##### Table of Contents





UNITED
    STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
    20549
      Form 10-K
 Annual Report Pursuant to
    Section 13 or 15(d) of the
 Securities Exchange Act of
    1934
 For the Fiscal Year Ended December 31, 2007
  Commission File No. 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)
 
      Securities Registered Pursuant to Section 12(b) of the
    Act:
  Name of Exchange onTitle of each class

Which registeredCommon Shares, $0.01 par value

Nasdaq Global Market   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  Other securities for which reports are submitted pursuant to
    Section (d) of the Act:
 None
      o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K.
  Rule 12b-2
  Large accelerated filer
    o

Accelerated filer
    þ

Non-accelerated
    filer o
    (Do not check if a smaller reporting company)

Smaller reporting
    company o   Rule 12b-2 o þ
          Documents
    Incorporated by Reference:




---



##### 





National
    Interstate Corporation
  Index to
    Annual Report on
    Form 10-K
   
 PagePART IItem 1



Business:


4Introduction


4Property and Casualty Insurance Operations


4Investments


12Competition


15Ratings


15Regulation


15Employees


18Item 1A



Risk Factors


18Item 1B



Unresolved Staff Comments


26Item 2



Properties


26Item 3



Legal Proceedings


26Item 4



Submission of Matters to a Vote of Security
    Holders


26PART IIItem 5



Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities


27Item 6



Selected Financial Data


29Item 7



Managements Discussion and Analysis of
    Financial Condition and Results of Operations


31Item 7A



Quantitative and Qualitative Disclosures About
    Market Risk


51Item 8



Financial Statements and Supplementary Data


52Item 9



Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


81Item 9A



Controls and Procedures


81Item 9B



Other Information


81PART IIIItem 10



Directors, Executive Officers and Corporate
    Governance


81Item 11



Executive Compensation


81Item 12



Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


82Item 13



Certain Relationships and Related Transactions,
    and Director Independence


82Item 14



Principal Accountant Fees and Services


82PART IVItem 15



Exhibits and Financial Statement Schedules


82Signatures


89EX-21.1EX-23.1EX-24.1EX-31.1EX-31.2EX-32.1EX-32.2   2




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##### Table of Contents



FORWARD-LOOKING
    STATEMENTS
  Form 10-K
  
    general economic conditions and other factors, including
    prevailing interest rate levels and stock and credit market
    performance which may affect (among other things) our ability to
    sell our products, our ability to access capital resources and
    the costs associated with such access to capital and the market
    value of our investments;
    customer response to new products and marketing initiatives;
    tax law changes;
    increasing competition in the sale of our insurance products and
    services and the retention of existing customers;
    changes in legal environment;
    regulatory changes or actions, including those relating to
    regulation of the sale, underwriting and pricing of insurance
    products and services and capital requirements;
    levels of natural catastrophes, terrorist events, incidents of
    war and other major losses;
    adequacy of insurance reserves; and
    availability of reinsurance and ability of reinsurers to pay
    their obligations.   3




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##### Table of Contents



PART I ITEM 1  Business  Please refer to Forward-Looking Statements
    following the Index in the front of this
    Form 10-K.
 Introduction  (330) 659-8900. Form 10-K.
     Property
    and Casualty Insurance Operations     4




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##### Table of Contents



Product Management Organization.
  Our
    Products
      Year Ended December 31,2007


2006


2005Amount


Percent


Amount


Percent


Amount


Percent(Dollars in thousands)Alternative Risk Transfer

$
167,717



48.5
%

$
135,283



44.3
%

$
103,537



38.4
%Transportation


90,984



26.3
%


89,399



29.3
%


90,751



33.6
%Specialty Personal Lines


55,169



15.9
%


52,060



17.0
%


45,935



17.0
%Hawaii and Alaska


25,126



7.3
%


23,267



7.6
%


22,486



8.3
%Other


7,010



2.0
%


5,495



1.8
%


7,327



2.7
%Gross premiums written

$
346,006



100.0
%

$
305,504



100.0
%

$
270,036



100.0
%  5




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##### Table of Contents



Premium Range

Annual Premium AverageAlternative Risk Transfer

$100,000-9,000,000


$500,000Transportation

$5,000-1,600,000


$72,000Specialty Personal Lines

$50-20,000


$900Hawaii and Alaska

$350-850,000


$5,400   Alternative Risk Transfer.
         6




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##### Table of Contents



Transportation.
  Specialty Personal Lines.
  Hawaii and Alaska.
 7




---



##### Table of Contents



Geographic
    Concentration
    Year Ended December 31,2007


2006Percent of





Percent ofVolume


Total


Volume


Total(Dollars in thousands)California

$
57,291



17.1
%

$
58,622



19.9
%Hawaii


25,465



7.6
%


24,340



8.3
%Florida


20,252



6.1
%


18,128



6.2
%North Carolina


19,721



5.9
%


18,046



6.1
%Texas


21,050



6.3
%


17,293



5.9
%New York


18,327



5.5
%


8,804



3.0
%All other states


172,558



51.5
%


148,796



50.6
%Direct premiums written

$
334,664



100.0
%

$
294,029



100.0
%   Concentration
    by Statutory Line of Business
    Year Ended December 31,2007


2006Percent of





Percent ofVolume


Total


Volume


Total(Dollars in thousands)Auto and other liability

$
209,676



62.7
%

$
181,195



61.6
%Auto physical damage


72,569



21.7
%


64,945



22.1
%Workers compensation


41,261



12.3
%


41,411



14.1
%Other lines:Allied lines


172



0.0
%


80



0.0
%Commercial multiple peril


1,411



0.4
%


1,159



0.4
%Ocean marine


861



0.3
%


978



0.3
%Inland marine


8,701



2.6
%


4,251



1.5
%Surety


13



0.0
%


10



0.0
%All others


11,158



3.3
%


6,478



2.2
%Direct premiums written

$
334,664



100.0
%

$
294,029



100.0
%   Underwriting
   8




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##### Table of Contents



Marketing
    and Distribution
    Reinsurance
      Gross


Prepaid


Total





CededA.M.  Best


Reinsurance


Reinsurance


Reinsurance


Percent of


Premiums


Percent ofRating


Receivables


Premium


Assets


Total


Written


Total(Dollars in thousands)Platinum UnderwritersReinsurance, Inc.


A


$
29,886


$
4,115


$
34,001



27.8
%

$
13,422



18.2
%Motors Ins Corp


A−



20,438



5,075



25,513



20.8
%


14,855



20.1
%TRAX Insurance, Ltd.






8,426



905(1
)


9,331



7.6
%


11,445



15.5
%Great American Insurance Company


A



7,028



1,276



8,304



6.8
%


3,957



5.4
%General Reinsurance


A++



5,383



1,428



6,811



5.6
%


3,318



4.5
%Subtotal






71,161



12,799



83,960



68.6
%


46,997



63.7
%All other reinsurers






26,930



11,526



38,456



31.4
%


26,867



36.3
%Total





$
98,091


$
24,325


$
122,416



100.0
%

$
73,864



100.0
%     (1)
    
    Does not reflect a $10.7 million letter of credit that is
    held as collateral for the net receivable from TRAX Insurance,
    Ltd., a member-owned captive insurance program.   9




---



##### Table of Contents



Claims
    Management and Administration
      24-hour,
    and/or
   10




---



##### Table of Contents



Reserves
    for Unpaid Losses and Loss Adjustment Expenses
    (LAE)
      As re-estimated at December 31, 2007,
  Net Liability For Unpaid Losses And Loss Adjustment
    Expenses:

1997


1998


1999


2000


2001


2002


2003


2004


2005


2006


2007(Dollars in thousands)As originally estimated

$
20,997


$
23,339


$
26,566


$
30,292


$
48,456


$
67,162


$
86,740


$
111,644


$
151,444


$
181,851


$
210,302As re-estimated at December 31, 2007


19,166



21,067



25,372



31,410



46,880



60,551



79,673



99,768



142,929



176,179Liability re-estimated as of:One year later


19,817



22,643



24,923



32,751



48,494



63,462



84,485



106,409



143,991



176,179Two years later


19,448



21,948



26,252



33,473



47,479



64,687



83,862



103,416



142,929Three years later


18,896



21,903



26,380



31,884



47,250



63,037



81,991



99,768Four years later


19,258



21,608



25,531



31,488



46,400



62,564



79,673Five years later


18,966



20,542



25,138



31,590



46,961



60,551Six years later


18,957



21,008



24,989



31,757



46,880Seven years later


19,064



21,051



25,364



31,410Eight years later


19,146



21,150



25,372Nine years later


19,254



21,067Ten years later


19,166Net cumulative (deficiency) redundancy


1,831



2,272



1,194



(1,118
)


1,576



6,611



7,067



11,876



8,515



5,672Net cumulative (deficiency) redundancy  %


8.7
%


9.7
%


4.5
%


(3.7%
)


3.3
%


9.8
%


8.1
%


10.6
%


5.6
%


3.1
%Cumulative paid of:One year later


7,268



8,742



10,307



14,924



18,048



22,792



29,616



37,049



51,901



63,314Two years later


11,769



14,189



17,637



20,077



28,510



36,927



48,672



59,038



85,193Three years later


14,980



18,170



20,157



24,313



35,718



48,660



61,001



76,617Four years later


17,543



19,115



22,383



26,869



40,615



53,531



68,594Five years later


18,253



20,158



23,413



28,591



43,474



57,697Six years later


18,573



20,537



24,033



30,180



45,365Seven years later


18,815



20,812



24,594



30,813Eight years later


18,999



20,913



24,826Nine years later


19,082



20,974Ten years later


19,132  11




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##### Table of Contents



1997


1998


1999


2000


2001


2002


2003


2004


2005


2006


2007(Dollars in thousands)As originally estimated:Net liability shown above

$
20,997


$
23,339


$
26,566


$
30,292


$
48,456


$
67,162


$
86,740


$
111,644


$
151,444


$
181,851


$
210,302Add reinsurance recoverables


6,729



9,519



11,396



12,416



22,395



35,048



41,986



59,387



71,763



84,115



91,786Gross liability

$
27,726


$
32,858


$
37,962


$
42,708


$
70,851


$
102,210


$
128,726


$
171,031


$
223,207


$
265,966


$
302,088As re-estimated at December 31, 2007Net liability shown above

$
19,166


$
21,067


$
25,372


$
31,410


$
46,880


$
60,551


$
79,673


$
99,768


$
142,929


$
176,179



N/AAdd reinsurance recoverables reestimated


5,500



4,940



6,764



12,985



34,207



47,287



51,889



60,219



73,870



77,854



N/AGross liability

$
24,666


$
26,007


$
32,136


$
44,395


$
81,087


$
107,838


$
131,562


$
159,987


$
216,799


$
254,033



N/AGross cumulative (deficiency) redundancy

$
3,060


$
6,851


$
5,826


$
(1,687
)

$
(10,236
)

$
(5,628
)

$
(2,836
)

$
11,044


$
6,408


$
11,933



N/AGross cumulative (deficiency) redundancy  %


11.0
%


20.9
%


15.3
%


(4.0
)%


(14.4
)%


(5.5
)%


(2.2
)%


6.5
%


2.9
%


4.5
%


N/A      Investments  General
   12




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##### Table of Contents



At December 31,2007


2006Short term investments


4.7
%


5.9
%Fixed maturities:US Government and government agencies


45.9
%


57.4
%State and local government obligations


16.8
%


11.5
%Mortgage-backed securities


7.7
%


Corporate obligations


13.2
%


16.3
%Total fixed maturities


83.6
%


85.2
%Equity securities:Common stocks


6.2
%


3.2
%Preferred stocks


5.5
%


5.7
%Total equity securities


11.7
%


8.9
%Total


100.0
%


100.0
%   Year Ended December 31,2007


2006


2005Yield on short term investments:Excluding realized gains and losses


4.9
%


4.3
%


2.5
%Including realized gains and losses


4.9
%


4.3
%


2.5
%Yield on fixed maturities:Excluding realized gains and losses


4.7
%


4.7
%


4.4
%Including realized gains and losses


4.7
%


4.7
%


4.4
%Yield on equity securities:Excluding realized gains and losses


5.3
%


4.3
%


4.3
%Including realized gains and losses


3.5
%


7.8
%


5.4
%Yield on all investments:Excluding realized gains and losses


4.8
%


4.6
%


4.2
%Including realized gains and losses


4.6
%


4.9
%


4.3
%     13




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##### Table of Contents



Year Ended December 31,2007


2006


2005Fixed maturities:National Interstate Total Return on Fixed Maturities


6.9
%


4.8
%


2.5
%Lehman Brothers Intermediate Aggregate Index


7.0
%


4.6
%


2.0
%Equity securities:National Interstate Total Return on Preferred Stock


(13.9
%)


9.0
%


4.6
%Merrill Lynch Preferred Stock Index


(11.7
%)


8.4
%


3.3
%National Interstate Total Return on all other Equity


4.3
%


13.2
%


6.0
%Standard & Poors 500 Index


5.5
%


15.8
%


4.9
%   Fixed
    Maturity Investments
    NAICDesignation


Comparable S&P Rating

Amortized Cost


Fair Value


% of Total(Dollars in thousands)1


AAA, AA, A

$
356,802


$
358,174



95.2
%2


BBB


16,281



15,250



4.1
%Total Investment Grade


373,083



373,424



99.3
%3


BB


2,401



2,361



0.6
%4


B


503



483



0.1
%5,6


CCC, CC, C, D


32



32



0.0
%Total Non-Investment Grade


2,936



2,876



0.7
%Total

$
376,019


$
376,300



100.0
%     December 31, 2007Fair Value


% of Total(Dollars in thousands)One year or less

$
35,545



9.4
%More than one year to five years


148,848



39.6
%More than five years to ten years


138,318



36.8
%More than ten years


18,880



5.0
%341,591



90.8
%Mortgage-backed securities


34,709



9.2
%Total fixed maturities

$
376,300



100.0
%    14




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##### Table of Contents



Competition     Ratings   Regulation  State
    Regulation
  General
   15




---



##### Table of Contents



Statutory
    Accounting Principles
      Restrictions
    on Paying Dividends
   16




---



##### Table of Contents



Assessments
    and Fees Payable
    Risk-Based
    Capital (RBC) Requirements
    Restrictions
    on Cancellation, Non-Renewal or Withdrawal
    Federal
    Regulation
  General
    The
    Terrorism Risk Insurance Act (the Act)
     17




---



##### Table of Contents



Employees    ITEM 1A
    Risk
    Factors  Please
    refer to Forward-Looking Statements following the
    Index in the front of this
    Form 10-K.
    If we
    expand our operations too rapidly and do not manage that
    expansion effectively, our financial performance could be
    adversely affected.
    Because
    we are primarily a transportation insurer, conditions in that
    industry could adversely affect our business.
     18




---



##### Table of Contents



Our
    growth strategy includes expanding into product lines in which
    we have limited experience.
    We
    face competition from companies with greater financial
    resources, broader product lines, higher ratings and stronger
    financial performance than us, which may impair our ability to
    retain existing customers, attract new customers and maintain
    our profitability and financial strength.
      If we
    are not able to attract and retain independent agents and
    brokers, our revenues could be negatively
    affected.
    We are
    subject to comprehensive regulation and our ability to earn
    profits may be restricted by these regulations.
    
    statutory capital and surplus and reserve requirements; 19




---



##### Table of Contents




    standards of solvency that must be met and maintained;
    payment of dividends;
    changes of control of insurance companies;
    transactions between an insurance company and any of its
    affiliates;
    licensing of insurers and their agents;
    types of insurance that may be written;
    market conduct, including underwriting and claims practices;
    provisions for unearned premiums, losses and other obligations;
    ability to enter and exit certain insurance markets;
    nature of and limitations on investments, premium rates or
    restrictions on the size of risks that may be insured under a
    single policy;
    privacy practices;
    deposits of securities for the benefit of policyholders;
    prior approval of certain corporate transactions;
    payment of sales compensation to third parties;
    approval of policy forms; and
    guaranty fund and voluntary market regulations and assessments.      As a
    holding company, we are dependent on the results of operations
    of our insurance company subsidiaries to meet our obligations
    and pay future dividends.
   20




---



##### Table of Contents



We are
    currently rated A (Excellent) by A.M. Best,
    their third highest rating out of 16 rating categories. A
    decline in our rating below A- could adversely
    affect our position in the insurance market, make it more
    difficult to market our insurance products and cause our
    premiums and earnings to decrease.
      New
    claim and coverage issues are continually emerging in the
    insurance industry and these new issues could negatively impact
    our revenues, our business operations or our
    reputation.
    If our
    claims payments and related expenses exceed our reserves, our
    financial condition and results of operations could be adversely
    affected.
      
    the amount of claims payments;
    the expenses that we incur in resolving claims;
    legislative and judicial developments; and
    changes in economic conditions, including the effect of
    inflation. 21




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##### Table of Contents



Market
    fluctuations, changes in interest rates or a need to generate
    liquidity can have significant and negative effects on our
    investment portfolio.
        We may
    not be successful in reducing our risk and increasing our
    underwriting capacity through reinsurance arrangements, which
    could adversely affect our business, financial condition and
    results of operations.
    We are
    subject to credit risk with respect to the obligations of our
    reinsurers and certain of our insureds. The inability of our
    risk sharing partners to meet their obligations could adversely
    affect our profitability.
   22




---



##### Table of Contents



We may
    not be successful in executing our business plan for our US
    Virgin Islands servicing operations.
    Our
    inability to retain our senior executives and other key
    personnel could adversely affect our business.
    Your
    interests as a holder of our common shares may be different than
    the interests of our majority shareholder, Great American
    Insurance Company.
   23




---



##### Table of Contents



We may
    have conflicts of interest with our majority shareholder, Great
    American Insurance Company, which we would be unable to resolve
    in our favor.
      Provisions
    in our organizational documents, Ohio corporate law and the
    insurance laws of Ohio, Pennsylvania and Hawaii could impede an
    attempt to replace or remove our management or Directors or
    prevent or delay a merger or sale, which could diminish the
    value of our common shares.
    
    a classified Board of Directors consisting of eight Directors
    divided into two classes;
    the inability of our shareholders to remove a Director from the
    Board without cause;
    requiring a vote of holders of 50% of the common shares to call
    a special meeting of the shareholders;
    requiring a two-thirds vote to amend the shareholder protection
    provisions of our Code of Regulations and to amend the Articles
    of Incorporation;
    requiring the affirmative vote of a majority of the voting power
    of our shares represented at a special meeting of shareholders;
    excluding the voting power of interested shares to approve a
    control share acquisition under Ohio law; and
    prohibiting a merger, consolidation, combination or majority
    share acquisition between us and an interested shareholder or an
    affiliate of an interested shareholder for a period of three
    years from the date on which the shareholder first became an
    interested shareholder, unless previously approved by our Board.     24




---



##### Table of Contents



Future
    sales of our common shares may affect the trading price of our
    common shares.
    Form S-3. Form S-8 Form S-8
  We
    completed our initial public offering in February 2005 and you
    may have difficulty selling your common shares because of the
    limited trading volume for such shares.
    We
    face ongoing challenges as a result of being a public company
    and our financial results could be adversely
    affected.
     25




---



##### Table of Contents



ITEM 1B
    Unresolved
    Staff Comments    ITEM 2
    Properties      ITEM 3
    Legal
    Proceedings  Please
    refer to Forward-Looking Statements following the
    Index in front of this
    Form 10-K.
        ITEM 4
    Submission
    of Matters to a Vote of Security Holders   26




---



##### Table of Contents



PART II  ITEM 5
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities  Please
    refer to Forward-Looking Statements following the
    Index in front of this
    Form 10-K.
  Market
    Information
    2007


2006High


Low


High


LowFirst Quarter

$
28.50


$
20.29


$
23.57


$
19.00Second Quarter


27.10



23.12



31.50



18.62Third Quarter


35.79



25.01



29.05



22.13Fourth Quarter


37.01



30.15



29.98



22.10     Dividend
    Policy
       27




---



##### Table of Contents



Performance
    Graph
    
  Cumulative
    Total Return as of December 31, 2007
    (assumes a $100 investment at the close of trading on
    January 27, 2005)
  Company/Index

1/28/05

6/30/05

12/31/05

6/30/06

12/31/06

6/30/07

12/31/07NATL Common Stock

$
100


$
147


$
142


$
202


$
182


$
196


$
249Nasdaq Insurance Stocks


100



108



117



121



132



138



132Nasdaq Index


100



101



109



107



119



128



129  28




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##### Table of Contents



ITEM 6
    Selected
    Financial Data  Form 10-K
  At and for the Year Ended December 31,2007


2006


2005


2004


2003(In thousands, except per share data)Operating Data:Gross premiums written(1)

$
346,006


$
305,504


$
270,036


$
224,984


$
187,561Net premiums written(2)

$
272,142


$
241,916


$
211,106


$
166,419


$
141,924Premiums earned

$
257,561


$
217,319


$
194,397


$
156,908


$
126,364Net investment income


22,141



17,579



12,527



8,613



5,772Net realized (losses) gains on investments


(653
)


1,193



278



1,661



1,529Other income


4,137



2,387



1,974



1,967



2,211Total revenues


283,186



238,478



209,176



169,149



135,876Losses and loss adjustment expenses


149,501



129,491



117,449



92,008



68,798Commissions and other underwriting expense


50,922



42,671



35,741



34,201



30,038Other operating and general expenses


12,140



9,472



8,436



6,053



4,566Expense on amounts withheld(3)


3,708



2,147



992



835



327Interest expense


1,550



1,522



1,421



1,610



1,043Total expenses


217,821



185,303



164,039



134,707



104,772Income before income taxes


65,365



53,175



45,137



34,442



31,104Provision for income taxes


21,763



17,475



14,857



11,674



11,260Net income

$
43,602


$
35,700


$
30,280


$
22,768


$
19,844Selected GAAP Ratios:Losses and loss adjustment expense ratio(4)


58.0
%


59.6
%


60.4
%


58.6
%


54.4
%Underwriting expense ratio(5)


22.9
%


22.9
%


21.7
%


24.4
%


25.6
%Combined ratio(6)


80.9
%


82.5
%


82.1
%


83.0
%


80.0
%Return on equity(7)


22.6
%


22.8
%


28.5
%


37.2
%


49.9
%Per Share Data(8):Earnings per common share, basic

$
2.27


$
1.87


$
1.62


$
1.50


$
1.32Earnings per common share, assuming dilution


2.25



1.85



1.60



1.47



1.29Book value per common share, basic (at year end)(9)

$
11.08


$
9.07


$
7.32


$
4.69


$
3.31Weighted average number of common shares outstanding, basic


19,193



19,136



18,737



15,171



15,057Weighted average number of common shares outstanding, diluted


19,348



19,302



18,975



15,480



15,347Common shares outstanding (at year end)


19,312



19,159



19,055



15,530



15,024Cash dividends per common share

$
0.20


$
0.16


$
0.08


$



$
   29




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##### Table of Contents



At December 31,2007


2006


2005


2004


2003(Dollars in thousands)Balance Sheet Data:Cash and investments

$
492,916


$
406,454


$
320,220


$
238,951


$
167,622Reinsurance recoverable


98,091



90,070



77,834



63,128



43,119Total assets


898,634



806,248



523,003



401,236



300,656Unpaid losses and loss adjustment expenses


302,088



265,966



223,207



171,031



128,726Long-term debt(10)


15,464



15,464



16,297



32,547



18,901Total shareholders equity


212,806



173,763



139,533



72,789



49,680   At and for the Year Ended December 31,2007


2006


2005


2004


2003Selected Statutory Data(11):Policyholder surplus(12)

$
182,302


$
148,266


$
122,825


$
92,124


$
58,621Combined ratio(13)


78.3
%


82.4
%


77.1
%


81.3
%


81.7
%     (1)
    
    The sum of premiums written on insurance policies issued by us
    and premiums assumed by us on policies written by other
    insurance companies.(2)
    
    Gross premiums written less premiums ceded to reinsurance
    companies.(3)
    
    We invest funds in the participant loss layer for several of the
    alternative risk transfer programs. We receive investment income
    and incur an equal expense on the amounts owed to alternative
    risk transfer participants. Expense on amounts
    withheld represents investment income that we remit back
    to alternative risk transfer participants. The related
    investment income is included in our Net investment
    income line on our Consolidated Statements of Income.
    Beginning in 2007, we began presenting this expense as a
    separate income statement line item and no longer included as
    part of Other operating and general expenses or the
    calculation of the Underwriting expense ratio. All
    prior periods have been reclassified to conform to the current
    periods presentation.(4)
    
    The ratio of losses and LAE to premiums earned.(5)
    
    The ratio of the net of the sum of commissions and other
    underwriting expenses, other operating expenses less other
    income to premiums earned.(6)
    
    The sum of the loss and LAE ratio and the underwriting expense
    ratio.(7)
    
    The ratio of net income to the average of the shareholders
    equity at the beginning and end of the period.(8)
    
    Adjusted to reflect a
    200-for-1 share
    split effective December 6, 2004.(9)
    
    Book value per common share is computed using only vested common
    shares. All unvested restricted shares have been excluded for
    purposes of this calculation. As of December 31, 2007 total
    vested common shares were 19,205,000. There were no unvested
    restricted shares prior to 2007.  (10)
    
    The 2004 data includes a $15.0 million note payable to
    Great American, junior subordinated debt and bank debt.(11)
    
    While financial data is reported in accordance with GAAP for
    shareholder and other investment purposes, it is reported on a
    statutory basis for insurance regulatory purposes. Certain
    statutory expenses differ from amounts reported under GAAP.
    Specifically, under GAAP, premium taxes and other variable costs
    incurred in connection with writing new and renewal business are
    capitalized and amortized on a pro rata basis over the period in
    which the related premiums are earned. On a statutory basis,
    these items are expensed as incurred. In addition, certain other
    expenses, such as those related to the expensing or amortization
    of computer software, are accounted for differently for
    statutory purposes than the treatment accorded under GAAP.(12)
    
    The statutory policyholder surplus of NIIC, which includes the
    statutory policyholder surplus of its subsidiaries, NIIC-HI and
    TCC.(13)
    
    Statutory combined ratio of NIIC represents the sum of the
    following ratios: (1) losses and LAE incurred as a
    percentage of net earned premium and (2) underwriting
    expenses incurred as a percentage of net written premiums. 30




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##### Table of Contents



ITEM 7
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Please refer to Forward-Looking Statements
    following the Index in front of this
    Form 10-K.
  The following discussion and analysis of our historical
    consolidated financial statements should be read in conjunction
    with our audited consolidated financial statements and the
    related notes included elsewhere in this
    Form 10-K.
  Overview
        start-up
    Submissions
  
    The increase or decrease in the number of new applications we
    receive. This is influenced by the effectiveness of our
    marketing activities compared to the marketing activities of our
    competitors in each market.
    The change in the number of current policyholders that are
    available for a renewal quote. The number of policyholders
    available for renewal changes based upon the economic conditions
    impacting our customer groups and the extent of consolidation
    that may be taking place within the industries we support. 31




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##### Table of Contents



Quotes
  
    The change in the percentage of the new applications received
    that do not receive a quote from us. We do not quote risks that
    do not meet our risk selection criteria or for which we have not
    been provided complete application data. We refer to this ratio
    as the declination ratio and an increasing
    declination ratio usually results in reduced opportunities to
    write new business.  Sales
  
    The change in percentage of the quotes we issue that are
    actually sold. We refer to this ratio as the hit
    ratio. Hit ratios are affected by the number of
    competitors, the prices quoted by these competitors and the
    degree of difference between the competitors pricing,
    terms and conditions and ours.  Rates
  
    The change in our rate structure from period to period. The
    rates we file and quote are impacted by several factors
    including: the cost and extent of the reinsurance we purchase;
    our operating efficiencies; our average loss costs, which
    reflect the effectiveness of our underwriting; our underwriting
    profit expectations; and our claims adjusting processes. The
    difference between our rates and the rates of our competitors is
    the primary factor impacting the revenue growth of our
    established product lines.  Product
    Offerings and Distribution
  
    We operate in multiple markets with multiple distribution
    approaches to attempt to reduce the probability that an adverse
    competitive response in any single market will have a
    significant impact on our overall business. We also attempt to
    maintain several new products, product line extensions or
    product distribution approaches in active development status so
    we are able to take advantage of market opportunities. We select
    from potential new product ideas based on our stated new
    business criteria and the anticipated competitive response.  Industry
    and Trends
  1999-2000).
    
    Our business model and bottom line orientation have resulted in
    disciplined and consistent risk assessment and pricing adequacy. 32




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##### Table of Contents




    Our ability to attract and retain some of the best
    transportation companies in the industries we serve and insure
    them directly or through our captive programs.
    Our stable operating expenses at or below the revenue growth
    rate.          Revenues
     33




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##### Table of Contents



Expenses
         34




---



##### Table of Contents



Results
    of Operations
  Overview
    Gross
    Premiums Written
    Year Ended December 31,2007


2006


2005Amount


Percent


Amount


Percent


Amount


Percent(Dollars in thousands)Alternative Risk Transfer

$
167,717



48.5
%

$
135,283



44.3
%

$
103,537



38.4
%Transportation


90,984



26.3
%


89,399



29.3
%


90,751



33.6
%Specialty Personal Lines


55,169



15.9
%


52,060



17.0
%


45,935



17.0
%Hawaii and Alaska


25,126



7.3
%


23,267



7.6
%


22,486



8.3
%Other


7,010



2.0
%


5,495



1.8
%


7,327



2.7
%Gross premiums written

$
346,006



100.0
%

$
305,504



100.0
%

$
270,036



100.0
%          35




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##### Table of Contents



Premiums
    Earned
  2007 compared to 2006.
  Year Ended December 31,


Change2007


2006


Amount


Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer

$
105,123


$
75,712


$
29,411



38.8
%Transportation


73,592



71,682



1,910



2.7
%Specialty Personal Lines


50,678



46,445



4,233



9.1
%Hawaii and Alaska


17,101



15,257



1,844



12.1
%Other


11,067



8,223



2,844



34.6
%Total premiums earned

$
257,561


$
217,319


$
40,242



18.5
%    36




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##### Table of Contents



2006 compared to 2005.
  Year Ended December 31,


Change2006


2005


Amount


Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer

$
75,712


$
60,223


$
15,489



25.7
%Transportation


71,682



70,502



1,180



1.7
%Specialty Personal Lines


46,445



38,561



7,884



20.4
%Hawaii and Alaska


15,257



14,855



402



2.7
%Other


8,223



10,256



(2,033
)


(19.8
)%Total premiums earned

$
217,319


$
194,397


$
22,922



11.8
%     Underwriting
    and Loss Ratio Analysis
     37




---



##### Table of Contents



Year Ended December 31,2007


2006


2005(Dollars in thousands)Gross premiums written

$
346,006


$
305,504


$
270,036Ceded reinsurance


(73,864
)


(63,588
)


(58,930
)Net premiums written


272,142



241,916



211,106Change in unearned premiums, net of ceded


(14,581
)


(24,597
)


(16,709
)Net premiums earned

$
257,561


$
217,319


$
194,397Combined Ratios:Loss and LAE ratio(1)


58.0
%


59.6
%


60.4
%Underwriting expense ratio(2)


22.9
%


22.9
%


21.7
%Combined ratio


80.9
%


82.5
%


82.1
%     (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. Beginning in 2007, Expense on amounts
    withheld is presented as a separate income statement line
    item and no longer included as part of Other operating and
    general expenses or the calculation of the
    Underwriting expense ratio. All prior periods have
    been reclassified to conform to the current periods
    presentation.  2007 compared to 2006.
    2006 compared to 2005.
   38




---



##### Table of Contents



Investment
    Income
  2007 compared to 2006.
  2006 compared to 2005.
  Realized
    Gains (Losses) on Investments
  2007 compared to 2006.
    2006 compared to 2005.
  Other
    Income
  2007 compared to 2006.
  2006 compared to 2005.
  Commissions
    and Other Underwriting Expenses
  2007 compared to 2006.
 39




---



##### Table of Contents



2006 compared to 2005.
  Other
    Operating and General Expenses
  2007 compared to 2006.
    2006 compared to 2005.
  Expense
    on Amounts Withheld
  2007 compared to 2006.
  2006 compared to 2005.
  Income
    Taxes
  2007 compared to 2006.
  2006 compared to 2005.
  Financial
    Condition
  Investments
   40




---



##### Table of Contents



Securities with


Securities withUnrealized


UnrealizedGains


Losses(Dollars in thousands)Fixed Maturities:Fair value of securities

$
289,574


$
86,726Amortized cost of securities


286,475



89,544Gross unrealized gain or loss

$
3,099


$
(2,818
)Fair value as a % of amortized cost


101.1
%


96.9
%Number of security positions held


356



85Number individually exceeding $50,000 gain or loss


8



11Concentration of gains or losses by type or industry:US Government and government agencies

$
1,530


$
(380
)State, municipalities and political subdivisions


798



(71
)Mortgage-backed securities


332



(37
)Banks, insurance and brokers


335



(1,380
)Industrial and other


104



(950
)Percentage rated investment grade(1)


99.5
%


98.4
%Equity Securities:Fair value of securities

$
20,250


$
32,390Cost of securities


19,827



37,973Gross unrealized gain or loss

$
423


$
(5,583
)Fair value as a % of cost


102.1
%


85.3
%Number individually exceeding $50,000 gain or loss


4



40     (1)
    
    Investment grade of AAA to BBB by Standard &
    Poors Corporation. 41




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##### Table of Contents



Securities with


Securities withUnrealized


UnrealizedGains


LossesMaturity:One year or less


7.0
%


17.6
%After one year through five years


40.5
%


36.5
%After five years through ten years


38.7
%


30.3
%After ten years


3.8
%


8.9
%90.0
%


93.3
%Mortgage-backed securities


10.0
%


6.7
%100.0
%


100.0
%     At December 31, 2007Aggregate


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 ( 6 issues)

$
9,978


$
447



104.7
%More than one year ( 2 issues)


1,589



268



120.3
%Less than $50,000 ( 348 issues)


278,007



2,384



100.9
%$
289,574


$
3,099Securities with unrealized losses:Exceeding $50,000 and for:Less than one year ( 2 issues)

$
1,569


$
(186
)


89.4
%More than one year ( 9 issues)


13,963



(2,020
)


87.4
%Less than $50,000 ( 74 issues)


71,194



(612
)


99.1
%$
86,726


$
(2,818
)Equity Securities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year ( 4 issues)

$
5,747


$
326



106.0
%More than one year ( 0 issues)










0.0
%Less than $50,000 ( 22 issues)


14,503



97



100.7
%$
20,250


$
423Securities with unrealized losses:Exceeding $50,000 and for:Less than one year ( 40 issues)

$
26,241


$
(4,979
)


84.1
%More than one year ( 0 issues)










0.0
%Less than $50,000 ( 33 issues)


6,149



(604
)


91.1
%$
32,390


$
(5,583
)  42




---



##### Table of Contents



Net RealizedGains (Losses)


Charges foron Sales


Impairment


Total(Dollars in thousands)Year ended:2007

$
321


$
(974
)

$
(653
)2006


1,193







1,1932005


555



(277
)


278   Liquidity
    and Capital Resources
  Capital Ratios.
  Sources of Funds.
     43




---



##### Table of Contents



44




---



##### Table of Contents



12-month
  Off-Balance Sheet Items.
  Contractual Obligations.
  Payment Due by PeriodWithin








More thanTotal


1 Year


2-3 Years


4-5 Years


5 Years(Dollars in thousands)Gross unpaid losses and LAE(1)

$
302,088


$
122,762


$
122,722


$
41,317


$
15,287Securities lending obligations(2)


141,316



141,316











Long-term debt obligations(3)


15,464



15,464











Operating lease obligations


1,325



314



553



355



103Total

$
460,193


$
279,856


$
123,275


$
41,672


$
15,390     (1)
    
    Dollar amounts and time periods are estimates based on
    historical net payment patterns applied to the gross reserve and
    do not represent actual contractual obligations. Actual payments
    and their timing could differ significantly from these
    estimates, and the estimates provided do not reflect potential
    recoveries under reinsurance treaties.(2)
    
    The timing for the return of the collateral associated with our
    securities lending varies, but generally within one year;
    therefore, the return of collateral is reflected as being due
    within one year. Management believes there is an active market
    for securities lending and currently intends to participate in
    this program beyond just one year.(3)
    
    We plan to exercise the redemption of these debentures in whole
    on May 23, 2008.  Critical
    Accounting Policies
    Loss and
    Loss Adjustment Expenses Reserves
   45




---



##### Table of Contents




    the Case Incurred Development Method;
    the Paid Development Method;
    the Bornhuetter-Ferguson Method; and
    the Incremental Paid LAE to Paid Loss Methods.      
    open and closed claim counts;
    average case reserves and average incurred on open claims;
    closure rates and statistics related to closed and open claim
    percentages;
    average closed claim severity;
    ultimate claim severity;
    reported loss ratios;
    projected ultimate loss ratios; and
    loss payment patterns.   46




---



##### Table of Contents



CumulativeLine of Business

ImpactCommercial Auto Liability

$
1.7 millionWorkers Compensation

$
0.3 million     5-yr. Average

Net Reserves

Effect on NetDevelopment (*)

December 31, 2007

Earnings(2.7
)%

$
210.3 million


$
5.7 million     (*)
    
    Net of tax effect.    Commercial Auto Liability.
    
    litigious climate;
    unpredictability of judicial decisions regarding coverage issues;
    magnitude of jury awards;
    outside counsel costs; and
    frequency and timing of claims reporting.    Workers Compensation.
  
    legislative actions and regulatory interpretations;
    future medical cost inflation; and
    timing of claims reporting. 47




---



##### Table of Contents



48




---



##### Table of Contents



At December 31, 2007Statutory Lines of Business:

Case


IBNR


LAE


Total(Dollars in thousands)Commercial auto liability

$
64,504


$
109,323


$
36,346


$
210,173Workers compensation


11,100



39,642



6,075



56,817Auto physical damage


7,380



7,165



2,341



16,886General liability


1,163



3,944



1,761



6,868Private passenger


3,156



1,399



1,025



5,580Inland marine


692



2,854



235



3,781Commercial multiple peril


908



298



213



1,419Other lines


293



216



55



564$
89,196


$
164,841


$
48,051


$
302,088   Reinsurance Recoverables.
  Other-Than-Temporary
    Impairment
  case-by-case
 49




---



##### Table of Contents




    the length of time and the extent to which the market value has
    been below amortized cost;
    whether the issuer is experiencing significant financial
    difficulties;
    economic stability of an entire industry sector or subsection;
    whether the issuer, series of issuers or industry has a
    catastrophic type of loss;
    the extent to which the unrealized loss is credit-driven or a
    result of changes in market interest rates;
    historical operating, balance sheet and cash flow data;
    internally generated financial models and forecasts;
    our ability and intent to hold the investment for a period of
    time sufficient to allow for any anticipated recovery in market
    value; and
    other subjective factors, including concentrations and
    information obtained from regulators and rating agencies.   50




---



##### Table of Contents



ITEM 7A
    Quantitative
    and Qualitative Disclosures About Market Risk    Fixed Maturity Portfolio.
    December 31, 2007


December 31, 2006Principal





PrincipalCash Flows


Rate


Cash Flows


Rate(Dollars in thousands)Subsequent calendar year

$
73,258



4.8
%

$
54,614



4.8
%2nd Subsequent calendar year


43,464



4.6
%


42,741



4.8
%3rd Subsequent calendar year


44,736



4.8
%


37,812



4.8
%4th Subsequent calendar year


46,946



5.1
%


35,615



4.4
%5th Subsequent calendar year


36,486



5.2
%


28,628



5.1
%Thereafter


127,789



4.9
%


131,561



4.8
%Total

$
372,679



4.9
%

$
330,971



4.8
%Fair value

$
376,300






$
327,449   Equity Risk.
 51




---



##### 



ITEM 8
    Financial
    Statements and Supplementary Data   
 PageIndex to Financial StatementsManagements Report on Internal Control Over
    Financial Reporting


53Reports of Independent Registered Public
    Accounting Firm


54Consolidated Balance Sheets:December 31, 2007 and 2006


56Consolidated Statements of Income:Years ended December 31, 2007, 2006 and 2005


57Consolidated Statements of Shareholders
    Equity:Years ended December 31, 2007, 2006 and 2005


58Consolidated Statements of Cash Flows:Years ended December 31, 2007, 2006 and 2005


59Notes to Consolidated Financial Statements


60     52




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##### Table of Contents



MANAGEMENTS
    REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING    
    Pertain to the maintenance of records that in reasonable detail
    accurately and fairly reflect the transactions and dispositions
    of the assets of the Company;
    Provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with generally accepted accounting principles and
    that receipts and expenditures of the Company are being made
    only in accordance with authorizations of management and
    directors of the Company; and
    Provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of the
    Companys assets that could have a material effect on the
    financial statements.  Internal Control  Integrated Framework,
    /s/  David
    W.
    MichelsonDavid
    W. Michelson

/s/  Julie
    A.
    McGrawJulie
    A. McGrawPresident and Chief Executive Officer

Vice President and Chief Financial Officer  53




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM             Internal Control 
    Integrated Framework
  
    54




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 ON INTERNAL CONTROL OVER FINANCIAL REPORTING
     Internal Control 
    Integrated Framework
            
    55




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
    BALANCE SHEETS  December 31,2007


2006(In thousands, except per share data)ASSETSInvestments:Fixed maturities available-for-sale, at fair value (amortized
    cost  $376,019 and $332,552, respectively)

$
376,300


$
327,449Equity securities available-for-sale, at fair value
    (cost  $57,800 and $33,476, respectively)


52,640



34,095Short-term investments, at cost which approximates fair value


20,907



22,744Total investments


449,847



384,288Cash and cash equivalents


43,069



22,166Securities lending collateral


139,305



158,928Accrued investment income


4,783



4,321Premiums receivable, net of allowance for doubtful accounts of
    $462 and $522, respectively


84,708



77,076Reinsurance recoverables on paid and unpaid losses


98,091



90,070Prepaid reinsurance premiums


24,325



21,272Deferred policy acquisition costs


17,578



15,035Deferred federal income taxes


11,993



10,731Property and equipment, net


19,502



18,586Funds held by reinsurer


3,337



2,340Prepaid expenses and other assets


2,096



1,435Total assets

$
898,634


$
806,248LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses

$
302,088


$
265,966Unearned premiums and service fees


145,296



127,723Long-term debt


15,464



15,464Amounts withheld or retained for account of others


38,739



27,885Reinsurance balances payable


7,596



7,156Securities lending obligation


141,316



158,928Accounts payable and other liabilities


24,363



19,676Commissions payable


7,332



6,347Assessments and fees payable


3,634



3,340Total liabilities


685,828



632,485Shareholders equity:Preferred shares  no par valueAuthorized  10,000 sharesIssued  0 shares






Common shares  $0.01 par valueAuthorized  50,000 sharesIssued  23,350 shares, including 4,145 and
    4,191 shares, respectively, in treasury


234



234Additional paid-in capital


45,566



43,921Retained earnings


178,190



138,450Accumulated other comprehensive loss


(5,321
)


(2,915
)Treasury shares


(5,863
)


(5,927
)Total shareholders equity


212,806



173,763Total liabilities and shareholders equity

$
898,634


$
806,248    56




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
    STATEMENTS OF INCOME  Year Ended December 31,2007


2006


2005(In thousands, except per share data)Revenues:Premiums earned

$
257,561


$
217,319


$
194,397Net investment income


22,141



17,579



12,527Realized (losses) gains on investments


(653
)


1,193



278Other


4,137



2,387



1,974Total revenues


283,186



238,478



209,176Expenses:Losses and loss adjustment expenses


149,501



129,491



117,449Commissions and other underwriting expense


50,922



42,671



35,741Other operating and general expenses


12,140



9,472



8,436Expense on amounts withheld


3,708



2,147



992Interest expense


1,550



1,522



1,421Total expenses


217,821



185,303



164,039Income before federal income taxes


65,365



53,175



45,137Provision for federal income taxes


21,763



17,475



14,857Net income

$
43,602


$
35,700


$
30,280Net income per common share  basic

$
2.27


$
1.87


$
1.62Net income per common share  diluted

$
2.25


$
1.85


$
1.60Weighted average of common shares outstanding  basic


19,193



19,136



18,737Weighted average of common shares outstanding  diluted


19,348



19,302



18,975Cash dividends per common share

$
0.20


$
0.16


$
0.08    57




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
    STATEMENTS OF SHAREHOLDERS EQUITY  AccumulatedAdditional





OtherCommon


Paid-In


Retained


Comprehensive


TreasuryStock


Capital


Earnings


Income (Loss)


Stock


Total(Dollars in thousands)Balance at January 1, 2005

$
200


$
1,264


$
77,102


$
539


$
(6,316
)

$
72,789Net income










30,280











30,280Unrealized depreciation of investment securities, net of tax
    benefit of $1,750














(3,251
)






(3,251
)Comprehensive income






















27,029Proceeds from initial public offering


34



40,357















40,391Dividends on common stock










(1,540
)










(1,540
)Issuance of 175,600 treasury shares upon exercise of stock
    options and stock award grants






26



(16
)






244



254Tax benefit realized from exercise of stock options






610















610Balance at December 31, 2005


234



42,257



105,826



(2,712
)


(6,072
)


139,533Net income










35,700











35,700Unrealized depreciation of investment securities, net of tax
    benefit of $109














(203
)






(203
)Comprehensive income






















35,497Dividends on common stock










(3,076
)










(3,076
)Issuance of 104,000 treasury shares upon exercise of stock
    options and stock award grants






341











145



486Tax benefit realized from exercise of stock options






557















557Stock compensation expense






766















766Balance at December 31, 2006


234



43,921



138,450



(2,915
)


(5,927
)


173,763Net income










43,602











43,602Unrealized depreciation of investment securities, no related tax
    benefit














(2,406
)






(2,406
)Comprehensive income






















41,196Dividends on common stock










(3,862
)










(3,862
)Issuance of 46,009 treasury shares upon exercise of options and
    stock award grants






392











64



456Tax benefit realized from exercise of stock options






218















218Stock compensation expense






1,035















1,035Balance at December 31, 2007

$
234


$
45,566


$
178,190


$
(5,321
)

$
(5,863
)

$
212,806    58




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
    STATEMENTS OF CASH FLOWS  Year Ended December 31,2007


2006


2005(Dollars in thousands)Operating activitiesNet income

$
43,602


$
35,700


$
30,280Adjustments to reconcile net income to net cash provided by
    operating activities:Net amortization of bond premiums and discounts


382



303



887Provision for depreciation and amortization


1,266



1,111



1,197Net realized losses (gains) on investment securities


653



(1,193
)


(278
)Deferred federal income taxes


(1,262
)


(1,020
)


(1,419
)Tax benefit realized from exercise of stock options










610Stock compensation expense


1,035



766



Increase in deferred policy acquisition costs, net


(2,543
)


(3,349
)


(105
)Increase in reserves for losses and loss adjustment expenses


36,122



40,580



52,176Increase in premiums receivable


(7,632
)


(22,471
)


(8,460
)Increase in unearned premiums and service fees


17,573



29,062



17,733(Increase) decrease in interest receivable and other assets


(2,210
)


2,062



(1,750
)Increase in prepaid reinsurance premiums


(3,053
)


(4,056
)


(1,026
)Increase (decrease) in accounts payable, commissions and other
    liabilities and assessments and fees payable


5,966



6,986



(4,016
)Increase in amounts withheld or retained for account of others


10,854



8,566



4,105Increase in reinsurance recoverable


(8,021
)


(12,178
)


(14,706
)Increase in reinsurance balances payable


440



2,452



1,275Other


(3
)


2



(2
)Net cash provided by operating activities


93,169



83,323



76,501Investing activitiesPurchases of fixed maturities


(199,918
)


(95,208
)


(130,598
)Purchases of equity securities


(45,460
)


(50,905
)


(37,473
)Proceeds from sale of fixed maturities






1,917



17,542Proceeds from sale of equity securities


21,921



34,643



13,467Proceeds from maturity of investments


156,466



47,742



41,775Additional cash paid for purchase of subsidiary






(1,246
)


(11,744
)Cash and cash equivalents of business acquired






5,585



Purchase of building






(7,025
)


Capital expenditures


(2,087
)


(1,255
)


(733
)Net cash used in investing activities


(69,078
)


(65,752
)


(107,764
)Financing activitiesProceeds from issuance of common shares










40,391Repayment of note payable to affiliate










(15,000
)Repayment of long-term debt






(833
)


(1,250
)Decrease (increase) in securities lending collateral


17,612



(158,928
)


(Decrease) increase in securities lending obligation


(17,612
)


158,928



Tax benefit realized from exercise of stock options


218



557



Issuance of common shares from treasury upon exercise of stock
    options or stock award grants


456



486



254Cash dividends paid on common shares


(3,862
)


(3,076
)


(1,540
)Net cash (used in) provided by financing activities


(3,188
)


(2,866
)


22,855Net increase (decrease) in cash and cash equivalents


20,903



14,705



(8,408
)Cash and cash equivalents at beginning of year


22,166



7,461



15,869Cash and cash equivalents at end of year

$
43,069


$
22,166


$
7,461    59




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
 NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS  1.
    Background,
    Basis of Presentation and Principals of Consolidation          Basis of
    Presentation
      Principles
    of Consolidation
   60




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Use of
    Estimates
    2.
    Significant
    Accounting Policies  Cash
    Equivalents
    Premium,
    Commissions and Service Fee Recognition
    Investments
      Deferred
    Policy Acquisition Costs
    Property
    and Equipment
   61




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Unpaid
    Losses and Loss Adjustment Expenses
    Assessments
    Premiums
    Receivable
    Reinsurance
    Segment
    Information
    Federal
    Income Taxes
    Comprehensive
    Income
    Earnings
    Per Common Share
   62




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Stock-Based
    Compensation
  Share-Based Payment,
  Recent
    Accounting Pronouncements
  Accounting
    for Certain Hybrid Instruments
  Accounting
    for Certain Hybrid Financial Instruments
  Fair
    Value Measurements
  Fair Value Measurements
  The
    Fair Value Option for Financial Assets and Financial
    Liabilities   Including an amendment of FASB
    Statement No. 115
  The
    Fair Value Option for Financial Assets and Financial
    Liabilities
 63




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Accounting
    for Income Tax Benefits of Dividends on Share-Based Payment
    Awards
  06-11, Accounting for Income Tax Benefits of Dividends on
    Share-Based Payment Awards EITF 06-11 EITF 06-11 EITF 06-11
 64




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  3.
    Investments    Cost or


Gross


GrossAmortized


Unrealized


UnrealizedCost


Gains


Losses


Fair Value(Dollars in thousands)December 31, 2007:Fixed maturities:U.S. Government and government agency obligations

$
205,424


$
1,530


$
(380
)

$
206,574State and local government obligations


74,727



798



(71
)


75,454Mortgage-backed securities


34,414



332



(37
)


34,709Corporate obligations


61,454



439



(2,330
)


59,563Total fixed maturities


376,019



3,099



(2,818
)


376,300Equity securities:Preferred stocks


29,164



224



(4,464
)


24,924Common stocks


28,636



199



(1,119
)


27,716Total equity securities


57,800



423



(5,583
)


52,640Short-term investments


20,907











20,907Total investments

$
454,726


$
3,522


$
(8,401
)

$
449,847December 31, 2006:Fixed maturities:U.S. Government and government agency obligations

$
224,004


$
265


$
(3,691
)

$
220,578State and local government obligations


44,217



160



(297
)


44,080Corporate obligations


64,331



299



(1,839
)


62,791Total fixed maturities


332,552



724



(5,827
)


327,449Equity securities:Preferred stocks


21,484



374



(99
)


21,759Common stocks


11,992



371



(27
)


12,336Total equity securities


33,476



745



(126
)


34,095Short-term investments


22,744











22,744Total investments

$
388,772


$
1,469


$
(5,953
)

$
384,288  65




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    Amortized Cost


Fair Value(Dollars in thousands)Due in one year or less

$
35,580


$
35,545Due after one year through five years


147,910



148,848Due after five years through ten years


139,078



138,318Due after ten years


19,037



18,880341,605



341,591Mortgage-backed securities


34,414



34,709Total fixed maturities

$
376,019


$
376,300     Year Ended December 31,2007


2006


2005(Dollars in thousands)Fixed maturity gains

$
183


$
41


$
252Fixed maturity losses


(15
)






(236
)Equity security gains


1,068



1,156



429Equity security losses


(1,889
)


(4
)


(167
)Net realized (losses) gains on investments

$
(653
)

$
1,193


$
278    66




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    Less than Twelve Months


Twelve Months or MoreFair











FairFair


Unrealized


Value as


Number of


Fair


Unrealized


Value as


Number ofValue


Losses


% of Cost


Holdings


Value


Losses


% of Cost


Holdings(Dollars in thousands)December 31, 2007:Fixed maturities:U.S. Government and government agency obligations

$
5,431


$
(3
)


99.9
%


3


$
19,193


$
(377
)


98.1
%


17State and local government obligations


2,781



(14
)


99.5
%


4



12,887



(57
)


99.6
%


10Mortgage-backed securities


5,776



(37
)


99.4
%


6















Corporate obligations


8,713



(329
)


96.4
%


14



31,944



(2,001
)


94.1
%


31Total fixed maturities


22,701



(383
)


98.3
%


27



64,024



(2,435
)


96.3
%


58Equity securities:Preferred stocks


15,544



(3,621
)


81.1
%


53



3,510



(843
)


80.6
%


9Common stocks


11,641



(870
)


93.0
%


9



1,695



(249
)


87.2
%


2Total equity securities


27,185



(4,491
)


85.8
%


62



5,205



(1,092
)


82.7
%


11Total fixed maturities and equity securities

$
49,886


$
(4,874
)


91.1
%


89


$
69,229


$
(3,527
)


95.2
%


69December 31, 2006:Fixed maturities:U.S. Government and government agency obligations

$
38,588


$
(315
)


99.2
%


45


$
135,601


$
(3,376
)


97.6
%


107State and local government obligations


4,064



(30
)


99.3
%


7



23,378



(267
)


98.9
%


24Corporate obligations


19,312



(346
)


98.2
%


25



30,277



(1,493
)


95.3
%


31Total fixed maturities


61,964



(691
)


98.9
%


77



189,256



(5,136
)


97.4
%


162Equity securities:Preferred stocks


2,500



(70
)


97.3
%


6



2,838



(29
)


99.0
%


5Common stocks


1,874



(22
)


98.8
%


5



675



(5
)


99.3
%


2Total equity securities


4,374



(92
)


97.9
%


11



3,513



(34
)


99.0
%


7Total fixed maturities and equity securities

$
66,338


$
(783
)


98.8
%


88


$
192,769


$
(5,170
)


97.4
%


169    67




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
      Year Ended December 31,2007


2006


2005(Dollars in thousands)Investment income:Fixed maturities

$
16,351


$
14,116


$
10,520Equity securities


2,414



1,396



1,026Short-term investments and cash equivalents


3,478



2,166



1,109Total investment income


22,243



17,678



12,655Investment expense


(102
)


(99
)


(128
)Net investment income

$
22,141


$
17,579


$
12,527     4.
    Securities
    Lending    December 31,2007


2006(Dollars in thousands)Collateral obligation

$
141,316


$
158,928Fair value of collateral held


139,305



158,928Pretax unrealized loss on fair value of collateral held


(2,011
)


Fair value of securities lent plus accrued interest


138,581



155,683  68




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  5.
    Property
    and Equipment    December 31,2007


2006(Dollars in thousands)Land and buildings

$
18,447


$
18,308Machinery and equipment


1,112



270Data processing equipment and software


8,108



7,173Office furniture and leasehold improvement


1,382



1,195Automobiles


299



31529,348



27,261Accumulated depreciation and amortization


(9,846
)


(8,675
)Total net property and equipment

$
19,502


$
18,586     6.
    Leases
    and Rent Expense        7.
    Long-term
    Debt    Consolidation of Variable Interest Entities
 69




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
            8.
    Income
    Taxes    Year Ended December 31,2007


2006


2005(Dollars in thousands)Current federal income tax provision

$
23,034


$
18,527


$
16,788Deferred federal income tax benefit


(1,271
)


(1,052
)


(1,931
)$
21,763


$
17,475


$
14,857     Year Ended December 31,2007


2006


2005(Dollars in thousands)Expected federal income tax expense at statuatory rate

$
22,878


$
18,611


$
15,798Tax effect of tax-exempt investment income


(949
)


(729
)


(623
)Other items, net


(166
)


(407
)


(318
)$
21,763


$
17,475


$
14,857  70




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    December 31,2007


2006(Dollars in thousands)Deferred Tax Assets:Unearned premiums

$
8,528


$
7,492Unpaid losses and LAE expenses


6,599



5,885Assignments and assessments


992



889Unrealized losses on investments


2,412



1,570Other, net


1,220



81919,751



16,655Valuation allowance


(842
)


18,909



16,655Deferred Tax Liabilities:Deferred policy acquisition costs


(6,152
)


(5,262
)Other, net


(764
)


(662
)Total deferred tax liabilities


(6,916
)


(5,924
)Net deferred income tax assets

$
11,993


$
10,731     Accounting for Uncertainty in
    Income Taxes  an interpretation of
    SFAS No. 109
      9.
    Shareholders
    Equity and Stock-Based Compensation  Accounting for Stock Issued to
 71




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  Employees Accounting for Stock-Based Compensation
          Year Ended December 31,2005(Dollars in thousands, except per share)Net income, as reported

$
30,280Proforma stock-based employee compensation expense, net of
    related tax effects


1,186Proforma net income

$
29,094Earnings per share:Basic  as reported

$
1.62Basic  proforma

$
1.55Diluted  as reported

$
1.60Diluted  proforma

$
1.54  72




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    Year Ended December 31, 2007Total Options OutstandingWeighted


Weighted


Weighted AverageAverage


Average Fair


RemainingShares


Exercise Price


Value


Contractual TermOptions outstanding, beginning of year


665,000


$
15.03


$
6.51Forfeited


(32,000
)


15.03



6.23Exercised


(39,950
)


7.54



3.22Granted


30,000



24.99



8.78Options outstanding, end of year


623,050


$
15.99


$
6.84



6.6 yearsOptions exercisable, end of year


149,450


$
12.91


$
5.92



3.7 years       Year Ended December 31,2007


2006


2005Risk-free interest rate


4.6
%


4.7
%


4.2
%Expected option life


6.5 years



6.7 years



9.0 yearsExpected stock price volatility


28.1
%


29.6
%


31.0
%Dividend yield


0.8
%


0.3
%


0.3
%Weighted average fair value of options granted during period

$
8.78


$
8.71


$
7.18    73




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    Stock Option


NonvestedAwards


Shares(Dollars in thousands)2008

$
785


$
4832009


788



4832010


430



2922011


103



2922012 and thereafter


43



1,458Total remaining compensation expense

$
2,149


$
3,008   10.
    Employee
    Benefit Plan      Form S-8
  11.
    Earnings
    Per Common Share    Year Ended December 31,2007


2006


2005(In thousands, except per share)Net income

$
43,602


$
35,700


$
30,280Weighted average shares outstanding during year


19,193



19,136



18,737Additional shares issuable under employee common stock option
    plans using treasury stock method


155



166



238Weighted average shares outstanding assuming exercise of stock
    option


19,348



19,302



18,975Net income per share:Basic

$
2.27


$
1.87


$
1.62Diluted


2.25



1.85



1.60  74




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    12.
    Transactions
    with Related Parties      Year Ended December 31,2007


2006


2005(Dollars in thousands)Assumed premiums written

$
6,165


$
4,533


$
3,733Assumed premiums earned


5,583



4,024



3,921Assumed losses and loss adjustment expense incurred


5,483



5,527



3,028Ceded premiums written


3,957



3,790



5,119Ceded premiums earned


4,031



3,956



3,870Ceded losses and loss adjustment expense recoveries


3,304



2,797



14Payable to Great American as of year end


49



884



720Service fee expense


112



192



134          75




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    13.
    Reinsurance    Year Ended December 31,2007


2006


2005Written


Earned


Written


Earned


Written


Earned(Dollars in thousands)Direct

$
334,664


$
316,787


$
294,029


$
264,158


$
254,588


$
237,639Assumed


11,342



11,588



11,475



12,669



15,448



14,638Ceded


(73,864
)


(70,814
)


(63,588
)


(59,508
)


(58,930
)


(57,880
)Net premium

$
272,142


$
257,561


$
241,916


$
217,319


$
211,106


$
194,397       December 31,


A.M. Best2007


Rating(Dollars in thousands)Platinum Underwriters Reinsurance, Inc.

$
34,001



AMotors Ins Corp


25,513



A−TRAX Insurance Ltd.(1)


9,331



Great American Insurance Company


8,304



AGeneral Reinsurance


6,811



A++Subtotal


83,960All other reinsurers


38,456Total

$
122,416Reinsurance receivable on paid and unpaid losses

$
98,091Prepaid reinsurance premiums


24,325$
122,416     (1)
    
    Does not reflect a $10.7 million letter of credit that is
    held as collateral for the net receivable from TRAX Insurance
    Ltd., a member-owned captive insurance program. 76




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
   14.
    Unpaid
    Losses and Loss Adjustment Expenses    December 31,2007


2006


2005(Dollars in thousands)Reserve for losses and LAE, net of related reinsurance
    recoverables, at beginning of year

$
181,851


$
151,444


$
111,644Add:Provision for unpaid losses and LAE for claims net of
    reinsurance, occurring during:Current year


155,173



136,944



122,684Prior years


(5,672
)


(7,453
)


(5,235
)149,501



129,491



117,449Deduct:Losses and LAE payments for claims, net of reinsurance,
    occurring during:Current year


57,735



47,183



40,600Prior years


63,315



51,901



37,049121,050



99,084



77,649Reserve for losses and LAE, net of related reinsurance
    recoverables, end of year


210,302



181,851



151,444Reinsurance recoverables on unpaid losses and LAE, at end of year


91,786



84,115



71,763Reserve for unpaid losses and LAE, gross of reinsurance
    recoverables

$
302,088


$
265,966


$
223,207     15.
    Expense
    on Amounts Withheld   77




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
    Year Ended December 31,2007


2006


2005(Dollars in thousands)Investment income on amounts withheld related to alternative
    risk transfer programs

$
3,708


$
2,147


$
992Investment expense on amounts withheld related to alternative
    risk transfer programs


3,708



2,147



992Investment balance related to alternative risk transfer programs


89,823



58,790



33,222   16.
    Statutory
    Accounting Principles    As of and For The YearEnded December 31,2007


2006


2005(Dollars in thousands)NIIC statutory capital and surplus

$
182,302


$
148,266


$
122,825NIIC statutory net income


37,745



26,579



29,311NIIC-HI statutory capital and surplus


9,614



8,736



8,361NIIC-HI statutory net income


811



230



332TCC statutory capital and surplus


14,119



13,671



N/ATCC statutory net income


483



703



N/A             17.
    Commitments
    and Contingencies   78




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
         79




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  18.
    Segment
    Information    Year Ended December 31,2007


2006


2005(Dollars in thousands)Revenue:Premiums earned:Alternative Risk Transfer

$
105,123


$
75,712


$
60,223Transportation


73,592



71,682



70,502Specialty Personal Lines


50,678



46,445



38,561Hawaii and Alaska


17,101



15,257



14,855Other


11,067



8,223



10,256Total premiums earned


257,561



217,319



194,397Net investment income


22,141



17,579



12,527Realized (losses) gains on investments


(653
)


1,193



278Other


4,137



2,387



1,974Total revenues

$
283,186


$
238,478


$
209,176   19.
    Quarterly
    Operating Results (Unaudited)    1st


2nd


3rd


4th


TotalQuarter


Quarter


Quarter


Quarter


Year(Dollars in thousands)2007Revenues

$
66,365


$
70,013


$
73,122


$
73,686


$
283,186Net income


10,467



11,858



10,145



11,132



43,602Net income per share  basic(1)


0.55



0.62



0.53



0.58



2.27Net income per share  diluted(1)


0.54



0.61



0.52



0.57



2.252006Revenues

$
55,061


$
57,390


$
61,932


$
64,095


$
238,478Net income


8,726



9,003



6,543



11,428



35,700Net income per share  basic(1)


0.46



0.47



0.34



0.60



1.87Net income per share  diluted(1)


0.45



0.47



0.34



0.59



1.85     (1)
    
    Earnings per share are computed independently for each quarter
    and the full year based upon respective average shares
    outstanding. Therefore, the sum of the quarterly earnings per
    share amounts may not equal the annual amounts reported. 80




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
    (Continued)
  ITEM 9
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    ITEM 9A
    Controls
    and Procedures  Please refer to Forward-Looking Statements
    following the Index in the front of this
    Form 10-K.
  Rules 13a-15(e) 15d-15(e) Rule 13a-15(e))
      ITEM 9B
    Other
    Information   PART III    Item 10.
    Directors,
    Executive Officers and Corporate Governance      Item 11.
    Executive
    Compensation   81




---



##### 



Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence    Item 14.
    Principal
    Accountant and Fees   PART IV ITEM 15        Index to
    Financial Statement Schedules
   
 Page/FilingSchedule

Description

BasisSchedule I


Summary of Investments


(2)Schedule II


Condensed Financial Information of Parent
    Company


84Schedule III


Supplementary Insurance Information


87Schedule IV


Reinsurance


(3)Schedule V


Valuation and Qualifying Accounts


88Schedule VI


Supplementary Information Concerning Property-Casualty Insurance
    Operations


(4)   82




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##### Table of Contents



Number

Description

Filing Basis3
.1

Amended and Restated Articles of Incorporation


(1)3
.2

Amended and Restated Code of Regulations


(1)10
.1

Long Term Incentive Plan*


(1)10
.2

Deferred Compensation Plan*


(1)10
.3

Underwriting Management Agreement dated November 1, 1989,
    as amended, among National Interstate Insurance Agency, Inc.,
    Great American Insurance Company, Agricultural Insurance
    Company, American Alliance Insurance Company and American
    National Fire Insurance Company


(1)10
.4

Registration Rights Agreement effective February 2, 2005
    among National Interstate Corporation, Alan Spachman and Great
    American Insurance Company


(1)10
.5

Amended and Restated Declaration of Trust of National Interstate
    Capital Trust I dated as of May 22, 2003


(1)10
.6

Indenture dated as of May 22, 2003 with National Interstate
    Corporation as Issuer and Wilmington Trust Company as
    Trustee


(1)10
.7

Agreement of Reinsurance No. 0012 dated November 1,
    1989 between National Interstate Insurance Company and Great
    American Insurance Company


(1)10
.8

Amended and Restated Employee Retention Agreement between
    National Interstate Insurance Agency, Inc. and David W.
    Michelson, dated December 28, 2007*


(5)10
.9

Employment and Non-Competition Agreement dated March 12,
    2007 between National Interstate Corporation and Alan R.
    Spachman, as amended as of January 1, 2008*


(5),(8)10
.10

Employment and Non-Competition Agreement dated March 12,
    2007 between National Interstate Corporation and David W.
    Michelson, as amended as of January 1, 2008*


(5),(8)10
.11

Restricted Shares Agreement dated March 12, 2007 between
    National Interstate Corporation and David W. Michelson*


(8)10
.12

Stock Bonus Agreement dated March 12, 2007 between National
    Interstate Corporation and David W. Michelson*


(8)10
.13

National Interstate Corporation Amended and Restated Management
    Bonus Plan*


(6)10
.14

Credit Agreement among National Interstate Corporation, Key Bank
    National Association and U.S. Bank National Association, dated
    as of December 19, 2007


(7)21
.1

List of subsidiaries23
.1

Consent of Independent Registered Public Accounting Firm24
.1

Power of attorney31
.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     *
    
    Indicates a management contract or compensatory plan or
    arrangement.(1)
    
    These exhibits are incorporated by reference to our
    Registration Statement on
    Form S-1
    (Registration
    No. 333-119270)(2)
    
    This information is contained in Notes to Consolidated
    Financial Statements at Note Three Investments(3)
    
    This information is contained in Notes to Consolidated
    Financial Statements at Note Thirteen Reinsurance(4)
    
    This information is contained in Notes to Consolidated
    Financial Statements at Note Fourteen Unpaid Losses and
    Loss Adjustment Expenses and in Schedule III
    Supplementary Insurance Information(5)
    
    This exhibit is incorporated by reference to our
    Form 8-K
    filed January 4, 2008(6)
    
    This exhibit is incorporated by reference to our
    Form 8-K
    filed September 27, 2007(7)
    
    This exhibit is incorporated by reference to our
    Form 8-K
    filed December 21, 2007(8)
    
    This exhibit is incorporated by reference to our
    Form 10-K
    filed March 14, 2007 83




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
 SCHEDULE II 
    CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
    CONDENSED BALANCE SHEETS  December 31,2007


2006(In thousands, exceptper share data)ASSETSInvestment in subsidiaries

$
208,505


$
169,526Investments:Fixed maturities available-for-sale, at fair value (cost of
    $16,385 and $16,518, respectively)


15,967



16,131Equities available-for-sale, at fair value (cost of $1,108 and
    $1,133, respectively)


1,437



1,611Short-term investments, at cost which approximates fair value


1,600



4,370Total investments


19,004



22,112Receivable from subsidiary


3,507



689Cash


64



373Securities lending collateral


10,548



Property and equipment  net


1,519



899Other assets


694



518Total assets

$
243,841


$
194,117LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesLong-term debt

$
15,464


$
15,464Securities lending obligation


10,548



Other liabilities


5,023



4,890Total liabilities


31,035



20,354Shareholders equity
    Preferred shares  no par valueAuthorized  10,000 sharesIssued  0 shares






Common shares   $0.01 par value
    Authorized  50,000 sharesIssued  23,350 shares, including 4,145 and
    4,191 shares,
    respectively in treasury


234



234Additional paid-in capital


45,566



43,921Retained earnings


178,190



138,450Accumulated other comprehensive loss


(5,321
)


(2,915
)Treasury shares


(5,863
)


(5,927
)Total shareholders equity


212,806



173,763Total liabilities and shareholders equity

$
243,841


$
194,117  84




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
 SCHEDULE II 
    CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
    CONDENSED STATEMENTS OF INCOME  For Years Ended December 312007


2006


2005(In thousands)Revenues:Fees from subsidiaries

$
12,055


$
10,862


$
11,106Net investment income


965



1,026



930Realized gains on investments


1



13



16Total revenues


13,021



11,901



12,052Expenses:General and administrative expenses


13,660



11,721



11,178Interest expense


1,550



1,522



1,421Total expenses


15,210



13,243



12,599Loss before income taxes and equity in undistributed income of
    subsidiaries


(2,189
)


(1,342
)


(547
)Income tax benefit


(729
)


(470
)


(191
)Loss before equity in undistributed income of subsidiaries


(1,460
)


(872
)


(356
)Equity in undistributed income of subsidiaries, net of tax


45,062



36,572



30,636Net income

$
43,602


$
35,700


$
30,280  85




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  SCHEDULE II 
    CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
    CONDENSED STATEMENTS OF CASH FLOWS
  For Years Ended December 31,2007


2006


2005(In thousands)Operating ActivitiesNet income

$
43,602


$
35,700


$
30,280Adjustments to reconcile net income to cash (used in) provided
    by operating activities


(46,807
)


(35,612
)


(29,368
)Net cash (used in) provided by operating activities


(3,205
)


88



912Investing ActivitiesCapital contributions to subsidiaries






(788
)


Distributions from subsidiaries


4,000



3,000



Purchases of investments


(1,662
)


(3,249
)


(27,810
)Proceeds from sale or maturity of investments


4,580



3,768



5,213Purchases of property and equipment


(834
)


(416
)


(338
)Net cash provided by (used in) investing activities


6,084



2,315



(22,935
)Financing ActivitiesProceeds from issuance of common shares










40,391Repayment of note payable to affiliate










(15,000
)Repayment of long-term debt






(833
)


(1,250
)Increase in securities lending collateral


(10,548
)






Increase in securities lending obligation


10,548







Issuance of common shares from treasury upon exercise of stock
    options


456



486



254Cash dividends paid on common shares


(3,862
)


(3,076
)


(1,540
)Tax benefit realized from exercise of stock option


218



557



Net cash (used in) provided by financing activities


(3,188
)


(2,866
)


22,855Net (decrease) increase in cash


(309
)


(463
)


832Cash at beginning of year


373



836



4Cash at end of year

$
64


$
373


$
836  86




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
 SCHEDULE III 
    SUPPLEMENTARY INSURANCE INFORMATION  Liability for














AmortizationDeferred


Unpaid Losses











Losses and


of DeferredPolicy


and Loss








Net


Loss


Policy


Other


NetAcquisition


Adjustment


Unearned


Earned


Investment


Adjustment


Acquisition


Underwriting


PremiumsCosts


Expenses


Premiums


Premiums


Income


Expenses


Costs


Expenses


Written(In thousands)Year ended December 31, 2007

$
17,578


$
302,088


$
145,296


$
257,561


$
22,141


$
149,501


$
44,607


$
6,315


$
272,142Year ended December 31, 2006


15,035



265,966



127,723



217,319



17,579



129,491



37,674



4,997



241,916Year ended December 31, 2005


11,711



223,207



98,661



194,397



12,527



117,449



33,455



2,286



211,106  87




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
 SCHEDULE V 
    VALUATION AND QUALIFYING ACCOUNTS  AdditionsBalance at





Charged to





Balance atBeginning


Charged/(Credited)


Other





End ofof Period


to Expenses


Accounts


Deductions(1)


Period(In thousands)Year ended December 31, 2007Premiums in course of collection

$
522


$
338


$



$
398


$
462Year ended December 31, 2006Premiums in course of collection


580



151







209



522Year ended December 31, 2005Premiums in course of collection


361



635







416



580     (1)
    
    Deductions include write-offs of amounts determined to be
    uncollectible. 88




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##### Table of Contents



SIGNATURES      By:
    /s/  DAVID
    W. MICHELSON   Title:
    President and Chief Executive Officer      Signature

Title

Date/s/  DAVID
    W. MICHELSONDavid
    W. Michelson

President and Chief Executive Officer (Principal Executive
    Officer)

March 10, 2008/s/  JULIE
    A. MCGRAWJulie
    A. McGraw

Vice President
    and Chief Financial Officer
    (Principal Financial and Accounting Officer)

March 10, 2008/s/  ALAN
    R. SPACHMAN*Alan
    R. Spachman

Chairman of the Board

March 10, 2008/s/  JOSEPH
    E. CONSOLINO*Joseph
    E. Consolino

Director

March 10, 2008/s/  THEODORE
    H. ELLIOTT, JR.*Theodore
    H. Elliott, Jr.

Director

March 10, 2008/s/  GARY
    J. GRUBER*Gary
    J. Gruber

Director

March 10, 2008/s/  KEITH
    A. JENSEN*Keith
    A. Jensen

Director

March 10, 2008/s/  JAMES
    C. KENNEDY*James
    C. Kennedy

Director

March 10, 2008/s/  DONALD
    D. LARSON*Donald
    D. Larson

Director

March 10, 2008/s/  JOEL
    SCHIAVONE*Joel
    Schiavone

Director

March 10, 2008   *
    
    By David W. Michelson and Julie A. McGraw, attorneys-in-fact 89