##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





Form 10-K


ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934


For the Fiscal Year Ended December 31, 2004


Commission File No. 000-51130





National Interstate Corporation


(Exact name of registrant as specified in its charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Ohio                                                               |  | 34-1607394                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)




3250 Interstate Drive


Richfield, Ohio 44286-9000


(330) 659-8900


(Address and telephone number of principal executive
offices)





Securities Registered Pursuant to Section 12(b) of the
Act:


None


Securities registered pursuant to Section 12(g) of the
Act:


Common Stock


(Title of Class)


Other securities for which reports are submitted pursuant to
Section (d) of the Act:


None





o þ


þ


o þ







Documents Incorporated by Reference:












---










National Interstate Corporation


Index to Annual Report on Form 10-K


|                                          |  |   |  |                                                                                                                         |  |      |    | 
|----------------------------------------- |  | - |  | ----------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                          |  |   |  |                                                                                                                         |  | Page |   
|                                          |  |   |  |                                                                                                                         |  |      |   
|Part I                                   
|Item 1                                    |  |  |  | Business:                                                                                                               |  |      |    | 
|                                          |  |   |  | Introduction                                                                                                            |  |      | 4  | 
|                                          |  |   |  | Property and Casualty Insurance
    Operations                                                                          |  |      | 4  | 
|                                          |  |   |  | Investments                                                                                                             |  |      | 12 | 
|                                          |  |   |  | Future Operations in the U.S. Virgin
    Islands                                                                        |  |      | 14 | 
|                                          |  |   |  | Competition                                                                                                             |  |      | 14 | 
|                                          |  |   |  | Ratings                                                                                                                 |  |      | 15 | 
|                                          |  |   |  | Regulation                                                                                                              |  |      | 15 | 
|                                          |  |   |  | Employees                                                                                                               |  |      | 17 | 
|Item 2                                    |  |  |  | Properties                                                                                                              |  |      | 17 | 
|Item 3                                    |  |  |  | Legal Proceedings                                                                                                       |  |      | 18 | 
|Item 4                                    |  |  |  | Submission of Matters to a Vote of Security
    Holders                                                                 |  |      | 18 | 
|                                         
|Part II                                  
|Item 5                                    |  |  |  | Market for Registrants Common Equity
    and Related Stockholder Matters and Issuer Purchases of Equity
    Securities |  |      | 18 | 
|Item 6                                    |  |  |  | Selected Financial Data                                                                                                 |  |      | 21 | 
|Item 7                                    |  |  |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                               |  |      | 22 | 
|Item 7A                                   |  |  |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                          |  |      | 38 | 
|Item 8                                    |  |  |  | Financial Statements and Supplementary
    Data                                                                         |  |      | 39 | 
|Item 9                                    |  |  |  | Changes and Disagreements with Accountants
    on Accounting and Financial Disclosure                                   |  |      | 63 | 
|Item 9A                                   |  |  |  | Controls and Procedures                                                                                                 |  |      | 63 | 
|Item 9B                                   |  |  |  | Other Information                                                                                                       |  |      | 63 | 
|                                         
|Part III                                 
|Item 10                                   |  |  |  | Directors and Executive Officers of the
    Registrant                                                                  |  |      | 64 | 
|Item 11                                   |  |  |  | Executive Compensation                                                                                                  |  |      | 64 | 
|Item 12                                   |  |  |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                      |  |      | 64 | 
|Item 13                                   |  |  |  | Certain Relationships and Related
    Transactions                                                                      |  |      | 64 | 
|Item 14                                   |  |  |  | Principal Accountant Fees and Services                                                                                  |  |      | 64 | 
|                                         
|Part IV                                  
|Item 15                                   |  |  |  | Exhibits and Financial Statement
    Schedules                                                                          |  |      | 64 | 
|Exhibit 14.1 Code of Ethics and Conduct  
|Exhibit 21.1 Subsidiaries of Registrant  
|Exhibit 23.1 Consent of Ernst & Young LLP
|Exhibit 24.1 Power of Attorney           
|Exhibit 31.1 302 CEO Certification       
|Exhibit 31.2 302 CFO Certification       
|Exhibit 32.1 906 CEO Certification       
|Exhibit 32.2 906 CFO Certification       



2



---



##### Table of Contents



FORWARD-LOOKING STATEMENTS






| |   |                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | general economic conditions and other factors, including
    prevailing interest rate levels and stock and credit market
    performance which may affect (among other things) our ability to
    sell our products, our ability to access capital resources and
    the costs associated with such access to capital and the market
    value of our investments;
|
| |  | customer response to new products and marketing initiatives;                                                                                                                                                                                                                                                                                                      
|
| |  | tax law changes;                                                                                                                                                                                                                                                                                                                                                  
|
| |  | increasing competition in the sale of our insurance products and
    services and the retention of existing customers;                                                                                                                                                                                                                                            
|
| |  | changes in legal environment;                                                                                                                                                                                                                                                                                                                                     
|
| |  | regulatory changes or actions, including those relating to
    regulation of the sale, underwriting and pricing of insurance
    products and services and capital requirements;                                                                                                                                                                                  
|
| |  | levels of natural catastrophes, terrorist events, incidents of
    war and other major losses;                                                                                                                                                                                                                                                                    
|
| |  | adequacy of insurance reserves; and                                                                                                                                                                                                                                                                                                                               
|
| |  | availability of reinsurance and ability of reinsurers to pay
    their obligations.                                                                                                                                                                                                                                                                               



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











Property and Casualty Insurance Operations






4



---



##### Table of Contents







Product Management Organization.




| |             
| | ------------
| | Our Products



|                          |  |                         |         |  |         |  |       |        |  |   |         |  |  |        |       |   |         |   |         |  |  |  |       |  
|------------------------- |  | ----------------------- | ------- |  | ------- |  | ----- | ------ |  | - | ------- |  |  | ------ | ----- | - | ------- | - | ------- |  |  |  | ----- | -
|                          |  | Year Ended December 31, |        
|                          |  |                         |        
|                          |  | 2004                    |         |  | 2003    |  |       | 2002   | 
|                          |  |                         |         |  |         |  |       |        | 
|                          |  | Amount                  |         |  | Percent |  |       | Amount |  |   | Percent |  |  | Amount |       |   | Percent |  
|                          |  |                         |         |  |         |  |       |        |  |   |         |  |  |        |       |   |         |  
|                          |  | (Dollars in thousands)  |        
|Transportation            |  | $                       | 89,849  |  |         |  | 39.9  | %      |  | $ | 91,306  |  |  |        | 48.7  | % |         | $ | 58,697  |  |  |  | 48.2  | %
|Alternative Risk Transfer |  |                         | 72,001  |  |         |  | 32.0  | %      |  |   | 52,051  |  |  |        | 27.8  | % |         |   | 24,263  |  |  |  | 19.9  | %
|Specialty Personal Lines  |  |                         | 37,059  |  |         |  | 16.5  | %      |  |   | 21,928  |  |  |        | 11.7  | % |         |   | 18,212  |  |  |  | 15.0  | %
|Hawaii                    |  |                         | 21,812  |  |         |  | 9.7   | %      |  |   | 20,655  |  |  |        | 11.0  | % |         |   | 18,808  |  |  |  | 15.4  | %
|Other                     |  |                         | 4,263   |  |         |  | 1.9   | %      |  |   | 1,621   |  |  |        | 0.8   | % |         |   | 1,767   |  |  |  | 1.5   | %
|                          |  |                         |         |  |         |  |       |        |  |   |         |  |  |        |       |   |         |  
|Total                     |  | $                       | 224,984 |  |         |  | 100.0 | %      |  | $ | 187,561 |  |  |        | 100.0 | % |         | $ | 121,747 |  |  |  | 100.0 | %
|                          |  |                         |         |  |         |  |       |        |  |   |         |  |  |        |       |   |         |  

5



---



##### Table of Contents





|                          |  |               |          |  |                        |  |   |  |  |  |           |  |  |  |          | 
|------------------------- |  | ------------- | -------- |  | ---------------------- |  | - |  |  |  | --------- |  |  |  | -------- | 
|                          |  | Premium Range |          |  | Annual Premium Average | 
|                          |  |               |          |  |                        | 
|Transportation            |  |               | $5,000   |  |                        |  | - |  |  |  | 500,000   |  |  |  | $68,000  | 
|Alternative Risk Transfer |  |               | $100,000 |  |                        |  | - |  |  |  | 1,000,000 |  |  |  | $280,000 | 
|Specialty Personal Lines  |  |               | $50      |  |                        |  | - |  |  |  | 20,000    |  |  |  | $890     | 
|Hawaii                    |  |               | $350     |  |                        |  | - |  |  |  | 100,000   |  |  |  | $4,200   | 

Transportation.


Alternative Risk Transfer.








6



---



##### Table of Contents









Specialty Personal Lines.


Hawaii.


7



---



##### Table of Contents





| |                         
| | ------------------------
| | Geographic Concentration



|                 |       |                         |         |            |       |  |      |        |            |   |         |         |  |  |      |       |  
|---------------- | ----- | ----------------------- | ------- | ---------- | ----- |  | ---- | ------ | ---------- | - | ------- | ------- |  |  | ---- | ----- | -
|                 |       | Year Ended December 31, |        
|                 |       |                         |        
|                 |       | 2004                    |         |            | 2003  | 
|                 |       |                         |         |            |       | 
|                 |       |                         |         | Percent of |       |  |      |        | Percent of |  
|                 |       | Volume                  |         |            | Total |  |      | Volume |            |   | Total   |        
|                 |       |                         |         |            |       |  |      |        |            |   |         |        
|                 |       | (Dollars in thousands)  |        
|California       |       | $                       | 28,871  |            |       |  | 13.7 | %      |            | $ | 18,850  |         |  |  | 11.6 | %    
|Hawaii           |       |                         | 23,592  |            |       |  | 11.2 | %      |            |   | 21,489  |         |  |  | 13.2 | %    
|North Carolina   |       |                         | 14,784  |            |       |  | 7.0  | %      |            |   | 10,740  |         |  |  | 6.6  | %    
|Florida          |       |                         | 13,882  |            |       |  | 6.6  | %      |            |   | 10,227  |         |  |  | 6.3  | %    
|All other states |       |                         | 129,567 |            |       |  | 61.5 | %      |            |   | 100,953 |         |  |  | 62.3 | %    
|                 |       |                         |         |            |       |  |      |        |            |   |         |        
|                 | Total |                         | $       | 210,696    |       |  |      | 100.0  | %          |   | $       | 162,259 |  |  |      | 100.0 | %
|                 |       |                         |         |            |       |  |      |        |            |   |         |        



| |                                            
| | -------------------------------------------
| | Concentration by Statutory Line of Business



|                         |       |                         |         |            |       |  |      |        |            |   |         |         |  |  |      |       |  
|------------------------ | ----- | ----------------------- | ------- | ---------- | ----- |  | ---- | ------ | ---------- | - | ------- | ------- |  |  | ---- | ----- | -
|                         |       | Year Ended December 31, |        
|                         |       |                         |        
|                         |       | 2004                    |         |            | 2003  | 
|                         |       |                         |         |            |       | 
|                         |       |                         |         | Percent of |       |  |      |        | Percent of |  
|                         |       | Volume                  |         |            | Total |  |      | Volume |            |   | Total   |        
|                         |       |                         |         |            |       |  |      |        |            |   |         |        
|                         |       | (Dollars in thousands)  |        
|Auto and other liability |       | $                       | 120,550 |            |       |  | 57.2 | %      |            | $ | 102,148 |         |  |  | 63.0 | %    
|Auto physical damage     |       |                         | 53,174  |            |       |  | 25.2 | %      |            |   | 36,552  |         |  |  | 22.5 | %    
|Workers compensation    |       |                         | 33,177  |            |       |  | 15.7 | %      |            |   | 20,333  |         |  |  | 12.5 | %    
|All others               |       |                         | 3,795   |            |       |  | 1.8  | %      |            |   | 3,226   |         |  |  | 2.0  | %    
|                         |       |                         |         |            |       |  |      |        |            |   |         |        
|                         | Total |                         | $       | 210,696    |       |  |      | 100.0  | %          |   | $       | 162,259 |  |  |      | 100.0 | %
|                         |       |                         |         |            |       |  |      |        |            |   |         |        



| |             
| | ------------
| | Underwriting





8



---



##### Table of Contents





| |                           
| | --------------------------
| | Marketing and Distribution





| |            
| | -----------
| | Reinsurance





|                                        |                               |           |     |       |             |                        |         |             |  |       |             |        |  |            |        |        |          |  |      |            |   |   |        |        |  |  |      |       |  
|--------------------------------------- | ----------------------------- | --------- | --- | ----- | ----------- | ---------------------- | ------- | ----------- |  | ----- | ----------- | ------ |  | ---------- | ------ | ------ | -------- |  | ---- | ---------- | - | - | ------ | ------ |  |  | ---- | ----- | -
|                                        |                               |           |     | Gross |             |                        | Prepaid |             |  | Total |             |        |  |            | Ceded  |        |          | 
|                                        |                               | A.M. Best |     |       | Reinsurance |                        |         | Reinsurance |  |       | Reinsurance |        |  | Percent of |        |        | Premiums |  |      | Percent of |  
|                                        |                               | Rating    |     |       | Receivables |                        |         | Premium     |  |       | Assets      |        |  | Total      |        |        | Written  |  |      | Total      |  
|                                        |                               |           |     |       |             |                        |         |             |  |       |             |        |  |            |        |        |          |  |      |            |  
|                                        |                               |           |     |       |             | (Dollars in thousands) |         |             |  |       |             |        | 
|Platinum Underwriters Reinsurance, Inc. |                               |           | A   |       |             | $                      | 18,226  |             |  | $     | 5,054       |        |  | $          | 23,280 |        |          |  | 29.4 | %          |   | $ | 15,720 |        |  |  | 26.8 | %    
|Berkley Insurance Company               |                               |           | A   |       |             |                        | 10,022  |             |  |       | 3,077       |        |  |            | 13,099 |        |          |  | 16.5 | %          |   |   | 9,938  |        |  |  | 17.0 | %    
|TOA Reinsurance Co. of America          |                               |           | A   |       |             |                        | 9,210   |             |  |       | 1,966       |        |  |            | 11,176 |        |          |  | 14.1 | %          |   |   | 7,253  |        |  |  | 12.4 | %    
|TRAX Insurance Ltd.                     |                               |           |    |       |             |                        | 8,964   |             |  |       | 855         |        |  |            | 9,819  | (1)    |          |  | 12.4 | %          |   |   | 9,871  |        |  |  | 16.9 | %    
|General Reinsurance Corporation         |                               |           | A++ |       |             |                        | 7,004   |             |  |       | 804         |        |  |            | 7,808  |        |          |  | 9.8  | %          |   |   | 1,754  |        |  |  | 3.0  | %    
|Great American Insurance Company        |                               |           | A   |       |             |                        | 4,532   |             |  |       | 268         |        |  |            | 4,800  |        |          |  | 6.1  | %          |   |   | 305    |        |  |  | 0.5  | %    
|                                        |                               |           |     |       |             |                        |         |             |  |       |             |        |  |            |        |        |          |  |      |            |  
|                                        | Subtotal                      |           |     |       |             |                        |         | 57,958      |  |       |             | 12,024 |  |            |        | 69,982 |          |  |      | 88.2       | % |   |        | 44,841 |  |  |      | 76.6  | %
|                                        | All other reinsurers          |           |     |       |             |                        |         | 5,170       |  |       |             | 4,166  |  |            |        | 9,336  |          |  |      | 11.8       | % |   |        | 13,724 |  |  |      | 23.4  | %
|                                        |                               |           |     |       |             |                        |         |             |  |       |             |        |  |            |        |        |          |  |      |            |  
|                                        | Total reinsurance receivables |           |     |       |             |                        | $       | 63,128      |  |       | $           | 16,190 |  |            | $      | 79,318 |          |  |      | 100.0      | % |   | $      | 58,565 |  |  |      | 100.0 | %
|                                        |                               |           |     |       |             |                        |         |             |  |       |             |        |  |            |        |        |          |  |      |            |  






|    |                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Does not reflect a $9.8 million letter of credit that is
    held as collateral for the net receivable from TRAX Insurance
    Ltd., a member-owned group captive insurance program that we
    created with a captive insurance consultant.





| |                                     
| | ------------------------------------
| | Claims Management and Administration



9



---



##### Table of Contents

















| |                                                        
| | -------------------------------------------------------
| | Reserves for Unpaid Losses and Loss Adjustment Expenses



10



---



##### Table of Contents





Liability for Unpaid Losses and
Loss Adjustment Expenses  As re-estimated at
December 31, 2004,


|                                         |                                            |                        |        |        |        |   |        |       |        |   |        |       |        |      |        |       |        |   |        |       |        |   |        |       |        |      |        |     |        |   |        |       |        |   |        |       |        |   |        |       |        |   |         |  |  | 
|---------------------------------------- | ------------------------------------------ | ---------------------- | ------ | ------ | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------ | ---- | ------ | ----- | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------ | ---- | ------ | --- | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------ | - | ------- |  |  | 
|Net Liability for Unpaid Losses and Loss |                                            |                        |        |        |        |   |        |       |        |   |        |       |        |      |        |       |        |   |        |       |        |  
|Adjustment Expenses:                     |                                            | 1994                   |        |        | 1995   |   |        | 1996  |        |   | 1997   |       |        | 1998 |        |       | 1999   |   |        | 2000  |        |   | 2001   |       |        | 2002 |        |     | 2003   |   |        | 2004  |       
|                                         |                                            |                        |        |        |        |   |        |       |        |   |        |       |        |      |        |       |        |   |        |       |        |   |        |       |        |      |        |     |        |   |        |       |       
|                                         |                                            | (Dollars in thousands) |       
|As originally estimated                  |                                            | $                      | 20,561 |        |        | $ | 22,511 |       |        | $ | 19,691 |       |        | $    | 20,997 |       |        | $ | 23,339 |       |        | $ | 26,566 |       |        | $    | 30,292 |     |        | $ | 48,456 |       |        | $ | 67,162 |       |        | $ | 86,740 |       |        | $ | 111,644 | 
|As re-estimated at December 31, 2004     |                                            |                        | 22,066 |        |        |   | 17,455 |       |        |   | 16,611 |       |        |      | 18,956 |       |        |   | 20,871 |       |        |   | 24,487 |       |        |      | 29,962 |     |        |   | 47,250 |       |        |   | 64,687 |       |        |   | 84,485 |       |        |   |         | 
|                                         | Liability re-estimated as of:              |                        |        |        |        |   |        |       |        |   |        |       |        |      |        |       |        |   |        |       |        |   |        |       |        |      |        |     |        |   |        |       |        |   |        |       |        |   |        |       |        |   |         |  | 
|                                         |                                            | One year later         |        |        | 19,924 |   |        |       | 20,983 |   |        |       | 18,563 |      |        |       | 19,817 |   |        |       | 22,643 |   |        |       | 24,923 |      |        |     | 32,751 |   |        |       | 48,494 |   |        |       | 63,462 |   |        |       | 84,485 |   |         |  |  | 
|                                         |                                            | Two years later        |        |        | 19,117 |   |        |       | 19,571 |   |        |       | 17,520 |      |        |       | 19,448 |   |        |       | 21,948 |   |        |       | 26,252 |      |        |     | 33,473 |   |        |       | 47,479 |   |        |       | 64,687 |   |        |       |        |   |         |  |  | 
|                                         |                                            | Three years later      |        |        | 17,474 |   |        |       | 18,332 |   |        |       | 16,632 |      |        |       | 18,896 |   |        |       | 21,903 |   |        |       | 26,380 |      |        |     | 31,884 |   |        |       | 47,250 |   |        |       |        |   |        |       |        |   |         |  |  | 
|                                         |                                            | Four years later       |        |        | 21,081 |   |        |       | 17,696 |   |        |       | 16,323 |      |        |       | 19,258 |   |        |       | 21,608 |   |        |       | 25,531 |      |        |     | 29,962 |   |        |       |        |   |        |       |        |   |        |       |        |   |         |  |  | 
|                                         |                                            | Five years later       |        |        | 21,518 |   |        |       | 17,304 |   |        |       | 16,446 |      |        |       | 18,966 |   |        |       | 20,542 |   |        |       | 24,487 |      |        |     |        |   |        |       |        |   |        |       |        |   |        |       |        |   |         |  |  | 
|                                         |                                            | Six years later        |        |        | 21,835 |   |        |       | 17,512 |   |        |       | 16,666 |      |        |       | 18,957 |   |        |       | 20,871 |   |        |       |        |      |        |     |        |   |        |       |        |   |        |       |        |   |        |       |        |   |         |  |  | 
|                                         |                                            | Seven years later      |        |        | 21,912 |   |        |       | 17,535 |   |        |       | 16,682 |      |        |       | 18,956 |   |        |       |        |   |        |       |        |      |        |     |        |   |        |       |        |   |        |       |        |   |        |       |        |   |         |  |  | 
|                                         |                                            | Eight years later      |        |        | 22,153 |   |        |       | 17,514 |   |        |       | 16,611 |      |        |       |        |   |        |       |        |   |        |       |        |      |        |     |        |   |        |       |        |   |        |       |        |   |        |       |        |   |         |  |  | 
|                                         |                                            | Nine years later       |        |        | 22,136 |   |        |       | 17,455 |   |        |       |        |      |        |       |        |   |        |       |        |   |        |       |        |      |        |     |        |   |        |       |        |   |        |       |        |   |        |       |        |   |         |  |  | 
|                                         |                                            | Ten years later        |        |        | 22,066 |   |        |       |        |   |        |       |        |      |        |       |        |   |        |       |        |   |        |       |        |      |        |     |        |   |        |       |        |   |        |       |        |   |        |       |        |   |         |  |  | 
|                                         | Net cumulative (deficiency) redundancy     |                        |        | (1,505 | )      |   |        | 5,056 |        |   |        | 3,080 |        |      |        | 2,041 |        |   |        | 2,468 |        |   |        | 2,079 |        |      |        | 330 |        |   |        | 1,206 |        |   |        | 2,475 |        |   |        | 2,255 |        |   |         |  | 
|                                         | Net cumulative (deficiency) redundancy  % |                        |        | (7.3   | )%     |   |        | 22.5  | %      |   |        | 15.6  | %      |      |        | 9.7   | %      |   |        | 10.6  | %      |   |        | 7.8   | %      |      |        | 1.1 | %      |   |        | 2.5   | %      |   |        | 3.7   | %      |   |        | 2.6   | %      |   |         |  | 
|                                         | Cumulative paid of:                        |                        |        |        |        |   |        |       |        |   |        |       |        |      |        |       |        |   |        |       |        |   |        |       |        |      |        |     |        |   |        |       |        |   |        |       |        |   |        |       |        |   |         |  | 
|                                         |                                            | One year later         |        |        | 6,663  |   |        |       | 7,413  |   |        |       | 6,583  |      |        |       | 7,268  |   |        |       | 8,742  |   |        |       | 10,307 |      |        |     | 14,924 |   |        |       | 18,048 |   |        |       | 22,792 |   |        |       | 29,617 |   |         |  |  | 
|                                         |                                            | Two years later        |        |        | 11,052 |   |        |       | 11,743 |   |        |       | 10,605 |      |        |       | 11,769 |   |        |       | 14,189 |   |        |       | 17,637 |      |        |     | 20,077 |   |        |       | 28,510 |   |        |       | 36,927 |   |        |       |        |   |         |  |  | 
|                                         |                                            | Three years later      |        |        | 13,446 |   |        |       | 14,375 |   |        |       | 12,931 |      |        |       | 14,980 |   |        |       | 18,170 |   |        |       | 20,157 |      |        |     | 24,313 |   |        |       | 35,718 |   |        |       |        |   |        |       |        |   |         |  |  | 
|                                         |                                            | Four years later       |        |        | 19,432 |   |        |       | 15,831 |   |        |       | 14,653 |      |        |       | 17,543 |   |        |       | 19,115 |   |        |       | 22,383 |      |        |     | 25,343 |   |        |       |        |   |        |       |        |   |        |       |        |   |         |  |  | 
|                                         |                                            | Five years later       |        |        | 20,934 |   |        |       | 16,715 |   |        |       | 15,642 |      |        |       | 18,253 |   |        |       | 20,158 |   |        |       | 22,762 |      |        |     |        |   |        |       |        |   |        |       |        |   |        |       |        |   |         |  |  | 
|                                         |                                            | Six years later        |        |        | 21,547 |   |        |       | 17,156 |   |        |       | 16,088 |      |        |       | 18,573 |   |        |       | 20,400 |   |        |       |        |      |        |     |        |   |        |       |        |   |        |       |        |   |        |       |        |   |         |  |  | 
|                                         |                                            | Seven years later      |        |        | 21,739 |   |        |       | 17,217 |   |        |       | 16,347 |      |        |       | 18,707 |   |        |       |        |   |        |       |        |      |        |     |        |   |        |       |        |   |        |       |        |   |        |       |        |   |         |  |  | 
|                                         |                                            | Eight years later      |        |        | 21,969 |   |        |       | 17,321 |   |        |       | 16,419 |      |        |       |        |   |        |       |        |   |        |       |        |      |        |     |        |   |        |       |        |   |        |       |        |   |        |       |        |   |         |  |  | 
|                                         |                                            | Nine years later       |        |        | 22,036 |   |        |       | 17,397 |   |        |       |        |      |        |       |        |   |        |       |        |   |        |       |        |      |        |     |        |   |        |       |        |   |        |       |        |   |        |       |        |   |         |  |  | 
|                                         |                                            | Ten years later        |        |        | 22,030 |   |        |       |        |   |        |       |        |      |        |       |        |   |        |       |        |   |        |       |        |      |        |     |        |   |        |       |        |   |        |       |        |   |        |       |        |   |         |  |  | 

11



---



##### Table of Contents





|                                     |                                              |                              |   |        |        |  |   |        |        |  |      |        |        |      |   |        |        |  |   |        |        |  |      |        |        |      |   |        |        |  |   |        |        |  |   |        |         |  |   |        |         |  |   |         |         | 
|------------------------------------ | -------------------------------------------- | ---------------------------- | - | ------ | ------ |  | - | ------ | ------ |  | ---- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ |  | ---- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------- |  | - | ------ | ------- |  | - | ------- | ------- | 
|                                     |                                              | 1994                         |   |        | 1995   |  |   | 1996   |        |  | 1997 |        |        | 1998 |   |        | 1999   |  |   | 2000   |        |  | 2001 |        |        | 2002 |   |        | 2003   |  |   | 2004   |       
|                                     |                                              |                              |   |        |        |  |   |        |        |  |      |        |        |      |   |        |        |  |   |        |        |  |      |        |        |      |   |        |        |  |   |        |       
|As originally estimated:             |                                              |                              |   |        |        |  |   |        |        |  |      |        |        |      |   |        |        |  |   |        |        |  |      |        |        |      |   |        |        |  |   |        |        |  |   |        |         |  |   |        |         |  |   |        
|                                     | Net liability shown above                    |                              | $ | 20,561 |        |  | $ | 22,511 |        |  | $    | 19,691 |        |      | $ | 20,997 |        |  | $ | 23,339 |        |  | $    | 26,566 |        |      | $ | 30,292 |        |  | $ | 48,456 |        |  | $ | 67,162 |         |  | $ | 86,740 |         |  | $ | 111,644 |        
|                                     |                                              | Add reinsurance recoverables |   |        | 3,631  |  |   |        | 2,997  |  |      |        | 4,786  |      |   |        | 6,729  |  |   |        | 9,519  |  |      |        | 11,396 |      |   |        | 12,416 |  |   |        | 22,395 |  |   |        | 35,048  |  |   |        | 41,986  |  |   |         | 59,387  | 
|                                     |                                              |                              |   |        |        |  |   |        |        |  |      |        |        |      |   |        |        |  |   |        |        |  |      |        |        |      |   |        |        |  |   |        |       
|                                     |                                              | Gross liability              |   | $      | 24,192 |  |   | $      | 25,508 |  |      | $      | 24,477 |      |   | $      | 27,726 |  |   | $      | 32,858 |  |      | $      | 37,962 |      |   | $      | 42,708 |  |   | $      | 70,851 |  |   | $      | 102,210 |  |   | $      | 128,726 |  |   | $       | 171,031 | 
|                                     |                                              |                              |   |        |        |  |   |        |        |  |      |        |        |      |   |        |        |  |   |        |        |  |      |        |        |      |   |        |        |  |   |        |       
|As re-estimated at December 31, 2004 |                                              |                              |   |        |        |  |   |        |        |  |      |        |        |      |   |        |        |  |   |        |        |  |      |        |        |      |   |        |        |  |   |        |        |  |   |        |         |  |   |        |         |  |   |        
|                                     |                                              | Net liability shown above    |   | $      | 22,066 |  |   | $      | 17,455 |  |      | $      | 16,611 |      |   | $      | 18,956 |  |   | $      | 20,871 |  |      | $      | 24,487 |      |   | $      | 29,962 |  |   | $      | 47,250 |  |   | $      | 64,687  |  |   | $      | 84,485  |  |   | $       | N/A-    | 
|                                     |                                              | Add reinsurance recoverables |   |        | 4,128  |  |   |        | 3,539  |  |      |        | 4,432  |      |   |        | 6,371  |  |   |        | 5,033  |  |      |        | 6,830  |      |   |        | 12,373 |  |   |        | 29,729 |  |   |        | 45,345  |  |   |        | 51,315  |  |   |         | N/A     | 
|                                     |                                              |                              |   |        |        |  |   |        |        |  |      |        |        |      |   |        |        |  |   |        |        |  |      |        |        |      |   |        |        |  |   |        |       
|                                     |                                              | Gross liability              |   | $      | 26,194 |  |   | $      | 20,994 |  |      | $      | 21,043 |      |   | $      | 25,327 |  |   | $      | 25,904 |  |      | $      | 31,317 |      |   | $      | 42,335 |  |   | $      | 76,979 |  |   | $      | 110,032 |  |   | $      | 135,800 |  |   |         | N/A     | 
|                                     |                                              |                              |   |        |        |  |   |        |        |  |      |        |        |      |   |        |        |  |   |        |        |  |      |        |        |      |   |        |        |  |   |        |       
|                                     | Gross cumulative (deficiency) redundancy     |                              | $ | (2,002 | )      |  | $ | 4,514  |        |  | $    | 3,434  |        |      | $ | 2,399  |        |  | $ | 6,954  |        |  | $    | 6,645  |        |      | $ | 373    |        |  | $ | (6,128 | )      |  | $ | (7,822 | )       |  | $ | (7,074 | )       |  |   | N/A     |        
|                                     |                                              |                              |   |        |        |  |   |        |        |  |      |        |        |      |   |        |        |  |   |        |        |  |      |        |        |      |   |        |        |  |   |        |       
|                                     | Gross cumulative (deficiency) redundancy  % |                              |   | (8.3   | )%     |  |   | 17.7   | %      |  |      | 14.0   | %      |      |   | 8.7    | %      |  |   | 21.2   | %      |  |      | 17.5   | %      |      |   | 0.9    | %      |  |   | (8.6   | )%     |  |   | (7.7   | )%      |  |   | (5.5   | )%      |  |   | N/A     |        
|                                     |                                              |                              |   |        |        |  |   |        |        |  |      |        |        |      |   |        |        |  |   |        |        |  |      |        |        |      |   |        |        |  |   |        |       






Investments




| |        
| | -------
| | General





|                          |                                         |                 |     |       |      |  |      |       |  
|------------------------- | --------------------------------------- | --------------- | --- | ----- | ---- |  | ---- | ----- | -
|                          |                                         | At December 31, |    
|                          |                                         |                 |    
|                          |                                         | 2004            |     |       | 2003 | 
|                          |                                         |                 |     |       |      | 
|Cash and Cash Equivalents |                                         |                 | 4.4 | %     |      |  | 12.9 | %    
|Short Term Investments    |                                         |                 | 2.2 | %     |      |  | 1.0  | %    
|Fixed Maturities:         |                                         |                 |     |       |      |  |      |      
|                          | U.S. Government and government agencies |                 |     | 60.1  | %    |  |      | 38.8  | %
|                          | State and municipal                     |                 |     | 13.7  | %    |  |      | 17.0  | %
|                          | Corporate and other                     |                 |     | 12.5  | %    |  |      | 21.1  | %
|                          |                                         |                 |     |       |      | 
|                          | Total fixed maturities                  |                 |     | 86.3  | %    |  |      | 76.9  | %
|Equity Securities         |                                         |                 | 7.1 | %     |      |  | 9.2  | %    
|                          |                                         |                 |     |       |      | 
|                          | Total                                   |                 |     | 100.0 | %    |  |      | 100.0 | %
|                          |                                         |                 |     |       |      | 

12



---



##### Table of Contents



|                            |                                     |              |  |     |      |  |  |      |   |  |  |      |   
|--------------------------- | ----------------------------------- | ------------ |  | --- | ---- |  |  | ---- | - |  |  | ---- | --
|                            |                                     | Year Ended   | 
|                            |                                     | December 31, | 
|                            |                                     |              | 
|                            |                                     | 2004         |  |     | 2003 |  |  | 2002 |  
|                            |                                     |              |  |     |      |  |  |      |  
|Yield on Fixed Maturities:  |                                     |              |  |     |      |  |  |      |   |  |  |     
|                            | Excluding realized gains and losses |              |  | 4.4 | %    |  |  | 4.6  | % |  |  | 5.1  | % 
|                            | Including realized gains and losses |              |  | 4.9 | %    |  |  | 6.1  | % |  |  | 6.1  | % 
|Yield on Equity Securities: |                                     |              |  |     |      |  |  |      |   |  |  |     
|                            | Excluding realized gains and losses |              |  | 4.5 | %    |  |  | 4.9  | % |  |  | 4.5  | % 
|                            | Including realized gains and losses |              |  | 9.5 | %    |  |  | 3.8  | % |  |  | (4.5 | )%
|Yield on All Investments:   |                                     |              |  |     |      |  |  |      |   |  |  |     
|                            | Excluding realized gains and losses |              |  | 4.4 | %    |  |  | 4.6  | % |  |  | 5.1  | % 
|                            | Including realized gains and losses |              |  | 5.3 | %    |  |  | 5.9  | % |  |  | 4.6  | % 



|                                                      |  |              |      |   |      |  |      |      |  |  |       |   
|----------------------------------------------------- |  | ------------ | ---- | - | ---- |  | ---- | ---- |  |  | ----- | --
|                                                      |  | Year Ended   |     
|                                                      |  | December 31, |     
|                                                      |  |              |     
|                                                      |  | 2004         |      |   | 2003 |  |      | 2002 | 
|                                                      |  |              |      |   |      |  |      |      | 
|National Interstate Total Return on Fixed Maturities  |  |              | 5.1  | % |      |  | 5.2  | %    |  |  | 9.2   | % 
|Lehman Universal Bond Index                           |  |              | 5.0  | % |      |  | 5.8  | %    |  |  | 9.8   | % 
|National Interstate Total Return on Equity Securities |  |              | 5.9  | % |      |  | 17.3 | %    |  |  | (7.4  | )%
|Standard & Poors 500 Index                           |  |              | 10.9 | % |      |  | 28.7 | %    |  |  | (22.1 | )%



| |                           
| | --------------------------
| | Fixed Maturity Investments



|            |  |                            |  |                        |         |  |            |   |         |            |  |  |       |  
|----------- |  | -------------------------- |  | ---------------------- | ------- |  | ---------- | - | ------- | ---------- |  |  | ----- | -
|NAIC        |  |                            |  |                        |         |  |            |  
|Designation |  | Comparable S&P Rating      |  | Amortized Cost         |         |  | Fair Value |   |         | % of Total | 
|            |  |                            |  |                        |         |  |            |   |         |            | 
|            |  |                            |  | (Dollars in thousands) |         |  |           
|1           |  | AAA, AA, A                 |  | $                      | 200,217 |  |            | $ | 200,733 |            |  |  | 97.4  | %
|2           |  | BBB                        |  |                        | 4,625   |  |            |   | 4,586   |            |  |  | 2.2   | %
|            |  |                            |  |                        |         |  |            |   |         |            | 
|            |  | Total Investment Grade     |  |                        | 204,842 |  |            |   | 205,319 |            |  |  | 99.6  | %
|3           |  | BB                         |  |                        | 772     |  |            |   | 802     |            |  |  | 0.4   | %
|4           |  | B                          |  |                        |        |  |            |   |        |            |  |  | 0.0   | %
|5           |  | CCC, CC, C                 |  |                        | 97      |  |            |   | 100     |            |  |  | 0.0   | %
|6           |  | D                          |  |                        |        |  |            |   |        |            |  |  | 0.0   | %
|            |  |                            |  |                        |         |  |            |   |         |            | 
|            |  | Total Non-Investment Grade |  |                        | 869     |  |            |   | 902     |            |  |  | 0.4   | %
|            |  |                            |  |                        |         |  |            |   |         |            | 
|            |  | Total                      |  | $                      | 205,711 |  |            | $ | 206,221 |            |  |  | 100.0 | %
|            |  |                            |  |                        |         |  |            |   |         |            | 

13



---



##### Table of Contents





|                                  |  |                        |         |      |                   |  |       |            |      |   |         |  |  |  |       |  
|--------------------------------- |  | ---------------------- | ------- | ---- | ----------------- |  | ----- | ---------- | ---- | - | ------- |  |  |  | ----- | -
|                                  |  | December 31, 2004      |         |      | December 31, 2003 | 
|                                  |  |                        |         |      |                   | 
|                                  |  |                        |         | % of |                   |  |       |            | % of |  
|                                  |  | Fair Value             |         |      | Total             |  |       | Fair Value |      |   | Total   | 
|                                  |  |                        |         |      |                   |  |       |            |      |   |         | 
|                                  |  | (Dollars in thousands) |        
|One year or less                  |  | $                      | 2,725   |      |                   |  | 1.3   | %          |      | $ | 2,372   |  |  |  | 1.8   | %
|More than one year to five years  |  |                        | 76,102  |      |                   |  | 36.9  | %          |      |   | 28,417  |  |  |  | 22.0  | %
|More than five years to ten years |  |                        | 103,294 |      |                   |  | 50.1  | %          |      |   | 24,555  |  |  |  | 19.1  | %
|More than ten years               |  |                        | 24,100  |      |                   |  | 11.7  | %          |      |   | 73,538  |  |  |  | 57.1  | %
|                                  |  |                        |         |      |                   |  |       |            |      |   |         | 
|Total fixed maturities            |  | $                      | 206,221 |      |                   |  | 100.0 | %          |      | $ | 128,882 |  |  |  | 100.0 | %
|                                  |  |                        |         |      |                   |  |       |            |      |   |         | 






Future Operations in the U.S. Virgin Islands







Competition




14



---



##### Table of Contents








Ratings







Regulation




| |                 
| | ----------------
| | State Regulation



| |        
| | -------
| | General







15



---



##### Table of Contents







| |                                
| | -------------------------------
| | Statutory Accounting Principles







| |                                 
| | --------------------------------
| | Restrictions on Paying Dividends







| |                             
| | ----------------------------
| | Assessments and Fees Payable





| |                                      
| | -------------------------------------
| | Risk-Based Capital (RBC) Requirements



16



---



##### Table of Contents





| |                                                        
| | -------------------------------------------------------
| | Restrictions on Cancellation, Non-Renewal or Withdrawal





| |                   
| | ------------------
| | Federal Regulation



| |        
| | -------
| | General





| |                                 
| | --------------------------------
| | The Terrorism Risk Insurance Act





| |                         
| | ------------------------
| | Legislative Developments








Employees









|       |           
|------ | ----------
|ITEM 2 | Properties



17



---



##### Table of Contents










|       |                  
|------ | -----------------
|ITEM 3 | Legal Proceedings

Please refer to Forward-Looking Statements
following the Index in front of this Form 10-K.













|       |                                                        
|------ | -------------------------------------------------------
|ITEM 4 | Submission of Matters to a Vote of Security
    Holders






PART II







|       |                                                                                                                     
|------ | --------------------------------------------------------------------------------------------------------------------
|ITEM 5 | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities

Please refer to Forward-Looking Statements
following the Index in front of this Form 10-K.




Dividend Policy




18



---



##### Table of Contents





Equity Compensation Plan Information




|                             |  |                            |         |  |                           |                                           |      |                                          |  |  |         | 
|---------------------------- |  | -------------------------- | ------- |  | ------------------------- | ----------------------------------------- | ---- | ---------------------------------------- |  |  | ------- | 
|                             |  |                            |         |  |                           | Number of Securities Available for Future |     
|                             |  | Number of Securities to be |         |  | Weighted-Average Exercise |                                           |      | Issuance under Equity Compensation       | 
|                             |  | Issued upon Exercise of    |         |  | Price of Outstanding      |                                           |      | Plans (Excluding Securities Reflected in | 
|                             |  | Outstanding Options        |         |  | Options                   |                                           |      | Column (a))                              | 
|Equity Compensation Plans    |  | (a)                        |         |  | (b)                       |                                           |      | (c)                                      | 
|                             |  |                            |         |  |                           |                                           |      |                                          | 
|Approved by shareholders     |  |                            | 417,600 |  |                           |                                           | 1.69 |                                          |  |  | 920,400 | 
|Not approved by shareholders |  |                            | none    |  |                           |                                           | N/A  |                                          |  |  | none    | 

Recent Sales of Unregistered Securities






| |                                                                
| | ---------------------------------------------------------------
| | Common Share issuances in connection with option
    exercises:

|                        |  |      |           |  |               |                |         |           |  |   |      | 
|----------------------- |  | ---- | --------- |  | ------------- | -------------- | ------- | --------- |  | - | ---- | 
|                        |  |      |           |  |               | Exercise Price |        
|Name                    |  | Date |           |  | No. of Shares |                |         | per Share | 
|                        |  |      |           |  |               |                |         |           | 
|Eric J. Raudins         |  |      | 9/17/2004 |  |               |                | 24,000  |           |  | $ | 1.25 | 
|Alan R. Spachman        |  |      | 9/17/2004 |  |               |                | 100,000 |           |  | $ | 0.98 | 
|Ronald G. Steiger       |  |      | 9/17/2004 |  |               |                | 40,000  |           |  | $ | 0.94 | 
|Bradley S. Schneeberger |  |      | 9/17/2004 |  |               |                | 30,000  |           |  | $ | 0.69 | 
|Robert A. Bernatchez    |  |      | 9/17/2004 |  |               |                | 32,000  |           |  | $ | 1.32 | 
|David W. Michelson      |  |      | 9/17/2004 |  |               |                | 70,400  |           |  | $ | 0.94 | 
|James A. Parks          |  |      | 9/17/2004 |  |               |                | 10,000  |           |  | $ | 1.91 | 
|Terry E. Phillips       |  |      | 9/17/2004 |  |               |                | 64,000  |           |  | $ | 0.94 | 
|Michael A. Schroeder    |  |      | 9/17/2004 |  |               |                | 16,000  |           |  | $ | 1.91 | 
|Edward J. Masch         |  |      | 9/17/2004 |  |               |                | 5,000   |           |  | $ | 0.83 | 
|Michelle A. Silvestro   |  |      | 9/17/2004 |  |               |                | 40,000  |           |  | $ | 0.94 | 
|John Woods              |  |      | 9/17/2004 |  |               |                | 10,000  |           |  | $ | 1.91 | 
|Gary N. Monda           |  |      | 9/20/2004 |  |               |                | 64,000  |           |  | $ | 0.94 | 

19



---



##### Table of Contents





| |                        
| | -----------------------
| | Stock Option issuances:

|                        |  |      |           |            |         |  |                |           |  |   |      | 
|----------------------- |  | ---- | --------- | ---------- | ------- |  | -------------- | --------- |  | - | ---- | 
|                        |  |      |           | Underlying |         |  | Exercise Price |          
|Name                    |  | Date |           |            | Options |  |                | per Share | 
|                        |  |      |           |            |         |  |                |           | 
|Tony Mercurio           |  |      | 1/1/2004  |            |         |  | 50,000 shares  |           |  | $ | 3.31 | 
|Bradley S. Schneeberger |  |      | 9/17/2004 |            |         |  | 30,000 shares  |           |  | $ | 0.69 | 
|Edward J. Masch         |  |      | 9/17/2004 |            |         |  | 5,000 shares   |           |  | $ | 0.83 | 

Use of Proceeds






|                                       |  |   |             | 
|-------------------------------------- |  | - | ----------- | 
|Underwriting discounts and commissions |  | $ | 3.2 million | 
|Other Expenses                         |  |   | 1.4 million | 
|                                       |  |   |            
|Total                                  |  | $ | 4.6 million | 
|                                       |  |   |            



20



---



##### Table of Contents








|       |                        
|------ | -----------------------
|ITEM 6 | Selected Financial Data



|                                                              |                |                                        |         |         |      |   |         |         |  |   |         |        |  |      |        |        |  |   |        |        | 
|------------------------------------------------------------- | -------------- | -------------------------------------- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------ |  | ---- | ------ | ------ |  | - | ------ | ------ | 
|                                                              |                | At and for the Year Ended December 31, |        
|                                                              |                |                                        |        
|                                                              |                | 2004                                   |         |         | 2003 |   |         | 2002    |  |   | 2001    |        |  | 2000 |       
|                                                              |                |                                        |         |         |      |   |         |         |  |   |         |        |  |      |       
|                                                              |                | (In thousands, except per share data)  |        
|Operating Data:                                               |                |                                        |         |         |      |   |         |         |  |   |         |        |  |      |        |        |  |   |        |       
|Gross premiums written(1)                                     |                | $                                      | 224,984 |         |      | $ | 187,561 |         |  | $ | 121,747 |        |  | $    | 98,132 |        |  | $ | 72,426 |       
|                                                              |                |                                        |         |         |      |   |         |         |  |   |         |        |  |      |       
|Net premiums written(2)                                       |                | $                                      | 166,419 |         |      | $ | 141,924 |         |  | $ | 93,516  |        |  | $    | 74,262 |        |  | $ | 57,808 |       
|                                                              |                |                                        |         |         |      |   |         |         |  |   |         |        |  |      |       
|Premiums earned                                               |                | $                                      | 156,908 |         |      | $ | 126,364 |         |  | $ | 87,356  |        |  | $    | 72,256 |        |  | $ | 45,653 |       
|Net investment income                                         |                |                                        | 8,613   |         |      |   | 5,772   |         |  |   | 4,513   |        |  |      | 3,725  |        |  |   | 3,323  |       
|Net realized gains (losses)                                   |                |                                        | 1,661   |         |      |   | 1,529   |         |  |   | (386    | )      |  |      | 469    |        |  |   | 113    |       
|Other income                                                  |                |                                        | 4,526   |         |      |   | 4,384   |         |  |   | 3,367   |        |  |      | 2,477  |        |  |   | 3,320  |       
|                                                              |                |                                        |         |         |      |   |         |         |  |   |         |        |  |      |       
|                                                              | Total revenues |                                        |         | 171,708 |      |   |         | 138,049 |  |   |         | 94,850 |  |      |        | 78,927 |  |   |        | 52,409 | 
|Losses and loss adjustment expenses                           |                |                                        | 92,008  |         |      |   | 68,798  |         |  |   | 55,049  |        |  |      | 52,565 |        |  |   | 27,240 |       
|Commissions and other underwriting expense                    |                |                                        | 36,760  |         |      |   | 32,211  |         |  |   | 24,156  |        |  |      | 21,940 |        |  |   | 16,041 |       
|Other operating and general expenses                          |                |                                        | 6,888   |         |      |   | 4,893   |         |  |   | 3,928   |        |  |      | 2,398  |        |  |   | 2,428  |       
|Interest expense                                              |                |                                        | 1,610   |         |      |   | 1,043   |         |  |   | 193     |        |  |      | 329    |        |  |   | 118    |       
|                                                              |                |                                        |         |         |      |   |         |         |  |   |         |        |  |      |       
|                                                              | Total expenses |                                        |         | 137,266 |      |   |         | 106,945 |  |   |         | 83,326 |  |      |        | 77,232 |  |   |        | 45,827 | 
|                                                              |                |                                        |         |         |      |   |         |         |  |   |         |        |  |      |       
|Income before income taxes                                    |                |                                        | 34,442  |         |      |   | 31,104  |         |  |   | 11,524  |        |  |      | 1,695  |        |  |   | 6,582  |       
|Provision for income taxes                                    |                |                                        | 11,674  |         |      |   | 11,260  |         |  |   | 3,236   |        |  |      | 487    |        |  |   | 2,107  |       
|                                                              |                |                                        |         |         |      |   |         |         |  |   |         |        |  |      |       
|Net income                                                    |                | $                                      | 22,768  |         |      | $ | 19,844  |         |  | $ | 8,288   |        |  | $    | 1,208  |        |  | $ | 4,475  |       
|                                                              |                |                                        |         |         |      |   |         |         |  |   |         |        |  |      |       
|Selected GAAP Ratios:                                         |                |                                        |         |         |      |   |         |         |  |   |         |        |  |      |        |        |  |   |        |       
|Losses and loss adjustment expense ratio(3)                   |                |                                        | 58.6    | %       |      |   | 54.4    | %       |  |   | 63.0    | %      |  |      | 72.7   | %      |  |   | 59.7   | %     
|Underwriting expense ratio(4)                                 |                |                                        | 24.9    | %       |      |   | 25.9    | %       |  |   | 28.3    | %      |  |      | 30.2   | %      |  |   | 33.2   | %     
|                                                              |                |                                        |         |         |      |   |         |         |  |   |         |        |  |      |       
|Combined ratio(5)                                             |                |                                        | 83.5    | %       |      |   | 80.3    | %       |  |   | 91.3    | %      |  |      | 102.9  | %      |  |   | 92.9   | %     
|                                                              |                |                                        |         |         |      |   |         |         |  |   |         |        |  |      |       
|Return on equity(6)                                           |                |                                        | 37.2    | %       |      |   | 49.9    | %       |  |   | 31.2    | %      |  |      | 5.4    | %      |  |   | 23.3   | %     
|Per Share Data(7):                                            |                |                                        |         |         |      |   |         |         |  |   |         |        |  |      |        |        |  |   |        |       
|Earnings per common share, basic                              |                | $                                      | 1.50    |         |      | $ | 1.32    |         |  | $ | 0.49    |        |  | $    | 0.07   |        |  | $ | 0.25   |       
|Earnings per common share, assuming dilution                  |                |                                        | 1.47    |         |      |   | 1.29    |         |  |   | 0.49    |        |  |      | 0.07   |        |  |   | 0.25   |       
|Book value per common share, basic (at period end)            |                |                                        | 4.69    |         |      |   | 3.31    |         |  |   | 1.99    |        |  |      | 1.32   |        |  |   | 1.25   |       
|Weighted average number of common shares outstanding, basic   |                |                                        | 15,171  |         |      |   | 15,057  |         |  |   | 16,805  |        |  |      | 17,583 |        |  |   | 17,585 |       
|Weighted average number of common shares outstanding, diluted |                |                                        | 15,480  |         |      |   | 15,347  |         |  |   | 16,949  |        |  |      | 17,674 |        |  |   | 17,631 |       
|Common shares outstanding (at period end)                     |                |                                        | 15,530  |         |      |   | 15,024  |         |  |   | 15,074  |        |  |      | 17,575 |        |  |   | 17,585 |       

21



---



##### Table of Contents



|                                           |  |                 |         |  |      |   |         |      |  |   |         |  |  |      |         |  |  |   |         | 
|------------------------------------------ |  | --------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------- |  |  | - | ------- | 
|                                           |  | At December 31, |        
|                                           |  |                 |        
|                                           |  | 2004            |         |  | 2003 |   |         | 2002 |  |   | 2001    |  |  | 2000 |        
|                                           |  |                 |         |  |      |   |         |      |  |   |         |  |  |      |        
|Balance Sheet Data:                        |  |                 |         |  |      |   |         |      |  |   |         |  |  |      |         |  |  |   |         | 
|Cash and investments                       |  | $               | 238,951 |  |      | $ | 167,622 |      |  | $ | 110,454 |  |  | $    | 87,194  |  |  | $ | 64,854  | 
|Reinsurance recoverable                    |  |                 | 63,128  |  |      |   | 43,119  |      |  |   | 37,732  |  |  |      | 23,166  |  |  |   | 9,652   | 
|Total assets                               |  |                 | 401,236 |  |      |   | 300,656 |      |  |   | 210,369 |  |  |      | 162,279 |  |  |   | 123,801 | 
|Unpaid losses and loss adjustment expenses |  |                 | 171,031 |  |      |   | 128,726 |      |  |   | 102,210 |  |  |      | 70,852  |  |  |   | 43,235  | 
|Long-term debt(8)                          |  |                 | 32,547  |  |      |   | 18,901  |      |  |   | 6,583   |  |  |      | 9,207   |  |  |   | 9,617   | 
|Total shareholders equity                 |  |                 | 72,789  |  |      |   | 49,680  |      |  |   | 29,932  |  |  |      | 23,198  |  |  |   | 21,957  | 

|                            |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|--------------------------- |  | -------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                            |  | At and for the Year Ended December 31, |       
|                            |  |                                        |       
|                            |  | 2004                                   |        |   | 2003 |   |        | 2002 |  |   | 2001   |   |  | 2000 |       
|                            |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |       
|Selected Statutory Data(9): |  |                                        |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Policyholder surplus(10)    |  | $                                      | 92,124 |   |      | $ | 58,621 |      |  | $ | 36,944 |   |  | $    | 33,982 |   |  | $ | 21,106 |  
|Combined ratio(11)          |  |                                        | 81.3   | % |      |   | 81.7   | %    |  |   | 90.8   | % |  |      | 103.4  | % |  |   | 91.8   | %






| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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 loss adjustment expenses to premiums
    earned.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (4) | The ratio of the net of the sum of commissions and other
    underwriting expenses, other operating expenses less other
    income to premiums earned.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (5) | The sum of the loss and loss adjustment expense ratio and the
    underwriting expense ratio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | (6) | The ratio of net income to the average of the shareholders
    equity at the beginning and end of the period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | (7) | Adjusted to reflect a 200-for-1 share split effective
    December 6, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | (8) | The 2004 data includes $15.0 million note payable to Great
    American, junior subordinated debt and bank debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | (9) | While financial data is reported in accordance with accounting
    principles generally accepted in the United States, or GAAP, for
    shareholder and other investment purposes, it is reported on a
    statutory basis for insurance regulatory purposes. Certain
    statutory expenses differ from amounts reported under GAAP.
    Specifically, under GAAP, premium taxes and other variable costs
    incurred in connection with writing new and renewal business are
    capitalized and amortized on a pro rata basis over the period in
    which the related premiums are earned. On a statutory basis,
    these items are expensed as incurred. In addition, certain other
    expenses, such as those related to the expensing or amortization
    of computer software, are accounted for differently for
    statutory purposes than the treatment accorded under GAAP.



|     |                                                                                                                                                                                                                                                                                                     
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | The statutory policyholder surplus of National Interstate
    Insurance Company, which includes the statutory policyholder
    surplus of its subsidiary, National Interstate Insurance Company
    of Hawaii.                                                                                      
|    
|(11) | Statutory combined ratio of National Interstate Insurance
    Company represents the sum of the following ratios:
    (1) losses and loss adjustment expenses incurred as a
    percentage of net earned premium and (2) underwriting
    expenses incurred as a percentage of net written premiums.






|       |                                                                                          
|------ | -----------------------------------------------------------------------------------------
|ITEM 7 | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

Please refer to Forward Looking Statements
following the Index in front of this 10-K.


The following discussion and analysis of the historical
consolidated financial statements of National Interstate should
be read in conjunction with our audited consolidated financial
statements and the related notes included elsewhere in this
Form 10-K. All historical per share amounts reflect a
200-for-1 share split as discussed elsewhere in this
Form 10-K and the reclassification of all Class A
common shares as common shares effective December 6, 2004.
Our actual results could differ materially from those
anticipated in these


22



---



##### Table of Contents



forward-looking statements as a result of various factors
including those discussed below and elsewhere in this 10-K.


Overview












| |            
| | -----------
| | 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.

23



---



##### Table of Contents





| |       
| | ------
| | Quotes



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The change in the percentage of the new applications received
    that do not receive a National Interstate quote. We do not quote
    risks that do not meet our risk selection criteria or for which
    we have not been provided complete application data. We refer to
    this ratio as the declination ratio and an
    increasing declination ratio usually results in reduced
    opportunities to quote 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 routines; our
    underwriting profit expectations; and our claims adjusting
    processes. The difference between our rates and the rates of our
    competitors is the primary factor impacting the revenue growth
    of our established product lines.



| |                                   
| | ----------------------------------
| | Product Offerings and Distribution



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We operate in multiple markets with multiple distribution
    approaches to attempt to reduce the probability that an adverse
    competitive response in any single market will have a
    significant impact on our overall business. We also attempt to
    maintain several new products, product line extensions or
    product distribution approaches in an active development status
    so we are able to take advantage of market opportunities. We
    select from potential new product ideas based on our stated new
    business criteria and the anticipated competitive response.



| |                    
| | -------------------
| | Industry and Trends







| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our business model and bottom line orientation have resulted in
    what we believe is disciplined and consistent risk assessment
    and pricing adequacy.  
|
| |  | Our ability to attract and retain what we believe are some of
    the best transportation companies in the industries we serve
    into our captive programs.
|
| |  | Operating expense reductions through system investments and a
    lower cost structure in our captive products.                                              

24



---



##### Table of Contents













| |         
| | --------
| | Revenues





25



---



##### Table of Contents













| |         
| | --------
| | Expenses



Critical Accounting Policies




26



---



##### Table of Contents







| |                                                       
| | ------------------------------------------------------
| | Losses and Loss Adjustment Expenses
    (LAE) Reserves







| |   |                                               
| | - | ----------------------------------------------
| |  | the Case Incurred Development Method;         
|
| |  | the Paid Development Method;                  
|
| |  | the Bornhuetter-Ferguson Method; and          
|
| |  | the Incremental Paid LAE to Paid Loss Methods.





| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | open and closed claim counts;                                                 
|
| |  | average case reserves and average incurred on open claims;                    
|
| |  | closure rates and statistics related to closed and open claim
    percentages;
|
| |  | average closed claim severity;                                                
|
| |  | ultimate claim severity;                                                      
|
| |  | reported loss ratios;                                                         
|
| |  | projected ultimate loss ratios; and                                           
|
| |  | loss payment patterns.                                                        



27



---



##### Table of Contents





|                          |  |            |       | 
|------------------------- |  | ---------- | ----- | 
|                          |  | Cumulative |      
|Line of Business          |  | Impact     |      
|                          |  |            |      
|Commercial Auto Liability |  | $          | 1,195 | 
|Workers Compensation     |  |            | 111   | 

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.                        







28



---



##### Table of Contents









Gross Loss Reserves


|                            |  |                      |        |                |      |   |        |     |  |   |        |  |  |   |         | 
|--------------------------- |  | -------------------- | ------ | -------------- | ---- | - | ------ | --- |  | - | ------ |  |  | - | ------- | 
|                            |  | At December 31, 2004 |       
|                            |  |                      |       
|Statutory Lines of Business |  | Case                 |        |                | IBNR |   |        | LAE |  |   | Total  | 
|                            |  |                      |        |                |      |   |        |     |  |   |        | 
|                            |  |                      |        | (In thousands) |      |   |       
|Commercial auto liability   |  | $                    | 43,462 |                |      | $ | 50,386 |     |  | $ | 29,380 |  |  | $ | 123,228 | 
|Workers compensation       |  |                      | 5,873  |                |      |   | 16,544 |     |  |   | 3,651  |  |  |   | 26,068  | 
|Auto physical damage        |  |                      | 3,935  |                |      |   | 5,084  |     |  |   | 1,912  |  |  |   | 10,931  | 
|General liability           |  |                      | 905    |                |      |   | 2,316  |     |  |   | 876    |  |  |   | 4,097   | 
|Private passenger           |  |                      | 1,710  |                |      |   | 660    |     |  |   | 433    |  |  |   | 2,803   | 
|Inland marine               |  |                      | 462    |                |      |   | 924    |     |  |   | 106    |  |  |   | 1,492   | 
|Commercial multiple peril   |  |                      | 1,107  |                |      |   | 279    |     |  |   | 634    |  |  |   | 2,020   | 
|Other lines                 |  |                      | 338    |                |      |   | 41     |     |  |   | 13     |  |  |   | 392     | 
|                            |  |                      |        |                |      |   |        |     |  |   |        | 
|                            |  | $                    | 57,792 |                |      | $ | 76,234 |     |  | $ | 37,005 |  |  | $ | 171,031 | 
|                            |  |                      |        |                |      |   |        |     |  |   |        | 

Reinsurance Recoverables.


29



---



##### Table of Contents







| |                                
| | -------------------------------
| | Other-Than-Temporary Impairment





| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the length of time and the extent to which the market value has
    been below amortized cost;                                                  
|
| |  | whether the issuer is experiencing significant financial
    difficulties;                                                                      
|
| |  | economic stability of an entire industry sector or subsection;                                                                                  
|
| |  | whether the issuer, series of issuers or industry has a
    catastrophic type of loss;                                                          
|
| |  | the extent to which the unrealized loss is credit-driven or a
    result of changes in market interest rates;                                   
|
| |  | historical operating, balance sheet and cash flow data;                                                                                         
|
| |  | internally generated financial models and forecasts;                                                                                            
|
| |  | our ability and intent to hold the investment for a period of
    time sufficient to allow for any anticipated recovery in market
    value; and
|
| |  | other subjective factors, including concentrations and
    information obtained from regulators and rating agencies.                            



Results of Operations




| |             
| | ------------
| | Underwriting





30



---



##### Table of Contents





|                           |                               |                         |   |         |      |  |   |         |   |  |   |         |  
|-------------------------- | ----------------------------- | ----------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                           |                               | Year Ended December 31, |  
|                           |                               |                         |  
|                           |                               | 2004                    |   |         | 2003 |  |   | 2002    |  
|                           |                               |                         |   |         |      |  |   |         |  
|                           |                               | (Dollars in thousands)  |  
|Net Earned Premiums (GAAP) |                               |                         |   |         |      |  |   |         |   |  |   |        
|                           | Gross written premiums        |                         | $ | 224,984 |      |  | $ | 187,561 |   |  | $ | 121,747 |  
|                           | Ceded reinsurance             |                         |   | 58,565  |      |  |   | 45,637  |   |  |   | 28,231  |  
|                           |                               |                         |   |         |      |  |   |         |  
|                           | Net written premiums          |                         |   | 166,419 |      |  |   | 141,924 |   |  |   | 93,516  |  
|                           | Change in unearned premiums   |                         |   | 9,511   |      |  |   | 15,560  |   |  |   | 6,160   |  
|                           |                               |                         |   |         |      |  |   |         |  
|                           | Net earned premiums           |                         | $ | 156,908 |      |  | $ | 126,364 |   |  | $ | 87,356  |  
|                           |                               |                         |   |         |      |  |   |         |  
|Combined Ratios (GAAP)     |                               |                         |   |         |      |  |   |         |   |  |   |        
|                           | Loss and LAE ratio(1)         |                         |   | 58.6    | %    |  |   | 54.4    | % |  |   | 63.0    | %
|                           | Underwriting expense ratio(2) |                         |   | 24.9    | %    |  |   | 25.9    | % |  |   | 28.3    | %
|                           |                               |                         |   |         |      |  |   |         |  
|                           | Combined ratio                |                         |   | 83.5    | %    |  |   | 80.3    | % |  |   | 91.3    | %
|                           |                               |                         |   |         |      |  |   |         |  






|    |                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The ratio of losses and loss adjustment expenses to premiums
    earned.                                                                              
|   
|(2) | The ratio of the net of the sum of commissions and other
    underwriting expenses, other operating expenses less other
    income to premiums earned.

2004 compared to 2003.




31



---



##### Table of Contents







2003 compared to 2002.








| |                  
| | -----------------
| | Investment Income

2004 compared to 2003.


2003 compared to 2002.


32



---



##### Table of Contents





| |                                       
| | --------------------------------------
| | Realized Gains (Losses) on Investments

2004 compared to 2003.


2003 compared to 2002.




| |                                     
| | ------------------------------------
| | Other Operating and General Expenses





| |                 
| | ----------------
| | Interest Expense

2004 compared to 2003.


2003 compared to 2002.




| |             
| | ------------
| | Income Taxes



Liquidity and Capital Resources


Capital Ratios.


Sources of Funds.




33



---



##### Table of Contents



















34



---



##### Table of Contents





Contractual Obligations




|                               |  |                        |         |        |        |   |        |           |           |   |           |  |  |         |        |  |  |   |        | 
|------------------------------ |  | ---------------------- | ------- | ------ | ------ | - | ------ | --------- | --------- | - | --------- |  |  | ------- | ------ |  |  | - | ------ | 
|                               |  | Payment Due by Period  |        
|                               |  |                        |        
|                               |  |                        |         | Within |        |   |        |           | More Than |  
|                               |  | Total                  |         |        | 1 Year |   |        | 2-3 Years |           |   | 4-5 Years |  |  | 5 Years |       
|                               |  |                        |         |        |        |   |        |           |           |   |           |  |  |         |       
|                               |  | (Dollars in thousands) |        
|Gross Unpaid Losses and LAE(1) |  | $                      | 171,031 |        |        | $ | 63,486 |           |           | $ | 62,165    |  |  | $       | 37,964 |  |  | $ | 7,416  | 
|Long-term debt obligations     |  |                        | 17,547  |        |        |   | 1,250  |           |           |   | 833       |  |  |         |       |  |  |   | 15,464 | 
|Operating lease obligations    |  |                        | 691     |        |        |   | 171    |           |           |   | 343       |  |  |         | 172    |  |  |   | 5      | 
|                               |  |                        |         |        |        |   |        |           |           |   |           |  |  |         |       
|Total                          |  | $                      | 189,269 |        |        | $ | 64,907 |           |           | $ | 63,341    |  |  | $       | 38,136 |  |  | $ | 22,885 | 
|                               |  |                        |         |        |        |   |        |           |           |   |           |  |  |         |       






|    |                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.



Investments






35



---



##### Table of Contents





|                   |                                                       |                        |   |         |                 |  |   |         |  
|------------------ | ----------------------------------------------------- | ---------------------- | - | ------- | --------------- |  | - | ------- | -
|                   |                                                       | Securities with        |   |         | Securities with | 
|                   |                                                       | Unrealized             |   |         | Unrealized      | 
|                   |                                                       | Gains                  |   |         | Losses          | 
|                   |                                                       |                        |   |         |                 | 
|                   |                                                       | (Dollars in thousands) |  
|Fixed Maturities:  |                                                       |                        |   |         |                 |  |   |        
|                   | Fair value of securities                              |                        | $ | 105,309 |                 |  | $ | 100,912 |  
|                   | Amortized cost of securities                          |                        |   | 104,002 |                 |  |   | 101,709 |  
|                   | Gross unrealized gain or loss                         |                        |   | 1,307   |                 |  |   | (797    | )
|                   | Fair value as a % of amortized cost                   |                        |   | 101.3   | %               |  |   | 99.2    | %
|                   | Number of security positions held                     |                        |   | 133     |                 |  |   | 103     |  
|                   | Number individually exceeding $50,000 gain or loss    |                        |   | 2       |                 |  |   |        |  
|                   | Concentration of gains or losses by type or industry: |                        |   |         |                 |  |   |         |  
|                   | US Government and government agencies                 |                        | $ | 308     |                 |  | $ | (599    | )
|                   | State, municipalities and political subdivisions      |                        |   | 656     |                 |  |   | (51     | )
|                   | Banks, insurance and brokers                          |                        |   | 243     |                 |  |   | (127    | )
|                   | Electric services                                     |                        |   | 18      |                 |  |   |        |  
|                   | Industrial and other                                  |                        |   | 82      |                 |  |   | (20     | )
|                   | Percentage rated investment grade(1)                  |                        |   | 97.6    | %               |  |   | 100.0   | %
|Equity Securities: |                                                       |                        |   |         |                 |  |   |        
|                   | Fair value of securities                              |                        | $ | 9,142   |                 |  | $ | 7,699   |  
|                   | Cost of securities                                    |                        |   | 8,737   |                 |  |   | 7,785   |  
|                   | Gross unrealized gain or loss                         |                        |   | 405     |                 |  |   | (86     | )
|                   | Fair value as a % of cost                             |                        |   | 104.6   | %               |  |   | 98.9    | %
|                   | Number individually exceeding $50,000 gain or loss    |                        |   |        |                 |  |   |        |  






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



|                                   |  |                 |       |   |                 |  |        |  
|---------------------------------- |  | --------------- | ----- | - | --------------- |  | ------ | -
|                                   |  | Securities with |       |   | Securities with | 
|                                   |  | Unrealized      |       |   | Unrealized      | 
|                                   |  | Gains           |       |   | Losses          | 
|                                   |  |                 |       |   |                 | 
|Maturity:                          |  |                 |       |   |                 |  |        |  
|One year or less                   |  |                 | 2.3   | % |                 |  | 0.1    | %
|After one year through five years  |  |                 | 46.1  | % |                 |  | 29.8   | %
|After five years through ten years |  |                 | 42.0  | % |                 |  | 52.1   | %
|After ten years                    |  |                 | 9.6   | % |                 |  | 18.0   | %
|                                   |  |                 |       |   |                 | 
|                                   |  |                 | 100.0 | % |                 |  | 100.00 | %

36



---



##### Table of Contents





|                                   |                                |                               |         |         |             |   |       |            |    |  |  |       |       |  
|---------------------------------- | ------------------------------ | ----------------------------- | ------- | ------- | ----------- | - | ----- | ---------- | -- |  |  | ----- | ----- | -
|                                   |                                | At December 31, 2004          |        
|                                   |                                |                               |        
|                                   |                                | Aggregate                     |         |         | Aggregate   |   |       | Fair Value |   
|                                   |                                | Fair                          |         |         | Unrealized  |   |       | as % of    |   
|                                   |                                | Value                         |         |         | Gain (Loss) |   |       | Cost Basis |   
|                                   |                                |                               |         |         |             |   |       |            |   
|                                   |                                | (Dollars in thousands)        |        
|Fixed Maturities:                  |                                |                               |         |         |             |   |       |            |    |  |  |      
|Securities with unrealized gains:  |                                |                               |         |         |             |   |       |            |    |  |  |      
|                                   | Exceeding $50,000 and for:     |                               |         |         |             |   |       |            |    |  |  |       |      
|                                   |                                | Less than one year (1 issue)  |         | $       | 2,000       |   |       | $          | 52 |  |  |       | 102.7 | %
|                                   |                                | More than one year (1 issues) |         |         | 1,090       |   |       |            | 56 |  |  |       | 105.4 | %
|                                   | Less than $50,000 (131 issues) |                               |         | 102,219 |             |   |       | 1,199      |    |  |  | 101.2 | %    
|                                   |                                |                               |         |         |             |   |       |            |   
|                                   |                                | $                             | 105,309 |         |             | $ | 1,307 |            |    |  |  |      
|                                   |                                |                               |         |         |             |   |       |            |   
|Securities with unrealized losses: |                                |                               |         |         |             |   |       |            |    |  |  |      
|                                   | Exceeding $50,000 and for:     |                               |         |         |             |   |       |            |    |  |  |       |      
|                                   |                                | Less than one year (0 issues) |         | $       |            |   |       | $          |   |  |  |       |       |  
|                                   |                                | More than one year (0 issues) |         |         |            |   |       |            |   |  |  |       |       |  
|                                   | Less than $50,000 (103 issues) |                               |         | 100,912 |             |   |       | (797       | )  |  |  | 99.2  | %    
|                                   |                                |                               |         |         |             |   |       |            |   
|                                   |                                | $                             | 100,912 |         |             | $ | (797  | )          |    |  |  |      
|                                   |                                |                               |         |         |             |   |       |            |   
|Equity Securities:                 |                                |                               |         |         |             |   |       |            |    |  |  |      
|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 (33 issues)  |                               |         | 9,142   |             |   |       | 405        |    |  |  | 104.6 | %    
|                                   |                                |                               |         |         |             |   |       |            |   
|                                   |                                | $                             | 9,142   |         |             | $ | 405   |            |    |  |  |      
|                                   |                                |                               |         |         |             |   |       |            |   
|Securities with unrealized losses: |                                |                               |         |         |             |   |       |            |    |  |  |      
|                                   | Exceeding $50,000 and for:     |                               |         |         |             |   |       |            |    |  |  |       |      
|                                   |                                | Less than one year (0 issue)  |         | $       |            |   |       | $          |   |  |  |       |       |  
|                                   |                                | More than one year (0 issues) |         |         |            |   |       |            |   |  |  |       |       |  
|                                   | Less than $50,000 (13 issues)  |                               |         | 7,699   |             |   |       | (86        | )  |  |  | 98.9  | %    
|                                   |                                |                               |         |         |             |   |       |            |   
|                                   |                                | $                             | 7,699   |         |             | $ | (86   | )          |    |  |  |      
|                                   |                                |                               |         |         |             |   |       |            |   



|            |  |                        |       |  |             |   |      |       |  |   |       |  
|----------- |  | ---------------------- | ----- |  | ----------- | - | ---- | ----- |  | - | ----- | -
|            |  | Net Realized           |       |  |             |   |     
|            |  | Gains (Losses)         |       |  | Charges for |   |      |      
|            |  | on Sales               |       |  | Impairment  |   |      | Total | 
|            |  |                        |       |  |             |   |      |       | 
|            |  | (Dollars in thousands) |      
|Year ended: |  |                        |       |  |             |   |      |       |  |   |       |  
|2004        |  | $                      | 1,661 |  |             | $ |     |       |  | $ | 1,661 |  
|2003        |  |                        | 1,540 |  |             |   | (11  | )     |  |   | 1,529 |  
|2002        |  |                        | 40    |  |             |   | (426 | )     |  |   | (386  | )

37



---



##### Table of Contents



Off-Balance Sheet Items









|        |                                                               
|------- | --------------------------------------------------------------
|ITEM 7A | Quantitative and Qualitative Disclosures About Market
    Risk



Fixed Maturity Portfolio.




|                             |            |                        |        |         |                   |  |           |            |   |   |        |         |  |  |     |     |  
|---------------------------- | ---------- | ---------------------- | ------ | ------- | ----------------- |  | --------- | ---------- | - | - | ------ | ------- |  |  | --- | --- | -
|                             |            | December 31, 2004      |        |         | December 31, 2003 | 
|                             |            |                        |        |         |                   | 
|                             |            | Principal              |        |         |                   |  | Principal |            |   |  
|                             |            | Cash Flows             |        |         | Rate              |  |           | Cash Flows |   |   | Rate   |        
|                             |            |                        |        |         |                   |  |           |            |   |   |        |        
|                             |            | (Dollars in thousands) |       
|Subsequent calendar year     |            | $                      | 2,680  |         |                   |  | 6.1       | %          |   | $ | 14,325 |         |  |  | 5.1 | %  
|2nd subsequent calendar year |            |                        | 2,525  |         |                   |  | 4.6       | %          |   |   | 16,125 |         |  |  | 4.5 | %  
|3rd subsequent calendar year |            |                        | 12,780 |         |                   |  | 3.7       | %          |   |   | 10,590 |         |  |  | 5.1 | %  
|4th subsequent calendar year |            |                        | 8,028  |         |                   |  | 4.2       | %          |   |   | 10,930 |         |  |  | 5.3 | %  
|5th subsequent calendar year |            |                        | 30,944 |         |                   |  | 4.5       | %          |   |   | 12,398 |         |  |  | 5.1 | %  
|                             | Thereafter |                        |        | 146,846 |                   |  |           | 5.0        | % |   |        | 61,075  |  |  |     | 5.5 | %
|                             |            |                        |        |         |                   |  |           |            |   |   |        |        
|                             | Total      |                        | $      | 203,803 |                   |  |           | 4.8        | % |   | $      | 125,443 |  |  |     | 5.2 | %
|                             |            |                        |        |         |                   |  |           |            |   |   |        |        
|                             | Fair value |                        | $      | 206,221 |                   |  |           |            |   |   | $      | 128,882 |  |  |     |     |  
|                             |            |                        |        |         |                   |  |           |            |   |   |        |        

Equity Risk.


38



---



##### Table of Contents








|       |                                            
|------ | -------------------------------------------
|ITEM 8 | Financial Statements and Supplementary Data

|                                                                                                     |  |      |    | 
|---------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                     |  | Page |   
|                                                                                                     |  |      |   
|Index to Financial Statements                                                                        |  |      |    | 
|Report of Independent Registered Public
    Accounting Firm                                          |  |      | 40 | 
|Consolidated Balance Sheets:
    December 31, 2004 and 2003                                          |  |      | 41 | 
|Consolidated Statements of Income:
    Years ended December 31, 2004, 2003 and 2002                  |  |      | 42 | 
|Consolidated Statements of
    Shareholders Equity
    Years ended December 31, 2004, 2003 and 2002 |  |      | 43 | 
|Consolidated Statements of Cash Flows:
    Years ended December 31, 2004, 2003 and 2002              |  |      | 44 | 
|Notes to Consolidated Financial
    Statements                                                       |  |      | 45 | 



39



---



##### Table of Contents






REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














| |                      
| | ---------------------
| | /s/ Ernst & Young LLP





40



---



##### Table of Contents



INTERSTATE CORPORATION AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


|                                                                                               |                                                                                                                |                                                                                      |        |         |              |  |        |         |         | 
|---------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | ------ | ------- | ------------ |  | ------ | ------- | ------- | 
|                                                                                               |                                                                                                                | December 31,                                                                         |        |         | December 31, | 
|                                                                                               |                                                                                                                | 2004                                                                                 |        |         | 2003         | 
|                                                                                               |                                                                                                                |                                                                                      |        |         |              | 
|                                                                                               |                                                                                                                | (Dollars in thousands, except                                                        |       
|                                                                                               |                                                                                                                | share data)                                                                          |       
|ASSETS                                                                                        
|Investments:                                                                                   |                                                                                                                |                                                                                      |        |         |              |  |        |        
|                                                                                               | Fixed maturities available-for-sale, at fair value (amortized
    cost of $205,711 and $127,962, respectively) |                                                                                      | $      | 206,221 |              |  | $      | 128,882 |        
|                                                                                               | Equities available-for-sale, at fair value (cost of $16,522 and
    $14,441, respectively)                     |                                                                                      |        | 16,841  |              |  |        | 15,411  |        
|                                                                                               | Short-term investments, at cost which approximates fair value                                                  |                                                                                      |        | 5,280   |              |  |        | 1,719   |        
|                                                                                               |                                                                                                                |                                                                                      |        |         |              | 
|                                                                                               |                                                                                                                | Total investments                                                                    |        |         | 228,342      |  |        |         | 146,012 | 
|Cash and cash equivalents                                                                      |                                                                                                                |                                                                                      | 10,609 |         |              |  | 21,610 |        
|Promissory note from officer                                                                   |                                                                                                                |                                                                                      |       |         |              |  | 1,100  |        
|Accrued investment income                                                                      |                                                                                                                |                                                                                      | 2,344  |         |              |  | 1,490  |        
|Premiums receivable, net of allowance for doubtful accounts of
    $361 and $424, respectively |                                                                                                                |                                                                                      | 45,129 |         |              |  | 42,551 |        
|Reinsurance recoverables on paid and unpaid losses                                             |                                                                                                                |                                                                                      | 63,128 |         |              |  | 43,119 |        
|Prepaid reinsurance premiums                                                                   |                                                                                                                |                                                                                      | 16,190 |         |              |  | 14,463 |        
|Deferred policy acquisition costs                                                              |                                                                                                                |                                                                                      | 11,606 |         |              |  | 10,720 |        
|Deferred federal income taxes                                                                  |                                                                                                                |                                                                                      | 6,400  |         |              |  | 4,274  |        
|Property and equipment, net                                                                    |                                                                                                                |                                                                                      | 11,738 |         |              |  | 11,765 |        
|Funds held by reinsurer                                                                        |                                                                                                                |                                                                                      | 3,599  |         |              |  | 1,926  |        
|Other assets                                                                                   |                                                                                                                |                                                                                      | 2,151  |         |              |  | 1,626  |        
|                                                                                               |                                                                                                                |                                                                                      |        |         |              | 
|                                                                                               |                                                                                                                | Total assets                                                                         |        | $       | 401,236      |  |        | $       | 300,656 | 
|                                                                                               |                                                                                                                |                                                                                      |        |         |              | 
|                                                                                              
|LIABILITIES AND SHAREHOLDERS EQUITY                                                          
|Liabilities:                                                                                   |                                                                                                                |                                                                                      |        |         |              |  |        |        
|                                                                                               | Unpaid losses and loss adjustment expenses                                                                     |                                                                                      | $      | 171,031 |              |  | $      | 128,726 |        
|                                                                                               | Unearned premiums                                                                                              |                                                                                      |        | 80,928  |              |  |        | 69,708  |        
|                                                                                               | Long-term debt                                                                                                 |                                                                                      |        | 17,547  |              |  |        | 18,901  |        
|                                                                                               | Note payable to affiliate                                                                                      |                                                                                      |        | 15,000  |              |  |        |        |        
|                                                                                               | Amounts withheld or retained for account of others                                                             |                                                                                      |        | 14,911  |              |  |        | 10,975  |        
|                                                                                               | Reinsurance balances payable                                                                                   |                                                                                      |        | 3,429   |              |  |        | 3,784   |        
|                                                                                               | Other accounts payable                                                                                         |                                                                                      |        | 14,432  |              |  |        | 9,027   |        
|                                                                                               | Commissions payable                                                                                            |                                                                                      |        | 4,719   |              |  |        | 5,653   |        
|                                                                                               | Assessments and fees payable                                                                                   |                                                                                      |        | 6,450   |              |  |        | 4,202   |        
|                                                                                               |                                                                                                                |                                                                                      |        |         |              | 
|                                                                                               |                                                                                                                | Total liabilities                                                                    |        |         | 328,447      |  |        |         | 250,976 | 
|Shareholders Equity:                                                                          |                                                                                                                |                                                                                      |        |         |              |  |        |        
|                                                                                               | Preferred shares  no par value                                                                                |                                                                                      |        |         |              |  |        |         |        
|                                                                                               |                                                                                                                | Authorized  10,000,000 shares                                                       |        |         |              |  |        |         |         | 
|                                                                                               |                                                                                                                | Issued  0 shares                                                                    |        |         |             |  |        |         |        | 
|                                                                                               | Common shares  $0.01 par value                                                                                |                                                                                      |        |         |              |  |        |         |        
|                                                                                               |                                                                                                                | Authorized  50,000,000 shares                                                       |        |         |              |  |        |         |         | 
|                                                                                               |                                                                                                                | Issued  20,000,000 shares, including 4,470,400
    and 4,975,800 shares in treasury |        |         | 200          |  |        |         | 200     | 
|                                                                                               | Additional paid-in capital                                                                                     |                                                                                      |        | 1,264   |              |  |        | 758     |        
|                                                                                               | Retained earnings                                                                                              |                                                                                      |        | 77,102  |              |  |        | 54,512  |        
|                                                                                               | Accumulated other comprehensive income                                                                         |                                                                                      |        | 539     |              |  |        | 1,229   |        
|                                                                                               | Treasury shares                                                                                                |                                                                                      |        | (6,316  | )            |  |        | (7,019  | )      
|                                                                                               |                                                                                                                |                                                                                      |        |         |              | 
|                                                                                               |                                                                                                                | Total shareholders equity                                                           |        |         | 72,789       |  |        |         | 49,680  | 
|                                                                                               |                                                                                                                |                                                                                      |        |         |              | 
|                                                                                               |                                                                                                                | Total liabilities and shareholders equity                                           |        | $       | 401,236      |  |        | $       | 300,656 | 
|                                                                                               |                                                                                                                |                                                                                      |        |         |              | 



41



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF INCOME


|                                                       |                |                                       |         |         |      |   |         |         |  |   |        |        | 
|------------------------------------------------------ | -------------- | ------------------------------------- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------ | ------ | 
|                                                       |                | Year Ended December 31,               |        
|                                                       |                |                                       |        
|                                                       |                | 2004                                  |         |         | 2003 |   |         | 2002    | 
|                                                       |                |                                       |         |         |      |   |         |         | 
|                                                       |                | (In thousands, except per share data) |        
|Revenue:                                               |                |                                       |         |         |      |   |         |         |  |   |        |       
|Premiums earned                                        |                | $                                     | 156,908 |         |      | $ | 126,364 |         |  | $ | 87,356 |       
|Net investment income                                  |                |                                       | 8,613   |         |      |   | 5,772   |         |  |   | 4,513  |       
|Realized gains (losses) on investments                 |                |                                       | 1,661   |         |      |   | 1,529   |         |  |   | (386   | )     
|Other                                                  |                |                                       | 4,526   |         |      |   | 4,384   |         |  |   | 3,367  |       
|                                                       |                |                                       |         |         |      |   |         |         | 
|                                                       | Total revenues |                                       |         | 171,708 |      |   |         | 138,049 |  |   |        | 94,850 | 
|Expenses:                                              |                |                                       |         |         |      |   |         |         |  |   |        |       
|Losses and loss adjustment expenses                    |                |                                       | 92,008  |         |      |   | 68,798  |         |  |   | 55,049 |       
|Commissions and other underwriting expense             |                |                                       | 36,760  |         |      |   | 32,211  |         |  |   | 24,156 |       
|Other operating and general expenses                   |                |                                       | 6,888   |         |      |   | 4,893   |         |  |   | 3,928  |       
|Interest expense                                       |                |                                       | 1,610   |         |      |   | 1,043   |         |  |   | 193    |       
|                                                       |                |                                       |         |         |      |   |         |         | 
|                                                       | Total expenses |                                       |         | 137,266 |      |   |         | 106,945 |  |   |        | 83,326 | 
|                                                       |                |                                       |         |         |      |   |         |         | 
|Income before federal income taxes                     |                |                                       | 34,442  |         |      |   | 31,104  |         |  |   | 11,524 |       
|Provision for federal income taxes                     |                |                                       | 11,674  |         |      |   | 11,260  |         |  |   | 3,236  |       
|                                                       |                |                                       |         |         |      |   |         |         | 
|Net income                                             |                | $                                     | 22,768  |         |      | $ | 19,844  |         |  | $ | 8,288  |       
|                                                       |                |                                       |         |         |      |   |         |         | 
|Net income per common share  basic                    |                | $                                     | 1.50    |         |      | $ | 1.32    |         |  | $ | 0.49   |       
|                                                       |                |                                       |         |         |      |   |         |         | 
|Net income per common share  diluted                  |                | $                                     | 1.47    |         |      | $ | 1.29    |         |  | $ | 0.49   |       
|                                                       |                |                                       |         |         |      |   |         |         | 
|Weighted average of common shares outstanding, basic   |                |                                       | 15,171  |         |      |   | 15,057  |         |  |   | 16,805 |       
|                                                       |                |                                       |         |         |      |   |         |         | 
|Weighted average of common shares outstanding, diluted |                |                                       | 15,480  |         |      |   | 15,347  |         |  |   | 16,949 |       
|                                                       |                |                                       |         |         |      |   |         |         | 



42



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


|                             |                                                                                  |                        |     |            |         |   |       |             |               |   |        |        |   |          |       |       |       |   |        |        |   |   |        |        |  
|---------------------------- | -------------------------------------------------------------------------------- | ---------------------- | --- | ---------- | ------- | - | ----- | ----------- | ------------- | - | ------ | ------ | - | -------- | ----- | ----- | ----- | - | ------ | ------ | - | - | ------ | ------ | -
|                             |                                                                                  |                        |     |            |         |   |       | Accumulated |               |   |        |        |  
|                             |                                                                                  |                        |     |            |         |   |       | Other       |               |   |        |        |  
|                             |                                                                                  |                        |     | Additional |         |   |       |             | Comprehensive |   |        |        |   |         
|                             |                                                                                  | Common                 |     |            | Paid-In |   |       | Retained    |               |   | Income |        |   | Treasury |       |       |      
|                             |                                                                                  | Shares                 |     |            | Capital |   |       | Earnings    |               |   | (Loss) |        |   | Shares   |       |       | Total |  
|                             |                                                                                  |                        |     |            |         |   |       |             |               |   |        |        |   |          |       |       |       |  
|                             |                                                                                  | (Dollars in thousands) |    
|Balance at January 1, 2002   |                                                                                  | $                      | 200 |            |         | $ | 758   |             |               | $ | 26,380 |        |   | $        | (824  | )     |       | $ | (3,316 | )      |   | $ | 23,198 |       
|                             | Net income                                                                       |                        |     |            |         |   |       |             |               |   |        | 8,288  |   |          |       |       |       |   |        |        |   |   |        | 8,288  |  
|                             | Unrealized appreciation of investment securities, net of taxes
    of $616       |                        |     |            |         |   |       |             |               |   |        |        |   |          |       | 2,021 |       |   |        |        |   |   |        | 2,021  |  
|                             |                                                                                  |                        |     |            |         |   |       |             |               |   |        |        |   |          |       |       |       |  
|                             | Comprehensive income                                                             |                        |     |            |         |   |       |             |               |   |        |        |   |          |       |       |       |   |        |        |   |   |        | 10,309 |  
|                             | Issuance of 9,000 treasury shares                                                |                        |     |            |         |   |       |             |               |   |        |        |   |          |       |       |       |   |        | 47     |   |   |        | 47     |  
|                             | Purchase of 2,510,000 treasury shares                                            |                        |     |            |         |   |       |             |               |   |        |        |   |          |       |       |       |   |        | (3,622 | ) |   |        | (3,622 | )
|                             |                                                                                  |                        |     |            |         |   |       |             |               |   |        |        |   |          |       |       |       |  
|Balance at December 31, 2002 |                                                                                  |                        | 200 |            |         |   | 758   |             |               |   | 34,668 |        |   |          | 1,197 |       |       |   | (6,891 | )      |   |   | 29,932 |       
|                             | Net income                                                                       |                        |     |            |         |   |       |             |               |   |        | 19,844 |   |          |       |       |       |   |        |        |   |   |        | 19,844 |  
|                             | Unrealized appreciation of investment securities, net of taxes
    of $45        |                        |     |            |         |   |       |             |               |   |        |        |   |          |       | 32    |       |   |        |        |   |   |        | 32     |  
|                             |                                                                                  |                        |     |            |         |   |       |             |               |   |        |        |   |          |       |       |       |  
|                             | Comprehensive income                                                             |                        |     |            |         |   |       |             |               |   |        |        |   |          |       |       |       |   |        |        |   |   |        | 19,876 |  
|                             | Purchase of 50,000 treasury shares                                               |                        |     |            |         |   |       |             |               |   |        |        |   |          |       |       |       |   |        | (128   | ) |   |        | (128   | )
|                             |                                                                                  |                        |     |            |         |   |       |             |               |   |        |        |   |          |       |       |       |  
|Balance at December 31, 2003 |                                                                                  |                        | 200 |            |         |   | 758   |             |               |   | 54,512 |        |   |          | 1,229 |       |       |   | (7,019 | )      |   |   | 49,680 |       
|                             | Net income                                                                       |                        |     |            |         |   |       |             |               |   |        | 22,768 |   |          |       |       |       |   |        |        |   |   |        | 22,768 |  
|                             | Unrealized depreciation of investment securities, net of tax
    benefit of $372 |                        |     |            |         |   |       |             |               |   |        |        |   |          |       | (690  | )     |   |        |        |   |   |        | (690   | )
|                             |                                                                                  |                        |     |            |         |   |       |             |               |   |        |        |   |          |       |       |       |  
|                             | Comprehensive income                                                             |                        |     |            |         |   |       |             |               |   |        |        |   |          |       |       |       |   |        |        |   |   |        | 22,078 |  
|                             | Issuance of 505,400 treasury shares upon exercise of stock
    options           |                        |     |            |         |   |       |             |               |   |        | (178   | ) |          |       |       |       |   |        | 703    |   |   |        | 525    |  
|                             | Tax benefit realized from exercise of stock options                              |                        |     |            |         |   |       | 506         |               |   |        |        |   |          |       |       |       |   |        |        |   |   |        | 506    |  
|                             |                                                                                  |                        |     |            |         |   |       |             |               |   |        |        |   |          |       |       |       |  
|Balance at December 31, 2004 |                                                                                  | $                      | 200 |            |         | $ | 1,264 |             |               | $ | 77,102 |        |   | $        | 589   |       |       | $ | (6,316 | )      |   | $ | 72,789 |       
|                             |                                                                                  |                        |     |            |         |   |       |             |               |   |        |        |   |          |       |       |       |  



43



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                                      |                                                                                                                                                          |                         |          |         |      |   |          |         |   |   |         |         |  
|------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | -------- | ------- | ---- | - | -------- | ------- | - | - | ------- | ------- | -
|                                                                                      |                                                                                                                                                          | Year Ended December 31, |         
|                                                                                      |                                                                                                                                                          |                         |         
|                                                                                      |                                                                                                                                                          | 2004                    |          |         | 2003 |   |          | 2002    |  
|                                                                                      |                                                                                                                                                          |                         |          |         |      |   |          |         |  
|                                                                                      |                                                                                                                                                          | (Dollars in thousands)  |         
|Operating activities                                                                  |                                                                                                                                                          |                         |          |         |      |   |          |         |   |   |         |        
|Net income                                                                            |                                                                                                                                                          | $                       | 22,768   |         |      | $ | 19,844   |         |   | $ | 8,288   |        
|Adjustments to reconcile net income to net cash provided by
    operating activities: |                                                                                                                                                          |                         |          |         |      |   |          |         |   |   |         |        
|                                                                                      | Net amortization of bond premiums and discounts                                                                                                          |                         |          | 396     |      |   |          | 646     |   |   |         | 563     |  
|                                                                                      | Provision for depreciation and amortization                                                                                                              |                         |          | 1,198   |      |   |          | 1,256   |   |   |         | 1,395   |  
|                                                                                      | Net realized (gain) loss on investment securities                                                                                                        |                         |          | (1,661  | )    |   |          | (1,529  | ) |   |         | 386     |  
|                                                                                      | Loss on disposal of fixed assets                                                                                                                         |                         |          | 5       |      |   |          | 9       |   |   |         |        |  
|                                                                                      | Tax benefit realized from exercise of stock options                                                                                                      |                         |          | 506     |      |   |          |        |   |   |         |        |  
|                                                                                      | Deferred federal income taxes                                                                                                                            |                         |          | (1,754  | )    |   |          | (1,949  | ) |   |         | (1,358  | )
|                                                                                      | Increase in deferred policy acquisition costs, net                                                                                                       |                         |          | (886    | )    |   |          | (2,116  | ) |   |         | (333    | )
|                                                                                      | Increase in reserves for losses and loss adjustment expenses                                                                                             |                         |          | 42,305  |      |   |          | 26,516  |   |   |         | 31,358  |  
|                                                                                      | Increase in premiums receivable                                                                                                                          |                         |          | (2,578  | )    |   |          | (16,586 | ) |   |         | (7,062  | )
|                                                                                      | Increase in unearned premiums and service fees                                                                                                           |                         |          | 11,220  |      |   |          | 21,482  |   |   |         | 7,060   |  
|                                                                                      | Increase in interest receivable, prepaid reinsurance premiums
    and other assets                                                                       |                         |          | (4,871  | )    |   |          | (7,046  | ) |   |         | (2,271  | )
|                                                                                      | Increase in accounts payable, commissions and other liabilities,
    premiums and other funds collected from others and assessments
    and fees payable |                         |          | 10,654  |      |   |          | 12,815  |   |   |         | 5,507   |  
|                                                                                      | Increase in reinsurance recoverable                                                                                                                      |                         |          | (20,009 | )    |   |          | (5,387  | ) |   |         | (14,566 | )
|                                                                                      | Increase (decrease) in reinsurance balances payable                                                                                                      |                         |          | (355    | )    |   |          | (2,592  | ) |   |         | 56      |  
|                                                                                      |                                                                                                                                                          |                         |          |         |      |   |          |         |  
|Net cash provided by operating activities                                             |                                                                                                                                                          |                         | 56,938   |         |      |   | 45,363   |         |   |   | 29,023  |        
|Investing activities                                                                  |                                                                                                                                                          |                         |          |         |      |   |          |         |   |   |         |        
|Purchases of investments                                                              |                                                                                                                                                          |                         | (191,644 | )       |      |   | (158,405 | )       |   |   | (50,113 | )      
|Proceeds from sale or maturity of investments                                         |                                                                                                                                                          |                         | 110,618  |         |      |   | 112,005  |         |   |   | 31,829  |        
|Purchases of property and equipment                                                   |                                                                                                                                                          |                         | (1,084   | )       |      |   | (889     | )       |   |   | (1,253  | )      
|                                                                                      |                                                                                                                                                          |                         |          |         |      |   |          |         |  
|Net cash used in investing activities                                                 |                                                                                                                                                          |                         | (82,110  | )       |      |   | (47,289  | )       |   |   | (19,537 | )      
|Financing activities                                                                  |                                                                                                                                                          |                         |          |         |      |   |          |         |   |   |         |        
|Proceeds from long-term debt                                                          |                                                                                                                                                          |                         |         |         |      |   | 15,464   |         |   |   | 7,000   |        
|Proceeds from note payable to affiliate                                               |                                                                                                                                                          |                         | 15,000   |         |      |   |         |         |   |   |        |        
|Repayment of mortgage loan and notes payable                                          |                                                                                                                                                          |                         | (1,354   | )       |      |   | (3,146   | )       |   |   | (9,624  | )      
|Purchase of common shares for treasury                                                |                                                                                                                                                          |                         |         |         |      |   | (128     | )       |   |   | (3,622  | )      
|Issuance of common shares from treasury                                               |                                                                                                                                                          |                         | 525      |         |      |   |         |         |   |   | 47      |        
|Deferred financing costs                                                              |                                                                                                                                                          |                         |         |         |      |   | (456     | )       |   |   |        |        
|                                                                                      |                                                                                                                                                          |                         |          |         |      |   |          |         |  
|Net cash provided by (used in) financing activities                                   |                                                                                                                                                          |                         | 14,171   |         |      |   | 11,734   |         |   |   | (6,199  | )      
|                                                                                      |                                                                                                                                                          |                         |          |         |      |   |          |         |  
|Net increase (decrease) in cash and cash equivalents                                  |                                                                                                                                                          |                         | (11,001  | )       |      |   | 9,808    |         |   |   | 3,287   |        
|Cash and cash equivalents at beginning of year                                        |                                                                                                                                                          |                         | 21,610   |         |      |   | 11,802   |         |   |   | 8,515   |        
|                                                                                      |                                                                                                                                                          |                         |          |         |      |   |          |         |  
|Cash and cash equivalents at end of year                                              |                                                                                                                                                          | $                       | 10,609   |         |      | $ | 21,610   |         |   | $ | 11,802  |        
|                                                                                      |                                                                                                                                                          |                         |          |         |      |   |          |         |  



44



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2004


(Dollars in thousands, except share data)




|   |                                                                 
|-- | ----------------------------------------------------------------
|1. | Background, Organization and Significant Accounting
    Policies







Basis of Presentation






Principles of Consolidation




Use of Estimates




45



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Cash Equivalents




Premium, Commissions and Service Fee Recognition




Investments






Deferred Policy Acquisition Costs




Property and Equipment




Unpaid Losses and Loss Adjustment Expenses




46



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Assessments




Unearned Premiums, Commissions and Service Fees




Premiums Receivable




Promissory Note from Officer




Reinsurance




Segment Information




Federal Income Taxes




Stock-Based Compensation


Accounting for Stock Issued to Employees


Accounting for Stock-Based
Compensations  Transition and Disclosure,


47



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Accounting for Stock-Based
Compensation




|                                                                                                                                       |                       |                         |        |      |      |   |        |      |  |   |       |      | 
|-------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ----------------------- | ------ | ---- | ---- | - | ------ | ---- |  | - | ----- | ---- | 
|                                                                                                                                       |                       | Year Ended December 31, |       
|                                                                                                                                       |                       |                         |       
|                                                                                                                                       |                       | 2004                    |        |      | 2003 |   |        | 2002 | 
|                                                                                                                                       |                       |                         |        |      |      |   |        |      | 
|Net income, as reported                                                                                                                |                       | $                       | 22,768 |      |      | $ | 19,844 |      |  | $ | 8,288 |     
|Less: Stock-based employee compensation expense determined under
    fair value based method for all awards net of related tax effects |                       |                         | 138    |      |      |   | 53     |      |  |   | 37    |     
|                                                                                                                                       |                       |                         |        |      |      |   |        |      | 
|Proforma net income                                                                                                                    |                       | $                       | 22,630 |      |      | $ | 19,791 |      |  | $ | 8,251 |     
|                                                                                                                                       |                       |                         |        |      |      |   |        |      | 
|Earnings per share:                                                                                                                    |                       |                         |        |      |      |   |        |      |  |   |       |     
|                                                                                                                                       | Basic  as reported   |                         | $      | 1.50 |      |   | $      | 1.32 |  |   | $     | 0.49 | 
|                                                                                                                                       |                       |                         |        |      |      |   |        |      | 
|                                                                                                                                       | Basic  proforma      |                         |        | 1.49 |      |   |        | 1.31 |  |   |       | 0.49 | 
|                                                                                                                                       |                       |                         |        |      |      |   |        |      | 
|                                                                                                                                       | Diluted  as reported |                         |        | 1.47 |      |   |        | 1.29 |  |   |       | 0.49 | 
|                                                                                                                                       |                       |                         |        |      |      |   |        |      | 
|                                                                                                                                       | Diluted  proforma    |                         |        | 1.48 |      |   |        | 1.30 |  |   |       | 0.49 | 
|                                                                                                                                       |                       |                         |        |      |      |   |        |      | 

Comprehensive Income




Earnings Per Common Share




Recent Accounting Pronouncements




| |                    
| | -------------------
| | Share-Based Payment



48



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                                
| | -------------------------------
| | Other-Than-Temporary Impairment

The
Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments Accounting for Certain Investments in
Debt and Equity Securities






|   |                                           
|-- | ------------------------------------------
|2. | Initial Public Offering  Subsequent Event



49



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |            
|-- | -----------
|3. | Investments



|                   |                         |                                                   |   |         |            |  |       |            |     |  |            |        |      |   |   |         |         | 
|------------------ | ----------------------- | ------------------------------------------------- | - | ------- | ---------- |  | ----- | ---------- | --- |  | ---------- | ------ | ---- | - | - | ------- | ------- | 
|                   |                         |                                                   |   | Gross   |            |  | Gross |            |     | 
|                   |                         | Amortized                                         |   |         | Unrealized |  |       | Unrealized |     |  |           
|                   |                         | Cost                                              |   |         | Gains      |  |       | Losses     |     |  | Fair Value |       
|                   |                         |                                                   |   |         |            |  |       |            |     |  |            |       
|December 31, 2004: |                         |                                                   |   |         |            |  |       |            |     |  |            |        |      |   |   |        
|                   | Fixed maturities:       |                                                   |   |         |            |  |       |            |     |  |            |        |      |   |   |         |        
|                   |                         | U.S. Government and government agency obligations |   | $       | 143,908    |  |       | $          | 308 |  |            | $      | (599 | ) |   | $       | 143,617 | 
|                   |                         | State and local government obligations            |   |         | 32,014     |  |       |            | 656 |  |            |        | (51  | ) |   |         | 32,619  | 
|                   |                         | Corporate obligations                             |   |         | 29,789     |  |       |            | 343 |  |            |        | (147 | ) |   |         | 29,985  | 
|                   |                         |                                                   |   |         |            |  |       |            |     |  |            |       
|                   | Total fixed maturities  |                                                   |   | 205,711 |            |  |       | 1,307      |     |  |            | (797   | )    |   |   | 206,221 |        
|                   | Equity securities:      |                                                   |   |         |            |  |       |            |     |  |            |        |      |   |   |         |        
|                   |                         | Preferred stocks                                  |   |         | 8,424      |  |       |            | 296 |  |            |        | (28  | ) |   |         | 8,692   | 
|                   |                         | Common stocks                                     |   |         | 8,098      |  |       |            | 109 |  |            |        | (58  | ) |   |         | 8,149   | 
|                   |                         |                                                   |   |         |            |  |       |            |     |  |            |       
|                   | Total equity securities |                                                   |   | 16,522  |            |  |       | 405        |     |  |            | (86    | )    |   |   | 16,841  |        
|                   | Short-term investments  |                                                   |   | 5,280   |            |  |       |           |     |  |            |       |      |   |   | 5,280   |        
|                   |                         |                                                   |   |         |            |  |       |            |     |  |            |       
|                   | Total investments       |                                                   | $ | 227,513 |            |  | $     | 1,712      |     |  | $          | (883   | )    |   | $ | 228,342 |        
|                   |                         |                                                   |   |         |            |  |       |            |     |  |            |       
|December 31, 2003: |                         |                                                   |   |         |            |  |       |            |     |  |            |        |      |   |   |        
|                   | Fixed maturities:       |                                                   |   |         |            |  |       |            |     |  |            |        |      |   |   |         |        
|                   |                         | U.S. Government and government agency obligations |   | $       | 65,486     |  |       | $          | 435 |  |            | $      | (842 | ) |   | $       | 65,079  | 
|                   |                         | State and local government obligations            |   |         | 27,816     |  |       |            | 735 |  |            |        | (117 | ) |   |         | 28,434  | 
|                   |                         | Corporate obligations                             |   |         | 34,660     |  |       |            | 892 |  |            |        | (183 | ) |   |         | 35,369  | 
|                   |                         |                                                   |   |         |            |  |       |            |     |  |            |       
|                   | Total fixed maturities  |                                                   |   | 127,962 |            |  |       | 2,062      |     |  |            | (1,142 | )    |   |   | 128,882 |        
|                   | Equity securities:      |                                                   |   |         |            |  |       |            |     |  |            |        |      |   |   |         |        
|                   |                         | Preferred stocks                                  |   |         | 9,791      |  |       |            | 415 |  |            |        | (37  | ) |   |         | 10,169  | 
|                   |                         | Common stocks                                     |   |         | 4,650      |  |       |            | 671 |  |            |        | (79  | ) |   |         | 5,242   | 
|                   |                         |                                                   |   |         |            |  |       |            |     |  |            |       
|                   | Total equity securities |                                                   |   | 14,441  |            |  |       | 1,086      |     |  |            | (116   | )    |   |   | 15,411  |        
|                   | Short-term investments  |                                                   |   | 1,719   |            |  |       |           |     |  |            |       |      |   |   | 1,719   |        
|                   |                         |                                                   |   |         |            |  |       |            |     |  |            |       
|                   | Total investments       |                                                   | $ | 144,122 |            |  | $     | 3,148      |     |  | $          | (1,258 | )    |   | $ | 146,012 |        
|                   |                         |                                                   |   |         |            |  |       |            |     |  |            |       

50



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                       |                        |           |         |         |       |   |         |         | 
|-------------------------------------- | ---------------------- | --------- | ------- | ------- | ----- | - | ------- | ------- | 
|                                       |                        | Amortized |         |         | Fair  |  
|                                       |                        | Cost      |         |         | Value |  
|                                       |                        |           |         |         |       |  
|Due in one year or less                |                        | $         | 2,695   |         |       | $ | 2,725   |        
|Due after one year through five years  |                        |           | 75,738  |         |       |   | 76,102  |        
|Due after five years through ten years |                        |           | 103,161 |         |       |   | 103,293 |        
|Due after ten years                    |                        |           | 24,117  |         |       |   | 24,101  |        
|                                       |                        |           |         |         |       |  
|                                       | Total fixed maturities |           | $       | 205,711 |       |   | $       | 206,221 | 
|                                       |                        |           |         |         |       |  



|                           |  |                         |        |  |      |   |        |      |  |   |        | 
|-------------------------- |  | ----------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                           |  | Year Ended December 31, |       
|                           |  |                         |       
|                           |  | 2004                    |        |  | 2003 |   |        | 2002 | 
|                           |  |                         |        |  |      |   |        |      | 
|Fixed maturities           |  | $                       | 43,479 |  |      | $ | 77,841 |      |  | $ | 23,332 | 
|Common and preferred stock |  |                         | 14,726 |  |      |   | 2,587  |      |  |   | 976    | 



|                            |  |                         |       |   |      |   |       |      |  |   |        |  
|--------------------------- |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ------ | -
|                            |  | Year Ended December 31, |      
|                            |  |                         |      
|                            |  | 2004                    |       |   | 2003 |   |       | 2002 | 
|                            |  |                         |       |   |      |   |       |      | 
|Fixed maturity gains        |  | $                       | 1,035 |   |      | $ | 2,158 |      |  | $ | 779    |  
|Fixed maturity losses       |  |                         | (170  | ) |      |   | (463  | )    |  |   | (108   | )
|Equity security gains       |  |                         | 1,052 |   |      |   | 225   |      |  |   | 61     |  
|Equity security losses      |  |                         | (256  | ) |      |   | (391  | )    |  |   | (1,118 | )
|                            |  |                         |       |   |      |   |       |      | 
|Net realized gains (losses) |  | $                       | 1,661 |   |      | $ | 1,529 |      |  | $ | (386   | )
|                            |  |                         |       |   |      |   |       |      | 



51



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                             |                        |           |         |        |       |   |         |            |  |   |           |      |   |  |     |    | 
|-------------------------------------------- | ---------------------- | --------- | ------- | ------ | ----- | - | ------- | ---------- |  | - | --------- | ---- | - |  | --- | -- | 
|                                             |                        | Amortized |         |        | Fair  |   |         | Unrealized |  |   | Number of |     
|                                             |                        | Cost      |         |        | Value |   |         | Losses     |  |   | Holdings  |     
|                                             |                        |           |         |        |       |   |         |            |  |   |           |     
|December 31, 2004:                           |                        |           |         |        |       |   |         |            |  |   |           |      |   |  |     |   
|Fixed maturities:                            |                        |           |         |        |       |   |         |            |  |   |           |      |   |  |     |   
|                                             | 12 months or less      |           | $       | 76,930 |       |   | $       | 76,583     |  |   | $         | (347 | ) |  |     | 73 | 
|                                             | Greater than 12 months |           |         | 24,779 |       |   |         | 24,329     |  |   |           | (450 | ) |  |     | 30 | 
|                                             |                        |           |         |        |       |   |         |            |  |   |           |     
|Total fixed maturities                       |                        |           | 101,709 |        |       |   | 100,912 |            |  |   | (797      | )    |   |  | 103 |   
|Equity securities:                           |                        |           |         |        |       |   |         |            |  |   |           |      |   |  |     |   
|                                             | 12 months or less      |           |         | 7,395  |       |   |         | 7,352      |  |   |           | (43  | ) |  |     | 11 | 
|                                             | Greater than 12 months |           |         | 390    |       |   |         | 347        |  |   |           | (43  | ) |  |     | 2  | 
|                                             |                        |           |         |        |       |   |         |            |  |   |           |     
|Total equity securities                      |                        |           | 7,785   |        |       |   | 7,699   |            |  |   | (86       | )    |   |  | 13  |   
|                                             |                        |           |         |        |       |   |         |            |  |   |           |     
|Total fixed maturities and equity securities |                        | $         | 109,494 |        |       | $ | 108,611 |            |  | $ | (883      | )    |   |  | 116 |   
|                                             |                        |           |         |        |       |   |         |            |  |   |           |     

|                                             |                        |           |        |        |       |   |        |            |  |   |           |       |  |  |    |    | 
|-------------------------------------------- | ---------------------- | --------- | ------ | ------ | ----- | - | ------ | ---------- |  | - | --------- | ----- |  |  | -- | -- | 
|                                             |                        | Amortized |        |        | Fair  |   |        | Unrealized |  |   | Number of |      
|                                             |                        | Cost      |        |        | Value |   |        | Losses     |  |   | Holdings  |      
|                                             |                        |           |        |        |       |   |        |            |  |   |           |      
|December 31, 2003:                           |                        |           |        |        |       |   |        |            |  |   |           |       |  |  |    |   
|Fixed maturities:                            |                        |           |        |        |       |   |        |            |  |   |           |       |  |  |    |   
|                                             | 12 months or less      |           | $      | 49,944 |       |   | $      | 48,802     |  |   | $         | 1,142 |  |  |    | 57 | 
|                                             | Greater than 12 months |           |        |       |       |   |        |           |  |   |           |      |  |  |    |   | 
|                                             |                        |           |        |        |       |   |        |            |  |   |           |      
|Total fixed maturities                       |                        |           | 49,944 |        |       |   | 48,802 |            |  |   | 1,142     |       |  |  | 57 |   
|Equity securities:                           |                        |           |        |        |       |   |        |            |  |   |           |       |  |  |    |   
|                                             | 12 months or less      |           |        | 2,198  |       |   |        | 2,152      |  |   |           | 46    |  |  |    | 12 | 
|                                             | Greater than 12 months |           |        | 930    |       |   |        | 860        |  |   |           | 70    |  |  |    | 11 | 
|                                             |                        |           |        |        |       |   |        |            |  |   |           |      
|Total equity securities                      |                        |           | 3,128  |        |       |   | 3,012  |            |  |   | 116       |       |  |  | 23 |   
|                                             |                        |           |        |        |       |   |        |            |  |   |           |      
|Total fixed maturities and equity securities |                        | $         | 53,072 |        |       | $ | 51,814 |            |  | $ | 1,258     |       |  |  | 80 |   
|                                             |                        |           |        |        |       |   |        |            |  |   |           |      



|                      |  |                         |       |   |      |   |       |      |  |   |       |  
|--------------------- |  | ----------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                      |  | Year Ended December 31, |      
|                      |  |                         |      
|                      |  | 2004                    |       |   | 2003 |   |       | 2002 | 
|                      |  |                         |       |   |      |   |       |      | 
|Investment income:    |  |                         |       |   |      |   |       |      |  |   |       |  
|Fixed maturities      |  | $                       | 7,582 |   |      | $ | 5,055 |      |  | $ | 3,810 |  
|Equity securities     |  |                         | 717   |   |      |   | 686   |      |  |   | 528   |  
|Other                 |  |                         | 422   |   |      |   | 139   |      |  |   | 269   |  
|Investment expense    |  |                         | (108  | ) |      |   | (108  | )    |  |   | (94   | )
|                      |  |                         |       |   |      |   |       |      | 
|Net investment income |  | $                       | 8,613 |   |      | $ | 5,772 |      |  | $ | 4,513 |  
|                      |  |                         |       |   |      |   |       |      | 



52



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                             
|-- | ----------------------------
|4. | Promissory Note from Officer





|   |                       
|-- | ----------------------
|5. | Property and Equipment



|                                           |  |              |        |   |      |   |        |  
|------------------------------------------ |  | ------------ | ------ | - | ---- | - | ------ | -
|                                           |  | December 31, |       
|                                           |  |              |       
|                                           |  | 2004         |        |   | 2003 |  
|                                           |  |              |        |   |      |  
|Land and building                          |  | $            | 11,161 |   |      | $ | 10,976 |  
|Data processing equipment and software     |  |              | 5,838  |   |      |   | 5,144  |  
|Office furniture and leasehold improvement |  |              | 1,086  |   |      |   | 891    |  
|Automobiles                                |  |              | 169    |   |      |   | 188    |  
|                                           |  |              |        |   |      |  
|                                           |  |              | 18,254 |   |      |   | 17,199 |  
|Accumulated depreciation and amortization  |  |              | (6,516 | ) |      |   | (5,434 | )
|                                           |  |              |        |   |      |  
|Total net property and equipment           |  | $            | 11,738 |   |      | $ | 11,765 |  
|                                           |  |              |        |   |      |  



|   |                                
|-- | -------------------------------
|6. | Note Payable and Long-term Debt



|                                       |  |              |        |  |      |   |        | 
|-------------------------------------- |  | ------------ | ------ |  | ---- | - | ------ | 
|                                       |  | December 31, |       
|                                       |  |              |       
|                                       |  | 2004         |        |  | 2003 |  
|                                       |  |              |        |  |      |  
|Junior subordinated debentures         |  | $            | 15,464 |  |      | $ | 15,464 | 
|Line of credit                         |  |              |       |  |      |   |       | 
|Term note payable to bank              |  |              | 2,083  |  |      |   | 3,437  | 
|Note payable to affiliate              |  |              | 15,000 |  |      |   |       | 
|                                       |  |              |        |  |      |  
|Total notes payable and long-term debt |  | $            | 32,547 |  |      | $ | 18,901 | 
|                                       |  |              |        |  |      |  

Consolidation of Variable
Interest Entities,


53



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












|               |  |              |        | 
|-------------- |  | ------------ | ------ | 
|               |  | December 31, |       
|               |  | 2004         |       
|               |  |              |       
|2005           |  | $            | 1,250  | 
|2006           |  |              | 833    | 
|2007           |  |              | 0      | 
|2008           |  |              |       | 
|2009 and later |  |              | 30,464 | 
|               |  |              |       
|               |  | $            | 32,547 | 
|               |  |              |       



|   |                                                                
|-- | ---------------------------------------------------------------
|7. | Premiums, Reinsurance and Transactions with Related
    Parties





|                                                    |  |                         |       |  |      |   |       |      |  |   |        | 
|--------------------------------------------------- |  | ----------------------- | ----- |  | ---- | - | ----- | ---- |  | - | ------ | 
|                                                    |  | Year Ended December 31, |      
|                                                    |  |                         |      
|                                                    |  | 2004                    |       |  | 2003 |   |       | 2002 | 
|                                                    |  |                         |       |  |      |   |       |      | 
|Written premiums assumed                            |  | $                       | 9,506 |  |      | $ | 8,261 |      |  | $ | 11,544 | 
|Assumed premiums earned                             |  |                         | 8,260 |  |      |   | 8,834 |      |  |   | 12,092 | 
|Assumed losses and loss adjustment expense incurred |  |                         | 6,895 |  |      |   | 4,653 |      |  |   | 8,207  | 
|Service fee expense                                 |  |                         | 306   |  |      |   | 250   |      |  |   | 404    | 
|Payable to Great American as of year end            |  |                         | 932   |  |      |   | 780   |      |  |   | 533    | 

54



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|            |  |                         |         |   |        |   |         |         |  |   |         |   |  |         |         |   |        |   |         |   |  |   |         |  
|----------- |  | ----------------------- | ------- | - | ------ | - | ------- | ------- |  | - | ------- | - |  | ------- | ------- | - | ------ | - | ------- | - |  | - | ------- | -
|            |  | Year Ended December 31, |        
|            |  |                         |        
|            |  | 2004                    |         |   | 2003   |   |         | 2002    | 
|            |  |                         |         |   |        |   |         |         | 
|            |  | Written                 |         |   | Earned |   |         | Written |  |   | Earned  |   |  | Written |         |   | Earned |  
|            |  |                         |         |   |        |   |         |         |  |   |         |   |  |         |         |   |        |  
|Direct      |  | $                       | 210,696 |   |        | $ | 197,502 |         |  | $ | 162,259 |   |  | $       | 143,958 |   |        | $ | 108,436 |   |  | $ | 101,238 |  
|Assumed     |  |                         | 14,288  |   |        |   | 16,341  |         |  |   | 25,302  |   |  |         | 21,791  |   |        |   | 13,311  |   |  |   | 13,549  |  
|Ceded       |  |                         | (58,565 | ) |        |   | (56,935 | )       |  |   | (45,637 | ) |  |         | (39,385 | ) |        |   | (28,231 | ) |  |   | (27,431 | )
|            |  |                         |         |   |        |   |         |         |  |   |         |   |  |         |         |   |        |  
|Net Premium |  | $                       | 166,419 |   |        | $ | 156,908 |         |  | $ | 141,924 |   |  | $       | 126,364 |   |        | $ | 93,516  |   |  | $ | 87,356  |  
|            |  |                         |         |   |        |   |         |         |  |   |         |   |  |         |         |   |        |  



|                                                 |                      |              |        |        |           |  |     |  | 
|------------------------------------------------ | -------------------- | ------------ | ------ | ------ | --------- |  | --- |  | 
|                                                 |                      | December 31, |        |        | A.M. Best | 
|                                                 |                      | 2004         |        |        | Rating    | 
|                                                 |                      |              |        |        |           | 
|Platinum Underwriters Reinsurance, Inc.          |                      | $            | 23,280 |        |           |  | A   | 
|Berkley Insurance Company                        |                      |              | 13,099 |        |           |  | A   | 
|TOA Reinsurance Co. of America                   |                      |              | 11,176 |        |           |  | A   | 
|TRAX Insurance Ltd.                              |                      |              | 9,819  |        |           |  |    | 
|General Reinsurance                              |                      |              | 7,808  |        |           |  | A++ | 
|Great American Insurance Company                 |                      |              | 4,800  |        |           |  | A   | 
|                                                 | Subtotal             |              |        | 69,982 |           |  |     |  | 
|                                                 |                      |              |        |        |           | 
|                                                 | All other reinsurers |              |        | 9,336  |           |  |     |  | 
|                                                 | Total                |              | $      | 79,318 |           |  |     |  | 
|                                                 |                      |              |        |        |           | 
|Reinsurance receivable on paid and unpaid losses |                      | $            | 63,128 |        |           |  |     | 
|Prepaid reinsurance premiums                     |                      |              | 16,190 |        |           |  |     | 
|                                                 |                      |              |        |        |           | 
|                                                 |                      | $            | 79,318 |        |           |  |     | 
|                                                 |                      |              |        |        |           | 



55



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                           
|-- | ------------------------------------------
|8. | Unpaid Losses and Loss Adjustment Expenses



|                                                                                              |                                                                                          |                |         |  |        |   |         |      |        |   |         |  |        | 
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | -------------- | ------- |  | ------ | - | ------- | ---- | ------ | - | ------- |  | ------ | 
|                                                                                              |                                                                                          | December 31,   |        
|                                                                                              |                                                                                          |                |        
|                                                                                              |                                                                                          | 2004           |         |  | 2003   |   |         | 2002 |       
|                                                                                              |                                                                                          |                |         |  |        |   |         |      |       
|Reserve for losses and LAE, net of related reinsurance
    recoverables, at beginning of year |                                                                                          | $              | 86,740  |  |        | $ | 67,162  |      |        | $ | 48,456  | 
|Add:                                                                                          |                                                                                          |                |         |  |        |   |         |      |        |   |         | 
|                                                                                              | Provision for unpaid losses and LAE for claims net of
    reinsurance, occurring during: |                |         |  |        |   |         |      |        |   |         |  |       
|                                                                                              |                                                                                          | Current period |         |  | 94,263 |   |         |      | 72,498 |   |         |  | 55,011 | 
|                                                                                              |                                                                                          | Prior period   |         |  | (2,255 | ) |         |      | (3,700 | ) |         |  | 38     | 
|                                                                                              |                                                                                          |                |         |  |        |   |         |      |       
|                                                                                              |                                                                                          |                | 92,008  |  |        |   | 68,798  |      |        |   | 55,049  | 
|Deduct:                                                                                       |                                                                                          |                |         |  |        |   |         |      |        |   |         | 
|                                                                                              | Losses and LAE payments for claims, net of reinsurance,
    occurring during:            |                |         |  |        |   |         |      |        |   |         |  |       
|                                                                                              |                                                                                          | Current period |         |  | 37,418 |   |         |      | 26,385 |   |         |  | 20,573 | 
|                                                                                              |                                                                                          | Prior period   |         |  | 29,686 |   |         |      | 22,835 |   |         |  | 15,770 | 
|                                                                                              |                                                                                          |                |         |  |        |   |         |      |       
|                                                                                              |                                                                                          |                | 67,104  |  |        |   | 49,220  |      |        |   | 36,343  | 
|Reserve for losses and LAE, net of related reinsurance
    recoverables, end of period        |                                                                                          |                | 111,644 |  |        |   | 86,740  |      |        |   | 67,162  | 
|Reinsurance recoverables on unpaid losses and LAE, at end of
    period                       |                                                                                          |                | 59,387  |  |        |   | 41,986  |      |        |   | 35,048  | 
|                                                                                              |                                                                                          |                |         |  |        |   |         |      |       
|Reserve for unpaid losses and LAE, gross of reinsurance
    recoverables                      |                                                                                          | $              | 171,031 |  |        | $ | 128,726 |      |        | $ | 102,210 | 
|                                                                                              |                                                                                          |                |         |  |        |   |         |      |       



56



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |             
|-- | ------------
|9. | Income Taxes



|                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|------------------------------------ |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                     |  | Year Ended December 31, |       
|                                     |  |                         |       
|                                     |  | 2004                    |        |   | 2003 |   |        | 2002 | 
|                                     |  |                         |        |   |      |   |        |      | 
|Current federal income tax provision |  | $                       | 13,428 |   |      | $ | 13,209 |      |  | $ | 4,594  |  
|Deferred federal income tax benefit  |  |                         | (1,754 | ) |      |   | (1,949 | )    |  |   | (1,358 | )
|                                     |  |                         |        |   |      |   |        |      | 
|                                     |  | $                       | 11,674 |   |      | $ | 11,260 |      |  | $ | 3,236  |  
|                                     |  |                         |        |   |      |   |        |      | 



|                                                          |  |                         |        |   |      |   |        |      |  |   |       |  
|--------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                                          |  | Year Ended December 31, |       
|                                                          |  |                         |       
|                                                          |  | 2004                    |        |   | 2003 |   |        | 2002 | 
|                                                          |  |                         |        |   |      |   |        |      | 
|Expected statutory rate                                   |  |                         | 35     | % |      |   | 35     | %    |  |   | 34    | %
|                                                          |  |                         |        |   |      |   |        |      | 
|Expected federal income tax expense at the statutory rate |  | $                       | 12,055 |   |      | $ | 10,887 |      |  | $ | 3,918 |  
|Tax effect of tax exempt investment income                |  |                         | (302   | ) |      |   | (283   | )    |  |   | (262  | )
|Other items, net                                          |  |                         | (79    | ) |      |   | 656    |      |  |   | (420  | )
|                                                          |  |                         |        |   |      |   |        |      | 
|                                                          |  | $                       | 11,674 |   |      | $ | 11,260 |      |  | $ | 3,236 |  
|                                                          |  |                         |        |   |      |   |        |      | 



|                                            |                                |              |        |        |      |   |        |        |  
|------------------------------------------- | ------------------------------ | ------------ | ------ | ------ | ---- | - | ------ | ------ | -
|                                            |                                | December 31, |       
|                                            |                                |              |       
|                                            |                                | 2004         |        |        | 2003 |  
|                                            |                                |              |        |        |      |  
|Deferred Tax Assets:                        |                                |              |        |        |      |   |        |       
|Unearned premiums                           |                                | $            | 4,530  |        |      | $ | 3,863  |       
|Losses and loss adjustment expense reserves |                                |              | 4,036  |        |      |   | 3,296  |       
|Assignments and assessments                 |                                |              | 1,907  |        |      |   | 1,471  |       
|Other, net                                  |                                |              | 437    |        |      |   | 253    |       
|                                            |                                |              |        |        |      |  
|                                            | Total deferred tax assets      |              |        | 10,910 |      |   |        | 8,883  |  
|Deferred Tax Liabilities:                   |                                |              |        |        |      |   |        |       
|Deferred policy acquisition costs           |                                |              | (4,062 | )      |      |   | (3,752 | )     
|Other, net                                  |                                |              | (158   | )      |      |   | (195   | )     
|Unrealized appreciation on investments      |                                |              | (290   | )      |      |   | (662   | )     
|                                            |                                |              |        |        |      |  
|                                            | Total deferred tax liabilities |              |        | (4,510 | )    |   |        | (4,609 | )
|                                            |                                |              |        |        |      |  
|                                            | Net deferred income tax assets |              | $      | 6,400  |      |   | $      | 4,274  |  
|                                            |                                |              |        |        |      |  





57



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                
|--- | -------------------------------
|10. | Statutory Accounting Principles





| |   |                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Under SAP, investment grade fixed maturities are carried at
    amortized cost, while under GAAP available for sale
    fixed maturities are recorded at fair value.                                                                                                                                                                                      
|
| |  | Under SAP, policy acquisition costs, such as commissions,
    premium taxes, fees and other costs of underwriting policies,
    are charged to current operations as incurred, while under GAAP,
    such costs are deferred and amortized on a pro rata basis over
    the policy period.                                                                  
|
| |  | 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 Year |       
|                                      |  | Ended December 31,     |       
|                                      |  |                        |       
|                                      |  | 2004                   |        |  | 2003 |   |        | 2002 | 
|                                      |  |                        |        |  |      |   |        |      | 
|NIIC statutory capital and surplus    |  | $                      | 92,320 |  |      | $ | 58,621 |      |  | $ | 36,944 | 
|NIIC statutory net income             |  |                        | 20,450 |  |      |   | 13,706 |      |  |   | 4,873  | 
|NIIC-HI statutory capital and surplus |  |                        | 8,032  |  |      |   | 7,849  |      |  |   | 5,131  | 
|NIIC-HI statutory net income          |  |                        | 174    |  |      |   | 218    |      |  |   | 428    | 







|    |                      
|--- | ---------------------
|11. | Employee Benefit Plan



58



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|    |                  
|--- | -----------------
|12. | Stock Option Plan



|                                               |  |                         |          |              |       |   |      |        |              |  |         |  |  |              |      |  |       |  |         |   |  |   |      | 
|---------------------------------------------- |  | ----------------------- | -------- | ------------ | ----- | - | ---- | ------ | ------------ |  | ------- |  |  | ------------ | ---- |  | ----- |  | ------- | - |  | - | ---- | 
|                                               |  | Year Ended December 31, |         
|                                               |  |                         |         
|                                               |  | 2004                    |          |              | 2003  |   |      | 2002   |             
|                                               |  |                         |          |              |       |   |      |        |             
|                                               |  |                         |          | Weighted     |       |   |      |        | Weighted     |  |         |  |  | Weighted     |     
|                                               |  |                         |          | Average per  |       |   |      |        | Average per  |  |         |  |  | Average per  |     
|                                               |  |                         |          | Share        |       |   |      |        | Share        |  |         |  |  | Share        |     
|                                               |  |                         |          | Exercise     |       |   |      |        | Exercise     |  |         |  |  | Exercise     |     
|                                               |  | Shares                  |          |              | Price |   |      | Shares |              |  | Price   |  |  | Shares       |      |  | Price | 
|                                               |  |                         |          |              |       |   |      |        |              |  |         |  |  |              |      |  |       | 
|                                               |  |                         |          | (In dollars) |       |   |      |        | (In dollars) |  |         |  |  | (In dollars) |     
|Options outstanding at the beginning of period |  |                         | 838,000  |              |       | $ | 1.24 |        |              |  | 658,000 |  |  | $            | 1.06 |  |       |  | 608,000 |   |  | $ | 0.99 | 
|Granted                                        |  |                         | 85,000   |              |       |   | 2.24 |        |              |  | 180,000 |  |  |              | 1.91 |  |       |  | 130,000 |   |  |   | 1.32 | 
|Exercised                                      |  |                         | (505,400 | )            |       |   | 1.04 |        |              |  |        |  |  |              |     |  |       |  | (48,000 | ) |  |   | 0.98 | 
|Forfeited                                      |  |                         |         |              |       |   |     |        |              |  |        |  |  |              |     |  |       |  | (32,000 | ) |  |   | 0.98 | 
|                                               |  |                         |          |              |       |   |      |        |              |  |         |  |  |              |      |  |       | 
|Options outstanding at the end of year         |  |                         | 417,600  |              |       |   | 1.69 |        |              |  | 838,000 |  |  |              | 1.24 |  |       |  | 658,000 |   |  |   | 1.06 | 
|                                               |  |                         |          |              |       |   |      |        |              |  |         |  |  |              |      |  |       | 
|Options exercisable at the end of year         |  |                         | 201,600  |              |       |   | 1.38 |        |              |  | 514,400 |  |  |              | 1.08 |  |       |  | 346,800 |   |  |   | 1.00 | 
|                                               |  |                         |          |              |       |   |      |        |              |  |         |  |  |              |      |  |       | 



|                               |  |                     |         |         |                     |   |                  |                |  |  |        |         |  |                |         |  |  |   |      | 
|------------------------------ |  | ------------------- | ------- | ------- | ------------------- | - | ---------------- | -------------- |  |  | ------ | ------- |  | -------------- | ------- |  |  | - | ---- | 
|                               |  | December 31, 2004   |        
|                               |  |                     |        
|                               |  | Options Outstanding |         |         | Options Exercisable |  
|                               |  |                     |         |         |                     |  
|                               |  |                     |         | Average |                     |   | Weighted Average |                |  |  |        | Average | 
|Per Share Exercise Price Range |  | Shares              |         |         | Exercise Price      |   |                  | Remaining Life |  |  | Shares |         |  | Exercise Price |        
|                               |  |                     |         |         |                     |   |                  |                |  |  |        |         |  |                |        
|$0.94 - $1.25                  |  |                     | 125,600 |         |                     | $ | 1.08             |                |  |  | 5.5    |         |  |                | 109,600 |  |  | $ | 1.08 | 
|1.26 -  1.95                   |  |                     | 242,000 |         |                     |   | 1.67             |                |  |  | 7.6    |         |  |                | 82,000  |  |  |   | 1.67 | 
|1.96 -  3.31                   |  |                     | 50,000  |         |                     |   | 3.31             |                |  |  | 9.0    |         |  |                | 10,000  |  |  |   | 3.31 | 
|                               |  |                     |         |         |                     |   |                  |                |  |  |        |         |  |                |        
|0.94 -  3.31                   |  |                     | 417,600 |         |                     | $ | 1.69             |                |  |  | 7.1    |         |  |                | 201,600 |  |  | $ | 1.38 | 
|                               |  |                     |         |         |                     |   |                  |                |  |  |        |         |  |                |        

59



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                   
|--- | ----------------------------------
|13. | Lease Commitments and Rent Expense



|                    |  |              |     | 
|------------------- |  | ------------ | --- | 
|                    |  | December 31, |    
|                    |  | 2004         |    
|                    |  |              |    
|2005                |  | $            | 171 | 
|2006                |  |              | 171 | 
|2007                |  |              | 171 | 
|2008                |  |              | 131 | 
|2009 and thereafter |  |              | 43  | 





|    |                              
|--- | -----------------------------
|14. | Commitments and Contingencies







60



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                          
|--- | -------------------------
|15. | Earnings Per Common Share



|                                                                                                    |         |                         |        |      |      |   |        |      |  |   |        |      | 
|--------------------------------------------------------------------------------------------------- | ------- | ----------------------- | ------ | ---- | ---- | - | ------ | ---- |  | - | ------ | ---- | 
|                                                                                                    |         | Year Ended December 31, |       
|                                                                                                    |         |                         |       
|                                                                                                    |         | 2004                    |        |      | 2003 |   |        | 2002 | 
|                                                                                                    |         |                         |        |      |      |   |        |      | 
|Net income                                                                                          |         | $                       | 22,768 |      |      | $ | 19,844 |      |  | $ | 8,288  |     
|Weighted average shares outstanding during period                                                   |         |                         | 15,171 |      |      |   | 15,057 |      |  |   | 16,805 |     
|Additional shares issuable under employee common stock option
    plans using treasury stock method |         |                         | 309    |      |      |   | 290    |      |  |   | 144    |     
|                                                                                                    |         |                         |        |      |      |   |        |      | 
|Weighted average shares outstanding assuming exercise of stock
    options                          |         |                         | 15,480 |      |      |   | 15,347 |      |  |   | 16,949 |     
|                                                                                                    |         |                         |        |      |      |   |        |      | 
|Net income per share:                                                                               |         |                         |        |      |      |   |        |      |  |   |        |     
|                                                                                                    | Basic   |                         | $      | 1.50 |      |   | $      | 1.32 |  |   | $      | 0.49 | 
|                                                                                                    | Diluted |                         |        | 1.47 |      |   |        | 1.29 |  |   |        | 0.49 | 



|    |                    
|--- | -------------------
|16. | Segment Information



|                                       |                          |                          |       |         |      |  |       |         |  |  |       |        | 
|-------------------------------------- | ------------------------ | ------------------------ | ----- | ------- | ---- |  | ----- | ------- |  |  | ----- | ------ | 
|                                       |                          | Years Ended December 31, |      
|                                       |                          |                          |      
|                                       |                          | 2004                     |       |         | 2003 |  |       | 2002    | 
|                                       |                          |                          |       |         |      |  |       |         | 
|Revenue:                               |                          |                          |       |         |      |  |       |         |  |  |       |       
|Premiums earned:                       |                          |                          |       |         |      |  |       |         |  |  |       |       
|                                       | Transportation           |                          | $     | 70,973  |      |  | $     | 64,933  |  |  | $     | 44,540 | 
|                                       | Alternate Risk Transfer  |                          |       | 36,499  |      |  |       | 25,635  |  |  |       | 11,735 | 
|                                       | Specialty Personal Lines |                          |       | 28,377  |      |  |       | 19,065  |  |  |       | 16,293 | 
|                                       | Hawaii                   |                          |       | 15,042  |      |  |       | 14,203  |  |  |       | 13,331 | 
|                                       | Other                    |                          |       | 6,017   |      |  |       | 2,528   |  |  |       | 1,457  | 
|                                       |                          |                          |       |         |      |  |       |         | 
|                                       | Total                    |                          |       | 156,908 |      |  |       | 126,364 |  |  |       | 87,356 | 
|Net investment income                  |                          |                          | 8,613 |         |      |  | 5,772 |         |  |  | 4,513 |       
|Realized gains (losses) on investments |                          |                          | 1,661 |         |      |  | 1,529 |         |  |  | (386  | )     
|Other                                  |                          |                          | 4,526 |         |      |  | 4,384 |         |  |  | 3,367 |       
|                                       |                          |                          |       |         |      |  |       |         | 
|                                       | Total revenues           |                          | $     | 171,708 |      |  | $     | 138,049 |  |  | $     | 94,850 | 
|                                       |                          |                          |       |         |      |  |       |         | 



|    |                     
|--- | --------------------
|17. | Shareholders Equity



61



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |                                        
|--- | ---------------------------------------
|18. | Quarterly Operating Results (Unaudited)



|     |                                |         |   |        |         |  |   |         |  |  |         |        |  |       |   |        |  |  |   |         | 
|---- | ------------------------------ | ------- | - | ------ | ------- |  | - | ------- |  |  | ------- | ------ |  | ----- | - | ------ |  |  | - | ------- | 
|     |                                | 1st     |   |        | 2nd     |  |   | 3rd     |  |  | 4th     |        |  | Total |  
|     |                                | Quarter |   |        | Quarter |  |   | Quarter |  |  | Quarter |        |  | Year  |  
|     |                                |         |   |        |         |  |   |         |  |  |         |        |  |       |  
|2004 |                                |         |   |        |         |  |   |         |  |  |         |        |  |       |   |        |  |  |   |        
|     | Revenues                       |         | $ | 37,226 |         |  | $ | 44,992  |  |  | $       | 43,309 |  |       | $ | 46,181 |  |  | $ | 171,708 | 
|     | Net earnings                   |         |   | 4,138  |         |  |   | 6,046   |  |  |         | 5,931  |  |       |   | 6,653  |  |  |   | 22,768  | 
|     | Net income per share  basic   |         |   | 0.28   |         |  |   | 0.40    |  |  |         | 0.39   |  |       |   | 0.43   |  |  |   | 1.50    | 
|     | Net income per share  diluted |         |   | 0.27   |         |  |   | 0.39    |  |  |         | 0.38   |  |       |   | 0.42   |  |  |   | 1.47    | 
|2003 |                                |         |   |        |         |  |   |         |  |  |         |        |  |       |   |        |  |  |   |        
|     | Revenues                       |         | $ | 28,482 |         |  | $ | 36,442  |  |  | $       | 35,535 |  |       | $ | 37,590 |  |  | $ | 138,049 | 
|     | Net earnings                   |         |   | 5,143  |         |  |   | 5,485   |  |  |         | 3,932  |  |       |   | 5,284  |  |  |   | 19,844  | 
|     | Net income per share  basic   |         |   | 0.34   |         |  |   | 0.36    |  |  |         | 0.26   |  |       |   | 0.35   |  |  |   | 1.32    | 
|     | Net income per share  diluted |         |   | 0.34   |         |  |   | 0.36    |  |  |         | 0.26   |  |       |   | 0.34   |  |  |   | 1.29    | 

Please refer to Forward-Looking Statements
following the Index in the front of this Form 10-K.


62



---



##### Table of Contents








|       |                                                                                         
|------ | ----------------------------------------------------------------------------------------
|ITEM 9 | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|        |                        
|------- | -----------------------
|ITEM 9A | Controls and Procedures














|        |                  
|------- | -----------------
|ITEM 9B | Other Information



63



---



##### Table of Contents






PART III









|         |                                                       
|-------- | ------------------------------------------------------
|ITEM 10. | Directors and Executive Officers of the
    Registrant








|         |                       
|-------- | ----------------------
|ITEM 11. | Executive Compensation






|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|ITEM 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters






|         |                                                   
|-------- | --------------------------------------------------
|ITEM 13. | Certain Relationships and Related
    Transactions






|         |                                       
|-------- | --------------------------------------
|ITEM 14. | Principal Accountant Fees and Services




PART IV







|        |                                           
|------- | ------------------------------------------
|ITEM 15 | Exhibits and Financial Statement Schedules





| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | (1) The Financial Statements listed in the accompanying
    index on page 39 are filed as part of this report.
|
| | (2) The Financial Statement Schedules listed in the
    following Index are filed as part of this report.     

|                                       |              |      |  |                                                                                 |  |  |    | 
|-------------------------------------- | ------------ | ---- |  | ------------------------------------------------------------------------------- |  |  | -- | 
|Index to Financial Statement Schedules |              | Page | 
|                                       |              |      | 
|                                       | Schedule I   |      |  | Summary of Investments*                                                         |  |  |    | 
|                                       | Schedule II  |      |  | Condensed Financial Information of Parent Company                               |  |  | 66 | 
|                                       | Schedule III |      |  | Supplementary Insurance Information                                             |  |  | 69 | 
|                                       | Schedule IV  |      |  | Reinsurance**                                                                   |  |  |    | 
|                                       | Schedule V   |      |  | Valuation and Qualifying Accounts                                               |  |  | 70 | 
|                                       | Schedule VI  |      |  | Supplementary Information Concerning Property-Casualty Insurance
    Operations |  |  | 71 | 



| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | (3) The Exhibits listed below are filed as part of, or
    incorporated by reference into, this report:

|       |    |             |  |                                                                                                                                                                                                                                                                                               
|------ | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|       | 3  | .1          |  | Amended and Restated Articles of Incorporation***                                                                                                                                                                                                                                             
|      
|       | 3  | .2          |  | Amended and Restated Code of Regulations***                                                                                                                                                                                                                                                   
|      
|       | 10 | .1          |  | Long Term Incentive Plan***                                                                                                                                                                                                                                                                   
|      
|       | 10 | .2          |  | Deferred compensation Plan***                                                                                                                                                                                                                                                                 
|      
|       | 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***
|      
|       | 10 | .4          |  | Registration Rights Agreement effective February 2, 2005
    among National Interstate Corporation, Alan Spachman and Great
    American Insurance Company***                                                                                                                                 

64



---



##### Table of Contents



|       |    |     |             |                                                                                                                                                                                                                   
|------ | -- | --- | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    |     | Description
|       |    |     |            
|      
|       | 10 | .5  |             | Amended and Restated Declaration of Trust of National Interstate
    Capital Trust I dated as of May 22, 2003***                                                                                                  
|      
|       | 10 | .6  |             | Indenture dated as of May 22, 2003 with National Interstate
    Corporation as Issuer and Wilmington Trust Company as Trustee***                                                                                  
|      
|       | 10 | .7  |             | Promissory Note dated June 23, 2004 to Great American
    Insurance Company from National Interstate Corporation***                                                                                               
|      
|       | 10 | .8  |             | Agreement of Reinsurance No. 0012 dated November 1, 1989
    between National Interstate Insurance Company and Great American
    Insurance Company***                                                            
|      
|       | 10 | .9  |             | Promissory Note dated December 31, 1998 to National
    Interstate Corporation from Alan R. Spachman***                                                                                                           
|      
|       | 10 | .1  |             | Term Loan Agreement dated August 28, 2002 between KeyBank
    National Association and National Interstate Corporation***                                                                                         
|      
|       | 10 | .11 |             | Master Demand Promissory Note dated August 28, 2002 to
    KeyBank National Association from National Interstate
    Corporation***                                                                               
|      
|       | 14 | .1  |             | Code of Ethics and Conduct                                                                                                                                                                                        
|      
|       | 21 | .1  |             | Subsidiaries of the Registrant                                                                                                                                                                                    
|      
|       | 23 | .1  |             | Consent of Ernst & Young LLP                                                                                                                                                                                      
|      
|       | 24 | .1  |             | Power of attorney                                                                                                                                                                                                 
|      
|       | 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 2002
|      
|       | 31 | .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 2002
|      
|       | 32 | .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 2002                                                          
|      
|       | 32 | .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                                                          






| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| | * | This information contained in Notes to Consolidated Financial
    Statements at Note Three Investments



| |    |                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | ** | This information contained in Notes to Consolidated Financial
    Statements at Note Seven Premiums, Reinsurance and
    Transactions with Related Parties



|    |                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------
|*** | These exhibits are incorporated by reference to our
    Registration Statement on Form S-1 (Registration
    No. 333-119270)

65



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


SCHEDULE II  CONDENSED FINANCIAL INFORMATION
OF PARENT COMPANY


CONDENSED BALANCE SHEETS


|                                     |                                              |                                                                                      |         |        |         |   |        |        |        | 
|------------------------------------ | -------------------------------------------- | ------------------------------------------------------------------------------------ | ------- | ------ | ------- | - | ------ | ------ | ------ | 
|                                     |                                              | December 31,                                                                         |        
|                                     |                                              |                                                                                      |        
|                                     |                                              | 2004                                                                                 |         |        | 2003    |  
|                                     |                                              |                                                                                      |         |        |         |  
|                                     |                                              | (Dollars in thousands,                                                               |        
|                                     |                                              | except share data)                                                                   |        
|ASSETS                              
|Investment in subsidiaries           |                                              | $                                                                                    | 106,315 |        |         | $ | 70,091 |       
|Receivable from subsidiary           |                                              |                                                                                      |        |        |         |   | 1,083  |       
|Cash                                 |                                              |                                                                                      | 4       |        |         |   | 211    |       
|Property and equipment  net         |                                              |                                                                                      | 991     |        |         |   | 1,160  |       
|Other assets                         |                                              |                                                                                      | 1,749   |        |         |   | 497    |       
|                                     |                                              |                                                                                      |         |        |         |  
|                                     |                                              | Total assets                                                                         |         | $      | 109,059 |   |        | $      | 73,042 | 
|                                     |                                              |                                                                                      |         |        |         |  
|                                    
|LIABILITIES AND SHAREHOLDERS EQUITY
|Liabilities:                         |                                              |                                                                                      |         |        |         |   |        |       
|                                     | Debt                                         |                                                                                      |         | 32,547 |         |   | $      | 18,901 |       
|                                     | Payable to affiliates                        |                                                                                      |         | 780    |         |   |        |       |       
|                                     | Other liabilities                            |                                                                                      |         | 2,943  |         |   |        | 4,461  |       
|                                     |                                              |                                                                                      |         |        |         |  
|                                     |                                              | Total Liabilities                                                                    |         |        | 36,270  |   |        |        | 23,362 | 
|Shareholders Equity:                |                                              |                                                                                      |         |        |         |   |        |       
|                                     | Preferred shares  no par value              |                                                                                      |         |        |         |   |        |        |       
|                                     |                                              | Authorized  10,000,000 shares                                                       |         |        |         |   |        |        |        | 
|                                     |                                              | Issued  0 shares                                                                    |         |        |        |   |        |        |       | 
|                                     | Common stock  Class A  $0.01 par
    value |                                                                                      |         |        |         |   |        |        |       
|                                     |                                              | Authorized  50,000,000 shares                                                       |         |        |         |   |        |        |        | 
|                                     |                                              | Issued  20,000,000 shares, including 4,470,400
    and 4,975,800 shares in treasury |         |        | 200     |   |        |        | 200    | 
|                                     | Additional paid-in capital                   |                                                                                      |         | 1,264  |         |   |        | 758    |       
|                                     | Retained earnings (deficit)                  |                                                                                      |         | 77,102 |         |   |        | 54,512 |       
|                                     | Accumulated other comprehensive income       |                                                                                      |         | 539    |         |   |        | 1,229  |       
|                                     | Treasury stock                               |                                                                                      |         | (6,316 | )       |   |        | (7,019 | )     
|                                     |                                              |                                                                                      |         |        |         |  
|                                     |                                              | Total shareholders equity                                                           |         |        | 72,789  |   |        |        | 49,680 | 
|                                     |                                              |                                                                                      |         |        |         |  
|                                     |                                              | Total liabilities and shareholders equity                                           |         | $      | 109,059 |   |        | $      | 73,042 | 
|                                     |                                              |                                                                                      |         |        |         |  

66



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


SCHEDULE II  CONDENSED FINANCIAL INFORMATION
OF PARENT COMPANY


CONDENSED STATEMENTS OF INCOME


|                                                                                         |  |                             |        |   |      |   |        |      |  |   |       |  
|---------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                                                                         |  | For Years Ended December 31 |       
|                                                                                         |  |                             |       
|                                                                                         |  | 2004                        |        |   | 2003 |   |        | 2002 | 
|                                                                                         |  |                             |        |   |      |   |        |      | 
|                                                                                         |  | (Dollars in thousands)      |       
|Revenues                                                                                 |  |                             |        |   |      |   |        |      |  |   |       |  
|Fees from subsidiaries                                                                   |  | $                           | 8,334  |   |      | $ | 8,373  |      |  | $ | 6,000 |  
|Investment income                                                                        |  |                             | 4      |   |      |   | 5      |      |  |   |      |  
|Other income                                                                             |  |                             |       |   |      |   | 2      |      |  |   |      |  
|                                                                                         |  |                             |        |   |      |   |        |      | 
|                                                                                         |  |                             | 8,338  |   |      |   | 8,380  |      |  |   | 6,000 |  
|Expenses                                                                                 |  |                             |        |   |      |   |        |      |  |   |       |  
|General and administrative expenses                                                      |  |                             | 8,195  |   |      |   | 3,142  |      |  |   | 6,818 |  
|Interest expense                                                                         |  |                             | 1,610  |   |      |   | 716    |      |  |   |       |  
|                                                                                         |  |                             |        |   |      |   |        |      | 
|Total expenses                                                                           |  |                             | 9,805  |   |      |   | 3,858  |      |  |   | 6,818 |  
|                                                                                         |  |                             |        |   |      |   |        |      | 
|Income (loss) before income taxes and equity in undistributed
    income of subsidiaries |  |                             | (1,467 | ) |      |   | 4,522  |      |  |   | (818  | )
|Provision (benefit) for income taxes                                                     |  |                             | (221   | ) |      |   |       |      |  |   |      |  
|                                                                                         |  |                             |        |   |      |   |        |      | 
|Income (loss) before equity in undistributed income of
    subsidiaries                  |  |                             | (1,246 | ) |      |   | 4,522  |      |  |   | (818  | )
|Equity in undistributed income of subsidiaries, net of tax                               |  |                             | 24,014 |   |      |   | 15,322 |      |  |   | 9,106 |  
|                                                                                         |  |                             |        |   |      |   |        |      | 
|Net income                                                                               |  | $                           | 22,768 |   |      | $ | 19,844 |      |  | $ | 8,288 |  
|                                                                                         |  |                             |        |   |      |   |        |      | 

67



---



##### 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                          |    
|                          |                                                                                  |                                                      |    
|                          |                                                                                  | 2004                                                 |     |         | 2003    |   |     | 2002    |       
|                          |                                                                                  |                                                      |     |         |         |   |     |         |       
|                          |                                                                                  | (In thousands)                                       |    
|Operating activities      |                                                                                  |                                                      |     |         |         |   |     |         |        |   |   |        
|                          | Net income                                                                       |                                                      | $   | 22,768  |         |   | $   | 19,844  |        |   | $ | 8,288   |       
|                          | Adjustments to reconcile net income to cash provided by
    operating activities |                                                      |     | (23,766 | )       |   |     | (25,978 | )      |   |   | (14,233 | )     
|                          |                                                                                  |                                                      |     |         |         |   |     |         |       
|                          |                                                                                  | Net cash used in operating activities                |     |         | (998    | ) |     |         | (6,134 | ) |   |         | (5,945 | )
|                          |                                                                                  |                                                      |     |         |         |   |     |         |       
|Investment activities     |                                                                                  |                                                      |     |         |         |   |     |         |        |   |   |        
|                          | Capital contributions to subsidiaries                                            |                                                      |     | (15,000 | )       |   |     | (9,965  | )      |   |   |        |       
|                          | Distributions from subsidiaries                                                  |                                                      |     | 2,100   |         |   |     | 5,105   |        |   |   | 8,846   |       
|                          | Purchases of property and equipment                                              |                                                      |     | (480    | )       |   |     | (529    | )      |   |   | (702    | )     
|                          |                                                                                  |                                                      |     |         |         |   |     |         |       
|                          |                                                                                  | Net cash provided by (used in) investment activities |     |         | (13,380 | ) |     |         | (5,389 | ) |   |         | 8,144  |  
|                          |                                                                                  |                                                      |     |         |         |   |     |         |       
|Financing activities      |                                                                                  |                                                      |     |         |         |   |     |         |        |   |   |        
|                          | Proceeds from term loan and Trust preferred securities                           |                                                      |     |        |         |   |     | 15,464  |        |   |   |        |       
|                          | Proceeds on loan from affiliate                                                  |                                                      |     | 15,000  |         |   |     |        |        |   |   |        |       
|                          | Issuance of short term debt                                                      |                                                      |     |        |         |   |     |        |        |   |   | 2,000   |       
|                          | Repayment of long term debt                                                      |                                                      |     | (1,354  | )       |   |     | (3,146  | )      |   |   | (624    | )     
|                          | (Purchases) issuance of treasury stock                                           |                                                      |     | 525     |         |   |     | (128    | )      |   |   | (3,622  | )     
|                          | Issuance of common shares                                                        |                                                      |     |        |         |   |     |        |        |   |   | 47      |       
|                          | Deferred financing costs                                                         |                                                      |     |        |         |   |     | (456    | )      |   |   |        |       
|                          |                                                                                  |                                                      |     |         |         |   |     |         |       
|                          |                                                                                  | Net cash provided by (used in) financing activities  |     |         | 14,171  |   |     |         | 11,734 |   |   |         | (2,199 | )
|                          |                                                                                  |                                                      |     |         |         |   |     |         |       
|                          |                                                                                  | Net increase (decrease) in cash                      |     |         | (207    | ) |     |         | 211    |   |   |         |        |  
|Cash at beginning of year |                                                                                  |                                                      | 211 |         |         |   |    |         |        |   |   |        
|                          |                                                                                  |                                                      |     |         |         |   |     |         |       
|Cash at end of year       |                                                                                  | $                                                    | 4   |         |         | $ | 211 |         |        | $ |  |        
|                          |                                                                                  |                                                      |     |         |         |   |     |         |       

68



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


SCHEDULE III  SUPPLEMENTARY INSURANCE
INFORMATION


|                             |  |                |        |               |            |   |         |          |  |   |          |     |  |            |              |  |             |        |       |             |       |   |              |     |  |          |        |  |  |   |       |  |  |   |         | 
|---------------------------- |  | -------------- | ------ | ------------- | ---------- | - | ------- | -------- |  | - | -------- | --- |  | ---------- | ------------ |  | ----------- | ------ | ----- | ----------- | ----- | - | ------------ | --- |  | -------- | ------ |  |  | - | ----- |  |  | - | ------- | 
|                             |  |                |        | Liability for |            |   |         |          |  |   |          |     |  |            |              |  |             |        |      
|                             |  |                |        | Unpaid        |            |   |         |          |  |   |          |     |  |            | Amortization |  |             |        |       |            
|                             |  | Deferred       |        |               | Losses and |   |         |          |  |   |          |     |  | Losses and |              |  | of Deferred |        |       |             |       |  
|                             |  | Policy         |        |               | Loss       |   |         |          |  |   |          | Net |  |            | Loss         |  |             | Policy |       |             | Other |   |              | Net | 
|                             |  | Acquisition    |        |               | Adjustment |   |         | Unearned |  |   | Earned   |     |  | Investment |              |  | Adjustment  |        |       | Acquisition |       |   | Underwriting |     |  | Premiums |       
|                             |  | Costs          |        |               | Expenses   |   |         | Premiums |  |   | Premiums |     |  | Income     |              |  | Expenses    |        |       | Costs       |       |   | Expenses     |     |  | Written  |       
|                             |  |                |        |               |            |   |         |          |  |   |          |     |  |            |              |  |             |        |       |             |       |   |              |     |  |          |       
|                             |  | (In thousands) |       
|Year ended December 31, 2004 |  | $              | 11,606 |               |            | $ | 171,031 |          |  | $ | 80,928   |     |  | $          | 156,908      |  |             | $      | 8,613 |             |       | $ | 92,008       |     |  | $        | 34,370 |  |  | $ | 2,390 |  |  | $ | 166,419 | 
|Year ended December 31, 2003 |  | $              | 10,720 |               |            | $ | 128,726 |          |  | $ | 69,708   |     |  | $          | 126,364      |  |             | $      | 5,772 |             |       | $ | 68,798       |     |  | $        | 29,783 |  |  | $ | 2,428 |  |  | $ | 141,924 | 
|Year ended December 31, 2002 |  | $              | 8,604  |               |            | $ | 102,210 |          |  | $ | 48,226   |     |  | $          | 87,356       |  |             | $      | 4,513 |             |       | $ | 55,049       |     |  | $        | 23,106 |  |  | $ | 1,050 |  |  | $ | 93,516  | 

69



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


SCHEDULE V  VALUATION AND QUALIFYING ACCOUNTS


|                                 |  |                |     |           |                    |   |            |          |  |  |               |            |        |        |    |  |  |   |     | 
|-------------------------------- |  | -------------- | --- | --------- | ------------------ | - | ---------- | -------- |  |  | ------------- | ---------- | ------ | ------ | -- |  |  | - | --- | 
|                                 |  |                |     | Additions |                    |   |            |          | 
|                                 |  |                |     |           |                    |   |            |          | 
|                                 |  | Balance at     |     |           |                    |   | Charged to |          |  |  |               | Balance at |       
|                                 |  | Beginning      |     |           | Charged/(Credited) |   |            | Other    |  |  |               |            | End of |       
|                                 |  | of Period      |     |           | to Expenses        |   |            | Accounts |  |  | Deductions(1) |            |        | Period |   
|                                 |  |                |     |           |                    |   |            |          |  |  |               |            |        |        |   
|                                 |  | (In thousands) |    
|Year ended December 31, 2004     |  |                |     |           |                    |   |            |          |  |  |               |            |        |        |    |  |  |   |     | 
|Premiums in course of collection |  | $              | 424 |           |                    |   |           |          |  |  |              |            |        | $      | 63 |  |  | $ | 361 | 
|Year ended December 31, 2003     |  |                |     |           |                    |   |            |          |  |  |               |            |        |        |    |  |  |   |     | 
|Premiums in course of collection |  |                | 476 |           |                    |   |           |          |  |  |              |            |        |        | 52 |  |  |   | 424 | 
|Year ended December 31, 2002     |  |                |     |           |                    |   |            |          |  |  |               |            |        |        |    |  |  |   |     | 
|Premiums in course of collection |  |                | 385 |           |                    | $ | 91         |          |  |  |              |            |        |        |   |  |  |   | 476 | 






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

70



---



##### Table of Contents



NATIONAL INTERSTATE CORPORATION AND SUBSIDIARIES


SCHEDULE VI  SUPPLEMENTARY INFORMATION CONCERNING
PROPERTY 


CASUALTY INSURANCE OPERATIONS


|                             |  |                |         |      |                |               |               |              |  |   |                   |                 |                     |   |   |             |  |   |            |  |  |   |        |   |  |   |        | 
|---------------------------- |  | -------------- | ------- | ---- | -------------- | ------------- | ------------- | ------------ |  | - | ----------------- | --------------- | ------------------- | - | - | ----------- |  | - | ---------- |  |  | - | ------ | - |  | - | ------ | 
|                             |  |                |         |      |                | Liability for |               |              |  |   |                   |                 |                    
|                             |  |                |         | Less |                |               | Unpaid Losses |              |  |   |                   | Losses and Loss |                     |   |  
|                             |  | Liability for  |         |      | Reinsurance    |               |               | and Loss     |  |   |                   |                 | Adjustment Expenses |   |   |            
|                             |  | Unpaid         |         |      | Recoverable on |               |               | Adjustment   |  |   |                   |                 | (Benefits) Incurred |   |   |            
|                             |  | Losses and     |         |      | Unpaid Losses  |               |               | Expenses Net |  |   |                   |                 | Related to          |   |   | Paid Losses | 
|                             |  | Loss           |         |      | and Loss       |               |               | of Related   |  |   | Discount, if any, |                 |                     |   |   | and Loss    | 
|                             |  | Adjustment     |         |      | Adjustment     |               |               | Reinsurance  |  |   | Deducted from     |                 | Current             |   |   | Prior       |  |   | Adjustment | 
|                             |  | Expense        |         |      | Expense        |               |               | Recoverable  |  |   | Reserves          |                 | Period              |   |   | Period      |  |   | Expenses   | 
|                             |  |                |         |      |                |               |               |              |  |   |                   |                 |                     |   |   |             |  |   |            | 
|                             |  | (In thousands) |        
|Year ended December 31, 2004 |  | $              | 171,031 |      |                | $             | (59,387       | )            |  | $ | 111,644           |                 |                     | $ |  |             |  | $ | 94,263     |  |  | $ | (2,255 | ) |  | $ | 67,104 | 
|                             |  |                |         |      |                |               |               |              |  |   |                   |                 |                     |   |   |             |  |   |            |  | 
|Year ended December 31, 2003 |  | $              | 128,726 |      |                | $             | (41,986       | )            |  | $ | 86,740            |                 |                     | $ |  |             |  | $ | 72,498     |  |  | $ | (3,700 | ) |  | $ | 49,220 | 
|                             |  |                |         |      |                |               |               |              |  |   |                   |                 |                     |   |   |             |  |   |            |  | 
|Year ended December 31, 2002 |  | $              | 102,210 |      |                | $             | (35,048       | )            |  | $ | 67,162            |                 |                     | $ |  |             |  | $ | 55,011     |  |  | $ | 38     |   |  | $ | 36,343 | 
|                             |  |                |         |      |                |               |               |              |  |   |                   |                 |                     |   |   |             |  |   |            |  | 

71



---



##### Table of Contents






SIGNATURES






| |                                    
| | -----------------------------------
| | NATIONAL INTERSTATE
    CORPORATION



| |     |                     
| | --- | --------------------
| | By: | /s/ ALAN R. SPACHMAN

| |                                  
| | ---------------------------------
| |                                  
| | Name:        Alan R.
    Spachman

| |        |                                    
| | ------ | -----------------------------------
| | Title: | Chairman of the Board and President





|                                                          |  |                                                                                             |  |                |  | 
|--------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | -------------- |  | 
|Signature                                                 |  | Title                                                                                       |  | Date          
|                                                          |  |                                                                                             |  |               
|                                                         
|/s/ ALAN R. SPACHMANAlan
    R. Spachman                  |  | Chairman of the Board and President
    (Principal Executive Officer)                       |  | March 28, 2005
|                                                         
|/s/ GARY N. MONDAGary
    N. Monda                        |  | Vice President and Chief Financial Officer (Principal Financial
    and Accounting Officer) |  | March 28, 2005
|                                                         
|/s/ DONALD D. LARSON*Donald
    D. Larson                 |  | Director                                                                                    |  | March 28, 2005
|                                                         
|/s/ KEITH A. JENSEN*Keith
    A. Jensen                   |  | Director                                                                                    |  | March 28, 2005
|                                                         
|/s/ JAMES C. KENNEDY*James
    C. Kennedy                 |  | Director                                                                                    |  | March 28, 2005
|                                                         
|/s/ GARY J. GRUBER*Gary
    J. Gruber                     |  | Director                                                                                    |  | March 28, 2005
|                                                         
|/s/ JOEL SCHIAVONE*Joel
    Schiavone                     |  | Director                                                                                    |  | March 28, 2005
|                                                         
|/s/ THEODORE H. ELLIOTT, JR.*Theodore
    H. Elliott, Jr. |  | Director                                                                                    |  | March 28, 2005
|                                                         
|/s/ K. BRENT SOMERS*K.
    Brent Somers                   |  | Director                                                                                    |  | March 28, 2005



|  |                                   
|- | ----------------------------------
|* | By Gary N. Monda, attorney-in-fact

72