##### 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 September 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
  Ohio
    
    34-1607394(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    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 StatementsConsolidated 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
    
    
    21Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    35Part II  Other Information
    
    
    35Item 1. Legal Proceedings
    
    
    35Item 1A. Risk Factors
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 3. Defaults Upon Senior Securities
    
    
    35Item 4. [RESERVED]
    
    
    35Item 5. Other Information
    
    
    36Item 6. Exhibits
    
    
    36EX-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)
 September 30,2010
    
    
    December 31, 2009(Unaudited)ASSETSInvestments:Fixed maturities available-for-sale, at fair value (amortized cost  $876,914 and $565,753, respectively)
    
    $
    898,176
    
    
    $
    566,901Equity securities available-for-sale, at fair value (amortized cost  $26,305 and $26,203, respectively)
    
    
    28,612
    
    
    
    28,673Short-term investments, at cost which approximates fair value
    
    
    267
    
    
    
    811Total investments
    
    
    927,055
    
    
    
    596,385Cash and cash equivalents
    
    
    35,084
    
    
    
    18,589Accrued investment income
    
    
    8,208
    
    
    
    4,926Premiums receivable, net of allowance for doubtful accounts of $1,253 and $963, respectively
    
    
    185,766
    
    
    
    98,679Reinsurance recoverable on paid and unpaid losses
    
    
    209,438
    
    
    
    149,949Prepaid reinsurance premiums
    
    
    39,691
    
    
    
    25,163Deferred policy acquisition costs
    
    
    23,331
    
    
    
    17,833Deferred federal income taxes
    
    
    20,807
    
    
    
    18,178Property and equipment, net
    
    
    25,038
    
    
    
    21,747Funds held by reinsurer
    
    
    4,008
    
    
    
    3,441Intangible assets, net
    
    
    9,049
    
    
    
    Amounts refundable on estimated purchase price of Vanliner
    
    
    5,894
    
    
    
    Prepaid expenses and other assets
    
    
    4,489
    
    
    
    863Total assets
    
    $
    1,497,858
    
    
    $
    955,753LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses
    
    $
    786,794
    
    
    $
    417,260Unearned premiums and service fees
    
    
    247,292
    
    
    
    149,509Long-term debt
    
    
    18,500
    
    
    
    15,000Amounts withheld or retained for accounts of others
    
    
    58,248
    
    
    
    51,359Reinsurance balances payable
    
    
    25,941
    
    
    
    10,540Accounts payable and other liabilities
    
    
    38,776
    
    
    
    29,371Commissions payable
    
    
    9,639
    
    
    
    8,164Assessments and fees payable
    
    
    4,739
    
    
    
    3,233Total liabilities
    
    
    1,189,929
    
    
    
    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 3,994 and 4,048 shares, respectively, in treasury
    
    
    234
    
    
    
    234Additional paid-in capital
    
    
    50,358
    
    
    
    49,264Retained earnings
    
    
    247,670
    
    
    
    225,195Accumulated other comprehensive income
    
    
    15,320
    
    
    
    2,353Treasury shares
    
    
    (5,653
    )
    
    
    (5,729
    )Total shareholders equity
    
    
    307,929
    
    
    
    271,317Total liabilities and shareholders equity
    
    $
    1,497,858
    
    
    $
    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 September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues:Premiums earned
    
    $
    111,866
    
    
    $
    70,825
    
    
    $
    251,280
    
    
    $
    209,927Net investment income
    
    
    6,440
    
    
    
    4,501
    
    
    
    16,411
    
    
    
    14,430Net realized gains on investments (*)
    
    
    983
    
    
    
    760
    
    
    
    3,534
    
    
    
    1,831Gain on bargain purchase
    
    
    635
    
    
    
    
    
    
    
    635
    
    
    
    Other
    
    
    1,030
    
    
    
    879
    
    
    
    2,824
    
    
    
    2,627Total revenues
    
    
    120,954
    
    
    
    76,965
    
    
    
    274,684
    
    
    
    228,815Expenses:Losses and loss adjustment expenses
    
    
    85,204
    
    
    
    48,286
    
    
    
    174,340
    
    
    
    127,052Commissions and other underwriting expenses
    
    
    18,433
    
    
    
    15,189
    
    
    
    48,004
    
    
    
    43,565Other operating and general expenses
    
    
    3,799
    
    
    
    3,085
    
    
    
    11,421
    
    
    
    9,580Expense on amounts withheld
    
    
    840
    
    
    
    811
    
    
    
    2,575
    
    
    
    2,578Interest expense
    
    
    131
    
    
    
    71
    
    
    
    235
    
    
    
    403Total expenses
    
    
    108,407
    
    
    
    67,442
    
    
    
    236,575
    
    
    
    183,178Income before income taxes
    
    
    12,547
    
    
    
    9,523
    
    
    
    38,109
    
    
    
    45,637Provision for income taxes
    
    
    3,603
    
    
    
    1,367
    
    
    
    10,961
    
    
    
    12,726Net income
    
    $
    8,944
    
    
    $
    8,156
    
    
    $
    27,148
    
    
    $
    32,911Net income per share  basic
    
    $
    0.46
    
    
    $
    0.42
    
    
    $
    1.40
    
    
    $
    1.71Net income per share  diluted
    
    $
    0.46
    
    
    $
    0.42
    
    
    $
    1.40
    
    
    $
    1.70Weighted average of common shares outstanding  basic
    
    
    19,344
    
    
    
    19,301
    
    
    
    19,338
    
    
    
    19,301Weighted average of common shares outstanding  diluted
    
    
    19,457
    
    
    
    19,384
    
    
    
    19,431
    
    
    
    19,360Cash dividends per common share
    
    $
    0.08
    
    
    $
    0.07
    
    
    $
    0.24
    
    
    $
    0.21
 
 (*)
    
    Consists of the following: Net realized gains before impairment losses
    
    $
    1,180
    
    
    $
    2,035
    
    
    $
    3,832
    
    
    $
    4,339Total losses on securities with impairment charges
    
    
    (197
    )
    
    
    (1,275
    )
    
    
    (197
    )
    
    
    (5,522
    )Non-credit portion in other comprehensive income
    
    
    
    
    
    
    
    
    
    
    (101
    )
    
    
    3,014Net impairment charges recognized in earnings
    
    
    (197
    )
    
    
    (1,275
    )
    
    
    (298
    )
    
    
    (2,508
    )Net realized gains on investments
    
    $
    983
    
    
    $
    760
    
    
    $
    3,534
    
    
    $
    1,831
 .
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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
    
    
    Income (Loss)
    
    
    Stock
    
    
    TotalBalance at January 1, 2010
    
    $
    234
    
    
    $
    49,264
    
    
    $
    225,195
    
    
    $
    2,353
    
    
    $
    (5,729
    )
    
    $
    271,317Net income
    
    
    
    
    
    
    
    
    
    
    27,148
    
    
    
    
    
    
    
    
    
    
    
    27,148Unrealized appreciation of investment securities,
net of tax of $7.0 million
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    12,967
    
    
    
    
    
    
    
    12,967Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,115Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (4,673
    )
    
    
    
    
    
    
    
    
    
    
    (4,673
    )Issuance of 54,457 treasury shares upon exercise of
options, stock award grants and restricted stock
issued, net of forfeitures
    
    
    
    
    
    
    414
    
    
    
    
    
    
    
    
    
    
    
    76
    
    
    
    490Tax benefit realized from exercise of stock options
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31Stock compensation expense
    
    
    
    
    
    
    649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    649Balance at September 30, 2010
    
    $
    234
    
    
    $
    50,358
    
    
    $
    247,670
    
    
    $
    15,320
    
    
    $
    (5,653
    )
    
    $
    307,929Balance at January 1, 2009
    
    $
    234
    
    
    $
    48,004
    
    
    $
    184,187
    
    
    $
    (10,613
    )
    
    $
    (5,738
    )
    
    $
    216,074Net income
    
    
    
    
    
    
    
    
    
    
    32,911
    
    
    
    
    
    
    
    
    
    
    
    32,911Unrealized appreciation of investment securities,
net of tax of $7.5 million
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,060
    
    
    
    
    
    
    
    14,060Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,971Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (4,081
    )
    
    
    
    
    
    
    
    
    
    
    (4,081
    )Issuance of 6,089 treasury shares from restricted
stock issued, net of forfeitures
    
    
    
    
    
    
    (56
    )
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    (48
    )Stock compensation expense
    
    
    
    
    
    
    994
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    994Balance at September 30, 2009
    
    $
    234
    
    
    $
    48,942
    
    
    $
    213,017
    
    
    $
    3,447
    
    
    $
    (5,730
    )
    
    $
    259,910
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##### Table of Contents



National Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 (Dollars in thousands)
 Nine Months Ended September 30,2010
    
    
    2009Operating activitiesNet income
    
    $
    27,148
    
    
    $
    32,911Adjustments to reconcile net income to net cash provided by operating activities:Net amortization of bond premiums and discounts
    
    
    3,649
    
    
    
    1,940Provision for depreciation and amortization
    
    
    1,883
    
    
    
    1,350Net realized gains on investment securities
    
    
    (3,534
    )
    
    
    (1,831
    )Gain on bargain purchase
    
    
    (635
    )
    
    
    Deferred federal income taxes
    
    
    (1,542
    )
    
    
    (1,871
    )Stock compensation expense
    
    
    649
    
    
    
    994Increase in deferred policy acquisition costs, net
    
    
    (5,498
    )
    
    
    (879
    )Increase in reserves for losses and loss adjustment expenses
    
    
    11,936
    
    
    
    17,785Increase in premiums receivable
    
    
    (20,708
    )
    
    
    (22,664
    )Increase in unearned premiums and service fees
    
    
    24,667
    
    
    
    14,397Decrease (increase) in interest receivable and other assets
    
    
    9,592
    
    
    
    (856
    )Increase in prepaid reinsurance premiums
    
    
    (7,530
    )
    
    
    (4,326
    )Increase (decrease) in accounts payable, commissions and other liabilities and assessments and fees payable
    
    
    107
    
    
    
    (3,880
    )Increase in amounts withheld or retained for accounts of others
    
    
    1,355
    
    
    
    4,656Decrease (increase) in reinsurance recoverable
    
    
    11,599
    
    
    
    (948
    )Increase in reinsurance balances payable
    
    
    7,462
    
    
    
    5,610Other
    
    
    (109
    )
    
    
    (45
    )Net cash provided by operating activities
    
    
    60,491
    
    
    
    42,343Investing activitiesPurchases of fixed maturities
    
    
    (412,680
    )
    
    
    (271,708
    )Purchases of equity securities
    
    
    
    
    
    
    (4,756
    )Proceeds from sale of fixed maturities
    
    
    89,750
    
    
    
    39,467Proceeds from sale of equity securities
    
    
    654
    
    
    
    12,135Proceeds from maturities and redemptions of investments
    
    
    314,477
    
    
    
    216,345Acquisition of subsidiary, net of cash and cash equivalents acquired
    
    
    (33,438
    )
    
    
    Capital expenditures
    
    
    (2,107
    )
    
    
    (2,592
    )Net cash used in investing activities
    
    
    (43,344
    )
    
    
    (11,109
    )Financing activitiesDecrease in securities lending collateral
    
    
    
    
    
    
    49,314Decrease in securities lending obligation
    
    
    
    
    
    
    (95,828
    )Additional long-term borrowings
    
    
    30,000
    
    
    
    Reductions of long-term debt
    
    
    (26,500
    )
    
    
    Tax benefit realized from exercise of stock options
    
    
    31
    
    
    
    Issuance of common shares from treasury upon exercise of stock options or stock award grants
    
    
    490
    
    
    
    (48
    )Cash dividends paid on common shares
    
    
    (4,673
    )
    
    
    (4,081
    )Net cash used in financing activities
    
    
    (652
    )
    
    
    (50,643
    )Net increase (decrease) in cash and cash equivalents
    
    
    16,495
    
    
    
    (19,409
    )Cash and cash equivalents at beginning of period
    
    
    18,589
    
    
    
    77,159Cash and cash equivalents at end of period
    
    $
    35,084
    
    
    $
    57,750
  6




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##### Table of Contents



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




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##### Table of Contents



Business Combinations
  Purchase consideration:Cash paid
    
    $
    128,059Additional future consideration
    
    
    2,936Refund based on closing balance sheet delivered by UniGroup
    
    
    (4,579
    )Refund from closing balance sheet adjustments noted during 60 day review
    
    
    (1,315
    )Total purchase consideration
    
    $
    125,101
   Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(Dollars in thousands)Assets:Investments
    
    $
    
    
    
    $
    303,033
    
    
    $
    
    
    
    $
    303,033Cash and cash equivalents
    
    
    94,621
    
    
    
    
    
    
    
    
    
    
    
    94,621Accrued investment income
    
    
    
    
    
    
    3,589
    
    
    
    
    
    
    
    3,589Premiums receivable, net of allowance for doubtful accounts
    
    
    
    
    
    
    
    
    
    
    66,183
    
    
    
    66,183Reinsurance recoverable on paid and unpaid losses
    
    
    
    
    
    
    
    
    
    
    71,088
    
    
    
    71,088Prepaid reinsurance premiums
    
    
    
    
    
    
    
    
    
    
    6,998
    
    
    
    6,998Deferred federal income taxes
    
    
    
    
    
    
    
    
    
    
    8,069
    
    
    
    8,069Property and equipment
    
    
    
    
    
    
    
    
    
    
    2,950
    
    
    
    2,950Intangible assets
    
    
    
    
    
    
    
    
    
    
    9,061
    
    
    
    9,061Other assets
    
    
    
    
    
    
    
    
    
    
    14,106
    
    
    
    14,106Total assets
    
    
    94,621
    
    
    
    306,622
    
    
    
    178,455
    
    
    
    579,698Liabilities:Unpaid loss and loss adjustment expenses
    
    
    
    
    
    
    
    
    
    
    357,598
    
    
    
    357,598Unearned premiums
    
    
    
    
    
    
    
    
    
    
    73,116
    
    
    
    73,116Payable to reinsurers
    
    
    
    
    
    
    
    
    
    
    7,939
    
    
    
    7,939Other liabilities
    
    
    
    
    
    
    
    
    
    
    15,309
    
    
    
    15,309Total liabilities
    
    
    
    
    
    
    
    
    
    
    453,962
    
    
    
    453,962Net assets acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,736Adjusted purchase price
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,101Gain on bargain purchase
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    635
  8




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##### Table of Contents



Significant Factors Affecting Acquisition Date Fair Values  Intangibles
  Loss and Loss Adjustment Expense (LAE) Reserves Acquired
  Non-financial Assets and Liabilities
  Vanliners Contribution to the Companys Revenues and Income
  Revenues
    
    $
    37,688Net income
    
    $
    1,622
 Proforma Results of Operations
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands, except per share data)Pro forma revenues
    
    $
    119,030
    
    
    $
    119,279
    
    
    $
    354,716
    
    
    $
    350,914Pro forma net income
    
    
    8,774
    
    
    
    13,118
    
    
    
    33,853
    
    
    
    50,627Pro forma net income per share  basic
    
    
    0.45
    
    
    
    0.68
    
    
    
    1.75
    
    
    
    2.62Pro forma net income per share  diluted
    
    
    0.45
    
    
    
    0.68
    
    
    
    1.74
    
    
    
    2.62
 3. Recent Accounting Pronouncements
 Financial Services  Insurance Financial Services  Insurance
 9




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##### Table of Contents



Improving Disclosures about Fair Value Measurements Fair Value Measurements and Disclosures
 4. Fair Value Measurements
     10




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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
    
    $
    
    
    
    $
    224,015
    
    
    $
    
    
    
    $
    224,015Foreign government obligations
    
    
    
    
    
    
    4,706
    
    
    
    
    
    
    
    4,706State and local government obligations
    
    
    
    
    
    
    254,024
    
    
    
    4,006
    
    
    
    258,030Residential mortgage-backed securities
    
    
    
    
    
    
    172,928
    
    
    
    2,667
    
    
    
    175,595Commercial mortgage-backed securities
    
    
    
    
    
    
    3,508
    
    
    
    
    
    
    
    3,508Corporate obligations
    
    
    
    
    
    
    214,643
    
    
    
    5,202
    
    
    
    219,845Redeemable preferred stocks
    
    
    9,752
    
    
    
    297
    
    
    
    2,428
    
    
    
    12,477Total fixed maturities
    
    
    9,752
    
    
    
    874,121
    
    
    
    14,303
    
    
    
    898,176Equity securities:Perpetual preferred stock
    
    
    865
    
    
    
    128
    
    
    
    396
    
    
    
    1,389Common stock
    
    
    14,020
    
    
    
    13,203
    
    
    
    
    
    
    
    27,223Total equity securities
    
    
    14,885
    
    
    
    13,331
    
    
    
    396
    
    
    
    28,612Short-term investments
    
    
    
    
    
    
    267
    
    
    
    
    
    
    
    267Total investments
    
    
    24,637
    
    
    
    887,719
    
    
    
    14,699
    
    
    
    927,055Cash and cash equivalents
    
    
    35,084
    
    
    
    
    
    
    
    
    
    
    
    35,084Total investments and cash and cash equivalents
    
    $
    59,721
    
    
    $
    887,719
    
    
    $
    14,699
    
    
    $
    962,139
  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
 11




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##### Table of Contents



Three Months Ended September 30, 2010State and Local
    
    
    ResidentialCorporate
    
    
    Government
    
    
    Mortgage-Backed
    
    
    Redeemable
    
    
    Perpetual PreferredObligations
    
    
    Obligations
    
    
    Securities
    
    
    Preferred Stock
    
    
    Stock(Dollars in thousands)Beginning balance at July 1, 2010
    
    $
    5,561
    
    
    $
    3,964
    
    
    $
    2,067
    
    
    $
    2,407
    
    
    $
    396Total gains or (losses):Included in earnings
    
    
    (187
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Included in other comprehensive income
    
    
    (109
    )
    
    
    42
    
    
    
    812
    
    
    
    21
    
    
    
    Purchases, issuances, sales and settlements:Sales (a)
    
    
    (63
    )
    
    
    
    
    
    
    (212
    )
    
    
    
    
    
    
    Transfers in and/or (out) of Level 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ending balance at September 30, 2010
    
    $
    5,202
    
    
    $
    4,006
    
    
    $
    2,667
    
    
    $
    2,428
    
    
    $
    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
    
    $
    (187
    )
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (a)
    
    These amounts are attributable to principal pay downs during the three months
ended September 30, 2010. Nine Months Ended September 30, 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
    
    
    (187
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Included in other comprehensive income
    
    
    (97
    )
    
    
    637
    
    
    
    1,013
    
    
    
    75
    
    
    
    Purchases, issuances, sales and settlements:Sales (a)
    
    
    (356
    )
    
    
    (3,000
    )
    
    
    (730
    )
    
    
    
    
    
    
    Transfers in and/or (out) of Level 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ending balance at September 30, 2010
    
    $
    5,202
    
    
    $
    4,006
    
    
    $
    2,667
    
    
    $
    2,428
    
    
    $
    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
    
    $
    (187
    )
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (a)
    
    These amounts are attributable to either principal pay downs or calls during the
nine months ended September 30, 2010. 12




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##### Table of Contents



Three Months Ended September 30, 2009State and Local
    
    
    ResidentialCorporate
    
    
    Government
    
    
    Mortgage-backed
    
    
    Redeemable
    
    
    Perpetual PreferredObligations
    
    
    Obligations
    
    
    securities
    
    
    Preferred Stock
    
    
    Stock(Dollars in thousands)Beginning balance at July 1, 2009
    
    $
    5,825
    
    
    $
    6,338
    
    
    $
    2,705
    
    
    $
    2,299
    
    
    $
    396Total gains or (losses):Included in earnings
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Included in other comprehensive income
    
    
    65
    
    
    
    35
    
    
    
    16
    
    
    
    47
    
    
    
    Purchases, issuances, sales and settlements (a)
    
    
    (77
    )
    
    
    
    
    
    
    (227
    )
    
    
    
    
    
    
    Transfers in and/or (out) of Level 3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ending balance at September 30, 2009
    
    $
    5,878
    
    
    $
    6,373
    
    
    $
    2,494
    
    
    $
    2,346
    
    
    $
    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
    
    $
    65
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (a)
    
    These amounts are attributable to either purchases of securities, principal pay
downs, conversions or maturities during the three months ended September 30, 2009. Nine Months Ended September 30, 2009State and Local
    
    
    ResidentialCorporate
    
    
    Government
    
    
    Mortgage-backed
    
    
    Redeemable
    
    
    Perpetual Preferred
    
    
    Securities LendingObligations
    
    
    Obligations
    
    
    securities
    
    
    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
    
    
    65
    
    
    
    
    
    
    
    (497
    )
    
    
    
    
    
    
    (170
    )
    
    
    (421
    )Included in other comprehensive income
    
    
    (45
    )
    
    
    255
    
    
    
    716
    
    
    
    (60
    )
    
    
    1,551
    
    
    
    546Purchases, issuances, sales and settlements (a)
    
    
    (577
    )
    
    
    
    
    
    
    (269
    )
    
    
    
    
    
    
    (4,250
    )
    
    
    (487
    )Transfers in and/or (out) of Level 3 (b)
    
    
    2,140
    
    
    
    
    
    
    
    2,544
    
    
    
    
    
    
    
    
    
    
    
    (4,684
    )Ending balance at September 30, 2009
    
    $
    5,878
    
    
    $
    6,373
    
    
    $
    2,494
    
    
    $
    2,346
    
    
    $
    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
    
    $
    65
    
    
    $
    
    
    
    $
    (497
    )
    
    $
    
    
    
    $
    (170
    )
    
    $
    (421
    )
 
 (a)
    
    These amounts are attributable to either purchases of securities, principal pay downs,
conversions or maturities during the nine months ended September 30, 2009.(b)
    
    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 nine
months ended September 30, 2009. 5. Investments
  13




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##### Table of Contents



Cost or
    
    
    Gross Unrealized
    
    
    Gross UnrealizedAmortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(Dollars in thousands)September 30, 2010:Fixed Maturities:U.S. Government and government agency obligations
    
    $
    219,715
    
    
    $
    4,352
    
    
    $
    (52
    )
    
    $
    224,015Foreign government obligations
    
    
    4,726
    
    
    
    
    
    
    
    (20
    )
    
    
    4,706State and local government obligations
    
    
    248,549
    
    
    
    10,347
    
    
    
    (866
    )
    
    
    258,030Residential mortgage-backed securities
    
    
    174,343
    
    
    
    4,217
    
    
    
    (2,965
    )
    
    
    175,595Commercial mortgage-backed securities
    
    
    3,720
    
    
    
    
    
    
    
    (212
    )
    
    
    3,508Corporate obligations
    
    
    213,434
    
    
    
    7,189
    
    
    
    (778
    )
    
    
    219,845Redeemable preferred stock
    
    
    12,427
    
    
    
    237
    
    
    
    (187
    )
    
    
    12,477Total fixed maturities
    
    
    876,914
    
    
    
    26,342
    
    
    
    (5,080
    )
    
    
    898,176Equity securities:Perpetual preferred stocks
    
    
    1,309
    
    
    
    80
    
    
    
    
    
    
    
    1,389Common stocks
    
    
    24,996
    
    
    
    2,227
    
    
    
    
    
    
    
    27,223Total equity securities
    
    
    26,305
    
    
    
    2,307
    
    
    
    
    
    
    
    28,612Short-term investments
    
    
    267
    
    
    
    
    
    
    
    
    
    
    
    267Total investments
    
    $
    903,486
    
    
    $
    28,649
    
    
    $
    (5,080
    )
    
    $
    927,055December 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
   Amortized Cost
    
    
    Fair Value(Dollars in thousands)Due in one year or less
    
    $
    25,058
    
    
    $
    25,348Due after one year through five years
    
    
    322,604
    
    
    
    329,150Due after five years through ten years
    
    
    258,131
    
    
    
    269,973Due after ten years
    
    
    93,058
    
    
    
    94,602698,851
    
    
    
    719,073Mortgage-backed securities
    
    
    178,063
    
    
    
    179,103Total
    
    $
    876,914
    
    
    $
    898,176
 14




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##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)
    
    
    (Dollars in thousands)Fixed maturity gains
    
    $
    1,020
    
    
    $
    266
    
    
    $
    3,428
    
    
    $
    1,828Fixed maturity losses
    
    
    (255
    )
    
    
    (1,392
    )
    
    
    (357
    )
    
    
    (2,424
    )Equity security gains
    
    
    403
    
    
    
    1,886
    
    
    
    947
    
    
    
    4,766Equity security losses
    
    
    (185
    )
    
    
    
    
    
    
    (484
    )
    
    
    (1,916
    )Securities lending fixed maturity losses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (423
    )Net realized gains on investments
    
    $
    983
    
    
    $
    760
    
    
    $
    3,534
    
    
    $
    1,831
   15




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##### Table of Contents



Less than Twelve Months
    
    
    Twelve Months or MoreFair Value as % of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair Value as % ofFair Value
    
    
    Unrealized Losses
    
    
    Cost
    
    
    Number of Holdings
    
    
    Fair Value
    
    
    Unrealized Losses
    
    
    Cost
    
    
    Number of Holdings(Dollars in thousands)September 30, 2010:Fixed maturities:U.S. Government and government
agency obligations
    
    $
    52,172
    
    
    $
    (52
    )
    
    
    99.9
    %
    
    
    17
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    
    Foreign government obligations
    
    
    4,706
    
    
    
    (20
    )
    
    
    99.6
    %
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    State and local government
obligations
    
    
    6,248
    
    
    
    (38
    )
    
    
    99.4
    %
    
    
    6
    
    
    
    3,672
    
    
    
    (828
    )
    
    
    81.6
    %
    
    
    3Residential mortgage-backed
securities
    
    
    37,743
    
    
    
    (203
    )
    
    
    99.5
    %
    
    
    10
    
    
    
    7,245
    
    
    
    (2,762
    )
    
    
    72.4
    %
    
    
    6Commercial mortgage-backed
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,507
    
    
    
    (212
    )
    
    
    94.3
    %
    
    
    1Corporate obligations
    
    
    7,132
    
    
    
    (90
    )
    
    
    98.8
    %
    
    
    16
    
    
    
    6,311
    
    
    
    (688
    )
    
    
    90.2
    %
    
    
    5Redeemable preferred stocks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,217
    
    
    
    (187
    )
    
    
    97.1
    %
    
    
    10Total fixed maturities
    
    
    108,001
    
    
    
    (403
    )
    
    
    99.6
    %
    
    
    52
    
    
    
    26,952
    
    
    
    (4,677
    )
    
    
    85.2
    %
    
    
    25Equity securities:Perpetual preferred stocks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common stocks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total fixed maturities and equity
securities
    
    $
    108,001
    
    
    $
    (403
    )
    
    
    99.6
    %
    
    
    52
    
    
    $
    26,952
    
    
    $
    (4,677
    )
    
    
    85.2
    %
    
    
    25December 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
    16




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##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)
    
    
    (Dollars in thousands)Beginning balance
    
    $
    1,974
    
    
    $
    534
    
    
    $
    1,910
    
    
    $
    Additional credit impairments on:Previously impaired securities
    
    
    
    
    
    
    
    
    
    
    101
    
    
    
    Securities without prior impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    534Reductions
    
    
    
    
    
    
    
    
    
    
    (37
    )
    
    
    Ending balance
    
    $
    1,974
    
    
    $
    534
    
    
    $
    1,974
    
    
    $
    534
 6. Long-term Debt
     17




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##### Table of Contents



7. Income Taxes
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)
    
    
    (Dollars in thousands)Federal income tax expense at statutory rate
    
    $
    4,392
    
    
    $
    3,333
    
    
    $
    13,338
    
    
    $
    15,973Effect of:Tax-exempt investment income
    
    
    (559
    )
    
    
    (420
    )
    
    
    (1,310
    )
    
    
    (1,287
    )Change in valuation allowance on net capital losses
    
    
    
    
    
    
    (1,792
    )
    
    
    (810
    )
    
    
    (2,397
    )Gain on bargain purchase
    
    
    (222
    )
    
    
    
    
    
    
    (222
    )
    
    
    Other items, net
    
    
    (8
    )
    
    
    246
    
    
    
    (35
    )
    
    
    437$
    3,603
    
    
    $
    1,367
    
    
    $
    10,961
    
    
    $
    12,726
  September 30, 2010
    
    
    December 31, 2009(Dollars in thousands)Deferred Tax Assets:Unearned premiums
    
    $
    14,541
    
    
    $
    8,750Unpaid losses and loss adjustment expenses
    
    
    18,486
    
    
    
    8,742Assignments and assessments
    
    
    1,310
    
    
    
    817Realized losses on investments, primarily impairments
    
    
    2,035
    
    
    
    6,436Accrued compensation
    
    
    2,271
    
    
    
    2,218Other, net
    
    
    2,154
    
    
    
    1,39840,797
    
    
    
    28,361Valuation allowance
    
    
    
    
    
    
    (810
    )40,797
    
    
    
    27,551Deferred Tax Liabilities:Deferred policy acquisition costs
    
    
    (8,166
    )
    
    
    (6,241
    )Unrealized gains on investments
    
    
    (8,249
    )
    
    
    (1,266
    )Other, net
    
    
    (3,575
    )
    
    
    (1,866
    )Total deferred tax liabilities
    
    
    (19,990
    )
    
    
    (9,373
    )Net deferred income tax assets
    
    $
    20,807
    
    
    $
    18,178
  8. Shareholders Equity and Stock-Based Compensation
   18




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##### Table of Contents



9. Earnings Per Common Share
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(In thousands, except per share data)
    
    
    (In thousands, except per share data)Net income
    
    $
    8,944
    
    
    $
    8,156
    
    
    $
    27,148
    
    
    $
    32,911Weighted average shares outstanding during period
    
    
    19,344
    
    
    
    19,301
    
    
    
    19,338
    
    
    
    19,301Additional shares issuable under employee common stock option plans
using treasury stock method
    
    
    113
    
    
    
    83
    
    
    
    93
    
    
    
    59Weighted average shares outstanding assuming exercise of stock
options
    
    
    19,457
    
    
    
    19,384
    
    
    
    19,431
    
    
    
    19,360Net income per share:Basic
    
    $
    0.46
    
    
    $
    0.42
    
    
    $
    1.40
    
    
    $
    1.71Diluted
    
    $
    0.46
    
    
    $
    0.42
    
    
    $
    1.40
    
    
    $
    1.70
  10. Transactions with Related Parties
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)
    
    
    (Dollars in thousands)Assumed premiums written
    
    $
    855
    
    
    $
    588
    
    
    $
    3,141
    
    
    $
    2,624Assumed premiums earned
    
    
    902
    
    
    
    835
    
    
    
    2,473
    
    
    
    3,042Assumed losses and loss adjustment expense incurred
    
    
    702
    
    
    
    931
    
    
    
    1,351
    
    
    
    3,215Ceded premiums written
    
    
    484
    
    
    
    610
    
    
    
    1,866
    
    
    
    2,789Ceded premiums earned
    
    
    577
    
    
    
    827
    
    
    
    1,881
    
    
    
    2,422Ceded losses and loss adjustment expense recoveries
    
    
    558
    
    
    
    783
    
    
    
    2,260
    
    
    
    2,454Payable to Great American as of period end
    
    
    325
    
    
    
    531
    
    
    
    325
    
    
    
    531
  19




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##### Table of Contents



11. Reinsurance
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)
    
    
    (Dollars in thousands)Direct premiums written
    
    $
    114,329
    
    
    $
    67,423
    
    
    $
    326,695
    
    
    $
    274,044Reinsurance assumed
    
    
    2,200
    
    
    
    2,145
    
    
    
    6,364
    
    
    
    5,702Reinsurance ceded
    
    
    (16,005
    )
    
    
    (10,584
    )
    
    
    (65,154
    )
    
    
    (59,875
    )Net premiums written
    
    $
    100,524
    
    
    $
    58,984
    
    
    $
    267,905
    
    
    $
    219,871Direct premiums earned
    
    $
    132,590
    
    
    $
    87,158
    
    
    $
    303,411
    
    
    $
    259,372Reinsurance assumed
    
    
    2,063
    
    
    
    2,191
    
    
    
    5,481
    
    
    
    6,103Reinsurance ceded
    
    
    (22,787
    )
    
    
    (18,524
    )
    
    
    (57,612
    )
    
    
    (55,548
    )Total premiums earned
    
    $
    111,866
    
    
    $
    70,825
    
    
    $
    251,280
    
    
    $
    209,927
  12. Commitments and Contingencies
    20




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##### Table of Contents



13. Segment Information
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009(Dollars in thousands)
    
    
    (Dollars in thousands)Revenue:Premiums Earned:Alternative Risk Transfer
    
    $
    40,833
    
    
    $
    36,695
    
    
    $
    113,206
    
    
    $
    105,680Transportation
    
    
    51,518
    
    
    
    14,300
    
    
    
    80,701
    
    
    
    46,074Specialty Personal Lines
    
    
    14,504
    
    
    
    14,262
    
    
    
    43,188
    
    
    
    42,127Hawaii and Alaska
    
    
    3,550
    
    
    
    3,837
    
    
    
    10,230
    
    
    
    11,671Other
    
    
    1,461
    
    
    
    1,731
    
    
    
    3,955
    
    
    
    4,375Total premiums earned
    
    
    111,866
    
    
    
    70,825
    
    
    
    251,280
    
    
    
    209,927Net investment income
    
    
    6,440
    
    
    
    4,501
    
    
    
    16,411
    
    
    
    14,430Net realized gains on investments
    
    
    983
    
    
    
    760
    
    
    
    3,534
    
    
    
    1,831Gain on bargain purchase
    
    
    635
    
    
    
    
    
    
    
    635
    
    
    
    Other
    
    
    1,030
    
    
    
    879
    
    
    
    2,824
    
    
    
    2,627Total revenues
    
    $
    120,954
    
    
    $
    76,965
    
    
    $
    274,684
    
    
    $
    228,815
 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 ongoing 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;
 21




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##### Table of Contents




    
    regulatory changes or actions, including those relating to the regulation of the
sale, underwriting and pricing of insurance products and services and capital requirements;
 
    
    levels of natural catastrophes, terrorist events, incidents of war and other
major losses;
 
    
    adequacy of insurance reserves; and
 
    
    availability of reinsurance and ability of reinsurers to pay their obligations.
  General
       22




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##### Table of Contents



Results of Operations
 Overview
    Three Months Ended September 30,2010
    
    
    2009 (a)Amount
    
    
    Per Share
    
    
    Amount
    
    
    Per Share(Dollars in thousands, except per share data)Net income from operations
    
    $
    7,670
    
    
    $
    0.40
    
    
    $
    5,869
    
    
    $
    0.30Change in valuation allowance related to net capital losses
    
    
    
    
    
    
    
    
    
    
    1,792
    
    
    
    0.09After-tax net realized gains from investments
    
    
    639
    
    
    
    0.03
    
    
    
    495
    
    
    
    0.03Gain on bargain purchase of Vanliner
    
    
    635
    
    
    
    0.03
    
    
    
    
    
    
    
    Net income
    
    $
    8,944
    
    
    $
    0.46
    
    
    $
    8,156
    
    
    $
    0.42
 
 (a)
    
    The results of operation for Vanliner are consolidated only from the July 1, 2010 date
of acquisition. Consequently, 2009 data does not include Vanliners financial results. Nine Months Ended September 30,2010
    
    
    2009 (a)Amount
    
    
    Per Share
    
    
    Amount
    
    
    Per Share(Dollars in thousands, except per share data)Net income from operations
    
    $
    23,406
    
    
    $
    1.21
    
    
    $
    29,324
    
    
    $
    1.51Change in valuation allowance related to net capital losses
    
    
    810
    
    
    
    0.04
    
    
    
    2,397
    
    
    
    0.13After-tax net realized gains from investments
    
    
    2,297
    
    
    
    0.12
    
    
    
    1,190
    
    
    
    0.06Gain on bargain purchase of Vanliner
    
    
    635
    
    
    
    0.03
    
    
    
    
    
    
    
    Net income
    
    $
    27,148
    
    
    $
    1.40
    
    
    $
    32,911
    
    
    $
    1.70
 
 (a)
    
    The results of operation for Vanliner are consolidated only from the July 1, 2010 date
of acquisition. Consequently, 2009 data does not include Vanliners financial results.  23




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##### Table of Contents



Gross Premiums Written
  Three Months Ended September 30,2010
    
    
    2009 (a)Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Alternative Risk Transfer
    
    $
    45,591
    
    
    
    39.1
    %
    
    $
    27,839
    
    
    
    40.0
    %Transportation
    
    
    48,288
    
    
    
    41.4
    %
    
    
    18,837
    
    
    
    27.1
    %Specialty Personal Lines
    
    
    14,794
    
    
    
    12.7
    %
    
    
    14,692
    
    
    
    21.1
    %Hawaii and Alaska
    
    
    6,259
    
    
    
    5.4
    %
    
    
    6,319
    
    
    
    9.1
    %Other
    
    
    1,597
    
    
    
    1.4
    %
    
    
    1,881
    
    
    
    2.7
    %Gross premiums written
    
    $
    116,529
    
    
    
    100.0
    %
    
    $
    69,568
    
    
    
    100.0
    %
 
 (a)
    
    The results of operation for Vanliner are consolidated only from the July 1, 2010 date
of acquisition. Consequently, 2009 data does not include Vanliners financial results. Nine Months Ended September 30,2010
    
    
    2009 (a)Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Alternative Risk Transfer
    
    $
    179,753
    
    
    
    54.0
    %
    
    $
    161,188
    
    
    
    57.6
    %Transportation
    
    
    85,378
    
    
    
    25.6
    %
    
    
    51,147
    
    
    
    18.3
    %Specialty Personal Lines
    
    
    49,467
    
    
    
    14.9
    %
    
    
    48,210
    
    
    
    17.2
    %Hawaii and Alaska
    
    
    14,435
    
    
    
    4.3
    %
    
    
    14,958
    
    
    
    5.4
    %Other
    
    
    4,026
    
    
    
    1.2
    %
    
    
    4,243
    
    
    
    1.5
    %Gross premiums written
    
    $
    333,059
    
    
    
    100.0
    %
    
    $
    279,746
    
    
    
    100.0
    %
 
 (a)
    
    The results of operation for Vanliner are consolidated only from the July 1, 2010 date
of acquisition. Consequently, 2009 data does not include Vanliners financial results. 24




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##### Table of Contents



Premiums Earned
 Three months ended September 30, 2010 compared to September 30, 2009.
 Three Months Ended September 30,
    
    
    Change2010
    
    
    2009 (a)
    
    
    Amount
    
    
    Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer
    
    $
    40,833
    
    
    $
    36,695
    
    
    $
    4,138
    
    
    
    11.3
    %Transportation
    
    
    51,518
    
    
    
    14,300
    
    
    
    37,218
    
    
    
    260.3
    %Specialty Personal Lines
    
    
    14,504
    
    
    
    14,262
    
    
    
    242
    
    
    
    1.7
    %Hawaii and Alaska
    
    
    3,550
    
    
    
    3,837
    
    
    
    (287
    )
    
    
    (7.5
    %)Other
    
    
    1,461
    
    
    
    1,731
    
    
    
    (270
    )
    
    
    (15.6
    %)Total premiums earned
    
    $
    111,866
    
    
    $
    70,825
    
    
    $
    41,041
    
    
    
    57.9
    %
 
 (a)
    
    The results of operation for Vanliner are consolidated only from the July 1, 2010 date
of acquisition. Consequently, 2009 data does not include Vanliners financial results. 25




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##### Table of Contents



Nine months ended September 30, 2010 compared to September 30, 2009.
 Nine Months Ended September 30,
    
    
    Change2010
    
    
    2009 (a)
    
    
    Amount
    
    
    Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer
    
    $
    113,206
    
    
    $
    105,680
    
    
    $
    7,526
    
    
    
    7.1
    %Transportation
    
    
    80,701
    
    
    
    46,074
    
    
    
    34,627
    
    
    
    75.2
    %Specialty Personal Lines
    
    
    43,188
    
    
    
    42,127
    
    
    
    1,061
    
    
    
    2.5
    %Hawaii and Alaska
    
    
    10,230
    
    
    
    11,671
    
    
    
    (1,441
    )
    
    
    (12.3
    %)Other
    
    
    3,955
    
    
    
    4,375
    
    
    
    (420
    )
    
    
    (9.6
    %)Total premiums earned
    
    $
    251,280
    
    
    $
    209,927
    
    
    $
    41,353
    
    
    
    19.7
    %
 
 (a)
    
    The results of operation for Vanliner are consolidated only from the July 1, 2010 date
of acquisition. Consequently, 2009 data does not include Vanliners financial results.  Underwriting and Loss Ratio Analysis
    Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009 (a)
    
    
    2010
    
    
    2009 (a)(Dollars in thousands)
    
    
    (Dollars in thousands)Gross premiums written
    
    $
    116,529
    
    
    $
    69,568
    
    
    $
    333,059
    
    
    $
    279,746Ceded reinsurance
    
    
    (16,005
    )
    
    
    (10,584
    )
    
    
    (65,154
    )
    
    
    (59,875
    )Net premiums written
    
    
    100,524
    
    
    
    58,984
    
    
    
    267,905
    
    
    
    219,871Change in unearned premiums, net of ceded
    
    
    11,342
    
    
    
    11,841
    
    
    
    (16,625
    )
    
    
    (9,944
    )Total premiums earned
    
    $
    111,866
    
    
    $
    70,825
    
    
    $
    251,280
    
    
    $
    209,927Combined Ratios:Loss and LAE ratio (b)
    
    
    76.2
    %
    
    
    68.2
    %
    
    
    69.4
    %
    
    
    60.5
    %Underwriting expense ratio (c)
    
    
    18.9
    %
    
    
    24.6
    %
    
    
    22.5
    %
    
    
    24.1
    %Combined ratio
    
    
    95.1
    %
    
    
    92.8
    %
    
    
    91.9
    %
    
    
    84.6
    %
 
 (a)
    
    The results of operation for Vanliner are consolidated only from the July 1, 2010 date
of acquisition. Consequently, 2009 data does not include Vanliners financial results.(b)
    
    The ratio of losses and LAE to premiums earned.(c)
    
    The ratio of the sum of commissions and other underwriting expenses, other operating
expenses less other income to premiums earned. 26




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##### Table of Contents



Three months ended September 30, 2010 compared to September 30, 2009.
   Nine months ended September 30, 2010 compared to September 30, 2009.
  Net Investment Income
 2010 compared to 2009.
 27




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##### Table of Contents



Net Realized Gains on Investments
 2010 compared to 2009.
 Gain on Bargain Purchase
  Commissions and Other Underwriting Expenses
 2010 compared to 2009.
 Other Operating and General Expenses
 2010 compared to 2009.
 Income Taxes
 2010 compared to 2009.
 28




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##### Table of Contents



Financial Condition
 Investments
    Securities with
    
    
    Securities withUnrealized Gains
    
    

Unrealized Losses(Dollars in thousands)Fixed Maturities:Fair value of securities
    
    $
    761,151
    
    
    $
    134,953Amortized cost of securities
    
    
    734,809
    
    
    
    140,033Gross unrealized gain or (loss)
    
    $
    26,342
    
    
    $
    (5,080
    )Fair value as a % of amortized cost
    
    
    103.6
    %
    
    
    96.4
    %Number of security positions held
    
    
    680
    
    
    
    77Number individually exceeding $50,000 gain or (loss)
    
    
    189
    
    
    
    15Concentration of gains or losses by type or industry:U.S. Government and government agencies
    
    $
    4,352
    
    
    $
    (52
    )Foreign governments
    
    
    
    
    
    
    (20
    )State, municipalities and political subdivisions
    
    
    10,347
    
    
    
    (866
    )Residential mortgage-backed securities
    
    
    4,217
    
    
    
    (2,965
    )Commercial mortgage-backed securities
    
    
    
    
    
    
    (212
    )Banks, insurance and brokers
    
    
    2,625
    
    
    
    (732
    )Industrial and other
    
    
    4,801
    
    
    
    (233
    )Percent rated investment grade (a)
    
    
    97.0
    %
    
    
    90.4
    %Equity Securities:Fair value of securities
    
    $
    15,416
    
    
    $
    Cost of securities
    
    
    13,109
    
    
    
    Gross unrealized gain or (loss)
    
    $
    2,307
    
    
    $
    Fair value as a % of cost
    
    
    117.6
    %
    
    
    Number individually exceeding $50,000 gain or (loss)
    
    
    9
    
    
    
    
 
 (a)
    
    Investment grade of AAA to BBB- by nationally recognized rating agencies.  Securities with
    
    
    Securities withUnrealized Gains
    
    
    Unrealized LossesMaturity:One year or less
    
    
    2.8
    %
    
    
    1.2
    %After one year through five years
    
    
    35.4
    %
    
    
    44.2
    %After five years through ten years
    
    
    34.0
    %
    
    
    8.5
    %After ten years
    
    
    10.6
    %
    
    
    10.2
    %82.8
    %
    
    
    64.1
    %Mortgage-backed securities
    
    
    17.2
    %
    
    
    35.9
    %100.0
    %
    
    
    100.0
    %
 29




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##### Table of Contents



At September 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 (145 issues)
    
    $
    265,982
    
    
    $
    13,083
    
    
    
    105.2
    %More than one year (44 issues)
    
    
    61,158
    
    
    
    5,259
    
    
    
    109.4
    %Less than $50,000 (491 issues)
    
    
    434,011
    
    
    
    8,000
    
    
    
    101.9
    %$
    761,151
    
    
    $
    26,342Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (1 issue)
    
    $
    4,987
    
    
    $
    (53
    )
    
    
    98.9
    %More than one year (14 issues)
    
    
    18,953
    
    
    
    (4,533
    )
    
    
    80.7
    %Less than $50,000 (62 issues)
    
    
    111,013
    
    
    
    (494
    )
    
    
    99.6
    %$
    134,953
    
    
    $
    (5,080
    )Equity Securities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (9 issues)
    
    $
    13,100
    
    
    $
    2,188
    
    
    
    120.1
    %More than one year (0 issues)
    
    
    
    
    
    
    
    
    
    
    0.0
    %Less than $50,000 (17 issues)
    
    
    2,316
    
    
    
    119
    
    
    
    105.4
    %$
    15,416
    
    
    $
    2,307Securities 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 (0 issues)
    
    
    
    
    
    
    
    
    
    
    0.0
    %$
    
    
    
    $
    
  Premiums and Reinsurance
    30




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##### Table of Contents



Liquidity and Capital Resources
       31




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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.
 32




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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.
 33




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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
    
    $
    18,500
    
    
    $
    
    
    
    $
    18,500
    
    
    $
    
    
    
    $
    Additional future consideration payable to UniGroup
    
    
    2,936
    
    
    
    1,146
    
    
    
    1,387
    
    
    
    403
    
    
    
    Total
    
    $
    21,436
    
    
    $
    1,146
    
    
    $
    19,887
    
    
    $
    403
    
    
    $
    
 34




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##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
  
 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]
 35




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##### Table of Contents



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)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. 36




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##### Table of Contents



SIGNATURES
  NATIONAL INTERSTATE CORPORATIONDate: November 9, 2010
    /s/ David W. MichelsonDavid W. MichelsonPresident and Chief Executive Officer
(Duly Authorized Officer and Principal Executive Officer)  /s/ Julie A. McGrawJulie A. McGrawVice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) 37