##### Table of Contents



UNITED
    STATES SECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2006
  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:
  Name of Exchange onTitle of each class

Which registeredCommon Shares, $0.01 par
    value

Nasdaq Global Market   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  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 þ o
  Rule 12b-2 o þ
          Documents
    Incorporated by Reference:




---



##### 



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



Business:


4Introduction


4Property and
    Casualty Insurance Operations


4Investments


12Competition


15Ratings


15Regulation


15Employees


18Item 1A



Risk
    Factors


18Item 1B



Unresolved Staff
    Comments


25Item 2



Properties


26Item 3



Legal
    Proceedings


26Item 4



Submission of
    Matters to a Vote of Security Holders


26Part IIItem 5



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


27Item 6



Selected Financial
    Data


29Item 7



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


31Item 7A



Quantitative and
    Qualitative Disclosures About Market Risk


48Item 8



Financial
    Statements and Supplementary Data


49Item 9



Changes and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


75Item 9A



Controls and
    Procedures


75Item 9B



Other
    Information


75Part IIIItem 10



Directors,
    Executive Officers and Corporate Governance


77Item 11



Executive
    Compensation


77Item 12



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


77Item 13



Certain
    Relationships and Related Transactions, and Director
    Independence


77Item 14



Principal
    Accountant Fees and Services


77Part IVItem 15



Exhibits and
    Financial Statement Schedules


77Signatures


85EX-10.15EX-10.16EX-10.17EX-10.18EX-21.1EX-23.1EX-24.1EX-31.1EX-31.2EX-32.1EX-32.2   2




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##### 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 31,2006


2005


2004Amount


Percent


Amount


Percent


Amount


Percent(Dollars in thousands)Alternative Risk Transfer

$
135,283



44.3
%

$
103,537



38.4
%

$
72,001



32.0
%Transportation


89,399



29.3
%


90,751



33.6
%


89,849



39.9
%Specialty Personal Lines


52,060



17.0
%


45,935



17.0
%


37,059



16.5
%Hawaii and Alaska


23,267



7.6
%


22,486



8.3
%


21,812



9.7
%Other


5,495



1.8
%


7,327



2.7
%


4,263



1.9
%Gross premiums written

$
305,504



100.0
%

$
270,036



100.0
%

$
224,984



100.0
%  5




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##### Table of Contents



Premium Range

Annual Premium AverageTransportation


$5,000
-1,000,000


$63,000Alternative Risk Transfer


$100,000
-9,000,000


$620,000Specialty Personal Lines


$50
-20,000


$900Hawaii 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 31,2006


2005Percent of





Percent ofVolume


Total


Volume


Total(Dollars in thousands)California

$
58,622



19.9
%

$
37,833



14.9
%Hawaii


24,340



8.3
%


24,076



9.5
%Florida


18,128



6.2
%


15,982



6.3
%North Carolina


18,046



6.1
%


19,441



7.6
%Texas


17,293



5.9
%


13,021



5.1
%All other states


157,600



53.6
%


144,235



56.6
%Direct premiums written

$
294,029



100.0
%

$
254,588



100.0
%   Concentration
    by Statutory Line of Business
    Year Ended December 31,2006


2005Percent of





Percent ofVolume


Total


Volume


Total(Dollars in thousands)Auto and other liability

$
181,195



61.6
%

$
155,019



60.9
%Auto physical damage


64,945



22.1
%


56,254



22.1
%Workers compensation


41,411



14.1
%


37,881



14.9
%Other lines:Allied lines


80



0.0
%


460



0.2
%Commercial multiple peril


1,159



0.4
%


1,163



0.4
%Ocean marine


978



0.3
%


640



0.3
%Inland marine


4,251



1.5
%


3,098



1.2
%Surety


10



0.0
%


73



0.0
%All others


6,478



2.2
%


5,434



2.1
%Direct premiums written

$
294,029



100.0
%

$
254,588



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 UnderwritersReinsurance, Inc.


A


$
28,882


$
5,398


$
34,280



30.8
%

$
15,655



24.6
%Motors Ins Corp


A−



11,446



4,622



16,068



14.4
%


11,424



18.0
%TRAX Insurance Ltd.






9,672



999
(1)


10,671



9.6
%


11,681



18.4
%Berkley Insurance Company


A



8,696



833



9,529



8.5
%


2,748



4.3
%Great American Insurance Company


A



6,853



1,351



8,204



7.4
%


3,793



6.0
%General Reinsurance


A++



5,217



1,353



6,570



5.9
%


2,697



4.2
%Subtotal






70,766



14,556



85,322



76.6
%


47,998



75.5
%All other reinsurers






19,304



6,716



26,020



23.4
%


15,590



24.5
%Total





$
90,070


$
21,272


$
111,342



100.0
%

$
63,588



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
   10




---



##### Table of Contents



Reserves
    for Unpaid Losses and Loss Adjustment Expenses
    (LAE)
      Liability for Unpaid Losses and Loss Adjustment
    Expenses  As re-estimated at December 31,
    2006, shows the re-estimated liability as of
    December 31, 2006.
  Net Liability for Unpaid Losses and Loss Adjustment
    Expenses:

1996


1997


1998


1999


2000


2001


2002


2003


2004


2005


2006(Dollars in thousands)As originally estimated

$
19,691


$
20,997


$
23,339


$
26,566


$
30,292


$
48,456


$
67,162


$
86,740


$
111,644


$
151,444


$
181,851As re-estimated at
    December 31, 2006


16,845



19,254



21,150



25,364



31,757



46,962



62,564



81,991



103,416



143,991Liability re-estimated as
    of:One year later


18,563



19,817



22,643



24,923



32,751



48,494



63,462



84,485



106,409



143,991Two years later


17,520



19,448



21,948



26,252



33,473



47,479



64,687



83,862



103,416Three years later


16,632



18,896



21,903



26,380



31,884



47,250



63,037



81,991Four years later


16,323



19,258



21,608



25,531



31,488



46,400



62,564Five years later


16,446



18,966



20,542



25,138



31,590



46,962Six years later


16,666



18,957



21,008



24,989



31,757Seven years later


16,682



19,064



21,051



25,364Eight years later


16,673



19,146



21,150Nine years later


16,733



19,254Ten years later


16,845Net cumulative (deficiency)
    redundancy


2,846



1,743



2,189



1,202



(1,465
)


1,494



4,598



4,749



8,228



7,453Net cumulative (deficiency)
    redundancy  %


14.5
%


8.3
%


9.4
%


4.5
%


−4.8
%


3.1
%


6.8
%


5.5
%


7.4
%


4.9
%Cumulative paid of:One year later


6,583



7,268



8,742



10,307



14,924



18,048



22,792



29,616



37,049



51,901Two years later


10,605



11,769



14,189



17,637



20,077



28,510



36,927



48,672



59,038Three years later


12,931



14,980



18,170



20,157



24,313



35,718



48,660



61,001Four years later


14,653



17,543



19,115



22,383



26,869



40,615



53,531Five years later


15,642



18,253



20,158



23,413



28,591



43,474Six years later


16,088



18,573



20,537



24,033



30,180Seven years later


16,347



18,815



20,812



24,594Eight years later


16,481



18,999



20,913Nine years later


16,639



19,082Ten years later


16,715  11




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##### Table of Contents



1996


1997


1998


1999


2000


2001


2002


2003


2004


2005


2006(Dollars in thousands)As originally
    estimated:Net liability shown above

$
19,691


$
20,997


$
23,339


$
26,566


$
30,292


$
48,456


$
67,162


$
86,740


$
111,644


$
151,444


$
181,851Add reinsurance recoverables


4,786



6,729



9,519



11,396



12,416



22,395



35,048



41,986



59,387



71,763



84,115Gross liability

$
24,477


$
27,726


$
32,858


$
37,962


$
42,708


$
70,851


$
102,210


$
128,726


$
171,031


$
223,207


$
265,966As re-estimated at
    December 31, 2006Net liability shown above

$
16,845


$
19,254


$
21,150


$
25,364


$
31,757


$
46,962


$
62,564


$
81,991


$
103,416


$
143,991



N/AAdd reinsurance recoverables
    reestimated


2,335



5,478



4,918



6,715



12,749



33,682



47,188



55,271



64,816



75,866



N/AGross liability

$
19,180


$
24,732


$
26,068


$
32,079


$
44,506


$
80,644


$
109,752


$
137,262


$
168,232


$
219,857



N/AGross cumulative (deficiency)
    redundancy

$
5,297


$
2,994


$
6,790


$
5,883


$
(1,798
)

$
(9,793
)

$
(7,542
)

$
(8,536
)

$
2,799


$
3,350



N/AGross cumulative (deficiency)
    redundancy  %


21.6
%


10.8
%


20.7
%


15.5
%


−4.2
%


−13.8
%


−7.4
%


−6.6
%


1.6
%


1.5
%


N/A      Investments  General
   12




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##### Table of Contents



At December 31,2006


2005Cash and cash equivalents


5.5
%


2.3
%Short term investments


5.6
%


2.5
%Fixed maturities:US Government and government
    agencies


54.3
%


58.5
%State and local government
    obligations


10.8
%


13.5
%Corporate obligations


15.4
%


13.1
%Total fixed maturities


80.5
%


85.1
%Equity securities:Common stocks


3.0
%


4.0
%Preferred stocks


5.4
%


6.1
%Total equity securities


8.4
%


10.1
%Total


100.0
%


100.0
%   Year Ended December 31,2006


2005


2004Yield on fixed maturities:Excluding realized gains and losses


4.7
%


4.4
%


4.7
%Including realized gains and losses


4.7
%


4.4
%


5.2
%Yield on equity securities:Excluding realized gains and losses


4.3
%


4.3
%


4.5
%Including realized gains and losses


7.8
%


5.4
%


9.5
%Yield on all investments:Excluding realized gains and losses


4.6
%


4.4
%


4.7
%Including realized gains and losses


5.0
%


4.5
%


5.6
%     13




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##### Table of Contents



Year Ended December 31,2006


2005


2004Fixed maturities:National Interstate Total Return
    on Fixed Maturities


4.8
%


2.5
%


5.1
%Merrill Lynch
    U.S. Treasuries, 3-5 Yrs


3.6
%


0.9
%


2.1
%Merrill Lynch U.S. Agencies,
    3-5 Yrs


4.6
%


1.1
%


2.7
%Merrill Lynch U.S. Corporate,
    A-AAA Rated, 3-5 Yrs


4.6
%


1.3
%


3.0
%Merrill Lynch U.S. Corporate,
    BBB-A Rated, 3-5 Yrs


4.9
%


0.7
%


3.6
%Equity securities:National Interstate Total Return
    on Equity Securities


10.7
%


5.1
%


5.9
%Merrill Lynch Preferred Stock
    Index, Perpetuals


8.4
%


3.3
%


4.5
%Standard & Poors
    500 Index


15.8
%


4.9
%


10.9
%   Fixed
    Maturity Investments
    NAICDesignation


Comparable S&P Rating

Amortized Cost


Fair Value


% of Total(Dollars in thousands)1


AAA, AA, A

$
316,253


$
311,331



95.1
%2


BBB


13,143



12,918



4.0
%Total Investment Grade


329,396



324,249



99.1
%3


BB


2,598



2,670



0.8
%4


B


505



475



0.1
%5,6


CCC, CC, C, D


53



55



0.0
%Total Non-Investment
    Grade


3,156



3,200



0.9
%Total

$
332,552


$
327,449



100.0
%     December 31, 2006


December 31, 2005Fair Value


% of Total


Fair Value


% of Total(Dollars in thousands)One year or less

$
26,446



8.1
%

$
6,269



2.3
%More than one year to five years


159,796



48.8
%


116,784



42.8
%More than five years to ten years


115,981



35.4
%


119,288



43.8
%More than ten years


25,226



7.7
%


30,237



11.1
%Total fixed maturities

$
327,449



100.0
%

$
272,578



100.0
%    14




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##### Table of Contents



Competition     Ratings   Regulation  State
    Regulation
  General
   15




---



##### Table of Contents



Statutory
    Accounting Principles
      Restrictions
    on Paying Dividends
     16




---



##### Table of Contents



Assessments
    and Fees Payable
    Risk-Based
    Capital (RBC) Requirements
    Restrictions
    on Cancellation, Non-Renewal or Withdrawal
    Federal
    Regulation
  General
    The
    Terrorism Risk Insurance Act
       17




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##### Table of Contents



Employees    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




---



##### 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



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




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##### Table of Contents



We may
    not be successful in executing our business plan for our US
    Virgin Islands servicing operations.
    Our
    inability to retain our senior executives and other key
    personnel could adversely affect our business.
    Your
    interests as a holder of our common shares may be different than
    the interests of our majority shareholder, Great American
    Insurance Company.
     23




---



##### Table of Contents



We may
    have conflicts of interest with our majority shareholder, Great
    American Insurance Company, that we are unable to resolve in our
    favor.
      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.     24




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##### Table of Contents



Future
    sales of our common shares may affect the trading price of our
    common shares.
    Form S-3. 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   25




---



##### Table of Contents



ITEM 2
    Properties      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   26




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##### Table of Contents



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
    2006


2005High


Low


High


LowFirst Quarter(1)

$
23.57


$
19.00


$
19.15


$
13.50Second Quarter


31.50



18.62



21.64



14.75Third Quarter


29.05



22.13



20.24



15.61Fourth Quarter


29.98



22.10



21.45



13.91     (1)
    
    First quarter 2005 data represents the period from
    January 28, 2005 to March 31, 2005.    Dividend
    Policy
       27




---



##### Table of Contents



Performance
    Graph
    
  Cumulative
    Total Return as of December 31, 2006
    (assumes a $100 investment at the close of trading on
    January 27, 2005)
  Company/Index

1/28/05


3/31/05


6/30/05


9/30/05


12/31/05


3/31/06


6/30/06


9/30/06


12/31/06NATL Common Stock

$
100


$
124


$
147


$
128


$
142


$
162


$
202


$
184


$
182Nasdaq Insurance Stocks


100



103



108



112



117



119



121



126



132Nasdaq Index


100



98



101



106



109



106



99



103



110  28




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##### Table of Contents



ITEM 6
    Selected
    Financial Data  Form 10-K
  At and for the Year Ended December 31,2006


2005


2004


2003


2002(In thousands, except per share data)Operating Data:Gross premiums written(1)

$
305,504


$
270,036


$
224,984


$
187,561


$
121,747Net premiums written(2)

$
241,916


$
211,106


$
166,419


$
141,924


$
93,516Premiums earned

$
217,319


$
194,397


$
156,908


$
126,364


$
87,356Net investment income


17,579



12,527



8,613



5,772



4,513Net realized gains (losses)


1,193



278



1,661



1,529



(386
)Other income


2,387



1,974



1,967



2,211



3,367Total revenues


238,478



209,176



169,149



135,876



94,850Losses and loss adjustment expenses


129,491



117,449



92,008



68,798



55,049Commissions and other underwriting
    expense


42,671



35,741



34,201



30,038



24,156Other operating and general
    expenses


11,619



9,428



6,888



4,893



3,928Interest expense


1,522



1,421



1,610



1,043



193Total expenses


185,303



164,039



134,707



104,772



83,326Income before income taxes


53,175



45,137



34,442



31,104



11,524Provision for income taxes


17,475



14,857



11,674



11,260



3,236Net income

$
35,700


$
30,280


$
22,768


$
19,844


$
8,288Selected
    GAAP Ratios:Losses and loss adjustment expense
    ratio(3)


59.6
%


60.4
%


58.6
%


54.4
%


63.0
%Underwriting expense ratio(4)


23.9
%


22.2
%


24.9
%


25.9
%


28.3
%Combined ratio(5)


83.5
%


82.6
%


83.5
%


80.3
%


91.3
%Return on equity(6)


22.8
%


28.5
%


37.2
%


49.9
%


31.2
%Per Share Data(7):Earnings per common share, basic

$
1.87


$
1.62


$
1.50


$
1.32


$
0.49Earnings per common share,
    assuming dilution


1.85



1.60



1.47



1.29



0.49Book value per common share, basic
    (at period end)

$
9.07


$
7.32


$
4.69


$
3.31


$
1.99Weighted average number of common
    shares outstanding, basic


19,136



18,737



15,171



15,057



16,805Weighted average number of common
    shares outstanding, diluted


19,302



18,975



15,480



15,347



16,949Common shares outstanding (at
    period end)


19,159



19,055



15,530



15,024



15,074Cash dividends per common share

$
0.16


$
0.08


$



$



$
   29




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##### Table of Contents



At December 31,2006


2005


2004


2003


2002Balance Sheet Data:Cash and investments

$
406,454


$
320,220


$
238,951


$
167,622


$
110,454Reinsurance recoverable


90,070



77,834



63,128



43,119



37,732Total assets


806,248



523,003



401,236



300,656



210,369Unpaid losses and loss adjustment
    expenses


265,966



223,207



171,031



128,726



102,210Long-term debt(8)


15,464



16,297



32,547



18,901



6,583Total shareholders equity


173,763



139,533



72,789



49,680



29,932   At and for the Year Ended December 31,2006


2005


2004


2003


2002Selected Statutory
    Data(9):Policyholder surplus(10)

$
148,266


$
122,825


$
92,124


$
58,621


$
36,944Combined ratio(11)


82.4
%


77.1
%


81.3
%


81.7
%


90.8
%     (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 LAE 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 LAE 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 a $15.0 million note payable to
    Great American, junior subordinated debt and bank debt.(9)
    
    While financial data is reported in accordance with 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 subsidiaries, NIIC-HI and
    TCC.(11)
    
    Statutory combined ratio of NIIC represents the sum of the
    following ratios: (1) losses and LAE incurred as a
    percentage of net earned premium and (2) underwriting
    expenses incurred as a percentage of net written premiums. 30




---



##### Table of Contents



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 our historical
    consolidated financial statements should be read in conjunction
    with our audited consolidated financial statements and the
    related notes included elsewhere in this
    Form 10-K.
  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. 31




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##### Table of Contents



Quotes
  
    The change in the percentage of the new applications received
    that do not receive a quote from us. 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.  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; 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 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
  1999-2000).
    
    Our business model and bottom line orientation have resulted in
    disciplined and consistent risk assessment and pricing adequacy. 32




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##### Table of Contents




    Our ability to attract and retain some of the best
    transportation companies in the industries we serve into our
    captive programs.
    Our stable operating expenses at or below the revenue growth
    rate.          Revenues
     33




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##### Table of Contents



Expenses
   34




---



##### Table of Contents



Results
    of Operations
  Overview
    Gross
    Premiums Written
    Year Ended December 31,2006


2005


2004Amount


Percent


Amount


Percent


Amount


Percent(Dollars in thousands)Alternative Risk Transfer

$
135,283



44.3
%

$
103,537



38.4
%

$
72,001



32.0
%Transportation


89,399



29.3
%


90,751



33.6
%


89,849



39.9
%Specialty Personal Lines


52,060



17.0
%


45,935



17.0
%


37,059



16.5
%Hawaii and Alaska


23,267



7.6
%


22,486



8.3
%


21,812



9.7
%Other


5,495



1.8
%


7,327



2.7
%


4,263



1.9
%Gross premiums written

$
305,504



100.0
%

$
270,036



100.0
%

$
224,984



100.0
%       year-over-year
 35




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##### Table of Contents



Premiums
    Earned
  2006 compared to 2005.
  Year Ended December 31,


ChangeRevenue:

2006


2005


Amount


Percent(Dollars in thousands)Premiums earned:Alternative Risk Transfer

$
75,712


$
60,223


$
15,489



25.7
%Transportation


71,682



70,502



1,180



1.7
%Specialty Personal Lines


46,445



38,561



7,884



20.4
%Hawaii and Alaska


15,257



14,855



402



2.7
%Other


8,223



10,256



(2,033
)


(19.8
)%Total premiums earned

$
217,319


$
194,397


$
22,922



11.8
%    36




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##### Table of Contents



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
%     Underwriting
    and Loss Ratio Analysis
     37




---



##### Table of Contents



Year Ended December 31,2006


2005


2004(Dollars in thousands)Gross premiums written

$
305,504


$
270,036


$
224,984Ceded reinsurance


(63,588
)


(58,930
)


(58,565
)Net premiums written


241,916



211,106



166,419Change in unearned premiums, net
    of ceded


(24,597
)


(16,709
)


(9,511
)Net premiums earned

$
217,319


$
194,397


$
156,908Combined Ratios:Loss and LAE ratio(1)


59.6
%


60.4
%


58.6
%Underwriting expense ratio(2)


23.9
%


22.2
%


24.9
%Combined ratio


83.5
%


82.6
%


83.5
%     (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.  2006 compared to 2005.
      2005 compared to 2004.
 38




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##### Table of Contents



Investment
    Income
  2006 compared to 2005.
  2005 compared to 2004.
  Realized
    Gains (Losses) on Investments
  2006 compared to 2005. other-than-temporary
  2005 compared to 2004. other-than-temporary
 39




---



##### Table of Contents



Other
    Operating and General Expenses
  2006 compared to 2005.
  2005 compared to 2004.
  Income
    Taxes
    Financial
    Condition
  Investments
        Securities with


Securities withUnrealized


UnrealizedGains


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

$
76,229


$
251,220Amortized cost of securities


75,505



257,047Gross unrealized gain or loss

$
724


$
(5,827
)Fair value as a % of amortized cost


101.0
%


97.7
%Number of security positions held


123



239Number individually exceeding
    $50,000 gain or loss


3



24Concentration of gains or losses
    by type or industry:US Government and government
    agencies

$
265


$
(3,691
)State, municipalities and
    political subdivisions


160



(297
)Banks, insurance and brokers


284



(1,218
)Telephone communications






(80
)Industrial and other

$
15


$
(541
)Percentage rated investment
    grade(1)


98.6
%


99.2
%Equity Securities:Fair value of securities

$
26,208


$
7,887Cost of securities


25,463



8,013Gross unrealized gain or loss

$
745


$
(126
)Fair value as a % of cost


102.9
%


98.4
%Number individually exceeding
    $50,000 gain or loss


2



     (1)
    
    Investment grade of AAA to BBB by Standard &
    Poors Corporation. 40




---



##### Table of Contents



Securities with


Securities withUnrealized


UnrealizedGains


LossesMaturity:One year or less


6.0
%


8.7
%After one year through five years


57.1
%


46.3
%After five years through ten years


29.8
%


37.1
%After ten years


7.1
%


7.9
%100.0
%


100.0
%     At December 31, 2006Aggregate


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 ( 3 issues)

$
2,030


$
258



114.6
%More than one year ( 0 issues)






Less than $50,000 ( 120 issues)


74,199



466



100.6
%$
76,229


$
724Securities with unrealized
    losses:Exceeding $50,000 and for:Less than one year ( 12 issues)

$
17,663


$
(1,000
)


94.6
%More than one year ( 12 issues)


23,646



(2,300
)


91.1
%Less than $50,000 ( 215 issues)


209,911



(2,527
)


98.8
%$
251,220


$
(5,827
)Equity Securities:Securities with unrealized
    gains:Exceeding $50,000 and for:Less than one year ( 1 issues)

$
301


$
78



135.0
%More than one year ( 1 issues)


78



52



300.0
%Less than $50,000 ( 61 issues)


25,829



615



102.4
%$
26,208


$
745Securities with unrealized
    losses:Exceeding $50,000 and for:Less than one year ( 0 issues)

$



$
More than one year ( 0 issues)






Less than $50,000 ( 18 issues)


7,887



(126
)


98.4
%$
7,887


$
(126
)  41




---



##### Table of Contents



Other-Than-Temporary
  other-than-temporary
  Net RealizedGains (Losses)


Charges foron Sales


Impairment


Total(Dollars in thousands)Year ended:2006

$
1,193


$



$
1,1932005


555



(277
)


2782004


1,661







1,661   Liquidity
    and Capital Resources
  Capital Ratios.
  Sources of Funds.
     42




---



##### Table of Contents



12-month
   43




---



##### Table of Contents



Off-Balance Sheet Items.
  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)

$
265,966


$
107,607


$
109,199


$
36,981


$
12,179Long-term debt obligations


15,464















15,464Operating lease obligations


653



245



206



118



84Total

$
282,083


$
107,852


$
109,405


$
37,099


$
27,727     (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 Reserves
      
    the Case Incurred Development Method;
    the Paid Development Method; 44




---



##### 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

$
1.7 millionWorkers Compensation

$
0.3 million   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.   45




---



##### Table of Contents



46




---



##### Table of Contents



Gross
    Loss Reserves
  At December 31, 2006Statutory Lines of Business:

Case


IBNR


LAE


Total(Dollars in thousands)Commercial auto liability

$
61,777


$
86,661


$
34,696


$
183,134Workers compensation


10,668



33,199



5,198



49,065Auto physical damage


7,761



6,002



2,362



16,125General liability


2,493



3,416



1,601



7,510Private passenger


3,874



1,335



959



6,168Inland marine


514



1,896



168



2,578Commercial multiple peril


672



229



207



1,108Other lines


100



158



20



278$
87,859


$
132,896


$
45,211


$
265,966   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 47




---



##### Table of Contents




    other subjective factors, including concentrations and
    information obtained from regulators and rating agencies.  other-than-temporary other-than-temporarily other-than-temporary
  ITEM 7A
    Quantitative
    and Qualitative Disclosures About Market Risk    Fixed Maturity Portfolio. step-up
    December 31, 2006


December 31, 2005Principal





PrincipalCash Flows


Rate


Cash Flows


Rate(Dollars in thousands)Subsequent calendar year

$
54,614



4.8
%

$
24,184



4.9
%2nd Subsequent calendar year


42,741



4.8
%


25,285



4.4
%3rd Subsequent calendar year


37,812



4.8
%


26,373



4.4
%4th Subsequent calendar year


35,615



4.4
%


27,215



4.6
%5th Subsequent calendar year


28,628



5.1
%


37,732



4.5
%Thereafter


131,561



4.8
%


134,064



4.8
%Total

$
330,971



4.8
%

$
274,853



4.7
%Fair value

$
327,449






$
272,578   Equity Risk.
 48




---



##### Table of Contents



ITEM 8
    Financial
    Statements and Supplementary Data  PageIndex to Financial
    StatementsManagements
    Report on Internal Control Over Financial Reporting


50Reports of
    Independent Registered Public Accounting Firm


51-52Consolidated
    Balance Sheets:December 31, 2006 and 2005


53Consolidated
    Statements of Income:Years ended December 31,
    2006, 2005 and 2004


54Consolidated
    Statements of Shareholders Equity:Years ended December 31,
    2006, 2005 and 2004


55Consolidated
    Statements of Cash Flows:Years ended December 31,
    2006, 2005 and 2004


56Notes to
    Consolidated Financial Statements


57    49




---



##### Table of Contents



MANAGEMENTS
    REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING     
    Pertain to the maintenance of records that in reasonable detail
    accurately and fairly reflect the transactions and dispositions
    of the assets of the Company;
    Provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with generally accepted accounting principles, and
    that receipts and expenditures of the Company are being made
    only in accordance with authorizations of management and
    directors of the Company; and
    Provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use or disposition of the
    Companys assets that could have a material effect on the
    financial statements.  Internal Control  Integrated Framework,
    /s/  Alan
    R.
    SpachmanAlan
    R. Spachman

/s/  Julie
    A.
    McGrawJulie
    A. McGrawChairman and Chief Executive
    Officer

Vice President and Chief Financial
    Officer  50




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM             Internal Control 
    Integrated Framework
  
    51




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 ON INTERNAL CONTROL OVER FINANCIAL REPORTING
     Internal Control  Integrated Framework
            
    52




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
    BALANCE SHEETS  December 31,2006


2005(In thousands, except per share data)ASSETSInvestments:Fixed maturities
    available-for-sale,
    at fair value (amortized cost  $332,552 and

$
327,449


$
272,578$276,929, respectively)Equity securities
    available-for-sale,
    at fair value (cost  $33,476 and $32,017,
    respectively)


34,095



32,196Short-term investments, at cost
    which approximates fair value


22,744



7,985Total investments


384,288



312,759Cash and cash equivalents


22,166



7,461Securities lending collateral


158,928



Accrued investment income


4,321



3,172Premiums receivable, net of
    allowance for doubtful accounts of $522 and $580, respectively


77,076



53,589Reinsurance recoverables on paid
    and unpaid losses


90,070



77,834Prepaid reinsurance premiums


21,272



17,216Deferred policy acquisition costs


15,035



11,711Deferred federal income taxes


10,731



9,569Property and equipment, net


18,586



11,366Funds held by reinsurer


2,340



3,769Other assets


1,435



14,557Total assets

$
806,248


$
523,003LIABILITIES AND
    SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment
    expenses

$
265,966


$
223,207Unearned premiums and service fees


127,723



98,661Long-term debt


15,464



16,297Amounts withheld or retained for
    account of others


27,885



19,016Reinsurance balances payable


7,156



4,704Securities lending obligation


158,928



Accounts payable and other
    liabilities


19,676



14,379Commissions payable


6,347



4,730Assessments and fees payable


3,340



2,476Total liabilities


632,485



383,470Shareholders equity:Preferred shares  no par
    valueAuthorized 
    10,000 sharesIssued  0 shares






Common shares 
    $0.01 par valueAuthorized 
    50,000 sharesIssued 
    23,350 shares, including 4,191 and 4,295 shares,
    respectively, in treasury


234



234Additional paid-in capital


43,921



42,257Retained earnings


138,450



105,826Accumulated other comprehensive loss


(2,915
)


(2,712
)Treasury shares


(5,927
)


(6,072
)Total shareholders equity


173,763



139,533Total liabilities and
    shareholders equity

$
806,248


$
523,003    53




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF INCOME
  Year Ended December 31,2006


2005


2004(In thousands, except per share data)Revenue:Premiums earned

$
217,319


$
194,397


$
156,908Net investment income


17,579



12,527



8,613Realized gains on investments


1,193



278



1,661Other


2,387



1,974



1,967Total revenues


238,478



209,176



169,149Expenses:Losses and loss adjustment expenses


129,491



117,449



92,008Commissions and other underwriting
    expense


42,671



35,741



34,201Other operating and general
    expenses


11,619



9,428



6,888Interest expense


1,522



1,421



1,610Total expenses


185,303



164,039



134,707Income before federal income taxes


53,175



45,137



34,442Provision for federal income taxes


17,475



14,857



11,674Net income

$
35,700


$
30,280


$
22,768Net income per common
    share  basic

$
1.87


$
1.62


$
1.50Net income per common
    share  diluted

$
1.85


$
1.60


$
1.47Weighted average of common shares
    outstanding  basic


19,136



18,737



15,171Weighted average of common shares
    outstanding  diluted


19,302



18,975



15,480Cash dividends per common share

$
0.16


$
0.08


$
    54




---



##### Table of Contents



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





OtherCommon


Paid-In


Retained


Comprehensive


TreasuryStock


Capital


Earnings


Income (Loss)


Stock


Total(Dollars in thousands)Balance at January 1, 2004

$
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
)


139,533Net income










35,700











35,700Unrealized depreciation of
    investment securities, net of tax benefit of $109














(203
)






(203
)Comprehensive income






















35,497Dividends on common stock










(3,076
)










(3,076
)Issuance of 104,000 treasury shares
    upon exercise of stock options






341











145



486Tax benefit realized from exercise
    of stock options






557















557Stock compensation expense






766















766Balance at December 31, 2006

$
234


$
43,921


$
138,450


$
(2,915
)

$
(5,927
)

$
173,763    55




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
    STATEMENTS OF CASH FLOWS  Year Ended December 31,2006


2005


2004(Dollars in thousands)Operating activitiesNet income

$
35,700


$
30,280


$
22,768Adjustments to reconcile net income
    to net cash provided by operating activities:Net amortization of bond premiums
    and discounts


303



887



396Provision for depreciation and
    amortization


1,111



1,197



1,198Net realized gains on investment
    securities


(1,193
)


(278
)


(1,661
)Deferred federal income taxes


(1,020
)


(1,419
)


(1,754
)Tax benefit realized from exercise
    of stock options






610



506Stock compensation expense


766







Increase in deferred policy
    acquisition costs, net


(3,349
)


(105
)


(886
)Increase in reserves for losses and
    loss adjustment expenses


40,580



52,176



42,305Increase in premiums receivable


(22,471
)


(8,460
)


(2,578
)Increase in unearned premiums and
    service fees


29,062



17,733



11,220Decrease (increase) in interest
    receivable and other assets


2,062



(1,750
)


(3,144
)Increase in prepaid reinsurance
    premiums


(4,056
)


(1,026
)


(1,727
)Increase (decrease) in accounts
    payable, commissions and other liabilities and assessments and
    fees payable


6,986



(4,016
)


6,719Increase in amounts withheld or
    retained for account of others


8,566



4,105



3,935Increase in reinsurance recoverable


(12,178
)


(14,706
)


(20,009
)Increase (decrease) in reinsurance
    balances payable


2,452



1,275



(355
)Other


2



(2
)


5Net cash provided by operating
    activities


83,323



76,501



56,938Investing activitiesPurchases of fixed maturities


(95,208
)


(130,598
)


(170,915
)Purchases of equity securities


(50,905
)


(37,473
)


(16,968
)Proceeds from sale of fixed
    maturities


1,917



17,542



44,579Proceeds from sale of equity
    securities


34,643



13,467



14,726Proceeds from maturity of
    investments


47,742



41,775



51,313Additional cash paid for purchase
    of subsidiary


(1,246
)


(11,744
)


Cash and cash equivalents of
    business acquired


5,585







Purchase of building


(7,025
)






Capital expenditures


(1,255
)


(733
)


(1,084
)Net cash used in investing
    activities


(65,752
)


(107,764
)


(78,349
)Financing activitiesProceeds from issuance of common
    shares






40,391



Proceeds (repayment) of note
    payable to affiliate






(15,000
)


15,000Repayment of long-term debt


(833
)


(1,250
)


(1,354
)Increase in securities lending
    collateral


(158,928
)






Increase in securities lending
    obligation


158,928







Tax benefit realized from exercise
    of stock options


557







Issuance of common shares from
    treasury upon exercise of stock options


486



254



525Cash dividends paid on common shares


(3,076
)


(1,540
)


Net cash (used in) provided by
    financing activities


(2,866
)


22,855



14,171Net increase (decrease) in cash and
    cash equivalents


14,705



(8,408
)


(7,240
)Cash and cash equivalents at
    beginning of year


7,461



15,869



23,109Cash and cash equivalents at end of
    year

$
22,166


$
7,461


$
15,869    56




---



##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
 NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS December 31, 2006  1.  Background,
    Basis of Presentation and Principals of Consolidation
          Basis of
    Presentation
    200-for-1
  Principles
    of Consolidation
   57




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Use of
    Estimates
    2.
    Significant
    Accounting Policies  Cash
    Equivalents
    Premium,
    Commissions and Service Fee Recognition
    Investments
    other-than-temporary,
  Deferred
    Policy Acquisition Costs
    Property
    and Equipment
   58




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Other
    Assets
    Unpaid
    Losses and Loss Adjustment Expenses
    Assessments
    Premiums
    Receivable
    Reinsurance
    Segment
    Information
    Federal
    Income Taxes
   59




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Comprehensive
    Income
  available-for-sale
  Earnings
    Per Common Share
    Stock-Based
    Compensation
  Share-Based
    Payment,
  Accounting for Stock Issued to Employees
  Recent
    Accounting Pronouncements
  Accounting
    for Certain Hybrid Instruments
  Accounting
    for Certain Hybrid Financial Instruments
  Accounting
    for Uncertainty in Income Taxes
  Accounting for Uncertainty in
    Income Taxes
 60




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fair
    Value Measurements
  Fair Value Measurements.
  3.
    Investments    Cost or


Gross


GrossAmortized


Unrealized


UnrealizedCost


Gains


Losses


Fair Value(Dollars in thousands)December 31,
    2006:Fixed maturities:U.S. Government and
    government agency obligations

$
224,004


$
265


$
(3,691
)

$
220,578State and local government
    obligations


44,217



160



(297
)


44,080Corporate obligations


64,331



299



(1,839
)


62,791Total fixed maturities


332,552



724



(5,827
)


327,449Equity securities:Preferred stocks


21,484



374



(99
)


21,759Common stocks


11,992



371



(27
)


12,336Total equity securities


33,476



745



(126
)


34,095Short-term investments


22,744











22,744Total investments

$
388,772


$
1,469


$
(5,953
)

$
384,288December 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
)

$
312,759  61




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Amortized


FairCost


Value(Dollars in thousands)Due one year or less

$
26,550


$
26,446Due after one year through five
    years


161,181



159,796Due after five years through ten
    years


118,064



115,981Due after ten years


26,757



25,226Total fixed maturities

$
332,552


$
327,449     Year Ended December 31,2006


2005


2004(Dollars in thousands)Fixed maturity gain

$
41


$
252


$
1,035Fixed maturity losses






(236
)


(170
)Equity security gain


1,156



429



1,052Equity security losses


(4
)


(167
)


(256
)Net realized gains

$
1,193


$
278


$
1,661   other-than-temporary other-than-temporary.
    Amortized


Fair


Unrealized


Number ofCost


Value


Losses


Holdings(Dollars in thousands)December 31,
    2006:Fixed maturities:12 months or less

$
62,655


$
61,964


$
(691
)


77Greater than 12 months


194,392



189,256



(5,136
)


162Total fixed maturities


257,047



251,220



(5,827
)


239Equity securities:12 months or less


4,466



4,374



(92
)


11Greater than 12 months


3,547



3,513



(34
)


7Total equity securities


8,013



7,887



(126
)


18Total fixed maturities and equity
    securities

$
265,060


$
259,107


$
(5,953
)


257   62




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  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     other-than-temporarily
  other-than-temporarily
    Year Ended December 31,2006


2005


2004(Dollars in thousands)Investment income:Fixed maturities

$
14,116


$
10,520


$
7,582Equity securities


1,396



1,026



717Other


2,166



1,109



422Total investment income


17,678



12,655



8,721Investment expense


(99
)


(128
)


(108
)Net investment income

$
17,579


$
12,527


$
8,613    63




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   4.
    Securities
    Lending    5.
    Property
    and Equipment    December 31,2006


2005(Dollars in thousands)Land and building

$
18,308


$
11,164Machinery and equipment


270



Data processing equipment and
    software


7,173



6,417Office furniture and leasehold
    improvement


1,195



1,165Automobiles


315



23727,261



18,983Accumulated depreciation and
    amortization


(8,675
)


(7,617
)Total net property and equipment

$
18,586


$
11,366     6.
    Leases
    and Rent Expense       64




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   7.
    Long-term
    Debt    December 31,2006


2005(Dollars in thousands)Junior subordinated debentures

$
15,464


$
15,464Term note payable to bank






833Total notes payable and long-term
    debt

$
15,464


$
16,297   Consolidation of
    Variable Interest Entities
          8.
    Income
    Taxes    Year Ended December 31,2006


2005


2004(Dollars in thousands)Current federal income tax
    provision

$
18,527


$
16,788


$
13,428Deferred federal income tax benefit


(1,052
)


(1,931
)


(1,754
)$
17,475


$
14,857


$
11,674  65




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Year Ended December 31,2006


2005


2004(Dollars in thousands)Expected statutory rate


35
%


35
%


35
%Expected federal income tax
    expense at statutory rate

$
18,611


$
15,798


$
12,055Tax effect of tax exempt
    investment income


(729
)


(623
)


(302
)Tax effect of HMG operations


(894
)






Other items, net


487



(318
)


(79
)$
17,475


$
14,857


$
11,674     December 31,2006


2005(Dollars in thousands)Deferred Tax Assets:Unearned premiums

$
7,492


$
5,699Unpaid losses and LAE expenses


5,885



5,091Assignments and assessments


889



517Unrealized losses on investments


1,570



1,460Other, net


819



998Total deferred tax assets


16,655



13,765Deferred Tax
    Liabilities:Deferred policy acquisition costs


(5,262
)


(4,099
)Other, net


(662
)


(97
)Total deferred tax liabilities


(5,924
)


(4,196
)Net deferred income tax assets

$
10,731


$
9,569     9.
    Stock-Based
    Compensation  Accounting for Stock Issued to Employees Accounting for
    Stock-Based Compensation.
   66




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          Year Ended December 31,2005(Dollars in thousands,except per share)Net income, as reported

$
30,280Less: Stock-based employee
    compensation expense determined under fair value based method
    for all awards,net of related tax effects


1,186Proforma net income

$
29,094Earnings per share:Basic  as reported

$
1.62Basic  proforma


1.55Diluted  as reported


1.60Diluted  proforma


1.54    67




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     Year Ended December 31, 2006Total Options OutstandingWeighted


Weighted


WeightedAverage


Average


AverageExercise


Fair


RemainingShares


Price


Value


Contractual TermOptions outstanding, beginning of
    year


785,000


$
12.43


$
5.58Forfeited


(116,000
)


12.85



5.98Exercised


(104,000
)


4.67



2.16Granted


100,000



22.13



8.71Options outstanding, end of year


665,000


$
15.03


$
6.51



8.1 yearsOptions exercisable, end of year


65,200


$
10.09


$
4.85



7.0 years     Year Ended December 31,2006


2005Risk-free interest rate


4.7
%


4.2
%Expected option life


6.7 years



9.0 yearsExpected stock price volatility


29.6
%


31.0
%Dividend yield


0.3
%


0.3
%Weighted average fair value of
    options granted during period

$
8.71


$
7.18       2007

$
7842008


7842009


7842010


4282011


61   10.
    Employee
    Benefit Plan   68




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     11.
    Earnings
    Per Common Share    Year Ended December 31,2006


2005


2004(Dollars in thousands, except per share)Net income

$
35,700


$
30,280


$
22,768Weighted average shares
    outstanding during period


19,136



18,737



15,171Additional shares issuable under
    employee common stock option plans using treasury stock method


166



238



309Weighted average shares
    outstanding assuming exercise of stock option


19,302



18,975



15,480Net income per share:Basic

$
1.87


$
1.62


$
1.50Diluted


1.85



1.60



1.47     12.
    Premiums,
    Reinsurance and Transactions with Related Parties      Year Ended December 31,2006


2005


2004(Dollars in thousands)Written premiums assumed

$
4,533


$
3,733


$
4,333Assumed premiums earned


4,024



3,921



5,424Assumed losses and loss adjustment
    expense incurred


5,527



3,028



5,093Payable to Great American as of
    year end


884



720



932Service fee expense


192



134



306    69




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Year Ended December 31,2006


2005


2004Written


Earned


Written


Earned


Written


Earned(Dollars in thousands)Direct

$
294,029


$
264,158


$
254,588


$
237,639


$
210,696


$
197,502Assumed


11,475



12,669



15,448



14,638



14,288



16,341Ceded


(63,588
)


(59,508
)


(58,930
)


(57,880
)


(58,565
)


(56,935
)Net premium

$
241,916


$
217,319


$
211,106


$
194,397


$
166,419


$
156,908     December 31,


A.M. Best2006


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

$
34,280


AMotors Ins Corp


16,068


A−TRAX Insurance Ltd.


10,671


Berkley Insurance Company


9,529


AGreat American Insurance Company


8,204


AGeneral Reinsurance


6,570


A++Subtotal


85,322All other reinsurers


26,020Total

$
111,342Reinsurance receivable on paid and
    unpaid losses

$
90,070Prepaid reinsurance premiums


21,272$
111,342    70




---



##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    13.
    Unpaid
    Losses and Loss Adjustment Expenses    December 31,2006


2005


2004(Dollars in thousands)Reserve for losses and LAE, net of
    related reinsurance recoverables, at beginning of year

$
151,444


$
111,644


$
86,740Add:Provision for unpaid losses and
    LAE for claims net of reinsurance, occurring during:Current year


136,944



122,684



94,263Prior years


(7,453
)


(5,235
)


(2,255
)129,491



117,449



92,008Deduct:Losses and LAE payments for
    claims, net of reinsurance, occurring during:Current year


47,183



40,600



37,488Prior years


51,901



37,049



29,61699,084



77,649



67,104Reserve for losses and LAE, net of
    related reinsurance recoverables, end of year


181,851



151,444



111,644Reinsurance recoverables on unpaid
    losses and LAE, at end of year


84,115



71,763



59,387Reserve for unpaid losses and LAE,
    gross of reinsurance recoverables

$
265,966


$
223,207


$
171,031     14.
    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. 71




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   
    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.
    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.    As of and for the YearEnded December 31,2006


2005


2004(Dollars in thousands)NIIC statutory capital and surplus

$
148,266


$
122,825


$
92,320NIIC statutory net income


26,579



29,311



20,450NIIC-HI statutory capital and
    surplus


8,736



8,361



8,032NIIC-HI statutory net income


230



332



174TCC statutory capital and surplus


13,671



N/A



N/ATCC statutory net income


703



N/A



N/A           15.
    Commitments
    and Contingencies   72




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        16.
    Segment
    Information    Year Ended December 31,2006


2005


2004(Dollars in thousands)Revenue:Premiums earned:Alternative Risk Transfer

$
75,712


$
60,223


$
36,499Transportation


71,682



70,502



70,973Specialty Personal Lines


46,445



38,561



28,377Hawaii and Alaska


15,257



14,855



15,042Other


8,223



10,256



6,017Total premiums earned


217,319



194,397



156,908Net investment income


17,579



12,527



8,613Realized gains on investments


1,193



278



1,661Other


2,387



1,974



1,967Total revenues

$
238,478


$
209,176


$
169,149  73




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##### Table of Contents



NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  17.
    Quarterly
    Operating Results (Unaudited)    1st


2nd


3rd


4th


TotalQuarter


Quarter


Quarter


Quarter


Year(Dollars in thousands)2006Revenues

$
55,061


$
57,390


$
61,932


$
64,095


$
238,478Net income


8,726



9,003



6,543



11,428



35,700Net income per share 
    basic(1)


0.46



0.47



0.34



0.60



1.87Net income per share 
    diluted(1)


0.45



0.47



0.34



0.59



1.852005Revenues

$
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     (1)
    
    Earnings per share are computed independently for each quarter
    and the full year based upon respective average shares
    outstanding. Therefore, the sum of the quarterly earnings per
    share amounts may not equal the annual amounts reported. 74




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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(e))
      ITEM 9B
    Other
    Information  Employment
    Agreement with Mr. Spachman
         75




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##### Table of Contents



Employment
    Agreement with Mr. Michelson
       76




---



##### Table of Contents



PART III    ITEM 10.
    Directors,
    Executive Officers and Corporate Governance    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, and Director
    Independence  ITEM 14.
    Principal
    Accountant Fees and Services PART IV ITEM 15  Exhibits
    and Financial Statement Schedules        Index to
    Financial Statement Schedules
  Page/FilingSchedule

Description

BasisSchedule I

Summary of Investments

(2)Schedule II

Condensed Financial Information of
    Parent Company

80Schedule III

Supplementary Insurance Information

83Schedule IV

Reinsurance

(3)Schedule V

Valuation and Qualifying Accounts

84Schedule VI

Supplementary Information
    Concerning Property-Casualty Insurance Operations

(7)  77




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##### Table of Contents



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 Insurance Company


(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
.10

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)10
.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)10
.14

National Interstate Corporation
    Management Bonus Plan


(8)10
.15

Employment and Non-Competition
    Agreement dated March 12, 2007 between National Interstate
    Corporation and Alan R. Spachman10
.16

Employment and Non-Competition
    Agreement dated March 12, 2007 between National Interstate
    Corporation and David W. Michelson10
.17

Restriced Shares Agreement
    dated March 12, 2007 between National Interstate
    Corporation and David W. Michelson10
.18

Stock Bonus Agreement dated
    March 12, 2007 between National Interstate Corporation and
    David W. Michelson14
.1

Code of Ethics and Conduct


(4)21
.1

List of subsidiaries23
.1

Consent of Independent Registered
    Public Accounting Firm24
.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 2002 78




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##### Table of Contents



Number

Description

Filing Basis31
.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 Three
    Investments(3)
    
    This information is contained in Notes to Consolidated
    Financial Statements at Note Twelve 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 Thirteen Unpaid Losses
    and Loss Adjustment Expenses(8)
    
    This exhibit is incorporated by reference to our
    Form 10-Q
    filed November 7, 2006 79




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##### Table of Contents



NATIONAL
    INTERSTATE CORPORATION AND SUBSIDIARIES
  SCHEDULE II 
    CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
 CONDENSED
    BALANCE SHEETS
  December 31,2006


2005(In thousands, exceptper share data)ASSETSInvestment in subsidiaries

$
169,990


$
136,090Investments:Fixed maturities
    available-for-sale,
    at fair value (cost of $16,518 and $18,914, respectively)


16,131



18,621Equities
    available-for-sale,
    at fair value (cost of $1,133 and $2,509, respectively)


1,147



2,518Short-term investments, at cost
    which approximates fair value


4,370



1,150Total investments


21,648



22,289Receivable from subsidiary


689



710Cash


373



836Property and equipment 
    net


899



801Other assets


518



695Total assets

$
194,117


$
161,421LIABILITIES AND
    SHAREHOLDERS EQUITYLiabilitiesLong-term debt

$
15,464


$
16,297Other liabilities


4,890



5,591Total liabilities


20,354



21,888Shareholders equityPreferred shares  no
    par valueAuthorized 
    10,000 sharesIssued  0 shares






Common shares 
    $0.01 par valueAuthorized 
    50,000 sharesIssued 
    23,350 shares, including 4,191 and 4,295 shares,respectively in treasury


234



234Additional paid-in capital


43,921



42,257Retained earnings


138,450



105,826Accumulated other comprehensive
    loss


(2,915
)


(2,712
)Treasury shares


(5,927
)


(6,072
)Total shareholders equity


173,763



139,533Total liabilities and
    shareholders equity

$
194,117


$
161,421  80




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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 312006


2005


2004(In thousands)Revenues:Fees from subsidiaries

$
10,862


$
11,106


$
8,334Net investment income


1,026



930



4Realized gains on investments


13



16



Total revenues


11,901



12,052



8,338Expenses:General and administrative expenses


11,721



11,178



8,195Interest expense


1,522



1,421



1,610Total expenses


13,243



12,599



9,805Loss before income taxes and
    equity inundistributed income of subsidiaries


(1,342
)


(547
)


(1,467
)Income tax benefit


(470
)


(191
)


(221
)Loss before equity in
    undistributed income of subsidiaries


(872
)


(356
)


(1,246
)Equity in undistributed income of
    subsidiaries, net of tax


36,572



30,636



24,014Net income

$
35,700


$
30,280


$
22,768  81




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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 31,2006


2005


2004(In thousands)Operating ActivitiesNet income

$
35,700


$
30,280


$
22,768Adjustments to reconcile net
    income to cash provided by (used in) operating activities


(35,612
)


(29,368
)


(23,766
)Net cash provided by (used in)
    operating activities


88



912



(998
)Investing ActivitiesCapital contributions to
    subsidiaries


(788
)






(15,000
)Distributions from subsidiaries


3,000







2,100Purchases of investments


(3,249
)


(27,810
)


Proceeds from sale or maturity of
    investments


3,768



5,213



Purchases of property and equipment


(416
)


(338
)


(480
)Net cash provided by (used in)
    investing activities


2,315



(22,935
)


(13,380
)Financing ActivitiesProceeds from issuance of common
    shares






40,391



(Repayment) proceeds of note
    payable to affiliate






(15,000
)


15,000Repayment of long-term debt


(833
)


(1,250
)


(1,354
)Issuance of common shares from
    treasury upon exercise of stock options


486



254



525Cash dividends paid on common
    shares


(3,076
)


(1,540
)


Tax benefit realized from exercise
    of stock option


557







Net cash (used in) provided by
    financing activities


(2,866
)


22,855



14,171Net increase (decrease) in cash


(463
)


832



(207
)Cash at beginning of year


836



4



211Cash at end of year

$
373


$
836


$
4  82




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##### Table of Contents



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














AmortizationDeferred


Unpaid Losses











Losses and


of DeferredPolicy


and 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, 2006

$
15,035


$
265,966


$
127,723


$
217,319


$
17,579


$
129,491


$
37,674


$
4,997


$
241,916Year 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



166,419  83




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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,
    2006Premiums in course of collection

$
580


$
151


$



$
209


$
522Year ended December 31,
    2005Premiums in course of collection


361



635







416



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


424











63



361     (1)
    
    Deductions include write-offs of amounts determined to be
    uncollectible. 84




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##### Table of Contents



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

Title

Date/s/  ALAN
    R. SPACHMANAlan
    R. Spachman

Chairman of the Board
    and Chief Executive Officer
    (Principal Executive Officer)

March 14, 2007/s/  JULIE
    A. MCGRAWJulie
    A. McGraw

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

March 14, 2007/s/  JOSEPH
    E. CONSOLINO*Joseph
    E. Consolino

Director

March 14, 2007/s/  THEODORE
    H.
    ELLIOTT, JR.*Theodore
    H. Elliott, Jr.

Director

March 14, 2007/s/  GARY
    J. GRUBER*Gary
    J. Gruber

Director

March 14, 2007/s/  KEITH
    A. JENSEN*Keith
    A. Jensen

Director

March 14, 2007/s/  JAMES
    C. KENNEDY*James
    C. Kennedy

Director

March 14, 2007/s/  DONALD
    D. LARSON*Donald
    D. Larson

Director

March 14, 2007/s/  JOEL
    SCHIAVONE*Joel
    Schiavone

Director

March 14, 2007* By

Paul F. Haffner,
    attorney-in-fact  85