##### 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, 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
    
    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
 o þ




---



##### 



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
    
    
    10Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21Part II  Other Information
    
    
    21Item 1. Legal Proceedings
    
    
    21Item 1A. Risk Factors
    
    
    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
    
    
    22EX-31.1EX-31.2EX-32.1EX-32.2




---



##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 National Interstate Corporation and Subsidiaries
 
 Consolidated Balance Sheets
 (In thousands, except per share data)
 September 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSInvestments:Fixed maturities available-for-sale, at fair value (amortized cost  $347,914 and
$332,552, respectively)
    
    $
    345,443
    
    
    $
    327,449Equity securities available-for-sale, at fair value (cost  $51,194 and $33,476, respectively)
    
    
    49,507
    
    
    
    34,095Short-term investments, at cost which approximates fair value
    
    
    47,480
    
    
    
    22,744Total investments
    
    
    442,430
    
    
    
    384,288Cash and cash equivalents
    
    
    30,109
    
    
    
    22,166Securities lending collateral
    
    
    147,198
    
    
    
    158,928Accrued investment income
    
    
    4,619
    
    
    
    4,321Premiums receivable, net of allowance for doubtful accounts of $589 and $522, respectively
    
    
    103,305
    
    
    
    77,076Reinsurance recoverables on paid and unpaid losses
    
    
    108,947
    
    
    
    90,070Prepaid reinsurance premiums
    
    
    32,186
    
    
    
    21,272Deferred policy acquisition costs
    
    
    19,656
    
    
    
    15,035Deferred federal income taxes
    
    
    11,075
    
    
    
    10,731Property and equipment, net
    
    
    19,283
    
    
    
    18,586Funds held by reinsurer
    
    
    3,574
    
    
    
    2,340Other assets
    
    
    1,925
    
    
    
    1,435Total assets
    
    $
    924,307
    
    
    $
    806,248LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses
    
    $
    309,869
    
    
    $
    265,966Unearned premiums and service fees
    
    
    161,929
    
    
    
    127,723Long-term debt
    
    
    15,464
    
    
    
    15,464Amounts withheld or retained for account of others
    
    
    35,390
    
    
    
    27,885Reinsurance balances payable
    
    
    10,542
    
    
    
    7,156Securities lending obligation
    
    
    147,741
    
    
    
    158,928Accounts payable and other liabilities
    
    
    25,980
    
    
    
    19,676Commissions payable
    
    
    8,456
    
    
    
    6,347Assessments and fees payable
    
    
    4,307
    
    
    
    3,340Total liabilities
    
    
    719,678
    
    
    
    632,485Shareholders equity:Preferred shares  no par valueAuthorized  10,000 sharesIssued  0 shares
    
    
    
    
    
    
    Common shares  $0.01 par valueAuthorized  50,000 sharesIssued  23,350 shares, including 4,145 and 4,191
shares, respectively, in treasury
    
    
    234
    
    
    
    234Additional paid-in capital
    
    
    45,286
    
    
    
    43,921Retained earnings
    
    
    168,028
    
    
    
    138,450Accumulated other comprehensive loss
    
    
    (3,056
    )
    
    
    (2,915
    )Treasury shares
    
    
    (5,863
    )
    
    
    (5,927
    )Total shareholders equity
    
    
    204,629
    
    
    
    173,763Total liabilities and shareholders equity
    
    $
    924,307
    
    
    $
    806,248
  1




---



##### 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 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue:Premiums earned
    
    $
    66,187
    
    
    $
    56,619
    
    
    $
    189,742
    
    
    $
    159,363Net investment income
    
    
    5,690
    
    
    
    4,528
    
    
    
    16,421
    
    
    
    12,703Realized
(losses) gains on investments
    
    
    (319
    )
    
    
    199
    
    
    
    (47
    )
    
    
    714Other
    
    
    1,564
    
    
    
    586
    
    
    
    3,384
    
    
    
    1,603aaaaaaaaaaaaTotal revenues
    
    
    73,122
    
    
    
    61,932
    
    
    
    209,500
    
    
    
    174,383Expenses:Losses and
loss adjustment expenses
    
    
    39,844
    
    
    
    38,092
    
    
    
    112,564
    
    
    
    98,426Commissions
and other underwriting expenses
    
    
    13,803
    
    
    
    11,283
    
    
    
    36,348
    
    
    
    29,982Other
operating and general expenses
    
    
    3,792
    
    
    
    2,766
    
    
    
    11,631
    
    
    
    8,865Interest expense
    
    
    393
    
    
    
    389
    
    
    
    1,160
    
    
    
    1,132Total expenses
    
    
    57,832
    
    
    
    52,530
    
    
    
    161,703
    
    
    
    138,405Income
before federal income taxes
    
    
    15,290
    
    
    
    9,402
    
    
    
    47,797
    
    
    
    35,978Provision
for federal income taxes
    
    
    5,145
    
    
    
    2,859
    
    
    
    15,327
    
    
    
    11,706Net income
    
    $
    10,145
    
    
    $
    6,543
    
    
    $
    32,470
    
    
    $
    24,272Net income per
common share  basic
    
    $
    0.53
    
    
    $
    0.34
    
    
    $
    1.69
    
    
    $
    1.27Net income per
common share 
diluted
    
    $
    0.52
    
    
    $
    0.34
    
    
    $
    1.67
    
    
    $
    1.26Weighted average of
common shares
outstanding  basic
    
    
    19,199
    
    
    
    19,146
    
    
    
    19,189
    
    
    
    19,128Weighted average of
common shares
outstanding 
diluted
    
    
    19,459
    
    
    
    19,354
    
    
    
    19,401
    
    
    
    19,292Cash dividends per
common share
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.15
    
    
    $
    0.12
 .
 2




---



##### Table of Contents



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
    
    
    
    
    
    
    
    
    
    
    32,470
    
    
    
    
    
    
    
    
    
    
    
    32,470Unrealized depreciation of
investment securities,
net of tax benefit of $76
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (141
    )
    
    
    
    
    
    
    (141
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,329Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (2,892
    )
    
    
    
    
    
    
    
    
    
    
    (2,892
    )Issuance of 45,847 treasury
shares upon exercise of stock
options and stock award grants
    
    
    
    
    
    
    388
    
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    452Tax benefit realized from
exercise of stock options
    
    
    
    
    
    
    201
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    201Stock compensation expense
    
    
    
    
    
    
    776
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    776Balance at September 30, 2007
    
    $
    234
    
    
    $
    45,286
    
    
    $
    168,028
    
    
    $
    (3,056
    )
    
    $
    (5,863
    )
    
    $
    204,629Balance at January 1, 2006
    
    $
    234
    
    
    $
    42,257
    
    
    $
    105,826
    
    
    $
    (2,712
    )
    
    $
    (6,072
    )
    
    $
    139,533Net income
    
    
    
    
    
    
    
    
    
    
    24,272
    
    
    
    
    
    
    
    
    
    
    
    24,272Unrealized depreciation of
investment securities,
net of tax benefit of $196
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (363
    )
    
    
    
    
    
    
    (363
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,909Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (2,307
    )
    
    
    
    
    
    
    
    
    
    
    (2,307
    )Issuance of 100,000 treasury
shares upon exercise of stock
options and stock award grants
    
    
    
    
    
    
    293
    
    
    
    
    
    
    
    
    
    
    
    139
    
    
    
    432Tax benefit realized from
exercise of stock options
    
    
    
    
    
    
    536
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    536Stock compensation expense
    
    
    
    
    
    
    582
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    582Balance at September 30, 2006
    
    $
    234
    
    
    $
    43,668
    
    
    $
    127,791
    
    
    $
    (3,075
    )
    
    $
    (5,933
    )
    
    $
    162,685
  3




---



##### Table of Contents



National Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows
 (Unaudited)
 (Dollars in thousands)
 Nine Months Ended September 30,2007
    
    
    2006Operating activitiesNet income
    
    $
    32,470
    
    
    $
    24,272Adjustments to reconcile net income to net cash provided by operating activities:Net amortization of bond premiums and discounts
    
    
    253
    
    
    
    185Provision for depreciation and amortization
    
    
    948
    
    
    
    827Net realized losses (gains) on investment securities
    
    
    47
    
    
    
    (714
    )Deferred federal income taxes
    
    
    (268
    )
    
    
    (689
    )Stock compensation expense
    
    
    776
    
    
    
    582Increase in deferred policy acquisition costs, net
    
    
    (4,621
    )
    
    
    (4,115
    )Increase in reserves for losses and loss adjustment expenses
    
    
    43,903
    
    
    
    37,647Increase in premiums receivable
    
    
    (26,229
    )
    
    
    (38,404
    )Increase in unearned premiums and service fees
    
    
    34,206
    
    
    
    39,870(Increase) decrease in interest receivable and other assets
    
    
    (2,089
    )
    
    
    1,819Increase in prepaid reinsurance premiums
    
    
    (10,914
    )
    
    
    (9,255
    )Increase in accounts payable, commissions and other liabilities
and assessments and fees payable
    
    
    9,380
    
    
    
    4,022Increase in amounts withheld or retained for account of others
    
    
    7,505
    
    
    
    7,072Increase in reinsurance recoverable
    
    
    (18,877
    )
    
    
    (11,009
    )Increase in reinsurance balances payable
    
    
    3,386
    
    
    
    5,564Other
    
    
    
    
    
    
    2Net cash provided by operating activities
    
    
    69,876
    
    
    
    57,676Investing activitiesPurchases of fixed maturities
    
    
    (127,238
    )
    
    
    (57,095
    )Purchases of equity securities
    
    
    (57,143
    )
    
    
    (44,864
    )Proceeds from sale of fixed maturities
    
    
    
    
    
    
    1,917Proceeds from sale of equity securities
    
    
    14,593
    
    
    
    23,213Proceeds from maturity of investments
    
    
    111,672
    
    
    
    27,983Additional cash paid for purchase of subsidiary
    
    
    
    
    
    
    (1,246
    )Cash and cash equivalents of business acquired
    
    
    
    
    
    
    5,585Capital expenditures
    
    
    (1,578
    )
    
    
    (858
    )Net cash used in investing activities
    
    
    (59,694
    )
    
    
    (45,365
    )Financing activitiesRepayment of long-term debt
    
    
    
    
    
    
    (833
    )Decrease (increase) in securities lending collateral
    
    
    11,187
    
    
    
    (159,219
    )(Decrease) increase in securities lending obligation
    
    
    (11,187
    )
    
    
    159,219Tax benefit realized from exercise of stock options
    
    
    201
    
    
    
    536Issuance of common shares from treasury upon exercise of stock options
    
    
    452
    
    
    
    432Cash dividends paid on common shares
    
    
    (2,892
    )
    
    
    (2,307
    )Net cash used in financing activities
    
    
    (2,239
    )
    
    
    (2,172
    )Net increase in cash and cash equivalents
    
    
    7,943
    
    
    
    10,139Cash and cash equivalents at beginning of period
    
    
    22,166
    
    
    
    7,461Cash and cash equivalents at end of period
    
    $
    30,109
    
    
    $
    17,600
  4




---



##### 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




---



##### Table of Contents



3. Shareholders Equity
     4. Transactions with Related Parties
  6




---



##### Table of Contents



Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006(Dollars in thousands)
    
    (Dollars in thousands)Assumed premiums written
    
    $
    1,288
    
    
    $
    1,203
    
    
    $
    4,901
    
    
    $
    3,551Assumed premiums earned
    
    
    1,467
    
    
    
    1,081
    
    
    
    4,060
    
    
    
    3,062Assumed losses and loss adjustment expense incurred
    
    
    2,123
    
    
    
    1,262
    
    
    
    4,581
    
    
    
    2,777Ceded premiums written
    
    
    658
    
    
    
    719
    
    
    
    3,410
    
    
    
    3,244Ceded premiums earned
    
    
    1,013
    
    
    
    967
    
    
    
    2,966
    
    
    
    3,015Ceded losses and loss adjustment expense recoveries
    
    
    146
    
    
    
    790
    
    
    
    1,186
    
    
    
    2,038Payable to Great American as of period end
    
    
    725
    
    
    
    1,569
    
    
    
    725
    
    
    
    1,569
    5. Reinsurance
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Written
    
    
    Earned
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    Earned(Dollars in thousands)
    
    
    
    
    
    
    
    
    

    (Dollars in thousands)Direct
    
    $
    67,867
    
    
    $
    79,700
    
    
    $
    59,924
    
    
    $
    68,697
    
    
    $
    265,626
    
    
    $
    231,713
    
    
    $
    234,631
    
    
    $
    193,652Assumed
    
    
    4,190
    
    
    
    3,878
    
    
    
    1,803
    
    
    
    2,971
    
    
    
    9,244
    
    
    
    8,952
    
    
    
    9,362
    
    
    
    9,611Ceded
    
    
    (12,786
    )
    
    
    (17,391
    )
    
    
    (10,705
    )
    
    
    (15,049
    )
    
    
    (61,837
    )
    
    
    (50,923
    )
    
    
    (54,042
    )
    
    
    (43,900
    )Net Premium
    
    $
    59,271
    
    
    $
    66,187
    
    
    $
    51,022
    
    
    $
    56,619
    
    
    $
    213,033
    
    
    $
    189,742
    
    
    $
    189,951
    
    
    $
    159,363
  7




---



##### Table of Contents



6. Commitments and Contingencies
     7. Earnings Per Common Share
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands, except per share)
    
    
    (In thousands, except per share)Net income
    
    $
    10,145
    
    
    $
    6,543
    
    
    $
    32,470
    
    
    $
    24,272Weighted average shares outstanding during period
    
    
    19,199
    
    
    
    19,146
    
    
    
    19,189
    
    
    
    19,128Additional shares issuable under employee common stockoption plans using treasury stock method
    
    
    260
    
    
    
    208
    
    
    
    212
    
    
    
    164Weighted average shares outstanding assuming exercise of
stock options
    
    
    19,459
    
    
    
    19,354
    
    
    
    19,401
    
    
    
    19,292Net income per share:Basic
    
    $
    0.53
    
    
    $
    0.34
    
    
    $
    1.69
    
    
    $
    1.27Diluted
    
    $
    0.52
    
    
    $
    0.34
    
    
    $
    1.67
    
    
    $
    1.26
  8




---



##### Table of Contents



8. Segment Information
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)
    
    
    (Dollars in thousands)Revenue:Premiums earned:Alternative Risk Transfer
    
    $
    26,521
    
    
    $
    21,111
    
    
    $
    76,217
    
    
    $
    54,393Transportation
    
    
    18,441
    
    
    
    17,800
    
    
    
    55,156
    
    
    
    53,460Specialty Personal Lines
    
    
    12,965
    
    
    
    11,981
    
    
    
    37,699
    
    
    
    34,245Hawaii and Alaska
    
    
    4,444
    
    
    
    3,964
    
    
    
    12,681
    
    
    
    11,201Other
    
    
    3,816
    
    
    
    1,763
    
    
    
    7,989
    
    
    
    6,064Total premiums earned
    
    
    66,187
    
    
    
    56,619
    
    
    
    189,742
    
    
    
    159,363Net investment income
    
    
    5,690
    
    
    
    4,528
    
    
    
    16,421
    
    
    
    12,703Realized (losses) gains on investments
    
    
    (319
    )
    
    
    199
    
    
    
    (47
    )
    
    
    714Other
    
    
    1,564
    
    
    
    586
    
    
    
    3,384
    
    
    
    1,603Total revenues
    
    $
    73,122
    
    
    $
    61,932
    
    
    $
    209,500
    
    
    $
    174,383
 9. Securities Lending
  10. Comprehensive Income
  11. Employee Benefit Plan
  9




---



##### 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
   Results of Operations
 Overview
  10




---



##### Table of Contents



Gross Premiums Written
  Three Months Ended September 30,2007
    
    
    2006Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Alternative Risk Transfer
    
    $
    22,435
    
    
    
    31.1
    %
    
    $
    17,561
    
    
    
    28.4
    %Transportation
    
    
    25,717
    
    
    
    35.7
    %
    
    
    24,159
    
    
    
    39.2
    %Specialty Personal Lines
    
    
    12,773
    
    
    
    17.7
    %
    
    
    12,230
    
    
    
    19.8
    %Hawaii and Alaska
    
    
    7,747
    
    
    
    10.8
    %
    
    
    6,872
    
    
    
    11.1
    %Other
    
    
    3,385
    
    
    
    4.7
    %
    
    
    905
    
    
    
    1.5
    %Gross premiums written
    
    $
    72,057
    
    
    
    100.0
    %
    
    $
    61,727
    
    
    
    100.0
    %
 Nine Months Ended September 30,2007
    
    
    2006Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Alternative Risk Transfer
    
    $
    132,866
    
    
    
    48.4
    %
    
    $
    112,853
    
    
    
    46.3
    %Transportation
    
    
    72,830
    
    
    
    26.5
    %
    
    
    67,419
    
    
    
    27.6
    %Specialty Personal Lines
    
    
    43,746
    
    
    
    15.9
    %
    
    
    41,059
    
    
    
    16.8
    %Hawaii and Alaska
    
    
    19,834
    
    
    
    7.2
    %
    
    
    18,536
    
    
    
    7.6
    %Other
    
    
    5,594
    
    
    
    2.0
    %
    
    
    4,126
    
    
    
    1.7
    %Gross premiums written
    
    $
    274,870
    
    
    
    100.0
    %
    
    $
    243,993
    
    
    
    100.0
    %
  
 11




---



##### Table of Contents



Premiums Earned
 Three months ended September 30, 2007 compared to September 30, 2006.
 Three Months Ended September 30,
    
    
    Change2007
    
    
    2006
    
    
    Amount
    
    
    Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer
    
    $
    26,521
    
    
    $
    21,111
    
    
    $
    5,410
    
    
    
    25.6
    %Transportation
    
    
    18,441
    
    
    
    17,800
    
    
    
    641
    
    
    
    3.6
    %Specialty Personal Lines
    
    
    12,965
    
    
    
    11,981
    
    
    
    984
    
    
    
    8.2
    %Hawaii and Alaska
    
    
    4,444
    
    
    
    3,964
    
    
    
    480
    
    
    
    12.1
    %Other
    
    
    3,816
    
    
    
    1,763
    
    
    
    2,053
    
    
    
    116.4
    %Total premiums earned
    
    $
    66,187
    
    
    $
    56,619
    
    
    $
    9,568
    
    
    
    16.9
    %
  12




---



##### Table of Contents



Nine months ended September 30, 2007 compared to September 30, 2006.
 Nine Months Ended September 30,
    
    
    Change2007
    
    
    2006
    
    
    Amount
    
    
    Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer
    
    $
    76,217
    
    
    $
    54,393
    
    
    $
    21,824
    
    
    
    40.1%Transportation
    
    
    55,156
    
    
    
    53,460
    
    
    
    1,696
    
    
    
    3.2%Specialty Personal Lines
    
    
    37,699
    
    
    
    34,245
    
    
    
    3,454
    
    
    
    10.1%Hawaii and Alaska
    
    
    12,681
    
    
    
    11,201
    
    
    
    1,480
    
    
    
    13.2%Other
    
    
    7,989
    
    
    
    6,064
    
    
    
    1,925
    
    
    
    31.7%Total premiums earned
    
    $
    189,742
    
    
    $
    159,363
    
    
    $
    30,379
    
    
    
    19.1%
  Underwriting and Loss Ratio Analysis
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Dollars in thousands)
    
    
    (Dollars in thousands)Gross premiums written
    
    $
    72,057
    
    
    $
    61,727
    
    
    $
    274,870
    
    
    $
    243,993Ceded reinsurance
    
    
    (12,786
    )
    
    
    (10,705
    )
    
    
    (61,837
    )
    
    
    (54,042
    )Net premiums written
    
    
    59,271
    
    
    
    51,022
    
    
    
    213,033
    
    
    
    189,951Change in unearned premiums, net of ceded
    
    
    6,916
    
    
    
    5,597
    
    
    
    (23,291
    )
    
    
    (30,588
    )Net premiums earned
    
    $
    66,187
    
    
    $
    56,619
    
    
    $
    189,742
    
    
    $
    159,363Combined Ratios:Loss and LAE ratio(1)
    
    
    60.2
    %
    
    
    67.3
    %
    
    
    59.3
    %
    
    
    61.8
    %Underwriting expense ratio (2)
    
    
    24.2
    %
    
    
    23.8
    %
    
    
    23.5
    %
    
    
    23.4
    %Combined ratio
    
    
    84.4
    %
    
    
    91.1
    %
    
    
    82.8
    %
    
    
    85.2
    %
 
 (1)
    
    The ratio of losses and LAE to premiums earned.(2)
    
    The ratio of the sum of commissions and other underwriting expenses, other operating
and general expenses less other income to premiums earned. 13




---



##### Table of Contents



Three months ended September 30, 2007 compared to September 30, 2006.
  Nine months ended September 30, 2007 compared to September 30, 2006.
  Investment Income
 2007 compared to 2006.
 Realized (Losses) Gains on Investments
 2007 compared to 2006.
 14




---



##### Table of Contents



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
   15




---



##### Table of Contents



Securities with
    
    Securities withUnrealized
    
    UnrealizedGains
    
    Losses(Dollars in thousands)Fixed Maturities:Fair value of securities
    
    $
    164,875
    
    
    $
    180,568Amortized cost of securities
    
    $
    163,198
    
    
    $
    184,716Gross unrealized gain or (loss)
    
    $
    1,677
    
    
    $
    (4,148
    )Fair value as a percent of amortized cost
    
    
    101.0
    %
    
    
    97.8
    %Number of security positions held
    
    
    277
    
    
    
    166Number
individually exceeding $50,000 gain or (loss)
    
    
    3
    
    
    
    17Concentration of gains or losses by type or industry:US Government and government agencies
    
    $
    961
    
    
    $
    (1,777
    )State, municipalities, and political subdivisions
    
    
    314
    
    
    
    (240
    )Banks, insurance, and brokers
    
    
    372
    
    
    
    (1,991
    )Industrial and other
    
    
    30
    
    
    
    (140
    )Percentage
rated investment grade (1)
    
    
    99.5
    %
    
    
    98.8
    %Equity Securities:Fair value of securities
    
    $
    23,603
    
    
    $
    25,904Cost of securities
    
    $
    23,141
    
    
    $
    28,053Gross unrealized gain or (loss)
    
    $
    462
    
    
    $
    (2,149
    )Fair value as percent of cost
    
    
    102.0
    %
    
    
    92.3
    %Number
individually exceeding $50,000 gain or (loss)
    
    
    4
    
    
    
    13
 
 (1)
    
    Investment grade of AAA to BBB by Standard & Poors Corporation.  Securities with
    
    Securities withUnrealized
    
    UnrealizedGains
    
    LossesMaturity:One year or less
    
    
    5.5
    %
    
    
    16.7
    %After one year through five years
    
    
    51.0
    %
    
    
    33.3
    %After five years through ten years
    
    
    38.4
    %
    
    
    43.1
    %After ten years
    
    
    5.1
    %
    
    
    6.9
    %100.0
    %
    
    
    100.0
    %
 16




---



##### Table of Contents



September 30, 2007Aggregate
    
    
    Fair Value asAggregate Fair
    
    
    Unrealized
    
    
    % of CostValue
    
    
    Gain (Loss)
    
    
    Basis(Dollars in thousands)Fixed Maturities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (2 issues)
    
    $
    2,563
    
    
    $
    176
    
    
    
    107.4
    %More than one year (1 issue)
    
    
    935
    
    
    
    197
    
    
    
    126.7
    %Less than $50,000 (274 issues)
    
    
    161,377
    
    
    
    1,304
    
    
    
    100.8
    %$
    164,875
    
    
    $
    1,677Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (3 issues)
    
    $
    2,685
    
    
    $
    (315
    )
    
    
    89.5
    %More than one year (14 issues)
    
    
    19,616
    
    
    
    (2,684
    )
    
    
    88.0
    %Less than $50,000 (149 issues)
    
    
    158,267
    
    
    
    (1,149
    )
    
    
    99.3
    %$
    180,568
    
    
    $
    (4,148
    )Equity Securities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (4 issues)
    
    $
    5,695
    
    
    $
    274
    
    
    
    105.1
    %More than one year (0 issues)
    
    
    
    
    
    
    Less than $50,000 (23 issues)
    
    
    17,908
    
    
    
    188
    
    
    
    101.1
    %$
    23,603
    
    
    $
    462Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (13 issues)
    
    $
    6,394
    
    
    $
    (856
    )
    
    
    88.2
    %More than one year (0 issues)
    
    
    
    
    
    
    Less than $50,000 (63 issues)
    
    
    19,510
    
    
    
    (1,293
    )
    
    
    93.8
    %$
    25,904
    
    
    $
    (2,149
    )
  Premiums and Reinsurance
   17




---



##### Table of Contents



Liquidity and Capital Resources
         st
  18




---



##### 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;
 19




---



##### 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
  20




---



##### 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
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
  
 ITEM 5. Other Information
  21




---



##### Table of Contents



ITEM 6. Exhibits
 3.1
    
    
    Amended and Restated Articles of Incorporation (1)3.2
    
    
    Amended and Restated Code of Regulations (1)10.1
    
    
    National Interstate Corporation Amended and Restated Management Bonus Plan (2)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.(2)
    
    This exhibit is incorporated by reference to Exhibit 10.1 of our Current Report on Form
8-K filed on September 27, 2007. 22




---



##### Table of Contents



SIGNATURES
  NATIONAL INTERSTATE CORPORATIONDate: November 6, 2007
    /s/ Alan R. SpachmanAlan R. SpachmanChairman of the Board and Chief Executive Officer
(Duly Authorized Officer and Principal Executive Officer)Date: November 6, 2007
    /s/ Julie A. McGrawJulie A. McGrawVice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) 23