##### Table of Contents





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
      Form 10-K
 Annual Report Pursuant to
    Section 13 or 15(d) of the
 Securities Exchange Act of
    1934
 For the Fiscal Year Ended December 31, 2009
  Commission File No. 000-51130
      National Interstate
    Corporation
 (Exact name of registrant as
    specified in its charter)
  Ohio

34-1607394(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)       3250 Interstate Drive
 Richfield, Ohio
    44286-9000
 (330) 659-8900
 (Address and telephone number of
    principal executive offices)
      Securities Registered Pursuant to Section 12(b) of the
    Act:
  Name of Exchange onTitle of each class

Which registeredCommon Shares, $0.01 par value

Nasdaq Global Select Market   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  Other securities for which reports are submitted pursuant to
    Section (d) of the Act:
 None
      o þ
  o þ
  þ o
  Regulation S-T o o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
  Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o

Smaller reporting company o(Do not check if a smaller reporting company)   Rule 12b-2 o þ
          Documents
    Incorporated by Reference:




---



##### 





National
    Interstate Corporation
  Index to
    Annual Report on
    Form 10-K
   
  
 PagePART IItem 1



Business:


4Introduction


4Property and Casualty Insurance Operations


4Investments


12Competition


14Ratings


15Regulation


15Employees


17Item 1A



Risk Factors


18Item 1B



Unresolved Staff Comments


26Item 2



Properties


26Item 3



Legal Proceedings


26Item 4



[Reserved]


26PART IIItem 5



Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities


27Item 6



Selected Financial Data


29Item 7



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


31Item 7A



Quantitative and Qualitative Disclosures About
    Market Risk


53Item 8



Financial Statements and Supplementary Data


54Item 9



Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


85Item 9A



Controls and Procedures


85Item 9B



Other Information


85PART IIIItem 10



Directors, Executive Officers and Corporate
    Governance


85Item 11



Executive Compensation


85Item 12



Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


86Item 13



Certain Relationships and Related Transactions,
    and Director Independence


86Item 14



Principal Accountant Fees and Services


86PART IVItem 15



Exhibits and Financial Statement Schedules


86Signatures


93EX-21.1EX-23.1EX-24.1EX-31.1EX-31.2EX-32.1EX-32.2   2




---



##### Table of Contents



FORWARD-LOOKING
    STATEMENTS
  Form 10-K
  
    general economic conditions, weakness of the financial markets
    and other factors, including prevailing interest rate levels and
    stock and credit market performance, which may affect or
    continue to affect (among other things) our ability to sell our
    products and to collect amounts due to us, our ability to access
    capital resources and the costs associated with such access to
    capital and the market value of our investments;
    our ability to manage our growth strategy;
    customer response to new products and marketing initiatives;
    tax law changes;
    increasing competition in the sale of our insurance products and
    services and the retention of existing customers;
    changes in legal environment;
    regulatory changes or actions, including those relating to
    regulation of the sale, underwriting and pricing of insurance
    products and services and capital requirements;
    levels of natural catastrophes, terrorist events, incidents of
    war and other major losses;
    adequacy of insurance reserves; and
    availability of reinsurance and ability of reinsurers to pay
    their obligations.   3




---



##### Table of Contents



PART I   ITEM 1
    Business  Please refer to Forward-Looking Statements
    following the Index in the front of this
    Form 10-K.
 Introduction  (330) 659-8900. Form 10-K.
     Property
    and Casualty Insurance Operations       4




---



##### Table of Contents



Product Management Organization.
  Our
    Products
      Year Ended December 31,2009


2008


2007Percent of





Percent of





Percent ofAmount


Total


Amount


Total


Amount


Total(Dollars in thousands)Alternative Risk Transfer

$
192,953



55.9
%

$
206,342



54.3
%

$
167,717



48.5
%Transportation


66,537



19.3
%


87,246



22.9
%


90,984



26.3
%Specialty Personal Lines


61,523



17.8
%


59,065



15.5
%


55,169



15.9
%Hawaii and Alaska


18,576



5.5
%


22,489



5.9
%


25,126



7.3
%Other


5,288



1.5
%


5,154



1.4
%


7,010



2.0
%Gross premiums written

$
344,877



100.0
%

$
380,296



100.0
%

$
346,006



100.0
%     Premium Range

Annual Premium AverageAlternative Risk Transfer

$5,800-$2,652,000


$69,300Transportation

$24,200-$55,300


$35,500Specialty Personal Lines

$900-$2,700


$1,100Hawaii and Alaska

$2,000-$29,000


$3,700   Alternative Risk Transfer.
 5




---



##### Table of Contents



sm
 6




---



##### Table of Contents



Transportation.
  Specialty Personal Lines.
  Hawaii and Alaska.
 7




---



##### Table of Contents



Geographic
    Concentration
    Year Ended December 31,2009


2008Percent of





Percent ofVolume


Total


Volume


Total(Dollars in thousands)California

$
40,693



12.0
%

$
57,564



15.5
%Texas


39,156



11.6
%


33,676



9.1
%New York


18,554



5.5
%


20,340



5.4
%Hawaii


18,452



5.5
%


22,574



6.1
%Florida


16,441



4.9
%


24,849



6.7
%North Carolina


15,267



4.5
%


18,015



4.9
%Massachusetts


15,119



4.5
%


10,697



2.9
%Pennsylvania


14,848



4.4
%


12,971



3.5
%All other states


159,442



47.1
%


170,557



45.9
%Direct premiums written

$
337,972



100.0
%

$
371,243



100.0
%   Concentration
    by Statutory Line of Business
    Year Ended December 31,2009


2008Percent of





Percent ofVolume


Total


Volume


Total(Dollars in thousands)Auto and other liability

$
197,766



58.5
%

$
228,119



61.4
%Auto physical damage


72,375



21.4
%


74,886



20.2
%Workers compensation


57,143



16.9
%


49,634



13.4
%All other lines


10,688



3.2
%


18,604



5.0
%Direct premiums written

$
337,972



100.0
%

$
371,243



100.0
%   Underwriting
     8




---



##### Table of Contents



Marketing
    and Distribution
    Reinsurance
      Claims
    Management and Administration
      24-hour,
 9




---



##### Table of Contents



and/or
    Reserves
    for Unpaid Losses and Loss Adjustment Expenses
    (LAE)
      As re-estimated at December 31, 2009,
 10




---



##### Table of Contents



Net Liability for UnpaidLosses And LAE:

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009(Dollars in thousands)As originally estimated

$
26,566


$
30,292


$
48,456


$
67,162


$
86,740


$
111,644


$
151,444


$
181,851


$
210,302


$
262,440


$
276,419As re-estimated at December 31, 2009


25,735



32,105



48,243



62,437



79,163



99,362



138,108



169,879



207,281



261,154Liability re-estimated as of:One year later


24,923



32,751



48,494



63,462



84,485



106,409



143,991



176,179



209,448



261,154Two years later


26,252



33,473



47,479



64,687



83,862



103,416



142,929



173,860



207,281Three years later


26,380



31,884



47,250



63,037



81,991



99,768



139,994



169,879Four years later


25,531



31,488



46,400



62,564



79,673



99,487



138,108Five years later


25,138



31,590



46,961



60,551



79,084



99,362Six years later


24,989



31,757



46,880



61,268



79,163Seven years later


25,364



31,410



47,361



62,437Eight years later


25,372



31,505



48,243Nine years later


25,471



32,105Ten years later


25,735Net cumulative (deficiency) redundancy


831



(1,813
)


213



4,725



7,577



12,282



13,336



11,972



3,021



1,286Net cumulative (deficiency) redundancy  %


3.1
%


(6.0
%)


0.4
%


7.0%



8.7
%


11.0
%


8.8
%


6.6
%


1.4
%


0.5
%Cumulative paid of:One year later


10,307



14,924



18,048



22,792



29,616



37,049



51,901



63,314



67,673



91,615Two years later


17,637



20,077



28,510



36,927



48,672



59,038



85,193



95,752



111,841Three years later


20,157



24,313



35,718



48,660



61,001



76,617



101,340



119,984Four years later


22,383



26,869



40,615



53,531



68,594



84,070



112,474Five years later


23,413



28,591



43,474



57,697



71,904



89,821Six years later


24,033



30,180



45,365



59,035



74,938Seven years later


24,594



30,813



45,828



61,179Eight years later


24,926



30,863



47,396Nine years later


25,008



31,549Ten years later


25,397The
    following is a reconciliation of our net liability to the gross
    liability for unpaid losses and LAE:1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009(Dollars in thousands)As originally estimated:Net liability shown above

$
26,566


$
30,292


$
48,456


$
67,162


$
86,740


$
111,644


$
151,444


$
181,851


$
210,302


$
262,440


$
276,419Add reinsurance recoverables


11,396



12,416



22,395



35,048



41,986



59,387



71,763



84,115



91,786



137,561



140,841Gross liability

$
37,962


$
42,708


$
70,851


$
102,210


$
128,726


$
171,031


$
223,207


$
265,966


$
302,088


$
400,001


$
417,260As re-estimated at December 31, 2009Net liability shown above

$
25,735


$
32,105


$
48,243


$
62,437


$
79,163


$
99,362


$
138,108


$
169,879


$
207,281


$
261,154



N/AAdd reinsurance recoverables reestimated


6,927



13,039



34,029



47,314



50,303



57,385



63,625



70,572



69,191



122,981



N/AGross liability

$
32,662


$
45,144


$
82,272


$
109,751


$
129,466


$
156,747


$
201,733


$
240,451


$
276,472


$
384,135



N/AGross cumulative (deficiency) redundancy

$
5,300


$
(2,436
)

$
(11,421
)

$
(7,541
)

$
(740
)

$
14,284


$
21,474


$
25,515


$
25,616


$
15,866



N/AGross cumulative (deficiency) redundancy  %


14.0
%


(5.7
%)


(16.1
%)


(7.4%
)


(0.6
%)


8.4
%


9.6
%


9.6
%


8.5
%


4.0
%


N/A  11




---



##### Table of Contents



Investments  General
      At December 31,2009


2008Short term investments


0.1
%


0.0
%Fixed maturities:US Government and government agencies


35.6
%


41.6
%State and local government obligations


26.0
%


25.7
%Residential mortgage-backed securities


19.6
%


16.2
%Commercial mortgage-backed securities


0.7
%


0.0
%Corporate obligations


11.3
%


8.6
%Redeemable preferred stock


1.9
%


2.3
%Total fixed maturities


95.1
%


94.4
%Equity securities:Perpetual preferred stocks


0.2
%


1.2
%Common stocks


4.6
%


4.4
%Total equity securities


4.8
%


5.6
%Total


100.0
%


100.0
%    12




---



##### Table of Contents



Year Ended December 31,2009


2008


2007Yield on short term investments:Excluding realized gains and losses


1.0
%


5.5
%


4.9
%Including realized gains and losses


1.0
%


5.5
%


4.9
%Yield on fixed maturities:Excluding realized gains and losses


3.7
%


4.5
%


4.8
%Including realized gains and losses


3.5
%


3.4
%


4.7
%Yield on equity securities:Excluding realized gains and losses


2.3
%


3.5
%


4.6
%Including realized gains and losses


16.5
%


(42.8
%)


3.4
%Yield on all investments:Excluding realized gains and losses


3.7
%


4.4
%


4.8
%Including realized gains and losses


4.1
%


(0.3
%)


4.6
%     Year Ended December 31,2009


2008


2007Fixed maturities:National Interstate Total Return on Fixed Maturities


7.1
%


3.9
%


6.9
%Barclays Intermediate Aggregate Index


6.5
%


4.9
%


7.0
%Equity securities:National Interstate Total Return on Preferred Stock


33.8
%


(27.2
%)


(13.9
%)Merrill Lynch Preferred Stock Index


26.6
%


(37.9
%)


(11.7
%)National Interstate Total Return on all other Equity


30.8
%


(29.6
%)


4.3
%Standard & Poors 500 Index


26.5
%


(37.0
%)


5.5
%  13




---



##### Table of Contents



Fixed
    Maturity Investments
    Fixed MaturitiesS&P or Comparable Rating

Amortized Cost


Fair Value


% of Total(Dollars in thousands)AAA, AA, A

$
494,950


$
501,578



88.5
%BBB


35,592



34,805



6.1
%Total Investment Grade


530,542



536,383



94.6
%BB


15,008



13,785



2.4
%B


6,973



7,050



1.3
%CCC


8,392



4,371



0.8
%CC, C, D


4,838



5,312



0.9
%Total Non-Investment Grade


35,211



30,518



5.4
%Total

$
565,753


$
566,901



100.0
%     December 31, 2009Fair Value


% of Total(Dollars in thousands)One year or less

$
29,578



5.2
%More than one year to five years


209,201



36.9
%More than five years to ten years


165,780



29.2
%More than ten years


41,694



7.4
%446,253



78.7
%Mortgage-backed securities


120,648



21.3
%Total fixed maturities

$
566,901



100.0
%    Competition   14




---



##### Table of Contents



Ratings   Regulation  State
    Regulation
  General
       15




---



##### Table of Contents



Statutory
    Accounting Principle (SAP)
      Restrictions
    on Paying Dividends
      Assessments
    and Fees Payable
   16




---



##### Table of Contents



Risk-Based
    Capital (RBC) Requirements
    Restrictions
    on Cancellation, Non-Renewal or Withdrawal
    Federal
    Regulation
  General
    The
    Terrorism Risk Insurance Act (the Act)
       Employees   17




---



##### Table of Contents



ITEM 1A
    Risk
    Factors  Please
    refer to Forward-Looking Statements following the
    Index in the front of this
    Form 10-K.
    Market
    fluctuations, changes in interest rates or a need to generate
    liquidity can have significant and negative effects on our
    investment portfolio.
          We may
    not have access to capital in the future due to an economic
    downturn.
  and/or
 18




---



##### Table of Contents



Our
    ability to recognize future tax benefits on realized and
    unrealized investment losses is limited.
    If we
    expand our operations too rapidly and do not manage that
    expansion effectively, our financial performance and stock price
    could be adversely affected.
          Our
    growth strategy includes expanding into product lines in which
    we have limited experience.
    Because
    we are primarily a transportation insurer, conditions in that
    industry could adversely affect our business.
   19




---



##### Table of Contents



We
    face competition from companies with greater financial
    resources, broader product lines, higher ratings and stronger
    financial performance than us, which may impair our ability to
    retain existing customers, attract new customers and maintain
    our profitability and financial strength.
      If we
    are not able to attract and retain independent agents and
    brokers, our revenues could be negatively
    affected.
    We are
    subject to comprehensive regulation and our ability to earn
    profits may be restricted by these regulations.
     20




---



##### Table of Contents



We
    cannot predict the impact that changing climate conditions,
    including legal, regulatory and social responses thereto, may
    have on our business.
      As a
    holding company, we are dependent on the results of operations
    of our insurance company subsidiaries to meet our obligations
    and pay future dividends.
    We are
    currently rated A (Excellent) by A.M. Best,
    their third highest rating out of 16 rating categories. A
    decline in our rating below A- could adversely
    affect our position in the insurance market, make it more
    difficult to market our insurance products and cause our
    premiums and earnings to decrease.
   21




---



##### Table of Contents



New
    claim and coverage issues are continually emerging in the
    insurance industry and these new issues could negatively impact
    our revenues, our business operations or our
    reputation.
    If our
    claims payments and related expenses exceed our reserves, our
    financial condition and results of operations could be adversely
    affected.
      
    the amount of claims payments;
    the expenses that we incur in resolving claims;
    legislative and judicial developments; and
    changes in economic conditions, including the effect of
    inflation.    We may
    not be successful in reducing our risk and increasing our
    underwriting capacity through reinsurance arrangements, which
    could adversely affect our business, financial condition and
    results of operations.
   22




---



##### Table of Contents



We are
    subject to credit risk with respect to the obligations of our
    reinsurers and certain of our insureds. The inability of our
    risk sharing partners to meet their obligations could adversely
    affect our profitability.
      Our
    inability to retain our senior executives and other key
    personnel could adversely affect our business.
     23




---



##### Table of Contents



Your
    interests as a holder of our common shares may be different than
    the interests of our majority shareholder, Great American
    Insurance Company.
      We may
    have conflicts of interest with our majority shareholder, Great
    American Insurance Company, which we would be unable to resolve
    in our favor.
      Provisions
    in our organizational documents, Ohio corporate law and the
    insurance laws of Ohio and Pennsylvania could impede an attempt
    to replace or remove our management or Directors or prevent or
    delay a merger or sale, which could diminish the value of our
    common shares.
    
    a classified Board of Directors consisting of nine Directors
    divided into two classes;
    the inability of our shareholders to remove a Director from the
    Board without cause;
    requiring a vote of holders of 50% of the common shares to call
    a special meeting of the shareholders;
    requiring a two-thirds vote to amend the shareholder protection
    provisions of our Code of Regulations and to amend the Articles
    of Incorporation;
    requiring the affirmative vote of a majority of the voting power
    of our shares represented at a special meeting of shareholders;
    excluding the voting power of interested shares to approve a
    control share acquisition under Ohio law; and
    prohibiting a merger, consolidation, combination or majority
    share acquisition between us and an interested shareholder or an
    affiliate of an interested shareholder for a period of three
    years from the date on which the shareholder first became an
    interested shareholder, unless previously approved by our Board. 24




---



##### Table of Contents



Future
    sales of our common shares may affect the trading price of our
    common shares.
    Form S-3. Form S-3
  Form S-8 Form S-8
  We
    face ongoing challenges as a result of being a public company
    and our financial results could be adversely
    affected.
     25




---



##### Table of Contents



ITEM 1B
    Unresolved
    Staff Comments    ITEM 2
    Properties      ITEM 3
    Legal
    Proceedings  Please
    refer to Forward-Looking Statements following the
    Index in front of this
    Form 10-K.
        ITEM 4
    [Reserved] 26




---



##### Table of Contents



PART II  ITEM 5
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities  Please refer to Forward-Looking Statements
    following the Index in front of this
    Form 10-K.
  Market
    Information
    2009

2008High

Low

High

LowFirst Quarter

$
19.89


$
12.95


$
33.24


$
21.00Second Quarter


18.19



13.03



25.59



18.26Third Quarter


21.20



14.51



24.98



16.13Fourth Quarter


21.72



16.06



23.90



13.57     Dividend
    Policy
        Equity
    Compensation Plan Information
    Number of SecuritiesAvailable forFuture IssuanceNumber of Securities



Under Equityto be Issued upon

Weighted-Average

Compensation PlansExercise of

Exercise Price of

(Excluding SecuritiesEquity Compensation Plans

Outstanding Options

Outstanding Options

Reflected in Column (a))(a)

(b)

(c)Approved by shareholders


647,050


$
18.08



825,139Not approved by shareholders


none



N/A



none  27




---



##### Table of Contents



Performance
    Graph
    
  Cumulative
    Total Return as of December 31, 2009
    (Assumes a $100 investment at the close of trading on
    January 27, 2005)
  Company/ Index

1/28/05

6/30/05

12/31/05

6/30/06

12/31/06

6/30/07

12/31/07

6/30/08

12/31/08

6/30/09

12/31/09NATL Common Stock

$
100


$
147


$
142


$
202


$
182


$
196


$
249


$
139


$
136


$
117


$
132Nasdaq Insurance Stocks


100



108



117



121



132



138



132



113



123



105



128Nasdaq Index


100



101



109



107



119



128



129



112



62



72



90  28




---



##### Table of Contents



ITEM 6
    Selected
    Financial Data  Form 10-K
  At and for the Year Ended December 31,2009


2008


2007


2006


2005(Dollars in thousands, except per share data)Operating Data:Gross premiums written(1)

$
344,877


$
380,296


$
346,006


$
305,504


$
270,036Net premiums written(2)

$
275,046


$
298,081


$
272,142


$
241,916


$
211,106Premiums earned

$
279,079


$
290,741


$
257,561


$
217,319


$
194,397Net investment income


19,324



22,501



22,141



17,579



12,527Net realized gains (losses) on investments


2,561



(22,394
)


(653
)


1,193



278Other income


3,488



2,868



4,137



2,387



1,974Total revenues


304,452



293,716



283,186



238,478



209,176Losses and loss adjustment expenses


169,755



188,131



149,501



129,491



117,449Commissions and other underwriting expense


57,245



62,130



50,922



42,671



35,741Other operating and general expenses


13,076



12,605



12,140



9,472



8,436Expense on amounts withheld(3)


3,535



4,299



3,708



2,147



992Interest expense


717



833



1,550



1,522



1,421Total expenses


244,328



267,998



217,821



185,303



164,039Income before income taxes


60,124



25,718



65,365



53,175



45,137Provision for income taxes


13,675



15,058



21,763



17,475



14,857Net income

$
46,449


$
10,660


$
43,602


$
35,700


$
30,280Selected GAAP Ratios:Losses and loss adjustment expense ratio(4)


60.8
%


64.7
%


58.0
%


59.6
%


60.4
%Underwriting expense ratio(5)


24.0
%


24.7
%


22.9
%


22.9
%


21.7
%Combined ratio(6)


84.8
%


89.4
%


80.9
%


82.5
%


82.1
%Return on equity(7)


19.1
%


5.0
%


22.6
%


22.8
%


28.5
%Per Share Data:Earnings per common share, basic

$
2.41


$
0.55


$
2.27


$
1.87


$
1.62Earnings per common share, assuming dilution


2.40



0.55



2.25



1.85



1.60Book value per common share,
    basic (at year end)(8)

$
14.06


$
11.20


$
11.08


$
9.07


$
7.32Weighted average number of common shares outstanding, basic


19,301



19,285



19,193



19,136



18,737Weighted average number of common shares outstanding, diluted


19,366



19,366



19,348



19,302



18,975Common shares outstanding (at year end)


19,302



19,295



19,312



19,159



19,055Cash dividends per common share

$
0.28


$
0.24


$
0.20


$
0.16


$
0.08   29




---



##### Table of Contents



At December 31,2009

2008

2007

2006

2005Balance Sheet Data:Cash and investments

$
614,974


$
563,714


$
492,916


$
406,454


$
320,220Securities lending collateral






84,670



139,305



158,928



Reinsurance recoverables


149,949



150,791



98,091



90,070



77,834Total assets


955,753



990,812



898,634



806,248



523,003Unpaid losses and loss adjustment expenses


417,260



400,001



302,088



265,966



223,207Long-term debt


15,000



15,000



15,464



15,464



16,297Total shareholders equity


271,317



216,074



212,806



173,763



139,533   At and for the Year Ended December 31,2009

2008

2007

2006

2005Selected Statutory Data(9):Policyholder surplus(10)

$
238,390


$
190,134


$
182,302


$
148,266


$
122,825Combined ratio(11)


85.8
%


89.0
%


78.3
%


82.4
%


77.1
%     (1)
    
    The sum of premiums written on insurance policies issued by us
    and premiums assumed by us on policies written by other
    insurance companies.(2)
    
    Gross premiums written less premiums ceded to reinsurance
    companies.(3)
    
    We invest funds in the participant loss layer for several of the
    alternative risk transfer programs. We receive investment income
    and incur an equal expense on the amounts owed to alternative
    risk transfer participants. Expense on amounts
    withheld represents investment income that we remit back
    to alternative risk transfer participants. The related
    investment income is included in our Net investment
    income line on our Consolidated Statements of Income.(4)
    
    The ratio of losses and LAE to premiums earned.(5)
    
    The ratio of the net of the sum of commissions and other
    underwriting expenses, other operating and general expenses less
    other income to premiums earned.(6)
    
    The sum of the loss and LAE ratio and the underwriting expense
    ratio.(7)
    
    The ratio of net income to the average of the shareholders
    equity at the beginning and end of the year.(8)
    
    Book value per common share is computed using only unrestricted
    outstanding common shares. As of December 31, 2009 and 2008
    total unrestricted common shares were 19,302,000 and 19,295,000,
    respectively. There were no unvested restricted shares prior to
    2007.(9)
    
    While financial data is reported in accordance with GAAP for
    shareholder and other investment purposes, it is reported on a
    statutory basis for insurance regulatory purposes. Certain
    statutory expenses differ from amounts reported under GAAP.
    Specifically, under GAAP, premium taxes and other variable costs
    incurred in connection with writing new and renewal business are
    capitalized and amortized on a pro rata basis over the period in
    which the related premiums are earned. On a statutory basis,
    these items are expensed as incurred. In addition, certain other
    expenses, such as those related to the expensing or amortization
    of computer software, are accounted for differently for
    statutory purposes than the treatment accorded under GAAP.(10)
    
    The statutory policyholder surplus of NIIC, which includes the
    statutory policyholder surplus of its subsidiaries, NIIC-HI and
    TCC.(11)
    
    Statutory combined ratio of NIIC represents the sum of the
    following ratios: (1) losses and LAE incurred as a
    percentage of net earned premium and (2) underwriting
    expenses incurred as a percentage of net written premiums. 30




---



##### Table of Contents



ITEM 7
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Please refer to Forward-Looking Statements
    following the Index in front of this
    Form 10-K.
  The following discussion and analysis of our historical
    consolidated financial statements should be read in conjunction
    with our audited consolidated financial statements and the
    related notes included elsewhere in this
    Form 10-K.
  Overview
        start-up
    Submissions
  
    The increase or decrease in the number of new applications we
    receive. This is influenced by the effectiveness of our
    marketing activities compared to the marketing activities of our
    competitors in each market.
    The change in the number of current policyholders that are
    available for a renewal quote. The number of policyholders
    available for renewal changes based upon the economic conditions
    impacting our customer groups and the extent of consolidation
    that may be taking place within the industries we support. 31




---



##### Table of Contents



Quotes
  
    The change in the percentage of the new applications received
    that do not receive a quote from us. We do not quote risks that
    do not meet our risk selection criteria or for which we have not
    been provided complete application data. We refer to this ratio
    as the declination ratio and an increasing
    declination ratio usually results in reduced opportunities to
    write new business.  Sales
  
    The change in percentage of the quotes we issue that are
    actually sold. We refer to this ratio as the hit
    ratio. Hit ratios are affected by the number of
    competitors, the prices quoted by these competitors and the
    degree of difference between the competitors pricing,
    terms and conditions and ours.  Rates
  
    The change in our rate structure from period to period. The
    rates we file and quote are impacted by several factors
    including: the cost and extent of the reinsurance we purchase;
    our operating efficiencies; our average loss costs, which
    reflect the effectiveness of our underwriting; our underwriting
    profit expectations; and our claims adjusting processes. The
    difference between our rates and the rates of our competitors is
    the primary factor impacting the revenue growth of our
    established product lines.  Product
    Offerings and Distribution
  
    We operate in multiple markets with multiple distribution
    approaches to attempt to reduce the probability that an adverse
    competitive response in any single market will have a
    significant impact on our overall business. We also attempt to
    maintain several new products, product line extensions or
    product distribution approaches in active development status so
    we are able to take advantage of market opportunities. We select
    from potential new product ideas based on our stated new
    business criteria and the anticipated competitive response.  Industry
    and Trends
      
    Our business model and bottom line orientation have resulted in
    disciplined and consistent risk assessment and pricing adequacy.
    Our ability to attract and retain some of the best
    transportation companies in the industries we serve and insure
    them directly or through our captive programs.
    Our stable operating expenses which have historically been at or
    below the revenue growth rate. 32




---



##### Table of Contents



other-than-temporary
          Revenues
     33




---



##### Table of Contents



Expenses
       34




---



##### Table of Contents



Results
    of Operations
  Overview
    Year Ended December 31,2009


2008


2007Amount


Per Share


Amount


Per Share


Amount


Per Share(Dollars in thousands, except per share data)Net income from operations

$
38,050


$
1.96


$
32,761


$
1.69


$
44,027


$
2.27Change in valuation allowance related to net capital losses


6,735



0.35



(7,545
)


(0.39
)






After-tax net realized gains (losses) from investments


1,664



0.09



(14,556
)


(0.75
)


(425
)


(0.02
)Net income

$
46,449


$
2.40


$
10,660


$
0.55


$
43,602


$
2.25       other-than-temporary
 35




---



##### Table of Contents



Gross
    Premiums Written
    Year Ended December 31,2009


2008


2007Amount


Percent


Amount


Percent


Amount


Percent(Dollars in thousands)Alternative Risk Transfer

$
192,953



55.9
%

$
206,342



54.3
%

$
167,717



48.5
%Transportation


66,537



19.3
%


87,246



22.9
%


90,984



26.3
%Specialty Personal Lines


61,523



17.8
%


59,065



15.5
%


55,169



15.9
%Hawaii and Alaska


18,576



5.5
%


22,489



5.9
%


25,126



7.3
%Other


5,288



1.5
%


5,154



1.4
%


7,010



2.0
%Gross premiums written

$
344,877



100.0
%

$
380,296



100.0
%

$
346,006



100.0
%          36




---



##### Table of Contents



Premiums
    Earned
  2009 compared to 2008.
  Year Ended December 31,


Change2009


2008


Amount


Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer

$
141,525


$
137,298


$
4,227



3.1
%Transportation


60,344



75,495



(15,151
)


(20.1
%)Specialty Personal Lines


56,385



54,862



1,523



2.8
%Hawaii and Alaska


15,272



17,591



(2,319
)


(13.2
%)Other


5,553



5,495



58



1.1
%Total premiums earned

$
279,079


$
290,741


$
(11,662
)


(4.0
%)     2008 compared to 2007.
  Year Ended December 31,


Change2008


2007


Amount


Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer

$
137,298


$
107,303


$
29,995



28.0
%Transportation


75,495



74,112



1,383



1.9
%Specialty Personal Lines


54,862



51,852



3,010



5.8
%Hawaii and Alaska


17,591



17,625



(34
)


(0.2
%)Other


5,495



6,669



(1,174
)


(17.6
%)Total premiums earned

$
290,741


$
257,561


$
33,180



12.9
%    37




---



##### Table of Contents



Underwriting
    and Loss Ratio Analysis
        Year Ended December 31,2009


2008


2007(Dollars in thousands)Gross premiums written

$
344,877


$
380,296


$
346,006Ceded reinsurance


(69,831
)


(82,215
)


(73,864
)Net premiums written


275,046



298,081



272,142Change in unearned premiums, net of ceded


4,033



(7,340
)


(14,581
)Net premiums earned

$
279,079


$
290,741


$
257,561Combined Ratios:Loss and LAE ratio(1)


60.8
%


64.7
%


58.0
%Underwriting expense ratio(2)


24.0
%


24.7
%


22.9
%Combined ratio


84.8
%


89.4
%


80.9
%     (1)
    
    The ratio of losses and LAE to premiums earned.(2)
    
    The ratio of the sum of commissions and other underwriting
    expenses, other operating expenses less other income to premiums
    earned.  2009 compared to 2008.
     38




---



##### Table of Contents



2008 compared to 2007.
      Net
    Investment Income
  2009 compared to 2008.
  2008 compared to 2007.
  Net
    Realized Gains (Losses) on Investments
  2009 compared to 2008. other-than-temporary other-than-temporary
  2008 compared to 2007.
 39




---



##### Table of Contents



other-than-temporary
  Other
    Income
  2009 compared to 2008.
  2008 compared to 2007.
  Commissions
    and Other Underwriting Expenses
  2009 compared to 2008.
  2008 compared to 2007.
  Other
    Operating and General Expenses
  2009 compared to 2008.
  2008 compared to 2007.
  Expense
    on Amounts Withheld
  2009 compared to 2008.
  2008 compared to 2007.
 40




---



##### Table of Contents



Income
    Taxes
  2009 compared to 2008.
  2008 compared to 2007.
    Financial
    Condition
  Investments
    and Securities Lending Collateral
         41




---



##### Table of Contents



Securities with

Securities withUnrealized

UnrealizedGains

Losses(Dollars in thousands)Fixed Maturities:Fair value of securities

$
368,831


$
197,850Amortized cost of securities


357,881



207,652Gross unrealized gain or (loss)

$
10,950


$
(9,802
)Fair value as a % of amortized cost


103.1
%


95.3
%Number of security positions held


369



168Number individually exceeding $50,000 gain or (loss)


75



30Concentration of gains or losses by type or industry:US Government and government agencies

$
1,736


$
(349
)State, municipalities and political subdivisions


5,436



(1,612
)Residential mortgage-backed securities


2,224



(4,478
)Commercial mortgage-backed securities






(547
)Banks, insurance and brokers


891



(2,429
)Industrial and other


663



(387
)Percentage rated investment grade(1)


97.3
%


89.7
%Equity Securities:Fair value of securities

$
15,037


$
94Cost of securities


12,558



103Gross unrealized gain or (loss)

$
2,479


$
(9
)Fair value as a % of cost


119.7
%


91.3
%Number individually exceeding $50,000 gain or (loss)


7



     (1)
    
    Investment grade of AAA to BBB- by Standard &
    Poors Corporation.    Securities with


Securities withUnrealized


UnrealizedGains


LossesMaturity:One year or less


5.3
%


5.0
%After one year through five years


39.4
%


32.2
%After five years through ten years


29.7
%


28.5
%After ten years


5.8
%


10.2
%80.2
%


75.9
%Mortgage-backed securities


19.8
%


24.1
%100.0
%


100.0
%  42




---



##### Table of Contents



At December 31, 2009Aggregate


Aggregate


Fair ValueFair


Unrealized


as % ofValue


Gain (Loss)


Cost Basis(Dollars in thousands)Fixed Maturities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (56 issues)

$
84,043


$
4,375



105.5
%More than one year (19 issues)


25,108



1,627



106.9
%Less than $50,000 (294 issues)


259,680



4,948



101.9
%$
368,831


$
10,950Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (3 issues)

$
9,749


$
(316
)


96.9
%More than one year (27 issues)


30,016



(8,373
)


78.2
%Less than $50,000 (138 issues)


158,085



(1,113
)


99.3
%$
197,850


$
(9,802
)Equity Securities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (7 issues)

$
13,130


$
2,283



121.0
%More than one year (0 issues)










0.0
%Less than $50,000 (18 issues)


1,907



196



111.5
%$
15,037


$
2,479Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (0 issues)

$



$




0.0
%More than one year (0 issues)










0.0
%Less than $50,000 (1 issue)


94



(9
)


91.3
%$
94


$
(9
)   other-than-temporary, other-than-temporary Other-Than-Temporary
 43




---



##### Table of Contents



other-than-temporary
  Net Realized



Net RealizedGains (Losses)

Charges for

Gains (Losses)on Sales

Impairment

on Investments(Dollars in thousands)Year ended:2009

$
6,449


$
(3,888
)

$
2,5612008


(2,230
)


(20,164
)


(22,394
)2007


321



(974
)


(653
)   Fair
    Value Measurements
           44




---



##### Table of Contents



Liquidity
    and Capital Resources
  Capital Ratios.
  Sources of Funds.
       45




---



##### Table of Contents



debt-to-capital
  12-month
  Off-Balance Sheet Items.
 46




---



##### Table of Contents



Contractual Obligations.
  Payment Due by PeriodWithin 1








More thanTotal


Year


2-3 Years


4-5 Years


5 Years(Dollars in thousands)Gross unpaid losses and LAE(1)

$
417,260


$
170,404


$
155,344


$
59,066


$
32,446Long term debt obligations


15,000







15,000







Operating lease obligations


822



307



412



103



Total

$
433,082


$
170,711


$
170,756


$
59,169


$
32,446     (1)
    
    Dollar amounts and time periods are estimates based on
    historical net payment patterns applied to the gross reserves
    and do not represent actual contractual obligations. Actual
    payments and their timing could differ significantly from these
    estimates, and the estimates provided do not reflect potential
    recoveries under reinsurance treaties.  Critical
    Accounting Policies
  other-than-temporary
  Loss
    and Loss Adjustment Expenses Reserves
      
    the Case Incurred Development Method;
    the Paid Development Method;
    the Bornhuetter-Ferguson Method; and
    the Incremental Paid LAE to Paid Loss Methods. 47




---



##### Table of Contents




    open and closed claim counts;
    average case reserves and average incurred on open claims;
    closure rates and statistics related to closed and open claim
    percentages;
    average closed claim severity;
    ultimate claim severity;
    reported loss ratios;
    projected ultimate loss ratios; and
    loss payment patterns.    CumulativeLine of Business

ImpactCommercial Auto Liability

$
2.0 millionWorkers Compensation

$
0.6 million     5-yr. Average

Net Reserves

Effect on NetDevelopment (*)

December 31, 2009

Earnings(1.8
)%

$
276.4 million


$
4.9 million     (*)
    
    Net of tax effect. 48




---



##### Table of Contents



Commercial Auto Liability.
    
    litigious climate;
    unpredictability of judicial decisions regarding coverage issues;
    magnitude of jury awards;
    outside counsel costs; and
    frequency and timing of claims reporting.    Workers Compensation.
  
    legislative actions and regulatory interpretations;
    future medical cost inflation; and
    timing of claims reporting.       49




---



##### Table of Contents



50




---



##### Table of Contents



At December 31, 2009Statutory Lines of Business:

Case


IBNR


LAE


Total(Dollars in thousands)Commercial auto liability

$
99,975


$
142,699


$
40,547


$
283,221Workers compensation


22,973



52,505



10,300



85,778Auto physical damage


7,341



9,619



2,301



19,261General liability


3,831



8,005



3,687



15,523Inland marine


1,089



5,148



636



6,873Private passenger


2,389



1,407



971



4,767Commercial multiple peril


783



291



247



1,321Other lines


76



376



64



516$
138,457


$
220,050


$
58,753


$
417,260   Reinsurance Recoverables.
  Other-Than-Temporary
    Impairment
  case-by-case
  
    the length of time and the extent to which the market value has
    been below amortized cost;
    whether the issuer is experiencing significant financial
    difficulties;
    economic stability of an entire industry sector or subsection;
    whether the issuer, series of issuers or industry has a
    catastrophic type of loss;
    the extent to which the unrealized loss is credit-driven or a
    result of changes in market interest rates;
    historical operating, balance sheet and cash flow data;
    internally and externally generated financial models and
    forecasts;
    our ability and intent to hold the investment for a period of
    time sufficient to allow for any anticipated recovery in market
    value; and
    other subjective factors, including concentrations and
    information obtained from regulators and rating agencies. 51




---



##### Table of Contents



other-than-temporary other-than-temporary other-than-temporary
  other-than-temporary other-than-temporary other-than-temporary other-than-temporary other-than-temporary other-than-temporary other-than-temporary other-than-temporary other-than-temporary other-than-temporary
 52




---



##### Table of Contents



ITEM 7A
    Quantitative
    and Qualitative Disclosures About Market Risk          December 31, 2009


December 31, 2008Principal





PrincipalCash Flows


Rate


Cash Flows


Rate(Dollars in thousands)Subsequent calendar year

$
149,602



3.8
%

$
194,172



4.7
%2nd Subsequent calendar year


52,332



4.3
%


64,532



5.0
%3rd Subsequent calendar year


48,983



4.4
%


27,441



5.0
%4th Subsequent calendar year


49,124



4.4
%


20,948



5.1
%5th Subsequent calendar year


77,296



4.2
%


26,804



5.1
%Thereafter


183,325



4.3
%


121,973



5.2
%Total

$
560,662



4.2
%

$
455,870



4.9
%Fair value

$
566,901






$
459,237   Equity Risk.
 53




---



##### Table of Contents



ITEM 8
    Financial
    Statements and Supplementary Data  PageIndex to Financial StatementsManagements Report on Internal Control Over
    Financial Reporting


55Reports of Independent Registered Public
    Accounting Firm


56Consolidated Balance Sheets:December 31, 2009 and 2008


58Consolidated Statements of Income:Years ended December 31, 2009, 2008 and 2007


59Consolidated Statements of Shareholders
    Equity:Years ended December 31, 2009, 2008 and 2007


60Consolidated Statements of Cash Flows:Years ended December 31, 2009, 2008 and 2007


61Notes to Consolidated Financial Statements


62     54




---



##### Table of Contents



MANAGEMENTS
    REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING    
    Pertain to the maintenance of records that in reasonable detail
    accurately and fairly reflect the transactions and dispositions
    of the assets of the Company;
    Provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with generally accepted accounting principles and
    that receipts and expenditures of the Company are being made
    only in accordance with authorizations of management and
    directors of the Company; and
    Provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of the
    Companys assets that could have a material effect on the
    financial statements.  Internal Control 
    Integrated Framework,
    /s/  David
    W.
    MichelsonDavid
    W. Michelson

/s/  Julie
    A.
    McGrawJulie
    A. McGrawPresident and Chief Executive Officer

Vice President and Chief Financial Officer  55




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    ON INTERNAL CONTROL OVER FINANCIAL REPORTING     Internal Control  Integrated Framework
            
    56




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
           other-than-temporary other-than-temporary
  Internal Control 
    Integrated Framework
  
    57




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
  December 31,2009


2008(In thousands, except per share data)ASSETSInvestments:Fixed maturities
    available-for-sale,
    at fair value (amortized cost  $565,753 and $462,562,
    respectively)

$
566,901


$
459,237Equity securities
    available-for-sale,
    at fair value (cost  $26,203 and $30,143,
    respectively)


28,673



27,233Short-term investments, at cost which approximates fair value


811



85Total investments


596,385



486,555Cash and cash equivalents


18,589



77,159Securities lending collateral (cost  $0 and $94,655,
    respectively)






84,670Accrued investment income


4,926



5,161Premiums receivable, net of allowance for doubtful accounts of
    $963 and $587, respectively


98,679



95,610Reinsurance recoverables on paid and unpaid losses


149,949



150,791Prepaid reinsurance premiums


25,163



28,404Deferred policy acquisition costs


17,833



19,245Deferred federal income taxes


18,178



18,324Property and equipment, net


21,747



20,406Funds held by reinsurer


3,441



3,073Prepaid expenses and other assets


863



1,414Total assets

$
955,753


$
990,812LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses

$
417,260


$
400,001Unearned premiums and service fees


149,509



156,598Long-term debt


15,000



15,000Amounts withheld or retained for account of others


51,359



48,357Reinsurance balances payable


10,540



10,267Securities lending obligation






95,828Accounts payable and other liabilities


29,371



35,813Commissions payable


8,164



9,274Assessments and fees payable


3,233



3,600Total liabilities


684,436



774,738Shareholders equity:Preferred shares  no par valueAuthorized  10,000 sharesIssued  0 shares






Common shares  $0.01 par valueAuthorized  50,000 sharesIssued  23,350 shares, including 4,048 and
    4,055 shares, respectively, in treasury


234



234Additional paid-in capital


49,264



48,004Retained earnings


225,195



184,187Accumulated other comprehensive income (loss)


2,353



(10,613
)Treasury shares


(5,729
)


(5,738
)Total shareholders equity


271,317



216,074Total liabilities and shareholders equity

$
955,753


$
990,812    58




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME
  Year Ended December 31,2009


2008


2007(In thousands, except per share data)Revenues:Premiums earned

$
279,079


$
290,741


$
257,561Net investment income


19,324



22,501



22,141Net realized gains (losses) on investments(*)


2,561



(22,394
)


(653
)Other


3,488



2,868



4,137Total revenues


304,452



293,716



283,186Expenses:Losses and loss adjustment expenses


169,755



188,131



149,501Commissions and other underwriting expenses


57,245



62,130



50,922Other operating and general expenses


13,076



12,605



12,140Expense on amounts withheld


3,535



4,299



3,708Interest expense


717



833



1,550Total expenses


244,328



267,998



217,821Income before income taxes


60,124



25,718



65,365Provision for income taxes


13,675



15,058



21,763Net income

$
46,449


$
10,660


$
43,602Net income per common share  basic

$
2.41


$
0.55


$
2.27Net income per common share  diluted

$
2.40


$
0.55


$
2.25Weighted average of common shares outstanding  basic


19,301



19,285



19,193Weighted average of common shares outstanding  diluted


19,366



19,366



19,348Cash dividends per common share

$
0.28


$
0.24


$
0.20(*) Consists of the following:Realized gains (losses) before impairment losses

$
6,448


$
(2,230
)

$
321Total losses on securities with impairment charges


(6,955
)


(20,164
)


(974
)Non-credit portion in other comprehensive income


3,068







Net impairment charges recognized in earnings


(3,887
)


(20,164
)


(974
)Net realized gains (losses) on investments

$
2,561


$
(22,394
)

$
(653
)    59




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS
    EQUITY
  AccumulatedOtherAdditional





ComprehensiveCommon


Paid-In


Retained


Income


TreasuryStock


Capital


Earnings


(Loss)


Stock


Total(Dollars in thousands)Balance at January 1, 2007

$
234


$
43,921


$
138,450


$
(2,915
)

$
(5,927
)

$
173,763Net income










43,602











43,602Unrealized depreciation of investment securities, no related tax
    benefit














(2,406
)






(2,406
)Comprehensive income






















41,196Dividends on common stock










(3,862
)










(3,862
)Issuance of 46,009 treasury shares upon exercise of options and
    stock award grants






392











64



456Tax benefit realized from exercise of stock options






218















218Stock compensation expense






1,035















1,035Balance at December 31, 2007


234



45,566



178,190



(5,321
)


(5,863
)


212,806Net income










10,660











10,660Unrealized depreciation of investment securities, net of tax
    benefit of $4.0 million














(5,292
)






(5,292
)Comprehensive income






















5,368Dividends on common stock










(4,663
)










(4,663
)Issuance of 90,035 treasury shares upon exercise of options and
    restricted stock issued, net of forfeitures






713











125



838Tax benefit realized from exercise of stock options






396















396Stock compensation expense






1,329















1,329Balance at December 31, 2008


234



48,004



184,187



(10,613
)


(5,738
)


216,074Net income










46,449











46,449Unrealized appreciation of investment securities, net of tax
    expense of $6.9 million














12,966







12,966Comprehensive income






















59,415Dividends on common stock










(5,441
)










(5,441
)Issuance of 6,517 treasury shares from restricted stock issued,
    net of forfeitures






(49
)










9



(40
)Stock compensation expense






1,309















1,309Balance at December 31, 2009

$
234


$
49,264


$
225,195


$
2,353


$
(5,729
)

$
271,317    60




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
  Year Ended December 31,2009


2008


2007(Dollars in thousands)Operating activitiesNet income

$
46,449


$
10,660


$
43,602Adjustments to reconcile net income to net cash provided by
    operating activities:Net amortization of bond premiums and discounts


2,713



1,673



382Provision for depreciation and amortization


1,841



1,470



1,266Net realized (gains) losses on investment securities


(2,561
)


22,394



653Deferred federal income taxes


(6,727
)


(2,294
)


(1,262
)Stock compensation expense


1,309



1,329



1,035Decrease (increase) in deferred policy acquisition costs, net


1,412



(1,667
)


(2,543
)Increase in reserves for losses and loss adjustment expenses


17,259



97,913



36,122Increase in premiums receivable


(3,069
)


(10,902
)


(7,632
)(Decrease) increase in unearned premiums and service fees


(7,089
)


11,302



17,573Decrease (increase) in interest receivable and other assets


418



539



(2,210
)Decrease (increase) in prepaid reinsurance premiums


3,241



(4,079
)


(3,053
)(Decrease) increase in accounts payable, commissions and other
    liabilities and assessments and fees payable


(7,919
)


13,358



5,966Increase in amounts withheld or retained for account of others


3,002



9,618



10,854Decrease (increase) in reinsurance recoverable


842



(52,700
)


(8,021
)Increase in reinsurance balances payable


273



2,671



440Other


(45
)


23



(3
)Net cash provided by operating activities


51,349



101,308



93,169Investing activitiesPurchases of fixed maturities


(401,140
)


(412,313
)


(199,918
)Purchases of equity securities


(4,772
)


(3,386
)


(45,460
)Proceeds from sale of fixed maturities


67,558



2,234



Proceeds from sale of equity securities


11,653



11,948



21,921Proceeds from maturities and redemptions of investments


271,914



340,561



156,466Capital expenditures


(3,137
)


(2,369
)


(2,087
)Net cash used in investing activities


(57,924
)


(63,325
)


(69,078
)Financing activitiesDecrease in securities lending collateral


49,314



45,488



17,612Decrease in securities lending obligation


(95,828
)


(45,488
)


(17,612
)Additional long-term borrowings






15,000



Reductions of long-term debt






(15,464
)


Tax benefit realized from exercise of stock options






396



218Issuance of common shares from treasury upon exercise of stock
    options or stock award grants


(40
)


838



456Cash dividends paid on common shares


(5,441
)


(4,663
)


(3,862
)Net cash used in financing activities


(51,995
)


(3,893
)


(3,188
)Net (decrease) increase in cash and cash equivalents


(58,570
)


34,090



20,903Cash and cash equivalents at beginning of year


77,159



43,069



22,166Cash and cash equivalents at end of year

$
18,589


$
77,159


$
43,069    61




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  1.
    Background,
    Basis of Presentation and Principals of Consolidation          Basis of
    Presentation
      Principles
    of Consolidation
    Use of
    Estimates
   62




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   2.
    Significant
    Accounting Policies  Cash
    Equivalents
    Premium,
    Commissions and Service Fee Recognition
    Investments
    other-than-temporary,
  other-than-temporary other-than-temporary other-than-temporary
  Deferred
    Policy Acquisition Costs
   63




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Property
    and Equipment
    Unpaid
    Losses and Loss Adjustment Expenses (LAE)
    Assessments
    Premiums
    Receivable
    Reinsurance
    Segment
    Information
    Federal
    Income Taxes
   64




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Comprehensive
    Income
  available-for-sale
  Earnings
    Per Common Share
    Stock-Based
    Compensation
    Recent
    Accounting Pronouncements
  No. 2010-06, Improving Disclosures about Fair Value Measurements 2010-06). Fair Value Measurements and
    Disclosures 2010-06 2010-06 2010-06
  Consolidation,
  3.
    Securities
    Lending Program     65




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Other-than-temporary
  other-than-temporary other-than-temporary
  December 31, 2008(Dollars in thousands)Collateral obligation

$
95,828Pretax unrealized loss on fair value of collateral held


(9,985
)Other than temporary impairment charge


(1,173
)Fair value of collateral held


84,670Fair value of securities lent plus accrued interest


94,265   4.
    Fair
    Value Measurements         66




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Level 1


Level 2


Level 3


Total(Dollars in thousands)Fixed maturities:U.S. government and government agency obligations

$



$
212,538


$



$
212,538State and local government obligations






148,594



6,369



154,963Residential mortgage-backed securities






114,329



2,384



116,713Commercial mortgage-backed securities






3,935







3,935Corporate obligations






61,582



5,842



67,424Redeemable preferred stocks


8,297



678



2,353



11,328Total fixed maturities


8,297



541,656



16,948



566,901Equity securities:Perpetual preferred stock


857



167



396



1,420Common stock


14,270



12,983







27,253Total equity securities


15,127



13,150



396



28,673Short-term investments






811







811Total investments


23,424



555,617



17,344



596,385Cash and cash equivalents


18,589











18,589Total investments and cash and cash equivalents

$
42,013


$
555,617


$
17,344


$
614,974  67




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Level 1


Level 2


Level 3


Total(Dollars in thousands)Fixed maturities:U.S. Government and government agency obligations

$



$
202,277


$



$
202,277State and local government obligations






118,961



6,118



125,079Residential mortgage-backed securities






78,568







78,568Corporate obligations






37,719



4,295



42,014Redeemable preferred stocks


8,312



581



2,406



11,299Total fixed maturities


8,312



438,106



12,819



459,237Equity securities:Perpetual preferred stock


2,134



341



3,265



5,740Common stock


12,433



9,060







21,493Total equity securities


14,567



9,401



3,265



27,233Short-term investments






85







85Total investments


22,879



447,592



16,084



486,555Cash and cash equivalents


77,159











77,159Total investments and cash and cash equivalents

$
100,038


$
447,592


$
16,084


$
563,714Securities lending:Cash and cash equivalents

$
41,968


$
391


$



$
42,359Residential mortgage-backed securities






12,518



2,552



15,070Commercial mortgage-backed securities






3,531







3,531Corporate obligations






21,216



2,494



23,710Total securities lending

$
41,968


$
37,656


$
5,046


$
84,670  68




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31, 2009State and Local


Residential


Redeemable


Perpetual


SecuritiesCorporate


Government


Mortgage-Backed


Preferred


Preferred


LendingObligations


Obligations


Securities


Stock


Stock


Collateral(Dollars in thousands)Beginning balance at January 1, 2009

$
4,295


$
6,118


$



$
2,406


$
3,265


$
5,046Total gains or (losses):Included in earnings


65







(1,781
)






(170
)


(421
)Included in other comprehensive income


(18
)


251



2,074



(53
)


1,551



546Purchases and (settlements)(1)


(640
)






(453
)






(4,250
)


(487
)Transfers in and/or (out) of Level 3(2)


2,140







2,544











(4,684
)Ending balance at December 31, 2009

$
5,842


$
6,369


$
2,384


$
2,353


$
396


$
The amount of total gains or (losses) for the year included in
    earnings attributable to the change in unrealized gains or
    (losses) relating to assets still held at the reporting date

$
65


$



$
(1,781
)

$



$
(170
)

$
(421
)     (1)
    
    These amounts are attributable to either purchases of securities
    or principal pay downs, conversions or maturities during the
    year ended December 31, 2009.(2)
    
    Transfers in and/or (out) of Level 3 relate to the
    termination of the securities lending program and moving
    longer-term assets into the investment portfolio during the year
    ended December 31, 2009.    Year Ended December 31, 2008State and Local





Perpetual


SecuritiesCorporate


Government


Redeemable


Preferred


LendingObligations


Obligations


Preferred Stock


Stock


Collateral(Dollars in thousands)Beginning balance at January 1, 2008

$
1,388


$



$
2,592


$
1,220


$
4,675Total gains or (losses):Included in earnings


(64
)










(565
)


(1,143
)Included in other comprehensive income


46



(986
)


(186
)


(1,940
)


321Purchases, issuances and settlements(1)






(175
)










(1,359
)Transfers into Level 3(2)


2,925



7,279







4,550



2,552Ending balance at December 31, 2008

$
4,295


$
6,118


$
2,406


$
3,265


$
5,046The amount of total gains or losses for the year included in
    earnings attributable to the change in unrealized gains or
    losses relating to assets still held at the reporting date

$
(64
)

$



$



$
(565
)

$
(1,143
)     (1)
    
    The settlement is attributable to securities, which experienced
    either a principal pay down or a call on principal during the
    year ended December 31, 2008.(2)
    
    Transfers into Level 3 during the year ended
    December 31, 2008 are attributable to a change in the
    availability of market observable information for securities
    within the respective category. 69




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   5.
    Investments    Cost or


Gross


GrossAmortized


Unrealized


UnrealizedCost


Gains


Losses


Fair Value(Dollars in thousands)December 31, 2009(1):Fixed maturities:U.S. Government and government agency obligations

$
211,151


$
1,736


$
(349
)

$
212,538State and local government obligations


151,139



5,436



(1,612
)


154,963Residential mortgage-backed securities


118,967



2,224



(4,478
)


116,713Commercial mortgage-backed securities


4,482







(547
)


3,935Corporate obligations


67,588



1,465



(1,629
)


67,424Redeemable preferred stock


12,426



89



(1,187
)


11,328Total fixed maturities


565,753



10,950



(9,802
)


566,901Equity securities:Perpetual preferred stocks


1,320



109



(9
)


1,420Common stocks


24,883



2,370







27,253Total equity securities


26,203



2,479



(9
)


28,673Short-term investments


811











811Total investments

$
592,767


$
13,429


$
(9,811
)

$
596,385December 31, 2008:Fixed maturities:U.S. Government and government agency obligations

$
199,207


$
3,120


$
(50
)

$
202,277State and local government obligations


125,312



2,172



(2,405
)


125,079Residential mortgage-backed securities


77,170



1,425



(27
)


78,568Corporate obligations


46,942



188



(5,116
)


42,014Redeemable preferred stock


13,931



49



(2,681
)


11,299Total fixed maturities


462,562



6,954



(10,279
)


459,237Equity securities:Perpetual preferred stocks


8,650



2



(2,912
)


5,740Common stocks


21,493











21,493Total equity securities


30,143



2



(2,912
)


27,233Short-term investments


85











85Total investments

$
492,790


$
6,956


$
(13,191
)

$
486,555Securities lending:Cash and cash equivalents

$
42,359


$



$



$
42,359Residential mortgage-backed securities


23,108







(8,038
)


15,070Commercial mortgage-backed securities


4,695







(1,164
)


3,531Corporate obligations


24,493



3



(786
)


23,710Total securities lending

$
94,655


$
3


$
(9,988
)

$
84,670     (1)
    
    As of December 31, 2009, the Company held no securities
    lending collateral, therefore no breakout is included.   70




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Amortized


FairCost


Value(Dollars in thousands)Due in one year or less

$
28,990


$
29,578Due after one year through five years


206,704



209,201Due after five years through ten years


162,816



165,780Due after ten years


43,794



41,694442,304



446,253Mortgage-backed securities


123,449



120,648Total

$
565,753


$
566,901   other-than-temporary
  Year Ended December 31,2009


2008


2007(Dollars in thousands)Fixed maturity gains

$
2,870


$
463


$
184Fixed maturity losses


(3,803
)


(4,197
)


(449
)Equity security gains


5,841



694



1,066Equity security losses


(1,924
)


(18,181
)


(1,454
)Securities lending fixed maturity losses


(423
)


(1,173
)


Net realized gains (losses) on investments

$
2,561


$
(22,394
)

$
(653
)   other-than-temporary other-than-temporary other-than-temporary other-than-temporary other-than-temporary other-than-temporary
 71




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Less than Twelve Months


Twelve Months or MoreFair











FairFair


Unrealized


Value as


Number of


Fair


Unrealized


Value as


Number ofValue


Losses


% of Cost


Holdings


Value


Losses


% of Cost


Holdings(Dollars in thousands)December 31, 2009(1):Fixed maturities:U.S. Government and government agency obligations

$
84,971


$
(349
)


99.6
%


46


$



$








State and local government obligations


14,279



(122
)


99.2
%


13



6,725



(1,490
)


81.9
%


6Residential mortgage-backed securities


35,434



(210
)


99.4
%


20



8,426



(4,268
)


66.4
%


7Commercial mortgage-backed securities


















3,934



(547
)


87.8
%


2Corporate obligations


23,189



(459
)


98.1
%


45



12,150



(1,170
)


91.2
%


9Redeemable preferred stocks


















8,742



(1,187
)


88.0
%


20Total fixed maturities


157,873



(1,140
)


99.3
%


124



39,977



(8,662
)


82.2
%


44Equity securities:Perpetual preferred stocks


















94



(9
)


91.3
%


1Total equity securities


















94



(9
)


91.3
%


1Total fixed maturities and equity securities

$
157,873


$
(1,140
)


99.3
%


124


$
40,071


$
(8,671
)


82.2
%


45December 31, 2008:Fixed maturities:U.S. Government and governmentagency obligations

$
4,305


$
(36
)


99.1
%


5


$
2,985


$
(14
)


99.5
%


1State and local government obligations


24,990



(2,109
)


92.2
%


28



7,947



(296
)


96.4
%


7Residential mortgage-backed securities


2,424



(16
)


99.3
%


2



680



(11
)


98.4
%


1Corporate obligations


14,746



(513
)


96.6
%


21



16,124



(4,603
)


77.8
%


20Redeemable preferred stocks


2,113



(12
)


99.4
%


2



8,170



(2,669
)


75.4
%


27Total fixed maturities


48,578



(2,686
)


94.8
%


58



35,906



(7,593
)


82.5
%


56Equity securities:Perpetual preferred stocks


3,368



(2,625
)


56.2
%


4



1,485



(287
)


83.8
%


9Total equity securities


3,368



(2,625
)


56.2
%


4



1,485



(287
)


83.8
%


9Total fixed maturities and equity securities

$
51,946


$
(5,311
)


90.7
%


62


$
37,391


$
(7,880
)


82.6
%


65Securities lending:Residential mortgage-backed securities

$



$











$
15,070


$
(8,038
)


65.2
%


7Commercial mortgage-backed securities


















3,531



(1,164
)


75.2
%


2Corporate obligations


















16,213



(786
)


95.4
%


5Total securities lending

$



$











$
34,814


$
(9,988
)


77.7
%


14     (1)
    
    As of December 31, 2009, the Company held no securities
    lending collateral, therefore no breakout is included.   72




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  other-than-temporary
  other-than-temporary other-than-temporary
    other-than-temporary other-than-temporarily other-than-temporarily
 73




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  other-than-temporary
  Beginning balance at January 1, 2009

$
Additional credit impairment on:Previously impaired securities


Securities without prior impairments


1,910Reductions


Ending balance at December 31, 2009

$
1,910     Year Ended December 31,2009


2008


2007(Dollars in thousands)Investment income:Fixed maturities

$
18,730


$
19,545


$
17,275Equity securities


627



1,313



1,490Short-term investments and cash equivalents


85



1,755



3,478Total investment income


19,442



22,613



22,243Investment expense


(118
)


(112
)


(102
)Net investment income

$
19,324


$
22,501


$
22,141     6.
    Long-term
    Debt         74




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      7.
    Income
    Taxes    Year Ended December 31,2009


2008


2007(Dollars in thousands)Current federal income tax provision

$
18,729


$
17,392


$
22,993Current state income tax provision


1,683



45



41Deferred federal income tax benefit


(6,737
)


(2,379
)


(1,271
)$
13,675


$
15,058


$
21,763     Year Ended December 31,2009


2008


2007(Dollars in thousands)Federal income tax expense at statutory rate

$
21,043


$
9,001


$
22,878Effect of:Tax-exempt investment income


(1,697
)


(1,387
)


(949
)Change in valuation allowance on net capital losses


(6,735
)


7,545



State income taxes


1,094



29



26Other items, net


(30
)


(130
)


(192
)$
13,675


$
15,058


$
21,763  75




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31,2009


2008(Dollars in thousands)Deferred Tax Assets:Unearned premiums

$
8,750


$
9,035Unpaid losses and LAE expenses


8,742



8,233Assignments and assessments


817



945Unrealized losses on investments






5,677Realized losses on investments, primarily impairments


6,436



7,936Accrued compensation


2,218



1,394Other, net


1,398



75028,361



33,970Valuation allowance


(810
)


(7,616
)27,551



26,354Deferred Tax Liabilities:Deferred policy acquisition costs


(6,241
)


(6,736
)Unrealized gains on investments


(1,266
)


Other, net


(1,866
)


(1,294
)Total deferred tax liabilities


(9,373
)


(8,030
)Net deferred income tax assets

$
18,178


$
18,324            76




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   8.
    Shareholders
    Equity and Stock-Based Compensation        Year Ended December 31, 2009Total Options OutstandingWeighted


Weighted


Weighted AverageAverage


Average Fair


RemainingShares


Exercise Price


Value


Contractual TermOptions outstanding, beginning of year


607,050


$
17.80


$
7.18Forfeited


(40,000
)


23.53



7.00Exercised










Granted


80,000



22.95



3.02Options outstanding, end of year


647,050


$
18.08


$
6.68



5.5 yearsOptions exercisable, end of year


313,850


$
15.19


$
6.77



5.1 years   Year Ended December 31, 2009Total Nonvested SharesWeighted AverageGrant DateShares


Fair ValueNonvested shares at the beginning of year


99,000


$
31.10Granted






Vested


(7,500
)


25.46Forfeited






Nonvested shares at the end of year


91,500


$
31.56    77




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2009


2008


2007Risk-free interest rate


2.6
%


3.1
%


4.6
%Expected option life


6.5 years



6.5 years



6.5 yearsExpected stock price volatility


31.9
%


26.4
%


28.1
%Dividend yield


1.8
%


1.0
%


0.8
%Weighted average fair value of options granted during year

$
3.02


$
7.20


$
8.78       Stock Option


NonvestedAwards


Shares(Dollars in thousands)2010

$
621


$
2922011


94



2922012


94



2922013


43



2922014 and thereafter


23



875Total remaining compensation expense

$
875


$
2,043   9.
    Employee
    Benefit Plan     78




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   10.
    Earnings
    Per Common Share    Year Ended December 31,2009


2008


2007(In thousands, except per share data)Net income

$
46,449


$
10,660


$
43,602Weighted average shares outstanding during year


19,301



19,285



19,193Additional shares issuable under employee common stock option
    plans using treasury stock method


65



81



155Weighted average shares outstanding assuming exercise of stock
    option


19,366



19,366



19,348Net income per share:Basic

$
2.41


$
0.55


$
2.27Diluted


2.40



0.55



2.25     11.
    Transactions
    with Related Parties      Year Ended December 31,2009


2008


2007(Dollars in thousands)Assumed premiums written

$
3,151


$
5,374


$
6,165Assumed premiums earned


3,850



6,249



5,583Assumed losses and loss adjustment expense incurred


4,137



5,305



5,483Ceded premiums written


3,100



3,478



3,957Ceded premiums earned


3,199



3,567



4,031Ceded losses and loss adjustment expense recoveries


3,109



1,530



3,304Payable to Great American as of year end


258



386



538Service fee expense


60



96



112    79




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    12.
    Reinsurance    Year Ended December 31,2009


2008


2007(Dollars in thousands)Direct premiums written

$
337,972


$
371,243


$
334,664Reinsurance assumed


6,905



9,053



11,342Reinsurance ceded


(69,831
)


(82,215
)


(73,864
)Net written premiums

$
275,046


$
298,081


$
272,142Direct premiums earned

$
344,451


$
358,696


$
316,787Reinsurance assumed


7,699



10,196



11,588Reinsurance ceded


(73,071
)


(78,151
)


(70,814
)Net earned premiums

$
279,079


$
290,741


$
257,561Reinsurance recoverables

$
149,949


$
150,791


$
98,091    80




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   13.
    Unpaid
    Losses and LAE    December 31,2009


2008


2007(Dollars in thousands)Reserve for losses and LAE, net of related reinsurance
    recoverables, at beginning of year

$
262,440


$
210,302


$
181,851Add:Provision for unpaid losses and LAE for claims net of
    reinsurance, occurring during:Current year


171,041



188,985



155,173Prior years


(1,286
)


(854
)


(5,672
)169,755



188,131



149,501Deduct:Losses and LAE payments for claims, net of reinsurance,
    occurring during:Current year


64,161



68,320



57,735Prior years


91,615



67,673



63,315155,776



135,993



121,050Reserve for losses and LAE, net of related reinsurance
    recoverables, end of year


276,419



262,440



210,302Reinsurance recoverables on unpaid losses and LAE, at end of year


140,841



137,561



91,786Reserve for unpaid losses and LAE, gross of reinsurance
    recoverables

$
417,260


$
400,001


$
302,088     14.
    Expense
    on Amounts Withheld   81




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2009


2008


2007(Dollars in thousands)Investment income on amounts withheld related to alternative
    risk transfer programs

$
3,535


$
4,299


$
3,708Investment expense on amounts withheld related to alternative
    risk transfer programs


3,535



4,299



3,708Investment balance related to alternative risk transfer programs


128,934



124,076



89,823   15.
    Statutory
    Accounting Principles    At and for the YearEnded December 31,2009


2008


2007(Dollars in thousands)NIIC statutory capital and surplus

$
238,390


$
190,134


$
182,302NIIC statutory net income


33,158



7,611



37,745NIIC-HI statutory capital and surplus


11,295



10,397



9,614NIIC-HI statutory net income


899



839



811TCC statutory capital and surplus


15,977



14,707



14,119TCC statutory net income


1,115



366



483         16.
    Commitments
    and Contingencies     82




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        17.
    Segment
    Information    Year Ended December 31,2009


2008


2007(Dollars in thousands)Revenue:Premiums earned:Alternative Risk Transfer

$
141,525


$
137,298


$
107,303Transportation


60,344



75,495



74,112Specialty Personal Lines


56,385



54,862



51,852Hawaii and Alaska


15,272



17,591



17,625Other


5,553



5,495



6,669Total premiums earned


279,079



290,741



257,561Net investment income


19,324



22,501



22,141Net realized gains (losses) on investments


2,561



(22,394
)


(653
)Other


3,488



2,868



4,137Total revenues

$
304,452


$
293,716


$
283,186  83




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   18.
    Quarterly
    Operating Results (Unaudited)    1st


2nd


3rd


4th


YearQuarter


Quarter


Quarter


Quarter


Ended(Dollars in thousands)2009Revenues

$
75,260


$
76,590


$
76,965


$
75,637


$
304,452Net income


12,646



12,109



8,156



13,538



46,449Net income per share  basic(1)


0.66



0.63



0.42



0.70



2.41Net income per share  diluted(1)


0.65



0.63



0.42



0.70



2.402008Revenues

$
73,744


$
76,297


$
72,704


$
70,971


$
293,716Net income (loss)


9,571



4,370



(4,228
)


947



10,660Net income (loss) per share  basic(1)


0.50



0.23



(0.22
)


0.05



0.55Net income (loss) per share  diluted(1)


0.49



0.23



(0.22
)


0.05



0.55     (1)
    
    Earnings per share are computed independently for each quarter
    and the full year based upon respective average shares
    outstanding. Therefore, the sum of the quarterly earnings per
    share amounts may not equal the annual amounts reported.  19.
    Subsequent
    Events  Form 10-K,
 84




---



##### Table of Contents



ITEM 9
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    ITEM 9A
    Controls
    and Procedures  Please refer to Forward-Looking Statements
    following the Index in the front of this
    Form 10-K.
  Rules 13a-15(e) 15d-15(e) Rule 13a-15(e))
      ITEM 9B
    Other
    Information   PART III    Item 10.
    Directors,
    Executive Officers and Corporate Governance  (http://invest.natl.com).
    Item 11.
    Executive
    Compensation   85




---



##### Table of Contents



ITEM 12
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    ITEM 13
    Certain
    Relationships and Related Transactions, and Director
    Independence    ITEM 14
    Principal
    Accountant Fees and Services   PART IV ITEM 15        Index to
    Financial Statement Schedules
  Page/FilingSchedule

Description

BasisSchedule I


Summary of Investments


(2)Schedule II


Condensed Financial Information of Parent Company


88Schedule III


Supplementary Insurance Information


91Schedule IV


Reinsurance


(3)Schedule V


Valuation and Qualifying Accounts


92Schedule VI


Supplementary Information Concerning Property-Casualty Insurance
    Operations


(4)  86




---



##### Table of Contents



Number

Description

Filing Basis3
.1

Amended and Restated Articles of Incorporation


(1)3
.2

Amended and Restated Code of Regulations


(1)10
.1

Long Term Incentive Plan, as amended through March 16, 2009*


(10)10
.2

Deferred Compensation Plan*


(1)10
.3

Underwriting Management Agreement dated November 1, 1989,
    as amended, among National Interstate Insurance Agency, Inc.,
    Great American Insurance Company, Agricultural Insurance
    Company, American Alliance Insurance Company and American
    National Fire Insurance Company


(1)10
.4

Registration Rights Agreement effective February 2, 2005
    among National Interstate Corporation, Alan Spachman and Great
    American Insurance Company


(1)10
.5

Agreement of Reinsurance No. 0012 dated November 1,
    1989 between National Interstate Insurance Company and Great
    American Insurance Company


(1)10
.6

Amended and Restated Employee Retention Agreement between
    National Interstate Insurance Agency, Inc. and David W.
    Michelson, dated December 28, 2007*


(5)10
.7

Employment and Non-Competition Agreement dated March 12,
    2007 between National Interstate Corporation and Alan R.
    Spachman, as amended as of January 1, 2008*


(5),(8)10
.8

Employment and Non-Competition Agreement dated March 12,
    2007 between National Interstate Corporation and David W.
    Michelson, as amended as of January 1, 2008*


(5),(8)10
.9

Restricted Shares Agreement dated March 12, 2007
    between National Interstate Corporation and David W. Michelson*


(8)10
.10

Stock Bonus Agreement dated March 12, 2007 between National
    Interstate Corporation and David W. Michelson*


(8)10
.11

National Interstate Corporation Amended and Restated Management
    Bonus Plan, as amended as of November 6, 2009*


(6),(9)10
.12

Credit Agreement among National Interstate Corporation, Key Bank
    National Association and U.S. Bank National Association, dated
    as of December 19, 2007


(7)21
.1

List of subsidiaries23
.1

Consent of Independent Registered Public Accounting Firm24
.1

Power of attorney31
.1

Certification of Chief Executive Officer pursuant to Rule13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
    amended, as adopted pursuant to Section 302 of the
    Sarbanes-Oxley Act of 200231
.2

Certification of Chief Financial Officer pursuant to
    Rule 13a-14(a)/15d-14(a)
    of the Securities Exchange Act of 1934, as amended, as adopted
    pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
.1

Certification of Chief Executive Officer pursuant to 18 U.S.C
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 200232
.2

Certification of Chief Financial Officer pursuant to 18 U.S.C
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002     *
    
    Indicates a management contract or compensatory plan or
    arrangement.(1)
    
    These exhibits are incorporated by reference to our
    Registration Statement on
    Form S-1
    (Registration
    No. 333-119270)(2)
    
    This information is contained in Notes to Consolidated
    Financial Statements at Note Five Investments(3)
    
    This information is contained in Notes to Consolidated
    Financial Statements at Note Twelve Reinsurance(4)
    
    This information is contained in Notes to Consolidated
    Financial Statements at Note Thirteen Unpaid Losses and
    Loss Adjustment Expenses and in Schedule III
    Supplementary Insurance Information(5)
    
    This exhibit is incorporated by reference to our
    Form 8-K
    filed January 4, 2008(6)
    
    This exhibit is incorporated by reference to our
    Form 8-K
    filed September 27, 2007(7)
    
    This exhibit is incorporated by reference to our
    Form 8-K
    filed December 21, 2007(8)
    
    This exhibit is incorporated by reference to our
    Form 10-K
    filed March 14, 2007(9)
    
    This exhibit is incorporated by reference to our
    Form 8-K
    filed November 12, 2009  (10)
    
    This exhibit is incorporated by reference to our Proxy
    statement filed March 24, 2009 87




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  SCHEDULE II 
    CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
    CONDENSED BALANCE SHEETS
  December 31,2009


2008(In thousands, except per share data)ASSETSInvestment in subsidiaries

$
278,425


$
216,933Investments:Fixed maturities
    available-for-sale,
    at fair value (cost of $6,105 and $11,629, respectively)


5,897



9,906Equities
    available-for-sale,
    at fair value (cost of $23 and $200, respectively)


35



200Total investments


5,932



10,106Receivable from subsidiary


4,227



2,076Cash


95



3,458Securities lending collateral






4,682Property and equipment  net


2,476



2,023Other assets


487



397Total assets

$
291,642


$
239,675LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesLong-term debt

$
15,000


$
15,000Securities lending obligation






4,682Other liabilities


5,325



3,919Total liabilities


20,325



23,601Shareholders equityPreferred shares  no par valueAuthorized  10,000 sharesIssued  0 shares






Common shares   $0.01 par valueAuthorized  50,000 sharesIssued  23,350 shares, including 4,048 and
    4,055 shares, respectively in treasury


234



234Additional paid-in capital


49,264



48,004Retained earnings


225,195



184,187Accumulated other comprehensive income (loss)


2,353



(10,613
)Treasury shares


(5,729
)


(5,738
)Total shareholders equity


271,317



216,074Total liabilities and shareholders equity

$
291,642


$
239,675  88




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
    SCHEDULE II  CONDENSED FINANCIAL INFORMATION OF
    PARENT COMPANY
    CONDENSED STATEMENTS OF INCOME
  Year Ended December 31,2009


2008


2007(In thousands)Revenues:Fees from subsidiaries

$
14,759


$
13,189


$
12,055Net investment income


347



733



965Realized (losses) gains on investments


(1,132
)


(1,006
)


1Total revenues


13,974



12,916



13,021Expenses:General and administrative expenses


16,359



14,854



13,660Interest expense


353



833



1,550Total expenses


16,712



15,687



15,210Loss before income taxes and equity in undistributed income of
    subsidiaries


(2,738
)


(2,771
)


(2,189
)Income tax benefit


(958
)


(969
)


(729
)Loss before equity in undistributed income of subsidiaries


(1,780
)


(1,802
)


(1,460
)Equity in undistributed income of subsidiaries, net of tax


48,229



12,462



45,062Net income

$
46,449


$
10,660


$
43,602  89




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  SCHEDULE II 
    CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
    CONDENSED STATEMENTS OF CASH FLOWS
  Year Ended December 31,2009


2008


2007(In thousands)Operating ActivitiesNet income

$
46,449


$
10,660


$
43,602Adjustments to reconcile net income to cash used in operating
    activities


(47,838
)


(9,191
)


(46,807
)Net cash (used in) provided by operating activities


(1,389
)


1,469



(3,205
)Investing ActivitiesDistributions from subsidiaries










4,000Purchases of investments


(1,534
)


(6,454
)


(1,662
)Proceeds from sale or maturity of investments


6,036



13,133



4,580Purchases of property and equipment


(995
)


(861
)


(834
)Net cash provided by investing activities


3,507



5,818



6,084Financing ActivitiesAdditional long-term borrowings






15,000



Repayment of long-term debt






(15,464
)


Decrease (increase) in securities lending collateral


4,682



5,866



(10,548
)(Decrease) increase in securities lending obligation


(4,682
)


(5,866
)


10,548Issuance of common shares from treasury uponexercise of stock options or stock award grants


(40
)


838



456Cash dividends paid on common shares


(5,441
)


(4,663
)


(3,862
)Tax benefit realized from exercise of stock option






396



218Net cash used in financing activities


(5,481
)


(3,893
)


(3,188
)Net (decrease) increase in cash


(3,363
)


3,394



(309
)Cash at beginning of year


3,458



64



373Cash at end of year

$
95


$
3,458


$
64  90




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  SCHEDULE III 
    SUPPLEMENTARY INSURANCE INFORMATION
  Amortizationof DeferredDeferred

Liability for





Net



Policy

Other

NetPolicy

Unpaid Losses

Unearned

Earned

Investment

Losses and

Acquisition

Underwriting

PremiumsAcquisition Costs

and LAE

Premiums

Premiums

Income

LAE

Costs

Expenses

Written(In thousands)Year ended December 31, 2009

$
17,833


$
417,260


$
149,509


$
279,079


$
19,324


$
169,755


$
49,113


$
8,132


$
275,046Year ended December 31, 2008


19,245



400,001



156,598



290,741



22,501



188,131



54,293



7,837



298,081Year ended December 31, 2007


17,578



302,088



145,296



257,561



22,141



149,501



44,607



6,315



272,142  91




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  SCHEDULE V 
    VALUATION AND QUALIFYING ACCOUNTS
  AdditionsBalance at





Charged to





Balance atBeginning


Charged/(Credited)


Other





End ofof Period


to Expenses


Accounts


Deductions(1)


Period(In thousands)Year ended December 31, 2009Premiums in course of collection

$
587


$
555


$



$
179


$
963Year ended December 31, 2008Premiums in course of collection


462



354







229



587Year ended December 31, 2007Premiums in course of collection


522



338







398



462     (1)
    
    Deductions include write-offs of amounts determined to be
    uncollectible. 92




---



##### Table of Contents



SIGNATURES      By:
    /s/  DAVID
    W. MICHELSON   Title:
    President and Chief Executive Officer    1
  Signature

Title

Date/s/  DAVID
    W. MICHELSONDavid
    W. Michelson

Director, President and Chief Executive Officer (Principal
    Executive Officer)

March 8, 2010/s/  JULIE
    A. MCGRAWJulie
    A. McGraw

Vice President
    and Chief Financial Officer 
    (Principal Financial and Accounting Officer)

March 8, 2010/s/  ALAN
    R. SPACHMAN*Alan
    R. Spachman

Chairman of the Board

March 8, 2010/s/  JOSEPH
    E. CONSOLINO*Joseph
    E. Consolino

Director

March 8, 2010/s/  THEODORE
    H. ELLIOTT, JR. *Theodore
    H. Elliott, Jr.

Director

March 8, 2010/s/  GARY
    J. GRUBER*Gary
    J. Gruber

Director

March 8, 2010/s/  KEITH
    A. JENSEN*Keith
    A. Jensen

Director

March 8, 2010/s/  JAMES
    C. KENNEDY*James
    C. Kennedy

Director

March 8, 2010/s/  DONALD
    D. LARSON*Donald
    D. Larson

Director

March 8, 2010    *
    
    By Arthur J. Gonzales and Julie A. McGraw, attorneys-in-fact    1
 93