##### 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, 2009
 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
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
    
    
    13Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23Part II  Other Information
    
    
    23Item 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3. Defaults Upon Senior Securities
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 5. Other Information
    
    
    24Item 6. Exhibits
    
    
    24EX-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 31,2009
    
    
    2008(Unaudited)ASSETSInvestments:Fixed
maturities available-for-sale, at fair value (amortized cost  $479,897 and $462,562, respectively)
    
    $
    476,014
    
    
    $
    459,237Equity securities available-for-sale, at fair value (cost  $30,002 and $30,143, respectively)
    
    
    24,066
    
    
    
    27,233Short-term investments, at cost which approximates fair value
    
    
    85
    
    
    
    85Total investments
    
    
    500,165
    
    
    
    486,555Cash and cash equivalents
    
    
    72,104
    
    
    
    77,159Securities lending collateral, at fair value (cost  $78,001 and $94,655, respectively)
    
    
    68,052
    
    
    
    84,670Accrued investment income
    
    
    4,920
    
    
    
    5,161Premiums receivable, net of allowance for doubtful accounts of $568 and $587, respectively
    
    
    127,541
    
    
    
    95,610Reinsurance recoverables on paid and unpaid losses
    
    
    148,418
    
    
    
    150,791Prepaid reinsurance premiums
    
    
    38,350
    
    
    
    28,404Deferred policy acquisition costs
    
    
    22,180
    
    
    
    19,245Deferred federal income taxes
    
    
    19,101
    
    
    
    18,324Property and equipment, net
    
    
    21,049
    
    
    
    20,406Funds held by reinsurer
    
    
    2,586
    
    
    
    3,073Prepaid expenses and other assets
    
    
    1,468
    
    
    
    1,414Total assets
    
    $
    1,025,934
    
    
    $
    990,812LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses
    
    $
    399,168
    
    
    $
    400,001Unearned premiums and service fees
    
    
    185,644
    
    
    
    156,598Long-term debt
    
    
    15,000
    
    
    
    15,000Amounts withheld or retained for account of others
    
    
    51,406
    
    
    
    48,357Reinsurance balances payable
    
    
    21,260
    
    
    
    10,267Securities lending obligation
    
    
    79,597
    
    
    
    95,828Accounts payable and other liabilities
    
    
    35,323
    
    
    
    35,813Commissions payable
    
    
    9,768
    
    
    
    9,274Assessments and fees payable
    
    
    3,861
    
    
    
    3,600Total liabilities
    
    
    801,027
    
    
    
    774,738Shareholders equity:Preferred shares  no par value 

Authorized  10,000 shares 

Issued  0 shares
    
    
    
    
    
    
    Common shares  $0.01 par value

Authorized  50,000 shares 

Issued  23,350 shares, including 4,050 and 4,055 shares, respectively, in treasury
    
    
    234
    
    
    
    234Additional paid-in capital
    
    
    48,299
    
    
    
    48,004Retained earnings
    
    
    195,473
    
    
    
    184,187Accumulated other comprehensive loss
    
    
    (13,368
    )
    
    
    (10,613
    )Treasury shares
    
    
    (5,731
    )
    
    
    (5,738
    )Total shareholders equity
    
    
    224,907
    
    
    
    216,074Total liabilities and shareholders equity
    
    $
    1,025,934
    
    
    $
    990,812
  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 March 31,2009
    
    
    2008Revenues:Premiums earned
    
    $
    69,439
    
    
    $
    67,650Net investment income
    
    
    5,010
    
    
    
    5,844Net realized gains (losses) on investments
    
    
    23
    
    
    
    (587
    )Other
    
    
    788
    
    
    
    837Total revenues
    
    
    75,260
    
    
    
    73,744Expenses:Losses and loss adjustment expenses
    
    
    39,326
    
    
    
    41,685Commissions and other underwriting expenses
    
    
    13,019
    
    
    
    12,961Other operating and general expenses
    
    
    3,292
    
    
    
    3,232Expense on amounts withheld
    
    
    867
    
    
    
    1,258Interest expense
    
    
    120
    
    
    
    346Total expenses
    
    
    56,624
    
    
    
    59,482Income before federal income taxes
    
    
    18,636
    
    
    
    14,262Provision for federal income taxes
    
    
    5,990
    
    
    
    4,691Net income
    
    $
    12,646
    
    
    $
    9,571Net income per common share  basic
    
    $
    0.66
    
    
    $
    0.50Net income per common share  diluted
    
    $
    0.65
    
    
    $
    0.49Weighted average of common shares outstanding  basic
    
    
    19,300
    
    
    
    19,262Weighted average of common shares outstanding  diluted
    
    
    19,353
    
    
    
    19,422Cash dividends per common share
    
    $
    0.07
    
    
    $
    0.06
 .
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##### Table of Contents



National Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Shareholders Equity
 (Unaudited)
 (Dollars in thousands)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    TreasuryStock
    
    
    Capital
    
    
    Earnings
    
    
    Loss
    
    
    Stock
    
    
    TotalBalance at January 1, 2009
    
    $
    234
    
    
    $
    48,004
    
    
    $
    184,187
    
    
    $
    (10,613
    )
    
    $
    (5,738
    )
    
    $
    216,074Net income
    
    
    
    
    
    
    
    
    
    
    12,646
    
    
    
    
    
    
    
    
    
    
    
    12,646Unrealized depreciation of investment securities,
net of tax benefit of $0.8 million
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,755
    )
    
    
    
    
    
    
    (2,755
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,891Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (1,360
    )
    
    
    
    
    
    
    
    
    
    
    (1,360
    )Issuance of 5,152 treasury shares from vesting of
restricted
stock, net of forfeitures
    
    
    
    
    
    
    (70
    )
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    (63
    )Stock compensation expense
    
    
    
    
    
    
    365
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    365Balance at March 31, 2009
    
    $
    234
    
    
    $
    48,299
    
    
    $
    195,473
    
    
    $
    (13,368
    )
    
    $
    (5,731
    )
    
    $
    224,907Balance at January 1, 2008
    
    $
    234
    
    
    $
    45,566
    
    
    $
    178,190
    
    
    $
    (5,321
    )
    
    $
    (5,863
    )
    
    $
    212,806Net income
    
    
    
    
    
    
    
    
    
    
    9,571
    
    
    
    
    
    
    
    
    
    
    
    9,571Unrealized depreciation of investment securities,
net of tax benefit of $671
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,486
    )
    
    
    
    
    
    
    (4,486
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,085Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (1,165
    )
    
    
    
    
    
    
    
    
    
    
    (1,165
    )Issuance of 74,901 treasury shares upon exercise
of options
and restricted stock issued, net of forfeitures
    
    
    
    
    
    
    539
    
    
    
    
    
    
    
    
    
    
    
    104
    
    
    
    643Tax benefit realized from exercise of stock options
    
    
    
    
    
    
    361
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    361Stock compensation expense
    
    
    
    
    
    
    352
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    352Balance at March 31, 2008
    
    $
    234
    
    
    $
    46,818
    
    
    $
    186,596
    
    
    $
    (9,807
    )
    
    $
    (5,759
    )
    
    $
    218,082
  5




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National Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 (Dollars in thousands)
 Three Months Ended March 31,2009
    
    
    2008Operating activitiesNet income
    
    $
    12,646
    
    
    $
    9,571Adjustments to reconcile net income to net cash provided by operating activities:Net amortization of bond premiums and discounts
    
    
    555
    
    
    
    254Provision for depreciation and amortization
    
    
    453
    
    
    
    338Net realized (gains) losses on investment securities
    
    
    (23
    )
    
    
    587Deferred federal income taxes
    
    
    15
    
    
    
    57Stock compensation expense
    
    
    365
    
    
    
    372Increase in deferred policy acquisition costs, net
    
    
    (2,935
    )
    
    
    (5,037
    )(Decrease) increase in reserves for losses and loss adjustment expenses
    
    
    (833
    )
    
    
    25,028Increase in premiums receivable
    
    
    (31,931
    )
    
    
    (44,656
    )Increase in unearned premiums and service fees
    
    
    29,046
    
    
    
    47,823Decrease in interest receivable and other assets
    
    
    674
    
    
    
    1,375Increase in prepaid reinsurance premiums
    
    
    (9,946
    )
    
    
    (16,378
    )Increase in accounts payable, commissions and other liabilities
and assessments and fees payable
    
    
    266
    
    
    
    4,337Increase in amounts withheld or retained for account of others
    
    
    3,049
    
    
    
    5,336Decrease (increase) in reinsurance recoverable
    
    
    2,373
    
    
    
    (11,506
    )Increase in reinsurance balances payable
    
    
    10,993
    
    
    
    17,531Other
    
    
    
    
    
    
    81Net cash provided by operating activities
    
    
    14,767
    
    
    
    35,113Investing activitiesPurchases of fixed maturities
    
    
    (125,372
    )
    
    
    (171,439
    )Purchases of equity securities
    
    
    (86
    )
    
    
    (1,151
    )Proceeds from sale of fixed maturities
    
    
    18,010
    
    
    
    Proceeds from sale of equity securities
    
    
    320
    
    
    
    3,578Proceeds from maturity and redemptions of investments
    
    
    89,825
    
    
    
    152,483Capital expenditures
    
    
    (1,096
    )
    
    
    (440
    )Net cash used in investing activities
    
    
    (18,399
    )
    
    
    (16,969
    )Financing activitiesDecrease in securities lending collateral
    
    
    16,231
    
    
    
    4,820Decrease in securities lending obligation
    
    
    (16,231
    )
    
    
    (4,820
    )Tax benefit realized from exercise of stock options
    
    
    
    
    
    
    361Issuance of common shares from treasury upon exercise of stock options or
stock award grants
    
    
    (63
    )
    
    
    623Cash dividends paid on common shares
    
    
    (1,360
    )
    
    
    (1,165
    )Net cash used in financing activities
    
    
    (1,423
    )
    
    
    (181
    )Net (decrease) increase in cash and cash equivalents
    
    
    (5,055
    )
    
    
    17,963Cash and cash equivalents at beginning of period
    
    
    77,159
    
    
    
    43,069Cash and cash equivalents at end of period
    
    $
    72,104
    
    
    $
    61,032
  6




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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
     7




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3. Fair Value Measurements
 Fair Value Measurements,
    March 31, 2009Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(Dollars in thousands)Fixed maturities:U.S. government and government agency obligations
    
    $
    
    
    
    $
    183,587
    
    
    $
    
    
    
    $
    183,587State and local government obligations
    
    
    
    
    
    
    151,383
    
    
    
    6,313
    
    
    
    157,696Mortgage-backed securities
    
    
    
    
    
    
    91,246
    
    
    
    
    
    
    
    91,246Corporate obligations
    
    
    
    
    
    
    30,237
    
    
    
    3,830
    
    
    
    34,067Preferred redeemable securities
    
    
    6,575
    
    
    
    563
    
    
    
    2,280
    
    
    
    9,418Total fixed maturities
    
    
    6,575
    
    
    
    457,016
    
    
    
    12,423
    
    
    
    476,014Equity securities:Perpetual preferred stock
    
    
    1,513
    
    
    
    19
    
    
    
    2,153
    
    
    
    3,685Common stock
    
    
    10,936
    
    
    
    9,445
    
    
    
    
    
    
    
    20,381Total equity securities
    
    
    12,449
    
    
    
    9,464
    
    
    
    2,153
    
    
    
    24,066Short-term investments
    
    
    
    
    
    
    85
    
    
    
    
    
    
    
    85Total investments
    
    
    19,024
    
    
    
    466,565
    
    
    
    14,576
    
    
    
    500,165Cash and cash equivalents
    
    
    72,104
    
    
    
    
    
    
    
    
    
    
    
    72,104Total investments and cash and cash equivalents
    
    $
    91,128
    
    
    $
    466,565
    
    
    $
    14,576
    
    
    $
    572,269Securities lending:Cash and cash equivalents
    
    $
    31,930
    
    
    $
    257
    
    
    $
    
    
    
    $
    32,187Mortgage-backed securities
    
    
    
    
    
    
    14,923
    
    
    
    2,502
    
    
    
    17,425Corporate obligations
    
    
    
    
    
    
    16,424
    
    
    
    2,016
    
    
    
    18,440Total securities lending
    
    $
    31,930
    
    
    $
    31,604
    
    
    $
    4,518
    
    
    $
    68,052
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Three Months Ended March 31, 2009State and local
    
    
    
    
    
    
    Perpetual
    
    
    SecuritiesCorporate
    
    
    government
    
    
    Redeemable
    
    
    preferred
    
    
    lendingobligations
    
    
    obligations
    
    
    preferred 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (170
    )
    
    
    (421
    )Included in other comprehensive income
    
    
    35
    
    
    
    195
    
    
    
    (126
    )
    
    
    (998
    )
    
    
    150Purchases and (settlements) (1)
    
    
    (500
    )
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    (257
    )Transfers in and/or (out) of Level 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ending balance at March 31, 2009
    
    $
    3,830
    
    
    $
    6,313
    
    
    $
    2,280
    
    
    $
    2,153
    
    
    $
    4,518The amount of total gains or (losses) for the
period included in earnings attributable to the
change in unrealized gains or (losses) relating
to assets still held at the reporting date
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (170
    )
    
    $
    (421
    )
 
 (1)
    
    These amounts are attributable to either a) purchases of securities or b) principal
pay downs, calls or maturities during the three months ended March 31, 2009. 4. Securities Lending Program
   March 31,
    
    December 31,2009
    
    2008(Dollars in thousands)Collateral obligation
    
    $
    79,597
    
    
    $
    95,828Pretax unrealized loss on fair value of collateral held
    
    
    (9,949
    )
    
    
    (9,985
    )Cumulative other-than-temporary impairment charges
    
    
    (1,596
    )
    
    
    (1,173
    )Fair value of collateral held
    
    
    68,052
    
    
    
    84,670Fair value of securities lent plus accrued interest
    
    
    78,310
    
    
    
    94,265
 5. Shareholders Equity and Stock-Based Compensation
  9




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6. Transactions with Related Parties
   Three Months Ended March 31,2009
    
    2008(Dollars in thousands)Assumed premiums written
    
    $
    1,178
    
    
    $
    2,062Assumed premiums earned
    
    
    1,223
    
    
    
    1,561Assumed losses and loss adjustment expense incurred
    
    
    1,167
    
    
    
    1,095Ceded premiums written
    
    
    1,341
    
    
    
    1,546Ceded premiums earned
    
    
    804
    
    
    
    924Ceded losses and loss adjustment expense recoveries
    
    
    1,225
    
    
    
    248Payable to Great American as of period end
    
    
    1,138
    
    
    
    1,326
   10




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7. Reinsurance
  Three Months Ended March 31,2009
    
    
    2008Written
    
    
    Earned
    
    
    Written
    
    
    Earned(Dollars in thousands)Direct
    
    $
    115,579
    
    
    $
    86,371
    
    
    $
    130,560
    
    
    $
    83,042Assumed
    
    
    1,839
    
    
    
    2,067
    
    
    
    2,744
    
    
    
    2,463Ceded
    
    
    (28,945
    )
    
    
    (18,999
    )
    
    
    (34,236
    )
    
    
    (17,855
    )Net Premium
    
    $
    88,473
    
    
    $
    69,439
    
    
    $
    99,068
    
    
    $
    67,650
  8. Commitments and Contingencies
     11




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9. Earnings Per Common Share
  Three Months Ended March 31,2009
    
    
    2008(In thousands, except per share data)Net income
    
    $
    12,646
    
    
    $
    9,571Weighted average shares outstanding during period
    
    
    19,300
    
    
    
    19,262Additional shares issuable under employee common stock
option plans using treasury stock method
    
    
    53
    
    
    
    160Weighted average shares outstanding assuming exercise of
stock options
    
    
    19,353
    
    
    
    19,422Net income per share:Basic
    
    $
    0.66
    
    
    $
    0.50Diluted
    
    $
    0.65
    
    
    $
    0.49
  10. Segment Information
  Three Months Ended March 31,2009
    
    
    2008(Dollars in thousands)Revenue:Premiums earned:Alternative Risk Transfer
    
    $
    34,062
    
    
    $
    28,715Transportation
    
    
    16,125
    
    
    
    18,594Specialty Personal Lines
    
    
    13,790
    
    
    
    12,895Hawaii and Alaska
    
    
    4,015
    
    
    
    4,396Other
    
    
    1,447
    
    
    
    3,050Total premiums earned
    
    
    69,439
    
    
    
    67,650Net investment income
    
    
    5,010
    
    
    
    5,844Net realized gains (losses) on investments
    
    
    23
    
    
    
    (587
    )Other
    
    
    788
    
    
    
    837Total revenues
    
    $
    75,260
    
    
    $
    73,744
 12




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##### Table of Contents



11. Income Taxes
  Three Months Ended March 31,2009
    
    
    2008(Dollars in thousands)Expected federal income tax expense at statutory rate
    
    $
    6,523
    
    
    $
    4,992Tax effect of tax-exempt investment income
    
    
    (406
    )
    
    
    (319
    )Valuation allowance on net capital losses
    
    
    (124
    )
    
    
    Other items, net
    
    
    (3
    )
    
    
    19$
    5,990
    
    
    $
    4,692
  March 31, 2009
    
    
    December 31, 2008(Dollars in thousands)Deferred Tax Assets:Unearned premiums
    
    $
    10,414
    
    
    $
    9,035Unpaid losses and loss adjustment expenses
    
    
    8,194
    
    
    
    8,233Assignments and assessments
    
    
    1,036
    
    
    
    945Unrealized losses on investments
    
    
    6,965
    
    
    
    5,677Realized losses on investments, primarily impairments
    
    
    8,136
    
    
    
    7,936Other, net
    
    
    192
    
    
    
    87334,937
    
    
    
    32,699Valuation allowance
    
    
    (7,941
    )
    
    
    (7,616
    )26,996
    
    
    
    25,083Deferred Tax Liabilities:Deferred policy acquisition costs
    
    
    (7,763
    )
    
    
    (6,736
    )Other, net
    
    
    (132
    )
    
    
    (23
    )Total deferred tax liabilities
    
    
    (7,895
    )
    
    
    (6,759
    )Net deferred income tax assets
    
    $
    19,101
    
    
    $
    18,324
  
 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
 13




---



##### Table of Contents



products and to collect amounts due to us, our ability to access capital resources and the
costs associated with such access to capital and the market value of our investments;
    
    customer response to new products and marketing initiatives;
    
    tax law changes;
    
    increasing competition in the sale of our insurance products and services and the
retention of existing customers;
    
    changes in legal environment;
    
    regulatory changes or actions, including those relating to regulation of the sale,
underwriting and pricing of insurance products and services and capital requirements;
    
    levels of natural catastrophes, terrorist events, incidents of war and other major
losses;
    
    adequacy of insurance reserves; and
    
    availability of reinsurance and ability of reinsurers to pay their obligations.
  General
    Results of Operations
 Overview
   14




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##### Table of Contents



Three Months Ended March 31,2009
    
    
    2008Amount
    
    
    Per Share
    
    
    Amount
    
    
    Per Share(Dollars in thousands, except per share data)Net income from operations
    
    $
    12,507
    
    
    $
    0.64
    
    
    $
    9,953
    
    
    $
    0.51After-tax net realized gains (losses) from investments
    
    
    139
    
    
    
    0.01
    
    
    
    (382
    )
    
    
    (0.02
    )Net income
    
    $
    12,646
    
    
    $
    0.65
    
    
    $
    9,571
    
    
    $
    0.49
   Gross Premiums Written
  Three Months Ended March 31,2009
    
    
    2008Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Alternative Risk Transfer
    
    $
    79,377
    
    
    
    67.6
    %
    
    $
    88,775
    
    
    
    66.6
    %Transportation
    
    
    16,196
    
    
    
    13.8
    %
    
    
    22,701
    
    
    
    17.0
    %Specialty Personal Lines
    
    
    16,117
    
    
    
    13.7
    %
    
    
    15,331
    
    
    
    11.5
    %Hawaii and Alaska
    
    
    4,561
    
    
    
    3.9
    %
    
    
    5,622
    
    
    
    4.2
    %Other
    
    
    1,167
    
    
    
    1.0
    %
    
    
    875
    
    
    
    0.7
    %Gross premiums written
    
    $
    117,418
    
    
    
    100.0
    %
    
    $
    133,304
    
    
    
    100.0
    %
   15




---



##### Table of Contents



Premiums Earned
 2009 compared to 2008.
 Three Months Ended March 31,
    
    
    Change2009
    
    
    2008
    
    
    Amount
    
    
    Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer
    
    $
    34,062
    
    
    $
    28,715
    
    
    $
    5,347
    
    
    
    18.6
    %Transportation
    
    
    16,125
    
    
    
    18,594
    
    
    
    (2,469
    )
    
    
    (13.3
    %)Specialty Personal Lines
    
    
    13,790
    
    
    
    12,895
    
    
    
    895
    
    
    
    6.9
    %Hawaii and Alaska
    
    
    4,015
    
    
    
    4,396
    
    
    
    (381
    )
    
    
    (8.7
    %)Other
    
    
    1,447
    
    
    
    3,050
    
    
    
    (1,603
    )
    
    
    (52.6
    %)Net premiums earned
    
    $
    69,439
    
    
    $
    67,650
    
    
    $
    1,789
    
    
    
    2.6
    %
  Underwriting and Loss Ratio Analysis
  16




---



##### Table of Contents



Three Months Ended March 31,2009
    
    
    2008(Dollars in thousands)Gross premiums written
    
    $
    117,418
    
    
    $
    133,304Ceded reinsurance
    
    
    (28,945
    )
    
    
    (34,236
    )Net premiums written
    
    
    88,473
    
    
    
    99,068Change in unearned premiums, net of ceded
    
    
    (19,034
    )
    
    
    (31,418
    )Net premiums earned
    
    $
    69,439
    
    
    $
    67,650Combined Ratios:Loss and LAE ratio(1)
    
    
    56.6
    %
    
    
    61.6
    %Underwriting expense ratio (2)
    
    
    22.4
    %
    
    
    22.7
    %Combined ratio
    
    
    79.0
    %
    
    
    84.3
    %
 
 (1)
    
    The ratio of losses and LAE to premiums earned.(2)
    
    The ratio of the sum of commissions and other underwriting expenses, other operating
expenses less other income to premiums earned. 2009 compared to 2008.
  Net Investment Income
 2009 compared to 2008.
 Net
Realized Gains (Losses) on Investments
 2009 compared to 2008.
 17




---



##### Table of Contents



Expense on Amounts Withheld
 2009 compared to 2008.
 Financial Condition
 Investments and Securities Lending Collateral
    Securities with
    
    Securities withUnrealized
    
    UnrealizedGains
    
    Losses(Dollars in thousands)Fixed Maturities:Fair value of securities
    
    $
    367,644
    
    
    $
    99,147Amortized cost of securities
    
    
    359,348
    
    
    
    111,326Gross unrealized gain or (loss)
    
    $
    8,296
    
    
    $
    (12,179
    )Fair value as a % of amortized cost
    
    
    102.3
    %
    
    
    89.1
    %Number of security positions held
    
    
    301
    
    
    
    113Number individually exceeding $50,000 gain or (loss)
    
    
    39
    
    
    
    43Concentration of gains or (losses) by type or industry:US government and government agencies
    
    $
    2,680
    
    
    $
    (75
    )State, municipalities and political subdivisions
    
    
    3,296
    
    
    
    (2,442
    )Mortgage-backed securities
    
    
    2,119
    
    
    
    (6
    )Banks, insurance and brokers
    
    
    104
    
    
    
    (8,302
    )Industrial and other
    
    
    97
    
    
    
    (1,354
    )Percentage rated investment grade (1)
    
    
    99.8
    %
    
    
    96.1
    %Equity Securities:Fair value of securities
    
    $
    837
    
    
    $
    13,349Cost of securities
    
    
    792
    
    
    
    19,330Gross unrealized gain or (loss)
    
    $
    45
    
    
    $
    (5,981
    )Fair value as a % of cost
    
    
    105.7
    %
    
    
    69.1
    %Number individually exceeding $50,000 gain or (loss)
    
    
    
    
    
    
    16Securities Lending:Fair value of securities
    
    $
    
    
    
    $
    33,849Amortized cost of securities
    
    
    
    
    
    
    43,798Gross unrealized loss
    
    $
    
    
    
    $
    (9,949
    )Fair value as a % of amortized cost
    
    
    
    
    
    
    77.3
    %Number of security positions held
    
    
    
    
    
    
    14Number individually exceeding $50,000 gain or (loss)
    
    
    
    
    
    
    11Concentration of loss by type:Repurchase agreements  overnight
    
    
    
    
    
    
    Mortgage-backed securities
    
    
    
    
    
    
    (9,374
    )Banks, insurance, and brokers
    
    
    
    
    
    
    (575
    )Percentage rated investment grade (1)
    
    
    
    
    
    
    82.2
    %
 
 (1)
    
    Investment grade of AAA to BBB by Standard & Poors Corporation. 18




---



##### Table of Contents



Fixed Maturities Portfolio
    
    Securities Lending CollateralSecurities with
    
    Securities with
    
    Securities with
    
    Securities withUnrealized
    
    Unrealized
    
    Unrealized
    
    UnrealizedGains
    
    Losses
    
    Gains
    
    LossesMaturity:Due one year or less
    
    
    2.2
    %
    
    
    7.5
    %
    
    
    0.0
    %
    
    
    42.9
    %Due after one year through five years
    
    
    37.9
    %
    
    
    27.1
    %
    
    
    0.0
    %
    
    
    5.6
    %Due after five years through ten years
    
    
    31.3
    %
    
    
    33.9
    %
    
    
    0.0
    %
    
    
    0.0
    %Due after ten years
    
    
    4.0
    %
    
    
    30.9
    %
    
    
    0.0
    %
    
    
    0.0
    %75.4
    %
    
    
    99.4
    %
    
    
    0.0
    %
    
    
    48.5
    %Mortgage-backed securities
    
    
    24.6
    %
    
    
    0.6
    %
    
    
    0.0
    %
    
    
    51.5
    %100.0
    %
    
    
    100.0
    %
    
    
    0.0
    %
    
    
    100.0
    %
  At March 31, 2009Aggregate
    
    
    Aggregate
    
    
    Fair ValueFair
    
    
    Unrealized
    
    
    as % ofValue
    
    
    Gain (Loss)
    
    
    Cost Basis(Dollars in thousands)Fixed Maturities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (35 issues)
    
    $
    61,002
    
    
    $
    2,589
    
    
    
    104.4
    %More than one year (4 issues)
    
    
    7,277
    
    
    
    510
    
    
    
    107.5
    %Less than $50,000 (262 issues)
    
    
    299,365
    
    
    
    5,197
    
    
    
    101.8
    %$
    367,644
    
    
    $
    8,296Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (24 issues)
    
    $
    14,226
    
    
    $
    (2,965
    )
    
    
    82.8
    %More than one year (19 issues)
    
    
    14,867
    
    
    
    (8,124
    )
    
    
    64.7
    %Less than $50,000 (70 issues)
    
    
    70,054
    
    
    
    (1,090
    )
    
    
    98.5
    %$
    99,147
    
    
    $
    (12,179
    )Equity Securities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (0 issues)
    
    $
    
    
    
    $
    
    
    
    
    0.0
    %More than one year (0 issues)
    
    
    
    
    
    
    
    
    
    
    0.0
    %Less than $50,000 (8 issues)
    
    
    837
    
    
    
    45
    
    
    
    105.7
    %$
    837
    
    
    $
    45Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (15 issues)
    
    $
    10,726
    
    
    $
    (2,518
    )
    
    
    81.0
    %More than one year (1 issue)
    
    
    1,695
    
    
    
    (3,305
    )
    
    
    33.9
    %Less than $50,000 (11 issues)
    
    
    928
    
    
    
    (158
    )
    
    
    85.5
    %$
    13,349
    
    
    $
    (5,981
    )Securities Lending:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (0 issues)
    
    $
    
    
    
    $
    
    
    
    
    More than one year (0 issues)
    
    
    
    
    
    
    
    
    
    
    Less than $50,000 (0 issues)
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (4 issues)
    
    $
    8,545
    
    
    $
    (881
    )
    
    
    90.7
    %More than one year (7 issues)
    
    
    12,352
    
    
    
    (9,020
    )
    
    
    57.8
    %Less than $50,000 (3 issues)
    
    
    12,952
    
    
    
    (48
    )
    
    
    99.6
    %$
    33,849
    
    
    $
    (9,949
    )
 19




---



##### Table of Contents



Premiums and Reinsurance
    Liquidity and Capital Resources
      20




---



##### Table of Contents



Critical Accounting Policies
  Losses and LAE Reserves
   
    
    the Case Incurred Development Method;
 21




---



##### Table of Contents




    
    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;
    
    historical operating, balance sheet and cash flow data;
 22




---



##### Table of Contents




    
    internally generated financial models and forecasts;
    
    our ability and intent to hold the investment for a period of time sufficient to allow
for any anticipated recovery in market value; and
    
    other subjective factors, including concentrations and information obtained from
regulators and rating agencies.
  Contractual Obligations/Off-Balance Sheet Arrangements
   
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
  
 ITEM 4. Controls and Procedures
   
 PART II  OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  23




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##### Table of Contents



ITEM 1A. Risk Factors.
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3. Defaults Upon Senior Securities
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
  
 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, as amended (Registration No. 333-119270) filed on November 12,
2004. 24




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##### Table of Contents



SIGNATURES
  NATIONAL INTERSTATE CORPORATIONDate: May 6, 2009
    /s/ David W. MichelsonDavid W. MichelsonPresident and Chief Executive Officer
(Duly Authorized Officer and Principal Executive Officer)Date: May 6, 2009
    /s/ Julie A. McGrawJulie A. McGrawVice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) 25