reasonable assurance that information
required to be disclosed in our reports filed or submitted under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange
Commission (the SEC). In designing and evaluating our disclosure controls and procedures, our management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable,
rather than absolute, assurance of achieving the desired control objectives.

An evaluation was performed by our management, with the
participation of our chief executive officer (CEO) and chief financial officer (CFO), of the effectiveness of the design and operation of the our disclosure controls and procedures as of the end of the period covered by this
report. Based on this evaluation, our CEO and CFO have concluded that, as of the end of such period, our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports that
we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms and made known to our management, including our CEO and CFO, as appropriate, to allow
timely decisions regarding required disclosures.



| | b) | Changes in Internal Controls
| | -- | ----------------------------

There have been no changes
in EIHIs internal control over financial reporting identified in connection with the evaluation described in the above paragraph that have materially affected, or are reasonably likely to materially affect, EIHIs internal control over
financial reporting.



| | (c) | Managements Report on Internal Control Over Financial Reporting.
| | --- | -----------------------------------------------------------------

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Under the
supervision and with the participation of our management, including the principal executive officer and principal financial officer, we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the
framework in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control-Integrated Framework, we have concluded that the
internal control over financial reporting was effective as of December 31, 2008. We have excluded Employers Security Holding Company and its subsidiaries, Employers Security Insurance Company and Affinity Management Services, Inc., from our
assessment of internal control over financial reporting as of December 31, 2008 because it was acquired by the Company in a purchase business combination during 2008. Employers Security Holding Company is a wholly-owned subsidiary of the
Company whose total assets and total revenues represent 6.8% and 1.5%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2008.

Because of its inherent limitations, internal control over the financial reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



| | (d) | The Report of Independent Registered Public Accounting Firm on internal control over financial reporting is included in this Annual Report on Form 10-K immediately before the
consolidated financial statements.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 9BOther Information

None



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PART III

Item 10Directors and Officers of the Registrant

Incorporated by reference from the
Companys 2009 Proxy Statement.

Item 11Executive Compensation

Incorporated by reference from the Companys 2009 Proxy Statement.

Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Incorporated by reference from the Companys 2009 Proxy Statement.

Item 13Certain Relationships and Related Transactions

Incorporated by reference from the Companys 2009 Proxy Statement.

Item 14Principal Accountant Fees
and Services

Incorporated by reference from the Companys 2009 Proxy Statement.



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Part IV

Item 15Exhibits, Financial Statement Schedules



| | a) | (1)Financial Statements.
| | -- | ------------------------

The following
consolidated financial statements are filed as part of this report in Item 8:

Consolidated Financial Statements

Consolidated Balance Sheets as of December 31, 2008 and 2007

Consolidated Statements of Operations and Comprehensive Income (Loss) for Years Ended December 31, 2008, 2007 and 2006

Consolidated Statements of Changes in Shareholders Equity for Years Ended December 31, 2008, 2007 and 2006

Consolidated Statements of Cash Flows for Years Ended December 31, 2008, 2007 and 2006

Notes to Consolidated Financial Statements

(2) Financial Statement Schedules.

The following financial statement schedules for the years 2008,
2007 and 2006 are submitted herewith:

Schedule ISummary of Investments

Schedule IICondensed Financial Information of Parent Company

Schedule IIISupplementary Schedule Information

Schedule IVReinsurance

Schedule VISupplemental Information

The information required by Schedule VAllowance for Uncollectible Premiums and Other Receivables has been included within the consolidated financial statements or notes thereto.

(3)Exhibits.



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



EASTERN INSURANCE HOLDINGS, INC.By:

/s/    KEVIN M.
SHOOKKevin M. Shook, Chief Financial Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons in the capacities indicated on the date indicated:



|                                  |  |                                                                                    |  |               
|--------------------------------- |  | ---------------------------------------------------------------------------------- |  | --------------
|Signature                         |  |                                                                                    |  |               
|                                  |  |                                                                                   
|/S/    BRUCE M.
ECKERT            |  | Chief Executive Officer (Principal Executive
Officer) and Director                 |  | March 13, 2009
|Bruce M. Eckert                   |  |                                                                                   
|                                  |  |                                                                                   
|/S/    KEVIN M.
SHOOK             |  | Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 13, 2009
|Kevin M. Shook                    |  |                                                                                   
|                                  |  |                                                                                   
|/S/    ROBERT M.
MCALAINE         |  | Chairman and Director                                                              |  | March 13, 2009
|Robert M. McAlaine                |  |                                                                                   
|                                  |  |                                                                                   
|/S/    LAWRENCE W.
BITNER         |  | Director                                                                           |  | March 13, 2009
|Lawrence W. Bitner                |  |                                                                                   
|                                  |  |                                                                                   
|/S/    PAUL R.
BURKE              |  | Director                                                                           |  | March 13, 2009
|Paul R. Burke                     |  |                                                                                   
|                                  |  |                                                                                   
|/S/    RONALD L.
KING             |  | Director                                                                           |  | March 13, 2009
|Ronald L. King                    |  |                                                                                   
|                                  |  |                                                                                   
|/S/    SCOTT C.
PENWELL           |  | Director                                                                           |  | March 13, 2009
|Scott C. Penwell                  |  |                                                                                   
|                                  |  |                                                                                   
|/S/    JOHN O.
SHIRK              |  | Director                                                                           |  | March 13, 2009
|John O. Shirk                     |  |                                                                                   
|                                  |  |                                                                                   
|/S/    W. LLOYD SNYDER
III        |  | Director                                                                           |  | March 13, 2009
|W. Lloyd Snyder III               |  |                                                                                   
|                                  |  |                                                                                   
|/S/    RICHARD STEVENS
III        |  | Director                                                                           |  | March 13, 2009
|Richard Stevens III               |  |                                                                                   
|                                  |  |                                                                                   
|/S/    CHARLES H. VETTERLEIN,
JR. |  | Director                                                                           |  | March 13, 2009
|Charles H. Vetterlein, Jr.        |  |                                                                                   



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                                                                                 
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                     
|2.1           |  | Plan of Conversion from Mutual to Stock Organization of Educators Mutual Life Insurance Company adopted March 17, 2005, as amended June 9, 2005. (Incorporated by reference from Exhibit
2.1 to the Eastern Insurance Holdings, Inc. Registration Statement No. 333-128913 on Form S-1)                                         
|              | 
|2.2           |  | Agreement and Plan of Reorganization dated March 17, 2005, between and among Educators Mutual Life Insurance Company, Eastern Insurance Holdings, Inc., and Eastern Holding Company, Ltd.
(Incorporated by reference from Exhibit 2.2 to the Eastern Insurance Holdings, Inc. Registration Statement No. 333-131215 on Form S-4)
|              | 
|2.3           |  | Agreement and Plan of Merger by and among Eastern Insurance Holdings, Inc., Eastern Acquisition Corp. and Employers Security Holding Company, dated as of August 6, 2008. (Incorporated by
reference from Exhibit 2.1 to the Eastern Insurance Holdings, Inc. Current Report on Form 8-K filed on August 7, 2008)               
|              | 
|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)                                                                                                                                               
|              | 
|4.1           |  | Form of Stock Certificate of Eastern Insurance Holdings, Inc. (Incorporated by reference from Exhibit 4.1 to the Eastern Insurance Holdings, Inc. Registration Statement No. 333-128913 on Form
S-1)                                                                                                                            
|              | 
|10.1          |  | Transition Agreement, dated March 4, 2005, between Educators Insurance Company and Alex T. Schneebacher (Incorporated by reference from Exhibit 10.1 to the Eastern Insurance Holdings, Inc.
Registration Statement No. 333-128913 on Form S-1)                                                                                 
|              | 
|10.2          |  | Employee Stock Ownership Plan of Eastern Insurance Holdings, Inc. (Incorporated by reference from Exhibit 10.2 to the Eastern Insurance Holdings, Inc. Registration Statement No. 333-128913 on
Form S-1)                                                                                                                       
|              | 
|10.3          |  | Stock Compensation Plan of Eastern Insurance Holdings, Inc. (Incorporated by reference from Exhibit 10.3 to the Eastern Insurance Holdings, Inc. Registration Statement No. 333-128913 on Form
S-1)                                                                                                                             
|              | 
|10.4          |  | Employment Agreement, dated March 17, 2005, between Eastern Holding Company, Ltd. and Bruce M. Eckert (Incorporated by reference from Exhibit 10.4 to the Eastern Insurance Holdings, Inc.
Registration Statement No. 333-128913 on Form S-1)                                                                                   
|              | 
|10.5          |  | Employment Agreement, dated March 17, 2005, between Eastern Holding Company, Ltd. and Michael L. Boguski (Incorporated by reference from Exhibit 10.5 to the Eastern Insurance Holdings, Inc.
Registration Statement No. 333-128913 on Form S-1)                                                                                
|              | 
|10.6          |  | Employment Agreement, dated March 17, 2005, between Eastern Holding Company, Ltd. and Kevin M. Shook (Incorporated by reference from Exhibit 10.6 to the Eastern Insurance Holdings,
Inc. Registration Statement No. 333-128913 on Form S-1)                                                                                    
|              | 
|10.7          |  | Employment Agreement, dated March 17, 2005, between Eastern Holding Company, Ltd. and Robert A. Gilpin (Incorporated by reference from Exhibit 10.7 to the Eastern Insurance Holdings,
Inc. Registration Statement No. 333-128913 on Form S-1)                                                                                  
|              | 
|10.8          |  | Employment Agreement, dated March 17, 2005, between Eastern Holding Company, Ltd. and Suzanne M. Emmet (Incorporated by reference from Exhibit 10.8 to the Eastern Insurance Holdings,
Inc. Registration Statement No. 333-128913 on Form S-1)                                                                                  
|              | 
|10.9          |  | Coinsurance Agreement, effective October 1, 2003, between Educators Mutual Life Insurance Company and London Life Reinsurance Company (Incorporated by reference from Exhibit 10.10 to the
Eastern Insurance Holdings, Inc. Registration Statement No. 333-128913 on Form S-1)                                                  
|              | 
|10.10         |  | Agreement of Sale for IBSi (Incorporated by reference from Exhibit 10.26 to the Eastern Insurance Holdings, Inc. Registration Statement No. 333-128913 on Form S-1)                                                                                                                                                             
|              | 
|10.11         |  | Officer Retention Agreement dated March 4, 2005, between M. Christine Gimber and Educators Mutual Life Insurance Company (Incorporated by reference from Exhibit 10.27 to the Eastern
Insurance Holdings, Inc. Registration Statement No. 333-128913 on Form S-1)                                                               



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|              |  |                                                                                                                                                                                                                        
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                            
|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)                                            
|              | 
|10.13         |  | Loan Agreement, effective December 17, 2007, between Eastern Insurance Holdings, Inc. and Fulton Bank (Incorporated by reference to Exhibit 10.13 to EIHIs Form 10-K filed on March 14,
2008)                         
|              | 
|10.14         |  | Eastern Insurance Holdings, Inc. 2008 Agency Stock Purchase Plan, effective July 1, 2008 (Incorporated by reference to Exhibit 99.1 to EIHIs Registration Statement No. 333-151706 on Form
S-3 filed on June 17, 2008)
|              | 
|14.1          |  | Eastern Insurance Holdings, Inc. Code of Conduct and Ethics (Incorporated by reference from Exhibit 14 to EIHIs Current Report on Form 8-K filed on February 14, 2008.                                                
|              | 
|21.1          |  | Subsidiaries of Eastern Insurance Holdings, Inc. (filed herewith as Exhibit 21.1)                                                                                                                                      
|              | 
|23.1          |  | Consent of PricewaterhouseCoopers LLP, dated March 12, 2009 (filed herewith as Exhibit 23.1)                                                                                                                           
|              | 
|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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Eastern Insurance Holdings, Inc. and Subsidiaries

Schedule ISummary of InvestmentsOther than

Investments in Related Parties as of December 31, 2008



|                                                                 |  |                        |         |             |   |              |  |   |        
|---------------------------------------------------------------- |  | ---------------------- | ------- | ----------- | - | ------------ |  | - | -------
|Column A                                                         |  | Column B               |         | Column C    |   | Column D    
|Type of Investment                                               |  | Cost                   |         | MarketValue |   | BalanceSheet
|                                                                 |  | (Dollars in thousands)
|Fixed maturities:                                                |  |                        |         |             |   |              |  |   |        
|Bonds:                                                           |  |                        |         |             |   |              |  |   |        
|United States Government and government agencies and authorities |  | $                      | 28,185  |             | $ | 30,461       |  | $ | 30,461 
|States, municipalities and political subdivisions                |  |                        | 19,522  |             |   | 20,274       |  |   | 20,274 
|Public utilities                                                 |  |                        | 5,208   |             |   | 5,204        |  |   | 5,204  
|Convertibles and bonds with warrants attached                    |  |                        | 13,783  |             |   | 12,346       |  |   | 12,346 
|All other corporate bonds                                        |  |                        | 127,187 |             |   | 127,197      |  |   | 127,197
|                                                                 |  |                        |         |             |   |              |  |   |        
|Total fixed maturities                                           |  |                        | 193,885 |             |   | 195,482      |  |   | 195,482
|                                                                 |  |                        |         |             |   |              |  |   |        
|Equity securities:                                               |  |                        |         |             |   |              |  |   |        
|Common stocks:                                                   |  |                        |         |             |   |              |  |   |        
|Industrial, miscellaneous and all other                          |  |                        | 22,287  |             |   | 17,162       |  |   | 17,162 
|                                                                 |  |                        |         |             |   |              |  |   |        
|Total equity securities                                          |  |                        | 22,287  |             |   | 17,162       |  |   | 17,162 
|                                                                 |  |                        |         |             |   |              |  |   |        
|Other long-term investments                                      |  |                        | 10,586  |             |   | 9,519        |  |   | 9,519  
|                                                                 |  |                        |         |             |   |              |  |   |        
|Total investments                                                |  | $                      | 226,758 |             | $ | 222,163      |  | $ | 222,163
|                                                                 |  |                        |         |             |   |              |  |   |        



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Eastern Insurance Holdings, Inc.

Schedule IICondensed Financial Information of Parent Company

Condensed Balance Sheets

December 31, 2008 and 2007

(In thousands, except share data)



|                                                                                                                                                             |  |      |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                             |  | 2008 |         |   | 2007 |  
|ASSETS                                                                                                                                                       |  |      |         |   |      |   |         |  
|Investment in common stock of subsidiaries (equity method)                                                                                                   |  | $    | 118,731 |   |      | $ | 154,345 |  
|Cash and cash equivalents                                                                                                                                    |  |      | 1,569   |   |      |   | 10,049  |  
|Intangible assets                                                                                                                                            |  |      | 9,179   |   |      |   | 6,372   |  
|Goodwill                                                                                                                                                     |  |      | 10,752  |   |      |   | 7,992   |  
|Federal income taxes recoverable                                                                                                                             |  |      | 238     |   |      |   | 323     |  
|Other assets                                                                                                                                                 |  |      | 222     |   |      |   | 939     |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total assets                                                                                                                                                 |  | $    | 140,691 |   |      | $ | 180,020 |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                         |  |      |         |   |      |   |         |  
|Liabilities:                                                                                                                                                 |  |      |         |   |      |   |         |  
|Accounts payable and accrued expenses                                                                                                                        |  | $    | 202     |   |      | $ | 254     |  
|Deferred tax liability, net                                                                                                                                  |  |      | 2,182   |   |      |   | 1,373   |  
|Due to subsidiaries, net                                                                                                                                     |  |      | 170     |   |      |   | 562     |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total liabilities                                                                                                                                            |  |      | 2,554   |   |      |   | 2,189   |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Equity:                                                                                                                                                      |  |      |         |   |      |   |         |  
|Series A preferred stock, par value $0; authorized shares5,000,000; no shares issued and outstanding                                                        |  |      |        |   |      |   |        |  
|Common stock, par value $0, authorized shares20,000,000; issued11,602,723 and 11,597,723, respectively; outstanding9,512,366
and 10,580,858, respectively |  |      |        |   |      |   |        |  
|Unearned ESOP compensation                                                                                                                                   |  |      | (5,606  | ) |      |   | (6,354  | )
|Additional paid-in capital                                                                                                                                   |  |      | 111,772 |   |      |   | 110,166 |  
|Treasury stock, at cost (2,090,357 and 1,016,865 shares, respectively)                                                                                       |  |      | (32,655 | ) |      |   | (15,589 | )
|Accumulated other comprehensive income:                                                                                                                      |  |      |         |   |      |   |         |  
|Unrealized gains in investments, net of taxes                                                                                                                |  |      | (1,361  | ) |      |   | 2,714   |  
|Unrecognized benefit plan gains, net of taxes                                                                                                                |  |      | (505    | ) |      |   | 531     |  
|Retained Earnings                                                                                                                                            |  |      | 66,492  |   |      |   | 86,363  |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total stockholders equity                                                                                                                                   |  |      | 138,137 |   |      |   | 177,831 |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  
|Total liabilities and stockholders equity                                                                                                                   |  | $    | 140,691 |   |      | $ | 180,020 |  
|                                                                                                                                                             |  |      |         |   |      |   |         |  

See accompanying notes to consolidated financial statements.



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Eastern Insurance Holdings, Inc.

Schedule IICondensed Financial Information of Parent Company

Condensed Statement of Earnings

For the Years Ended December 31, 2008, 2007 and 2006

(In thousands)



|                                             |  |      |         |   |      |   |        |      |  |   |        |  
|-------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                             |  | 2008 |         |   | 2007 |   |        | 2006 | 
|Revenue                                      |  |      |         |   |      |   |        |      |  |   |        |  
|Investment income, net of expenses           |  | $    | 594     |   |      | $ | 1,320  |      |  | $ | 720    |  
|Net realized investment gains                |  |      | 276     |   |      |   | 233    |      |  |   |       |  
|                                             |  |      |         |   |      |   |        |      |  |   |        |  
|Total revenue                                |  |      | 870     |   |      |   | 1,553  |      |  |   | 720    |  
|                                             |  |      |         |   |      |   |        |      |  |   |        |  
|Expenses:                                    |  |      |         |   |      |   |        |      |  |   |        |  
|Other expenses                               |  |      | 4,767   |   |      |   | 4,898  |      |  |   | 1,412  |  
|Amortization of intangibles                  |  |      | 1,373   |   |      |   | 1,738  |      |  |   | 1,088  |  
|                                             |  |      |         |   |      |   |        |      |  |   |        |  
|Total expenses                               |  |      | 6,140   |   |      |   | 6,636  |      |  |   | 2,500  |  
|                                             |  |      |         |   |      |   |        |      |  |   |        |  
|Loss before income tax expense               |  |      | (5,270  | ) |      |   | (5,083 | )    |  |   | (1,780 | )
|Income tax benefit                           |  |      | (1,532  | ) |      |   | (2,016 | )    |  |   | 227    |  
|                                             |  |      |         |   |      |   |        |      |  |   |        |  
|Loss before equity in income of subsidiaries |  |      | (3,738  | ) |      |   | (3,067 | )    |  |   | (2,007 | )
|Equity in (loss) income of subsidiaries      |  |      | (13,645 | ) |      |   | 21,750 |      |  |   | 10,285 |  
|                                             |  |      |         |   |      |   |        |      |  |   |        |  
|Net (loss) income                            |  | $    | (17,383 | ) |      | $ | 18,683 |      |  | $ | 8,278  |  
|                                             |  |      |         |   |      |   |        |      |  |   |        |  

See accompanying notes to consolidated financial statements.



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Eastern Insurance Holdings, Inc.

Schedule IICondensed Financial Information of Parent Company

Condensed
Statements of Cash Flows

For the Years ended December 31, 2008, 2007 and 2006

(In thousands)



|                                                                                                   |  |      |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                   |  | 2008 |         |   | 2007 |   |         | 2006 | 
|Cash flows from operating activities:                                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Net (loss) income                                                                                  |  | $    | (17,383 | ) |      | $ | 18,683  |      |  | $ | 8,278   |  
|Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: |  |      |         |   |      |   |         |      |  |   |         |  
|Equity in undistributed income of subsidiaries                                                     |  |      | 13,645  |   |      |   | (21,750 | )    |  |   | (10,285 | )
|Dividends from subsidiaries                                                                        |  |      | 28,500  |   |      |   | 10,000  |      |  |   |        |  
|Stock compensation                                                                                 |  |      | 2,353   |   |      |   | 2,410   |      |  |   | 525     |  
|Intangible asset amortization                                                                      |  |      | 1,373   |   |      |   | 1,738   |      |  |   | 1,088   |  
|Deferred income tax provision                                                                      |  |      | (376    | ) |      |   | (1,076  | )    |  |   | 130     |  
|Other                                                                                              |  |      | (435    | ) |      |   | (1,748  | )    |  |   | (1,731  | )
|                                                                                                   |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) operating activities                                                |  |      | 27,677  |   |      |   | 8,257   |      |  |   | (1,995  | )
|                                                                                                   |  |      |         |   |      |   |         |      |  |   |         |  
|Cash flows from investing activities:                                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Acquisition of EHC                                                                                 |  |      |        |   |      |   |        |      |  |   | (38,496 | )
|Acquisition of ESHC                                                                                |  |      | (12,277 | ) |      |   |        |      |  |   |        |  
|Capital contributions to subsidiaries                                                              |  |      | (4,326  | ) |      |   |        |      |  |   | (4,130  | )
|Dividend from ELH                                                                                  |  |      |        |   |      |   |        |      |  |   | 2,100   |  
|Other                                                                                              |  |      |        |   |      |   |        |      |  |   | (12     | )
|                                                                                                   |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                                              |  |      | (16,603 | ) |      |   |        |      |  |   | (40,538 | )
|                                                                                                   |  |      |         |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities:                                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Proceeds from initial public offering, net of expenses                                             |  |      |        |   |      |   |        |      |  |   | 62,122  |  
|Repurchase of common stock                                                                         |  |      | (17,066 | ) |      |   | (15,589 | )    |  |   |        |  
|Shareholder dividends                                                                              |  |      | (2,488  | ) |      |   | (2,208  | )    |  |   |        |  
|                                                                                                   |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash (used in) provided by financing activities                                                |  |      | (19,554 | ) |      |   | (17,797 | )    |  |   | 62,122  |  
|                                                                                                   |  |      |         |   |      |   |         |      |  |   |         |  
|Net (decrease) increase in cash and cash equivalents                                               |  |      | (8,480  | ) |      |   | (9,540  | )    |  |   | 19,589  |  
|Cash and cash equivalents at beginning of period                                                   |  |      | 10,049  |   |      |   | 19,589  |      |  |   |        |  
|                                                                                                   |  |      |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of period                                                         |  | $    | 1,569   |   |      | $ | 10,049  |      |  | $ | 19,589  |  
|                                                                                                   |  |      |         |   |      |   |         |      |  |   |         |  
|Cash received during the year for:                                                                 |  |      |         |   |      |   |         |      |  |   |         |  
|Interest                                                                                           |  | $    |        |   |      | $ |        |      |  | $ |        |  
|Income taxes                                                                                       |  | $    | (2,003  | ) |      | $ | (129    | )    |  | $ |        |  

See accompanying notes to consolidated financial statements.



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Eastern Insurance Holdings, Inc. and Subsidiaries

Schedule IIISupplementary Schedule Information

(In thousands)



|                                      |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   |        
|------------------------------------- |  | ------------------------------ | ------ | ----------------------------------------------------- | - | ------- | ------------------- |  | - | ------------------------------------- | - | --------------- | - | ------ |  | - | -------
|Column A                              |  | Column B                       |        | Column C                                              |   |         | Column D            |  |   | Column E                              |   | Column F       
|                                      |  | DeferredPolicyAcquisitionCosts |        | Future PolicyBenefits,Losses, Claims,and LossExpenses |   |         | UnearnedPremiums    |  |   | Other PolicyClaims andBenefitsPayable |   | PremiumRevenue 
|December 31, 2008                     |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   |        
|Workers compensation insurance       |  | $                              | 2,617  |                                                       | $ | 61,141  |                     |  | $ | 30,941                                |   |                 | $ |       |  | $ | 65,962 
|Group benefits insurance              |  |                                |       |                                                       |   | 32,585  |                     |  |   | 79                                    |   |                 |   |       |  |   | 36,723 
|Run-off specialty reinsurance         |  |                                | 294    |                                                       |   | 40,539  |                     |  |   | 978                                   |   |                 |   |       |  |   | 9,682  
|Segregated portfolio cell reinsurance |  |                                | 2,849  |                                                       |   | 24,852  |                     |  |   | 10,367                                |   |                 |   |       |  |   | 23,440 
|Corporate and other                   |  |                                |       |                                                       |   |        |                     |  |   |                                      |   |                 |   |       |  |   |       
|                                      |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   |        
|Total                                 |  | $                              | 5,760  |                                                       | $ | 159,117 |                     |  | $ | 42,365                                |   |                 | $ |       |  | $ | 135,807
|                                      |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   |        
|December 31, 2007                     |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   |        
|Workers compensation insurance       |  | $                              | 1,924  |                                                       | $ | 46,485  |                     |  | $ | 24,707                                |   |                 | $ |       |  | $ | 56,319 
|Group benefits insurance              |  |                                |       |                                                       |   | 35,282  |                     |  |   | 83                                    |   |                 |   |       |  |   | 35,863 
|Run-off specialty reinsurance         |  |                                | 2,196  |                                                       |   | 24,937  |                     |  |   | 7,320                                 |   |                 |   |       |  |   | 14,452 
|Segregated portfolio cell reinsurance |  |                                | 2,137  |                                                       |   | 23,084  |                     |  |   | 7,716                                 |   |                 |   |       |  |   | 22,861 
|Corporate and other                   |  |                                |       |                                                       |   |        |                     |  |   |                                      |   |                 |   |       |  |   |       
|                                      |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   |        
|Total                                 |  | $                              | 6,257  |                                                       | $ | 129,788 |                     |  | $ | 39,826                                |   |                 | $ |       |  | $ | 129,495
|                                      |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   |        
|December 31, 2006                     |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   |        
|Workers compensation insurance       |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  | $ | 24,148 
|Group benefits insurance              |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   | 33,451 
|Run-off specialty reinsurance         |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   | 5,514  
|Segregated portfolio cell reinsurance |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   | 11,806 
|Corporate and other                   |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   |       
|                                      |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   |        
|Total                                 |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  | $ | 74,919 
|                                      |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   |        
|                                      |  |                                |        |                                                       |  
|                                      |  | Column G                       |        | Column H                                              |   |         | Column I            |  |   | Column J                              |   | Column K       
|                                      |  | NetInvestmentIncome            |        | Benefits,Claims, Lossesand SettlementExpenses         |   |         | Amortizationof DPAC |  |   | OtherOperatingExpenses                |   | PremiumsWritten
|December 31, 2008                     |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   |        
|Workers compensation insurance       |  | $                              | 4,045  |                                                       | $ | 36,535  |                     |  | $ | 2,159                                 |   |                 | $ | 14,227 |  | $ | 68,563 
|Group benefits insurance              |  |                                | 2,578  |                                                       |   | 24,444  |                     |  |   |                                      |   |                 |   | 11,300 |  |   | 36,718 
|Run-off specialty reinsurance         |  |                                | 1,343  |                                                       |   | 25,027  |                     |  |   | 2,196                                 |   |                 |   | 1,344  |  |   | 3,341  
|Segregated portfolio cell reinsurance |  |                                | 1,112  |                                                       |   | 13,182  |                     |  |   | 2,137                                 |   |                 |   | 5,387  |  |   | 26,090 
|Corporate and other                   |  |                                | 553    |                                                       |   |        |                     |  |   |                                      |   |                 |   | 7,430  |  |   |       
|                                      |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   |        
|Total                                 |  | $                              | 9,631  |                                                       | $ | 99,188  |                     |  | $ | 6,492                                 |   |                 | $ | 39,688 |  | $ | 134,712
|                                      |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   |        
|December 31, 2007                     |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   |        
|Workers compensation insurance       |  | $                              | 4,221  |                                                       | $ | 25,614  |                     |  | $ | 1,524                                 |   |                 | $ | 9,814  |  | $ | 58,489 
|Group benefits insurance              |  |                                | 3,277  |                                                       |   | 23,253  |                     |  |   |                                      |   |                 |   | 10,629 |  |   | 35,864 
|Run-off specialty reinsurance         |  |                                | 1,298  |                                                       |   | 13,050  |                     |  |   | 1,773                                 |   |                 |   | 2,806  |  |   | 14,069 
|Segregated portfolio cell reinsurance |  |                                | 1,284  |                                                       |   | 11,671  |                     |  |   | 1,497                                 |   |                 |   | 5,899  |  |   | 23,467 
|Corporate and other                   |  |                                | 1,589  |                                                       |   |        |                     |  |   |                                      |   |                 |   | 7,196  |  |   |       
|                                      |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   |        
|Total                                 |  | $                              | 11,669 |                                                       | $ | 73,588  |                     |  | $ | 4,794                                 |   |                 | $ | 36,344 |  | $ | 131,889
|                                      |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   |        
|December 31, 2006                     |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   |        
|Workers compensation insurance       |  | $                              | 2,147  |                                                       | $ | 15,162  |                     |  | $ | (595                                  | ) |                 | $ | 4,518  |  | $ | 22,101 
|Group benefits insurance              |  |                                | 3,515  |                                                       |   | 20,600  |                     |  |   |                                      |   |                 |   | 11,408 |  |   | 33,428 
|Run-off specialty reinsurance         |  |                                | 950    |                                                       |   | 6,292   |                     |  |   | (484                                  | ) |                 |   | 1,684  |  |   | 5,775  
|Segregated portfolio cell reinsurance |  |                                | 588    |                                                       |   | 5,892   |                     |  |   | (449                                  | ) |                 |   | 3,301  |  |   | 6,225  
|Corporate and other                   |  |                                | 1,478  |                                                       |   | (33     | )                   |  |   |                                      |   |                 |   | 3,575  |  |   |       
|                                      |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   |        
|Total                                 |  | $                              | 8,678  |                                                       | $ | 47,913  |                     |  | $ | (1,528                                | ) |                 | $ | 24,486 |  | $ | 67,529 
|                                      |  |                                |        |                                                       |   |         |                     |  |   |                                       |   |                 |   |        |  |   |        



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Eastern Insurance Holdings, Inc. and Subsidiaries

Schedule IVReinsurance

For the years ended December 31, 2008, 2007 and 2006

(In thousands)



|                                     |  |             |           |                        |   |                            |  |            |        |                                  |   |           |  |      |  
|------------------------------------ |  | ----------- | --------- | ---------------------- | - | -------------------------- |  | ---------- | ------ | -------------------------------- | - | --------- |  | ---- | -
|Column A                             |  | Column B    |           | Column C               |   | Column D                   |  | Column E   |        | Column F                         |  
|                                     |  | GrossAmount |           | Ceded toOtherCompanies |   | Assumedfrom OtherCompanies |  | Net Amount |        | Percentageof AmountAssumed toNet |  
|Premiums Earned                      |  |             |           |                        |   |                            |  |            |        |                                  |   |           |  |      |  
|For the year ended December 31, 2008 |  |             |           |                        |   |                            |  |            |        |                                  |   |           |  |      |  
|Life insurance in force              |  | $           | 1,758,863 |                        | $ | 91,095                     |  | $          |       |                                  | $ | 1,667,768 |  | 0.0  | %
|                                     |  |             |           |                        |  
|Premiums:                            |  |             |           |                        |   |                            |  |            |        |                                  |   |           |  |      |  
|Life insurance                       |  | $           | 6,068     |                        | $ | 244                        |  | $          |       |                                  | $ | 5,824     |  | 0.0  | %
|Accident and health insurance        |  | $           | 33,142    |                        | $ | 2,243                      |  | $          |       |                                  | $ | 30,899    |  | 0.0  | %
|Property and liability insurance     |  | $           | 69,795    |                        | $ | 7,626                      |  | $          | 36,915 |                                  | $ | 99,084    |  | 39.3 | %
|For the year ended December 31, 2007 |  |             |           |                        |   |                            |  |            |        |                                  |   |           |  |      |  
|Life insurance in force              |  | $           | 1,782,647 |                        | $ | 87,476                     |  | $          |       |                                  | $ | 1,695,171 |  | 0.0  | %
|                                     |  |             |           |                        |  
|Premiums:                            |  |             |           |                        |   |                            |  |            |        |                                  |   |           |  |      |  
|Life insurance                       |  | $           | 6,014     |                        | $ | 289                        |  | $          |       |                                  | $ | 5,725     |  | 0.0  | %
|Accident and health insurance        |  | $           | 32,502    |                        | $ | 2,364                      |  | $          |       |                                  | $ | 30,138    |  | 0.0  | %
|Property and liability insurance     |  | $           | 61,242    |                        | $ | 10,500                     |  | $          | 42,890 |                                  | $ | 93,632    |  | 42.7 | %
|For the year ended December 31, 2006 |  |             |           |                        |   |                            |  |            |        |                                  |   |           |  |      |  
|Life insurance in force              |  | $           | 1,676,349 |                        | $ | 76,194                     |  | $          |       |                                  | $ | 1,600,155 |  | 0.0  | %
|                                     |  |             |           |                        |  
|Premiums:                            |  |             |           |                        |   |                            |  |            |        |                                  |   |           |  |      |  
|Life insurance                       |  | $           | 5,852     |                        | $ | 248                        |  | $          |       |                                  | $ | 5,604     |  | 0.0  | %
|Accident and health insurance        |  | $           | 30,076    |                        | $ | 2,230                      |  | $          |       |                                  | $ | 27,846    |  | 0.0  | %
|Property and liability insurance     |  | $           | 22,442    |                        | $ | 4,223                      |  | $          | 23,250 |                                  | $ | 41,469    |  | 46.4 | %



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Eastern Insurance Holdings, Inc.

Schedule VISupplemental Information

For the year ended
December 31, 2008



|                                         |  |                                |       |                                        |   |                                    |  |                  |       |                    |   |                     |  |   |        |  |   |      
|---------------------------------------- |  | ------------------------------ | ----- | -------------------------------------- | - | ---------------------------------- |  | ---------------- | ----- | ------------------ | - | ------------------- |  | - | ------ |  | - | -----
|Column A                                 |  | Column B                       |       | Column C                               |   | Column D                           |  | Column E         |       | Column F           |   | Column G           
|Affiliation with Registrant              |  | DeferredPolicyAcquisitionCosts |       | Reserve forLosses andLoss Adj.Expenses |   | Discount ifany Deductedin Column C |  | UnearnedPremiums |       | Net EarnedPremiums |   | NetInvestmentIncome
|                                         |  | (Dollars in thousands)        
|Consolidated property-casualty entities: |  |                                |       |                                        |   |                                    |  |                  |       |                    |   |                     |  |   |        |  |   |      
|Year ended December 31, 2008             |  | $                              | 5,760 |                                        | $ | 126,532                            |  | $                | 4,145 |                    | $ | 42,286              |  | $ | 99,084 |  | $ | 6,500
|Year ended December 31, 2007             |  | $                              | 6,257 |                                        | $ | 94,506                             |  | $                | 3,474 |                    | $ | 39,743              |  | $ | 93,632 |  | $ | 6,803
|Year ended December 31, 2006             |  |                                |       |                                        |   |                                    |  |                  |       |                    |   |                     |  | $ | 41,468 |  | $ | 3,685



|                                         |  |                                |        |           |          |        |                     |          |   |                                  |   |                     |   |        |  |   |       
|---------------------------------------- |  | ------------------------------ | ------ | --------- | -------- | ------ | ------------------- | -------- | - | -------------------------------- | - | ------------------- | - | ------ |  | - | ------
|                                         |  | Column HLosses and LAEIncurred |        |           | Column I |        |                     | Column J |   | Column K                        
|                                         |  | CurrentPeriod                  |        | PriorYear |          |        | Amortizationof DPAC |          |   | PaidLosses andAdjustmentExpenses |   | Net WrittenPremiums
|                                         |  | (Dollars in thousands)        
|Consolidated property-casualty entities: |  |                                |        |           |          |        |                     |          |   |                                  |   |                     |   |        |  |   |       
|Year ended December 31, 2008             |  | $                              | 58,742 |           | $        | 16,002 |                     |          | $ | 6,492                            |   |                     | $ | 53,352 |  | $ | 97,994
|Year ended December 31, 2007             |  | $                              | 55,562 |           | $        | (5,228 | )                   |          | $ | 4,794                            |   |                     | $ | 44,840 |  | $ | 96,025
|Year ended December 31, 2006             |  | $                              | 30,079 |           | $        | (2,733 | )                   |          | $ | (1,528                           | ) |                     | $ | 19,063 |  | $ | 34,101



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