##### 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, 2009
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from _______ to _______.
 Commission File Number 000-51130
 
 National Interstate Corporation
 (Exact name of registrant as specified in its charter)
 Ohio
    
    34-1607394(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 
 3250 Interstate Drive
Richfield, Ohio 44286-9000
(330) 659-8900 (Address and telephone number of principal executive offices)
 
 þ o
 o o
  Large Accelerated Filer o
Accelerated Filer þ
Non-Accelerated Filer o
(Do not check if a smaller reporting company)
Smaller Reporting Company o
 o þ




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##### 



National Interstate Corporation
Table of Contents
 PagePart I  Financial Information
    
    
    
    
    
    
    3Item 1. Financial Statements
    
    
    
    
    
    
    3Consolidated Balance Sheets
    
    
    
    
    
    
    3Consolidated Statements of Operations
    
    
    
    
    
    
    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
    
    
    
    
    
    
    31Item 4. Controls and Procedures
    
    
    
    
    
    
    31Part II  Other Information
    
    
    
    
    
    
    32Item 1. Legal Proceedings
    
    
    
    
    
    
    32Item 1A. Risk Factors
    
    
    
    
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    
    
    
    
    32Item 3. Defaults Upon Senior Securities
    
    
    
    
    
    
    32Item 4. Submission of Matters to a Vote of Security Holders
    
    
    
    
    
    
    32Item 5. Other Information
    
    
    
    
    
    
    32Item 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)
 September 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)ASSETSInvestments:Fixed maturities available-for-sale, at fair value (amortized cost  $521,089 and
$462,562, respectively)
    
    $
    523,742
    
    
    $
    459,237Equity securities available-for-sale, at fair value (cost  $25,363 and $30,143, respectively)
    
    
    28,013
    
    
    
    27,233Short-term investments, at cost which approximates fair value
    
    
    86
    
    
    
    85Total investments
    
    
    551,841
    
    
    
    486,555Cash and cash equivalents
    
    
    57,750
    
    
    
    77,159Securities lending collateral (cost  $0 and $94,655, respectively)
    
    
    
    
    
    
    84,670Accrued investment income
    
    
    4,837
    
    
    
    5,161Premiums receivable, net of allowance for doubtful accounts of $769 and $587, respectively
    
    
    118,274
    
    
    
    95,610Reinsurance recoverables on paid and unpaid losses
    
    
    151,739
    
    
    
    150,791Prepaid reinsurance premiums
    
    
    32,730
    
    
    
    28,404Deferred policy acquisition costs
    
    
    20,124
    
    
    
    19,245Deferred federal income taxes
    
    
    12,733
    
    
    
    18,324Property and equipment, net
    
    
    21,693
    
    
    
    20,406Funds held by reinsurer
    
    
    3,346
    
    
    
    3,073Prepaid expenses and other assets
    
    
    2,321
    
    
    
    1,414Total assets
    
    $
    977,388
    
    
    $
    990,812LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses
    
    $
    417,786
    
    
    $
    400,001Unearned premiums and service fees
    
    
    170,995
    
    
    
    156,598Long-term debt
    
    
    15,000
    
    
    
    15,000Amounts withheld or retained for account of others
    
    
    53,013
    
    
    
    48,357Reinsurance balances payable
    
    
    15,877
    
    
    
    10,267Securities lending obligation
    
    
    
    
    
    
    95,828Accounts payable and other liabilities
    
    
    31,679
    
    
    
    35,813Commissions payable
    
    
    9,088
    
    
    
    9,274Assessments and fees payable
    
    
    4,040
    
    
    
    3,600Total liabilities
    
    
    717,478
    
    
    
    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
    
    
    48,942
    
    
    
    48,004Retained earnings
    
    
    213,017
    
    
    
    184,187Accumulated other comprehensive income (loss)
    
    
    3,447
    
    
    
    (10,613
    )Treasury shares
    
    
    (5,730
    )
    
    
    (5,738
    )Total shareholders equity
    
    
    259,910
    
    
    
    216,074Total liabilities and shareholders equity
    
    $
    977,388
    
    
    $
    990,812
  3




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##### Table of Contents



National Interstate Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share data)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues:Premiums earned
    
    $
    70,825
    
    
    $
    75,058
    
    
    $
    209,927
    
    
    $
    214,521Net investment income
    
    
    4,501
    
    
    
    5,498
    
    
    
    14,430
    
    
    
    16,793Net realized gains (losses) on investments (*)
    
    
    760
    
    
    
    (8,457
    )
    
    
    1,831
    
    
    
    (10,768
    )Other
    
    
    879
    
    
    
    605
    
    
    
    2,627
    
    
    
    2,199Total revenues
    
    
    76,965
    
    
    
    72,704
    
    
    
    228,815
    
    
    
    222,745Expenses:Losses and loss adjustment expenses
    
    
    48,286
    
    
    
    51,995
    
    
    
    127,052
    
    
    
    144,097Commissions and other underwriting expenses
    
    
    15,189
    
    
    
    18,529
    
    
    
    43,565
    
    
    
    46,685Other operating and general expenses
    
    
    3,085
    
    
    
    3,241
    
    
    
    9,580
    
    
    
    9,786Expense on amounts withheld
    
    
    811
    
    
    
    1,001
    
    
    
    2,578
    
    
    
    3,261Interest expense
    
    
    71
    
    
    
    133
    
    
    
    403
    
    
    
    704Total expenses
    
    
    67,442
    
    
    
    74,899
    
    
    
    183,178
    
    
    
    204,533Income (loss) before federal income taxes
    
    
    9,523
    
    
    
    (2,195
    )
    
    
    45,637
    
    
    
    18,212Provision for federal income taxes
    
    
    1,367
    
    
    
    2,033
    
    
    
    12,726
    
    
    
    8,499Net income (loss)
    
    $
    8,156
    
    
    $
    (4,228
    )
    
    $
    32,911
    
    
    $
    9,713Net income (loss) per common share  basic
    
    $
    0.42
    
    
    $
    (0.22
    )
    
    $
    1.71
    
    
    $
    0.50Net income (loss) per common share  diluted
    
    $
    0.42
    
    
    $
    (0.22
    )
    
    $
    1.70
    
    
    $
    0.50Weighted average of common shares outstanding  basic
    
    
    19,301
    
    
    
    19,293
    
    
    
    19,301
    
    
    
    19,281Weighted average of common shares outstanding  diluted
    
    
    19,384
    
    
    
    19,293
    
    
    
    19,360
    
    
    
    19,375Cash dividends per common share
    
    $
    0.07
    
    
    $
    0.06
    
    
    $
    0.21
    
    
    $
    0.18(*)    Consists of the following:Realized gains (losses) before impairment losses
    
    $
    2,035
    
    
    $
    (498
    )
    
    $
    4,339
    
    
    $
    (252
    )Total losses on securities with impairment charges
    
    
    (1,275
    )
    
    
    (7,959
    )
    
    
    (5,522
    )
    
    
    (10,516
    )Non-credit portion in other comprehensive income
    
    
    
    
    
    
    
    
    
    
    3,014
    
    
    
    Net impairment charges recognized in earnings
    
    
    (1,275
    )
    
    
    (7,959
    )
    
    
    (2,508
    )
    
    
    (10,516
    )Net realized gains (losses) on investments
    
    $
    760
    
    
    $
    (8,457
    )
    
    $
    1,831
    
    
    $
    (10,768
    )
 .
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##### Table of Contents



National Interstate Corporation and Subsidiaries
Consolidated Statements of Shareholders Equity
(Unaudited)
(Dollars in thousands)
 Accumulated OtherCommon
    
    
    Additional 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
    
    
    
    
    
    
    
    
    
    
    32,911
    
    
    
    
    
    
    
    
    
    
    
    32,911Unrealized appreciation of investment securities,
net of tax expense 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
    )
    
    $
    259,910Balance at January 1, 2008
    
    $
    234
    
    
    $
    45,566
    
    
    $
    178,190
    
    
    $
    (5,321
    )
    
    $
    (5,863
    )
    
    $
    212,806Net income
    
    
    
    
    
    
    
    
    
    
    9,713
    
    
    
    
    
    
    
    
    
    
    
    9,713Unrealized depreciation of investment securities,
net of tax benefit of $4.4 million
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,444
    )
    
    
    
    
    
    
    (16,444
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,731
    )Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (3,497
    )
    
    
    
    
    
    
    
    
    
    
    (3,497
    )Issuance of 89,723 treasury shares upon exercise
of options
and restricted stock issued, net of forfeitures
    
    
    
    
    
    
    706
    
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    831Tax benefit realized from exercise of stock options
    
    
    
    
    
    
    396
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    396Stock compensation expense
    
    
    
    
    
    
    1,012
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,012Balance at September 30, 2008
    
    $
    234
    
    
    $
    47,680
    
    
    $
    184,406
    
    
    $
    (21,765
    )
    
    $
    (5,738
    )
    
    $
    204,817
  5




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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 30,2009
    
    
    2008Operating activitiesNet income
    
    $
    32,911
    
    
    $
    9,713Adjustments to reconcile net income to net cash provided by operating
activities:Net amortization of bond premiums and discounts
    
    
    1,940
    
    
    
    1,251Provision for depreciation and amortization
    
    
    1,350
    
    
    
    1,017Net realized (gains) losses on investment securities
    
    
    (1,831
    )
    
    
    10,768Deferred federal income taxes
    
    
    (1,871
    )
    
    
    (2,877
    )Stock compensation expense
    
    
    994
    
    
    
    1,012Increase in deferred policy acquisition costs, net
    
    
    (879
    )
    
    
    (4,488
    )Increase in reserves for losses and loss adjustment expenses
    
    
    17,785
    
    
    
    86,627Increase in premiums receivable
    
    
    (22,664
    )
    
    
    (34,046
    )Increase in unearned premiums and service fees
    
    
    14,397
    
    
    
    40,281Increase in interest receivable and other assets
    
    
    (856
    )
    
    
    (80
    )Increase in prepaid reinsurance premiums
    
    
    (4,326
    )
    
    
    (15,260
    )(Decrease) increase in accounts payable, commissions and other liabilities
and assessments and fees payable
    
    
    (3,880
    )
    
    
    8,283Increase in amounts withheld or retained for account of others
    
    
    4,656
    
    
    
    9,674Increase in reinsurance recoverable
    
    
    (948
    )
    
    
    (40,425
    )Increase in reinsurance balances payable
    
    
    5,610
    
    
    
    9,845Other
    
    
    (45
    )
    
    
    (3
    )Net cash provided by operating activities
    
    
    42,343
    
    
    
    81,292Investing activitiesPurchases of fixed maturities
    
    
    (271,708
    )
    
    
    (342,290
    )Purchases of equity securities
    
    
    (4,756
    )
    
    
    (3,387
    )Proceeds from sale of fixed maturities
    
    
    39,467
    
    
    
    1,148Proceeds from sale of equity securities
    
    
    12,135
    
    
    
    10,115Proceeds from maturities and redemptions of investments
    
    
    216,345
    
    
    
    278,896Capital expenditures
    
    
    (2,592
    )
    
    
    (1,359
    )Net cash used in investing activities
    
    
    (11,109
    )
    
    
    (56,877
    )Financing activitiesDecrease in securities lending collateral
    
    
    49,314
    
    
    
    54,416Decrease in securities lending obligation
    
    
    (95,828
    )
    
    
    (54,416
    )Additional long-term borrowings
    
    
    
    
    
    
    15,000Reductions of long-term debt
    
    
    
    
    
    
    (15,464
    )Tax benefit realized from exercise of stock options
    
    
    
    
    
    
    396Issuance of common shares from treasury upon exercise of stock options or
stock award grants
    
    
    (48
    )
    
    
    831Cash dividends paid on common shares
    
    
    (4,081
    )
    
    
    (3,497
    )Net cash used in financing activities
    
    
    (50,643
    )
    
    
    (2,734
    )Net (decrease) increase in cash and cash equivalents
    
    
    (19,409
    )
    
    
    21,681Cash and cash equivalents at beginning of period
    
    
    77,159
    
    
    
    43,069Cash and cash equivalents at end of period
    
    $
    57,750
    
    
    $
    64,750
  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



September 30,
    
    December 31,2009
    
    2008(Dollars in thousands)
    
    (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



September 30, 2009Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Total(Dollars in thousands)Fixed maturities:U.S. government and government agency obligations
    
    $
    
    
    
    $
    177,159
    
    
    $
    
    
    
    $
    177,159State and local government obligations
    
    
    
    
    
    
    162,887
    
    
    
    6,373
    
    
    
    169,260Residential mortgage-backed securities
    
    
    
    
    
    
    120,217
    
    
    
    2,494
    
    
    
    122,711Commercial mortgage-backed securities
    
    
    
    
    
    
    3,751
    
    
    
    
    
    
    
    3,751Corporate obligations
    
    
    
    
    
    
    33,756
    
    
    
    5,878
    
    
    
    39,634Redeemable preferred stocks
    
    
    8,231
    
    
    
    650
    
    
    
    2,346
    
    
    
    11,227Total fixed maturities
    
    
    8,231
    
    
    
    498,420
    
    
    
    17,091
    
    
    
    523,742Equity securities:Perpetual preferred stock
    
    
    848
    
    
    
    246
    
    
    
    396
    
    
    
    1,490Common stock
    
    
    14,551
    
    
    
    11,972
    
    
    
    
    
    
    
    26,523Total equity securities
    
    
    15,399
    
    
    
    12,218
    
    
    
    396
    
    
    
    28,013Short-term investments
    
    
    
    
    
    
    86
    
    
    
    
    
    
    
    86Total investments
    
    
    23,630
    
    
    
    510,724
    
    
    
    17,487
    
    
    
    551,841Cash and cash equivalents
    
    
    57,750
    
    
    
    
    
    
    
    
    
    
    
    57,750Total investments and cash and cash equivalents
    
    $
    81,380
    
    
    $
    510,724
    
    
    $
    17,487
    
    
    $
    609,591
  Three Months Ended September 30, 2009State and local
    
    
    Residential
    
    
    
    
    
    
    PerpetualCorporate
    
    
    government
    
    
    mortgage-backed
    
    
    Redeemable
    
    
    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 and (settlements) (1)
    
    
    (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 attributable to the
change in unrealized gains or (losses) relating
to assets still held at the reporting date
    
    $
    65
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    These amounts are attributable to either purchases of securities or
principal pay downs, conversions or maturities during the three months ended September 30, 2009. 9




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##### Table of Contents



Nine Months Ended September 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
    
    
    65
    
    
    
    
    
    
    
    (497
    )
    
    
    
    
    
    
    (170
    )
    
    
    (421
    )Included in other comprehensive income
    
    
    (45
    )
    
    
    255
    
    
    
    716
    
    
    
    (60
    )
    
    
    1,551
    
    
    
    546Purchases and (settlements) (1)
    
    
    (577
    )
    
    
    
    
    
    
    (269
    )
    
    
    
    
    
    
    (4,250
    )
    
    
    (487
    )Transfers in and/or (out) of Level 3 (2)
    
    
    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 attributable to the
change in unrealized gains or (losses) relating
to assets still held at the reporting date
    
    $
    65
    
    
    $
    
    
    
    $
    (497
    )
    
    $
    
    
    
    $
    (170
    )
    
    $
    (421
    )
 
 (1)
    
    These amounts are attributable to either purchases of securities or
principal pay downs, conversions or maturities during the nine months ended September 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
nine months ended September 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)September 30, 2009(1) :Fixed maturities:U.S. Government and government agency obligations
    
    $
    174,694
    
    
    $
    2,486
    
    
    $
    (21
    )
    
    $
    177,159State and local government obligations
    
    
    162,628
    
    
    
    8,129
    
    
    
    (1,497
    )
    
    
    169,260Residential mortgage-backed securities
    
    
    126,134
    
    
    
    3,010
    
    
    
    (6,433
    )
    
    
    122,711Commercial mortgage-backed securities
    
    
    4,566
    
    
    
    
    
    
    
    (815
    )
    
    
    3,751Corporate obligations
    
    
    40,641
    
    
    
    1,195
    
    
    
    (2,202
    )
    
    
    39,634Redeemable preferred stock
    
    
    12,426
    
    
    
    83
    
    
    
    (1,282
    )
    
    
    11,227Total fixed maturities
    
    
    521,089
    
    
    
    14,903
    
    
    
    (12,250
    )
    
    
    523,742Equity securities:Perpetual preferred stocks
    
    
    1,320
    
    
    
    182
    
    
    
    (12
    )
    
    
    1,490Common stocks
    
    
    24,043
    
    
    
    2,485
    
    
    
    (5
    )
    
    
    26,523Total equity securities
    
    
    25,363
    
    
    
    2,667
    
    
    
    (17
    )
    
    
    28,013Short-term investments
    
    
    86
    
    
    
    
    
    
    
    
    
    
    
    86Total investments
    
    $
    546,538
    
    
    $
    17,570
    
    
    $
    (12,267
    )
    
    $
    551,841December 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 September 30, 2009, the Company held no securities lending collateral,
therefore no breakout is included. 11




---



##### Table of Contents



Fixed MaturitiesAmortized Cost
    
    
    Fair Value(Dollars in thousands)Due in one year or less
    
    $
    25,886
    
    
    $
    26,140Due after one year through five years
    
    
    155,517
    
    
    
    157,368Due after five years through ten years
    
    
    157,064
    
    
    
    163,149Due after ten years
    
    
    51,922
    
    
    
    50,623390,389
    
    
    
    397,280Mortgage-backed securities
    
    
    130,700
    
    
    
    126,462Total
    
    $
    521,089
    
    
    $
    523,742
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Dollars in thousands)
    
    
    (Dollars in thousands)Fixed maturity gains
    
    $
    266
    
    
    $
    13
    
    
    $
    1,828
    
    
    $
    423Fixed maturity losses
    
    
    (1,392
    )
    
    
    (3,197
    )
    
    
    (2,424
    )
    
    
    (3,734
    )Equity security gains
    
    
    1,886
    
    
    
    
    
    
    
    4,766
    
    
    
    148Equity security losses
    
    
    
    
    
    
    (4,777
    )
    
    
    (1,916
    )
    
    
    (6,463
    )Securities lending fixed maturity losses
    
    
    
    
    
    
    (496
    )
    
    
    (423
    )
    
    
    (1,142
    )Net realized gains (losses) on investments
    
    $
    760
    
    
    $
    (8,457
    )
    
    $
    1,831
    
    
    $
    (10,768
    )
    12




---



##### Table of Contents



Less than Twelve Months
    
    
    Twelve Months or MoreFair Value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair ValueFair
    
    
    Unrealized
    
    
    as % of
    
    
    Number of
    
    
    Fair
    
    
    Unrealized
    
    
    as % of
    
    
    Number ofValue
    
    
    Losses
    
    
    Cost
    
    
    Holdings
    
    
    Value
    
    
    Losses
    
    
    Cost
    
    
    Holdings(Dollars in thousands)September 30, 2009(1):Fixed maturities:U.S. Government and government
agency obligations
    
    $
    11,241
    
    
    $
    (21
    )
    
    
    99.8
    %
    
    
    7
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    
    State and local government obligations
    
    
    2,430
    
    
    
    (15
    )
    
    
    99.4
    %
    
    
    2
    
    
    
    6,734
    
    
    
    (1,482
    )
    
    
    82.0
    %
    
    
    6Residential mortgage-backed securities
    
    
    10,106
    
    
    
    (35
    )
    
    
    99.7
    %
    
    
    6
    
    
    
    8,520
    
    
    
    (6,398
    )
    
    
    57.1
    %
    
    
    7Commercial mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,751
    
    
    
    (815
    )
    
    
    82.2
    %
    
    
    2Corporate obligations
    
    
    5,780
    
    
    
    (272
    )
    
    
    95.5
    %
    
    
    5
    
    
    
    11,816
    
    
    
    (1,930
    )
    
    
    86.0
    %
    
    
    9Redeemable preferred stocks
    
    
    1,962
    
    
    
    (38
    )
    
    
    98.1
    %
    
    
    1
    
    
    
    7,184
    
    
    
    (1,244
    )
    
    
    85.2
    %
    
    
    21Total fixed maturities
    
    
    31,519
    
    
    
    (381
    )
    
    
    98.8
    %
    
    
    21
    
    
    
    38,005
    
    
    
    (11,869
    )
    
    
    76.2
    %
    
    
    45Equity securities:Perpetual preferred stocks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    220
    
    
    
    (12
    )
    
    
    94.8
    %
    
    
    2Common stocks
    
    
    162
    
    
    
    (5
    )
    
    
    97.0
    %
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total equity securities
    
    
    162
    
    
    
    (5
    )
    
    
    97.0
    %
    
    
    2
    
    
    
    220
    
    
    
    (12
    )
    
    
    94.8
    %
    
    
    2Total fixed maturities and equity securities
    
    $
    31,681
    
    
    $
    (386
    )
    
    
    98.8
    %
    
    
    23
    
    
    $
    38,225
    
    
    $
    (11,881
    )
    
    
    76.3
    %
    
    
    47December 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
    )
    
    
    83.8
    %
    
    
    9Common stocks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total equity securities
    
    
    3,368
    
    
    
    (2,625
    )
    
    
    56.2
    %
    
    
    4
    
    
    
    1,485
    
    
    
    (287
    )
    
    
    83.8
    %
    
    
    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 September 30, 2009, the Company held no securities lending collateral, therefore no breakout is included.   13




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2009
    
    
    September 30, 2009(Dollars in thousands)
    
    
    (Dollars in thousands)Beginning balance
    
    $
    534
    
    
    $
    Additional credit impairment on:Previously impaired securities
    
    
    
    
    
    
    Securities without prior impairments
    
    
    
    
    
    
    534Reductions
    
    
    
    
    
    
    Ending balance
    
    $
    534
    
    
    $
    534
 5. Income Taxes
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Dollars in thousands)
    
    
    (Dollars in thousands)Expected federal income tax expense (benefit) at statutory rate
    
    $
    3,333
    
    
    $
    (768
    )
    
    $
    15,973
    
    
    $
    6,374Tax effect of tax exempt investment income
    
    
    (420
    )
    
    
    (339
    )
    
    
    (1,287
    )
    
    
    (1,006
    )Change in valuation allowance on net capital losses
    
    
    (1,792
    )
    
    
    3,191
    
    
    
    (2,397
    )
    
    
    3,191Other items, net
    
    
    246
    
    
    
    (51
    )
    
    
    437
    
    
    
    (60
    )$
    1,367
    
    
    $
    2,033
    
    
    $
    12,726
    
    
    $
    8,499
 14




---



##### Table of Contents



September 30, 2009
    
    
    December 31, 2008(Dollars in thousands)
    
    
    (Dollars in thousands)Deferred Tax Assets:Unearned premiums
    
    $
    9,735
    
    
    $
    9,035Unpaid losses and loss adjustment expenses
    
    
    8,672
    
    
    
    8,233Assignments and assessments
    
    
    1,099
    
    
    
    945Unrealized losses on investments
    
    
    360
    
    
    
    5,677Realized losses on investments, primarily impairments
    
    
    5,966
    
    
    
    7,936Other, net
    
    
    1,806
    
    
    
    87327,638
    
    
    
    32,699Valuation allowance
    
    
    (5,149
    )
    
    
    (7,616
    )22,489
    
    
    
    25,083Deferred Tax Liabilities:Deferred policy acquisition costs
    
    
    (7,043
    )
    
    
    (6,736
    )Other, net
    
    
    (2,713
    )
    
    
    (23
    )Total deferred tax liabilities
    
    
    (9,756
    )
    
    
    (6,759
    )Net deferred income tax assets
    
    $
    12,733
    
    
    $
    18,324
  6. Shareholders Equity and Stock-Based Compensation
   7. Comprehensive Income
  15




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##### Table of Contents



8. Earnings Per Common Share
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(In thousands, except per share data)
    
    
    (In thousands, except per share data)Net income (loss)
    
    $
    8,156
    
    
    $
    (4,228
    )
    
    $
    32,911
    
    
    $
    9,713Weighted average shares outstanding during period
    
    
    19,301
    
    
    
    19,293
    
    
    
    19,301
    
    
    
    19,281Additional shares issuable under employee common
stock option plans using treasury stock method
    
    
    83
    
    
    
    
    
    
    
    59
    
    
    
    94Weighted average shares outstanding assuming
exercise of
stock options(1)
    
    
    19,384
    
    
    
    19,293
    
    
    
    19,360
    
    
    
    19,375Net income (loss) per share:Basic
    
    $
    0.42
    
    
    $
    (0.22
    )
    
    $
    1.71
    
    
    $
    0.50Diluted
    
    $
    0.42
    
    
    $
    (0.22
    )
    
    $
    1.70
    
    
    $
    0.50
 
 (1)
    
    Since the Company reported a net loss for the third quarter 2008, the calculated
diluted earnings per share was anti-dilutive; therefore, basic earnings (loss) per share
was used.  9. Transactions with Related Parties
   Three Months Ended September 30,
    
    Nine Months Ended September 30,2009
    
    2008
    
    2009
    
    2008(Dollars in thousands)
    
    (Dollars in thousands)Assumed premiums written
    
    $
    588
    
    
    $
    821
    
    
    $
    2,624
    
    
    $
    4,779Assumed premiums earned
    
    
    835
    
    
    
    1,617
    
    
    
    3,042
    
    
    
    4,818Assumed losses and loss adjustment expense incurred
    
    
    931
    
    
    
    1,347
    
    
    
    3,215
    
    
    
    3,763Ceded premiums written
    
    
    610
    
    
    
    576
    
    
    
    2,789
    
    
    
    3,026Ceded premiums earned
    
    
    827
    
    
    
    880
    
    
    
    2,422
    
    
    
    2,707Ceded losses and loss adjustment expense recoveries
    
    
    783
    
    
    
    452
    
    
    
    2,454
    
    
    
    849Payable to Great American as of period end
    
    
    531
    
    
    
    526
    
    
    
    531
    
    
    
    526
  16




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##### Table of Contents



10. Reinsurance
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Written
    
    
    Earned
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    Earned(Dollars in thousands)
    
    
    (Dollars in thousands)Direct
    
    $
    67,423
    
    
    $
    87,158
    
    
    $
    75,487
    
    
    $
    93,386
    
    
    $
    274,044
    
    
    $
    259,372
    
    
    $
    304,508
    
    
    $
    264,561Assumed
    
    
    2,145
    
    
    
    2,191
    
    
    
    1,964
    
    
    
    2,748
    
    
    
    5,702
    
    
    
    6,103
    
    
    
    7,739
    
    
    
    7,934Ceded
    
    
    (10,584
    )
    
    
    (18,524
    )
    
    
    (15,036
    )
    
    
    (21,076
    )
    
    
    (59,875
    )
    
    
    (55,548
    )
    
    
    (72,674
    )
    
    
    (57,974
    )Net Premium
    
    $
    58,984
    
    
    $
    70,825
    
    
    $
    62,415
    
    
    $
    75,058
    
    
    $
    219,871
    
    
    $
    209,927
    
    
    $
    239,573
    
    
    $
    214,521
  11. Commitments and Contingencies
    17




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##### Table of Contents



12. Segment Information
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Dollars in thousands)
    
    
    (Dollars in thousands)Revenue:Premiums earned:Alternative Risk Transfer
    
    $
    36,695
    
    
    $
    35,814
    
    
    $
    105,680
    
    
    $
    99,212Transportation
    
    
    14,300
    
    
    
    19,162
    
    
    
    46,074
    
    
    
    56,882Specialty Personal Lines
    
    
    14,262
    
    
    
    14,046
    
    
    
    42,127
    
    
    
    40,797Hawaii and Alaska
    
    
    3,837
    
    
    
    4,467
    
    
    
    11,671
    
    
    
    13,393Other
    
    
    1,731
    
    
    
    1,569
    
    
    
    4,375
    
    
    
    4,237Total premiums earned
    
    
    70,825
    
    
    
    75,058
    
    
    
    209,927
    
    
    
    214,521Net investment income
    
    
    4,501
    
    
    
    5,498
    
    
    
    14,430
    
    
    
    16,793Net realized
gains (losses) on investments
    
    
    760
    
    
    
    (8,457
    )
    
    
    1,831
    
    
    
    (10,768
    )Other
    
    
    879
    
    
    
    605
    
    
    
    2,627
    
    
    
    2,199Total revenues
    
    $
    76,965
    
    
    $
    72,704
    
    
    $
    228,815
    
    
    $
    222,745
 13. Subsequent Events
  
 ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Forward-Looking Statements
  
    
    general economic conditions, any weaknesses in 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;
 18




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##### Table of Contents



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




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##### Table of Contents



Three Months Ended September 30,2009
    
    
    2008Amount
    
    
    Per Share
    
    
    Amount
    
    
    Per Share(Dollars in thousands, except per share data)Net income from operations
    
    $
    5,869
    
    
    $
    0.30
    
    
    $
    4,460
    
    
    $
    0.23After-tax net realized gains (losses) from investments
    
    
    2,287
    
    
    
    0.12
    
    
    
    (8,688
    )
    
    
    (0.45
    )Net income (loss)
    
    $
    8,156
    
    
    $
    0.42
    
    
    $
    (4,228
    )
    
    $
    (0.22
    )
 Nine Months Ended September 30,2009
    
    
    2008Amount
    
    
    Per Share
    
    
    Amount
    
    
    Per Share(Dollars in thousands, except per share data)Net income from operations
    
    $
    29,324
    
    
    $
    1.51
    
    
    $
    19,903
    
    
    $
    1.03After-tax net realized gains (losses) from investments
    
    
    3,587
    
    
    
    0.19
    
    
    
    (10,190
    )
    
    
    (0.53
    )Net income
    
    $
    32,911
    
    
    $
    1.70
    
    
    $
    9,713
    
    
    $
    0.50
   20




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##### Table of Contents



Gross Premiums Written
  Three Months Ended September 30,2009
    
    
    2008Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Alternative Risk Transfer
    
    $
    27,839
    
    
    
    40.0
    %
    
    $
    33,808
    
    
    
    43.7
    %Transportation
    
    
    18,837
    
    
    
    27.1
    %
    
    
    20,972
    
    
    
    27.1
    %Specialty Personal Lines
    
    
    14,692
    
    
    
    21.1
    %
    
    
    14,120
    
    
    
    18.2
    %Hawaii and Alaska
    
    
    6,319
    
    
    
    9.1
    %
    
    
    6,996
    
    
    
    9.0
    %Other
    
    
    1,881
    
    
    
    2.7
    %
    
    
    1,555
    
    
    
    2.0
    %Gross premiums written
    
    $
    69,568
    
    
    
    100.0
    %
    
    $
    77,451
    
    
    
    100.0
    %
 Nine Months Ended September 30,2009
    
    
    2008Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Alternative Risk Transfer
    
    $
    161,188
    
    
    
    57.6
    %
    
    $
    172,024
    
    
    
    55.1
    %Transportation
    
    
    51,147
    
    
    
    18.3
    %
    
    
    71,735
    
    
    
    23.0
    %Specialty Personal Lines
    
    
    48,210
    
    
    
    17.2
    %
    
    
    46,800
    
    
    
    15.0
    %Hawaii and Alaska
    
    
    14,958
    
    
    
    5.4
    %
    
    
    17,727
    
    
    
    5.7
    %Other
    
    
    4,243
    
    
    
    1.5
    %
    
    
    3,961
    
    
    
    1.2
    %Gross premiums written
    
    $
    279,746
    
    
    
    100.0
    %
    
    $
    312,247
    
    
    
    100.0
    %
    21




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Premiums Earned
 Three months ended September 30, 2009 compared to September 30, 2008.
 Three Months Ended September 30,
    
    
    Change2009
    
    
    2008
    
    
    Amount
    
    
    Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer
    
    $
    36,695
    
    
    $
    35,814
    
    
    $
    881
    
    
    
    2.5
    %Transportation
    
    
    14,300
    
    
    
    19,162
    
    
    
    (4,862
    )
    
    
    (25.4
    %)Specialty Personal Lines
    
    
    14,262
    
    
    
    14,046
    
    
    
    216
    
    
    
    1.5
    %Hawaii and Alaska
    
    
    3,837
    
    
    
    4,467
    
    
    
    (630
    )
    
    
    (14.1
    %)Other
    
    
    1,731
    
    
    
    1,569
    
    
    
    162
    
    
    
    10.3
    %Net premiums earned
    
    $
    70,825
    
    
    $
    75,058
    
    
    $
    (4,233
    )
    
    
    (5.6
    %)
  22




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Nine months ended September 30, 2009 compared to September 30, 2008.
 Nine Months EndedSeptember 30,
    
    
    Change2009
    
    
    2008
    
    
    Amount
    
    
    Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer
    
    $
    105,680
    
    
    $
    99,212
    
    
    $
    6,468
    
    
    
    6.5
    %Transportation
    
    
    46,074
    
    
    
    56,882
    
    
    
    (10,808
    )
    
    
    (19.0
    %)Specialty Personal Lines
    
    
    42,127
    
    
    
    40,797
    
    
    
    1,330
    
    
    
    3.3
    %Hawaii and Alaska
    
    
    11,671
    
    
    
    13,393
    
    
    
    (1,722
    )
    
    
    (12.9
    %)Other
    
    
    4,375
    
    
    
    4,237
    
    
    
    138
    
    
    
    3.3
    %Net premiums earned
    
    $
    209,927
    
    
    $
    214,521
    
    
    $
    (4,594
    )
    
    
    (2.1
    %)
  Underwriting and Loss Ratio Analysis
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(Dollars in thousands)
    
    
    (Dollars in thousands)Gross premiums written
    
    $
    69,568
    
    
    $
    77,451
    
    
    $
    279,746
    
    
    $
    312,247Ceded reinsurance
    
    
    (10,584
    )
    
    
    (15,036
    )
    
    
    (59,875
    )
    
    
    (72,674
    )Net premiums written
    
    
    58,984
    
    
    
    62,415
    
    
    
    219,871
    
    
    
    239,573Change in unearned premiums, net of ceded
    
    
    11,841
    
    
    
    12,643
    
    
    
    (9,944
    )
    
    
    (25,052
    )Net premiums earned
    
    $
    70,825
    
    
    $
    75,058
    
    
    $
    209,927
    
    
    $
    214,521Combined Ratios:Loss and LAE ratio(1)
    
    
    68.2
    %
    
    
    69.3
    %
    
    
    60.5
    %
    
    
    67.2
    %Underwriting expense ratio (2)
    
    
    24.6
    %
    
    
    28.2
    %
    
    
    24.1
    %
    
    
    25.3
    %Combined ratio
    
    
    92.8
    %
    
    
    97.5
    %
    
    
    84.6
    %
    
    
    92.5
    %
 
 (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 September 30, 2009 compared to September 30, 2008.
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Nine months ended September 30, 2009 compared to September 30, 2008.
  Net Investment Income
 2009 compared to 2008.
 Net Realized Gains (Losses) on Investments
 2009 compared to 2008.
 24




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Commissions and Other Underwriting Expenses
 2009 compared to 2008.
 Expense on Amounts Withheld
 2009 compared to 2008.
 Income Taxes
 2009 compared to 2008.
 Financial Condition
 Investments and Securities Lending Collateral
    25




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Securities with
    
    Securities withUnrealized
    
    UnrealizedGains
    
    Losses(Dollars in thousands)Fixed Maturities:Fair value of securities
    
    $
    451,295
    
    
    $
    69,524Amortized cost of securities
    
    
    436,392
    
    
    
    81,774Gross unrealized gain or (loss)
    
    $
    14,903
    
    
    $
    (12,250
    )Fair value as a % of amortized cost
    
    
    103.4
    %
    
    
    85.0
    %Number of security positions held
    
    
    357
    
    
    
    66Number individually exceeding $50,000 gain or (loss)
    
    
    117
    
    
    
    29Concentration of gains or (losses) by type or industry:US government and government agencies
    
    $
    2,486
    
    
    $
    (21
    )State, municipalities and political subdivisions
    
    
    8,129
    
    
    
    (1,497
    )Residential mortgage-backed securities
    
    
    3,010
    
    
    
    (6,433
    )Commercial mortgage-backed securities
    
    
    
    
    
    
    (815
    )Banks, insurance and brokers
    
    
    877
    
    
    
    (2,925
    )Industrial and other
    
    
    401
    
    
    
    (559
    )Percentage rated investment grade (1)
    
    
    99.4
    %
    
    
    77.3
    %Equity Securities:Fair value of securities
    
    $
    15,282
    
    
    $
    382Cost of securities
    
    
    12,615
    
    
    
    399Gross unrealized gain or (loss)
    
    $
    2,667
    
    
    $
    (17
    )Fair value as a % of cost
    
    
    121.1
    %
    
    
    95.7
    %Number individually exceeding $50,000 gain or (loss)
    
    
    8
    
    
    
    
 
 (1)
    
    Investment grade of AAA to BBB- by nationally recognized rating
agencies.  Fixed Maturities PortfolioSecurities with
    
    Securities withUnrealized
    
    UnrealizedGains
    
    LossesMaturity:Due one year or less
    
    
    4.1
    %
    
    
    9.8
    %Due after one year through five years
    
    
    30.9
    %
    
    
    25.4
    %Due after five years through ten years
    
    
    34.3
    %
    
    
    9.4
    %Due after ten years
    
    
    7.6
    %
    
    
    23.2
    %76.9
    %
    
    
    67.8
    %Mortgage-backed securities
    
    
    23.1
    %
    
    
    32.2
    %100.0
    %
    
    
    100.0
    %
 26




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At September 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 (113 issues)
    
    $
    168,744
    
    
    $
    9,354
    
    
    
    105.9
    %More than one year (4 issues)
    
    
    6,153
    
    
    
    375
    
    
    
    106.5
    %Less than $50,000 (240 issues)
    
    
    276,398
    
    
    
    5,174
    
    
    
    101.9
    %$
    451,295
    
    
    $
    14,903Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (3 issues)
    
    $
    2,135
    
    
    $
    (501
    )
    
    
    81.0
    %More than one year (26 issues)
    
    
    28,385
    
    
    
    (11,324
    )
    
    
    71.5
    %Less than $50,000 (37 issues)
    
    
    39,004
    
    
    
    (425
    )
    
    
    98.9
    %$
    69,524
    
    
    $
    (12,250
    )Equity Securities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (8 issues)
    
    $
    13,648
    
    
    $
    2,396
    
    
    
    121.3
    %More than one year (0 issues)
    
    
    
    
    
    
    
    
    
    
    0.0
    %Less than $50,000 (18 issues)
    
    
    1,634
    
    
    
    271
    
    
    
    119.9
    %$
    15,282
    
    
    $
    2,667Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (0 issues)
    
    $
    
    
    
    $
    
    
    
    
    0.0
    %More than one year (0 issue)
    
    
    
    
    
    
    
    
    
    
    0.0
    %Less than $50,000 (4 issues)
    
    
    382
    
    
    
    (17
    )
    
    
    95.7
    %$
    382
    
    
    $
    (17
    )
  Premiums and Reinsurance
    Liquidity and Capital Resources
  27




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28




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




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
    
    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
    
    other subjective factors, including concentrations and information obtained from
regulators and rating agencies.
  30




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Contractual Obligations/Off-Balance Sheet Arrangements
   
 ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
  
 ITEM 4.
    
    Controls and Procedures
   31




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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.
  
 ITEM 5.
    
    Other Information.
  
 ITEM 6.
    
    Exhibits.
 3.1
    
    Amended and Restated Articles of Incorporation (1)3.2
    
    Amended and Restated Code of Regulations (1)31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
 
 (1)
    
    These exhibits are incorporated by reference to our Registration Statement on Form
S-1, as amended (Registration No. 333-119270) filed on November 12, 2004. 32




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SIGNATURES
  NATIONAL INTERSTATE CORPORATIONDate: November 4, 2009
    /s/ David W. MichelsonDavid W. MichelsonPresident and Chief Executive Officer
(Duly Authorized Officer and Principal Executive Officer)Date: November 4, 2009
    /s/ Julie A. McGrawJulie A. McGrawVice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) 33