Eastern Insurance Holdings, Inc. - FORM 10-Q

Eastern Insurance Holdings, Inc. - FORM 10-Q - August 4, 2011

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Eastern Insurance Holdings, Inc. Reports

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Eastern Insurance Holdings, Inc. Reports

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file	filename
EXCEL - IDEA: XBRL DOCUMENT - Eastern Insurance Holdings, Inc.	Financial_Report.xls
EX-32.2 - SECTION 906 CFO CERTIFICATION - Eastern Insurance Holdings, Inc.	dex322.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - Eastern Insurance Holdings, Inc.	dex311.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - Eastern Insurance Holdings, Inc.	dex321.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - Eastern Insurance Holdings, Inc.	dex312.htm

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 June 30, 2011,

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

for the Transition Period from to

No. 001-32899

(Commission File Number)

EASTERN INSURANCE HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

PENNSYLVANIA

20-2653793

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)


25 Race Avenue, Lancaster, Pennsylvania		17603
(Address of principal executive offices)		(Zip Code)

(717) 396-7095

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

COMMON STOCK (No Par Value)

Number of Shares Outstanding as of August 3, 2011

8,130,026

(Title of Class)

(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		22

Item 3. Quantitative and Qualitative Disclosures About Market Risk		33

Item 4. Controls and Procedures		34

PART II – OTHER INFORMATION		35

Item 1. Legal Proceedings		35

Item 1A. Risk Factors		35

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		35

Item 3. Defaults Upon Senior Securities		36

Item 4. Submission of Matters to Vote of Security Holders		36

Item 5. Other Information		36

Item 6. Exhibits		36

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except share data)


	June 30 2011			December 31 2010
ASSETS
Investments:
Fixed income securities, at estimated fair value (amortized cost, $120,890; $124,201)	$	124,739		$	127,474
Convertible bonds, at estimated fair value (amortized cost, $17,012; $16,481)		18,813			18,140
Equity securities, at estimated fair value (cost, $21,159; $17,002)		25,042			20,880
Other long-term investments, at estimated fair value (cost, $10,282; $10,271)		12,081			11,435

Total investments		180,675			177,929

Cash and cash equivalents		46,716			45,855
Accrued investment income		1,054			1,195
Premiums receivable (net of allowance, $225; $225)		54,769			46,402
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses		12,462			12,285
Deferred acquisition costs		9,223			7,721
Deferred income taxes, net		—			721
Federal income taxes recoverable		1,359			918
Intangible assets		5,655			6,163
Goodwill		10,752			10,752
Other assets		14,696			12,723

Total assets	$	337,361		$	322,664


LIABILITIES
Reserves for unpaid losses and loss adjustment expenses	$	100,637		$	95,963
Unearned premium reserves		65,157			53,485
Advance premium		421			482
Accounts payable and accrued expenses		16,258			15,707
Ceded reinsurance balances payable		9,082			7,371
Segregated portfolio cell dividend payable		14,390			13,355
Policyholder dividends payable		1,841			1,590
Deferred income taxes, net		41			—

Total liabilities	$	207,827		$	187,953


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 – 11,784,514 and 11,784,514; respectively; outstanding – 8,232,770 and 8,964,344, respectively		—			—
Unearned ESOP compensation		(3,741	)		(4,111	)
Additional paid in capital		115,263			114,472
Treasury stock, at cost (3,551,744 and 2,820,170 shares, respectively)		(50,161	)		(40,835	)
Retained earnings		64,118			61,364
Accumulated other comprehensive income, net		4,055			3,821

Total shareholders’ equity		129,534			134,711

Total liabilities and shareholders’ equity	$	337,361		$	322,664

See accompanying notes to unaudited consolidated financial statements.

EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

For the Three and Six Months Ended June 30, 2011 and 2010

(Unaudited, in thousands, except per share data)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2011			2010			2011		2010
REVENUE
Net premiums earned	$	32,207		$	25,926		$	62,085	$	51,266
Net investment income		908			730			1,934		1,777
Change in equity interest in limited partnerships		95			(5	)		646		254
Net realized investment gains (losses)		975			(862	)		1,805		(50	)
Other revenue		79			145			262		291

Total revenue		34,264			25,934			66,732		53,538


EXPENSES
Losses and loss adjustment expenses incurred		20,818			18,377			40,164		35,524
Acquisition and other underwriting expenses		3,308			2,541			6,726		5,825
Other expenses		6,044			5,202			11,933		10,220
Amortization of intangibles		254			321			508		642
Policyholder dividend expense		306			223			619		408
Segregated portfolio dividend expense		663			(885	)		1,188		(702	)

Total expenses		31,393			25,779			61,138		51,917

Income from continuing operations before income taxes		2,871			155			5,594		1,621
Income tax expense (benefit) from continuing operations		881			(124	)		1,722		397

Net income from continuing operations	$	1,990		$	279		$	3,872	$	1,224


Discontinued operations (Note 3):
Loss from discontinued operations before income taxes		—			(1,385	)		—		(167	)
Income tax expense		—			343			—		604

Net loss from discontinued operations		—			(1,728	)		—		(771	)

Net income (loss)	$	1,990		$	(1,449	)	$	3,872	$	453


Other comprehensive (loss) income
Unrealized holding gains arising during period, net of tax of $455, $144, $720 and $648		846			268			1,338		1,204
Amortization of unrecognized benefit plan amounts, net of tax of $2, $2, $3, and $4		3			3			5		6
Less: Reclassification adjustment for gains included in net (loss) income, net of tax of $468, $906, $597, and $762		869			1,682			1,109		1,415

Other comprehensive (loss) income		(20	)		(1,411	)		234		(205	)

Comprehensive income (loss)	$	1,970		$	(2,860	)	$	4,106	$	248


Earnings per share (See Note 4):	Three Months Ended June 30						Six Months Ended June 30
Earnings per share (See Note 4):	2011			2010			2011		2010
Basic earnings per share:
Income from continuing operations	$	0.25		$	0.03		$	0.47	$	0.14
Loss from discontinued operations		N/A		$	(0.19	)		N/A	$	(0.09	)
Diluted earnings per share:
Income from continuing operations	$	0.25		$	0.03		$	0.47	$	0.13
Loss from discontinued operations		N/A		$	(0.19	)		N/A	$	(0.09	)

See accompanying notes to unaudited consolidated financial statements.

EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Three and Six Months Ended June 30, 2011

(Unaudited, in thousands, except share data)

Three Months Ended June 30, 2011


	Outstanding Shares
	Series A Preferred Stock		Common Capital Stock			Common Capital Stock		Unearned ESOP Compensation			Additional Paid-In Capital		Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss) Net of Tax			Total
Balance, April 1, 2011		—		8,445,111			—	$	(3,927	)	$	114,855	$	(47,368	)	$	62,641		$	4,075		$	130,276
ESOP shares released		—		—			—		186			50		—			—			—			236
Equity awards		—		—			—		—			358		—			—			—			358
Repurchase of common stock		—		(212,341	)		—		—			—		(2,793	)		—			—			(2,793	)
Shareholder dividend		—		—			—		—			—		—			(513	)		—			(513	)
Net income		—		—			—		—			—		—			1,990			—			1,990
Other comprehensive loss, net of tax		—		—			—		—			—		—			—			(20	)		(20	)

Balance, June 30, 2011		—		8,232,770			—	$	(3,741	)	$	115,263	$	(50,161	)	$	64,118		$	4,055		$	129,534

Six Months Ended June 30, 2011


	Outstanding Shares
	Series A Preferred Stock		Common Capital Stock			Common Capital Stock		Unearned ESOP Compensation			Additional Paid-In Capital		Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss) Net of Tax		Total
Balance, January 1, 2011		—		8,964,344			—	$	(4,111	)	$	114,472	$	(40,835	)	$	61,364		$	3,821	$	134,711
ESOP shares released		—		—			—		370			79		—			—			—		449
Equity awards		—		—			—		—			712		—			—			—		712
Repurchase of common stock		—		(731,574	)		—		—			—		(9,326	)		—			—		(9,326	)
Shareholder dividend		—		—			—		—			—		—			(1,118	)		—		(1,118	)
Net income		—		—			—		—			—		—			3,872			—		3,872
Other comprehensive income, net of tax		—		—			—		—			—		—			—			234		234

Balance, June 30, 2011		—		8,232,770			—	$	(3,741	)	$	115,263	$	(50,161	)	$	64,118		$	4,055	$	129,534

See accompanying notes to unaudited consolidated financial statements

EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the Three and Six Months Ended June 30, 2010

(Unaudited, in thousands, except share data)

Three Months Ended June 30, 2010


	Outstanding Shares
	Series A Preferred Stock		Common Capital Stock			Common Capital Stock		Unearned ESOP Compensation			Additional Paid-In Capital		Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss) Net of Tax			Total
Balance, April 1, 2010		—		9,691,257			—	$	(4,675	)	$	113,442	$	(32,666	)	$	74,262		$	6,509		$	156,872
ESOP shares released		—		—			—		187			5		—			—			—			192
Equity awards		—		—			—		—			324		—			—			—			324
Repurchase of common stock		—		(318,556	)		—		—			—		(3,448	)		—			—			(3,448	)
Shareholder dividend		—		—			—		—			—		—			(590	)		—			(590	)
Net loss		—		—			—		—			—		—			(1,449	)		—			(1,449	)
Other comprehensive loss, net of tax		—		—			—		—			—		—			—			(1,411	)		(1,411	)

Balance, June 30, 2010		—		9,372,701			—	$	(4,488	)	$	113,771	$	(36,114	)	$	72,223		$	5,098		$	150,490

Six Months Ended June 30, 2010


	Outstanding Shares
	Series A Preferred Stock		Common Capital Stock			Common Capital Stock		Unearned ESOP Compensation			Additional Paid-In Capital		Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss) Net of Tax			Total
Balance, January 1, 2010		—		9,691,257			—	$	(4,859	)	$	113,049	$	(32,666	)	$	73,038		$	5,303		$	153,865
ESOP shares released		—		—			—		371			30		—			—			—			401
Equity awards		—		—			—		—			692		—			—			—			692
Repurchase of common stock		—		(318,556	)		—		—			—		(3,448	)		—			—			(3,448	)
Shareholder dividend		—		—			—		—			—		—			(1,268	)		—			(1,268	)
Net income		—		—			—		—			—		—			453			—			453
Other comprehensive loss, net of tax		—		—			—		—			—		—			—			(205	)		(205	)

Balance, June 30, 2010		—		9,372,701			—	$	(4,488	)	$	113,771	$	(36,114	)	$	72,223		$	5,098		$	150,490

See accompanying notes to unaudited consolidated financial statements

EASTERN INSURANCE HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2011 and 2010

(Unaudited, in thousands)


	2011			2010
Cash flows from operating activities:
Net income from continuing operations	$	3,872		$	1,224
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization		347			351
Amortization of bond premium/discount		273			412
Net realized investment gains		(1,918	)		(79	)
Change in equity interest in limited partnerships		(646	)		(254	)
Deferred tax expense (benefit)		686			(59	)
Stock compensation		1,184			1,058
Intangible asset amortization		508			642
Changes in assets and liabilities:
Accrued investment income		141			(2	)
Premiums receivable		(8,367	)		(5,719	)
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses		(177	)		(473	)
Deferred acquisition costs		(1,502	)		(1,250	)
Other assets		(1,777	)		(425	)
Reserves for unpaid losses and loss adjustment expenses		4,674			259
Unearned and advance premium		11,611			8,933
Ceded reinsurance balances payable		1,711			(224	)
Accounts payable and accrued expenses		557			(1,407	)
Segregated portfolio cell dividend payable		828			(2,872	)
Policyholder dividends payable		251			(48	)
Federal income taxes recoverable/payable		(441	)		282

Net cash provided by operating activities – continuing operations		11,815			349
Net cash used in operating activities – discontinued operations		—			(2,995	)

Net cash provided by (used in) operating activities		11,815			(2,646	)


Cash flows from investing activities:
Purchase of fixed income securities		(22,473	)		(36,044	)
Purchase of equity securities		(6,999	)		(1,871	)
Purchase of other long-term investments		—			(2,186	)
Proceeds from sale of fixed income securities		17,755			21,361
Proceeds from maturities/calls of fixed income securities		7,921			11,172
Proceeds from equity securities		3,852			1,472
Proceeds from sale of ELH		—			534
Purchase of equipment, net		(543	)		(344	)

Net cash used in investing activities – continuing operations		(487	)		(5,906	)
Net cash provided by investing activities – discontinued operations		—			28,144

Net cash (used in) provided by investing activities		(487	)		22,238


Cash flows from financing activities:
Repurchase of common stock		(9,326	)		(3,448	)
Shareholder dividend		(1,118	)		(1,268	)
Repayment of loan principal		—			(250	)
Income taxes related to stock compensation		(23	)		34

Net cash used in financing activities		(10,467	)		(4,932	)

Net increase in cash and cash equivalents		861			14,660
Cash and cash equivalents, beginning of period		45,855			50,437
Reclassification to discontinued operations		—			404

Cash and cash equivalents, end of period	$	46,716		$	65,501


Non-cash investing activity:
Issuance of promissory note	$	—		$	1,750

See accompanying notes to unaudited consolidated financial statements.

Eastern Insurance Holdings, Inc. and Subsidiaries

Condensed Notes to Consolidated Financial Statements

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

1. Background and Nature of Operations

Eastern Insurance Holdings, Inc. (“EIHI”) is an insurance holding company offering workers’ compensation and 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., S.P.C. (“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 Securities and Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, being normal, recurring adjustments, necessary for a fair statement of the financial position and results of operations of the Company for the periods presented have been included. The results of operations for an interim period are not necessarily indicative of the results for an entire year. These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto as of and for the year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K, which was filed with the U.S. Securities and Exchange Commission on March 4, 2011.

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.

Recent Accounting Pronouncements

Presentation of Comprehensive Income

In June 2011, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to the presentation of comprehensive income. The new guidance requires entities to present net income and comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The option to present items of other comprehensive income in the statement of changes in equity is eliminated. The new guidance is effective for public entities as of the beginning of a fiscal year that begins after December 15, 2011 (including interim periods) and for nonpublic entities for fiscal years ending after December 15, 2012 and interim and annual periods thereafter. Early adoption is permitted. The Company currently presents comprehensive income in the consolidated statement of operations and comprehensive income, which is consistent with requirements of the new guidance. Therefore, the Company does not expect its presentation of comprehensive income to change as a result of adopting the new accounting guidance.

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

with the acquisition or renewal of insurance contracts. Those costs include incremental direct costs of contract acquisition incurred in connection with independent third parties and certain costs related to activities performed by the insurer for the contract, including underwriting, policy issuance and processing, medical and inspection, and sales force contract selling. Under the new guidance, costs incurred by an entity related to unsuccessful acquisition or renewal efforts must be charged to expense as incurred. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011 and is to be applied prospectively. Retrospective application to all prior periods upon the date of adoption is permitted, but not required. Early adoption is permitted but only at the beginning of an entity’s annual reporting period. The Company currently capitalizes and defers commissions and related expenses, premium taxes and certain underwriting personnel salaries. The Company expects to adopt this new guidance effective January 1, 2012 and apply it retrospectively to prior periods for purposes of consistency across all periods presented. Upon adoption, the Company expects to reduce the amount of acquisition costs capitalized related to certain underwriting personnel salaries to give effect to unsuccessful acquisition or renewal activities. Management does not expect the adoption of the new guidance to have a material effect on the Company’s financial condition or results of operations.

3. Discontinued Operations

On December 9, 2010, EIHI completed the sale of Eastern Atlantic RE (“Atlantic RE”). Atlantic RE was a Cayman Islands reinsurance company formed for the purpose of transferring certain assets and liabilities related to EIHI’s run-off specialty reinsurance segment as part of the sale. As a result of the sale, the results of operations for the portion of the run-off specialty reinsurance segment that was transferred to Atlantic RE have been reflected as discontinued operations for the three and six months ended June 30, 2010. The portion of the run-off specialty reinsurance segment that was not sold has been reclassified to the corporate/other segment. For the three and six months ended June 30, 2010, the run-off specialty reinsurance segment reported net premiums earned and revenue of $(8) and $378 and $(2) and $874, respectively. The run-off specialty reinsurance segment reported a loss before income taxes of $(1,991) and $(1,570) for the three and six months ended June 30, 2010, respectively.

The Company recognized an estimated contingent profit commission of $3,018 related to the sale of Atlantic RE, which is based on the adequacy of the run-off specialty reinsurance segment’s reserves for losses and LAE as of September 30, 2010, compared to a predetermined targeted reserve for losses and LAE. The estimated contingent profit commission is included in other assets and any decrease in the estimated amount would be recorded as a loss from discontinued operations. As of June 30, 2011, management believes that the estimated contingent profit commission is realizable; however, due to the inherent uncertainty in the run-off specialty reinsurance segment’s reserves for losses and LAE, the estimated realizable amount could decrease in the future.

On June 21, 2010, EIHI completed the sale of Eastern Life and Health Insurance Company (“Eastern Life”). As a result of the sale, Eastern Life’s operations, which were reported as the group benefits insurance segment, have been reflected as discontinued operations for the three and six months ended June 30, 2010. For the three and six months ended June 30, 2010, the group benefits insurance segment reported net premiums earned and revenue of $9,086 and $10,691 and $18,262 and $20,563, respectively. The group benefits insurance segment reported income before income taxes of $161 and $952 for the three and six months ended June 30, 2010, respectively.

4. Earnings Per Share

Basic earnings per share are computed by dividing net (loss) income by the weighted average number of shares outstanding for the respective period. Diluted earnings per share are computed by dividing net (loss) income by the weighted average number of shares outstanding for the period, including dilutive potential common shares outstanding for the period. For the three and six months ended June 30, 2011, there were 945,161 and 947,520 equity awards, respectively, that were not included in the Company’s earnings per share calculation because to do so would have been anti-dilutive. For the three and six months ended June 30, 2010, there were 794,071 and 802,361 equity awards, respectively, that were not included in the Company’s earnings per share calculation because to do so would have been anti-dilutive.

Consolidated net (loss) income, basic shares outstanding, diluted shares outstanding, basic earnings per share, diluted earnings per share and cash dividends per share for the three and six months ended June 30, 2011 and 2010 were as follows (unaudited, in thousands, except share and per share data):


	Three Months Ended June 30, 2011			Three Months Ended June 30, 2010			Six Months Ended June 30, 2011			Six Months Ended June 30, 2010
Net income (loss) for basic and diluted earnings per share	$	1,990		$	(1,449	)	$	3,872		$	453

Less: Dividends declared – common and unvested restricted share units		(513	)		(590	)		(1,118	)		(1,268	)


Undistributed earnings		1,477			(2,039	)		2,754			(815	)

Percent allocated to common shareholders		99.3	%		98.9	%		99,3	%		98.9	%


		1,467			(2,017	)		2,735			(806	)

Add: Dividends declared – common shares		511			583			1,110			1,254


	$	1,978		$	(1,434	)	$	3,845		$	448


Denominator for basic earnings per share		7,881,326			9,048,929			8,106,057			9,081,716

Effect of dilutive securities		107,235			57,347			104,876			49,057


Denominator for diluted earnings per common share		7,988,561			9,106,276			8,210,933			9,130,773


Basic earnings per share:
Income from continuing operations	$	0.25		$	0.03		$	0.47		$	0.14
Loss from discontinued operations		N/A		$	(0.19	)		N/A		$	(0.09	)
Diluted earnings per share:
Income from continuing operations	$	0.25		$	0.03		$	0.47		$	0.13
Loss from discontinued operations		N/A		$	(0.19	)		N/A		$	(0.09	)
Cash dividends per share	$	0.07		$	0.07		$	0.14		$	0.14

5. Fair Value Measurements

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

The following is a description of the Company’s categorization of the inputs used in the recurring fair value measurements of its financial assets included in its consolidated balance sheet as of June 30, 2011:

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

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

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

The following table provides a summary of the fair value measurements of the Company’s fixed income securities, convertible bonds, and equity securities, as of June 30, 2011 and December 31, 2010, excluding the segregated portfolio cell reinsurance segment (unaudited, in thousands):


			Fair Value Measurements at Reporting Date Using
	6/30/11		Level 1		Level 2		Level 3
Fixed income securities – available for sale:
U.S. Treasuries and government agencies	$	17,872	$	9,667	$	8,205	$	—
States, municipalities, and political subdivisions		31,962		—		31,962		—
Corporate securities		20,580		—		20,580		—
Residential mortgage-backed securities		28,611		—		28,611		—
Commercial mortgage-backed securities		229		—		229		—
Collateralized mortgage obligations		4,594		—		4,594		—
Other structured securities		1,012		—		1,012		—
Convertible bonds		18,813		—		18,813		—
Equity securities – available for sale		20,278		20,278		—		—

Total	$	143,951	$	29,945	$	114,006	$	—


			Fair Value Measurements at Reporting Date Using
	12/31/10		Level 1		Level 2		Level 3
Fixed income securities – available for sale:
U.S. Treasuries and government agencies	$	23,344	$	9,272	$	14,072	$	—
States, municipalities, and political subdivisions		32,621		—		32,621		—
Corporate securities		16,006		—		16,006		—
Residential mortgage-backed securities		25,759		—		25,759		—
Commercial mortgage-backed securities		289		—		289		—
Collateralized mortgage obligations		7,220		—		7,220		—
Other structured securities		773		—		773		—
Convertible bonds		18,140		—		18,140		—
Equity securities – available for sale		16,753		13,228		3,525		—

Total	$	140,905	$	22,500	$	118,405	$	—

There were no transfers between Level 1 and Level 2 securities for the three and six months ended June 30, 2011.

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

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

The Company’s equity securities consist primarily of mutual fund instruments for which there is an active market and quoted market prices; therefore, the Company has classified its mutual fund investments as Level 1 securities. As of December 31, 2010, the Company held an investment in an international equity fund that is not traded on an active exchange market and, therefore, is considered a Level 2 security. Approximately 94.1% of the international equity fund’s underlying investments were considered Level 1 securities as of December 31, 2010, the most recent date for which the Company has audited financial statements of the fund. The Company sold its interest in the international equity fund in the second quarter of 2011.

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

As of June 30, 2011 and December 31, 2010, the estimated fair values of the Company’s limited partnership investments, by investment strategy, were as follows (unaudited, in thousands):


	6/30/11		12/31/10
Multi-strategy fund of funds	$	5,737	$	5,351
Natural resources		2,695		2,515
Structured finance opportunity fund		3,009		2,892
Open-ended investment fund		640		629
Real estate		—		48

Total	$	12,081	$	11,435

The activity in the Company’s limited partnership investments for the three and six months ended June 30, 2011 and 2010 was as follows (unaudited, in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
	2011		2010			2011		2010
Balance, beginning of period	$	11,986	$	8,456		$	11,435	$	8,197
Contributions		—		2,186			—		2,186
Withdrawals		—		—			—		—
Unrealized change in interest		95		(4	)		646		255

Balance, end of period	$	12,081	$	10,638		$	12,081	$	10,638

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

6. Investments

The following tables provide the amortized cost and estimated fair value of the Company’s fixed income and equity securities as of June 30, 2011 and December 31, 2010 (unaudited, in thousands):


June 30, 2011	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Treasuries and government agencies	$	17,285	$	593	$	(6	)	$	17,872
States, municipalities, and political subdivisions		30,244		1,722		(4	)		31,962
Corporate securities		39,556		958		(55	)		40,459
Residential mortgage-backed securities		28,085		574		(48	)		28,611
Commercial mortgage-backed securities		211		18		—			229
Collateralized mortgage obligations		4,502		111		(19	)		4,594
Other structured securities		1,007		5		—			1,012

Total fixed income securities		120,890		3,981		(132	)		124,739
Equity securities		21,159		4,000		(117	)		25,042

Total fixed income and equity securities	$	142,049	$	7,981	$	(249	)	$	149,781


December 31, 2010	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. Treasuries and government agencies	$	22,775	$	575	$	(6	)	$	23,344
States, municipalities, and political subdivisions		31,282		1,428		(89	)		32,621
Corporate securities		36,462		1,130		(124	)		37,468
Residential mortgage-backed securities		25,474		415		(130	)		25,759
Commercial mortgage-backed securities		272		17		—			289
Collateralized mortgage obligations		7,177		117		(74	)		7,220
Other structured securities		759		18		(4	)		773

Total fixed income securities		124,201		3,700		(427	)		127,474
Equity securities		17,002		3,906		(28	)		20,880

Total fixed income and equity securities	$	141,203	$	7,606	$	(455	)	$	148,354

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

The gross unrealized losses and estimated fair value of fixed income and equity securities, excluding those securities in the segregated portfolio cell reinsurance segment, classified as a available-for-sale by category and length of time an individual security has been in a continuous unrealized position as of June 30, 2011 and December 31, 2010 are as follows (unaudited, in thousands):


	Less Than 12 Months					12 Months or More				Total
June 30, 2011	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
U.S. Treasuries and government agencies	$	1,561	$	(6	)	$	—	$	—	$	1,561	$	(6	)
States, municipalities, and political subdivisions		901		(4	)		—		—		901		(4	)
Corporate securities		4,216		(31	)		—		—		4,216		(31	)
Residential mortgage-backed securities		5,531		(48	)		—		—		5,531		(48	)
Collateralized mortgage obligations		539		(19	)		—		—		539		(19	)

Total fixed income securities		12,748		(108	)		—		—		12,748		(108	)
Equity securities		3,384		(89	)		—		—		3,384		(89	)

Total fixed income and equity securities	$	16,132	$	(197	)	$	—	$	—	$	16,132	$	(197	)

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


	Less Than 12 Months					12 Months or More					Total
December 31, 2010	Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses			Estimated Fair Value		Gross Unrealized Losses
U.S. Treasuries and government agencies	$	860	$	(6	)	$	—	$	—		$	860	$	(6	)
States, municipalities, and political subdivisions		5,914		(89	)		—		—			5,914		(89	)
Corporate securities		2,508		(25	)		—		—			2,508		(25	)
Residential mortgage-backed securities		10,921		(130	)		—		—			10,921		(130	)
Collateralized mortgage obligations		1,700		(19	)		722		(55	)		2,422		(74	)
Other structured securities		446		(4	)		—		—			446		(4	)

Total fixed income securities	$	22,349	$	(273	)	$	722	$	(55	)	$	23,071	$	(328	)

As of June 30, 2011, the Company held 26 fixed income securities with gross unrealized losses totaling $108. 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 June 30, 2011.

As of June 30, 2011, the Company held 2 equity securities with gross unrealized losses totaling $89. Both of these securities were purchased in 2011 and are not considered other-than-temporarily impaired.

There were no other-than-temporary impairments recognized by the Company for the three and six months ended June 30, 2011. The Company recognized other-than-temporary impairments of $0 and $6 for the three and six months ended June 30, 2010.

The Company’s equity interest in limited partnerships increased $95 and $646 for the three and six months ended June 30, 2011, respectively, compared to a decrease of $5 and an increase of $254 for the same periods in 2010. The Company obtains audited financial statements of its limited partnership investments on an annual basis. The total assets, total liabilities and results of operations of the limited partnerships in which the Company invests as of and for the year ended December 31, 2010, based on the limited partnerships’ audited financial statements, were as follows (unaudited, in thousands):


	Total Assets		Total Liabilities		Results of Operations
Multi-strategy fund of funds	$	452,826	$	54,633	$	41,821
Natural resource funds	$	187,079	$	12,604	$	25,103
Structured finance opportunity fund	$	294,726	$	20,153	$	54,793
Open-ended investment fund	$	118,386	$	575	$	11,167
Real estate partnership	$	3,606	$	2,655	$	(190	)

7. 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 and six months ended June 30, 2011 and 2010 (unaudited, in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
	2011			2010		2011			2010
Balance, beginning of period	$	98,766		$	89,644	$	95,963		$	89,509
Reinsurance recoverables on unpaid losses and LAE		9,062			8,181		7,864			8,512

Net balance, beginning of period		89,704			81,463		88,099			80,997

Incurred related to:
Current year		20,924			17,237		40,384			33,672
Prior year		(106	)		1,140		(220	)		1,852

Total incurred		20,818			18,377		40,164			35,524
Paid related to:
Current year		7,735			8,029		10,558			11,418
Prior year		10,634			10,320		25,552			23,612

Total paid		18,369			18,349		36,110			35,030

Net balance, end of period		92,153			81,491		92,153			81,491
Reinsurance recoverables on unpaid losses and LAE		8,484			8,273		8,484			8,273

Balance, end of period	$	100,637		$	89,764	$	100,637		$	89,764

Incurred losses by segment were as follows for the three and six months ended June 30, 2011 and 2010, respectively (unaudited, in thousands):

Three Months Ended June 30, 2011


June 30, 2011	Workers’ Compensation Insurance Segment			Segregated Portfolio Cell Reinsurance Segment			Total
Incurred related to:
Current year, gross of discount	$	16,927		$	4,840		$	21,767
Current period discount		(665	)		(178	)		(843	)
Prior year, gross of discount		—			(732	)		(732	)
Accretion of prior period discount		452			174			626

Total incurred	$	16,714		$	4,104		$	20,818

Three Months Ended June 30, 2010


June 30, 2010	Workers’ Compensation Insurance Segment			Segregated Portfolio Cell Reinsurance Segment			Total
Incurred related to:
Current year, gross of discount	$	13,321		$	4,497		$	17,818
Current period discount		(402	)		(179	)		(581	)
Prior year, gross of discount		—			714			714
Accretion of prior period discount		370			56			426

Total incurred	$	13,289		$	5,088		$	18,377

Six Months Ended June 30, 2011


June 30, 2011	Workers’ Compensation Insurance Segment			Segregated Portfolio Cell Reinsurance Segment			Total
Incurred related to:
Current year, gross of discount	$	32,912		$	9,223		$	42,135
Current period discount		(1,345	)		(406	)		(1,751	)
Prior year, gross of discount		—			(1,431	)		(1,431	)
Accretion of prior period discount		789			422			1,211

Total incurred	$	32,356		$	7,808		$	40,164

Six Months Ended June 30, 2010


June 30, 2010	Workers’ Compensation Insurance Segment			Segregated Portfolio Cell Reinsurance Segment			Total
Incurred related to:
Current year, gross of discount	$	26,091		$	9,012		$	35,103
Current period discount		(1,036	)		(395	)		(1,431	)
Prior year, gross of discount		—			(19	)		(19	)
Accretion of prior period discount		1,074			797			1,871

Total incurred	$	26,129		$	9,395		$	35,524

The Company’s results of operations include favorable development in its segregated portfolio cell reinsurance segment of $732 and $1,431 for the three and six months ended June 30, 2011, compared to unfavorable development of $714 and favorable development of $19 for the same periods in 2010. The favorable development in 2011 primarily reflects the impact of claim settlements for amounts at, or less than, previously established case and IBNR reserves. The unfavorable development reported for the three months ended June 30, 2010 reflected an increase in reported claims in the segregated portfolio cell reinsurance segment during the second quarter.

There was no development in the workers’ compensation insurance segment in 2011 or 2010.

8. Segment Information

The Company currently operates in three business segments. Prior to the sale of Atlantic RE and Eastern Life, the Company’s operations included a run-off specialty reinsurance segment and a group benefits insurance segment. The components of the run-off specialty reinsurance segment that were not transferred to Atlantic RE have been included in the corporate/other segment for the three and six months ended June 30, 2011 and 2010.

Workers’ Compensation Insurance

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

Segregated Portfolio Cell Reinsurance

The Company offers alternative market workers’ compensation solutions to individual companies, groups and associations (referred to as “segregated portfolio cell dividend participants”) through the creation of segregated portfolio cells. The segregated portfolio cells are segregated pools of assets that function as insurance companies within an insurance company. The pool of assets and associated liabilities of each segregated portfolio cell are solely for the benefit of the segregated portfolio cell dividend participants, and the pool of assets of one segregated portfolio cell are statutorily protected from the creditors of the others. This permits the Company to provide customers with a turn-key alternative markets solution that includes program design, fronting, claims administration, risk management, segregated portfolio cell rental, 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 segregated portfolio cell reinsurance segment generated fee revenue to the Company’s workers’ compensation, run-off specialty reinsurance, and corporate/other segments totaling $1,217 and $962 for the three months ended June 30, 2011 and 2010, respectively and $2,878 and $2,373 for the six months ended June 30, 2011 and 2010, respectively.

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 (loss). The Company’s share of the segregated portfolio dividend is included in the corporate/other segment.

Corporate/Other

The corporate/other segment primarily includes the expenses of the holding company, the third party administration activities of the Company, the Company’s interest in certain segregated portfolio cells, and the non-segregated portfolio cell reinsurance 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 corporate/other segment also includes the Company’s 10% interest in a segregated portfolio cell with an unaffiliated primary carrier that writes insurance coverage for sprinkler contractors. The Company cancelled the non-segregated portfolio cell reinsurance contracts in 1999 on a run-off basis and continues to have exposure for outstanding claims as of June 30, 2011. The Company non-renewed the contract for its 10% interest in the segregated portfolio cell on a run-off basis effective April 1, 2009.

The following table represents the segment results for the three months ended June 30, 2011 (unaudited, in thousands):


	Workers’ Compensation Insurance		Segregated Portfolio Cell Reinsurance		Corporate/ Other			Total
Revenue:
Net premiums earned	$	25,119	$	7,088	$	—		$	32,207
Net investment income		883		143		(118	)		908
Change in equity interest in limited partnerships		73		—		22			95
Net realized investment gains		879		30		66			975
Other revenue		—		—		79			79

Total revenue		26,954		7,261		49			34,264


Expenses:
Losses and LAE incurred		16,714		4,104		—			20,818
Acquisition and other underwriting expenses		1,667		2,131		(490	)		3,308
Other expenses		4,036		85		1,923			6,044
Amortization of intangibles		—		—		254			254
Policyholder dividend expense		298		8		—			306
Segregated portfolio dividend expense		—		933		(270	)		663

Total expenses		22,715		7,261		1,417			31,393

Income (loss) from continuing operations before income taxes		4,239		—		(1,368	)		2,871
Income tax expense (benefit) from continuing operations		1,369		—		(488	)		881

Net income (loss) from continuing operations	$	2,870	$	—	$	(880	)	$	1,990

Total assets	$	291,494	$	60,525	$	(14,658	)	$	337,361

The following table represents the segment results for the three months ended June 30, 2010 (unaudited, in thousands):


	Workers’ Compensation Insurance			Segregated Portfolio Cell Reinsurance			Corporate/ Other			Total
Revenue:
Net premiums earned	$	20,161		$	5,765		$	—		$	25,926
Net investment income		513			158			59			730
Change in equity interest in limited partnerships		26			—			(31	)		(5	)
Net realized investment losses		(708	)		(23	)		(131	)		(862	)
Other revenue		—			—			145			145

Total revenue		19,992			5,900			42			25,934


Expenses:
Losses and LAE incurred		13,289			5,088			—			18,377
Acquisition and other underwriting expenses		1,100			1,788			(347	)		2,541
Other expenses		3,466			81			1,655			5,202
Amortization of intangibles		—			—			321			321
Policyholder dividend expense		221			2			—			223
Segregated portfolio dividend expense		—			(1,059	)		174			(885	)

Total expenses		18,076			5,900			1,803			25,779

Income (loss) from continuing operations before income taxes		1,916			—			(1,761	)		155
Income tax expense (benefit) from continuing operations		542			—			(666	)		(124	)

Net income (loss) from continuing operations	$	1,374		$	—		$	(1,095	)	$	279

Total assets	$	258,836		$	57,742		$	968		$	317,546

The following table represents the segment results for the six months ended June 30, 2011 (unaudited, in thousands):


	Workers’ Compensation Insurance		Segregated Portfolio Cell Reinsurance		Corporate/ Other			Total
Revenue:
Net premiums earned	$	48,701	$	13,384	$	—		$	62,085
Net investment income		1,760		252		(78	)		1,934
Change in equity interest in limited partnerships		542		—		104			646
Net realized investment gains		1,640		67		98			1,805
Other revenue		—		—		262			262

Total revenue	$	52,643	$	13,703	$	386		$	66,732


Expenses:
Losses and LAE incurred		32,356		7,808		—			40,164
Acquisition and other underwriting expenses		3,775		4,005		(1,054	)		6,726
Other expenses		7,733		149		4,051			11,933
Amortization of intangibles		—		—		508			508
Policyholder dividend expense		606		13		—			619
Segregated portfolio dividend expense		—		1,728		(540	)		1,188

Total expenses		44,470		13,703		2,965			61,138

Income (loss) from continuing operations before income taxes		8,173		—		(2,579	)		5,594
Income tax expense (benefit) from continuing operations		2,644		—		(922	)		1,722

Net income (loss) from continuing operations	$	5,529	$	—	$	(1,657	)	$	3,872

Total assets	$	291,494	$	60,525	$	(14,658	)	$	337,361

The following table represents the segment results for the six months ended June 30, 2010 (unaudited, in thousands):


	Workers’ Compensation Insurance			Segregated Portfolio Cell Reinsurance			Corporate/ Other			Total
Revenue:
Net premiums earned	$	39,616		$	11,650		$	—		$	51,266
Net investment income		1,343			309			125			1,777
Change in equity interest in limited partnerships		231			—			23			254
Net realized investment (losses) gains		(258	)		542			(334	)		(50	)
Other revenue		—			—			291			291

Total revenue		40,932			12,501			105			53,538


Expenses:
Losses and LAE incurred		26,129			9,395			—			35,524
Acquisition and other underwriting expenses		3,070			3,580			(825	)		5,825
Other expenses		6,977			140			3,103			10,220
Amortization of intangibles		—			—			642			642
Policyholder dividend expense		399			9			—			408
Segregated portfolio dividend expense		—			(623	)		(79	)		(702	)

Total expenses		36,575			12,501			2,841			51,917

Income (loss) from continuing operations before income taxes		4,357			—			(2,736	)		1,621
Income tax expense (benefit) from continuing operations		1,257			—			(860	)		397

Net income (loss) from continuing operations	$	3,100		$	—		$	(1,876	)	$	1,224

Total assets	$	258,836		$	57,742		$	968		$	317,546

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.

10. Subsequent Events

Management performed an evaluation of subsequent events and determined there were no recognized or unrecognized subsequent events that would require an adjustment and/or additional disclosure in the consolidated financial statements as of June 30, 2011.

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, 2011.

Forward-looking Statements

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

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

•

the ability to carry out our business plans;

•

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

•

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

•

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

•

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

•

the impact of acts of terrorism and acts of war;

•

the effects of terrorist related insurance legislation and laws;

•

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

•

the cost, availability and collectibility of reinsurance;

•

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

•

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

•

the effects of mergers, acquisitions and dispositions;

•

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

•

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

•

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

•

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

•

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

•

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

•

adverse litigation or arbitration results; and

•

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

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

Overview

The Company reported net income from continuing operations of $2.0 million and $3.9 million for the three and six months ended June 30, 2011, respectively, compared to $279,000 and $1.2 million for the same periods in 2010.

The improved operating results primarily reflect growth in premium revenue, which was driven by new business sales, an improvement in the renewal retention rate and renewal rate increases, as well as an improvement in audit premium. Net premiums earned included audit premium from customers of $595,000 and $461,000 for the three and six months ended June 30, 2011, respectively, compared to audit premium returned to customers of $1.5 million and $2.1 million for the same periods in 2010. The audit premium also had a favorable impact on the consolidated expense ratio, which improved to 29.8% and 30.9% for the three and six months ended June 30, 2011, from 31.1% and 32.6% for the same period in 2010.

The Company’s investment results also improved from 2010 to 2011, primarily reflecting improvement in the limited partnership investments, an increase in the fair value of the convertible bond portfolio, and the sale of a previously impaired equity security that resulted in a realized gain.

Principal Revenue and Expense Items

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

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

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

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

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

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

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

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

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

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

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

Key Financial Measures

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

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

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

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

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

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

Critical Accounting Policies and Estimates

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

Reserves for Unpaid Losses and LAE

The Company establishes reserves for unpaid losses and LAE for its workers’ compensation, segregated portfolio cell reinsurance and run-off specialty reinsurance products, which are estimates of future payments of reported and unreported claims for losses and related expenses. The adequacy of the Company’s reserves for unpaid losses and LAE are inherently uncertain because the ultimate amount that the Company may pay under many of the claims incurred as of the balance sheet date will not be known for many years. Establishing reserves continues to be a complex and imprecise process, requiring the use of informed estimates and judgments. The Company’s estimates and judgments may be revised as additional experience and other data becomes available and are reviewed, as new or improved methodologies are developed, or as current laws change. Any such revisions could result in future changes in estimates of losses or reinsurance recoverable and would be reflected in the Company’s results of operations in the period in which the estimates are changed. Estimating the ultimate claims liability is necessarily a complex and judgmental process inasmuch as the amounts are based on management’s informed estimates and judgments using data currently available. If ultimate losses, net of reinsurance, prove to be substantially higher than the amounts recorded as of June 30, 2010, the related adjustments could have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

The Company discounts its workers’ compensation reserves, using a discount rate of approximately 3.0%. As of June 30, 2011 and December 31, 2010, the Company’s reserves for unpaid losses and LAE were reduced by $5.2 million and $4.6 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 run-off specialty reinsurance segments as of June 30, 2011 (unaudited) and December 31, 2010 are summarized below (in thousands):


June 30, 2011	Workers’ Compensation Insurance Segment			Segregated Portfolio Cell Reinsurance Segment			Corporate/Other		Total
Case reserves	$	41,243		$	10,320		$	—	$	51,563
Case incurred development, IBNR, and unallocated LAE reserves		31,982			13,102			667		45,751
Amount of discount		(3,990	)		(1,171	)		—		(5,161	)

Net reserves		69,235			22,251			667		92,153
Reinsurance recoverables on unpaid losses and LAE		5,210			3,274			—		8,484

Reserves for unpaid losses and LAE	$	74,445		$	25,525		$	667	$	100,637


December 31, 2010	Workers’ Compensation Insurance Segment			Segregated Portfolio Cell Reinsurance Segment			Corporate/Other		Total
Case reserves	$	35,758		$	11,618		$	—	$	47,376
Case incurred development, IBNR, and unallocated LAE reserves		32,124			12,369			862		45,355
Amount of discount		(3,435	)		(1,198	)		—		(4,633	)

Net reserves		64,447			22,789			862		88,098
Reinsurance recoverables on unpaid losses and LAE		4,464			3,401			—		7,865

Reserves for unpaid losses and LAE	$	68,911		$	26,190		$	862	$	95,963

“Other Than Temporary” Investment Impairments

Unrealized investment gains or losses on investments carried at fair value, net of applicable income taxes, are reflected directly in shareholders’ equity as a component of comprehensive income (loss) and, accordingly, have no effect on net

income. When, in the opinion of management, a decline in the fair value of an investment below its cost or amortized cost is considered to be “other-than-temporary,” such investment is written down to its fair value. The amount written down is recorded in earnings as a realized loss on investments. Generally, the determination of other-than-temporary impairment includes, in addition to other relevant factors, a presumption that if the market value is below cost by a significant amount for a period of time, a write down is necessary. Notwithstanding this presumption, the determination of other-than-temporary impairment requires judgment about future prospects for an investment and is therefore a matter of inherent uncertainty. There were no other-than-temporary impairments recognized by the Company for the three and six months ended June 30, 2011. The Company recognized other-than-temporary impairments totaling $0 and $6,000 for the three and six months ended June 30, 2010. As of June 30, 2011, the Company held securities with gross unrealized losses of $197,000, excluding those securities in the segregated portfolio cell reinsurance segment, of which $0 were in an unrealized loss position for more than 12 months. Adverse investment market conditions, poor operating results of underlying investments, or the passage of time with respect to equity securities in an unrealized loss position, could result in impairment charges in the future. The Company generally applies the following standards in determining whether the decline in fair value of an investment is other-than-temporary:

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

The Company did not recognize any other-than-temporary impairments related to its equity securities for the three and six months ended June 30, 2011.

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

•

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

•

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

•

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

The Company did not recognize any other-than-temporary impairments related to its fixed income securities for the three and six months ended June 30, 2011.

Limited partnerships. A limited partnership investment is generally written down if the Company is unable to hold or otherwise intends to sell its interest in the limited partnership at a loss, or if management has received information that suggests the Company will be unable to recover its original investment in the limited partnership. The amount written down is recorded in the change in equity interest in other long-term investments in the consolidated statement of operations. There were no other-than-temporary impairments related to the Company’s limited partnership interests for the three and six months ended June 30, 2011 or 2010.

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 June 30, 2011 to its workers’ compensation insurance segment. The goodwill impairment test, performed as of September 30 of each year, is a two-step test. The first step identifies whether

there is potential impairment by comparing the fair value of a reporting unit to the carrying amount, including goodwill. If the fair value of a reporting unit is less than its carrying amount, the second step of the impairment test is required to measure the amount of any impairment loss.

We did not evaluate goodwill for impairment as of June 30, 2011 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, 2010.

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

Deferred Income Taxes

The temporary differences between the tax and book bases of assets and liabilities are recorded as deferred income taxes. Management evaluates the recoverability of its gross deferred tax assets based on historical trends of generating taxable income or losses, as well as expectations of future taxable income or loss. As of June 30, 2011, the Company recorded a net deferred tax liability of $41,000. Management has evaluated its gross deferred tax assets as of June 30, 2011 and expects them to be fully recoverable. If this assumption were to change, any amount of the gross 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 June 30, 2011, 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 $11,401,000 as of June 30, 2011, a portion of which is capital in nature and may only be utilized to offset future capital gains generated by Eastern Re. The outside basis difference primarily arises from losses at Eastern Re recognized for financial statement purposes, which have not yet been recognized for tax purposes. Management presently believes that the Company will not be able to recognize these tax benefits in the foreseeable future and, therefore, has not recognized the future tax benefits as of June 30, 2011, however, to the extent Eastern Re generates earnings and profits, the Company will be able to record the tax benefit of the outside basis difference.

Reinsurance Recoverables

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

Recent Accounting Pronouncements

Presentation of Comprehensive Income

In June 2011, the FASB issued new accounting guidance related to the presentation of comprehensive income. The new guidance requires entities to present net income and comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. The option to present items of other comprehensive income in the statement of changes in equity is eliminated. The new guidance is effective for public entities as of the beginning of a fiscal year that begins after December 15, 2011 (including interim periods) and for nonpublic entities for fiscal years ending after December 15, 2012 and interim and annual periods thereafter. Early adoption is permitted. The Company currently presents comprehensive income in the consolidated statement of operations and comprehensive income, which is consistent with requirements of the new guidance. Therefore, the Company does not expect its presentation of comprehensive income to change as a result of adopting the new accounting guidance.

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

In October 2010, the FASB issued new accounting guidance related to the accounting for costs related to the acquisition or renewal of insurance contracts. The new guidance provides specific types of costs that should be capitalized in connection with the acquisition or renewal of insurance contracts. Those costs include incremental direct costs of contract acquisition incurred in connection with independent third parties and certain costs related to activities performed by the insurer for the contract, including underwriting, policy issuance and processing, medical and inspection, and sales force contract selling. Under the new guidance, costs incurred by an entity related to unsuccessful acquisition or renewal efforts must be charged to expense as incurred. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011 and is to be applied prospectively. Retrospective application to all prior periods upon the date of

adoption is permitted, but not required. Early adoption is permitted but only at the beginning of an entity’s annual reporting period. The Company currently capitalizes and defers commissions and related expenses, premium taxes and certain underwriting personnel salaries. The Company expects to adopt this new guidance effective January 1, 2012 and apply it retrospectively to prior periods for purposes of consistency across all periods presented. Upon adoption, the Company expects to reduce the amount of acquisition costs capitalized related to certain underwriting personnel salaries to give effect to unsuccessful acquisition or renewal activities. Management does not expect the adoption of the new guidance to have a material effect on the Company’s financial condition or results of operations.

RESULTS OF OPERATIONS

The major components of consolidated revenue from continuing operations were as follows for the three and six months ended June 30, 2011 and 2010 (unaudited, in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
	2011		2010			2011		2010
Net premiums written	$	30,411	$	24,296		$	73,757	$	60,711


Net premiums earned	$	32,207	$	25,926		$	62,085	$	51,266
Net investment income		908		730			1,934		1,777
Change in equity interest in limited partnerships		95		(5	)		646		254
Net realized investment gains (losses)		975		(862	)		1,805		(50	)
Other revenue		79		145			262		291


Consolidated revenue	$	34,264	$	25,934		$	66,732	$	53,538

The increase in consolidated revenue primarily reflects premium growth related to new business sales and the impact of audit premium, which increased net premiums earned in 2011 and reduced net premiums earned in 2010, an increase in the Company’s equity interest in its limited partnership investments, and an increase in net realized investment gains, which primarily reflects the sale of a previously impaired equity security and an increase in the fair value of the Company’s convertible bond portfolio. The decrease in other revenue primarily reflects the loss of a TPA customer at the end of the first quarter of 2011.

The components of consolidated net (loss) income from continuing operations, by segment, for the three and six months ended June 30, 2011 and 2010 were as follows (unaudited, in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Workers’ compensation insurance	$	2,870		$	1,374		$	5,529		$	3,100
Segregated portfolio cell reinsurance		—			—			—			—
Corporate / other		(880	)		(1,095	)		(1,657	)		(1,876	)

Consolidated net income from continuing operations	$	1,990		$	279		$	3,872		$	1,224

The increase in consolidated net income from continuing operations primarily reflects the growth in premium revenue, including the impact of audit premium, and the improvement in the Company’s investment results.

WORKERS’ COMPENSATION INSURANCE

The following table represents the operations of the workers’ compensation insurance segment for the three and six months ended June 30, 2011 and 2010 (unaudited, in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Revenue:
Direct premiums written	$	32,947		$	26,599		$	79,548		$	65,473
Reinsurance premiums assumed		819			494			1,151			759
Ceded premiums written		(9,890	)		(8,227	)		(23,858	)		(19,866	)

Net premiums written		23,876			18,866			56,841			46,366
Change in unearned premiums		1,243			1,295			(8,140	)		(6,750	)

Net premiums earned		25,119			20,161			48,701			39,616
Net investment income		883			513			1,760			1,343
Change in equity interest in limited partnerships		73			26			542			231
Net realized investment gains (losses)		879			(708	)		1,640			(258	)
Other revenue		—			—			—			—

Total revenue		26,954			19,992			52,643			40,932


Expenses:
Losses and LAE incurred		16,714			13,289			32,356			26,129
Acquisition and other underwriting expenses		1,667			1,100			3,775			3,070
Other expenses		4,036			3,466			7,733			6,977
Policyholder dividend expense		298			221			606			399

Total expenses		22,715			18,076			44,470			36,575


Income before income taxes		4,239			1,916			8,173			4,357
Income tax expense		1,369			542			2,644			1,257

Net income	$	2,870		$	1,374		$	5,529		$	3,100

The workers’ compensation insurance ratios were as follows for the three and six months ended June 30, 2011 and 2010:


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Loss and LAE ratio		66.5	%		65.9	%		66.4	%		66.0	%
Expense ratio		22.7	%		22.6	%		23.7	%		25.4	%
Policyholders’ dividend ratio		1.2	%		1.1	%		1.2	%		1.0	%


Combined ratio		90.4	%		89.6	%		91.3	%		92.4	%

Premiums

The increase in direct premiums written primarily reflects new business sales $17.1 million, an increase in audit premium, an increase in the renewal retention rate, and renewal rate increases of 1.6%. Audit premium from customers totaled $595,000 and $461,000 for the three and six months ended June 30, 2011, respectively, compared to audit premium returned to customers of $1.5 million and $2.1 million for the same periods in 2010. The Company’s traditional book of business recognized audit premium from customers of $331,000 and $603,000 for the three and six months ended June 30, 2011, compared to audit premium returned to customers of $810,000 and $1.2 million for the same periods in 2010, respectively. The renewal retention rate increased from 87.0% in 2010 to 88.1% in 2011.

Net Investment Income

The increase in net investment income primarily reflects an increase in invested assets, partially offset by a decrease in the average yield on the fixed income portfolio. The average yield on the fixed income portfolio was 3.28% as of June 30, 2011, compared to 3.79% as of June 30, 2010.

Net Realized Investment Gains (Losses)

Net realized investment gains for the three and six months ended June 30, 2011 primarily reflects the sale of an interest in an international equity fund that experienced an other-than-temporary write down prior to 2011. Net realized investment losses for the three and six months ended June 30, 2010 primarily reflect a decrease in the fair value of the Company’s convertible bond portfolio.

Losses and LAE

The increase in the calendar period loss and LAE ratio primarily reflects an increase in the accident period loss ratio from 2010 to 2011, partially offset by additional audit premium in 2011, compared to return audit premium in 2010. The calendar period loss and LAE ratio was impacted by additional audit premium from customers of $331,000 and $603,000 for the three and six months ended June 30, 2011, which decreased the loss and LAE ratio by 0.9 and 0.9 points, respectively, compared to audit premium returned to customers of $810,000 and $1.2 million for the same periods in 2010, which increased the loss and LAE ratio by 2.5 points and 2.0 points, respectively. There was no prior year reserve development recognized in 2011 or 2010.

Acquisition and Other Underwriting Expenses

The acquisition and other underwriting expense ratio was 6.6% and 7.8% for the three and six months ended June 30, 2011, respectively, compared to 5.5% and 7.7% for the same periods in 2010. The increase in the expense ratio from 2010 to 2011 primarily reflects the reversal of the 2009 Security Fund accrual in the second quarter of 2010, which reduced the 2010 expense ratio. The increase in the expense ratio related to the Security Fund was partially offset by the increase in net premiums earned and an increase in fee-based revenue from the segregated portfolio cell reinsurance segment.

Other Expenses

The other expense ratio was 16.1% and 15.9% for the three and six months ended June 30, 2011, respectively, compared to 17.2% and 17.6% for the same periods in 2010. The decrease in the expense ratio primarily reflects the impact of the increase in net premiums earned.

Policyholder Dividends

The increase in the policyholder dividend expense primarily reflects the loss experience of dividend paying policies. For the six months ended June 30, 2011 and 2010, 12.2% and 13.8%, respectively, of all policies were written on a dividend policy basis.

Tax Expense

The effective tax rate for the three and six months ended June 30, 2011 was 32.3% and 32.4%, respectively, compared to an effective tax rate of 28.3% and 28.9% for the same periods in 2010. The primary difference between the statutory rate of 35.0% and the effective tax rate reflects tax-exempt income on municipal bond securities. The increase in the effective tax rate from 2010 to 2011 primarily reflects the relationship of tax-exempt municipal bond income to pre-tax income.

SEGREGATED PORTFOLIO CELL REINSURANCE

The following table represents the operations of the segregated portfolio cell reinsurance segment for the three and six months ended June 30, 2011 and 2010 (unaudited, in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Revenue:
Reinsurance premiums assumed	$	7,516		$	6,190		$	18,759		$	15,893
Ceded premiums written		(981	)		(760	)		(1,843	)		(1,548	)

Net premiums written		6,535			5,430			16,916			14,345
Change in unearned premiums		553			335			(3,532	)		(2,695	)

Net premiums earned		7,088			5,765			13,384			11,650
Net investment income		143			158			252			309
Net realized investment gains (losses)		30			(23	)		67			542

Total revenue		7,261			5,900			13,703			12,501


Expenses:
Losses and LAE incurred		4,104			5,088			7,808			9,395
Acquisition and other underwriting expenses		2,131			1,788			4,005			3,580
Other expenses		85			81			149			140
Policyholder dividend expense		8			2			13			9
Segregated portfolio dividend expense (1)		933			(1,059	)		1,728			(623	)

Total expenses		7,261			5,900			13,703			12,501

Net income (1)	$	—		$	—		$	—		$	—

(1)

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

The segregated portfolio cell reinsurance ratios were as follows for the three and six months ended June 30, 2011 and 2010:


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Loss and LAE ratio		57.9	%		88.3	%		58.3	%		80.6	%
Expense ratio		31.4	%		32.5	%		31.1	%		32.0	%

Combined ratio		89.3	%		120.8	%		89.4	%		112.6	%

Reinsurance Premiums Assumed

The increase in reinsurance premiums assumed primarily reflects new business sales of $2.9 million, an increase in audit premium, and renewal rate increases of 2.3%, partially offset by a slight decline in the renewal retention rate. Audit premium from customers totaled $264,000 and audit premium returned to customers totaled $142,000 for the three and six months ended June 30, 2011, respectively, compared to audit premium returned to customers of $658,000 and $865,000 for the same periods in 2010. The renewal retention rate was 91.0% in 2010, compared to 90.8% in 2011.

Net Investment Income

The decrease in net investment income primarily reflects a decrease in fixed income securities from 2010 to 2011.

Net Realized Investment Gains (Losses)

Net realized investment gains (losses) primarily reflect investment sale activity in 2011 and 2010.

Losses and LAE

The decrease in the calendar period loss and LAE ratio reflects a decrease in the accident period loss ratio, an increase in favorable reserve development, and an improvement in audit premium from 2010 to 2011. The accident period loss ratio was 68.2% and 69.1% for the three and six months ended June 30, 2011, respectively, compared to 75.9% and 80.8% for the same periods in 2010. The Company recorded favorable reserve development of $732,000 and $1.4 million for the three and six months ended June 30, 2011, respectively, compared to unfavorable reserve development of $714,000 and favorable reserve development of $19,000 for the same periods in 2010. The 2011 favorable reserve development primarily reflects the impact of claim settlements for amounts at, or less than, previously established case and IBNR reserves. The 2010 unfavorable reserve development primarily reflected an increase in the severity and number of reported claims, primarily in economically sensitive segregated portfolio cell programs, during the second quarter of 2010. The calendar period loss and LAE ratio was impacted by additional audit premium from customers of $264,000 and audit premium returned to customers of $142,000 for the three and six months ended June 30, 2011, which decreased the loss and LAE ratio by 2.2 points and increased the loss and LAE ratio by 0.6 points, respectively, compared to audit premium returned to customers of $658,000 and $865,000 for the same periods in 2010, which increased the loss and LAE ratio by 9.1 points and 5.5 points, respectively.

Acquisition and Other Underwriting Expenses

The expense ratios are consistent with the contractual ceding commissions for the three and six months ended June 30, 2011 and 2010.

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 corporate/other segment reported a net loss of $880,000 and $1.7 million for the three and six months ended June 30, 2010, compared to a net loss of $1.1 million and $1.9 million for the same periods in 2010. The improvement in the corporate/other results primarily reflects an increase in the Company’s equity interest in certain segregated portfolio cells, partially offset by a decrease in other revenue related to the loss of a third party administration customer at the end of the first quarter of 2011. The decrease in net investment income from 2010 to 2011 reflects a decline in the Company’s equity interest in the segregated portfolio cell with an unaffiliated primary carrier that insures sprinkler contractors.

CONSOLIDATED FINANCIAL POSITION

Consolidated assets totaled $337.4 million at June 30, 2010, compared to $322.7 million at December 31, 2010. The increase primarily reflects investment purchases and an increase in the estimated fair value of the investment portfolio, an increase in premiums receivable and deferred acquisition costs, which reflect the January renewal business as well as an increase in premium revenue, and an increase in other assets, partially offset by a decrease in deferred income taxes. The increase in other assets primarily reflects an increase in the Company’s equity interest in certain segregated portfolio cells and an increase in prepaid reinsurance, which also reflects the January renewal business. The decrease in deferred income taxes primarily reflects the increase in fair value of the Company’s investment portfolio and the sale of investments that had been previously impaired.

Consolidated liabilities totaled $207.8 million at June 30, 2011, compared to $188.0 million at December 31, 2010. The increase primarily reflects the growth in premium and the January renewal business. Loss and LAE reserves increased primarily as a result of the growth in net premiums earned, while unearned premiums and ceded reinsurance balances payable increased due to premium growth and the January renewal business. The increase in the segregated portfolio cell dividend payable reflects the segment’s results of operations for the period.

Consolidated equity totaled $129.5 million at June 30, 2011, compared to $134.7 million at December 31, 2010. The decrease reflects common stock repurchases and shareholder dividends, partially offset by 2011 net income and an increase in the estimated fair value of the investment 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 $2.6 million line of credit available to provide additional liquidity if needed.

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

CASH FLOWS

Cash flows from continuing operations for the six months ended June 30, 2011 and 2010 were as follows (unaudited, in thousands):


	2011			2010
Cash flows provided by operating activities	$	11,815		$	349
Cash flows used in investing activities		(487	)		(5,906	)
Cash flows used in financing activities		(10,467	)		(4,932	)

Net increase (decrease) in cash and cash equivalents	$	861		$	(10,489	)

The increase in cash flows provided by operating activities primarily reflects the increase in net premiums written.

The decrease in cash used in investment activities primarily reflects the transfer of investments from Eastern Life in 2010 prior to the sale.

The increase in cash used in financing activities primarily reflects common stock repurchases in 2011.

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 June 30, 2011, 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, 2010. 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, 2011.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

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

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

None

Item 1A.

Risk Factors

With the exception to the risk factor noted below, 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, 2010, SEC File No. 001-32899.

Failure of the United States Government to implement fiscal policies considered satisfactory to the various credit rating agencies could potentially result in a downgrade of the United States’ sovereign credit rating, which could have a material adverse effect on our business, financial condition and results of operations.

While Congress has passed a bill raising the statutory debt limit, the various credit rating agencies have warned that the possibility of a future downgrade to the United States’ credit rating has not been eliminated. Both Moody’s Investor Services and Fitch Ratings have put the United States’ credit rating on negative outlook and have indicated that Congress needs to implement fiscal policies consistent with those discussed in the bill passed to raise the statutory debt limit. In the event the credit rating agencies downgrade the United States’ credit rating, this could have a material adverse effect on our business, financial condition and results of operations. In particular, these events could have a material adverse effect on the value and liquidity of assets in our investment portfolio.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The following table presents information with respect to those purchases of our common stock made during the six months ended June 30, 2011 and 2010.


Period	Total number of shares purchased		Average price paid per share		Total number of shares purchases as part of publicly announced plans or programs		Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs
January 1-31, 2011		129,110	$	12.34		129,110		987,855
February 1-28, 2011		31,976	$	13.02		31,976		955,879
March 1-31, 2011		360,832	$	12.57		360,832		595,047
April 1-30, 2011		72,948	$	12.86		72,948		522,099
May 1-31, 2011		111,984	$	13.24		111,984		410,115
June 1-30, 2011		26,405	$	13.21		26,405		383,710

Total		733,255	$	12.70		733,255


Period	Total number of shares purchased		Average price paid per share		Total number of shares purchases as part of publicly announced plans or programs		Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs
January 1-31, 2010		—	$	—		—	$	9,570,000
February 1-28, 2010		—	$	—		—	$	9,570,000
March 1-31, 2010		—	$	—		—	$	9,570,000
April 1-30, 2010		—	$	—		—	$	9,570,000
May 1-31, 2010		167,128	$	10.79		167,128	$	7,770,000
June 1-30, 2010		218,917	$	10.75		218,917	$	5,420,000

Total		386,045	$	10.77		386,045

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Submission of Matters to a Vote of Security Holders

None

Item 5.

Other Information

None

Item 6.

Exhibits


Exhibit No.		Title

3.1		Articles of Incorporation of Eastern Insurance Holdings, Inc. (Incorporated by reference from Exhibit 3.1 to the Eastern Insurance Holdings, Inc. Registration Statement No. 333-128913 on Form S-1)

3.2		Bylaws of Eastern Insurance Holdings, Inc. (Incorporated by reference from Exhibit 3.2 to the Eastern Insurance Holdings, Inc. Registration Statement No. 333-128913 on Form S-1)

10.12		Eastern Insurance Holdings, Inc. 2006 Stock Incentive Plan (Incorporated by reference from Exhibit 4.1 to EIHI’s Registration Statement on Form S-8 filed on April 2, 2007)

21.1		Subsidiaries of Eastern Insurance Holdings, Inc. (Incorporated by reference from Exhibit 21 to the Eastern Insurance Holdings, Inc. Registration Statement No. 333-128913 on Form S-1)

31.1		Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002, (filed herewith)

31.2		Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002, (filed herewith)

32.1		Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002, (filed herewith)

32.2		Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002, (filed herewith)

101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010, (ii) the Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2011 and 2010, (iii) the Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2011 and 2010, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010, and (v) the Condensed Notes to Consolidated Financial Statements, tagged as blocks of text.

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: August 4, 2011	By:	/s/ Michael L. Boguski
		Michael L. Boguski,
		President and Chief Executive Officer

Dated: August 4, 2011	By:	/S/ KEVIN M. SHOOK
		Kevin M. Shook,
		Executive Vice President, Treasurer and Chief Financial Officer

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