Professionals Direct (PFLD) DEF 14A Definitive proxy

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

SCHEDULE 14A

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PROFESSIONALS DIRECT, INC.

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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 11, 2004
Time:	10:00 a.m., local time
Place:	Crowne Plaza Grand Rapids 5700 - 28th Street, S.E. Grand Rapids, Michigan 49546

March 30, 2004

Dear Fellow Shareholder:

You are cordially invited to attend the Annual Meeting of Shareholders of Professional Direct, Inc. on May 11, 2004. 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 25, 2004. 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

March 30, 2004

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 11, 2004, 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 25, 2004. Each such shareholder is entitled to one vote per share on each matter presented.

As of March 25, 2004, 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 three 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
Tracy T. Larsen	2007
Mary L. Ursul	2007
Julius A. Otten	2007

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

Tracy T. Larsen (age 44) is nominated for a term ending in 2007. 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 1996 to 2001. He currently serves as a member of the Executive Committee of Professionals Direct. Mr. Larsen is the managing partner of the Grand Rapids office of Barnes & Thornburg and an attorney at law. Prior to joining Barnes & Thornburg in 2003, Mr. Larsen was a partner with Warner Norcross & Judd, LLP. He is a member of the American Bar Association and the State Bar of Michigan. He is a past 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 andAmerica's Leading Business Lawyers. His legal expertise encompasses all aspects of corporate and s ecurities 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 45) is nominated for a term ending in 2007. She 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 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, she is a former member of the Grand Rapids Bar Association, the American Society of Healthcare Risk Management and the Michigan Society of Healthcare Risk Management. Ms. Ursul received a B.S. degree in nursing fro m 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 65) is nominated for a term ending in 2007. He 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 committees 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 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. He is also a director of American Community Mutual Insurance Company and the chair of their audit committee.

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

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Continuing Directors with Terms Expiring in 2006

David W. Crooks (age 55) has been a director of Professionals Direct since 2001 and was a director of PDIC from 1993 to 2001. He currently serves as a member of the Audit Committee, Executive Committee and Governance 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 "community betterment programs," and the Cadillac Local Development Authority, which administered and facilitated an environmental cle anup 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 42) 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), a member of the American Institute of Certified Public Accountants and a former member of the MACPA.

Thomas F. Dickinson (age 47) has been a director of Professionals Direct since 2003. He currently serves as a member of the Audit Committee and Executive Committee of Professionals Direct. Mr. Dickinson is President and Chief Executive Officer of MHA Insurance Company and FinCor Holdings, Inc. MHA Insurance Company provides professional medical liability insurance to health care facilities and physicians. 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. FinCor Holdings, Inc. is the parent holding company of MHA Insurance Company. 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. A t Foremost, he served as Group Product Manager, 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 50) has been a director of Professionals Direct since 2003 and currently serves as chair of the Compensation Committee. Mr. Krueger is currently Executive Vice President and Secretary for Wolverine World Wide, Inc., and President of the global Caterpillar Footwear business, a division of Wolverine. Wolverine World Wide, Inc. is a New York Stock Exchange listed international marketer of footwear and accessories with annual sales of over $900 million. Wolverine has owned-operations and subsidiaries in Canada and all key European countries and licensees and distributors which serve consumers in more than 140 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 and has direct reporting responsibilities for the Caterpillar Footwear and Wolverine Retail divisions. Mr. Krueger practiced law at Warner, Norcross & Judd from 1978 through 1996 in the f ield of corporate and business law, mergers, acquisitions and securities. Mr. Krueger is a former Director of the Grand Rapids 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.

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Continuing Directors with Terms Expiring in 2005

Stephen M. Tuuk (age 50) 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. In 1986 and 1987, Mr. Tuuk served as counsel to the State Bar of Michigan and the organizing Board of Directors of PDIC in connection with its formation, licensure and capitalization. Thereafter, Mr. Tuuk served as its general counsel from 1988 to 1993. In 1993, Mr. Tuuk became president and chief executive officer and a director of PDIC in order to establish its corporate office and to develop PDIC as an independent business enterprise. Mr. Tuuk is a former member of the State Bar's Standing Committee on Insurance Law and Lawyers Professional Liability Insurance Committee. He is a past president of the National Associatio n 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, PLC where he practiced in the areas of corporate law and insurance regulation. He received his undergraduate degree with honors from Calvin College in 1975 and his law degree with honors from Valparaiso University in 1978. He is a member of the American Bar Association and the State Bar of Michigan. Mr. Tuuk was admitted to the State Bar of Michigan in 1978.

Thomas J. Ryan(age 56) 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 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 a 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 Pres ident 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 61) has been a director of Professionals Direct since 2002. He currently serves as a member of the Compensation Committee and as the Company's representative to the Insurance Institute of Michigan. 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. Mr. Fink is a Fellow of the Michigan Bar Foundation, is listed inWho's Who in American Law andWho's Who in the Law, is named inBest Lawyers in Americafor commercial litigation, and is a member of the Association of Life Insurance Counsel and the International Association of Insurance Receivers. 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. District 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 areas of insurance and commercial and regulatory litigation. 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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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 and functions, in part, as the nominating committee. 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"). A copy of the Gove rnance Committee Charter is attached as Appendix A.

The Board of Directors believes the Company and its shareholders are best served by having a Board of Directors that brings a diversity of education, experience, skills and perspective to board meetings. While the Board of Directors expects each director to be a highly qualified individual, it has no specific qualifications or criteria for nomination for election or appointment to the board.

The members of the Governance Committee are Stephen M. Tuuk (Chair), David W. Crooks, and Thomas J. Ryan. Messrs. Crooks and Ryan are independent directors, as defined in Rule 4200(a)(15) of the National Association of Securities Dealers. Mr. Tuuk is not independent. The Board of Directors considers its Governance Committee to be sufficiently independent to meet the needs of the Company and its shareholders.

The Governance Committee held one meeting in 2003.

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 Thomas F. Dickinson.

The Audit Committee held four meetings in 2003.

The Board has determined that Mr. Otten is an audit committee financial expert, as that term is defined in Item 401(e)(2) of Regulation S-B to the Securities Exchange Act of 1934. Mr. Otten is independent, as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934.

The Audit Committee has been established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. Professionals Direct has adopted the definition for audit committee member independence enacted by NASDAQ Stock Market, Inc., set forth in NASD Rule 4350(d)(2), and each member of the Audit Committee is independent under such definition.

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 Blake Krueger (Chair), Tracy T. Larsen and Joseph A. Fink.

The Compensation Committee held two meetings in 2003.

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

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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 F. Dickinson and Tracy T. Larsen.

The Executive Committee held three meetings in 2003.

Compensation of Directors

Each Director who is not an employee is paid a quarterly fee of $3,000, $700 for each board meeting and $350 for each committee meeting. In addition, the chair of the audit committee and the chair of the compensation committee each receive an annual fee of $5,000 and $2,000, respectively. 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 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 Securiti es 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, 2003, the Board of Directors held four 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 2003. All directors are expected to attend the annual meeting of shareholders unless prevented from doing so by compelling personal circumstances.

Shareholder Communications with Directors

Shareholders who wish to send communications to the Company's Board of Directors may do so by sending them in care of the Secretary of the Company at the address which appears on the first page of this proxy statement. Such communications may be addressed either to specified individual directors or the entire Board. The Secretary has the discretion to screen and not forward to directors communications which the Secretary determines in his or her discretion are communications unrelated to the business or governance of the Company and its subsidiaries, commercial solicitations, offensive, obscene, or otherwise inappropriate. The Secretary will, however, compile all shareholder communications which are not forwarded and such communications will be available to any director.

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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, 2003, 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, 2003. 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, 2003.

Name of Beneficial Owner(1)	Amount and Nature of Beneficial Ownership(2)	Percentage of Class(3)
Stephen M. Tuuk	16,675	5.0%
Stephen M. Westfield	10,000	3.0%
Mary L. Ursul	14,500	4.3%
David W. Crooks	11,000	3.3%
Thomas F. Dickinson	0	0.0%
Joseph A. Fink	6,800	2.0%
Blake W. Krueger	0	0.0%
Tracy T. Larsen	6,000	1.8%
Julius A. Otten	0	0.0%
Thomas J. Ryan	2,200	0.7%
All Executive Officers Directors and Nominees for Director as a group (10 persons)	67,175	20.1%

(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, 2003, the cash and non-cash compensation awarded to, earned by or paid 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 2003 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	2003 2002 2001	$230,140 227,640 233,640	$150,000 15,000 85,938	$          - - - 411,158	$7,000          5,500          5,250
Mary L. Ursul, Vice President and Secretary	2003 2002 2001	152,640 147,640 147,640	112,500 22,500 52,068	- - - 28,275	6,000          4,191          - -
Stephen M. Westfield, Vice President and Treasurer	2003 2002 2001	125,140 112,640 106,640	30,000 10,000 25,894	- - - 67,055	6,000          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 2003.

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, 2003, 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, 2003. This paragraph and the names of each Audit Committee member listed below shall not be deemed to be "soliciting material," 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 Securities 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 Securities 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 Securities 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. A copy of the Audit Committee Charter is attached as Appendix B.

Respectfully submitted,

Julius A. Otten, Chairman
David W. Crooks
Thomas F. Dickinson

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Related Matters

Solicitation of Proxies

We will initially solicit proxies by mail. Professionals Direct officers, directors 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

Stephen 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 representing 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. LRC is a participant in a 2003 reinsurance treaty of PDIC. During 2003, premiums of $424,000 were ceded to and no losses were paid by LRC. As of December 31, 2003, unearned premiums ceded to LRC were $182,000.

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. Thomas F. Dickinson and Blake W. Krueger were elected to the Board of Directors on May 13, 2003, and the Company filed the Forms 3 late on behalf of Messrs. Dickinson and Krueger. Messrs. Dickinson and Krueger owned no shares of Professionals Director's common stock. Except as previously noted, based on its review of the copies of the Section 16(a) 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, 2003, our directors and officers filed all reports require d by Section 16(a) in a timely manner.

Code of Ethics

Professionals Direct has adopted a Code of Ethics that applies to the Chief Executive Officer and Vice President of Finance.

Shareholder Proposals

If you would like a proposal to be presented at the annual meeting of shareholders in 2005 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 November 30, 2004, 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 2005 annual meeting of shareholders must similarly be received by Professionals Direct by November 30, 2004.

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Independent Public Accountants

The board of directors has selected BDO Seidman, LLP as Professionals Direct's principal accountant for 2004. 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 Forms 10-QSB and for services provided in connection with statutory and regulatory filings for each of the last two fiscal years were $98,525 and $99,022 in 2003 and 2002, respectively.

Audit-Related Fees. No audit-related fees were paid in the last two fiscal years.

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 $71,700 and $32,759 in 2003 and 2002, respectively.

All Other Fees. No other fees were paid in the last two fiscal years.

All of the hours expended on BDO Seidman, LLP's engagement to audit Professionals Direct's financial statements for the year ended December 31, 2003, were performed by BDO Seidman, LLP's full-time, permanent employees.

Audit Committee Pre-Approval Policies and Procedures. The Audit Committee has the authority and responsibility to pre-approve all audit and permissible non-audit services provided to Professionals Direct by Professionals Direct's principal accountant.

All pre-approvals of audit and permissible non-audit services granted by the Audit Committee must be reasonably detailed as to the particular services to be provided and do not result in the delegation of the Audit Committee's pre-approval responsibilities to management. Pre-approvals of services granted by the Audit Committee do not use monetary limits as the only basis for pre-approval and do not provide for broad categorical approvals (e.g., tax compliance services under $10,000). Pre-approval policies and practices adopted by the Audit Committee are designed to ensure that the Audit Committee knows what particular services it is being asked to pre-approve so that it can make a well-reasoned assessment of the impact of the service on the principal accountant's independence.

The Audit Committee may delegate to one or more designated members of the Audit Committee the authority to grant pre-approvals of permissible non-audit services. The decisions of any Audit Committee member to whom authority is delegated to pre-approve permissible non-audit services are reported to the full Audit Committee.

None of the audit-related fees or tax fees were approved by the Audit Committee pursuant to thede minimus exception set forth in Section 10A(i)(1)(B) of the Securities Exchange Act of 1934.

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APPENDIX A
Governance Committee Charter

13

Governance Committee Charter

General Description of Role

The Governance Committee is a standing committee of the Board. The Governance Committee's 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 vendor relationships that any 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 this Charter.

Committee Membership

The Governance Committee shall consist of at least two and no more than four Board members. A majority of the Governance Committee shall be independent and non-executive. The Governance Committee members shall have knowledge of the primary industries in which Professionals Direct and the Subsidiaries operate. The Board shall select the chair of the committee.

Nominations

Directors are elected each year on a staggered basis by the shareholders at the annual meeting of the shareholders. The Governance Committee will recommend a slate of proposed Board nominees annually. After considering the recommendations of the Governance Committee, the Board will annually approve a slate of Board nominees and present them to the shareholders, with the Board's recommendation, for election to the Board.

Shareholders may also propose nominees by following procedures provided in Professionals Direct's Articles of Incorporation. The Governance Committee shall consider every nominee so proposed by a shareholder and report each such nomination along with the Committee's recommendation to the full Board of Directors. The Governance Committee may also, in its discretion, consider shareholders' informal suggestions of possible nominees.

The Governance Committee will recommend candidates to fill vacancies on the Board of Directors. After considering such recommendations, the Board may appoint directors to fill vacancies on the Board to complete an unexpired term.

Director Qualification

The Board believes that Professional Direct and its shareholders are best served by having a Board of Directors that brings a diversity of education, experience, skills, and perspective to Board meetings. Accordingly, there are no specific or minimum qualifications or criteria for nomination for election or appointment to the Board.

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Committee Responsibilities

The Governance Committee will:

(a)	Review and assess the qualifications of new candidates for open director positions, taking into account the needs of the Board and Professionals Direct, and recommend nominees to the Board for submission to shareholders;
(b)	Review, assess and make recommendation to the full Board on actual or potential conflicts of interest by and amongst the officers, Board members or other key employees; and
(c)	Review and assess the performance quality of the Board and make recommendations to the full Board for changes, if any, in this Charter.

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APPENDIX B
Audit Committee Charter

17

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 Professionals Direct'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 Professionals Direct'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. The Audit Committee shall have the power to engage and fund independent counsel and other advisors in the Committee's sole discretion.

Committee Membership

The Audit Committee shall consist of at least two, and no more than six, independent directors, other than an officer or employee of Professionals Direct or its subsidiaries or any other individual having a relationship, which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. No Audit Committee member shall be paid or accept any consulting, advisory or other compensatory fee from Professionals Direct or its subsidiaries (other than in his or her capacity as a member of the Board or any committee). No Audit Committee member may be an affiliated person of Professionals Direct or any of its subsidiaries. Each Audit Committee member shall be an "Independent Director" as defined by NASD Rules for NASDAQ issuers. 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.

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 Professionals Direct'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.

At least one member of the Audit Committee, preferably the Chair, should be an "audit committee financial expert." An "audit committee financial expert" is a person who has (1) an understanding of generally accepted accounting principles and financial statements; (2) the ability to assess the general application of such principles in connection with the accounting for estimates, accruals, and reserves; (3) experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by Professionals Direct's financial statements, or experience actively supervising one or more persons engaged in such activities; (4) an understanding of internal controls and procedures for financial reporting; (5) an understanding of audit committee functions; and (6) general financial sophistication. An audit committee financial expert mus t have acquired such attributes through any one or more of the following: (i) education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor or experience in one or more positions that involve the performance of similar functions; (ii) experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions; (iii) experience overseeing or assessing the

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performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements; or (iv) other relevant experience.

Financial Reporting and Controls

The Audit Committee will:

(a)	Review and discuss the audited financial statements with management before they are released to the public or filed with the Securities Exchange Commission, and based on such review and discussion, recommend to the Board that the audited financial statements be included in Professionals Direct's Annual Report on Form 10-KSB.
(b)	Review and discuss, or appoint one or more members of the Audit Committee to review and discuss, the interim financial statements with management before they are released to the public or filed with the Securities Exchange Commission.
(c)	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.
(d)	Review changes in important accounting principles and the application thereof in both interim and annual financial reports.
(e)	Review and assess the business and financial risk management process for Professionals Direct and the Subsidiaries.
(f)	Review and assess the system of internal controls over financial reporting designed by, or under the supervision of, the Chief Executive Officer and Vice President of Finance to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, including policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and the Board; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the assets that c ould have a material effect on the financial statements.
(g)	Review and assess the system of disclosure controls and procedures of Professionals Direct that are designed to ensure that information required to be disclosed is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms, including controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to management to allow timely decisions regarding required disclosure.
(h)	Review with legal counsel any regulatory matters which may have a material impact on the financial statements.
(i)	Review the results of the annual audits of director's and officers' expense accounts and management prerequisites prepared either by internal or external auditors.

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(j) Establish procedures for the receipt, retention and treatment of complaints received by Professionals Direct regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by employees of Professionals Direct 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.

	The Audit Committee may establish policies and procedures for pre-approving audit and permissible non-audit services by the external auditors. All pre-approvals of audit and permissible non-audit services granted by the Audit Committee shall be reasonably detailed as to the particular services to be provided and shall not result in the delegation of the Audit Committee's pre-approval responsibilities to management. Pre-approvals of services granted by the Audit Committee must not use monetary limits as the only basis for pre-approval and must not provide for broad categorical approvals (e.g., tax compliance services under $10,000). Any pre-approval policies or practices adopted by the Audit Committee must be designed to ensure that the Audit Committee knows what particular services it is being asked to pre-approve so that it can make a well-reasoned assessment of the impact of the service on the external auditors' independence.
	The Audit Committee may delegate to one or more designated members of the Audit Committee the authority to grant pre-approvals of permissible non-audit services. The decisions of any Audit Committee member to whom authority is delegated under this paragraph to pre-approve permissible non-audit services shall be reported to the full Audit Committee.
(c)	Instruct the external auditors that they are responsible to the Board and the Audit Committee as representatives of the shareholders of Professionals Direct. In that regard, they are to 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.

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(e)	Obtain the written disclosures and the letter from the external auditors required by Independent Standards Board Standard No. 1 (Independence Discussions with Audit Committees), as may be modified or supplemented, and discuss with the external auditor the external auditor's independence, including any relationship or non-audit services that may affect their objectivity or independence.
(f)	Discuss with the external auditors the matters required to be discussed by SAS 61, as may be modified or supplemented.
(g)	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.
(h)	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 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.
(i)	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 Professionals Direct or any of the Subsidiaries.

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         Professionals
          Direct, Inc.

2004
Annual Report

PRESIDENT'S MESSAGE

TO OUR SHAREHOLDERS:

Our core mission is to develop, market and manage programs which provide small law firms with insurance products and financial services. Our programs manage risk and build financial security for our customers. At the same time, we seek to provide favorable long-term returns on the capital which you have invested with us.

Last year, I wrote about our national expansion. Starting as early as 1999, we planned to become a national provider of professional liability insurance and had taken many steps, including demutualization, to achieve that goal. Our plans and investments met opportunity in 2003. By the end of 2003, we were operating in 34 states and across six time zones, serving a customer base of more than 10,500 lawyers. During the year, we added critical mass and breadth to our two main professional liability programs: the Lawyers Direct® program for law firms of one to five attorneys, and the Premier program for six and over attorneys. Most of the business generated from these programs was placed with our own insurance subsidiary.

In our growth, we were favored by the departure of a number of commercial carriers from our niche, by the liquidation of a competitor, and overall increases in premiums and added restrictions imposed by almost all remaining carriers. The market changes allowed us to grow profitably without the friction and cost of expanding in a normal competitive environment. In the process, Professionals Direct positioned itself as a leading national provider of lawyers professional liability insurance for small firms.

Our overall revenues reached a record $17.6 million in 2003, up more than 100% from 2002. On a consolidated basis, we reported after tax profits of $2.7 million for the year, or earnings per share of $8.10. At December 31, 2003, our book value per share stood at $29.57 - almost triple the price per share paid in our 2001 demutualization a little more than 30 months prior.

Insurance markets can be highly cyclical. On programs where we take risk, we expect an underwriting profit. We walk away from business that, in our view, is not responsibly priced. Looking forward to 2004, we do not see the same scope and degree of market opportunities that were evident in 2002. In our markets, pricing is still firm, but competition has returned. The upshot is that Professionals Direct will not see that same rate of increase in its revenues for 2004 as it saw in 2003. As our organization matures, we plan to use our position to develop additional programs for the legal community and to sell other non-risk attaching products and services to our established customer base.

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.

2004 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-14
Consolidated Financial Statements	A-15
Notes to Consolidated Financial Statements	A-19

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 ("Services") 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 2004 Annual Report contains audited financial statements and a detailed financial review. This is Professionals Direct, Inc.'s 2004 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, 1999, 2000, 2001, 2002 and 2003 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
	2003	2002	2001	2000	1999
	(in thousands of dollars, except for ratios and ratio data)
Revenue Data:
Direct premiums written	$24,294	$10,404	$7,066	$ 6,982	$ 7,598
Net premiums written	20,118	8,479	5,956	5,427	4,186
Net premiums earned	15,927	6,790	5,648	5,105	3,358
Fees and commissions earned	619	474	665	1,295	1,566
Net investment income	926	1,410	1,506	954	966
Finance and other income earned	127	116	121	181	105
Total Revenues	17,599	8,790	7,940	7,535	5,995
Losses and Expenses:
Losses and loss adjustment expenses	7,737	4,851	2,265	2,931	1,957
Operating expenses	5,420	3,511	3,922	3,355	2,619
Interest expense	300	200	99	368	342
Total Expenses	13,457	8,562	6,286	6,654	4,918
Income before federal income taxes and policyholder dividend	4,142	228	1,654	881	1,077
Policyholder dividend	0	316	297	0	0
Income (loss) before federal income taxes	4,142	(88)	1,357	881	1,077
Federal income taxes (benefit)	1,442	(62)	527	95	297
Net income (loss)	$2,700	$ (26)	$ 830	$ 786	$ 780
Selected Balance Sheet Data:    (at year end)
Total investments and cash	36,410	22,451	19,341	17,781	16,919
Total assets	46,359	30,770	25,572	28,956	29,473
Total liabilities	36,496	23,455	18,286	25,445	27,161
Total shareholders' equity (2003-2001) or     policyholders' surplus (2000-1999)	9,863	7,315	7,286	3,511	2,312
Per Share Data: (1)
Net Income (loss)	$8.10	$(0.08)	N/A	N/A	N/A
Book value	$29.57	$21.93	N/A	N/A	N/A
Selected GAAP Ratios:
Return on prior year equity	36.9%	(.4%)	23.6%	34.0%	36.7%
Return on current year revenue	15.3%	(.3%)	10.5%	10.4%	13.0%
Return on current year assets	5.8%	(.1%)	3.2%	2.7%	2.6%

A-3

	Years Ended
	2003	2002	2001	2000	1999
	(in thousands of dollars, except for ratios and ratio data)
Statutory (SAP) Ratio Data:
Loss Ratio (2)	49.2%	76.9%	41.6%	58.4%	52.1%
Expense Ratio (3)	30.8%	37.0%	37.2%	28.3%	24.4%
Combined ratio (4)	80.0%	113.9%	78.8%	86.7%	76.5%
Operating Ratio (5)	74.2%	93.4%	61.5%	69.8%	47.7%
A. M. Best Industry% operating ratio (6)	N/A	97.0%	103.7%	95.0%	94.0%
Statutory surplus (7)	16,132	10,473	9,370	7,609	6,583
Earned surplus (8)	13,601	7,942	6,839	3,264	1,964
Ratio of statutory net written premiums to statutory surplus	124.7%	81.0%	63.6%	71.3%	63.6%

(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 and 2003, the only years 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 1999. As of December 31, 2000, statutory surplus includes $4.345 million in surplus certificates. For 2003, 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, 2003 and 2002 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.

Introduction

In 2003, the Company's profitability increased significantly from 2002. The Company's revenue increased in response to elevated demand for PDIC's underwriting capacity and this resulted in higher levels of net written and net earned premium. The Company's expenses also increased in 2003, but at a rate of increase which was lower than the corresponding revenue increase. The following table and discussion compares the financial results for 2003 and 2002 by revenue and expense lines:

	Years Ended
	2003	2002	Change	Percent Change
	(in thousands of dollars, except for per share data)
Revenue Data:
Net premiums earned	15,927	6,790	9,137	134.6%
Fees and commissions earned	619	474	145	30.6%
Net investment income	926	1,410	(484)	(34.3%)
Finance and other income earned	127	116	11	9.5%
Total Revenues	17,599	8,790	8,809	100.2%
Losses and Expenses:
Losses and loss adjustment expenses	7,737	4,851	2,886	59.5%
Operating expenses	5,420	3,511	1,909	54.4%
Interest expense	300	200	100	50.0%
Total Expenses	13,457	8,562	4,895	57.2%
Income before federal income taxes and policyholder dividend	4,142	228	3,914	1,716.67%
Policyholder dividend	0	316	(316)	(100.0%)
Income (loss) before federal income taxes	4,142	(88)	4,230	4,806.82%
Federal income taxes (benefit)	1,442	(62)	1,504	2,425.81%
Net income (loss)	$2,700	$ (26)	$ 2,726	10,484.62%
Selected Balance Sheet Data:    (at year end)
Total investments and cash	$36,410	$22,451	$13,959	62.2%
Total assets	46,359	30,770	15,589	50.7%
Total liabilities	36,496	23,455	13,041	55.6%
Total shareholders' equity	9,863	7,315	2,548	34.8%
Per Share Data:
Net Income (loss)	$8.10	$(0.08)	$8.18	10,225.0%
Book value	$29.57	$21.93	$7.64	34.8%

A-5

Results of Operations (000 omitted):

The following is a summary and analysis of the material revenue and expense components of our operational results for 2003.

         Net Premiums Earned.In 2003, PDIC was our only provider of insurance underwriting and only wrote LPL insurance. As a revenue line, insurance underwriting was our largest and fastest growing revenue source in 2003 and 2002. The following is a summary of premium writings by PDIC:

	Years Ended
	2003	2002	Change	Percent Change
	(in thousands of dollars)
Direct premiums written	$24,294	$10,404	$13,890	133.5%
Net premiums written	20,118	8,479	11,639	137.3%

Net premiums earned are equal to direct premiums earned (premiums earned for policies written) less ceded premiums earned (amounts ceded to reinsurers). The increase in net premiums earned was primarily the result of the increase in the direct premiums written in the later half of 2002 and the first half of 2003. Several factors contributed to PDIC's increased premium writings. They include:

(a)          As of December 31, 2003, PDIC was licensed and admitted to sell insurance in thirty-three states plus the District of Columbia. The majority of these licenses were granted during the second half of 2002. As new licenses were granted, we commenced selling insurance in selected states. As a result, PDIC wrote direct premium of $15,106 outside of Michigan in 2003, compared with $2,497 in 2002; and

(b)          One-time events accentuated the demand for lawyers' professional liability (LPL) insurance from companies like PDIC in certain states. Several companies discontinued actively writing LPL in 2002 and 2003. Most notably, American National Lawyers Insurance Reciprocal (ANLIR) became subject to receivership proceedings in January 2003, liquidation proceedings in June 2003, and ultimately cancelled all outstanding policies effective July 3, 2003. ANLIR was a comparatively large writer of LPL insurance and wrote policies in a number of states where we had become licensed. During the first half of 2003, ANLIR policyholders sought replacement coverage from us and other carriers when they learned ANLIR might be insolvent. Direct premium written in these states was $3,617 for 2003. Most former ANLIR policyholders have now replaced their policies. We do not expect further increases in premium from this market disruption; and

(c)          Premium rates increased overall during 2003. Our average gross premium collected per attorney increased approximately 22% for 2003 compared to 2002. This premium increase was not ratably applied to all policyholders or in all states but varied based on state, limits, exposures and other factors. Not all of this increase is reflected in net written premium as a significant portion of the increase was in the ceded layers reflecting the increased costs of reinsurance; and

(d)          Starting in 2002, PDIC accepted business from selected independent agents in addition to the business sourced by Services. Independent agents were responsible for 37% of PDIC's total direct premium written for 2003. For 2002, independent agents were responsible for 18% of total direct premium written. Of the 37% written in 2003, four agents were responsible for 24% with the remainder split among several other independent agents. Independent agents were used primarily in geographic markets or in market segments which Services could not otherwise access.

The above factors combined to allow PDIC to write substantial amounts of new business outside Michigan, mostly in the first half of 2003. During the first six months of 2003, PDIC wrote $9,566 in new business of which $9,174 was outside of Michigan. For the entire year, new business totaled $13,722 compared to $3,658 for 2002. PDIC was able to add significant numbers of new policyholders without the usual operational friction, discounting or other costs usually associated with generating new business in a normal and fully functional competitive marketplace. We do not expect to see the same combination or scope of market changes in 2004 as we saw in 2003. Further, PDIC's ability to grow is constrained by premium to surplus ratios and other financial benchmarks followed by

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rating agencies, regulators and other external parties. As a result, in 2004, PDIC's direct premium written is expected to grow only modestly and will not grow at the same rate as in either 2003 or 2002.

PDIC decreased the per claim attachment point from $500 per claim for 2003 effective date policies to $250 per claim for 2004 effective date policies. The decrease was accomplished by purchasing more reinsurance from unaffiliated third party reinsurers. In 2004, the transaction is expected to increase PDIC's underwriting capacity, but will also have the effect of increasing the portion of PDIC's direct premium written that is ceded to reinsurers. If direct premium written remains level, then PDIC's net premiums written and net premiums earned would be reduced in 2004 as compared with 2003.

         Fee and Commissions Earned. In 2003, we earned fee and commission income from two sources. The first source is the operations of Services in placing insurance business with unrelated third parties and performing management services. The second source is the membership fees earned by Lawyers Direct Risk Purchasing Group, an affiliate organized, formed and managed by Services as part of the Lawyers Direct® program for one to five person law firms. Fee and commission income earned was $619 in 2003, an increase of $145 or 31%, compared to 2002. Most of the increase was attributable to an increase in the membership fees from the Purchasing Group. Fee and commission income for Services did not change materially from 2002 to 2003. In 2004, our fee and commission income is expected to increase as membership in the Purchasing Group increases and from additional commission income from the sale of more products of other insurance carriers by Services.

         Net Investment Income.In 2003, we earned investment income primarily from yields on fixed income investments of PDIC. Investment income decreased $484 or 34% in 2003 as compared to 2002. The decrease is primarily due to the reduction in realized capital gains. Gains from the sale of securities for 2003 totaled $172 and in 2002 were $727. 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. While similar market conditions were present during 2003, the magnitude of the gain that could be realized was much less. Exclusive of the gains, investment income increased $71. The increase is largely attributable to the overall increase in the size of the investment portfolio as the overall percentage yield on fixed income investments declined from 2002 to 2003.

         Finance and Other Income Earned.We earned finance income primarily by providing premium financing incidental to the sale of PDIC's insurance policies. Premium financing is offered to PDIC policyholders in Michigan and selected other states. Premium finance income increased modestly from 2002 to 2003 and is expected to increase modestly again in 2004 with the expansion of the finance operation into additional states.

         Losses and Loss Adjustment Expenses.In 2003, losses and loss adjustment expenses increased $2,886 or 59.5% to $7,737 in 2003. The loss ratio in 2003 was 48.6% compared to 71.4% in 2002. The loss ratio is the sum of the losses and loss adjustment expenses paid and accrued expressed as a percentage of net premiums earned. The lower loss ratio is the result of the significant increase in net earned premium experienced without a corresponding increase in loss experience. Our overall profitability is in great part determined by the loss estimate for the current year plus the favorable or adverse development of prior years' reserves. There was no significant development of prior years losses either favorable or adverse recorded during 2003 or 2002.

         Operating Expenses.Operating and administrative expenses for 2003 compared to 2002 increased 54.4% or a total of $1,909. As would be expected, expenses increased in connection with the increase in overall revenues. The single biggest expense increase relates to commissions paid to independent agents. During 2003, the volume of business placed through independent agents increased to $9.0 million from $1.9 million in 2002. Commissions paid increased by $1,500 compared to 2002. Not all of this increase is recognized as expense because the portion corresponding to unearned premium is deferred. Also contributing to the increase in administrative expenses is the increased premium tax of $263 and other costs tied to increased premium volume. No significant staffing changes were made in 2003 notwithstanding the increase in premium volume, in part due to the significant efficiencies resulting from more efficient business processes and higher levels of automation.

         Interest Expense. Interest expense in 2003 increased $100 from 2002. This increase is primarily the result of the trust preferred securities being outstanding for the entire year. Total interest expense for 2003 consisted of $133 on surplus certificates, $108 on the trust preferred securities $38 on the line of credit used to fund premium finance receivables, and $21 on the general line of credit. For 2004, interest expense will increase because the line of credit debt will be outstanding for the entire year.

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         Policyholder Dividend.The policyholder dividend was a one-time program that concluded during the third quarter of 2002.

         Income Taxes.The effective federal income tax rate was 34.8% for 2003 compared to 70.7% for 2002. The effective rate for 2003 approximates the expected rate as contrasted to the adjustment affected rate in 2002.

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, taxes and debt repayment.

Trends or uncertainties that may impact short-term or long-term liquidity include changes in the cost and availability of reinsurance, changes in interest rates and changes in investment income. As the costs of obtaining reinsurance may 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 minimized.

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 effects are realized. Interest rates continue to be at historically low levels. If interest rates begin to increase, it will be unlikely that we will realize any gains on portfolio assets during 2004. However, we are hopeful that lower gains will be offset by increased interest earned, thus reducing the impact on liquidity.

Our net cash flow from operations for 2003 was $10,814 compared to $1,701 for 2002. This increase in cash from operating activities largely resulted from the collection of increased premiums written as discussed earlier and is manifested in the increase in unearned premiums. Conversely, the investment of this cash in fixed maturities resulted in increased investing activities of $11,894 during the current year. In addition, cash for investing activities was impacted by the sale and subsequent repurchase of selected bonds in order to realize gains during the second quarter of this year. Cash received from financing activities for the current year was $3,644, the result of net borrowing under three different lines of credit. Last year, the increase in the net borrowings was $1,558. General economic conditions and premium increases have led to increased utilization of the premium finance option by policyholders and, as a result, increased debt under the line of credit used to fund this option. In addition, p roceeds from one line of credit have been used to increase the statutory surplus of PDIC. We will continue to consider additional sources of funding to provide adequate capital to support our increased market opportunities and premium growth.

At December 31, 2003, we had cash and cash equivalents of $7,006. This represents that portion of total assets necessary to be kept liquid to meet demand for operations and 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 2004.

We have three lines of credit available through the same financial institution that also provide liquidity. All of the lines of credit grant a security interest in substantially all assets of the Company, Services and Finance. In addition the Company provided a pledge of its shares of PDIC generally subject to the rights of policyholders under insurance laws and the rights of insurance regulators. One line of credit is a $1,800 revolving line of credit which is used to assist Finance with its financing of insurance premiums. It 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 bears interest at 1% over the bank's prime rate. The third line of credit is a $3,000 facility that requires quarterly principal payments of $150 beginning April 1, 2004 and matures October 1, 2006. The lines of credit require, among other things, that we maintain a minimum tangible net worth of $7,500, that PDI C 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 periodic 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

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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 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. As part of the process of establishing those estimates, the following should be noted:

(a)          Estimates of the loss reserve liability are reviewed by independent actuaries. Various methodologies are used to calculate the appropriate amount of the loss reserve liability that should be recorded each year.

(b)          In the first several 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 recently reported tends to be more difficult. As claims get older, the loss reserve liability may be estimated with less inaccuracy, but are still be subject to material fluctuations until the claim is paid or otherwise closed. 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.

(c)          One factor that impacts year to year incurred losses is the existence of reserve development from prior years. Favorable or adverse development 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.

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 case supplement 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

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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, 2003 and 2002 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 1993 through 2003 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.

	Report Year Ended December 31,
	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002	2003
	(in thousands)
Reserve for unpaid losses and      loss adjustment expenses	$3,321	$3,619	$2,572	$2,960	$3,944	$3,042	$1,890	$2,894	$3,317	$4,061	$6,636
Cumulative amount of liability      paid through:
One year later	976	1,451	1,342	1,521	590	675	641	609	1,758	2,127	-
Two years later	2,239	2,658	2,758	3,160	1,726	1,402	1,159	1,961	2,354
Three years later	2,963	4,296	3,544	3,871	1,991	1,532	1,347	2,166
Four years later	3,040	4,532	3,809	4,112	2,089	1,610	1,369
Five years later	3,512	4,791	4,014	4,256	2,088	1,618
Six years later	3,551	4,865	4,062	4,314	2,087
Seven years later	3,551	4,904	4,011	4,349
Eight years later	3,551	4,902	4,010
Nine years later	3,551	4,911
Ten years later	3,551
Reestimated net liability as of:
One year later	3,177	4,076	3,700	4,285	3,287	2,805	2,303	2,522	3,320	4,041	-
Two years later	3,155	4,427	4,078	4,841	2,944	2,134	1,994	2,470	3,317
Three years later	3,375	5,067	4,144	4,843	2,425	1,820	1,990	2,532
Four years later	3,505	5,057	4,141	4,735	2,163	1,813	1,991
Five years later	3,679	4,959	4,359	4,405	2,162	1,818
Six years later	3,625	4,957	4,260	4,407	2,087
Seven years later	3,598	4,904	4,261	4,384
Eight years later	3,551	4,902	4,271
Nine years later	3,551	4,911
Ten years later	3,551
Net cumulative (deficiency)      redundancy	(230)	(1,292)	(1,699)	(1,424)	1,857	1,224	(101)	362	- -	20

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 1997, PDIC's claims were administered by an outside claims administrator. Beginning in 1997, PDIC hired its own employees to administer the claims. At the same time, PDIC also engaged a new actuarial firm.

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An independent actuary that specializes in the lawyers' professional 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 an 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 pro ve 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.

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, 2003, there were approximately 790 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.

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          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, 2003, 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.

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 Company'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 Company 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;

• changes in financial ratings issued by independent organizations, including A.M. Best, Standard & Poors and Moody's;

• 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.

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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, 2003, 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, 2003, 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 4, 2004

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

December 31,		2003
Assets (Note 9)		(000)
Fixed maturities available for sale, at fair value (Note 3)	$	29,136
Other invested asset, at cost which approximates fair value		268
Total investments		29,404
Cash and cash equivalents		7,006
Receivables:
Premiums (Note 4)		1,252
Amounts due from reinsurers (Note 8)		2,366
Deductibles (Note 4)		33
Investment income		357
Ceding commissions		298
Prepaid reinsurance premiums		1,775
Property and equipment, net (Note 6)		404
Deferred acquisition costs (Note 14)		1,629
Net deferred federal income taxes (Note 13)		1,132
Intangible assets, net (Note 5)		678
Other assets		25
		16,955
Total Assets	$	46,359
Liabilities and Shareholders' Equity
Liabilities
Loss and loss adjustment expense reserves (Note 7)	$	13,461
Unearned premiums		10,468
Amounts due to reinsurers		493
Lines of credit (Note 9)		4,274
Unearned ceding commission (Note 14)		111
Accrued expenses and other liabilities		1,469
Accrued interest		1,383
Federal income taxes payable		306
Surplus certificates (Note 11)		2,531
Trust preferred securities (Note 10)		2,000
Total Liabilities		36,496
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		6,768
Accumulated other comprehensive loss (Note 18)		(111	)
Total Shareholders' Equity		9,863
Total Liabilities and Shareholders' Equity	$	46,359

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,		2003			2002
		(000)			(000)
Revenues
Net premiums earned (Note 8)	$	15,927		$	6,790
Fees and commissions earned		619			474
Net investment income (Note 3)		926			1,410
Finance and other income earned		127			116
Total revenues		17,599			8,790
Expenses
Losses and loss adjustment expenses           incurred (Notes 7 and 8)		7,737			4,851
Operating and administrative (Note 14)		5,420			3,511
Interest		300			200
Total expenses		13,457			8,562
Income before federal income tax expense (benefit)      and policyholder dividend		4,142			228
Policyholder dividend (Note 19)		-			316
Income (loss) before federal income tax expense (benefit)		4,142			(88	)
Federal Income Tax Expense (Benefit)(Note 13)		1,442			(62	)
Net Income (Loss)		2,700			(26	)
Other Comprehensive Income (Loss)(Note 18)		(152	)		55
Comprehensive Income	$	2,548		$	29
Per share of common stock (not in thousands):
Basic and diluted net income (loss) per share	$	8.10			(0.08	)
Basic and diluted comprehensive income per share		7.64			0.09

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, 2002		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
Net income for the year						2,700					2,700
Net depreciation on available      for sale securities, net of      taxes (Note 18)								(152	)		(152	)
Balance, December 31, 2003		333,500	$	3,206	$	6,768	$	(111	)	$	9,863

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,		2003			2002
		(000)			(000)
Operating Activities
Net income (loss)	$	2,700		$	(26	)
Adjustments to reconcile net income (loss) to net cash from operating           activities:
Deferred federal income tax expense		(269	)		-
Realized gains		(173	)		(727	)
Depreciation		181			160
Amortization		620			205
Changes in operating assets and liabilities:
Premiums receivable		(540	)		22
Amounts due from reinsurers		587			(231	)
Deductibles receivable		19			(16	)
Investment income receivable		(92	)		(244	)
Ceding commissions receivable		(57	)		(2	)
Federal income taxes recoverable		57			120
Prepaid reinsurance premiums		(760	)		(490	)
Deferred acquisition costs		(816	)		(665	)
Other assets		5			78
Loss and loss adjustment expense reserves		3,323			549
Unearned premiums		4,952			2,179
Unearned ceding commissions		111			(70	)
Amounts due to reinsurers		123			268
Federal income taxes payable		306			-
Accrued expenses and other liabilities		396			379
Accrued interest		141			142
Net cash from operating activities		10,814			1,701
Investing Activities
Cost of fixed maturities acquired		(21,678	)		(34,083	)
Proceeds from sales or maturities of fixed maturities		9,902			18,442
Cost of property and equipment acquired		(118	)		(334	)
Cost of intangible assets acquired		-			(491	)
Net cash for investing activities		(11,894	)		(16,466	)
Financing Activities
Net borrowings (repayments) under lines of credit		3,689			(348	)
Payment of debt issue costs		(45	)		(94	)
Proceeds from issuance of trust preferred securities		-			2,000
Net cash from financing activities		3,644			1,558
Net Increase (Decrease) in Cash and Cash Equivalents		2,564			(13,207	)
Cash and Cash Equivalents, beginning of year		4,442			17,649
Cash and Cash Equivalents, end of year	$	7,006		$	4,442
Supplemental Disclosures of Cash Flow Information
Federal income tax payments (receipts)	$	1,110		$	(182	)
Interest payments		159			58

See accompanying notes to consolidated financial statements.

A-18

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 2003, 38% of premiums were written in Michigan, 12% each in Arizona and Florida with the balance in twenty-two additional states with no other state exceeding 7%.

          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.

          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.

          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

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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.

A-20

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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.

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.

A-21

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

New Accounting Standards

Statement No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, clarifies how some instruments or securities should be classified on an issuer's balance sheet and their related impact on income and results of operations. This statement was effective beginning July 1, 2003 and did not materially impact us as our trust-preferred securities have already been classified as debt obligations.

FASB Interpretations No. 46,Consolidation of Variable Interest Entities, (as revised December 2003 - FIN 46(R), clarifies when some entities previously not consolidated under prior accounting guidance, should be. In some instances, it also requires certain previously consolidated entities to be deconsolidated. FIN46(R) is effective for periods ending after December 15, 2003 for special purpose entities and for periods ending after March 15, 2004 for other types of variable interest entities that are not defined as special purpose entities. We are currently evaluating the impact of FIN46(R) and believe that it will not have a material impact on our consolidated financial position or results of operations upon implementation.

Implementation of this new guidance will require us to deconsolidate our investment in the Statutory Trust, which issued trust-preferred securities and are classified as debt obligations on our consolidated balance sheet (see Note 1). Although the Trust will no longer be consolidated, the underlying subordinated debentures will continue to be reported as debt obligations on our consolidated balance sheet.

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 38% 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, 2003, the estimated fair value of the Company's bond portfolio was less than its cost.

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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 available for sale is as follows:

			Gross unrealized
December 31, 2003		Amortized cost		Gains		Losses		Fair value
		(000)		(000)		(000)		(000)
Fixed maturities:
U.S. treasury securities and obligations           of U.S. government agencies	$	3,933	$	15	$	22	$	3,926
Obligations of states and political           subdivisions		14,286		62		230		14,118
Corporate securities		9,586		35		33		9,588
Mortgage and other asset-backed           securities		1,499		11		6		1,504
Total fixed maturities	$	29,304	$	123	$	291	$	29,136

          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, 2003			Amortized cost		Fair value
		(000)			(000)
Fixed maturities, other than mortgage and other asset-backed      securities:
Due in one year or less	$	3,880		$	3,894
Due after one year through five years		16,428			16,431
Due after five years through ten years		5,576			5,422
Due after ten years		1,921			1,885
		27,805			27,632
Mortgage and other asset-backed securities		1,499			1,504
	$	29,304		$	29,136

          Proceeds from sales of fixed maturities were $8,691,828 and $18,038,289 in 2003 and 2002, respectively, on which gross gains of $218,534 and $732,580 and gross losses of $35,772 and $5,953 were realized in 2003 and 2002, respectively.

          At December 31, 2003, investments with a fair value of $2,923,851 and amortized cost of $2,905,424 were on deposit with regulatory authorities, as required by law.

A-23

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          Net investment income was comprised of the following components:

Year ended December 31,		2003		2002
		(000)		(000)
Investment income:
Fixed maturities	$	769	$	635
Short-term investments		63		114
Equity securities		-		1
Net realized gains (losses)		172		727
		1,004		1,477
Less investment expenses		78		67
Net investment income	$	926	$	1,410

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

Issuer			Amortized cost		Fair value
		(000)			(000)
Obligations of states and political subdivisions:
Tarrant County, Texas	$	1,045		$	1,049
U.S. government issuer obligations:
U.S. Treasury Note	$	1,008			1,009

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, 2003 and 2002 was $30,000.

A-24

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.          Intangible Assets

          Intangible assets consist of the following:

December 31,		2003
		(000)
Cost:
Debt issue costs	$	139
Covenants not to compete		310
Renewal rights and customer lists		526
		975
Less accumulated amortization		297
Net intangible assets	$	678

          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) and $45,000 incurred in 2003 in connection with additional bank financing. In 2002 the Company purchased the renewal rights to the direct written lawyers professional liability policies of Interlex Insurance Company for $309,000. 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 the term of the repayment period ranging from 3 to 30 years.

          Future amortization expense expected is as follows:

Year ending December 31,
		(000)
2004	$	114
2005		112
2006		57
2007		38
2008		38
Thereafter		319
	$	678

A-25

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.          Property and Equipment

          Property and equipment consist of the following:

December 31,		2003
		(000)
Cost:
Computer equipment	$	338
Furniture and other equipment		248
Computer software		1,067
Leasehold improvements		47
		1,700
Less accumulated depreciation and amortization		1,296
Net property and equipment	$	404

7.          Loss and Loss Adjustment Expense Reserves

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

December 31,		2003		2002
		(000)		(000)
Balance, beginning of year	$	10,138	$	9,589
Less reinsurance balances recoverable		(2,469	)	(2,539	)
Net balance, beginning of year		7,669		7,050
Incurred related to:
Current year		7,738		4,851
Prior years		(1	)	-
Total incurred		7,737		4,851
Paid related to:
Current year		1,094		990
Prior years		3,014		3,242
Total paid		4,108		4,232
Net balance, end of year		11,298		7,669
Plus reinsurance balances recoverable		2,163		2,469
Balance, end of year	$	13,461	$	10,138

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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 2003 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,		2003
		(000	)
Paid loss and loss adjustment expenses	$	203
Unpaid loss and loss adjustment expenses		2,163
	$	2,366

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

		2003				2002
		Written		Earned		Written		Earned
		(000)		(000)		(000)		(000)
Direct	$	24,294	$	19,342	$	10,405	$	8,226
Ceded		(4,176	)	(3,415	)	(1,926	)	(1,436	)
Net Premiums	$	20,118	$	15,927	$	8,479	$	6,790

          As a result of reinsurance ceded, loss and loss adjustment expenses incurred were reduced by $177,663 and $2,171,005 in 2003 and 2002, respectively.

          The Company holds collateral under related reinsurance agreements in the form of irrevocable letters of credit with a single bank. At December 31, 2003, the balance of these letters of credit approximated $1,482,619.

9.          Lines of Credit

          At December 31, 2003, the Company owed $1,274,278 under a $1.8 million line of credit that bears interest at .5% over the bank's prime rate (effectively 4.5% at December 31, 2003). In addition, the Company owed $3,000,000 under a second line of credit that bears interest at 1.25% over the bank's

A-27

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

prime rate (effectively 5.25% at December 31, 2003). This line of credit requires quarterly principal payments of $150,000 beginning April 1, 2004 and matures October 1, 2006. At December 31, 2003, the Company had available a third line of credit of $1,000,000 that bears interest at 1.0% over the bank's prime rate (effectively 5.0% at December 31, 2003). All of the lines of credit grant a security interest in substantially all assets of the Company, Services and Finance. In addition the Company provided a pledge of its shares of PDIC. All of the 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, 2003, interest accrued at an annual rate per annum equal to 5.18%. 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 Indenture 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 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

A-28

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 2003 and 2002 to these certificate holders amounted to $0 and $2,125, 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. At December 31, 2003, 2,531 certificates remain outstanding.

          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, 2003, statutory surplus of PDIC was $16.1 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, 2003 and 2002 was $1,674,932 and $(471,111), 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.

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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,		2003			2002
		(000)			(000)
Current	$	1,542		$	(62	)
Deferred		(100	)		-
	$	1,442		$	(62	)

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

Year ended December 31,		2003			2002
		(000)			(000)
Operations	$	1,442		$	(62	)
Equity - accumulated other comprehensive income (loss)		(82	)		28

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

Year ended December 31,	2003		2002
Federal statutory tax rate	34.0	%	34.0	%
Increase (reduction) in income taxes
relating to:
Tax-exempt municipal bond interest	0.8		7.1
Provision to return adjustment	-		29.6
Effective tax rate	34.8	%	70.7	%

          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-30

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31,		2003
		(000)
Deferred tax assets:
Loss reserve discounting	$	369
Unearned premium reserves		591
Interest on surplus certificates		464
Other		224
Total gross deferred tax assets		1,648
Deferred tax liabilities:
Deferred acquisition costs		(516	)
Net deferred federal income tax asset	$	1,132

          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,		2003		2002
		(000)		(000)
Balance, beginning of year	$	813	$	149
Amounts deferred:
Commissions		1,733		293
Premium taxes		396		132
General and administrative expenses		1,652		1,109
Total amounts deferred		4,594		1,683
Less amortization		(2,965	)	(870	)
Balance, end of year	$	1,629	$	813

A-31

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          Changes in unearned ceding commissions are summarized as follows:

Year ended December 31,		2003		2002
		(000)		(000)
Balance, beginning of year	$	-	$	70
Ceding commissions deferred		257		-
Less amortization		(146	)	(70	)
Balance, end of year	$	111	$	-

15.          Commitments and Contingencies

          The Company has entered into operating leases for office space and equipment. Rental expense for these items totaled $196,371 and $204,421 in 2003 and 2002, respectively. Future net minimum lease payments under noncancelable leases are as follows:

Year ending December 31,
		(000)
2004	$	195
2005		116
2006		18
2007		5
2008		1
	$	335

          The Company has purchased an annuity policy from a life insurance company for purposes of funding a structured claim settlement. At December 31, 2003, the Company remains contingently liable for this settlement in the amount of $396,000.

16.          Employee Benefit Plans

          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 $46,781 and $52,613 in 2003 and 2002, 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. There has been no subsequent activity in this plan.

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

A-32

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

participant in the reinsurance treaties of PDIC. During 2003 and 2002, premiums of $424,000 and $161,000 were ceded to and no losses were paid by Lawyers Re. As of December 31, 2003, unearned premiums ceded to Lawyers Re were $182,000.

18.          Other Comprehensive Income (Loss)

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

Year ended December 31,		2003			2002
		(000)			(000)
Unrealized holding gain (loss) on securities arising during the year	$	(58	)	$	811
Income taxes (benefit)		20			(276	)
		(38	)		535
Reclassification adjustment for gains included in net income		(172	)		(727	)
Income tax benefit		58			247
		(114	)		(480	)
Other comprehensive income (loss)	$	(152	)	$	55

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-33

PROFESSIONALS DIRECT, INC. DIRECTORS AND EXECUTIVE OFFICERS

At December 31, 2003

Board of Directors

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

Tracy T. Larsen - Barnes & Thornburg
     (a full-service law firm)

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

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

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

Thomas F. Dickinson - President and Chief Executive Officer of MHA Insurance
     Company
     (medical liability insurance provider)

Blake W. Krueger - Executive Vice President, General Counsel and Secretary of
     Wolverine World Wide, Inc.
     (international marketer of footwear and accessories)

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-34

Proxy PROFESSIONALS DIRECT, INC.
161 Ottawa Avenue, N.W., Suite 607
Grand Rapids, Michigan 49503
Annual Meeting of Shareholders
May 11, 2004

          The undersigned shareholder appoints STEPHEN M. TUUK and STEPHEN M. WESTFIELD, 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
Tracy T. Larsen	2007
Mary L. Ursul	2007
Julius A. Otten	2007

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:  _______________, 2004

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.