##### 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 March 31, 2008
 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
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-Accelerated Filer o
    
    Smaller Reporting Company o(Do not check if a smaller reporting company)
 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
    
    10Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    21Item 4. Controls and Procedures
    
    22Part II  Other Information
    
    22Item 1. Legal Proceedings
    
    22Item 1A. Risk Factors
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    22Item 3. Defaults Upon Senior Securities
    
    22Item 4. Submission of Matters to a Vote of Security Holders
    
    22Item 5. Other Information
    
    22Item 6. Exhibits
    
    23EX-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)
 March 31,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSInvestments:Fixed
maturities available-for-sale, at fair value (amortized cost  $403,103 and $376,109, respectively)
    
    $
    403,688
    
    
    $
    376,300Equity securities available-for-sale, at fair value (cost 
$63,099 and $57,800, respectively)
    
    
    56,343
    
    
    
    52,640Short-term investments, at cost which approximates fair value
    
    
    4,859
    
    
    
    20,907Total investments
    
    
    464,890
    
    
    
    449,847Cash and cash equivalents
    
    
    61,032
    
    
    
    43,069Securities
lending collateral, at fair value (cost  $136,496 and $141,316, respectively)
    
    
    129,972
    
    
    
    139,305Accrued investment income
    
    
    4,958
    
    
    
    4,783Premiums
receivable, net of allowance for doubtful accounts of $442 and $462, respectively
    
    
    129,364
    
    
    
    84,708Reinsurance recoverables on paid and unpaid losses
    
    
    109,597
    
    
    
    98,091Prepaid reinsurance premiums
    
    
    40,703
    
    
    
    24,325Deferred policy acquisition costs
    
    
    22,615
    
    
    
    17,578Deferred federal income taxes
    
    
    12,607
    
    
    
    11,993Property and equipment, net
    
    
    19,546
    
    
    
    19,502Funds held by reinsurer
    
    
    2,226
    
    
    
    3,337Prepaid expenses and other assets
    
    
    1,635
    
    
    
    2,096Total assets
    
    $
    999,145
    
    
    $
    898,634LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses
    
    $
    327,116
    
    
    $
    302,088Unearned premiums and service fees
    
    
    193,119
    
    
    
    145,296Long-term debt
    
    
    15,464
    
    
    
    15,464Amounts withheld or retained for account of others
    
    
    44,075
    
    
    
    38,739Reinsurance balances payable
    
    
    25,127
    
    
    
    7,596Securities lending obligation
    
    
    136,496
    
    
    
    141,316Accounts payable and other liabilities
    
    
    26,081
    
    
    
    24,363Commissions payable
    
    
    9,531
    
    
    
    7,332Assessments and fees payable
    
    
    4,054
    
    
    
    3,634Total liabilities
    
    
    781,063
    
    
    
    685,828Shareholders equity:Preferred shares  no par valueAuthorized  10,000 sharesIssued  0 shares
    
    
    
    
    
    
    Common shares  $0.01 par valueAuthorized  50,000 sharesIssued
 23,350 shares, including 4,070 and 4,145 shares, respectively, in treasury
    
    
    234
    
    
    
    234Additional paid-in capital
    
    
    46,818
    
    
    
    45,566Retained earnings
    
    
    186,596
    
    
    
    178,190Accumulated other comprehensive loss
    
    
    (9,807
    )
    
    
    (5,321
    )Treasury shares, at cost
    
    
    (5,759
    )
    
    
    (5,863
    )Total shareholders equity
    
    
    218,082
    
    
    
    212,806Total liabilities and shareholders equity
    
    $
    999,145
    
    
    $
    898,634
  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 March 31,2008
    
    
    2007Revenues:Premiums earned
    
    $
    67,650
    
    
    $
    60,290Net investment income
    
    
    5,895
    
    
    
    5,145Realized (losses) gains on investments
    
    
    (638
    )
    
    
    65Other
    
    
    837
    
    
    
    865Total revenues
    
    
    73,744
    
    
    
    66,365Expenses:Losses and loss adjustment expenses
    
    
    41,685
    
    
    
    35,533Commissions and other underwriting expenses
    
    
    12,961
    
    
    
    11,401Other operating and general expenses
    
    
    3,232
    
    
    
    3,030Expense on amounts withheld
    
    
    1,258
    
    
    
    761Interest expense
    
    
    346
    
    
    
    382Total expenses
    
    
    59,482
    
    
    
    51,107Income before federal income taxes
    
    
    14,262
    
    
    
    15,258Provision for federal income taxes
    
    
    4,691
    
    
    
    4,791Net income
    
    $
    9,571
    
    
    $
    10,467Net income per common share  basic
    
    $
    0.50
    
    
    $
    0.55Net income per common share  diluted
    
    $
    0.49
    
    
    $
    0.54Weighted average of common shares outstanding  basic
    
    
    19,262
    
    
    
    19,174Weighted average of common shares outstanding  diluted
    
    
    19,422
    
    
    
    19,341Cash dividends per common share
    
    $
    0.06
    
    
    $
    0.05
 .
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##### 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
    
    
    Income (Loss)
    
    
    Stock
    
    
    TotalBalance at January 1, 2008
    
    $
    234
    
    
    $
    45,566
    
    
    $
    178,190
    
    
    $
    (5,321
    )
    
    $
    (5,863
    )
    
    $
    212,806Net income
    
    
    
    
    
    
    
    
    
    
    9,571
    
    
    
    
    
    
    
    
    
    
    
    9,571Unrealized depreciation of investment
securities,
net of tax benefit of $671
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,486
    )


    
    
    
    
    
    
    (4,486
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,085Dividends on common stock
    
    
    
    
    

    
    
    
    
    
    (1,165
    )


    
    
    
    
    
    
    
    
    
    
    (1,165
    )Issuance of 74,901 treasury shares upon exercise of options
and restricted stock issued, net of forfeitures
    
    
    
    
    
    
    539
    
    
    
    
    
    
    
    
    
    
    
    104
    
    
    
    643Tax benefit
realized from exercise of stock options
    
    
    
    
    
    
    361
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    361Stock compensation expense
    
    
    
    
    
    
    352
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    352Balance at March 31, 2008
    
    $
    234
    
    
    $
    46,818
    
    
    $
    186,596
    
    
    $
    (9,807
    )
    
    $
    (5,759
    )
    
    $
    218,082Balance at January 1, 2007
    
    $
    234
    
    
    $
    43,921
    
    
    $
    138,450
    
    
    $
    (2,915
    )
    
    $
    (5,927
    )
    
    $
    173,763Net income
    
    
    
    
    
    
    
    
    
    
    10,467
    
    
    
    
    
    
    
    
    
    
    
    10,467Unrealized appreciation of investment
securities,
net of tax expense of $454
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    844
    
    
    
    

    
    
    
    844Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,311Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (968
    )
    
    
    
    
    
    
    
    
    
    
    (968
    )Issuance of 28,212 treasury shares upon exercise of options
and stock award grants
    
    
    
    
    
    
    171
    
    
    
    
    
    
    
    
    
    
    
    39
    
    
    
    210Tax benefit
realized from exercise of stock options
    
    
    
    
    
    
    166
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    166Stock compensation expense
    
    
    
    
    
    
    270
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    270Balance at March 31, 2007
    
    $
    234
    
    
    $
    44,528
    
    
    $
    147,949
    
    
    $
    (2,071
    )
    
    $
    (5,888
    )
    
    $
    184,752
  3




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National Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
 Three Months Ended March 31,2008
    
    
    2007Operating activitiesNet income
    
    $
    9,571
    
    
    $
    10,467Adjustments to reconcile net income to net cash provided by operating
activities:Net amortization of bond premiums and accretion of discounts
    
    
    254
    
    
    
    65Provision for depreciation and amortization
    
    
    338
    
    
    
    305Net realized losses (gains) on investment securities
    
    
    638
    
    
    
    (65
    )Deferred federal income taxes
    
    
    57
    
    
    
    442Stock compensation expense
    
    
    372
    
    
    
    399Increase in deferred policy acquisition costs, net
    
    
    (5,037
    )
    
    
    (3,589
    )Increase in reserves for losses and loss adjustment expenses
    
    
    25,028
    
    
    
    18,378Increase in premiums receivable
    
    
    (44,656
    )
    
    
    (41,987
    )Increase in unearned premiums and service fees
    
    
    47,823
    
    
    
    44,431Decrease (increase) in interest receivable and other assets
    
    
    1,375
    
    
    
    (488
    )Increase in prepaid reinsurance premiums
    
    
    (16,378
    )
    
    
    (17,373
    )Increase in accounts payable, commissions and other liabilities
and assessments and fees payable
    
    
    4,337
    
    
    
    5,692Increase in amounts withheld or retained for account of others
    
    
    5,336
    
    
    
    2,697Increase in reinsurance recoverable
    
    
    (11,506
    )
    
    
    (8,177
    )Increase in reinsurance balances payable
    
    
    17,531
    
    
    
    17,981Other
    
    
    81
    
    
    
    50Net cash provided by operating activities
    
    
    35,164
    
    
    
    29,228Investing activitiesPurchases of fixed maturities
    
    
    (171,439
    )
    
    
    (54,280
    )Purchases of equity securities
    
    
    (1,202
    )
    
    
    (14,808
    )Proceeds from sale of equity securities
    
    
    3,578
    
    
    
    1,210Proceeds from maturity and redemptions of fixed maturities
    
    
    152,483
    
    
    
    36,748Capital expenditures
    
    
    (440
    )
    
    
    (553
    )Net cash used in investing activities
    
    
    (17,020
    )
    
    
    (31,683
    )Financing activitiesDecrease (increase) in securities lending collateral
    
    
    4,820
    
    
    
    (16,713
    )(Decrease) increase in securities lending obligation
    
    
    (4,820
    )
    
    
    16,713Tax benefit realized from exercise of stock options
    
    
    361
    
    
    
    166Issuance of common shares from treasury upon exercise of stock options or
restricted shares
    
    
    623
    
    
    
    81Cash dividends paid on common shares
    
    
    (1,165
    )
    
    
    (968
    )Net cash used in financing activities
    
    
    (181
    )
    
    
    (721
    )Net increase (decrease) in cash and cash equivalents
    
    
    17,963
    
    
    
    (3,176
    )Cash and cash equivalents at beginning of period
    
    
    43,069
    
    
    
    22,166Cash and cash equivalents at end of period
    
    $
    61,032
    
    
    $
    18,990
  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
 3. Fair Value Measurements
 Fair Value Measurements,
  5




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##### Table of Contents



March 31, 2008Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Fair Value(Dollars in thousands)Fixed maturities:U.S. Government and government agency obligations
    
    $
    
    
    
    $
    198,389
    
    
    $
    
    
    
    $
    198,389State and local government obligations
    
    
    
    
    
    
    99,080
    
    
    
    
    
    
    
    99,080Mortgage-backed securities
    
    
    
    
    
    
    53,396
    
    
    
    
    
    
    
    53,396Corporate obligations
    
    
    
    
    
    
    51,423
    
    
    
    1,400
    
    
    
    52,823Total fixed maturities
    
    
    
    
    
    
    402,288
    
    
    
    1,400
    
    
    
    403,688Equity securities:Preferred stock
    
    
    17,614
    
    
    
    7,830
    
    
    
    3,880
    
    
    
    29,324Common stock
    
    
    18,091
    
    
    
    8,928
    
    
    
    
    
    
    
    27,019Total equity securities
    
    
    35,705
    
    
    
    16,758
    
    
    
    3,880
    
    
    
    56,343Short-term investments
    
    
    
    
    
    
    4,859
    
    
    
    
    
    
    
    4,859Total investments
    
    $
    35,705
    
    
    $
    423,905
    
    
    $
    5,280
    
    
    $
    464,890
  March 31, 2008Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Fair Value(Dollars in thousands)Fixed maturities:Cash and cash equivalents
    
    $
    57,364
    
    
    $
    
    
    
    $
    
    
    
    $
    57,364Mortgage-backed securities
    
    
    
    
    
    
    27,607
    
    
    
    
    
    
    
    27,607Corporate obligations
    
    
    
    
    
    
    40,651
    
    
    
    4,350
    
    
    
    45,001Total fixed maturities:
    
    $
    57,364
    
    
    $
    68,258
    
    
    $
    4,350
    
    
    $
    129,972
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Three
Months Ended March 31,2008Securities lendingCorporate obligations
    
    
    Preferred stock
    
    
    collateral(Dollars in thousands)Beginning balance at January 1, 2008
    
    $
    1,388
    
    
    $
    3,812
    
    
    $
    4,675Total gains or (losses):Included in earnings
    
    
    
    
    
    
    
    
    
    
    (646
    )Included in other comprehensive income
    
    
    12
    
    
    
    68
    
    
    
    321Purchases, issuances and settlements
    
    
    
    
    
    
    
    
    
    
    Transfers in and/or (out) of Level 3
    
    
    
    
    
    
    
    
    
    
    Ending balance at March 31, 2008
    
    $
    1,400
    
    
    $
    3,880
    
    
    $
    4,350The amount of total gains or losses
for the period included
in earnings attributable to the change
in unrealized gains or losses relating to
assets still held at the reporting date
    
    $
    
    
    
    $
    
    
    
    $
    (646
    )
 4. Securities Lending
   March 31,
    
    December 31,2008
    
    2007(Dollars in thousands)Collateral obligation
    
    $
    136,496
    
    
    $
    141,316Pretax unrealized loss on fair value of collateral held
    
    
    (5,878
    )
    
    
    (2,011
    )Other than temporary impairment charge
    
    
    (646
    )
    
    
    Fair value of collateral held
    
    
    129,972
    
    
    
    139,305Fair value of securities lent plus accrued interest
    
    
    133,883
    
    
    
    138,581
 5. Shareholders Equity and Stock-Based Compensation
   7




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6. Transactions with Related Parties
   Three Months Ended March 31,2008
    
    2007(Dollars in thousands)Assumed premiums written
    
    $
    2,062
    
    
    $
    1,672Assumed premiums earned
    
    
    1,561
    
    
    
    1,203Assumed losses and loss adjustment expense
incurred
    
    
    1,095
    
    
    
    1,006Ceded premiums written
    
    
    1,546
    
    
    
    1,756Ceded premiums earned
    
    
    924
    
    
    
    968Ceded losses and loss adjustment expense
recoveries
    
    
    248
    
    
    
    930Payable to Great American as of period end
    
    
    1,326
    
    
    
    294Service fee expense
    
    
    42
    
    
    
    39
   7. Reinsurance
  Three Months Ended March 31,2008
    
    
    2007Written
    
    
    Earned
    
    
    Written
    
    
    Earned(Dollars in thousands)Direct
    
    $
    130,560
    
    
    $
    83,042
    
    
    $
    118,212
    
    
    $
    73,871Assumed
    
    
    2,744
    
    
    
    2,463
    
    
    
    2,718
    
    
    
    2,749Ceded
    
    
    (34,236
    )
    
    
    (17,855
    )
    
    
    (33,702
    )
    
    
    (16,330
    )Net Premium
    
    $
    99,068
    
    
    $
    67,650
    
    
    $
    87,228
    
    
    $
    60,290
  8




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##### Table of Contents



8. Commitments and Contingencies
     9. Earnings Per Common Share
  Three Months Ended March 31,2008
    
    
    2007(In thousands, except per share)Net income
    
    $
    9,571
    
    
    $
    10,467Weighted average shares outstanding during period
    
    
    19,262
    
    
    
    19,174Additional shares issuable under employee common stock
option plans using treasury stock method
    
    
    160
    
    
    
    167Weighted average shares outstanding assuming exercise of
stock options
    
    
    19,422
    
    
    
    19,341Net income per share:Basic
    
    $
    0.50
    
    
    $
    0.55Diluted
    
    $
    0.49
    
    
    $
    0.54
  9




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10. Segment Information
  Three Months Ended March 31,2008
    
    
    2007(Dollars in thousands)Revenue:Premiums earned:Alternative Risk Transfer
    
    $
    28,715
    
    
    $
    23,845Transportation
    
    
    18,594
    
    
    
    18,064Specialty Personal Lines
    
    
    12,895
    
    
    
    12,103Hawaii and Alaska
    
    
    4,396
    
    
    
    4,048Other
    
    
    3,050
    
    
    
    2,230Total premiums earned
    
    
    67,650
    
    
    
    60,290Net investment income
    
    
    5,895
    
    
    
    5,145Realized (losses) gains on investments
    
    
    (638
    )
    
    
    65Other
    
    
    837
    
    
    
    865Total revenues
    
    $
    73,744
    
    
    $
    66,365
 
 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.
  10




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General
   Results of Operations
 Overview
    Gross Premiums Written
  Three Months Ended March 31,2008
    
    
    2007Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Alternative Risk Transfer
    
    $
    88,775
    
    
    
    66.6
    %
    
    $
    76,710
    
    
    
    63.4
    %Transportation
    
    
    22,701
    
    
    
    17.0
    %
    
    
    21,875
    
    
    
    18.1
    %Specialty Personal Lines
    
    
    15,331
    
    
    
    11.5
    %
    
    
    14,936
    
    
    
    12.4
    %Hawaii and Alaska
    
    
    5,622
    
    
    
    4.2
    %
    
    
    6,154
    
    
    
    5.1
    %Other
    
    
    875
    
    
    
    0.7
    %
    
    
    1,255
    
    
    
    1.0
    %Gross premiums written
    
    $
    133,304
    
    
    
    100.0
    %
    
    $
    120,930
    
    
    
    100.0
    %
  11




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##### Table of Contents



Premiums Earned
 2008 compared to 2007.
 Three Months Ended March 31,
    
    
    Change2008
    
    
    2007
    
    
    Amount
    
    
    Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer
    
    $
    28,715
    
    
    $
    23,845
    
    
    $
    4,870
    
    
    
    20.4
    %Transportation
    
    
    18,594
    
    
    
    18,064
    
    
    
    530
    
    
    
    2.9
    %Specialty Personal Lines
    
    
    12,895
    
    
    
    12,103
    
    
    
    792
    
    
    
    6.5
    %Hawaii and Alaska
    
    
    4,396
    
    
    
    4,048
    
    
    
    348
    
    
    
    8.6
    %Other
    
    
    3,050
    
    
    
    2,230
    
    
    
    820
    
    
    
    36.8
    %Total premiums earned
    
    $
    67,650
    
    
    $
    60,290
    
    
    $
    7,360
    
    
    
    12.2
    %
  Underwriting and Loss Ratio Analysis
  12




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##### Table of Contents



Three Months Ended March 31,2008
    
    
    2007(Dollars in thousands)Gross premiums written
    
    $
    133,304
    
    
    $
    120,930Ceded reinsurance
    
    
    (34,236
    )
    
    
    (33,702
    )Net premiums written
    
    
    99,068
    
    
    
    87,228Change in unearned premiums, net of ceded
    
    
    (31,418
    )
    
    
    (26,938
    )Net premiums earned
    
    $
    67,650
    
    
    $
    60,290Combined Ratios:Loss and LAE ratio(1)
    
    
    61.6
    %
    
    
    58.9
    %Underwriting expense ratio (2)
    
    
    22.7
    %
    
    
    22.5
    %Combined ratio
    
    
    84.3
    %
    
    
    81.4
    %
 
 (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. 2008 compared to 2007.
  Investment Income
 2008 compared to 2007.
 Realized (Losses) Gains on Investments
 2008 compared to 2007.
  13




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##### Table of Contents



Commissions and Other Underwriting Expenses
 2008 compared to 2007.
 Other Operating and General Expenses
 2008 compared to 2007.
 Expense on Amounts Withheld
 2008 compared to 2007.
 Income Taxes
 2008 compared to 2007.
 Financial Condition
 Investments and Securities Lending Collateral
   14




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##### Table of Contents



Securities with
    
    Securities withUnrealized
    
    UnrealizedGains
    
    Losses(Dollars in thousands)Fixed Maturities:Fair value of securities
    
    $
    322,057
    
    
    $
    81,631Amortized cost of securities
    
    $
    317,141
    
    
    $
    85,962Gross unrealized gain or (loss)
    
    $
    4,916
    
    
    $
    (4,331
    )Fair value as a % of amortized cost
    
    
    101.6
    %
    
    
    95.0
    %Number of security positions held
    
    
    291
    
    
    
    71Number individually exceeding $50,000 gain or loss
    
    
    20
    
    
    
    18Concentration of gains or (losses) by type or industry:US Government and government agencies
    
    $
    2,289
    
    
    $
    (206
    )State, municipalities and political subdivisions
    
    
    1,088
    
    
    
    (843
    )Mortgage-backed securities
    
    
    857
    
    
    
    (95
    )Banks, insurance and brokers
    
    
    439
    
    
    
    (3,016
    )Industrial and other
    
    
    243
    
    
    
    (171
    )Percentage rated investment grade (1)
    
    
    99.9
    %
    
    
    98.4
    %Equity Securities:Fair value of securities
    
    $
    16,886
    
    
    $
    39,457Cost of securities
    
    $
    16,440
    
    
    $
    46,659Gross unrealized gain or (loss)
    
    $
    446
    
    
    $
    (7,202
    )Fair value as a % of cost
    
    
    102.7
    %
    
    
    84.6
    %Number individually exceeding $50,000 gain or (loss)
    
    
    2
    
    
    
    39
 
 (1)
    
    Investment grade of AAA to BBB- by Standard & Poors Corporation.  Securities with
    
    Securities withUnrealized
    
    UnrealizedGains(2)
    
    Losses(Dollars in thousands)Fixed Maturities:Fair value of securities
    
    $
    59,365
    
    
    $
    70,607Amortized cost of securities
    
    $
    59,365
    
    
    $
    76,485Gross unrealized gain or (loss)
    
    $
    
    
    
    $
    (5,878
    )Fair value as a % of amortized cost
    
    
    100.0
    %
    
    
    92.3
    %Number of security positions held
    
    
    7
    
    
    
    19Number individually exceeding $50,000 gain or loss
    
    
    
    
    
    
    12Concentration of gains or (losses) by type:Repurchase agreements  overnight
    
    
    
    
    
    
    Mortgage-backed securities
    
    
    
    
    
    
    (5,529
    )Banks, insurance and brokers
    
    
    
    
    
    
    (349
    )Percentage rated investment grade (1)
    
    
    100.0
    %
    
    
    93.8
    %
 
 (1)
    
    Investment grade of AAA to BBB- by Standard & Poors Corporation.(2)
    
    Includes cash and cash equivalents. 15




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##### Table of Contents



Securities with
    
    Securities withUnrealized
    
    UnrealizedGains
    
    LossesMaturity:One year or less
    
    
    6.9
    %
    
    
    7.2
    %After one year through five years
    
    
    41.4
    %
    
    
    19.7
    %After five years through ten years
    
    
    35.7
    %
    
    
    43.0
    %After ten years
    
    
    2.3
    %
    
    
    18.9
    %86.3
    %
    
    
    88.8
    %Mortgage-backed securities
    
    
    13.7
    %
    
    
    11.2
    %100.0
    %
    
    
    100.0
    %
  Securities with
    
    Securities withUnrealized
    
    UnrealizedGains
    
    LossesMaturity:One year or less
    
    
    100.0
    % (1)
    
    
    31.0
    %After one year through five years
    
    
    0.0
    %
    
    
    29.9
    %After five years through ten years
    
    
    0.0
    %
    
    
    0.0
    %After ten years
    
    
    0.0
    %
    
    
    0.0
    %100.0
    %
    
    
    60.9
    %Mortgage-backed securities
    
    
    0.0
    %
    
    
    39.1
    %100.0
    %
    
    
    100.0
    %
 
 (1)
    
    Includes cash and cash equivalents. 16




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##### Table of Contents



March 31, 2008Aggregate
    
    
    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 (18 issues)
    
    $
    43,061
    
    
    $
    1,440
    
    
    
    103.5
    %More than one year (2 issues)
    
    
    1,611
    
    
    
    289
    
    
    
    121.9
    %Less than $50,000 (271 issues)
    
    
    277,385
    
    
    
    3,187
    
    
    
    101.2
    %$
    322,057
    
    
    $
    4,916Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (10 issues)
    
    $
    12,242
    
    
    $
    (1,017
    )
    
    
    92.3
    %More than one year (8 issues)
    
    
    12,322
    
    
    
    (2,667
    )
    
    
    82.2
    %Less than $50,000 (53 issues)
    
    
    57,067
    
    
    
    (647
    )
    
    
    98.9
    %$
    81,631
    
    
    $
    (4,331
    )Equity Securities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (1 issue)
    
    $
    1,220
    
    
    $
    90
    
    
    
    108.0
    %More than one year (1 issue)
    
    
    2,164
    
    
    
    165
    
    
    
    108.3
    %Less than $50,000 (20 issues)
    
    
    13,502
    
    
    
    191
    
    
    
    101.4
    %$
    16,886
    
    
    $
    446Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (39 issues)
    
    $
    32,284
    
    
    $
    (6,591
    )
    
    
    83.0
    %More than one year (0 issues)
    
    
    
    
    
    
    
    
    
    
    0.0
    %Less than $50,000 (35 issues)
    
    
    7,173
    
    
    
    (611
    )
    
    
    92.2
    %$
    39,457
    
    
    $
    (7,202
    )
 17




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##### Table of Contents



March 31, 2008Aggregate
    
    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 (0 issue)
    
    $
    
    
    
    $
    More than one year (0 issue)
    
    
    
    
    
    Less than $50,000 (7 issues)
    
    
    59,365
    
    
    
    
    
    
    
    100.0
    %$
    59,365
    
    
    $
    Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (12 issues)
    
    $
    39,327
    
    
    $
    (5,808
    )
    
    
    87.1
    %More than one year (0 issues)
    
    
    
    
    
    
    Less than $50,000 (7 issues)
    
    
    31,280
    
    
    
    (70
    )
    
    
    99.8
    %$
    70,607
    
    
    $
    (5,878
    )
  Premiums and Reinsurance
    Liquidity and Capital Resources
   18




---



##### Table of Contents



Critical Accounting Policies
  19




---



##### Table of Contents



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;
    
    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.
 20




---



##### Table of Contents



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
   
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
  21




---



##### Table of Contents



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
  22




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##### Table of Contents



ITEM 6. Exhibits
 3.1
    
    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. 23




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##### Table of Contents



SIGNATURES
   Date: May 6, 2008
    /s/ David W. MichelsonDavid W. MichelsonPresident and Chief Executive Officer
(Duly Authorized Officer and Principal Executive Officer)  /s/ Julie A. McGrawJulie A. McGrawVice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) 24