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

Forward-looking Statements

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

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

• the ability to carry out our business plans;

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

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

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

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

• the impact of acts of terrorism and acts of war;

• the effects of terrorist related insurance legislation and laws;

• changes in general economic conditions, including inflation, unemployment, interest rates and other factors;

• the cost, availability and collectibility of reinsurance;

• estimates and adequacy of loss reserves and trends in losses and LAE;

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

• the effects of mergers, acquisitions and dispositions;

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

• changes in the underwriting criteria that we use resulting from competitive pressures;

• our inability to obtain regulatory approval of, or to implement, premium rate increases;

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

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

• unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;

• adverse litigation or arbitration results; and

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

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

Overview

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

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

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

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

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

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

Principal Revenue and Expense Items

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

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

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

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

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

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

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

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

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

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

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

Key Financial Measures

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

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

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

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

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

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

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

Critical Accounting Policies and Estimates

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

Reserves for Unpaid Losses and LAE

The Company establishes reserves for unpaid losses and LAE for its workers' compensation, segregated portfolio cell reinsurance, group benefits insurance, and run-off specialty reinsurance products, which are estimates of future payments of reported and unreported claims for losses and related expenses. The adequacy of the Company's reserves for unpaid losses and LAE are inherently uncertain because the ultimate amount that the Company may pay under many of the claims incurred as of the balance sheet date will not be known for many years. Establishing reserves continues to be a complex and imprecise process, requiring the use of informed estimates and judgments. The Company's estimates and judgments may be revised as additional experience and other data becomes available and are reviewed, as new or improved methodologies are developed, or as current laws change. Any such revisions could result in future changes in estimates of losses or reinsurance recoverable and would be reflected in the Company's results of operations in the period in which the estimates are changed. Estimating the ultimate claims liability is necessarily a complex and judgmental process inasmuch as the amounts are based on management's informed estimates and judgments using data currently available. If ultimate losses, net of reinsurance, prove to be substantially higher than the amounts recorded as of March 31, 2009, the related adjustments could have a material adverse effect on the Company's financial condition, results of operations or liquidity.

The Company discounts its workers' compensation reserves, using a discount rate of approximately 3.0%. As of March 31, 2009 and December 31, 2008, the Company's reserves for unpaid losses and LAE were reduced by $4,141 and $4,145, respectively, related to the effects of discounting.

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

                                                       Segregated
                                      Workers'          Portfolio          Group
                                    Compensation          Cell           Benefits       Specialty
March 31, 2009                       Insurance         Reinsurance       Insurance     Reinsurance        Total
Case/tabular reserves              $       34,471     $      13,074     $    10,277   $      14,982     $  72,804
Case incurred development, IBNR,
and unallocated LAE reserves               24,776            10,169           3,583          23,652        62,180
Amount of discount                         (2,979 )          (1,162 )            -               -         (4,141 )

Net reserves                               56,268            22,081          13,860          38,634       130,843
Reinsurance recoverables on
unpaid losses and LAE                       5,063             3,203          16,255              -         24,521
Purchase accounting adjustments               837                69              -              (27 )         879

Reserves for unpaid losses and
LAE                                $       62,168     $      25,353     $    30,115   $      38,607     $ 156,243

                                                        Segregated
                                       Workers'          Portfolio          Group
                                     Compensation          Cell           Benefits       Specialty
December 31, 2008                     Insurance         Reinsurance       Insurance     Reinsurance        Total
Case/tabular reserves               $       34,897     $      11,808     $    10,690   $      15,632     $  73,027
Case incurred development, IBNR,
and
unallocated LAE reserves                    23,320            11,210           3,956          24,938        63,424
Amount of discount                          (2,994 )          (1,151 )            -               -         (4,145 )

Net reserves                                55,223            21,867          14,646          40,570       132,306
Reinsurance recoverables on
unpaid losses and LAE                        4,932             2,903          17,939              -         25,774
Purchase accounting adjustments                986                82              -              (31 )       1,037

Reserves for unpaid losses and
LAE                                 $       61,141     $      24,852     $    32,585   $      40,539     $ 159,117

"Other Than Temporary" Investment Impairments

Unrealized investment gains or losses on investments carried at fair value, net of applicable income taxes, are reflected directly in shareholders' equity as a component of comprehensive income (loss) and, accordingly, have no effect on net income. When, in the opinion of management, a decline in the fair value of an investment below its cost or amortized cost is considered to be "other-than-temporary," such investment is written down to its fair value. The amount written down is recorded in earnings as a realized loss on investments. Generally, the determination of other-than-temporary impairment includes, in addition to other relevant factors, a presumption that if the market value is below cost by a significant amount for a period of time, a write down is necessary. Notwithstanding this presumption, the determination of other-than-temporary impairment requires judgment about future prospects for an investment and is therefore a matter of inherent uncertainty. For the three months ended March 31, 2009, the Company recognized other-than-temporary impairments of $2.4 million, compared to no impairments for the same period in 2008. As of March 31, 2009, the Company held securities with gross unrealized losses of $7.0 million, excluding those securities in the segregated portfolio cell reinsurance segment, of which $2.4 million were in an unrealized loss position for more than 12 months. Adverse investment market conditions, poor operating results of underlying investments, or the passage of time with respect to equity securities in an unrealized loss position, could result in impairment charges in the future. The Company generally applies the following standards in determining whether the decline in fair value of an investment is other-than-temporary:

Equity securities. An equity security is considered impaired when one of the following conditions exist: 1) an equity security's market value is less than 80% of its cost for a continuous period of six months, 2) an equity's security's market value is less than 50% of its cost, regardless of the amount of time the security's market value has been below cost, and 3) an equity security's market value has been less than cost for a continuous period of 12 months, regardless of the magnitude of the decline in market value. Equity securities that are in an unrealized loss position, but do not meet the above quantitative thresholds, are evaluated to determine if the decline in market value is other than temporary.

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

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

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

• Moody's or Standard & Poor's rate the security below investment grade; or

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

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

Limited partnerships. A limited partnership investment is generally written down if the Company is unable to hold or otherwise intends to sell its interest in . . .