Professionals Direct (PFLD) DEF 14A Definitive proxy

SCHEDULE 14A
(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT
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PROFESSIONALS DIRECT, INC.

(Name of Registrant as Specified in its Charter)

(Name of Person(s) Filing Proxy Statement, if other Than the Registrant)

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PROFESSIONALS DIRECT, INC.

161 Ottawa Avenue, N.W., Suite 607
Grand Rapids, Michigan 49503

Notice of Annual Meeting of Shareholders

Date:	Tuesday, May 13, 2003
Time:	10:00 a.m., local time
Place:	Crowne Plaza Grand Rapids 5700 - 28th Street, S.E. Grand Rapids, Michigan 49546

April 15, 2003

Dear Fellow Shareholder:

You are cordially invited to attend the Annual Meeting of Shareholders of Professional Direct, Inc. on May 13, 2003. At the meeting, we will vote on election of directors and such other business as may properly come before the meeting.

You can vote at the annual meeting if you were a shareholder of record on March 27, 2003. Your board of directors recommends that you voteFOR each of the nominees.

We look forward to seeing you at the meeting.

By Order of the Board of Directors,



Stephen M. Tuuk
President and Chief Executive Officer

Your vote is important to us. Even if you plan to attend the meeting, please
vote now, by signing, dating, and mailing your proxy in the enclosed
envelope.

Professionals Direct, Inc.

161 Ottawa Avenue, N.W., Suite 607
Grand Rapids, Michigan 49503

April 15, 2003

Proxy Statement

Time and Place of Meeting

You are cordially invited to attend the annual meeting of shareholders of Professionals Direct, Inc. to be held on Tuesday, May 13, 2003, at the Crowne Plaza Grand Rapids, 5700 - 28^th Street, S.E., Grand Rapids, Michigan, 49546, at 10:00 a.m. local time.

Purposes of Meeting

The purpose of the annual meeting is to consider and vote upon:

(1)     Election of directors; and

(2)     Such other business as may properly come
          before the meeting.

Your board of directors recommends that you vote FOR each of the nominees.

You may vote at the meeting if you were a shareholder of record of Professionals Direct at the close of business on March 27, 2003. Each such shareholder is entitled to one vote per share on each matter presented.

As of March 27, 2003, there were 333,500 shares of Professionals Direct common stock issued and outstanding.

How to Vote by Proxy

To vote by mail, please sign and return the enclosed form of proxy.

If you specify a choice, the shares represented by your proxy will be voted as specified. If you do not specify a choice, your shares will be voted for the election of the nominees named in this proxy statement as directors and, with respect to any other matter that may come before the meeting, in the discretion of the individuals named as proxies on your proxy. If any other matters are presented for consideration at the annual meeting, the individuals named in the enclosed form of proxy will have the discretion to vote on those matters. As of the date of this proxy statement, we do not know of any other matters to be considered at the annual meeting. You may revoke your proxy at any time prior to its exercise by delivering written notice of revocation to the Secretary of Professionals Direct, by signing and delivering a later dated proxy or by attending and voting at the annual meeting. Required Vote A plurality of the shares voting is required to elect directors. This means that if there are more nominees than positions to be filled, the nominees for whom the most votes are cast will be elected. Any other matter voted upon at the meeting will be approved if a majority of the votes cast are voted for such matter. The presence of the holders of a majority of the votes entitled to be cast at the meeting is necessary to constitute a quorum. If you submit a proxy or attend the meeting in person, your shares will be counted towards the quorum, even if you abstain from voting on some or all of the matters introduced at the meeting. Abstentions and broker non-votes will not be counted as votes on any matter expected to come before the meeting.

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Election of Directors

The board of directors presently consists of ten individuals, divided into three classes of four, three, and three individuals. Each class has a term of office of three years, with the term of office of one class expiring at the annual meeting in each successive year. The terms of four directors will expire as of the annual meeting.

The board of directors proposes that the following nominees be elected as directors at the annual meeting for terms expiring at the annual meeting in the year indicated:

Nominee	Term Expiring
David W. Crooks	2006
Stephen M. Westfield	2006
Thomas F. Dickinson	2006
Blake W. Krueger	2006

Each proposed nominee is willing to be elected and serve as a director. However, if a nominee is unable to serve or is otherwise unavailable for election, which we do not anticipate, the incumbent board of directors may or may not select a substitute nominee. If a substitute nominee is selected, your proxy (unless you give alternative instructions) will be voted for the person so selected. If a substitute nominee is not selected, your proxy will be voted for the election of the remaining nominees. Proxies will not be voted for a greater number of persons than the number of nominees named.

Biographical information concerning nominees and current directors is presented below. Except as otherwise indicated, each nominee has had the same principal employment for over five years.

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Professionals Direct's Board of Directors

Nominees for the Board of Directors

David W. Crooks (age 54) is nominated for a term ending in 2006. He has been a director of Professionals Direct since 2001 and was a director of Professionals Direct Insurance Company (f/k/a Michigan Lawyers Mutual Insurance Company) ("PDIC") from 1993 to 2001. He currently serves as a member of the Audit Committee and Executive Committee of Professionals Direct. Mr. Crooks is the principal business consultant for Value Added Consultants, Ltd. He is a member of both the American Bar Association and the State Bar of Michigan. From 1983 to 1997, Mr. Crooks served as Vice President, General Counsel and Secretary of Kysor Industrial Corporation, where he was responsible for all legal matters of the corporation, its subsidiaries and divisions and Board of Directors. Before joining Kysor, Mr. Crooks practiced law with Warner, Norcross & Judd of Grand Rapids, Michigan. Mr. Crooks is a former member of the Cadillac Area Steering Team, a group of business leaders who provided "commun ity betterment programs," and the Cadillac Local Development Authority, which administered and facilitated an environmental cleanup in the Cadillac Industrial Park. Mr. Crooks holds degrees from Denison University and Vanderbilt School of Law. He also graduated from the United States Air Force pilot training school and served as a military pilot. Mr. Crooks was admitted to the State Bar of Michigan in 1977. Stephen M. Westfield (age 41) is nominated for a term ending in 2006. He has been a director of Professionals Direct since 2002. Mr. Westfield joined Professionals Direct in April 1994 as Director of Finance and Accounting. In April of 1997, he was appointed to the position of Vice President, Finance and Information Systems, and Treasurer, and in 1999 assumed the position of Vice President of Finance and Treasurer of Professionals Direct and PDIC. Before joining Professionals Direct, he worked for ten years with Plante & Moran, a public accounting and consulting firm. His experience in public accounting was with a large variety of clients in the audit practice, including manufacturing, schools, governmental units and service industries. Mr. Westfield received a B.B.A. degree from Western Michigan University in December 1983. He is a Certified Public Accountant (CPA) and a member of the American Institute of Certified Public Accountants. Thomas F. Dickinson (age 46) is nominated for his first term as a director of Professionals Direct, the term to end in 2006. Mr. Dickinson is currently President and Chief Executive Officer of MHA Insurance Company, a stock company owned primarily by Michigan hospitals. MHA Insurance Company provides professional medical liability insurance to health care facilities and physicians in Michigan, Ohio, Minnesota, and North Dakota. In addition, The Risk Management & Patient Safety Institute, a Division of MHA Insurance Company provides claims and risk management products and services to a national audience. Mr. Dickinson joined MHA Insurance Company in 1993 serving in several executive positions before assuming his current role of President and Chief Executive Officer in May 2000. Prior to joining MHA Insurance Company, Mr. Dickinson served Comerica Bank in a variety of positions and joined Foremost Insurance Company in September 1984. At Foremost, he served as Group Product Man ager, National Accounts Manager, Strategic Operation Manager, and Agency Director. Mr. Dickinson obtained a Bachelor of Arts degree from Albion College in 1979, majoring in Economics and Computational Math, and received a Master in Business Administration degree from Eastern Michigan University in 1982. Blake W. Krueger(age 49) is nominated for his first term as a director of Professionals Direct, the term to end in 2006. Mr. Krueger is currently Executive Vice President, General Counsel and Secretary for Wolverine World Wide, Inc., a New York Stock Exchange listed international marketer of footwear and accessories with annual sales of over $800 million. Wolverine has owned-operations and subsidiaries in Canada and all key European countries and licensing operations in more than 100 countries. At Wolverine World Wide, Mr. Krueger is one of five senior executives responsible for establishing corporate strategies and providing top-level management of operations. He has direct reporting responsibility for Wolverine's retail, licensing, human resources, legal, strategic planning and acquisition divisions and departments. Mr. Krueger practiced law at Warner, Norcross & Judd from 1978 through 1996 in the field of corporate and business law, mergers, acquisitions and securities. Mr. Krueger i s a former Director of the Grand Rapids

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Bar Association Foundation and was listed in theBest Lawyers of America while in private practice. Mr. Krueger graduated from the Michigan State University, Honors College in 1975 with a B.A. in Business Administration with High Honors (Magna Cum Laude) and graduated Magna Cum Laude from Wayne State University Law School in 1978, where he was a member of the Wayne State Law Review.

Your Board of Directors Recommends That You
VoteFOR the Election of All Nominees as Directors

Continuing Directors with Terms Expiring in 2004

Tracy T. Larsen (age 43) has been a director of Professionals Direct since 2001 and was a director of PDIC from 1996 to 2001. He currently serves as a member of the Executive Committee of Professionals Direct. Mr. Larsen is a partner with Warner Norcross & Judd LLP and an attorney at law. He was Chairman of the firm's Corporate Mergers and Acquisitions Group until 2003. He is a member of the American Bar Association and presently serves on its Negotiated Acquisitions Subcommittee of the Business Law Section. He also is a member of the State Bar of Michigan and serves as the Chairman of the Business Law Section of the State Bar of Michigan. Mr. Larsen has been elected a Fellow of the Michigan Bar Foundation, is listed inWho's Who in American Law, and has been named inBest Lawyers of America. His legal expertise encompasses all aspects of corporate and securities law, with an emphasis on mergers, acquisitions and corporate finance. Mr. Larsen is a graduate of Hope College (A.B. summa cum laude, 1981) and Indiana University School of Law (J.D. magna cum laude, 1984). He holds numerous academic distinctions and honors, including being named Phi Beta Kappa and Baker Scholar and being elected to the Order of the Coif and the Order of the Barristers. While at Indiana University, Mr. Larsen served as the Executive Editor of the Indiana Law Journal and was a member of the National Moot Court Team. He was admitted to the State Bar of Michigan in 1984. Mary L. Ursul (age 44) has been a director of Professionals Direct since 2002 and was a director of PDIC from 1995 to 2000. Ms. Ursul joined Professionals Direct in 2000 as an executive officer and serves as its Vice President and Secretary. Before joining Professionals Direct, Ms. Ursul practiced law from 1985 to 1988 with Dykema Gossett and from 1988 to 1989 had her own practice. From 1989 to 1998, Ms. Ursul served as General Counsel and Director of Administrative Services at Blodgett Memorial Medical Center and from 1998 to 2000 served as General Counsel/VP Administrative Services and was Corporate Compliance Officer for Spectrum Health, a large healthcare system located in Grand Rapids, Michigan. In addition to the State Bar of Michigan and the Grand Rapids Bar Association, she is a former member of the American Society of Healthcare Risk Management and the Michigan Society of Healthcare Risk Management. Ms. Ursul received a B.S. degree in nursing from New York University in 1981 and a law degree from the University of Detroit School of Law. She is the 1995 recipient of the R. Paul Venzke Award from the Michigan Society of Healthcare Risk Management. Ms. Ursul was admitted to the State Bar of Michigan in 1985. Ms. Ursul is a director of Kent Commerce Bank, a wholly-owned subsidiary of Capital Bancorp, Ltd. Julius A. Otten (age 64) has been a director of Professionals Direct since 2002 and currently serves as the Chair of the Audit Committee. Mr. Otten is a Certified Public Accountant (CPA) in the State of Michigan. He is a member of the Michigan Association of Certified Public Accountants (MACPA), where he has served as an officer and director. In the past, he has chaired the MACPA's Member Insurance and Annual Meeting committees. He is also a member of the American Institute of Certified Public Accountants (AICPA), where he has served on Council. He retired in 1999 after a 36-year association with KPMG, LLP where he served as partner-in-charge of the firm's Michigan insurance industry practice. Since retirement from KPMG, Mr. Otten has worked as an independent consultant principally on matters requiring insurance industry expertise. He has worked with the Office of Financial and Insurance Services (OFIS) of the State of Michigan on behalf of various insurers and has served on task force commi ttees organized by the OFIS and others. He has also represented the MACPA on OFIS issues affecting the accounting profession. Mr. Otten received his BBA and MBA degrees from the School of Business Administration at The University of Michigan. He currently serves on the Board of the Paton Accounting Fund and the Paton Accounting Center at the University of

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Michigan, Ann Arbor, the Financial and Accounting Advisory Board at the University of Michigan, Dearborn, and on the Accounting Advisory Board of Henry Ford Community College.

Continuing Directors with Terms Expiring in 2005

Stephen M. Tuuk (age 49) has been a director of Professionals Direct since 2001 and was a director of PDIC from 1993 to 2001. He currently serves as the Chair of the Governance Committee and as the Chair of the Executive Committee of Professionals Direct. Mr. Tuuk has served as President, Chief Executive Officer and Chairman of the Board of Professionals Direct since 2001. Before this, Mr. Tuuk served as counsel to the State Bar of Michigan and the organizing Board of Directors of Professionals Direct in connection with its formation and served as general counsel to Professionals Direct from 1988 to 1993. In addition to his responsibilities with Professionals Direct, he is a member of the American Bar Association, the State Bar of Michigan and the Grand Rapids Bar Association. Mr. Tuuk is a former member of the Standing Committee on Insurance Law, was a member of the State Bar's Lawyers Professional Liability Insurance Committee and is a member of the American Bar Association's Committee on the Public Regulation of Insurance. He is a past president of the National Association of Bar-Related Insurance companies. Mr. Tuuk was an associate from 1984 to 1989, a full-time member from 1990 to 1992 and a part-time member from 1993 to 1995 at Miller, Canfield, Paddock and Stone, P.L.C. He received his undergraduate degree with honors from Calvin College in 1975 and his law degree with honors from Valparaiso University in 1978. Mr. Tuuk was admitted to the State Bar of Michigan in 1978. Thomas J. Ryan(age 55) has been a director of Professionals Direct since 2001 and was a director of PDIC from 1995 to 2001. He currently serves as a member of the Governance Committee and the Executive Committee of Professionals Direct. He is a member of the American Bar Association, the State Bar of Michigan and the Oakland Ancient Order of Hibernians. He is the immediate past President of the State Bar of Michigan. Mr. Ryan has been a member of the Board of Commissioners of the State Bar of Michigan since 1992. He also is Attorney for the Village of Beverly Hills and the City of Keego Harbor, Prosecuting Attorney for the Township of Bloomfield and the Township of Southfield and City Attorney for the City of the Village of Clarkston and the City of Orchard Lake Village. In addition to the Oakland County Bar Association, he served as a member of the Oakland/Livingston Legal Aid Board of Directors and was its Vice President from 1994 to 1995. Mr. Ryan served on the Oakland County Bar Association Board of Directors and was its President from 1993 to 1994. He received his undergraduate degree from the University of Notre Dame and his law degree from the University of Detroit. He has been in the private practice of law since January 1977. Mr. Ryan was admitted to the State Bar of Michigan in 1973. Joseph A. Fink (age 60) has been a director of Professionals Direct since 2002. He currently serves as the Chair of the Compensation Committee. Mr. Fink is a member with Dickinson Wright, PLLC and serves as Director of the firm's Insurance Industry Task Force. He is a member of the State Bar of Michigan and the Federal Bar Association. He currently serves as chair of the Ingham County Hearing Panel for the State Bar Disciplinary Board. Mr. Fink is a Fellow of the Michigan Bar Foundation, is listed inWho's Who in American Law andWho's Who in the Law, and has been named inBest Lawyers in America. He is a past member of the Michigan Defense Trial Counsel Association, the Ingham County Commercial Mediation Panel and former Chair of the Trial Experience Subcommittee of the DeVitt Committee on Trial Competency of the U.S. District Court, Western District of Michigan. He has also served as a member of the U.S. Courts Committee and the Committee on Local Rules for the U.S. Di strict Court, Western District of Michigan. Mr. Fink has served as an Adjunct Professor on Trial Advocacy at the Thomas M. Cooley Law School and is a former member and Secretary of the Olivet College Board of Trustees. His legal expertise is in the area of insurance and regulatory litigation and he has represented numerous insurance industry clients before the Michigan Office of Financial and Insurance Services. Mr. Fink received his undergraduate degree from Oberlin College and his law degree from the Duke University School of Law. Mr. Fink was admitted to the State Bar of Michigan in 1968.

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Non-Continuing Directors with Terms Expiring in 2003

Charlene M. Snow (age 51) has been a director of Professionals Direct since 2001 and was a director of PDIC from 1987 to 2001. She currently serves as a member of the Compensation Committee of Professionals Direct. Ms. Snow is presently employed as a consultant, most recently working with the Youth Urban Agenda/Civic Literacy Project at Wayne State University. She is a member of the State Bar of Michigan, is a member of the State Bar Prisons and Corrections Section and serves as a board member for the Friends School in Detroit. Ms. Snow is also a member of the Alternative Dispute Resolution Section of the State Bar of Michigan. In 2001, she completed the requirements under the Michigan Court Rules to be a Facilitative Mediator in court cases in Michigan. She is presently on the Oakland County Circuit Court's list of mediators and has mediated cases for Neighborhood Reconciliation Centers and for the courts. In 2002, Ms. Snow began working part-time with Neighborhood Reconciliati on Center as a court liaison. Ms. Snow is also a board member and past chair of the Michigan Women's Campaign Fund. Ms. Snow practiced law with Michigan Legal Services, in a solo practice, and in small law firms from 1976 to 1998. She was an associate with Chiamp and Associates from 1990 until her retirement from active practice in July 1998. In addition to the State Bar, she is a member of the Women Lawyers Association of Michigan and served as president of that organization in 1987. Ms. Snow received her undergraduate degree from Michigan State University, James Madison College, and her law degree from the University of Detroit. She was a recipient of the Champion of Justice Award from the State Bar of Michigan in 1987 and a recipient of the Spirit of Detroit Award in 1981. Ms. Snow was admitted to the State Bar of Michigan in 1976. Craig A. Anderson (age 47) has been a director of Professionals Direct since 2001 and was a director of PDIC from 2000 to 2001. He currently serves as a member of the Audit Committee of Professionals Direct. Mr. Andersonhas more than 20 years of senior management experience, having served as chairman, general counsel, chief financial officer, chief operating officer and president, and in other senior executive positions, with high-growth technology companies. Mr. Anderson has served on several Boards of Directors, including Prairiewave Communications, Natural Gas Compression Systems, US CommCorp, Bandy Telecom Group, Inc., Dakota Telecommunications Group, Inc., The Austad Company, DialNet, Inc. and The Zond Group. He received a B.A. degree from Augustana College in accounting, economics and business administration, a J.D. degree from the University of Southern California and M.B.A. and M.P.A. degrees from the University of South Dakota. Mr. Anderson is a certified public accountant a nd is licensed to practice law, having been admitted to the state bars in California (1980), South Dakota (1987) and Minnesota (1988).

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Committees of the Board of Directors The board of directors has established four committees. Each standing committee is chaired by an outside director, unless otherwise decided by the board of directors. TheGovernance Committee is a standing committee of the Board. Its role is: (a) to review and oversee all material aspects of the board's governance of itself and of Professionals Direct, (b) to review and to nominate candidates for board positions and for board committee positions, (c) to review business arrangements which may present actual or potential conflicts of interest, and (d) to review and oversee any vendor relationships a board member may have with Professionals Direct or any of its subsidiaries. At least annually, the Governance Committee will review and make recommendations to the full board as to any changes in policies and procedures. The Governance Committee will consider nominees recommended by shareholders if such shareholder nominations are properly received in accordance with the procedures set forth in Professionals Direct's Articles of Incorporation (described below under "Shareholder Nominations"). The members of the Governance Committee are Stephen M. Tuuk (Chair), Thomas J. Ryan and Tracy T. Larsen. The Governance Committee held one meeting in 2002. TheAudit Committee is a standing committee of the board. Its role is to act on behalf of the board and oversee all material aspects of Professional Direct's financial reporting, control and audit functions, except those specifically related to the responsibilities of another standing committee. The Audit Committee's roles include a particular focus on the qualitative aspects of financial reporting to shareholders and on the processes for the management of business and financial risk and for compliance with significant applicable legal, ethical and regulatory requirements. The role also includes coordination with other board committees and maintenance of strong, positive working relationship with management, external and internal auditors, counsel and other committee advisors. The members of the Audit Committee are Julius A. Otten (Chair), David W. Crooks and Craig A. Anderson. The Audit Committee held three meetings in 2002. TheCompensation Committee is a standing committee of the board. Its role is to act on behalf of the board and to oversee and recommend to the full board on all material aspects of Professionals Direct's compensation for directors and executive officers. The members of the Compensation Committee are Joseph A. Fink (Chair) and Charlene M. Snow. The Compensation Committee held two meetings in 2002. TheExecutive Committee is a standing committee of the board. Its role is to provide assistance to the board in fulfilling its responsibility to the shareholders, potential shareholders and investment community by exercising the full powers and authority of the board in the management of business affairs and property of Professionals Direct during intervals between meetings of the full board. The members of the Executive Committee are Stephen M. Tuuk (Chair), David W. Crooks, Thomas J. Ryan and Tracy T. Larsen. The Executive Committee held no meetings in 2002. Compensation of Directors Each Director who is not an employee is paid a quarterly fee of $2,000, $500 for each board meeting and $250 for each committee meeting. Directors of the Company who are employees do not receive any compensation for their services as members of the Board of Directors. All directors are reimbursed for expenses incurred in connection with their attendance at meetings of the Board of Directors. Shareholder Nominations A shareholder of record may nominate an individual for a directorship, provided such shareholder is entitled to vote at the applicable annual meeting or special meeting of shareholders called for election of directors (an "election meeting"). To make such a nomination, a shareholder must deliver - not less than 120 days prior to the date of the election meeting in the case of an annual meeting and not more than seven days following the date of notice of the election meeting in the case of a special meeting - a notice to the Secretary of Professionals Direct setting forth with respect to each proposed nominee: the name, age, business address and residence address of the nominee; the principal occupation or employment of the nominee; the number of shares of capital stock of Professionals Direct that are beneficially owned by the nominee; a statement that

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the nominee is willing to be nominated and to serve; and such other information concerning the nominee as would be required under the rules of the Securities and Exchange Commission to be included in a proxy statement soliciting proxies for the election of the nominee. Meetings of the Board of Directors During the fiscal year ended December 31, 2002, the Board of Directors held three meetings. No incumbent director attended fewer than 75 percent of the total number of meetings of the Board of Directors and meetings held by all committees of the Board of Directors on which that incumbent director served in 2002.

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Ownership of Professionals Direct Stock

The following table shows the number of shares of Professionals Direct stock beneficially owned on December 31, 2002 by each of Professionals Direct's directors and nominees for director, each of the executive officers, and all of Professionals Direct's directors and executive officers as a group. No shareholder known to management of Professionals Direct beneficially owned more than 5% of the shares of Professionals Direct stock outstanding on December 31, 2002. As a group, Professionals Direct's directors, nominees for director and executive officers owned 23.3% of Professionals Direct's outstanding stock on December 31, 2002.

Name of Beneficial Owner(1)	Amount and Nature of Beneficial Ownership(2)	Percentage of Class(3)
Stephen M. Tuuk	16,675	5.0%
Charlene M. Snow	2,000	0.6%
David W. Crooks	11,000	3.3%
Thomas J. Ryan	2,200	0.7%
Tracy T. Larsen	6,000	1.8%
Craig A. Anderson	10,000	3.0%
Joseph A. Fink	5,300	1.6%
Mary L. Ursul	14,500	4.3%
Stephen M. Westfield	10,000	3.0%
All Executive Officers Directors and Nominees for Director as a group (9 persons)	77,675	23.3%

(1)	The address of each beneficial owner is 161 Ottawa Avenue, N.W., Suite 607, Grand Rapids, Michigan, 49503.
(2)	The numbers of shares stated are based on information furnished by each person listed and include shares personally owned of record by that person and shares which under applicable regulations are considered to be otherwise beneficially owned by that person. Under these regulations, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power or dispositive power with respect to the security. Voting power includes the power to vote or direct the voting of the security. Dispositive power includes the power to dispose or direct the disposition of the security. A person would also be considered the beneficial owner of a security if the person has a right to acquire beneficial ownership of the security within 60 days, but no shares listed are deemed to be beneficially owned for this reason. These numbers include shares as to which the listed person is legally entitled to sh are voting or dispositive power by reason of joint ownership, trust or other contract or property right, and shares held by spouses and minor children over whom the listed person may have substantial influence by reason of relationship.
(3)	Percentage of beneficial ownership is based on 333,500 shares of common stock outstanding.

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Executive Compensation

Summary of Compensation

          The following table sets forth for the fiscal year ended December 31, 2002, the cash and non-cash compensation awarded, paid or accrued by the Company and its subsidiaries to Stephen M. Tuuk, President, Chief Executive Officer and director, Mary L. Ursul, Vice President, Secretary and director, and Stephen M. Westfield, Vice President, Treasurer and director. No other executive officers of the Company earned more than $100,000 in total annual salary and bonus for 2002 in all capacities in which such person served the Company.

		Annual Compensation		Long-Term Compensation Payouts
Name and Principal Position	Year	Salary	Bonus	LTIP Payouts	All Other Compensation(1)
Stephen M. Tuuk, President and Chief Executive Officer	2002 2001	$227,640 233,640	$ 85,938 101,641	$          - 411,158	$5,500 5,250
Mary L. Ursul, Vice President and Secretary	2002 2001	147,640 147,640	52,068 36,222	- 28,275	4,191 - -
Stephen M. Westfield, Vice President and Treasurer	2002 2001	112,640 106,640	25,894 29,419	- 67,055	5,500 5,250

(1) Consisting of the Company's 50% matching contribution under its 401(k) plan.

The Company had no equity compensation plans, stock options and made no long-term incentive plan awards in 2002.

Employment Contracts

The Company has employment agreements with its executive officers as described below.

Agreements with Mr. Tuuk. The Company has an employment agreement with Mr. Tuuk. The agreement provides that the Company and Mr. Tuuk may end the employment at any time and for any reason. If the Company ends Mr. Tuuk's employment without cause, then it is required to pay Mr. Tuuk's base salary and benefits for 24 months from the date of termination. If Mr. Tuuk resigns his employment or is terminated without cause, then Mr. Tuuk is immediately deemed to have resigned from the Company's Board of Directors and as a director of PDIC and any of the subsidiaries. Upon termination of employment and for 24 months thereafter, Mr. Tuuk may not compete against the Company, PDIC or any of the subsidiaries in any state in which they are doing business.

Agreements with Ms. Ursul and Mr. Westfield. The Company has employment termination and severance agreements with Ms. Ursul and Mr. Westfield, respectively, which provide that the Company and Ms. Ursul and Mr. Westfield may end their respective employment at any time and for any reason. If the Company ends Ms. Ursul's or Mr. Westfield's employment without cause, then it must pay the employee's base salary and benefits for 12 months from the date of termination. Upon termination of employment and for 12 months thereafter, Ms. Ursul and Mr. Westfield may not compete against the Company, PDIC or any of the subsidiaries in any state in which they are doing business.

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Audit Committee Report

The Audit Committee has reviewed and discussed the audited financial statements of Professionals Direct for the year ended December 31, 2002, with management. The Audit Committee has discussed with the independent auditors the matters required to be discussed by SAS 61. The Audit Committee has received the written disclosures and the letter from the independent accountants required by Independence Standards Board Standard No. 1 (Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees) and has discussed with the independent accountant the independent accountant's independence. Based on the review and discussions referred to in this paragraph, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in Professionals Direct's Annual Report on Form 10-KSB for the year ended December 31, 2002. This paragraph and the names of each Audit Committee member listed below shall not be deemed to be "soliciting mate rial," or to be "filed" with the Commission or subject to Regulation 14A or 14C, other than as provided in Item 306 of Regulation S-B, or to be liabilities of Section 18 of the Exchange Act of 1934, except to the extent that Professionals Direct specifically requests that the information be treated as soliciting material or specifically incorporates it by reference into a document filed under the Securities Act of 1933 or the Exchange Act of 1934. Such information will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act of 1934, except to the extent that Professionals Direct incorporates it by reference. The Board of Directors has adopted a written charter for the Audit Committee (attached as Appendix A). The board of directors has selected BDO Seidman, LLP as Professionals Direct's principal accountant for 2003. Representatives of BDO Seidman, LLP will be present at the annual meeting, have an opportunity to make a statement, and be available to respond to appropriate questions. Audit Fees.The aggregate fees billed for professional services rendered by Professionals Direct's principal accountant, BDO Seidman LLP, for the audit of Professionals Direct's annual financial statements, for the review of financial statements included in Professionals Direct's Form 10-QSB and for services provided in connection with statutory and regulatory filings for each of the last two fiscal years were $55,797 and $99,022 in 2001 and 2002, respectively. Audit-Related Fees.The aggregate fees billed for assurance and related services rendered by Professionals Direct's principal accountant, BDO Seidman LLP, that were related to the performance of the audit or review at Professionals Direct's financial statements, and not included in the Audit Fees described above, for each of the last two fiscal years were $23,509 in 2001. Such services related primarily to the issuance of a comfort letter in connection with the conversion and restructure of Professionals Direct. Tax Fees.The aggregate fees billed for tax compliance, tax advice and tax planning services rendered by Professionals Direct's principal accountant, BDO Seidman LLP, for each of the last two fiscal years were $22,451 and $32,759 in 2001 and 2002, respectively. Such services included the preparation of various tax returns and review of the estimated tax liability in the financial statements. All Other Fees. No other fees were paid in the last two fiscal years.
Respectfully submitted, Julius A. Otten, Chairman
David W. Crooks
Craig A. Anderson

11

Related Matters

Solicitation of Proxies

We will initially solicit proxies by mail. Professionals Direct directors, officers and employees may also solicit proxies in person, by telephone or by facsimile without additional compensation. Professionals Direct will bear the entire cost of soliciting proxies.

Certain Relationships and Related Transactions

As part of the conversion and restructuring of the Company in 2001 (the "Conversion"), the executive officers and directors of the Company participated in the related subscription offering and best efforts offering and purchased the Company's common stock. The purchase price paid by the executive officers and directors was $10 per share, which was the same as the purchase price paid by all other purchasers. The officers and directors purchased a total of 77,675 shares of common stock in the subscription and best efforts offering. The number of shares listed for each individual officer and director is listed on page 9 (Ownership of Professionals Direct Stock) and represents the total number of shares that individual purchased in the offerings.

Also as part of the Conversion, the executive officers and directors received compensation in settlement of the Directors and Officers Long Term Incentive Compensation Plan, which included Share Grants, Deferred Compensation Units, and Appreciation Units. For additional information about executive compensation, see page 10 (Executive Compensation) and page 7 (Compensation of Directors).

The following table states the total LTIP payments made during the year ended December 31, 2001:

Officer and/or Director	LTIP Payouts
Craig A. Anderson	$	15,405
David W. Crooks		66,539
Tracy T. Larsen		51,903
Pamela J. Liggett		8,371
Thomas J. Ryan		26,945
Charlene M. Snow		16,944
Stephen M. Tuuk		411,158
Mary L. Ursul		28,275
Stephen M. Westfield		67,055
Total	$	692,595

No LTIP payments were made during 2002.

Steve M. Tuuk serves as a director on the board of directors of Lawyers Reinsurance Company ("LRC"). Mr. Tuuk receives no compensation or any other remuneration for serving as a director on LRC's board of directors. LRC is a reinsurance company owned by various members of the National Association of Bar Related Insurance Companies. Professionals Direct Finance, Inc., a wholly owned subsidiary of the Company, made an initial investment in LRC of $250,000 and currently owns 12.5% of its common stock. Through negotiations by outside brokers, the Company cedes premium to LRC in the layer of $4 million in excess of $1 million. LRC is under no obligation to contract with the Company and the Company is under no obligation to use LRC as a reinsurer. LRC is a participant in a 2002 reinsurance treaty of PDIC. During 2002, premiums of $160,521 were ceded to and no losses were paid by LRC. As of December 31, 2002, unearned premiums ceded to LRC were $85,484.

12

Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires Professionals Direct's directors and officers to file reports of ownership and changes in ownership of shares of common stock with the Securities and Exchange Commission. Directors and officers are required by Securities and Exchange Commission regulations to furnish Professionals Direct with copies of all Section 16(a) reports they file. Based on its review of the copies of such reports received by Professionals Direct (or written representations from certain reporting persons that no Forms 5 were required for those persons), we believe that, from January 1 through December 31, 2002, our directors and officers filed all reports required by Section 16(a) in a timely manner. Shareholder Proposals If you would like a proposal to be presented at the annual meeting of shareholders in 2004 and if you would like your proposal to be included in Professionals Direct's proxy statement and form of proxy relating to that meeting, you must submit the proposal to Professionals Direct in accordance with Securities and Exchange Commission Rule 14a-8. Professionals Direct must receive your proposal by December 2, 2003 for your proposal to be eligible for inclusion in the proxy statement and form of proxy relating to that meeting. To be considered timely, any other proposal that you intend to present at the 2004 annual meeting of shareholders must similarly be received by Professionals Direct by December 2, 2003.

13

APPENDIX A

AUDIT COMMITTEE CHARTER

General Description of Role

The Audit Committee is a standing committee of the Board. The Audit Committee's role is to oversee all material aspects of the Holding Company's financial reporting, internal control and audit functions, except those specifically related to the responsibilities of another standing committee. The Audit Committee should focus on the qualitative aspects of financial reporting to shareholders and on the Holding Company's and the Subsidiaries' processes for the management of business and financial risk and for compliance with significant applicable legal, ethical and regulatory requirements. The Audit Committee shall also communicate with other Board committees and maintain a strong, positive working relationship with management, external and internal auditors, counsel and other committee advisors.

Committee Membership

The Audit Committee shall consist of at least two, and no more than six, independent, non-executive Board members. A Committee member shall be considered independent only if the member (i) does not accept any consulting, advisory or other compensatory fee, other than director's fees from the Holding Company, and (ii) is not a director, officer or employee of the Holding Company or own or control 5% or more of the Holding Company's voting securities. Committee members shall have: (1) knowledge of the insurance and financial services industries; (2) the ability to read and understand fundamental insurance industry financial statements, including the Holding Company's and the Subsidiaries' balance sheet, income statement, statement of cash flows and key performance indicators; and (3) the ability to understand key business and financial risks and related controls and control processes. The Audit Committee shall have the power to engage independent counsel and other advisors in the committee's sole discretion . At least one member of the Audit Committee, preferably the Chair, should be a financial expert. A financial expert is a person who has, through education and experience as a public accountant or auditor or a principal financial officer, controller or principal accounting officer of a publicly reporting company, or experience in one or more positions involving similar functions, (1) an understanding of GAAP and financial statements, (2) experience preparing or auditing financial statements that present accounting issues generally comparable to the issues raised by the Holding Company's financial statements, (3) experience in applying GAAP for estimates, accruals and reserves that is generally comparable to the accounting for those items in the Holding Company's financial statements, (4) experience with internal accounting controls and financial reporting procedures, and (5) an understanding of Audit Committee functions. Audit Committee appointments shall be approved annually by the Board upon recommendation of the Governance Committee. The Board will select the Chair of the Audit Committee.

Financial Reporting and Controls

The Audit Committee will:

(a)	Review and assess the annual and interim financial statements before they are released to the public or filed with the Securities Exchange Commission.
(b)	Review and assess the key financial statement issues and risks, their impact or potential effect on reported financial information, the processes used by management to address such matters, related auditor's views, and the basis for audit conclusions.
(c)	Review changes in important accounting principles and the application thereof in both interim and annual financial reports.
(d)	Review and assess the business and financial risk management process for the Holding Company and the Subsidiaries.

14

(e)	Review and assess the system of internal controls for detecting accounting and financial reporting errors, fraud and legal violations.
(f)	Review and assess the system of disclosure controls for detecting accounting and financial reporting errors, fraud and legal violations to ensure that information required to be disclosed by the Holding Company is recorded, processed, summarized and reported within the required periods.
(g)	Review with legal counsel any regulatory matters which may have a material impact on the financial statements.
(h)	Review the results of the annual audits of director's and officers' expense accounts and management prerequisites prepared either by internal or external auditors.
(i)	Establish procedures for the receipt, retention and treatment of complaints received by the Holding Company regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by employees of the Holding Company of concerns regarding questionable accounting or auditing matters.

External Auditors

The Audit Committee will:

(a)	Be responsible for the appointment, compensation and oversight of the work of the external auditors for the purpose of preparing or issuing an audit report or related work.
(b)	Preapprove all audit and non-audit services of the external auditors. The external auditors shall not perform any of the following services contemporaneously with the audit:

i.	Bookkeeping;
ii.	Financial information systems design and implementation;
iii.	Appraisal or valuation services, fairness opinions, and contribution-in-kind reports;
iv.	Actuarial services;
v.	Internal audit outsourcing services;
vi.	Management or human resource functions;
vii.	Broker or dealer, investment adviser or investment banking services;
viii.	Legal services and expert services unrelated to the audit; or
ix.	Any other services that the Public Company Accounting Oversight Board determines by regulation.

(c)	Instruct the external auditors that they are responsible to the Board and the Audit Committee as representatives of the shareholders of the Holding Company. In that regard, report all relevant issues to the Audit Committee in response to agreed upon expectations.
(d)	Review the performance of the external auditors, including the history and reputation of the auditing firm, the experience and knowledge of the auditors assigned to the audit, and the thoroughness and effectiveness of the audit process.
(e)	Obtain a formal written statement from the external auditors consistent with standards set by the Independence Standards Board. Additionally, the Audit Committee will discuss and review with the auditors any relationship or non-audit services that may affect their objectivity or independence.
(f)	Consider the audit scope of the external auditors and plans to ensure completeness of coverage, reduction of redundant efforts and the effective use of audit resources.
(g)	Review with management and the external auditors the results of the annual audits and related comments in consultation with the other committees as deemed appropriate, including any difficulties with or disputes

15

	with management, any significant changes in the audit plans, the rationale behind the adoptions and changes in accounting principles and accounting estimates requiring significant judgments.
(h)	Review with the external auditors their judgments about the quality, not just the acceptability, of accounting principles and financial disclosure practices used or proposed to be adopted by the Holding Company or any of the Subsidiaries.

16

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   Professionals
   Direct, Inc.

2003
Annual Report

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PRESIDENT'S MESSAGE

TO OUR SHAREHOLDERS:

Our core mission is to provide insurance products and financial services to small law firms and other professionals on a national basis. We work to manage risk and to build financial security for our customers and to provide favorable long-term returns on the capital invested by our shareholders. Toward these goals, we achieved the following in 2002:

          1.         Operational Expansion. We expanded our insurance license applications to 39 states. By the date of this letter, 29 of those applications were granted. Following this expansion, Professionals Direct Insurance Company wrote policies in 13 states covering more than 5,000 attorneys. In 2002, we expanded the LAWYERS DIRECT program to market to a number of many new states, providing responsive and reliable service to solo practitioners and small law firms in many states. In October, 2002, we completed the purchase of the expiration dates of the Interlex block of business, giving us entry into the Kansas and Missouri markets. As a result of these efforts, PDIC wrote a record $10.4 million in gross written premium - an increase of more than 46% over its writings in 2001. After Michigan, our next largest state markets are Arizona, Florida, Pennsylvania, Ohio and Missouri. The multiple state expansion provides better balance and spread of insurance risk, thereby strengthening the overall enterprise.

          2.         Customer Retention.Our premium prices increased in 2002, in part due to higher reinsurance costs. Even with the price increases, PDIC still achieved an account renewal retention rate of 90%. This renewal retention is a tribute to the quality of our products and services.

          3.         Ratings Upgrade.A.M. Best upgraded PDIC to A- (Excellent) on February 27, 2002. By yearend, we increased to a Class V financial size. In its report, Best commented favorably on our high levels of customer service, consistently high renewals, and improvement of our capital base. While a rating does not make a better company, it affirms the financial strength which we have been building over the years.

          4.         Financial Results. On a consolidated basis, Professionals Direct reported a slight net loss for the year. Primarily, this was due to the extra expense and the investments we made in building out our infrastructure to operate on a national basis. In part, these costs include the added expense of compliance and licenses, developing and implementing new software and other technology and improving our business systems to absorb new operational volume. We also paid out the remaining policyholder dividend from our demutualization in 2001. Certain of these costs were non-recurring and created the ability to write additional volumes of business. The premium increases have continued into 2003. We could not have achieved these increases without making the investments. We believe that our operational improvements will create a pay back over the next several years.

          5.          The Hard Market. In 2002, the lawyers professional liability insurance industry saw many commercial carriers stop writing, suffer rating downgrades, restrict underwriting terms or reduce capital capacity dedicated to the line of business. These events left the marketplace in turmoil. In rare situations, carriers actually went into various forms of receivership leaving lawyers scrambling for new coverage. We have been a specialist in the field for a long time. We understand the ups and downs of the marketplace and anticipated some of the pricing changes. In 2002, Professionals Direct was well positioned to take advantage of the change in the landscape. In contrast to a contraction in the soft market, Professionals Direct was able to respond and add significant amounts of business at responsible rates. With the ability to respond in hard times, we also establish Professionals Direct as a market leader in lawyers profe ssional liability insurance.

Please read the enclosed report and participate in our system of corporate governance by voting in person at our annual meeting or by proxy.

Sincerely,

Stephen M. Tuuk
President and Chief Executive Officer

Professionals Direct, Inc.

2003 Annual Report

Contents	Page
Professionals Direct, Inc.	A-2
A Message to our Shareholders	A-2
Five-Year Summary of Selected Financial Reporting	A-3
Management's Discussion and Analysis	A-5
Report of Independent Public Accountants	A-12
Consolidated Financial Statements	A-13
Notes to Consolidated Financial Statements	A-17

Professionals Direct, Inc.

Professionals Direct Inc. is an insurance holding company with five wholly-owned subsidiaries, Professionals Direct Insurance Company, the property and casualty insurance company ("PDIC"); Professionals Direct Employer Organization, Inc., an inactive Michigan professional employer organization; Professionals Direct Finance, Inc., a premium finance company; Professionals Direct Insurance Services, Inc., a company providing underwriting claims, accounting, information technology services and selling professionals liability and other insurance and Professionals Direct Statutory Trust I. PDIC, Professionals Direct's principal subsidiary, provides professional liability insurance to attorneys and law firms in Michigan and other states. Through its other subsidiaries, Professionals Direct provides underwriting, policy issuance, claims administration, accounting and information systems services to insurance companies and provides financing for premiums to customers of PDIC.

A Message to our Shareholders

This 2003 Annual Report contains audited financial statements and a detailed financial review. This is Professionals Direct, Inc.'s 2002 Annual Report to Shareholders. Although attached to our proxy statement, this report is not part of our proxy statement, is not deemed to be soliciting material, and is not deemed to be filed with the Securities and Exchange Commission (the "SEC") except to the extent that it is expressly incorporated by reference in a document filed with the SEC.

Our Annual Report on Form 10-KSB, as filed with the SEC, will be provided to any shareholder, without charge, upon written request to Professionals Direct, Inc., Attn. Corporate Secretary, 161 Ottawa Avenue, N.W., Suite 607, Grand Rapids, Michigan 49503.

A-2

Five Year Summary of Selected Financial Data

The following table provides selected consolidated financial and operating data (unaudited) for Professionals Direct and its subsidiaries as of December 31, 1998, 1999, 2000, 2001 and 2002 and for the years then ended. The consolidated financial and operating data are derived from, and should be read in conjunction with, Professionals Direct's Consolidated Financial Statements and Notes thereto.

	Years Ended
	2002	2001	2000	1999	1998
	(in thousands of dollars, except for ratios and ratio data)
Revenue Data:
Direct premiums written	$10,404	$7,066	$ 6,982	$ 7,598	$ 8,652
Net premiums written	8,479	5,956	5,427	4,186	3,102
Net premiums earned	6,790	5,648	5,105	3,358	3,676
Fees and commissions earned	474	665	1,295	1,566	1,392
Net investment income	1,410	1,506	954	966	1,085
Finance and other income earned	116	121	181	105	50
Total Revenues	8,790	7,940	7,535	5,995	6,203
Losses and Expenses:
Losses and loss adjustment expenses	4,851	2,265	2,931	1,957	3,795
Operating expenses	3,511	3,922	3,355	2,619	2,485
Interest expense	200	99	368	342	312
Total Expenses	8,562	6,286	6,654	4,918	6,592
Income (loss) before federal income taxes and policyholder dividend	228	1,654	881	1,077	(389)
Policyholder dividend	316	297	0	0	0
Income (loss) before federal income taxes	(88)	1,357	881	1077	(389)
Federal income taxes (benefit)	(62)	527	95	297	(243)
Net income (loss)	$ (26)	$ 830	$ 786	$ 780	$ (146)
Selected Balance Sheet Data:           (at year end)
Total investments and cash	22,451	19,341	17,781	16,919	20,440
Total assets	30,770	25,572	28,956	29,473	32,256
Total liabilities	23,455	18,286	25,445	27,161	30,135
Total shareholders' equity (2001-2002) or    policyholders' surplus (2000-1998)	7,315	7,286	3,511	2,312	2,121
Per Share Data: (1)
Net Income (loss)	$(0.08)	N/A	N/A	N/A	N/A
Book value	$21.93	N/A	N/A	N/A	N/A
Selected GAAP Ratios:
Return on prior year equity	(.4%)	23.6%	34.0%	36.7%	(6.8%)
Return on current year revenue	(.3%)	10.5%	10.4%	13.0%	(2.3%)
Return on current year assets	(.1%)	3.2%	2.7%	2.6%	(0.5%)

A-3

	Years Ended
	2002	2001	2000	1999	1998
	(in thousands of dollars, except for ratios and ratio data)
Statutory (SAP) Ratio Data:
Loss Ratio (2)	76.9%	41.6%	58.4%	52.1%	96.0%
Expense Ratio (3)	37.0%	37.2%	28.3%	24.4%	12.7%
Combined ratio (4)	113.9%	78.8%	86.7%	76.5%	108.7%
Operating Ratio (5)	93.4%	61.5%	69.8%	47.7%	79.6%
A. M. Best Industry operating ratio (6)	N/A	103.7%	95.0%	94.0%	91.0%
Statutory surplus (7)	10,473	9,370	7,609	6,583	6,060
Earned surplus (8)	7,942	6,839	3,264	1,964	1,441
Ratio of statutory net written premiums to statutory surplus	81.0%	63.6%	71.3%	63.6%	51.2%

(1)	The Company became a shareholder owned company on July 1, 2001, following the conversion and demutualization of its predecessor, Michigan Lawyers Mutual Insurance Company. Accordingly, per share data is presented only for 2002, its only full year of operations as a shareholder owned company.
(2)	Calculated by dividing losses and loss adjustment expenses by net premiums earned.
(3)	Calculated by dividing other underwriting expenses by net premiums written.
(4)	The sum of the statutory loss and loss adjustment expense ratio and the total underwriting expense ratio.
(5)	Calculated by taking the combined ratio and subtracting the ratio of net investment income divided by net premiums earned. An operating ratio of more than 100% indicates that an insurance company is unable to recoup underwriting losses with investment earnings.
(6)	As reported by A. M. Best, Best's Aggregate & Averages - Property - Casualty (Other Liability Quantitative Analysis Report).
(7)	Statutory surplus includes $4.619 million in surplus certificates for years 1998 and 1999. As of December 31, 2000, statutory surplus includes $4.345 million in surplus certificates. For 2002 and 2001, statutory surplus includes $2.531 million in surplus certificates. In all years, interest on the surplus certificates was not accrued until actually approved by the OFIS.
(8)	Statutory surplus less surplus contributed under surplus certificates.

A-4

Management's Discussion and Analysis

The following discussion and analysis for the years ended December 31, 2002 and 2001, should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this report. The following discussion of our financial condition and results of operations contains certain forward-looking statements. A discussion of the limitations of forward looking statements appears at the end of this section.

Results of Operations (000 omitted):

Net premiums earned were $6,790 for the year 2002, an increase of $1,142, or 20.2%, compared to 2001. Net premiums earned are equal to the sum of direct earned premiums (premiums earned for policies written) and assumed earned premiums (premiums earned from providing reinsurance to other insurers), less ceded earned premiums (amounts ceded to reinsurers). The increase in net premiums earned was a result of two primary factors. The first was the increase in our retention of risk from $500 to $600 on the majority of policies issued by PDIC in 2002, compared to 2001. In other words, PDIC retained a larger portion of the risk of loss and therefore, was able to retain a larger portion of the premium earned. By increasing retention, less premium is ceded to reinsurers, thereby reducing ceded earned premium and increasing net premiums earned. The second factor was the increase in the direct premiums written. As a result of efforts to expand beyond Michigan, PDIC had direct premiums written of $2,497 in states ot her than Michigan during 2002. Most of the increased volume was written during the fourth quarter. As a result, earned premium did not increase as significantly.

Direct earned premium in 2002 increased by $1,238 and assumed earned premium decreased by $87. In addition, ceded earned premium increased $9. The increase in direct premium offset by the decrease in assumed earned premium and increase in ceded earned premium, resulted in the increase in net premiums earned of $1,142 for 2002.

During 2002, no new assumed business was written. Direct written premium for 2002, compared to 2001, increased $3,339. Some of this volume increase is a result of the acquisition of the renewal rights of policies issued by Interlex Insurance Company. On December 1, 2002, the Company purchased renewal rights from Interlex Insurance Company in exchange for a total of $491 (see Note 5 to the consolidated financial statements included in this report). During the last quarter of the year, PDIC had $194 in gross written premium from former Interlex customers. It is expected that PDIC will write approximately $2,000 in premiums during 2003 to former Interlex customers. Price changes have also had an impact on overall premium. Prices have generally been increasing as a result of market conditions and because of the increased cost of reinsurance. Finally, the timing of when policies are written and the changes in the premium charged for renewed policies impacts earned premium from year to year. Premium is earned o n a daily pro-rata basis typically over a twelve-month policy period.

The increase in ceded earned premium of $9 is the result of an increase in ceded written premium from $1,112 in 2001, to $1,926 in 2002. The increase in ceded written premium is largely a function of the increased volume of direct premium written offset by the impact of the increase in the retention.

We continue to obtain licenses to sell insurance and conduct premium finance operations in states other than Michigan. For 2002, PDIC sold policies in thirteen different states and was licensed in a total of twenty-two states. Twenty-four percent of the premiums written during 2002 were in states outside of Michigan. We continue to pursue licenses for PDIC in additional states and have several licensing applications currently pending. Subsequent to the end of the year, PDIC received its licenses to sell insurance in Oregon and Maine, bringing the total number of licenses to twenty-four. During 2003, we expect that revenues will continue to increase as we become active in several more states. Revenue is also expected to increase as a result of the opportunity that has been created by the takeover of American National Lawyers Insurance Reciprocal ("ANLIR") by state regulators in February 2003. PDIC is licensed in several states where ANLIR was doing business and is actively pursuing business in those states .

Fee and commission income for 2002 decreased $191, or 28.7%, compared to 2001. We earn fee and commission income from several sources. In 2002, total ceding commissions earned were $70, compared to $270 in 2001. The decrease in ceding commissions is primarily attributable to the fact that no 2002 reinsurance treaties provide for ceding commissions. Other sources of fee and commission income did not change materially from 2001 to 2002.

Investment income decreased $96, or 6.4% in 2002, as compared to 2001. During the fourth quarter of 2002, PDIC, in order to take advantage of favorable bond market conditions, sold virtually all of its bonds and realized gains of $724. PDIC realized gains of $681 in the prior year under similar market conditions. The proceeds from the sale

A-5
were re-invested during the fourth quarter, consistent with company guidelines. The decline in investment income, exclusive of the gains, is largely attributable to the overall decline in market rates experienced during 2002.

Losses and loss adjustment expenses increased $2,586, or 114.2%, to $4,851 in 2002. The loss ratio in 2002 was 71.4%, compared to 40.1% in 2001. The loss ratio is the sum of the losses and loss adjustment expenses paid and accrued by PDIC expressed as a percentage of net premiums earned. The increase in the loss ratio is attributable to the lack of favorable development experienced on prior years' losses during the current year. In 2001, significant favorable development decreased the total loss and loss adjustment expense. Favorable development occurs when actual losses and loss adjustment expenses are lower than previously estimated or expected. Total favorable development recorded in 2001 was $1,619. There was no development of prior years losses either favorable or adverse recorded during 2002. There can be no assurance that PDIC will experience favorable development in the future.

Favorable or adverse development also occurs when subsequent estimates of the loss reserve liability change from their initial estimate. A subsequent decrease in the estimate results in favorable development. A subsequent increase in the estimate results in adverse development. Development, either favorable or adverse, is reflected as a decrease or increase in the current year loss and loss adjustment expense total. Estimates of the loss reserve liability are reviewed by independent outside actuaries that specialize in the professional liability insurance industry. Various methodologies are used to calculate the appropriate amount of the loss reserve liability that should be accrued each year. As claims get older, the loss reserve liability can be estimated with greater accuracy. In the first two years after a claim is reported, there is a significant amount of uncertainty over what the ultimate loss will be. Therefore, estimating the loss reserve liability for claims less than two years old is more diffi cult. Initial estimates may be too high or too low. As time passes, estimates become more certain. Eventually, all the claims in a particular year are closed and no additional development, favorable or adverse, will be experienced because the amount of the claims is certain.

Operating and administrative expenses for 2002, compared to the total of operating and administrative expenses, plus demutualization expenses for 2001, decreased $412. The combined total of operating and administrative and demutualization expenses for 2001 was $3,923. The costs of demutualization did not recur in 2002 as the activity was concluded during 2001. Operating and administrative expenses decreased from $3,574 in 2001 to $3,511 in 2002. Overall administrative expenses remained constant compared to the prior year as we were able to better utilize existing resources even with increased volume. During 2003, we expect that administrative expenses will increase as existing capacity becomes fully utilized and more staff are brought on to process the increased volume.

Interest expense in 2002 increased $101 from 2001. This increase primarily resulted from unusual factors that caused interest expense for 2001 to be unusually low. In 2001, interest expense was net of the write-off of accrued interest expense on certain surplus certificates converted to stock in the conversion of the Company from a mutual to a stock insurance company (the "Conversion"). Total interest expense for 2002 consists of $133 on surplus certificates, $39 on the line of credit secured by premium finance receivables, $21 on the general line of credit and $8 on the trust preferred securities.

During 2002, PDIC paid $316 in a policyholder dividend to those eligible policyholders who met specific criteria in accordance with the terms of the Conversion. This compares with the $297 paid during 2001. The dividend payment plan was concluded in 2002 and no additional amounts will be paid. The increase in the dividend paid is a function of the timing of when policyholders met the criteria to receive the dividend and the amount of their renewal premium. As a result, a slightly larger proportion was paid in 2002.

Federal income taxes had an effective rate of 70.7% for 2002 compared to 38.8% for 2001. The increase in the effective rate principally results from 2002 pre-tax income being much lower than 2001's causing nominal differences in absolute amounts to materially impact comparative percentages.

Financial Condition, Liquidity, and Capital Resources (000 omitted):

The primary sources of our liquidity, on both a short-term and long-term basis, are funds provided by insurance premiums collected, net investment income, recoveries from reinsurance, and proceeds from the maturity or sale of invested assets. The primary uses of cash, on both a short-term and long-term basis, are losses, loss adjustment expenses, operating expenses, reinsurance premiums, and taxes.

A-6

Trends or uncertainties that may have an impact on short-term or long-term liquidity include changes in the cost and availability of reinsurance, changes in interest rates and changes in investment income. Due to the uncertainties created by the events of September 11 and the volatility of the securities market, the cost of obtaining reinsurance has increased. As the costs of obtaining reinsurance change in the future, we intend to adjust the rates we charge our customers. However, such rate changes may be limited by competition. We believe that we will be able to manage these reinsurance costs so the impact on overall liquidity is reduced.

When interest rates decline, the cost of borrowing decreases and the market value of our investment portfolio, which primarily consists of debt securities, generally increases. At the same time, however, the overall yield on new investments tends to decrease. When interest rates increase, the opposite effect is realized. Interest rates continue to be at historically low levels. If interest rates begin to increase, it will be unlikely that PDIC would realize gains on portfolio assets during 2003 at the same levels as 2002 and 2001. However, we are hopeful that such lower gains will be offset by increased interest earned on the portfolio investments, thus having less of an impact on liquidity.

Our net cash flow generated by operations for the year was $1,701, compared to $340 for 2001. The improvement in cash flow is largely attributable to the increased premium volume experienced during the fourth quarter. As a result, the balance of unearned premium increased markedly, generating the majority of the improvement in cash flow from operations. We generated negative cash flow from investing activities of $16,466 during 2002, compared to the positive cash flow of $15,719 during 2001. This negative cash flow in the current year was the result of the reinvestment of the proceeds of the sale of the bonds in 2001 that generated the significant positive cash flow in the prior year. Cash received from financing activities for 2002 was $1,558. This positive cash flow was primarily the result of the proceeds from the issuance of trust preferred securities offset by a reduction in the line of credit balance (see Note 10 to the consolidated financial statements included in this report).

At December 31, 2002, we had cash and cash equivalents of $4,442. This represents that portion of total assets necessary to be kept liquid to meet demand for loss and reinsurance payments. It is expected that this will be maintained in cash and other short-term instruments to meet cash flow needs for 2003.

We also have two lines of credit available through the same financial institution that also provide liquidity. Both lines of credit are guaranteed by Finance and Services and Professionals Direct Employer Organization, Inc. One line of credit is a $1,500 revolving line of credit which is used to assist Finance with its financing of insurance premiums. It is secured by the premium finance contracts and bears interest at .5% over the bank's prime rate. The second line of credit is a $1,000 line of credit which can be used to provide financing for potential acquisitions. It is secured by all assets of the Company and its subsidiaries (except for PDIC) and bears interest at 1% over the bank's prime rate. Both lines of credit require, among other things, that we maintain a minimum tangible net worth of $7,000, that PDIC maintain a minimum surplus of not less than 240% of the Authorized Control Level Risk Based Capital (as defined by the National Association of Insurance Commissioners), and that we deliver peri odic financial reports to the bank.

Based on historical trends, market conditions and our business plans, we believe that our existing resources and sources of funds will be sufficient to meet our short-term and long-term liquidity needs over the next year and beyond. Because economic, market and regulatory conditions may change, however, there can be no assurance that our funds will be sufficient to meet these liquidity needs. In addition, competition, pricing, the frequency and severity of losses and interest rates could significantly affect our short-term and long-term liquidity needs.

Critical Accounting Estimates and Judgments

The consolidated financial statements include certain amounts, based upon informed estimates and judgments made by management, for transactions not yet complete or for which the ultimate resolution is not certain. Such estimates and judgments affect the reported amounts in the financial statements. Although management believes that they are making the best decisions based upon information then available, it is possible that as conditions and experience develop, these estimates may change and may be materially different from originally reported in the financial statements. Our reserves for unpaid loss and loss adjustment expenses represent the most critical estimate present within the financial statements.

Loss and Loss Adjustment Expense Reserves

PDIC is required by applicable insurance laws and regulations to maintain reserves for payment of losses and loss adjustment expenses for reported claims and for claims incurred but not reported, arising from policies that have

A-7
been issued. These laws and regulations require that PDIC provide for the ultimate cost of those claims without regard to how long it takes to settle them or the time value of money. The determination of reserves involves actuarial and statistical projections of what PDIC expects to be the cost of the ultimate settlement and administration of such claims based on facts and circumstances then known, estimates of future trends in claim severity, and other variable factors such as inflation and changing judicial theories of liability.

The estimation of ultimate liability for losses and loss adjustment expenses is an inherently uncertain process and does not represent an exact calculation of that liability. PDIC's current reserve policy recognizes this uncertainty by maintaining bulk reserves or excess case reserves to provide for the possibility that actual results may be less favorable compared to the estimated costs relative to the normal case reserve estimation process. The bulk reserve is determined by estimating the ultimate liability for both reported and non-reported claims and then subtracting the case reserves for reported claims. PDIC does not discount its reserves to recognize the time value of money.

When a claim is reported to PDIC, claims personnel establish a case reserve for the estimated amount of the ultimate payment. This estimate reflects an informed judgment based upon general insurance reserving practices and on the experience and knowledge of the estimator regarding the nature and value of the specific claim, the severity of injury or damage, and the policy provisions relating to the type of loss. The claims staff periodically adjusts case reserves as more information becomes available.

Each quarter, PDIC computes its estimated liability using appropriate principles and procedures. PDIC's independent actuary also reviews its reserves twice a year. Because the establishment of loss reserves is an inherently uncertain process, however, there can be no assurance that losses will not exceed reserves. Adjustments in aggregate reserves, if any, are reflected in the operating results of the period during which such adjustments are made. As required by insurance regulatory authorities, PDIC annually receives a statement of opinion by its appointed actuary concerning the reasonableness of its statutory reserves.

A reconciliation of the beginning and ending net liability for unpaid losses and loss adjustment expenses for the years ended December 31, 2002 and 2001 is provided in Note 7 to the consolidated financial statements included in this report.

The following table shows the development of the reserve for unpaid losses and loss adjustment expenses (excluding unallocated loss adjustment expenses) for report years 1992 through 2002 for PDIC. The top line of the table shows the reserve for unpaid losses and loss adjustment expense at the respective balance sheet dates. The upper portion of the table shows the cumulative amounts paid in successive years. The lower portion of the table shows the reestimated amount of losses based on experience as of the end of each succeeding year. The estimates change as claims settle and more information becomes known about the ultimate frequency and severity of claims for individual years. A redundancy (deficiency) exists when the reestimated liability at each December 31 is less (greater) than the prior year's liability estimate. The "cumulative redundancy" (deficiency) for a calendar year represents the difference between the initial and current year estimate for each calendar year.

The volatility of professional liability claim frequency and severity makes the prediction of the ultimate loss very difficult. Likewise, the long time frame for professional liability claims to develop and be paid further complicates the reserving process.

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	Report Year Ended December 31,
	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002
	(in thousands)
Reserve for unpaid losses and    loss adjustment expenses	$2,634	$3,321	$3,619	$2,572	$2,960	$3,944	$3,042	$1,890	$2,894	$3,317	$4,061
Cumulative amount of liability    paid through:
One year later	382	976	1,451	1,342	1,521	590	675	641	609	1,758	-
Two years later	1,435	2,239	2,658	2,758	3,160	1,726	1,402	1,159	1,961
Three years later	1,789	2,963	4,296	3,544	3,871	1,991	1,532	1,347
Four years later	2,331	3,040	4,532	3,809	4,112	2,089	1,610
Five years later	2,282	3,512	4,791	4,014	4,256	2,088
Six years later	2,257	3,551	4,865	4,062	4,314
Seven years later	2,254	3,551	4,904	4,011
Eight years later	2,254	3,551	4,902
Nine years later	2,254	3,551
Ten years later	2,254
Reestimated net liability as of:
One year later	2,863	3,177	4,076	3,700	4,285	3,287	2,805	2,303	2,522	3,320	-
Two years later	2,336	3,155	4,427	4,078	4,841	2,944	2,134	1,994	2,470
Three years later	2,295	3,375	5,067	4,144	4,843	2,425	1,820	1,990
Four years later	2,334	3,505	5,057	4,141	4,735	2,163	1,813
Five years later	2,282	3,679	4,959	4,359	4,405	2,162
Six years later	2,257	3,625	4,957	4,260	4,407
Seven years later	2,254	3,598	4,904	4,261
Eight years later	2,254	3,551	4,902
Nine years later	2,254	3,551
Ten years later	2,254
Net cumulative (deficiency)    redundancy	380	(230)	(1,283)	(1,689)	(1,447)	1,782	1,229	(100)	424	(3)	- -

As previously discussed, the process of estimating loss and loss adjustment expense reserves is inherently uncertain, which results in favorable and adverse development on initial estimates. The table above illustrates such uncertainty. Another variable in the process of estimating reserves is the quality of the claims administration. The underlying claims must be promptly analyzed to accurately estimate the potential loss. Prior to 1998, PDIC's claims were administered by an outside claims administrator. Beginning in 1998, PDIC hired its own employees to administer the claims. At the same time, PDIC also engaged a new actuarial firm.

An independent actuary that specializes in the lawyers professionals liability industry performs a semi-annual study for PDIC that results in a recommended reserve level for losses and loss adjustment expenses. The actuary reviews PDIC's historical claim payment data and premiums data. In addition, the actuary performs statistical analyses based upon many factors, including the size of the firms insured, the ages of the attorneys, the practice areas of the attorneys, and the nature of the underlying errors that drive the claims. The actuary also considers the terms of PDIC's reinsurance contracts. Ultimately, based on this examination, the actuary provides PDIC with their estimate of the reserves that should be recorded. These estimates vary from study to study based on new information available about previous claims and uncertainties inherent in new claims. Occasionally, as can be seen in the table, the estimates initially recorded for losses and loss adjustment expenses based upon the actuarial studies prove to be significantly different from actual results.

Beginning in 1996, PDIC has focused its efforts on refining the process of estimating the ultimate cost of claims and in decreasing the length of time it takes to settle a claim. Decreasing the length of time to settle claims brings certainty to the estimates more quickly. In the first few years after bringing claims administration in-house and in reaction to the prior underestimated reserves recorded by the outside claims administrator, reserve levels were too conservative, resulting in high reserves. With more experience, refined assessment procedures and working closely with its actuary, PDIC expects to improve its accuracy for setting initial reserves with the hopes that subsequent development as a percentage of the initial estimate will be minimal. Unfortunately, any improvement in the accuracy of such estimates, if any, will not be known for some time.

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Conditions and trends that have affected the development of liabilities in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table.

Statutory accounting principles require reserves to be reported net (i.e. after reinsurance). Generally accepted accounting principles require reserves to be reported gross (i.e. before reinsurance) with a corresponding asset established for the reinsurance recoverable. When compared on a net basis, Statutory and GAAP reserves are identical.

Market for Common Stock and Dividends

          There is no active public trading market for the Company's securities. Bid and asked quotation for the Company's securities may be reported on the over-the-counter bulletin board (the "OTC") under the symbol PFLD. Transactions in the Company's securities are occasionally effected by individuals through the OTC or on an informal basis. The prices at which such transactions are effected are only occasionally reported to the Company.

         Holders. As of December 31, 2002, there were approximately 800 record holders of the Company's common stock.

         Dividends. The Company has never declared a cash dividend on its common stock. Payment of dividends by the Company may be contingent on the receipt of dividends from PDIC. The payment of dividends by PDIC is subject to limitations imposed by the Michigan Insurance Code and the plan that governed the Company's Conversion. PDIC is not presently permitted to pay any dividends until such time as the Surplus Certificates are paid in full.

         Recent Sales of Unregistered Securities. All of the Company's outstanding shares were sold in an offering conducted pursuant to the Conversion. The offering was completed on June 29, 2001. The Company offered 290,000 shares through a subscription offering and engaged Donnelly, Penman, French, Haggarty & Co. as its placement agent to offer and sell 43,500 shares through a best efforts offering. A total of 333,500 shares of common stock were issued under the offering. The net cash proceeds from the offering were $1,391,952 (after placement agent expenses of $129,048) and were used as additional surplus to fund the Company's growth in written premiums. In addition to cash, the Company received 1,814 Surplus Certificates, valued at $1,000 each, that were exchanged in lieu of payment for the shares. The common stock sold pursuant to the offering was issued in reliance on an exemption from registration under Section 3(a)(11) of the federal Securities Act of 1 933 and Rule 147 promulgated thereunder. As such, the shares were only offered and sold to bona fide residents of Michigan and could not be transferred to any person that was not a bona fide resident of Michigan during the nine-month period following the last sale in the Offering.

          On December 4, 2002, Professionals Direct Statutory Trust I, a wholly owned trust subsidiary of the Company, issued $2 million in 30-year floating rate trust preferred securities (less issuance expenses of $93,848). The proceeds from the sale of the trust preferred securities were used by Professionals Direct Statutory Trust I to purchase an equivalent amount of subordinated debentures from the Company. The Company subsequently contributed some of the proceeds to PDIC as additional surplus and used the remainder to pay off bank indebtedness. The trust preferred securities were issued in reliance on an exemption from registration under Section 4(2) of the federal Securities Act of 1933.

          Equity Compensation Plans. As of December 31, 2002, no equity securities of the Company were authorized for issuance under compensation plans.

Forward-Looking Statements

This report contains forward-looking statements, including, but not limited to, statements relating to the Company's business objectives and strategy. Such forward-looking statements are based on current expectations, management beliefs, certain assumptions made by the Company's management, and estimates and projections about the Company's industry. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "is likely," "hopeful," "judgment," "objective," "plans," "predicts," "projects," "seeks," variations of such words and similar expressions are intended to identify such forward-looking statements. Determination of loss and loss adjustment expense reserves and amounts due from insurers are based substantially on estimates and the amounts so determined are inherently forward-looking.

A-10

Forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict with respect to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may differ materially from those expressed, forecasted, or contemplated by any such forward-looking statements. Other factors, some of which are listed below, also influence the results of operations, financial condition and business of the Company and its subsidiaries:

• future economic conditions and the legal and regulatory environment in the markets served by the Corporation's subsidiaries;

• re-insurance market conditions, including changes in pricing and availability of re-insurance;

• financial market conditions, including, but not limited to, changes in interest rates and the values of investments;

• inflation;

• credit worthiness of the issuers of investment securities, reinsurers and others with whom the Corporation and its subsidiaries do business;

• estimates of loss reserves and trends in losses and loss adjustment expenses;

• changing competition;

• the company's ability to execute its business plan;

• the effects of war and terrorism on investment and reinsurance markets;

• the company's ability to enter new markets successfully and capitalize on growth opportunities; and

• changes in the laws, rules and regulations governing insurance holding companies and insurance companies, as well as applicable tax and accounting matters.

Changes in any of these factors, or others, could have an adverse affect on the business, results of operations, or business of the Company or its subsidiaries. Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

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Independent Auditor's Report

The Board of Directors
Professionals Direct Inc. and Subsidiaries
Grand Rapids, Michigan

We have audited the accompanying consolidated balance sheet of Professionals Direct Inc. and Subsidiaries as of December 31, 2002, and the related consolidated statements of income and comprehensive income, shareholders' equity and cash flows for the two years in the period then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Professionals Direct Inc. and Subsidiaries as of December 31, 2002, and the consolidated results of their operations and their cash flows for the two years in the period then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ BDO Seidman, LLP

Grand Rapids, Michigan
March 5, 2003

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

December 31,		2002
Assets(Note 9)		(000)
Investments available for sale, at fair value (Note 3):
Fixed maturities	$	17,686
Equity securities		50
Total investments available for sale		17,736
Other invested asset, at cost which approximates fair value		273
Total investments		18,009
Cash and cash equivalents		4,442
Receivables:
Premiums (Note 4)		712
Amounts due from reinsurers (Note 8)		2,953
Deductibles (Note 4)		52
Investment income		265
Ceding commissions		241
Federal income taxes recoverable		57
Prepaid reinsurance premiums		1,015
Property and equipment, net (Note 6)		467
Deferred acquisition costs (Note 14)		813
Net deferred federal income taxes (Note 13)		945
Intangible assets, net (Note 5)		769
Other assets		30
		12,761
	$	30,770
Liabilities and Shareholders' Equity
Liabilities
Loss and loss adjustment expense reserves (Note 7)	$	10,138
Unearned premiums		5,516
Amounts due to reinsurers		370
Line of credit (Note 9)		585
Accrued expenses and other liabilities		1,073
Accrued interest		1,242
Surplus certificates (Note 11)		2,531
Trust preferred securities (Note 10)		2,000
Total Liabilities		23,455
Commitments and Contingencies(Notes 8, 9 and 15)
Shareholders' Equity(Note 11)
Preferred stock, no par (500,000 shares authorized, no shares issued)		-
Common stock, no par (5,000,000 shares authorized, 333,500 shares           issued and outstanding)		3,206
Retained Earnings		4,068
Accumulated other comprehensive income (Note 18)		41
Total Shareholders' Equity		7,315
	$	30,770

See accompanying notes to consolidated financial statements.

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME

Year ended December 31,		2002			2001
		(000)			(000)
Revenues
Net premiums earned (Note 8)	$	6,790		$	5,648
Fees and commissions earned		474			665
Net investment income (Note 3)		1,410			1,506
Finance and other income earned		116			121
Total revenues		8,790			7,940
Expenses
Losses and loss adjustment expenses           incurred (Notes 7 and 8)		4,851			2,265
Operating and administrative (Note 14)		3,511			3,574
Demutualization expenses		-			349
Interest		200			99
Total expenses		8,562			6,286
Income before federal income tax expense (benefit)      and policyholder dividend		228			1,654
Policyholder dividend (Note 19)		316			297
Income (loss) before federal income tax expense (benefit)		(88	)		1,357
Federal Income Tax Expense (Benefit)(Note 13)		(62	)		527
Net Income (Loss)		(26	)		830
Other Comprehensive Income (Loss)(Note 18)		55			(261	)
Comprehensive Income	$	29		$	569
Per share of common stock (not in thousands):
Basic and diluted net income (loss) per share	$	(0.08	)		2.49
Basic and diluted comprehensive income per share		0.09			1.71

See accompanying notes to consolidated financial statements.

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

	Common shares			Common Stock par value		Retained Earnings	Accumulated other comprehensive income (loss)				Total
				(000)		(000)		(000)			(000)
Balance, January 1, 2001			-		-	3,264		247			3,511
Common stock issued		333,500		3,206		-		-			3,206
Net income for the year		-		-		830		-			830
Net depreciation on available      for sale securities, net of      taxes (Note 18)		- -		- -		- -		(261	)		(261	)
Balance, December 31, 2001		333,500	$	3,206	$	4,094	$	(14)		$	7,286
Net loss for the year		-		-		(26	)	-			(26	)
Net appreciation on available      for sale securities, net of      taxes (Note 18)		- -		- -		- -		55			55
Balance, December 31, 2002		333,500	$	3,206	$	4,068	$	41		$	7,315

See accompanying notes to consolidated financial statements.

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Year ended December 31,		2002			2001
		(000)			(000)
Operating Activities
Net income (loss)	$	(26	)	$	830
Adjustments to reconcile net income (loss) to net cash from operating           activities:
Deferred federal income tax expense		-			434
Realized gains		(727	)		(681	)
Depreciation		160			178
Amortization		205			66
Changes in operating assets and liabilities:
Premiums receivable		22			52
Amounts due from reinsurers		(231	)		3,914
Deductibles receivable		(16	)		(2	)
Investment income receivable		(244	)		214
Ceding commissions receivable		(2	)		217
Federal income taxes recoverable		120			(177	)
Prepaid reinsurance premiums		(490	)		315
Deferred acquisition costs		(665	)		(73	)
Other assets		78			(1	)
Loss and loss adjustment expense reserves		549			(3,462	)
Unearned premiums		2,179			(7	)
Unearned ceding commissions		(70	)		(84	)
Amounts due to reinsurers		268			(54	)
Federal income taxes payable		-			(21	)
Accrued expenses and other liabilities		449			(272	)
Accrued interest		142			(601	)
Deferred compensation		-			(445	)
Net cash from operating activities		1,701			340
Investing Activities
Cost of fixed maturities acquired		(34,083	)		(1,103	)
Proceeds from sales or maturities of fixed maturities		18,442			16,343
Cost of property and equipment acquired		(334	)		(110	)
Cost of intangible assets acquired		(491	)		(11	)
Proceeds from sale of intangibles		-			60
Net cash from (for) investing activities		(16,466	)		15,179
Financing Activities
Net repayments under line of credit		(348	)		(60	)
Payment of debt issue costs		(94	)		-
Proceeds from issuance of trust preferred securities		2,000			-
Principal payments on note payable		-			(339	)
Common stock issued for cash		-			1,392
Net cash from financing activities		1,558			993
Net Increase (Decrease) in Cash and Cash Equivalents		(13,207	)		16,512
Cash and Cash Equivalents, beginning of year		17,649			1,137
Cash and Cash Equivalents, end of year	$	4,442		$	17,649
Supplemental Disclosures of Cash Flow Information
Federal income tax payments (receipts)	$	(182	)	$	226
Interest payments		58			622
Noncash Transactions:
Surplus certificates exchanged for common stock	$	-		$	1,814

See accompanying notes to consolidated financial statements.

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.          Organization of the Company and Nature of Business

          Professionals Direct Inc. (Company) is an insurance holding company with five subsidiaries (see Note 2). One of the subsidiaries, Professionals Direct Insurance Company (PDIC) is the former Michigan Lawyers Mutual Insurance Company (the Mutual). The Mutual was originally formed in the State of Michigan on June 4, 1987, for the principal purpose of providing professional liability insurance on a claims-made basis to attorneys practicing in Michigan. PDIC continues to provide professional liability insurance to attorneys and law firms in Michigan and other states. In 2002, 76% of premiums were written in Michigan, 13.5% in Arizona and the balance in eleven additional states with no other state exceeding 5%.

          Effective July 1, 2001, the Company took part in a corporate restructuring in which Michigan Lawyers Mutual Insurance Company demutualized and converted from a mutual insurance company to a Michigan domiciled stock property and casualty insurance company (the Conversion). As part of the demutualization, the organization was restructured and the names of certain entities were changed (the Restructure). Prior to the Restructure, MLM Holdings, Inc. (Holdings) was a wholly-owned subsidiary of the Mutual. As part of the Restructure, Holdings was renamed Professionals Direct, Inc., and the Mutual was renamed Professionals Direct Insurance Company and became a wholly-owned subsidiary of Professionals Direct, Inc.

          In conjunction with the demutualization, the Company completed its initial public offering of stock through a subscription offering of 290,000 shares of common stock at $10.00 per share, whereby eligible policyholders, officers, directors and employees were offered the opportunity to become shareholders of the Company and a best efforts offering open to the public of any subscription shares not subscribed for plus an additional 43,500 shares of common stock at $10.00 per share. Proceeds from the offering were $3,205,952, net of offering costs (primarily legal and placement agent fees of $129,048).

          The Lawyers Direct Risk Purchasing Group (Group) was formed during 2002 to facilitate the purchase of liability insurance by certain of the Company's insureds. The Group is a non-profit corporation with current management of the Company comprising its Board.

          The Professionals Direct Statutory Trust I was formed during 2002 to facilitate the issuance of trust preferred securities. The trust is wholly owned by the Company.

2.          Basis of Presentation and Significant Accounting Policies

Basis of Presentation

          These consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP).

Principles of Consolidation

          The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries (Professionals Direct Insurance Company, the property and casualty insurance company; Professionals Direct Employer Organization, Inc., an inactive Michigan professional employer organization; Professionals Direct Finance, Inc. (Finance), a premium finance company; Professionals Direct Insurance Services, Inc. (Services), a company providing underwriting claims, accounting, information technology services and selling professionals liability and other insurance; and Professionals Direct Statutory Trust I) plus Lawyers Direct Risk Purchasing Group which the company controls.

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          All significant intercompany transactions and balances have been eliminated.

Investments

          The Company classifies marketable investment securities in one of three categories: trading, available for sale, or held to maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held to maturity securities are those securities which the Company has the ability and intent to hold until maturity. All other securities are classified as available for sale. All of the Company's marketable securities are classified as available for sale.

          Available for sale securities are recorded at fair value based upon quoted market prices of the underlying securities. Unrealized gains and losses, net of the related tax effect, on available for sale securities are excluded from net income and reported as accumulated other comprehensive income, until realized. A decline in the fair value of any available for sale security below cost that is deemed other than temporary is charged to earnings and results in the establishment of a new cost basis for the security.

          Premiums and discounts are amortized or accreted over the life of the related fixed maturity security as an adjustment to yield using the effective interest method. Dividend and interest income is recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of the securities sold.

Other Invested Asset

          Other invested asset is an investment in a non-public reinsurance company accounted for using cost basis accounting. The fair value of this investment represents management's best estimate of fair value based upon information received from the investee. A decline in the estimated fair value of any other invested asset below cost that is deemed other than temporary is charged to earnings and results in the establishment of a new cost basis for the security.

Cash and Cash Equivalents

          Cash and cash equivalents includes money market mutual funds and investments with maturities of one year or less and are stated at cost, which approximates fair value.

Property and Equipment

          Property and equipment, consisting principally of computer equipment and software, is stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using accelerated and straight-line methods over estimated useful lives, which range from three to seven years.

Intangible Assets

          Intangible assets consist of customer lists and non-compete agreements that are amortized on a straight-line basis over the estimated benefit periods from two to fifteen years and debt issue costs that are amortized by the effective interest method over the term of the securities.

A-18

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenue Recognition

          Insurance premiums are earned on a daily pro-rata basis over the life of the policy. Most policies have a life of twelve months.

Commission Income

          Commissions are recognized when the respective policies become effective.

Deferred Acquisition Costs and Unearned Ceding Commissions

          Acquisition costs, consisting of commissions, premium taxes and other underwriting costs are deferred and amortized ratably over the terms of the policies. Unearned ceding commissions are deferred and amortized ratably over the terms of the treaties.

Unearned Premiums

          Unearned premiums represent the portion of premiums written which is applicable to the unexpired terms of policies in force, calculated using the daily pro-rata basis.

Loss and Loss Adjustment Expenses

          A liability for losses is provided based upon formula and case basis estimates for losses reported on direct premiums written and estimates of additional development of these losses over case basis estimates based upon past experience.

          A liability for loss adjustment expenses is provided by estimating future expenses to be incurred in settlement of the claims provided for in the liability for losses.

Federal Income Taxes

          Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect at the balance sheet date. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as a charge or credit to income tax expense in the period that includes the enactment date.

Use of Estimates

          In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.

          The most significant estimates that are susceptible to significant change in the near term relate to the determination of the loss and loss adjustment expense reserves and amounts due from reinsurers. Although considerable variability is inherent in these estimates, management believes that they are fairly stated, based on presently available information. Estimates are reviewed regularly and adjusted as deemed appropriate. Such adjustments are reflected in current operations.

A-19

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Earnings Per Share of Common Stock

          Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per share is equal to basic earnings per share as there are no stock options or other dilutive instruments outstanding.

Certain Significant Risks

          Following is a description of the more significant risks facing property/casualty insurers and how the Company mitigates those risks:

         Legal/Regulatory Risk - is the risk that changes in the legal or regulatory environment in which an insurer operates will change and create additional loss costs or expenses not anticipated by the insurer in pricing its products. That is, regulatory initiatives designed to reduce insurer profits or new legal theories may create costs for the insurer beyond those recorded in the financial statements. The Company mitigates this risk through underwriting and loss adjusting practices intended to identify and minimize the adverse impact of this risk.

         Credit Risk - is the risk that issuers of securities owned by the Company will default, or other parties, including reinsurers and customers which owe the Company money, will not pay. The Company has a concentration of amounts due from customers in the State of Michigan as approximately 76% of current year revenues were derived from customers in Michigan. The Company manages this risk by adhering to a conservative investment strategy, by maintaining sound reinsurance and credit and collection policies, and by providing for any amounts deemed uncollectible.

         Interest Rate Risk - is the risk that interest rates will change and cause a decrease in the value of an insurer's investments. The Company mitigates this risk by attempting to match the maturity schedule of its assets with the expected payout of its liabilities. To the extent that liabilities come due more quickly than assets mature or the Company liquidates investments to meet operating needs, the Company would have to sell assets prior to maturity and recognize a gain or loss. At December 31, 2002, the estimated fair value of the Company's bond portfolio was greater than its cost.

A-20

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.          Investments

          A summary of amortized cost, gross unrealized gains and losses, and fair value of fixed maturities and equity securities available for sale is as follows:

			Gross unrealized
December 31, 2002		Amortized cost		Gains		Losses		Fair value
		(000)		(000)		(000)		(000)
Fixed maturities:
U.S. treasury securities and obligations           of U.S. government agencies	$	2,158	$	21	$	- -	$	2,180
Obligations of states and political           subdivisions		10,695		82		74		10,703
Corporate securities		2,272		22		15		2,279
Mortgage and other asset-backed           securities		2,504		20		- -		2,524
Total fixed maturities	$	17,629	$	145	$	89	$	17,686
Equity securities	$	68	$	-	$	18	$	50

          The amortized cost and fair value of fixed maturities, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

December 31, 2002			Amortized cost		Fair value
		(000)			(000)
Fixed maturities, other than mortgage and other asset-backed      securities:
Due in one year or less	$	1,415		$	1,418
Due after one year through five years		7,539			7,589
Due after five years through ten years		4,718			4,708
Due after ten years		1,453			1,447
		15,125			15,162
Mortgage and other asset-backed securities		2,504			2,524
	$	17,629		$	17,686

          Proceeds from sales of fixed maturities were $18,038,289 and $16,049,181 in 2002 and 2001, respectively, on which gross gains of $732,580 and $686,443 and gross losses of $5,953 and $5,152 were realized in 2002 and 2001, respectively.

          At December 31, 2002, investments with a fair value of $2,796,583 and amortized cost of $2,784,049 were on deposit with regulatory authorities, as required by law.

A-21

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          Net investment income was comprised of the following components:

Year ended December 31,		2002		2001
		(000)		(000)
Investment income:
Fixed maturities	$	635	$	766
Short-term investments		114		121
Equity securities		1		2
Net realized gains (losses)		727		681
		1,477		1,570
Less investment expenses		67		64
Net investment income	$	1,410	$	1,506

          The following represent investments that exceed ten percent of stockholders' equity:

Issuer			Amortized cost		Fair value
		(000)			(000)
Obligations of states and political subdivisions:
Broomfield, Colorado	$	1,064		$	1,069
Tarrant County, Texas		1,074			1,052
Santa Fe, New Mexico		974			972
Seattle, Washington		832			813

4.          Premiums and Deductibles Receivable and Allowance for Doubtful Accounts

          Premium receivables are primarily customer obligations due under terms of premium finance contracts. We sell our policies exclusively to lawyers and law firms. Professionals Direct Finance, Inc. provides premium financing to policyholders of Professionals Direct Insurance Company for up to eighty percent of the premium. Typically, Finance will accept installment payments over nine months, including a finance charge. Finance holds the policy as collateral and if an account is delinquent will have the insurance company cancel the policy. The return of unearned premium will exceed the amount owed on the contract and the difference is paid to the policyholder. As a result, no allowance for doubtful accounts is provided.

          Deductible receivables are amounts due from policyholders under the terms of the policy when the Company pays indemnity on behalf of a policyholder. There are typically a limited number of policyholders with balances outstanding for deductible. We record an allowance for doubtful accounts based on specifically identified amounts that we believe to be uncollectible. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. The allowance for doubtful accounts at December 31, 2002 and 2001 was $30,000.

A-22

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.          Intangible Assets

          Intangible assets consist of the following:

December 31,		2002
		(000)
Cost:
Debt issue costs	$	94
Covenants not to compete		310
Renewal rights and customer lists		526
		930
Less accumulated amortization		161
Net intangible assets	$	769

          Intangible assets include debt issue costs of $93,848 incurred in 2002 in connection with the issuance of the trust preferred securities (see Note 10). Also, the Company purchased the renewal rights to the direct written lawyers professional liability policies of Interlex Insurance Company for $309,000 effective December 1, 2002. In conjunction with this purchase, the Company obtained certain non-competition covenants from Interlex and its employees for $132,428 and acquired the renewal rights and a covenant not to compete from a former Interlex agent for $49,371.

          The renewal rights are being amortized on a straight line basis over fifteen years. The covenants are being amortized over the associated duration of the covenant ranging from 15 to 51 months. Debt issue costs are being amortized by the effective interest method over thirty years, the term of the securities.

          Future amortization expense expected is as follows:

Year ending December 31,
		(000)
2003	$	136
2004		99
2005		97
2006		42
2007		38
Thereafter		357
	$	769

A-23

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.          Property and Equipment

          Property and equipment consist of the following:

December 31,		2002
		(000)
Cost:
Computer equipment	$	323
Furniture and other equipment		242
Computer software		980
Leasehold improvements		47
		1,592
Less accumulated depreciation and amortization		1,125
Net property and equipment	$	467

7.          Loss and Loss Adjustment Expense Reserves

          Activity in the loss and loss adjustment expense reserves is summarized as follows:

December 31,		2002		2001
		(000)		(000)
Balance, beginning of year	$	9,589	$	13,051
Less reinsurance balances recoverable		(2,539	)	(5,909	)
Net balance, beginning of year		7,050		7,142
Incurred related to:
Current year		4,851		3,884
Prior years		-		(1,619	)
Total incurred		4,851		2,265
Paid related to:
Current year		990		671
Prior years		3,242		1,686
Total paid		4,232		2,357
Net balance, end of year		7,669		7,050
Plus reinsurance balances recoverable		2,469		2,539
Balance, end of year	$	10,138	$	9,589

          The 2001 decrease in incurred losses related to prior accident years resulted from favorable loss development.

A-24

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.          Reinsurance

          In the normal course of business, the Company seeks to reduce the loss that may arise from events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Although reinsurance agreements contractually obligate the Company's reinsurers to reimburse the Company for their proportionate share of losses, they do not discharge the primary liability of the Company. The Company is contingently liable for unpaid losses and loss adjustment expenses and unearned premiums associated with ceded insured risks in the event the assuming insurance organizations fail to meet their contractual obligations.

          In 2001 and 2002, the Company's net retention on the majority of the policies issued was $500,000 and $600,000, respectively, per claim.

          Amounts due from reinsurers consisted of amounts related to the following:

December 31,		2002
		(000)
Paid loss and loss adjustment expenses	$	484
Unpaid loss and loss adjustment expenses		2,469
	$	2,953

          The effect of reinsurance on premiums written and earned is as follows:

		2002				2001
		Written		Earned		Written		Earned
		(000)		(000)		(000)		(000)
Direct	$	10,405	$	8,226	$	7,066	$	6,988
Assumed		-		-		2		86
Ceded		(1,926	)	(1,436	)	(1,112	)	(1,427	)
Net Premiums	$	8,479	$	6,790	$	5,956	$	5,648

          As a result of reinsurance ceded, loss and loss adjustment expenses incurred were reduced by $2,171 in 2002 and increased by $2,362 in 2001. During 2001, the Company experienced favorable development on losses previously ceded to reinsurers.

          The Company holds collateral under related reinsurance agreements in the form of irrevocable letters of credit with a single bank. At December 31, 2002, the balance of these letters of credit approximated $2,621,857.

A-25

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.          Lines of Credit

          At December 31, 2002, the Company owed $585,259 under a $1.5 million line of credit that bears interest at .5% over the bank's prime rate (effectively 4.75% at December 31, 2002), is secured by premium finance contracts receivable. At December 31, 2002, the Company had available a second line of credit of $1,000,000 that bears interest at 1.0% over the bank's prime rate (effectively 5.25% at December 31, 2002) and is secured by substantially all assets of Finance and Services. Both lines of credit impose financial covenants.

10.          Trust Preferred Securities

          On December 4, 2002, the Company issued a floating rate junior subordinated debenture (the "Debenture") having a principal amount of $2,062,000 to Professionals Direct Statutory Trust I (the "Trust"). Cumulative interest on the principal sum of the Debenture accrues from December 4, 2002, and it is payable quarterly in arrears on March 4, June 4, September 4 and December 4 of each year at a variable rate per annum equal to LIBOR (London Interbank Offering Rate) plus 4.00% (not to exceed 12.50%). At December 31, 2002, interest accrued at an annual rate per annum equal to 5.42375%. Interest is computed on the actual number of days elapsed in a year of twelve 30 day months. The Debenture ranks subordinate and junior in right of payment to all Indebtedness (as defined) of the Company. The Debenture matures on December 4, 2032, but may be redeemed in whole or in part beginning on December 4, 2007, or earlier upon the occurrence of certain special events defined in the Indentu re governing the Debenture.

          On December 4, 2002, the Trust sold floating rate capital securities ("Capital Securities") having an aggregate liquidation amount of $2 million to investors and issued floating rate common securities ("Common Securities") having an aggregate liquidating amount of $2,062,000 to the Company. All of the proceeds from the sale of Capital Securities and Common Securities were invested in the Debenture. Capital Securities and Common Securities represent undivided beneficial interests in the Debenture, which is the sole asset of the Trust. Holders of Capital Securities and Common Securities are entitled to receive distributions from the Trust on terms which correspond to the interest and principal payments due on the Debenture. Payment of distributions by the Trust and payments on liquidation of the Trust or redemption of Capital Securities are guaranteed by the Company to the extent the Trust has funds available (the "Guarantee"). The Company's obligations under the Guarantee , taken together with its obligations under the Debenture and the Indenture, constitute a full and unconditional guarantee of all of the Trust's obligations under the Capital Securities issued by the Trust. Because the Common Securities held by the Company represent all of the outstanding voting securities of the Trust (in the absence of a default or other specified event), the Trust is considered to be a wholly owned subsidiary of the Company for reporting purposes and its accounts are reflected in the Consolidated Financial Statements of the Company.

11.          Surplus Certificates

          Surplus certificates were offered for sale only in the State of Michigan to lawyers resident in and authorized to practice in Michigan, and to law partnerships and professional corporations which have their principal place of business in Michigan. Certificate ownership was required for a lawyer to be insured by the Company prior to March 31, 1995, when the requirement was suspended and, effective December 9, 2000, this requirement was permanently removed.

          Certificates have a principal value of $1,000 each and bear simple interest at the rate of 5.25% per annum from the issuance date until paid. Principal and accrued interest thereon may be paid only from

A-26

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

surplus earnings, and then only upon the written consent of the Michigan Department of Financial and Insurance Services and in such amounts as are determined by the board of directors. Subject to these conditions for repayment, certificates are redeemable by the holder after they have been outstanding for ten years. To date, the Company has received approval to pay certain interest on certificates issued prior to December 31, 1993. Interest payments during 2002 and 2001 to these certificate holders amounted to $2,125 and $74,962, respectively.

          During the Conversion in 2001, 1,814 surplus certificates were converted to common stock and interest totaling $540,798 was paid on these converted certificates. 2,531 certificates remained outstanding at December 31, 2002.

          In the event of liquidation, receivership, insolvency, reorganization, dissolution, or termination of existence of the Company, or the sale by the Company of substantially all its assets, the outstanding certificates will be of equal rank with each other regardless of the issuance date of a certificate, and redemption thereof will be subordinate to claims of creditors and policyholders and any other priority claims as provided by the insurance code. If there are insufficient assets in such event to pay, in full, interest and principal on all outstanding certificates, payment will be made pro rata.

12.          Statutory Information

Dividend Restrictions

          As required by the Plan of Conversion, PDIC is prohibited from making any dividend payments to the Company until such time as the surplus certificates are repaid in full. In addition, under Michigan law, the maximum dividend that may be paid by PDIC to the Company during any twelve-month period without the prior approval of the OFIS is the greater of 10% of PDIC's statutory surplus as reported on the most recent annual statement filed with the OFIS or the net income of PDIC for the period covered by such annual statement.

Statutory Information

          At December 31, 2002, statutory surplus of PDIC was $10.5 million. The State of Michigan requires insurance companies domiciled in Michigan to have minimum statutory surplus of $7 million. Statutory net income (loss) for the years ended December 31, 2002 and 2001, was $(471,111) and $1,111,342, respectively.

Risk-Based Capital

          The NAIC has established RBC requirements to assist regulators in monitoring the financial strength and stability of property and casualty insurers. Under the NAIC requirements, each insurer must maintain its total capital and surplus above a calculated minimum threshold or take corrective measures to achieve that threshold. PDIC has calculated its RBC levels based on these requirements and determined that it has surplus in excess of the minimum threshold.

A-27

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.          Federal Income Taxes

          Federal income tax expense (benefit) consists of:

Year ended December 31,		2002			2001
		(000)			(000)
Current	$	(62	)	$	93
Deferred		-			434
	$	(62	)	$	527

          The significant components of federal income tax expense (benefit) were as follows:

Year ended December 31,		2002			2001
		(000)			(000)
Operations	$	(62	)	$	527
Equity - accumulated other comprehensive income (loss)		28			(135	)

          A reconciliation of the federal statutory tax rate to the Company's effective tax rate is as follows:

Year ended December 31,	2002		2001
Federal statutory tax rate	34.0	%	34.0	%
Increase (reduction) in income taxes
relating to:
Tax-exempt municipal bond interest	7.1		(5.1	)
Non-deductible conversion costs	-		10.1
Provision to return adjustment	29.6		(0.2	)
Effective tax rate	70.7	%	38.8	%

          Several provisions of the Internal Revenue Code specifically affect property and casualty insurers. Such provisions that materially affect the Company are the discounting of loss and loss adjustment expense reserves, a reduction in the allowable deduction for unearned premium reserves, and a reduced exclusion for interest from certain tax-exempt bonds. The tax effects of these and other temporary differences that give rise to deferred tax assets and liabilities are presented below:

A-28

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,		2002
		(000)
Deferred tax assets:
Loss reserve discounting	$	271
Unearned premium reserves		306
Interest on surplus certificates		408
AMT credit carryforward		169
Other		67
Total gross deferred tax assets		1,221
Deferred tax liabilities:
Deferred acquisition costs		(276	)
Net deferred tax assets	$	945

          In assessing the realizability of deferred federal income tax assets, management considers whether it is more likely than not that some portion of the deferred federal income tax assets will not be realized. Because of the carryforward provisions of the Internal Revenue Code, and the Company's expectation that temporary differences will reverse during periods in which taxable income is generated, management believes it is more likely than not that the Company will fully realize the net deferred federal income tax assets. Accordingly, no valuation allowance has been established.

14.          Deferred Acquisition Costs and Unearned Ceding Commissions

          Changes in deferred acquisition costs are summarized as follows:

Year ended December 31,		2002		2001
		(000)		(000)
Balance, beginning of year	$	149	$	75
Amounts deferred:
Commissions		293		60
Premium taxes		132		84
General and administrative expenses		1,109		81
Total amounts deferred		1,683		300
Less amortization		(870	)	(151	)
Balance, end of year	$	813	$	149

A-29

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          Changes in unearned ceding commissions are summarized as follows:

Year ended December 31,		2002		2001
		(000)		(000)
Balance, beginning of year	$	70	$	154
Ceding commissions deferred		-		148
Less amortization		(70	)	(232	)
Balance, end of year	$	-	$	70

15.          Commitments and Contingencies

          The Company has entered into operating leases for office space and equipment. Rental expense for these items totaled $204,421 and $188,634 in 2002 and 2001, respectively. Future net minimum lease payments under noncancelable leases are as follows:

Year ending December 31,
		(000)
2003	$	165
2004		161
2005		80
	$	406

          The Company has purchased an annuity policy from a life insurance company for purposes of funding a structured claim settlement. At December 31, 2002, the Company remains contingently liable for this settlement in the amount of $396,000.

16.          Employee Benefit Plans

          During 1999, Holdings established a deferred compensation plan for its officers and directors. This plan allowed certain key employees and members of its Board of Directors to defer a portion of their compensation and to receive additional benefits based upon the financial growth of the Company. In connection with the Conversion, all amounts awarded and deferred under the terms of this plan became fully vested and were paid out. As a result, additional expense of $247,253 was recognized and the plan terminated as of June 30, 2001.

          The Company maintains a 401(k) defined contribution employee benefit plan covering substantially all employees meeting eligibility requirements. The Company matches 50% of employee contributions up to an annual maximum of 5% of an employee's salary. The Company's expense under this plan was $52,613 and $50,758 in 2002 and 2001, respectively.

          Effective January 1, 2001, the Company established a Savings & Retirement Plan. This plan was established to facilitate employee purchases of Company stock upon demutualization.

A-30

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

17.          Related Party Transaction

          The Company's president serves on the Board of Directors and is treasurer of Lawyers Reinsurance Company ("Lawyers Re"), in which the Company has an investment. Lawyers Re is a participant in a 2002 reinsurance treaty of PDIC. During 2002, premiums of $160,521 were ceded to and no losses were paid by Lawyers Re. As of December 31, 2002, unearned premiums ceded to Lawyers Re were $85,484.

18.          Other Comprehensive Income (Loss)

          The significant components of other comprehensive income (loss) were as follows:

Year ended December 31,		2002		2001
		(000)		(000)
Unrealized holding gain on securities arising during the year	$	811	$	285
Income taxes		(276	)	(97	)
		535		188
Reclassification adjustment for gains included in net income		(727	)	(681	)
Income tax benefit		247		232
		(480	)	(449	)
Other comprehensive income (loss)	$	55	$	(261	)

19.          Policyholder Dividend

          In conjunction with the Conversion, the Company declared a policyholder dividend equal to 10% of certain direct premiums billed. This cash dividend was paid to all eligible policyholders that renewed their policies after the Conversion and kept their respective policies in force for 60 days following renewal. The dividend was paid only after the first renewal and not for subsequent renewals. As of December 31, 2002, the entire dividend distribution was paid.

A-31

PROFESSIONALS DIRECT, INC. DIRECTORS AND EXECUTIVE OFFICERS

At Dcember 31, 2002

Board of Directors

          Charlene M. Snow - Youth Urban Agenda/Civic Literacy Project at Wayne State
               University
               (consultant and court liaison)

          David W. Crooks - Value Added Consultants, Ltd.
               general business consulting)

          Tracy T. Larsen - Partner, Warner Norcross & Judd LLP
               (a full-service law firm)

          Thomas J. Ryan - Thomas J. Ryan, P.C.
               (attorney at law)

          Craig A. Anderson - Chief Executive Officer and Chairman of the Board of Prairiewave
               Telecommunications, Inc.
               (telecommunications provider)

          Joseph A. Fink - Member, Dickinson Wright, PLLC
               (a full-service law firm)

          Julius A. Otten - Independent consultant
               (consulting on matters in the insurance industry)

          Stephen M. Tuuk - President and Chief Executive Officer of Professionals Direct, Inc.

          Mary L. Ursul - Vice President and Secretary of Professionals Direct, Inc.

          Stephen M. Westfield - Vice President and Treasurer of Professionals Direct, Inc.

Executive Officers

          Stephen M. Tuuk - Chairman, President and Chief Executive

          Mary L. Ursul - Vice President and Secretary

          Stephen M. Westfield - Vice President and Treasurer

A-32

Proxy PROFESSIONALS DIRECT, INC.
161 Ottawa Avenue, N.W., Suite 607
Grand Rapids, Michigan 49503
Annual Meeting of Shareholders
May 13, 2003

          The undersigned shareholder appoints stephen m. tuuk and mary l. ursul, or either of them, each with power to appoint his substitute, attorneys and proxies to represent the shareholder and to vote and act with respect to all shares that the shareholder would be entitled to vote on all matters that come before the annual meeting of shareholders of professionals direct, inc. referred to above or any adjournment of that meeting.

          This proxy is solicited on behalf of the Board of Directors. If this proxy is properly executed, the shares represented by this proxy will be voted as specified. If no specification is made, the shares will be voted for election of all nominees named on this proxy as directors. The shares represented on this proxy will be voted in the discretion of the proxies on any other matters that may come before the meeting.

1. Election of the following nominees to the board of directors of the Company for the terms expiring at the annual meeting in the year indicated:

Name	Term Expires
David W. Crooks	2006
Stephen M. Westfield	2006
Thomas F. Dickinson	2006
Blake W. Krueger	2006

FOR ALL WITHHOLD ALL

Your Board of Directors recommends that you voteFOR all nominees

          Sign this proxy in the same way that your stock is registered with the Company (as may be shown on the printed label affixed below). Corporate officers should indicate their title and the corporation's full name. Persons signing on behalf of other entities should indicate their capacity and the entity's full name.

Dated: _______________, 2003

Shareholder Name
(shown on stock certificate or address label)

By:

Representative capacity, if any

          For purposes of planning the annual meeting, please indicate whether you plan to attend the annual meeting in person: ___ Yes ___ No

PLEASE SIGN, DATE, AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED ENVELOPE.