##### 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 June 30, 2010
 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(State or other jurisdiction of 
incorporation or organization)
    
    34-1607394(I.R.S. Employer
Identification No.)
 
 3250 Interstate Drive
Richfield, Ohio 44286-9000
(330) 659-8900  (Address and telephone number of principal executive offices)
 
 þ o
 o o
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-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
    
    
    19Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    32Part II  Other Information
    
    
    32Item 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3. Defaults Upon Senior Securities
    
    
    32Item 4. [RESERVED]
    
    
    32Item 5. Other Information
    
    
    32Item 6. Exhibits
    
    
    33EX-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)
 June 30,
    
    
    December 31,2010
    
    
    2009(Unaudited)ASSETSInvestments:Fixed maturities available-for-sale, at fair value (amortized cost  $470,339 and
$565,753, respectively)
    
    $
    479,381
    
    
    $
    566,901Equity securities available-for-sale, at fair value (amortized cost  $26,086 and
$26,203, respectively)
    
    
    27,394
    
    
    
    28,673Short-term investments, at cost which approximates fair value
    
    
    765
    
    
    
    811Total investments
    
    
    507,540
    
    
    
    596,385Cash and cash equivalents
    
    
    42,826
    
    
    
    18,589Accrued investment income
    
    
    4,187
    
    
    
    4,926Deposit in advance of acquisition
    
    
    128,059
    
    
    
    Premiums receivable, net of allowance for doubtful accounts of $1,020 and $963, respectively
    
    
    139,994
    
    
    
    98,679Reinsurance recoverable on paid and unpaid losses
    
    
    145,030
    
    
    
    149,949Prepaid reinsurance premiums
    
    
    39,488
    
    
    
    25,163Deferred policy acquisition costs
    
    
    22,502
    
    
    
    17,833Deferred federal income taxes
    
    
    17,344
    
    
    
    18,178Property and equipment, net
    
    
    21,773
    
    
    
    21,747Funds held by reinsurer
    
    
    3,248
    
    
    
    3,441Prepaid expenses and other assets
    
    
    814
    
    
    
    863Total assets
    
    $
    1,072,805
    
    
    $
    955,753LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses
    
    $
    423,118
    
    
    $
    417,260Unearned premiums and service fees
    
    
    191,922
    
    
    
    149,509Long-term debt
    
    
    45,000
    
    
    
    15,000Amounts withheld or retained for accounts of others
    
    
    52,006
    
    
    
    51,359Reinsurance balances payable
    
    
    22,326
    
    
    
    10,540Accounts payable and other liabilities
    
    
    33,973
    
    
    
    29,371Commissions payable
    
    
    9,486
    
    
    
    8,164Assessments and fees payable
    
    
    3,314
    
    
    
    3,233Total liabilities
    
    
    781,145
    
    
    
    684,436Shareholders equity:Preferred shares  no par valueAuthorized  10,000 sharesIssued  0 shares
    
    
    
    
    
    
    Common shares  $0.01 par valueAuthorized  50,000 sharesIssued  23,350 shares, including 4,007 and 4,048 shares, respectively, in treasury
    
    
    234
    
    
    
    234Additional paid-in capital
    
    
    50,086
    
    
    
    49,264Retained earnings
    
    
    240,284
    
    
    
    225,195Accumulated other comprehensive income
    
    
    6,728
    
    
    
    2,353Treasury shares
    
    
    (5,672
    )
    
    
    (5,729
    )Total shareholders equity
    
    
    291,660
    
    
    
    271,317Total liabilities and shareholders equity
    
    $
    1,072,805
    
    
    $
    955,753
  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 Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues:Premiums earned
    
    $
    69,233
    
    
    $
    69,663
    
    
    $
    139,414
    
    
    $
    139,102Net investment income
    
    
    5,012
    
    
    
    4,919
    
    
    
    9,971
    
    
    
    9,929Net realized gains on investments (*)
    
    
    1,669
    
    
    
    1,048
    
    
    
    2,551
    
    
    
    1,071Other
    
    
    976
    
    
    
    960
    
    
    
    1,794
    
    
    
    1,748Total revenues
    
    
    76,890
    
    
    
    76,590
    
    
    
    153,730
    
    
    
    151,850Expenses:Losses and loss adjustment expenses
    
    
    46,032
    
    
    
    39,440
    
    
    
    89,136
    
    
    
    78,766Commissions and other underwriting expenses
    
    
    14,735
    
    
    
    15,357
    
    
    
    29,571
    
    
    
    28,376Other operating and general expenses
    
    
    3,996
    
    
    
    3,203
    
    
    
    7,622
    
    
    
    6,495Expense on amounts withheld
    
    
    926
    
    
    
    900
    
    
    
    1,735
    
    
    
    1,767Interest expense
    
    
    92
    
    
    
    212
    
    
    
    104
    
    
    
    332Total expenses
    
    
    65,781
    
    
    
    59,112
    
    
    
    128,168
    
    
    
    115,736Income before income taxes
    
    
    11,109
    
    
    
    17,478
    
    
    
    25,562
    
    
    
    36,114Provision for income taxes
    
    
    3,491
    
    
    
    5,369
    
    
    
    7,358
    
    
    
    11,359Net income
    
    $
    7,618
    
    
    $
    12,109
    
    
    $
    18,204
    
    
    $
    24,755Net income per share    basic
    
    $
    0.39
    
    
    $
    0.63
    
    
    $
    0.94
    
    
    $
    1.28Net income per share  diluted
    
    $
    0.39
    
    
    $
    0.63
    
    
    $
    0.94
    
    
    $
    1.28Weighted average of common shares outstanding  basic
    
    
    19,343
    
    
    
    19,301
    
    
    
    19,336
    
    
    
    19,301Weighted
average of common shares outstanding - diluted
    
    
    19,456
    
    
    
    19,359
    
    
    
    19,424
    
    
    
    19,351Cash dividends per common share
    
    $
    0.08
    
    
    $
    0.07
    
    
    $
    0.16
    
    
    $
    0.14
 
 (*)
    
    Consists of the following: Net realized gains before impairment losses
    
    $
    1,770
    
    
    $
    1,674
    
    
    $
    2,652
    
    
    $
    2,304Total losses on securities with impairment charges
    
    
    
    
    
    
    (3,640
    )
    
    
    
    
    
    
    (4,247
    )Non-credit portion in other comprehensive income
    
    
    (101
    )
    
    
    3,014
    
    
    
    (101
    )
    
    
    3,014Net impairment charges recognized in earnings
    
    
    (101
    )
    
    
    (626
    )
    
    
    (101
    )
    
    
    (1,233
    )Net realized gains on investments
    
    $
    1,669
    
    
    $
    1,048
    
    
    $
    2,551
    
    
    $
    1,071
 .
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National Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Shareholders Equity
(Unaudited)
(Dollars in thousands)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    TreasuryStock
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Stock
    
    
    TotalBalance at January 1, 2010
    
    $
    234
    
    
    $
    49,264
    
    
    $
    225,195
    
    
    $
    2,353
    
    
    $
    (5,729
    )
    
    $
    271,317Net income
    
    
    
    
    
    
    
    
    
    
    18,204
    
    
    
    
    
    
    
    
    
    
    
    18,204Unrealized appreciation of investment
securities, net
of tax of $2.4 million
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,375
    
    
    
    
    
    
    
    4,375Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,579Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (3,115
    )
    
    
    
    
    
    
    
    
    
    
    (3,115
    )Issuance of 41,579 treasury shares upon exercise
of options, stock award grants and restricted
stock
issued, net of forfeitures
    
    
    
    
    
    
    387
    
    
    
    
    
    
    
    
    
    
    
    57
    
    
    
    444Tax
shortfall realized from exercise of stock options
    
    
    
    
    
    
    (50
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50
    )Stock compensation expense
    
    
    
    
    
    
    485
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    485Balance at June 30, 2010
    
    $
    234
    
    
    $
    50,086
    
    
    $
    240,284
    
    
    $
    6,728
    
    
    $
    (5,672
    )
    
    $
    291,660Balance at January 1, 2009
    
    $
    234
    
    
    $
    48,004
    
    
    $
    184,187
    
    
    $
    (10,613
    )
    
    $
    (5,738
    )
    
    $
    216,074Net income
    
    
    
    
    
    
    
    
    
    
    24,755
    
    
    
    
    
    
    
    
    
    
    
    24,755Unrealized appreciation of investment
securities, net
of tax of $2.5 million
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,813
    
    
    
    
    
    
    
    4,813Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,568Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (2,720
    )
    
    
    
    
    
    
    
    
    
    
    (2,720
    )Issuance of 5,595 treasury shares from restricted
stock issued, net of forfeitures
    
    
    
    
    
    
    (63
    )
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    (55
    )Stock compensation expense
    
    
    
    
    
    
    680
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    680Balance at June 30, 2009
    
    $
    234
    
    
    $
    48,621
    
    
    $
    206,222
    
    
    $
    (5,800
    )
    
    $
    (5,730
    )
    
    $
    243,547
  5




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National Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
 Six Months Ended June 30,2010
    
    
    2009Operating activitiesNet income
    
    $
    18,204
    
    
    $
    24,755Adjustments to reconcile net income to net cash provided by operating activities:Net amortization of bond premiums and discounts
    
    
    1,368
    
    
    
    1,280Provision for depreciation and amortization
    
    
    1,112
    
    
    
    922Net realized gains on investment securities
    
    
    (2,551
    )
    
    
    (1,071
    )Deferred federal income taxes
    
    
    (1,522
    )
    
    
    152Stock compensation expense
    
    
    485
    
    
    
    680Increase in deferred policy acquisition costs, net
    
    
    (4,669
    )
    
    
    (2,881
    )Increase in reserves for losses and loss adjustment expenses
    
    
    5,858
    
    
    
    4,985Increase in premiums receivable
    
    
    (41,315
    )
    
    
    (43,838
    )Increase in unearned premiums and service fees
    
    
    42,413
    
    
    
    34,046Decrease in interest receivable and other assets
    
    
    981
    
    
    
    254Increase in prepaid reinsurance premiums
    
    
    (14,325
    )
    
    
    (12,048
    )Increase (decrease) in accounts payable, commissions and other liabilities and assessments and fees payable
    
    
    6,005
    
    
    
    (6,184
    )Increase in amounts withheld or retained for accounts of others
    
    
    647
    
    
    
    2,961Decrease in reinsurance recoverable
    
    
    4,919
    
    
    
    2,948Increase in reinsurance balances payable
    
    
    11,786
    
    
    
    10,978Other
    
    
    (58
    )
    
    
    Net cash provided by operating activities
    
    
    29,338
    
    
    
    17,939Investing activitiesPurchases of fixed maturities
    
    
    (191,247
    )
    
    
    (204,681
    )Purchases of equity securities
    
    
    
    
    
    
    (4,392
    )Proceeds from sale of fixed maturities
    
    
    70,911
    
    
    
    37,029Proceeds from sale of equity securities
    
    
    156
    
    
    
    6,189Proceeds from maturities and redemptions of investments
    
    
    216,940
    
    
    
    179,154Deposit in advance of acquisition
    
    
    (128,059
    )
    
    
    Capital expenditures
    
    
    (1,131
    )
    
    
    (1,819
    )Net cash (used in) provided by investing activities
    
    
    (32,430
    )
    
    
    11,480Financing activitiesDecrease in securities lending collateral
    
    
    
    
    
    
    49,313Decrease in securities lending obligation
    
    
    
    
    
    
    (95,828
    )Additional long-term borrowings
    
    
    30,000
    
    
    
    Issuance of common shares from treasury upon exercise of stock options or stock award grants
    
    
    444
    
    
    
    (55
    )Cash dividends paid on common shares
    
    
    (3,115
    )
    
    
    (2,720
    )Net cash provided by (used in) financing activities
    
    
    27,329
    
    
    
    (49,290
    )Net increase (decrease) in cash and cash equivalents
    
    
    24,237
    
    
    
    (19,871
    )Cash and cash equivalents at beginning of period
    
    
    18,589
    
    
    
    77,159Cash and cash equivalents at end of period
    
    $
    42,826
    
    
    $
    57,288
  6




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NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. Basis of Presentation
     2. Subsequent Events  Acquisition of Vanliner Group, Inc.
   Business Combinations
  7




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##### Table of Contents



3. Recent Accounting Pronouncements
 Improving Disclosures about Fair Value Measurements Fair Value Measurements and Disclosures
 4. Fair Value Measurements
     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
    
    $
    
    
    
    $
    159,872
    
    
    $
    
    
    
    $
    159,872State and local government obligations
    
    
    
    
    
    
    126,155
    
    
    
    3,964
    
    
    
    130,119Residential mortgage-backed securities
    
    
    
    
    
    
    98,535
    
    
    
    2,067
    
    
    
    100,602Commercial mortgage-backed securities
    
    
    
    
    
    
    3,433
    
    
    
    
    
    
    
    3,433Corporate obligations
    
    
    
    
    
    
    68,108
    
    
    
    5,561
    
    
    
    73,669Redeemable preferred stocks
    
    
    8,832
    
    
    
    447
    
    
    
    2,407
    
    
    
    11,686Total fixed maturities
    
    
    8,832
    
    
    
    456,550
    
    
    
    13,999
    
    
    
    479,381Equity securities:Perpetual preferred stock
    
    
    827
    
    
    
    105
    
    
    
    396
    
    
    
    1,328Common stock
    
    
    13,129
    
    
    
    12,937
    
    
    
    
    
    
    
    26,066Total equity securities
    
    
    13,956
    
    
    
    13,042
    
    
    
    396
    
    
    
    27,394Short-term investments
    
    
    
    
    
    
    765
    
    
    
    
    
    
    
    765Total investments
    
    
    22,788
    
    
    
    470,357
    
    
    
    14,395
    
    
    
    507,540Cash and cash equivalents
    
    
    42,826
    
    
    
    
    
    
    
    
    
    
    
    42,826Total investments and cash and cash equivalents
    
    $
    65,614
    
    
    $
    470,357
    
    
    $
    14,395
    
    
    $
    550,366
  Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(Dollars in thousands)Fixed maturities:U.S. Government and government agency obligations
    
    $
    
    
    
    $
    212,538
    
    
    $
    
    
    
    $
    212,538State and local government obligations
    
    
    
    
    
    
    148,594
    
    
    
    6,369
    
    
    
    154,963Residential mortgage-backed securities
    
    
    
    
    
    
    114,329
    
    
    
    2,384
    
    
    
    116,713Commercial mortgage-backed securities
    
    
    
    
    
    
    3,935
    
    
    
    
    
    
    
    3,935Corporate obligations
    
    
    
    
    
    
    61,582
    
    
    
    5,842
    
    
    
    67,424Redeemable preferred stocks
    
    
    8,297
    
    
    
    678
    
    
    
    2,353
    
    
    
    11,328Total fixed maturities
    
    
    8,297
    
    
    
    541,656
    
    
    
    16,948
    
    
    
    566,901Equity securities:Perpetual preferred stock
    
    
    857
    
    
    
    167
    
    
    
    396
    
    
    
    1,420Common stock
    
    
    14,270
    
    
    
    12,983
    
    
    
    
    
    
    
    27,253Total equity securities
    
    
    15,127
    
    
    
    13,150
    
    
    
    396
    
    
    
    28,673Short-term investments
    
    
    
    
    
    
    811
    
    
    
    
    
    
    
    811Total investments
    
    
    23,424
    
    
    
    555,617
    
    
    
    17,344
    
    
    
    596,385Cash and cash equivalents
    
    
    18,589
    
    
    
    
    
    
    
    
    
    
    
    18,589Total investments and cash and cash equivalents
    
    $
    42,013
    
    
    $
    555,617
    
    
    $
    17,344
    
    
    $
    614,974
 9




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Three Months Ended June 30, 2010State and
    
    
    ResidentialLocal
    
    
    Mortgage-
    
    
    Redeemable
    
    
    PerpetualCorporate
    
    
    Government
    
    
    Backed
    
    
    Preferred
    
    
    PreferredObligations
    
    
    Obligations
    
    
    Securities
    
    
    Stock
    
    
    Stock(Dollars in thousands)Beginning balance at April 1, 2010
    
    $
    5,840
    
    
    $
    6,387
    
    
    $
    2,367
    
    
    $
    2,368
    
    
    $
    396Total gains or (losses):Included in earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Included in other comprehensive income
    
    
    (101
    )
    
    
    577
    
    
    
    54
    
    
    
    39
    
    
    
    Purchases, issuances, sales and settlements:Sales (1)
    
    
    (178
    )
    
    
    (3,000
    )
    
    
    (354
    )
    
    
    
    
    
    
    Transfers in and/or (out) of Level 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ending balance at June 30, 2010
    
    $
    5,561
    
    
    $
    3,964
    
    
    $
    2,067
    
    
    $
    2,407
    
    
    $
    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
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    These amounts are attributable to either principal pay downs or calls during the
three months ended June 30, 2010. Six Months Ended June 30, 2010State and
    
    
    ResidentialLocal
    
    
    Mortgage-
    
    
    Redeemable
    
    
    PerpetualCorporate
    
    
    Government
    
    
    Backed
    
    
    Preferred
    
    
    PreferredObligations
    
    
    Obligations
    
    
    Securities
    
    
    Stock
    
    
    Stock(Dollars in thousands)Beginning balance at January 1, 2010
    
    $
    5,842
    
    
    $
    6,369
    
    
    $
    2,384
    
    
    $
    2,353
    
    
    $
    396Total gains or (losses):Included in earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Included in other comprehensive income
    
    
    12
    
    
    
    595
    
    
    
    201
    
    
    
    54
    
    
    
    Purchases, issuances, sales and settlements:Sales (1)
    
    
    (293
    )
    
    
    (3,000
    )
    
    
    (518
    )
    
    
    
    
    
    
    Transfers in and/or (out) of Level 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ending balance at June 30, 2010
    
    $
    5,561
    
    
    $
    3,964
    
    
    $
    2,067
    
    
    $
    2,407
    
    
    $
    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
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    These amounts are attributable to either principal pay downs or calls during
the six months ended June 30, 2010. 10




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##### Table of Contents



Three Months Ended June 30, 2009State and
    
    
    ResidentialLocal
    
    
    mortgage-
    
    
    Redeemable
    
    
    Perpetual
    
    
    SecuritiesCorporate
    
    
    Government
    
    
    backed
    
    
    Preferred
    
    
    Preferred
    
    
    LendingObligations
    
    
    Obligations
    
    
    securities
    
    
    Stock
    
    
    Stock
    
    
    Collateral(Dollars in thousands)Beginning balance at April 1, 2009
    
    $
    3,830
    
    
    $
    6,313
    
    
    $
    
    
    
    $
    2,280
    
    
    $
    2,153
    
    
    $
    4,518Total gains or (losses):Included in earnings
    
    
    
    
    
    
    
    
    
    
    (497
    )
    
    
    
    
    
    
    
    
    
    
    Included in other comprehensive income
    
    
    (145
    )
    
    
    25
    
    
    
    700
    
    
    
    19
    
    
    
    2,549
    
    
    
    396Purchases, issuances, sales and settlements (1)
    
    
    
    
    
    
    
    
    
    
    (42
    )
    
    
    
    
    
    
    (4,306
    )
    
    
    (230
    )Transfers in and/or (out) of Level 3 (2)
    
    
    2,140
    
    
    
    
    
    
    
    2,544
    
    
    
    
    
    
    
    
    
    
    
    (4,684
    )Ending balance at June 30, 2009
    
    $
    5,825
    
    
    $
    6,338
    
    
    $
    2,705
    
    
    $
    2,299
    
    
    $
    396
    
    
    $
    The 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
    
    $
    
    
    
    $
    
    
    
    $
    (497
    )
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    These amounts are attributable to either purchases of securities, principal pay
downs, conversions or maturities during the three months ended June 30, 2009.(2)
    
    Transfers in and/or (out) of Level 3 relate to the termination of the securities
lending program and moving longer-term assets into the investment portfolio during the
three months ended June 30, 2009. Six Months Ended June 30, 2009State and
    
    
    ResidentialLocal
    
    
    mortgage-
    
    
    Redeemable
    
    
    Perpetual
    
    
    SecuritiesCorporate
    
    
    Government
    
    
    backed
    
    
    Preferred
    
    
    Preferred
    
    
    LendingObligations
    
    
    Obligations
    
    
    securities
    
    
    Stock
    
    
    Stock
    
    
    Collateral(Dollars in thousands)Beginning balance at January 1, 2009
    
    $
    4,295
    
    
    $
    6,118
    
    
    $
    
    
    
    $
    2,406
    
    
    $
    3,265
    
    
    $
    5,046Total gains or (losses):Included in earnings
    
    
    
    
    
    
    
    
    
    
    (497
    )
    
    
    
    
    
    
    (170
    )
    
    
    (421
    )Included in other comprehensive income
    
    
    (110
    )
    
    
    220
    
    
    
    700
    
    
    
    (107
    )
    
    
    1,551
    
    
    
    546Purchases, issuances, sales and settlements (1)
    
    
    (500
    )
    
    
    
    
    
    
    (42
    )
    
    
    
    
    
    
    (4,250
    )
    
    
    (487
    )Transfers in and/or (out) of Level 3 (2)
    
    
    2,140
    
    
    
    
    
    
    
    2,544
    
    
    
    
    
    
    
    
    
    
    
    (4,684
    )Ending balance at June 30, 2009
    
    $
    5,825
    
    
    $
    6,338
    
    
    $
    2,705
    
    
    $
    2,299
    
    
    $
    396
    
    
    $
    The 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
    
    $
    
    
    
    $
    
    
    
    $
    (497
    )
    
    $
    
    
    
    $
    (170
    )
    
    $
    (421
    )
 
 (1)
    
    These amounts are attributable to either purchases of securities, principal
pay downs, conversions or maturities during the six months ended June 30, 2009.
 (2)
    
    Transfers in and/or (out) of Level 3 relate to the termination of the securities
lending program and moving longer-term assets into the investment portfolio during the six
months ended June 30, 2009.
 5. Investments
  11




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##### Table of Contents



Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(Dollars in thousands)June 30, 2010:Fixed Maturities:U.S. Government and government agency obligations
    
    $
    156,454
    
    
    $
    3,438
    
    
    $
    (20
    )
    
    $
    159,872State and local government obligations
    
    
    124,978
    
    
    
    6,094
    
    
    
    (953
    )
    
    
    130,119Residential mortgage-backed securities
    
    
    100,718
    
    
    
    3,620
    
    
    
    (3,736
    )
    
    
    100,602Commercial mortgage-backed securities
    
    
    3,720
    
    
    
    
    
    
    
    (287
    )
    
    
    3,433Corporate obligations
    
    
    72,043
    
    
    
    2,624
    
    
    
    (998
    )
    
    
    73,669Redeemable preferred stock
    
    
    12,426
    
    
    
    106
    
    
    
    (846
    )
    
    
    11,686Total fixed maturities
    
    
    470,339
    
    
    
    15,882
    
    
    
    (6,840
    )
    
    
    479,381Equity securities:Perpetual preferred stocks
    
    
    1,320
    
    
    
    60
    
    
    
    (52
    )
    
    
    1,328Common stocks
    
    
    24,766
    
    
    
    1,317
    
    
    
    (17
    )
    
    
    26,066Total equity securities
    
    
    26,086
    
    
    
    1,377
    
    
    
    (69
    )
    
    
    27,394Short-term investments
    
    
    765
    
    
    
    
    
    
    
    
    
    
    
    765Total investments
    
    $
    497,190
    
    
    $
    17,259
    
    
    $
    (6,909
    )
    
    $
    507,540December 31, 2009:Fixed Maturities:U.S. Government and government agency obligations
    
    $
    211,151
    
    
    $
    1,736
    
    
    $
    (349
    )
    
    $
    212,538State and local government obligations
    
    
    151,139
    
    
    
    5,436
    
    
    
    (1,612
    )
    
    
    154,963Residential mortgage-backed securities
    
    
    118,967
    
    
    
    2,224
    
    
    
    (4,478
    )
    
    
    116,713Commercial mortgage-backed securities
    
    
    4,482
    
    
    
    
    
    
    
    (547
    )
    
    
    3,935Corporate obligations
    
    
    67,588
    
    
    
    1,465
    
    
    
    (1,629
    )
    
    
    67,424Redeemable preferred stock
    
    
    12,426
    
    
    
    89
    
    
    
    (1,187
    )
    
    
    11,328Total fixed maturities
    
    
    565,753
    
    
    
    10,950
    
    
    
    (9,802
    )
    
    
    566,901Equity securities:Perpetual preferred stocks
    
    
    1,320
    
    
    
    109
    
    
    
    (9
    )
    
    
    1,420Common stocks
    
    
    24,883
    
    
    
    2,370
    
    
    
    
    
    
    
    27,253Total equity securities
    
    
    26,203
    
    
    
    2,479
    
    
    
    (9
    )
    
    
    28,673Short-term investments
    
    
    811
    
    
    
    
    
    
    
    
    
    
    
    811Total investments
    
    $
    592,767
    
    
    $
    13,429
    
    
    $
    (9,811
    )
    
    $
    596,385
   AmortizedCost
    
    
    Fair Value(Dollars in thousands)Due in one year or less
    
    $
    12,957
    
    
    $
    13,319Due after one year through five years
    
    
    159,882
    
    
    
    164,356Due after five years through ten years
    
    
    164,070
    
    
    
    169,935Due after ten years
    
    
    28,992
    
    
    
    27,736365,901
    
    
    
    375,346Mortgage-backed securities
    
    
    104,438
    
    
    
    104,035Total
    
    $
    470,339
    
    
    $
    479,381
 12




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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)
    
    
    (Dollars in thousands)Fixed maturity gains
    
    $
    1,949
    
    
    $
    817
    
    
    $
    2,408
    
    
    $
    1,562Fixed maturity losses
    
    
    (102
    )
    
    
    (641
    )
    
    
    (102
    )
    
    
    (1,032
    )Equity security gains
    
    
    121
    
    
    
    2,022
    
    
    
    544
    
    
    
    2,880Equity security losses
    
    
    (299
    )
    
    
    (1,150
    )
    
    
    (299
    )
    
    
    (1,916
    )Securities lending fixed maturity losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (423
    )Net realized gains on investments
    
    $
    1,669
    
    
    $
    1,048
    
    
    $
    2,551
    
    
    $
    1,071
   13




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##### Table of Contents



Less than Twelve Months
    
    
    Twelve Months or MoreFair
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    FairValue
    
    
    Number
    
    
    
    
    
    
    
    
    
    
    Value
    
    
    NumberUnrealized
    
    
    as % of
    
    
    of
    
    
    Fair
    
    
    Unrealized
    
    
    as % of
    
    
    ofFair Value
    
    
    Losses
    
    
    Cost
    
    
    Holdings
    
    
    Value
    
    
    Losses
    
    
    Cost
    
    
    Holdings(Dollars in thousands)June 30, 2010:Fixed maturities:U.S. Government and government
agency obligations
    
    $
    8,122
    
    
    $
    (20
    )
    
    
    99.8
    %
    
    
    5
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    
    State and local government
obligations
    
    
    5,645
    
    
    
    (65
    )
    
    
    98.9
    %
    
    
    4
    
    
    
    4,326
    
    
    
    (888
    )
    
    
    83.0
    %
    
    
    5Residential mortgage-backed
securities
    
    
    2,587
    
    
    
    (12
    )
    
    
    99.5
    %
    
    
    3
    
    
    
    6,809
    
    
    
    (3,724
    )
    
    
    64.6
    %
    
    
    6Commercial mortgage-backed
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,433
    
    
    
    (287
    )
    
    
    92.3
    %
    
    
    1Corporate obligations
    
    
    9,389
    
    
    
    (155
    )
    
    
    98.4
    %
    
    
    56
    
    
    
    6,156
    
    
    
    (843
    )
    
    
    88.0
    %
    
    
    5Redeemable preferred stocks
    
    
    249
    
    
    
    (1
    )
    
    
    99.6
    %
    
    
    1
    
    
    
    8,833
    
    
    
    (845
    )
    
    
    91.3
    %
    
    
    19Total fixed maturities
    
    
    25,992
    
    
    
    (253
    )
    
    
    99.0
    %
    
    
    69
    
    
    
    29,557
    
    
    
    (6,587
    )
    
    
    81.8
    %
    
    
    36Equity securities:Perpetual preferred stocks
    
    
    611
    
    
    
    (51
    )
    
    
    92.3
    %
    
    
    4
    
    
    
    102
    
    
    
    (1
    )
    
    
    99.0
    %
    
    
    1Common stocks
    
    
    595
    
    
    
    (17
    )
    
    
    97.2
    %
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total equity securities
    
    
    1,206
    
    
    
    (68
    )
    
    
    94.7
    %
    
    
    6
    
    
    
    102
    
    
    
    (1
    )
    
    
    99.0
    %
    
    
    1Total fixed maturities and equity
securities
    
    $
    27,198
    
    
    $
    (321
    )
    
    
    98.8
    %
    
    
    75
    
    
    $
    29,659
    
    
    $
    (6,588
    )
    
    
    81.8
    %
    
    
    37December 31, 2009:Fixed maturities:U.S. Government and government
agency obligations
    
    $
    84,971
    
    
    $
    (349
    )
    
    
    99.6
    %
    
    
    46
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    
    State and local government
obligations
    
    
    14,279
    
    
    
    (122
    )
    
    
    99.2
    %
    
    
    13
    
    
    
    6,725
    
    
    
    (1,490
    )
    
    
    81.9
    %
    
    
    6Residential mortgage-backed
securities
    
    
    35,434
    
    
    
    (210
    )
    
    
    99.4
    %
    
    
    20
    
    
    
    8,426
    
    
    
    (4,268
    )
    
    
    66.4
    %
    
    
    7Commercial mortgage-backed
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,934
    
    
    
    (547
    )
    
    
    87.8
    %
    
    
    2Corporate obligations
    
    
    23,189
    
    
    
    (459
    )
    
    
    98.1
    %
    
    
    45
    
    
    
    12,150
    
    
    
    (1,170
    )
    
    
    91.2
    %
    
    
    9Redeemable preferred stocks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,742
    
    
    
    (1,187
    )
    
    
    88.0
    %
    
    
    20Total fixed maturities
    
    
    157,873
    
    
    
    (1,140
    )
    
    
    99.3
    %
    
    
    124
    
    
    
    39,977
    
    
    
    (8,662
    )
    
    
    82.2
    %
    
    
    44Equity securities:Perpetual preferred stocks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94
    
    
    
    (9
    )
    
    
    91.3
    %
    
    
    1Total equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94
    
    
    
    (9
    )
    
    
    91.3
    %
    
    
    1Total fixed maturities and equity
securities
    
    $
    157,873
    
    
    $
    (1,140
    )
    
    
    99.3
    %
    
    
    124
    
    
    $
    40,071
    
    
    $
    (8,671
    )
    
    
    82.2
    %
    
    
    45
   14




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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)
    
    
    (Dollars in thousands)Beginning balance
    
    $
    1,910
    
    
    $
    
    
    
    $
    1,910
    
    
    $
    Additional credit impairments on:Previously impaired securities
    
    
    101
    
    
    
    
    
    
    
    101
    
    
    
    Securities without prior impairments
    
    
    
    
    
    
    534
    
    
    
    
    
    
    
    534Reductions
    
    
    (37
    )
    
    
    
    
    
    
    (37
    )
    
    
    Ending balance
    
    $
    1,974
    
    
    $
    534
    
    
    $
    1,974
    
    
    $
    534
 6. Long-term Debt
     15




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##### Table of Contents



7. Income Taxes
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)
    
    
    (Dollars in thousands)Federal income tax expense at statutory rate
    
    $
    3,888
    
    
    $
    6,117
    
    
    $
    8,947
    
    
    $
    12,640Effect of:Tax-exempt investment income
    
    
    (377
    )
    
    
    (460
    )
    
    
    (751
    )
    
    
    (867
    )Change in valuation allowance on net capital losses
    
    
    
    
    
    
    (481
    )
    
    
    (810
    )
    
    
    (605
    )Other items, net
    
    
    (20
    )
    
    
    193
    
    
    
    (28
    )
    
    
    191$
    3,491
    
    
    $
    5,369
    
    
    $
    7,358
    
    
    $
    11,359
  June 30, 2010
    
    
    December 31, 2009(Dollars in thousands)Deferred Tax Assets:Unearned premiums
    
    $
    10,716
    
    
    $
    8,750Unpaid losses and loss adjustment expenses
    
    
    9,048
    
    
    
    8,742Assignments and assessments
    
    
    721
    
    
    
    817Realized losses on investments, primarily impairments
    
    
    6,309
    
    
    
    6,436Accrued compensation
    
    
    2,084
    
    
    
    2,218Other, net
    
    
    1,224
    
    
    
    1,39830,102
    
    
    
    28,361Valuation allowance
    
    
    
    
    
    
    (810
    )30,102
    
    
    
    27,551Deferred Tax Liabilities:Deferred policy acquisition costs
    
    
    (7,876
    )
    
    
    (6,241
    )Unrealized gains on investments
    
    
    (3,622
    )
    
    
    (1,266
    )Other, net
    
    
    (1,260
    )
    
    
    (1,866
    )Total deferred tax liabilities
    
    
    (12,758
    )
    
    
    (9,373
    )Net deferred income tax assets
    
    $
    17,344
    
    
    $
    18,178
  8. Shareholders Equity and Stock-Based Compensation
   16




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##### Table of Contents



9. Earnings Per Common Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands, except per share data)
    
    
    (In thousands, except per share data)Net income
    
    $
    7,618
    
    
    $
    12,109
    
    
    $
    18,204
    
    
    $
    24,755Weighted average shares outstanding during period
    
    
    19,343
    
    
    
    19,301
    
    
    
    19,336
    
    
    
    19,301Additional
shares issuable under employee common stock option plans using treasury stock method
    
    
    113
    
    
    
    58
    
    
    
    88
    
    
    
    50Weighted
average shares outstanding assuming exercise of stock options
    
    
    19,456
    
    
    
    19,359
    
    
    
    19,424
    
    
    
    19,351Net income per share:Basic
    
    $
    0.39
    
    
    $
    0.63
    
    
    $
    0.94
    
    
    $
    1.28Diluted
    
    $
    0.39
    
    
    $
    0.63
    
    
    $
    0.94
    
    
    $
    1.28
  10. Transactions with Related Parties
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)
    
    
    (Dollars in thousands)Assumed premiums written
    
    $
    1,241
    
    
    $
    858
    
    
    $
    2,287
    
    
    $
    2,036Assumed premiums earned
    
    
    799
    
    
    
    984
    
    
    
    1,571
    
    
    
    2,207Assumed losses and loss adjustment expense incurred
    
    
    544
    
    
    
    1,117
    
    
    
    649
    
    
    
    2,284Ceded premiums written
    
    
    694
    
    
    
    838
    
    
    
    1,383
    
    
    
    2,179Ceded premiums earned
    
    
    623
    
    
    
    791
    
    
    
    1,303
    
    
    
    1,595Ceded losses and loss adjustment expense recoveries
    
    
    1,434
    
    
    
    446
    
    
    
    1,701
    
    
    
    1,671Payable to Great American as of period end
    
    
    540
    
    
    
    688
    
    
    
    540
    
    
    
    688
  17




---



##### Table of Contents



11. Reinsurance
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)
    
    
    (Dollars in thousands)Direct premiums written
    
    $
    108,239
    
    
    $
    91,042
    
    
    $
    212,365
    
    
    $
    206,621Reinsurance assumed
    
    
    2,487
    
    
    
    1,718
    
    
    
    4,165
    
    
    
    3,557Reinsurance ceded
    
    
    (24,799
    )
    
    
    (20,346
    )
    
    
    (49,149
    )
    
    
    (49,291
    )Net premiums written
    
    $
    85,927
    
    
    $
    72,414
    
    
    $
    167,381
    
    
    $
    160,887Direct premiums earned
    
    $
    85,103
    
    
    $
    85,843
    
    
    $
    170,821
    
    
    $
    172,214Reinsurance assumed
    
    
    1,884
    
    
    
    1,846
    
    
    
    3,417
    
    
    
    3,912Reinsurance ceded
    
    
    (17,754
    )
    
    
    (18,026
    )
    
    
    (34,824
    )
    
    
    (37,024
    )Total premiums earned
    
    $
    69,233
    
    
    $
    69,663
    
    
    $
    139,414
    
    
    $
    139,102
  12. Commitments and Contingencies
    18




---



##### Table of Contents



13. Segment Information
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)
    
    
    (Dollars in thousands)Revenue:Premiums Earned:Alternative Risk Transfer
    
    $
    35,003
    
    
    $
    34,923
    
    
    $
    72,373
    
    
    $
    68,985Transportation
    
    
    14,984
    
    
    
    15,649
    
    
    
    29,183
    
    
    
    31,774Specialty Personal Lines
    
    
    14,538
    
    
    
    14,075
    
    
    
    28,684
    
    
    
    27,865Hawaii and Alaska
    
    
    3,361
    
    
    
    3,819
    
    
    
    6,680
    
    
    
    7,834Other
    
    
    1,347
    
    
    
    1,197
    
    
    
    2,494
    
    
    
    2,644Total premiums earned
    
    
    69,233
    
    
    
    69,663
    
    
    
    139,414
    
    
    
    139,102Net investment income
    
    
    5,012
    
    
    
    4,919
    
    
    
    9,971
    
    
    
    9,929Net realized gains on investments
    
    
    1,669
    
    
    
    1,048
    
    
    
    2,551
    
    
    
    1,071Other
    
    
    976
    
    
    
    960
    
    
    
    1,794
    
    
    
    1,748Total revenues
    
    $
    76,890
    
    
    $
    76,590
    
    
    $
    153,730
    
    
    $
    151,850
 14. Comprehensive Income
  
 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, including the integration of Vanliner
Group, Inc. (Vanliner);
    
    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 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;
 19




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##### Table of Contents




    
    adequacy of insurance reserves; and
    
    availability of reinsurance and ability of reinsurers to pay their obligations.
  General
       Results of Operations
 Overview
  20




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##### Table of Contents



Three Months Ended June 30,2010
    
    
    2009Amount
    
    
    Per Share
    
    
    Amount
    
    
    Per Share(Dollars in thousands, except per share data)Net income from operations
    
    $
    6,534
    
    
    $
    0.33
    
    
    $
    10,948
    
    
    $
    0.57Change in valuation allowance related to net capital losses
    
    
    
    
    
    
    
    
    
    
    481
    
    
    
    0.02After-tax net realized gains from investments
    
    
    1,084
    
    
    
    0.06
    
    
    
    680
    
    
    
    0.04Net income
    
    $
    7,618
    
    
    $
    0.39
    
    
    $
    12,109
    
    
    $
    0.63
 Six Months Ended June 30,2010
    
    
    2009Amount
    
    
    Per Share
    
    
    Amount
    
    
    Per Share(Dollars in thousands, except per share data)Net income from operations
    
    $
    15,736
    
    
    $
    0.81
    
    
    $
    23,455
    
    
    $
    1.21Change in valuation allowance related to net capital losses
    
    
    810
    
    
    
    0.04
    
    
    
    605
    
    
    
    0.03After-tax net realized gains from investments
    
    
    1,658
    
    
    
    0.09
    
    
    
    695
    
    
    
    0.04Net income
    
    $
    18,204
    
    
    $
    0.94
    
    
    $
    24,755
    
    
    $
    1.28
    21




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##### Table of Contents



Gross Premiums Written
  Three Months Ended June 30,2010
    
    
    2009Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Alternative Risk Transfer
    
    $
    68,217
    
    
    
    61.6
    %
    
    $
    53,972
    
    
    
    58.2
    %Transportation
    
    
    19,038
    
    
    
    17.2
    %
    
    
    16,114
    
    
    
    17.4
    %Specialty Personal Lines
    
    
    17,784
    
    
    
    16.1
    %
    
    
    17,401
    
    
    
    18.7
    %Hawaii and Alaska
    
    
    4,175
    
    
    
    3.8
    %
    
    
    4,078
    
    
    
    4.4
    %Other
    
    
    1,512
    
    
    
    1.3
    %
    
    
    1,195
    
    
    
    1.3
    %Gross premiums written
    
    $
    110,726
    
    
    
    100.0
    %
    
    $
    92,760
    
    
    
    100.0
    %
 Six Months Ended June 30,2010
    
    
    2009Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Alternative Risk Transfer
    
    $
    134,162
    
    
    
    62.0
    %
    
    $
    133,349
    
    
    
    63.4
    %Transportation
    
    
    37,090
    
    
    
    17.1
    %
    
    
    32,310
    
    
    
    15.4
    %Specialty Personal Lines
    
    
    34,673
    
    
    
    16.0
    %
    
    
    33,518
    
    
    
    16.0
    %Hawaii and Alaska
    
    
    8,176
    
    
    
    3.8
    %
    
    
    8,639
    
    
    
    4.1
    %Other
    
    
    2,429
    
    
    
    1.1
    %
    
    
    2,362
    
    
    
    1.1
    %Gross premiums written
    
    $
    216,530
    
    
    
    100.0
    %
    
    $
    210,178
    
    
    
    100.0
    %
    22




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##### Table of Contents



Premiums Earned
 Three months ended June 30, 2010 compared to June 30, 2009.
 Three Months Ended June 30,
    
    
    Change2010
    
    
    2009
    
    
    Amount
    
    
    Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer
    
    $
    35,003
    
    
    $
    34,923
    
    
    $
    80
    
    
    
    0.2
    %Transportation
    
    
    14,984
    
    
    
    15,649
    
    
    
    (665
    )
    
    
    (4.2
    %)Specialty Personal Lines
    
    
    14,538
    
    
    
    14,075
    
    
    
    463
    
    
    
    3.3
    %Hawaii and Alaska
    
    
    3,361
    
    
    
    3,819
    
    
    
    (458
    )
    
    
    (12.0
    %)Other
    
    
    1,347
    
    
    
    1,197
    
    
    
    150
    
    
    
    12.5
    %Total premiums earned
    
    $
    69,233
    
    
    $
    69,663
    
    
    $
    (430
    )
    
    
    (0.6
    %)
  Six months ended June 30, 2010 compared to June 30, 2009.
 Six Months Ended June 30,
    
    
    Change2010
    
    
    2009
    
    
    Amount
    
    
    Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer
    
    $
    72,373
    
    
    $
    68,985
    
    
    $
    3,388
    
    
    
    4.9
    %Transportation
    
    
    29,183
    
    
    
    31,774
    
    
    
    (2,591
    )
    
    
    (8.2
    %)Specialty Personal Lines
    
    
    28,684
    
    
    
    27,865
    
    
    
    819
    
    
    
    2.9
    %Hawaii and Alaska
    
    
    6,680
    
    
    
    7,834
    
    
    
    (1,154
    )
    
    
    (14.7
    %)Other
    
    
    2,494
    
    
    
    2,644
    
    
    
    (150
    )
    
    
    (5.7
    %)Total premiums earned
    
    $
    139,414
    
    
    $
    139,102
    
    
    $
    312
    
    
    
    0.2
    %
  23




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##### Table of Contents



Underwriting and Loss Ratio Analysis
    Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)
    
    
    (Dollars in thousands)Gross premiums written
    
    $
    110,726
    
    
    $
    92,760
    
    
    $
    216,530
    
    
    $
    210,178Ceded reinsurance
    
    
    (24,799
    )
    
    
    (20,346
    )
    
    
    (49,149
    )
    
    
    (49,291
    )Net premiums written
    
    
    85,927
    
    
    
    72,414
    
    
    
    167,381
    
    
    
    160,887Change in unearned premiums, net of ceded
    
    
    (16,694
    )
    
    
    (2,751
    )
    
    
    (27,967
    )
    
    
    (21,785
    )Total premiums earned
    
    $
    69,233
    
    
    $
    69,663
    
    
    $
    139,414
    
    
    $
    139,102Combined Ratios:Loss and LAE ratio (1)
    
    
    66.5
    %
    
    
    56.6
    %
    
    
    63.9
    %
    
    
    56.6
    %Underwriting expense ratio (2)
    
    
    25.6
    %
    
    
    25.3
    %
    
    
    25.4
    %
    
    
    23.8
    %Combined ratio
    
    
    92.1
    %
    
    
    81.9
    %
    
    
    89.3
    %
    
    
    80.4
    %
 
 (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. Three months ended June 30, 2010 compared to June 30, 2009.
  Six months ended June 30, 2010 compared to June 30, 2009.
 24




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##### Table of Contents



Net Investment Income
 2010 compared to 2009.
 Net Realized Gains on Investments
 2010 compared to 2009.
 Commissions and Other Underwriting Expenses
 2010 compared to 2009.
 Other Operating and General Expenses
 2010 compared to 2009.
 25




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##### Table of Contents



Income Taxes
 2010 compared to 2009.
 Financial Condition
 Investments
    Securities with
    
    
    Securities withUnrealized Gains
    
    
    Unrealized Losses(Dollars in thousands)Fixed Maturities:Fair value of securities
    
    $
    423,612
    
    
    $
    55,549Amortized cost of securities
    
    
    407,730
    
    
    
    62,389Gross unrealized gain or (loss)
    
    $
    15,882
    
    
    $
    (6,840
    )Fair value as a % of amortized cost
    
    
    103.9
    %
    
    
    89.0
    %Number of security positions held
    
    
    413
    
    
    
    105Number individually exceeding $50,000 gain or (loss)
    
    
    122
    
    
    
    21Concentration of gains or losses by type or industry:U.S. Government and government agencies
    
    $
    3,438
    
    
    $
    (20
    )State, municipalities and political subdivisions
    
    
    6,094
    
    
    
    (953
    )Residential mortgage-backed securities
    
    
    3,620
    
    
    
    (3,736
    )Commercial mortgage-backed securities
    
    
    
    
    
    
    (287
    )Banks, insurance and brokers
    
    
    1,233
    
    
    
    (1,525
    )Industrial and other
    
    
    1,497
    
    
    
    (319
    )Percent rated investment grade (1)
    
    
    97.7
    %
    
    
    65.4
    %Equity Securities:Fair value of securities
    
    $
    13,148
    
    
    $
    1,308Cost of securities
    
    
    11,771
    
    
    
    1,377Gross unrealized gain or (loss)
    
    $
    1,377
    
    
    $
    (69
    )Fair value as a % of cost
    
    
    111.7
    %
    
    
    95.0
    %Number individually exceeding $50,000 gain or (loss)
    
    
    7
    
    
    
    
 
 (1)
    
    Investment grade of AAA to BBB- by nationally recognized rating agencies. 26




---



##### Table of Contents



Securities with
    
    
    Securities withUnrealized Gains
    
    
    Unrealized LossesMaturity:One year or less
    
    
    2.9
    %
    
    
    1.8
    %After one year through five years
    
    
    35.8
    %
    
    
    22.5
    %After five years through ten years
    
    
    36.7
    %
    
    
    26.0
    %After ten years
    
    
    3.1
    %
    
    
    26.6
    %78.5
    %
    
    
    76.9
    %Mortgage-backed securities
    
    
    21.5
    %
    
    
    23.1
    %100.0
    %
    
    
    100.0
    %
  At June 30, 2010Aggregate
    
    
    Fair ValueAggregate
    
    
    Unrealized Gain
    
    
    as % ofFair Value
    
    
    (Loss)
    
    
    Cost Basis(Dollars in thousands)Fixed Maturities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (94 issues)
    
    $
    158,964
    
    
    $
    7,689
    
    
    
    105.1
    %More than one year (28 issues)
    
    
    37,394
    
    
    
    3,098
    
    
    
    109.0
    %Less than $50,000 (291 issues)
    
    
    227,254
    
    
    
    5,095
    
    
    
    102.3
    %$
    423,612
    
    
    $
    15,882Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (1 issue)
    
    $
    1,930
    
    
    $
    (70
    )
    
    
    96.5
    %More than one year (20 issues)
    
    
    21,270
    
    
    
    (6,326
    )
    
    
    77.1
    %Less than $50,000 (84 issues)
    
    
    32,349
    
    
    
    (444
    )
    
    
    98.6
    %$
    55,549
    
    
    $
    (6,840
    )Equity Securities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (7 issues)
    
    $
    11,927
    
    
    $
    1,301
    
    
    
    112.2
    %More than one year (0 issues)
    
    
    
    
    
    
    
    
    
    
    0.0
    %Less than $50,000 (15 issues)
    
    
    1,221
    
    
    
    76
    
    
    
    106.6
    %$
    13,148
    
    
    $
    1,377Securities 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 (7 issues)
    
    
    1,308
    
    
    
    (69
    )
    
    
    95.0
    %$
    1,308
    
    
    $
    (69
    )
  Premiums and Reinsurance
  27




---



##### Table of Contents



Liquidity and Capital Resources
       28




---



##### Table of Contents



Critical Accounting Policies
  Losses and LAE Reserves
   
    
    the Case Incurred Development Method;
    
    the Paid Development Method;
    
    the Bornhuetter-Ferguson Method; and
    
    the Incremental Paid LAE to Paid Loss Methods.
 29




---



##### Table of Contents




    
    open and closed claim counts;
    
    average case reserves and average incurred on open claims;
    
    closure rates and statistics related to closed and open claim percentages;
    
    average closed claim severity;
    
    ultimate claim severity;
    
    reported loss ratios;
    
    projected ultimate loss ratios; and
    
    loss payment patterns.
 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;
    
    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.
  30




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##### Table of Contents



Contractual
Obligations/Off-Balance Sheet Arrangements
  Payment Due by PeriodTotal
    
    Within 1 
Year
    
    2-3 Years
    
    4-5 Years
    
    More than 
5 Years(Dollars in thousands)Long term debt obligations
    
    $
    45,000
    
    
    $
    
    
    
    $
    45,000
    
    
    $
    
    
    
    $
    Total
    
    $
    45,000
    
    
    $
    
    
    
    $
    45,000
    
    
    $
    
    
    
    $
    
  
 ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
  31




---



##### Table of Contents



ITEM 4.
    
    Controls and Procedures
   
 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
  32




---



##### Table of Contents



ITEM 6.
    
    Exhibits
 3.1
    
    Amended and Restated Articles of Incorporation (1)3.2
    
    Amended and Restated Code of Regulations (1)10.1
    
    Purchase Agreement, dated as of
April 26, 2010, among UniGroup, Inc., National Interstate Insurance
Company and National Interstate Corporation (2)10.2
    
    Credit Agreement among National
Interstate Corporation, Key Bank National Association and U.S. Bank
National Association, dated as of December 19, 2007 (3)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).(2)
    
    This exhibit is incorporated by reference to our Form 8-K filed April 28, 2010.(3)
    
    This exhibit is incorporated by reference to our Form 8-K filed December 21, 2007. 33




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##### Table of Contents



SIGNATURES
  NATIONAL INTERSTATE CORPORATIONDate: August 4, 2010
    /s/ David W. MichelsonDavid W. MichelsonPresident and Chief Executive Officer

(Duly Authorized Officer and Principal Executive Officer) Date: August 4, 2010
    /s/ Julie A. McGrawJulie A. McGrawVice President and Chief Financial Officer

(Duly Authorized Officer and Principal Financial Officer) 34