##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
     Form 10-K
  ANNUAL REPORT PURSUANT TO
    SECTION 13 OR 15(d)
 OF THE SECURITIES EXCHANGE ACT
    OF 1934
  For the Fiscal Year Ended December 31, 2005
  Commission File
    No. 000-51130
     National Interstate
    Corporation
 (Exact name of registrant as
    specified in its charter)
  Ohio

34-1607394(State or other jurisdiction
    of
    incorporation or organization)

(I.R.S. Employer
    Identification No.)      3250 Interstate Drive
 Richfield, Ohio
    44286-9000
 (330) 659-8900
 (Address and telephone number of
    principal executive offices)
     Securities Registered Pursuant to Section 12(b) of the
    Act: None
  Securities registered pursuant to Section 12(g) of the
    Act:
  Name of Exchange onTitle of each class

Which registeredCommon Shares, $0.01 par
    value

Nasdaq National
    Market   Other securities for which reports are submitted pursuant to
    Section (d) of the Act:
 None
     o þ
 o þ
 þ o
 Regulation S-K Form 10-K Form 10-K. o
 Rule 12b-2 o o þ
 Rule 12b-2 o þ
       Documents Incorporated by Reference:




---



##### 



National
    Interstate Corporation
  Index to
    Annual Report on
    Form 10-K
  PagePart IItem 1



Business:Introduction


4Property and
    Casualty Insurance Operations


4Investments


12Competition


14Ratings


15Regulation


15Employees


17Item 1A



Risk Factors


18Item 1B



Unresolved Staff Comments


25Item 2



Properties


25Item 3



Legal Proceedings


26Item 4



Submission of Matters to a Vote of
    Security Holders


26Part IIItem 5



Market for Registrants
    Common Equity and Related Stockholder Matters and Issuer
    Purchases of Equity Securities


26Item 6



Selected Financial Data


28Item 7



Managements Discussion and
    Analysis of Financial Condition and Results of Operations


29Item 7A



Quantitative and Qualitative
    Disclosures About Market Risk


47Item 8



Financial Statements and
    Supplementary Data


48Item 9



Changes and Disagreements with
    Accountants on Accounting and Financial Disclosure


73Item 9A



Controls and Procedures


73Item 9B



Other Information


73Part IIIItem 10



Directors and Executive Officers
    of the Registrant


73Item 11



Executive Compensation


74Item 12



Security Ownership of Certain
    Beneficial Owners and Management and Related
    Stockholder Matters


74Item 13



Certain Relationships and Related
    Transactions


74Item 14



Principal Accountant Fees and
    Services


74Part IVItem 15



Exhibits and Financial Statement
    Schedules


74Signatures


81EX-21.1 List of SubsidiariesEX-23.1 Consent of Ernst & Young LLPEX-24.1 Power of AttorneyEX-31.1 302 Certification of CEOEX-31.2 302 Certification of CFOEX-32.1 906 Certification of CEOEX-32.2 906 Certification of CFO   2




---



##### Table of Contents



FORWARD-LOOKING
    STATEMENTS
  Form 10-K
  
    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.   3




---



##### Table of Contents



PART I  ITEM 1
    Business  Please refer to Forward-Looking Statements
    following the Index in the front of this
    10-K.
 Introduction  (330) 659-8900. Form 10-K.
     Property
    and Casualty Insurance Operations     4




---



##### Table of Contents



Product Management Organization.
  Our
    Products
    Year Ended
    December 31,2005


2004


2003Amount


Percent


Amount


Percent


Amount


Percent(Dollars in thousands)Transportation

$
90,751



33.6
%

$
89,849



39.9
%

$
91,306



48.7
%Alternative Risk Transfer


103,537



38.4
%


72,001



32.0
%


52,051



27.8
%Specialty Personal Lines


45,935



17.0
%


37,059



16.5
%


21,928



11.7
%Hawaii and Alaska


22,486



8.3
%


21,812



9.7
%


20,655



11.0
%Other


7,327



2.7
%


4,263



1.9
%


1,621



0.8
%Gross Premiums Written

$
270,036



100.0
%

$
224,984



100.0
%

$
187,561



100.0
%  5




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##### Table of Contents



Premium Range

Annual Premium AverageTransportation


$5,000
- 1,000,000


$66,000Alternative Risk Transfer


$100,000
- 6,500,000


$567,000Specialty Personal Lines


$50
- 20,000


$890Hawaii and Alaska


$350
- 100,000


$4,200   Transportation.
  Alternative Risk Transfer.
       6




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##### Table of Contents



Specialty Personal Lines.
  Hawaii and Alaska.
 7




---



##### Table of Contents



Geographic
    Concentration
    Year Ended
    December 31,2005


2004Percent of





Percent ofVolume


Total


Volume


Total(Dollars in thousands)California

$
37,833



14.9%


$
28,871



13.7
%Hawaii


24,076



9.5%



23,592



11.2
%North Carolina


19,441



7.6%



14,784



7.0
%Florida


15,982



6.3%



13,882



6.6
%Texas


13,021



5.1%



8,116



3.9
%All other states


144,235



56.6%



121,451



57.6
%Total

$
254,588



100.0%


$
210,696



100.0
%   Concentration
    by Statutory Line of Business
    Year Ended
    December 31,2005


2004Percent of





Percent ofVolume


Total


Volume


Total(Dollars in thousands)Auto and other liability

$
155,019



60.9
%

$
120,550



57.2
%Auto physical damage


56,254



22.1
%


53,174



25.2
%Workers compensation


37,881



14.9
%


33,177



15.8
%Other lines:Allied lines


460



0.2
%


549



0.3
%Commercial multiple peril


1,163



0.4
%


1,153



0.5
%Ocean marine


640



0.3
%


2



0.0
%Inland marine


3,098



1.2
%


2,021



1.0
%Surety


73



0.0
%


70



0.0
%All others


5,434



2.1
%


3,795



1.8
%Total

$
254,588



100.0
%

$
210,696



100.0
%   Underwriting
   8




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##### Table of Contents



Marketing
    and Distribution
    Reinsurance
      Gross


Prepaid


Total





CededA.M. Best

Reinsurance


Reinsurance


Reinsurance


Percent of


Premiums


Percent ofRating

Receivables


Premium


Assets


Total


Written


Total(Dollars in thousands)Platinum Underwriters Reinsurance,
    Inc.

A

$
32,155


$
5,380


$
37,535



39.5
%

$
16,079



27.3
%Berkley Insurance Company

A


11,240



1,421



12,661



13.3
%


3,914



6.6
%TRAX Insurance Ltd.




9,144



902
(1)


10,046



10.6
%


11,582



19.7
%TOA Reinsurance Co. of America

A


5,636



504



6,140



6.4
%


2,873



4.9
%Great American Insurance Company

A


5,553



1,520



7,073



7.4
%


5,119



8.7
%General Reinsurance

A++


3,357



1,068



4,425



4.7
%


2,447



4.1
%Subtotal




67,085



10,795



77,880



81.9
%


42,014



71.3
%All other reinsurers




10,749



6,421



17,170



18.1
%


16,916



28.7
%Total



$
77,834


$
17,216


$
95,050



100.0
%

$
58,930



100.0
%     (1)
    
    Does not reflect a $10.7 million letter of credit that is
    held as collateral for the net receivable from TRAX Insurance
    Ltd., a member-owned captive insurance program.   9




---



##### Table of Contents



Claims
    Management and Administration
      24-hour,
    and/or
    Reserves
    for Unpaid Losses and Loss Adjustment Expenses
   10




---



##### Table of Contents



Liability for Unpaid Losses and
    Loss Adjustment Expenses  As re-estimated at
    December 31, 2005,
 Net Liability for Unpaid Losses
    andLoss Adjustment
    Expenses:

1995


1996


1997


1998


1999


2000


2001


2002


2003


2004


2005(Dollars in thousands)As originally estimated

$
22,511


$
19,691


$
20,997


$
23,339


$
26,566


$
30,292


$
48,456


$
67,162


$
86,740


$
111,644


$
151,444As re-estimated at
    December 31, 2005


17,481



16,733



19,146



20,914



24,338



30,064



46,400



63,037



83,862



106,409Liability re-estimated as
    of:One year later


20,983



18,563



19,817



22,643



24,923



32,751



48,494



63,462



84,485



106,409Two years later


19,571



17,520



19,448



21,948



26,252



33,473



47,479



64,687



83,862Three years later


18,332



16,632



18,896



21,903



26,380



31,884



47,250



63,037Four years later


17,696



16,323



19,258



21,608



25,531



29,962



46,400Five years later


17,304



16,446



18,966



20,542



24,487



30,064Six years later


17,512



16,666



18,957



20,871



24,338Seven years later


17,535



16,682



19,064



20,914Eight years later


17,514



16,673



19,146Nine years later


17,483



16,733Ten years later


17,481Net cumulative (deficiency)
    redundancy


5,030



2,958



1,851



2,425



2,228



228



2,056



4,125



2,878



5,235Net cumulative (deficiency)
    redundancy  %


22.3
%


15.0
%


8.8
%


10.4
%


8.4
%


0.8
%


4.2
%


6.1
%


3.3
%


4.7
%Cumulative paid of:One year later


7,413



6,583



7,268



8,742



10,307



14,924



18,048



22,792



29,617



37,049Two years later


11,743



10,605



11,769



14,189



17,637



20,077



28,510



36,927



48,672Three years later


14,375



12,931



14,980



18,170



20,157



24,313



35,718



48,660Four years later


15,831



14,653



17,543



19,115



22,383



25,343



40,615Five years later


16,715



15,642



18,253



20,158



22,762



27,065Six years later


17,156



16,088



18,573



20,400



23,382Seven years later


17,217



16,347



18,815



20,675Eight years later


17,321



16,481



18,999Nine years later


17,425



16,639Ten years later


17,454  11




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##### Table of Contents



1995


1996


1997


1998


1999


2000


2001


2002


2003


2004


2005(Dollars in thousands)As originally
    estimated:Net liability shown above

$
22,511


$
19,691


$
20,997


$
23,339


$
26,566


$
30,292


$
48,456


$
67,162


$
86,740


$
111,644


$
151,444Add reinsurance recoverables


2,997



4,786



6,729



9,519



11,396



12,416



22,395



35,048



41,986



59,387



71,763Gross liability

$
25,508


$
24,477


$
27,726


$
32,858


$
37,962


$
42,708


$
70,851


$
102,210


$
128,726


$
171,031


$
223,207As re-estimated at
    December 31, 2005Net liability shown above

$
17,481


$
16,733


$
19,146


$
20,914


$
24,338


$
30,064


$
46,400


$
63,037


$
83,862


$
106,409



N/AAdd reinsurance recoverables
    reestimated


994



2,348



5,509



5,031



6,884



12,765



33,642



47,899



51,389



63,338



N/AGross liability

$
18,475


$
19,081


$
24,655


$
25,945


$
31,222


$
42,829


$
80,042


$
110,936


$
135,251


$
169,747



N/AGross cumulative (deficiency)
    redundancy

$
7,033


$
5,396


$
3,071


$
6,913


$
6,740


$
(121
)

$
(9,191
)

$
(8,726
)

$
(6,525
)

$
1,284



N/AGross cumulative (deficiency)
    redundancy  %


27.6
%


22.0
%


11.1
%


21.0
%


17.8
%


−0.3
%


−13.0
%


−8.5
%


−5.1
%


0.8
%


N/A      Investments  General
   12




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##### Table of Contents



At December 31,2005


2004Cash and Cash Equivalents


2.3
%


4.4
%Short Term Investments


2.5
%


2.2
%Fixed Maturities:US Government and government
    agencies


58.8
%


60.1
%State and local government
    obligations


13.4
%


13.7
%Corporate obligations


13.2
%


12.5
%Total fixed Maturities


85.4
%


86.3
%Equity securities


9.8
%


7.1
%Total


100.0
%


100.0
%   Year Ended
    December 31,2005


2004


2003Yield on fixed maturities:Excluding realized gains and losses


4.3%



4.7%



4.8%Including realized gains and losses


4.3%



5.2%



6.4%Yield on equity securities:Excluding realized gains and losses


4.3%



4.7%



5.1%Including realized gains and losses


5.4%



10.0%



3.9%Yield on all investments:Excluding realized gains and losses


4.3%



4.7%



4.9%Including realized gains and losses


4.4%



5.6%



6.2%     Year Ended
    December 31,2005


2004


2003Fixed maturities:National Interstate Total Return
    on Fixed Maturities


2.5
%


5.1
%


6.1
%Merrill Lynch
    U.S. Treasuries, 3-5 Yrs


0.9
%


2.1
%


2.5
%Merrill Lynch U.S. Agencies,
    3-5 Yrs


1.1
%


2.7
%


2.6
%Merrill Lynch
    U.S. Corporates, BBB-A Rated, 3-5 Yrs


0.7
%


3.6
%


7.5
%Lehman Universal Bond Index


2.7
%


5.0
%


5.8
%Equity securities:National Interstate Total Return
    on Equity Securities


5.1
%


5.9
%


22.7
%Standard & Poors
    500 Index


4.9
%


10.9
%


28.7
%  13




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##### Table of Contents



Fixed
    Maturity Investments
    NAICDesignation


Comparable S&P
    Rating

Amortized Cost


Fair Value


% of Total(Dollars in thousands)1


AAA, AA, A

$
268,482


$
264,321



97.0
%2


BBB


6,204



6,009



2.2
%Total Investment Grade


274,686



270,330



99.2
%3


BB


1,640



1,653



0.6
%4


B


505



495



0.2
%5,6


CCC, CC, C, D


98



100



0.0
%Total Non-Investment Grade


2,243



2,248



0.8
%Total

$
276,929


$
272,578



100.0
%     December 31, 2005


December 31, 2004% of





% ofFair Value


Total


Fair Value


Total(Dollars in thousands)One year or less

$
6,269



2.3
%

$
2,725



1.3
%More than one year to five years


116,784



42.8
%


76,102



36.9
%More than five years to ten years


119,288



43.8
%


103,294



50.1
%More than ten years


30,237



11.1
%


24,100



11.7
%Total fixed maturities

$
272,578



100.0
%

$
206,221



100.0
%    Competition   14




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##### Table of Contents



Ratings   Regulation  State
    Regulation
  General
       15




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##### Table of Contents



Statutory
    Accounting Principles
      Restrictions
    on Paying Dividends
      Assessments
    and Fees Payable
    Risk-Based
    Capital (RBC) Requirements
   16




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##### Table of Contents



Restrictions
    on Cancellation, Non-Renewal or Withdrawal
    Federal
    Regulation
  General
    The
    Terrorism Risk Insurance Act
       Employees   17




---



##### Table of Contents



ITEM 1A  Risk
    Factors  Please refer to Forward-Looking Statements
    following the Index in the front of this
    Form 10-K.
    If we
    expand our operations too rapidly and do not manage that
    expansion effectively, our financial performance could be
    adversely affected.
    Because
    we are primarily a transportation insurer, conditions in that
    industry could adversely affect our business.
      Our
    growth strategy includes expanding into product lines in which
    we have limited experience.
   18




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##### Table of Contents



We
    face competition from companies with greater financial
    resources, broader product lines, higher ratings and stronger
    financial performance than us, which may impair our ability to
    retain existing customers, attract new customers and maintain
    our profitability and financial strength.
      If we
    are not able to attract and retain independent agents and
    brokers, our revenues could be negatively
    affected.
    We are
    subject to comprehensive regulation, and our ability to earn
    profits may be restricted by these regulations.
    
    statutory capital and surplus and reserve requirements;
    standards of solvency that must be met and maintained;
    payment of dividends;
    changes of control of insurance companies;
    transactions between an insurance company and any of its
    affiliates;
    licensing of insurers and their agents;
    types of insurance that may be written;
    market conduct, including underwriting and claims practices; 19




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##### Table of Contents




    provisions for unearned premiums, losses and other obligations;
    ability to enter and exit certain insurance markets;
    nature of and limitations on investments, premium rates, or
    restrictions on the size of risks that may be insured under a
    single policy;
    privacy practices;
    deposits of securities for the benefit of policyholders;
    prior approval of certain corporate transactions;
    payment of sales compensation to third parties;
    approval of policy forms; and
    guaranty fund and voluntary market regulations and assessments.      As a
    holding company, we are dependent on the results of operations
    of our insurance company subsidiaries to meet our obligations
    and pay future dividends.
    We are
    currently rated A (Excellent) by A.M. Best,
    their third highest rating out of 16 rating categories. A
    decline in our rating below A− could adversely
    affect our position in the insurance market, make it more
    difficult to market our insurance products and cause our
    premiums and earnings to decrease.
   20




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##### Table of Contents



New
    claim and coverage issues are continually emerging in the
    insurance industry, and these new issues could negatively impact
    our revenues, our business operations or our
    reputation.
    If our
    claims payments and related expenses exceed our reserves, our
    financial condition and results of operations could be adversely
    affected.
      
    the amount of claims payments;
    the expenses that we incur in resolving claims;
    legislative and judicial developments; and
    changes in economic conditions, including the effect of
    inflation.   21




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##### Table of Contents



Our
    inability to retain our senior executives and other key
    personnel could adversely affect our business.
    Market
    fluctuations, changes in interest rates or a need to generate
    liquidity can have significant and negative effects on our
    investment portfolio.
        We may
    not be successful in reducing our risk and increasing our
    underwriting capacity through reinsurance arrangements, which
    could adversely affect our business, financial condition and
    results of operations.
    We are
    subject to credit risk with respect to the obligations of our
    reinsurers and certain of our insureds. The inability of our
    risk sharing partners to meet their obligations could adversely
    affect our profitability.
   22




---



##### Table of Contents



We may
    not be successful in executing our business plan for our US
    Virgin Islands servicing operations.
    Your
    interests as a holder of our common shares may be different than
    the interests of our majority shareholder, Great American
    Insurance Company.
      We may
    have conflicts of interest with our majority shareholder, Great
    American Insurance Company, that we are unable to resolve in our
    favor.
     23




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##### Table of Contents



Provisions
    in our organizational documents, Ohio corporate law and the
    insurance laws of Ohio, Pennsylvania and Hawaii could impede an
    attempt to replace or remove our management or Directors or
    prevent or delay a merger or sale, which could diminish the
    value of our common shares.
    
    a classified Board of Directors consisting of eight Directors
    divided into two classes;
    the inability of our shareholders to remove a Director from the
    Board without cause;
    requiring a vote of holders of 50% of the common shares to call
    a special meeting of the shareholders;
    requiring a two-thirds vote to amend the shareholder protection
    provisions of our Code of Regulations and to amend the Articles
    of Incorporation;
    requiring the affirmative vote of a majority of the voting power
    of our shares represented at a special meeting of shareholders;
    excluding the voting power of interested shares to approve a
    control share acquisition under Ohio law; and
    prohibiting a merger, consolidation, combination or majority
    share acquisition between us and an interested shareholder or an
    affiliate of an interested shareholder for a period of three
    years from the date on which the shareholder first became an
    interested shareholder, unless previously approved by our Board.      Future
    sales of our common shares may affect the trading price of our
    common shares.
    Form S-3,
 24




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##### Table of Contents



Form 10-K. Form S-8 Form S-8
  We
    completed our initial public offering in February 2005, and we
    do not have a significant presence in the market. You may have
    difficulty selling your common shares because of the limited
    trading volume for such shares.
    We
    face ongoing challenges as a result of being a public company
    and our financial results could be adversely
    affected.
     ITEM 1B  Unresolved
    Staff Comments    ITEM 2
    Properties   25




---



##### Table of Contents



ITEM 3
    Legal
    Proceedings  Please refer to Forward  Looking
    Statements following the Index in front of this
    Form 10-K.
      ITEM 4
    Submission
    of Matters to a Vote of Security Holders   PART II  ITEM 5
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities  Please refer to Forward-Looking Statements
    following the Index in front of this
    Form 10-K.
  Market
    Information
      2005


2004High


Low


High


LowJanuary 28,
    2005 - March 31, 2005

$
19.15


$
13.50



N/A



N/ASecond Quarter


21.64



14.75



N/A



N/AThird Quarter


20.24



15.61



N/A



N/AFourth Quarter


21.45



13.91



N/A



N/A     Dividend
    Policy
   26




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##### Table of Contents



Equity
    Compensation Plan Information
    Number of Securities to be





Number of Securities Available
    For FutureIssued upon Exercise of


Weighted-Average Exercise


Issuance under Equity
    Compensation PlansEquity Compensation

Outstanding Options


Price of Outstanding


(Excluding Securities Reflected
    in Column (a))Plans

(a)


Options (b)


(c)Approved by shareholders


785,000


$
12.43



377,400Not approved by shareholders


none



N/A



none  27




---



##### Table of Contents



ITEM 6
    Selected
    Financial Data  Form 10-K
  At and for the Year Ended
    December 31,2005


2004


2003


2002


2001(Dollars in thousands, except
    per share data)Operating Data:Gross premiums written(1)

$
270,036


$
224,984


$
187,561


$
121,747


$
98,132Net premiums written(2)

$
211,106


$
166,419


$
141,924


$
93,516


$
74,262Premiums earned

$
194,397


$
156,908


$
126,364


$
87,356


$
72,256Net investment income


12,527



8,613



5,772



4,513



3,725Net realized gains (losses)


278



1,661



1,529



(386
)


469Other income


1,974



1,967



2,211



3,367



2,477Total revenues


209,176



169,149



135,876



94,850



78,927Losses and loss adjustment expenses


117,449



92,008



68,798



55,049



52,565Commissions and other underwriting
    expense


35,741



34,201



30,038



24,156



21,940Other operating and general
    expenses


9,428



6,888



4,893



3,928



2,398Interest expense


1,421



1,610



1,043



193



329Total expenses


164,039



134,707



104,772



83,326



77,232Income before income taxes


45,137



34,442



31,104



11,524



1,695Provision for income taxes


14,857



11,674



11,260



3,236



487Net income

$
30,280


$
22,768


$
19,844


$
8,288


$
1,208Selected
    GAAP Ratios:Losses and loss adjustment expense
    ratio(3)


60.4
%


58.6
%


54.4
%


63.0
%


72.7
%Underwriting expense ratio(4)


22.2
%


24.9
%


25.9
%


28.3
%


30.2
%Combined ratio(5)


82.6
%


83.5
%


80.3
%


91.3
%


102.9
%Return on equity(6)


28.5
%


37.2
%


49.9
%


31.2
%


5.4
%Per Share
    Data(7):Earnings per common share, basic

$
1.62


$
1.50


$
1.32


$
0.49


$
0.07Earnings per common share,
    assuming dilution


1.60



1.47



1.29



0.49



0.07Book value per common share, basic
    (at period end)

$
7.32


$
4.69


$
3.31


$
1.99


$
1.32Weighted average number of common
    shares outstanding, basic


18,737



15,171



15,057



16,805



17,583Weighted average number of common
    shares outstanding, diluted


18,975



15,480



15,347



16,949



17,674Common shares outstanding (at
    period end)


19,055



15,530



15,024



15,074



17,575Cash dividends per common share

$
0.08


$



$



$



$
   28




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##### Table of Contents



At December 31,2005


2004


2003


2002


2001Balance Sheet Data:Cash and investments

$
320,220


$
238,951


$
167,622


$
110,454


$
87,194Reinsurance recoverable


77,834



63,128



43,119



37,732



23,166Total assets


523,003



401,236



300,656



210,369



162,279Unpaid losses and loss adjustment
    expenses


223,207



171,031



128,726



102,210



70,852Long-term debt(8)


16,297



32,547



18,901



6,583



9,207Total shareholders equity


139,533



72,789



49,680



29,932



23,198   At and for the Year Ended
    December 31,2005


2004


2003


2002


2001Selected Statutory
    Data(9):Policyholder surplus(10)

$
122,825


$
92,124


$
58,621


$
36,944


$
33,982Combined ratio(11)


77.1
%


81.3
%


81.7
%


90.8
%


103.4
%     (1)
    
    The sum of premiums written on insurance policies issued by us
    and premiums assumed by us on policies written by other
    insurance companies.(2)
    
    Gross written premiums less premiums ceded to reinsurance
    companies.(3)
    
    The ratio of losses and loss adjustment expenses to premiums
    earned.(4)
    
    The ratio of the net of the sum of commissions and other
    underwriting expenses, other operating expenses less other
    income to premiums earned.(5)
    
    The sum of the loss and loss adjustment expense ratio and the
    underwriting expense ratio.(6)
    
    The ratio of net income to the average of the shareholders
    equity at the beginning and end of the period.(7)
    
    Adjusted to reflect a
    200-for-1 share
    split effective December 6, 2004.(8)
    
    The 2004 data includes $15.0 million note payable to Great
    American, junior subordinated debt and bank debt.(9)
    
    While financial data is reported in accordance with accounting
    principles generally accepted in the United States, or GAAP, for
    shareholder and other investment purposes, it is reported on a
    statutory basis for insurance regulatory purposes. Certain
    statutory expenses differ from amounts reported under GAAP.
    Specifically, under GAAP, premium taxes and other variable costs
    incurred in connection with writing new and renewal business are
    capitalized and amortized on a pro rata basis over the period in
    which the related premiums are earned. On a statutory basis,
    these items are expensed as incurred. In addition, certain other
    expenses, such as those related to the expensing or amortization
    of computer software, are accounted for differently for
    statutory purposes than the treatment accorded under GAAP.  (10)
    
    The statutory policyholder surplus of NIIC, which includes the
    statutory policyholder surplus of its subsidiary, National
    Interstate Insurance Company of Hawaii.(11)
    
    Statutory combined ratio of NIIC represents the sum of the
    following ratios: (1) losses and loss adjustment expenses
    incurred as a percentage of net earned premium and
    (2) underwriting expenses incurred as a percentage of net
    written premiums.  ITEM 7
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Please refer to Forward Looking Statements
    following the Index in front of this
    10-K.
  The following discussion and analysis of the historical
    consolidated financial statements of the Company should be read
    in conjunction with our audited consolidated financial
    statements and the related notes included elsewhere in this
    Form 10-K.
    All historical per share amounts reflect a
    200-for-1 share
    split as discussed elsewhere in this
    Form 10-K
    and the reclassification of all Class A common shares as
    common shares effective December 6, 2004.
 29




---



##### Table of Contents



Overview
      start-up
    Submissions
  
    The increase or decrease in the number of new applications we
    receive. This is influenced by the effectiveness of our
    marketing activities compared to the marketing activities of our
    competitors in each market.
    The change in the number of current policyholders that are
    available for a renewal quote. The number of policyholders
    available for renewal changes based upon the economic conditions
    impacting our customer groups and the extent of consolidation
    that may be taking place within the industries we support.  Quotes
  
    The change in the percentage of the new applications received
    that do not receive a Company quote. We do not quote risks that
    do not meet our risk selection criteria or for which we have not
    been provided complete application data. We refer to this ratio
    as the declination ratio and an increasing
    declination ratio usually results in reduced opportunities to
    write new business. 30




---



##### Table of Contents



Sales
  
    The change in percentage of the quotes we issue that are
    actually sold. We refer to this ratio as the hit
    ratio. Hit ratios are affected by the number of
    competitors, the prices quoted by these competitors and the
    degree of difference between the competitors pricing,
    terms and conditions and ours.  Rates
  
    The change in our rate structure from period to period. The
    rates we file and quote are impacted by several factors
    including: the cost and extent of the reinsurance we purchase;
    our operating efficiencies; our average loss costs, which
    reflect the effectiveness of our underwriting routines; our
    underwriting profit expectations; and our claims adjusting
    processes. The difference between our rates and the rates of our
    competitors is the primary factor impacting the revenue growth
    of our established product lines.  Product
    Offerings and Distribution
  
    We operate in multiple markets with multiple distribution
    approaches to attempt to reduce the probability that an adverse
    competitive response in any single market will have a
    significant impact on our overall business. We also attempt to
    maintain several new products, product line extensions or
    product distribution approaches in an active development status
    so we are able to take advantage of market opportunities. We
    select from potential new product ideas based on our stated new
    business criteria and the anticipated competitive response.  Industry
    and Trends
      
    Our business model and bottom line orientation have resulted in
    what we believe is disciplined and consistent risk assessment
    and pricing adequacy.
    Our ability to attract and retain what we believe are some of
    the best transportation companies in the industries we serve
    into our captive programs.
    Operating expense reductions through system investments and a
    lower cost structure in our captive products.     31




---



##### Table of Contents



Revenues
     32




---



##### Table of Contents



Expenses
    Results
    of Operations
  Overview
   33




---



##### Table of Contents



Underwriting
        Year Ended
    December 31,2005


2004


2003(Dollars in thousands)Gross premiums written

$
270,036


$
224,984


$
187,561Ceded reinsurance


(58,930
)


(58,565
)


(45,637
)Net premiums written


211,106



166,419



141,924Change in unearned premiums, net
    of ceded


(16,709
)


(9,511
)


(15,560
)Net earned premiums

$
194,397


$
156,908


$
126,364Combined Ratios:Loss and LAE ratio(1)


60.4
%


58.6
%


54.4
%Underwriting expense ratio(2)


22.2
%


24.9
%


25.9
%Combined ratio


82.6
%


83.5
%


80.3
%     (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.       34




---



##### Table of Contents



Year Ended
    December 31,2005


2004


2003Amount


Percent


Amount


Percent


Amount


Percent(Dollars in thousands)Transportation

$
90,751



33.6%


$
89,849



39.9%


$
91,306



48.7%Alternative Risk Transfer


103,537



38.4%



72,001



32.0%



52,051



27.8%Specialty Personal Lines


45,935



17.0%



37,059



16.5%



21,928



11.7%Hawaii and Alaska


22,486



8.3%



21,812



9.7%



20,655



11.0%Other


7,327



2.7%



4,263



1.9%



1,621



0.8%Gross premiums written

$
270,036



100.0%


$
224,984



100.0%


$
187,561



100%   2005 compared to 2004.
  Year Ended
    December 31,


ChangeRevenue:

2005


2004


Amount


Percent(Dollars in thousands)Premiums earned:Transportation

$
70,502


$
70,973


$
(471
)


(0.7
%)Alternative Risk Transfer


60,223



36,499



23,724



65.0
%Specialty Personal Lines


38,561



28,377



10,184



35.9
%Hawaii and Alaska


14,855



15,042



(187
)


(1.2
%)Other


10,256



6,017



4,239



70.5
%Total premiums earned


194,397



156,908



37,489



23.9
%Net investment income


12,527



8,613



3,914



45.4
%Realized gains on investments


278



1,661



(1,383
)


(83.3
%)Other


1,974



1,967



7



0.4
%Total revenues

$
209,176


$
169,149


$
40,027



23.7
%    35




---



##### Table of Contents



2004 compared to 2003.
  Year Ended
    December 31,


ChangeRevenue:

2004


2003


Amount


Percent(Dollars in thousands)Premiums earned:Transportation

$
70,973


$
64,933


$
6,040



9.3
%Alternative Risk Transfer


36,499



25,635



10,864



42.4
%Specialty Personal Lines


28,377



19,065



9,312



48.8
%Hawaii and Alaska


15,042



14,203



839



5.9
%Other


6,017



2,528



3,489



138.0
%Total premiums earned


156,908



126,364



30,544



24.2
%Net investment income


8,613



5,772



2,841



49.2
%Realized gains on investments


1,661



1,529



132



8.6
%Other


1,967



2,211



(244
)


(11.0
)%Total revenues

$
169,149


$
135,876


$
33,273



24.5
%    36




---



##### Table of Contents



Investment
    Income
  2005 compared to 2004.
  2004 compared to 2003.
  Realized
    Gains (Losses) on Investments
  2005 compared to 2004.
 37




---



##### Table of Contents



other-than-temporary
  other-than-temporary
  2004 compared to 2003.
  Other
    Operating and General Expenses
  2005 compared to 2004.
  2004 compared to 2003.
  Income
    Taxes
    Financial
    Condition
  Investments
     38




---



##### Table of Contents



Securities with


Securities withUnrealized


UnrealizedGains


Losses(Dollars in thousands)Fixed Maturities:Fair value of securities

$
44,300


$
228,278Amortized cost of securities

$
43,832


$
233,097Gross unrealized gain or loss

$
468


$
(4,819
)Fair value as a % of amortized cost


101.1
%


97.9
%Number of security positions held


77



201Number individually exceeding
    $50,000 gain or loss






15Concentration of gains or losses
    by type or industry:US Government and government
    agencies

$
134


$
(3,529
)State, municipalities and
    political subdivisions


228



(388
)Banks, insurance and brokers


102



(535
)Electric services






(13
)Telephone communications






(59
)Industrial and other


4



(295
)Percentage rated investment grade


96.8
%


99.8
%Equity Securities:Fair value of securities

$
20,068


$
12,128Cost of securities

$
19,476


$
12,541Gross unrealized gain or loss

$
592


$
(413
)Fair value as a % of cost


103.0
%


96.7
%Number individually exceeding
    $50,000 gain or loss


3



2     (1)
    
    Investment grade of AAA to BBB by Standard &
    Poors Corporation.    Securities with


Securities withUnrealized


UnrealizedGains


LossesMaturity:One year or less


1.0
%


0.3
%After one year through five years


52.9
%


29.6
%After five years through ten years


38.0
%


37.5
%After ten years


8.1
%


32.6
%100.0
%


100.0
%  39




---



##### Table of Contents



At December 31,
    2005Aggregate


Aggregate


Fair ValueFair


Unrealized


as % ofValue


Gain (Loss)


Cost Basis(Dollars in thousands)Fixed Maturities:Securities with unrealized
    gains:Exceeding $50,000 and for:Less than one year (0 issues)

$



$
More than one year (0 issues)






Less than $50,000 (77 issues)


44,300



468



101.1
%44,300



468Securities with unrealized
    losses:Exceeding $50,000 and for:Less than one year (15 issues)

$
30,211


$
(2,153
)


93.3
%More than one year (0 issues)






Less than $50,000 (186 issues)


198,067



(2,666
)


98.7
%228,278



(4,819
)Equity Securities:Securities with unrealized
    gains:Exceeding $50,000 and for:Less than one year (3 issues)

$
4,597


$
212



104.8
%More than one year (0 issues)






Less than $50,000 (37 issues)


15,471



380



102.5
%20,068



592Securities with unrealized
    losses:Exceeding $50,000 and for:Less than one year (2 issues)

$
1,131


$
(110
)


91.1
%More than one year (0 issues)






Less than $50,000 (22 issues)


10,997



(303
)


97.3
%12,128



(413
)   Operations  Other-Than-Temporary
 40




---



##### Table of Contents



other-than-temporary
  Net Realized


Charges forGains on Sales


Impairment


Total(Dollars in thousands)Year ended:2005

$
555


$
(277
)

$
2782004


1,661







1,6612003


1,540



(11
)


1,529   Liquidity
    and Capital Resources
  Capital Ratios.
  Sources of Funds.
           41




---



##### Table of Contents



12-month
    Off-Balance Sheet Items.
 42




---



##### Table of Contents



Contractual Obligations.
  Payment Due by PeriodWithin








More ThanTotal


1 Year


2-3 Years


4-5 Years


5 Years(Dollars in thousands)Gross unpaid losses and
    LAE (1)

$
223,207


$
87,217


$
93,311


$
33,138


$
9,541Long-term debt obligations


16,297



833











15,464Operating lease obligations


924



271



451



202



Total

$
240,428


$
88,321


$
93,762


$
33,340


$
25,005     (1)
    
    Dollar amounts and time periods are estimates based on
    historical net payment patterns applied to the gross reserve and
    do not represent actual contractual obligations. Actual payments
    and their timing could differ significantly from these
    estimates, and the estimates provided do not reflect potential
    recoveries under reinsurance treaties.  Critical
    Accounting Policies
  other-than-temporary
  Loss
    and Loss Adjustment Expenses (LAE) Reserves
      
    the Case Incurred Development Method;
    the Paid Development Method; 43




---



##### Table of Contents




    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.    CumulativeLine of Business

ImpactCommercial Auto Liability

$
1,491Workers Compensation


242   Commercial Auto Liability.
  
    litigious climate;
    unpredictability of judicial decisions regarding coverage issues;
    magnitude of jury awards;
    outside counsel costs; and
    frequency and timing of claims reporting.  Workers Compensation.
  
    legislative actions and regulatory interpretations;
    future medical cost inflation; and
    timing of claims reporting.   44




---



##### Table of Contents



45




---



##### Table of Contents



Gross
    Loss Reserves
  At December 31,
    2005Statutory Lines of
    Business

Case


IBNR


LAE


Total(In thousands)Commercial auto liability

$
54,587


$
68,877


$
34,085


$
157,549Workers compensation


7,423



26,640



4,505



38,568Auto physical damage


6,674



4,916



2,019



13,609General liability


1,668



2,750



1,210



5,628Private passenger


3,055



1,047



695



4,797Inland marine


269



1,053



87



1,409Commercial multiple peril


670



217



228



1,115Other lines


391



103



38



532$
74,737


$
105,603


$
42,867


$
223,207   Reinsurance Recoverables.
  Other-Than-Temporary
    Impairment
  case-by-case
  
    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. 46




---



##### Table of Contents



other-than-temporary other-than-temporary available-for-sale other-than-temporary
  ITEM 7A
    Quantitative
    and Qualitative Disclosures About Market Risk    Fixed Maturity Portfolio. step-up
    December 31, 2005


December 31, 2004Principal





PrincipalCash Flows


Rate


Cash Flows


Rate(Dollars in thousands)Subsequent calendar year

$
24,184



4.9
%

$
21,975



5.0
%2nd Subsequent calendar year


25,285



4.4
%


5,700



5.0
%3rd Subsequent calendar year


26,373



4.4
%


14,280



3.9
%4th Subsequent calendar year


27,215



4.6
%


9,028



4.3
%5th Subsequent calendar year


37,732



4.5
%


19,504



4.4
%Thereafter


134,064



4.8
%


133,316



4.9
%Total

$
274,853



4.7
%

$
203,803



4.8
%Fair value

$
272,578






$
206,221   Equity Risk.
 47




---



##### Table of Contents



ITEM 8
    Financial
    Statements and Supplementary Data  PageIndex to Financial
    StatementsReport of
    Independent Registered Public Accounting Firm


49Consolidated
    Balance Sheets:
    December 31, 2005 and 2004


50Consolidated
    Statements of Income:
    Years ended December 31, 2005, 2004 and 2003


51Consolidated
    Statements of Shareholders Equity
    Years ended December 31, 2005, 2004 and 2003


52Consolidated
    Statements of Cash Flows:
    Years ended December 31, 2005, 2004 and 2003


53Notes to
    Consolidated Financial Statements


54    48




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM              49




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  CONSOLIDATED BALANCE SHEETS
  December 31,


December 31,2005


2004(Dollars in thousands, except
    per share data)ASSETSInvestments:Fixed maturities
    available-for-sale,
    at fair value (amortized cost  $276,929 and
    $205,711, respectively)

$
272,578


$
206,221Equity securities
    available-for-sale,
    at fair value (cost  $32,017 and $16,522,
    respectively)


32,196



16,841Short-term investments, at cost
    which approximates fair value


7,985



20Total investments


312,759



223,082Cash and cash equivalents


7,461



15,869Accrued investment income


3,172



2,344Premiums receivable, net of
    allowance for doubtful accounts of $580 and $361, respectively


53,589



45,129Reinsurance recoverables on paid
    and unpaid losses


77,834



63,128Prepaid reinsurance premiums


17,216



16,190Deferred policy acquisition costs


11,711



11,606Deferred federal income taxes


9,569



6,400Property and equipment, net


11,366



11,738Funds held by reinsurer


3,769



3,599Other assets


14,557



2,151Total assets

$
523,003


$
401,236LIABILITIES AND
    SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment
    expenses

$
223,207


$
171,031Unearned premiums and service fees


98,661



80,928Long-term debt


16,297



17,547Note payable to affiliate






15,000Amounts withheld or retained for
    account of others


19,016



14,911Reinsurance balances payable


4,704



3,429Accounts payable and other
    liabilities


14,379



14,432Commissions payable


4,730



4,719Assessments and fees payable


2,476



6,450Total liabilities


383,470



328,447Shareholders equity:Preferred
    shares  no par valueAuthorized  10,000,000 sharesIssued  0 shares






Common
    shares  $0.01 par valueAuthorized  50,000,000 sharesIssued  23,350,000
    and 20,000,000 shares, including 4,294,800 and
    4,470,400 shares, respectively, in treasury


234



200Additional paid-in capital


42,257



1,264Retained earnings


105,826



77,102Accumulated other comprehensive
    (loss) income


(2,712
)


539Treasury shares


(6,072
)


(6,316
)Total shareholders equity


139,533



72,789Total liabilities and
    shareholders equity

$
523,003


$
401,236    50




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF INCOME
  Year Ended
    December 31,2005


2004


2003(Dollars in thousands, exceptper share data)Revenue:Premiums earned

$
194,397


$
156,908


$
126,364Net investment income


12,527



8,613



5,772Realized gains on investments


278



1,661



1,529Other


1,974



1,967



2,211Total revenues


209,176



169,149



135,876Expenses:Losses and loss adjustment expenses


117,449



92,008



68,798Commissions and other underwriting
    expense


35,741



34,201



30,038Other operating and general
    expenses


9,428



6,888



4,893Interest expense


1,421



1,610



1,043Total expenses


164,039



134,707



104,772Income before federal income taxes


45,137



34,442



31,104Provision for federal income taxes


14,857



11,674



11,260Net income

$
30,280


$
22,768


$
19,844Net income per common
    share  basic

$
1.62


$
1.50


$
1.32Net income per common
    share  diluted

$
1.60


$
1.47


$
1.29Weighted average of common shares
    outstanding, basic


18,737



15,171



15,057Weighted average of common shares
    outstanding, diluted


18,975



15,480



15,347Cash dividends per common share

$
0.08


$



$
    51




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF SHAREHOLDERS
    EQUITY
  AccumulatedAdditional





OtherCommon


Paid-In


Retained


Comprehensive


TreasuryShares


Capital


Earnings


Income (Loss)


Shares


Total(Dollars in thousands)Balance at January 1, 2003

$
200


$
758


$
34,668


$
1,197


$
(6,891
)

$
29,932Net income










19,844











19,844Unrealized appreciation of
    investment securities, net of taxes of $17














32







32Comprehensive income






















19,876Purchase of 50,000 treasury shares


















(128
)


(128
)Balance at December 31, 2003


200



758



54,512



1,229



(7,019
)


49,680Net income










22,768











22,768Unrealized depreciation of
    investment securities, net of tax benefit of $372














(690
)






(690
)Comprehensive income






















22,078Issuance of 505,400 treasury
    shares upon exercise of stock options










(178
)






703



525Tax benefit realized from exercise
    of stock options






506















506Balance at December 31, 2004


200



1,264



77,102



539



(6,316
)


72,789Net Income










30,280











30,280Unrealized depreciation of
    investment securities, net of tax benefit of $1,750














(3,251
)






(3,251
)Comprehensive income






















27,029Proceeds from initial public
    offering


34



40,357















40,391Dividends on Common Stock










(1,540
)










(1,540
)Issuance of 175,600 treasury
    shares upon exercise of stock options






26



(16
)






244



254Tax benefit realized from exercise
    of stock options






610















610Balance at December 31, 2005

$
234


$
42,257


$
105,826


$
(2,712
)

$
(6,072
)

$
139,533    52




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
    STATEMENTS OF CASH FLOWS  Year Ended
    December 31,2005


2004


2003(In thousands)Operating activitiesNet income

$
30,280


$
22,768


$
19,844Adjustments to reconcile net
    income to net cash provided by operating activities:Net amortization of bond premiums
    and discounts


887



396



646Provision for depreciation and
    amortization


1,197



1,198



1,256Net realized gain on investment
    securities


(278
)


(1,661
)


(1,529
)Tax benefit realized from exercise
    of stock options


610



506



Deferred federal income taxes


(1,419
)


(1,754
)


(1,949
)Increase in deferred policy
    acquisition costs, net


(105
)


(886
)


(2,116
)Increase in reserves for losses
    and loss adjustment expenses


52,176



42,305



26,516Increase in premiums receivable


(8,460
)


(2,578
)


(16,586
)Increase in unearned premiums and
    service fees


17,733



11,220



21,482Increase in interest receivable,
    prepaid reinsurance premiums and other assets


(2,776
)


(4,871
)


(7,046
)Increase in accounts payable,
    commissions and other liabilities, premiums and other funds
    collected from others and assessments and fees payable


89



10,654



12,815Increase in reinsurance recoverable


(14,706
)


(20,009
)


(5,387
)Increase (decrease) in reinsurance
    balances payable


1,275



(355
)


(2,592
)Other


(2
)


5



9Net cash provided by operating
    activities


76,501



56,938



45,363Investing activitiesPurchases of investments


(168,071
)


(187,883
)


(156,906
)Proceeds from sale or maturity of
    investments


72,784



110,618



112,005Triumphe purchase deposit


(11,744
)






Capital expenditures


(733
)


(1,084
)


(889
)Net cash used in investing
    activities


(107,764
)


(78,349
)


(45,790
)Financing activitiesProceeds from issuance of common
    shares


40,391







Proceeds from long-term debt










15,464Proceeds (repayment) of note
    payable to affiliate


(15,000
)


15,000



Repayment of long-term debt


(1,250
)


(1,354
)


(3,146
)Issuance of common shares from
    treasury upon exercise of stock options (purchase of shares)


254



525



(128
)Cash dividends paid on common
    shares


(1,540
)






Deferred financing costs










(456
)Net cash provided by financing
    activities


22,855



14,171



11,734Net (decrease) increase in cash
    and cash equivalents


(8,408
)


(7,240
)


11,307Cash and cash equivalents at
    beginning of year


15,869



23,109



11,802Cash and cash equivalents at end
    of year

$
7,461


$
15,869


$
23,109    53




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2005
    (Dollars in thousands, except share data)
  1.
    Background,
    Organization and Significant Accounting Policies        Basis of
    Presentation
    200-for-1
    Principles
    of Consolidation
   54




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Use of
    Estimates
    Cash
    Equivalents
    Premium,
    Commissions and Service Fee Recognition
    Investments
    other-than-temporary,
  Deferred
    Policy Acquisition Costs
    Property
    and Equipment
   55




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Other
    Assets
    Unpaid
    Losses and Loss Adjustment Expenses
    Assessments
    Premiums
    Receivable
    Reinsurance
    Segment
    Information
    Federal
    Income Taxes
    Comprehensive
    Income
  available-for-sale
 56




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Earnings
    Per Common Share
    Stock-Based
    Compensation
  Accounting for Stock Issued to Employees
  Accounting for Stock-Based
    Compensation  Transition and Disclosure fair-value-based Accounting for
    Stock-Based Compensation
 57




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   fair-value-based
  Year Ended
    December 31,2005


2004


2003Net income, as reported

$
30,280


$
22,768


$
19,844Less: Stock-based employee
    compensation expense determined under fair value based method
    for all awards, net of related tax effects


1,186



138



53Proforma net income

$
29,094


$
22,630


$
19,791Earnings per share:Basic  as reported

$
1.62


$
1.50


$
1.32Basic  proforma


1.55



1.49



1.31Diluted  as
    reported


1.60



1.47



1.29Diluted  proforma


1.54



1.48



1.30     Year Ended
    December 31,2005

2004

2003Dividend yield

0.3%



Volatility

31.0%



Risk-free interest rate

4.0%-4.6%

4.1%-4.4%

4.1%-4.4%Life of grant

9 years

10 years

10 years     Recent
    Accounting Pronouncements
  Share-Based
    Payment
  Share-Based Payment Accounting for Stock-Based
    Compensation Accounting for Stock Issued to Employees.
 58




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Accounting
    Changes and Error Corrections
  Accounting Changes and Error Corrections, Accounting Changes Reporting Accounting Changes in Interim
    Financial Statements,
  Accounting
    by Insurance Enterprises for Deferred Acquisition Costs in
    Connection with Modifications or Exchanges of Insurance
    Contracts
  Accounting by Insurance
    Enterprises for Deferred Acquisition Costs in Connection With
    Modifications or Exchanges of Insurance Contracts,
  2.
    Initial
    Public Offering    3.
    Shareholders
    Equity  200-for-1
 59




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   4.
    Investments    Cost or


Gross


GrossAmortized


Unrealized


UnrealizedCost


Gains


Losses


Fair ValueDecember 31,
    2005:Fixed maturities:U.S. Government and
    government agency obligations

$
190,613


$
134


$
(3,529
)

$
187,218State and local government
    obligations


43,407



228



(388
)


43,247Corporate obligations


42,909



106



(902
)


42,113Total fixed maturities


276,929



468



(4,819
)


272,578Equity securities:Preferred stocks


19,532



252



(280
)


19,504Common stocks


12,485



340



(133
)


12,692Total equity securities


32,017



592



(413
)


32,196Short-term investments


7,985











7,985Total investments

$
316,931


$
1,060


$
(5,232
)

$
312,759December 31,
    2004:Fixed maturities:U.S. Government and
    government agency obligations

$
143,908


$
308


$
(599
)

$
143,617State and local government
    obligations


32,014



656



(51
)


32,619Corporate obligations


29,789



343



(147
)


29,985Total fixed maturities


205,711



1,307



(797
)


206,221Equity securities:Preferred stocks


8,424



296



(28
)


8,692Common stocks


8,098



109



(58
)


8,149Total equity securities


16,522



405



(86
)


16,841Short-term investments


20











20Total investments

$
222,253


$
1,712


$
(883
)

$
223,082     Amortized


FairCost


ValueDue one year or less

$
6,277


$
6,269Due after one year through five
    years


117,964



116,784Due after five years through ten
    years


120,916



119,288Due after ten years


31,772



30,237Total fixed maturities

$
276,929


$
272,578  60




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Year Ended
    December 31,2005


2004


2003Fixed maturities

$
17,542


$
43,479


$
77,841Common and preferred stock


13,467



14,726



2,587     Year Ended
    December 31,2005


2004


2003Fixed maturity gain

$
252


$
1,035


$
2,158Fixed maturity losses


(236
)


(170
)


(463
)Equity security gain


429



1,052



225Equity security losses


(167
)


(256
)


(391
)Net realized gains

$
278


$
1,661


$
1,529   other-than-temporary other-than-temporary. other-than-temporary.
    Amortized


Fair


Unrealized


Number ofCost


Value


Losses


HoldingsDecember 31,
    2005:Fixed maturities:12 months or less

$
144,241


$
142,268


$
(1,973
)


134Greater than 12 months


88,856



86,010



(2,846
)


67Total fixed maturities


233,097



228,278



(4,819
)


201Equity securities:12 months or less


12,541



12,128



(413
)


24Greater than 12 months














Total equity securities


12,541



12,128



(413
)


24Total fixed maturities and equity
    securities

$
245,638


$
240,406


$
(5,232
)


225   61




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Amortized


Fair


Unrealized


Number ofCost


Value


Losses


HoldingsDecember 31,
    2004:Fixed maturities:12 months or less

$
76,930


$
76,583


$
(347
)


73Greater than 12 months


24,779



24,329



(450
)


30Total fixed maturities


101,709



100,912



(797
)


103Equity securities:12 months or less


7,395



7,352



(43
)


11Greater than 12 months


390



347



(43
)


2Total equity securities


7,785



7,699



(86
)


13Total fixed maturities and equity
    securities

$
109,494


$
108,611


$
(883
)


116     other-than-temporarily
    Year Ended
    December 31,2005


2004


2003Investment income:Fixed maturities

$
10,520


$
7,582


$
5,055Equity securities


1,026



717



686Other


1,109



422



139Investment expense


(128
)


(108
)


(108
)Net investment income

$
12,527


$
8,613


$
5,772    62




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   5.
    Property
    and Equipment    December 31,2005


2004Land and building

$
11,164


$
11,161Data processing equipment and
    software


6,417



5,838Office furniture and leasehold
    improvement


1,165



1,086Automobiles


237



16918,983



18,254Accumulated depreciation and
    amortization


(7,617
)


(6,516
)Total net property and equipment

$
11,366


$
11,738   6.
    Note Payable
    and Long-term Debt    December 31,2005


2004Junior subordinated debentures

$
15,464


$
15,464Term note payable to bank


833



2,083Note payable to affiliate






15,000Total notes payable and long-term
    debt

$
16,297


$
32,547   Consolidation of Variable Interest
    Entities
     63




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          7.
    Premiums,
    Reinsurance and Transactions with Related Parties      Year Ended
    December 31,2005


2004


2003Written premiums assumed

$
9,290


$
9,506


$
8,261Assumed premiums earned


9,214



8,260



8,834Assumed losses and loss adjustment
    expense incurred


6,445



6,895



4,653Service fee expense


134



306



250Payable to Great American as of
    year end


720



932



780       Year Ended
    December 31,2005


2004


2003Written


Earned


Written


Earned


Written


EarnedDirect

$
254,588


$
237,639


$
210,696


$
197,502


$
162,259


$
143,958Assumed


15,448



14,638



14,288



16,341



25,302



21,791Ceded


(58,930
)


(57,880
)


(58,565
)


(56,935
)


(45,637
)


(39,385
)Net premium

$
211,106


$
194,397


$
166,419


$
156,908


$
141,924


$
126,364  64




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     December 31,


A.M. Best2005


RatingPlatinum Underwriters Reinsurance,
    Inc.

$
37,535


ABerkley Insurance Company


12,661


ATRAX Insurance Ltd.


10,046


TOA Reinsurance Co. of America


6,140


AGreat American Insurance Company


7,073


AGeneral Reinsurance


4,425


A++Subtotal


77,880All other reinsurers


17,170Total

$
95,050Reinsurance recoverables on paid
    and unpaid losses

$
77,834Prepaid reinsurance premiums


17,216$
95,050    65




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   8.
    Unpaid
    Losses and Loss Adjustment Expenses    December 31,2005


2004


2003Reserve for losses and LAE, net of
    related reinsurance recoverables, at beginning of year

$
111,644


$
86,740


$
67,162Add:Provision for unpaid losses and
    LAE for claims net of reinsurance, occurring during:Current period


122,684



94,263



72,498Prior period


(5,235
)


(2,255
)


(3,700
)117,449



92,008



68,798Deduct:Losses and LAE payments for
    claims, net of reinsurance, occurring during:Current period


40,600



37,488



26,385Prior period


37,049



29,616



22,83577,649



67,104



49,220Reserve for losses and LAE, net of
    related reinsurance recoverables, end of period


151,444



111,644



86,740Reinsurance recoverables on unpaid
    losses and LAE, at end of period


71,763



59,387



41,986Reserve for unpaid losses and LAE,
    gross of reinsurance recoverables

$
223,207


$
171,031


$
128,726     9.
    Income
    Taxes    Year Ended
    December 31,2005


2004


2003Current federal income tax
    provision

$
16,788


$
13,428


$
13,209Deferred federal income tax benefit


(1,931
)


(1,754
)


(1,949
)$
14,857


$
11,674


$
11,260  66




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Year Ended
    December 31,2005


2004


2003Expected statutory rate


35
%


35
%


35
%Expected federal income tax
    expense at statutory rate

$
15,798


$
12,055


$
10,887Tax effect of tax exempt
    investment income


(623
)


(302
)


(283
)Other items, net


(318
)


(79
)


656$
14,857


$
11,674


$
11,260     December 31,2005


2004Deferred Tax Assets:Unearned premiums

$
5,699


$
4,530Losses and LAE reserves


5,091



4,036Assignments and assessments


517



1,907Unrealized depreciation on
    investments


1,460



Other, net


998



437Total deferred tax assets


13,765



10,910Deferred Tax
    Liabilities:Deferred policy acquisition costs


(4,099
)


(4,062
)Unrealized appreciation on
    investments






(290
)Other, net


(97
)


(158
)Total deferred tax liabilities


(4,196
)


(4,510
)Net deferred income tax assets

$
9,569


$
6,400     10.
    Statutory
    Accounting Principles    
    Under SAP, investment grade fixed maturities are carried at
    amortized cost, while under GAAP available for sale
    fixed maturities are recorded at fair value.
    Under SAP, policy acquisition costs, such as commissions,
    premium taxes, fees and other costs of underwriting policies,
    are charged to current operations as incurred, while under GAAP,
    such costs are deferred and amortized on a pro rata basis over
    the policy period. 67




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   
    Under SAP, certain assets (such as property and equipment)
    designated as non-admitted are charged directly to
    surplus.
    Under SAP, net deferred income tax assets are recorded as assets
    following the application of certain criteria, with the
    resulting admitted deferred tax asset credited directly to
    surplus.
    Under SAP, receivables are non-admitted based on certain aging
    criteria.
    Under SAP, the costs and related recoverables for guaranty funds
    and other assessments are recorded based on managements
    estimate of the ultimate liability, while under GAAP such costs
    are accrued when the liability is probable and reasonably
    estimable and the related recoverable amount is based on future
    premium collections.  NIIC-HI
  As of and for the YearEnded
    December 31,2005


2004


2003NIIC statutory capital and surplus

$
122,825


$
92,320


$
58,621NIIC statutory net income


29,311



20,450



13,706NIIC-HI statutory capital and
    surplus


8,361



8,032



7,849NIIC-HI statutory net income


332



174



218   NIIC-HI
  NIIC-HI
  11.
    Employee
    Benefit Plan      12.
    Stock
    Option Plan   68




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended
    December 31,2005


2004


2003Weighted





Weighted





WeightedAverage





Average





AverageExercise





Exercise





ExerciseShares


Price


Shares


Price


Shares


PriceOptions outstanding at the
    beginning of period


417,600


$
1.69



838,000


$
1.24



658,000


$
1.06Granted


621,000



15.79



85,000



2.24



180,000



1.91Exercised


(175,600
)


1.44



(505,400
)


1.04







Forfeited


(78,000
)


6.37















Options outstanding at the end of
    the period


785,000



12.43



417,600



1.69



838,000



1.24Options exercisable at the end of
    period


26,000



0.94



201,600



1.38



514,400



1.08     December 31, 2005Options Outstanding


Options ExercisableAverage


Weighted Average





AveragePer Share Exercise Price
    Range

Shares


Exercise Price


Remaining Life


Shares


Exercise Price$ 0.94  $ 3.31


194,000


$
1.85



7.4 years



26,000


$
0.94$ 3.32  $15.03


356,000



13.67



9.7 years







$15.04  $19.79


235,000



19.29



7.8 years







$ 0.94  $19.79


785,000


$
12.43



8.6 years



26,000


$
0.94   13.
    Leases
    and Rent Expense    December 31,20052006

$
2712007


2452008


2062009


1182010


842011 and thereafter


    69




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   14.
    Commitments
    and Contingencies        15.
    Earnings
    Per Common Share    Year Ended
    December 31,2005


2004


2003Net income

$
30,280


$
22,768


$
19,844Weighted average shares
    outstanding during period


18,737



15,171



15,057Additional shares issuable under
    employee common stock option plans using treasury stock method


238



309



290Weighted average shares
    outstanding assuming exercise of stock option


18,975



15,480



15,347Net income per share:Basic

$
1.62


$
1.50


$
1.32Diluted


1.60



1.47



1.29    70




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   16.
    Segment
    Information    Years Ended
    December 31,2005


2004


2003Revenue:Premiums earned:Transportation

$
70,502


$
70,973


$
64,933Alternative Risk Transfer


60,223



36,499



25,635Specialty Personal Lines


38,561



28,377



19,065Hawaii and Alaska


14,855



15,042



14,203Other


10,256



6,017



2,528Total premiums earned


194,397



156,908



126,364Net investment income


12,527



8,613



5,772Realized gains on investments


278



1,661



1,529Other


1,974



1,967



2,211Total revenues

$
209,176


$
169,149


$
135,876   17.
    Quarterly
    Operating Results (Unaudited)    1st


2nd


3rd


4th


TotalQuarter


Quarter


Quarter


Quarter


Year2005Revenues

$
46,467


$
50,161


$
56,781


$
55,767


$
209,176Net income


7,155



6,955



8,248



7,922



30,280Net income per
    share  basic(1)


0.40



0.37



0.43



0.42



1.62Net income per
    share  diluted(1)


0.39



0.36



0.43



0.41



1.60   1st


2nd


3rd


4th


TotalQuarter


Quarter


Quarter


Quarter


Year2004Revenues

$
35,898


$
43,407


$
44,083


$
45,761


$
169,149Net income


4,983



6,411



4,721



6,653



22,768Net income per
    share  basic(1)


0.33



0.43



0.31



0.43



1.50Net income per
    share  diluted(1)


0.32



0.42



0.31



0.42



1.47     (1)
    
    Earnings per share are computed independently for each quarter
    and the full year based upon respective average shares
    outstanding. Therefore, the sum of quarterly earnings per share
    amounts may not equal the annual amounts reported.  Form 10-Qs, Form 10-K
 71




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    18.
    Subsequent
    Event       72




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##### Table of Contents



ITEM 9
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure    ITEM 9A
    Controls
    and Procedures  Please refer to Forward-Looking Statements
    following the Index in the front of this
    Form 10-K.
  Rules 13a-15(e) 15d-15(e) Rule 13a-15)
  Form 10-Q Form S-1, Form 10-K.
      ITEM 9B
    Other
    Information   PART III    ITEM 10
    Directors
    and Executive Officers of the Registrant   73




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##### Table of Contents



ITEM 11
    Executive
    Compensation  ITEM 12
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters  ITEM 13
    Certain
    Relationships and Related Transactions  ITEM 14
    Principal
    Accountant Fees and Services PART IV  ITEM 15
    Exhibits
    and Financial Statement Schedules        Index to Financial Statement
    Schedules

PageSchedule I

Summary of Investments (2)Schedule II

Condensed Financial Information of
    Parent Company

76-78Schedule III

Supplementary Insurance Information

79Schedule IV

Reinsurance (3)Schedule V

Valuation and Qualifying Accounts

80Schedule VI

Supplementary Information
    Concerning Property-Casualty Insurance Operations (7)     Number

Description

Filing Basis3
.1

Amended and Restated Articles of
    Incorporation


(1)3
.2

Amended and Restated Code of
    Regulations


(1)10
.1

Long Term Incentive Plan


(1)10
.2

Deferred compensation Plan


(1)10
.3

Underwriting Management Agreement
    dated November 1, 1989, as amended, among National
    Interstate Insurance Agency, Inc., Great American Insurance
    Company, Agricultural Insurance Company, American Alliance
    Insurance Company, and American National Fire Insur


(1)10
.4

Registration Rights Agreement
    effective February 2, 2005 among National Interstate
    Corporation, Alan Spachman and Great American Insurance Company


(1)10
.5

Amended and Restated Declaration
    of Trust of National Interstate Capital Trust I dated as of
    May 22, 2003


(1)10
.6

Indenture dated as of May 22,
    2003 with National Interstate Corporation as Issuer and
    Wilmington Trust Company as Trustee


(1)10
.7

Promissory Note dated
    June 23, 2004 to Great American Insurance Company from
    National Interstate Corporation


(1)10
.8

Agreement of Reinsurance No. 0012
    dated November 1, 1989 between National Interstate
    Insurance Company and Great American Insurance Company


(1)10
.9

Promissory Note dated
    December 31, 1998 to National Interstate Corporation from
    Alan R. Spachman


(1)10
.1

Term Loan Agreement dated
    August 28, 2002 between KeyBank National Association and
    National Interstate Corporation


(1)10
.11

Master Demand Promissory Note
    dated August 28, 2002 to KeyBank National Association from
    National Interstate Corporation


(1) 74




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##### Table of Contents



Number

Description

Filing Basis10
.12

Stock Purchase Agreement between
    Triumphe Insurance Holdings LLC and National Interstate
    Insurance Company, date as of September 30, 2005


(5)10
.13

Employee Retention Agreement dated
    January 1, 1997, as amended February 8, 2006


(6)14
.1

Code of Ethics and Conduct


(4)21
.1

List of subsidiaries23
.1

Consent of Ernst & Young
    LLP24
.1

Power of attorney31
.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
    (Registration
    No. 333-119270)(2)
    
    This information is contained in Notes to Consolidated
    Financial Statements at Note Four
    Investments(3)
    
    This information is contained in Notes to Consolidated
    Financial Statements at Note Seven Premiums,
    Reinsurance and Transactions with Related Parties(4)
    
    This exhibit is incorporated by reference to our 2004
    Form 10-K
    filed March 28, 2005(5)
    
    This exhibit is incorporated by reference to our
    Form 10-Q
    filed November 11, 2005(6)
    
    This exhibit is incorporated by reference to our
    Form 8-K
    filed February 13, 2006(7)
    
    This information is contained in Notes to Consolidated
    Financial Statements at Note Eight Unpaid Losses and
    Loss Adjustment Expenses 75




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  SCHEDULE II  CONDENSED
    FINANCIAL INFORMATION OF PARENT COMPANY
 CONDENSED
    BALANCE SHEETS
  December 31,2005


2004(Dollars in thousands,except share data)ASSETSInvestment in subsidiaries

$
131,950


$
103,540Investments:Fixed maturities
    available-for-sale,
    at fair value (cost of $18,914 and $0, respectively)


18,621



Equities
    available-for-sale,
    at fair value (cost of $2,509 and $0, respectively)


2,518



Short-term investments, at cost
    which approximates fair value


1,150



Total investments


22,289



Receivable from subsidiary


4,850



3,360Cash


836



4Property and
    equipment  net


801



991Other assets


695



1,749Total assets

$
161,421


$
109,644LIABILITIES AND
    SHAREHOLDERS EQUITYLiabilitiesDebt

$
16,297


$
32,547Other liabilities


5,591



4,308Total liabilities


21,888



36,855Shareholders equityPreferred
    shares  no par valueAuthorized  10,000,000 sharesIssued  0 shares






Common shares  
    $.01 par valueAuthorized  50,000,000 sharesIssued  23,350,0000
    and 20,000,000 shares, including 4,294,800 and
    4,470,400 shares, respectively in treasury


234



200Additional paid-in capital


42,257



1,264Retained earnings


105,826



77,102Accumulated other comprehensive
    (loss) income


(2,712
)


539Treasury shares


(6,072
)


(6,316
)Total shareholders equity


139,533



72,789Total liabilities and
    shareholders equity

$
161,421


$
109,644  76




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  SCHEDULE II  CONDENSED
    FINANCIAL INFORMATION OF PARENT COMPANY
 CONDENSED
    STATEMENTS OF INCOME
  For Years Ended
    December 312005


2004


2003(In thousands)Revenues:Fees from subsidiaries

$
11,106


$
8,334


$
8,373Investment income


930



4



5Realized gains on investments


16







Other










2Total revenues


12,052



8,338



8,380Expenses:General and administrative expenses


11,178



8,195



3,142Interest expense


1,421



1,610



716Total expenses


12,599



9,805



3,858(Loss) income before income taxes
    and equity in undistributed income of subsidiaries


(547
)


(1,467
)


4,522Provision for income taxes


(191
)


(221
)


(Loss) income before equity in
    undistributed income of subsidiaries


(356
)


(1,246
)


4,522Equity in undistributed income of
    subsidiaries, net of tax


30,636



24,014



15,322Net income

$
30,280


$
22,768


$
19,844  77




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  SCHEDULE II  CONDENSED
    FINANCIAL INFORMATION OF PARENT COMPANY
 CONDENSED
    STATEMENTS OF CASH FLOWS
   For Years Ended
    December 312005


2004


2003(In thousands)Operating ActivitiesNet income

$
30,280


$
22,768


$
19,844Adjustments to reconcile net
    income to cash provided by (used in) operating activities


(29,368
)


(23,766
)


(25,978
)Net cash provided by (used in)
    operating activities


912



(998
)


(6,134
)Investing ActivitiesCapital contributions to
    subsidiaries






(15,000
)


(9,965
)Distributions from subsidiaries






2,100



5,105Purchases of investments


(27,810
)






Proceeds from sale or maturity of
    investments


5,213







Purchases of property and equipment


(338
)


(480
)


(529
)Net cash used in investing
    activities


(22,935
)


(13,380
)


(5,389
)Financing ActivitiesProceeds from issuance of common
    shares


40,391







Proceeds from long-term debt










15,464(Repayment) proceeds of note
    payable to affiliate


(15,000
)


15,000



Repayment of long-term debt


(1,250
)


(1,354
)


(3,146
)Issuance (purchase) of common
    shares from treasury upon exercise of stock options


254



525



(128
)Cash dividends paid on common
    shares


(1,540
)






Deferred financing costs










(456
)Net cash provided by financing
    activities


22,855



14,171



11,734Net increase (decrease) in cash


832



(207
)


211Cash at beginning of year


4



211



Cash at end of year

$
836


$
4


$
211  78




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  SCHEDULE III  SUPPLEMENTARY
    INSURANCE INFORMATION
  Liability ForUnpaid














AmortizationDeferred


Losses and











Losses and


of DeferredPolicy


Loss








Net


Loss


Policy


Other


NetAcquisition


Adjustment


Unearned


Earned


Investment


Adjustment


Acquisition


Underwriting


PremiumsCosts


Expenses


Premiums


Premiums


Income


Expenses


Costs


Expenses


Written(In thousands)Year ended December 31, 2005

$
11,711


$
223,207


$
98,661


$
194,397


$
12,527


$
117,449


$
33,455


$
2,286


$
211,106Year ended December 31, 2004


11,606



171,031



80,928



156,908



8,613



92,008



31,811



2,390



166,419Year ended December 31, 2003


10,720



128,726



69,708



126,364



5,772



68,798



27,610



2,428



141,924  79




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  SCHEDULE V  VALUATION
    AND QUALIFYING ACCOUNTS
  AdditionsBalance at





Charged to





Balance atBeginning


Charged/(Credited)


Other





End ofof Period


to Expenses


Accounts


Deductions (1)


Period(In thousands)Year ended December 31,
    2005Premiums in course of collection

$
361


$
635


$



$
416


$
580Year ended December 31,
    2004Premiums in course of collection


424











63



361Year ended December 31,
    2003Premiums in course of collection


476











52



424     (1)
    
    Deductions include write-offs of amounts determined to be
    uncollectible. 80




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##### Table of Contents



SIGNATURES       By:
    /s/  ALAN
    R. SPACHMAN    Title:
    Chairman of the Board and President      Signature

Title

Date/s/  ALAN R. SPACHMANAlan
    R. Spachman

Chairman of the Board and
    President
    (Principal Executive Officer)

March 21, 2006/s/  JULIE A. MCGRAWJulie
    A. McGraw

Vice President and Chief Financial
    Officer (Principal Financial and Accounting Officer)

March 21, 2006/s/  DONALD D.
    LARSON*Donald
    D. Larson

Director

March 21, 2006/s/  KEITH A. JENSEN*Keith
    A. Jensen

Director

March 21, 2006/s/  JAMES C.
    KENNEDY*James
    C. Kennedy

Director

March 21, 2006/s/  GARY J. GRUBER*Gary
    J. Gruber

Director

March 21, 2006/s/  JOEL SCHIAVONE*Joel
    Schiavone

Director

March 21, 2006/s/  THEODORE H.
    ELLIOTT, JR.*Theodore
    H. Elliott, Jr.

Director

March 21, 2006/s/  K. BRENT SOMERS*K.
    Brent Somers

Director

March 21, 2006* By

Paul F. Haffner,
    attorney-in-fact  81