##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2009
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to .
 Commission File Number 000-51130
 
 National Interstate Corporation
 (Exact name of registrant as specified in its charter)
 Ohio(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 Information
    
    
    3Item 1. Financial Statements

    
    3Consolidated Balance Sheets

    
    3Consolidated Statements of Income

    
    4Consolidated Statements of Shareholders Equity

    
    5Consolidated Statements of Cash Flows

    
    6Notes to Consolidated Financial Statements

    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations

    
    18Item 3. Quantitative and Qualitative Disclosures about Market Risk

    
    30Item 4. Controls and Procedures

    
    30Part II  Other Information

    
    31Item 1. Legal Proceedings

    
    31Item 1A. Risk Factors

    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

    
    31Item 3. Defaults Upon Senior Securities

    
    31Item 4. Submission of Matters to a Vote of Security Holders

    
    31Item 5. Other Information

    
    31Item 6. Exhibits

    
    32EX-31.1EX-31.2EX-32.1EX-32.2
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1.
    
    Financial Statements
 National Interstate Corporation and Subsidiaries
 
 Consolidated Balance Sheets
 (In thousands, except per share data)
 June 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)ASSETSInvestments:Fixed maturities available-for-sale, at fair value (amortized cost   $495,228 and
$462,562, respectively)
    
    $
    485,780
    
    
    $
    459,237Equity securities available-for-sale, at fair value (cost  $29,309 and $30,143, respectively)
    
    
    29,834
    
    
    
    27,233Short-term investments, at cost which approximates fair value
    
    
    86
    
    
    
    85Total investments
    
    
    515,700
    
    
    
    486,555Cash and cash equivalents
    
    
    57,288
    
    
    
    77,159Securities lending collateral (cost  $0 and $94,655, respectively)
    
    
    
    
    
    
    84,670Accrued investment income
    
    
    4,395
    
    
    
    5,161Premiums receivable, net of allowance for doubtful accounts of $577 and $587, respectively
    
    
    139,448
    
    
    
    95,610Reinsurance recoverables on paid and unpaid losses
    
    
    147,843
    
    
    
    150,791Prepaid reinsurance premiums
    
    
    40,452
    
    
    
    28,404Deferred policy acquisition costs
    
    
    22,126
    
    
    
    19,245Deferred federal income taxes
    
    
    15,689
    
    
    
    18,324Property and equipment, net
    
    
    21,303
    
    
    
    20,406Funds held by reinsurer
    
    
    3,007
    
    
    
    3,073Prepaid expenses and other assets
    
    
    1,992
    
    
    
    1,414Total assets
    
    $
    969,243
    
    
    $
    990,812LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses
    
    $
    404,986
    
    
    $
    400,001Unearned premiums and service fees
    
    
    190,644
    
    
    
    156,598Long-term debt
    
    
    15,000
    
    
    
    15,000Amounts withheld or retained for account of others
    
    
    51,318
    
    
    
    48,357Reinsurance balances payable
    
    
    21,245
    
    
    
    10,267Securities lending obligation
    
    
    
    
    
    
    95,828Accounts payable and other liabilities
    
    
    28,614
    
    
    
    35,813Commissions payable
    
    
    9,980
    
    
    
    9,274Assessments and fees payable
    
    
    3,909
    
    
    
    3,600Total liabilities
    
    
    725,696
    
    
    
    774,738Shareholders equity:Preferred shares  no par valueAuthorized  10,000 sharesIssued  0 shares
    
    
    
    
    
    
    Common shares  $0.01 par valueAuthorized  50,000 sharesIssued  23,350 shares, including 4,049 and 4,055
shares, respectively, in treasury
    
    
    234
    
    
    
    234Additional paid-in capital
    
    
    48,621
    
    
    
    48,004Retained earnings
    
    
    206,222
    
    
    
    184,187Accumulated other comprehensive loss
    
    
    (5,800
    )
    
    
    (10,613
    )Treasury shares
    
    
    (5,730
    )
    
    
    (5,738
    )Total shareholders equity
    
    
    243,547
    
    
    
    216,074Total liabilities and shareholders equity
    
    $
    969,243
    
    
    $
    990,812
  3




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##### Table of Contents



National Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Income
 (Unaudited)
 (In thousands, except per share data)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues:Premiums earned
    
    $
    69,663
    
    
    $
    71,813
    
    
    $
    139,102
    
    
    $
    139,463Net investment income
    
    
    4,919
    
    
    
    5,451
    
    
    
    9,929
    
    
    
    11,295Net realized gains
(losses) on
investments (*)
    
    
    1,048
    
    
    
    (1,724
    )
    
    
    1,071
    
    
    
    (2,311
    )Other
    
    
    960
    
    
    
    757
    
    
    
    1,748
    
    
    
    1,594Total revenues
    
    
    76,590
    
    
    
    76,297
    
    
    
    151,850
    
    
    
    150,041Expenses:Losses and loss
adjustment expenses
    
    
    39,440
    
    
    
    50,417
    
    
    
    78,766
    
    
    
    92,102Commissions and
other underwriting
expenses
    
    
    15,357
    
    
    
    15,195
    
    
    
    28,376
    
    
    
    28,156Other operating and
general expenses
    
    
    3,203
    
    
    
    3,313
    
    
    
    6,495
    
    
    
    6,545Expense on amounts
withheld
    
    
    900
    
    
    
    1,002
    
    
    
    1,767
    
    
    
    2,260Interest expense
    
    
    212
    
    
    
    225
    
    
    
    332
    
    
    
    571Total expenses
    
    
    59,112
    
    
    
    70,152
    
    
    
    115,736
    
    
    
    129,634Income before
federal income taxes
    
    
    17,478
    
    
    
    6,145
    
    
    
    36,114
    
    
    
    20,407Provision for
federal income taxes
    
    
    5,369
    
    
    
    1,775
    
    
    
    11,359
    
    
    
    6,466Net income
    
    $
    12,109
    
    
    $
    4,370
    
    
    $
    24,755
    
    
    $
    13,941Net income per
common share  basic
    
    $
    0.63
    
    
    $
    0.23
    
    
    $
    1.28
    
    
    $
    0.72Net income per
common share 
diluted
    
    $
    0.63
    
    
    $
    0.23
    
    
    $
    1.28
    
    
    $
    0.72Weighted average of
common shares
outstanding  basic
    
    
    19,301
    
    
    
    19,288
    
    
    
    19,301
    
    
    
    19,275Weighted average of
common shares
outstanding 
diluted
    
    
    19,359
    
    
    
    19,375
    
    
    
    19,351
    
    
    
    19,400Cash dividends per
common share
    
    $
    0.07
    
    
    $
    0.06
    
    
    $
    0.14
    
    
    $
    0.12(*) Consists of the following:Realized gains
(losses) before
impairment
losses
    
    $
    1,674
    
    
    $
    (96
    )
    
    $
    2,304
    
    
    $
    246Total losses on
securities with
impairment
charges
    
    
    (3,640
    )
    
    
    (1,628
    )
    
    
    (4,247
    )
    
    
    (2,557
    )Non-credit
portion in other
comprehensive
income
    
    
    3,014
    
    
    
    
    
    
    
    3,014
    
    
    
    Net
impairment
charges
recognized
in earnings
    
    
    (626
    )
    
    
    (1,628
    )
    
    
    (1,233
    )
    
    
    (2,557
    )Net realized
gains (losses)
on investments
    
    $
    1,048
    
    
    $
    (1,724
    )
    
    $
    1,071
    
    
    $
    (2,311
    )
 .
 4




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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, 2009
    
    $
    234
    
    
    $
    48,004
    
    
    $
    184,187
    
    
    $
    (10,613
    )
    
    $
    (5,738
    )
    
    $
    216,074Net income
    
    
    
    
    
    
    
    
    
    
    24,755
    
    
    
    
    
    
    
    
    
    
    
    24,755Unrealized appreciation of
investment securities,
net of tax benefit of
$2.5 million
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,813
    
    
    
    
    
    
    
    4,813Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,568Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (2,720
    )
    
    
    
    
    
    
    
    
    
    
    (2,720
    )Issuance of 5,595 treasury
shares from restricted
stock
issued, net of forfeitures
    
    
    
    
    
    
    (63
    )
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    (55
    )Stock compensation expense
    
    
    
    
    
    
    680
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    680Balance at June 30, 2009
    
    $
    234
    
    
    $
    48,621
    
    
    $
    206,222
    
    
    $
    (5,800
    )
    
    $
    (5,730
    )
    
    $
    243,547Balance at January 1, 2008
    
    $
    234
    
    
    $
    45,566
    
    
    $
    178,190
    
    
    $
    (5,321
    )
    
    $
    (5,863
    )
    
    $
    212,806Net income
    
    
    
    
    
    
    
    
    
    
    13,941
    
    
    
    
    
    
    
    
    
    
    
    13,941Unrealized depreciation of
investment securities,
net of tax benefit of
$2.3 million
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,094
    )
    
    
    
    
    
    
    (9,094
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,847Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (2,331
    )
    
    
    
    
    
    
    
    
    
    
    (2,331
    )Issuance of 87,315 treasury
shares upon exercise of
options
and restricted stock
issued, net of
forfeitures
    
    
    
    
    
    
    698
    
    
    
    
    
    
    
    
    
    
    
    121
    
    
    
    819Tax benefit realized from
exercise of stock options
    
    
    
    
    
    
    381
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    381Stock compensation expense
    
    
    
    
    
    
    694
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    694Balance at June 30, 2008
    
    $
    234
    
    
    $
    47,339
    
    
    $
    189,800
    
    
    $
    (14,415
    )
    
    $
    (5,742
    )
    
    $
    217,216
  5




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##### Table of Contents



National Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 (Dollars in thousands)
 Six Months Ended June 30,2009
    
    
    2008Operating activitiesNet income
    
    $
    24,755
    
    
    $
    13,941Adjustments to reconcile net income to net cash provided by operating
activities:Net amortization of bond premiums and discounts
    
    
    1,280
    
    
    
    758Provision for depreciation and amortization
    
    
    922
    
    
    
    688Net realized (gains) losses on investments
    
    
    (1,071
    )
    
    
    2,311Deferred federal income taxes
    
    
    152
    
    
    
    (2,304
    )Stock compensation expense
    
    
    680
    
    
    
    694Increase in deferred policy acquisition costs, net
    
    
    (2,881
    )
    
    
    (6,042
    )Increase in reserves for losses and loss adjustment expenses
    
    
    4,985
    
    
    
    54,239Increase in premiums receivable
    
    
    (43,838
    )
    
    
    (54,774
    )Increase in unearned premiums and service fees
    
    
    34,046
    
    
    
    58,569Decrease in interest receivable and other assets
    
    
    254
    
    
    
    977Increase in prepaid reinsurance premiums
    
    
    (12,048
    )
    
    
    (20,936
    )(Decrease) increase in accounts payable, commissions and other liabilities
and assessments and fees payable
    
    
    (6,184
    )
    
    
    6,874Increase in amounts withheld or retained for account of others
    
    
    2,961
    
    
    
    4,591Decrease (increase) in reinsurance recoverable
    
    
    2,948
    
    
    
    (23,066
    )Increase in reinsurance balances payable
    
    
    10,978
    
    
    
    18,576Net cash provided by operating activities
    
    
    17,939
    
    
    
    55,096Investing activitiesPurchases of fixed maturities
    
    
    (204,681
    )
    
    
    (305,489
    )Purchases of equity securities
    
    
    (4,392
    )
    
    
    (3,150
    )Proceeds from sale of fixed maturities
    
    
    37,029
    
    
    
    483Proceeds from sale of equity securities
    
    
    6,189
    
    
    
    9,175Proceeds from maturities and redemptions of investments
    
    
    179,154
    
    
    
    244,140Capital expenditures
    
    
    (1,819
    )
    
    
    (751
    )Net cash provided by (used in) investing activities
    
    
    11,480
    
    
    
    (55,592
    )Financing activitiesDecrease in securities lending collateral
    
    
    49,313
    
    
    
    25,967Decrease in securities lending obligation
    
    
    (95,828
    )
    
    
    (25,967
    )Additional long-term borrowings
    
    
    
    
    
    
    15,000Reductions of long-term debt
    
    
    
    
    
    
    (15,464
    )Tax benefit realized from exercise of stock options
    
    
    
    
    
    
    381Issuance of common shares from treasury upon exercise of stock options or
stock award grants
    
    
    (55
    )
    
    
    819Cash dividends paid on common shares
    
    
    (2,720
    )
    
    
    (2,331
    )Net cash used in financing activities
    
    
    (49,290
    )
    
    
    (1,595
    )Net decrease in cash and cash equivalents
    
    
    (19,871
    )
    
    
    (2,091
    )Cash and cash equivalents at beginning of period
    
    
    77,159
    
    
    
    43,069Cash and cash equivalents at end of period
    
    $
    57,288
    
    
    $
    40,978
  6




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##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 1. Basis of Presentation
     2. Securities Lending Program
   7




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##### Table of Contents



June 30,
    
    December 31,2009
    
    2008(Dollars in thousands)Collateral obligation
    
    $
    
    
    
    $
    95,828Pretax unrealized loss on fair value of collateral held
    
    
    
    
    
    
    (9,985
    )Cumulative other-than-temporary impairment charges
    
    
    
    
    
    
    (1,173
    )Fair value of collateral held
    
    
    
    
    
    
    84,670Fair value of securities lent plus accrued interest
    
    
    
    
    
    
    94,265
 3. Fair Value Measurements
      8




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##### Table of Contents



June 30, 2009Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(Dollars in thousands)Fixed maturities:U.S. government and government agency obligations
    
    $
    
    
    
    $
    154,248
    
    
    $
    
    
    
    $
    154,248State and local government obligations
    
    
    
    
    
    
    151,990
    
    
    
    6,338
    
    
    
    158,328Residential mortgage-backed securities
    
    
    
    
    
    
    102,491
    
    
    
    2,705
    
    
    
    105,196Commercial mortgage-backed securities
    
    
    
    
    
    
    3,574
    
    
    
    
    
    
    
    3,574Corporate obligations
    
    
    
    
    
    
    47,972
    
    
    
    5,825
    
    
    
    53,797Redeemable preferred stocks
    
    
    7,710
    
    
    
    628
    
    
    
    2,299
    
    
    
    10,637Total fixed maturities
    
    
    7,710
    
    
    
    460,903
    
    
    
    17,167
    
    
    
    485,780Equity securities:Perpetual preferred stock
    
    
    763
    
    
    
    142
    
    
    
    396
    
    
    
    1,301Common stock
    
    
    17,272
    
    
    
    11,261
    
    
    
    
    
    
    
    28,533Total equity securities
    
    
    18,035
    
    
    
    11,403
    
    
    
    396
    
    
    
    29,834Short-term investments
    
    
    
    
    
    
    86
    
    
    
    
    
    
    
    86Total investments
    
    
    25,745
    
    
    
    472,392
    
    
    
    17,563
    
    
    
    515,700Cash and cash equivalents
    
    
    57,288
    
    
    
    
    
    
    
    
    
    
    
    57,288Total investments and cash and cash equivalents
    
    $
    83,033
    
    
    $
    472,392
    
    
    $
    17,563
    
    
    $
    572,988
  Three Months Ended June 30, 2009State and local
    
    
    Residential
    
    
    
    
    
    
    Perpetual
    
    
    SecuritiesCorporate
    
    
    government
    
    
    mortgage-backed
    
    
    Redeemable
    
    
    preferred
    
    
    lendingobligations
    
    
    obligations
    
    
    securities
    
    
    preferred stock
    
    
    stock
    
    
    collateral(Dollars in thousands)Beginning balance at April 1, 2009
    
    $
    3,830
    
    
    $
    6,313
    
    
    $
    
    
    
    $
    2,280
    
    
    $
    2,153
    
    
    $
    4,518Total gains or (losses):Included in earnings
    
    
    
    
    
    
    
    
    
    
    (497
    )
    
    
    
    
    
    
    
    
    
    
    Included in other comprehensive income
    
    
    (145
    )
    
    
    25
    
    
    
    700
    
    
    
    19
    
    
    
    2,549
    
    
    
    396Purchases and (settlements) (1)
    
    
    
    
    
    
    
    
    
    
    (42
    )
    
    
    
    
    
    
    (4,306
    )
    
    
    (230
    )Transfers in and/or (out) of Level 3 (2)
    
    
    2,140
    
    
    
    
    
    
    
    2,544
    
    
    
    
    
    
    
    
    
    
    
    (4,684
    )Ending balance at June 30, 2009
    
    $
    5,825
    
    
    $
    6,338
    
    
    $
    2,705
    
    
    $
    2,299
    
    
    $
    396
    
    
    $
    The amount of total gains or (losses) for the
period included in earnings attributable to the
change in unrealized gains or (losses) relating
to assets still held at the reporting date
    
    $
    
    
    
    $
    
    
    
    $
    (497
    )
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    These amounts are attributable to either purchases of securities or principal pay downs,
conversions or maturities during the three months ended June 30, 2009.(2)
    
    Transfers in and/or (out) of Level 3 relate to the termination of the securities
lending program and moving longer-term assets into the investment portfolio during the
three months ended June 30, 2009. 9




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##### Table of Contents



Six Months Ended June 30, 2009State and local
    
    
    Residential
    
    
    
    
    
    
    Perpetual
    
    
    SecuritiesCorporate
    
    
    government
    
    
    mortgage-backed
    
    
    Redeemable
    
    
    preferred
    
    
    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
    
    
    
    
    
    
    
    
    
    
    (497
    )
    
    
    
    
    
    
    (170
    )
    
    
    (421
    )Included in other comprehensive income
    
    
    (110
    )
    
    
    220
    
    
    
    700
    
    
    
    (107
    )
    
    
    1,551
    
    
    
    546Purchases and (settlements) (1)
    
    
    (500
    )
    
    
    
    
    
    
    (42
    )
    
    
    
    
    
    
    (4,250
    )
    
    
    (487
    )Transfers in and/or (out) of Level 3 (2)
    
    
    2,140
    
    
    
    
    
    
    
    2,544
    
    
    
    
    
    
    
    
    
    
    
    (4,684
    )Ending balance at June 30, 2009
    
    $
    5,825
    
    
    $
    6,338
    
    
    $
    2,705
    
    
    $
    2,299
    
    
    $
    396
    
    
    $
    The amount of total gains or (losses) for
the
period included in earnings attributable
to the
change in unrealized gains or (losses)
relating
to assets still held at the reporting date
    
    $
    
    
    
    $
    
    
    
    $
    (497
    )
    
    $
    
    
    
    $
    (170
    )
    
    $
    (421
    )
 
 (1)
    
    These amounts are attributable to either purchases of securities or principal pay
downs, conversions or maturities during the six months ended June 30, 2009.(2)
    
    Transfers in and/or (out) of Level 3 relate to the termination of the securities
lending program and moving longer-term assets into the investment portfolio during the
six months ended June 30, 2009. 4. Investments
  10




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##### Table of Contents



Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair Value(Dollars in thousands)June 30, 2009 (1):Fixed maturities:U.S. Government and government agency
obligations
    
    $
    152,587
    
    
    $
    2,034
    
    
    $
    (373
    )
    
    $
    154,248State and local government obligations
    
    
    157,885
    
    
    
    3,004
    
    
    
    (2,561
    )
    
    
    158,328Residential mortgage-backed securities
    
    
    110,253
    
    
    
    1,785
    
    
    
    (6,842
    )
    
    
    105,196Commercial mortgage-backed securities
    
    
    4,676
    
    
    
    
    
    
    
    (1,102
    )
    
    
    3,574Corporate obligations
    
    
    56,987
    
    
    
    796
    
    
    
    (3,986
    )
    
    
    53,797Redeemable preferred stock
    
    
    12,840
    
    
    
    18
    
    
    
    (2,221
    )
    
    
    10,637Total fixed maturities
    
    
    495,228
    
    
    
    7,637
    
    
    
    (17,085
    )
    
    
    485,780Equity securities:Perpetual preferred stocks
    
    
    1,320
    
    
    
    75
    
    
    
    (94
    )
    
    
    1,301Common stocks
    
    
    27,989
    
    
    
    665
    
    
    
    (121
    )
    
    
    28,533Total equity securities
    
    
    29,309
    
    
    
    740
    
    
    
    (215
    )
    
    
    29,834Short-term investments
    
    
    86
    
    
    
    
    
    
    
    
    
    
    
    86Total investments
    
    $
    524,623
    
    
    $
    8,377
    
    
    $
    (17,300
    )
    
    $
    515,700December 31, 2008:Fixed maturities:U.S. Government and government agency
obligations
    
    $
    199,207
    
    
    $
    3,120
    
    
    $
    (50
    )
    
    $
    202,277State and local government obligations
    
    
    125,312
    
    
    
    2,172
    
    
    
    (2,405
    )
    
    
    125,079Residential mortgage-backed securities
    
    
    77,170
    
    
    
    1,425
    
    
    
    (27
    )
    
    
    78,568Corporate obligations
    
    
    46,942
    
    
    
    188
    
    
    
    (5,116
    )
    
    
    42,014Redeemable preferred stock
    
    
    13,931
    
    
    
    49
    
    
    
    (2,681
    )
    
    
    11,299Total fixed maturities
    
    
    462,562
    
    
    
    6,954
    
    
    
    (10,279
    )
    
    
    459,237Equity securities:Perpetual preferred stocks
    
    
    8,650
    
    
    
    2
    
    
    
    (2,912
    )
    
    
    5,740Common stocks
    
    
    21,493
    
    
    
    
    
    
    
    
    
    
    
    21,493Total equity securities
    
    
    30,143
    
    
    
    2
    
    
    
    (2,912
    )
    
    
    27,233Short-term investments
    
    
    85
    
    
    
    
    
    
    
    
    
    
    
    85Total investments
    
    $
    492,790
    
    
    $
    6,956
    
    
    $
    (13,191
    )
    
    $
    486,555Securities lending:Cash and cash equivalents
    
    $
    42,359
    
    
    $
    
    
    
    $
    
    
    
    $
    42,359Residential mortgage-backed securities
    
    
    23,108
    
    
    
    
    
    
    
    (8,038
    )
    
    
    15,070Commercial mortgage-backed securities
    
    
    4,695
    
    
    
    
    
    
    
    (1,164
    )
    
    
    3,531Corporate obligations
    
    
    24,493
    
    
    
    3
    
    
    
    (786
    )
    
    
    23,710Total securities lending
    
    $
    94,655
    
    
    $
    3
    
    
    $
    (9,988
    )
    
    $
    84,670
 
 (1)
    
    As of June 30, 2009, the Company held no securities lending collateral, therefore no
breakout is included. 11




---



##### Table of Contents



Fixed MaturitiesAmortizedCost
    
    
    Fair Value(Dollars in thousands)Due in one year or less
    
    $
    36,900
    
    
    $
    36,697Due after one year through five years
    
    
    144,612
    
    
    
    146,052Due after five years through ten years
    
    
    142,900
    
    
    
    142,168Due after ten years
    
    
    55,887
    
    
    
    52,093380,299
    
    
    
    377,010Mortgage-backed securities
    
    
    114,929
    
    
    
    108,770Total
    
    $
    495,228
    
    
    $
    485,780
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Dollars in thousands)
    
    
    (Dollars in thousands)Fixed maturity gains
    
    $
    817
    
    
    $
    51
    
    
    $
    1,562
    
    
    $
    410Fixed maturity losses
    
    
    (641
    )
    
    
    (233
    )
    
    
    (1,032
    )
    
    
    (537
    )Equity security gains
    
    
    2,022
    
    
    
    86
    
    
    
    2,880
    
    
    
    148Equity security losses
    
    
    (1,150
    )
    
    
    (1,628
    )
    
    
    (1,916
    )
    
    
    (1,686
    )Securities lending fixed maturity losses
    
    
    
    
    
    
    
    
    
    
    (423
    )
    
    
    (646
    )Net realized gains (losses) on investments
    
    $
    1,048
    
    
    $
    (1,724
    )
    
    $
    1,071
    
    
    $
    (2,311
    )
  12




---



##### Table of Contents



Less than Twelve Months
    
    
    Twelve Months or MoreUnrealized
    
    
    Fair Value as
    
    
    Number of
    
    
    
    
    
    
    Unrealized
    
    
    Fair Value as
    
    
    Number ofFair Value
    
    
    Losses
    
    
    % of Cost
    
    
    Holdings
    
    
    Fair Value
    
    
    Losses
    
    
    % of Cost
    
    
    Holdings(Dollars in thousands)June 30, 2009 (1):Fixed maturities:U.S. Government and government
agency obligations
    
    $
    51,719
    
    
    $
    (373
    )
    
    
    99.3
    %
    
    
    23
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    
    State and local government obligations
    
    
    32,230
    
    
    
    (491
    )
    
    
    98.5
    %
    
    
    26
    
    
    
    23,124
    
    
    
    (2,070
    )
    
    
    91.8
    %
    
    
    24Residential mortgage-backed securities
    
    
    27,142
    
    
    
    (299
    )
    
    
    98.9
    %
    
    
    15
    
    
    
    10,678
    
    
    
    (6,543
    )
    
    
    62.0
    %
    
    
    8Commercial mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,574
    
    
    
    (1,102
    )
    
    
    76.4
    %
    
    
    2Corporate obligations
    
    
    3,944
    
    
    
    (392
    )
    
    
    91.0
    %
    
    
    4
    
    
    
    24,526
    
    
    
    (3,594
    )
    
    
    87.2
    %
    
    
    17Redeemable preferred stocks
    
    
    2,044
    
    
    
    (81
    )
    
    
    96.2
    %
    
    
    2
    
    
    
    7,577
    
    
    
    (2,140
    )
    
    
    78.0
    %
    
    
    24Total fixed maturities
    
    
    117,079
    
    
    
    (1,636
    )
    
    
    98.6
    %
    
    
    70
    
    
    
    69,479
    
    
    
    (15,449
    )
    
    
    81.8
    %
    
    
    75Equity securities:Perpetual preferred stocks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    763
    
    
    
    (94
    )
    
    
    89.0
    %
    
    
    3Common stocks
    
    
    2,934
    
    
    
    (121
    )
    
    
    96.0
    %
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total equity securities
    
    
    2,934
    
    
    
    (121
    )
    
    
    96.0
    %
    
    
    7
    
    
    
    763
    
    
    
    (94
    )
    
    
    89.0
    %
    
    
    3Total fixed maturities and equity securities
    
    $
    120,013
    
    
    $
    (1,757
    )
    
    
    98.6
    %
    
    
    77
    
    
    $
    70,242
    
    
    $
    (15,543
    )
    
    
    81.9
    %
    
    
    78December 31, 2008:Fixed maturities:U.S. Government and government
agency obligations
    
    $
    4,305
    
    
    $
    (36
    )
    
    
    99.2
    %
    
    
    5
    
    
    $
    2,985
    
    
    $
    (14
    )
    
    
    99.5
    %
    
    
    1State and local government obligations
    
    
    24,990
    
    
    
    (2,109
    )
    
    
    92.2
    %
    
    
    28
    
    
    
    7,947
    
    
    
    (296
    )
    
    
    96.4
    %
    
    
    7Residential mortgage-backed securities
    
    
    2,424
    
    
    
    (16
    )
    
    
    99.3
    %
    
    
    2
    
    
    
    680
    
    
    
    (11
    )
    
    
    98.4
    %
    
    
    1Corporate obligations
    
    
    14,746
    
    
    
    (513
    )
    
    
    96.6
    %
    
    
    21
    
    
    
    16,124
    
    
    
    (4,603
    )
    
    
    77.8
    %
    
    
    20Redeemable preferred stocks
    
    
    2,113
    
    
    
    (12
    )
    
    
    99.4
    %
    
    
    2
    
    
    
    8,170
    
    
    
    (2,669
    )
    
    
    75.4
    %
    
    
    27Total fixed maturities
    
    
    48,578
    
    
    
    (2,686
    )
    
    
    94.8
    %
    
    
    58
    
    
    
    35,906
    
    
    
    (7,593
    )
    
    
    82.5
    %
    
    
    56Equity securities:Perpetual preferred stocks
    
    
    3,368
    
    
    
    (2,625
    )
    
    
    56.2
    %
    
    
    4
    
    
    
    1,485
    
    
    
    (287
    )
    
    
    83.9
    %
    
    
    9Common stocks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total equity securities
    
    
    3,368
    
    
    
    (2,625
    )
    
    
    56.2
    %
    
    
    4
    
    
    
    1,485
    
    
    
    (287
    )
    
    
    83.9
    %
    
    
    9Total fixed maturities and equity securities
    
    $
    51,946
    
    
    $
    (5,311
    )
    
    
    90.7
    %
    
    
    62
    
    
    $
    37,391
    
    
    $
    (7,880
    )
    
    
    82.6
    %
    
    
    65Securities Lending:Residential mortgage-backed securities
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    $
    15,070
    
    
    $
    (8,038
    )
    
    
    65.2
    %
    
    
    7Commercial mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,531
    
    
    
    (1,164
    )
    
    
    75.2
    %
    
    
    2Corporate obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,213
    
    
    
    (786
    )
    
    
    95.4
    %
    
    
    5Total securities lending
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    $
    34,814
    
    
    $
    (9,988
    )
    
    
    77.7
    %
    
    
    14
 
 (1)
    
    As of June 30, 2009, the Company held no securities lending collateral, therefore no
breakout is included.   13




---



##### Table of Contents



Three Months Ended June 30, 2009(Dollars in thousands)Beginning balance at April 1, 2009
    
    $
    Additional credit impairment on:Previously impaired securities
    
    
    Securities without prior impairments
    
    
    534Reductions
    
    
    Ending balance at June 30, 2009
    
    $
    534
 5. Income Taxes
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Dollars in thousands)
    
    
    (Dollars in thousands)Expected federal income tax expense at statutory rate
    
    $
    6,117
    
    
    $
    2,151
    
    
    $
    12,640
    
    
    $
    7,142Tax effect of tax-exempt investment income
    
    
    (460
    )
    
    
    (348
    )
    
    
    (867
    )
    
    
    (667
    )Valuation allowance on net capital losses
    
    
    (481
    )
    
    
    
    
    
    
    (605
    )
    
    
    Other items, net
    
    
    193
    
    
    
    (28
    )
    
    
    191
    
    
    
    (9
    )$
    5,369
    
    
    $
    1,775
    
    
    $
    11,359
    
    
    $
    6,466
 14




---



##### Table of Contents



June 30, 2009
    
    
    December 31, 2008(Dollars in thousands)Deferred Tax Assets:Unearned premiums
    
    $
    10,582
    
    
    $
    9,035Unpaid losses and loss adjustment expenses
    
    
    8,269
    
    
    
    8,233Assignments and assessments
    
    
    1,053
    
    
    
    945Unrealized losses on investments
    
    
    3,314
    
    
    
    5,677Realized losses on investments, primarily impairments
    
    
    6,898
    
    
    
    7,936Other, net
    
    
    492
    
    
    
    87330,608
    
    
    
    32,699Valuation allowance
    
    
    (6,940
    )
    
    
    (7,616
    )23,668
    
    
    
    25,083Deferred Tax Liabilities:Deferred policy acquisition costs
    
    
    (7,744
    )
    
    
    (6,736
    )Other, net
    
    
    (235
    )
    
    
    (23
    )Total deferred tax liabilities
    
    
    (7,979
    )
    
    
    (6,759
    )Net deferred income tax assets
    
    $
    15,689
    
    
    $
    18,324
  6. Shareholders Equity and Stock-Based Compensation
    7. Comprehensive Income
  15




---



##### Table of Contents



8. Earnings Per Common Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(In thousands, except per share data)
    
    
    (In thousands, except per share data)Net income
    
    $
    12,109
    
    
    $
    4,370
    
    
    $
    24,755
    
    
    $
    13,941Weighted average shares outstanding during period
    
    
    19,301
    
    
    
    19,288
    
    
    
    19,301
    
    
    
    19,275Additional shares issuable under employee common
stock
option plans using treasury stock method
    
    
    58
    
    
    
    87
    
    
    
    50
    
    
    
    125Weighted average shares outstanding assuming
exercise of
stock options
    
    
    19,359
    
    
    
    19,375
    
    
    
    19,351
    
    
    
    19,400Net income per share:Basic
    
    $
    0.63
    
    
    $
    0.23
    
    
    $
    1.28
    
    
    $
    0.72Diluted
    
    $
    0.63
    
    
    $
    0.23
    
    
    $
    1.28
    
    
    $
    0.72
  9. Transactions with Related Parties
   Three Months Ended June 30,
    
    Six Months Ended June 30,2009
    
    2008
    
    2009
    
    2008(Dollars in thousands)
    
    (Dollars in thousands)Assumed premiums written
    
    $
    858
    
    
    $
    1,896
    
    
    $
    2,036
    
    
    $
    3,958Assumed premiums earned
    
    
    984
    
    
    
    1,640
    
    
    
    2,207
    
    
    
    3,201Assumed losses and loss adjustment expense incurred
    
    
    1,117
    
    
    
    1,321
    
    
    
    2,284
    
    
    
    2,416Ceded premiums written
    
    
    838
    
    
    
    904
    
    
    
    2,179
    
    
    
    2,450Ceded premiums earned
    
    
    791
    
    
    
    903
    
    
    
    1,595
    
    
    
    1,827Ceded losses and loss adjustment expense recoveries
    
    
    446
    
    
    
    149
    
    
    
    1,671
    
    
    
    397Payable to Great American as of period end
    
    
    688
    
    
    
    765
    
    
    
    688
    
    
    
    765
   16




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##### Table of Contents



10. Reinsurance
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Written
    
    
    Earned
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    Earned(Dollars in thousands)
    
    
    (Dollars in thousands)Direct
    
    $
    91,042
    
    
    $
    85,843
    
    
    $
    98,461
    
    
    $
    88,133
    
    
    $
    206,621
    
    
    $
    172,214
    
    
    $
    229,021
    
    
    $
    171,175Assumed
    
    
    1,718
    
    
    
    1,846
    
    
    
    3,031
    
    
    
    2,723
    
    
    
    3,557
    
    
    
    3,912
    
    
    
    5,775
    
    
    
    5,186Ceded
    
    
    (20,346
    )
    
    
    (18,026
    )
    
    
    (23,402
    )
    
    
    (19,043
    )
    
    
    (49,291
    )
    
    
    (37,024
    )
    
    
    (57,638
    )
    
    
    (36,898
    )Net Premium
    
    $
    72,414
    
    
    $
    69,663
    
    
    $
    78,090
    
    
    $
    71,813
    
    
    $
    160,887
    
    
    $
    139,102
    
    
    $
    177,158
    
    
    $
    139,463
  11. Commitments and Contingencies
    17




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##### Table of Contents



12. Segment Information
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Dollars in thousands)
    
    
    (Dollars in thousands)Revenue:Premiums earned:Alternative Risk Transfer
    
    $
    34,923
    
    
    $
    33,521
    
    
    $
    68,985
    
    
    $
    63,398Transportation
    
    
    15,649
    
    
    
    18,833
    
    
    
    31,774
    
    
    
    37,720Specialty Personal Lines
    
    
    14,075
    
    
    
    13,537
    
    
    
    27,865
    
    
    
    26,751Hawaii and Alaska
    
    
    3,819
    
    
    
    4,404
    
    
    
    7,834
    
    
    
    8,926Other
    
    
    1,197
    
    
    
    1,518
    
    
    
    2,644
    
    
    
    2,668Total premiums earned
    
    
    69,663
    
    
    
    71,813
    
    
    
    139,102
    
    
    
    139,463Net investment income
    
    
    4,919
    
    
    
    5,451
    
    
    
    9,929
    
    
    
    11,295Net realized gains (losses) on investments
    
    
    1,048
    
    
    
    (1,724
    )
    
    
    1,071
    
    
    
    (2,311
    )Other
    
    
    960
    
    
    
    757
    
    
    
    1,748
    
    
    
    1,594Total revenues
    
    $
    76,590
    
    
    $
    76,297
    
    
    $
    151,850
    
    
    $
    150,041
 13. Subsequent Events
  
 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;
    
    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;
 18




---



##### Table of Contents




    
    changes in legal environment;
    
    regulatory changes or actions, including those relating to regulation of the
sale, underwriting and pricing of insurance products and services and capital requirements;
    
    levels of natural catastrophes, terrorist events, incidents of war and other
major losses;
    
    adequacy of insurance reserves; and
    
    availability of reinsurance and ability of reinsurers to pay their obligations.
  General
    Results of Operations
 Overview
   19




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##### Table of Contents



Three Months Ended June 30,2009
    
    
    2008Amount
    
    
    Per Share
    
    
    Amount
    
    
    Per Share(Dollars in thousands, except per share data)Net income from operations
    
    $
    10,948
    
    
    $
    0.57
    
    
    $
    5,490
    
    
    $
    0.29After-tax net realized gains (losses) from investments
    
    
    1,161
    
    
    
    0.06
    
    
    
    (1,120
    )
    
    
    (0.06
    )Net income
    
    $
    12,109
    
    
    $
    0.63
    
    
    $
    4,370
    
    
    $
    0.23
 Six Months Ended June 30,2009
    
    
    2008Amount
    
    
    Per Share
    
    
    Amount
    
    
    Per Share(Dollars in thousands, except per share data)Net income from operations
    
    $
    23,455
    
    
    $
    1.21
    
    
    $
    15,443
    
    
    $
    0.80After-tax net realized gains (losses) from investments
    
    
    1,300
    
    
    
    0.07
    
    
    
    (1,502
    )
    
    
    (0.08
    )Net income
    
    $
    24,755
    
    
    $
    1.28
    
    
    $
    13,941
    
    
    $
    0.72
   20




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##### Table of Contents



Gross Premiums Written
  Three Months Ended June 30,2009
    
    
    2008Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Alternative Risk Transfer
    
    $
    53,972
    
    
    
    58.2
    %
    
    $
    49,441
    
    
    
    48.7
    %Transportation
    
    
    16,114
    
    
    
    17.4
    %
    
    
    28,062
    
    
    
    27.7
    %Specialty Personal Lines
    
    
    17,401
    
    
    
    18.7
    %
    
    
    17,349
    
    
    
    17.1
    %Hawaii and Alaska
    
    
    4,078
    
    
    
    4.4
    %
    
    
    5,109
    
    
    
    5.0
    %Other
    
    
    1,195
    
    
    
    1.3
    %
    
    
    1,531
    
    
    
    1.5
    %Gross premiums written
    
    $
    92,760
    
    
    
    100.0
    %
    
    $
    101,492
    
    
    
    100.0
    %
 Six Months Ended June 30,2009
    
    
    2008Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Alternative Risk Transfer
    
    $
    133,349
    
    
    
    63.4
    %
    
    $
    138,216
    
    
    
    58.9
    %Transportation
    
    
    32,310
    
    
    
    15.4
    %
    
    
    50,763
    
    
    
    21.6
    %Specialty Personal Lines
    
    
    33,518
    
    
    
    16.0
    %
    
    
    32,680
    
    
    
    13.9
    %Hawaii and Alaska
    
    
    8,639
    
    
    
    4.1
    %
    
    
    10,731
    
    
    
    4.6
    %Other
    
    
    2,362
    
    
    
    1.1
    %
    
    
    2,406
    
    
    
    1.0
    %Gross premiums written
    
    $
    210,178
    
    
    
    100.0
    %
    
    $
    234,796
    
    
    
    100.0
    %
    21




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##### Table of Contents



Premiums Earned
 Three months ended June 30, 2009 compared to June 30, 2008.
 Three Months Ended June 30,
    
    
    Change2009
    
    
    2008
    
    
    Amount
    
    
    Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer
    
    $
    34,923
    
    
    $
    33,521
    
    
    $
    1,402
    
    
    
    4.2
    %Transportation
    
    
    15,649
    
    
    
    18,833
    
    
    
    (3,184
    )
    
    
    (16.9
    %)Specialty Personal Lines
    
    
    14,075
    
    
    
    13,537
    
    
    
    538
    
    
    
    4.0
    %Hawaii and Alaska
    
    
    3,819
    
    
    
    4,404
    
    
    
    (585
    )
    
    
    (13.3
    %)Other
    
    
    1,197
    
    
    
    1,518
    
    
    
    (321
    )
    
    
    (21.1
    %)Net premiums earned
    
    $
    69,663
    
    
    $
    71,813
    
    
    $
    (2,150
    )
    
    
    (3.0
    %)
  22




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##### Table of Contents



Six months ended June 30, 2009 compared to June 30, 2008.
 Six Months Ended June 30,
    
    
    Change2009
    
    
    2008
    
    
    Amount
    
    
    Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer
    
    $
    68,985
    
    
    $
    63,398
    
    
    $
    5,587
    
    
    
    8.8
    %Transportation
    
    
    31,774
    
    
    
    37,720
    
    
    
    (5,946
    )
    
    
    (15.8
    %)Specialty Personal Lines
    
    
    27,865
    
    
    
    26,751
    
    
    
    1,114
    
    
    
    4.2
    %Hawaii and Alaska
    
    
    7,834
    
    
    
    8,926
    
    
    
    (1,092
    )
    
    
    (12.2
    %)Other
    
    
    2,644
    
    
    
    2,668
    
    
    
    (24
    )
    
    
    (0.9
    %)Net premiums earned
    
    $
    139,102
    
    
    $
    139,463
    
    
    $
    (361
    )
    
    
    (0.3
    %)
  Underwriting and Loss Ratio Analysis
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Dollars in thousands)
    
    
    (Dollars in thousands)Gross premiums written
    
    $
    92,760
    
    
    $
    101,492
    
    
    $
    210,178
    
    
    $
    234,796Ceded reinsurance
    
    
    (20,346
    )
    
    
    (23,402
    )
    
    
    (49,291
    )
    
    
    (57,638
    )Net premiums written
    
    
    72,414
    
    
    
    78,090
    
    
    
    160,887
    
    
    
    177,158Change in unearned premiums, net of ceded
    
    
    (2,751
    )
    
    
    (6,277
    )
    
    
    (21,785
    )
    
    
    (37,695
    )Net premiums earned
    
    $
    69,663
    
    
    $
    71,813
    
    
    $
    139,102
    
    
    $
    139,463Combined Ratios:Loss and LAE ratio(1)
    
    
    56.6
    %
    
    
    70.2
    %
    
    
    56.6
    %
    
    
    66.0
    %Underwriting expense ratio (2)
    
    
    25.3
    %
    
    
    24.7
    %
    
    
    23.8
    %
    
    
    23.7
    %Combined ratio
    
    
    81.9
    %
    
    
    94.9
    %
    
    
    80.4
    %
    
    
    89.7
    %
 
 (1)
    
    The ratio of losses and LAE to premiums earned.(2)
    
    The ratio of the sum of commissions and other underwriting expenses, other operating
expenses less other income to premiums earned. Three months ended June 30, 2009 compared to June 30, 2008.
 23




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##### Table of Contents



Six months ended June 30, 2009 compared to June 30, 2008.
  Net Investment Income
 2009 compared to 2008.
 Net Realized Gains (Losses) on Investments
 2009 compared to 2008.
 Expense on Amounts Withheld
 2009 compared to 2008.
 24




---



##### Table of Contents



Income Taxes
 2009 compared to 2008.
 Financial Condition
 Investments and Securities Lending Collateral
     Securities with
    
    Securities withUnrealized
    
    UnrealizedGains
    
    Losses(Dollars in thousands)Fixed Maturities:Fair value of securities
    
    $
    293,545
    
    
    $
    186,558Amortized cost of securities
    
    
    285,908
    
    
    
    203,643Gross unrealized gain or (loss)
    
    $
    7,637
    
    
    $
    (17,085
    )Fair value as a % of amortized cost
    
    
    102.7
    %
    
    
    91.6
    %Number of security positions held
    
    
    264
    
    
    
    145Number individually exceeding $50,000 gain or (loss)
    
    
    43
    
    
    
    45Concentration of gains or (losses) by type or industry:US government and government agencies
    
    $
    2,034
    
    
    $
    (373
    )State, municipalities and political subdivisions
    
    
    3,004
    
    
    
    (2,561
    )Residential mortgage-backed securities
    
    
    1,785
    
    
    
    (6,842
    )Commercial mortgage-backed securities
    
    
    
    
    
    
    (1,102
    )Banks, insurance and brokers
    
    
    561
    
    
    
    (5,290
    )Industrial and other
    
    
    253
    
    
    
    (917
    )Percentage rated investment grade (1)
    
    
    99.1
    %
    
    
    91.1
    %Equity Securities:Fair value of securities
    
    $
    14,497
    
    
    $
    3,697Cost of securities
    
    
    13,757
    
    
    
    3,912Gross unrealized gain or (loss)
    
    $
    740
    
    
    $
    (215
    )Fair value as a % of cost
    
    
    105.4
    %
    
    
    94.5
    %Number individually exceeding $50,000 gain or (loss)
    
    
    4
    
    
    
    1
 
 (1)
    
    Investment grade of AAA to BBB- by nationally recognized rating agencies. 25




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##### Table of Contents



Fixed Maturities PortfolioSecurities with
    
    Securities withUnrealized
    
    UnrealizedGains
    
    LossesMaturity:Due one year or less
    
    
    5.8
    %
    
    
    8.9
    %Due after one year through five years
    
    
    35.5
    %
    
    
    22.1
    %Due after five years through ten years
    
    
    30.1
    %
    
    
    27.7
    %Due after ten years
    
    
    5.6
    %
    
    
    19.1
    %77.0
    %
    
    
    77.8
    %Mortgage-backed securities
    
    
    23.0
    %
    
    
    22.2
    %100.0
    %
    
    
    100.0
    %
  At June 30, 2009Aggregate
    
    
    Aggregate
    
    
    Fair ValueFair
    
    
    Unrealized
    
    
    as % ofValue
    
    
    Gain (Loss)
    
    
    Cost Basis(Dollars in thousands)Fixed Maturities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (39 issues)
    
    $
    56,483
    
    
    $
    2,902
    
    
    
    105.4
    %More than one year (4 issues)
    
    
    7,213
    
    
    
    440
    
    
    
    106.5
    %Less than $50,000 (221issues)
    
    
    229,849
    
    
    
    4,295
    
    
    
    101.9
    %$
    293,545
    
    
    $
    7,637Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (15 issues)
    
    $
    23,950
    
    
    $
    (1,523
    )
    
    
    94.0
    %More than one year (30 issues)
    
    
    33,203
    
    
    
    (13,994
    )
    
    
    70.3
    %Less than $50,000 (100 issues)
    
    
    129,405
    
    
    
    (1,568
    )
    
    
    98.8
    %$
    186,558
    
    
    $
    (17,085
    )Equity Securities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (4 issues)
    
    $
    10,612
    
    
    $
    508
    
    
    
    105.0
    %More than one year (0 issues)
    
    
    
    
    
    
    
    
    
    
    0.0
    %Less than $50,000 (18 issues)
    
    
    3,885
    
    
    
    232
    
    
    
    106.4
    %$
    14,497
    
    
    $
    740Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (0 issues)
    
    $
    
    
    
    $
    
    
    
    
    0.0
    %More than one year (1 issue)
    
    
    569
    
    
    
    (56
    )
    
    
    91.0
    %Less than $50,000 (9 issues)
    
    
    3,128
    
    
    
    (159
    )
    
    
    95.2
    %$
    3,697
    
    
    $
    (215
    )
  Premiums and Reinsurance
  26




---



##### Table of Contents



Liquidity and Capital Resources
       27




---



##### Table of Contents



Critical Accounting Policies
  Losses and LAE Reserves
   
    
    the Case Incurred Development Method;
    
    the Paid Development Method;
    
    the Bornhuetter-Ferguson Method; and
 28




---



##### Table of Contents




    
    the Incremental Paid LAE to Paid Loss Methods.
   
    
    open and closed claim counts;
 
    
    average case reserves and average incurred on open claims;
 
    
    closure rates and statistics related to closed and open claim percentages;
 
    
    average closed claim severity;
 
    
    ultimate claim severity;
 
    
    reported loss ratios;
 
    
    projected ultimate loss ratios; and
 
    
    loss payment patterns.
 Other-Than-Temporary Impairment
  
    
    the length of time and the extent to which the market value has been below
amortized cost;
 
    
    whether the issuer is experiencing significant financial difficulties;
 
    
    economic stability of an entire industry sector or subsection;
 
    
    whether the issuer, series of issuers or industry has a catastrophic type of
loss;
 
    
    the extent to which the unrealized loss is credit-driven or a result of changes
in market interest rates or conditions;
 
    
    historical operating, balance sheet and cash flow data;
 
    
    internally generated financial models and forecasts;
 
    
    our ability and current intent to hold the investment for a period of time
sufficient to allow for any anticipated recovery in market value; and
 29




---



##### Table of Contents




    
    other subjective factors, including concentrations and information obtained from
regulators and rating agencies.
   Contractual Obligations/Off-Balance Sheet Arrangements
   
 ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
  
 ITEM 4.
    
    Controls and Procedures
   30




---



##### 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.
    
    Submission of Matters to a Vote of Security Holders.
   Name
    
    
    
    
    
    Term Expires
    
    For
    
    Against
    
    Withheld
    
    Abstain
    
    Broker Non-VotesProposal 1:Joseph E. (Jeff) Consolino
    
    
    
    
    
    
    2011
    
    
    
    16,416,785
    
    
    
    N/A
    
    
    
    163,463
    
    
    
    N/A
    
    
    
    N/ATheodore H. Elliott, Jr.
    
    
    
    
    
    
    2011
    
    
    
    16,360,790
    
    
    
    N/A
    
    
    
    219,458
    
    
    
    N/A
    
    
    
    N/AGary J. Gruber
    
    
    
    
    
    
    2011
    
    
    
    12,736,257
    
    
    
    N/A
    
    
    
    3,843,991
    
    
    
    N/A
    
    
    
    N/ADonald D. Larson
    
    
    
    
    
    
    2011
    
    
    
    12,706,070
    
    
    
    N/A
    
    
    
    3,874,178
    
    
    
    N/A
    
    
    
    N/AProposal 2
    
    
    
    
    
    
    
    
    
    
    15,968,928
    
    
    
    153,561
    
    
    
    N/A
    
    
    
    3,894
    
    
    
    N/AProposal 3
    
    
    
    
    
    
    
    
    
    
    16,463,495
    
    
    
    92,812
    
    
    
    N/A
    
    
    
    23,940
    
    
    
    N/A
 
 N/A  Not Applicable  Name
    
    Term ExpiresKeith A. Jensen
    
    
    2010James C. Kennedy
    
    
    2010Joel Schiavone
    
    
    2010Alan R. Spachman
    
    
    2010
 
 ITEM 5.
    
    Other Information.
  31




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##### Table of Contents



ITEM 6.
    
    Exhibits.
 3.1
    
    Amended and Restated Articles of Incorporation (1)3.2
    
    Amended and Restated Code of Regulations (1)31.1
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 
 (1)
    
    These exhibits are incorporated by reference to our Registration
Statement on Form S-1, as amended (Registration No. 333-119270) filed on
November 12, 2004. 32




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##### Table of Contents



SIGNATURES
  NATIONAL INTERSTATE CORPORATIONDate: August 6, 2009
    /s/ David W. MichelsonDavid W. MichelsonPresident and Chief Executive Officer

(Duly Authorized Officer and Principal Executive Officer)Date: August 6, 2009
    /s/ Julie A. McGrawJulie A. McGrawVice President and Chief Financial Officer

(Duly Authorized Officer and Principal Financial Officer) 33