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10-Q 1 d577409d10q.htm FORM 10-Q Form 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

for the Quarterly Period Ended June 30, 2013,

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

for the Transition Period from to

Commission File Number No. 001-32899

EASTERN INSURANCE HOLDINGS, INC.

Incorporated in Pennsylvania

I.R.S. Employer

Identification No.

20-2653793

25 Race Avenue, Lancaster, Pennsylvania

17603-3179

(717) 396-7095

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

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

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

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

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


Title of Each Class		Number of Shares Outstanding as of July 31, 2013
Common Stock, No Par Value		7,910,827 (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		21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		34

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.	Mine Safety Disclosures		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,			December 31,
	2013			2012
ASSETS
Investments:
Fixed income securities, at estimated fair value (amortized cost, $147,833; $145,486)	$	147,994		$	148,976
Convertible bonds, at estimated fair value (amortized cost, $22,715; $18,207)		24,753			19,747
Equity securities, at estimated fair value (cost, $20,254; $20,462)		25,234			23,200
Other long-term investments, at estimated fair value (cost, $8,000; $7,000)		11,732			9,974

Total investments		209,713			201,897
Cash and cash equivalents		46,982			48,075
Accrued investment income		822			858
Premiums receivable (net of allowance, $225; $225)		82,871			67,525
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses		20,103			19,676
Deferred acquisition costs		11,237			9,497
Deferred income taxes, net		4,511			3,239
Federal income taxes recoverable		1,262			—
Intangible assets		4,010			4,331
Goodwill		10,752			10,752
Other assets		15,007			14,902

Total assets	$	407,270		$	380,752


LIABILITIES
Reserves for unpaid losses and loss adjustment expenses	$	123,365		$	117,728
Unearned premium reserves		88,914			73,775
Advance premium		189			672
Accounts payable and accrued expenses		20,967			23,540
Ceded reinsurance balances payable		11,430			9,273
Segregated portfolio cell dividend payable		19,260			17,354
Policyholder dividends payable		2,344			2,312
Federal income taxes payable		—			243

Total liabilities		266,469			244,897


Commitments and contingencies (Note 9)

SHAREHOLDERS’ EQUITY
Series A preferred stock, par value $0, auth. shares—5,000,000; no shares issued and outstanding		—			—
Common capital stock, par value $0, auth. shares—20,000,000; issued—11,927,714 and 11,927,714, respectively; outstanding—7,910,827 and 7,910,609, respectively		—			—
Unearned ESOP compensation		(2,246	)		(2,616	)
Additional paid in capital		118,197			117,443
Treasury stock, at cost (4,016,887 and 4,017,105 shares, respectively)		(56,529	)		(56,532	)
Retained earnings		79,841			75,169
Accumulated other comprehensive income, net		1,538			2,391

Total shareholders’ equity		140,801			135,855

Total liabilities and shareholders’ equity	$	407,270		$	380,752

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, 2013 and 2012

(Unaudited, in thousands, except per share data)


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
REVENUE
Net premiums earned	$	45,510		$	38,735		$	87,853		$	75,221
Net investment income		1,119			1,064			1,822			2,014
Change in equity interest in limited partnerships		315			118			758			448
Net realized investment gains (losses)		64			(1,203	)		906			488
Other revenue		66			71			135			155

Total revenue		47,074			38,785			91,474			78,326


EXPENSES
Losses and loss adjustment expenses incurred		29,172			25,571			55,724			48,486
Acquisition and other underwriting expenses		5,288			4,473			10,721			9,905
Other expenses		6,855			6,208			13,723			11,896
Amortization of intangibles		160			202			320			403
Policyholder dividend expense		250			39			497			223
Segregated portfolio dividend expense		1,084			389			1,713			1,385

Total expenses		42,809			36,882			82,698			72,298

Income before income taxes		4,265			1,903			8,776			6,028
Income tax expense		1,263			557			2,540			1,760

Net income	$	3,002		$	1,346		$	6,236		$	4,268


Other comprehensive (loss) income:
Unrealized holding (losses) gains arising during period, net of tax of $(615), $5, $(74) and $498		(1,142	)		10			(138	)		924
Amortization of unrecognized benefit plan amounts, net of tax of $4, $2, $8 and $5		7			5			14			9
Less: Reclassification adjustment for gains included in net income, net of tax of $263, $84, $392 and $155		488			155			729			293

Other comprehensive (loss) income		(1,623	)		(140	)		(853	)		640

Comprehensive income	$	1,379		$	1,206		$	5,383		$	4,908


EARNINGS PER SHARE (SEE NOTE 3):
Net income	$	3,002		$	1,346		$	6,236		$	4,268
Basic earnings per share	$	0.39		$	0.18		$	0.81		$	0.55
Diluted earnings per share	$	0.39		$	0.17		$	0.81		$	0.54

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, 2013 and 2012

(Unaudited, in thousands, except share data)

Three Months Ended June 30, 2013


							Unearned ESOP Compensation			Additional Paid-In Capital			Treasury Stock			Retained Earnings			Accumulated			Total
	Outstanding Shares																		Other
	Series A Preferred Stock		Common Capital Stock		Common Capital Stock														Comprehensive Income (Loss), Net of Taxes
Balance, April 1, 2013		—		7,910,609	$	—	$	(2,432	)	$	117,837		$	(56,532	)	$	77,699		$	3,161		$	139,733
ESOP shares released		—		—		—		186			163			—			—			—			349
Equity awards		—		—		—		—			200			—			—			—			200
Issuance of shares under stock compensation plan		—		218		—		—			—			3			—			—			3

Tax benefit related to stock compensation		—		—		—		—			(3	)		—			10			—			7
Repurchase of common stock		—		—		—		—			—			—			—			—			—
Shareholder dividend		—		—		—		—			—			—			(870	)		—			(870	)
Net income		—		—		—		—			—			—			3,002			—			3,002

Other comprehensive loss, net of tax		—		—		—		—			—			—			—			(1,623	)		(1,623	)

Balance, June 30, 2013		—		7,910,827	$	—	$	(2,246	)	$	118,197		$	(56,529	)	$	79,841		$	1,538		$	140,801

Six Months Ended June 30, 2013


																		Accumulated
	Outstanding Shares																	Other
	Series A Preferred Stock		Common Capital Stock		Common Capital Stock		Unearned ESOP Compensation			Additional Paid-In Capital		Treasury Stock			Retained Earnings			Comprehensive Income (Loss), Net of Taxes			Total
Balance, January 1, 2013		—		7,910,609	$	—	$	(2,616	)	$	117,443	$	(56,532	)	$	75,169		$	2,391		$	135,855
ESOP shares released		—		—		—		370			309		—			—			—			679
Equity awards		—		—		—		—			397		—			—			—			397
Issuance of shares under stock compensation plan		—		218		—		—			—		3			—			—			3

Tax benefit related to stock compensation		—		—		—		—			48		—			18			—			66
Repurchase of common stock		—		—		—		—			—		—			—			—			—
Shareholder dividend		—		—		—		—			—		—			(1,582	)		—			(1,582	)
Net income		—		—		—		—			—		—			6,236			—			6,236
Other comprehensive loss, net of tax		—		—		—		—			—		—			—			(853	)		(853	)

Balance, June 30, 2013		—		7,910,827	$	—	$	(2,246	)	$	118,197	$	(56,529	)	$	79,841		$	1,538		$	140,801

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, 2013 and 2012

(Unaudited, in thousands, except share data)

Three Months Ended June 30, 2012


								Unearned ESOP Compensation			Additional Paid-In Capital		Treasury Stock			Retained Earnings			Accumulated			Total
	Outstanding Shares																		Other
	Series A Preferred Stock		Common Capital Stock			Common Capital Stock													Comprehensive Income (Loss), Net of Taxes
																			Accumulated
Balance, April 1, 2012		—		8,064,146		$	—	$	(3,178	)	$	116,475	$	(54,109	)	$	69,268		$	3,330		$	131,786
ESOP shares released		—		—			—		187			108		—			—			—			295
Equity awards		—		13,000			—		—			189		—			—			—			189

Tax benefit related to stock compensation		—		—			—		—			—		—			—			—			—
Repurchase of common stock		—		(166,537	)		—		—			—		(2,423	)		—			—			(2,423	)
Shareholder dividend		—		—			—		—			—		—			(502	)		—			(502	)
Net income		—		—			—		—			—		—			1,346			—			1,346

Other comprehensive loss, net of tax		—		—			—		—			—		—			—			(140	)		(140	)

Balance, June 30, 2012		—		7,910,609		$	—	$	(2,991	)	$	116,772	$	(56,532	)	$	70,112		$	3,190		$	130,551

Six Months Ended June 30, 2012


								Unearned ESOP Compensation			Additional Paid-In Capital		Treasury Stock			Retained Earnings			Accumulated		Total
	Outstanding Shares																		Other
	Series A Preferred Stock		Common Capital Stock			Common Capital Stock													Comprehensive Income (Loss), Net of Taxes
Balance, January 1, 2012		—		7,935,446		$	—	$	(3,364	)	$	116,272	$	(54,109	)	$	66,910		$	2,550	$	128,259
ESOP shares released		—		—			—		373			188		—			—			—		561
Equity awards		—		141,700			—		—			309		—			—			—		309

Tax benefit related to stock compensation		—		—			—		—			3		—			—			—		3
Repurchase of common stock		—		(166,537	)		—		—			—		(2,423	)		—			—		(2,423	)
Shareholder dividend		—		—			—		—			—		—			(1,066	)		—		(1,066	)
Net income		—		—			—		—			—		—			4,268			—		4,268
Other comprehensive income, net of tax		—		—			—		—			—		—			—			640		640

Balance, June 30, 2012		—		7,910,609		$	—	$	(2,991	)	$	116,772	$	(56,532	)	$	70,112		$	3,190	$	130,551

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, 2013 and 2012

(Unaudited, in thousands)


	2013			2012
Cash flows from operating activities:
Net income	$	6,236		$	4,268
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		404			388
Net amortization of bond premium/discount		558			547
Net realized investment gains		(906	)		(488	)
Change in equity interest in limited partnerships		(758	)		(448	)
Deferred tax benefit		(721	)		(347	)
Stock compensation expense		1,077			870
Intangible asset amortization		320			403
Changes in assets and liabilities:
Accrued investment income		36			(69	)
Premiums receivable		(15,346	)		(12,187	)
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses		(427	)		(2,970	)
Deferred acquisition costs		(1,740	)		(771	)
Other assets		(7	)		(1,456	)
Reserves for unpaid losses and loss adjustment expenses		5,637			5,444
Unearned and advance premium		14,656			12,687
Ceded reinsurance balances payable		2,157			167
Accounts payable and accrued expenses		(2,640	)		(954	)
Federal income taxes recoverable/payable		(1,505	)		(696	)
Policyholder dividends payable		32			(130	)
Segregated portfolio cell dividend payable		1,569			983

Net cash provided by operating activities		8,632			5,241


Cash flows from investing activities:
Purchase of fixed income securities		(34,643	)		(28,511	)
Purchase of equity securities		(2,583	)		(7,207	)
Purchase of other long-term investments		(1,000	)		—
Proceeds from sale of fixed income securities		9,541			13,308
Proceeds from maturities/calls of fixed income securities		17,903			6,062
Proceeds from the sale of equity securities		3,072			5,122
Purchase of equipment		(502	)		(403	)

Net cash used in investing activities		(8,212	)		(11,629	)


Cash flows from financing activities:
Repurchase of common stock		—			(2,423	)
Shareholder dividend		(1,582	)		(1,066	)
Issuance of shares under stock compensation plan		3			—
Tax benefit related to stock compensation		66			3

Net cash used in financing activities		(1,513	)		(3,486	)

Net decrease in cash and cash equivalents		(1,093	)		(9,874	)
Cash and cash equivalents, beginning of period		48,075			52,448

Cash and cash equivalents, end of period	$	46,982		$	42,574

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

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

2. Significant Accounting Policies

Basis of Presentation

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

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

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

During the second quarter of 2013, management changed its accounting policy related to the classification of premium amortization and discount accretion recognized in its convertible bond portfolio. The Company previously reported amortization/accretion related to its convertible bond portfolio as a component of net investment income. The Company’s convertible bond portfolio is reported at estimated fair value with changes in fair value reported as a realized gain or loss. Due to the nature of convertible securities, certain securities may be purchased at a significant premium (commonly referred to as “conversion premium”) as a result of the underlying value of the issuer’s common stock, and the conversion premium can have a significant impact on net investment income as it is amortized. Management believes the conversion premium is reflective of the fair value of the convertible security at acquisition and should be reflected as a component of the change in fair value reported as a realized gain or loss. As a result, the Company has changed its policy for recognizing amortization/accretion related to its convertible bond portfolio and will report amortization/accretion as a component of the change in estimated fair value in net realized investment gains (losses) on the consolidated statements of operations and comprehensive income (loss). This change in accounting policy had no impact of the Company’s consolidated financial position or results of operations. Prior period amounts have not been reclassified.

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.

3. Earnings Per Share

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

Consolidated net income, basic shares outstanding, diluted shares outstanding, basic earnings per share, diluted earnings per share and cash dividends per share for the three and six months ended June 30, 2013 and 2012 were as follows (in thousands, except share and per share data):


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Net income for basic and diluted earnings per share	$	3,002		$	1,346		$	6,236		$	4,268
Less: Dividends declared – common and unvested restricted share units		(870	)		(502	)		(1,582	)		(1,066	)

Undistributed earnings		2,132			844			4,654			3,202
Percent allocated to common shareholders		98.5	%		98.0	%		98.5	%		98.1	%

		2,100			827			4,584			3,141
Add: Dividends declared – common shares		857			492			1,560			1,046

	$	2,957		$	1,319		$	6,144		$	4,187

Denominator for basic earnings per share		7,562,360			7,526,286			7,545,422			7,565,051
Effect of dilutive securities		19,231			137,202			16,567			136,866

Denominator for diluted earnings per common share		7,581,591			7,663,488			7,561,989			7,701,917


Basic earnings per share	$	0.39		$	0.18		$	0.81		$	0.55
Diluted earnings per share	$	0.39		$	0.17		$	0.81		$	0.54
Cash dividends per share	$	0.11		$	0.07		$	0.20		$	0.14

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Total outstanding equity awards		1,424,875		1,433,875		1,424,875		1,433,875
Dilutive equity awards		19,231		137,202		16,567		136,866

Equity awards excluded from earnings per share calculation		1,444,106		1,296,673		1,441,442		1,297,009

4. Fair Value Measurements

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

The following is a description of the Company’s categorization of the inputs used in the recurring fair value measurements of its financial assets included in its consolidated balance sheets as of June 30, 2013 and December 31, 2012:

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

Level 2—Represents financial assets whose fair value is determined based upon: quoted market prices for similar assets in active markets; quoted market prices for identical assets in inactive markets; inputs other than quoted market prices that are observable for the asset such as interest rates or yield curves; or other inputs derived principally from or corroborated from other observable market

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

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

The following table provides a summary of the fair value measurements of the Company’s fixed income securities, convertible bonds, and equity securities, as of June 30, 2013 and December 31, 2012, excluding the segregated portfolio cell reinsurance segment (in thousands):


			Fair Value Measurements at Reporting Date Using
	6/30/2013		Level 1		Level 2		Level 3
Fixed income securities—available for sale:
U.S. Treasuries and government agencies	$	12,478	$	5,251	$	7,227	$	—
States, municipalities, and political subdivisions		44,642		—		44,642		—
Corporate securities		17,770		—		17,770		—
Residential mortgage-backed securities		25,030		—		25,030		—
Commercial mortgage-backed securities		162		—		162		—
Collateralized mortgage obligations		15,154		—		15,154		—
Other structured securities		1,014		—		1,014		—
Convertible bonds		24,753		—		24,753		—
Equity securities—available for sale		17,186		17,186		—		—

Total	$	158,189	$	22,437	$	135,752	$	—


			Fair Value Measurements at Reporting
			Date Using
	12/31/2012		Level 1		Level 2		Level 3
Fixed income securities—available for sale:
U.S. Treasuries and government agencies	$	15,865	$	10,743	$	5,122	$	—
States, municipalities, and political subdivisions		45,150		—		45,150		—
Corporate securities		10,285		—		10,285		—
Residential mortgage-backed securities		28,434		—		28,434		—
Commercial mortgage-backed securities		167		—		167		—
Collateralized mortgage obligations		17,122		—		17,122		—
Other structured securities		1,023		—		1,023		—
Convertible bonds		19,747		—		19,747		—
Equity securities—available for sale		15,588		15,588		—		—

Total	$	153,381	$	26,331	$	127,050	$	—

There were no transfers between Level 1 and Level 2 securities for the three and six months ended June 30, 2013.

The estimated fair values of the Company’s investments in fixed income securities, convertible bonds, and equity securities are based on prices provided by an independent, nationally recognized pricing service. The prices provided by the independent pricing service are based on quoted market prices, when available, non-binding broker quotes, or matrix pricing. The independent pricing service provides a single price or quote per security and the Company did not adjust security prices during the three and six months ended June 30, 2013 and 2012. Management has controls in place to validate the reasonableness of fair values provided by the independent pricing service, including testing the fair value of a sample of securities on a quarterly basis by comparing fair values from different pricing sources. Fixed income securities include U.S. Treasuries, agencies backed by the U.S. Government, municipal bonds, corporate bonds, mortgage-backed securities, collateralized mortgage obligations, and asset-backed securities.

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

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

The estimated fair value of the Company’s equity securities, excluding equity securities in the segregated portfolio cell reinsurance segment, as of June 30, 2013 and December 31, 2012, by investment strategy and/or industry, are as follows (in thousands):


	2013		2012
Large growth fund	$	3,505	$	3,156
Foreign large blend fund		558		554
Diversified emerging markets fund		793		911
Large value fund		8,061		7,062
Foreign large value fund		376		378
Foreign large growth fund		1,935		1,881
Natural gas industry		1,509		1,263
Financial institutions		431		383
Other		18		—

Total	$	17,186	$	15,588

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

As of June 30, 2013 and December 31, 2012, the estimated fair values of the Company’s limited partnership investments, by investment strategy, were as follows (in thousands):


	2013		2012
Multi-strategy fund of funds	$	7,549	$	6,063
Structured finance opportunity fund		3,522		3,278
Open-ended investment fund		661		633

Total	$	11,732	$	9,974

The activity in the Company’s limited partnership investments for the three and six months ended June 30, 2013 and 2012 was as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Balance, beginning of period	$	11,417	$	10,539	$	9,974	$	10,209
Contributions		—		—		1,000		—
Withdrawals		—		—		—		—
Unrealized change in interest		315		118		758		448

Balance, end of period	$	11,732	$	10,657	$	11,732	$	10,657

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.

5. 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, 2013 and December 31, 2012 (in thousands):


	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
June 30, 2013	Cost		Gains		Losses			Fair Value
U.S. Treasuries and government agencies	$	16,135	$	197	$	(90	)	$	16,242
States, municipalities, and political subdivisions		43,763		1,229		(350	)		44,642
Corporate securities		46,033		140		(423	)		45,750
Residential mortgage-backed securities		25,542		230		(742	)		25,030
Commercial mortgage-backed securities		148		14		—			162
Collateralized mortgage obligations		15,212		137		(195	)		15,154
Other structured securities		1,000		14		—			1,014

Total fixed income securities		147,833		1,961		(1,800	)		147,994
Equity securities		20,254		5,149		(169	)		25,234

Total fixed income and equity securities	$	168,087	$	7,110	$	(1,969	)	$	173,228


	Cost or		Gross		Gross
	Amortized		Unrealized		Unrealized			Estimated
December 31, 2012	Cost		Gains		Losses			Fair Value
U.S. Treasuries and government agencies	$	19,780	$	364	$	(5	)	$	20,139
States, municipalities, and political subdivisions		42,942		2,239		(31	)		45,150
Corporate securities		36,624		321		(4	)		36,941
Residential mortgage-backed securities		27,983		481		(30	)		28,434
Commercial mortgage-backed securities		148		19		—			167
Collateralized mortgage obligations		17,009		172		(59	)		17,122
Other structured securities		1,000		23		—			1,023

Total fixed income securities		145,486		3,619		(129	)		148,976
Equity securities		20,462		2,877		(139	)		23,200

Total fixed income and equity securities	$	165,948	$	6,496	$	(268	)	$	172,176

Corporate securities include an investment in a fixed income mutual fund with a cost and estimated fair value of $28,256 and $27,980, respectively, as of June 30, 2013. The fixed income mutual fund’s investment objective is to provide a total return that is consistent with the preservation of capital through investing in high grade U.S. Dollar fixed income securities with a maximum maturity not exceeding five years.

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

The gross unrealized losses and estimated fair value of fixed income and equity securities, excluding those securities in the segregated portfolio cell reinsurance segment, classified as available-for-sale by category and length of time an individual security has been in a continuous unrealized position as of June 30, 2013 and December 31, 2012 are as follows (in thousands):


	Less Than 12 Months							12 Months or More							Total
June 30, 2013	Estimated Fair Value		Gross Unrealized Losses			# of Securities		Estimated Fair Value		Gross Unrealized Losses			# of Securities		Estimated Fair Value		Gross Unrealized Losses			# of Securities
U.S. Treasuries and government agencies	$	4,773	$	(90	)		14	$	—	$	—			—	$	4,773	$	(90	)		14
States, municipalities, and political subdivisions		11,881		(350	)		54		—		—			—		11,881		(350	)		54

Corporate securities		11,892		(147	)		15		—		—			—		11,892		(147	)		15

Residential mortgage-backed securities		16,518		(742	)		20		—		—			—		16,518		(742	)		20

Collateralized mortgage obligations		6,817		(188	)		12		936		(7	)		4		7,753		(195	)		16


Total fixed income securities		51,881		(1,517	)		115		936		(7	)		4		52,817		(1,524	)		119

Equity securities		1,225		(169	)		7		—		—			—		1,225		(169	)		7

Total fixed income and equity securities	$	53,106	$	(1,686	)		122	$	936	$	(7	)		4	$	54,042	$	(1,693	)		126


	Less Than 12 Months							12 Months or More							Total
December 31, 2012	Estimated Fair Value		Gross Unrealized Losses			# of Securities		Estimated Fair Value		Gross Unrealized Losses			# of Securities		Estimated Fair Value		Gross Unrealized Losses			# of Securities
U.S. Treasuries and government agencies	$	594	$	(5	)		1	$	—	$	—			—	$	594	$	(5	)		1
States, municipalities, and political subdivisions		3,922		(31	)		17		—		—			—		3,922		(31	)		17

Residential mortgage-backed securities		11,922		(30	)		10		—		—			—		11,922		(30	)		10

Collateralized mortgage obligations		4,943		(56	)		9		122		(3	)		2		5,065		(59	)		11


Total fixed income securities		21,381		(122	)		37		122		(3	)		2		21,503		(125	)		39

Equity securities		1,034		(135	)		11		—		—			—		1,034		(135	)		11

Total fixed income and equity securities	$	22,415	$	(257	)		48	$	122	$	(3	)		2	$	22,537	$	(260	)		50

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

Management has evaluated the unrealized losses related to its fixed income securities and determined that they are primarily due to a fluctuation in interest rates and not to credit issues of the issuer or the underlying assets in the case of asset-backed securities. The Company does not intend to sell the fixed income securities and it is not more likely than not that the Company will be required to sell the fixed income securities before recovery of their amortized cost bases, which may be maturity; therefore, management does not consider the fixed income securities to be other–than-temporarily impaired as of June 30, 2013.

Management has evaluated the unrealized losses related to its equity securities and determined that they are primarily related to the current market conditions and not due to underlying issues related to the issuer or the industry in which the issuer operates. The equity securities have been in an unrealized loss position for less than twelve months and none of the securities had an estimated fair value less than 80% of its cost basis. The Company does not intend to sell the equity securities and it is not more likely than not that the Company will be required to sell the equity securities before recovery of their cost bases; therefore, management does not consider the equity securities to be other-than-temporarily impaired as of June 30, 2013.

The Company recognized other-than-temporary impairments of $0 and $87 for the three and six months ended June 30, 2013 and 2012, respectively.

6. Reserves for Unpaid Losses and Loss Adjustment Expenses

The following table provides a summary of the activity in the Company’s reserves for unpaid losses and LAE for the three months ended June 30, 2013 and 2012 (in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
	2013		2012			2013		2012
Balance, beginning of period	$	120,773	$	107,773		$	117,728	$	106,077
Reinsurance recoverables on unpaid losses and LAE		14,766		13,685			15,084		11,805

Net balance, beginning of period		106,007		94,088			102,644		94,272
Incurred related to:
Current year		28,791		25,821			55,278		48,328
Prior year		381		(250	)		446		158

Total incurred		29,172		25,571			55,724		48,486
Paid related to:
Current year		9,075		8,839			12,974		12,065
Prior year		16,812		13,838			36,102		33,711

Total paid		25,887		22,677			49,076		45,776

Net balance, end of period		109,292		96,982			109,292		96,982
Reinsurance recoverables on unpaid losses and LAE		14,073		14,539			14,073		14,539

Balance, end of period	$	123,365	$	111,521		$	123,365	$	111,521

Incurred losses by segment were as follows for the three and six months ended June 30, 2013 and 2012, respectively (in thousands):

Three Months Ended June 30, 2013


	Workers’ Compensation Insurance Segment			Segregated Portfolio Cell Reinsurance Segment			Total
Incurred related to:
Current year, gross of discount	$	24,224		$	5,344		$	29,568
Current period discount		(600	)		(177	)		(777	)
Prior year, gross of discount		—			(327	)		(327	)
Accretion of prior period discount		500			208			708

Total incurred	$	24,124		$	5,048		$	29,172

Three Months Ended June 30, 2012


	Workers’ Compensation Insurance Segment			Segregated Portfolio Cell Reinsurance Segment			Total
Incurred related to:
Current year, gross of discount	$	20,586		$	6,136		$	26,722
Current period discount		(698	)		(203	)		(901	)
Prior year, gross of discount		—			(1,014	)		(1,014	)
Accretion of prior period discount		661			103			764

Total incurred	$	20,549		$	5,022		$	25,571

Six Months Ended June 30, 2013


	Workers’ Compensation Insurance Segment			Segregated Portfolio Cell Reinsurance Segment			Total
Incurred related to:
Current year, gross of discount	$	45,980		$	11,588		$	57,568
Current period discount		(1,877	)		(413	)		(2,290	)
Prior year, gross of discount		—			(1,538	)		(1,538	)
Accretion of prior period discount		1,546			438			1,984

Total incurred	$	45,649		$	10,075		$	55,724

Six Months Ended June 30, 2012


	Workers’ Compensation Insurance Segment			Segregated Portfolio Cell Reinsurance Segment			Total
Incurred related to:
Current year, gross of discount	$	39,435		$	11,057		$	50,492
Current period discount		(1,750	)		(414	)		(2,164	)
Prior year, gross of discount		—			(1,580	)		(1,580	)
Accretion of prior period discount		1,430			308			1,738

Total incurred	$	39,115		$	9,371		$	48,486

For the three and six months ended June 30, 2013 and 2012, the estimates of ultimate losses and LAE for prior accident periods produced from our actuarial methods were reasonably consistent, in the aggregate, with the estimates we prepared as of December 31, 2012. In 2013, however, there were some deviations, by accident year, between the actuarial indications and recorded reserves. Based on consideration of the credibility of the higher than expected loss experience on older accident periods and the robustness of the recent accident period loss ratio, management adjusted the spread of the recorded reserves by accident period to align the reserves with the actuarial indications. In the aggregate, the Company did not recognize any development on prior accident period workers compensation insurance reserves for the three and six months ended June 30, 2013.

The Company recognized favorable development in its segregated portfolio cell reinsurance segment of $327 and $1,538 for the three and six months ended June 30, 2013, respectively, compared to favorable development of $1,014 and $1,580 for the same periods in 2012. The favorable development primarily reflects the impact of claim settlements for amounts at, or less than, previously established case and IBNR reserves. Prior period reserve development in the segregated portfolio cell reinsurance segment results in an increase or decrease in the segment’s losses and LAE incurred, and a corresponding decrease or increase in the segregated portfolio cell dividend expense.

7. Segment Information

The Company currently operates in three business segments.

Workers’ Compensation Insurance

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

Net premiums earned in the workers’ compensation insurance segment for the three and six months ended June 30, 2013 and 2012 were as follows (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Guaranteed cost policies	$	28,185	$	23,112	$	53,709	$	45,184
Dividend policies		4,633		4,452		9,271		8,749
Deductible policies		1,992		1,702		3,845		3,194
Retrospectively-rated policies		1,633		1,375		3,252		2,510

Total	$	36,443	$	30,641	$	70,077	$	59,637

Segregated Portfolio Cell Reinsurance

The Company offers alternative market workers’ compensation solutions to individual companies, groups and associations (referred to as “segregated portfolio cell dividend participants”) through the creation of segregated portfolio cells. The segregated portfolio cells are segregated pools of assets that function as insurance companies within an insurance company. The pool of assets and associated liabilities of each segregated portfolio cell are solely for the benefit of the segregated portfolio cell dividend participants, and the pool of assets of one segregated portfolio cell are statutorily protected from the creditors of the others. This permits the Company to provide customers with a turn-key alternative markets solution that includes program design, fronting, claims administration, risk management, segregated portfolio cell rental, asset management and segregated portfolio management services. The Company outsources the asset management and segregated portfolio cell management services to a third party. The segregated portfolio cell structure provides dividend participants the opportunity to share in both underwriting profit and investment income derived from their respective segregated portfolio cell’s financial results.

The following table provides the fee revenue generated by the segregated portfolio cell reinsurance segment that is included in the Company’s workers’ compensation insurance and corporate/other segments for the three and six months ended June 30, 2013 and 2012, respectively (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Workers’ compensation insurance segment	$	1,336	$	1,033	$	3,508	$	2,864
Corporate/other segment		156		310		268		435

Total	$	1,492	$	1,343	$	3,776	$	3,299

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

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

The Company’s share of the segregated portfolio dividend, which is included in the corporate/other segment, was as follows for the three and six months ended June 30, 2013 and 2012, respectively (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Segregated portfolio dividend income	$	307	$	234	$	757	$	523

Corporate/Other

The corporate/other segment primarily includes the expenses of EIHI, the third party administration activities of the Company, and the results of operations of Eastern Re, as well as certain eliminations necessary to reconcile the segment information to the consolidated statements of operations and comprehensive income (loss). The Company cancelled the remaining reinsurance contracts at Eastern Re in 1999 on a run-off basis and continues to have exposure for outstanding claims as of June 30, 2013. The corporate/other segment also included the Company’s interest in a segregated portfolio cell with an unaffiliated primary carrier that wrote insurance coverage for sprinkler contractors, known as “SprinklerPro”. The Company non-renewed the SprinklerPro contract on a run-off basis effective April 1, 2009. The Company commuted the SprinklerPro contract during the second quarter of 2012 and recognized a realized loss of $641,000, which is included in net realized investment gains (losses) for the three and six months ended June 30, 2012.

The following table represents the segment results for the three months ended June 30, 2013 (in thousands):


	Workers’ Compensation Insurance			Segregated Portfolio Cell Reinsurance		Corporate/ Other			Total
Revenue:
Net premiums earned	$	36,443		$	9,067	$	—		$	45,510
Net investment income		974			81		64			1,119
Change in equity interest in limited partnerships		272			—		43			315
Net realized investment (losses) gains		(66	)		130		—			64
Other revenue		—			—		66			66

Total revenue		37,623			9,278		173			47,074

Expenses:
Losses and LAE incurred		24,124			5,048		—			29,172
Acquisition and other underwriting expenses		2,723			2,721		(156	)		5,288
Other expenses		5,521			105		1,229			6,855
Amortization of intangibles		—			—		160			160
Policyholder dividend expense		237			13		—			250
Segregated portfolio dividend expense		—			1,391		(307	)		1,084

Total expenses		32,605			9,278		926			42,809

Income (loss) before income taxes		5,018			—		(753	)		4,265
Income tax expense (benefit)		1,525			—		(262	)		1,263

Net income (loss)	$	3,493		$	—	$	(491	)	$	3,002

Total assets	$	357,016		$	75,271	$	(25,017	)	$	407,270

The following table represents the segment results for the three months ended June 30, 2012 (in thousands):


	Workers’ Compensation Insurance			Segregated Portfolio Cell Reinsurance		Corporate/ Other			Total
Revenue:
Net premiums earned	$	30,641		$	8,094	$	—		$	38,735
Net investment income		839			86		139			1,064
Change in equity interest in limited partnerships		103			—		15			118
Net realized investment (losses) gains		(608	)		7		(602	)		(1,203	)
Other revenue		—			—		71			71

Total revenue		30,975			8,187		(377	)		38,785

Expenses:
Losses and LAE incurred		20,549			5,022		—			25,571
Acquisition and other underwriting expenses		2,329			2,454		(310	)		4,473
Other expenses		5,140			65		1,003			6,208
Amortization of intangibles		—			—		202			202
Policyholder dividend expense		16			23		—			39
Segregated portfolio dividend expense		—			623		(234	)		389

Total expenses		28,034			8,187		661			36,882

Income (loss) before income taxes		2,941			—		(1,038	)		1,903
Income tax expense (benefit)		726			—		(169	)		557

Net income (loss)	$	2,215		$	—	$	(869	)	$	1,346

Total assets	$	320,731		$	67,221	$	(22,087	)	$	365,865

The following table represents the segment results for the six months ended June 30, 2013 (in thousands):


	Workers’ Compensation Insurance		Segregated Portfolio Cell Reinsurance		Corporate/ Other			Total
Revenue:
Net premiums earned	$	70,077	$	17,776	$	—		$	87,853
Net investment income		1,555		156		111			1,822
Change in equity interest in limited partnerships		623		—		135			758
Net realized investment gains		762		140		4			906
Other revenue		—		—		135			135

Total revenue		73,017		18,072		385			91,474

Expenses:
Losses and LAE incurred		45,649		10,075		—			55,724
Acquisition and other underwriting expenses		5,686		5,303		(268	)		10,721
Other expenses		11,171		192		2,360			13,723
Amortization of intangibles		—		—		320			320
Policyholder dividend expense		465		32		—			497
Segregated portfolio dividend expense		—		2,470		(757	)		1,713

Total expenses		62,971		18,072		1,655			82,698

Income (loss) before income taxes		10,046		—		(1,270	)		8,776
Income tax expense (benefit)		3,094		—		(554	)		2,540

Net income (loss)	$	6,952	$	—	$	(716	)	$	6,236

Total assets	$	357,016	$	75,271	$	(25,017	)	$	407,270

The following table represents the segment results for the six months ended June 30, 2012 (in thousands):


	Workers’ Compensation Insurance		Segregated Portfolio Cell Reinsurance		Corporate/ Other			Total
Revenue:
Net premiums earned	$	59,637	$	15,584	$	—		$	75,221
Net investment income		1,636		174		204			2,014
Change in equity interest in limited partnerships		362		—		86			448
Net realized investment gains (losses)		596		467		(575	)		488
Other revenue		—		—		155			155

Total revenue		62,231		16,225		(130	)		78,326

Expenses:
Losses and LAE incurred		39,115		9,371		—			48,486
Acquisition and other underwriting expenses		5,595		4,745		(435	)		9,905
Other expenses		9,699		164		2,033			11,896
Amortization of intangibles		—		—		403			403
Policyholder dividend expense		186		37		—			223
Segregated portfolio dividend expense		—		1,908		(523	)		1,385

Total expenses		54,595		16,225		1,478			72,298

Income (loss) before income taxes		7,636		—		(1,608	)		6,028
Income tax expense (benefit)		2,274		—		(514	)		1,760

Net income (loss)	$	5,362	$	—	$	(1,094	)	$	4,268

Total assets	$	320,731	$	67,221	$	(22,087	)	$	365,865

8. Segregated Portfolio Cell Reinsurance Segment

The segregated portfolio cell reinsurance segment includes the Company’s 18 alternative market programs, which are included in the Company’s consolidated financial position and results of operations. The segregated portfolio cell reinsurance segment’s assets and liabilities as of June 30, 2013 and December 31, 2012, which are included in the Company’s consolidated balance sheets, were as follows (unaudited):


	June 30		December 31,
	2013		2012
ASSETS
Investments:
Fixed income securities, at estimated fair value (amortized cost, $32,020; $30,874)	$	31,744	$	30,931
Equity securities, at estimated fair value (cost, $6,809; $7,043)		8,048		7,612

Total investments		39,792		38,543
Cash and cash equivalents		2,048		1,495
Reinsurance recoverable on paid and unpaid losses and loss adjustment expenses		4,454		4,716
Deferred acquisition costs		5,351		4,160
Other assets		5,301		4,361
Due from affiliates, net		18,325		12,803

Total assets	$	75,271	$	66,078


LIABILITIES
Reserves for unpaid losses and loss adjustment expenses	$	28,858	$	28,295
Unearned premium reserves		19,994		14,817
Accounts payable and accrued expenses		64		3
Segregated portfolio cell dividend payable		19,260		17,353
Policyholder dividends payable		152		150
Due to affiliates, net		6,914		5,435

Total liabilities		75,242		66,053


SHAREHOLDERS’ EQUITY
Preferred stock outstanding		29		25

Total shareholders’ equity		29		25

Total liabilities and shareholders’ equity	$	75,271	$	66,078

9. Commitments and Contingencies

Legal Proceedings

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

AIG Arbitration

On September 6, 2011, the Company served a written demand (the “Arbitration Demand”) initiating arbitration proceedings against various AIG Companies under 24 reinsurance treaties pursuant to which the Company reinsured AIG Companies for certain pollution liability risks related to underground storage tanks for the policy years 1990 through 1999 (the “Treaties”). The Treaties were cancelled by Eastern Re in 1999. In the Arbitration Demand, the Company seeks an award from the arbitration panel compelling AIG Companies to permit the Company to examine the bases for certain paid losses and loss reserves ceded by AIG Companies to Eastern Re under the Treaties. The Company believes that the Treaties permit such an audit.

On October 3, 2011, AIG Companies responded to the Arbitration Demand by advising that they will seek an award from the arbitration panel of approximately $1,900 plus future amounts that may become due under the Treaties before the final hearing in the arbitration. Both the Company and AIG Companies seek attorney’s fees and costs in the arbitration. Both the Company and AIG Companies have appointed arbitrators.

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

The Company commenced an audit of the claims covered under the Treaties during the third quarter of 2012. Following the claim audit, the Company requested additional files and further information from AIG Companies in order to allow the Company to complete the audit. AIG Companies have not provided the requested information which the Company is now pursuing in the arbitration. Once received, the information will be evaluated to determine whether such information would cause the Company to revise its estimates or position with respect to the pending arbitration.

During the second quarter of 2013, an umpire was selected in the arbitration and an organizational meeting was held. Both parties submitted Position Statements which stated their respective positions and requested relief. In addition to seeking a full audit, the Company is seeking an order from the arbitration panel granting it all appropriate relief relating to or arising from the incorrect, improper, or untimely billings that AIG has sent to the Company. Subject to the results of the audit and discovery, the relief the Company seeks may include a refund of payments the Company has already made to AIG Companies under the treaties as well as an award in the Company’s favor for the damages it has suffered. AIG Companies is seeking approximately $4,100, which AIG Companies contends is the total the Company owes under 14 of 24 reinsurance treaties the parties entered into between 1989 and 1999. At the organizational meeting, the final hearing was set for the week of March 31, 2014. Following the meeting, the arbitration panel approved a schedule for the arbitration.

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

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

Eastern Alliance brought this action against Managepoint, Inc., Managepoint, LLC, and Management 2000 Group, Inc. (collectively, the “Defendants”) to recover amounts due and owing under five workers’ compensation deductible insurance policies issued to the Defendants.

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

On June 12, 2013, Eastern Alliance and the Defendants entered into a Settlement Agreement and Mutual Release (the “Settlement”) related to the above matter.

10. Subsequent Events

Management performed an evaluation of subsequent events through the issuance date of the consolidated financial statements and determined there were no recognized or unrecognized subsequent events that would require an adjustment and/or additional disclosure in the consolidated financial statements as of June 30, 2013.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Forward-looking Statements

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

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

•

the ability to carry out our business plans;

•

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

•

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

•

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

•

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

•

the impact of acts of terrorism and acts of war;

•

the effects of terrorist related insurance legislation and laws;

•

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

•

the cost, availability and collectibility of reinsurance;

•

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

•

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

•

the effects of mergers, acquisitions and dispositions;

•

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

•

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

•

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

•

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

•

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

•

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

•

adverse litigation or arbitration results including, without limitation, the AIG Arbitration; and

•

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 of $3.0 million for the three months ended June 30, 2013, compared to net income of $1.3 million for the same period in 2012. The Company’s consolidated combined ratio was 91.7% for the three months ended June 30, 2013, compared to 94.2% for the same period in 2012.

The Company’s results of operations for the three months ended June 30, 2013, when compared to the same period in 2012, primarily reflect the following:

•

An 17.5% increase in net premiums earned, which primarily reflects new business, renewal rate increases and an increase in the renewal retention rate. New business totaled $21.2 million for the first six months of 2013, renewal rate increases were 6.6% and the renewal retention rate increased from 84.1% in 2012 to 85.8% in 2013.

•

Net realized investment gains of $64,000 in 2013, compared to net realized investment losses of $1.2 million in 2012. The improvement primarily reflects a realized loss of $641,000 in 2012 related to the SprinklerPro commutation and the change in fair value of the Company’s convertible bond portfolio, which decreased $689,000 in 2013, compared to a decrease of $808,000 in 2012.

•

A decrease in the consolidated loss ratio, which primarily reflects a decrease in the accident period loss ratio in both the workers’ compensation insurance and segregated portfolio cell reinsurance segments.

•

A decrease in the consolidated expense ratio, which primarily reflects the growth in net premiums earned.

Principal Revenue and Expense Items

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

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

Net premiums earned. Net premiums earned are the earned portion of the Company’s net premiums written. Premiums are earned over the term of the related policies. At the end of each accounting period, the portion of the premiums that are not yet earned are included in unearned premiums and are realized as revenue in subsequent periods over the remaining term of the policy. The Company’s workers’ compensation policies typically have a term of twelve months. Thus, for example, for a policy that is written on July 1, one-half of the premiums would be earned in the current calendar year and the other half would be earned in the following calendar year. Workers’ compensation premiums are determined based upon the payroll of the insured, the applicable premium rates and, where applicable, an experience based modification factor. An audit of the policyholders’ records is conducted after policy expiration, to make a final determination of applicable premiums. Included with net premiums earned is an estimate for earned but unbilled final audit premiums. The Company can estimate earned but unbilled premiums because it keeps track, by policy, of how much additional premium is billed (or returned to insureds as a result of payroll reductions) in final audit invoices as a percentage to estimate the probable additional amount that it has earned but not yet billed as of the balance sheet date.

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

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

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

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

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

Other expenses. Other expenses consist of general administrative expenses such as salaries, rent, office supplies, depreciation and all other operating expenses not otherwise classified separately.

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 insurance segment.

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

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

Critical Accounting Policies and Estimates

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

Reserves for Unpaid Losses and LAE

The Company establishes reserves for unpaid losses and LAE for its workers’ compensation insurance and segregated portfolio cell reinsurance, which are estimates of future payments of reported and unreported claims for losses and related expenses. The adequacy of the Company’s reserves for unpaid losses and LAE are inherently uncertain because the ultimate amount that the Company may pay under many of the claims incurred as of the balance sheet date will not be known for many years. Establishing reserves continues to be a complex and imprecise process, requiring the use of informed estimates and judgments. The Company’s estimates and judgments may be revised as additional experience and other data becomes available and are reviewed, as new or improved methodologies are developed, or as current laws change. Any such revisions could result in future changes in estimates of losses or reinsurance recoverable and would be reflected in the Company’s results of operations in the period in which the estimates are changed. Estimating the ultimate claims liability is necessarily a complex and judgmental process inasmuch as the amounts are based on management’s informed estimates and judgments using data currently available. If ultimate losses, net of reinsurance, prove to be substantially higher than the amounts recorded as of June 30, 2013, the related adjustments could have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

The Company discounts its workers’ compensation reserves, using a discount rate of approximately 3.0%. As of June 30, 2013 and December 31, 2012, the Company’s reserves for unpaid losses and LAE were reduced by $6.9 million and $6.5 million, respectively, related to the effects of discounting.

The Company’s reserves for unpaid losses and LAE in its workers’ compensation insurance, segregated portfolio cell reinsurance and corporate/other segments as of June 30, 2013 (unaudited) and December 31, 2012 are summarized below (in thousands):


June 30, 2013	Workers’ Compensation Insurance			Segregated Portfolio Cell Reinsurance			Corporate / Other		Total
Case reserves and unallocated LAE reserves	$	47,266		$	10,116		$	—	$	57,382
Case incurred development and IBNR		43,251			15,338			206		58,795
Amount of discount		(5,608	)		(1,277	)		—		(6,885	)

Net reserves before reinsurance recoverables		84,909			24,177			206		109,292
Reinsurance recoverables on unpaid losses and LAE		9,392			4,681			—		14,073

Reserves for unpaid losses and LAE	$	94,301		$	28,858		$	206	$	123,365


December 31, 2012	Workers’ Compensation Insurance			Segregated Portfolio Cell Reinsurance			Corporate / Other		Total
Case reserves and unallocated LAE reserves	$	42,376		$	8,986		$	—	$	51,362
Case incurred development and IBNR		42,042			15,537			206		57,785
Amount of discount		(5,277	)		(1,226	)		—		(6,503	)

Net reserves before reinsurance recoverables		79,141			23,297			206		102,644
Reinsurance recoverables on unpaid losses and LAE		10,086			4,998			—		15,084

Reserves for unpaid losses and LAE	$	89,227		$	28,295		$	206	$	117,728

“Other Than Temporary” Investment Impairments

Unrealized investment gains or losses on investments carried at estimated fair value, net of applicable income taxes, are reflected directly in shareholders’ equity as a component of accumulated other comprehensive income (loss) and, accordingly, have no effect on net income. When, in the opinion of management, a decline in the fair value of an investment below its cost or amortized cost is considered to be “other-than- temporary,” such investment is written down to its fair value at the balance sheet date. The amount written down is recorded as a realized loss in the consolidated statements of operations and comprehensive income (loss). Generally, the determination of other-than-temporary impairment includes, in addition to other relevant factors, a presumption that if the market value is below cost by a significant amount for a period of time, a write-down is necessary. Notwithstanding this presumption, the determination of other-than-temporary impairment requires judgment about future prospects for an investment and is therefore a matter of inherent uncertainty. The Company recorded other-than-temporary impairments of $0 and $87,000 for the three and six months ended June 30, 2013 and 2012.

The Company generally applies the following standards in determining whether the decline in fair value of an investment is other-than-temporary:

Equity securities. An equity security is considered impaired when one of the following conditions exist: 1) an equity security’s market value is less than 80% of its cost for a continuous period of 6 months, 2) an equity security’s market value is less than 50% of its cost, regardless of the amount of time the security’s market value has been below cost, and 3) an equity security’s market value has been less than cost for a continuous period of 12 months or more, regardless of the magnitude of the decline in market value. Equity securities that are in an unrealized loss position, but do not meet the above quantitative thresholds are evaluated to determine if the decline in market value is other than temporary.

As of June 30, 2013, the Company held equity securities, excluding equity securities in the segregated portfolio cell reinsurance segment, with gross unrealized losses of $169,000, none of which were in an unrealized loss position for more than twelve months. The Company does not intend to sell the equity securities and it is not more likely than not that the Company will be required to sell the equity securities before recovery of their cost bases; therefore, management does not consider the equity securities to be other-than-temporarily impaired as of June 30, 2013. Adverse investment market conditions, or poor operating results of underlying investments, could result in impairment charges in the future.

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

•

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

•

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

•

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

As of June 30, 2013, the Company held fixed income securities, excluding fixed income securities in the segregated portfolio cell reinsurance segment, with gross unrealized losses of $1.5 million, of which $7,000 were in an unrealized loss position for more than twelve months. Management has evaluated the unrealized losses related to those fixed income securities and determined that they are primarily due to a fluctuation in interest rates and not to credit issues of the issuer or the underlying assets in the case of asset-backed securities. The Company does not intend to sell the fixed income securities and it is not more likely than not that the Company will be required to sell the fixed income securities before recovery of their amortized cost bases, which may be maturity; therefore, management does not consider the fixed income securities to be other–than-temporarily impaired as of June 30, 2013. Adverse investment market conditions, or poor operating results of underlying investments, could result in impairment charges in the future.

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

Goodwill

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

Goodwill is assigned to one or more reporting units at the date of acquisition. The Company has allocated 100% of the goodwill recorded on its consolidated balance sheet as of June 30, 2013 to its workers’ compensation insurance segment.

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

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

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

Deferred Income Taxes

The temporary differences between the tax and book bases of assets and liabilities are recorded as deferred income taxes. Management evaluates the recoverability of the net deferred tax asset based on historical trends of generating taxable income or losses, as well as expectations of future taxable income or loss. As of June 30, 2013, the Company recorded a net deferred tax asset of $4.5 million. Management expects that the net deferred tax asset is fully recoverable. If this assumption were to change, any amount of the net deferred tax asset that the Company could not expect to recover would be provided for as an allowance and would be reflected as an increase in income tax expense in the period in which it was established.

As of June 30, 2013, the Company has not recognized any future tax benefit related to its foreign operations at Eastern Re. The unrecognized tax benefit, which represents the excess of the tax basis over the amount for financial reporting (i.e., outside basis difference) of Eastern Re, was $9.9 million and $10.5 million as of June 30, 2013 and December 31, 2012, respectively. The outside basis difference primarily arises from losses at Eastern Re recognized for financial statement purposes, which have not yet been recognized for tax purposes.

Reinsurance Recoverables

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

RESULTS OF OPERATIONS

The major components of consolidated revenue were as follows for the three and six months ended June 30, 2013 and 2012 (unaudited, in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
	2013		2012			2013		2012
Net premiums written	$	43,608	$	36,754		$	102,993	$	88,371

Net premiums earned	$	45,510	$	38,735		$	87,853	$	75,221
Net investment income		1,119		1,064			1,822		2,014
Change in equity interest in limited partnerships		315		118			758		448
Net realized investment gains (losses)		64		(1,203	)		906		488
Other revenue		66		71			135		155

Consolidated revenue	$	47,074	$	38,785		$	91,474	$	78,326

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

•

An increase in net premiums earned reflecting new business, renewal rate increases, an improvement in the renewal retention rate, and an increase in audit premium.

•

An increase in the Company’s limited partnership interests.

•

The aforementioned improvement in net realized investment gains.

The components of consolidated net income, by segment, for the three and six months ended June 30, 2013 and 2012 were as follows (unaudited, in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Workers’ compensation insurance	$	3,493		$	2,215		$	6,952		$	5,362
Segregated portfolio cell reinsurance		—			—			—			—
Corporate/other		(491	)		(869	)		(716	)		(1,094	)

Consolidated net income	$	3,002		$	1,346		$	6,236		$	4,268

The increase in consolidated net income primarily reflects the increase in net premiums earned, the improvement in net realized investment gains (losses), and a decrease in the workers’ compensation insurance segment’s combined ratio from 2012 to 2013.

WORKERS’ COMPENSATION INSURANCE

The following table represents the operations of the workers’ compensation insurance segment for the three and six months ended June 30, 2013 and 2012 (unaudited, in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Revenue:
Direct premiums written	$	46,194		$	39,515		$	109,165		$	95,174
Reinsurance premiums assumed		1,783			938			2,722			1,473
Ceded premiums written (1)		(12,178	)		(10,746	)		(31,848	)		(27,503	)

Net premiums written		35,799			29,707			80,039			69,144
Change in unearned premiums		644			934			(9,962	)		(9,507	)

Net premiums earned		36,443			30,641			70,077			59,637
Net investment income		974			839			1,555			1,636
Change in equity interest in limited partnerships		272			103			623			362
Net realized investment (losses) gains		(66	)		(608	)		762			596

Total revenue		37,623			30,975			73,017			62,231

Expenses:
Losses and LAE incurred		24,124			20,549			45,649			39,115
Acquisition and other underwriting expenses		2,723			2,329			5,686			5,595
Other expenses		5,521			5,140			11,171			9,699
Policyholder dividend expense		237			16			465			186

Total expenses		32,605			28,034			62,971			54,595

Income before income taxes		5,018			2,941			10,046			7,636
Income tax expense		1,525			726			3,094			2,274

Net income	$	3,493		$	2,215		$	6,952		$	5,362

(1)	Ceded premiums written include premiums ceded to the segregated portfolio cell reinsurance segment of $9,040 and $8,145 and $25,348 and $21,335 for the three and six months ended June 30, 2013 and 2012, respectively.

The workers’ compensation insurance ratios were as follows for the three and six months ended June 30, 2013 and 2012:


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Loss and LAE ratio		66.2	%		67.1	%		65.1	%		65.6	%
Expense ratio		22.6	%		24.4	%		24.1	%		25.6	%
Policyholder dividend expense ratio		0.6	%		1.0	%		0.7	%		0.3	%

Combined ratio		89.4	%		91.6	%		89.9	%		91.5	%

Premiums

The increase in direct premiums written primarily reflects new business, renewal rate increases, an improvement in the renewal retention rate, and an increase in audit premium from customers. New business totaled $21.2 million for the first six months of 2013, renewal rate increases were 6.6% and the renewal retention rate increased from 84.1% in 2012 to 85.8% in 2013. For the three months ended June 30, 2013, the Company recognized audit premium from customers totaling $1.5 million, in the aggregate, related to its traditional and alternative market books of business, compared to audit premium from customers of $1.1 million for the same period in 2012. The Company’s traditional book of business recognized audit premium from customers of $1.4 million for the three months ended June 30, 2013, compared to audit premium from customers of $864,000 for the same period in 2012.

Net Investment Income

The increase in net investment income primarily reflects the change in accounting policy related to the classification of amortization/accretion on the Company’s convertible bond portfolio, partially offset by a decrease in the average yield on the fixed income portfolio. Net premium amortization totaling $558,000 related to the convertible bond portfolio was included in net realized investment gains (losses) for the three and six months ended June 30, 2013. The average yield on the fixed income portfolio was 2.19% as of June 30, 2013, compared to 2.93% as of June 30, 2012.

Net Realized Investment Gains (Losses)

The decrease in net realized investment losses from 2012 to 2013 primarily reflects an increase in realized gains from sale activity and a decrease in the realized loss related to the change in fair value of the Company’s convertible bond portfolio. The fair value of the convertible bond portfolio decreased $689,000 for the three months ended June 30, 2013, compared to $808,000 for the same period in 2012. Net realized investment losses for the three months ended June 30, 2013 include net premium amortization of $558,000 related to the convertible bond portfolio.

Losses and LAE

The decrease in the calendar period loss ratio primarily reflects a decrease in accident year loss experience from 2012 to 2013. Audit premium reduced the loss ratio by 2.6 percentage points and 2.5 percentage points for the three months ended June 30, 2013 and 2012, respectively. There was no prior year accident period reserve development, in the aggregate, in 2013 or 2012. In 2013, however, there were some deviations, by accident period, between the actuarial indications and recorded reserves. Based on consideration of the credibility of the higher than expected loss experience on older accident periods and the robustness of the recent accident period loss ratio, management adjusted the spread of the recorded reserves by accident period to align the reserves with the actuarial indications.

Acquisition and Other Underwriting Expenses and Other Expenses

The acquisition and other underwriting expense ratio was 7.5% and 7.6% for the three months ended June 30, 2013 and 2012, respectively.

The other expense ratio was 15.1% and 16.8% for the three months ended June 30, 2013 and 2012, respectively. The decrease in the other expense ratio primarily reflects growth in net premiums earned.

Policyholder Dividends

The increase in the policyholder dividend expense primarily reflects the underlying loss experience of dividend paying policies. As of June 30, 2013 and 2012, 8.9% and 11.1%, respectively, of all policies were written on a dividend policy basis.

Tax Expense

The effective tax rate was 30.4% and 24.7% for the three months ended June 30, 2013 and 2012, respectively. The primary difference between the statutory rate of 35.0% and the effective tax rate reflects tax-exempt income on municipal bond securities and the tax benefit associated with workers’ compensation insurance business ceded to Eastern Re. The increase in the effective tax rate from 2012 to 2013 primarily reflects the increase in pre-tax income in relation to tax-exempt income on municipal bond securities.

SEGREGATED PORTFOLIO CELL REINSURANCE

The following table represents the operations of the segregated portfolio cell reinsurance segment for the three and six months ended June 30, 2013 and 2012 (unaudited, in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Revenue:
Reinsurance premiums assumed	$	9,040		$	8,145		$	25,348		$	21,335
Ceded premiums written		(1,231	)		(1,098	)		(2,394	)		(2,108	)

Net premiums written		7,809			7,047			22,954			19,227
Change in unearned premiums		1,258			1,047			(5,178	)		(3,643	)

Net premiums earned		9,067			8,094			17,776			15,584
Net investment income		81			86			156			174
Net realized investment gains		130			7			140			467

Total revenue		9,278			8,187			18,072			16,225

Expenses:
Losses and LAE incurred		5,048			5,022			10,075			9,371
Acquisition and other underwriting expenses		2,721			2,454			5,303			4,745
Other expenses		105			65			192			164
Policyholder dividend expense		13			23			32			37
Segregated portfolio dividend expense (1)		1,391			623			2,470			1,908

Total expenses		9,278			8,187			18,072			16,225

Net income (1)	$	—		$	—		$	—		$	—

(1)

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

The segregated portfolio cell reinsurance ratios were as follows for the three and six months ended June 30, 2013 and 2012:


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Loss and LAE ratio		55.7	%		62.0	%		56.7	%		60.1	%
Expense ratio		31.2	%		31.1	%		30.9	%		31.5	%
Policyholder dividend expense ratio		0.1	%		0.3	%		0.2	%		0.2	%

Combined ratio		87.0	%		93.4	%		87.8	%		91.8	%

Reinsurance Premiums Assumed

The increase in reinsurance premiums assumed primarily reflects new business of $3.6 million and renewal rate increases of 6.2%, partially offset by a decrease in the renewal retention rate. The renewal retention rate decreased from 92.2% in 2012 to 91.8% in 2013. Reinsurance premiums assumed includes audit premium from customers of $168,000 and $282,000 for the three months ended June 30, 2013 and 2012, respectively.

Net Investment Income

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

Net Realized Investment Gains

Net realized investment gains for the three months ended June 30, 2013 and 2012 reflect sale activity in the segregated portfolio cells’ investment portfolios.

Losses and LAE

The decrease in the calendar period loss and LAE ratio primarily reflects a decrease in the accident period loss ratio, partially offset by a decrease in favorable loss reserve development on prior accident periods. The accident period loss ratio was 59.3% and 74.6% for the three months ended June 30, 2013 and 2012, respectively. Favorable loss reserve development totaled $327,000 and $1.0 million for the three months ended June 30, 2013 and 2012, respectively. The 2012 accident period loss ratio reflected increased claim activity in two segregated portfolio cells during the second quarter of 2012.

Acquisition and Other Underwriting Expenses

The expense ratios are consistent with the contractual ceding commissions for the three months ended June 30, 2013 and 2012.

Segregated Portfolio Dividend Expense

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

CORPORATE/OTHER

The following table represents the operations of the corporate/other segment for the three and six months ended June 30, 2013 and 2012 (unaudited, in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Revenue:
Net investment income	$	64		$	139		$	111		$	204
Change in equity interest in limited partnerships		43			15			135			86
Net realized investment (losses) gains		—			(602	)		4			(575	)
Other revenue		66			71			135			155

Total revenue		173			(377	)		385			(130	)

Expenses:
Acquisition and other underwriting expenses		(156	)		(310	)		(268	)		(435	)
Other expenses		1,229			1,003			2,360			2,033
Amortization of intangibles		160			202			320			403
Segregated portfolio dividend expense		(307	)		(234	)		(757	)		(523	)

Total expenses		926			661			1,655			1,478

Loss before income taxes		(753	)		(1,038	)		(1,270	)		(1,608	)
Income tax benefit		(262	)		(169	)		(554	)		(514	)

Net loss	$	(491	)	$	(869	)	$	(716	)	$	(1,094	)

Revenue

The increase in revenue primarily reflects the following:

•

An improvement in net realized investment gains (losses) from 2012 to 2013, which primarily reflects the net realized loss of $641,000 in 2012 related to the SprinklerPro commutation.

•

The improvement in net realized investment gains (losses) was partially offset by a decrease in net investment income, which primarily reflects a decrease in fixed income securities at EIHI, and a decrease in third-party administration revenue related to the loss of a customer. During 2012, EIHI liquidated its remaining fixed income securities to fund the Company’s stock buyback program.

Expenses

The increase in expenses primarily reflects the following:

•

An increase in legal expenses related to the AIG arbitration.

•

An increase in stock compensation expense, reflecting an increase in ESOP compensation expense related to the increase in the Company’s stock price, and an increase in compensation expense related to stock options and restricted stock granted in the first and second quarters of 2012.

•

A decrease in cell rental fees at Eastern Re, which are reflected in acquisition and other underwriting expenses.

•

The above items were partially offset by a decrease in intangible asset amortization and an increase in the Company’s segregated portfolio cell equity interest.

Income Tax Benefit

The effective tax rate was a benefit of 34.8% and 16.3% for the three months ended June 30, 2013 and 2012, respectively. The increase in the income tax benefit from 2012 to 2013 primarily reflects the impact of the Company’s annualized effective tax rate adjustment.

CONSOLIDATED FINANCIAL POSITION

Consolidated assets totaled $407.3 million at June 30, 2013, compared to $380.8 million at December 31, 2012. The increase in consolidated assets primarily reflects the following:

•

An increase in investments, which primarily reflects net purchases during the six months ended June 30, 2013 and an increase in the estimated fair value of the convertible bond and equity portfolios, partially offset by a decline in the estimated fair value of the fixed income portfolio. The decline in the fixed income portfolio primarily reflects the impact of rising interest rates.

•

An increase in premiums receivable and deferred acquisition costs, which primarily reflects the impact of business with a January 1 effective date, including new business written in 2013.

•

An increase in the net deferred income tax asset, which primarily reflects the increase in unearned premiums, loss reserves and the decline in the estimated fair value of the Company’s fixed income portfolio, partially offset by the increase in deferred acquisition costs.

•

An increase in federal income taxes recoverable, which primarily reflect estimated tax payments of $4.0 million remitted in the second quarter of 2013, partially offset by the estimated federal income tax liability for the six months ended June 30, 2013.

•

An increase in other assets, which primarily reflects an increase in the Company’s segregated portfolio cell equity interest and an increase in prepaid reinsurance in the segregated portfolio cell reinsurance segment. These increases were partially offset by full payment of the outstanding note receivable from Security Life Insurance Company totaling $1.75 million in June 2013.

Consolidated liabilities totaled $266.5 million at June 30, 2013, compared to $244.9 million at December 31, 2012. The increase in consolidated liabilities primarily reflects the following:

•

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

•

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

•

A decrease in accounts payable and accrued expenses, which primarily reflects the payment of liabilities and accruals recorded at December 31, 2012, including the payment of 2012 premium taxes and 2012 employee bonuses. The decrease also reflects a decrease in the deposit in transit recorded at June 30, 2013, compared to December 31, 2012.

•

An increase in ceded reinsurance balances payable, which primarily reflects premiums written during the six months ended June 30, 2013, but not yet paid to the Company’s reinsurers.

•

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

Consolidated equity totaled $140.8 million at June 30, 2013, compared to $135.9 million at December 31, 2012. The increase in consolidated equity primarily reflects the following:

•

Net income for the six months ended June 30, 2013, net of the quarterly shareholder dividend.

•

A decrease in accumulated other comprehensive income, which primarily reflects a decrease in net unrealized gains in the fixed income portfolio, partially offset by an increase in net unrealized gains in the equity portfolio.

LIQUIDITY AND CAPITAL RESOURCES

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

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

The Company has a $10.0 million revolving line of credit available to provide additional liquidity if needed. The line of credit matures on May 2, 2014 and may be renewed annually for additional periods expiring on May 1 at the lender’s discretion. Outstanding balances under the line of credit bear interest at an adjustable monthly rate equal to LIBOR plus 2.0% per annum. There were no outstanding balances under the line of credit as of June 30, 2013.

Our domestic insurance subsidiaries’ ability to pay dividends to EIHI is limited by the insurance laws and regulations of Pennsylvania and Indiana. The maximum annual dividends that the domestic insurance entities may pay without prior approval from the Pennsylvania Insurance Department and the Indiana Insurance Department is limited to the greater of 10.0% of statutory surplus or 100% of statutory net income for the most recently filed annual statement. Eastern Re must receive approval from the Cayman Islands Monetary Authority (“CIMA”) before it can pay any dividend to the Company. During the second quarter of 2013, Eastern Re paid a dividend of $3.0 million to EIHI to fund corporate expenses and shareholder dividend obligations. The dividend was approved by CIMA.

CASH FLOWS

Cash flows from continuing operations for the six months ended June 30, 2013 and 2012 were as follows (unaudited, in thousands):


	Six Months Ended
	June 30,
	2013			2012
Cash provided by operating activities	$	8,632		$	5,241
Cash used in investing activities		(8,212	)		(11,629	)
Cash used in financing activities		(1,513	)		(3,486	)

	$	(1,093	)	$	(9,874	)

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

The increase in cash flows provided by operating activities primarily reflects the increase in net premiums written and a decrease in claims paid from 2012 to 2013 in relation to net premiums written, partially offset by an increase in estimated federal income tax payments. Estimated federal income tax payments totaled $4.7 million for the six months ended June 30, 2013, compared to $2.8 million for the same period in 2012. Cash flows from operating activities also reflect full payment of the note receivable from Security Life Insurance Company totaling $1.75 million in June 2013.

The decrease in cash used in investing activities primarily reflects an increase in fixed income maturities in 2013.

Cash used in financing activities for the six months ended June 30, 2013 primarily reflects shareholder dividends, while the 2012 financing activities includes both shareholder dividends and $2.4 million in stock repurchases. Cash paid for shareholder dividends increased from 2012 to 2013 as a result of the increase in cash dividends per share from $0.07/share in 2012 to $0.09/share and $0.11/share in the first quarter of 2013 and second quarter of 2013, respectively.

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, 2013, future effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

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

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

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

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

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 1A.

Risk Factors

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

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

As of June 30, 2013, the Company has repurchased 4,017,105 shares of its common stock. The share repurchases will be held as treasury stock and are available for issuance in connection with the Company’s Stock Incentive Plan. There were no share repurchases during the six months ended June 30, 2013. The following table provides information with respect to those purchases of our common stock during the six months ended June 30, 2012.


Period	Total number of shares purchased		Average price paid per share		Total number of shares purchased 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, 2012		—	$	—		—		1,086,567
February 1-29, 2012		—	$	—		—		1,086,567
March 1-31, 2012		—	$	—		—		1,086,567
April 1-30, 2012		—	$	—		—		1,086,567
May 1-31, 2012		166,537	$	14.49		166,537		920,030
June 1-30, 2012		—	$	—		—		920,030

Total		166,537	$	14.49		166,537

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Mine Safety Disclosures

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)

31.1		Certification of Chief Executive Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer in accordance with Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer in accordance with Section 906 of the Sarbanes-Oxley Act of 2002

101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012, (ii) the Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2013 and 2012, (iii) the Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2013 and 2012, (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012, and (v) the Condensed Notes to Consolidated Financial Statements.

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 1, 2013	By:	/s/ Michael L. Boguski
		Michael L. Boguski,
		President and Chief Executive Officer

Dated: August 1, 2013	By:	/s/ Kevin M. Shook
		Kevin M. Shook,
		Executive Vice President, Treasurer & Chief Financial Officer

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