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 12,
2012.

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.




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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 $1.3 million and $4.3 million for the three
and six months ended June 30, 2012, compared to net income of $2.0 million and
$3.9 million for the same periods in 2011. The Company's consolidated combined
ratio was 94.2% and 94.3% for the three and six months ended June 30, 2012,
compared to 95.4% and 96.6% for the same periods in 2011.

The Company's results of operations for the three and six months ended June 30, 2012, when compared to the same periods in 2011, reflect the following:

• Net premiums earned increased 20.3% and 21.2% for the three and six months

ended June 30, 2012, compared to the same period in 2011. The increase

primarily reflects new business writings, an increase in audit premium and

renewal rate increases, partially offset by a decrease in the renewal

         retention rate.

• Net realized investment (losses) gains for the three and six months ended

June 30, 2012 include a realized loss of $641,000 related to the

commutation of the SprinklerPro contract during the second quarter. The

estimated fair value of the Company's convertible bond portfolio decreased

$808,000 for the three months ended June 30, 2012, compared to a decrease

         of $392,000 for the same period in 2011.




     •   The decrease in the consolidated expense ratio from 29.8% and 30.9% for

the three and six months ended June 30, 2011, respectively, to 28.1% and

29.5% for the same periods in 2012 primarily reflects the increase in net

premiums earned and a decrease in stock compensation expense, partially

offset by the change in accounting related to deferred acquisition costs.

Effective January 1, 2012, the Company adopted ASU 2010-26, which resulted

in a decrease in the amount of underwriting salaries capitalized and

deferred over the life of the underlying workers' compensation insurance

policies. The change in accounting resulted in the Company expensing

underwriting salaries of approximately $219,000 ($142,000, net of tax) and

$945,000 ($614,000, net of tax) for the three and six months ended

June 30, 2012 that would have been capitalized and deferred prior to the

adoption of ASU 2010-26. The adoption of ASU 2012-26 increased the

Company's consolidated expense ratio by 0.6 and 1.3 percentage points for

the three and six months ended June 30, 2012, respectively.

Principal Revenue and Expense Items

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

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

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



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Net investment income and realized gains and losses on investments. The Company
invests its surplus and the funds supporting its insurance liabilities
(including unearned premiums and unpaid losses and LAE) in cash, cash
equivalents, fixed income securities, convertible bonds, equity securities, and
limited partnership 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 fees earned for claim administration and
risk management services provided to self-insured property/casualty customers.
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, other expenses, policyholder dividends, and income taxes:

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

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

Other expenses. Other expenses consist of general administrative expenses such
as salaries, stock compensation, 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 federal income tax return. Deferred tax
expense represents the change in the Company's net deferred tax asset, exclusive
of the tax effect related to changes in unrealized gains and losses in the
Company's investment portfolio and changes in the unrecognized amounts related
to the Company's benefit plan liabilities.

Key Financial Measures

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

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



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premiums earned during that year. A calendar year loss ratio measures losses and
LAE for insured events occurring during a particular year and the change in loss
reserves from prior accident years as a percentage of net premiums earned during
that year.

Expense ratio. The expense ratio is the ratio (expressed as a percentage) of the
sum of the acquisition and other underwriting expenses 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 and segregated portfolio cell
reinsurance segments.

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

Net 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, and segregated portfolio cell reinsurance products, which are
estimates of future payments of reported and unreported claims for losses and
related expenses. The adequacy of the Company's reserves for unpaid losses and
LAE are inherently uncertain because the ultimate amount that the Company may
pay under many of the claims incurred as of the balance sheet date will not be
known for many years. Establishing reserves continues to be a complex and
imprecise process, requiring the use of informed estimates and judgments. The
Company's estimates and judgments may be revised as additional experience and
other data becomes available and are reviewed, as new or improved methodologies
are developed, or as current laws change. Any such revisions could result in
future changes in estimates of losses or reinsurance recoverable and would be
reflected in the Company's results of operations in the period in which the
estimates are changed. Estimating the ultimate claims liability is necessarily a
complex and judgmental process inasmuch as the amounts are based on management's
informed estimates and judgments using data currently available. If ultimate
losses, net of reinsurance, prove to be substantially higher than the amounts
recorded as of June 30, 2012, 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, 2012 and December 31, 2011, the Company's
reserves for unpaid losses and LAE were reduced by $6.0 million and $5.7
million, respectively, related to the effects of discounting.



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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, 2012 (unaudited) and December 31, 2011 are summarized below (in
thousands):



                                       Workers'             Segregated
                                     Compensation         Portfolio Cell
                                      Insurance             Reinsurance
June 30, 2012                          Segment                Segment             Corporate/Other        Total

Case reserves                       $       44,588        $         8,883        $              -      $  53,471
Case incurred development,
IBNR, and unallocated LAE
reserves                                    34,835                 14,486                      206        49,527
Amount of discount                          (4,848 )               (1,168 )                     -         (6,016 )

Net reserves                                74,575                 22,201                      206        96,982
Reinsurance recoverables on
unpaid losses and LAE                        9,278                  5,261                       -         14,539

Reserves for unpaid losses and
LAE                                 $       83,853        $        27,462        $             206     $ 111,521


                                       Workers'             Segregated
                                     Compensation         Portfolio Cell
December 31, 2011                     Insurance             Reinsurance           Corporate/Other        Total
Case/tabular reserves               $       39,380        $        10,229        $              -      $  49,609
Case incurred development,
IBNR, and unallocated LAE
reserves                                    37,249                 12,931                      206        50,386
Amount of discount                          (4,527 )               (1,196 )                     -         (5,723 )

Net reserves                                72,102                 21,964                      206        94,272
Reinsurance recoverables on
unpaid losses and LAE                        9,007                  2,798                       -         11,805

Reserves for unpaid losses and
LAE                                 $       81,109        $        24,762        $             206     $ 106,077



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
recognized other-than-temporary impairments, excluding impairments in the
segregated portfolio cell reinsurance segment, of $87,000 during the three and
six months ended June 30, 2012. There were no impairments during the three and
six months ended June 30, 2011. There were no other-than-temporary impairments
in the segregated portfolio cell reinsurance segment during the three and six
months ended June 30, 2012. Other-than-temporary impairments in the segregated
portfolio cell reinsurance segment totaled $0 and $1,000 for the three and six
months ended June 30, 2011, respectively.

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.

The Company recognized an other-than-temporary impairment of $87,000 related to
one equity security during the three and six months ended June 30, 2012. The
impairment was a result of the security being in an unrealized loss position for
more than 12 months. The Company did not recognize any other-than-temporary
impairments related to its equity security portfolio during the three and six
months ended June 30, 2011.

As of June 30, 2012, 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, 2012. Adverse investment market conditions, or poor
operating results of underlying investments, could result in impairment charges
in the future.



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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.


There were no other-than-temporary impairments related to the Company's fixed
income security portfolio during the three and six months ended June 30, 2012 or
2011.

As of June 30, 2012, the Company held fixed income securities, excluding fixed
income securities in the segregated portfolio cell reinsurance segment, with
gross unrealized losses of $51,000, of which $4,000 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, 2012. 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).

There were no other-than-temporary impairments related to the Company's limited
partnership investments during the three and six months ended June 30, 2012 or
2011.

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, 2012 to its workers' compensation insurance segment.

The Company performs its annual goodwill impairment test as of September 30. The
Company adopted Accounting Standards Update No. 2011-08 ("ASU 2011-08"),
"Testing Goodwill for Impairment", effective September 30, 2011. Under ASU
2011-08, the Company assessed certain qualitative factors to determine if it was
more likely than not that the fair value of the workers' compensation insurance
segment was less than its carrying amount. As a result of this assessment, it
was determined that it was not more likely than not that fair value of the
workers' compensation insurance segment was less than its carrying amount;
therefore, the performance of the two-step impairment test was not required.

We did not evaluate goodwill for impairment as of June 30, 2012 as no events
occurred or circumstances changed that would have more likely than not reduced
the fair value of the workers' compensation insurance segment below its carrying
amount since September 30, 2011.



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

Deferred Income Taxes

The temporary differences between the tax and book bases of assets and
liabilities are recorded as deferred income taxes. Management evaluates the
recoverability of 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, 2012, the Company recorded a net deferred tax
asset of $1.8 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, 2012, the Company has not recognized any future tax benefit
related to its foreign operations at Eastern Re. The unrecognized tax benefit,
which represents the excess of the tax basis over the amount for financial
reporting (i.e., outside basis difference) of Eastern Re, was $11.0 million as
of June 30, 2012. The outside basis difference primarily arises from losses at
Eastern Re recognized for financial statement purposes, which have not yet been
recognized for tax purposes. Management presently believes that the Company will
not be able to recognize these tax benefits in the foreseeable future and,
therefore, has not recognized the future tax benefits as of June 30, 2012.

Reinsurance Recoverables

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

Recent Accounting Pronouncements

Presentation of Comprehensive Income

In June 2011, the FASB issued ASU 2011-05, "Presentation of Comprehensive
Income" ("ASU 2011-05"). ASU 2011-05 requires entities to present net income and
comprehensive income in either a single continuous statement or in two separate,
but consecutive, statements of net income and other comprehensive income. The
option to present items of other comprehensive income in the statement of
changes in equity was eliminated. ASU 2011-05 was effective for public entities
as of the beginning of a fiscal year that began after December 15, 2011
(including interim periods) and is effective for nonpublic entities for fiscal
years ending after December 15, 2012 and interim and annual periods thereafter.
Early adoption was permitted and retrospective application is required. The
Company adopted ASU 2011-05 effective January 1, 2012. The Company presents
comprehensive income in the consolidated statement of operations and
comprehensive income; therefore, the adoption of ASU 2011-05 did not change the
Company's presentation of comprehensive income.

Fair Value Measurement and Disclosure Requirements

In May 2011, the FASB issued ASU 2011-04, "Fair Value Measurements and
Disclosures - Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRS." ASU 2011-04 clarifies the application of
existing fair value measurement and disclosure requirements, changes certain
principles related to measuring fair value, and requires additional disclosures
about fair value measurements. ASU 2011-04 was effective for periods beginning
after December 15, 2011. The Company adopted ASU 2011-04 effective January 1,
2012. The adoption of ASU 2011-04 did not affect the Company's financial
condition or results of operations.

Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts

In October 2010, the FASB issued ASU 2010-26, "Accounting for Costs Associated
with Acquiring or Renewing Insurance Contracts" ("ASU 2010-26"). ASU 2010-26
provides specific types of costs that should be capitalized in connection with
the acquisition or renewal of insurance contracts. Those costs include
incremental direct costs of contract acquisition incurred in connection with
independent third parties and certain costs related to activities performed by
the insurer for the contract, including underwriting, policy issuance and
processing, medical and inspection, and sales force contract selling. Under ASU



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2010-26, costs incurred by an entity related to unsuccessful acquisition or
renewal efforts must be charged to expense as incurred. ASU 2010-26 was
effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2011 and is to be applied prospectively.
Retrospective application to all prior periods upon the date of adoption was
permitted, but not required. The Company adopted ASU 2010-26 effective
January 1, 2012 and applied it prospectively. As a result of adoption, the
Company expensed certain underwriting salaries totaling approximately $219,000
($142,000, net of tax) and $945,000 ($614,000, net of tax) for the three and six
months ended June 30, 2012, respectively, that would have been capitalized under
the previous accounting guidance to give effect to unsuccessful acquisition or
renewal activities. The adoption of ASU 2012-26 increased the Company's
consolidated expense ratio by 0.6 and 1.3 percentage points for the three and
six months ended June 30, 2012, respectively. If the new accounting guidance had
been adopted effective January 1, 2011, the Company would have recognized
additional expense related to underwriting salaries totaling $439,000 ($285,000,
net of tax) and $938,000 ($610,000, net of tax) for the three and six months
ended June 30, 2011, respectively, which would have increased the Company's
consolidated expense ratio by 1.4 and 1.5 percentage points, respectively.

RESULTS OF OPERATIONS

The major components of consolidated revenue were as follows for the three and six months ended June 30, 2012 and 2011 (unaudited, in thousands):

                                                        Three Months Ended            Six Months Ended
                                                             June 30,                     June 30,
                                                       2012            2011          2012          2011
Net premiums written                                 $  36,754       $ 30,411      $ 88,371      $ 73,757


Net premiums earned                                  $  38,735       $ 32,207      $ 75,221      $ 62,085
Net investment income                                    1,064            908         2,014         1,934
Change in equity interest in limited partnerships          118             95           448           646
Net realized investment (losses) gains                  (1,203 )          975           488         1,805
Other revenue                                               71             79           155           262


Consolidated revenue                                 $  38,785       $ 34,264      $ 78,326      $ 66,732



The increase in consolidated revenue from 2011 to 2012 primarily reflects the
increase in net premiums earned, partially offset by a decrease in net realized
investment (losses) gains. The decrease in net realized investment (losses)
primarily reflects a decline in the fair value of the convertible bond portfolio
and a realized loss related to the commutation of the Company's participation in
the SprinklerPro program during the second quarter of 2012.

The components of consolidated net income, by segment, for the three and six months ended June 30, 2012 and 2011 were as follows (unaudited, in thousands):