##### 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, 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
    
    Smaller Reporting Company o(Do not check if a smaller reporting company)
 o þ




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##### 



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




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1.
    
    Financial Statements
 National Interstate Corporation and Subsidiaries
 
 Consolidated Balance Sheets
 (In thousands, except per share data)
 March 31, 2010
    
    
    December 31, 2009(Unaudited)ASSETSInvestments:Fixed maturities available-for-sale, at fair value (amortized cost  $580,707 and
$565,753, respectively)
    
    $
    585,860
    
    
    $
    566,901Equity securities available-for-sale, at fair value (amortized cost  $26,265 and
$26,203, respectively)
    
    
    29,851
    
    
    
    28,673Short-term investments, at cost which approximates fair value
    
    
    810
    
    
    
    811Total investments
    
    
    616,521
    
    
    
    596,385Cash and cash equivalents
    
    
    23,988
    
    
    
    18,589Accrued investment income
    
    
    5,478
    
    
    
    4,926Premiums receivable, net of allowance for doubtful accounts of $1,097 and $963, respectively
    
    
    114,580
    
    
    
    98,679Reinsurance recoverable on paid and unpaid losses
    
    
    151,617
    
    
    
    149,949Prepaid reinsurance premiums
    
    
    32,443
    
    
    
    25,163Deferred policy acquisition costs
    
    
    20,223
    
    
    
    17,833Deferred federal income taxes
    
    
    16,674
    
    
    
    18,178Property and equipment, net
    
    
    21,745
    
    
    
    21,747Funds held by reinsurer
    
    
    2,709
    
    
    
    3,441Prepaid expenses and other assets
    
    
    1,337
    
    
    
    863Total assets
    
    $
    1,007,315
    
    
    $
    955,753LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses
    
    $
    426,882
    
    
    $
    417,260Unearned premiums and service fees
    
    
    168,086
    
    
    
    149,509Long-term debt
    
    
    15,000
    
    
    
    15,000Amounts withheld or retained for accounts of others
    
    
    51,685
    
    
    
    51,359Reinsurance balances payable
    
    
    17,796
    
    
    
    10,540Accounts payable and other liabilities
    
    
    31,022
    
    
    
    29,371Commissions payable
    
    
    8,972
    
    
    
    8,164Assessments and fees payable
    
    
    3,383
    
    
    
    3,233Total liabilities
    
    
    722,826
    
    
    
    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
    
    
    50,022
    
    
    
    49,264Retained earnings
    
    
    234,224
    
    
    
    225,195Accumulated other comprehensive income
    
    
    5,681
    
    
    
    2,353Treasury shares
    
    
    (5,672
    )
    
    
    (5,729
    )Total shareholders equity
    
    
    284,489
    
    
    
    271,317Total liabilities and shareholders equity
    
    $
    1,007,315
    
    
    $
    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 March 31,2010
    
    
    2009Revenues:Premiums earned
    
    $
    70,181
    
    
    $
    69,439Net investment income
    
    
    4,959
    
    
    
    5,010Net realized gains on investments (*)
    
    
    882
    
    
    
    23Other
    
    
    818
    
    
    
    788Total revenues
    
    
    76,840
    
    
    
    75,260Expenses:Losses and loss adjustment expenses
    
    
    43,104
    
    
    
    39,326Commissions and other underwriting expenses
    
    
    14,836
    
    
    
    13,019Other operating and general expenses
    
    
    3,626
    
    
    
    3,292Expense on amounts withheld
    
    
    809
    
    
    
    867Interest expense
    
    
    12
    
    
    
    120Total expenses
    
    
    62,387
    
    
    
    56,624Income before income taxes
    
    
    14,453
    
    
    
    18,636Provision for income taxes
    
    
    3,867
    
    
    
    5,990Net income
    
    $
    10,586
    
    
    $
    12,646Net income per share  basic
    
    $
    0.55
    
    
    $
    0.66Net income per share  diluted
    
    $
    0.55
    
    
    $
    0.65Weighted average of common shares outstanding  basic
    
    
    19,328
    
    
    
    19,300Weighted average of common shares outstanding  diluted
    
    
    19,409
    
    
    
    19,353Cash dividends per common share
    
    $
    0.08
    
    
    $
    0.07
 
 (*)      Consists of the following:Net realized gains before impairment losses
    
    $
    882
    
    
    $
    630Total losses on securities with impairment charges
    
    
    
    
    
    
    (607
    )Non-credit portion in other comprehensive income
    
    
    
    
    
    
    Net impairment charges recognized in earnings
    
    
    
    
    
    
    (607
    )Net realized gains on investments
    
    $
    882
    
    
    $
    23
 .
 4




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##### Table of Contents



National Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Shareholders Equity
 (Unaudited)
(Dollars in thousands)
 Additional
    
    
    
    
    
    
    Accumulated 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
    
    
    
    
    
    
    
    
    
    
    10,586
    
    
    
    
    
    
    
    
    
    
    
    10,586Unrealized appreciation of investment
securities, net of tax expense of $1.8 million
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,328
    
    
    
    
    
    
    
    3,328Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,914Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (1,557
    )
    
    
    
    
    
    
    
    
    
    
    (1,557
    )Issuance of 41,217 treasury shares upon exercise
of options, stock award grants and restricted
stock issued, net of forfeitures
    
    
    
    
    
    
    380
    
    
    
    
    
    
    
    
    
    
    
    57
    
    
    
    437Tax shortfall realized from exercise of stock
options
    
    
    
    
    
    
    (50
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50
    )Stock compensation expense
    
    
    
    
    
    
    428
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    428Balance at March 31, 2010
    
    $
    234
    
    
    $
    50,022
    
    
    $
    234,224
    
    
    $
    5,681
    
    
    $
    (5,672
    )
    
    $
    284,489Balance 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
    )
    
    $
    224,907
  5




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National Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows
 (Unaudited)
(Dollars in thousands)
 Three Months Ended March 31,2010
    
    
    2009Operating activitiesNet income
    
    $
    10,586
    
    
    $
    12,646Adjustments to reconcile net income to net cash provided by operating activities:Net amortization of bond premiums and discounts
    
    
    841
    
    
    
    555Provision for depreciation and amortization
    
    
    550
    
    
    
    453Net realized gains on investment securities
    
    
    (882
    )
    
    
    (23
    )Deferred federal income taxes
    
    
    (288
    )
    
    
    15Stock compensation expense
    
    
    428
    
    
    
    365Increase in deferred policy acquisition costs, net
    
    
    (2,390
    )
    
    
    (2,935
    )Increase (decrease) in reserves for losses and loss adjustment expenses
    
    
    9,622
    
    
    
    (833
    )Increase in premiums receivable
    
    
    (15,901
    )
    
    
    (31,931
    )Increase in unearned premiums and service fees
    
    
    18,577
    
    
    
    29,046(Increase) decrease in interest receivable and other assets
    
    
    (294
    )
    
    
    674Increase in prepaid reinsurance premiums
    
    
    (7,280
    )
    
    
    (9,946
    )Increase in accounts payable, commissions and other liabilities and assessments and fees payable
    
    
    2,609
    
    
    
    266Increase in amounts withheld or retained for accounts of others
    
    
    326
    
    
    
    3,049(Increase) decrease in reinsurance recoverable
    
    
    (1,668
    )
    
    
    2,373Increase in reinsurance balances payable
    
    
    7,256
    
    
    
    10,993Other
    
    
    (47
    )
    
    
    Net cash provided by operating activities
    
    
    22,045
    
    
    
    14,767Investing activitiesPurchases of fixed maturities
    
    
    (132,722
    )
    
    
    (125,372
    )Purchases of equity securities
    
    
    
    
    
    
    (86
    )Proceeds from sale of fixed maturities
    
    
    9,033
    
    
    
    18,010Proceeds from sale of equity securities
    
    
    111
    
    
    
    320Proceeds from maturities and redemptions of investments
    
    
    108,603
    
    
    
    89,825Capital expenditures
    
    
    (551
    )
    
    
    (1,096
    )Net cash used in investing activities
    
    
    (15,526
    )
    
    
    (18,399
    )Financing activitiesDecrease in securities lending collateral
    
    
    
    
    
    
    16,231Decrease in securities lending obligation
    
    
    
    
    
    
    (16,231
    )Issuance of common shares from treasury upon exercise of stock options or stock award grants
    
    
    437
    
    
    
    (63
    )Cash dividends paid on common shares
    
    
    (1,557
    )
    
    
    (1,360
    )Net cash used in financing activities
    
    
    (1,120
    )
    
    
    (1,423
    )Net increase (decrease) in cash and cash equivalents
    
    
    5,399
    
    
    
    (5,055
    )Cash and cash equivalents at beginning of period
    
    
    18,589
    
    
    
    77,159Cash and cash equivalents at end of period
    
    $
    23,988
    
    
    $
    72,104
  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
 Improving Disclosures about Fair Value Measurements Fair Value Measurements and
Disclosures
 Consolidation,
 3. Fair Value Measurements
   7




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##### Table of Contents



Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(Dollars in thousands)Fixed maturities:U.S. Government and government agency obligations
    
    $
    
    
    
    $
    213,265
    
    
    $
    
    
    
    $
    213,265State and local government obligations
    
    
    
    
    
    
    153,863
    
    
    
    6,387
    
    
    
    160,250Residential mortgage-backed securities
    
    
    
    
    
    
    117,428
    
    
    
    2,367
    
    
    
    119,795Commercial mortgage-backed securities
    
    
    
    
    
    
    3,439
    
    
    
    
    
    
    
    3,439Corporate obligations
    
    
    
    
    
    
    71,525
    
    
    
    5,840
    
    
    
    77,365Redeemable preferred stocks
    
    
    8,921
    
    
    
    457
    
    
    
    2,368
    
    
    
    11,746Total fixed maturities
    
    
    8,921
    
    
    
    559,977
    
    
    
    16,962
    
    
    
    585,860Equity securities:Perpetual preferred stock
    
    
    890
    
    
    
    151
    
    
    
    396
    
    
    
    1,437Common stock
    
    
    15,298
    
    
    
    13,116
    
    
    
    
    
    
    
    28,414Total equity securities
    
    
    16,188
    
    
    
    13,267
    
    
    
    396
    
    
    
    29,851Short-term investments
    
    
    
    
    
    
    810
    
    
    
    
    
    
    
    810Total investments
    
    
    25,109
    
    
    
    574,054
    
    
    
    17,358
    
    
    
    616,521Cash and cash equivalents
    
    
    23,988
    
    
    
    
    
    
    
    
    
    
    
    23,988Total investments and cash and cash equivalents
    
    $
    49,097
    
    
    $
    574,054
    
    
    $
    17,358
    
    
    $
    640,509
 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
    
    $
    
    
    
    $
    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
  Three Months Ended March 31, 2010State and Local
    
    
    ResidentialCorporate
    
    
    Government
    
    
    Mortgage-Backed
    
    
    Redeemable
    
    
    Perpetual PreferredObligations
    
    
    Obligations
    
    
    Securities
    
    
    Preferred 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
    
    
    113
    
    
    
    18
    
    
    
    147
    
    
    
    15
    
    
    
    Purchases,
issuances, sales and settlements:Sales (1)
    
    
    (115
    )
    
    
    
    
    
    
    (164
    )
    
    
    
    
    
    
    Transfers in and/or (out) of Level 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ending balance at March 31, 2010
    
    $
    5,840
    
    
    $
    6,387
    
    
    $
    2,367
    
    
    $
    2,368
    
    
    $
    396The amount of total gains or (losses) for the period
included in earnings and attributable to the change
in unrealized gains or (losses) relating to assets still
held at the reporting date
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    These amounts are attributable to either maturities or principal pay downs. 9




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##### Table of Contents



Three Months Ended March 31, 2009State andLocal
    
    
    Redeemable
    
    
    Perpetual
    
    
    SecuritiesCorporate
    
    
    Government
    
    
    Preferred
    
    
    Preferred
    
    
    LendingObligations
    
    
    Obligations
    
    
    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, issuances, sales 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 and 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 purchases of securities, principal pay
downs or maturities. 4. Investments
  10




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Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(Dollars in thousands)March 31, 2010:Fixed Maturities:U.S. Government and government agency obligations
    
    $
    211,321
    
    
    $
    2,181
    
    
    $
    (237
    )
    
    $
    213,265State and local government obligations
    
    
    156,354
    
    
    
    5,543
    
    
    
    (1,647
    )
    
    
    160,250Residential mortgage-backed securities
    
    
    120,929
    
    
    
    2,751
    
    
    
    (3,885
    )
    
    
    119,795Commercial mortgage-backed securities
    
    
    3,720
    
    
    
    
    
    
    
    (281
    )
    
    
    3,439Corporate obligations
    
    
    75,957
    
    
    
    2,278
    
    
    
    (870
    )
    
    
    77,365Redeemable preferred stock
    
    
    12,426
    
    
    
    100
    
    
    
    (780
    )
    
    
    11,746Total fixed maturities
    
    
    580,707
    
    
    
    12,853
    
    
    
    (7,700
    )
    
    
    585,860Equity securities:Perpetual preferred stocks
    
    
    1,320
    
    
    
    118
    
    
    
    (1
    )
    
    
    1,437Common stocks
    
    
    24,945
    
    
    
    3,469
    
    
    
    
    
    
    
    28,414Total equity securities
    
    
    26,265
    
    
    
    3,587
    
    
    
    (1
    )
    
    
    29,851Short-term investments
    
    
    810
    
    
    
    
    
    
    
    
    
    
    
    810Total investments
    
    $
    607,782
    
    
    $
    16,440
    
    
    $
    (7,701
    )
    
    $
    616,521December 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
    
    $
    22,132
    
    
    $
    22,836Due after one year through five years
    
    
    210,142
    
    
    
    214,319Due after five years through ten years
    
    
    176,874
    
    
    
    180,270Due after ten years
    
    
    46,910
    
    
    
    45,201456,058
    
    
    
    462,626Mortgage-backed securities
    
    
    124,649
    
    
    
    123,234Total
    
    $
    580,707
    
    
    $
    585,860
  Three Months Ended March 31,2010
    
    
    2009(Dollars in thousands)Fixed maturity gains
    
    $
    459
    
    
    $
    745Fixed maturity losses
    
    
    
    
    
    
    (392
    )Equity security gains
    
    
    423
    
    
    
    859Equity security losses
    
    
    
    
    
    
    (766
    )Securities lending fixed maturity losses
    
    
    
    
    
    
    (423
    )Net realized gains on investments
    
    $
    882
    
    
    $
    23
 11




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##### Table of Contents



Less than Twelve Months
    
    
    Twelve Months or MoreFair Value
    
    
    Number
    
    
    
    
    
    
    
    
    
    
    Fair Value
    
    
    NumberFair
    
    
    Unrealized
    
    
    as % of
    
    
    of
    
    
    Fair
    
    
    Unrealized
    
    
    as % of
    
    
    ofValue
    
    
    Losses
    
    
    Cost
    
    
    Holdings
    
    
    Value
    
    
    Losses
    
    
    Cost
    
    
    Holdings(Dollars in thousands)March 31, 2010:Fixed maturities:U.S. Government and government
agency obligations
    
    $
    46,620
    
    
    $
    (237
    )
    
    
    99.5
    %
    
    
    28
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    
    State and local government
obligations
    
    
    16,244
    
    
    
    (175
    )
    
    
    98.9
    %
    
    
    12
    
    
    
    6,743
    
    
    
    (1,472
    )
    
    
    82.1
    %
    
    
    6Residential mortgage-backed
securities
    
    
    13,057
    
    
    
    (118
    )
    
    
    99.1
    %
    
    
    6
    
    
    
    7,768
    
    
    
    (3,767
    )
    
    
    67.3
    %
    
    
    7Commercial mortgage-backed
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,439
    
    
    
    (281
    )
    
    
    92.4
    %
    
    
    1Corporate obligations
    
    
    10,634
    
    
    
    (104
    )
    
    
    99.0
    %
    
    
    24
    
    
    
    8,234
    
    
    
    (766
    )
    
    
    91.5
    %
    
    
    6Redeemable preferred stocks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,899
    
    
    
    (780
    )
    
    
    91.9
    %
    
    
    19Total fixed maturities
    
    
    86,555
    
    
    
    (634
    )
    
    
    99.3
    %
    
    
    70
    
    
    
    35,083
    
    
    
    (7,066
    )
    
    
    83.2
    %
    
    
    39Equity securities:Perpetual preferred stocks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102
    
    
    
    (1
    )
    
    
    99.0
    %
    
    
    1Total equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102
    
    
    
    (1
    )
    
    
    99.0
    %
    
    
    1Total fixed maturities and equity
securities
    
    $
    86,555
    
    
    $
    (634
    )
    
    
    99.3
    %
    
    
    70
    
    
    $
    35,185
    
    
    $
    (7,067
    )
    
    
    83.3
    %
    
    
    40December 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
  12




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##### Table of Contents



Three Months Ended March 31,2010
    
    
    2009(Dollars in thousands)Beginning balance
    
    $
    1,910
    
    
    $
    Additional credit impairments on:Previously impaired securities
    
    
    
    
    
    
    Securities without prior impairments
    
    
    
    
    
    
    Reductions
    
    
    
    
    
    
    Ending balance
    
    $
    1,910
    
    
    $
    
 5. Income Taxes
  Three Months Ended March 31,2010
    
    
    2009(Dollars in thousands)Federal income tax expense at statutory rate
    
    $
    5,059
    
    
    $
    6,523Effect of:Tax-exempt investment income
    
    
    (374
    )
    
    
    (406
    )Change in valuation allowance on net capital losses
    
    
    (810
    )
    
    
    (124
    )Other items, net
    
    
    (8
    )
    
    
    (3
    )$
    3,867
    
    
    $
    5,990
 13




---



##### Table of Contents



March 31, 2010
    
    
    December 31, 2009(Dollars in thousands)Deferred Tax Assets:Unearned premiums
    
    $
    9,582
    
    
    $
    8,750Unpaid losses and loss adjustment expenses
    
    
    8,925
    
    
    
    8,742Assignments and assessments
    
    
    623
    
    
    
    817Realized losses on investments, primarily impairments
    
    
    6,436
    
    
    
    6,436Accrued compensation
    
    
    1,392
    
    
    
    2,218Other, net
    
    
    1,477
    
    
    
    1,39828,435
    
    
    
    28,361Valuation allowance
    
    
    
    
    
    
    (810
    )28,435
    
    
    
    27,551Deferred Tax Liabilities:Deferred policy acquisition costs
    
    
    (7,078
    )
    
    
    (6,241
    )Unrealized gains on investments
    
    
    (3,059
    )
    
    
    (1,266
    )Other, net
    
    
    (1,624
    )
    
    
    (1,866
    )Total deferred tax liabilities
    
    
    (11,761
    )
    
    
    (9,373
    )Net deferred income tax assets
    
    $
    16,674
    
    
    $
    18,178
  6. Shareholders Equity and Stock-Based Compensation
   7. Earnings Per Common Share
  Three Months Ended March 31,2010
    
    
    2009(In thousands, except per share data)Net income
    
    $
    10,586
    
    
    $
    12,646Weighted average shares outstanding during period
    
    
    19,328
    
    
    
    19,300Additional shares issuable under employee common stock option plans
using treasury stock method
    
    
    81
    
    
    
    53Weighted average shares outstanding assuming exercise of stock options
    
    
    19,409
    
    
    
    19,353Net income per share:Basic
    
    $
    0.55
    
    
    $
    0.66Diluted
    
    $
    0.55
    
    
    $
    0.65
  14




---



##### Table of Contents



8. Transactions with Related Parties
   Three Months Ended March 31,2010
    
    
    2009(Dollars in thousands)Assumed premiums written
    
    $
    1,046
    
    
    $
    1,178Assumed premiums earned
    
    
    772
    
    
    
    1,223Assumed losses and loss adjustment expense incurred
    
    
    105
    
    
    
    1,167Ceded premiums written
    
    
    688
    
    
    
    1,341Ceded premiums earned
    
    
    680
    
    
    
    804Ceded losses and loss adjustment expense recoveries
    
    
    267
    
    
    
    1,225Payable to Great American as of period end
    
    
    583
    
    
    
    1,138
  9. Reinsurance
  Three Months Ended March 31,2010
    
    
    2009(Dollars in thousands)Direct premiums written
    
    $
    104,126
    
    
    $
    115,579Reinsurance assumed
    
    
    1,678
    
    
    
    1,839Reinsurance ceded
    
    
    (24,350
    )
    
    
    (28,945
    )Net premiums written
    
    $
    81,454
    
    
    $
    88,473Direct premiums earned
    
    $
    85,718
    
    
    $
    86,371Reinsurance assumed
    
    
    1,533
    
    
    
    2,067Reinsurance ceded
    
    
    (17,070
    )
    
    
    (18,999
    )Total premiums earned
    
    $
    70,181
    
    
    $
    69,439
  10. Commitments and Contingencies
  15




---



##### Table of Contents



11. Segment Information
  Three Months Ended March 31,2010
    
    
    2009(Dollars in thousands)Revenue:Premiums Earned:Alternative Risk Transfer
    
    $
    37,370
    
    
    $
    34,062Transportation
    
    
    14,199
    
    
    
    16,125Specialty Personal Lines
    
    
    14,146
    
    
    
    13,790Hawaii and Alaska
    
    
    3,319
    
    
    
    4,015Other
    
    
    1,147
    
    
    
    1,447Total premiums earned
    
    
    70,181
    
    
    
    69,439Net investment income
    
    
    4,959
    
    
    
    5,010Net realized gains on investments
    
    
    882
    
    
    
    23Other
    
    
    818
    
    
    
    788Total revenues
    
    $
    76,840
    
    
    $
    75,260
 12. Subsequent Events
    16




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##### Table of Contents



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 execution and
integration of the pending acquisition 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 regulation of the
sale, underwriting and pricing of insurance products and services and capital requirements;
    
    levels of natural catastrophes, terrorist events, incidents of war and other
major losses;
    
    adequacy of insurance reserves; and
    
    availability of reinsurance and ability of reinsurers to pay their obligations.
  General
   17




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##### Table of Contents



Results of Operations
 Overview
    Three Months Ended March 31,2010
    
    
    2009Amount
    
    
    Per Share
    
    
    Amount
    
    
    Per Share(Dollars in thousands, except per share data)Net income from operations
    
    $
    9,202
    
    
    $
    0.48
    
    
    $
    12,507
    
    
    $
    0.64Change in valuation allowance related to net capital losses
    
    
    810
    
    
    
    0.04
    
    
    
    124
    
    
    
    0.01After-tax net realized gains from investments
    
    
    574
    
    
    
    0.03
    
    
    
    15
    
    
    
    Net income
    
    $
    10,586
    
    
    $
    0.55
    
    
    $
    12,646
    
    
    $
    0.65
  18




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##### Table of Contents



Gross Premiums Written
  Three Months Ended March 31,2010
    
    
    2009Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Alternative Risk Transfer
    
    $
    65,945
    
    
    
    62.3
    %
    
    $
    79,377
    
    
    
    67.6
    %Transportation
    
    
    18,052
    
    
    
    17.1
    %
    
    
    16,196
    
    
    
    13.8
    %Specialty Personal Lines
    
    
    16,889
    
    
    
    16.0
    %
    
    
    16,117
    
    
    
    13.7
    %Hawaii and Alaska
    
    
    4,001
    
    
    
    3.8
    %
    
    
    4,561
    
    
    
    3.9
    %Other
    
    
    917
    
    
    
    0.8
    %
    
    
    1,167
    
    
    
    1.0
    %Gross premiums written
    
    $
    105,804
    
    
    
    100.0
    %
    
    $
    117,418
    
    
    
    100.0
    %
    19




---



##### Table of Contents



Premiums Earned
 2010 compared to 2009.
 Three Months Ended March 31,
    
    
    Change2010
    
    
    2009
    
    
    Amount
    
    
    Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer
    
    $
    37,370
    
    
    $
    34,062
    
    
    $
    3,308
    
    
    
    9.7
    %Transportation
    
    
    14,199
    
    
    
    16,125
    
    
    
    (1,926
    )
    
    
    (11.9
    %)Specialty Personal Lines
    
    
    14,146
    
    
    
    13,790
    
    
    
    356
    
    
    
    2.6
    %Hawaii and Alaska
    
    
    3,319
    
    
    
    4,015
    
    
    
    (696
    )
    
    
    (17.3
    %)Other
    
    
    1,147
    
    
    
    1,447
    
    
    
    (300
    )
    
    
    (20.7
    %)Total premiums earned
    
    $
    70,181
    
    
    $
    69,439
    
    
    $
    742
    
    
    
    1.1
    %
  Underwriting and Loss Ratio Analysis
    Three Months Ended March 31,2010
    
    
    2009(Dollars in thousands)Gross premiums written
    
    $
    105,804
    
    
    $
    117,418Ceded reinsurance
    
    
    (24,350
    )
    
    
    (28,945
    )Net premiums written
    
    
    81,454
    
    
    
    88,473Change in unearned premiums, net of ceded
    
    
    (11,273
    )
    
    
    (19,034
    )Total premiums earned
    
    $
    70,181
    
    
    $
    69,439Combined Ratios:Loss and LAE ratio (1)
    
    
    61.4
    %
    
    
    56.6
    %Underwriting expense ratio (2)
    
    
    25.1
    %
    
    
    22.4
    %Combined ratio
    
    
    86.5
    %
    
    
    79.0
    %
 
 (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. 20




---



##### Table of Contents



2010 compared to 2009.
  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.
 21




---



##### Table of Contents



Other Operating and General Expenses
 2010 compared to 2009.
 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
    
    $
    459,532
    
    
    $
    121,638Amortized cost of securities
    
    
    446,679
    
    
    
    129,338Gross unrealized gain or (loss)
    
    $
    12,853
    
    
    $
    (7,700
    )Fair value as a % of amortized cost
    
    
    102.9
    %
    
    
    94.0
    %Number of security positions held
    
    
    456
    
    
    
    109Number individually exceeding $50,000 gain or (loss)
    
    
    85
    
    
    
    22Concentration of gains or losses by type or industry:U.S. Government and government agencies
    
    $
    2,181
    
    
    $
    (237
    )State, municipalities and political subdivisions
    
    
    5,543
    
    
    
    (1,647
    )Residential mortgage-backed securities
    
    
    2,751
    
    
    
    (3,885
    )Commercial mortgage-backed securities
    
    
    
    
    
    
    (281
    )Banks, insurance and brokers
    
    
    1,257
    
    
    
    (1,413
    )Industrial and other
    
    
    1,121
    
    
    
    (237
    )Percent rated investment grade (1)
    
    
    96.8
    %
    
    
    87.2
    %Equity Securities:Fair value of securities
    
    $
    16,633
    
    
    $
    102Cost of securities
    
    
    13,046
    
    
    
    103Gross unrealized gain or (loss)
    
    $
    3,587
    
    
    $
    (1
    )Fair value as a % of cost
    
    
    127.5
    %
    
    
    99.0
    %Number individually exceeding $50,000 gain or (loss)
    
    
    9
    
    
    
    
 
 (1)
    
    Investment grade of AAA to BBB- by nationally recognized rating agencies. 22




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##### Table of Contents



Securities with
    
    
    Securities withUnrealized Gains
    
    
    Unrealized LossesMaturity:One year or less
    
    
    4.4
    %
    
    
    2.0
    %After one year through five years
    
    
    38.9
    %
    
    
    25.9
    %After five years through ten years
    
    
    30.2
    %
    
    
    33.9
    %After ten years
    
    
    5.0
    %
    
    
    18.3
    %78.5
    %
    
    
    80.1
    %Mortgage-backed securities
    
    
    21.5
    %
    
    
    19.9
    %100.0
    %
    
    
    100.0
    %
  At March 31, 2010Aggregate
    
    
    Fair ValueAggregate
    
    
    Unrealized
    
    
    as % ofFair Value
    
    
    Gain (Loss)
    
    
    Cost Basis(Dollars in thousands)Fixed Maturities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (61 issues)
    
    $
    101,035
    
    
    $
    4,898
    
    
    
    105.1
    %More than one year (24 issues)
    
    
    30,775
    
    
    
    2,089
    
    
    
    107.3
    %Less than $50,000 (371 issues)
    
    
    327,722
    
    
    
    5,866
    
    
    
    101.8
    %$
    459,532
    
    
    $
    12,853Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (1 issue)
    
    $
    5,202
    
    
    $
    (99
    )
    
    
    98.1
    %More than one year (21 issues)
    
    
    24,514
    
    
    
    (6,848
    )
    
    
    78.2
    %Less than $50,000 (87 issues)
    
    
    91,922
    
    
    
    (753
    )
    
    
    99.2
    %$
    121,638
    
    
    $
    (7,700
    )Equity Securities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (9 issues)
    
    $
    14,582
    
    
    $
    3,433
    
    
    
    130.8
    %More than one year (0 issues)
    
    
    
    
    
    
    
    
    
    
    0.0
    %Less than $50,000 (20 issues)
    
    
    2,051
    
    
    
    154
    
    
    
    108.1
    %$
    16,633
    
    
    $
    3,587Securities 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 (2 issues)
    
    
    102
    
    
    
    (1
    )
    
    
    99.0
    %$
    102
    
    
    $
    (1
    )
  Premiums and Reinsurance
  23




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##### Table of Contents



Liquidity and Capital Resources
       24




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##### Table of Contents



Critical Accounting Policies
  Losses and LAE Reserves
   
    
    the Case Incurred Development Method;
    
    the Paid Development Method;
    
    the Bornhuetter-Ferguson Method; and
    
    the Incremental Paid LAE to Paid Loss Methods.
  25




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##### 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.
  26




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##### Table of Contents



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




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3. Defaults Upon Senior Securities
  
 ITEM 4. [RESERVED]
 
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
 3.1
    
    Amended and Restated Articles of Incorporation (1)3.2
    
    Amended and Restated Code of Regulations (1)10.1
    
    Purchase Agreement, dated as of April 26, 2010, among UniGroup, Inc.,
National Interstate Insurance Company and National Interstate
Corporation (2)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. 28




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##### Table of Contents



SIGNATURES
  NATIONAL INTERSTATE CORPORATIONDate: May 7, 2010
    /s/ David W. MichelsonDavid W. MichelsonPresident and Chief Executive Officer
(Duly Authorized Officer and Principal Executive Officer)Date: May 7, 2010
    /s/ Julie A. McGrawJulie A. McGrawVice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) 29