##### 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, 2005.
 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 
 3250 Interstate Drive
Richfield, Ohio 44286-9000
(330) 659-8900  (Address and telephone number of principal executive offices)
 
 þ o
 o þ
 o þ




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National Interstate Corporation
Table of Contents
 PagePart I  Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets
    
    
    1Consolidated Statements of Income
    
    
    2Consolidated Statement of Shareholders Equity
    
    
    3Consolidated Statements of Cash Flows
    
    
    4Notes to Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4. Controls and Procedures
    
    
    22Part II  Other InformationItem 1. Legal Proceedings
    
    
    23Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3. Defaults Upon Senior Securities
    
    
    23Item 4. Submission of Matters to a Vote of Security Holders
    
    
    23Item 5. Other Information
    
    
    23Item 6. Exhibits
    
    
    23Signatures
    
    
    24EX-10.1 STOCK PURCHASE AGREEMENTEX-31.1 302 CERTIFICATION FOR CEOEX-31.2 302 CERTIFICATION FOR CFOEX-32.1 906 CERTIFICATION FOR CEOEX-32.2 906 CERTIFICATION FOR CFO




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 National Interstate Corporation and Subsidiaries
 
 Consolidated Balance Sheets
 (Dollars in thousands, except per share data)
 September 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSInvestments:Fixed maturities available-for-sale, at fair value (amortized cost  $257,081 and
$205,711, respectively)
    
    $
    254,461
    
    
    $
    206,221Equity securities available-for-sale, at fair value (cost  $28,058 and $16,522, respectively)
    
    
    28,170
    
    
    
    16,841Short-term investments, at cost which approximates fair value
    
    
    22,457
    
    
    
    5,280Total investments
    
    
    305,088
    
    
    
    228,342Cash and cash equivalents
    
    
    8,866
    
    
    
    10,609Accrued investment income
    
    
    2,886
    
    
    
    2,344Premiums receivable, net of allowance for doubtful accounts of $458 and $361, respectively
    
    
    83,147
    
    
    
    45,129Reinsurance recoverables on paid and unpaid losses
    
    
    74,012
    
    
    
    63,128Prepaid reinsurance premiums
    
    
    27,522
    
    
    
    16,190Deferred policy acquisition costs
    
    
    14,329
    
    
    
    11,606Deferred federal income taxes
    
    
    9,081
    
    
    
    6,400Property and equipment, net
    
    
    11,356
    
    
    
    11,738Funds held by reinsurer
    
    
    4,249
    
    
    
    3,599Other assets
    
    
    2,775
    
    
    
    2,151Total assets
    
    $
    543,311
    
    
    $
    401,236LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses
    
    $
    213,683
    
    
    $
    171,031Unearned premiums
    
    
    127,760
    
    
    
    80,928Long-term debt
    
    
    16,610
    
    
    
    17,547Note payable to affiliate
    
    
    
    
    
    
    15,000Amounts withheld or retained for account of others
    
    
    19,039
    
    
    
    14,911Reinsurance balances payable
    
    
    9,876
    
    
    
    3,429Other accounts payable
    
    
    13,082
    
    
    
    14,432Commissions payable
    
    
    6,257
    
    
    
    4,719Assessments and fees payable
    
    
    3,778
    
    
    
    6,450Total liabilities
    
    
    410,085
    
    
    
    328,447Shareholders equity:Preferred shares  no par valueAuthorized  10,000,000 sharesIssued  NoneCommon shares  $0.01 par value
    
    
    
    
    
    
    Authorized  50,000,000 sharesIssued  23,350,000 and 20,000,000 shares, including 4,326,500 and 4,470,400
shares, respectively, in treasury
    
    
    234
    
    
    
    200Additional paid-in capital
    
    
    42,065
    
    
    
    1,264Retained earnings
    
    
    98,673
    
    
    
    77,102Accumulated other comprehensive (loss) income
    
    
    (1,630
    )
    
    
    539Treasury shares
    
    
    (6,116
    )
    
    
    (6,316
    )Total shareholders equity
    
    
    133,226
    
    
    
    72,789Total liabilities and shareholders equity
    
    $
    543,311
    
    
    $
    401,236
  1




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##### Table of Contents



National Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Income
 (Unaudited)
 (In thousands, except per share data)
 Three months ended September 30,
    
    
    Nine months ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue:Premiums earned
    
    $
    52,866
    
    
    $
    41,072
    
    
    $
    142,466
    
    
    $
    114,486Net investment income
    
    
    3,178
    
    
    
    2,353
    
    
    
    8,985
    
    
    
    6,180Realized gains on investments
    
    
    178
    
    
    
    126
    
    
    
    484
    
    
    
    1,282Other
    
    
    559
    
    
    
    532
    
    
    
    1,474
    
    
    
    1,440Total revenues
    
    
    56,781
    
    
    
    44,083
    
    
    
    153,409
    
    
    
    123,388Expenses:Losses and loss adjustment expenses
    
    
    33,254
    
    
    
    24,780
    
    
    
    87,041
    
    
    
    68,132Commissions and other underwriting expense
    
    
    8,577
    
    
    
    9,897
    
    
    
    25,307
    
    
    
    24,355Other operating and general expenses
    
    
    2,322
    
    
    
    1,640
    
    
    
    6,558
    
    
    
    5,269Interest expense
    
    
    340
    
    
    
    531
    
    
    
    1,063
    
    
    
    1,059Total expenses
    
    
    44,493
    
    
    
    36,848
    
    
    
    119,969
    
    
    
    98,815Income before federal income taxes
    
    
    12,288
    
    
    
    7,235
    
    
    
    33,440
    
    
    
    24,573Provision for federal income taxes
    
    
    4,040
    
    
    
    2,514
    
    
    
    11,082
    
    
    
    8,458Net income
    
    $
    8,248
    
    
    $
    4,721
    
    
    $
    22,358
    
    
    $
    16,115Net income per common share  basic
    
    $
    0.43
    
    
    $
    0.31
    
    
    $
    1.20
    
    
    $
    1.07Net income per common share  diluted
    
    $
    0.43
    
    
    $
    0.31
    
    
    $
    1.18
    
    
    $
    1.05Weighted average of common shares outstanding, basic
    
    
    18,985
    
    
    
    15,101
    
    
    
    18,634
    
    
    
    15,050Weighted average of common shares outstanding, diluted
    
    
    19,229
    
    
    
    15,473
    
    
    
    18,885
    
    
    
    15,407Cash dividends per common share
    
    $
    0.04
    
    
    $
    
    
    
    $
    0.04
    
    
    $
    
  2




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##### Table of Contents



National Interstate Corporation and Subsidiaries
 
 Consolidated Statement of Shareholders Equity
 (Unaudited)
(Dollars in thousands)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    TreasuryShares
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Shares
    
    
    TotalBalance at January 1, 2005
    
    $
    200
    
    
    $
    1,264
    
    
    $
    77,102
    
    
    $
    539
    
    
    $
    (6,316
    )
    
    $
    72,789Net Income
    
    
    
    
    
    
    
    
    
    
    22,358
    
    
    
    
    
    
    
    
    
    
    
    22,358Unrealized depreciation of investment securities,
net of tax benefit of $1,168
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,169
    )
    
    
    
    
    
    
    (2,169
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,189Proceeds from initial public offering
    
    
    34
    
    
    
    40,357
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,391Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (771
    )
    
    
    
    
    
    
    
    
    
    
    (771
    )Issuance of 143,900 treasury shares upon exercise of
stock options
    
    
    
    
    
    
    26
    
    
    
    (16
    )
    
    
    
    
    
    
    200
    
    
    
    210Tax benefit realized from exercise of stock options
    
    
    
    
    
    
    418
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    418Balance at September 30, 2005
    
    $
    234
    
    
    $
    42,065
    
    
    $
    98,673
    
    
    $
    (1,630
    )
    
    $
    (6,116
    )
    
    $
    133,226
  3




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National Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows
 (Unaudited)
(Dollars in thousands)
 Nine months endedSeptember 30,2005
    
    
    2004Operating activitiesNet income
    
    $
    22,358
    
    
    $
    16,115Adjustments to reconcile net income to net cash provided by operating activities:Net amortization of bond premiums and discounts
    
    
    706
    
    
    
    264Provision for depreciation and amortization
    
    
    898
    
    
    
    888Net realized gain on investment securities
    
    
    (484
    )
    
    
    (1,282
    )Tax benefit realized from exercise of stock options
    
    
    418
    
    
    
    506Deferred federal income taxes
    
    
    (1,513
    )
    
    
    (1,726
    )Increase in deferred policy acquisition costs, net
    
    
    (2,723
    )
    
    
    (3,110
    )Increase in reserves for losses and loss adjustment expenses
    
    
    42,652
    
    
    
    20,629Increase in premiums receivable
    
    
    (38,018
    )
    
    
    (24,907
    )Increase in unearned premiums and service fees
    
    
    46,832
    
    
    
    36,264Increase in interest receivable, prepaid reinsurance premiums and other assets
    
    
    (13,215
    )
    
    
    (12,718
    )Increase in accounts payable, commissions and other liabilities, premiums
and other funds collected from others and assessments and fees payable
    
    
    1,644
    
    
    
    11,178Increase in reinsurance recoverable
    
    
    (10,884
    )
    
    
    (6,190
    )Increase in reinsurance balances payable
    
    
    6,447
    
    
    
    5,355Other
    
    
    (4
    )
    
    
    5Net cash provided by operating activities
    
    
    55,114
    
    
    
    41,271Investing activitiesPurchases of investments
    
    
    (145,134
    )
    
    
    (130,958
    )Proceeds from sale or maturity of investments
    
    
    64,831
    
    
    
    84,794Purchases of property and equipment
    
    
    (447
    )
    
    
    (678
    )Net cash used in investing activities
    
    
    (80,750
    )
    
    
    (46,842
    )Financing activitiesProceeds from issuance of common shares
    
    
    40,391
    
    
    
    Proceeds (repayment) of note payable to affiliate
    
    
    (15,000
    )
    
    
    15,000Repayment of mortgage loan and notes payable
    
    
    (937
    )
    
    
    (1,041
    )Issuance of common shares from treasury upon exercise of stock options
    
    
    210
    
    
    
    525Cash dividends paid on common shares
    
    
    (771
    )
    
    
    Net cash provided by financing activities
    
    
    23,893
    
    
    
    14,484Net (decrease) increase in cash and cash equivalents
    
    
    (1,743
    )
    
    
    8,913Cash and cash equivalents at beginning of period
    
    
    10,609
    
    
    
    21,610Cash and cash equivalents at end of period
    
    $
    8,866
    
    
    $
    30,523
  4




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##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
(Dollars in thousands, except share data)
 1. Basis of Presentation and Recent Accounting Pronouncements
 Basis of Presentation
      Recent Accounting Pronouncements
 Accounting for Income Taxes
 2. Quarterly Operating Results  As Corrected (Unaudited)
  5




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1st
    
    
    2nd
    
    
    3rd
    
    
    4th
    
    
    Total2004 (As stated in Form 10-K)
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    YearRevenues
    
    $
    37,226
    
    
    $
    44,992
    
    
    $
    43,309
    
    
    $
    46,181
    
    
    $
    171,708Net earnings
    
    
    4,138
    
    
    
    6,046
    
    
    
    5,931
    
    
    
    6,653
    
    
    
    22,768Net income per share  basic
    
    
    0.28
    
    
    
    0.40
    
    
    
    0.39
    
    
    
    0.43
    
    
    
    1.50Net income per share  diluted
    
    
    0.27
    
    
    
    0.39
    
    
    
    0.38
    
    
    
    0.42
    
    
    
    1.47
 1st
    
    
    2nd
    
    
    3rd
    
    
    4th
    
    
    Total2004 (As corrected)
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    YearRevenues
    
    $
    35,898
    
    
    $
    43,407
    
    
    $
    44,083
    
    
    $
    45,761
    
    
    $
    169,149Net earnings
    
    
    4,983
    
    
    
    6,411
    
    
    
    4,721
    
    
    
    6,653
    
    
    
    22,768Net income per share  basic
    
    
    0.33
    
    
    
    0.43
    
    
    
    0.31
    
    
    
    0.43
    
    
    
    1.50Net income per share  diluted
    
    
    0.32
    
    
    
    0.42
    
    
    
    0.31
    
    
    
    0.42
    
    
    
    1.47
 3. Initial Public Offering
  4. Stock-Based Compensation
 Accounting for Stock Issued to Employees
 Accounting for Stock-Based Compensation  Transition and Disclosure Accounting for Stock-Based Compensation
  6




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##### Table of Contents



Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    8,248
    
    
    $
    4,721
    
    
    $
    22,358
    
    
    $
    16,115Less: Proforma stock option expense, net of tax
    
    
    341
    
    
    
    93
    
    
    
    793
    
    
    
    118Proforma net income
    
    $
    7,907
    
    
    $
    4,628
    
    
    $
    21,565
    
    
    $
    15,997Earnings per share:Basic  as reported
    
    $
    0.43
    
    
    $
    0.31
    
    
    $
    1.20
    
    
    $
    1.07Basic  proforma
    
    
    0.42
    
    
    
    0.31
    
    
    
    1.16
    
    
    
    1.06Diluted  as reported
    
    
    0.43
    
    
    
    0.31
    
    
    
    1.18
    
    
    
    1.05Diluted  proforma
    
    
    0.41
    
    
    
    0.30
    
    
    
    1.15
    
    
    
    1.04
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Dividend yield
    
    
    0.3
    %
    
    
    
    
    
    
    0.3
    %
    
    
    Volatility
    
    
    31.0
    %
    
    
    
    
    
    
    31.0
    %
    
    
    Risk-free interest rate
    
    
    4.2
    %
    
    
    
    
    
    
    4.0% - 4.5
    %
    
    
    4.4
    %Life of grant
    
    7.4 years
    
    
    
    
    
    
    9.1 years
    
    
    10.0 years
  Share-Based Payment Accounting for Stock-Based Compensation Accounting for
Stock Issued to Employees
  5. Comprehensive Income
  6. Notes Payable and Long-term Debt
  7




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##### Table of Contents



September 30,
    
    
    December 31,2005
    
    
    2004Junior subordinated debentures
    
    $
    15,464
    
    
    $
    15,464Term note payable to bank
    
    
    1,146
    
    
    
    2,083Note payable to affiliate
    
    
    
    
    
    
    15,000Total notes payable and long-term debt
    
    $
    16,610
    
    
    $
    32,547
  7. Premiums, Reinsurance and Transactions with Related Parties
   Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Written premiums assumed
    
    $
    2,139
    
    
    $
    2,132
    
    
    $
    7,290
    
    
    $
    7,590Assumed premiums earned
    
    
    2,353
    
    
    
    2,220
    
    
    
    6,876
    
    
    
    5,963Assumed losses and loss adjustment expense incurred
    
    
    1,596
    
    
    
    2,655
    
    
    
    5,146
    
    
    
    5,360Payable to Great American as of period end
    
    
    1,099
    
    
    
    1,597
    
    
    
    1,099
    
    
    
    1,597
   Three months ended September 30,
    
    
    Nine months ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Written
    
    
    Earned
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    EarnedDirect
    
    $
    50,342
    
    
    $
    62,758
    
    
    $
    40,421
    
    
    $
    51,035
    
    
    $
    220,050
    
    
    $
    174,507
    
    
    $
    180,691
    
    
    $
    143,918Assumed
    
    
    6,643
    
    
    
    5,662
    
    
    
    2,889
    
    
    
    4,212
    
    
    
    12,648
    
    
    
    11,362
    
    
    
    12,024
    
    
    
    12,645Ceded
    
    
    (9,936
    )
    
    
    (15,554
    )
    
    
    (7,043
    )
    
    
    (14,175
    )
    
    
    (54,746
    )
    
    
    (43,403
    )
    
    
    (52,396
    )
    
    
    (42,077
    )Net Premium
    
    $
    47,049
    
    
    $
    52,866
    
    
    $
    36,267
    
    
    $
    41,072
    
    
    $
    177,952
    
    
    $
    142,466
    
    
    $
    140,319
    
    
    $
    114,486
  8




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##### Table of Contents



8. Commitments and Contingencies
    9. Earnings Per Common Share
  Three months ended September 30,
    
    
    Nine months ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    8,248
    
    
    $
    4,721
    
    
    $
    22,358
    
    
    $
    16,115Weighted average shares outstanding during period
    
    
    18,985
    
    
    
    15,101
    
    
    
    18,634
    
    
    
    15,050Additional shares issuable under employee common stock
option plans using treasury stock method
    
    
    244
    
    
    
    372
    
    
    
    251
    
    
    
    357Weighted average shares outstanding assuming exercise
of stock options
    
    
    19,229
    
    
    
    15,473
    
    
    
    18,885
    
    
    
    15,407Net income per share:Basic
    
    $
    0.43
    
    
    $
    0.31
    
    
    $
    1.20
    
    
    $
    1.07Diluted
    
    
    0.43
    
    
    
    0.31
    
    
    
    1.18
    
    
    
    1.05
 10. Segment Information
  9




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Three months ended September 30,
    
    
    Nine months ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue:Premiums earned:Transportation
    
    $
    18,430
    
    
    $
    18,192
    
    
    $
    52,013
    
    
    $
    52,176Alternate Risk Transfer
    
    
    16,603
    
    
    
    9,856
    
    
    
    43,620
    
    
    
    26,513Specialty Personal Lines
    
    
    10,195
    
    
    
    7,693
    
    
    
    28,280
    
    
    
    19,994Hawaii
    
    
    3,711
    
    
    
    3,764
    
    
    
    11,599
    
    
    
    11,288Other
    
    
    3,927
    
    
    
    1,567
    
    
    
    6,954
    
    
    
    4,515Total premiums earned
    
    
    52,866
    
    
    
    41,072
    
    
    
    142,466
    
    
    
    114,486Net investment income
    
    
    3,178
    
    
    
    2,353
    
    
    
    8,985
    
    
    
    6,180Realized gains on investments
    
    
    178
    
    
    
    126
    
    
    
    484
    
    
    
    1,282Other
    
    
    559
    
    
    
    532
    
    
    
    1,474
    
    
    
    1,440Total revenues
    
    $
    56,781
    
    
    $
    44,083
    
    
    $
    153,409
    
    
    $
    123,388
 11. Shareholders Equity
    10




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
  
    
    general economic conditions 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.
  General
     Triumphe Casualty Company
  11




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##### Table of Contents



Critical Accounting Policies
  Losses and Loss Adjustment Expense (LAE) Reserves
   
    
    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;
 12




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##### Table of Contents




    
    reported loss ratios;
    
    projected ultimate loss ratios; and
    
    loss payment patterns.
 Other-Than-Temporary Impairment
  
    
    the length of time and the extent to which the market value has been below amortized cost;
    
    whether the issuer is experiencing significant financial difficulties;
    
    economic stability of an entire industry sector or subsection;
    
    whether the issuer, series of issuers or industry has a catastrophic type of loss;
    
    the extent to which the unrealized loss is credit-driven or a result of changes in market interest rates;
    
    historical operating, balance sheet and cash flow data;
    
    internally 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.
  Results of Operations
 Overview
   13




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##### Table of Contents



Hurricane Update
  Underwriting
    Three months ended September 30,
    
    Nine months ended September 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Gross premiums written
    
    $
    56,985
    
    
    $
    43,310
    
    
    $
    232,698
    
    
    $
    192,715Ceded reinsurance
    
    
    (9,936
    )
    
    
    (7,043
    )
    
    
    (54,746
    )
    
    
    (52,396
    )Net premiums written
    
    
    47,049
    
    
    
    36,267
    
    
    
    177,952
    
    
    
    140,319Change in unearned premiums, net of ceded
    
    
    5,817
    
    
    
    4,805
    
    
    
    (35,486
    )
    
    
    (25,833
    )Net earned premiums
    
    $
    52,866
    
    
    $
    41,072
    
    
    $
    142,466
    
    
    $
    114,486Combined Ratios:Loss and LAE ratio (1)
    
    
    62.9
    %
    
    
    60.3
    %
    
    
    61.1
    %
    
    
    59.5
    %Underwriting expense ratio (2)
    
    
    19.6
    %
    
    
    26.8
    %
    
    
    21.3
    %
    
    
    24.6
    %Combined ratio
    
    
    82.5
    %
    
    
    87.1
    %
    
    
    82.4
    %
    
    
    84.1
    %
 
 (1)
    
    The ratio of losses and loss adjustment expenses to premiums earned.(2)
    
    The ratio of the sum of commissions and other underwriting expenses and other operating
expenses less other income to premiums earned.   14




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##### Table of Contents



Three months ended September 30,2005
    
    2004Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in thousands)Transportation
    
    $
    26,623
    
    
    
    46.7
    %
    
    $
    23,700
    
    
    
    54.7
    %Alternate Risk Transfer
    
    
    9,851
    
    
    
    17.3
    %
    
    
    4,652
    
    
    
    10.8
    %Specialty Personal Lines
    
    
    10,951
    
    
    
    19.2
    %
    
    
    8,629
    
    
    
    19.9
    %Hawaii
    
    
    5,686
    
    
    
    10.0
    %
    
    
    5,261
    
    
    
    12.1
    %Other
    
    
    3,874
    
    
    
    6.8
    %
    
    
    1,068
    
    
    
    2.5
    %Gross Premiums Written
    
    $
    56,985
    
    
    
    100.00
    %
    
    $
    43,310
    
    
    
    100.0
    %
 Nine months ended September 30,2005
    
    2004Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in thousands)Transportation
    
    $
    72,202
    
    
    
    31.0
    %
    
    $
    73,003
    
    
    
    37.9
    %Alternate Risk Transfer
    
    
    100,712
    
    
    
    43.3
    %
    
    
    69,899
    
    
    
    36.3
    %Specialty Personal Lines
    
    
    35,989
    
    
    
    15.5
    %
    
    
    29,057
    
    
    
    15.1
    %Hawaii
    
    
    17,845
    
    
    
    7.7
    %
    
    
    17,381
    
    
    
    9.0
    %Other
    
    
    5,950
    
    
    
    2.5
    %
    
    
    3,375
    
    
    
    1.7
    %Gross Premiums Written
    
    $
    232,698
    
    
    
    100.0
    %
    
    $
    192,715
    
    
    
    100.0
    %
  15




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##### Table of Contents



Three months ended September 30,
    
    Change2005
    
    2004
   
    Amount
    
    Percent(Dollars in thousands)Revenue:Premiums earned:Transportation
    
    $
    18,430
    
    
    $
    18,192
    
    
    $
    238
    
    
    
    1.3
    %Alternate Risk Transfer
    
    
    16,603
    
    
    
    9,856
    
    
    
    6,747
    
    
    
    68.5
    %Specialty Personal Lines
    
    
    10,195
    
    
    
    7,693
    
    
    
    2,502
    
    
    
    32.5
    %Hawaii
    
    
    3,711
    
    
    
    3,764
    
    
    
    (53
    )
    
    
    (1.4
    %)Other
    
    
    3,927
    
    
    
    1,567
    
    
    
    2,360
    
    
    
    150.6
    %Total Premiums Earned
    
    
    52,866
    
    
    
    41,072
    
    
    
    11,794
    
    
    
    28.7
    %Net investment income
    
    
    3,178
    
    
    
    2,353
    
    
    
    825
    
    
    
    35.1
    %Realized gains on investments
    
    
    178
    
    
    
    126
    
    
    
    52
    
    
    
    41.3
    %Other
    
    
    559
    
    
    
    532
    
    
    
    27
    
    
    
    5.1
    %Total revenues
    
    $
    56,781
    
    
    $
    44,083
    
    
    $
    12,698
    
    
    
    28.8
    %
 Three months ended September 30, 2005 compared to September 30, 2004.
   16




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##### Table of Contents



Nine months ended September 30,
    
    Change2005
    
    2004
    
    Amount
    
    Percent(Dollars in thousands)Revenue:Premiums earned:Transportation
    
    $
    52,013
    
    
    $
    52,176
    
    
    $
    (163
    )
    
    
    (0.3
    %)Alternate Risk Transfer
    
    
    43,620
    
    
    
    26,513
    
    
    
    17,107
    
    
    
    64.5
    %Specialty Personal Lines
    
    
    28,280
    
    
    
    19,994
    
    
    
    8,286
    
    
    
    41.4
    %Hawaii
    
    
    11,599
    
    
    
    11,288
    
    
    
    311
    
    
    
    2.8
    %Other
    
    
    6,954
    
    
    
    4,515
    
    
    
    2,439
    
    
    
    54.0
    %Total Premiums Earned
    
    
    142,466
    
    
    
    114,486
    
    
    
    27,980
    
    
    
    24.4
    %Net investment income
    
    
    8,985
    
    
    
    6,180
    
    
    
    2,805
    
    
    
    45.4
    %Realized gains on investments
    
    
    484
    
    
    
    1,282
    
    
    
    (798
    )
    
    
    (62.2
    %)Other
    
    
    1,474
    
    
    
    1,440
    
    
    
    34
    
    
    
    2.4
    %Total revenues
    
    $
    153,409
    
    
    $
    123,388
    
    
    $
    30,021
    
    
    
    24.3
    %
 Nine months ended September 30, 2005 compared to September 30, 2004.
   Investment Income
 Three months ended September 30, 2005 compared to September 30, 2004.
 Nine months ended September 30, 2005 compared to September 30, 2004.
 17




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##### Table of Contents



Realized Gains (Losses) on Investments
 2005 compared to 2004.
 Other Operating and General Expenses
 2005 compared to 2004.
 Income Taxes
 2005 compared to 2004.
 Financial Condition
 Investments
   18




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##### Table of Contents



Securities with
    
    Securities withUnrealized
    
    UnrealizedGains
    
    Losses(Dollars in thousands)Fixed Maturities:Fair value of securities
    
    $
    37,782
    
    
    $
    216,679Amortized cost of securities
    
    $
    37,219
    
    
    $
    219,862Gross unrealized gain or (loss)
    
    $
    563
    
    
    $
    (3,183
    )Fair value as a percent of amortized cost
    
    
    101.5
    %
    
    
    98.6
    %Number of security positions held
    
    
    63
    
    
    
    178Number individually exceeding $50,000 gain or (loss)
    
    
    1
    
    
    
    10Concentration of gains or losses by type or industry:US Government and government agencies
    
    $
    128
    
    
    $
    (2,099
    )State, municipalities, and political subdivisions
    
    
    302
    
    
    
    (354
    )Banks, insurance, and brokers
    
    
    128
    
    
    
    (455
    )Electric services
    
    
    
    
    
    
    (10
    )Industrial and other
    
    
    5
    
    
    
    (265
    )Percentage rated investment grade (1)
    
    
    97.8
    %
    
    
    99.1
    %Equity Securities:Fair value of securities
    
    $
    12,401
    
    
    $
    15,769Cost of securities
    
    $
    11,967
    
    
    $
    16,091Gross unrealized gain or (loss)
    
    $
    434
    
    
    $
    (322
    )Fair value as percent of cost
    
    
    103.6
    %
    
    
    98.0
    %Number individually exceeding $50,000 gain or (loss)
    
    
    3
    
    
    
    
 
 (1)
    
    Investment grade of AAA to BBB by Standard & Poors Corporation.  Securities with
    
    Securities withUnrealized
    
    UnrealizedGains
    
    LossesMaturity:One year or less
    
    
    6.4
    %
    
    
    1.3
    %After one year through five years
    
    
    29.5
    %
    
    
    38.7
    %After five years through ten years
    
    
    45.6
    %
    
    
    48.5
    %After ten years
    
    
    18.5
    %
    
    
    11.5
    %100.0
    %
    
    
    100.0
    %
 19




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##### Table of Contents



September 30, 2005Aggregate
    
    
    Fair Value asAggregate
    
    
    Unrealized
    
    
    % of CostFair Value
    
    
    Gain/Loss
    
    
    Basis(Dollars in thousands)Fixed Maturities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (1 issue)
    
    $
    3,000
    
    
    $
    69
    
    
    
    102.3
    %More than one year (0 issues)
    
    
    
    
    
    
    Less than $50,000 (62 issues)
    
    
    34,782
    
    
    
    494
    
    
    
    101.4
    %$
    37,782
    
    
    $
    563Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (10 issues)
    
    $
    20,248
    
    
    $
    (837
    )
    
    
    96.0
    %More than one year (0 issues)
    
    
    
    
    
    
    Less than $50,000 (168 issues)
    
    
    196,431
    
    
    
    (2,346
    )
    
    
    98.8
    %$
    216,679
    
    
    $
    (3,183
    )Equity Securities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (3 issues)
    
    $
    2,698
    
    
    $
    174
    
    
    
    106.9
    %More than one year (0 issues)
    
    
    
    
    
    
    Less than $50,000 (32 issues)
    
    
    9,703
    
    
    
    260
    
    
    
    102.8
    %$
    12,401
    
    
    $
    434Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (0 issues)
    
    $
    
    
    
    $
    More than one year (0 issues)
    
    
    
    
    
    
    Less than $50,000 (27 issues)
    
    
    15,769
    
    
    
    (322
    )
    
    
    98.0
    %$
    15,769
    
    
    $
    (322
    )
 Premiums and Reinsurance
    Liquidity and Capital Resources
 Sources of Funds.
 20




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Off-Balance Sheet Arrangements
  21




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##### Table of Contents



Contractual Obligations
  
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
  
 ITEM 4. Controls and Procedures
       22




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM
1. Legal Proceedings
 
 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
 Exhibit No.
    
    Exhibit Description10.1
    
    Stock Purchase Agreement between Triumphe Insurance Holdings
LLC, Seller, and National Interstate Insurance Company,
Purchaser, dated as of September 30, 200531.1
    
    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
 23




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##### Table of Contents



SIGNATURES
  NATIONAL INTERSTATE CORPORATIONDate:  November 8, 2005
    /s/ Alan R. SpachmanAlan R. SpachmanChairman of the Board and President
(Duly Authorized Officer and Principal Executive Officer)Date: November 8, 2005
    /s/ Gary N. MondaGary N. MondaVice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) 24