##### 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, 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(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




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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
    
    
    10Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20Part II  Other InformationItem 1. Legal Proceedings
    
    
    21Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 3. Defaults Upon Senior Securities
    
    
    21Item 4. Submission of Matters to a Vote of Security Holders
    
    
    21Item 5. Other Information
    
    
    21Item 6. Exhibits
    
    
    22Signatures
    
    
    23EX-31.1 302 CEO CertificationEX-31.2 302 CFO CertificationEX-32.1 903 CFO CertificationEX-32.2 906 CFO Certification




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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)
 June 30,
    
    December 31,2005
    
    2004(Unaudited)ASSETSInvestments:Fixed
maturities available-for-sale, at fair value (amortized cost  $238,918 and $205,711, respectively)
    
    $
    238,810
    
    
    $
    206,221Equity securities available-for-sale, at fair value (cost  $22,037 and $16,522, respectively)
    
    
    22,044
    
    
    
    16,841Short-term investments, at cost which approximates fair value
    
    
    28,365
    
    
    
    5,280Total investments
    
    
    289,219
    
    
    
    228,342Cash and cash equivalents
    
    
    12,086
    
    
    
    10,609Accrued investment income
    
    
    2,791
    
    
    
    2,344Premiums receivable, net of allowance for doubtful accounts of $366 and $361, respectively
    
    
    93,918
    
    
    
    45,129Reinsurance recoverables on paid and unpaid losses
    
    
    70,106
    
    
    
    63,128Prepaid reinsurance premiums
    
    
    33,151
    
    
    
    16,190Deferred policy acquisition costs
    
    
    14,459
    
    
    
    11,606Deferred federal income taxes
    
    
    8,923
    
    
    
    6,400Property and equipment, net
    
    
    11,475
    
    
    
    11,738Funds held by reinsurer
    
    
    3,107
    
    
    
    3,599Other assets
    
    
    1,302
    
    
    
    2,151Total assets
    
    $
    540,537
    
    
    $
    401,236LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses
    
    $
    197,296
    
    
    $
    171,031Unearned premiums
    
    
    139,215
    
    
    
    80,928Long-term debt
    
    
    16,922
    
    
    
    17,547Note payable to affiliate
    
    
    
    
    
    
    15,000Amounts withheld or retained for account of others
    
    
    16,035
    
    
    
    14,911Reinsurance balances payable
    
    
    19,867
    
    
    
    3,429Other accounts payable
    
    
    12,268
    
    
    
    14,432Commissions payable
    
    
    6,224
    
    
    
    4,719Assessments and fees payable
    
    
    5,795
    
    
    
    6,450Total liabilities
    
    
    413,622
    
    
    
    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 4,384,800 and 4,470,400, respectively,
shares in treasury
    
    
    234
    
    
    
    200Additional paid-in capital
    
    
    41,747
    
    
    
    1,264Retained earnings
    
    
    91,196
    
    
    
    77,102Accumulated other comprehensive (loss) income
    
    
    (65
    )
    
    
    539Treasury shares
    
    
    (6,197
    )
    
    
    (6,316
    )Total shareholders equity
    
    
    126,915
    
    
    
    72,789Total liabilities and shareholders equity
    
    $
    540,537
    
    
    $
    401,236
  1




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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 30,2005
    
    2004
    
    2005
    
    2004Revenue:Premiums earned
    
    $
    46,423
    
    
    $
    40,418
    
    
    $
    89,600
    
    
    $
    73,414Net investment income
    
    
    3,140
    
    
    
    2,070
    
    
    
    5,807
    
    
    
    3,827Realized gains on investments
    
    
    191
    
    
    
    464
    
    
    
    306
    
    
    
    1,156Other
    
    
    407
    
    
    
    455
    
    
    
    915
    
    
    
    908Total revenues
    
    
    50,161
    
    
    
    43,407
    
    
    
    96,628
    
    
    
    79,305Expenses:Losses and loss adjustment expenses
    
    
    27,720
    
    
    
    23,454
    
    
    
    53,787
    
    
    
    43,352Commissions and other underwriting expense
    
    
    9,478
    
    
    
    7,908
    
    
    
    16,730
    
    
    
    14,458Other operating and general expenses
    
    
    2,252
    
    
    
    2,010
    
    
    
    4,236
    
    
    
    3,629Interest expense
    
    
    322
    
    
    
    274
    
    
    
    723
    
    
    
    528Total expenses
    
    
    39,772
    
    
    
    33,646
    
    
    
    75,476
    
    
    
    61,967Income before federal income taxes
    
    
    10,389
    
    
    
    9,761
    
    
    
    21,152
    
    
    
    17,338Provision for federal income taxes
    
    
    3,434
    
    
    
    3,350
    
    
    
    7,042
    
    
    
    5,944Net income
    
    $
    6,955
    
    
    $
    6,411
    
    
    $
    14,110
    
    
    $
    11,394Net income per common share basic
    
    $
    0.37
    
    
    $
    0.43
    
    
    $
    0.76
    
    
    $
    0.76Net income per common share  diluted
    
    $
    0.36
    
    
    $
    0.42
    
    
    $
    0.75
    
    
    $
    0.74Weighted average of common shares outstanding, basic
    
    
    18,965
    
    
    
    15,024
    
    
    
    18,456
    
    
    
    15,024Weighted average of common shares outstanding, diluted
    
    
    19,223
    
    
    
    15,396
    
    
    
    18,710
    
    
    
    15,396
 .
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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
    
    
    
    
    
    
    
    
    
    
    14,110
    
    
    
    
    
    
    
    
    
    
    
    14,110Unrealized depreciation of investment securities,
net of tax benefit of $325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (604
    )
    
    
    
    
    
    
    (604
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,506Proceeds from initial public offering
    
    
    34
    
    
    
    40,357
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,391Issuance of
85,600 treasury shares upon exercise of stock options
    
    
    
    
    
    
    33
    
    
    
    (16
    )
    
    
    
    
    
    
    119
    
    
    
    136Tax benefit realized from exercise of stock options
    
    
    
    
    
    
    93
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93Balance at June 30, 2005
    
    $
    234
    
    
    $
    41,747
    
    
    $
    91,196
    
    
    $
    (65
    )
    
    $
    (6,197
    )
    
    $
    126,915
  3




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National Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 (In thousands)
 Six months endedJune 30,2005
    
    2004Operating activitiesNet income
    
    $
    14,110
    
    
    $
    11,394Adjustments to reconcile net income to net cash provided by operating activities:Net amortization of bond premiums and discounts
    
    
    423
    
    
    
    197Provision for depreciation and amortization
    
    
    593
    
    
    
    589Net realized gain on investment securities
    
    
    (306
    )
    
    
    (1,156
    )Tax benefit realized from exercise of stock options
    
    
    93
    
    
    
    Deferred federal income taxes
    
    
    (2,197
    )
    
    
    (1,303
    )Increase in deferred policy acquisition costs, net
    
    
    (2,853
    )
    
    
    (3,954
    )Increase in reserves for losses and loss adjustment expenses
    
    
    26,265
    
    
    
    14,865Increase in premiums receivable
    
    
    (48,789
    )
    
    
    (39,287
    )Increase in unearned premiums and service fees
    
    
    58,287
    
    
    
    47,211Increase in interest receivable, prepaid reinsurance premiums and other assets
    
    
    (16,111
    )
    
    
    (17,928
    )(Decrease) increase in accounts payable, commissions and other liabilities, premiums
and other funds collected from others and assessments and fees payable
    
    
    (190
    )
    
    
    9,338Increase in reinsurance recoverable
    
    
    (6,978
    )
    
    
    (4,219
    )Increase in reinsurance balances payable
    
    
    16,438
    
    
    
    9,560Other
    
    
    (5
    )
    
    
    11Net cash provided by operating activities
    
    
    38,780
    
    
    
    25,318Investing activitiesPurchases of investments
    
    
    (109,085
    )
    
    
    (96,062
    )Proceeds from sale or maturity of investments
    
    
    47,163
    
    
    
    59,930Purchases of property and equipment
    
    
    (283
    )
    
    
    (467
    )Net cash used in investing activities
    
    
    (62,205
    )
    
    
    (36,599
    )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
    
    
    (625
    )
    
    
    (729
    )Issuance of common shares from treasury upon exercise of stock options
    
    
    136
    
    
    
    Net cash provided by financing activities
    
    
    24,902
    
    
    
    14,271Net increase in cash and cash equivalents
    
    
    1,477
    
    
    
    2,990Cash and cash equivalents at beginning of period
    
    
    10,609
    
    
    
    21,610Cash and cash equivalents at end of period
    
    $
    12,086
    
    
    $
    24,600
  4




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




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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
  Three months ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net income, as reported
    
    $
    6,955
    
    
    $
    6,411
    
    
    $
    14,110
    
    
    $
    11,394Less: Proforma stock option expense, net of tax
    
    
    290
    
    
    
    12
    
    
    
    491
    
    
    
    25Proforma net income
    
    $
    6,665
    
    
    $
    6,399
    
    
    $
    13,619
    
    
    $
    11,369Earnings per share:Basic  as reported
    
    $
    0.37
    
    
    $
    0.43
    
    
    $
    0.76
    
    
    $
    0.76Basic  proforma
    
    
    0.35
    
    
    
    0.43
    
    
    
    0.74
    
    
    
    0.76Diluted  as reported
    
    
    0.36
    
    
    
    0.42
    
    
    
    0.75
    
    
    
    0.74Diluted  proforma
    
    
    0.35
    
    
    
    0.42
    
    
    
    0.73
    
    
    
    0.74
 6




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Three months ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Dividend yield
    
    
    0.3
    %
    
    
    
    
    
    
    0.3
    %
    
    
    Volatility
    
    
    31.0
    %
    
    
    
    
    
    
    31.0
    %
    
    
    Risk-free interest rate
    
    
    4.0
    %
    
    
    
    
    
    
    4.0% - 4.5
    %
    
    
    4.4
    %Life of grant
    
    7.5 years
    
    
    
    
    
    
    9.8 years
    
    
    10 years
  Share-Based Payment Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees
 5. Comprehensive Income
  6. Note Payable and Long-term Debt
  June 30,
    
    December 31,2005
    
    2004Junior subordinated debentures
    
    $
    15,464
    
    
    $
    15,464Term note payable to bank
    
    
    1,458
    
    
    
    2,083Note payable to affiliate
    
    
    
    
    
    
    15,000Total notes payable and long-term debt
    
    $
    16,922
    
    
    $
    32,547
  7. Premiums, Reinsurance and Transactions with Related Parties
  7




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Three months ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Written premiums assumed
    
    $
    2,572
    
    
    $
    2,700
    
    
    $
    5,151
    
    
    $
    5,458Assumed premiums earned
    
    
    2,293
    
    
    
    1,938
    
    
    
    4,523
    
    
    
    3,743Assumed losses and loss adjustment expense incurred
    
    
    2,092
    
    
    
    1,084
    
    
    
    3,550
    
    
    
    2,705Payable to
Great American as of period end
    
    
    754
    
    
    
    907
    
    
    
    754
    
    
    
    907
   Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004Written
    
    Earned
    
    Written
    
    Earned
    
    Written
    
    Earned
    
    Written
    
    EarnedDirect
    
    $
    69,030
    
    
    $
    57,712
    
    
    $
    55,499
    
    
    $
    49,752
    
    
    $
    169,708
    
    
    $
    111,749
    
    
    $
    140,270
    
    
    $
    92,883Assumed
    
    
    3,106
    
    
    
    2,871
    
    
    
    4,966
    
    
    
    5,152
    
    
    
    6,005
    
    
    
    5,700
    
    
    
    9,135
    
    
    
    8,433Ceded
    
    
    (14,862
    )
    
    
    (14,160
    )
    
    
    (12,905
    )
    
    
    (14,486
    )
    
    
    (44,810
    )
    
    
    (27,849
    )
    
    
    (45,353
    )
    
    
    (27,902
    )Net Premium
    
    $
    57,274
    
    
    $
    46,423
    
    
    $
    47,560
    
    
    $
    40,418
    
    
    $
    130,903
    
    
    $
    89,600
    
    
    $
    104,052
    
    
    $
    73,414
  8. Commitments and Contingencies
    8




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9. Earnings Per Common Share
  Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004Net income
    
    $
    6,955
    
    
    $
    6,411
    
    
    $
    14,110
    
    
    $
    11,394Weighted average shares outstanding during period
    
    
    18,965
    
    
    
    15,024
    
    
    
    18,456
    
    
    
    15,024Additional shares issuable under employee common stock
option plans using treasury stock method
    
    
    258
    
    
    
    372
    
    
    
    254
    
    
    
    372Weighted average shares outstanding assuming exercise
of stock options
    
    
    19,223
    
    
    
    15,396
    
    
    
    18,710
    
    
    
    15,396Net income per share:Basic
    
    $
    0.37
    
    
    $
    0.43
    
    
    $
    0.76
    
    
    $
    0.76Diluted
    
    
    0.36
    
    
    
    0.42
    
    
    
    0.75
    
    
    
    0.74
 10. Segment Information
  Three months ended June 30,
    
    Six months ended June 30,2005
    
    2004
    
    2005
    
    2004Revenue:Premiums earned:Transportation
    
    $
    17,277
    
    
    $
    18,816
    
    
    $
    33,583
    
    
    $
    33,984Alternate Risk Transfer
    
    
    14,264
    
    
    
    9,206
    
    
    
    27,017
    
    
    
    16,657Specialty Personal Lines
    
    
    9,420
    
    
    
    6,754
    
    
    
    18,085
    
    
    
    12,301Hawaii
    
    
    4,122
    
    
    
    3,807
    
    
    
    7,888
    
    
    
    7,524Other
    
    
    1,340
    
    
    
    1,835
    
    
    
    3,027
    
    
    
    2,948Total Premiums Earned
    
    
    46,423
    
    
    
    40,418
    
    
    
    89,600
    
    
    
    73,414Net investment income
    
    
    3,140
    
    
    
    2,070
    
    
    
    5,807
    
    
    
    3,827Realized gains on investments
    
    
    191
    
    
    
    464
    
    
    
    306
    
    
    
    1,156Other
    
    
    407
    
    
    
    455
    
    
    
    915
    
    
    
    908Total revenues
    
    $
    50,161
    
    
    $
    43,407
    
    
    $
    96,628
    
    
    $
    79,305
 11. Shareholders Equity
   9




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Note 12. Subsequent Event
  
 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
    10




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##### Table of Contents



United States Virgin Islands
  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;
 11




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##### Table of Contents




    
    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.
  Results of Operations
 Overview
  12




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##### Table of Contents



Underwriting
    Three months ended
    
    Six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(Dollars in thousands)Gross premiums written
    
    $
    72,136
    
    
    $
    60,465
    
    
    $
    175,713
    
    
    $
    149,405Ceded reinsurance
    
    
    (14,862
    )
    
    
    (12,905
    )
    
    
    (44,810
    )
    
    
    (45,353
    )Net premiums written
    
    
    57,274
    
    
    
    47,560
    
    
    
    130,903
    
    
    
    104,052Change in unearned premiums, net of ceded
    
    
    (10,851
    )
    
    
    (7,142
    )
    
    
    (41,303
    )
    
    
    (30,638
    )Net earned premiums
    
    $
    46,423
    
    
    $
    40,418
    
    
    $
    89,600
    
    
    $
    73,414Combined Ratios:Loss and LAE ratio (1)
    
    
    59.7
    %
    
    
    58.0
    %
    
    
    60.0
    %
    
    
    59.1
    %Underwriting expense ratio (2)
    
    
    24.4
    %
    
    
    23.4
    %
    
    
    22.4
    %
    
    
    23.4
    %Combined ratio
    
    
    84.1
    %
    
    
    81.4
    %
    
    
    82.4
    %
    
    
    82.5
    %
 
 (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.  13




---



##### Table of Contents



Three months ended June 30,2005
    
    2004Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in thousands)Transportation
    
    $
    26,152
    
    
    
    36.3
    %
    
    $
    28,433
    
    
    
    47.0
    %Alternate Risk Transfer
    
    
    25,834
    
    
    
    35.8
    %
    
    
    14,118
    
    
    
    23.4
    %Specialty Personal Lines
    
    
    13,152
    
    
    
    18.2
    %
    
    
    10,537
    
    
    
    17.4
    %Hawaii
    
    
    6,111
    
    
    
    8.5
    %
    
    
    5,831
    
    
    
    9.6
    %Other
    
    
    887
    
    
    
    1.2
    %
    
    
    1,546
    
    
    
    2.6
    %Gross Premiums Written
    
    $
    72,136
    
    
    
    100.0
    %
    
    $
    60,465
    
    
    
    100.0
    %
 Six months ended June 30,2005
    
    2004Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in thousands)Transportation
    
    $
    45,579
    
    
    
    25.9
    %
    
    $
    49,303
    
    
    
    33.0
    %Alternate Risk Transfer
    
    
    90,861
    
    
    
    51.7
    %
    
    
    65,247
    
    
    
    43.7
    %Specialty Personal Lines
    
    
    25,038
    
    
    
    14.3
    %
    
    
    20,428
    
    
    
    13.7
    %Hawaii
    
    
    12,159
    
    
    
    6.9
    %
    
    
    12,120
    
    
    
    8.1
    %Other
    
    
    2,076
    
    
    
    1.2
    %
    
    
    2,307
    
    
    
    1.5
    %Gross Premiums Written
    
    $
    175,713
    
    
    
    100.0
    %
    
    $
    149,405
    
    
    
    100.0
    %
  Three months ended June 30,
    
    Change2005
    
    2004
    
    Amount
    
    Percent(Dollars in thousands)Revenue:Premiums earned:Transportation
    
    $
    17,277
    
    
    $
    18,816
    
    
    $
    (1,539
    )
    
    
    (8.2
    %)Alternate Risk Transfer
    
    
    14,264
    
    
    
    9,206
    
    
    
    5,058
    
    
    
    54.9
    %Specialty Personal Lines
    
    
    9,420
    
    
    
    6,754
    
    
    
    2,666
    
    
    
    39.5
    %Hawaii
    
    
    4,122
    
    
    
    3,807
    
    
    
    315
    
    
    
    8.3
    %Other
    
    
    1,340
    
    
    
    1,835
    
    
    
    (495
    )
    
    
    (27.0
    %)Total Premiums Earned
    
    
    46,423
    
    
    
    40,418
    
    
    
    6,005
    
    
    
    14.9
    %Net investment income
    
    
    3,140
    
    
    
    2,070
    
    
    
    1,070
    
    
    
    51.7
    %Realized gains on investments
    
    
    191
    
    
    
    464
    
    
    
    (273
    )
    
    
    (58.8
    %)Other
    
    
    407
    
    
    
    455
    
    
    
    (48
    )
    
    
    (10.5
    %)Total revenues
    
    $
    50,161
    
    
    $
    43,407
    
    
    $
    6,754
    
    
    
    15.6
    %
 Three months ended June 30, 2005 compared to June 30, 2004.
 14




---



##### Table of Contents



Six months ended June 30,
    
    Change2005
    
    2004
    
    Amount
    
    Percent(Dollars in thousands)Revenue:Premiums earned:Transportation
    
    $
    33,583
    
    
    $
    33,984
    
    
    $
    (401
    )
    
    
    (1.2
    %)Alternate Risk Transfer
    
    
    27,017
    
    
    
    16,657
    
    
    
    10,360
    
    
    
    62.2
    %Specialty Personal Lines
    
    
    18,085
    
    
    
    12,301
    
    
    
    5,784
    
    
    
    47.0
    %Hawaii
    
    
    7,888
    
    
    
    7,524
    
    
    
    364
    
    
    
    4.8
    %Other
    
    
    3,027
    
    
    
    2,948
    
    
    
    79
    
    
    
    2.7
    %Total Premiums Earned
    
    
    89,600
    
    
    
    73,414
    
    
    
    16,186
    
    
    
    22.0
    %Net investment income
    
    
    5,807
    
    
    
    3,827
    
    
    
    1,980
    
    
    
    51.7
    %Realized gains on investments
    
    
    306
    
    
    
    1,156
    
    
    
    (850
    )
    
    
    (73.5
    %)Other
    
    
    915
    
    
    
    908
    
    
    
    7
    
    
    
    0.8
    %Total revenues
    
    $
    96,628
    
    
    $
    79,305
    
    
    $
    17,323
    
    
    
    21.8
    %
 Six months ended June 30, 2005 compared to June 30, 2004.
 15




---



##### Table of Contents



Investment Income
 Three months ended June 30, 2005 compared to June 30, 2004.
 Six months ended June 30, 2005 compared to June 30, 2004.
 Realized Gains (Losses) on Investments
 Three months ended June 30, 2005 compared to June 30, 2004.
 Six months ended June 30, 2005 compared to June 30, 2004.
 Other Operating and General Expenses
 Three months ended June 30, 2005 compared to June 30, 2004.
 Six months ended June 30, 2005 compared to June 30, 2004.
 Income Taxes
 Three months ended June 30, 2005 compared to June 30, 2004.
 Six months ended June 30, 2005 compared to June 30, 2004.
 16




---



##### Table of Contents



Financial Condition
 Investments
    Securities with
    
    Securities withUnrealized
    
    UnrealizedGains
    
    Losses(Dollars in thousands)Fixed Maturities:Fair value of securities
    
    $
    127,964
    
    
    $
    110,846Amortized cost of securities
    
    $
    126,888
    
    
    $
    112,030Gross unrealized gain or (loss)
    
    $
    1,076
    
    
    $
    (1,184
    )Fair value as a % of amortized cost
    
    
    100.8
    %
    
    
    98.9
    %Number of security positions held
    
    
    152
    
    
    
    128Number individually exceeding $50,000 gain or (loss)
    
    
    
    
    
    
    3Concentration of gains or losses by ty or industry:US Government and government agencies
    
    $
    293
    
    
    $
    (691
    )State, municipalities, and political subdivisions
    
    
    532
    
    
    
    (70
    )Banks, insurance, and brokers
    
    
    239
    
    
    
    (245
    )Electric services
    
    
    
    
    
    
    (3
    )Industrial and other
    
    
    11
    
    
    
    (174
    )Percentage rated investment grade (1)
    
    
    99.4
    %
    
    
    98.2
    %Equity Securities:Fair value of securities
    
    $
    9,488
    
    
    $
    12,556Cost of securities
    
    $
    9,100
    
    
    $
    12,937Gross unrealized gain or (loss)
    
    $
    388
    
    
    $
    (381
    )Fair value as % of cost
    
    
    104.3
    %
    
    
    97.1
    %Number individually exceeding $50,000 gain or (loss)
    
    
    1
    
    
    
    1
 
 (1)
    
    Investment grade of AAA to BBB by Standard & Poors Corporation.  Securities with
    
    Securities withUnrealized
    
    UnrealizedGains
    

LossesMaturity:One year or less
    
    
    1.3
    %
    
    
    0.0
    %After one year through five years
    
    
    22.8
    %
    
    
    42.8
    %After five years through ten years
    
    
    53.7
    %
    
    
    37.0
    %After ten years
    
    
    22.2
    %
    
    
    20.2
    %100.0
    %
    
    
    100.0
    %
 17




---



##### Table of Contents



June 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 (0 issues)
    
    $
    
    
    
    $
    More than one year (0 issues)
    
    
    
    
    
    
    Less than $50,000 (152 issues)
    
    
    127,964
    
    
    
    1,076
    
    
    
    100.8
    %$
    127,964
    
    
    $
    1,076Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (3 issues)
    
    $
    2,324
    
    
    $
    (266
    )
    
    
    89.7
    %More than one year (0 issues)
    
    
    
    
    
    
    Less than $50,000 (125 issues)
    
    
    108,522
    
    
    
    (918
    )
    
    
    99.2
    %$
    110,846
    
    
    $
    (1,184
    )Equity Securities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (1 issue)
    
    $
    79
    
    
    $
    54
    
    
    
    316.0
    %More than one year (0 issues)
    
    
    
    
    
    
    Less than $50,000 (29 issues)
    
    
    9,409
    
    
    
    334
    
    
    
    103.7
    %$
    9,488
    
    
    $
    388Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (1 issues)
    
    $
    1,016
    
    
    $
    (54
    )
    
    
    95.0
    %More than one year (0 issues)
    
    
    
    
    
    
    Less than $50,000 (22 issues)
    
    
    11,540
    
    
    
    (327
    )
    
    
    97.2
    %$
    12,556
    
    
    $
    (381
    )
 Premiums
and
Reinsurance
   18




---



##### Table of Contents



Liquidity and Capital Resources
 Sources of Funds.
        19




---



##### Table of Contents



Off-Balance Sheet Arrangements
  Contractual Obligations
  
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
  
 ITEM 4. Controls and Procedures
       20




---



##### 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
   Name
    
    Term Expires
    
    For
    
    Against
    
    Withheld
    
    Abstain
    
    Broker Non-VotesProposal 1Theodore H. Elliott, Jr.
    
    
    2007
    
    
    
    18,293,499
    
    
    
    N/A
    
    
    
    99,219
    
    
    
    N/A
    
    
    
    N/AGary J. Gruber
    
    
    2007
    
    
    
    17,770,860
    
    
    
    N/A
    
    
    
    621,858
    
    
    
    N/A
    
    
    
    N/ADonald D. Larson
    
    
    2007
    
    
    
    17,770,860
    
    
    
    N/A
    
    
    
    621,858
    
    
    
    N/A
    
    
    
    N/AK. Brent Somers
    
    
    2007
    
    
    
    18,374,699
    
    
    
    N/A
    
    
    
    18,019
    
    
    
    N/A
    
    
    
    N/AProposal 2
    
    
    
    
    
    
    18,294,749
    
    
    
    91,200
    
    
    
    N/A
    
    
    
    6,769
    
    
    
    N/A
 
 N/A  Not Applicable  Name
    
    Term Expires
    
    Committee DesignationsTheodore H. Elliott, Jr.
    
    
    2007
    
    
    AC, CCGary J. Gruber
    
    
    2007
    
    
    NCDonald D. Larson
    
    
    2007
    
    
    CC, NCK. Brent Somers*
    
    
    2007
    
    
    AC, CCKeith A. Jensen
    
    
    2006
    
    
    CCJames C. Kennedy
    
    
    2006
    
    
    NCJoel Schiavone
    
    
    2006
    
    
    AC, NCAlan R. Spachman
    
    
    2006
    
    
    N/A
 
 AC  Respective director is a member of the Audit Committee.CC  Respective director is a member of the Compensation Committee.NC  Respective director is a member of the Nominating/Corporate Governance Committee.*  Mr. K. Brent Somers currently serves as the chairman of the Audit Committee. 
 ITEM 5. Other Information
  21




---



##### Table of Contents



ITEM 6. Exhibits
 Exhibit No.
    
    Exhibit Description31.1
    
    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
 22




---



##### Table of Contents



SIGNATURES
  NATIONAL INTERSTATE CORPORATIONDate: August 15, 2005
    
    /s/ Alan R. SpachmanAlan R. SpachmanChairman of the Board and President(Duly Authorized Officer and Principal Executive Officer)Date: August 15, 2005/s/ Gary N. MondaGary N. MondaVice President and Chief Financial Officer(Duly Authorized Officer and Principal Financial Officer)
 23