##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2006
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to.
 Commission File Number 000-51130
 
 National Interstate Corporation
 (Exact name of registrant as specified in its charter)
 Ohio
    
    34-1607394(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 
 3250 Interstate Drive
Richfield, Ohio 44286-9000
(330) 659-8900  (Address and telephone number of principal executive offices)
 
 þ o
 o o þ
 o þ




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##### 



National Interstate Corporation
Table of Contents
 PagePart I  Financial Information
    

    1Item 1. Financial Statements
    

    1Consolidated Balance Sheets
    

    1Consolidated Statements of Income
    

    2Consolidated Statements of Shareholders Equity
    

    3Consolidated Statements of Cash Flows
    

    4Notes to Consolidated Financial Statements
    

    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    

    10Item 3. Quantitative and Qualitative Disclosures about Market Risk
    

    20Item 4. Controls and Procedures
    

    20Part II  Other Information
    

    20Item 1. Legal Proceedings
    

    20Item 1A. Risk Factors
    

    20Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    

    20Item 3. Defaults Upon Senior Securities
    

    20Item 4. Submission of Matters to a Vote of Security Holders
    

    20Item 5. Other Information
    

    20Item 6. Exhibits
    

    21Signatures
    

    22EX-31.1 CEO Section 302 CertificationEX-31.2 CFO Section 302 CertificationEX-32.1 CEO Section 906 CertificationEX-32.2 CFO Section 906 Certification




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 National
Interstate Corporation and Subsidiaries
 
 Consolidated Balance Sheets
(In thousands, except per share data)
 March 31,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSInvestments:Fixed maturities available-for-sale, at fair value (amortized cost  $308,825 and
$276,929, respectively)
    
    $
    301,266
    
    
    $
    272,578Equity securities available-for-sale, at fair value (cost  $33,821 and $32,017, respectively)
    
    
    34,111
    
    
    
    32,196Short-term investments, at cost which approximates fair value
    
    
    12,135
    
    
    
    7,985Total investments
    
    
    347,512
    
    
    
    312,759Cash and cash equivalents
    
    
    7,637
    
    
    
    7,461Accrued investment income
    
    
    3,421
    
    
    
    3,172Premiums receivable, net of allowance for doubtful accounts of $647 and $580, respectively
    
    
    95,528
    
    
    
    53,589Reinsurance recoverables on paid and unpaid losses
    
    
    82,824
    
    
    
    77,834Prepaid reinsurance premiums
    
    
    32,440
    
    
    
    17,216Deferred policy acquisition costs
    
    
    14,375
    
    
    
    11,711Deferred federal income taxes
    
    
    10,686
    
    
    
    9,569Property and equipment, net
    
    
    11,460
    
    
    
    11,366Funds held by reinsurer
    
    
    3,889
    
    
    
    3,769Other assets
    
    
    1,775
    
    
    
    14,557Total assets
    
    $
    611,547
    
    
    $
    523,003LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Unpaid losses and loss adjustment expenses
    
    $
    236,934
    
    
    $
    223,207Unearned premiums and service fees
    
    
    142,964
    
    
    
    98,661Long-term debt
    
    
    15,985
    
    
    
    16,297Amounts withheld or retained for account of others
    
    
    21,061
    
    
    
    19,016Reinsurance balances payable
    
    
    22,890
    
    
    
    4,704Accounts payable and other liabilities
    
    
    16,357
    
    
    
    14,379Commissions payable
    
    
    6,436
    
    
    
    4,730Assessments and fees payable
    
    
    2,703
    
    
    
    2,476Total liabilities
    
    
    465,330
    
    
    
    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 4,236 and 4,295
shares, respectively, in treasury
    
    
    234
    
    
    
    234Additional paid-in capital
    
    
    42,916
    
    
    
    42,257Retained earnings
    
    
    113,782
    
    
    
    105,826Accumulated other comprehensive loss
    
    
    (4,725
    )
    
    
    (2,712
    )Treasury shares
    
    
    (5,990
    )
    
    
    (6,072
    )Total shareholders equity
    
    
    146,217
    
    
    
    139,533Total liabilities and shareholders equity
    
    $
    611,547
    
    
    $
    523,003
  1




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##### Table of Contents



National
Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Income
(Unaudited)
(In thousands, except per share data)
 Three months ended March 31,2006
    
    
    2005Revenue:Premiums earned
    
    $
    50,315
    
    
    $
    43,177Net investment income
    
    
    3,899
    
    
    
    2,667Realized gains on investments
    
    
    370
    
    
    
    115Other
    
    
    477
    
    
    
    508Total revenues
    
    
    55,061
    
    
    
    46,467Expenses:Losses and loss adjustment expenses
    
    
    29,896
    
    
    
    26,067Commissions and other underwriting expense
    
    
    8,765
    
    
    
    7,252Other operating and general expenses
    
    
    2,793
    
    
    
    1,984Interest expense
    
    
    364
    
    
    
    401Total expenses
    
    
    41,818
    
    
    
    35,704Income before federal income taxes
    
    
    13,243
    
    
    
    10,763Provision for federal income taxes
    
    
    4,517
    
    
    
    3,608Net income
    
    $
    8,726
    
    
    $
    7,155Net income per common share  basic
    
    $
    0.46
    
    
    $
    0.40Net income per common share  diluted
    
    $
    0.45
    
    
    $
    0.39Weighted average of common shares outstanding, basic
    
    
    19,101
    
    
    
    17,941Weighted average of common shares outstanding, diluted
    
    
    19,253
    
    
    
    18,199Cash dividends per common share
    
    $
    0.04
    
    
    $
    
 .
 2




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##### Table of Contents



National
Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Shareholders Equity
(Unaudited)
(Dollars in thousands)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    TreasuryShares
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Shares
    
    
    TotalBalance at January 1, 2006
    
    $
    234
    
    
    $
    42,257
    
    
    $
    105,826
    
    
    $
    (2,712
    )
    
    $
    (6,072
    )
    
    $
    139,533Net income
    
    
    
    
    
    
    
    
    
    
    8,726
    
    
    
    
    
    
    
    
    
    
    
    8,726Unrealized
depreciation of investment securities, net of tax benefit of $1,084
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,013
    )
    
    
    
    
    
    
    (2,013
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,713Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    (770
    )
    
    
    
    
    
    
    
    
    
    
    (770
    )Issuance of
59,000 treasury shares upon exercise of stock options
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    82
    
    
    
    182Tax benefit realized from exercise of stock options
    
    
    
    
    
    
    346
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    346Stock compensation expense
    
    
    
    
    
    
    213
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    213Balance at March 31, 2006
    
    $
    234
    
    
    $
    42,916
    
    
    $
    113,782
    
    
    $
    (4,725
    )
    
    $
    (5,990
    )
    
    $
    146,217Balance at January 1, 2005
    
    $
    200
    
    
    $
    1,264
    
    
    $
    77,102
    
    
    $
    539
    
    
    $
    (6,316
    )
    
    $
    72,789Net income
    
    
    
    
    
    
    
    
    
    
    7,155
    
    
    
    
    
    
    
    
    
    
    
    7,155Unrealized depreciation of investment securities,
net of tax benefit of $1,305
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,424
    )
    
    
    
    
    
    
    (2,424
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,731Proceeds from initial public offering
    
    
    34
    
    
    
    40,410
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40,444Issuance of 85,600 treasury shares upon exercise of
stock options
    
    
    
    
    
    
    33
    
    
    
    (16
    )
    
    
    
    
    
    
    119
    
    
    
    136Tax benefit realized from exercise of stock options
    
    
    
    
    
    
    93
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93Balance at March 31, 2005
    
    $
    234
    
    
    $
    41,800
    
    
    $
    84,241
    
    
    $
    (1,885
    )
    
    $
    (6,197
    )
    
    $
    118,193
  3




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National
Interstate Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
 Three months endedMarch 31,2006
    
    
    2005Operating activitiesNet income
    
    $
    8,726
    
    
    $
    7,155Adjustments to reconcile net income to net cash provided
by operating activities:Net amortization of bond premiums and discounts
    
    
    38
    
    
    
    196Provision for depreciation and amortization
    
    
    292
    
    
    
    293Net realized gains on investment securities
    
    
    (370
    )
    
    
    (115
    )Tax benefit realized from exercise of stock options
    
    
    346
    
    
    
    93Deferred federal income taxes
    
    
    
    
    
    
    (874
    )Stock compensation expense
    
    
    213
    
    
    
    Increase in deferred policy acquisition costs, net
    
    
    (2,689
    )
    
    
    (4,296
    )Increase in reserves for losses and loss adjustment
expenses
    
    
    11,548
    
    
    
    14,312Increase in premiums receivable
    
    
    (40,923
    )
    
    
    (42,133
    )Increase in unearned premiums and service fees
    
    
    44,303
    
    
    
    46,695Increase in interest receivable, prepaid reinsurance
premiums and other assets
    
    
    (14,120
    )
    
    
    (14,481
    )Increase in accounts payable, commissions and other
liabilities, premiums
and other funds collected from others and
assessments and fees payable
    
    
    4,861
    
    
    
    11,094Increase in reinsurance recoverable
    
    
    (4,932
    )
    
    
    (5,783
    )Increase in reinsurance balances payable
    
    
    18,186
    
    
    
    18,460Other
    
    
    (1
    )
    
    
    (2
    )Net cash provided by operating activities
    
    
    25,478
    
    
    
    30,614Investing activitiesPurchases of fixed maturities
    
    
    (39,662
    )
    
    
    (50,626
    )Purchases of equity securities
    
    
    (17,785
    )
    
    
    (18,150
    )Proceeds from sale of fixed maturities
    
    
    997
    
    
    
    6,084Proceeds from sale of equity securities
    
    
    11,985
    
    
    
    252Proceeds from maturity of investments
    
    
    16,088
    
    
    
    13,593Additional cash paid for purchase of subsidiary
    
    
    (1,246
    )
    
    
    Cash and cash equivalents of business acquired
    
    
    5,585
    
    
    
    Capital expenditures
    
    
    (364
    )
    
    
    (109
    )Net cash used in investing activities
    
    
    (24,402
    )
    
    
    (48,956
    )Financing activitiesProceeds from issuance of common shares
    
    
    
    
    
    
    40,444Repayment of note payable to affiliate
    
    
    
    
    
    
    (15,000
    )Repayment of long-term debt
    
    
    (312
    )
    
    
    (312
    )Issuance of common shares from treasury upon exercise of
stock options
    
    
    182
    
    
    
    136Cash dividends paid on common shares
    
    
    (770
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (900
    )
    
    
    25,268Net increase in cash and cash equivalents
    
    
    176
    
    
    
    6,926Cash and cash equivalents at beginning of year
    
    
    7,461
    
    
    
    15,869Cash and cash equivalents at end of year
    
    $
    7,637
    
    
    $
    22,795
  4




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NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Basis of Presentation
     Recent Accounting Pronouncements
 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,
 Accounting for Certain Hybrid Instruments
 Accounting for Certain Hybrid Financial Instruments
 5




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##### Table of Contents



2. Stock-Based Compensation
     For the Three Months EndedMarch 31, 2006Using
    
    
    SFASPrevious
    
    
    123(R)
    
    
    AsAccounting
    
    
    Adjustment
    
    
    Reported(Dollars in thousands)Income before income taxes
    
    $
    13,456
    
    
    $
    (213
    )
    
    $
    13,243Income taxes
    
    
    4,544
    
    
    
    (27
    )
    
    
    4,517Net income
    
    $
    8,912
    
    
    $
    (186
    )
    
    $
    8,726Basic earnings per share
    
    $
    0.47
    
    
    $
    (0.01
    )
    
    $
    0.46Diluted earnings per share
    
    
    0.46
    
    
    
    (0.01
    )
    
    
    0.45
 6




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##### Table of Contents



For the Three Months EndedMarch 31, 2005SFAS
    
    
    IfAs
    
    
    123(R)
    
    
    UnderReported
    
    
    Adjustment
    
    
    SFAS 123(R)(Dollars in thousands)Income before income taxes
    
    $
    10,763
    
    
    $
    (229
    )
    
    $
    10,534Income taxes
    
    
    3,608
    
    
    
    (29
    )
    
    
    3,579Net income
    
    $
    7,155
    
    
    $
    (200
    )
    
    $
    6,955Basic earnings per share
    
    $
    0.40
    
    
    $
    (0.01
    )
    
    $
    0.39Diluted earnings per share
    
    
    0.39
    
    
    
    (0.01
    )
    
    
    0.38
   Three months ended March 31, 2006Total options outstandingWeighted
    
    
    Weighted
    
    
    WeightedAverage
    
    
    Average
    
    
    AverageExercise
    
    
    Fair
    
    
    RemainingShares
    
    
    Price
    
    
    Value
    
    
    Contractual TermOptions outstanding, beginning of period
    
    
    785,000
    
    
    $
    12.43
    
    
    $
    5.58Forfeited
    
    
    (70,000
    )
    
    
    9.73
    
    
    
    4.72Exercised
    
    
    (59,000
    )
    
    
    3.08
    
    
    
    1.34Granted
    
    
    60,000
    
    
    
    21.34
    
    
    
    8.61Options outstanding, end of period
    
    
    716,000
    
    
    $
    14.26
    
    
    $
    6.28

    
    
    8.7 yearsOptions exercisable, end of period
    
    
    110,200
    
    
    $
    8.72
    
    
    $
    4.19
    
    
    7.3 years
  Three months ended March 31,2006
    
    
    2005Risk-free interest rate
    
    
    4.4
    %
    
    
    4.2
    %Expected option life
    
    6.8 years
    
    
    10 yearsExpected stock price volatility
    
    
    29.7
    %
    
    
    31.0
    %Dividend yield
    
    
    0.1
    %
    
    
    0.3
    %Weighted
average fair value of options granted during year
    
    $
    8.61
    
    
    $
    6.77
 7




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##### Table of Contents



2007
    
    $
    8352008
    
    
    8352009
    
    
    8352010
    
    
    4242011
    
    
    41
 3. Premiums, Reinsurance and Transactions with Related Parties
   Three Months Ended March 31,2006
    
    
    2005(Dollars in thousands)Written premiums assumed
    
    $
    2,757
    
    
    $
    2,579Assumed premiums earned
    
    
    2,300
    
    
    
    2,230Assumed losses and loss adjustment expense incurred
    
    
    1,931
    
    
    
    1,458Payable to Great American as of quarter end
    
    
    551
    
    
    
    1,009
   Three Months Ended March 31,2006
    
    
    2005Written
    
    
    Earned
    
    
    Written
    
    
    Earned(Dollars in thousands)Direct
    
    $
    106,131
    
    
    $
    61,504
    
    
    $
    100,678
    
    
    $
    54,037Assumed
    
    
    3,407
    
    
    
    3,171
    
    
    
    2,899
    
    
    
    2,829Ceded
    
    
    (30,131
    )
    
    
    (14,360
    )
    
    
    (29,948
    )
    
    
    (13,689
    )Net Premium
    
    $
    79,407
    
    
    $
    50,315
    
    
    $
    73,629
    
    
    $
    43,177
 8




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4. Commitments and Contingencies
    5. Earnings Per Common Share
  Three months ended March 31,2006
    
    
    2005(In thousands, except per share data)Net income
    
    $
    8,726
    
    
    $
    7,155Weighted average shares outstanding during period
    
    
    19,101
    
    
    
    17,941Additional shares issuable under employee common stock
option plans using treasury stock method
    
    
    152
    
    
    
    258Weighted average shares outstanding assuming exercise of
stock option
    
    
    19,253
    
    
    
    18,199Net income per share:Basic
    
    $
    0.46
    
    
    $
    0.40Diluted
    
    $
    0.45
    
    
    $
    0.39
  6. Segment Information
  9




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Three
months endedMarch 31,2006
    
    
    2005(Dollars in thousands)Revenue:Premiums earned:Alternative Risk Transfer
    
    $
    15,928
    
    
    $
    12,753Transportation
    
    
    17,860
    
    
    
    16,306Specialty Personal Lines
    
    
    10,828
    
    
    
    8,665Hawaii and Alaska
    
    
    3,220
    
    
    
    3,766Other
    
    
    2,479
    
    
    
    1,687Total Premiums Earned
    
    
    50,315
    
    
    
    43,177Net investment income
    
    
    3,899
    
    
    
    2,667Realized gains on investments
    
    
    370
    
    
    
    115Other
    
    
    477
    
    
    
    508Total revenues
    
    $
    55,061
    
    
    $
    46,467
 7. Acquisition of Company
    
 ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Forward-Looking Statements
  
    
    general economic conditions and other factors, including prevailing interest
rate levels and stock and credit market performance which may affect (among other things)
our ability to sell our products, our ability to access capital resources and the costs
associated with such access to capital and the market value of our investments;
    
    customer response to new products and marketing initiatives;
    
    tax law changes;
    
    increasing competition in the sale of our insurance products and services and the retention of existing customers;
    
    changes in legal environment;
 10




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##### Table of Contents




    
    regulatory changes or actions, including those relating to regulation of the
sale, underwriting and pricing of insurance products and services and capital requirements;
    
    levels of natural catastrophes, terrorist events, incidents of war and other major losses;
    
    adequacy of insurance reserves; and
    
    availability of reinsurance and ability of reinsurers to pay their obligations.
  General
    Results of Operations
 Overview
    Underwriting
  11




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##### Table of Contents



Three months ended March 31,2006
    
    
    2005(Dollars in thousands)Gross premiums written
    
    $
    109,538
    
    
    $
    103,577Ceded reinsurance
    
    
    (30,131
    )
    
    
    (29,948
    )Net premiums written
    
    
    79,407
    
    
    
    73,629Change in unearned premiums, net of ceded
    
    
    (29,092
    )
    
    
    (30,452
    )Net earned premiums
    
    $
    50,315
    
    
    $
    43,177Combined Ratios:Loss and LAE ratio (1)
    
    
    59.4
    %
    
    
    60.4
    %Underwriting expense ratio (2)
    
    
    22.0
    %
    
    
    20.2
    %Combined ratio
    
    
    81.4
    %
    
    
    80.6
    %
 
 (1)
    
    The ratio of losses and loss adjustment expenses to premiums earned.(2)
    
    The ratio of the sum of commissions and other underwriting expenses and other operating
expenses less other income to premiums earned.     12




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##### Table of Contents



Three months ended March 31,2006
    
    
    2005Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in thousands)Alternative Risk Transfer
    
    $
    70,064
    
    
    
    64.0
    %
    
    $
    65,027
    
    
    
    62.8
    %Transportation
    
    
    18,519
    
    
    
    16.9
    %
    
    
    19,427
    
    
    
    18.8
    %Specialty Personal Lines
    
    
    13,773
    
    
    
    12.6
    %
    
    
    11,886
    
    
    
    11.5
    %Hawaii and Alaska
    
    
    5,743
    
    
    
    5.2
    %
    
    
    6,048
    
    
    
    5.8
    %Other
    
    
    1,439
    
    
    
    1.3
    %
    
    
    1,189
    
    
    
    1.1
    %Gross Premiums Written
    
    $
    109,538
    
    
    
    100.0
    %
    
    $
    103,577
    
    
    
    100.0
    %
 Three months ended March 31, 2006 compared to March 31, 2005.
 Three months ended March 31,
    
    
    Change2006
    
    
    2005
    
    
    Amount
    
    
    Percent(Dollars in thousands)Revenue:Premiums earned:Alternative Risk Transfer
    
    $
    15,928
    
    
    $
    12,753
    
    
    $
    3,175
    
    
    
    24.9
    %Transportation
    
    
    17,860
    
    
    
    16,306
    
    
    
    1,554
    
    
    
    9.5
    %Specialty Personal Lines
    
    
    10,828
    
    
    
    8,665
    
    
    
    2,163
    
    
    
    25.0
    %Hawaii and Alaska
    
    
    3,220
    
    
    
    3,766
    
    
    
    (546
    )
    
    
    (14.5
    %)Other
    
    
    2,479
    
    
    
    1,687
    
    
    
    792
    
    
    
    46.9
    %Total Premiums Earned
    
    
    50,315
    
    
    
    43,177
    
    
    
    7,138
    
    
    
    16.5
    %Net investment income
    
    
    3,899
    
    
    
    2,667
    
    
    
    1,232
    
    
    
    46.2
    %Realized gains on investments
    
    
    370
    
    
    
    115
    
    
    
    255
    
    
    
    221.7
    %Other
    
    
    477
    
    
    
    508
    
    
    
    (31
    )
    
    
    (6.1
    %)Total revenues
    
    $
    55,061
    
    
    $
    46,467
    
    
    $
    8,594
    
    
    
    18.5
    %
    13




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##### Table of Contents



Investment Income
  Realized Gains (Losses) on Investments
  Other Operating and General Expenses
  Income Taxes
  Financial Condition
 Investments
   14




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##### Table of Contents



Securities with
    
    Securities withUnrealized
    
    UnrealizedGains
    
    Losses(Dollars in thousands)Fixed Maturities:Fair value of securities
    
    $
    21,348
    
    
    $
    279,918Amortized cost of securities
    
    $
    20,963
    
    
    $
    287,862Gross unrealized gain or (loss)
    
    $
    385
    
    
    $
    (7,944
    )Fair value as a percent of amortized cost
    
    
    101.8
    %
    
    
    97.2
    %Number of security positions held
    
    
    47
    
    
    
    274Number individually exceeding $50,000 gain
    
    
    
    
    
    
    43Concentration of gains or (losses) by type or industry:US Government and government agencies
    
    $
    134
    
    
    $
    (5,238
    )State, municipalities, and political subdivisions
    
    
    136
    
    
    
    (816
    )Banks, insurance, and brokers
    
    
    112
    
    
    
    (1,658
    )Industrial and other
    
    
    3
    
    
    
    (232
    )Percentage rated investment grade (1)
    
    
    91.6
    %
    
    
    99.2
    %Equity Securities:Fair value of securities
    
    $
    23,752
    
    
    $
    10,359Cost of securities
    
    $
    23,140
    
    
    $
    10,681Gross unrealized gain or (loss)
    
    $
    612
    
    
    $
    (322
    )Fair value as percent of cost
    
    
    102.6
    %
    
    
    97.0
    %Number individually exceeding $50,000 gain or loss
    
    
    3
    
    
    
    1
 
 (1)
    
    Investment grade of AAA to BBB by Standard & Poors Corporation.  Securities with
    
    
    Securities withUnrealized
    
    
    UnrealizedGains
    
    
    LossesMaturity:One year or less
    
    
    3.2
    %
    
    
    3.7
    %After one year through five years
    
    
    54.1
    %
    
    
    43.8
    %After five years through ten years
    
    
    32.4
    %
    
    
    42.3
    %After ten years
    
    
    10.3
    %
    
    
    10.2
    %100.0
    %
    
    
    100.0
    %
 15




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##### Table of Contents



March 31, 2006Aggregate
    
    
    Fair ValueAggregate
    
    
    Unrealized
    
    
    as % ofFair Value
    
    
    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 (47 issues)
    
    
    21,348
    
    
    
    385
    
    
    
    101.8
    %$
    21,348
    
    
    $
    385Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (42 issues)
    
    $
    80,322
    
    
    $
    (4,381
    )
    
    
    94.8
    %More than one year (1 issue)
    
    
    710
    
    
    
    (282
    )
    
    
    71.6
    %Less than $50,000 (231 issues)
    
    
    198,886
    
    
    
    (3,281
    )
    
    
    98.4
    %$
    279,918
    
    
    $
    (7,944
    )Equity Securities:Securities with unrealized gains:Exceeding $50,000 and for:Less than one year (3 issue)
    
    $
    4,434
    
    
    $
    217
    
    
    
    105.2
    %More than one year (0 issues)
    
    
    
    
    
    
    Less than $50,000 (40 issues)
    
    
    19,318
    
    
    
    395
    
    
    
    102.1
    %$
    23,752
    
    
    $
    612Securities with unrealized losses:Exceeding $50,000 and for:Less than one year (1 issues)
    
    $
    1,446
    
    
    $
    (88
    )
    
    
    94.3
    %More than one year (0 issues)
    
    
    
    
    
    
    Less than $50,000 (20 issues)
    
    
    8,913
    
    
    
    (234
    )
    
    
    97.4
    %$
    10,359
    
    
    $
    (322
    )
  Premiums and Reinsurance
    16




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##### Table of Contents



Liquidity and Capital Resources
           17




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##### Table of Contents



Critical Accounting Policies
  Losses and Loss Adjustment Expense (LAE) Reserves
   
    
    the Case Incurred Development Method;
    
    the Paid Development Method;
    
    the Bornhuetter-Ferguson Method; and
    
    the Incremental Paid LAE to Paid Loss Methods.
 18




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##### Table of Contents




    
    open and closed claim counts;
    
    average case reserves and average incurred on open claims;
    
    closure rates and statistics related to closed and open claim percentages;
    
    average closed claim severity;
    
    ultimate claim severity;
    
    reported loss ratios;
    
    projected ultimate loss ratios; and
    
    loss payment patterns.
 Other-Than-Temporary Impairment
  
    
    the length of time and the extent to which the market value has been below amortized cost;
    
    whether the issuer is experiencing significant financial difficulties;
    
    economic stability of an entire industry sector or subsection;
    
    whether the issuer, series of issuers or industry has a catastrophic type of loss;
    
    the extent to which the unrealized loss is credit-driven or a result of changes in market interest rates;
    
    historical operating, balance sheet and cash flow data;
    
    internally generated financial models and forecasts;
    
    our ability and intent to hold the investment for a period of time sufficient to
allow for any anticipated recovery in market value; and
    
    other subjective factors, including concentrations and information obtained from
regulators and rating agencies.
  19




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##### Table of Contents



Contractual Obligations/ Off-Balance Sheet Arrangements
   
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
  
 ITEM 4. Controls and Procedures
   
 PART
II  OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors.
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3. Defaults Upon Senior Securities
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
  
 ITEM 5. Other Information
  
 20




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##### Table of Contents



ITEM 6. Exhibits
 
 Exhibit No.
    
    Exhibit Description3.1
    
    Amended and Restated Articles of Incorporation (1)3.2
    
    Amended and Restated Code of Regulations (1)31.1
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934, as amended, as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    These exhibits are incorporated by reference to our Registration Statement
on Form S-1, as amended (Registration No. 333-119270) filed on November 12,
2005 21




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##### Table of Contents



SIGNATURES
  NATIONAL INTERSTATE CORPORATIONDate: May 9, 2006
    
    /s/ Alan R. SpachmanAlan R. SpachmanChairman of the Board and President(Duly Authorized Officer and Principal Executive Officer)Date: May 9, 2006
    
    /s/ Julie A. McGrawJulie A. McGrawVice President and Chief Financial Officer(Duly Authorized Officer and Principal Financial Officer)
 22