##### 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, 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
    
    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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 o þ




---



##### 



National Interstate Corporation
Table of Contents
 PagePart I  Financial Information
    
    
    2Item 1. Financial Statements
    
    
    2Consolidated Balance Sheets
    
    
    2Consolidated Statements of Income
    
    
    3Consolidated Statements of Shareholders Equity
    
    
    4Consolidated Statements of Cash Flows
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23Part II  Other Information
    
    
    23Item 1. Legal Proceedings
    
    
    23Item 1A. Risk Factors
    
    
    23Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3. Defaults Upon Senior Securities
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 5. Other Information
    
    
    24Item 6. Exhibits
    
    
    24EX-31.1EX-31.2EX-32.1EX-32.2
  1




---



##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 National Interstate Corporation and Subsidiaries
 
 Consolidated Balance Sheets
 (In thousands, except per share data)
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSInvestments:Fixed maturities available-for-sale, at fair value (amortized cost  $444,966 and
$376,019, respectively)
    
    $
    440,650
    
    
    $
    376,300Equity securities available-for-sale, at fair value (cost  $62,095 and $57,800, respectively)
    
    
    54,786
    
    
    
    52,640Short-term investments, at cost which approximates fair value
    
    
    85
    
    
    
    20,907Total investments
    
    
    495,521
    
    
    
    449,847Cash and cash equivalents
    
    
    40,978
    
    
    
    43,069Securities lending collateral (cost  $114,703 and $141,316, respectively)
    
    
    108,086
    
    
    
    139,305Accrued investment income
    
    
    5,009
    
    
    
    4,783Premiums receivable, net of allowance for doubtful accounts of $557 and $462, respectively
    
    
    139,482
    
    
    
    84,708Reinsurance recoverables on paid and unpaid losses
    
    
    121,157
    
    
    
    98,091Prepaid reinsurance premiums
    
    
    45,260
    
    
    
    24,325Deferred policy acquisition costs
    
    
    23,620
    
    
    
    17,578Deferred federal income taxes
    
    
    16,554
    
    
    
    11,993Property and equipment, net
    
    
    19,594
    
    
    
    19,502Funds held by reinsurer
    
    
    2,662
    
    
    
    3,337Prepaid expenses and other assets
    
    
    1,540
    
    
    
    2,096Total assets
    
    $
    1,019,463
    
    
    $
    898,634LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses
    
    $
    356,327
    
    
    $
    302,088Unearned premiums and service fees
    
    
    203,865
    
    
    
    145,296Long-term debt
    
    
    15,000
    
    
    
    15,464Amounts withheld or retained for account of others
    
    
    43,330
    
    
    
    38,739Reinsurance balances payable
    
    
    26,172
    
    
    
    7,596Securities lending obligation
    
    
    115,349
    
    
    
    141,316Accounts payable and other liabilities
    
    
    26,908
    
    
    
    24,363Commissions payable
    
    
    11,172
    
    
    
    7,332Assessments and fees payable
    
    
    4,124
    
    
    
    3,634Total liabilities
    
    
    802,247
    
    
    
    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 4,057 and 4,145
shares, respectively, in treasury
    
    
    234
    
    
    
    234Additional paid-in capital
    
    
    47,339
    
    
    
    45,566Retained earnings
    
    
    189,800
    
    
    
    178,190Accumulated other comprehensive loss
    
    
    (14,415
    )
    
    
    (5,321
    )Treasury shares
    
    
    (5,742
    )
    
    
    (5,863
    )Total shareholders equity
    
    
    217,216
    
    
    
    212,806Total liabilities and shareholders equity
    
    $
    1,019,463
    
    
    $
    898,634
  2




---



##### Table of Contents



National Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Income
 (Unaudited)
(In thousands, except per share data)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Premiums earned
    
    $
    71,813
    
    
    $
    63,265
    
    
    $
    139,463
    
    
    $
    123,555Net investment income
    
    
    5,537
    
    
    
    5,586
    
    
    
    11,432
    
    
    
    10,731Realized (losses) gains on investments
    
    
    (1,810
    )
    
    
    207
    
    
    
    (2,448
    )
    
    
    272Other
    
    
    757
    
    
    
    955
    
    
    
    1,594
    
    
    
    1,820Total revenues
    
    
    76,297
    
    
    
    70,013
    
    
    
    150,041
    
    
    
    136,378Expenses:Losses and loss adjustment expenses
    
    
    50,417
    
    
    
    37,187
    
    
    
    92,102
    
    
    
    72,720Commissions and other underwriting expenses
    
    
    15,195
    
    
    
    11,144
    
    
    
    28,156
    
    
    
    22,545Other operating and general expenses
    
    
    3,313
    
    
    
    3,165
    
    
    
    6,545
    
    
    
    6,195Expense on amounts withheld
    
    
    1,002
    
    
    
    883
    
    
    
    2,260
    
    
    
    1,644Interest expense
    
    
    225
    
    
    
    385
    
    
    
    571
    
    
    
    767Total expenses
    
    
    70,152
    
    
    
    52,764
    
    
    
    129,634
    
    
    
    103,871Income before federal income taxes
    
    
    6,145
    
    
    
    17,249
    
    
    
    20,407
    
    
    
    32,507Provision for federal income taxes
    
    
    1,775
    
    
    
    5,391
    
    
    
    6,466
    
    
    
    10,182Net income
    
    $
    4,370
    
    
    $
    11,858
    
    
    $
    13,941
    
    
    $
    22,325Net income per common share  basic
    
    $
    0.23
    
    
    $
    0.62
    
    
    $
    0.72
    
    
    $
    1.16Net income per common share  diluted
    
    $
    0.23
    
    
    $
    0.61
    
    
    $
    0.72
    
    
    $
    1.15Weighted average of common shares outstanding  basic
    
    
    19,288
    
    
    
    19,192
    
    
    
    19,275
    
    
    
    19,183Weighted average of common shares outstanding  diluted
    
    
    19,375
    
    
    
    19,374
    
    
    
    19,400
    
    
    
    19,355Cash dividends per common share
    
    $
    0.06
    
    
    $
    0.05
    
    
    $
    0.12
    
    
    $
    0.10
 .
 3




---



##### Table of Contents



National Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Shareholders Equity
 (Unaudited)
(Dollars in thousands)
 Common
    
    
    Additional Paid-In
    
    
    Retained
    
    
    Accumulated Other
    
    
    TreasuryStock
    
    
    Capital
    
    
    Earnings
    
    
    Comprehensive Loss
    
    
    Stock
    
    
    TotalBalance at January 1, 2008
    
    $
    234
    
    
    $
    45,566
    
    
    $
    178,190
    
    
    $
    (5,321
    )
    
    $
    (5,863
    )
    
    $
    212,806Net income
    
    
    
    
    
    
    
    
    
    
    13,941
    
    
    
    
    
    
    
    
    
    
    
    13,941Unrealized depreciation of investment securities,
net of tax benefit of $2.3 million
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,094
    )
    
    
    
    
    
    
    (9,094
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,847Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (2,331
    )
    
    
    
    
    
    
    
    
    
    
    (2,331
    )Issuance of 87,315 treasury shares upon exercise
of options
and restricted stock issued, net of forfeitures
    
    
    
    
    
    
    698
    
    
    
    
    
    
    
    
    
    
    
    121
    
    
    
    819Tax benefit realized from exercise of stock options
    
    
    
    
    
    
    381
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    381Stock compensation expense
    
    
    
    
    
    
    694
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    694Balance at June 30, 2008
    
    $
    234
    
    
    $
    47,339
    
    
    $
    189,800
    
    
    $
    (14,415
    )
    
    $
    (5,742
    )
    
    $
    217,216Balance at January 1, 2007
    
    $
    234
    
    
    $
    43,921
    
    
    $
    138,450
    
    
    $
    (2,915
    )
    
    $
    (5,927
    )
    
    $
    173,763Net income
    
    
    
    
    
    
    
    
    
    
    22,325
    
    
    
    
    
    
    
    
    
    
    
    22,325Unrealized depreciation of investment securities,
net of tax benefit of $676
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,255
    )
    
    
    
    
    
    
    (1,255
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,070Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (1,928
    )
    
    
    
    
    
    
    
    
    
    
    (1,928
    )Issuance of 37,906 treasury shares upon exercise
of options
and stock award grants
    
    
    
    
    
    
    151
    
    
    
    
    
    
    
    
    
    
    
    53
    
    
    
    204Tax benefit realized from exercise of stock options
    
    
    
    
    
    
    178
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    178Stock compensation expense
    
    
    
    
    
    
    646
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    646Balance at June 30, 2007
    
    $
    234
    
    
    $
    44,896
    
    
    $
    158,847
    
    
    $
    (4,170
    )
    
    $
    (5,874
    )
    
    $
    193,933
  4




---



##### Table of Contents



National Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows
 (Unaudited)
(Dollars in thousands)
 Six Months Ended June 30,2008
    
    
    2007Operating activitiesNet income
    
    $
    13,941
    
    
    $
    22,325Adjustments to reconcile net income to net cash provided by operating activities:Net amortization of bond premiums and discounts
    
    
    758
    
    
    
    142Provision for depreciation and amortization
    
    
    688
    
    
    
    625Net realized losses (gains) on investment securities
    
    
    2,448
    
    
    
    (272
    )Deferred federal income taxes
    
    
    (2,304
    )
    
    
    112Stock compensation expense
    
    
    694
    
    
    
    646Increase in deferred policy acquisition costs, net
    
    
    (6,042
    )
    
    
    (4,729
    )Increase in reserves for losses and loss adjustment expenses
    
    
    54,239
    
    
    
    33,727Increase in premiums receivable
    
    
    (54,774
    )
    
    
    (42,587
    )Increase in unearned premiums and service fees
    
    
    58,569
    
    
    
    45,926Decrease (increase) in interest receivable and other assets
    
    
    977
    
    
    
    (536
    )Increase in prepaid reinsurance premiums
    
    
    (20,936
    )
    
    
    (15,509
    )Increase in accounts payable, commissions and other liabilities
and assessments and fees payable
    
    
    6,874
    
    
    
    3,384Increase in amounts withheld or retained for account of others
    
    
    4,591
    
    
    
    2,850Increase in reinsurance recoverable
    
    
    (23,066
    )
    
    
    (17,349
    )Increase in reinsurance balances payable
    
    
    18,576
    
    
    
    9,328Other
    
    
    
    
    
    
    50Net cash provided by operating activities
    
    
    55,233
    
    
    
    38,133Investing activitiesPurchases of fixed maturities
    
    
    (305,489
    )
    
    
    (103,821
    )Purchases of equity securities
    
    
    (3,287
    )
    
    
    (22,373
    )Proceeds from sale of fixed maturities
    
    
    483
    
    
    
    Proceeds from sale of equity securities
    
    
    9,175
    
    
    
    6,873Proceeds from maturities and redemptions of fixed maturities
    
    
    243,676
    
    
    
    85,639Proceeds from redemption of equity securities
    
    
    464
    
    
    
    Capital expenditures
    
    
    (751
    )
    
    
    (1,099
    )Net cash used in investing activities
    
    
    (55,729
    )
    
    
    (34,781
    )Financing activitiesDecrease in securities lending collateral
    
    
    25,967
    
    
    
    5,213Decrease in securities lending obligation
    
    
    (25,967
    )
    
    
    (5,213
    )Additional long-term borrowings
    
    
    15,000
    
    
    
    Reductions of long-term debt
    
    
    (15,464
    )
    
    
    Tax benefit realized from exercise of stock options
    
    
    381
    
    
    
    178Issuance of common shares from treasury upon exercise of stock options or
stock award grants
    
    
    819
    
    
    
    204Cash dividends paid on common shares
    
    
    (2,331
    )
    
    
    (1,928
    )Net cash used in financing activities
    
    
    (1,595
    )
    
    
    (1,546
    )Net (decrease) increase in cash and cash equivalents
    
    
    (2,091
    )
    
    
    1,806Cash and cash equivalents at beginning of period
    
    
    43,069
    
    
    
    22,166Cash and cash equivalents at end of period
    
    $
    40,978
    
    
    $
    23,972
  5




---



##### 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,
  6




---



##### Table of Contents



June 30, 2008Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Fair Value(Dollars in thousands)Fixed maturities:U.S. Government and government agency obligations
    
    $
    
    
    
    $
    214,436
    
    
    $
    
    
    
    $
    214,436State and local government obligations
    
    
    
    
    
    
    103,960
    
    
    
    7,279
    
    
    
    111,239Mortgage-backed securities
    
    
    
    
    
    
    63,442
    
    
    
    
    
    
    
    63,442Corporate obligations
    
    
    
    
    
    
    50,130
    
    
    
    1,403
    
    
    
    51,533Total fixed maturities
    
    
    
    
    
    
    431,968
    
    
    
    8,682
    
    
    
    440,650Equity securities:Preferred stock
    
    
    14,762
    
    
    
    3,835
    
    
    
    8,348
    
    
    
    26,945Common stock
    
    
    17,291
    
    
    
    10,550
    
    
    
    
    
    
    
    27,841Total equity securities
    
    
    32,053
    
    
    
    14,385
    
    
    
    8,348
    
    
    
    54,786Short-term investments
    
    
    
    
    
    
    85
    
    
    
    
    
    
    
    85Total investments
    
    $
    32,053
    
    
    $
    446,438
    
    
    $
    17,030
    
    
    $
    495,521
  June 30, 2008Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    Fair Value(Dollars in thousands)Fixed maturities:Cash and cash equivalents
    
    $
    41,321
    
    
    $
    
    
    
    $
    
    
    
    $
    41,321Mortgage-backed securities
    
    
    
    
    
    
    24,476
    
    
    
    
    
    
    
    24,476Corporate obligations
    
    
    
    
    
    
    38,800
    
    
    
    3,489
    
    
    
    42,289Total fixed maturities:
    
    $
    41,321
    
    
    $
    63,276
    
    
    $
    3,489
    
    
    $
    108,086
 7




---



##### Table of Contents



Three Months Ended June 30, 2008State and localCorporate
    
    
    government
    
    
    Preferred
    
    
    Securities lendingobligations
    
    
    obligations
    
    
    stock
    
    
    collateral(Dollars in thousands)Beginning balance at March 31, 2008
    
    $
    1,400
    
    
    $
    
    
    
    $
    3,880
    
    
    $
    4,350Total gains or (losses):Included in earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Included in other comprehensive income
    
    
    3
    
    
    
    
    
    
    
    (82
    )
    
    
    35Purchases, issuances and settlements (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (896
    )Transfers in and/or (out) of Level 3(2)
    
    
    
    
    
    
    7,279
    
    
    
    4,550
    
    
    
    Ending balance at June 30, 2008
    
    $
    1,403
    
    
    $
    7,279
    
    
    $
    8,348
    
    
    $
    3,489
 Six Months Ended June 30, 2008State and localCorporate
    
    
    government
    
    
    Preferred
    
    
    Securities lendingobligations
    
    
    obligations
    
    
    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
    
    
    15
    
    
    
    
    
    
    
    (14
    )
    
    
    356Purchases, issuances and settlements (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (896
    )Transfers in and/or (out) of Level 3(2)
    
    
    
    
    
    
    7,279
    
    
    
    4,550
    
    
    
    Ending balance at June 30, 2008
    
    $
    1,403
    
    
    $
    7,279
    
    
    $
    8,348
    
    
    $
    3,489The 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
    )
 
 (1)
    
    The settlement is attributable to a security which experienced a principal pay down
during the three months ended June 30, 2008.(2)
    
    Transfers in and/or (out) of Level 3 during the three and six months ended June 30,
2008 are attributable to a change in the availability of market observable information for auction
rate securities within the respective category. 4. Securities Lending
   8




---



##### Table of Contents



June 30
    
    December 31,2008
    
    2007(Dollars in thousands)Collateral obligation
    
    $
    115,349
    
    
    $
    141,316Pretax unrealized loss on fair value of collateral held
    
    
    (6,617
    )
    
    
    (2,011
    )Other than temporary impairment charge
    
    
    (646
    )
    
    
    Fair value of collateral held
    
    
    108,086
    
    
    
    139,305Fair value of securities lent plus accrued interest
    
    
    113,186
    
    
    
    138,581
 5. Shareholders Equity and Stock-Based Compensation
    6. Transactions with Related Parties
   Three Months Ended June 30,
    
    Six Months Ended June 30,2008
    
    2007
    
    2008
    
    2007(Dollars in thousands)
    
    (Dollars in thousands)Assumed premiums written
    
    $
    1,896
    
    
    $
    1,941
    
    
    $
    3,958
    
    
    $
    3,613Assumed premiums earned
    
    
    1,640
    
    
    
    1,390
    
    
    
    3,201
    
    
    
    2,593Assumed losses and loss adjustment expense incurred
    
    
    1,321
    
    
    
    1,452
    
    
    
    2,416
    
    
    
    2,458Ceded premiums written
    
    
    904
    
    
    
    1,004
    
    
    
    2,450
    
    
    
    2,752Ceded premiums earned
    
    
    903
    
    
    
    986
    
    
    
    1,827
    
    
    
    1,953Ceded losses and loss adjustment expense recoveries
    
    
    149
    
    
    
    110
    
    
    
    397
    
    
    
    1,010Payable to Great American as of period end
    
    
    765
    
    
    
    844
    
    
    
    765
    
    
    
    844
  9




---



##### Table of Contents



7. Reinsurance
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Written
    
    
    Earned
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    Earned
    
    
    Written
    
    
    Earned(Dollars in thousands)
    
    
    (Dollars in thousands)Direct
    
    $
    98,461
    
    
    $
    88,133
    
    
    $
    79,547
    
    
    $
    78,142
    
    
    $
    229,021
    
    
    $
    171,175
    
    
    $
    197,759
    
    
    $
    152,013Assumed
    
    
    3,031
    
    
    
    2,723
    
    
    
    2,336
    
    
    
    2,325
    
    
    
    5,775
    
    
    
    5,186
    
    
    
    5,054
    
    
    
    5,074Ceded
    
    
    (23,402
    )
    
    
    (19,043
    )
    
    
    (15,349
    )
    
    
    (17,202
    )
    
    
    (57,638
    )
    
    
    (36,898
    )
    
    
    (49,051
    )
    
    
    (33,532
    )Net Premium
    
    $
    78,090
    
    
    $
    71,813
    
    
    $
    66,534
    
    
    $
    63,265
    
    
    $
    177,158
    
    
    $
    139,463
    
    
    $
    153,762
    
    
    $
    123,555
  8. Commitments and Contingencies
    10




---



##### Table of Contents



9. Earnings Per Common Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands, except per share)
    
    
    (In thousands, except per share)Net income
    
    $
    4,370
    
    
    $
    11,858
    
    
    $
    13,941
    
    
    $
    22,325Weighted average shares outstanding during period
    
    
    19,288
    
    
    
    19,192
    
    
    
    19,275
    
    
    
    19,183Additional shares issuable under employee common
stock
option plans using treasury stock method
    
    
    87
    
    
    
    182
    
    
    
    125
    
    
    
    172Weighted average shares outstanding assuming
exercise of
stock options
    
    
    19,375
    
    
    
    19,374
    
    
    
    19,400
    
    
    
    19,355Net income per share:Basic
    
    $
    0.23
    
    
    $
    0.62
    
    
    $
    0.72
    
    
    $
    1.16Diluted
    
    $
    0.23
    
    
    $
    0.61
    
    
    $
    0.72
    
    
    $
    1.15
  10. Segment Information
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)
    
    
    (Dollars in thousands)Revenue:Premiums earned:Alternative Risk Transfer
    
    $
    33,521
    
    
    $
    26,267
    
    
    $
    63,398
    
    
    $
    50,462Transportation
    
    
    18,833
    
    
    
    18,735
    
    
    
    37,720
    
    
    
    36,841Specialty Personal Lines
    
    
    13,537
    
    
    
    12,969
    
    
    
    26,751
    
    
    
    25,312Hawaii and Alaska
    
    
    4,404
    
    
    
    4,323
    
    
    
    8,926
    
    
    
    8,513Other
    
    
    1,518
    
    
    
    971
    
    
    
    2,668
    
    
    
    2,427Total premiums earned
    
    
    71,813
    
    
    
    63,265
    
    
    
    139,463
    
    
    
    123,555Net investment income
    
    
    5,537
    
    
    
    5,586
    
    
    
    11,432
    
    
    
    10,731Realized (losses) gains on investments
    
    
    (1,810
    )
    
    
    207
    
    
    
    (2,448
    )
    
    
    272Other
    
    
    757
    
    
    
    955
    
    
    
    1,594
    
    
    
    1,820Total revenues
    
    $
    76,297
    
    
    $
    70,013
    
    
    $
    150,041
    
    
    $
    136,378
 11. Comprehensive Income
  11




---



##### 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
  12




---



##### Table of Contents



Gross Premiums Written
  Three Months Ended June 30,2008
    
    
    2007Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Alternative Risk Transfer
    
    $
    49,441
    
    
    
    48.7
    %
    
    $
    33,721
    
    
    
    41.2
    %Transportation
    
    
    28,062
    
    
    
    27.7
    %
    
    
    25,238
    
    
    
    30.8
    %Specialty Personal Lines
    
    
    17,349
    
    
    
    17.1
    %
    
    
    16,037
    
    
    
    19.6
    %Hawaii and Alaska
    
    
    5,109
    
    
    
    5.0
    %
    
    
    5,933
    
    
    
    7.2
    %Other
    
    
    1,531
    
    
    
    1.5
    %
    
    
    954
    
    
    
    1.2
    %Gross premiums written
    
    $
    101,492
    
    
    
    100.0
    %
    
    $
    81,883
    
    
    
    100.0
    %
 Six Months Ended June 30,2008
    
    
    2007Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Alternative Risk Transfer
    
    $
    138,216
    
    
    
    58.9
    %
    
    $
    110,431
    
    
    
    54.4
    %Transportation
    
    
    50,763
    
    
    
    21.6
    %
    
    
    47,113
    
    
    
    23.2
    %Specialty Personal Lines
    
    
    32,680
    
    
    
    13.9
    %
    
    
    30,973
    
    
    
    15.3
    %Hawaii and Alaska
    
    
    10,731
    
    
    
    4.6
    %
    
    
    12,087
    
    
    
    6.0
    %Other
    
    
    2,406
    
    
    
    1.0
    %
    
    
    2,209
    
    
    
    1.1
    %Gross premiums written
    
    $
    234,796
    
    
    
    100.0
    %
    
    $
    202,813
    
    
    
    100.0
    %
    13




---



##### Table of Contents



Premiums Earned
 Three months ended June 30, 2008 compared to June 30, 2007.
 Three Months Ended June 30,
    
    
    Change2008
    
    
    2007
    
    
    Amount
    
    
    Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer
    
    $
    33,521
    
    
    $
    26,267
    
    
    $
    7,254
    
    
    
    27.6
    %Transportation
    
    
    18,833
    
    
    
    18,735
    
    
    
    98
    
    
    
    0.5
    %Specialty Personal Lines
    
    
    13,537
    
    
    
    12,969
    
    
    
    568
    
    
    
    4.4
    %Hawaii and Alaska
    
    
    4,404
    
    
    
    4,323
    
    
    
    81
    
    
    
    1.9
    %Other
    
    
    1,518
    
    
    
    971
    
    
    
    547
    
    
    
    56.3
    %Total premiums earned
    
    $
    71,813
    
    
    $
    63,265
    
    
    $
    8,548
    
    
    
    13.5
    %
  Six months ended June 30, 2008 compared to June 30, 2007.
 Six Months Ended June 30,
    
    
    Change2008
    
    
    2007
    
    
    Amount
    
    
    Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer
    
    $
    63,398
    
    
    $
    50,462
    
    
    $
    12,936
    
    
    
    25.6
    %Transportation
    
    
    37,720
    
    
    
    36,841
    
    
    
    879
    
    
    
    2.4
    %Specialty Personal Lines
    
    
    26,751
    
    
    
    25,312
    
    
    
    1,439
    
    
    
    5.7
    %Hawaii and Alaska
    
    
    8,926
    
    
    
    8,513
    
    
    
    413
    
    
    
    4.9
    %Other
    
    
    2,668
    
    
    
    2,427
    
    
    
    241
    
    
    
    9.9
    %Total premiums earned
    
    $
    139,463
    
    
    $
    123,555
    
    
    $
    15,908
    
    
    
    12.9
    %
  14




---



##### Table of Contents



Underwriting and Loss Ratio Analysis
   Three Months Ended March 31,
    
    
    Six Months Ended March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007(Dollars in thousands)
    
    
    (Dollars in thousands)Gross premiums written
    
    $
    101,492
    
    
    $
    81,883
    
    
    $
    234,796
    
    
    $
    202,813Ceded reinsurance
    
    
    (23,402
    )
    
    
    (15,349
    )
    
    
    (57,638
    )
    
    
    (49,051
    )Net premiums written
    
    
    78,090
    
    
    
    66,534
    
    
    
    177,158
    
    
    
    153,762Change in unearned premiums, net of ceded
    
    
    (6,277
    )
    
    
    (3,269
    )
    
    
    (37,695
    )
    
    
    (30,207
    )Net premiums earned
    
    $
    71,813
    
    
    $
    63,265
    
    
    $
    139,463
    
    
    $
    123,555Combined Ratios:Loss and LAE ratio(1)
    
    
    70.2
    %
    
    
    58.8
    %
    
    
    66.0
    %
    
    
    58.9
    %Underwriting expense ratio (2)
    
    
    24.7
    %
    
    
    21.1
    %
    
    
    23.7
    %
    
    
    21.8
    %Combined ratio
    
    
    94.9
    %
    
    
    79.9
    %
    
    
    89.7
    %
    
    
    80.7
    %
 
 (1)
    
    The ratio of losses and LAE to premiums earned.(2)
    
    The ratio of the sum of commissions and other underwriting expenses, other operating
expenses less other income to premiums earned. Three months ended June 30, 2008 compared to June 30, 2007.
 .
 Six months ended June 30, 2008 compared to June 30, 2007.
 15




---



##### Table of Contents



Investment Income
 2008 compared to 2007.
 Realized (Losses) Gains on Investments
 2008 compared to 2007.
  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.
 16




---



##### Table of Contents



Financial Condition
 Investments and Securities Lending Collateral
    Securities with
    
    Securities withUnrealized
    
    UnrealizedGains
    
    Losses(Dollars in thousands)Fixed Maturities:Fair value of securities
    
    $
    203,998
    
    
    $
    236,652Amortized cost of securities
    
    $
    201,661
    
    
    $
    243,305Gross unrealized gain or (loss)
    
    $
    2,337
    
    
    $
    (6,653
    )Fair value as a % of amortized cost
    
    
    101.2
    %
    
    
    97.3
    %Number of security positions held
    
    
    202
    
    
    
    173Number individually exceeding $50,000 gain or loss
    
    
    6
    
    
    
    26Concentration of gains or (losses) by type or industry:US Government and government agencies
    
    $
    1,116
    
    
    $
    (761
    )State, municipalities and political subdivisions
    
    
    317
    
    
    
    (2,000
    )Mortgage-backed securities
    
    
    485
    
    
    
    (363
    )Banks, insurance and brokers
    
    
    352
    
    
    
    (3,235
    )Industrial and other
    
    
    67
    
    
    
    (294
    )Percentage rated investment grade (1)
    
    
    99.8
    %
    
    
    99.4
    %Equity Securities:Fair value of securities
    
    $
    20,683
    
    
    $
    34,103Cost of securities
    
    $
    20,406
    
    
    $
    41,689Gross unrealized gain or (loss)
    
    $
    277
    
    
    $
    (7,586
    )Fair value as a % of cost
    
    
    101.4
    %
    
    
    81.8
    %Number individually exceeding $50,000 gain or (loss)
    
    
    2
    
    
    
    37
 
 (1)
    
    Investment grade of AAA to BBB- by Standard & Poors Corporation. 17




---



##### Table of Contents



Securities with
    
    Securities withUnrealized
    
    UnrealizedGains(2)
    
    Losses(Dollars in thousands)Fixed Maturities:Fair value of securities
    
    $
    44,810
    
    
    $
    63,276Amortized cost of securities
    
    $
    44,776
    
    
    $
    69,927Gross unrealized gain or (loss)
    
    $
    34
    
    
    $
    (6,651
    )Fair value as a % of amortized cost
    
    
    100.1
    %
    
    
    90.5
    %Number of security positions held
    
    
    11
    
    
    
    18Number individually exceeding $50,000 gain or loss
    
    
    
    
    
    
    8Concentration of gains or (losses) by type:Repurchase agreements  overnight
    
    
    
    
    
    
    Mortgage-backed securities
    
    
    
    
    
    
    (6,452
    )Banks, insurance and brokers
    
    
    34
    
    
    
    (199
    )Percentage rated investment grade (1)
    
    
    92.2
    %
    
    
    100.0
    %
 
 (1)
    
    Investment grade of AAA to BBB- by Standard & Poors Corporation.(2)
    
    Includes cash and cash equivalents.  Securities with
    
    Securities withUnrealized
    
    UnrealizedGains
    
    LossesMaturity:One year or less
    
    
    6.5
    %
    
    
    3.8
    %After one year through five years
    
    
    59.9
    %
    
    
    36.1
    %After five years through ten years
    
    
    15.0
    %
    
    
    40.3
    %After ten years
    
    
    2.0
    %
    
    
    7.3
    %83.4
    %
    
    
    87.5
    %Mortgage-backed securities
    
    
    16.6
    %
    
    
    12.5
    %100.0
    %
    
    
    100.0
    %
  Securities with
    
    Securities withUnrealized
    
    UnrealizedGains
    
    LossesMaturity:One year or less
    
    
    92.2
    %(1)
    
    
    34.7
    %After one year through five years
    
    
    7.8
    %
    
    
    26.6
    %100.0
    %
    
    
    61.3
    %Mortgage-backed securities
    
    
    0.0
    %
    
    
    38.7
    %100.0
    %
    
    
    100.0
    %
 
 (1)
    
    Includes cash and cash equivalents. 18




---



##### Table of Contents



June 30, 2008Aggregate
    
    
    Fair Value asAggregate Fair
    
    
    Unrealized Gain
    
    
    % of CostValue
    
    
    (Loss)
    
    
    Basis(Dollars in thousands)Fixed Maturities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (4 issues)
    
    $
    7,050
    
    
    $
    299
    
    
    
    104.4
    %More than one year (2 issues)
    
    
    1,607
    
    
    
    284
    
    
    
    121.5
    %Less than $50,000 (196 issues)
    
    
    195,341
    
    
    
    1,754
    
    
    
    100.9
    %$
    203,998
    
    
    $
    2,337Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (18 issues)
    
    $
    37,446
    
    
    $
    (1,826
    )
    
    
    95.4
    %More than one year (8 issues)
    
    
    11,998
    
    
    
    (2,992
    )
    
    
    80.0
    %Less than $50,000 (147 issues)
    
    
    187,208
    
    
    
    (1,835
    )
    
    
    99.0
    %$
    236,652
    
    
    $
    (6,653
    )Equity Securities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (0 issue)
    
    $
    
    
    
    $
    
    
    
    
    More than one year (2 issues)
    
    
    3,317
    
    
    
    187
    
    
    
    106.0
    %Less than $50,000 (23 issues)
    
    
    17,366
    
    
    
    90
    
    
    
    100.5
    %$
    20,683
    
    
    $
    277Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (37 issues)
    
    $
    29,242
    
    
    $
    (7,045
    )
    
    
    80.6
    %More than one year (0 issues)
    
    
    
    
    
    
    
    
    
    
    Less than $50,000 (29 issues)
    
    
    4,861
    
    
    
    (541
    )
    
    
    90.0
    %$
    34,103
    
    
    $
    (7,586
    )
  June 30, 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 (11 issues)
    
    
    44,810
    
    
    
    34
    
    
    
    100.1
    %$
    44,810
    
    
    $
    34Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (8 issues)
    
    $
    19,460
    
    
    $
    (6,455
    )
    
    
    75.1
    %More than one year (0 issues)
    
    
    
    
    
    
    
    
    
    
    Less than $50,000 (10 issues)
    
    
    43,816
    
    
    
    (196
    )
    
    
    99.6
    %$
    63,276
    
    
    $
    (6,651
    )
 19




---



##### Table of Contents



Premiums and Reinsurance
    Liquidity and Capital Resources
       20




---



##### 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.
 21




---



##### Table of Contents




    
    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.
 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.
 22




---



##### Table of Contents



Contractual Obligations/Off-Balance Sheet Arrangements
   
 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
  23




---



##### Table of Contents



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 1:Keith A. Jensen
    
    
    2010
    
    
    
    14,679,633
    
    
    
    N/A
    
    
    
    1,994,294
    
    
    
    N/A
    
    
    
    N/AJames C. Kennedy
    
    
    2010
    
    
    
    14,694,057
    
    
    
    N/A
    
    
    
    1,979,870
    
    
    
    N/A
    
    
    
    N/AJoel Schiavone
    
    
    2010
    
    
    
    16,254,417
    
    
    
    N/A
    
    
    
    419,510
    
    
    
    N/A
    
    
    
    N/AAlan R. Spachman
    
    
    2010
    
    
    
    15,045,016
    
    
    
    N/A
    
    
    
    1,628,911
    
    
    
    N/A
    
    
    
    N/AProposal 2
    
    
    
    
    
    
    16,541,024
    
    
    
    129,242
    
    
    
    N/A
    
    
    
    3,659
    
    
    
    N/A
 
 N/A  Not Applicable  Name
    
    Term ExpiresJoseph E. Consolino
    
    
    2009Theodore H. Elliott, Jr.
    
    
    2009Gary J. Gruber
    
    
    2009Donald D. Larson
    
    
    2009
 
 ITEM 5. Other Information
  
 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. 24




---



##### Table of Contents



SIGNATURES
  NATIONAL INTERSTATE CORPORATIONDate: August 5, 2008
    /s/ David W. MichelsonDavid W. MichelsonPresident and Chief Executive Officer
(Duly Authorized Officer and Principal Executive Officer)Date: August 5, 2008
    /s/ Julie A. McGrawJulie A. McGrawVice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer) 25