##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2011
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to .
 Commission File Number 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)
 
 þ o
  o o
  Large Accelerated Filer oAccelerated Filer þNon-Accelerated Filer o(Do not check if a smaller reporting company)Smaller Reporting Company 
o o þ




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##### 



National Interstate Corporation
Table of Contents
 PagePart I  Financial Information
    
    
    3Item 1. Financial Statements
    
    
    3Consolidated Balance Sheets
    
    
    3Consolidated Statements of Income
    
    
    4Consolidated Statements of Shareholders Equity
    
    
    5Consolidated Statements of Cash Flows
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27Part II  Other Information
    
    
    28Item 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3. Defaults Upon Senior Securities
    
    
    28Item 4. [RESERVED]
    
    
    28Item 5. Other Information
    
    
    28Item 6. Exhibits
    
    
    28EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 
 National Interstate Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share data)
 March 31,
    
    
    December 31,2011
    
    
    2010(Unaudited)ASSETSInvestments:Fixed maturities available-for-sale, at fair value (amortized cost  $910,464 and $901,209, respectively)
    
    $
    916,195
    
    
    $
    907,575Equity securities available-for-sale, at fair value (amortized cost  $40,978 and $27,257, respectively)
    
    
    44,400
    
    
    
    30,508Short-term investments, at cost which approximates fair value
    
    
    67
    
    
    
    67Total investments
    
    
    960,662
    
    
    
    938,150Cash and cash equivalents
    
    
    25,012
    
    
    
    27,054Accrued investment income
    
    
    8,459
    
    
    
    8,650Premiums receivable, net of allowance for doubtful accounts of $1,368 and $1,435, respectively
    
    
    163,708
    
    
    
    162,906Reinsurance recoverable on paid and unpaid losses
    
    
    205,825
    
    
    
    208,590Prepaid reinsurance premiums
    
    
    38,044
    
    
    
    35,065Deferred policy acquisition costs
    
    
    26,919
    
    
    
    23,488Deferred federal income taxes
    
    
    26,840
    
    
    
    27,333Property and equipment, net
    
    
    24,302
    
    
    
    24,469Funds held by reinsurer
    
    
    2,519
    
    
    
    3,788Intangible assets, net
    
    
    8,894
    
    
    
    8,972Amounts refundable on estimated purchase price of Vanliner
    
    
    
    
    
    
    14,256Prepaid expenses and other assets
    
    
    6,748
    
    
    
    5,884Total assets
    
    $
    1,497,932
    
    
    $
    1,488,605LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses
    
    $
    798,559
    
    
    $
    798,645Unearned premiums and service fees
    
    
    229,952
    
    
    
    221,903Long-term debt
    
    
    20,000
    
    
    
    20,000Amounts withheld or retained for accounts of others
    
    
    60,200
    
    
    
    58,691Reinsurance balances payable
    
    
    18,592
    
    
    
    16,180Accounts payable and other liabilities
    
    
    37,759
    
    
    
    49,605Commissions payable
    
    
    10,588
    
    
    
    9,295Assessments and fees payable
    
    
    5,036
    
    
    
    4,708Total liabilities
    
    
    1,180,686
    
    
    
    1,179,027Shareholders equity:Preferred shares  no par valueAuthorized  10,000 sharesIssued  0 shares
    
    
    
    
    
    
    Common shares  $0.01 par valueAuthorized  50,000 sharesIssued  23,350 shares, including 3,983 and 3,993 shares, respectively, in treasury
    
    
    234
    
    
    
    234Additional paid-in capital
    
    
    50,451
    
    
    
    50,273Retained earnings
    
    
    266,250
    
    
    
    258,473Accumulated other comprehensive income
    
    
    5,949
    
    
    
    6,251Treasury shares
    
    
    (5,638
    )
    
    
    (5,653
    )Total shareholders equity
    
    
    317,246
    
    
    
    309,578Total liabilities and shareholders equity
    
    $
    1,497,932
    
    
    $
    1,488,605
  3




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##### Table of Contents



National Interstate Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
 Three Months EndedMarch 31,2011
    
    
    2010Revenues:Premiums earned
    
    $
    105,139
    
    
    $
    70,181Net investment income
    
    
    6,902
    
    
    
    4,959Net realized gains on investments (*)
    
    
    1,200
    
    
    
    882Other
    
    
    1,116
    
    
    
    818Total revenues
    
    
    114,357
    
    
    
    76,840Expenses:Losses and loss adjustment expenses
    
    
    74,659
    
    
    
    43,104Commissions and other underwriting expenses
    
    
    20,325
    
    
    
    14,836Other operating and general expenses
    
    
    4,541
    
    
    
    3,626Expense on amounts withheld
    
    
    840
    
    
    
    809Interest expense
    
    
    54
    
    
    
    12Total expenses
    
    
    100,419
    
    
    
    62,387Income before income taxes
    
    
    13,938
    
    
    
    14,453Provision for income taxes
    
    
    4,410
    
    
    
    3,867Net income
    
    $
    9,528
    
    
    $
    10,586Net income per share    basic
    
    $
    0.49
    
    
    $
    0.55Net income per share  diluted
    
    $
    0.49
    
    
    $
    0.55Weighted average of common shares outstanding  basic
    
    
    19,366
    
    
    
    19,328Weighted average of common shares outstanding  diluted
    
    
    19,475
    
    
    
    19,409Cash dividends per common share
    
    $
    0.09
    
    
    $
    0.08
 
 (*)
    
    Consists of the following: Net realized gains before impairment losses
    
    $
    1,200
    
    
    $
    882Total losses on securities with impairment charges
    
    
    
    
    
    
    Non-credit portion in other comprehensive income
    
    
    
    
    
    
    Net impairment charges recognized in earnings
    
    
    
    
    
    
    Net realized gains on investments
    
    $
    1,200
    
    
    $
    882
 .
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##### Table of Contents



National Interstate Corporation and Subsidiaries
Consolidated Statements of Shareholders Equity
(Unaudited)
(Dollars in thousands)
 Accumulated OtherCommon
    
    
    Additional Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    TreasuryStock
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Stock
    
    
    TotalBalance at January 1, 2011
    
    $
    234
    
    
    $
    50,273
    
    
    $
    258,473
    
    
    $
    6,251
    
    
    $
    (5,653
    )
    
    $
    309,578Net income
    
    
    
    
    
    
    
    
    
    
    9,528
    
    
    
    
    
    
    
    
    
    
    
    9,528Unrealized depreciation of investment securities,
net
of tax of ($0.2) million
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (302
    )
    
    
    
    
    
    
    (302
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,226Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (1,751
    )
    
    
    
    
    
    
    
    
    
    
    (1,751
    )Issuance of 10,643 treasury shares upon exercise of
options and restricted stock issued, net of
forfeitures
    
    
    
    
    
    
    (149
    )
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    (134
    )Excess tax benefit realized from vesting of
restricted
stock
    
    
    
    
    
    
    54
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54Stock compensation expense
    
    
    
    
    
    
    273
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    273Balance at March 31, 2011
    
    $
    234
    
    
    $
    50,451
    
    
    $
    266,250
    
    
    $
    5,949
    
    
    $
    (5,638
    )
    
    $
    317,246Balance at January 1, 2010
    
    $
    234
    
    
    $
    49,264
    
    
    $
    225,195
    
    
    $
    2,353
    
    
    $
    (5,729
    )
    
    $
    271,317Net income
    
    
    
    
    
    
    
    
    
    
    10,586
    
    
    
    
    
    
    
    
    
    
    
    10,586Unrealized appreciation of investment securities,
net
of tax of $1.8 million
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,328
    
    
    
    
    
    
    
    3,328Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,914Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (1,557
    )
    
    
    
    
    
    
    
    
    
    
    (1,557
    )Issuance of 41,217 treasury shares upon exercise of
options, stock award grants and restricted stock
issued, net of forfeitures
    
    
    
    
    
    
    380
    
    
    
    
    
    
    
    
    
    
    
    57
    
    
    
    437Tax shortfall realized from exercise of stock options
    
    
    
    
    
    
    (50
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50
    )Stock compensation expense
    
    
    
    
    
    
    428
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    428Balance at March 31, 2010
    
    $
    234
    
    
    $
    50,022
    
    
    $
    234,224
    
    
    $
    5,681
    
    
    $
    (5,672
    )
    
    $
    284,489
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##### Table of Contents



National Interstate Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
 Three Months Ended March 31,2011
    
    
    2010Operating activitiesNet income
    
    $
    9,528
    
    
    $
    10,586Adjustments to reconcile net income to net cash provided by operating activities:Net amortization of bond premiums and discounts
    
    
    2,680
    
    
    
    841Provision for depreciation and amortization
    
    
    918
    
    
    
    550Net realized gains on investment securities
    
    
    (1,200
    )
    
    
    (882
    )Deferred federal income taxes
    
    
    655
    
    
    
    (288
    )Stock compensation expense
    
    
    273
    
    
    
    428Increase in deferred policy acquisition costs, net
    
    
    (3,431
    )
    
    
    (2,390
    )(Decrease) increase in reserves for losses and loss adjustment expenses
    
    
    (86
    )
    
    
    9,622Increase in premiums receivable
    
    
    (802
    )
    
    
    (15,901
    )Increase in unearned premiums and service fees
    
    
    8,049
    
    
    
    18,577Decrease (increase) in interest receivable and other assets
    
    
    596
    
    
    
    (294
    )Increase in prepaid reinsurance premiums
    
    
    (2,979
    )
    
    
    (7,280
    )(Decrease) increase in accounts payable, commissions and other liabilities and assessments and fees payable
    
    
    (10,225
    )
    
    
    2,609Increase in amounts withheld or retained for accounts of others
    
    
    1,509
    
    
    
    326Decrease (increase) in reinsurance recoverable
    
    
    2,765
    
    
    
    (1,668
    )Increase in reinsurance balances payable
    
    
    2,412
    
    
    
    7,256Other
    
    
    (7
    )
    
    
    (47
    )Net cash provided by operating activities
    
    
    10,655
    
    
    
    22,045Investing activitiesPurchases of fixed maturities
    
    
    (98,335
    )
    
    
    (132,722
    )Purchases of equity securities
    
    
    (15,422
    )
    
    
    Proceeds from sale of fixed maturities
    
    
    6,779
    
    
    
    9,033Proceeds from sale of equity securities
    
    
    2,468
    
    
    
    111Proceeds from maturities and redemptions of investments
    
    
    80,053
    
    
    
    108,603Collection of amounts refundable on purchase price of Vanliner
    
    
    14,256
    
    
    
    Capital expenditures
    
    
    (665
    )
    
    
    (551
    )Net cash used in investing activities
    
    
    (10,866
    )
    
    
    (15,526
    )Financing activitiesExcess tax benefit realized from vesting of restricted stock
    
    
    54
    
    
    
    Issuance of common shares from treasury upon exercise of stock options or stock award grants
    
    
    (134
    )
    
    
    437Cash dividends paid on common shares
    
    
    (1,751
    )
    
    
    (1,557
    )Net cash used in financing activities
    
    
    (1,831
    )
    
    
    (1,120
    )Net (decrease) increase in cash and cash equivalents
    
    
    (2,042
    )
    
    
    5,399Cash and cash equivalents at beginning of period
    
    
    27,054
    
    
    
    18,589Cash and cash equivalents at end of period
    
    $
    25,012
    
    
    $
    23,988
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##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Basis of Presentation
      2. Recent Accounting Pronouncements
 Business Combinations (Topic 805) Business Combinations
 Financial Services  Insurance Financial Services  Insurance
 3. Fair Value Measurements
  7




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##### Table of Contents



Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(Dollars in thousands)Fixed maturities:U.S. Government and government agency obligations
    
    $
    
    
    
    $
    160,063
    
    
    $
    
    
    
    $
    160,063Foreign government obligations
    
    
    
    
    
    
    5,650
    
    
    
    
    
    
    
    5,650State and local government obligations
    
    
    
    
    
    
    274,316
    
    
    
    4,210
    
    
    
    278,526Residential mortgage-backed securities
    
    
    
    
    
    
    206,233
    
    
    
    
    
    
    
    206,233Commercial mortgage-backed securities
    
    
    
    
    
    
    5,605
    
    
    
    
    
    
    
    5,605Corporate obligations
    
    
    
    
    
    
    245,104
    
    
    
    2,268
    
    
    
    247,372Redeemable preferred stocks
    
    
    10,026
    
    
    
    297
    
    
    
    2,423
    
    
    
    12,746Total fixed maturities
    
    
    10,026
    
    
    
    897,268
    
    
    
    8,901
    
    
    
    916,195Equity securities:Common stocks
    
    
    18,866
    
    
    
    24,028
    
    
    
    
    
    
    
    42,894Perpetual preferred stocks
    
    
    858
    
    
    
    252
    
    
    
    396
    
    
    
    1,506Total equity securities
    
    
    19,724
    
    
    
    24,280
    
    
    
    396
    
    
    
    44,400Short-term investments
    
    
    
    
    
    
    67
    
    
    
    
    
    
    
    67Total investments
    
    
    29,750
    
    
    
    921,615
    
    
    
    9,297
    
    
    
    960,662Cash and cash equivalents
    
    
    25,012
    
    
    
    
    
    
    
    
    
    
    
    25,012Total investments and cash and cash equivalents
    
    $
    54,762
    
    
    $
    921,615
    
    
    $
    9,297
    
    
    $
    985,674
 8




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##### Table of Contents



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:Common stocks
    
    
    15,275
    
    
    
    13,870
    
    
    
    
    
    
    
    29,145Perpetual preferred stocks
    
    
    840
    
    
    
    127
    
    
    
    396
    
    
    
    1,363Total 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
   Three Months Ended March 31, 2011State and LocalGovernment
    
    
    Corporate
    
    
    Redeemable
    
    
    Perpetual PreferredObligations
    
    
    Obligations
    
    
    Preferred Stock
    
    
    Stock(Dollars in thousands)Beginning balance at January 1, 2011
    
    $
    3,992
    
    
    $
    2,290
    
    
    $
    2,429
    
    
    $
    396Total gains or (losses):Included in earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Included in other comprehensive income
    
    
    218
    
    
    
    50
    
    
    
    (6
    )
    
    
    Purchases and issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sales, settlements and redemptions
    
    
    
    
    
    
    (72
    )
    
    
    
    
    
    
    Transfers in and/or (out) of Level 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ending balance at March 31, 2011
    
    $
    4,210
    
    
    $
    2,268
    
    
    $
    2,423
    
    
    $
    396The amount of total gains or (losses) for the period
included in earnings and attributable to the change
in unrealized gains or (losses) relating to assets still
held at the reporting date
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 9




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##### Table of Contents



Three Months Ended March 31, 2010State and Local
    
    
    ResidentialGovernment
    
    
    Mortgage-Backed
    
    
    Corporate
    
    
    Redeemable
    
    
    Perpetual PreferredObligations
    
    
    Securities
    
    
    Obligations
    
    
    Preferred Stock
    
    
    Stock(Dollars in thousands)Beginning balance at January 1, 2010
    
    $
    6,369
    
    
    $
    2,384
    
    
    $
    5,842
    
    
    $
    2,353
    
    
    $
    396Total gains or (losses):Included in earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Included in other comprehensive income
    
    
    18
    
    
    
    147
    
    
    
    113
    
    
    
    15
    
    
    
    Purchases and issuances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sales, settlements and redemptions
    
    
    
    
    
    
    (164
    )
    
    
    (115
    )
    
    
    
    
    
    
    Transfers in and/or (out) of Level 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ending balance at March 31, 2010
    
    $
    6,387
    
    
    $
    2,367
    
    
    $
    5,840
    
    
    $
    2,368
    
    
    $
    396The amount of total gains or (losses) for the period
included in earnings and attributable to the change
in unrealized gains or (losses) relating to assets still
held at the reporting date
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 4. Investments
  10




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##### Table of Contents



Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(Dollars in thousands)March 31, 2011:Fixed Maturities:U.S. Government and government agency obligations
    
    $
    159,282
    
    
    $
    1,890
    
    
    $
    (1,109
    )
    
    $
    160,063Foreign government obligations
    
    
    5,722
    
    
    
    
    
    
    
    (72
    )
    
    
    5,650State and local government obligations
    
    
    277,302
    
    
    
    3,844
    
    
    
    (2,620
    )
    
    
    278,526Residential mortgage-backed securities
    
    
    206,644
    
    
    
    2,792
    
    
    
    (3,203
    )
    
    
    206,233Commercial mortgage-backed securities
    
    
    5,783
    
    
    
    
    
    
    
    (178
    )
    
    
    5,605Corporate obligations
    
    
    242,937
    
    
    
    5,269
    
    
    
    (834
    )
    
    
    247,372Redeemable preferred stocks
    
    
    12,794
    
    
    
    219
    
    
    
    (267
    )
    
    
    12,746Total fixed maturities
    
    
    910,464
    
    
    
    14,014
    
    
    
    (8,283
    )
    
    
    916,195Equity securities:Common stocks
    
    
    39,669
    
    
    
    3,237
    
    
    
    (12
    )
    
    
    42,894Perpetual preferred stocks
    
    
    1,309
    
    
    
    198
    
    
    
    (1
    )
    
    
    1,506Total equity securities
    
    
    40,978
    
    
    
    3,435
    
    
    
    (13
    )
    
    
    44,400Short-term investments
    
    
    67
    
    
    
    
    
    
    
    
    
    
    
    67Total investments
    
    $
    951,509
    
    
    $
    17,449
    
    
    $
    (8,296
    )
    
    $
    960,662December 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:Common stocks
    
    
    25,948
    
    
    
    3,197
    
    
    
    
    
    
    
    29,145Perpetual preferred stocks
    
    
    1,309
    
    
    
    88
    
    
    
    (34
    )
    
    
    1,363Total equity securities
    
    
    27,257
    
    
    
    3,285
    
    
    
    (34
    )
    
    
    30,508Short-term investments
    
    
    67
    
    
    
    
    
    
    
    
    
    
    
    67Total investments
    
    $
    928,533
    
    
    $
    18,011
    
    
    $
    (8,394
    )
    
    $
    938,150
    AmortizedCost
    
    
    Fair Value(Dollars in thousands)Due in one year or less
    
    $
    25,549
    
    
    $
    26,135Due after one year through five years
    
    
    267,737
    
    
    
    271,827Due after five years through ten years
    
    
    293,210
    
    
    
    296,427Due after ten years
    
    
    111,541
    
    
    
    109,968698,037
    
    
    
    704,357Mortgage-backed securities
    
    
    212,427
    
    
    
    211,838Total
    
    $
    910,464
    
    
    $
    916,195
 11




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##### Table of Contents



Three Months EndedMarch 31,2011
    
    
    2010(Dollars in thousands)Fixed maturity gains
    
    $
    433
    
    
    $
    459Fixed maturity losses
    
    
    
    
    
    
    Equity security gains
    
    
    767
    
    
    
    423Equity security losses
    
    
    
    
    
    
    Net realized gains on investments
    
    $
    1,200
    
    
    $
    882
   Less than Twelve Months
    
    
    Twelve Months or MoreFair
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    FairValue
    
    
    Number
    
    
    
    
    
    
    
    
    
    
    Value
    
    
    NumberFair
    
    
    Unrealized
    
    
    as % of
    
    
    of
    
    
    Fair
    
    
    Unrealized
    
    
    as % of
    
    
    ofValue
    
    
    Losses
    
    
    Cost
    
    
    Holdings
    
    
    Value
    
    
    Losses
    
    
    Cost
    
    
    Holdings(Dollars in thousands)March 31, 2011:Fixed maturities:U.S. Government and government
agency obligations
    
    $
    73,951
    
    
    $
    (1,109
    )
    
    
    98.5
    %
    
    
    33
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    
    Foreign government obligations
    
    
    5,650
    
    
    
    (72
    )
    
    
    98.7
    %
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    State and local government
obligations
    
    
    123,827
    
    
    
    (1,891
    )
    
    
    98.5
    %
    
    
    98
    
    
    
    5,424
    
    
    
    (729
    )
    
    
    88.2
    %
    
    
    4Residential mortgage-backed
securities
    
    
    93,527
    
    
    
    (1,433
    )
    
    
    98.5
    %
    
    
    31
    
    
    
    7,097
    
    
    
    (1,770
    )
    
    
    80.0
    %
    
    
    5Commercial mortgage-backed
securities
    
    
    2,014
    
    
    
    (64
    )
    
    
    96.9
    %
    
    
    1
    
    
    
    3,591
    
    
    
    (114
    )
    
    
    96.9
    %
    
    
    1Corporate obligations
    
    
    58,636
    
    
    
    (699
    )
    
    
    98.8
    %
    
    
    52
    
    
    
    6,609
    
    
    
    (135
    )
    
    
    98.0
    %
    
    
    7Redeemable preferred stocks
    
    
    2,604
    
    
    
    (151
    )
    
    
    94.5
    %
    
    
    5
    
    
    
    3,635
    
    
    
    (116
    )
    
    
    96.9
    %
    
    
    4Total fixed maturities
    
    
    360,209
    
    
    
    (5,419
    )
    
    
    98.5
    %
    
    
    223
    
    
    
    26,356
    
    
    
    (2,864
    )
    
    
    90.2
    %
    
    
    21Equity securities:Perpetual preferred stocks
    
    
    623
    
    
    
    (1
    )
    
    
    99.8
    %
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stocks
    
    
    800
    
    
    
    (12
    )
    
    
    98.5
    %
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total equity securities
    
    
    1,423
    
    
    
    (13
    )
    
    
    99.1
    %
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total fixed maturities and equity
securities
    
    $
    361,632
    
    
    $
    (5,432
    )
    
    
    98.5
    %
    
    
    229
    
    
    $
    26,356
    
    
    $
    (2,864
    )
    
    
    90.2
    %
    
    
    21December 31, 2010:Fixed maturities:U.S. Government and government
agency obligations
    
    $
    76,781
    
    
    $
    (976
    )
    
    
    98.7
    %
    
    
    35
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    
    Foreign government obligations
    
    
    5,676
    
    
    
    (65
    )
    
    
    98.9
    %
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    State and local government
obligations
    
    
    124,938
    
    
    
    (1,599
    )
    
    
    98.7
    %
    
    
    108
    
    
    
    5,194
    
    
    
    (963
    )
    
    
    84.4
    %
    
    
    4Residential mortgage-backed
securities
    
    
    78,332
    
    
    
    (1,056
    )
    
    
    98.7
    %
    
    
    25
    
    
    
    7,317
    
    
    
    (1,976
    )
    
    
    78.7
    %
    
    
    5Commercial mortgage-backed
securities
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total equity securities
    
    
    605
    
    
    
    (34
    )
    
    
    94.7
    %
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total fixed maturities and equity
securities
    
    $
    353,850
    
    
    $
    (4,696
    )
    
    
    98.7
    %
    
    
    245
    
    
    $
    26,049
    
    
    $
    (3,698
    )
    
    
    87.6
    %
    
    
    22
  12




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##### Table of Contents



Three Months Ended March 31,2011
    
    
    2010(Dollars in thousands)Beginning balance
    
    $
    2,017
    
    
    $
    1,910Additional credit impairments on:Previously impaired securities
    
    
    
    
    
    
    Securities without prior impairments
    
    
    
    
    
    
    Reductions
    
    
    
    
    
    
    Ending balance
    
    $
    2,017
    
    
    $
    1,910
 13




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##### Table of Contents



5. Income Taxes
  Three Months Ended March 31,2011
    
    
    2010(Dollars in thousands)Federal income tax expense at statutory rate
    
    $
    4,878
    
    
    $
    5,059Effect of:Tax-exempt investment income
    
    
    (634
    )
    
    
    (374
    )Change in valuation allowance on net capital losses
    
    
    
    
    
    
    (810
    )Other items, net
    
    
    166
    
    
    
    (8
    )$
    4,410
    
    
    $
    3,867
  March 31, 2011
    
    
    December 31, 2010(Dollars in thousands)Deferred Tax Assets:Unearned premiums
    
    $
    13,498
    
    
    $
    13,103Unpaid losses and loss adjustment expenses
    
    
    18,795
    
    
    
    18,700Assignments and assessments
    
    
    1,572
    
    
    
    1,474Realized losses on investments, primarily impairments
    
    
    5,758
    
    
    
    6,092Accrued compensation
    
    
    2,202
    
    
    
    3,156Other, net
    
    
    3,265
    
    
    
    2,12945,090
    
    
    
    44,654Deferred Tax Liabilities:Deferred policy acquisition costs
    
    
    (9,422
    )
    
    
    (8,221
    )Unrealized gains on investments
    
    
    (3,204
    )
    
    
    (3,366
    )Intangible assets
    
    
    (3,097
    )
    
    
    (3,122
    )Other, net
    
    
    (2,527
    )
    
    
    (2,612
    )Total deferred tax liabilities
    
    
    (18,250
    )
    
    
    (17,321
    )Net deferred income tax assets
    
    $
    26,840
    
    
    $
    27,333
  6. Shareholders Equity and Stock-Based Compensation
   14




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##### Table of Contents



7. Earnings Per Common Share
  Three Months Ended March 31,2011
    
    
    2010(In thousands, except per share data)Net income
    
    $
    9,528
    
    
    $
    10,586Weighted average shares outstanding during period
    
    
    19,366
    
    
    
    19,328Additional shares issuable under employee common stock option plans
using treasury stock method
    
    
    109
    
    
    
    81Weighted average shares outstanding assuming exercise of stock
options
    
    
    19,475
    
    
    
    19,409Net income per share:Basic
    
    $
    0.49
    
    
    $
    0.55Diluted
    
    $
    0.49
    
    
    $
    0.55
  8. Transactions with Related Parties
   Three Months Ended March 31,2011
    
    2010(Dollars in thousands)Assumed premiums written
    
    $
    1,208
    
    
    $
    1,046Assumed premiums earned
    
    
    980
    
    
    
    772Assumed losses and loss adjustment expense incurred
    
    
    1,088
    
    
    
    105Ceded premiums written
    
    
    333
    
    
    
    688Ceded premiums earned
    
    
    466
    
    
    
    680Ceded losses and loss adjustment expense recoveries
    
    
    787
    
    
    
    267Payable to Great American as of period end
    
    
    236
    
    
    
    583
  15




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##### Table of Contents



9. Reinsurance
  Three Months Ended March 31,2011
    
    
    2010(Dollars in thousands)Direct premiums written
    
    $
    131,851
    
    
    $
    104,126Reinsurance assumed
    
    
    2,462
    
    
    
    1,678Reinsurance ceded
    
    
    (24,061
    )
    
    
    (24,350
    )Net written premiums
    
    $
    110,252
    
    
    $
    81,454Direct premiums earned
    
    $
    123,486
    
    
    $
    85,718Reinsurance assumed
    
    
    2,484
    
    
    
    1,533Reinsurance ceded
    
    
    (20,831
    )
    
    
    (17,070
    )Net earned premiums
    
    $
    105,139
    
    
    $
    70,181
  10. Commitments and Contingencies
    11. Segment Information
  16




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##### Table of Contents



Three Months Ended March 31,2011
    
    
    2010(Dollars in thousands)Revenue:Premiums Earned:Alternative Risk Transfer
    
    $
    46,108
    
    
    $
    37,370Transportation
    
    
    40,387
    
    
    
    14,199Specialty Personal Lines
    
    
    13,862
    
    
    
    14,146Hawaii and Alaska
    
    
    3,362
    
    
    
    3,319Other
    
    
    1,420
    
    
    
    1,147Total premiums earned
    
    
    105,139
    
    
    
    70,181Net investment income
    
    
    6,902
    
    
    
    4,959Net realized gains on investments
    
    
    1,200
    
    
    
    882Other
    
    
    1,116
    
    
    
    818Total revenues
    
    $
    114,357
    
    
    $
    76,840
 
 ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Forward-Looking Statements
  
    
    general economic conditions, weakness of the financial markets and other
factors, including prevailing interest rate levels and stock and credit market performance,
which may affect or continue to affect (among other things) our ability to sell our
products and to collect amounts due to us, our ability to access capital resources and the
costs associated with such access to capital and the market value of our investments;
    
    our ability to manage our growth strategy;
    
    customer response to new products and marketing initiatives;
    
    tax law 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.
  General
  17




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##### Table of Contents



Results of Operations
 Overview
    Three Months Ended March 31,2011
    
    
    2010Amount
    
    
    Per Share
    
    
    Amount
    
    
    Per Share(Dollars in thousands, except per share data)Net income from operations
    
    $
    10,019
    
    
    $
    0.52
    
    
    $
    9,202
    
    
    $
    0.48After-tax net realized gains from investments
    
    
    780
    
    
    
    0.04
    
    
    
    574
    
    
    
    0.03Change in valuation allowance related to net capital losses
    
    
    
    
    
    
    
    
    
    
    810
    
    
    
    0.04After-tax impact from balance sheet guaranty for Vanliner
    
    
    (1,271
    )
    
    
    (0.07
    )
    
    
    
    
    
    
    Net income
    
    $
    9,528
    
    
    $
    0.49
    
    
    $
    10,586
    
    
    $
    0.55
  18




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##### Table of Contents



Gross Premiums Written
  Three Months Ended March 31,2011
    
    
    2010Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Alternative Risk Transfer
    
    $
    80,861
    
    
    
    60.2
    %
    
    $
    65,945
    
    
    
    62.3
    %Transportation
    
    
    34,097
    
    
    
    25.4
    %
    
    
    18,052
    
    
    
    17.1
    %Specialty Personal Lines
    
    
    14,660
    
    
    
    10.9
    %
    
    
    16,889
    
    
    
    16.0
    %Hawaii and Alaska
    
    
    3,678
    
    
    
    2.7
    %
    
    
    4,001
    
    
    
    3.8
    %Other
    
    
    1,017
    
    
    
    0.8
    %
    
    
    917
    
    
    
    0.8
    %Gross premiums written
    
    $
    134,313
    
    
    
    100.0
    %
    
    $
    105,804
    
    
    
    100.0
    %
   19




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##### Table of Contents



Premiums Earned
 2011 compared to 2010.
 Three Months Ended March 31,
    
    
    Change2011
    
    
    2010
    
    
    Amount
    
    
    Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer
    
    $
    46,108
    
    
    $
    37,370
    
    
    $
    8,738
    
    
    
    23.4
    %Transportation
    
    
    40,387
    
    
    
    14,199
    
    
    
    26,188
    
    
    
    184.4
    %Specialty Personal Lines
    
    
    13,862
    
    
    
    14,146
    
    
    
    (284
    )
    
    
    (2.0
    %)Hawaii and Alaska
    
    
    3,362
    
    
    
    3,319
    
    
    
    43
    
    
    
    1.3
    %Other
    
    
    1,420
    
    
    
    1,147
    
    
    
    273
    
    
    
    23.8
    %Total premiums earned
    
    $
    105,139
    
    
    $
    70,181
    
    
    $
    34,958
    
    
    
    49.8
    %
  Underwriting and Loss Ratio Analysis
     20




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##### Table of Contents



Three Months Ended March 31,2011
    
    
    2010(Dollars in thousands)Gross premiums written
    
    $
    134,313
    
    
    $
    105,804Ceded reinsurance
    
    
    (24,061
    )
    
    
    (24,350
    )Net premiums written
    
    
    110,252
    
    
    
    81,454Change in unearned premiums, net of ceded
    
    
    (5,113
    )
    
    
    (11,273
    )Net premiums earned
    
    $
    105,139
    
    
    $
    70,181Combined Ratios:Loss and LAE ratio (1)
    
    
    71.0
    %
    
    
    61.4
    %Underwriting expense ratio (2)
    
    
    22.6
    %
    
    
    25.1
    %Combined ratio
    
    
    93.6
    %
    
    
    86.5
    %
 
 (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. 2011 compared to 2010.
  Net Investment Income
 2011 compared to 2010.
 Net Realized Gains (Losses) on Investments
 2011 compared to 2010.
 Commissions and Other Underwriting Expenses
 2011 compared to 2010.
 21




---



##### Table of Contents



Other Operating and General Expenses
 2011 compared to 2010.
 Income Taxes
 2011 compared to 2010.
 Financial Condition
 Investments
    Securities with
    
    Securities withUnrealized Gains
    
    Unrealized Losses(Dollars in thousands)Fixed Maturities:Fair value of securities
    
    $
    527,865
    
    
    $
    386,565Amortized cost of securities
    
    
    513,851
    
    
    
    394,848Gross unrealized gain or (loss)
    
    $
    14,014
    
    
    $
    (8,283
    )Fair value as a % of amortized cost
    
    
    102.7
    %
    
    
    97.9
    %Number of security positions held
    
    
    564
    
    
    
    244Number individually exceeding $50,000 gain or (loss)
    
    
    78
    
    
    
    45Concentration of gains or losses by type or industry:U.S. Government and government agencies
    
    $
    1,890
    
    
    $
    (1,109
    )Foreign governments
    
    
    
    
    
    
    (72
    )State, municipalities and political subdivisions
    
    
    3,844
    
    
    
    (2,620
    )Residential mortgage-backed securities
    
    
    2,792
    
    
    
    (3,203
    )Commercial mortgage-backed securities
    
    
    
    
    
    
    (178
    )Banks, insurance and brokers
    
    
    2,373
    
    
    
    (482
    )Industrial and other
    
    
    3,115
    
    
    
    (619
    )Percent rated investment grade (a)
    
    
    92.8
    %
    
    
    96.0
    %Equity Securities:Fair value of securities
    
    $
    18,949
    
    
    $
    1,423Cost of securities
    
    
    15,514
    
    
    
    1,436Gross unrealized gain or (loss)
    
    $
    3,435
    
    
    $
    (13
    )Fair value as a % of cost
    
    
    122.1
    %
    
    
    99.1
    %Number individually exceeding $50,000 gain or (loss)
    
    
    9
    
    
    
    
 
 (a)
    
    Investment grade of AAA to BBB- by nationally recognized rating agencies. 22




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##### Table of Contents



Securities with
    
    
    Securities withUnrealized Gains
    
    
    Unrealized LossesMaturity:One year or less
    
    
    4.6
    %
    
    
    0.5
    %After one year through five years
    
    
    34.8
    %
    
    
    22.8
    %After five years through ten years
    
    
    35.3
    %
    
    
    28.1
    %After ten years
    
    
    5.3
    %
    
    
    21.1
    %80.0
    %
    
    
    72.5
    %Mortgage-backed securities
    
    
    20.0
    %
    
    
    27.5
    %100.0
    %
    
    
    100.0
    %
  At March 31, 2011Aggregate
    
    
    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 (36 issues)
    
    $
    69,350
    
    
    $
    2,884
    
    
    
    104.3
    %More than one year (42 issues)
    
    
    61,997
    
    
    
    4,025
    
    
    
    106.9
    %Less than $50,000 (486 issues)
    
    
    396,518
    
    
    
    7,105
    
    
    
    101.8
    %$
    527,865
    
    
    $
    14,014Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (34 issues)
    
    $
    93,921
    
    
    $
    (3,008
    )
    
    
    96.9
    %More than one year (11 issues)
    
    
    16,913
    
    
    
    (2,660
    )
    
    
    86.4
    %Less than $50,000 (199 issues)
    
    
    275,731
    
    
    
    (2,615
    )
    
    
    99.1
    %$
    386,565
    
    
    $
    (8,283
    )Equity Securities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (2 issues)
    
    $
    365
    
    
    $
    150
    
    
    
    169.8
    %More than one year (7 issues)
    
    
    12,321
    
    
    
    2,999
    
    
    
    132.2
    %Less than $50,000 (31 issues)
    
    
    6,263
    
    
    
    286
    
    
    
    104.8
    %$
    18,949
    
    
    $
    3,435Securities 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 (6 issues)
    
    
    1,423
    
    
    
    (13
    )
    
    
    99.1
    %$
    1,423
    
    
    $
    (13
    )
  Premiums and Reinsurance
  23




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##### Table of Contents



Liquidity and Capital Resources
      24




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##### Table of Contents



Critical Accounting Policies
  Losses and LAE Reserves
   25




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##### 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.
 Other-Than-Temporary Impairment
  
    
    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;
 26




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##### Table of Contents




    
    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.
   Contractual Obligations/Off-Balance Sheet Arrangements
   
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
  
 ITEM 4. Controls and Procedures
   27




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3. Defaults Upon Senior Securities
  
 ITEM 4. [RESERVED]
 
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
 3.1
    
    Amended and Restated Articles of Incorporation (1)3.2
    
    Amended and Restated Code of Regulations (1)31.1
    
    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
 
 (1)
    
    These exhibits are incorporated by reference to our
Registration Statement on Form S-1 (Registration No. 333-119270). 28




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##### Table of Contents



SIGNATURES
  NATIONAL INTERSTATE CORPORATIONDate: May 6, 2011
    /s/ David W. MichelsonDavid W. MichelsonPresident and Chief Executive Officer
(Duly Authorized Officer and Principal Executive Officer)  /s/ Julie A. McGrawJulie A. McGrawVice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) 29