##### 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, 2008
  Commission File No. 000-51130
      National Interstate
    Corporation
 (Exact name of registrant as
    specified in its charter)
  Ohio

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

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

Which registeredCommon Shares, $0.01 par value

Nasdaq Select Global 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-K Form 10-K Form 10-K. þ
  Rule 12b-2
  Large accelerated filer o

Accelerated filer þ

Non-accelerated filer o

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




---



##### 





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



Business:


4Introduction


4Property and Casualty Insurance Operations


4Investments


12Competition


14Ratings


15Regulation


15Employees


18Item 1A



Risk Factors


18Item 1B



Unresolved Staff Comments


26Item 2



Properties


26Item 3



Legal Proceedings


26Item 4



Submission of Matters to a Vote of Security
    Holders


26PART IIItem 5



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


27Item 6



Selected Financial Data


29Item 7



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


31Item 7A



Quantitative and Qualitative Disclosures About
    Market Risk


53Item 8



Financial Statements and Supplementary Data


54Item 9



Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


82Item 9A



Controls and Procedures


82Item 9B



Other Information


82PART IIIItem 10



Directors, Executive Officers and Corporate
    Governance


82Item 11



Executive Compensation


82Item 12



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


83Item 13



Certain Relationships and Related Transactions,
    and Director Independence


83Item 14



Principal Accountant Fees and Services


83PART IVItem 15



Exhibits and Financial Statement Schedules


83Signatures


90EX-21.1EX-23.1EX-24.1EX-31.1EX-31.2EX-32.1EX-32.2   2




---



##### Table of Contents



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




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##### Table of Contents



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




---



##### Table of Contents



Product Management Organization.
  Our
    Products
      Year Ended December 31,2008


2007


2006Amount


Percent


Amount


Percent


Amount


Percent(Dollars in thousands)Alternative Risk Transfer

$
206,342



54.3
%

$
167,717



48.5
%

$
135,283



44.3
%Transportation


87,246



22.9
%


90,984



26.3
%


89,399



29.3
%Specialty Personal Lines


59,065



15.5
%


55,169



15.9
%


52,060



17.0
%Hawaii and Alaska


22,489



5.9
%


25,126



7.3
%


23,267



7.6
%Other


5,154



1.4
%


7,010



2.0
%


5,495



1.8
%Gross premiums written

$
380,296



100.0
%

$
346,006



100.0
%

$
305,504



100.0
%     Premium Range

Annual Premium AverageAlternative Risk Transfer

$45,000-$10,400,000


$267,525Transportation

$5,000-$1,367,500


$37,125Specialty Personal Lines

$50-$20,000


$1,000Hawaii and Alaska

$500-$670,000


$4,032   Alternative Risk Transfer.
 5




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##### Table of Contents



sm
 6




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##### Table of Contents



Transportation.
  Specialty Personal Lines.
  Hawaii and Alaska.
  Geographic
    Concentration
    Year Ended December 31,2008


2007Percent of





Percent ofVolume


Total


Volume


Total(Dollars in thousands)California

$
57,564



15.5
%

$
57,291



17.1
%Texas


33,676



9.1
%


21,050



6.3
%Florida


24,849



6.7
%


20,252



6.1
%Hawaii


22,574



6.1
%


25,465



7.6
%New York


20,340



5.4
%


18,327



5.5
%North Carolina


18,015



4.9
%


19,721



5.9
%All other states


194,225



52.3
%


172,558



51.5
%Direct premiums written

$
371,243



100.0
%

$
334,664



100.0
%  7




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##### Table of Contents



Concentration
    by Statutory Line of Business
    Year Ended December 31,2008


2007Percent of





Percent ofVolume


Total


Volume


Total(Dollars in thousands)Auto and other liability

$
228,119



61.4
%

$
209,676



62.7
%Auto physical damage


74,886



20.2
%


72,569



21.7
%Workers compensation


49,634



13.4
%


41,261



12.3
%Other lines:Inland marine


15,414



4.1
%


8,701



2.6
%Commercial multiple peril


1,129



0.3
%


1,411



0.4
%Allied lines


1,079



0.3
%


172



0.0
%Ocean marine


973



0.3
%


861



0.3
%Surety


9



0.0
%


13



0.0
%All others


18,604



5.0
%


11,158



3.3
%Direct premiums written

$
371,243



100.0
%

$
334,664



100.0
%   Underwriting
      Marketing
    and Distribution
   8




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##### Table of Contents



Reinsurance
      Gross


Prepaid


Total





CededA.M. Best

Reinsurance


Reinsurance


Reinsurance


Percent of


Premiums


Percent ofRating

Receivables


Premium


Assets


Total


Written


Total(Dollars in thousands)Motors Ins Corp


A−


$
37,627


$
5,730


$
43,357



24.2
%

$
15,682



19.1
%Platinum Underwriters Reinsurance, Inc.


A



33,492



1,372



34,864



19.4
%


5,257



6.4
%Great American Insurance Company


A



11,813



1,188



13,001



7.2
%


3,478



4.2
%TRAX Insurance Ltd.(1)






9,909



760(1
)


10,669



6.0
%


10,250



12.5
%Hannover Ruckversicherungs Ag


A



7,596



1,360



8,956



5.0
%


3,572



4.3
%Scor Reinsurance Corp


A−



6,731



2,147



8,878



5.0
%


5,649



6.9
%Subtotal






107,168



12,557



119,725



66.8
%


43,888



53.4
%All other reinsurers






43,623



15,847



59,470



33.2
%


38,327



46.6
%Total





$
150,791


$
28,404


$
179,195



100.0
%

$
82,215



100.0
%     (1)
    
    Does not reflect a $10.7 million letter of credit that is
    held as collateral for the net receivable from TRAX Insurance
    Ltd., a member-owned captive insurance company.    Claims
    Management and Administration
     9




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##### Table of Contents



24-hour,
    and/or
    Reserves
    for Unpaid Losses and Loss Adjustment Expenses
    (LAE)
      As re-estimated at December 31, 2008,
 10




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##### Table of Contents



Net Liability for Unpaid Losses And LAE:

1998


1999


2000


2001


2002


2003


2004


2005


2006


2007


2008(Dollars in thousands)As originally estimated

$
23,339


$
26,566


$
30,292


$
48,456


$
67,162


$
86,740


$
111,644


$
151,444


$
181,851


$
210,302


$
262,440As re-estimated at December 31, 2008


20,987



25,471



31,505



47,361



61,268



79,084



99,487



139,994



173,860



209,448Liability re-estimated as of:One year later


22,643



24,923



32,751



48,494



63,462



84,485



106,409



143,991



176,179



209,440Two years later


21,948



26,252



33,473



47,479



64,687



83,862



103,416



142,929



173,860Three years later


21,903



26,380



31,884



47,250



63,037



81,991



99,768



139,994Four years later


21,608



25,531



31,488



46,400



62,564



79,673



99,487Five years later


20,542



25,138



31,590



46,961



60,551



79,094Six years later


21,008



24,989



31,757



46,880



61,268Seven years later


21,051



25,364



31,410



47,361Eight years later


21,150



25,372



31,505Nine years later


21,067



25,471Ten years later


20,987Net cumulative (deficiency) redundancy


2,352



1,095



(1,213
)


1,095



5,894



7,656



12,157



11,450



7,991



854Net cumulative (deficiency) redundancy  %


10.1
%


4.1
%


(4.0
%)


2.3%



8.8
%


8.8
%


10.9
%


7.6
%


4.4
%


0.4
%Cumulative paid of:One year later


8,742



10,307



14,924



18,048



22,792



29,616



37,049



51,901



63,314



67,673Two years later


14,189



17,637



20,077



28,510



36,927



48,672



59,038



85,193



95,752Three years later


18,170



20,157



24,313



35,718



48,660



61,001



76,617



101,340Four years later


19,115



22,383



26,869



40,615



53,531



68,594



84,070Five years later


20,158



23,413



28,591



43,474



57,697



71,904Six years later


20,537



24,033



30,180



45,365



59,035Seven years later


20,812



24,594



30,813



45,828Eight years later


20,913



24,826



30,863Nine years later


20,974



25,008Ten years later


20,858The
    following is a reconciliation of our net liability to the gross
    liability for unpaid losses and LAE:1998


1999


2000


2001


2002


2003


2004


2005


2006


2007


2008(Dollars in thousands)As originally estimated:Net liability shown above

$
23,339


$
26,566


$
30,292


$
48,456


$
67,162


$
86,740


$
111,644


$
151,444


$
181,851


$
210,302


$
262,440Add reinsurance recoverables


9,519



11,396



12,416



22,395



35,048



41,986



59,387



71,763



84,115



91,786



137,561Gross liability

$
32,858


$
37,962


$
42,708


$
70,851


$
102,210


$
128,726


$
171,031


$
223,207


$
265,966


$
302,088


$
400,001As re-estimated at December 31, 2008Net liability shown above

$
20,987


$
25,471


$
31,505


$
47,361


$
61,268


$
79,084


$
99,487


$
139,994


$
173,860


$
209,448



N/AAdd reinsurance recoverables reestimated


5,012



6,828



13,013



34,288



47,764



51,276



58,516



66,628



78,427


$
76,716



N/AGross liability

$
25,999


$
32,299


$
44,518


$
81,649


$
109,032


$
130,360


$
158,003


$
206,622


$
252,287


$
286,164



N/AGross cumulative (deficiency) redundancy

$
6,859


$
5,663


$
(1,810
)

$
(10,798
)

$
(6,822
)

$
(1,634
)

$
13,028


$
16,585


$
13,679


$
15,924



N/AGross cumulative (deficiency)
    redundancy  %


20.9
%


14.9
%


(4.2
%)


(15.2%
)


(6.7
%)


(1.3
%)


7.6
%


7.4
%


5.1
%


5.3
%


N/A  11




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##### Table of Contents



Investments  General
      At December 31,2008


2007Short term investments


0.0
%


4.7
%Fixed maturities:US Government and government agencies


41.6
%


45.9
%State and local government obligations


25.7
%


16.8
%Mortgage-backed securities


16.2
%


7.7
%Corporate obligations


8.6
%


13.2
%Total fixed maturities


92.1
%


83.6
%Equity securities:Common stocks


4.4
%


6.2
%Preferred stocks


3.5
%


5.5
%Total equity securities


7.9
%


11.7
%Total


100.0
%


100.0
%     At December 31,2008


2007Cash and cash equivalents


50.0
%


40.9
%Mortgage-backed securities


22.0
%


23.7
%Corporate obligations


28.0
%


35.4
%Total


100.0
%


100.0
%  12




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##### Table of Contents



Year Ended December 31,2008


2007


2006Yield on short term investments:Excluding realized gains and losses


5.5
%


4.9
%


4.3
%Including realized gains and losses


5.5
%


4.9
%


4.3
%Yield on fixed maturities:Excluding realized gains and losses


4.4
%


4.7
%


4.7
%Including realized gains and losses


3.4
%


4.7
%


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


4.4
%


5.3
%


4.3
%Including realized gains and losses


(31.7
%)


3.5
%


7.8
%Yield on all investments:Excluding realized gains and losses


4.4
%


4.8
%


4.6
%Including realized gains and losses


(0.3
%)


4.6
%


4.9
%     Year Ended December 31,2008


2007


2006Fixed maturities:National Interstate Total Return on Fixed Maturities


3.9
%


6.9
%


4.8
%Barclays Intermediate Aggregate Index


4.9
%


7.0
%


4.6
%Equity securities:National Interstate Total Return on Preferred Stock


(27.2
%)


(13.9
%)


9.0
%Merrill Lynch Preferred Stock Index


(37.9
%)


(11.7
%)


8.4
%National Interstate Total Return on all other Equity


(29.6
%)


4.3
%


13.2
%Standard & Poors 500 Index


(37.0
%)


5.5
%


15.8
%  13




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##### Table of Contents



Fixed
    Maturity Investments and Securities Lending Collateral
    NAIC




Fixed Maturities


Securities Lending CollateralDesignation


Comparable S&P Rating

Amortized Cost


Fair Value


% of Total


Amortized Cost


Fair Value


% of Total(Dollars in thousands)1


AAA, AA, A

$
431,583


$
433,526



96.8
%

$
84,685


$
78,629



92.9
%2


BBB


15,638



12,993



2.9
%


2,084



1,705



2.0
%Total Investment Grade


447,221



446,519



99.7
%


86,769



80,334



94.9
%3


BB


284



298



0.1
%










0.0
%4


B


500



495



0.1
%


5,000



1,450



1.7
%5


CCC, CC, C


407



407



0.1
%










0.0
%6


D


219



219



0.0
%


2,886



2,886



3.4
%Total Non-Investment Grade


1,410



1,419



0.3
%


7,886



4,336



5.1
%Total

$
448,631


$
447,938



100.0
%

$
94,655


$
84,670



100.0
%     December 31, 2008Investment Portfolio


Securities Lending CollateralFair Value


% of Total


Fair Value


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

$
21,153



4.7
%

$
62,728



74.1
%More than one year to five years


195,260



43.6
%


3,341



3.9
%More than five years to ten years


140,497



31.4
%






0.0
%More than ten years


12,460



2.8
%






0.0
%369,370



82.5
%


66,069



78.0
%Mortgage-backed securities


78,568



17.5
%


18,601



22.0
%Total fixed maturities

$
447,938



100.0
%

$
84,670



100.0
%    Competition   14




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##### Table of Contents



Ratings   Regulation  State
    Regulation
  General
     15




---



##### Table of Contents



Statutory
    Accounting Principles
      Restrictions
    on Paying Dividends
      Assessments
    and Fees Payable
   16




---



##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



As a
    holding company, we are dependent on the results of operations
    of our insurance company subsidiaries to meet our obligations
    and pay future dividends.
    We are
    currently rated A (Excellent) by A.M. Best,
    their third highest rating out of 16 rating categories. A
    decline in our rating below A- could adversely
    affect our position in the insurance market, make it more
    difficult to market our insurance products and cause our
    premiums and earnings to decrease.
      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.
   21




---



##### Table of Contents



If our
    claims payments and related expenses exceed our reserves, our
    financial condition and results of operations could be adversely
    affected.
      
    the amount of claims payments;
    the expenses that we incur in resolving claims;
    legislative and judicial developments; and
    changes in economic conditions, including the effect of
    inflation.    We may
    not be successful in reducing our risk and increasing our
    underwriting capacity through reinsurance arrangements, which
    could adversely affect our business, financial condition and
    results of operations.
    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.
     23




---



##### Table of Contents



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




---



##### Table of Contents



Future
    sales of our common shares may affect the trading price of our
    common shares.
    Form S-3. Form S-3 Form 10-K
  Form S-8 Form S-8
  We
    face ongoing challenges as a result of being a public company
    and our financial results could be adversely
    affected.
     25




---



##### Table of Contents



ITEM 1B
    Unresolved
    Staff Comments    ITEM 2
    Properties      ITEM 3
    Legal
    Proceedings  Please
    refer to Forward-Looking Statements following the
    Index in front of this
    Form 10-K.
        ITEM 4
    Submission
    of Matters to a Vote of Security Holders   26




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##### Table of Contents



PART II  ITEM 5
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities  Please
    refer to Forward-Looking Statements following the
    Index in front of this
    Form 10-K.
  Market
    Information
    2008


2007High


Low


High


LowFirst Quarter

$
33.24


$
21.00


$
28.50


$
20.29Second Quarter


25.59



18.26



27.10



23.12Third Quarter


24.98



16.13



35.79



25.01Fourth Quarter


23.90



13.57



37.01



30.15     Dividend
    Policy
       27




---



##### Table of Contents



Performance
    Graph
    
  Cumulative
    Total Return as of December 31, 2008
    (Assumes a $100 investment at the close of trading on
    January 27, 2005)
  Company/ Index

1/28/05

6/30/05

12/31/05

6/30/06

12/31/06

6/30/07

12/31/07

6/30/08

12/31/08NATL Common Stock

$
100


$
147


$
142


$
202


$
182


$
196


$
249


$
139


$
136Nasdaq Insurance Stocks


100



108



117



121



132



138



132



113



123Nasdaq Index


100



101



109



107



119



128



129



112



62  28




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##### Table of Contents



ITEM 6
    Selected
    Financial Data  Form 10-K
  At and for the Year Ended December 31,2008


2007


2006


2005


2004(In thousands, except per share data)Operating Data:Gross premiums written(1)

$
380,296


$
346,006


$
305,504


$
270,036


$
224,984Net premiums written(2)

$
298,081


$
272,142


$
241,916


$
211,106


$
166,419Premiums earned

$
290,741


$
257,561


$
217,319


$
194,397


$
156,908Net investment income


22,501



22,141



17,579



12,527



8,613Net realized (losses) gains on investments


(22,394
)


(653
)


1,193



278



1,661Other income


2,868



4,137



2,387



1,974



1,967Total revenues


293,716



283,186



238,478



209,176



169,149Losses and loss adjustment expenses


188,131



149,501



129,491



117,449



92,008Commissions and other underwriting expenses


62,130



50,922



42,671



35,741



34,201Other operating and general expenses


12,605



12,140



9,472



8,436



6,053Expense on amounts withheld(3)


4,299



3,708



2,147



992



835Interest expense


833



1,550



1,522



1,421



1,610Total expenses


267,998



217,821



185,303



164,039



134,707Income before income taxes


25,718



65,365



53,175



45,137



34,442Provision for income taxes


15,058



21,763



17,475



14,857



11,674Net income

$
10,660


$
43,602


$
35,700


$
30,280


$
22,768Selected GAAP Ratios:Losses and loss adjustment expense ratio(4)


64.7
%


58.0
%


59.6
%


60.4
%


58.6
%Underwriting expense ratio(5)


24.7
%


22.9
%


22.9
%


21.7
%


24.4
%Combined ratio(6)


89.4
%


80.9
%


82.5
%


82.1
%


83.0
%Return on equity(7)


5.0
%


22.6
%


22.8
%


28.5
%


37.2
%Per Share Data(8):Earnings per common share, basic

$
0.55


$
2.27


$
1.87


$
1.62


$
1.50Earnings per common share, assuming dilution


0.55



2.25



1.85



1.60



1.47Book value per common share, basic (at year end)(9)

$
11.20


$
11.08


$
9.07


$
7.32


$
4.69Weighted average number of common shares outstanding, basic


19,285



19,193



19,136



18,737



15,171Weighted average number of common shares outstanding, diluted


19,366



19,348



19,302



18,975



15,480Common shares outstanding (at year end)


19,295



19,312



19,159



19,055



15,530Cash dividends per common share

$
0.24


$
0.20


$
0.16


$
0.08


$
   29




---



##### Table of Contents



At December 31,2008


2007


2006


2005


2004(Dollars in thousands)Balance Sheet Data:Cash and investments

$
563,714


$
492,916


$
406,454


$
320,220


$
238,951Securities lending collateral


84,670



139,305



158,928







Reinsurance recoverable


150,791



98,091



90,070



77,834



63,128Total assets


990,812



898,634



806,248



523,003



401,236Unpaid losses and loss adjustment expenses


400,001



302,088



265,966



223,207



171,031Long-term debt(10)


15,000



15,464



15,464



16,297



32,547Total shareholders equity


216,074



212,806



173,763



139,533



72,789   At and for the Year Ended December 31,2008


2007


2006


2005


2004Selected Statutory Data(11):Policyholders surplus(12)

$
190,134


$
182,302


$
148,266


$
122,825


$
92,124Combined ratio(13)


89.0
%


78.3
%


82.4
%


77.1
%


81.3
%     (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 period.(8)
    
    Adjusted to reflect a
    200-for-1 share
    split effective December 6, 2004.(9)
    
    Book value per common share is computed using only unrestricted
    outstanding common shares. As of December 31, 2008 and 2007
    total unrestricted common shares were 19,295,000 and 19,205,000,
    respectively. There were no unvested restricted shares prior to
    2007.(10)
    
    The 2004 data includes a $15.0 million note payable to
    Great American, junior subordinated debt and bank debt.(11)
    
    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.(12)
    
    The statutory policyholder surplus of NIIC, which includes the
    statutory policyholder surplus of its subsidiaries, NIIC-HI and
    TCC.(13)
    
    Statutory combined ratio of NIIC represents the sum of the
    following ratios: (1) losses and LAE incurred as a
    percentage of net earned premium and (2) underwriting
    expenses incurred as a percentage of net written premiums. 30




---



##### Table of Contents



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




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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.  Industry
    and Trends
  1932-33.
  2004-2008
  
    Our business model and bottom line orientation have resulted in
    disciplined and consistent risk assessment and pricing adequacy. 32




---



##### Table of Contents




    Our ability to attract and retain some of the best
    transportation companies in the industries we serve and insure
    them directly or through our captive programs.
    Our stable operating expenses at or below the revenue growth
    rate.            Revenues
   33




---



##### Table of Contents



Expenses
     34




---



##### Table of Contents



Results
    of Operations
  Overview
    Year Ended December 31,2008


2007Amount


Per Share


Amount


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

$
32,761


$
1.69


$
44,027


$
2.27Net realized losses from investments


(22,101
)


(1.14
)


(425
)


(0.02
)Net income

$
10,660


$
0.55


$
43,602


$
2.25      35




---



##### Table of Contents



Gross
    Premiums Written
    Year Ended December 31,2008


2007


2006Amount


Percent


Amount


Percent


Amount


Percent(Dollars in thousands)Alternative Risk Transfer

$
206,342



54.3
%

$
167,717



48.5
%

$
135,283



44.3
%Transportation


87,246



22.9
%


90,984



26.3
%


89,399



29.3
%Specialty Personal Lines


59,065



15.5
%


55,169



15.9
%


52,060



17.0
%Hawaii and Alaska


22,489



5.9
%


25,126



7.3
%


23,267



7.6
%Other


5,154



1.4
%


7,010



2.0
%


5,495



1.8
%Gross premiums written

$
380,296



100.0
%

$
346,006



100.0
%

$
305,504



100.0
%            36




---



##### Table of Contents



Premiums
    Earned
  2008 compared to 2007.
  Year Ended December 31,


Change2008


2007


Amount


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

$
137,298


$
107,303


$
29,995



28.0
%Transportation


75,495



74,112



1,383



1.9
%Specialty Personal Lines


54,862



51,852



3,010



5.8
%Hawaii and Alaska


17,591



17,625



(34
)


(0.2
%)Other


5,495



6,669



(1,174
)


(17.6
%)Total premiums earned

$
290,741


$
257,561


$
33,180



12.9
%     2007 compared to 2006.
  Year Ended December 31,


Change2007


2006


Amount


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

$
107,303


$
76,645


$
30,658



40.0
%Transportation


74,112



71,820



2,292



3.2
%Specialty Personal Lines


51,852



47,641



4,211



8.8
%Hawaii and Alaska


17,625



15,743



1,882



12.0
%Other


6,669



5,470



1,199



21.9
%Total premiums earned

$
257,561


$
217,319


$
40,242



18.5
%    37




---



##### Table of Contents



Underwriting
    and Loss Ratio Analysis
        Year Ended December 31,2008


2007


2006(Dollars in thousands)Gross premiums written

$
380,296


$
346,006


$
305,504Ceded reinsurance


(82,215
)


(73,864
)


(63,588
)Net premiums written


298,081



272,142



241,916Change in unearned premiums, net of ceded


(7,340
)


(14,581
)


(24,597
)Net premiums earned

$
290,741


$
257,561


$
217,319Combined Ratios:Loss and LAE ratio(1)


64.7
%


58.0
%


59.6
%Underwriting expense ratio(2)


24.7
%


22.9
%


22.9
%Combined ratio


89.4
%


80.9
%


82.5
%     (1)
    
    The ratio of losses and LAE to premiums earned.(2)
    
    The ratio of the sum of commissions and other underwriting
    expenses, other operating expenses less other income to premiums
    earned.  2008 compared to 2007.
     38




---



##### Table of Contents



2007 compared to 2006.
    Investment
    Income
  2008 compared to 2007.
  2007 compared to 2006.
  Realized
    Gains (Losses) on Investments
  2008 compared to 2007.
  2007 compared to 2006.
  Other
    Income
  2008 compared to 2007.
  2007 compared to 2006.
  Commissions
    and Other Underwriting Expenses
  2008 compared to 2007.
 39




---



##### Table of Contents



2007 compared to 2006.
  Other
    Operating and General Expenses
  2008 compared to 2007.
  2007 compared to 2006.
    Expense
    on Amounts Withheld
  2008 compared to 2007.
  2007 compared to 2006.
  Income
    Taxes
  2008 compared to 2007.
   40




---



##### Table of Contents



2007 compared to 2006.
  Financial
    Condition
  Investments
    and Securities Lending Collateral
          Securities with


Securities withUnrealized


UnrealizedGains


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

$
361,342


$
74,201Amortized cost of securities


354,437



81,799Gross unrealized gain or loss

$
6,905


$
(7,598
)Fair value as a % of amortized cost


101.9
%


90.7
%Number of security positions held


295



85Number individually exceeding $50,000 gain or loss


38



26Concentration of gains or losses by type or industry:US Government and government agencies

$
3,120


$
(51
)State, municipalities and political subdivisions


2,172



(2,404
)Mortgage-backed securities


1,425



(27
)Banks, insurance and brokers


71



(4,453
)Industrial and other


117



(663
)Percentage rated investment grade(1)


99.9
%


99.0
% 41




---



##### Table of Contents



Securities with


Securities withUnrealized


UnrealizedGains


Losses(Dollars in thousands)Equity Securities:Fair value of securities

$
966


$
15,136Cost of securities


915



20,729Gross unrealized gain or (loss)

$
51


$
(5,593
)Fair value as a % of cost


105.6
%


73.0
%Number individually exceeding $50,000 gain or (loss)






22Securities Lending:Fair value of securities

$
5,003


$
34,814Amortized cost of securities


5,000



44,802Gross unrealized gain or (loss)

$
3


$
(9,988
)Fair value as a % of amortized cost


100.1
%


77.7
%Number of security positions held


1



14Number individually exceeding $50,000 gain or (loss)






12Concentration of gains or losses by type:Cash and cash equivalents






Mortgage-backed securities






(9,202
)Banks, insurance, and brokers


3



(786
)Percentage rated investment grade(1)


100.0
%


95.8
%     (1)
    
    Investment grade of AAA to BBB by Standard &
    Poors Corporation.    Fixed Maturities Portfolio


Securities Lending CollateralSecurities with


Securities with


Securities with


Securities withUnrealized


Unrealized


Unrealized


UnrealizedGains


Losses


Gains


LossesMaturity:One year or less


3.3
%


11.6
%


100.0
%


37.0
%After one year through five years


46.9
%


23.3
%


0.0
%


9.6
%After five years through ten years


28.3
%


47.1
%


0.0
%


0.0
%After ten years


0.6
%


13.8
%


0.0
%


0.0
%79.1
%


95.8
%


100.0
%


46.6
%Mortgage-backed securities


20.9
%


4.2
%


0.0
%


53.4
%100.0
%


100.0
%


100.0
%


100.0
%  42




---



##### Table of Contents



At December 31, 2008Aggregate


Aggregate


Fair ValueFair


Unrealized


as % ofValue


Gain (Loss)


Cost Basis(Dollars in thousands)Fixed Maturities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (34 issues)

$
52,333


$
2,419



104.8
%More than one year (4 issues)


7,330



568



108.4
%Less than $50,000 (257 issues)


301,679



3,918



101.3
%$
361,342


$
6,905Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (20 issues)

$
20,914


$
(3,664
)


85.1
%More than one year (6 issues)


6,765



(3,227
)


67.7
%Less than $50,000 (59 issues)


46,522



(707
)


98.5
%$
74,201


$
(7,598
)Equity Securities:Securities with unrealized gains: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)


966



51



105.6
%$
966


$
51Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (12 issues)

$
5,704


$
(3,359
)


62.9
%More than one year (10 issues)


3,714



(1,916
)


66.0
%Less than $50,000 (20 issues)


5,718



(318
)


94.7
%$
15,136


$
(5,593
)Securities Lending:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (0 issues)

$



$




0.0
%More than one year (0 issues)










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


5,003



3



100.1
%$
5,003


$
3Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (6 issues)

$
13,721


$
(1,175
)


92.1
%More than one year (6 issues)


11,151



(8,755
)


56.0
%Less than $50,000 (2 issues)


9,942



(58
)


99.4
%$
34,814


$
(9,988
)  43




---



##### Table of Contents



Net RealizedGains (Losses)


Charges foron Sales


Impairment


Total(Dollars in thousands)Year ended:2008

$
(2,230
)

$
(20,164
)

$
(22,394
)2007


321



(974
)


(653
)2006


1,193







1,193   Fair
    Value Measurements
  Fair Value Measurements,
      Liquidity
    and Capital Resources
  Capital Ratios.
  Sources of Funds.
 44




---



##### Table of Contents



45




---



##### Table of Contents



12-month
  Off-Balance Sheet Items.
    Contractual Obligations.
  Payment Due by PeriodWithin








More thanTotal


1 Year


2-3 Years


4-5 Years


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

$
400,001


$
169,692


$
151,607


$
55,019


$
23,683Securities lending obligations(2)


95,828



95,828











Long term debt obligations


15,000











15,000



Operating lease obligations


1,170



346



532



292



Total

$
511,999


$
265,866


$
152,139


$
70,311


$
23,683     (1)
    
    Dollar amounts and time periods are estimates based on
    historical net payment patterns applied to the gross reserve and
    do not represent actual contractual obligations. Actual payments
    and their timing could differ 46




---



##### Table of Contents



significantly from these estimates, and the estimates provided
    do not reflect potential recoveries under reinsurance treaties.(2)
    
    The timing for the return of the collateral associated with our
    securities lending varies, but generally within one year;
    therefore, the return of collateral is reflected as being due
    within one year.  Critical
    Accounting Policies
    Loss
    and LAE
      
    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; 47




---



##### Table of Contents



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

ImpactCommercial Auto Liability

$
2.0 millionWorkers Compensation

$
0.5 million     5-yr. Average

Net Reserves

Effect on NetDevelopment (*)

December 31, 2008

Earnings(2.1
)%

$
262.4 million


$
5.4 million     (*)
    
    Net of tax effect.    Commercial Auto Liability.
    
    litigious climate;
    unpredictability of judicial decisions regarding coverage issues; 48




---



##### Table of Contents




    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, 2008Statutory Lines of Business:

Case


IBNR


LAE


Total(Dollars in thousands)Commercial auto liability

$
102,790


$
133,651


$
42,064


$
278,505Workers compensation


16,822



46,735



7,707



71,264Auto physical damage


8,493



8,974



2,474



19,941General liability


2,894



8,122



3,030



14,046Inland marine


3,170



4,368



864



8,402Private passenger


3,709



1,482



1,152



6,343Commercial multiple peril


692



265



235



1,192Other lines


80



201



27



308$
138,650


$
203,798


$
57,553


$
400,001   Reinsurance Recoverables.
  Other-Than-Temporary
    Impairment
  case-by-case
  
    the length of time and the extent to which the market value has
    been below amortized cost;
    whether the issuer is experiencing significant financial
    difficulties;
    economic stability of an entire industry sector or subsection;
    whether the issuer, series of issuers or industry has a
    catastrophic type of loss;
    the extent to which the unrealized loss is credit-driven or a
    result of changes in market interest rates;
    historical operating, balance sheet and cash flow data;
    internally generated financial models and forecasts;
    our ability and intent to hold the investment for a period of
    time sufficient to allow for any anticipated recovery in market
    value; and
    other subjective factors, including concentrations and
    information obtained from regulators and rating agencies. 51




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##### Table of Contents



52




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##### Table of Contents



ITEM 7A
    Quantitative
    and Qualitative Disclosures About Market Risk          December 31, 2008


December 31, 2007Principal





PrincipalCash Flows


Rate


Cash Flows


Rate(Dollars in thousands)Subsequent calendar year

$
194,172



4.6
%

$
73,258



4.8
%2nd Subsequent calendar year


64,532



4.9
%


43,464



4.6
%3rd Subsequent calendar year


27,441



4.9
%


44,736



4.8
%4th Subsequent calendar year


20,948



4.9
%


46,946



5.1
%5th Subsequent calendar year


26,804



4.9
%


36,486



5.2
%Thereafter


107,688



5.0
%


127,789



4.9
%Total

$
441,585



4.8
%

$
372,679



4.9
%Fair value

$
447,938






$
376,300   Equity Risk.
 53




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##### Table of Contents



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


55Reports of Independent Registered Public
    Accounting Firm


56Consolidated Balance Sheets:December 31, 2008 and 2007


58Consolidated Statements of Income:Years ended December 31, 2008, 2007 and 2006


59Consolidated Statements of Shareholders
    Equity:Years ended December 31, 2008, 2007 and 2006


60Consolidated Statements of Cash Flows:Years ended December 31, 2008, 2007 and 2006


61Notes to Consolidated Financial Statements


62     54




---



##### Table of Contents



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

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

Vice President and Chief Financial Officer  55




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM           Internal Control 
    Integrated Framework
  
    56




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 ON INTERNAL CONTROL OVER FINANCIAL REPORTING
     Internal Control 
    Integrated Framework
            
    57




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  CONSOLIDATED BALANCE SHEETS
  December 31,2008


2007(In thousands, except per share data)ASSETSInvestments:Fixed maturities available-for-sale, at fair value (amortized
    cost  $448,631 and $376,019, respectively)

$
447,938


$
376,300Equity securities available-for-sale, at fair value
    (cost  $44,074 and $57,800, respectively)


38,532



52,640Short-term investments, at cost which approximates fair value


85



20,907Total investments


486,555



449,847Cash and cash equivalents


77,159



43,069Securities lending collateral, amortized (cost 
    $94,655 and $141,316, respectively)


84,670



139,305Accrued investment income


5,161



4,783Premiums receivable, net of allowance for doubtful accounts of
    $587 and $462, respectively


95,610



84,708Reinsurance recoverables on paid and unpaid losses


150,791



98,091Prepaid reinsurance premiums


28,404



24,325Deferred policy acquisition costs


19,245



17,578Deferred federal income taxes


18,324



11,993Property and equipment, net


20,406



19,502Funds held by reinsurer


3,073



3,337Prepaid expenses and other assets


1,414



2,096Total assets

$
990,812


$
898,634LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses

$
400,001


$
302,088Unearned premiums and service fees


156,598



145,296Long-term debt


15,000



15,464Amounts withheld or retained for account of others


48,357



38,739Reinsurance balances payable


10,267



7,596Securities lending obligation


95,828



141,316Accounts payable and other liabilities


35,813



24,363Commissions payable


9,274



7,332Assessments and fees payable


3,600



3,634Total liabilities


774,738



685,828Shareholders equity:Preferred shares  no par valueAuthorized  10,000 sharesIssued  0 shares






Common shares  $0.01 par valueAuthorized  50,000 sharesIssued  23,350 shares, including 4,055 and
    4,145 shares, respectively, in treasury


234



234Additional paid-in capital


48,004



45,566Retained earnings


184,187



178,190Accumulated other comprehensive loss


(10,613
)


(5,321
)Treasury shares


(5,738
)


(5,863
)Total shareholders equity


216,074



212,806Total liabilities and shareholders equity

$
990,812


$
898,634    58




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF INCOME
  Year Ended December 31,2008


2007


2006(In thousands, except per share data)Revenues:Premiums earned

$
290,741


$
257,561


$
217,319Net investment income


22,501



22,141



17,579Net realized (losses) gains on investments


(22,394
)


(653
)


1,193Other


2,868



4,137



2,387Total revenues


293,716



283,186



238,478Expenses:Losses and loss adjustment expenses


188,131



149,501



129,491Commissions and other underwriting expenses


62,130



50,922



42,671Other operating and general expenses


12,605



12,140



9,472Expense on amounts withheld


4,299



3,708



2,147Interest expense


833



1,550



1,522Total expenses


267,998



217,821



185,303Income before federal income taxes


25,718



65,365



53,175Provision for federal income taxes


15,058



21,763



17,475Net income

$
10,660


$
43,602


$
35,700Net income per common share  basic

$
0.55


$
2.27


$
1.87Net income per common share  diluted

$
0.55


$
2.25


$
1.85Weighted average of common shares outstanding  basic


19,285



19,193



19,136Weighted average of common shares outstanding  diluted


19,366



19,348



19,302Cash dividends per common share

$
0.24


$
0.20


$
0.16    59




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##### Table of Contents



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





OtherCommon


Paid-In


Retained


Comprehensive


TreasuryStock


Capital


Earnings


Loss


Stock


Total(Dollars in thousands)Balance at January 1, 2006

$
234


$
42,257


$
105,826


$
(2,712
)

$
(6,072
)

$
139,533Net income










35,700











35,700Unrealized depreciation of investment securities, net of tax
    benefit of $109














(203
)






(203
)Comprehensive income






















35,497Dividends on common stock










(3,076
)










(3,076
)Issuance of 104,000 treasury shares upon exercise of stock
    options and stock award grants






341











145



486Tax benefit realized from exercise of stock options






557















557Stock compensation expense






766















766Balance at December 31, 2006


234



43,921



138,450



(2,915
)


(5,927
)


173,763Net income










43,602











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














(2,406
)






(2,406
)Comprehensive income






















41,196Dividends on common stock










(3,862
)










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






392











64



456Tax benefit realized from exercise of stock options






218















218Stock compensation expense






1,035















1,035Balance at December 31, 2007


234



45,566



178,190



(5,321
)


(5,863
)


212,806Net income










10,660











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














(5,292
)






(5,292
)Comprehensive income






















5,368Dividends on common stock










(4,663
)










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






713











125



838Tax benefit realized from exercise of stock options






396















396Stock compensation expense






1,329















1,329Balance at December 31, 2008

$
234


$
48,004


$
184,187


$
(10,613
)

$
(5,738
)

$
216,074    60




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF CASH FLOWS
  Year Ended December 31,2008


2007


2006(Dollars in thousands)Operating activitiesNet income

$
10,660


$
43,602


$
35,700Adjustments to reconcile net income to net cash provided by
    operating activities:Net amortization of bond premiums and discounts


1,673



382



303Provision for depreciation and amortization


1,470



1,266



1,111Net realized losses (gains) on investment securities


22,394



653



(1,193
)Deferred federal income taxes


(2,294
)


(1,262
)


(1,020
)Stock compensation expense


1,329



1,035



766Increase in deferred policy acquisition costs, net


(1,667
)


(2,543
)


(3,349
)Increase in reserves for losses and loss adjustment expenses


97,913



36,122



40,580Increase in premiums receivable


(10,902
)


(7,632
)


(22,471
)Increase in unearned premiums and service fees


11,302



17,573



29,062Decrease (increase) in interest receivable and other assets


539



(2,210
)


2,062Increase in prepaid reinsurance premiums


(4,079
)


(3,053
)


(4,056
)Increase in accounts payable, commissions and other liabilities
    and assessments and fees payable


13,358



5,966



6,986Increase in amounts withheld or retained for account of others


9,618



10,854



8,566Increase in reinsurance recoverable


(52,700
)


(8,021
)


(12,178
)Increase in reinsurance balances payable


2,671



440



2,452Other


23



(3
)


2Net cash provided by operating activities


101,308



93,169



83,323Investing activitiesPurchases of fixed maturities


(412,313
)


(199,918
)


(95,208
)Purchases of equity securities


(3,386
)


(45,460
)


(50,905
)Proceeds from sale of fixed maturities


2,234







1,917Proceeds from sale of equity securities


11,948



21,921



34,643Proceeds from maturity and redemptions of investments


340,561



156,466



47,742Additional cash paid for purchase of subsidiary










(1,246
)Cash and cash equivalents of business acquired










5,585Purchase of building










(7,025
)Capital expenditures


(2,369
)


(2,087
)


(1,255
)Net cash used in investing activities


(63,325
)


(69,078
)


(65,752
)Financing activitiesDecrease (increase) in securities lending collateral


45,488



17,612



(158,928
)(Decrease) increase in securities lending obligation


(45,488
)


(17,612
)


158,928Additional long-term borrowing


15,000







Reductions of long-term debt


(15,464
)






(833
)Tax benefit realized from exercise of stock options


396



218



557Issuance of common shares from treasury upon exercise of stock
    options or stock award grants


838



456



486Cash dividends paid on common shares


(4,663
)


(3,862
)


(3,076
)Net cash used in financing activities


(3,893
)


(3,188
)


(2,866
)Net increase in cash and cash equivalents


34,090



20,903



14,705Cash and cash equivalents at beginning of year


43,069



22,166



7,461Cash and cash equivalents at end of year

$
77,159


$
43,069


$
22,166    61




---



##### Table of Contents



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




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  2.
    Significant
    Accounting Policies  Cash
    Equivalents
    Premium,
    Commissions and Service Fee Recognition
    Investments
      Deferred
    Policy Acquisition Costs
    Property
    and Equipment
    Unpaid
    Losses and Loss Adjustment Expenses (LAE)
   63




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Assessments
    Premiums
    Receivable
    Reinsurance
    Segment
    Information
    Federal
    Income Taxes
    Comprehensive
    Income
    Earnings
    Per Common Share
   64




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Stock-Based
    Compensation
  Share-Based Payment,
  3.
    Fair
    Value Measurements  Fair Value Measurements,
     65




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31, 2008Level 1


Level 2


Level 3


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

$



$
202,277


$



$
202,277State and local government obligations






118,960



6,118



125,078Mortgage-backed securities






78,568







78,568Corporate obligations






37,720



4,295



42,015Total fixed maturities






437,525



10,413



447,938Equity securities:Preferred stock


10,446



922



5,671



17,039Common stock


12,433



9,060







21,493Total equity securities


22,879



9,982



5,671



38,532Short-term investments






85







85Total investments


22,879



447,592



16,084



486,555Cash and cash equivalents


77,159











77,159Total investments and cash and cash equivalents

$
100,038


$
447,592


$
16,084


$
563,714Securities lending:Cash and cash equivalents

$
41,968


$
391


$



$
42,359Mortgage-backed securities






16,049



2,552



18,601Corporate obligations






21,216



2,494



23,710Total securities lending

$
41,968


$
37,656


$
5,046


$
84,670  66




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31, 2008State and Local





SecuritiesCorporate


Government


Preferred


LendingObligations


Obligations


Stock


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

$
1,388


$



$
3,812


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


(64
)






(565
)


(1,143
)Included in other comprehensive income


46



(986
)


(2,126
)


321Purchases, issuances and settlements(1)






(175
)






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


2,925



7,279



4,550



2,552Ending balance at December 31, 2008

$
4,295


$
6,118


$
5,671


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

$
(64
)

$



$
(565
)

$
(1,143
)     (1)
    
    The settlement is attributable to securities, which experienced
    either a principal pay down or a call on principal during the
    year ended December 31, 2008.(2)
    
    Transfers into Level 3 during the year ended
    December 31, 2008 are attributable to a change in the
    availability of market observable information for securities
    within the respective category.  4.
    Securities
    Lending Program      December 31,2008


2007(Dollars in thousands)Collateral obligation

$
95,828


$
141,316Pretax unrealized loss on fair value of collateral held


(9,985
)


(2,011
)Other-than-temporary impairmment charge


(1,173
)


Fair value of collateral held


84,670



139,305Fair value of securities lent plus accrued interest


94,265



138,581  67




---



##### Table of Contents



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


Gross


GrossAmortized


Unrealized


UnrealizedCost


Gains


Losses


Fair Value(Dollars in thousands)December 31, 2008:Fixed maturities:U.S. Government and government agency obligations

$
199,207


$
3,120


$
(50
)

$
202,277State and local government obligations


125,312



2,172



(2,405
)


125,079Mortgage-backed securities


77,170



1,425



(27
)


78,568Corporate obligations


46,942



188



(5,116
)


42,014Total fixed maturities


448,631



6,905



(7,598
)


447,938Equity securities:Preferred stocks


22,581



51



(5,593
)


17,039Common stocks


21,493











21,493Total equity securities


44,074



51



(5,593
)


38,532Short-term investments


85











85Total investments

$
492,790


$
6,956


$
(13,191
)

$
486,555Securities lending:Cash and cash equivalents

$
42,359


$



$



$
42,359Mortgage-backed securities


27,803







(9,202
)


18,601Corporate obligations


24,493



3



(786
)


23,710Total securities lending

$
94,655


$
3


$
(9,988
)

$
84,670December 31, 2007:Fixed maturities:U.S. Government and government agency obligations

$
205,424


$
1,530


$
(380
)

$
206,574State and local government obligations


74,727



798



(71
)


75,454Mortgage-backed securities


34,414



332



(37
)


34,709Corporate obligations


61,454



439



(2,330
)


59,563Total fixed maturities


376,019



3,099



(2,818
)


376,300Equity securities:Preferred stocks


29,164



224



(4,464
)


24,924Common stocks


28,636



199



(1,119
)


27,716Total equity securities


57,800



423



(5,583
)


52,640Short-term investments


20,907











20,907Total investments

$
454,726


$
3,522


$
(8,401
)

$
449,847Securities lending:Cash and cash equivalents

$
57,000


$



$



$
57,000Mortgage-backed securities


34,506







(1,493
)


33,013Corporate obligations


49,810



4



(522
)


49,292Total securities lending

$
141,316


$
4


$
(2,015
)

$
139,305  68




---



##### Table of Contents



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


Securities Lending CollateralAmortized





AmortizedCost


Fair Value


Cost


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

$
21,256


$
21,153


$
62,853


$
62,728Due after one year through five years


194,096



195,260



3,999



3,341Due after five years through ten years


142,005



140,497







Due after ten years


14,104



12,460







371,461



369,370



66,852



66,069Mortgage-backed securities


77,170



78,568



27,803



18,601Total

$
448,631


$
447,938


$
94,655


$
84,670     Year Ended December 31,2008


2007


2006(Dollars in thousands)Fixed maturity gains

$
459


$
183


$
41Fixed maturity losses


(3,718
)


(15
)


Equity security gains


17



1,068



1,156Equity security losses


(17,979
)


(1,889
)


(4
)Securities lending fixed maturity losses


(1,173
)






Net realized (losses) gains on investments

$
(22,394
)

$
(653
)

$
1,193    69




---



##### Table of Contents



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


Twelve Months or MoreFair











FairFair


Unrealized


Value as


Number of


Fair


Unrealized


Value as


Number ofValue


Losses


% of Cost


Holdings


Value


Losses


% of Cost


Holdings(Dollars in thousands)December 31, 2008:Fixed maturities:U.S. Government and government agency obligations

$
4,305


$
(36
)


99.1
%


5


$
2,985


$
(14
)


99.5
%


1State and local government obligations


24,990



(2,109
)


92.2
%


28



7,947



(296
)


96.4
%


7Mortgage-backed securities


2,424



(16
)


99.3
%


2



680



(11
)


98.4
%


1Corporate obligations


14,746



(513
)


96.6
%


21



16,124



(4,603
)


77.8
%


20Total fixed maturities


46,465



(2,674
)


94.6
%


56



27,736



(4,924
)


84.9
%


29Equity securities:Preferred stocks


5,481



(2,637
)


67.5
%


6



9,655



(2,956
)


76.6
%


36Common stocks






























Total equity securities


5,481



(2,637
)


67.5
%


6



9,655



(2,956
)


76.6
%


36Total fixed maturities and equity securities

$
51,946


$
(5,311
)


90.7
%


62


$
37,391


$
(7,880
)


82.6
%


65Securities Lending:Mortgage-backed securities

$



$











$
18,601


$
(9,202
)


66.9
%


9Corporate obligations


















16,213



(786
)


95.4
%


5Total securities lending

$



$











$
34,814


$
(9,988
)


77.7
%


14December 31, 2007:Fixed maturities:U.S. Government and government agency obligations

$
5,431


$
(3
)


99.9
%


3


$
19,193


$
(377
)


98.1
%


17State and local government obligations


2,781



(14
)


99.5
%


4



12,887



(57
)


99.6
%


10Mortgage-backed securities


5,776



(37
)


99.4
%


6















Corporate obligations


8,713



(329
)


96.4
%


14



31,944



(2,001
)


94.1
%


31Total fixed maturities


22,701



(383
)


98.3
%


27



64,024



(2,435
)


96.3
%


58Equity securtities:Preferred stocks


15,544



(3,621
)


81.1
%


53



3,510



(843
)


80.6
%


9Common stocks


11,641



(870
)


93.0
%


9



1,695



(249
)


87.2
%


2Total equity securities


27,185



(4,491
)


85.8
%


62



5,205



(1,092
)


82.7
%


11Total fixed maturities and equity securities

$
49,886


$
(4,874
)


91.1
%


89


$
69,229


$
(3,527
)


95.2
%


69Securities Lending:Mortgage-backed securities

$
29,886


$
(1,221
)


96.1
%


8


$
3,127


$
(272
)


92.0
%


1Corporate obligations


33,509



(486
)


98.6
%


8



4,964



(36
)


99.3
%


1Total securities lending

$
63,395


$
(1,707
)


97.4
%


16


$
8,091


$
(308
)


96.3
%


2  70




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            Year Ended December 31,2008


2007


2006(Dollars in thousands)Investment income:Fixed maturities

$
18,664


$
16,351


$
14,116Equity securities


2,194



2,414



1,396Short-term investments and cash equivalents


1,755



3,478



2,166Total investment income


22,613



22,243



17,678Investment expense


(112
)


(102
)


(99
)Net investment income

$
22,501


$
22,141


$
17,579     6.
    Long-term
    Debt     71




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          7.
    Income
    Taxes    Year Ended December 31,2008


2007


2006(Dollars in thousands)Current federal income tax provision

$
17,437


$
23,034


$
18,527Deferred federal income tax benefit


(2,379
)


(1,271
)


(1,052
)$
15,058


$
21,763


$
17,475     Year Ended December 31,2008


2007


2006(Dollars in thousands)Expected federal income tax expense at statuatory rate

$
9,001


$
22,878


$
18,611Tax effect of tax-exempt investment income


(1,387
)


(949
)


(729
)Valuation allowance on net capital losses


7,545







Other items, net


(101
)


(166
)


(407
)$
15,058


$
21,763


$
17,475  72




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    December 31,2008


2007(Dollars in thousands)Deferred Tax Assets:Unearned premiums

$
9,035


$
8,528Unpaid losses and LAE expenses


8,233



6,599Assignments and assessments


945



992Unrealized losses on investments, primarily impairments


5,677



2,412Realized losses on investments


7,936



Other, net


873



1,22032,699



19,751Valuation allowance


(7,616
)


(842
)25,083



18,909Deferred Tax Liabilities:Deferred policy acquisition costs


(6,736
)


(6,152
)Other, net


(23
)


(764
)Total deferred tax liabilities


(6,759
)


(6,916
)Net deferred income tax assets

$
18,324


$
11,993     Accounting for Uncertainty in
    Income Taxes  an interpretation of
    SFAS No. 109
     73




---



##### 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, 2008Total Options OutstandingWeighted


Weighted


Weighted AverageAverage


Average Fair


RemainingShares


Exercise Price


Value


Contractual TermOptions outstanding, beginning of year


623,050


$
15.99


$
6.84Forfeited


(12,000
)


18.49



6.70Exercised


(84,000
)


10.46



4.75Granted


80,000



24.28



7.20Options outstanding, end of year


607,050


$
17.80


$
7.18



6.8 yearsOptions exercisable, end of year


189,650


$
14.19


$
6.63



5.8 years   Year Ended December 31, 2008Total Nonvested SharesWeighted AverageGrant DateShares


Fair ValueNonvested shares at the beginning of year


106,500


$
30.71Granted






Vested


(7,500
)


25.46Forfeited






Nonvested shares at the end of year


99,000


$
31.10    74




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2008


2007


2006Risk-free interest rate


3.1
%


4.6
%


4.7
%Expected option life


6.5 years



6.5 years



6.7 yearsExpected stock price volatility


26.4
%


28.1
%


29.6
%Dividend yield


1.0
%


0.8
%


0.3
%Weighted average fair value of options granted during period

$
7.20


$
8.78


$
8.71       Stock Option


NonvestedAwards


Shares(Dollars in thousands)2009

$
853


$
4832010


662



2922011


113



2922012


113



2922013 and thereafter






1,166Total remaining compensation expense

$
1,741


$
2,525   9.
    Employee
    Benefit Plan     75




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  10.
    Earnings
    Per Common Share    Year Ended December 31,2008


2007


2006(In thousands, except per share data)Net income

$
10,660


$
43,602


$
35,700Weighted average shares outstanding during year


19,285



19,193



19,136Additional shares issuable under employee common stock option
    plans using treasury stock method


81



155



166Weighted average shares outstanding assuming exercise of stock
    option


19,366



19,348



19,302Net income per share:Basic

$
0.55


$
2.27


$
1.87Diluted


0.55



2.25



1.85     11.
    Transactions
    with Related Parties      Year Ended December 31,2008


2007


2006(Dollars in thousands)Assumed premiums written

$
5,374


$
6,165


$
4,533Assumed premiums earned


6,249



5,583



4,024Assumed losses and loss adjustment expense incurred


5,305



5,483



5,527Ceded premiums written


3,478



3,957



3,790Ceded premiums earned


3,567



4,031



3,956Ceded losses and loss adjustment expense recoveries


1,530



3,304



2,797Payable to Great American as of year end


386



538



1,429Service fee expense


96



112



192    76




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      12.
    Reinsurance    Year Ended December 31,2008


2007


2006Written


Earned


Written


Earned


Written


Earned(Dollars in thousands)Direct

$
371,243


$
358,696


$
334,664


$
316,787


$
294,029


$
264,158Assumed


9,053



10,196



11,342



11,588



11,475



12,669Ceded


(82,215
)


(78,151
)


(73,864
)


(70,814
)


(63,588
)


(59,508
)Net premium

$
298,081


$
290,741


$
272,142


$
257,561


$
241,916


$
217,319       December 31,


A.M. Best2008


Rating(Dollars in thousands)Motors Ins Corp

$
43,357



A−Platinum Underwriters Reinsurance, Inc.


34,864



AGreat American Insurance Company


13,001



ATRAX Insurance Ltd.(1)


10,669



Hannover Ruckversicherungs Ag


8,956



AScor Reinsurance Corp


8,878



A−Subtotal


119,725All other reinsurers


59,470Total

$
179,195Reinsurance receivable on paid and unpaid losses

$
150,791Prepaid reinsurance premiums


28,404$
179,195     (1)
    
    Does not reflect a $10.7 million letter of credit that is
    held as collateral for the net receivable from TRAX Insurance
    Ltd., a member-owned captive insurance program. 77




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  13.
    Unpaid
    Losses and LAE    December 31,2008


2007


2006(Dollars in thousands)Reserve for losses and LAE, net of related reinsurance
    recoverables, at beginning of year

$
210,302


$
181,851


$
151,444Add:Provision for unpaid losses and LAE for claims net of
    reinsurance, occurring during:Current year


188,985



155,173



136,944Prior years


(854
)


(5,672
)


(7,453
)188,131



149,501



129,491Deduct:Losses and LAE payments for claims, net of reinsurance,
    occurring during:Current year


68,320



57,735



47,183Prior years


67,673



63,315



51,901135,993



121,050



99,084Reserve for losses and LAE, net of related reinsurance
    recoverables, end of year


262,440



210,302



181,851Reinsurance recoverables on unpaid losses and LAE, at end of Year


137,561



91,786



84,115Reserve for unpaid losses and LAE, gross of reinsurance
    recoverables

$
400,001


$
302,088


$
265,966     14.
    Expense
    on Amounts Withheld   78




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2008


2007


2006(Dollars in thousands)Investment income on amounts withheld related to alternative
    risk transfer programs

$
4,299


$
3,708


$
2,147Investment expense on amounts withheld related to alternative
    risk transfer programs


4,299



3,708



2,147Investment balance related to alternative risk transfer programs


124,076



89,823



58,790   15.
    Statutory
    Accounting Principles    At and for the YearEnded December 31,2008


2007


2006(Dollars in thousands)NIIC statutory capital and surplus

$
190,134


$
182,302


$
148,266NIIC statutory net income


7,611



37,745



26,579NIIC-HI statutory capital and surplus


10,397



9,614



8,736NIIC-HI statutory net income


839



811



230TCC statutory capital and surplus


14,707



14,119



13,671TCC statutory net income


366



483



703         16.
    Commitments
    and Contingencies   79




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
       80




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  17.
    Segment
    Information    Year Ended December 31,2008


2007


2006(Dollars in thousands)Revenue:Premiums earned:Alternative Risk Transfer

$
137,298


$
107,303


$
76,645Transportation


75,495



74,112



71,820Specialty Personal Lines


54,862



51,852



47,641Hawaii and Alaska


17,591



17,625



15,743Other


5,495



6,669



5,470Total premiums earned


290,741



257,561



217,319Net investment income


22,501



22,141



17,579Realized (losses) gains on investments


(22,394
)


(653
)


1,193Other


2,868



4,137



2,387Total revenues

$
293,716


$
283,186


$
238,478   18.
    Quarterly
    Operating Results (Unaudited)    1st


2nd


3rd


4th


YearQuarter


Quarter


Quarter


Quarter


Ended(Dollars in thousands)2008Revenues

$
73,744


$
76,297


$
72,704


$
70,971


$
293,716Net income (loss)


9,571



4,370



(4,228
)


947



10,660Net income per share  basic(1)


0.50



0.23



(0.22
)


0.05



0.55Net income per share  diluted(1)


0.49



0.23



(0.22
)


0.05



0.552007Revenues

$
66,365


$
70,013


$
73,122


$
73,686


$
283,186Net income


10,467



11,858



10,145



11,132



43,602Net income per share  basic(1)


0.55



0.62



0.53



0.58



2.27Net income per share  diluted(1)


0.54



0.61



0.52



0.57



2.25     (1)
    
    Earnings per share are computed independently for each quarter
    and the full year based upon respective average shares
    outstanding. Therefore, the sum of the quarterly earnings per
    share amounts may not equal the annual amounts reported. 81




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##### Table of Contents



ITEM 9
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    ITEM 9A
    Controls
    and Procedures  Please refer to Forward-Looking Statements
    following the Index in the front of this
    Form 10-K.
  Rules 13a-15(e) 15d-15(e) Rule 13a-15(e))
      ITEM 9B
    Other
    Information   PART III    Item 10.
    Directors,
    Executive Officers and Corporate Governance  (http://invest.natl.com).
    Item 11.
    Executive
    Compensation   82




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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


85Schedule III


Supplementary Insurance Information


88Schedule IV


Reinsurance


(3)Schedule V


Valuation and Qualifying Accounts


89Schedule VI


Supplementary Information Concerning Property-Casualty Insurance
    Operations


(4)  83




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##### 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*


(1)10
.2

Deferred Compensation Plan*


(1)10
.3

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


(1)10
.4

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


(1)10
.5

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


(1)10
.6

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


(5)10
.7

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


(5),(8)10
.8

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


(5),(8)10
.9

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


(8)10
.10

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


(8)10
.11

National Interstate Corporation Amended and Restated Management
    Bonus Plan*


(6)10
.12

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


(7)21
.1

List of subsidiaries23
.1

Consent of Independent Registered Public Accounting Firm24
.1

Power of attorney31
.1

Certification of Chief Executive Officer pursuant to
    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     *
    
    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 and
    Securities Lending Collateral(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 84




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  SCHEDULE II 
    CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
    CONDENSED BALANCE SHEETS
  December 31,2008


2007(In thousands, exceptper share data)ASSETSInvestment in subsidiaries

$
216,933


$
208,505Investments:Fixed maturities available-for-sale, at fair value (cost of
    $11,629 and $16,385, respectively)


9,906



15,967Equities available-for-sale, at fair value (cost of $200 and
    $1,108, respectively)


200



1,437Short-term investments, at cost which approximates fair value






1,600Total investments


10,106



19,004Receivable from subsidiary


2,076



3,507Cash


3,458



64Securities lending collateral


4,682



10,548Property and equipment  net


2,023



1,519Other assets


397



694Total assets

$
239,675


$
243,841LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesLong-term debt

$
15,000


$
15,464Securities lending obligation


4,682



10,548Other liabilities


3,919



5,023Total liabilities


23,601



31,035Shareholders equityPreferred shares  no par valueAuthorized  10,000 sharesIssued  0 shares






Common shares   $0.01 par valueAuthorized  50,000 sharesIssued  23,350 shares, including 4,055 and
    4,145 shares, respectively in treasury


234



234Additional paid-in capital


48,004



45,566Retained earnings


184,187



178,190Accumulated other comprehensive loss


(10,613
)


(5,321
)Treasury shares


(5,738
)


(5,863
)Total shareholders equity


216,074



212,806Total liabilities and shareholders equity

$
239,675


$
243,841  85




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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 312008


2007


2006(In thousands)Revenues:Fees from subsidiaries

$
13,189


$
12,055


$
10,862Net investment income


733



965



1,026Realized (losses) gains on investments


(1,006
)


1



13Total revenues


12,916



13,021



11,901Expenses:General and administrative expenses


14,854



13,660



11,721Interest expense


833



1,550



1,522Total expenses


15,687



15,210



13,243Loss before income taxes and equity in undistributed income of
    subsidiaries


(2,771
)


(2,189
)


(1,342
)Income tax benefit


(969
)


(729
)


(470
)Loss before equity in undistributed income of subsidiaries


(1,802
)


(1,460
)


(872
)Equity in undistributed income of subsidiaries, net of tax


12,462



45,062



36,572Net income

$
10,660


$
43,602


$
35,700  86




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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 31,2008


2007


2006(In thousands)Operating ActivitiesNet income

$
10,660


$
43,602


$
35,700Adjustments to reconcile net income to cash used in operating
    activities


(9,191
)


(46,807
)


(35,612
)Net cash provided by (used in) operating activities


1,469



(3,205
)


88Investing ActivitiesCapital contributions to subsidiaries










(788
)Distributions from subsidiaries






4,000



3,000Purchases of investments


(6,454
)


(1,662
)


(3,249
)Proceeds from sale or maturity of investments


13,133



4,580



3,768Purchases of property and equipment


(861
)


(834
)


(416
)Net cash provided by investing activities


5,818



6,084



2,315Financing ActivitiesAdditional long-term borrowings


15,000







Reduction of long-term debt


(15,464
)






(833
)Decrease (increase) in securities lending collateral


5,866



(10,548
)


(Decrease) increase in securities lending obligation


(5,866
)


10,548



Issuance of common shares from treasury upon exercise of stock
    options


838



456



486Cash dividends paid on common shares


(4,663
)


(3,862
)


(3,076
)Tax benefit realized from exercise of stock option


396



218



557Net cash used in financing activities


(3,893
)


(3,188
)


(2,866
)Net increase (decrease) in cash


3,394



(309
)


(463
)Cash at beginning of year


64



373



836Cash at end of year

$
3,458


$
64


$
373  87




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  SCHEDULE III 
    SUPPLEMENTARY INSURANCE INFORMATION
  AmortizationDeferred

















of DeferredPolicy


Liability for








Net





Policy


Other


NetAcquisition


Unpaid Losses


Unearned


Earned


Investment


Losses and


Acquisition


Underwriting


PremiumsCosts


and LAE


Premiums


Premiums


Income


LAE


Costs


Expenses


Written(In thousands)Year ended December 31, 2008

$
19,245


$
400,001


$
156,598


$
290,741


$
22,501


$
188,131


$
54,293


$
7,837


$
298,081Year ended December 31, 2007


17,578



302,088



145,296



257,561



22,141



149,501



44,607



6,315



272,142Year ended December 31, 2006


15,035



265,966



127,723



217,319



17,579



129,491



37,674



4,997



241,916  88




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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(1)


Period(In thousands)Year ended December 31, 2008Premiums in course of collection

$
462


$
354


$



$
229


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


522



338







398



462Year ended December 31, 2006Premiums in course of collection


580



151







209



522     (1)
    
    Deductions include write-offs of amounts determined to be
    uncollectible. 89




---



##### Table of Contents



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

Title

Date/s/  DAVID
    W. MICHELSON

President and Chief Executive Officer

March 12, 2009David W. Michelson

(Principal Executive Officer)/s/  JULIE
    A. MCGRAW

Vice President

March 12, 2009Julie A. McGraw

and Chief Financial Officer
    (Principal Financial and Accounting Officer)/s/  ALAN
    R. SPACHMAN*

Chairman of the Board

March 12, 2009Alan R. Spachman/s/  JOSEPH
    E. CONSOLINO*

Director

March 12, 2009Joseph E. Consolino/s/  THEODORE
    H. ELLIOTT, JR.*

Director

March 12, 2009Theodore H. Elliott, Jr./s/  GARY
    J. GRUBER*

Director

March 12, 2009Gary J. Gruber/s/  KEITH
    A. JENSEN*

Director

March 12, 2009Keith A. Jensen/s/  JAMES
    C. KENNEDY*

Director

March 12, 2009James C. Kennedy/s/  DONALD
    D. LARSON*

Director

March 12, 2009Donald D. Larson/s/  JOEL
    SCHIAVONE*

Director

March 12, 2009Joel Schiavone   *
    
    By David W. Michelson and Julie A. McGraw, attorneys-in-fact 90