Niche insurance markets typically are too small, too remote or too difficult to attract or sustain most competitors. Examples of products for these markets include traditional property and casualty insurance for transportation companies, group captive programs for transportation companies, specialty personal lines, primarily recreational vehicle coverage and transportation and general commercial insurance in Hawaii.

In its transportation component, the Company underwrites commercial auto liability, general liability, physical damage and motor truck cargo coverages for truck and passenger operators. Passenger transportation operators include charter and tour bus companies, municipal transit systems, school transportation contractors, limousine companies, inter-city bus services and community service and paratransit operations.

The Company also underwrites, market and distribute alternative insurance products, also known as captives, to truck and passenger transportation operators. Group captives are insurance or reinsurance companies that are owned or “rented” by the participants in the group captive insurance program. Program participants share in the underwriting profits or losses and the investment results associated with the risks being insured by the captive insurance company. Participants in these programs typically are interested in the improved risk control, increased participation in the claims settlement process and asset investment features associated with a captive insurance program.

The Company supports two forms of group captive programs. In a member-owned captive, the policyholders form, capitalize and manage their own reinsurance company. In a rental group captive, the reinsurance company is formed, capitalized and managed by someone other than the policyholders. The participants in a rental group captive program pay a fee to the reinsurance company owner to use the reinsurance facility in their captive program; in other words, the policyholders “rent” it. In both member-owned and rented captives, National Interstate underwrites and prices the risk, issues the policies and adjusts the claims. A portion of the risk and premium is ceded to the captive insurance company. That captive insurance company serves the same purpose for the group captive participants regardless of whether they own the reinsurance company or rent it.

The Company entered the specialty personal lines insurance market with the introduction of a specialty recreational vehicle, or RV, insurance program in 1996. The Company believes its products differ from those offered by traditional personal auto insurers because the Company offers coverages written specifically for RV owners, including those who live in their RV full-time. The Company offers coverage for campsite liability, vehicle replacement coverage and coverage for trailers, golf carts and campsite storage facilities. In addition to its RV product, the Company also offers companion personal auto coverage to RV policyholders. This product covers the automobiles owned by the Company’s insured RV policyholders. One feature of the Company’s companion auto product that the Company believes is not generally available from other insurers is the application of a single deductible when an insured RV and the insured companion auto being towed are both damaged in an accident.

Transportation component accounted for 23.4 points of the growth. The transportation component contributed 12.9 points of the growth from a new insurance arrangement involving primarily physical damage coverage on trucks and 10.5 points due primarily to both increased rates on renewed policies and premiums from new business.

New insureds in The Company’s alternative risk transfer component accounted for 15.9 points of the growth. Specialty personal lines contributed 3.2 points of the growth primarily due to rate increases.

The loss and LAE ratio for the year ended December 31, 2003 decreased 8.6 points to 54.4% compared to 63.0% for the year ended December 31, 2002.