##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2007
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to.
 Commission File Number 000-51130
 National Interstate Corporation
 (Exact name of registrant as specified in its charter)
 Ohio(State or other jurisdiction of 
incorporation or organization)
    
    34-1607394(I.R.S. Employer
Identification No.)
 3250 Interstate Drive
Richfield, Ohio 44286-9000
(330) 659-8900  (Address and telephone number of principal executive offices)
 þ o
 o þ o
 o þ




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##### 



National Interstate Corporation
Table of Contents
 PagePart I  Financial Information
    
    
    1Item 1. Financial Statements
    
    
    1Consolidated Balance Sheets
    
    
    1Consolidated Statements of Income
    
    
    2Consolidated Statements 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
    
    
    9Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 4. Controls and procedures
    
    
    20Part II  Other Information
    
    
    20Item 1. Legal Proceedings
    
    
    20Item 1A. Risk Factors
    
    
    20Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 3. Defaults Upon Senior Securities
    
    
    20Item 4. Submission of Matters to a Vote of Security Holders
    
    
    21Item 5. Other Information
    
    
    21Item 6. Exhibits
    
    
    22EX-31.1EX-31.2EX-32.1EX-32.2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 National Interstate Corporation and Subsidiaries
 
 Consolidated Balance Sheets
(In thousands, except per share data)
 June 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSInvestments:Fixed maturities available-for-sale, at fair value (amortized cost  $350,631 and $332,552, respectively)
    
    $
    344,021
    
    
    $
    327,449Equity securities available-for-sale, at fair value (cost  $48,673 and $33,476, respectively)
    
    
    48,868
    
    
    
    34,095Short-term investments, at cost which approximates fair value
    
    
    23,280
    
    
    
    22,744Total investments
    
    
    416,169
    
    
    
    384,288Cash and cash equivalents
    
    
    23,972
    
    
    
    22,166Securities lending collateral
    
    
    153,715
    
    
    
    158,928Accrued investment income
    
    
    4,492
    
    
    
    4,321Premiums receivable, net of allowance for doubtful accounts of $583 and $522, respectively
    
    
    119,663
    
    
    
    77,076Reinsurance recoverables on paid and unpaid losses
    
    
    107,419
    
    
    
    90,070Prepaid reinsurance premiums
    
    
    36,781
    
    
    
    21,272Deferred policy acquisition costs
    
    
    19,764
    
    
    
    15,035Deferred federal income taxes
    
    
    11,295
    
    
    
    10,731Property and equipment, net
    
    
    19,055
    
    
    
    18,586Funds held by reinsurer
    
    
    2,003
    
    
    
    2,340Other assets
    
    
    2,092
    
    
    
    1,435Total assets
    
    $
    916,420
    
    
    $
    806,248LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses
    
    $
    299,693
    
    
    $
    265,966Unearned premiums and service fees
    
    
    173,649
    
    
    
    127,723Long-term debt
    
    
    15,464
    
    
    
    15,464Amounts withheld or retained for account of others
    
    
    30,735
    
    
    
    27,885Reinsurance balances payable
    
    
    16,484
    
    
    
    7,156Securities lending obligation
    
    
    153,715
    
    
    
    158,928Accounts payable and other liabilities
    
    
    19,821
    
    
    
    19,676Commissions payable
    
    
    8,728
    
    
    
    6,347Assessments and fees payable
    
    
    4,198
    
    
    
    3,340Total liabilities
    
    
    722,487
    
    
    
    632,485Shareholders equity:Preferred shares  no par valueAuthorized  10,000 sharesIssued  0 shares
    
    
    
    
    
    
    Common stock  $0.01 par valueAuthorized  50,000 sharesIssued  23,350 shares, including 4,153 and 4,191 shares, respectively, in treasury
    
    
    234
    
    
    
    234Additional paid-in capital
    
    
    44,896
    
    
    
    43,921Retained earnings
    
    
    158,847
    
    
    
    138,450Accumulated other comprehensive loss
    
    
    (4,170
    )
    
    
    (2,915
    )Treasury shares
    
    
    (5,874
    )
    
    
    (5,927
    )Total shareholders equity
    
    
    193,933
    
    
    
    173,763Total liabilities and shareholders equity
    
    $
    916,420
    
    
    $
    806,248
  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 June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue:Premiums earned
    
    $
    63,265
    
    
    $
    52,429
    
    
    $
    123,555
    
    
    $
    102,744Net investment income
    
    
    5,586
    
    
    
    4,276
    
    
    
    10,731
    
    
    
    8,175Realized gains on investments
    
    
    207
    
    
    
    145
    
    
    
    272
    
    
    
    515Other
    
    
    955
    
    
    
    540
    
    
    
    1,820
    
    
    
    1,017Total revenues
    
    
    70,013
    
    
    
    57,390
    
    
    
    136,378
    
    
    
    112,451Expenses:Losses and loss adjustment expenses
    
    
    37,187
    
    
    
    30,438
    
    
    
    72,720
    
    
    
    60,334Commissions and other underwriting expense
    
    
    11,144
    
    
    
    9,934
    
    
    
    22,545
    
    
    
    18,699Other operating and general expenses
    
    
    4,048
    
    
    
    3,306
    
    
    
    7,839
    
    
    
    6,099Interest expense
    
    
    385
    
    
    
    379
    
    
    
    767
    
    
    
    743Total expenses
    
    
    52,764
    
    
    
    44,057
    
    
    
    103,871
    
    
    
    85,875Income before federal income taxes
    
    
    17,249
    
    
    
    13,333
    
    
    
    32,507
    
    
    
    26,576Provision for federal income taxes
    
    
    5,391
    
    
    
    4,330
    
    
    
    10,182
    
    
    
    8,847Net income
    
    $
    11,858
    
    
    $
    9,003
    
    
    $
    22,325
    
    
    $
    17,729Net income per common share  basic
    
    $
    0.62
    
    
    $
    0.47
    
    
    $
    1.16
    
    
    $
    0.93Net income per common share  diluted
    
    $
    0.61
    
    
    $
    0.47
    
    
    $
    1.15
    
    
    $
    0.92Weighted average of common shares outstanding  basic
    
    
    19,192
    
    
    
    19,136
    
    
    
    19,183
    
    
    
    19,119Weighted average of common shares outstanding  diluted
    
    
    19,374
    
    
    
    19,279
    
    
    
    19,355
    
    
    
    19,271Cash dividends per common share
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.10
    
    
    $
    0.08
  2




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National Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Shareholders Equity
 (Unaudited)
(Dollars in thousands)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    TreasuryStock
    
    
    Capital
    
    
    Earnings
    
    
    Loss
    
    
    Stock
    
    
    TotalBalance at January 1, 2007
    
    $
    234
    
    
    $
    43,921
    
    
    $
    138,450
    
    
    $
    (2,915
    )
    
    $
    (5,927
    )
    
    $
    173,763Net income
    
    
    
    
    
    
    
    
    
    
    22,325
    
    
    
    
    
    
    
    
    
    
    
    22,325Unrealized depreciation of investment securities,
net of tax benefit of $676
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,255
    )
    
    
    
    
    
    
    (1,255
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,070Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (1,928
    )
    
    
    
    
    
    
    
    
    
    
    (1,928
    )Issuance of 37,906 treasury shares upon exercise of
options and stock award grants
    
    
    
    
    
    
    274
    
    
    
    
    
    
    
    
    
    
    
    53
    
    
    
    327Tax benefit realized from exercise of stock options
    
    
    
    
    
    
    178
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    178Stock compensation expense
    
    
    
    
    
    
    523
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    523Balance at June 30, 2007
    
    $
    234
    
    
    $
    44,896
    
    
    $
    158,847
    
    
    $
    (4,170
    )
    
    $
    (5,874
    )
    
    $
    193,933Balance at January 1, 2006
    
    $
    234
    
    
    $
    42,257
    
    
    $
    105,826
    
    
    $
    (2,712
    )
    
    $
    (6,072
    )
    
    $
    139,533Net income
    
    
    
    
    
    
    
    
    
    
    17,729
    
    
    
    
    
    
    
    
    
    
    
    17,729Unrealized depreciation of investment securities,
net of tax benefit of $2,412
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,479
    )
    
    
    
    
    
    
    (4,479
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,250Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (1,539
    )
    
    
    
    
    
    
    
    
    
    
    (1,539
    )Issuance of 90,000 treasury shares upon exercise
of stock
options
    
    
    
    
    
    
    171
    
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    296Tax benefit realized from exercise of stock options
    
    
    
    
    
    
    523
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    523Stock compensation expense
    
    
    
    
    
    
    399
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    399Balance at June 30, 2006
    
    $
    234
    
    
    $
    43,350
    
    
    $
    122,016
    
    
    $
    (7,191
    )
    
    $
    (5,947
    )
    
    $
    152,462
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##### Table of Contents



National Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows
 (Unaudited)
(Dollars in thousands)
 Six Months Ended June 30,2007
    
    
    2006Operating activitiesNet income
    
    $
    22,325
    
    
    $
    17,729Adjustments to reconcile net income to net cash provided by operating
activities:Net amortization of bond premiums and discounts
    
    
    142
    
    
    
    107Provision for depreciation and amortization
    
    
    625
    
    
    
    579Net realized gains on investment securities
    
    
    (272
    )
    
    
    (515
    )Deferred federal income taxes
    
    
    112
    
    
    
    (542
    )Stock compensation expense
    
    
    523
    
    
    
    399Increase in deferred policy acquisition costs, net
    
    
    (4,729
    )
    
    
    (4,202
    )Increase in reserves for losses and loss adjustment expenses
    
    
    33,727
    
    
    
    24,143Increase in premiums receivable
    
    
    (42,587
    )
    
    
    (44,126
    )Increase in unearned premiums and service fees
    
    
    45,926
    
    
    
    49,719(Increase) decrease in interest receivable and other assets
    
    
    (536
    )
    
    
    3,218Increase in prepaid reinsurance premiums
    
    
    (15,509
    )
    
    
    (13,544
    )Increase in accounts payable and other liabilities, commissions payable
and assessments and fees payable
    
    
    3,384
    
    
    
    3,640Increase in amounts withheld or retained for account of others
    
    
    2,850
    
    
    
    3,201Increase in reinsurance recoverable
    
    
    (17,349
    )
    
    
    (9,707
    )Increase in reinsurance balances payable
    
    
    9,328
    
    
    
    10,608Other
    
    
    50
    
    
    
    Net cash provided by operating activities
    
    
    38,010
    
    
    
    40,707Investing activitiesPurchases of fixed maturities
    
    
    (103,821
    )
    
    
    (48,337
    )Purchases of equity securities
    
    
    (22,373
    )
    
    
    (30,635
    )Proceeds from sale of fixed maturities
    
    
    
    
    
    
    997Proceeds from sale of equity securities
    
    
    6,873
    
    
    
    17,739Proceeds from maturity of investments
    
    
    85,639
    
    
    
    20,670Additional cash paid for purchase of subsidiary
    
    
    
    
    
    
    (1,246
    )Cash and cash equivalents of business acquired
    
    
    
    
    
    
    5,585Capital expenditures
    
    
    (1,099
    )
    
    
    (579
    )Net cash used in investing activities
    
    
    (34,781
    )
    
    
    (35,806
    )Financing activitiesRepayment of long-term debt
    
    
    
    
    
    
    (625
    )Decrease in securities lending collateral
    
    
    5,213
    
    
    
    Decrease in securities lending obligation
    
    
    (5,213
    )
    
    
    Tax benefit realized from exercise of stock options
    
    
    178
    
    
    
    523Issuance of common shares from treasury upon exercise of stock options
    
    
    327
    
    
    
    296Cash dividends paid on common shares
    
    
    (1,928
    )
    
    
    (1,539
    )Net cash used in financing activities
    
    
    (1,423
    )
    
    
    (1,345
    )Net increase in cash and cash equivalents
    
    
    1,806
    
    
    
    3,556Cash and cash equivalents at beginning of period
    
    
    22,166
    
    
    
    7,461Cash and cash equivalents at end of period
    
    $
    23,972
    
    
    $
    11,017
  4




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##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Basis of Presentation
     2. Recent Accounting Pronouncements
 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
 Fair Value Measurements
 Fair Value Measurements
 Accounting for Uncertainty in Income Taxes
 Accounting for Uncertainty in
Income Taxes
 5




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##### Table of Contents



3. Shareholders Equity
  Accounting for Stock-Based Compensation,
   4. Transactions with Related Parties
  6




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##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2007
    
    2006
    
    2007
    
    2006(Dollars in thousands)
    
    (Dollars in thousands)Written premiums assumed
    
    $
    1,941
    
    
    $
    1,237
    
    
    $
    3,613
    
    
    $
    2,348Assumed premiums earned
    
    
    1,390
    
    
    
    1,008
    
    
    
    2,593
    
    
    
    1,981Assumed losses and loss adjustment expense incurred
    
    
    1,452
    
    
    
    378
    
    
    
    2,458
    
    
    
    1,515Ceded premiums written
    
    
    1,004
    
    
    
    1,047
    
    
    
    2,752
    
    
    
    2,525Ceded premiums earned
    
    
    986
    
    
    
    945
    
    
    
    1,953
    
    
    
    2,048Ceded losses and loss adjustment expense recoveries
    
    
    110
    
    
    
    285
    
    
    
    1,040
    
    
    
    1,248Payable to Great American as of quarter end
    
    
    844
    
    
    
    1,738
    
    
    
    844
    
    
    
    1,738
   5. Reinsurance
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Written
    
    
    Earned
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    Earned(Dollars in thousands)
    
    
    
    
    
    
    
    
    
    
    (Dollars in thousands)Direct
    
    $
    79,547
    
    
    $
    78,142
    
    
    $
    68,576
    
    
    $
    63,451
    
    
    $
    197,759
    
    
    $
    152,013
    
    
    $
    174,707
    
    
    $
    124,955Assumed
    
    
    2,336
    
    
    
    2,325
    
    
    
    4,152
    
    
    
    3,469
    
    
    
    5,054
    
    
    
    5,074
    
    
    
    7,559
    
    
    
    6,640Ceded
    
    
    (15,349
    )
    
    
    (17,202
    )
    
    
    (13,206
    )
    
    
    (14,491
    )
    
    
    (49,051
    )
    
    
    (33,532
    )
    
    
    (43,337
    )
    
    
    (28,851
    )Net Premium
    
    $
    66,534
    
    
    $
    63,265
    
    
    $
    59,522
    
    
    $
    52,429
    
    
    $
    153,762
    
    
    $
    123,555
    
    
    $
    138,929
    
    
    $
    102,744
  6. Commitments and Contingencies
   7




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7. Earnings Per Common Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands, except per share)
    
    
    (In thousands, except per share)Net income
    
    $
    11,858
    
    
    $
    9,003
    
    
    $
    22,325
    
    
    $
    17,729Weighted average shares outstanding during period
    
    
    19,192
    
    
    
    19,136
    
    
    
    19,183
    
    
    
    19,119Additional shares issuable under employee common stock
option plans using treasury stock method
    
    
    182
    
    
    
    143
    
    
    
    172
    
    
    
    152Weighted average shares outstanding assuming exercise
of
stock options
    
    
    19,374
    
    
    
    19,279
    
    
    
    19,355
    
    
    
    19,271Net income per share:Basic
    
    $
    0.62
    
    
    $
    0.47
    
    
    $
    1.16
    
    
    $
    0.93Diluted
    
    $
    0.61
    
    
    $
    0.47
    
    
    $
    1.15
    
    
    $
    0.92
  8. Segment Information
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)
    
    
    (Dollars in thousands)Revenue:Premiums earned:Alternate Risk Transfer
    
    $
    25,851
    
    
    $
    17,354
    
    
    $
    49,696
    
    
    $
    33,282Transportation
    
    
    18,651
    
    
    
    17,800
    
    
    
    36,715
    
    
    
    35,660Specialty Personal Lines
    
    
    12,631
    
    
    
    11,436
    
    
    
    24,734
    
    
    
    22,264Hawaii and Alaska
    
    
    4,189
    
    
    
    4,017
    
    
    
    8,237
    
    
    
    7,237Other
    
    
    1,943
    
    
    
    1,822
    
    
    
    4,173
    
    
    
    4,301Total premiums earned
    
    
    63,265
    
    
    
    52,429
    
    
    
    123,555
    
    
    
    102,744Net investment income
    
    
    5,586
    
    
    
    4,276
    
    
    
    10,731
    
    
    
    8,175Realized gains on investments
    
    
    207
    
    
    
    145
    
    
    
    272
    
    
    
    515Other
    
    
    955
    
    
    
    540
    
    
    
    1,820
    
    
    
    1,017Total revenues
    
    $
    70,013
    
    
    $
    57,390
    
    
    $
    136,378
    
    
    $
    112,451
 8




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##### Table of Contents



9. Securities Lending
  10. Comprehensive Income
  
 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.
  9




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##### Table of Contents



General
   Results of Operations
 Overview
     10




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##### Table of Contents



Gross Premiums Written
  Three Months Ended June 30,2007
    
    
    2006Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Alternative Risk Transfer
    
    $
    33,721
    
    
    
    41.2
    %
    
    $
    25,228
    
    
    
    34.7
    %Transportation
    
    
    25,238
    
    
    
    30.8
    %
    
    
    24,741
    
    
    
    34.0
    %Specialty Personal Lines
    
    
    16,037
    
    
    
    19.6
    %
    
    
    15,056
    
    
    
    20.7
    %Hawaii and Alaska
    
    
    5,933
    
    
    
    7.2
    %
    
    
    5,921
    
    
    
    8.1
    %Other
    
    
    954
    
    
    
    1.2
    %
    
    
    1,782
    
    
    
    2.5
    %Gross premiums written
    
    $
    81,883
    
    
    
    100.00
    %
    
    $
    72,728
    
    
    
    100.0
    %
 Six Months Ended June 30,2007
    
    
    2006Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Alternative Risk Transfer
    
    $
    110,431
    
    
    
    54.4
    %
    
    $
    95,292
    
    
    
    52.3
    %Transportation
    
    
    47,113
    
    
    
    23.2
    %
    
    
    43,260
    
    
    
    23.7
    %Specialty Personal Lines
    
    
    30,973
    
    
    
    15.3
    %
    
    
    28,829
    
    
    
    15.8
    %Hawaii and Alaska
    
    
    12,087
    
    
    
    6.0
    %
    
    
    11,664
    
    
    
    6.4
    %Other
    
    
    2,209
    
    
    
    1.1
    %
    
    
    3,221
    
    
    
    1.8
    %Gross premiums written
    
    $
    202,813
    
    
    
    100.0
    %
    
    $
    182,266
    
    
    
    100.0
    %
     11




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##### Table of Contents



Premiums Earned
 Three months ended June 30, 2007 compared to June 30, 2006.
 Three Months Ended June 30,
    
    
    Change2007
    
    
    2006
    
    
    Amount
    
    
    Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer
    
    $
    25,851
    
    
    $
    17,354
    
    
    $
    8,497
    
    
    
    49.0
    %Transportation
    
    
    18,651
    
    
    
    17,800
    
    
    
    851
    
    
    
    4.8
    %Specialty Personal Lines
    
    
    12,631
    
    
    
    11,436
    
    
    
    1,195
    
    
    
    10.4
    %Hawaii and Alaska
    
    
    4,189
    
    
    
    4,017
    
    
    
    172
    
    
    
    4.3
    %Other
    
    
    1,943
    
    
    
    1,822
    
    
    
    121
    
    
    
    6.6
    %Total premiums earned
    
    $
    63,265
    
    
    $
    52,429
    
    
    $
    10,836
    
    
    
    20.7
    %
  Six months ended June 30, 2007 compared to June 30, 2006.
 Six Months Ended June 30,
    
    
    Change2007
    
    
    2006
    
    
    Amount
    
    
    Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer
    
    $
    49,696
    
    
    $
    33,282
    
    
    $
    16,414
    
    
    
    49.3
    %Transportation
    
    
    36,715
    
    
    
    35,660
    
    
    
    1,055
    
    
    
    3.0
    %Specialty Personal Lines
    
    
    24,734
    
    
    
    22,264
    
    
    
    2,470
    
    
    
    11.1
    %Hawaii and Alaska
    
    
    8,237
    
    
    
    7,237
    
    
    
    1,000
    
    
    
    13.8
    %Other
    
    
    4,173
    
    
    
    4,301
    
    
    
    (128
    )
    
    
    (3.0
    %)Total premiums earned
    
    $
    123,555
    
    
    $
    102,744
    
    
    $
    20,811
    
    
    
    20.3
    %
  Underwriting and Loss Ratio Analysis
  12




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##### Table of Contents



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)
    
    
    (Dollars in thousands)Gross premiums written
    
    $
    81,883
    
    
    $
    72,728
    
    
    $
    202,813
    
    
    $
    182,266Ceded reinsurance
    
    
    (15,349
    )
    
    
    (13,206
    )
    
    
    (49,051
    )
    
    
    (43,337
    )Net premiums written
    
    
    66,534
    
    
    
    59,522
    
    
    
    153,762
    
    
    
    138,929Change in unearned premiums, net of ceded
    
    
    (3,269
    )
    
    
    (7,093
    )
    
    
    (30,207
    )
    
    
    (36,185
    )Net premiums earned
    
    $
    63,265
    
    
    $
    52,429
    
    
    $
    123,555
    
    
    $
    102,744Combined Ratios:Loss and LAE ratio(1)
    
    
    58.8
    %
    
    
    58.1
    %
    
    
    58.9
    %
    
    
    58.7
    %Underwriting expense ratio (2)
    
    
    22.5
    %
    
    
    24.2
    %
    
    
    23.1
    %
    
    
    23.1
    %Combined ratio
    
    
    81.3
    %
    
    
    82.3
    %
    
    
    82.0
    %
    
    
    81.8
    %
 
 (1)
    
    The ratio of losses and LAE to premiums earned.(2)
    
    The ratio of the sum of commissions and other underwriting expenses, other operating
expenses less other income to premiums earned. Three months ended June 30, 2007 compared to June 30, 2006.
  Six months ended June 30, 2007 compared to June 30, 2006.
 Investment Income
 2007 compared to 2006.
 13




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##### Table of Contents



Realized Gains on Investments
 2007 compared to 2006.
 Other Income
 2007 compared to 2006.
 Commissions and Other Underwriting Expenses
 2007 compared to 2006.
 Other Operating and General Expenses
 2007 compared to 2006.
   Income Taxes
 2007 compared to 2006.
 Financial Condition
 Investments
  14




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##### Table of Contents



Securities with
    
    Securities withUnrealized
    
    UnrealizedGains
    
    Losses(Dollars in thousands)Fixed Maturities:Fair value of securities
    
    $
    40,758
    
    
    $
    303,263Amortized cost of securities
    
    $
    40,237
    
    
    $
    310,394Gross unrealized gain or (loss)
    
    $
    521
    
    
    $
    (7,131
    )Fair value as a percent of amortized cost
    
    
    101.3
    %
    
    
    97.7
    %Number of security positions held
    
    
    96
    
    
    
    342Number individually exceeding $50,000 gain or (loss)
    
    
    2
    
    
    
    35Concentration of gains or losses by type or industry:US Government and government agencies
    
    $
    131
    
    
    $
    (3,863
    )State, municipalities, and political subdivisions
    
    
    58
    
    
    
    (1,037
    )Banks, insurance, and brokers
    
    
    328
    
    
    
    (1,972
    )Industrial and other
    
    
    4
    
    
    
    (259
    )Percentage rated investment grade (1)
    
    
    94.6
    %
    
    
    99.5
    %Equity Securities:Fair value of securities
    
    $
    28,469
    
    
    $
    20,399Cost of securities
    
    $
    27,502
    
    
    $
    21,171Gross unrealized gain or (loss)
    
    $
    967
    
    
    $
    (772
    )Fair value as percent of cost
    
    
    103.5
    %
    
    
    96.4
    %Number individually exceeding $50,000 gain or (loss)
    
    
    6
    
    
    
    
 
 (1)
    
    Investment grade of AAA to BBB by Standard & Poors Corporation.  Securities with
    
    Securities withUnrealized Gains
    
    Unrealized LossesMaturity:One year or less
    
    
    11.6
    %
    
    
    9.4
    %After one year through five years
    
    
    54.4
    %
    
    
    42.5
    %After five years through ten years
    
    
    28.0
    %
    
    
    42.5
    %After ten years
    
    
    6.0
    %
    
    
    5.6
    %100.0
    %
    
    
    100.0
    %
 15




---



##### Table of Contents



June 30, 2007Aggregate
    
    
    Fair ValueAggregate Fair
    
    
    Unrealized Gain
    
    
    as % ofValue
    
    
    (Loss)
    
    
    Cost Basis(Dollars in thousands)Fixed Maturities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (2 issues)
    
    $
    1,600
    
    
    $
    280
    
    
    
    121.2
    %More than one year (0 issues)
    
    
    
    
    
    
    Less than $50,000 (94 issues)
    
    
    39,158
    
    
    
    241
    
    
    
    100.6
    %$
    40,758
    
    
    $
    521Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (17 issues)
    
    $
    30,867
    
    
    $
    (1,093
    )
    
    
    96.6
    %More than one year (18 issues)
    
    
    32,240
    
    
    
    (3,006
    )
    
    
    91.5
    %Less than $50,000 (307 issues)
    
    
    240,156
    
    
    
    (3,032
    )
    
    
    98.8
    %$
    303,263
    
    
    $
    (7,131
    )Equity Securities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (6 issues)
    
    $
    7,003
    
    
    $
    506
    
    
    
    107.8
    %More than one year (0 issues)
    
    
    
    
    
    
    Less than $50,000 (43 issues)
    
    
    21,466
    
    
    
    461
    
    
    
    102.2
    %$
    28,469
    
    
    $
    967Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (0 issues)
    
    $
    
    
    
    $
    More than one year (0 issues)
    
    
    
    
    
    
    Less than $50,000 (56 issues)
    
    
    20,399
    
    
    
    (772
    )
    
    
    96.4
    %$
    20,399
    
    
    $
    (772
    )
  Premiums and Reinsurance
   16




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##### Table of Contents



Liquidity and Capital Resources
         st
  17




---



##### Table of Contents



Critical Accounting Policies
  Losses and Loss Adjustment Expense 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;
 18




---



##### Table of Contents




    
    average case reserves and average incurred on open claims;
    
    closure rates and statistics related to closed and open claim percentages;
    
    average closed claim severity;
    
    ultimate claim severity;
    
    reported loss ratios;
    
    projected ultimate loss ratios; and
    
    loss payment patterns.
 Other-Than-Temporary Impairment
  
    
    the length of time and the extent to which the market value has been below amortized cost;
    
    whether the issuer is experiencing significant financial difficulties;
    
    economic stability of an entire industry sector or subsection;
    
    whether the issuer, series of issuers or industry has a catastrophic type of loss;
    
    the extent to which the unrealized loss is credit-driven or a result of changes in market interest rates;
    
    historical operating, balance sheet and cash flow data;
    
    internally 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.
  Contractual Obligations/Off-Balance Sheet Arrangements
  19




---



##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
  
 ITEM 4. Controls and Procedures
   
 PART II  OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
   
 ITEM 1A. Risk Factors.
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3. Defaults Upon Senior Securities
  20




---



##### Table of Contents



ITEM 4. Submission of Matters to a Vote of Security Holders
   Name
    
    Term Expires
    
    For
    
    Against
    
    Withheld
    
    Abstain
    
    Broker Non-VotesProposal 1:Joseph E. Consolino
    
    
    2009
    
    
    
    18,338,739
    
    
    
    N/A
    
    
    
    599,816
    
    
    
    N/A
    
    
    
    N/ATheodore H. Elliott, Jr.
    
    
    2009
    
    
    
    18,300,317
    
    
    
    N/A
    
    
    
    638,238
    
    
    
    N/A
    
    
    
    N/AGary J. Gruber
    
    
    2009
    
    
    
    16,621,930
    
    
    
    N/A
    
    
    
    2,316,625
    
    
    
    N/A
    
    
    
    N/ADonald D. Larson
    
    
    2009
    
    
    
    16,622,230
    
    
    
    N/A
    
    
    
    2,316,325
    
    
    
    N/A
    
    
    
    N/AProposal 2
    
    
    
    
    
    
    18,885,078
    
    
    
    46,793
    
    
    
    N/A
    
    
    
    6,684
    
    
    
    N/A
 
 N/A
    
     Not Applicable  Name
    
    Term ExpiresKeith A. Jensen
    
    
    2008James C. Kennedy
    
    
    2008Joel Schiavone
    
    
    2008Alan R. Spachman
    
    
    2008
 
 ITEM 5. Other Information
  21




---



##### Table of Contents



ITEM 6. Exhibits
 Exhibit No.
    
    Exhibit Description3.1
    
    Amended and Restated Articles of Incorporation (1)3.2
    
    Amended and Restated Code of Regulations (1)31.1
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
amended, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 
 (1)
    
    These exhibits are incorporated by reference to our Registration Statement on Form S-1, as
amended (Registration No. 333-119270) filed on November 12, 2004. 22




---



##### Table of Contents



SIGNATURES
  NATIONAL INTERSTATE CORPORATIONDate: August 7, 2007
    /s/ Alan R. SpachmanAlan R. SpachmanChairman of the Board and Chief Executive Officer
(Duly Authorized Officer and Principal Executive Officer)Date: August 7, 2007
    /s/ Julie A. McGrawJulie A. McGrawVice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) 23