##### 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, 2010
 Commission File
    No. 000-51130
      National Interstate
    Corporation
 (Exact name of registrant as
    specified in its charter)
  Ohio(State or other jurisdiction
    of
    incorporation or organization)

34-1607394(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. þ
  12b-2
  Large
    accelerated
    filer o
    Accelerated
    filer þ
    Non-accelerated
    filer o
    Smaller
    reporting
    company o   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


17Item 1B



Unresolved Staff Comments


25Item 2



Properties


25Item 3



Legal Proceedings


25Item 4



[Removed and Reserved]


25PART IIItem 5



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


26Item 6



Selected Financial Data


28Item 7



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


30Item 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


88Item 9A



Controls and Procedures


88Item 9B



Other Information


88PART IIIItem 10



Directors, Executive Officers and Corporate Governance


88Item 11



Executive Compensation


88Item 12



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


89Item 13



Certain Relationships and Related Transactions, and Director
    Independence


89Item 14



Principal Accountant Fees and Services


89PART IVItem 15



Exhibits and Financial Statement Schedules


89Signatures


97EX-21.1EX-23.1EX-24.1EX-31.1EX-31.2EX-32.1EX-32.2   2




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##### Table of Contents



FORWARD-LOOKING
    STATEMENTS
  Form 10-K, 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, including the ongoing
    integration of Vanliner Group, Inc. (Vanliner);
    customer response to new products and marketing initiatives;
    tax law and accounting 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 the
    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 Introduction  (330) 659-8900. www.NationalInterstate.com Form 10-K.
      Acquisition
    of Vanliner Group, Inc.
  Form 10-K
 Property
    and Casualty Insurance Operations     4




---



##### Table of Contents



Product Management Organization.
  Our
    Products
      Year Ended December 31,2010


2009


2008Amount


Percent


Amount


Percent


Amount


Percent(Dollars in thousands)Alternative Risk Transfer

$
229,844



52.4
%

$
192,953



55.9
%

$
206,342



54.3
%Transportation


123,752



28.2
%


66,537



19.3
%


87,246



22.9
%Specialty Personal Lines


61,662



14.1
%


61,523



17.8
%


59,065



15.5
%Hawaii and Alaska


18,104



4.1
%


18,576



5.5
%


22,489



5.9
%Other


5,268



1.2
%


5,288



1.5
%


5,154



1.4
%Gross premiums written

$
438,630



100.0
%

$
344,877



100.0
%

$
380,296



100.0
%  5




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##### Table of Contents



Premium Range

Annual AveragesAlternative Risk Transfer

$5,800-$4,653,000


$65,800Transportation

$3,700-$60,500


$15,800Specialty Personal Lines

$1,000-$2,700


$1,100Hawaii and Alaska

$1,900-$29,600


$3,600   Alternative Risk Transfer.
         6




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##### Table of Contents



sm
  Transportation.
  Specialty Personal Lines.
  Hawaii and Alaska.
 7




---



##### Table of Contents



Geographic
    Concentration
    Year Ended December 31,2010


2009Percent of





Percent ofVolume


Total


Volume


Total(Dollars in thousands)California

$
56,019



13.0
%

$
40,693



12.0
%Texas


46,248



10.7
%


39,156



11.6
%New York


26,609



6.2
%


18,554



5.5
%Massachusetts


20,529



4.8
%


15,119



4.5
%Florida


19,329



4.5
%


16,441



4.9
%North Carolina


18,912



4.4
%


15,267



4.5
%Missouri


17,140



4.0
%


6,374



1.9
%Hawaii


16,790



3.9
%


18,452



5.5
%Pennsylvania


16,094



3.7
%


14,848



4.4
%All other states


192,885



44.8
%


153,068



45.2
%Direct premiums written

$
430,555



100.0
%

$
337,972



100.0
%   Concentration
    by Statutory Line of Business
    Year Ended December 31,2010


2009Percent of





Percent ofVolume


Total


Volume


Total(Dollars in thousands)Auto and other liability

$
254,058



59.0
%

$
197,766



58.5
%Auto physical damage


88,256



20.5
%


72,375



21.4
%Workers compensation


78,956



18.3
%


57,143



16.9
%All other lines


9,285



2.2
%


10,688



3.2
%Direct premiums written

$
430,555



100.0
%

$
337,972



100.0
%   Underwriting
   8




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##### 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, 2010,
 10




---



##### Table of Contents



Net Liability for UnpaidLosses And LAE:

2000


2001


2002


2003


2004


2005


2006


2007


2008


2009


2010(Dollars in thousands)As originally estimated

$
30,292


$
48,456


$
67,162


$
86,740


$
111,644


$
151,444


$
181,851


$
210,302


$
262,440


$
276,419


$
596,136As re-estimated at December 31, 2010


31,810



47,541



61,794



78,797



98,005



135,635



166,043



199,142



250,185



269,747Liability re-estimated as of:One year later


32,751



48,494



63,462



84,485



106,409



143,991



176,179



209,448



261,154



269,747Two years later


33,473



47,479



64,687



83,862



103,416



142,929



173,860



207,281



250,185Three years later


31,884



47,250



63,037



81,991



99,768



139,994



169,879



199,142Four years later


31,488



46,400



62,564



79,673



99,487



138,108



166,043Five years later


31,590



46,961



60,551



79,084



99,362



135,635Six years later


31,757



46,880



61,268



79,163



98,005Seven years later


31,410



47,361



62,437



78,797Eight years later


31,505



48,243



61,794Nine years later


32,105



47,541Ten years later


31,810Net cumulative (deficiency) redundancy


(1,518
)


915



5,368



7,943



13,639



15,809



15,808



11,160



12,255



6,672Net cumulative (deficiency) redundancy  %


(5.0
)%


1.9
%


8.0
%


9.2%



12.2
%


10.4
%


8.7
%


5.3
%


4.7
%


2.4
%Cumulative paid of:One year later


14,924



18,048



22,792



29,616



37,049



51,901



63,314



67,673



91,615



90,410Two years later


20,077



28,510



36,927



48,672



59,038



85,193



95,752



111,841



145,279Three years later


24,313



35,718



48,660



61,001



76,617



101,340



119,984



141,484Four years later


26,869



40,615



53,531



68,594



84,070



112,474



133,976Five years later


28,591



43,474



57,697



71,904



89,821



117,073Six years later


30,180



45,365



59,035



74,938



91,206Seven years later


30,813



45,828



61,179



75,137Eight years later


30,863



47,396



61,021Nine years later


31,549



47,128Ten years later


31,590     2000


2001


2002


2003


2004


2005


2006


2007


2008


2009


2010(Dollars in thousands)As originally estimated:Net liability shown above

$
30,292


$
48,456


$
67,162


$
86,740


$
111,644


$
151,444


$
181,851


$
210,302


$
262,440


$
276,419


$
596,136Add reinsurance recoverables


12,416



22,395



35,048



41,986



59,387



71,763



84,115



91,786



137,561



140,841



202,509Gross liability

$
42,708


$
70,851


$
102,210


$
128,726


$
171,031


$
223,207


$
265,966


$
302,088


$
400,001


$
417,260


$
798,645As re-estimated at December 31, 2010Net liability shown above

$
31,810


$
47,541


$
61,794


$
78,797


$
98,005


$
135,635


$
166,043


$
199,142


$
250,185


$
269,747



N/AAdd reinsurance recoverables re-estimated


13,050



34,026



48,292



51,593



57,016



59,778



59,889



51,097



96,016



93,761



N/AGross liability

$
44,860


$
81,567


$
110,086


$
130,390


$
155,021


$
195,413



225,932


$
250,239


$
346,201


$
363,508



N/AGross cumulative (deficiency) redundancy

$
(2,152
)

$
(10,716
)

$
(7,876
)

$
(1,664
)

$
16,010


$
27,794



40,034


$
51,849


$
53,800


$
53,752



N/AGross cumulative (deficiency) redundancy  %


(5.0
)%


(15.1
)%


(7.7
)%


(1.3
)%


9.4
%


12.5
%


15.1
%


17.2
%


13.4
%


12.9
%


N/A  11




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##### Table of Contents



Investments  General
        At December 31,2010


2009Short term investments


0.0
%


0.1
%Fixed maturities:State and local government obligations


28.8
%


26.0
%Corporate obligations


24.8
%


11.3
%Residential mortgage-backed securities


21.0
%


19.6
%U.S. Government and government agency obligations


19.7
%


35.6
%Redeemable preferred stock


1.3
%


1.9
%Foreign government obligations


0.6
%


0.0
%Commercial mortgage-backed securities


0.6
%


0.7
%Total fixed maturities


96.8
%


95.1
%Equity securities:Common stocks


3.1
%


4.6
%Perpetual preferred stocks


0.1
%


0.2
%Total equity securities


3.2
%


4.8
%Total


100.0
%


100.0
%  12




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##### Table of Contents



Year Ended December 31,2010


2009


2008Yield on short term investments:Excluding realized gains and losses


1.0
%


1.0
%


5.5
%Including realized gains and losses


1.0
%


1.0
%


5.5
%Yield on fixed maturities:Excluding realized gains and losses


3.4
%


3.7
%


4.5
%Including realized gains and losses


3.8
%


3.5
%


3.4
%Yield on equity securitiesExcluding realized gains and losses


1.2
%


2.3
%


3.5
%Including realized gains and losses


5.1
%


16.5
%


(42.8
%)Yield on all investments:Excluding realized gains and losses


3.3
%


3.7
%


4.4
%Including realized gains and losses


3.9
%


4.1
%


(0.3
%)     Year Ended December 31,2010


2009


2008Fixed maturities:National Interstate Total Return on Fixed Maturities


5.5
%


7.1
%


3.9
%Barclays Intermediate Aggregate Index


5.9
%


6.5
%


4.9
%Equity securities:National Interstate Total Return on all other Equity


8.1
%


30.8
%


(29.6
%)Standard & Poors 500 Index


15.1
%


26.5
%


(37.0
%)   Fixed
    Maturity Investments
    S&P or Comparable Rating

Amortized Cost


Fair Value


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

$
787,805


$
794,028



87.5
%BBB


67,030



67,990



7.5
%Total Investment Grade


854,835



862,018



95.0
%BB


9,029



9,294



1.0
%B


22,740



23,093



2.5
%CCC


5,021



4,268



0.5
%CC, C, D


9,584



8,902



1.0
%Total Non-Investment Grade


46,374



45,557



5.0
%Total

$
901,209


$
907,575



100.0
%  13




---



##### Table of Contents



December 31, 2010Fair Value


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

$
28,058



3.1
%More than one year to five years


297,256



32.8
%More than five years to ten years


277,955



30.6
%More than ten years


101,998



11.2
%705,267



77.7
%Mortgage-backed securities


202,308



22.3
%Total fixed maturities

$
907,575



100.0
%    Competition     14




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##### Table of Contents



Ratings   Regulation  State
    Regulation
  General
         15




---



##### Table of Contents



Statutory
    Accounting Principle (SAP)
      Restrictions
    on Paying Dividends
      Assessments
    and Fees Payable
    Risk-Based
    Capital (RBC) Requirements
    Restrictions
    on Cancellation, Non-Renewal or Withdrawal
   16




---



##### Table of Contents



Federal
    Regulation
  General
    The
    Terrorism Risk Insurance Act (the Act)
       Employees    ITEM 1A
    Risk
    Factors    Market
    fluctuations, changes in interest rates or a need to generate
    liquidity can have significant and negative effects on our
    investment portfolio.
   17




---



##### Table of Contents



We may
    not have access to capital in the future due to an economic
    downturn.
  and/or
  If we
    expand our operations too rapidly and do not manage that
    expansion effectively, our financial performance and stock price
    could be adversely affected.
       18




---



##### Table of Contents



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.
      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.
     19




---



##### Table of Contents



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.
          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.
   20




---



##### Table of Contents



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.
      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; 21




---



##### Table of Contents




    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.
    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.
     22




---



##### Table of Contents



Our
    inability to retain our senior executives and other key
    personnel could adversely affect our business.
      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.
     23




---



##### Table of Contents



Provisions
    in our organizational documents, Ohio corporate law and the
    insurance laws of Ohio, Missouri 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 Amended
    and Restated 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.      Future
    sales of our common shares may affect the trading price of our
    common shares.
    Form S-3.
 24




---



##### Table of Contents



Form S-8 Form S-8
  ITEM 1B
    Unresolved
    Staff Comments    ITEM 2
    Properties      ITEM 3
    Legal
    Proceedings      ITEM 4
    [Removed
    and Reserved] 25




---



##### Table of Contents



PART II  ITEM 5
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities  Market
    Information
    2010


2009High


Low


High


LowFirst Quarter

$
21.19


$
16.06


$
19.89


$
12.95Second Quarter


21.98



18.66



18.19



13.03Third Quarter


22.83



17.57



21.20



14.51Fourth Quarter


23.00



19.98



21.72



16.06     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


561,550


$
18.39



773,338Not approved by shareholders


none



N/A



none  26




---



##### Table of Contents



Performance
    Graph
    2010
    Stock Performance Graph
  
  Cumulative
    5-Year Total
    Return as of December 31, 2010
    (Assumes a $100 investment at the close of trading on
    December 30, 2005)
  Company/Index

2005

2006

2007

2008

2009

2010NATL Common Stock

$
100


$
128


$
176


$
96


$
93


$
119Nasdaq Insurance Stocks


100



113



113



105



110



123Nasdaq Index


100



110



119



57



83



98  27




---



##### Table of Contents



ITEM 6
    Selected
    Financial Data  Form 10-K
  At and for the Year Ended December 31,2010


2009


2008


2007


2006(Dollars in thousands, except per share data)Operating Data:Gross premiums written(1)

$
438,630


$
344,877


$
380,296


$
346,006


$
305,504Net premiums written(2)

$
354,529


$
275,046


$
298,081


$
272,142


$
241,916Premiums earned

$
358,371


$
279,079


$
290,741


$
257,561


$
217,319Net investment income


23,298



19,324



22,501



22,141



17,579Net realized gains (losses) on investments


4,324



2,561



(22,394
)


(653
)


1,193Gain on bargain purchase


7,453















Other


3,680



3,488



2,868



4,137



2,387Total revenues


397,126



304,452



293,716



283,186



238,478Losses and loss adjustment expenses


256,408



169,755



188,131



149,501



129,491Commissions and other underwriting expenses


67,639



57,245



62,130



50,922



42,671Other operating and general expenses


17,197



13,076



12,605



12,140



9,472Expense on amounts withheld(3)


3,450



3,535



4,299



3,708



2,147Interest expense


294



717



833



1,550



1,522Total expenses


344,988



244,328



267,998



217,821



185,303Income before income taxes


52,138



60,124



25,718



65,365



53,175Provision for income taxes


12,629



13,675



15,058



21,763



17,475Net income

$
39,509


$
46,449


$
10,660


$
43,602


$
35,700Selected GAAP Ratios:Losses and loss adjustment expense ratio(4)


71.5
%


60.8
%


64.7
%


58.0
%


59.6
%Underwriting expense ratio(5)


22.7
%


24.0
%


24.7
%


22.9
%


22.9
%Combined ratio(6)


94.2
%


84.8
%


89.4
%


80.9
%


82.5
%Return on equity(7)


13.6
%


19.1
%


5.0
%


22.6
%


22.8
%Per Share Data:Earnings per common share, basic

$
2.04


$
2.41


$
0.55


$
2.27


$
1.87Earnings per common share, assuming dilution


2.03



2.40



0.55



2.25



1.85Book value per common share, basic (at year end)(8)

$
15.99


$
14.06


$
11.20


$
11.08


$
9.07Weighted average number of common shares outstanding, basic


19,343



19,301



19,285



19,193



19,136Weighted average number of common shares outstanding, diluted


19,452



19,366



19,366



19,348



19,302Common shares outstanding (at year end)


19,357



19,302



19,295



19,312



19,159Cash dividends per common share

$
0.32


$
0.28


$
0.24


$
0.20


$
0.16   28




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##### Table of Contents



At December 31,2010


2009


2008


2007


2006Balance Sheet Data:Cash and investments

$
965,204


$
614,974


$
563,714


$
492,916


$
406,454Securities lending collateral










84,670



139,305



158,928Reinsurance recoverables


208,590



149,949



150,791



98,091



90,070Total assets


1,488,605



955,753



990,812



898,634



806,248Unpaid losses and loss adjustment expenses


798,645



417,260



400,001



302,088



265,966Long-term debt


20,000



15,000



15,000



15,464



15,464Total shareholders equity


309,578



271,317



216,074



212,806



173,763   At and for the Year Ended December 31,2010

2009

2008

2007

2006Selected Statutory Data(9):Policyholder surplus(10)

$
273,647


$
238,390


$
190,134


$
182,302


$
148,266Combined ratio(11)


93.9
%


85.8
%


89.0
%


78.3
%


82.4
%     (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, 2010 and 2009
    total unrestricted common shares were 19,357,000 and 19,302,000,
    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, VIC, 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. 29




---



##### Table of Contents



ITEM 7
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  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. 30




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##### 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.  Acquisition
    of Vanliner Group, Inc. (Vanliner)
    Industry
    and Trends
  year-over-year
 31




---



##### Table of Contents




    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 to
    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



Revenues
              Expenses
   33




---



##### Table of Contents



Results
    of Operations
  Overview
    Year Ended December 31,2010


2009


2008Amount


Per Share


Amount


Per Share


Amount


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

$
30,516


$
1.58


$
38,050


$
1.96


$
32,761


$
1.69After-tax net realized gains (losses) from investments


2,811



0.14



1,664



0.09



(14,556
)


(0.75
)Change in valuation allowance related to net capital losses


810



0.04



6,735



0.35



(7,545
)


(0.39
)Gain on bargain purchase of Vanliner


7,453



0.38















After-tax impact from balance sheet guaranty for Vanliner


(2,081
)


(0.11
)














Net income

$
39,509


$
2.03


$
46,449


$
2.40


$
10,660


$
0.55   year-over-year
 34




---



##### Table of Contents



Gross
    Premiums Written
    Year Ended December 31,2010


2009


2008Amount


Percent


Amount


Percent


Amount


Percent(Dollars in thousands)Alternative Risk Transfer

$
229,844



52.4
%

$
192,953



55.9
%

$
206,342



54.3
%Transportation


123,752



28.2
%


66,537



19.3
%


87,246



22.9
%Specialty Personal Lines


61,662



14.1
%


61,523



17.8
%


59,065



15.5
%Hawaii and Alaska


18,104



4.1
%


18,576



5.5
%


22,489



5.9
%Other


5,268



1.2
%


5,288



1.5
%


5,154



1.4
%Gross premiums written

$
438,630



100.0
%

$
344,877



100.0
%

$
380,296



100.0
%    35




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##### Table of Contents



Premiums
    Earned
  2010 compared to 2009.
  Year Ended December 31,


Change2010


2009


Amount


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

$
155,819


$
141,525


$
14,294



10.1
%Transportation


125,713



60,344



65,369



108.3
%Specialty Personal Lines


57,800



56,385



1,415



2.5
%Hawaii and Alaska


13,687



15,272



(1,585
)


(10.4
%)Other


5,352



5,553



(201
)


(3.6
%)Total premiums earned

$
358,371


$
279,079


$
79,292



28.4
%    36




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##### Table of Contents



2008-2009
  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
%)     Underwriting
    and Loss Ratio Analysis
     37




---



##### Table of Contents



Year Ended December 31,2010


2009


2008(Dollars in thousands)Gross premiums written

$
438,630


$
344,877


$
380,296Ceded reinsurance


(84,101
)


(69,831
)


(82,215
)Net premiums written


354,529



275,046



298,081Change in unearned premiums, net of ceded


3,842



4,033



(7,340
)Total premiums earned

$
358,371


$
279,079


$
290,741Combined Ratios:Loss and LAE ratio(a)


71.5
%


60.8
%


64.7
%Underwriting expense ratio(b)


22.7
%


24.0
%


24.7
%Combined ratio


94.2
%


84.8
%


89.4
%     (a)
    
    The ratio of losses and LAE to premiums earned.(b)
    
    The ratio of the sum of commissions and other underwriting
    expenses, other operating expenses less other income to premiums
    earned.  2010 compared to 2009.
      2009 compared to 2008.
 38




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##### Table of Contents



Net
    Investment Income
  2010 compared to 2009.
  2009 compared to 2008.
  Net
    Realized Gains (Losses) on Investments
  2010 compared to 2009. other-than-temporary other-than-temporary
  2009 compared to 2008. other-than-temporary other-than-temporary
 39




---



##### Table of Contents



Gain
    on Bargain Purchase
    Other
    Income
  2010 compared to 2009.
  2009 compared to 2008.
  Commissions
    and Other Underwriting Expenses
  2010 compared to 2009.
  2009 compared to 2008.
  Other
    Operating and General Expenses
  2010 compared to 2009.
  2009 compared to 2008.
  Expense
    on Amounts Withheld
  2010 compared to 2009.
  2009 compared to 2008.
 40




---



##### Table of Contents



Income
    Taxes
  2010 compared to 2009.
  2009 compared to 2008.
  Financial
    Condition
  Investments
       41




---



##### Table of Contents



Securities with


Securities withUnrealized


UnrealizedGains


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

$
525,958


$
379,294Amortized cost of securities


511,232



387,654Gross unrealized gain or (loss)

$
14,726


$
(8,360
)Fair value as a % of amortized cost


102.9
%


97.8
%Number of security positions held


530



263Number individually exceeding $50,000 gain or (loss)


94



44Concentration of gains or losses by type or industry:U.S. Government and government agencies

$
2,463


$
(976
)Foreign governments






(65
)State, municipalities and political subdivisions


4,611



(2,562
)Residential mortgage-backed securities


3,126



(3,032
)Commercial mortgage-backed securities






(228
)Banks, insurance and brokers


2,003



(992
)Industrial and other


2,523



(505
)Percent rated investment grade(a)


94.6
%


95.6
%Equity Securities:Fair value of securities

$
16,069


$
605Cost of securities


12,784



639Gross unrealized gain or (loss)

$
3,285


$
(34
)Fair value as a % of cost


125.7
%


94.7
%Number individually exceeding $50,000 gain or (loss)


9



     (a)
    
    Investment grade of AAA to BBB- by nationally recognized rating
    agencies.    Securities with


Securities withUnrealized


UnrealizedGains


LossesMaturity:One year or less


4.6
%


1.1
%After one year through five years


33.5
%


31.3
%After five years through ten years


36.9
%


22.1
%After ten years


3.9
%


21.5
%78.9
%


76.0
%Mortgage-backed securities


21.1
%


24.0
%100.0
%


100.0
%  42




---



##### Table of Contents



At December 31, 2010Aggregate


Fair ValueAggregate


Unrealized


as % ofFair Value


Gain (Loss)


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

$
108,564


$
4,307



104.1
%More than one year (38 issues)


52,956



3,863



107.9
%Less than $50,000 (436 issues)


364,438



6,556



101.8
%$
525,958


$
14,726Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (31 issues)

$
79,045


$
(2,530
)


96.9
%More than one year (13 issues)


18,532



(3,479
)


84.2
%Less than $50,000 (219 issues)


281,717



(2,351
)


99.2
%$
379,294


$
(8,360
)Equity Securities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (4 issues)

$
992


$
404



168.7
%More than one year (5 issues)


13,073



2,749



126.6
%Less than $50,000 (19 issues)


2,004



132



107.1
%$
16,069


$
3,285Securities 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 (4 issues)


605



(34
)


94.7
%$
605


$
(34
)   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:2010

$
4,666


$
(342
)

$
4,3242009


6,449



(3,888
)


2,5612008


(2,230
)


(20,164
)


(22,394
)   Fair
    Value Measurements
         44




---



##### Table of Contents



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




---



##### Table of Contents



debt-to-capital
   46




---



##### Table of Contents



12-month
  Off-Balance Sheet Items.
    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(a)

$
798,645


$
320,012


$
308,856


$
112,562


$
57,215Long term debt obligations


20,000







20,000







Additional future consideration payable to UniGroup


2,839



1,049



1,387



403



Operating lease obligations


3,179



1,306



1,873







Total

$
824,663


$
322,367


$
332,116


$
112,965


$
57,215     (a)
    
    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
   47




---



##### Table of Contents




    the Case Incurred Development Method;
    the Paid Development Method;
    the Bornhuetter-Ferguson Method; and
    the Incremental Paid LAE to Paid Loss Methods.      
    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.   48




---



##### Table of Contents



CumulativeLine of Business

ImpactCommercial Auto Liability

$
4.7 millionWorkers Compensation

$
3.6 million     5-yr. Average

Net Reserves

Effect on NetDevelopment (*)

December 31, 2010

Earnings(1.5
)%

$
596.2 million


$
8.8 million     (*)
    
    Net of tax effect.    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, 2010Statutory Lines of Business:

Case


IBNR


LAE


Total(Dollars in thousands)Commercial auto liability

$
147,112


$
229,123


$
69,092


$
445,327Workers compensation


113,427



122,961



32,389



268,777General liability


12,364



29,402



7,049



48,815Auto physical damage


7,988



9,436



2,562



19,986Private passenger


3,842



1,673



1,316



6,831Inland marine


647



5,173



546



6,366Commercial multiple peril


162



1,090



238



1,490Other lines


144



772



137



1,053$
285,686


$
399,630


$
113,329


$
798,645   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; 51




---



##### Table of Contents




    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.  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, 2010


December 31, 2009Principal





PrincipalCash Flows


Rate


Cash Flows


Rate(Dollars in thousands)Subsequent calendar year

$
187,714



4.1
%

$
149,602



3.8
%2nd Subsequent calendar year


81,595



4.4
%


52,332



4.3
%3rd Subsequent calendar year


81,024



4.4
%


48,983



4.4
%4th Subsequent calendar year


109,701



4.3
%


49,124



4.4
%5th Subsequent calendar year


104,168



4.2
%


77,296



4.2
%Thereafter


307,701



4.8
%


183,325



4.3
%Total

$
871,903



4.4
%

$
560,662



4.2
%Fair Value

$
907,575






$
566,901   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:


58December 31, 2010 and 2009Consolidated Statements of Income:


59Years ended December 31, 2010, 2009 and 2008Consolidated Statements of Shareholders
    Equity:


60Years ended December 31, 2010, 2009 and 2008Consolidated Statements of Cash Flows:


61Years ended December 31, 2010, 2009 and 2008Notes 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 31,2010


2009(In thousands, except per share data)ASSETSInvestments:Fixed maturities
    available-for-sale,
    at fair value (amortized cost  $901,209 and $565,753,
    respectively)

$
907,575


$
566,901Equity securities
    available-for-sale,
    at fair value (amortized cost  $27,257 and $26,203,
    respectively)


30,508



28,673Short-term investments, at cost which approximates fair value


67



811Total investments


938,150



596,385Cash and cash equivalents


27,054



18,589Accrued investment income


8,650



4,926Premiums receivable, net of allowance for doubtful accounts of
    $1,435 and $963, respectively


162,906



98,679Reinsurance recoverable on paid and unpaid losses


208,590



149,949Prepaid reinsurance premiums


35,065



25,163Deferred policy acquisition costs


23,488



17,833Deferred federal income taxes


27,333



18,178Property and equipment, net


24,469



21,747Funds held by reinsurer


3,788



3,441Intangible assets, net


8,972



Amounts refundable on purchase price of Vanliner


14,256



Prepaid expenses and other assets


5,884



863Total assets

$
1,488,605


$
955,753LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses

$
798,645


$
417,260Unearned premiums and service fees


221,903



149,509Long-term debt


20,000



15,000Amounts withheld or retained for accounts of others


58,691



51,359Reinsurance balances payable


16,180



10,540Accounts payable and other liabilities


49,605



29,371Commissions payable


9,295



8,164Assessments and fees payable


4,708



3,233Total liabilities


1,179,027



684,436Shareholders equity:Preferred shares  no par valueAuthorized  10,000 sharesIssued  0 shares






Common shares  $0.01 par valueAuthorized  50,000 sharesIssued  23,350 shares, including 3,993 and
    4,048 shares, respectively, in treasury


234



234Additional paid-in capital


50,273



49,264Retained earnings


258,473



225,195Accumulated other comprehensive income


6,251



2,353Treasury shares


(5,653
)


(5,729
)Total shareholders equity


309,578



271,317Total liabilities and shareholders equity

$
1,488,605


$
955,753    58




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME
  Year Ended December 31,2010


2009


2008(In thousands, except per share data)Revenues:Premiums earned

$
358,371


$
279,079


$
290,741Net investment income


23,298



19,324



22,501Net realized gains (losses) on investments(*)


4,324



2,561



(22,394
)Gain on bargain purchase


7,453







Other


3,680



3,488



2,868Total revenues


397,126



304,452



293,716Expenses:Losses and loss adjustment expenses


256,408



169,755



188,131Commissions and other underwriting expenses


67,639



57,245



62,130Other operating and general expenses


17,197



13,076



12,605Expense on amounts withheld


3,450



3,535



4,299Interest expense


294



717



833Total expenses


344,988



244,328



267,998Income before income taxes


52,138



60,124



25,718Provision for income taxes


12,629



13,675



15,058Net income

$
39,509


$
46,449


$
10,660Net income per share  basic

$
2.04


$
2.41


$
0.55Net income per share  diluted

$
2.03


$
2.40


$
0.55Weighted average of common shares outstanding  basic


19,343



19,301



19,285Weighted average of common shares outstanding  diluted


19,452



19,366



19,366Cash dividends per common share

$
0.32


$
0.28


$
0.24(*) Consists of the following:Net realized gains (losses) before impairment losses

$
4,666


$
6,448


$
(2,230
)Total losses on securities with impairment charges


(197
)


(6,955
)


(20,164
)Non-credit portion recognized in other comprehensive income


(145
)


3,068



Net impairment charges recognized in earnings


(342
)


(3,887
)


(20,164
)Net realized gains (losses) on investments

$
4,324


$
2,561


$
(22,394
)    59




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF SHAREHOLDERS EQUITY
  AccumulatedAdditional





OtherCommon


Paid-In


Retained


Comprehensive


TreasuryStock


Capital


Earnings


Income (Loss)


Stock


Total(Dollars in thousands)Balance at January 1, 2008

$
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 ofoptions 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
)


271,317Net income










39,509











39,509Unrealized appreciation of investment securities, net of tax of
    $2.1 million














3,898







3,898Comprehensive income






















43,407Dividends on common stock










(6,231
)










(6,231
)Issuance of 54,801 treasury shares upon exercise of options,
    stock award grants and restricted stock issued, net of
    forfeitures






421











76



497Tax benefit realized from exercise of stock options






31















31Stock compensation expense






557















557Balance at December 31, 2010

$
234


$
50,273


$
258,473


$
6,251


$
(5,653
)

$
309,578    60




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
  Year Ended December 31,2010


2009


2008(Dollars in thousands)Operating activitiesNet income

$
39,509


$
46,449


$
10,660Adjustments to reconcile net income to net cash provided by
    operating activities:Net amortization of bond premiums and discounts


6,254



2,713



1,673Provision for depreciation and amortization


2,954



1,841



1,470Net realized (gains) losses on investment securities


(4,324
)


(2,561
)


22,394Gain on bargain purchase


(7,453
)






Deferred federal income taxes


(11,712
)


(6,727
)


(2,294
)Stock compensation expense


557



1,309



1,329(Increase) decrease in deferred policy acquisition costs, net


(5,655
)


1,412



(1,667
)Increase in reserves for losses and loss adjustment expenses


28,655



17,259



97,913Decrease (increase) in premiums receivable


2,152



(3,069
)


(10,902
)(Decrease) increase in unearned premiums and service fees


(722
)


(7,089
)


11,302Decrease in interest receivable and other assets


11,688



418



539(Increase) decrease in prepaid reinsurance premiums


(2,904
)


3,241



(4,079
)Increase (decrease) in accounts payable, commissions and other
    liabilities and assessments and fees payable


8,963



(7,919
)


13,358Increase in amounts withheld or retained for accounts of others


1,798



3,002



9,618Decrease (increase) in reinsurance recoverable


12,447



842



(52,700
)(Decrease) increase in reinsurance balances payable


(2,299
)


273



2,671Other


(105
)


(45
)


23Net cash provided by operating activities


79,803



51,349



101,308Investing activitiesPurchases of fixed maturities


(534,348
)


(401,140
)


(412,313
)Purchases of equity securities


(285
)


(4,772
)


(3,386
)Proceeds from sale of fixed maturities


95,488



67,558



2,234Proceeds from sale of equity securities


855



11,653



11,948Proceeds from maturities and redemptions of investments


403,629



271,914



340,561Acquisition of subsidiary, net of cash and cash equivalents
    acquired


(33,438
)






Capital expenditures


(2,536
)


(3,137
)


(2,369
)Net cash used in investing activities


(70,635
)


(57,924
)


(63,325
)Financing activitiesDecrease in securities lending collateral






49,314



45,488Decrease in securities lending obligation






(95,828
)


(45,488
)Additional long-term borrowings


31,500







15,000Reductions of long-term debt


(26,500
)






(15,464
)Tax benefit realized from exercise of stock options


31







396Issuance of common shares from treasury upon exercise of stock
    options or stock award grants


497



(40
)


838Cash dividends paid on common shares


(6,231
)


(5,441
)


(4,663
)Net cash used in financing activities


(703
)


(51,995
)


(3,893
)Net increase (decrease) in cash and cash equivalents


8,465



(58,570
)


34,090Cash and cash equivalents at beginning of year


18,589



77,159



43,069Cash and cash equivalents at end of year

$
27,054


$
18,589


$
77,159    61




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  1.
    Background,
    Basis of Presentation and Principles 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  Business
    Combinations
  Business Combinations
  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
    Intangible
    Assets
    Unpaid
    Losses and Loss Adjustment Expenses (LAE)
    Assessments
    Premiums
    Receivable
   64




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Reinsurance
    Segment
    Information
    Federal
    Income Taxes
    Comprehensive
    Income
  available-for-sale
  Earnings
    Per Common Share
    Stock-Based
    Compensation
    Recent
    Accounting Pronouncements
  No. 2010-29, Business Combinations (Topic 805) 2010-29). 2010-29 Business Combinations 2010-29 2010-29
 65




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  No. 2010-26, Financial Services  Insurance 2010-26 Financial Services 
    Insurance 2010-26 2010-26
  No. 2010-06, Improving Disclosures about Fair Value Measurements 2010-06 Fair Value Measurements and Disclosures 2010-06 2010-06
  3.
    Acquisition
    of Vanliner Group, Inc.      Form 10-Q,
 66




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Purchase consideration:Cash paid

$
128,059Additional future consideration


2,936Amounts refundable on purchase price of Vanliner


(14,256
)Total purchase consideration

$
116,739       Level 1


Level 2


Level 3


Total(Dollars in thousands)Assets:Investments

$



$
303,033


$



$
303,033Cash and cash equivalents


94,621











94,621Accrued investment income






3,589







3,589Premiums receivable, net of allowance for doubtful accounts










66,183



66,183Reinsurance recoverable on paid and unpaid losses










71,088



71,088Prepaid reinsurance premiums










6,998



6,998Property and equipment










2,950



2,950Intangible assets










9,061



9,061Other assets










17,819



17,819Total assets

$
94,621


$
306,622


$
174,099


$
575,342Liabilities:Unpaid loss and loss adjustment expenses

$



$



$
352,730


$
352,730Unearned premiums










73,116



73,116Payable to reinsurers










7,939



7,939Deferred federal income taxes










458



458Other liabilities










16,907



16,907Total liabilities

$



$



$
451,150


$
451,150Net assets acquired













$
124,192Final purchase price














116,739Gain on bargain purchase













$
7,453  67




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Form 10-Q,
  Significant
    Factors Affecting Acquisition Date Fair Values
  Intangibles
    Loss
    and Loss Adjustment Expense (LAE) Reserves
    Acquired
    Non-financial
    Assets and Liabilities
   68




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Vanliners
    Contribution to the Companys Revenues and Net
    Income
    Revenues

$
69,659Net income

$
2,012   Proforma
    Results of Operations (Unaudited)
    Year Ended December 31,2010


2009(Dollars in thousands, except per share data)Pro forma revenues

$
469,706


$
466,155Pro forma net income


38,826



67,376Pro forma net income per share  basic


2.01



3.49Pro forma net income per share  diluted


2.00



3.48   4.
    Fair
    Value Measurements     69




---



##### 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

$



$
184,857


$



$
184,857Foreign government obligations






5,676







5,676State and local government obligations






266,023



3,992



270,015Residential mortgage-backed securities






196,738







196,738Commercial mortgage-backed securities






5,570







5,570Corporate obligations






230,287



2,290



232,577Redeemable preferred stocks


9,238



475



2,429



12,142Total fixed maturities


9,238



889,626



8,711



907,575Equity securities:Perpetual preferred stocks


840



127



396



1,363Common stocks


15,275



13,870







29,145Total equity securities


16,115



13,997



396



30,508Short-term investments






67







67Total investments


25,353



903,690



9,107



938,150Cash and cash equivalents


27,054











27,054Total investments and cash and cash equivalents

$
52,407


$
903,690


$
9,107


$
965,204  70




---



##### 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 stocks


857



167



396



1,420Common stocks


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     Year Ended December 31, 2010State and Local


Residential


Redeemable


PerpetualCorporate


Government


Mortgage-Backed


Preferred


PreferredObligations


Obligations


Securities


Stock


Stock(Dollars in thousands)Beginning balance at January 1, 2010

$
5,842


$
6,369


$
2,384


$
2,353


$
396Total gains or (losses):Included in earnings


(187
)














Included in other comprehensive income


205



623



1,433



76



Purchases, issuances, sales and settlements:Sales(a)


(3,570
)


(3,000
)


(899
)






Transfers in and/or (out) of Level 3(b)










(2,918
)






Ending balance at December 31, 2010

$
2,290


$
3,992


$



$
2,429


$
396The amount of total gains or (losses) for the year included in
    earnings and attributable to the change in unrealized gains or
    (losses) relating to assets still held at the reporting date

$
(187
)

$



$



$



$
     (a)
    
    These amounts are attributable to either principal pay downs,
    calls or maturities during the year ended December 31, 2010.(b)
    
    Transfers out of Level 3 relate to two residential
    mortgage-backed securities that have inputs, including quotes,
    which were consistently observed in an active market during 2010. 71




---



##### 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, issuances, sales and settlements(a)


(640
)






(453
)






(4,250
)


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


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 and attributable to the change in unrealized gains or
    (losses) relating to assets still held at the reporting date

$
65


$



$
(1,781
)

$



$
(170
)

$
(421
)     (a)
    
    These amounts are attributable to either purchases of
    securities, principal pay downs, conversions or maturities
    during the year ended December 31, 2009.(b)
    
    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 year
    ended December 31, 2009.  5.
    Investments  other-than-temporary other-than-temporary other-than-temporary
 72




---



##### Table of Contents



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


Gross


GrossAmortized


Unrealized


UnrealizedCost


Gains


Losses


Fair Value(Dollars in thousands)December 31, 2010:Fixed Maturities:U.S. Government and government agency obligations

$
183,370


$
2,463


$
(976
)

$
184,857Foreign government obligations


5,741







(65
)


5,676State and local government obligations


267,966



4,611



(2,562
)


270,015Residential mortgage-backed securities


196,644



3,126



(3,032
)


196,738Commercial mortgage-backed securities


5,798







(228
)


5,570Corporate obligations


229,263



4,400



(1,086
)


232,577Redeemable preferred stocks


12,427



126



(411
)


12,142Total fixed maturities


901,209



14,726



(8,360
)


907,575Equity securities:Perpetual preferred stocks


1,309



88



(34
)


1,363Common stocks


25,948



3,197







29,145Total equity securities


27,257



3,285



(34
)


30,508Short-term investments


67











67Total investments

$
928,533


$
18,011


$
(8,394
)

$
938,150December 31, 2009: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 stocks


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
)

$
596,385    73




---



##### Table of Contents



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


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

$
27,566


$
28,058Due after one year through five years


293,529



297,256Due after five years through ten years


273,531



277,955Due after ten years


104,141



101,998698,767



705,267Mortgage-backed securities


202,442



202,308Total

$
901,209


$
907,575   other-than-temporary
  Year Ended December 31,2010


2009


2008(Dollars in thousands)Fixed maturity gains

$
3,596


$
2,870


$
463Fixed maturity losses


(402
)


(3,803
)


(4,197
)Equity security gains


1,614



5,841



694Equity security losses


(484
)


(1,924
)


(18,181
)Securities lending fixed maturity losses






(423
)


(1,173
)Net realized gains (losses) on investments

$
4,324


$
2,561


$
(22,394
)   other-than-temporary other-than-temporary mortgage-backed
  other-than-temporary other-than-temporary
 74




---



##### Table of Contents



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


Twelve Months or MoreFair











FairValue as











Value asFair


Unrealized


% of


Number of


Fair


Unrealized


% of


Number ofValue


Losses


Cost


Holdings


Value


Losses


Cost


Holdings(Dollars in thousands)December 31, 2010:Fixed maturities:U.S. Government and governmentagency obligations

$
76,781


$
(976
)


98.7
%


35


$



$








Foreign government obligations


5,676



(65
)


98.9
%


3















State and local governmentobligations


124,938



(1,599
)


98.7
%


108



5,194



(963
)


84.4
%


4Residential mortgage-backedsecurities


78,332



(1,056
)


98.7
%


25



7,317



(1,976
)


78.7
%


5Commercial mortgage-backedsecurities


2,034



(48
)


97.7
%


1



3,536



(180
)


95.2
%


1Corporate obligations


62,158



(652
)


99.0
%


61



6,311



(434
)


93.6
%


7Redeemable preferred stocks


3,326



(266
)


92.6
%


8



3,691



(145
)


96.2
%


5Total fixed maturities


353,245



(4,662
)


98.7
%


241



26,049



(3,698
)


87.6
%


22Equity securities:Perpetual preferred stocks


605



(34
)


94.7
%


4















Common stocks






























Total equity securities


605



(34
)


94.7
%


4















Total fixed maturities and equitysecurities

$
353,850


$
(4,696
)


98.7
%


245


$
26,049


$
(3,698
)


87.6
%


22December 31, 2009:Fixed maturities:U.S. Government and governmentagency obligations

$
84,971


$
(349
)


99.6
%


46


$



$








State and local governmentobligations


14,279



(122
)


99.2
%


13



6,725



(1,490
)


81.9
%


6Residential mortgage-backedsecurities


35,434



(210
)


99.4
%


20



8,426



(4,268
)


66.4
%


7Commercial mortgage-backedsecurities


















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 equitysecurities

$
157,873


$
(1,140
)


99.3
%


124


$
40,071


$
(8,671
)


82.2
%


45    75




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##### 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
  other-than-temporary
  Year Ended December 31,2010


2009(Dollars in thousands)Beginning balance

$
1,910


$
Additional credit impairments on:Previously impaired securities


144



Securities without prior impairments






1,910Reductions


(37
)


Ending balance

$
2,017


$
1,910  76




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2010


2009


2008(Dollars in thousands)Investment income:Fixed maturities

$
23,250


$
18,730


$
19,545Equity securities


346



627



1,313Short-term investments and cash equivalents


38



85



1,755Total investment income


23,634



19,442



22,613Investment expense


(336
)


(118
)


(112
)Net investment income

$
23,298


$
19,324


$
22,501     6.
    Long-term
    Debt           77




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  7.
    Income
    Taxes    Year Ended December 31,2010


2009


2008(Dollars in thousands)Current federal income tax provision

$
23,677


$
18,729


$
17,392Current state income tax provision


287



1,683



45Deferred federal income tax benefit


(11,335
)


(6,737
)


(2,379
)$
12,629


$
13,675


$
15,058     Year Ended December 31,2010


2009


2008(Dollars in thousands)Federal income tax expense at statutory rate

$
18,249


$
21,043


$
9,001Effect of:Tax-exempt investment income


(1,862
)


(1,697
)


(1,387
)Change in valuation allowance on net capital losses


(810
)


(6,735
)


7,545Gain on bargain purchase


(2,609
)






State income taxes


186



1,094



29Other items, net


(525
)


(30
)


(130
)$
12,629


$
13,675


$
15,058  78




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31,2010


2009(Dollars in thousands)Deferred Tax Assets:Unearned premiums

$
13,103


$
8,750Unpaid losses and loss adjustment expenses


18,700



8,742Assignments and assessments


1,474



817Realized losses on investments, primarily impairments


6,092



6,436Accrued compensation


3,156



2,218Other, net


2,129



1,39844,654



28,361Valuation allowance






(810
)44,654



27,551Deferred Tax Liabilities:Deferred policy acquisition costs


(8,221
)


(6,241
)Unrealized gains on investments


(3,366
)


(1,266
)Intangible assets


(3,122
)


Other, net


(2,612
)


(1,866
)Total deferred tax liabilities


(17,321
)


(9,373
)Net deferred income tax assets

$
27,333


$
18,178            79




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##### 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, 2010Total Options OutstandingWeighted


Weighted


Weighted AverageAverage


Average


RemainingShares


Exercise Price


Fair Value


Contractual TermOptions outstanding, beginning of year


647,050


$
18.08


$
6.68Forfeited


(100,000
)


22.47



6.61Exercised


(45,500
)


10.62



5.05Granted


60,000



22.63



5.54Options outstanding, end of year


561,550


$
18.39


$
6.70



5.3 yearsOptions exercisable, end of year


360,550


$
16.19


$
6.97



4.4 years   Year Ended December 31, 2010Total Nonvested SharesWeighted AverageGrant DateShares


Fair ValueNonvested share, beginning of year


91,500


$
31.56Granted


9,000



18.09Vested


(12,000
)


22.70Forfeited






Nonvested share, end of year


85,000


$
31.40    80




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2010


2009


2008Risk-free interest rate


2.8
%


2.6
%


3.1
%Expected option life


6.5 years



6.5 years



6.5 yearsExpected stock price volatility


33.1
%


31.9
%


26.4
%Dividend yield


1.6
%


1.8
%


1.0
%Weighted average fair value of options granted during year

$
5.54


$
3.02


$
7.20       Stock Option


NonvestedAwards


Shares(Dollars in thousands)2011

$
180


$
3282012


153



3012013


82



2922014


63



2922015 and thereafter






583Total remaining compensation expense

$
478


$
1,796   9.
    Employee
    Benefit Plan     81




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  10.
    Earnings
    Per Common Share    Year Ended December 31,2010


2009


2008(In thousands, except per share data)Net income

$
39,509


$
46,449


$
10,660Weighted average shares outstanding during period


19,343



19,301



19,285Additional shares issuable under employee common stock option
    plans using treasury stock method


109



65



81Weighted average shares outstanding assuming exercise of stock
    options


19,452



19,366



19,366Net income per share:Basic

$
2.04


$
2.41


$
0.55Diluted

$
2.03


$
2.40


$
0.55     11.
    Transactions
    with Related Parties      Year Ended December 31,2010


2009


2008(Dollars in thousands)Assumed premiums written

$
3,916


$
3,151


$
5,374Assumed premiums earned


3,427



3,850



6,249Assumed losses and loss adjustment expense incurred


2,021



4,137



5,305Ceded premiums written


2,170



3,100



3,478Ceded premiums earned


2,447



3,199



3,567Ceded losses and loss adjustment expense recoveries


2,889



3,109



1,530Payable to Great American as of year end


150



258



386Service fee expense


61



60



96    82




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    12.
    Reinsurance    Year Ended December 31,2010


2009


2008(Dollars in thousands)Direct premiums written

$
430,555


$
337,972


$
371,243Reinsurance assumed


8,075



6,905



9,053Reinsurance ceded


(84,101
)


(69,831
)


(82,215
)Net premiums written

$
354,529


$
275,046


$
298,081Direct premiums earned

$
432,281


$
344,451


$
358,696Reinsurance assumed


7,527



7,699



10,196Reinsurance ceded


(81,437
)


(73,071
)


(78,151
)Total premiums earned

$
358,371


$
279,079


$
290,741Reinsurance recoverable

$
208,590


$
149,949


$
150,791    83




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  13.
    Unpaid
    Losses and LAE    December 31,2010


2009


2008(Dollars in thousands)Reserve for losses and LAE, net of related reinsurance
    recoverables, at beginning of year

$
276,419


$
262,440


$
210,302Net VIC reserves acquired, at fair value


282,325







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


266,042



171,041



188,985Prior years


(9,634
)


(1,286
)


(854
)256,408



169,755



188,131Deduct:Losses and LAE payments for claims, net of reinsurance,
    occurring during:Current year


96,182



64,161



68,320Prior years


122,834



91,615



67,673219,016



155,776



135,993Reserve for losses and LAE, net of related reinsurance
    recoverables, at end of year


596,136



276,419



262,440Reinsurance recoverable on unpaid losses and LAE, at end of year


202,509



140,841



137,561Reserve for unpaid losses and LAE, gross of reinsurance
    recoverables

$
798,645


$
417,260


$
400,001     14.
    Expense
    on Amounts Withheld   84




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2010


2009


2008(Dollars in thousands)Investment income on amounts withheld related to alternative
    risk transfer programs

$
3,450


$
3,535


$
4,299Investment expense on amounts withheld related to alternative
    risk transfer programs


3,450



3,535



4,299Investment balance related to alternative risk transfer programs


137,546



128,934



124,076   15.
    Statutory
    Accounting Principles    Year Ended December 31,2010


2009


2008(Dollars in thousands)NIIC statutory capital and surplus

$
273,647


$
238,390


$
190,134NIIC statutory net income


19,858



33,158



7,611VIC statutory capital and surplus(a)


106,336







VIC statutory net income(b)


12,276







NIIC-HI statutory capital and surplus


12,040



11,295



10,397NIIC-HI statutory net income


726



899



839TCC statutory capital and surplus


16,944



15,977



14,707TCC statutory net income


932



1,115



366     (a)
    
    Includes the statutory surplus of VIC for 2010 only, as the
    Companys acquisition of VIC was effective on July 1,
    2010.(b)
    
    Includes the statutory net income of VIC for 2010 only, as the
    Companys acquisition of VIC was effective on July 1,
    2010. The statutory net income of VIC represents the income for
    the entire statutory annual period. The Companys
    consolidated net income, on a GAAP basis, includes the earnings
    of VIC since the July 1, 2010. See Note 3 
    Acquisition of Vanliner Group, Inc. for additional
    information.       85




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  16.
    Commitments
    and Contingencies        17.
    Segment
    Information   86




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2010


2009


2008(Dollars in thousands)Revenue:Premiums Earned:Alternative Risk Transfer

$
155,819


$
141,525


$
137,298Transportation


125,713



60,344



75,495Specialty Personal Lines


57,800



56,385



54,862Hawaii and Alaska


13,687



15,272



17,591Other


5,352



5,553



5,495Total premiums earned


358,371



279,079



290,741Net investment income


23,298



19,324



22,501Net realized gains (losses) on investments


4,324



2,561



(22,394
)Gain on bargain purchase


7,453







Other


3,680



3,488



2,868Total revenues

$
397,126


$
304,452


$
293,716   18.
    Quarterly
    Operating Results  (Unaudited)    1st


2nd


3rd


4th


YearQuarter


Quarter


Quarter


Quarter


Ended(Dollars in thousands)2010(a)Revenues

$
76,840


$
76,890


$
127,772


$
115,624


$
397,126Net income


10,586



7,618



15,762



5,543



39,509Net income per share  basic(b)


0.55



0.39



0.81



0.29



2.04Net income per share  diluted(b)


0.55



0.39



0.81



0.28



2.032009Revenues

$
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(b)


0.66



0.63



0.42



0.70



2.41Net income per share  diluted(b)


0.65



0.63



0.42



0.70



2.40     (a)
    
    Amounts shown in the table above for the 2010 third quarter,
    fourth quarter and full year include the results of operations
    for Vanliner from the July 1, 2010 date of acquisition
    through December 31, 2010. Additionally, the purchase
    accounting adjustments made within the fair value measurement
    period during the 2010 fourth quarter affected the provisional
    gain on bargain purchase of Vanliner and are reflected above in
    the results of operations for the 2010 third quarter, as the
    Company is required to retrospectively adjust such amounts as of
    the acquisition date in accordance with ASC 805. As such,
    the 2010 third quarter amounts shown above include the full
    $7.5 million gain on bargain purchase of Vanliner and
    differ from those originally reported in our September 30,
    2010
    Form 10-Q.
    See Note 3  Acquisition of Vanliner Group,
    Inc. for additional information.(b)
    
    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. 87




---



##### Table of Contents



ITEM 9
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    ITEM 9A
    Controls
    and Procedures  Rules 13a-15(e) 15d-15(e) Rule 13a-15(e))
        ITEM 9B
    Other
    Information   PART III



The information required by the following Items, except as to
    the information provided below under Item 10, will be
    included in our definitive Proxy Statement for the 2011 Annual
    Meeting of Shareholders, which will be filed with the SEC within
    120 days after the end of our fiscal year and is
    incorporated herein by reference. Item 10.
    Directors,
    Executive Officers and Corporate Governance  (http://invest.natl.com).
    Item 11.
    Executive
    Compensation   88




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##### 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


92Schedule III


Supplementary Insurance Information


95Schedule IV


Reinsurance


(3)Schedule V


Valuation and Qualifying Accounts


96Schedule VI


Supplementary Information Concerning Property-Casualty Insurance
    Operations


(4)  89




---



##### 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 David W.
    Michelson, as amended as of January 1, 2008*


(5),(8)10
.8

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


(8)10
.9

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


(8)10
.10

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


(6),(9)10
.11

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


(7)10
.12

Purchase Agreement, dated as of April 26, 2010, among
    UniGroup, Inc., National Interstate Insurance Company and
    National Interstate Corporation


(11)10
.13

Letter Agreement, dated as of February 18, 2011, among
    UniGroup, Inc., National Interstate Insurance Company and
    National Interstate Corporation


(12)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
    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 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  90




---



##### Table of Contents



*
    
    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(11)
    
    This exhibit is incorporated by reference to our
    Form 8-K
    filed April 28, 2010(12)
    
    This exhibit is incorporated by reference to our
    Form 8-K
    filed February 23, 2011 91




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  SCHEDULE II 
    CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
 CONDENSED
    BALANCE SHEETS
  December 31,2010


2009(In thousands, except per share data)ASSETSInvestment in subsidiaries

$
320,187


$
278,425Investments:Fixed maturities
    available-for-sale,
    at fair value (cost of $1,351 and $6,105, respectively)


1,205



5,897Equity securities
    available-for-sale,
    at fair value (cost of $21 and $23, respectively)


28



35Total investments


1,233



5,932Receivable from subsidiary


7,039



4,227Cash


24



95Property and equipment, net


4,510



2,476Other assets


3,080



487Total assets

$
336,073


$
291,642LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Long-term debt

$
20,000


$
15,000Other liabilities


6,495



5,325Total liabilities


26,495



20,325Shareholders equity:Preferred shares  no par valueAuthorized  10,000 sharesIssued  0 shares






Common shares  $0.01 par valueAuthorized  50,000 sharesIssued  23,350 shares, including 3,993 and
    4,048 shares, respectively, in treasury


234



234Additional paid-in capital


50,273



49,264Retained earnings


258,473



225,195Accumulated other comprehensive income


6,251



2,353Treasury shares


(5,653
)


(5,729
)Total shareholders equity


309,578



271,317Total liabilities and shareholders equity

$
336,073


$
291,642  92




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
    SCHEDULE II  CONDENSED FINANCIAL INFORMATION OF
    PARENT COMPANY
    CONDENSED STATEMENTS OF INCOME
  Year Ended December 31,2010


2009


2008(In thousands)Revenues:Fees from subsidiaries

$
18,125


$
14,759


$
13,189Net investment income


100



347



733Net realized gains (losses) on investments


187



(1,132
)


(1,006
)Total revenues


18,412



13,974



12,916Expenses:General and administrative expenses


19,254



16,359



14,854Interest expense


291



353



833Total expenses


19,545



16,712



15,687Loss before income taxes and equity in undistributed income of
    subsidiaries


(1,133
)


(2,738
)


(2,771
)Income tax benefit


(397
)


(958
)


(969
)Loss before equity in undistributed income of subsidiaries


(736
)


(1,780
)


(1,802
)Equity in undistributed income of subsidiaries, net of tax


40,245



48,229



12,462Net income

$
39,509


$
46,449


$
10,660  93




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  SCHEDULE II 
    CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
    CONDENSED STATEMENTS OF CASH FLOWS
  Year Ended December 31,2010


2009


2008(In thousands)Operating activitiesNet income

$
39,509


$
46,449


$
10,660Adjustments to reconcile net income to net cash provided by
    operating activities


(40,625
)


(47,838
)


(9,191
)Net cash (used in) provided by operating activities


(1,116
)


(1,389
)


1,469Investing activitiesPurchases of investments


(5,885
)


(1,534
)


(6,454
)Proceeds from sale or maturities of investments


10,814



6,036



13,133Purchase of property and equipment


(3,181
)


(995
)


(861
)Net cash provided by investing activities


1,748



3,507



5,818Financing activitiesDecrease in securities lending collateral






4,682



5,866Decrease in securities lending obligation






(4,682
)


(5,866
)Additional long-term borrowings


31,500







15,000Reductions of long-term debt


(26,500
)






(15,464
)Tax benefit realized from exercise of stock options


31







396Issuance of common shares from treasury upon exercise of stock
    options or stock award grants


497



(40
)


838Cash dividends paid on common shares


(6,231
)


(5,441
)


(4,663
)Net cash used in financing activities


(703
)


(5,481
)


(3,893
)Net (decrease) increase in cash and cash equivalents


(71
)


(3,363
)


3,394Cash at beginning of year


95



3,458



64Cash at end of year

$
24


$
95


$
3,458  94




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  SCHEDULE III 
    SUPPLEMENTARY INSURANCE INFORMATION
  AmortizationLiability for









of DeferredDeferred

Unpaid





Net



Policy

Other

NetPolicy

Losses and

Unearned

Earned

Investment

Losses and

Acquisition

Underwriting

PremiumsAcquisition Costs

LAE

Premiums

Premiums

Income

LAE

Costs

Expenses

Written(In thousands)Year ended December 31, 2010

$
23,488


$
798,645


$
221,903


$
358,371


$
23,298


$
256,408


$
58,871


$
8,768


$
354,529Year 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



298,081  95




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##### 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(a)


Period(In thousands)Year ended December 31, 2010Premiums in course of collection

$
963


$
1,299


$



$
347


$
1,915Year ended December 31, 2009Premiums in course of collection


587



555







179



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


462



354







229



587     (a)
    
    Deductions include write-offs of amounts determined to be
    uncollectible. 96




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##### Table of Contents



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

Title

Date/s/  DAVID
    W. MICHELSONDavid
    W. Michelson

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

March 8, 2011/s/  JULIE
    A. MCGRAWJulie
    A. McGraw

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

March 8, 2011/s/  ALAN
    R. SPACHMAN*Alan
    R. Spachman

Chairman of the Board

March 8, 2011/s/  JOSEPH
    E. CONSOLINO*Joseph
    E. Consolino

Director

March 8, 2011/s/  THEODORE
    H. ELLIOTT, JR.*Theodore
    H. Elliott, Jr.

Director

March 8, 2011/s/  GARY
    J. GRUBER*Gary
    J. Gruber

Director

March 8, 2011/s/  KEITH
    A. JENSEN*Keith
    A. Jensen

Director

March 8, 2011/s/  DONALD
    D. LARSON*Donald
    D. Larson

Director

March 8, 2011/s/  VITO
    PERAINO*Vito
    Peraino

Director

March 8, 2011/s/  JOEL
    SCHIAVONE*Joel
    Schiavone

Director

March 8, 2011     *
    
    By Arthur J. Gonzales and Julie A. McGraw, attorneys-in-fact 97