SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

¨ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended March 31, 2013,

or

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Transition Period from                      to                     

Commission File Number No. 001-32899

EASTERN INSURANCE HOLDINGS, INC.

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

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

Title of Each Class	Number of Shares Outstanding as of May 1, 2013
Common Stock, No Par Value	7,910,609 (Outstanding Shares)

TABLE OF CONTENTS

		Page
PART I -FINANCIAL INFORMATION			3
Item 1.	Financial Statements (Unaudited)		3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		30
Item 4.	Controls and Procedures		30
PART II -OTHER INFORMATION			31
Item 1.	Legal Proceedings		31
Item 1A.	Risk Factors		31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		32
Item 3.	Defaults Upon Senior Securities		33
Item 4.	Mine Safety Disclosures		33
Item 5.	Other Information		33
Item 6.	Exhibits		33

2

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except share data)

	March 31, 2013			December 31, 2012
ASSETS
Investments:
Fixed income securities, at estimated fair value (amortized cost, $148,418; $145,486)	$	151,345		$	148,976
Convertible bonds, at estimated fair value (amortized cost, $20,992; $18,207)		23,067			19,747
Equity securities, at estimated fair value (cost, $20,690; $20,462)		25,587			23,200
Other long-term investments, at estimated fair value (cost, $8,000; $7,000)		11,417			9,974
Total investments		211,416			201,897
Cash and cash equivalents		45,657			48,075
Accrued investment income		997			858
Premiums receivable (net of allowance, $225; $225)		81,647			67,525
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses		20,006			19,676
Deferred acquisition costs		11,022			9,497
Deferred income taxes, net		4,103			3,239
Intangible assets		4,170			4,331
Goodwill		10,752			10,752
Other assets		16,166			14,902
Total assets	$	405,936		$	380,752
LIABILITIES
Reserves for unpaid losses and loss adjustment expenses	$	120,773		$	117,728
Unearned premium reserves		90,817			73,775
Advance premium		134			672
Accounts payable and accrued expenses		19,694			23,540
Ceded reinsurance balances payable		11,366			9,273
Segregated portfolio cell dividend payable		19,080			17,354
Policyholder dividends payable		2,428			2,312
Federal income taxes payable		1,911			243
Total liabilities		266,203			244,897
Commitments and contingencies (Note 9)
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—11,927,714 and 11,927,714, respectively; outstanding—7,910,609 and 7,910,609, respectively		—			—
Unearned ESOP compensation		(2,432	)		(2,616	)
Additional paid in capital		117,837			117,443
Treasury stock, at cost (4,017,105 and 4,017,105 shares, respectively)		(56,532	)		(56,532	)
Retained earnings		77,699			75,169
Accumulated other comprehensive income, net		3,161			2,391
Total shareholders’ equity		139,733			135,855
Total liabilities and shareholders’ equity	$	405,936		$	380,752

See accompanying notes to unaudited consolidated financial statements.

3

EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

For the Three Months Ended March 31, 2013 and 2012

(Unaudited, in thousands, except per share data)

	Three Months Ended March 31,
	2013		2012
REVENUE
Net premiums earned	$	42,344	$	36,486
Net investment income		703		950
Change in equity interest in limited partnerships		443		330
Net realized investment gains		842		1,691
Other revenue		69		84
Total revenue		44,401		39,541
EXPENSES
Losses and loss adjustment expenses incurred		26,552		22,915
Acquisition and other underwriting expenses		5,434		5,432
Other expenses		6,868		5,687
Amortization of intangibles		160		202
Policyholder dividend expense		247		183
Segregated portfolio dividend expense		629		996
Total expenses		39,890		35,415
Income before income taxes		4,511		4,126
Income tax expense from continuing operations		1,277		1,204
Net income from continuing operations	$	3,234	$	2,922
Other comprehensive income:
Unrealized holding gains arising during period, net of tax of $540 and $492		1,003		914
Amortization of unrecognized benefit plan amounts, net of tax of $4 and $3		7		4
Less: Reclassification adjustment for gains included in net income, net of tax of $130 and $71		240		138
Other comprehensive income		770		780
Comprehensive income	$	4,004	$	3,702
EARNINGS PER SHARE (SEE NOTE 3):
Net income	$	3,234	$	2,922
Basic earnings per share	$	0.42	$	0.38
Diluted earnings per share	$	0.42	$	0.37

See accompanying notes to unaudited consolidated financial statements.

4

EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Three Months Ended March 31, 2013 and 2012

(Unaudited, in thousands, except share data)

Three Months Ended March 31, 2013

	Outstanding Shares																	Accumulated Other
	Series A Preferred Stock		Common Capital Stock		Common Capital Stock		Unearned ESOP Compensation			Additional Paid-In Capital		Treasury Stock			Retained Earnings			Comprehensive Income (Loss), Net of Taxes		Total
Balance, January 1, 2013		—		7,910,609	$	—	$	(2,616	)	$	117,443	$	(56,532	)	$	75,169		$	2,391	$	135,855
ESOP shares released		—		—		—		184			146		—			—			—		330
Equity awards		—		—		—		—			197		—			—			—		197
Tax benefit related to stock compensation		—		—		—		—			51		—			8			—		59
Repurchase of common stock		—		—		—		—			—		—			—			—		—
Shareholder dividend		—		—		—		—			—		—			(712	)		—		(712	)
Net income		—		—		—		—			—		—			3,234			—		3,234
Other comprehensive income, net of tax		—		—		—		—			—		—			—			770		770
Balance, March 31, 2013		—		7,910,609	$	—	$	(2,432	)	$	117,837	$	(56,532	)	$	77,699		$	3,161	$	139,733

Three Months Ended March 31, 2012

	Outstanding Shares																	Accumulated Other
	Series A Preferred Stock		Common Capital Stock		Common Capital Stock		Unearned ESOP Compensation			Additional Paid-In Capital		Treasury Stock			Retained Earnings			Comprehensive Income (Loss), Net of Taxes		Total
Balance, January 1, 2012		—		7,935,446	$	—	$	(3,364	)	$	116,272	$	(54,109	)	$	66,910		$	2,550	$	128,259
ESOP shares released		—		—		—		186			80		—			—			—		266
Equity awards		—		128,700		—		—			120		—			—			—		120
Tax benefit related to stock compensation		—		—		—		—			3		—			—			—		3
Repurchase of common stock		—		—		—		—			—		—			—			—		—
Shareholder dividend		—		—		—		—			—		—			(564	)		—		(564	)
Net income		—		—		—		—			—		—			2,922			—		2,922
Other comprehensive income, net of tax		—		—		—		—			—		—			—			780		780
Balance, March 31, 2012		—		8,064,146	$	—	$	(3,178	)	$	116,475	$	(54,109	)	$	69,268		$	3,330	$	131,786

See accompanying notes to unaudited consolidated financial statements

5

EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2013 and 2012

(Unaudited, in thousands)

	2013			2012
Cash flows from operating activities:
Net income	$	3,234		$	2,922
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		215			191
Net amortization of bond premium/discount		530			264
Net realized investment gains		(919	)		(1,691	)
Change in equity interest in limited partnerships		(443	)		(330	)
Deferred tax benefit		(1,149	)		(212	)
Stock compensation expense		527			386
Intangible asset amortization		160			202
Changes in assets and liabilities:
Accrued investment income		(139	)		(40	)
Premiums receivable		(14,122	)		(12,306	)
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses		(330	)		(3,334	)
Deferred acquisition costs		(1,525	)		(750	)
Other assets		(1,194	)		(1,408	)
Reserves for unpaid losses and loss adjustment expenses		3,045			1,696
Unearned and advance premium		16,504			14,566
Ceded reinsurance balances payable		2,093			1,575
Accounts payable and accrued expenses		(3,835	)		(2,994	)
Federal income taxes recoverable/payable		1,668			911
Policyholder dividends payable		116			(19	)
Segregated portfolio cell dividend payable		1,076			534
Net cash provided by operating activities		5,512			163
Cash flows from investing activities:
Purchase of fixed income securities		(18,494	)		(11,631	)
Purchase of equity securities		(357	)		(3,881	)
Purchase of other long-term investments		(1,000	)		—
Proceeds from sale of fixed income securities		3,942			4,857
Proceeds from maturities/calls of fixed income securities		8,779			3,921
Proceeds from the sale of equity securities		138			5,023
Purchase of equipment		(285	)		(199	)
Net cash used in investing activities		(7,277	)		(1,910	)
Cash flows from financing activities:
Shareholder dividend		(712	)		(564	)
Tax benefit related to stock compensation		59			3
Net cash used in financing activities		(653	)		(561	)
Net decrease in cash and cash equivalents		(2,418	)		(2,308	)
Cash and cash equivalents, beginning of period		48,075			52,448
Cash and cash equivalents, end of period	$	45,657		$	50,140

See accompanying notes to unaudited consolidated financial statements.

6

Eastern Insurance Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

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

1. Background and Nature of Operations

Eastern Insurance Holdings, Inc. (“EIHI”) is an insurance holding company offering workers’ compensation insurance and reinsurance products through its direct and indirect wholly-owned subsidiaries, Global Alliance Holdings, Ltd. (“Global Alliance”), Eastern Alliance Insurance Company (“Eastern Alliance”), Allied Eastern Indemnity Company (“Allied Eastern”), Eastern Advantage Assurance Company (“Eastern Advantage”), Employers Security Insurance Company (“Employers Security”), Employers Alliance, Inc. (“Employers Alliance”), Eastern Re Ltd., SPC (“Eastern Re”), and Eastern Services Corporation (“Eastern Services”), collectively referred to as the “Company.”

The Company currently operates in three segments: workers’ compensation insurance, segregated portfolio cell reinsurance, and corporate/other.

2. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, being normal, recurring adjustments, necessary for a fair statement of the financial position and results of operations of the Company for the periods presented have been included. The results of operations for an interim period are not necessarily indicative of the results for an entire year. These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto as of and for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K, which was filed with the U.S. Securities and Exchange Commission on March 8, 2013.

All inter-company transactions and related account balances have been eliminated in consolidation.

Certain amounts in the prior year consolidated financial statements have been reclassified to conform to the current year presentation.

Use of Estimates

The preparation of the unaudited interim consolidated financial statements requires management to make estimates and assumptions that affect the amount of reported assets and liabilities and disclosures of contingent assets and liabilities as of the date of the unaudited interim consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates in the unaudited interim consolidated financial statements include reserves for unpaid losses and loss adjustment expenses (“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.

7

3. Earnings Per Share

Basic earnings per share are computed by dividing net income (loss) by the weighted average number of shares outstanding for the respective period. Diluted earnings per share are computed by dividing net income (loss) by the weighted average number of shares outstanding for the period, including dilutive potential common shares outstanding for the period.

Consolidated net income, basic shares outstanding, diluted shares outstanding, basic earnings per share, diluted earnings per share and cash dividends per share for the three months ended March 31, 2013 and 2012 were as follows (in thousands, except share and per share data):

	Three Months Ended March 31,
	2013			2012
Net income for basic and diluted earnings per share	$	3,234		$	2,922
Less: Dividends declared – common and unvested restricted share units		(712	)		(564	)
Undistributed earnings		2,522			2,358
Percent allocated to common shareholders		98.5	%		98.2	%
		2,484			2,316
Add: Dividends declared – common shares		701			554
	$	3,185		$	2,870
Denominator for basic earnings per share		7,528,209			7,603,017
Effect of dilutive securities		13,678			126,471
Denominator for diluted earnings per common share		7,541,887			7,729,488
Basic earnings per share	$	0.42		$	0.38
Diluted earnings per share	$	0.42		$	0.37
Cash dividends per share	$	0.09		$	0.07

The following table provides a summary of the equity awards that were not included in the Company’s earnings per share calculation because to do so would have been anti-dilutive (unaudited):

	Three Months Ended March 31,
	2013		2012
Total outstanding equity awards		1,424,875		1,403,372
Dilutive equity awards		13,678		126,471
Equity awards excluded from earnings per share calculation		1,411,197		1,276,901

4. Fair Value Measurements

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

The following is a description of the Company’s categorization of the inputs used in the recurring fair value measurements of its financial assets included in its consolidated balance sheets as of March 31, 2013 and December 31, 2012:

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 can 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

8

information. An example of a Level 2 input utilized to measure fair value, specifically for the Company’s fixed income portfolio, is “matrix pricing.” “Matrix pricing” relies on observable inputs from active markets other than quoted market prices including, but not limited to, benchmark securities and yields, latest reported trades, quotes from brokers or dealers, issuer spreads, bids, offers, and other relevant reference data to determine fair value. “Matrix pricing” is used to measure the fair value of fixed income securities where obtaining individual quoted market prices is impractical. The Company considers U.S. Government agencies, municipal bonds, corporate bonds, mortgage-backed securities, collateralized mortgage obligations, asset-backed securities, and convertible bonds as Level 2 assets.

Level 3—Represents financial assets whose fair value is determined based upon inputs that are unobservable, including the Company’s own determinations of the assumptions that a market participant would use in pricing the asset.

The following table provides a summary of the fair value measurements of the Company’s fixed income securities, convertible bonds, and equity securities, as of March 31, 2013 and December 31, 2012, excluding the segregated portfolio cell reinsurance segment (in thousands):

			Fair Value Measurements at Reporting Date Using
	3/31/2013		Level 1		Level 2		Level 3
Fixed income securities—available for sale:
U.S. Treasuries and government agencies	$	15,407	$	9,189	$	6,218	$	—
States, municipalities, and political subdivisions		44,608		—		44,608		—
Corporate securities		16,600		—		16,600		—
Residential mortgage-backed securities		27,040		—		27,040		—
Commercial mortgage-backed securities		165		—		165		—
Collateralized mortgage obligations		16,244		—		16,244		—
Other structured securities		1,020		—		1,020		—
Convertible bonds		23,067		—		23,067		—
Equity securities—available for sale		17,324		17,324		—		—
Total	$	161,475	$	26,513	$	134,962	$	—
			Fair Value Measurements at Reporting Date Using
	12/31/2012		Level 1		Level 2		Level 3
Fixed income securities—available for sale:
U.S. Treasuries and government agencies	$	15,865	$	10,743	$	5,122	$	—
States, municipalities, and political subdivisions		45,150		—		45,150		—
Corporate securities		10,285		—		10,285		—
Residential mortgage-backed securities		28,434		—		28,434		—
Commercial mortgage-backed securities		167		—		167		—
Collateralized mortgage obligations		17,122		—		17,122		—
Other structured securities		1,023		—		1,023		—
Convertible bonds		19,747		—		19,747		—
Equity securities—available for sale		15,588		15,588		—		—
Total	$	153,381	$	26,331	$	127,050	$	—

There were no transfers between Level 1 and Level 2 securities for the three months ended March 31, 2013.

The estimated fair values of the Company’s investments in fixed income securities, convertible bonds, and equity securities are based on prices provided by an independent, nationally recognized pricing service. The prices provided by the independent pricing service are based on quoted market prices, when available, non-binding broker quotes, or matrix pricing. The independent pricing service provides a single price or quote per security and the Company did not adjust security prices during the three months ended March 31, 2013 and 2012. Management has controls in place to validate the reasonableness of fair values provided by the independent pricing service, including testing the fair value of a sample of securities on a quarterly basis by comparing fair values from different pricing sources. Fixed income securities include U.S. Treasuries, agencies backed by the U.S. Government, municipal bonds, corporate bonds, mortgage-backed securities, collateralized mortgage obligations, and asset-backed securities.

9

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

The Company’s equity securities consist primarily of exchange traded funds and equity securities of natural gas companies for which there is an active market and quoted market prices; therefore, the Company has classified its equity securities as Level 1 securities. The estimated fair values of the Company’s exchange traded funds are based on published net asset value (“NAV”) per share.

The estimated fair value of the Company’s equity securities, excluding equity securities in the segregated portfolio cell reinsurance segment, as of March 31, 2013 and December 31, 2012, by investment strategy and/or industry, are as follows (in thousands):

	2013		2012
Large growth fund	$	3,439	$	3,156
Foreign large blend fund		575		554
Diversified emerging markets fund		877		911
Large value fund		7,838		7,062
Foreign large value fund		387		378
Foreign large growth fund		1,984		1,881
Natural gas industry		1,493		1,263
Financial institutions		433		383
Other		298		—
Total	$	17,324	$	15,588

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

As of March 31, 2013 and December 31, 2012, the estimated fair values of the Company’s limited partnership investments, by investment strategy, were as follows (in thousands):

	2013		2012
Multi-strategy fund of funds	$	7,336	$	6,063
Structured finance opportunity fund		3,420		3,278
Open-ended investment fund		661		633
Total	$	11,417	$	9,974

The activity in the Company’s limited partnership investments for the three months ended March 31, 2013 and 2012 was as follows (in thousands):

	Three Months Ended March 31,
	2013		2012
Balance, beginning of period	$	9,974	$	10,209
Contributions		1,000		—
Withdrawals		—		—
Unrealized change in interest		443		330
Balance, end of period	$	11,417	$	10,539

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

10

5. Investments

The following tables provide the amortized cost and estimated fair value of the Company’s fixed income and equity securities as of March 31, 2013 and December 31, 2012 (in thousands):

March 31, 2013	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Treasuries and government agencies	$	18,933	$	284	$	(5	)	$	19,212
States, municipalities, and political subdivisions		42,626		2,003		(21	)		44,608
Corporate securities		42,815		251		(10	)		43,056
Residential mortgage-backed securities		26,789		385		(134	)		27,040
Commercial mortgage-backed securities		150		15		—			165
Collateralized mortgage obligations		16,105		180		(41	)		16,244
Other structured securities		1,000		20		—			1,020
Total fixed income securities		148,418		3,138		(211	)		151,345
Equity securities		20,690		4,977		(80	)		25,587
Total fixed income and equity securities	$	169,108	$	8,115	$	(291	)	$	176,932
December 31, 2012	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Treasuries and government agencies	$	19,780	$	364	$	(5	)	$	20,139
States, municipalities, and political subdivisions		42,942		2,239		(31	)		45,150
Corporate securities		36,624		321		(4	)		36,941
Residential mortgage-backed securities		27,983		481		(30	)		28,434
Commercial mortgage-backed securities		148		19		—			167
Collateralized mortgage obligations		17,009		172		(59	)		17,122
Other structured securities		1,000		23		—			1,023
Total fixed income securities		145,486		3,619		(129	)		148,976
Equity securities		20,462		2,877		(139	)		23,200
Total fixed income and equity securities	$	165,948	$	6,496	$	(268	)	$	172,176

Corporate securities include an investment in a fixed income mutual fund with a cost and estimated fair value of $34,445 and $34,449, respectively, as of March 31, 2013. The fixed income mutual fund’s investment objective is to provide a total return that is consistent with the preservation of capital through investing in high grade U.S. Dollar fixed income securities with a maximum maturity not exceeding five years.

Other structured securities include two asset-backed securities collateralized by auto loan receivables and one security in an equipment trust made up of fixed retail installment contracts and retail installment loans.

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 March 31, 2013 and December 31, 2012 are as follows (in thousands):

	Less Than 12 Months							12 Months or More							Total
March 31, 2013	Estimated Fair Value		Gross Unrealized Losses			# of Securities		Estimated Fair Value		Gross Unrealized Losses			# of Securities		Estimated Fair Value		Gross Unrealized Losses			# of Securities
U.S. Treasuries and government agencies	$	2,196	$	(5	)		4	$	—	$	—			—	$	2,196	$	(5	)		4
States, municipalities, and political subdivisions		2,133		(21	)		9		—		—			—		2,133		(21	)		9
Corporate securities		16		(1	)		1		—		—			—		16		(1	)		1
Residential mortgage-backed securities		15,275		(134	)		16		—		—			—		15,275		(134	)		16
Collateralized mortgage obligations		7,238		(39	)		12		95		(2	)		2		7,333		(41	)		14
Total fixed income securities		26,858		(200	)		42		95		(2	)		2		26,953		(202	)		44
Equity Securities		1,395		(80	)		6		—		—			—		1,395		(80	)		6
Total fixed income and equity securities	$	28,253	$	(280	)		48	$	95	$	(2	)		2	$	28,348	$	(282	)		50

11

	Less Than 12 Months							12 Months or More							Total
December 31, 2012	Estimated Fair Value		Gross Unrealized Losses			# of Securities		Estimated Fair Value		Gross Unrealized Losses			# of Securities		Estimated Fair Value		Gross Unrealized Losses			# of Securities
U.S. Treasuries and government agencies	$	594	$	(5	)		1	$	—	$	—			—	$	594	$	(5	)		1
States, municipalities, and political subdivisions		3,922		(31	)		17		—		—			—		3,922		(31	)		17
Residential mortgage-backed securities		11,922		(30	)		10		—		—			—		11,922		(30	)		10
Collateralized mortgage obligations		4,943		(56	)		9		122		(3	)		2		5,065		(59	)		11
Total fixed income securities		21,381		(122	)		37		122		(3	)		2		21,503		(125	)		39
Equity Securities		1,034		(135	)		11		—		—			—		1,034		(135	)		11
Total fixed income and equity securities	$	22,415	$	(257	)		48	$	122	$	(3	)		2	$	22,537	$	(260	)		50

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

Management has evaluated the unrealized losses related to its fixed income securities and determined that they are primarily due to a fluctuation in interest rates and not to credit issues of the issuer or the underlying assets in the case of asset-backed securities. The Company does not intend to sell the fixed income securities and it is not more likely than not that the Company will be required to sell the fixed income securities before recovery of their amortized cost bases, which may be maturity; therefore, management does not consider the fixed income securities to be other–than-temporarily impaired as of March 31, 2013.

Management has evaluated the unrealized losses related to its equity securities and determined that they are primarily related to the current market conditions and not due to underlying issues related to the issuer or the industry in which the issuer operates. The equity securities have been in an unrealized loss position for less than twelve months and none of the securities had an estimated fair value less than 80% of its cost basis. The Company does not intend to sell the equity securities and it is not more likely than not that the Company will be required to sell the equity securities before recovery of their cost bases; therefore, management does not consider the equity securities to be other-than-temporarily impaired as of March 31, 2013.

The Company did not recognize any other-than-temporary impairments for the three months ended March 31, 2013 and 2012.

12

6. Reserves for Unpaid Losses and Loss Adjustment Expenses

The following table provides a summary of the activity in the Company’s reserves for unpaid losses and LAE for the three months ended March 31, 2013 and 2012 (in thousands):

	Three Months Ended March 31,
	2013		2012
Balance, beginning of period	$	117,728	$	106,077
Reinsurance recoverables on unpaid losses and LAE		15,084		11,805
Net balance, beginning of period		102,644		94,272
Incurred related to:
Current year		26,487		22,507
Prior year		65		408
Total incurred		26,552		22,915
Paid related to:
Current year		3,899		3,226
Prior year		19,290		19,873
Total paid		23,189		23,099
Net balance, end of period		106,007		94,088
Reinsurance recoverables on unpaid losses and LAE		14,766		13,685
Balance, end of period	$	120,773	$	107,773

Incurred losses by segment were as follows for the three months ended March 31, 2013 and 2012, respectively (in thousands):

Three Months Ended March 31, 2013

	Workers’ Compensation Insurance Segment			Segregated Portfolio Cell Reinsurance Segment			Total
Incurred related to:
Current year, gross of discount	$	21,757		$	6,243		$	28,000
Current period discount		(1,277	)		(236	)		(1,513	)
Prior year, gross of discount		—			(1,211	)		(1,211	)
Accretion of prior period discount		1,046			230			1,276
Total incurred	$	21,526		$	5,026		$	26,552

Three Months Ended March 31, 2012

	Workers’ Compensation Insurance Segment			Segregated Portfolio Cell Reinsurance Segment			Total
Incurred related to:
Current year, gross of discount	$	18,849		$	4,921		$	23,770
Current period discount		(1,052	)		(211	)		(1,263	)
Prior year, gross of discount		—			(566	)		(566	)
Accretion of prior period discount		769			205			974
Total incurred	$	18,566		$	4,349		$	22,915

For the three months ended March 31, 2013, the estimates of ultimate losses and LAE for prior accident periods produced from our actuarial methods were reasonably consistent with the estimates we prepared as of December 31, 2012, and therefore we have not changed our best estimate of these amounts. Accordingly, the Company did not recognize any development on prior accident period workers compensation insurance reserves for the three months ended March 31, 2013.

The Company recognized favorable development in its segregated portfolio cell reinsurance segment of $1,211 for the three months ended March 31, 2013, compared to favorable development of $566 for the same period in 2012. The favorable development primarily reflects the impact of claim settlements for amounts at, or less than, previously established case and IBNR reserves. Prior period reserve development in the segregated portfolio cell reinsurance segment results in an increase or decrease in the segment’s losses and LAE incurred, and a corresponding decrease or increase in the segregated portfolio cell dividend expense.

13

7. Segment Information

The Company currently operates in three business segments.

Workers’ Compensation Insurance

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

Net premiums earned in the workers’ compensation insurance segment for the three months ended March 31, 2013 and 2012 were as follows (in thousands):

	Three Months Ended March 31,
	2013		2012
Guaranteed cost policies	$	25,525	$	22,072
Dividend policies		4,638		4,297
Deductible policies		1,853		1,492
Retrospectively-rated policies		1,619		1,135
Total	$	33,635	$	28,996

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, asset management and segregated portfolio management services. The Company outsources the asset management and segregated portfolio cell management services to a third party. 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 following table provides the fee revenue generated by the segregated portfolio cell reinsurance segment that is included in the Company’s workers’ compensation insurance and corporate/other segments for the three months ended March 31, 2013 and 2012, respectively (in thousands):

	Three Months Ended March 31,
	2013		2012
Workers’ compensation insurance segment	$	2,172	$	1,830
Corporate/other segment		112		126
Total	$	2,284	$	1,956

The fee revenue earned by the workers’ compensation insurance and corporate/other segments is included in acquisition and other underwriting expenses in the consolidated statements of operations and comprehensive income (loss).

The Company is a preferred shareholder in certain of the segregated portfolio cells. For those segregated portfolio cells in which the Company participates, the Company shares in the operating and investment results of those cells and recognizes its share of the segregated portfolio dividend in the consolidated statements of operations and comprehensive income.

14

The Company’s share of the segregated portfolio dividend, which is included in the corporate/other segment, was as follows for the three months ended March 31, 2013 and 2012, respectively (in thousands):

	Three Months Ended March 31,
	2013		2012
Segregated portfolio dividend income	$	450	$	289

Corporate/Other

The corporate/other segment primarily includes the expenses of EIHI, the third party administration activities of the Company, and the results of operations of Eastern Re, as well as certain eliminations necessary to reconcile the segment information to the consolidated statements of operations and comprehensive income (loss). The Company cancelled the remaining reinsurance contracts at Eastern Re in 1999 on a run-off basis and continues to have exposure for outstanding claims as of March 31, 2013. The corporate/other segment also included the Company’s interest in a segregated portfolio cell with an unaffiliated primary carrier that wrote insurance coverage for sprinkler contractors, known as “SprinklerPro”. The Company non-renewed the SprinklerPro contract on a run-off basis effective April 1, 2009. The Company commuted the SprinklerPro contract during the second quarter of 2012. Net investment income for the three months ended March 31, 2012 includes a reduction of $5 related to a decrease in the Company’s interest in SprinklerPro.

The following table represents the segment results for the three months ended March 31, 2013 (in thousands):

	Workers’ Compensation Insurance		Segregated Portfolio Cell Reinsurance		Corporate/ Other			Total
Revenue:
Net premiums earned	$	33,635	$	8,709	$	—		$	42,344
Net investment income		581		75		47			703
Change in equity interest in limited partnerships		351		—		92			443
Net realized investment gains		828		10		4			842
Other revenue		—		—		69			69
Total revenue		35,395		8,794		212			44,401
Expenses:
Losses and LAE incurred		21,526		5,026		—			26,552
Acquisition and other underwriting expenses		2,963		2,583		(112	)		5,434
Other expenses		5,650		88		1,130			6,868
Amortization of intangibles		—		—		160			160
Policyholder dividend expense		229		18		—			247
Segregated portfolio dividend expense		—		1,079		(450	)		629
Total expenses		30,368		8,794		728			39,890
Income before income taxes		5,027		—		(516	)		4,511
Income tax expense (benefit)		1,569		—		(292	)		1,277
Net income (loss)	$	3,458	$	—	$	(224	)	$	3,234
Total assets	$	360,147	$	75,284	$	(29,495	)	$	405,936

The following table represents the segment results for the three months ended March 31, 2012 (in thousands):

	Workers’ Compensation Insurance		Segregated Portfolio Cell Reinsurance		Corporate/ Other			Total
Revenue:
Net premiums earned	$	28,996	$	7,490	$	—		$	36,486
Net investment income		798		88		64			950
Change in equity interest in limited partnerships		259		—		71			330
Net realized investment gains		1,204		460		27			1,691
Other revenue		—		—		84			84
Total revenue		31,257		8,038		246			39,541
Expenses:
Losses and LAE incurred		18,566		4,349		—			22,915
Acquisition and other underwriting expenses		3,266		2,292		(126	)		5,432
Other expenses		4,559		98		1,030			5,687
Amortization of intangibles		—		—		202			202
Policyholder dividend expense		169		14		—			183
Segregated portfolio dividend expense		—		1,285		(289	)		996
Total expenses		26,560		8,038		817			35,415
Income before income taxes		4,697		—		(571	)		4,126
Income tax expense (benefit)		1,549		—		(345	)		1,204
Net income (loss)	$	3,148	$	—	$	(226	)	$	2,922
Total assets	$	323,420	$	66,342	$	(25,127	)	$	364,635

15

8. Segregated Portfolio Cell Reinsurance Segment

The segregated portfolio cell reinsurance segment’s assets and liabilities as of March 31, 2013 and December 31, 2012, which are included in the Company’s consolidated balance sheets, were as follows:

	March 31 2013		December 31, 2012
ASSETS
Investments:
Fixed income securities, at estimated fair value (amortized cost, $30,259; $30,874)	$	30,260	$	30,931
Equity securities, at estimated fair value (cost, $6,988; $7,043)		8,263		7,612
Total investments		38,523		38,543
Cash and cash equivalents		2,073		1,495
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses		4,738		4,716
Deferred acquisition costs		5,507		4,160
Other assets		5,349		4,361
Due from affiliates, net		19,094		12,803
Total assets	$	75,284	$	66,078
LIABILITIES
Reserves for unpaid losses and loss adjustment expenses	$	29,087	$	28,295
Unearned premium reserves		21,253		14,817
Accounts payable and accrued expenses		31		3
Segregated portfolio cell dividend payable		19,080		17,353
Policyholder dividends payable		139		150
Due to affiliates, net		5,667		5,435
Total liabilities		75,257		66,053
SHAREHOLDERS’ EQUITY
Preferred stock outstanding		27		25
Total shareholders’ equity		27		25
Total liabilities and shareholders’ equity	$	75,284	$	66,078

9. Commitments and Contingencies

Legal Proceedings

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

AIG Arbitration

On September 6, 2011, the Company served a written demand (the “Arbitration Demand”) initiating arbitration proceedings against various AIG Companies under 24 reinsurance treaties pursuant to which the Company reinsured AIG Companies for certain pollution

16

liability risks related to underground storage tanks for the policy years 1990 through 1999 (the “Treaties”). The Treaties were cancelled by Eastern Re in 1999. In the Arbitration Demand, the Company seeks an award from the arbitration panel compelling AIG Companies to permit the Company to examine the bases for certain paid losses and loss reserves ceded by AIG Companies to Eastern Re under the Treaties. The Company believes that the Treaties permit such an audit.

On October 3, 2011, AIG Companies responded to the Arbitration Demand by advising that they will seek an award from the arbitration panel of approximately $1.9 million plus future amounts that may become due under the Treaties before the final hearing in the arbitration. Both the Company and AIG Companies seek attorney’s fees and costs in the arbitration.

Both the Company and AIG Companies have appointed arbitrators. The parties are currently in the process of attempting to select an umpire. As of this date, the parties have obtained completed questionnaires from a selected pool of umpire candidates who are being evaluated by the parties.

During the first quarter of 2012, the Company received quarterly claims data from AIG Companies that reflected unfavorable claim development under the reinsurance treaties. The Company is unable to substantiate the reliability of the claims data reported by AIG Companies and, as a result, has not adjusted its consolidated financial statements for the amounts reported by AIG Companies. The Company continues to believe it has adequately reserved the claims at issue.

The Company commenced an audit of the claims covered under the Treaties during the third quarter of 2012. The claim audit is on-going and the Company has requested and is awaiting additional files and further information from AIG Companies, which will allow the Company to complete the audit. All of the information obtained and reviewed will be evaluated to determine whether such information would cause the Company to revise its estimates or position with respect to the pending arbitration.

The arbitration proceedings initiated by the Company against AIG Companies are on-going and there has been no further action in 2013 related to the arbitration process.

It is reasonably possible that the final outcome of the arbitration could go against the Company, which could result in a material, adverse effect on the Company’s results of operations and financial condition.

Eastern Alliance Insurance Co. v. Managepoint, LLC, d/b/a Management 2000 Group, Inc., a/k/a Management, Inc.

Eastern Alliance brought this action against Managepoint, Inc., Managepoint, LLC, and Management 2000 Group, Inc. (collectively, the “Defendants”) to recover amounts due and owing under five workers’ compensation deductible insurance policies issued to the Defendants. As of March 31, 2013, the aggregate amount due and unpaid for claims under the policies was approximately $265, all of which has been reserved for. In addition, there are outstanding claim reserves totaling approximately $270 under the policies as of March 31, 2013. Eastern Alliance seeks recovery of all amounts presently due, together with amounts which will have accrued and become due and owing as of the time of trial.

On November 21, 2012, the Defendants filed a complaint, denying Eastern Alliance’s assertion that they operate as the same entity, and thus, are liable for the debts of the other, and renouncing any liability for any amounts set forth in the complaint. The Defendants also raised a number of affirmative defenses, including that Eastern Alliance breached its duty of good faith and fair dealing by, among other things, failing to obtain required approvals to settling workers’ compensation claims and improperly invoicing, collecting, and retaining various overpayments by the Defendants.

This matter is presently in discovery, and it is too early and there is not enough information to predict an outcome. It is reasonably possible that the final outcome of this matter could go against the Company, which could result in a material, adverse effect on the Company’s results of operations and financial condition.

10. Subsequent Events

Management performed an evaluation of subsequent events through the issuance date of the consolidated financial statements and determined there were no recognized or unrecognized subsequent events that would require an adjustment and/or additional disclosure in the consolidated financial statements as of March 31, 2013.

17

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of financial condition and results of operations should be read in conjunction with the unaudited interim consolidated financial statements of Eastern Insurance Holdings, Inc. (the “Company”) and the related notes thereto included in Item 1 of this Part 1. The information contained in this quarterly report is not a complete description of the Company’s business or the risks associated with an investment in the Company’s common stock. You should carefully review and consider the various disclosures made by the Company in this quarterly report and in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on March 8, 2013.

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 including, without limitation, the AIG Arbitration and Managepoint litigation; 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.

18

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 net income of $3.2 million for the three months ended March 31, 2013, compared to net income of $2.9 million for the same period in 2012. The Company’s consolidated combined ratio was 92.7% for the three months ended March 31, 2013, compared to 94.3% for the same period in 2012.

The Company’s results of operations for the three months ended March 31, 2013, when compared to the same period in 2012, primarily reflect the following:

• An increase in net premiums earned, which primarily reflects new business of $11.7 million, renewal rate increases of 7.0% and an increase in the renewal retention rate from 84.7% in 2012 to 90.3% in 2013. These increases were partially offset by a decrease in audit premium from customers, which totaled $424,000 in 2013, compared to $884,000 in 2012.

• A decrease in net investment income, which primarily reflects the impact of amortization in the convertible bond portfolio during the first quarter of 2013. Certain convertible bonds in the Company’s convertible bond portfolio were purchased at a high premium to par value with a relatively short maturity, resulting in a significant quarterly amortization charge. The premium paid for these convertible bonds reflects the value of the underlying common stock of the issuer for which the Company can convert the bonds to the issuer’s common stock at a future date.

• An increase in the Company’s interest in its limited partnership investments. The Company’s interest increased in each of its investments during the first quarter of 2013. The Company invested an additional $1.0 million in the multi-strategy fund of funds in March 2013.

• A decrease in net realized investment gains, which primarily reflects a decrease in the impact of the change in fair value of the Company’s convertible bond portfolio. The convertible bond portfolio’s estimated fair value increased $458,000 in 2013, compared to $1.0 million in 2012.

• A decrease in the consolidated expense ratio, from 31.0% in 2012 to 29.4% in 2013. The decrease in the expense ratio primarily reflects the increase in net premiums earned.

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, 2012, one-half of the premiums would be earned in 2012 and the other half would be earned in 2013. 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 (or returned to insureds as a result of payroll reductions) in final audit invoices as a percentage to estimate the probable additional amount that it has earned but not yet billed as of the balance sheet date.

Net investment income and realized gains and losses on investments. The Company invests its surplus and the funds supporting its insurance liabilities (including unearned premiums and unpaid losses and loss adjustment expenses) in cash, cash equivalents, fixed

19

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 from prior periods, and (3) costs associated with investigating, defending and adjusting claims.

Acquisition and other underwriting expenses. In the workers’ compensation insurance segment, expenses incurred to underwrite risks are referred to as acquisition and other underwriting expenses, which consist of commissions, premium taxes and fees and other underwriting expenses incurred in acquiring, writing and administering the Company’s business. In the segregated portfolio cell reinsurance, 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.

20

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 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 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 insurance and segregated portfolio cell reinsurance, 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, 2013, 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, 2013 and December 31, 2012, the Company’s reserves for unpaid losses and LAE were reduced by $6.8 million and $6.5 million, 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 and corporate/other segments as of March 31, 2013 (unaudited) and December 31, 2012 are summarized below (in thousands):

March 31, 2013	Workers’ Compensation Insurance			Segregated Portfolio Cell Reinsurance			Corporate / Other		Total
Case reserves and unallocated LAE reserves	$	47,233		$	10,535		$	—	$	57,768
Case incurred development and IBNR		40,008			14,800			206		55,014
Amount of discount		(5,508	)		(1,267	)		—		(6,775	)
Net reserves before reinsurance recoverables		81,733			24,068			206		106,007
Reinsurance recoverables on unpaid losses and LAE		9,747			5,019			—		14,766
Reserves for unpaid losses and LAE	$	91,480		$	29,087		$	206	$	120,773

21

December 31, 2012	Workers’ Compensation Insurance			Segregated Portfolio Cell Reinsurance			Corporate / Other		Total
Case reserves and unallocated LAE reserves	$	42,376		$	8,986		$	—	$	51,362
Case incurred development and IBNR		42,042			15,537			206		57,785
Amount of discount		(5,277	)		(1,226	)		—		(6,503	)
Net reserves before reinsurance recoverables		79,141			23,297			206		102,644
Reinsurance recoverables on unpaid losses and LAE		10,086			4,998			—		15,084
Reserves for unpaid losses and LAE	$	89,227		$	28,295		$	206	$	117,728

“Other Than Temporary” Investment Impairments

Unrealized investment gains or losses on investments carried at estimated fair value, net of applicable income taxes, are reflected directly in shareholders’ equity as a component of accumulated other 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 at the balance sheet date. The amount written down is recorded as a realized loss in the consolidated statements of operations and comprehensive income (loss). 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. There were no other-than-temporary impairments for the three months ended March 31, 2013 and 2012.

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.

As of March 31, 2013, the Company held equity securities, excluding equity securities in the segregated portfolio cell reinsurance segment, with gross unrealized losses of $80,000, none of which were in an unrealized loss position for more than twelve months. The Company does not intend to sell the equity securities and it is not more likely than not that the Company will be required to sell the equity securities before recovery of their cost bases; therefore, management does not consider the equity securities to be other-than-temporarily impaired as of March 31, 2013. Adverse investment market conditions, or poor operating results of underlying investments, could result in impairment charges in the future.

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

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

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

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

As of March 31, 2013, the Company held fixed income securities, excluding fixed income securities in the segregated portfolio cell reinsurance segment, with gross unrealized losses of $202,000, of which $2,000 were in an unrealized loss position for more than twelve months. Management has evaluated the unrealized losses related to those fixed income securities and determined that they are primarily due to a fluctuation in interest rates and not to credit issues of the issuer or the underlying assets in the case of asset-backed securities. The Company does not intend to sell the fixed income securities and it is not more likely than not that the Company will be required to sell the fixed income securities before recovery of their amortized cost bases, which may be maturity; therefore, management does not consider the fixed income securities to be other–than-temporarily impaired as of March 31, 2013. Adverse investment market conditions, or poor operating results of underlying investments, could result in impairment charges in the future.

22

Limited partnerships. A limited partnership investment is generally written down if the Company is unable to hold or otherwise intends to sell its interest in the limited partnership at a loss, or if management has received information that suggests the Company will be unable to recover its original investment in the limited partnership. The amount written down is recorded in the change in equity interest in limited partnerships in the consolidated statement of operations and comprehensive income (loss).

Goodwill

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

Goodwill is assigned to one or more reporting units at the date of acquisition. The Company has allocated 100% of the goodwill recorded on its consolidated balance sheet as of March 31, 2013 to its workers’ compensation insurance segment.

The Company performs its annual goodwill impairment test as of September 30.

We did not evaluate goodwill for impairment as of March 31, 2013 as no events occurred or circumstances changed that would have more likely than not reduced the fair value of the workers’ compensation insurance segment below its carrying amount since September 30, 2012.

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

Deferred Income Taxes

The temporary differences between the tax and book bases of assets and liabilities are recorded as deferred income taxes. Management evaluates the recoverability of the net deferred tax asset based on historical trends of generating taxable income or losses, as well as expectations of future taxable income or loss. As of March 31, 2013, the Company recorded a net deferred tax asset of $4.1 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 March 31, 2013, the Company has not recognized any future tax benefit related to its foreign operations at Eastern Re. The unrecognized tax benefit, which represents the excess of the tax basis over the amount for financial reporting (i.e., outside basis difference) of Eastern Re, was $10.2 million and $10.8 million as of March 31, 2013 and December 31, 2012, respectively. 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.

Reinsurance Recoverables

Amounts recoverable from the Company’s reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Amounts paid for reinsurance contracts are expensed over the contract period during which insured events are covered by the reinsurance contracts. Reinsurance balances recoverable on paid and unpaid loss and 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.

23

RESULTS OF OPERATIONS

The major components of consolidated revenue were as follows for the three months ended March 31, 2013 and 2012 (unaudited, in thousands):

	Three Months Ended March 31,
	2013		2012
Net premiums written	$	59,386	$	51,617
Net premiums earned	$	42,344	$	36,486
Net investment income		703		950
Change in equity interest in limited partnerships		443		330
Net realized investment gains		842		1,691
Other revenue		69		84
Consolidated revenue	$	44,401	$	39,541

The increase in consolidated revenue from 2012 to 2013 primarily reflects the following:

• An increase in net premiums earned as a result of new business writings, renewal rate increases of 7.0%, and an increase in the renewal retention rate, partially offset by a decrease in audit premium.

• An increase in the Company’s limited partnership interests.

• The increase in net premiums earned and the limited partnership interests was partially offset by a decrease in net investment income and net realized investment gains. Net investment income reflects the impact of amortization in the convertible bond portfolio, while the decrease in net realized investment gains primarily reflects a decrease in the impact of the change in the estimated fair value of the convertible bond portfolio from 2012 to 2013.

The components of consolidated net income from continuing operations, by segment, for the three months ended March 31, 2013 and 2012 were as follows (unaudited, in thousands):

	Three Months Ended March 31,
	2013			2012
Workers’ compensation insurance	$	3,458		$	3,148
Segregated portfolio cell reinsurance		—			—
Corporate/other		(224	)		(226	)
Consolidated net income	$	3,234		$	2,922

The increase in consolidated net income primarily reflects an increase in net premiums earned and an improvement in the expense ratio in the workers’ compensation insurance segment from 2012 to 2013.

WORKERS’ COMPENSATION INSURANCE

The following table represents the operations of the workers’ compensation insurance segment for the three months ended March 31, 2013 and 2012 (unaudited, in thousands):

	Three Months Ended March 31,
	2013			2012
Revenue:
Direct premiums written	$	62,971		$	55,659
Reinsurance premiums assumed		939			535
Ceded premiums written (1)		(19,669	)		(16,757	)
Net premiums written		44,241			39,437
Change in unearned premiums		(10,606	)		(10,441	)
Net premiums earned		33,635			28,996
Net investment income		581			798
Change in equity interest in limited partnerships		351			259
Net realized investment gains		828			1,204
Total revenue		35,395			31,257
Expenses:
Losses and LAE incurred		21,526			18,566
Acquisition and other underwriting expenses		2,963			3,266
Other expenses		5,650			4,559
Policyholder dividend expense		229			169
Total expenses		30,368			26,560
Income before income taxes		5,027			4,697
Income tax expense		1,569			1,549
Net income	$	3,458		$	3,148

(1) Ceded premiums written include premiums ceded to the segregated portfolio cell reinsurance segment of $16,308 and $13,190 for the three months ended March 31, 2013 and 2012, respectively.

24

The workers’ compensation insurance ratios were as follows for the three months ended March 31, 2013 and 2012:

	Three Months Ended March 31,
	2013			2012
Loss and LAE ratio		64.0	%		64.0	%
Expense ratio		25.6	%		27.0	%
Policyholder dividend expense ratio		0.7	%		0.6	%
Combined ratio		90.3	%		91.6	%

Premiums

The increase in direct premiums written primarily reflects new business sales $11.7 million, renewal rate increases of 7.0% and an increase in the renewal retention rate, partially offset by a decrease in audit premium from customers. For the three months ended March 31, 2013, the Company recognized audit premium from customers totaling $424,000, in the aggregate, related to its traditional and alternative market books of business, compared to audit premium from customers of $884,000 for the same period in 2012. The Company’s traditional book of business recognized audit premium from customers of $175,000 for the three months ended March 31, 2013, compared to audit premium from customers of $1.1 million for the same period in 2012. The renewal retention rate increased from 84.7% in 2012 to 90.3% in 2013. The 2012 renewal retention reflects the loss of a few large accounts in the first quarter of 2012.

Net Investment Income

The decrease in net investment income primarily reflects the impact of amortization in the convertible bond portfolio in the first quarter of 2013 and a decrease in the average yield on the fixed income portfolio. The average yield on the fixed income portfolio was 2.37% as of March 31, 2013, compared to 2.97% as of March 31, 2012.

Net Realized Investment Gains

The decrease in net realized investment gains from 2012 to 2013 primarily reflects the impact of the change in the estimated fair value of the Company’s convertible bond portfolio.

Losses and LAE

The calendar period loss ratio remained consistent from 2012 to 2013. Audit premium reduced the loss ratio by 0.3 percentage points in 2013, compared to 2.5 percentage points in 2012. There was no prior year reserve development in 2013 or 2012.

Acquisition and Other Underwriting Expenses and Other Expenses

The acquisition and other underwriting expense ratio was 8.8% and 11.3% for the three months ended March 31, 2013 and 2012, respectively. The decrease in the ratio primarily reflects the amortization of deferred acquisition costs (“DAC”) in the first quarter of 2012 and the impact of fees generated by the segregated portfolio cell reinsurance segment. DAC amortization as a percent of net premiums earned was higher in the first quarter of 2012 as a result of a change in the accounting for the deferral of acquisition costs effective January 1, 2012. Fees generated by the segregated portfolio cell reinsurance segment totaled $2.2 million in 2013, compared to $1.8 million in 2012.

The other expense ratio was 16.8% and 15.7% for the three months ended March 31, 2013 and 2012, respectively. The increase in the other expense ratio primarily reflects legal fees related to the Managepoint litigation, expenses incurred related to the Pennsylvania and Indiana Insurance Departments’ financial examination, start-up costs related to the Company’s Gulf South region, and costs related to the establishment of the Company’s internal medical case management and utilization review operations.

25

Policyholder Dividends

The increase in the policyholder dividend expense primarily reflects the underlying loss experience of dividend paying policies. For the three months ended March 31, 2013 and 2012, 7.9% and 8.8%, respectively, of all policies were written on a dividend policy basis.

Tax Expense

The effective tax rate was 31.2% for the three months ended March 31, 2013, compared to an effective tax rate of 33.0% for the same period in 2012. The primary difference between the statutory rate of 35.0% and the effective tax rate reflects tax-exempt income on municipal bond securities and the tax benefit associated with workers’ compensation insurance business ceded to Eastern Re.

26

SEGREGATED PORTFOLIO CELL REINSURANCE

The following table represents the operations of the segregated portfolio cell reinsurance segment for the three months ended March 31, 2013 and 2012 (unaudited, in thousands):

	Three Months Ended March 31,
	2013			2012
Revenue:
Reinsurance premiums assumed	$	16,308		$	13,190
Ceded premiums written		(1,163	)		(1,010	)
Net premiums written		15,145			12,180
Change in unearned premiums		(6,436	)		(4,690	)
Net premiums earned		8,709			7,490
Net investment income		75			88
Net realized investment gains		10			460
Total revenue		8,794			8,038
Expenses:
Losses and LAE incurred		5,026			4,349
Acquisition and other underwriting expenses		2,583			2,292
Other expenses		88			98
Policyholder dividend expense		18			14
Segregated portfolio dividend expense (1)		1,079			1,285
Total expenses		8,794			8,038
Net income (1)	$	—		$	—

(1) The workers’ compensation insurance 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 results of operations 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 LAE, acquisition and other underwriting expenses, other expense and policyholder dividend expense is accrued as a segregated portfolio dividend expense. As a result, the segregated portfolio cell reinsurance segment has no net income for the period presented in this table.

The segregated portfolio cell reinsurance ratios were as follows for the three months ended March 31, 2013 and 2012:

	Three Months Ended March 31,
	2013			2012
Loss and LAE ratio		57.7	%		58.1	%
Expense ratio		30.7	%		31.9	%
Policyholder dividend expense ratio		0.2	%		0.2	%
Combined ratio		88.6	%		90.2	%

Reinsurance Premiums Assumed

The increase in reinsurance premiums assumed primarily reflects new business sales of $2.0 million, renewal rate increases of 6.3%, an increase in the renewal retention rate, and an increase in audit premium. For the three months ended March 31, 2013, the Company recognized audit premium from customers totaling $249,000, compared to audit premium returned to customers of $195,000 for the same period in 2012. The renewal retention rate increased from 94.4% in 2012 to 96.7% in 2013.

Net Investment Income

Net investment income reflects income earned on the segregated portfolio cells’ investments in fixed income and equity mutual funds.

Net Realized Investment Gains

Net realized investment gains for the three months ended March 31, 2012 primarily reflect the sale of individual equity securities in the first quarter of 2012. The proceeds from the sale of the equity securities were used to purchase equity mutual funds.

27

Losses and LAE

The decrease in the calendar period loss and LAE ratio primarily reflects an increase in favorable loss development on prior accident periods and the impact of audit premium. Favorable loss reserve development totaled $1.2 million and $566,000 for the three months ended March 31, 2013 and 2012, respectively. Audit premium from customers decreased the loss ratio by 1.7 percentage points in 2013, compared to audit premium returned to customers that increased the loss ratio by 1.5 percentage points. The accident period loss ratio was 71.6% and 65.6% for the three months ended March 31, 2013 and 2012, respectively.

Acquisition and Other Underwriting Expenses

The expense ratios are consistent with the contractual ceding commissions for the three months ended March 31, 2013 and 2012.

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.

CORPORATE/OTHER

The following table represents the operations of the corporate/other segment for the three months ended March 31, 2013 and 2012 (unaudited, in thousands):

	Three Months Ended March 31,
	2013			2012
Revenue:
Net investment income	$	47		$	64
Change in equity interest in limited partnerships		92			71
Net realized investment gains		4			27
Other revenue		69			84
Total revenue		212			246
Expenses:
Acquisition and other underwriting expenses		(112	)		(126	)
Other expenses		1,130			1,030
Amortization of intangibles		160			202
Segregated portfolio dividend expense		(450	)		(289	)
Total expenses		728			817
Loss before income taxes		(516	)		(571	)
Income tax benefit		(292	)		(345	)
Net loss	$	(224	)	$	(226	)

Revenue

The decrease in revenue primarily reflects the following:

• A decrease in net investment income, which primarily reflects a decrease in fixed income securities at EIHI. During 2012, EIHI liquidated its remaining fixed income securities to fund the Company’s stock buyback program.

• A decrease in third-party administration revenue, which primarily reflects the loss of a customer.

Expenses

The decrease in expenses primarily reflects the following:

• A decrease in intangible asset amortization.

• An increase in the Company’s equity interest in certain of the segregated portfolio cells.

• The above items were partially offset by an increase in stock compensation expense.

Income Tax Benefit

The effective tax rate was a benefit of 56.6% and 60.4% for the three months ended March 31, 2013 and 2012, respectively. The effective tax rate primarily reflects the impact of the Company’s outside basis difference in its foreign operations.

28

CONSOLIDATED FINANCIAL POSITION

Consolidated assets totaled $405.9 million at March 31, 2013, compared to $380.8 million at December 31, 2012. The increase in consolidated assets primarily reflects the following:

• An increase in investments, which primarily reflects net purchases during the first quarter and an increase in the estimated fair value of the convertible bond and equity portfolios, partially offset by a decline in the fixed income portfolio.

• An increase in premiums receivable, which primarily reflects the impact of business with a January 1 effective date.

• An increase in deferred acquisition costs, which reflects the increase in unearned premium.

• An increase in the net deferred income tax asset, which primarily reflects the increase in unearned premium and loss reserves, partially offset by the increase in deferred acquisition costs.

• An increase in other assets, which primarily reflects an increase in the Company’s equity interest in certain segregated portfolio cells and an increase in prepaid reinsurance in the segregated portfolio cell reinsurance segment.

Consolidated liabilities totaled $266.2 million at March 31, 2013, compared to $244.9 million at December 31, 2012. The increase in consolidated liabilities primarily reflects the following:

• An increase in loss reserves, primarily related to the increase in net premiums earned.

• An increase in unearned premiums, which primarily reflects the impact of business with a January 1 effective date.

• A decrease in accounts payable and accrued expenses, which primarily reflects the payment of liabilities and accruals recorded at December 31, 2012, including the annual Pennsylvania employer assessment remittance, 2012 premium tax payments and the payment of 2012 employee bonuses. The decrease also reflects a decrease in the deposit in transit at the end of the quarter.

• An increase in reinsurance balances payable, which primarily reflects premiums written in the first quarter, but not yet paid to the Company’s reinsurers.

• An increase in the segregated portfolio cell dividend payable, which reflects positive operating results in the segregated portfolio cell reinsurance segment.

• An increase in federal income taxes payable, reflecting the first quarter estimated tax liability.

Consolidated equity totaled $139.7 million at March 31, 2013, compared to $135.9 million at December 31, 2012. The increase in consolidated equity primarily reflects the following:

• Net income for the first quarter of 2013, net of the quarterly shareholder dividend.

• An increase in the estimated fair value of the equity portfolio, partially offset by a decline in the estimated fair value of the fixed income portfolio.

LIQUIDITY AND CAPITAL RESOURCES

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

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

The Company has a $10.0 million revolving line of credit available to provide additional liquidity if needed. The line of credit matures on May 2, 2013 and may be renewed annually for additional periods expiring on May 1 at the lender’s discretion. The line of credit is in the process of being renewed. Outstanding balances under the line of credit bear interest at an adjustable monthly rate equal to LIBOR plus 2.0% per annum. There were no outstanding balances under the line of credit as of March 31, 2013.

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

29

CASH FLOWS

Cash flows from continuing operations for the three months ended March 31, 2013 and 2012 were as follows (unaudited, in thousands):

	Three Months Ended March 31,
	2013			2012
Cash provided by operating activities	$	5,512		$	163
Cash used in investing activities		(7,277	)		(1,910	)
Cash used in financing activities		(653	)		(561	)
	$	(2,418	)	$	(2,308	)

Cash flows from operating activities consist primarily of cash receipts and disbursements related to premiums, investment income, claims and related adjustment expenses, operating expenses, policyholder dividends and income taxes. Cash flows from investing activities consist primarily of purchases and sales of investments and purchases of fixed assets. Cash flows from financing activities primarily consist of cash disbursements for repurchases of the Company’s common stock and shareholder dividends.

The increase in cash flows provided by operating activities primarily reflects the increase in net premiums written and a decrease in claims paid from 2012 to 2013 in relation to net premiums written.

The increase in cash used in investing activities primarily reflects the purchase of fixed income securities at Eastern Re.

Cash used in financing activities primarily reflects the quarterly shareholder dividend in both 2013 and 2012.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or, as of March 31, 2013, future effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

There have been no material changes in the Company’s market risk since December 31, 2012. Additional disclosures related to the Company’s market risk are discussed under “Quantitative and Qualitative Disclosures About Market Risk” in Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 8, 2013.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

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

30

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

There are no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, SEC File No. 001-32899.

31

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

Issuer Purchases of Equity Securities

As of March 31, 2013, the Company has repurchased 4,017,105 shares of its common stock. The share repurchases will be held as treasury stock and are available for issuance in connection with the Company’s Stock Incentive Plan. There were no share repurchases during the three months ended March 31, 2013 or 2012.

32

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

None

Item 6. Exhibits

Exhibits

Exhibit No.	Title
3.1	Articles of Incorporation of Eastern Insurance Holdings, Inc. (Incorporated by reference from Exhibit 3.1 to the Eastern Insurance Holdings, Inc. Registration Statement No. 333-128913 on Form S-1)
3.2	Bylaws of Eastern Insurance Holdings, Inc. (Incorporated by reference from Exhibit 3.2 to the Eastern Insurance Holdings, Inc. Registration Statement No. 333-128913 on Form S-1)
31.1	Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012, (ii) the Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2013 and 2012, (iii) the Consolidated Statements of Changes in Equity for the three months ended March 31, 2013 and 2012, (iv) the Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012, and (v) the Condensed Notes to Consolidated Financial Statements.

33

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	EASTERN INSURANCE HOLDINGS, INC. (Registrant)
Dated: May 2, 2013	By:	/s/ Michael L. Boguski
		Michael L. Boguski,
		President and Chief Executive Officer
Dated: May 2, 2013	By:	/s/ Kevin M. Shook
		Kevin M. Shook,
		Executive Vice President, Treasurer & Chief Financial Officer

34