**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
  **FORM
        10-KSB**
  
 [X]
              **Annual
                  report under Section 13 or 15(d) of the Securities Exchange Act
                  of
                  1934**For
                  the fiscal year ended December 31, 2006[  ]
              **Transition
                  report under Section 13 or 15(d) of the Securities Exchange Act
                  of
                  1934**For
                  the transition period from**_______________________**to**_____________________**
 
 Commission
        File Number: **000-49786**
 
 **PROFESSIONALS
        DIRECT, INC.**
 (Name
        of
        Small Business Issuer in Its Charter)
 
 **Michigan**
                (State
                  or Other Jurisdiction of
                Incorporation
                  or Organization)
              **38-3324634**
                (I.R.S.
                  Employer Identification No.)**5211
                  Cascade Road, S.E.**
                **Grand
                  Rapids, Michigan**
                (Address
                  of Principal Executive Offices)
              **49546**
                (Zip
                  Code)
 
 Issuer’s
        Telephone Number, Including Area Code: **(616)
        456-8899**
 
 Securities
        registered under Section 12(b) of the Exchange Act: **None** .
 
 Securities
        registered under Section 12(g) of the Exchange Act:
 **Common
        Stock, No Par Value**
 (Title
        of
        Class)
 
 Check
        whether the issuer is not required to file reports pursuant to Section 13
        or
        15(d) of the Exchange Act [  ]
 
 Check
        whether the issuer: (1) filed all reports required to be filed by Section
        13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
        period that the registrant was required to file such reports), and (2) has
        been subject to such filing requirements for the past 90
        days.       Yes X No_____
 
 Check
        if
        there is no disclosure of delinquent filers in response to Item 405 of
        Regulation S-B contained in this form, and no disclosure will be contained,
        to
        the best of registrant’s knowledge, in definitive proxy or information
        statements incorporated by reference in Part III of this Form 10-KSB or any
        amendment to this Form 10-KSB.  [X]
 
 Indicate
        by checkmark whether the registrant is a shell company (as defined in Rule
        12b-2
        of the Exchange Act).
 Yes  No X
 
 The
        issuer’s revenues for the year ended December 31, 2006, were
        $18,906,000.
 
 As
        of
        March 15, 2007, the aggregate market value of the common stock held by
        non-affiliates of the registrant was approximately $6,650,625. This amount
        is
        based on the sale price of $25 per share for the registrant’s stock as of such
        date.
 
 As
        of
        March 15, 2007, the registrant had outstanding 333,300 shares of common
        stock.
 
 Transitional
        Small Business Disclosure Format (check
        one):   Yes _____    No  X
 
  
  **FORWARD-LOOKING
        STATEMENTS**
 
 This
        Form
        10-KSB 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 “believes,” “estimates,”
“expects,” “forecasts,” “intends,” “objective,” “predicts,” “projects,”
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:
 
 Ÿ
              future
                  economic conditions and the legal and regulatory environment in
                  the
                  markets served by the Company’s subsidiaries;Ÿ
              re-insurance
                  market conditions, including changes in pricing and availability
                  of
                  re-insurance;Ÿ
              financial
                  market conditions, including, but not limited to, changes in interest
                  rates and the values of investments;Ÿ
              inflation;Ÿ
              credit
                  worthiness of the issuers of investment securities, reinsurers
                  and others
                  with whom the Company and its subsidiaries do business;Ÿ
              estimates
                  of loss reserves and trends in losses and loss adjustment
                  expenses;Ÿ
              changing
                  competition;Ÿ
              the
                  Company’s ability to execute its business plan;Ÿ
              the
                  effects of war and terrorism on investment and reinsurance
                  markets;Ÿ
              the
                  effects of hurricanes, earthquakes and other natural disasters
                  on
                  investment and reinsurance markets;Ÿ
              changes
                  in financial ratings issued by independent organizations, including
                  A.M.
                  Best, Standard & Poors and
                  Moody’s;
 
  2
  
 Ÿ
              the
                  Company’s ability to enter new markets successfully and capitalize on
                  growth opportunities; andŸ
              changes
                  in the laws, rules and regulations governing insurance holding
                  companies
                  and insurance companies, as well as applicable tax and accounting
                  matters.
 
 Changes
        in any of these factors, or others, could have an adverse affect on the
        business, results of operations, or business of the Company or its subsidiaries.
        Unless required by law, the Company undertakes no obligation to update publicly
        any forward-looking statements, whether as a result of new information, future
        events or otherwise.
  
  3
  **PART
        I**
 
 **Item
                  1.**
              **Description
                  of Business**.
 
 Business
        Development
 
 Professionals
        Direct, Inc. (the “Company”) was organized in 1996 as a Michigan corporation.
        The Company is primarily a holding company for several subsidiaries, including
        Professionals Direct Insurance Company (f/k/a Michigan Lawyers Mutual Insurance
        Company) (“PDIC”), a Michigan domiciled stock property and casualty insurance
        company. The current organizational structure is as follows:
 
 
 
 **Surplus
        Certificates** .
        PDIC
        was incorporated on June 4, 1987. Starting in 1987, PDIC was capitalized by
        contributions from Michigan lawyers and law firms which were evidenced by
        a
        financial instrument called a “Surplus Certificate.” The Surplus Certificates
        were issued under Section 5836 of the Michigan Insurance Code in denominations
        of $1,000, with simple interest accruing on the principal amount at a rate
        of
        5.25% per year. A total of 4,619 Surplus Certificates were issued from 1987
        through 1995. Redemption of Surplus Certificates is strictly limited and
        requires the prior approvals of the Michigan Office of Financial and Insurance
        Services (“OFIS”), formerly the Michigan Insurance Bureau, and PDIC’s
        Board.
 
 As
        of
        December 31, 2006, 1,603 Surplus Certificates were outstanding. The
        outstanding Surplus Certificates are treated as senior subordinated debt
        of
        PDIC, which must be redeemed before any distributions can be made by PDIC
        to its
        sole shareholder, the Company, but are in all other respects subordinated
        to the
        claims of policyholders and subject to all other limitations provided for
        in the
        Surplus Certificates and under applicable law.
 
  4
  Business
        of Issuer
 
 The
        Company is a holding company whose primary assets are the outstanding stock
        of
        its wholly-owned subsidiaries:
 
 Ÿ
              *Professionals
                  Direct Insurance Company*-
                  provides lawyers professional liability insurance to lawyers and
                  law firms
                  in various states, with 34% of current-year earned premium from
                  the State
                  of Michigan.Ÿ
              *Professionals
                  Direct Insurance Services, Inc. (“Services”)*-
                  provides underwriting, policy issuance, claims administration,
                  accounting
                  and information systems services to insurance companies. Services
                  also
                  provides a wide-variety of insurance products directly to consumers,
                  including lawyers professional liability on behalf of PDIC. In
                  the market
                  segment represented by firms of six or more lawyers, Services also
                  sells
                  the lawyers professional liability (“LPL”) products of other carriers. In
                  addition, Services sells most lines of property and casualty insurance
                  and
                  is also licensed to sell most types of life and health
                  insurance.Ÿ
              *Professionals
                  Direct Finance, Inc. (“Finance”)*-
                  provides financing for premiums to customers of PDIC. If customers
                  are
                  unable to pay the entire insurance premium in advance, they are
                  generally
                  able to finance the premium through a financing company, including
                  Finance. If policyholders finance the premium through Finance,
                  they are
                  required to pay a downpayment to PDIC and enter into a financing
                  contract.
                  Under the terms of the contract, Finance pays the balance of the
                  annual
                  premium to PDIC.Ÿ
              *Professionals
                  Direct Employer Organization, Inc.*-
                  has no current operations and no material assets. The Company intends
                  to
                  use this entity to implement additional services that compliment
                  its
                  current businesses.Ÿ
              *Professionals
                  Direct Statutory Trust I*-
                  was formed in 2002 to facilitate the issuance of trust preferred
                  securities.Ÿ
              *Professionals
                  Direct Statutory Trust II*-
                  was formed in 2005 to facilitate the issuance of trust preferred
                  securities.
 
 **Business
        Strategies** ***.*** The
        business strategy the Company and its subsidiaries intend to pursue has several
        components:
 
 Ÿ
              Increase
                  the number of lawyers insured through the Lawyers Direct Risk Purchasing
                  Group and limit geographic concentration of premium.Ÿ
              Develop
                  additional fee and commission income from our existing customer
                  base
                  through the cross-selling of other insurance and financial
                  products.Ÿ
              Develop
                  the Lawyers Direct name and logo as a national brand.
 
  5
  
 Ÿ
              Improve
                  and enhance the process of communicating with our customers through
                  greater use of the Internet.Ÿ
              Continuously
                  improve our application of technology to enhance customer
                  service.Ÿ
              Develop
                  a management team beyond the executive level that is knowledgeable
                  and
                  forward looking.Ÿ
              Maintain
                  a strong capital base sufficient to support the operations of a
                  national
                  service business.Ÿ
              Provide
                  liquidity to shareholders.
 
 **Programs
        and Policy Forms.** PDIC
        offers three kinds of LPL insurance policies.
 
 Two
        of
        the policy forms are similar in their coverage provisions. The *ProDirectPremier* *®* ** insurance
        policy is sold to law firms of six or more lawyers. The *ProDirectSelect®* insurance
        policy is sold to solo practitioners and to law firms of two to five lawyers.
        The policy forms are claims-made policies with full prior-acts coverage
        available.
 
 Coverage
        is generally offered up to $5 million per claim. Defense expenses are offered
        outside of the coverage limits with certain restrictions. Under the policy
        forms, the insured has the right to reject a settlement of a claim. PDIC
        has
        certain rights to limit its damages when a viable settlement is
        offered.
 
 In
        the *Premier* program,
        PDIC allows more endorsements, offers expanded coverage and is willing to
        tailor
        coverage to the unique needs of larger law firms. In addition, PDIC provides
        risk management to *Premier* program
        law firms through on-site visits and other assistance upon request.
 
 The *ProDirectEssentials®* insurance
        policy is the third kind of LPL insurance policy offered by PDIC. This policy
        is
        marketed and sold exclusively through the Lawyers Direct Risk Purchasing
        Group
        (described below), with liability limits of $100,000 to $1,000,000 per claim.
        There is no deductible. Coverage is limited to acts on behalf of the named
        insured law firm. The *Essentials* policy
        does have a consent to settle provision.
 
 **Underwriting.** PDIC
        offers pricing and underwriting terms that it believes will generate
        underwriting profits. In preparing its rates and forms, PDIC reviews its
        loss
        data and the sources of claims against its insureds.
 
 PDIC
        relies to a significant degree on information provided by its insureds, and
        on
        the investigation and review of claims, in underwriting risks. PDIC evaluates
        and accepts applications for insurance based on consistently applied
        underwriting guidelines. PDIC’s processing system allows modifications to some
        of these guidelines. Underwriting supervisors audit the work of individual
        underwriters to assure adherence to the guidelines.
        Underwriters
  6
  monitor
        policyholder deviations from the underwriting guidelines to assist in decisions
        relating to cancellation and non-renewal.
 
 **Small-Law-Firm
        Focus.** Most
        of
        PDIC’s LPL policies are written on its *Select* policy
        form for solo practitioners and law firms of two to five lawyers. PDIC, thus,
        is
        not dependent on any single customer or small group of customers.
 
 **Marketing
        and Distribution.** Services
        markets LPL polices for PDIC as well as for other insurance companies. Services
        is the source of 100% of PDIC’s business. Services has agreements with various
        independent agencies to allow them to place business with PDIC as sub-producers
        of Services. In 2006 PDIC wrote insurance policies in 32 states.
 
 **Claims.** In
        responding to claims, PDIC emphasizes timely investigation, evaluation and
        fair
        settlement while controlling claims expense and maintaining adequate reserves.
        The claims operation is centralized in Grand Rapids, Michigan. Law firms
        are
        employed as necessary to assist in the defense of claims.
 
 **The
        Lawyers Direct Risk Purchasing Group** **.** The
        Lawyers Direct Risk Purchasing Group (the “Group”) is a Michigan non-profit
        corporation that was formed to facilitate the purchase of liability insurance
        by
        certain of PDIC’s insureds. Although the Company does not own the Group, the
        Company’s executive officers are the sole members of the Group’s board of
        directors. Because the Company exercises significant control over the Group,
        its
        activity is included in the Company’s consolidated financial
        statements.
 
 **A.
        M. Best and S&P Ratings.** A.
        M.
        Best Company, which rates insurance companies based on factors of concern
        to
        policyholders, currently assigns to PDIC an “A-” (Excellent) rating (its fourth
        highest rating category out of 15 categories). A. M. Best assigns “A-” ratings
        to companies that, in its opinion, have demonstrated excellent financial
        strength, operating performance and market profile when compared to the
        standards established by A. M. Best. Companies rated “A-” have a strong ability
        to meet their ongoing obligations to policyholders.
 
 Standard
        & Poor’s Claims-Paying Ability Rating for PDIC is currently BBB (its fourth
        highest rating category out of eight categories). S&P’s ratings are divided
        into “Secure Range” and “Vulnerable Range” groupings with a BBB rating grouped
        in the Secure Range. An insurer rated BBB is deemed by S&P to have adequate
        capacity to meet its financial commitments. However, the rating acknowledges
        it
        is more likely that adverse economic conditions or a change in circumstances
        could lead to difficulty in meeting its financial commitments.
 
 In
        evaluating the financial and operating performance of PDIC, A. M. Best and
        S&P review, among other factors, the profitability, leverage and liquidity
        of PDIC, its book of business, the adequacy and soundness of its reinsurance,
        the quality and estimated market value of its assets, the adequacy of its
        loss
        reserves, the adequacy of its surplus, its capital structure, the experience
        and
        competency of its management and its market presence. No assurance can be
        given
        that A. M. Best or S&P will not reduce PDIC’s current rating. The Company
        believes that its current reserves are adequate to cover future losses. A.
        M.
        Best and S&P ratings are not
  7
  intended
        to protect investors. Accordingly, PDIC’s ratings should not be relied upon as a
        basis for an investment decision relative to the common stock of the
        Company.
 
 **Competition.** The
        property and casualty insurance business is highly competitive. PDIC has
        both
        Michigan-based competitors and out-of-state competitors for its product
        offerings. Some of these competitors are larger and have much greater financial,
        technical and operating resources than do the Company and its subsidiaries.
        The
        Company believes that competition is based primarily on the following
        factors:
 
 Ÿ
              price
                  of insurance products,Ÿ
              quality
                  of insurance products,Ÿ
              quality
                  and speed of service and claims response,Ÿ
              financial
                  strength,Ÿ
              A.
                  M. Best rating and other ratings,Ÿ
              sales
                  and marketing capability, andŸ
              technical
                  expertise in a specialty area.
 
 The
        Company’s top commercial competitors are as follows:
 
 Ÿ
              Westport
                  Insurance CompanyŸ
              XL
                  CapitalŸ
              CNAŸ
              Zurich
                  InsuranceŸ
              Carolina
                  Casualty Insurance CompanyŸ
              Hartford
                  Insurance CompanyŸ
              Great
                  American Insurance CompanyŸ
              St.
                  Paul Companies
 
 The
        professional liability insurance market for attorneys is difficult to measure.
        In addition to being a very fluid market, there is no way to know how many
        attorneys practice law without malpractice insurance.
  8
  The
        ability of the Company to compete successfully in the future is expected
        to
        depend in part on factors that it cannot control, such as market conditions,
        ratings and regulatory conditions.
 
 **Supervision
        and Regulation** .
        Michigan insurance companies such as PDIC are subject to oversight and
        regulation by the OFIS. The authority of the OFIS includes, without
        limitation:
 
 Ÿ
              establishing
                  standards of solvency which must be met and maintained by insurers,Ÿ
              licensing
                  insurers and agents to do business,Ÿ
              establishing
                  guidelines for the nature of and limitations on investments by
                  insurers,Ÿ
              reviewing
                  premium rates for various lines of insurance,Ÿ
              reviewing
                  the provisions which insurers must make for current losses and
                  future
                  liabilities,Ÿ
              the
                  ability to limit the amount and timing of any dividend payment
                  from PDIC
                  to the Company,Ÿ
              approving
                  the terms of the intercompany management agreements,Ÿ
              reviewing
                  transactions involving a change in control, andŸ
              approving
                  policy forms.
 
 The
        OFIS
        also requires the filing of annual and other reports relating to the financial
        condition of insurance companies doing business in Michigan.
 
 In
        addition to state-imposed insurance laws and regulations, the OFIS applies
        the
        requirements adopted by the National Association of Insurance Commissioners
        (the
“NAIC”) that require insurance companies to calculate and report information
        under a risk-based formula that attempts to measure capital and surplus needs
        based on the risks in a company’s mix of products and investment portfolio. The
        NAIC has also developed a set of financial ratios, referred to as the “Insurance
        Regulatory Information System,” or “IRIS,” for use by state insurance regulators
        in monitoring the financial condition of insurance companies. The NAIC has
        established an acceptable range of values for each of the IRIS financial
        ratios.
        Generally, an insurance company will become the subject of increased scrutiny
        when four or more of its IRIS ratio results fall outside the range deemed
        acceptable by the NAIC. For 2006, two of PDIC’s IRIS ratios generated
        exceptional values. PDIC's investment yield ratio generated an exceptional
        value
        as a result of interest expense recognized in connection with the redemption
        of
        surplus certificates that reduced net investment income in the current year.
        The
        two-year reserve development to policyholders’ surplus generated a value of 27.
        The ratio was impacted by the combination of current year adverse development
        combined with the adverse development from 2005.
  9
  
 Most
        states, including Michigan, have enacted legislation that regulates insurance
        holding company systems. Each insurance company in a holding company system
        is
        required to register with the insurance supervisory agency of its state of
        domicile and furnish information concerning the operations of companies within
        the holding company system that may materially affect the operations, management
        or financial condition of the insurers within the system. These laws permit
        the
        OFIS and any other relevant insurance departments to examine the Company
        and its
        insurance subsidiaries at any time, to require disclosure of material
        transactions with the Company and to require prior approval of transactions,
        such as extraordinary dividends from PDIC to the Company. All transactions
        within the holding company system between the Company and its subsidiaries
        must
        be fair and equitable. Under Michigan law, the maximum dividend that may
        be paid
        by PDIC to the Company during any twelve-month period without 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. In addition to the restrictions
        imposed by Michigan law, PDIC is prohibited from making any distributions
        to the
        Company until such time as the Surplus Certificates are repaid in
        full.
  The
        Michigan Insurance Code requires that the Insurance Commissioner receive
        prior
        notice of and approve a change of control for either PDIC or the Company.
        The
        Michigan Insurance Code contains a complete definition of “control.” In
        simplified terms, a person, corporation or other entity would obtain “control”
of PDIC or the Company if the person or entity possessed, had a right to
        acquire
        possession of, or had the power to direct any other person acquiring possession
        of, directly or indirectly, 10% or more of the voting securities of either
        company. To obtain approval for a change of control, the proposed acquirer
        must
        file an application with the Insurance Commissioner containing detailed
        information such as the identity and background of the acquirer and its
        affiliates, the sources of and amount of funds to be used to effect the
        acquisition and financial information regarding the proposed
        acquirer.
  **Employees** .
        As of
        December 31, 2006, the Company and its subsidiaries had 41 full-time
        employees and 43 total employees.
 
 Glossary
        of Selected Insurance Terms
 
 The
        following insurance terms, when used in this Form 10-KSB, have the meanings
        ascribed to them below.
 
 ***Cede*** **.** To
        transfer to another insurer (the reinsurer) all or part of the insurance
        risk
        underwritten by an insurer.
 
 ***Direct
        Written Premiums*** **.** Total
        premiums written by an insurer other than premiums for reinsurance assumed
        by an
        insurer.
 
 ***Earned
        Premium*** **.** The
        prorated portion of an insurance premium that is no longer considered prepaid
        as
        a result of the elapsed time the insurance policy has been in force.
        For
  10
  example,
        after three months, $6,000 of a prepaid $24,000 annual premium is considered
        earned premium.
 
 ***GAAP.*** The
        abbreviation for generally accepted accounting principles.
 
 ***Loss
        Adjustment Expenses (LAE).*** The
        expense of settling claims, including legal and other fees.
 
 ***Loss
        Ratio*** **.** The
        ratio of net incurred losses and loss adjustment expenses to net premiums
        earned. Generally, the loss ratio calculation is the same under SAP and
        GAAP.
 
 ***NAIC*** **.** The
        National Association of Insurance Commissioners, an association of the chief
        insurance supervisory officials of each state, territory and insular possession
        of the United States.
 
 ***Net
        Earned Premiums*** **.** The
        portion of written premiums that is recognized for accounting purposes as
        revenue during a period. The sum of direct earned premium plus assumed earned
        premium less ceded earned premium.
 
 ***Reinsurance.*** A
        procedure whereby an insurer remits or cedes a portion of the premium to
        a
        reinsurer as payment to the reinsurer for assuming a portion of the risk
        or
        liability under the policy. Reinsurance can be effected by “treaties” under
        which all risks of a defined category, amount and type for a primary insurer
        are
        covered, or on a “facultative” basis under which risks are covered on an
        individual, contract-by-contract basis.
 
 ***Reserves*** **.** Liability
        established by an insurer to reflect the estimated cost of claim payments
        and
        related expenses that the insurer will ultimately be required to pay with
        respect to the insurance it has underwritten.
 
 ***SAP.*** The
        abbreviation for statutory accounting principles, which is the form of
        accounting required by PDIC in its financial reports to the OFIS.
 
 ***Statutory
        Accounting Principles*** **.** Those
        principles required by state law which must be followed by insurers in
        submitting their financial statements to state insurance
        departments.
 
 ***Statutory
        Surplus*** **.** The
        amount remaining after all liabilities of an insurance company are subtracted
        from all of its admitted assets, applying statutory accounting
        principles.
 
 ***Surplus*** **.** The
        amount by which a company’s assets exceed its liabilities.
 
 ***Unearned
        Premium*** **.** The
        pro rata portion of an insurance premium considered to be a prepayment. For
        example, after three months, $18,000 of a prepaid $24,000 annual premium
        is
        still considered unearned premium.
 
  11
  
 **Item
                  2.**
              **Description
                  of Property**.
 
 The
        Company maintains its principal executive offices at 5211 Cascade Road, Grand
        Rapids, Michigan, where approximately 9,450 square feet of space is leased
        from
        an unaffiliated landlord. The space is leased under a lease through June
        30,
        2016. The lease agreement provides the Company with the ability to acquire
        additional space in the future if needed and a right of first refusal to
        purchase the building. This location is adequate for the Company’s present
        needs.
 
 The
        Company’s primary assets are the shares of stock in its subsidiaries. The
        Company and its subsidiaries do not ordinarily invest in real estate, interests
        in real estate, real estate mortgages or interests in companies primarily
        engaged in real estate activities.
 
 
 **Item
                  3.**
              **Legal
                  Proceedings.**
 
 From
        time
        to time, the Company is party, as plaintiff or defendant, to legal proceedings
        that are incidental to its business. No pending litigation is considered
        material at this time.
 
 
 **Item
                  4.**
              **Submission
                  of Matters to a Vote of Security
                  Holders.**
 
 Not
        applicable.
 
 
  12
  **PART
        II**
 
 **Item
                  5.**
              **Market
                  For Common Equity, Related Stockholder Matters and Small Business
                  Issuer
                  Purchases of Equity
                  Securities.**
 
 ***Market
        Information*** .
        There
        is no active public trading market for the Company’s securities. Bid and asked
        quotations 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, 2006, there were approximately 667 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 permitted to make distributions until such time as all Surplus
        Certificates are redeemed.
 
 ***Equity
        Compensation Plans*** .
        The
        following table provides information about the Company’s equity compensation
        plans regarding the number of securities to be issued under these plans,
        the
        weighted-average exercise prices of options outstanding under these plans
        and
        the number of securities available for future issuance as of December 31,
        2006.
 
  13
  Equity
        Compensation Plan Information
 
 Plan
                  Category
              
              Number
                  of securities to be issued upon exercise of outstanding options,
                  warrants
                  and rights
              
              Weighted-average
                  exercise price of outstanding options, warrants and rights
              
              Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column
                  (a))(a)
              
              (b)
              
              (c)Equity
                  compensation plans approved by security holders (1)
              
              0
              
              n/a
              
              70,000Equity
                  compensation plans not approved by security holders
              
              0
              
              n/a
              
              0Total
              
              0
              
              n/a
              
              70,000
 
 (1)
              Consists
                  of the Professionals Direct, Inc. Outside Directors' Deferred Compensation
                  Plan and the Professionals Direct, Inc. Employee and Director Stock
                  Purchase Plan. The numbers of shares reflected in column (c) in
                  the table
                  above with respect to the Outside Directors’ Deferred Compensation Plan
                  (35,000 shares) and Employee and Director Stock Purchase Plan (35,000
                  shares) represent shares that may be issued other than upon the
                  exercise
                  of an option, warrant or right. Each plan listed above contains
                  customary
                  anti-dilution provisions that are applicable in the event of a
                  stock split
                  or certain other changes in the Company’s
                  capitalization.
 
 
 **Item
                  6.**
              **Management’s
                  Discussion and Analysis or Plan of
                  Operation.**
 The
        following discussion and analysis for the years ended December 31, 2006 and
        2005
        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**
 
 Revenues
        increased during 2006 for all lines. Total expenses for 2006 decreased slightly,
        the result of lower losses and loss adjustment expenses (“LAE”) offset by higher
        operating and
  14
  administrative
        expenses and increased interest costs. For the year, net income increased
        significantly when compared to 2005. The following table and discussion compares
        the financial results for 2006 and 2005:
 
 **Years
                  Ended****2006**
              
              **2005**
              
              **Change**
              
              **Percent****Change****(in
                  thousands of dollars, except for per share data)****Revenues:**Net
                  premiums earned
              
              $
              16,033
              
              $
              15,375
              
              $
              658
              
              
              4.3
              %Fees
                  and commissions
              
              
              952
              
              
              792
              
              
              160
              
              
              20.2
              %Net
                  investment income
              
              
              1,498
              
              
              1,171
              
              
              327
              
              
              27.9
              %Finance
                  and other income
              
              
              423
              
              
              153
              
              
              270
              
              
              176.5
              %Total
                  revenues
              
              
              18,906
              
              
              17,491
              
              
              1,415
              
              
              8.1
              %**Expenses:**Losses
                  and LAE
              
              
              11,860
              
              
              12,521
              
              
              (661
              )
              
              (5.3
              %)Operating
                  and administrative
              
              
              4,218
              
              
              3,785
              
              
              433
              
              
              11.4
              %Interest
              
              
              554
              
              
              506
              
              
              48
              
              
              9.5
              %Total
                  expenses
              
              
              16,632
              
              
              16,812
              
              
              (180
              )
              
              (1.1
              %)Income
                  before federal income tax
              
              
              2,274
              
              
              679
              
              
              1,595
              
              
              234.9
              %Federal
                  income tax
              
              
              646
              
              
              177
              
              
              469
              
              
              265.0
              %Net
                  income
              
              $
              1,628
              
              $
              502
              
              $
              1,126
              
              
              224.3
              %**Selected
                  Balance Sheet Data:**
                (at
                  year end)Total
                  investments and cash
              
              $
              42,714
              
              $
              43,407
              
              
              ($693
              )
              
              (1.6
              %)Total
                  assets
              
              
              69,211
              
              
              71,348
              
              
              (2,137
              )
              
              (3.0
              %)Total
                  liabilities
              
              
              56,886
              
              
              60,746
              
              
              (3,860
              )
              
              (6.4
              %)Total
                  shareholders’ equity
              
              
              12,325
              
              
              10,602
              
              
              1,723
              
              
              16.3
              %**Per
                  Share Data:**Net
                  income
              
              $
              4.88
              
              $
              1.51
              
              $
              3.37
              
              
              223.2
              %Shareholders’
                  equity
              
              $
              36.98
              
              $
              31.79
              
              $
              5.19
              
              
              16.3
              %
 
 **Results
        of Operations (000 omitted)** :
 
 The
        following is a summary and analysis of the material revenue and expense
        components of our operational results for 2006 with comparisons to 2005.
 
 ***Net
        Premiums Earned*** .
        Net
        premiums earned is equal to direct premiums earned (premiums earned for policies
        written) less ceded premiums earned (amounts ceded to reinsurers) and is
        our
        primary source of revenue. The increase in net premiums earned is the result
        of
        higher beginning net unearned premium partially offset by lower net premiums
        written. Higher beginning gross unearned premium in 2006 resulted from increased
        direct premiums written in 2005. The effects of these changes are seen in
        the
        table below:
   15
  
  **Years
                  Ended****2006**
              
              **2005**
              
              **Change**
              
              **Percent****Change****(in
                  thousands of dollars)**Beginning
                  gross unearned premium
              
              $
              11,776
              
              $
              10,738
              
              $
              1,038
              
              
              9.7
              %Beginning
                  ceded unearned premium
              
              
              (4,175
              )
              
              (4,163
              )
              
              (12
              )
              
              (0.3
              %)Beginning
                  net unearned premium
              
              
              7,601
              
              
              6,575
              
              
              1,026
              
              
              15.6
              %Direct
                  premiums written
              
              
              25,181
              
              
              25,902
              
              
              (721
              )
              
              (2.8
              %)Ceded
                  premiums written
              
              
              (9,082
              )
              
              (9,501
              )
              
              419
              
              
              4.4
              %Net
                  premiums written
              
              
              16,099
              
              
              16,401
              
              
              (302
              )
              
              (1.8
              %)Ending
                  gross unearned premium
              
              
              11,785
              
              
              11,776
              
              
              9
              
              
              0.1
              %Ending
                  ceded unearned premium
              
              
              (4,118
              )
              
              (4,175
              )
              
              57
              
              
              1.4
              %Ending
                  net unearned premium
              
              
              7,667
              
              
              7,601
              
              
              66
              
              
              0.9
              %Net
                  premiums earned
              
              $
              16,033
              
              $
              15,375
              
              $
              658
              
              
              4.3
              %
 
 Direct
        premiums written were 2.8% lower in 2006 than in 2005. This decrease primarily
        resulted from a 2.4% reduction in the number of attorneys insured because
        of
        competitive pressures on renewal rates for larger law firms, primarily in
        Michigan and Florida. Net premiums written in 2006 were 1.8% lower than in
        2005.
        This decrease was mitigated by the decrease in ceded premiums written resulting
        from policyholders reducing their policy limits or finding coverage with
        other
        carriers.
 
 For
        policies with 2006 effective dates, PDIC’s retention is unchanged from 2005.
        Decisions on the appropriate level of reinsurance are impacted by a variety
        of
        market factors from pricing, to availability and credit quality of reinsurers,
        and our level of surplus. As such, reinsurance retentions may vary from year
        to
        year. After analyzing our surplus, we decided to maintain our retention level,
        which market conditions allowed us to do. In 2007, our reinsurance retention
        will increase slightly as market conditions were less favorable than in 2004
        -
        2006. Under the 2007 agreements, the maximum loss that will be retained by
        PDIC
        will increase from $250 to $275.
 
 ***Fees
        and Commissions*** .
        Fees
        and commissions originate from two primary sources. First are membership
        fees,
        which are earned by Lawyers Direct Risk Purchasing Group, Inc. (“Lawyers
        Direct”), an affiliate organized, formed and managed by Services as part of the
        Lawyers Direct® program for one to five person law firms. Second are
        commissions, which are earned by Services from placing insurance with unrelated
        third parties and performing management services. Fees and commission income
        earned was $952 in 2006, an increase of $160 or 20.2%, compared to 2005.
        While
        fees from Lawyers Direct were $16 less than in 2005, commission income increased
        by $176. This resulted from placing more business with other carriers in
        2006
        and the reversal of contingent ceding commissions in 2005 caused by adverse
        loss
        development.
   16
  ***Net
        Investment Income*** *.* Net
        investment income is comprised of interest on fixed maturity investments,
        short-term investments and realized investment gains and losses. The net
        investment income increase of $327 or 27.9% in 2006 as compared to 2005 is
        primarily attributable to an improvement in average yield resulting from
        an
        increase in interest rates. The tax equivalent book yield on the portfolio
        increased 77 basis points from a year ago and is now over 4.6%. This increase
        fully accounts for the change in net investment income.
 
 ***Finance
        and Other Income*** *.* Income
        generated from premium financing incidental to the sale of PDIC’s insurance
        policies in Michigan and selected other states was $39 higher in 2006 than
        in
        2005, principally because the rate charged was increased in the fourth quarter
        of 2005. Other income in 2006 (none in 2005) of $231 was an unusual gain
        from
        principal forgiven by holders of surplus certificates in return for early
        redemption.
 
 ***Losses
        and Loss Adjustment Expenses (“LAE”)*** *.* Overall
        profitability is materially influenced by the loss estimate for current year
        claims, plus the favorable or adverse development related to estimates for
        prior
        years’ claims. For 2006, PDIC recorded losses and LAE of $11,860, of which
        $10,675 was for current year losses and $1,185 was for prior years’ losses. For
        2005, PDIC recorded losses and LAE of $12,521 of which $11,212 was for 2005
        losses and $1,309 was for losses prior to 2005. Adjustments to prior year
        claims
        estimates are continually made to reflect current information and settlement
        experience. Incurred losses are determined based on loss reserve estimates
        which
        are set after considering the results of the reserve analysis performed by
        our
        independent actuary.
 
 Loss
        ratios are the sum of incurred losses and LAE expressed as a percentage of
        net
        premiums earned. The loss ratio for 2006 was 74.0% compared to 81.4% for
        2005.
        Loss ratios are the combination of two factors. First is the current year
        loss
        provision. As a result of lower claim frequency and higher net premium per
        policy in 2006, the provision for current year losses is 66.6% compared to
        72.9%
        for 2005. Second is the change in estimate of prior years’ losses. This change
        added 7.4% and 8.5% to the 2006 and 2005 loss ratios, respectively.
 
 Nearly
        80% of the 2006 adverse development is from the 2003 report year where a
        small
        number of claims settled for more than anticipated. In addition to the direct
        impact on current year losses, these higher settlements increased the actuarial
        estimate of remaining liabilities. As a result, the 2003 pure loss ratio
        (excludes unallocated loss adjustment expenses) increased to 69.2% compared
        to
        the weighted average pure loss ratio of 65.5% for the past five report years.
        Year to year volatility in loss ratios is not unusual given the complex nature
        of lawyers professional liability claims and multi-year settlement periods
        and
        because our loss reserves are material, small percentage changes in loss
        reserves can materially impact loss ratios as well as results of operations.
        Because the contributing events could not be anticipated, recognition of
        this
        adverse development in the current year is appropriate.
 
 ***Operating
        and Administrative Expenses*** *.* Operating
        and administrative expenses for 2006 compared to 2005 increased $433 or 11.4%.
        This increase is the result of reduced ceding commissions
        (consistent with the decrease in ceded premiums written) earned in 2006 compared
        to 2005 of $166 and increased compensation costs and insurance assessments
        of
        $267.
  17
  ***Interest
        Expense*** *.* Interest
        expense in 2006 increased $48 from 2005 because of increases in interest
        rates
        charged on our long-term variable rate debt and a full year of interest expense
        on debt entered into on June 30, 2005.
 
 ***Income
        Taxes.*** ** The
        effective federal income tax rate was 28.4% for 2006 compared to 26.1% for
        2005.
        Both years’ rates depart from the expected rate as a result of the impact of
        tax-exempt interest income.
 
 **Financial
        Condition, Liquidity, and Capital Resources (000 omitted)** :
 
 Professionals
        Direct, Inc. is a legal entity separate and distinct from its subsidiaries.
        Because the parent holding company has no other business operations, management
        fees and dividends from its subsidiaries represent the principal source of
        funds
        for its obligations, including debt service. Management fees paid by PDIC
        must
        be pre-approved by OFIS, the regulatory body in Michigan responsible for
        the
        oversight of the insurance subsidiary. Under terms of the plan that governed
        the
        Company’s conversion, PDIC is prohibited from making any dividend payments to
        the parent holding company until such time as the surplus certificates are
        redeemed. Management fees paid by the remaining subsidiaries are determined
        from
        time-to-time by the Board of Directors. Payment of management fees and dividends
        by our other subsidiaries are limited only by solvency
        requirements.
 
 The
        primary sources of 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, LAE, operating expenses, reinsurance premiums, taxes, debt repayment
        and
        acquisition of investments.
 
 Trends
        or
        uncertainties that may impact short-term or long-term liquidity include the
        impact that hard or soft market conditions may have on premium rates we can
        charge, changes in the cost and availability of reinsurance and changes in
        interest rates effecting both investment income and interest expense. As
        the
        costs of obtaining reinsurance change in the future, we intend to adjust
        the
        rates we charge our customers. However, such rate changes may be limited
        by
        competition or regulation and we may need to increase our retention levels
        which
        may impact our underwriting results. We believe that we will be able to manage
        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, increases
        and the overall yield on new investments decreases. When interest rates
        increase, the opposite effects are realized. Because interest rates have
        recovered from their historic lows, we believe it unlikely that material
        gains
        will be realized on portfolio assets or be a source of liquidity during
        2007.
  At
        December 31, 2006, we had cash and cash
        equivalents of $5,542. This represents that portion of total assets necessary
        to
        be kept liquid to meet demand for operating, loss and reinsurance
  18
  payments.
        It is expected that this level of cash and short term investments will be
        maintained to meet cash flow needs in 2007.
 
 Our
        net
        cash flow from operations for 2006 was $791 compared to $6,062 for 2005.
        This
        decrease is largely the result of increased loss and LAE payments net of
        the
        amounts recovered from reinsurers which accounts for $3,921 or approximately
        75%
        of the decrease. This cash flow plus existing cash was partially invested
        in
        fixed maturities which resulted in negative cash flow from investing activities
        of $3,687 for the year. Cash used for financing activities was $871, which
        was
        the result of net repayments under the lines of credit and redemptions of
        surplus certificates. Last year, proceeds from the issuance of trust preferred
        securities less repayments under lines of credit produced positive cash flow
        from financing activities.
 
 To
        provide additional liquidity, we have two lines of credit available from
        a bank.
        The first line is a $1,800 revolving line used by Finance to finance insurance
        premiums and bears interest at .5% over the bank’s prime rate. The second line
        for $1,000 can be used for general corporate purposes and bears interest
        at 1%
        over the bank’s prime rate. Neither of the lines had outstanding balances as of
        December 31, 2006. These lines of credit require, among other things, that
        we
        maintain a minimum tangible net worth of $7,500, that PDIC maintain a minimum
        surplus of not less than 240% of the Authorized Control Level Risk Based
        Capital
        (as defined by the National Association of Insurance Commissioners), and
        that we
        deliver periodic financial reports to the bank. The Company was in compliance
        with all covenants as of December 31, 2006. Debt under these lines is secured
        by
        substantially all assets of the Company, Services and Finance, including
        shares
        of PDIC subject to the rights of policyholders under insurance laws and the
        authority of insurance regulators. A third line of credit matured October
        1,
        2006 and was not renewed.
 
 Based
        on
        historical trends, market conditions and our business plans, we believe that
        our
        existing resources and sources of funds will be sufficient to meet our
        short-term and long-term liquidity needs over the next year and beyond. Because
        economic, market and regulatory conditions may change, however, there can
        be no
        assurance that our funds will be sufficient to meet these liquidity needs.
        In
        addition, competition, pricing, the frequency and severity of losses and
        interest rates could significantly affect our short-term and long-term liquidity
        needs.
 
 **Critical
        Accounting Estimates and Judgments (000 omitted):**
 
 The
        Company’s significant accounting policies are presented on pages 23 through 25
        of this Annual Report to Shareholders for the year ended December 31, 2006.
        Certain of these policies are important to the portrayal of the Company’s
        financial condition, because they require management to make difficult, complex
        or subjective judgments, some of which may relate to matters that are inherently
        uncertain.
 
 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,
  19
  these
        estimates may change and may be materially different from originally reported
        in
        the financial statements. Our reserves for unpaid loss and LAE, the related
        amounts due from reinsurers, investment valuation and deferred taxes represent
        the most critical estimates present within the financial statements.
 
 **Loss
        and Loss Adjustment Expense (LAE) Reserves**
 
 **Overview**
 PDIC
        establishes reserves for payment of losses and LAE related to our insurance
        contracts. Reserves are our estimated ultimate cost for reported claims and
        for
        claims incurred but not reported arising from policies that have been issued.
        PDIC provides for the estimated ultimate cost of those claims without regard
        to
        how long it takes to settle them or the time value of money.
 
 PDIC
        issues only contracts written on a “claims-made” basis. Claims-made insurance
        contracts are commonly used for lawyers professional liability policies and
        provide coverage for claims related to covered events described in the insurance
        contract that are made against the insured during the term of the contract
        and
        reported to the insurer during a period provided for in the
        contract.
  The
        determination of reserves involves actuarial and statistical projections
        of
        expected costs 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.
 
 Loss
        reserves consist of two components: (1) case reserves and (2) case supplement
        (commonly referred to as IBNR) reserves. Both include a provision for LAE.
        There
        are two types of LAE: (1) “allocated” expenses (“ALAE”) are those that arise
        from defending and settling specific claims, such as the cost of outside
        defense
        counsel, and (2) “unallocated” expenses (“ULAE”) are those that do not arise
        from and cannot be assigned to specific claims, such as the general expense
        of
        maintaining an internal claims department.
 
 **Case
        Reserves**
 Case
        reserves are liabilities for unpaid losses and ALAE on reported cases. 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. For claims involving litigation, PDIC utilizes outside
        attorneys with expertise in the area of litigation as defense counsel. In
        addition to relying on his or her own experience and judgment, claims personnel
        will consider defense counsel’s estimate of ultimate liability on a claim in
        establishing the case reserve. During the loss adjustment period, these
        estimates are revised as deemed necessary based upon developments and periodic
        reviews of cases. Individual case reserves on all claims are reviewed regularly
        by claims management.
  20
  
 **Management
        methodology**
 An
        in-depth review of loss reserves is undertaken on a semi-annual basis. In
        conjunction with these reviews, PDIC retains an independent actuarial firm
        of
        national standing to perform actuarial analyses of PDIC’s loss reserves. These
        analyses include a comprehensive review performed in the third quarter based
        on
        data as of June 30 and an update of the comprehensive review performed in
        January based on data as of December 31. Management continually reviews and
        updates data underlying the estimation of its loss reserves and makes
        adjustments when emerging data supports change. All adjustments are reflected
        in
        current operations.
 
 Loss
        and
        LAE reserves are adjusted at June 30 and December 31 to equal the point estimate
        of the independent actuary. At March 31, loss and LAE reserves for the current
        policy year are estimated utilizing the prior year’s average loss ratio.
        Adjustments to prior years’ reserves are made only if emerging data indicates
        the prior December 31 estimate is no longer appropriate. At September 30,
        loss
        and LAE reserves for the current policy year are estimated utilizing the
        current
        year loss ratio from the June 30 actuarial study. Adjustments to prior years’
reserves are made only if emerging data indicates the prior June 30 estimate
        is
        no longer appropriate.
 
 **Case
        Supplement (IBNR) Reserves**
 Case
        supplement is the estimated liability for: (1) changes in the values of claims
        that have been reported but are not yet settled, as well as (2) claims that
        have
        occurred but have not yet been reported. Each claim is settled individually
        based upon its merits, and it is not unusual for a claim to take years after
        being reported to settle, especially if legal action is involved. As a result,
        reserves for unpaid losses and ALAE include significant case supplement
        reserves.
 
 Claims
        may not be brought until several years after the acts or omissions that gave
        rise to the claim occurred. Ultimate loss costs, even for similar events,
        vary
        significantly depending upon many factors. Professional liability claims
        are
        typically resolved over an extended period of time, often three years or
        more.
        The combination of changing conditions and the extended time required for
        claim
        resolution results in a loss cost estimation process that requires actuarial
        expertise and the application of significant judgment. Such estimates require
        periodic revision. PDIC’s current reserve policy recognizes this uncertainty by
        maintaining case supplement (IBNR) reserves to provide for the possibility
        that
        actual results may be less favorable compared to the estimated costs as
        developed during the normal case reserve estimation process. Case supplement
        reserves as a percentage of total reserves at December 31, 2006 were 57.4%.
 
 The
        case
        supplement reserve is determined by estimating the ultimate liability for
        the
        claims which have been made and reported and then subtracting the case reserves.
        The determination of ultimate liability relies primarily upon the analysis
        from
        the independent actuary. PDIC’s policy is to record the point estimates for
        liability as determined by the independent actuary. At December 31, 2006,
        the
        recorded reserves were within $2 of the point estimate of our independent
        actuary. As required by insurance regulatory authorities, PDIC annually receives
        a statement of actuarial opinion from its appointed actuary concerning the
        reasonableness of its reserves.
  21
  The
        actuarial analysis is based upon multiple projection methodologies that involve
        detailed statistical analysis of past claim reporting, settlement activity
        and
        claim frequency and severity. In addition, the actuary considers 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 the actuary provides PDIC with an estimate of 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.
        Methodologies vary depending on the maturity of the claims being analyzed.
        All
        of the methodologies employ significant judgments and assumptions.
 
 **Actuarial
        Methodologies**
 In
        estimating the unpaid claim liabilities, the independent actuarial firm employed
        the following projection methodologies:
 
 ●  Historical
        development method on an incurred, paid and case reserve basis
 ●  Bornhuetter-Ferguson
        (“B-F”) method on both a paid and incurred basis
 ●  Loss
        ratio method
 ●  Frequency/severity
        method
 
 The
        following summarizes these projection methodologies:
 
 **Historical
        Development Method**
 As
        a
        group of claims matures, their collective value changes. This change in value
        over time is referred to as loss development. The loss development method
        is a
        traditional actuarial approach which relies on the historical changes in
        losses
        from one evaluation point to another to project the current valuation of
        losses
        to ultimate settlement values. Development patterns, which have been exhibited
        by more mature (older) years, are used to estimate the expected development
        of
        the less mature (more recent) years. The strength of this method is that
        it is
        very responsive to emerging loss experience for each accident year. The weakness
        is that this method can become highly leveraged and volatile for less mature
        years.
 
 **Bornhuetter-Ferguson
        Method**
 The
        incurred Bornhuetter-Ferguson ("B-F") method is commonly used to provide
        a more
        stable estimate of ultimate losses in situations where loss development is
        volatile, substantial and/or immature. The method calculates IBNR (or unpaid
        loss when conducting a paid B-F projection) directly as the product of: Expected
        Ultimate Losses multiplied by IBNR (or Unpaid) Percentage. The IBNR (or unpaid)
        percentage is derived from the incurred (or paid) loss development patterns.
        Various approaches can be used to determine the expected ultimate losses
        (e.g.,
        prior year estimates, pricing assumptions, etc.). To obtain an estimate of
        expected ultimate losses, the actuary utilized an expected loss ratio (ultimate
        losses divided by earned premium) based on review of prior years' loss ratio
        experience. This estimate is then applied to the more recent years' earned
        premium. The strength of the B-F method is that it is less leveraged than
        the
        historical development method and thus does not result in an overreaction
        to an
        unusual claim occurrence (or an
  22
  unusual
        lack of claims). The weakness of the method is that it is reliant on an initial
        expectation of ultimate losses.
 
 **Loss
        Ratio Method**
 This
        method relies on historical projected ultimate loss ratios for the more mature
        years to estimate the more recent, less mature years' ultimate losses. Applying
        a selected loss ratio (by reviewing more mature years) to the more recent
        years'
        earned premium results in an indication of the more recent years' ultimate
        losses. The strength of this method is that it can be used in connection
        with a
        company's pricing targets and can be used when the historical data has limited
        credibility. The weakness of this method is that it is slow to react to the
        emerging loss experience for a particular year.
 
 **Frequency/Severity
        Method**
 This
        method first projects the expected number of claims for each year and then
        multiplies this estimate by the expected average cost of claims for the
        applicable year. The number of claims can be projected using the historical
        development technique or other methodology. The average cost of claims for
        the
        more recent years is estimated by observing the estimated average cost of
        claims
        for the older more mature years and trending those values to appropriate
        cost
        levels for the more recent years. The strength of this method is that it
        is not
        reliant on loss development factors for less mature years which can become
        highly leveraged and volatile. The weakness is that this method is slow to
        react
        to an abrupt change in claim severities.
 
 **Key
        Variables**
 Each
        of
        the projection methodologies employed rely to varying degrees on the basic
        assumption that PDIC’s historical claim experience is indicative of future claim
        development. The amount of weight given to any individual projection method
        is
        based on an assessment of the volatility of the historical data and development
        patterns, an understanding of the changes in the overall lawyers professional
        liability industry over time and the resultant potential impact of these
        changes
        on the Company's prospective claims development, and an understanding of
        the
        changes to PDIC’s processes and procedures within its underwriting, claims
        handling and data systems functions, among other things. The decision as
        to how
        much weight to give to any particular projection methodology is ultimately
        a
        matter of experience and professional judgment.
 
 Small
        changes to any of the assumptions regarding the key variables utilized to
        develop the loss reserve estimate can significantly alter the outcome of
        the
        actuarial analysis. Key variables utilized to develop the loss reserve estimate
        include:
 
 ●
              Loss
                  reporting patterns
 ●
              Payment
                  patterns
 ●
              Loss
                  severity trend rates
 ●
              Application
                  of Michigan loss patterns and loss to premium relationships to
                  Non-Michigan business
 ●
              Case
                  reserve setting patterns
  23
  
 The
        following summarizes these key variables:
 
 **Loss
        reporting patterns** - These
        are the patterns under which loss for a given report year has historically
        been
        reported and is projected to be reported. Patterns are generally given by
        month
        of development and expressed by cumulative “loss development factors.” For
        example, if the cumulative loss development factor at twelve months of
        development is 1.30, this means that the ratio of ultimate loss for a given
        report year relative to the reported (i.e., paid plus case) loss of that
        report
        year at twelve months of development is estimated to be 1.30. “Months of
        development” are measured from the beginning of a report year. For example, as
        of December 31, 2006, report year 2006 would be at twelve months of
        development.
 
 **Payment
        patterns** - These
        are the patterns under which loss for a given report year is estimated to
        be
        paid. As with the loss reporting patterns, they are also measured by cumulative
        loss development factors. For example, if the selected paid loss development
        factor at twelve months of development is 8.00, this means that the ratio
        of
        ultimate loss for a given report year relative to the paid loss of that report
        year at twelve months of development is estimated to be 8.00. The payment
        pattern and the loss reporting pattern are relied upon in the Historical
        Development Method discussed above. As mentioned above, this method is relied
        upon for more mature report years (i.e., those at greater months of development)
        due to its potential volatility when applied to less mature report
        years.
 
 **Loss
        severity trend rates** - These
        are used in the Frequency/Severity Method discussed above. Severities from
        more
        mature report years are adjusted to the cost level anticipated for more recent
        report years by the application of a selected per annum trend rate. The per
        annum trend rate is the à priori expected annual change in claim
        severity.
 
 **Application
        of Michigan loss patterns and loss to premium relationships to Non-Michigan
        business** - This
        assumption has been applied because PDIC does not have sufficient historical
        experience outside of Michigan from which to develop patterns unique to the
        non-Michigan business.
 
 **Case
        reserve setting patterns** - This
        refers to the overall adequacy of case reserves relative to historical case
        reserve adequacy. “Case reserve adequacy” refers to the relationship between the
        values at which case reserves are set and the final settlement values of
        the
        associated claims. If this relationship changes over time, it can be said
        that
        the case reserve adequacy levels have changed.
 
 There
        have been no significant changes in assumptions from those used in prior
        years
        to estimate the current year loss and LAE reserves.
 
 **Impact
        of variability**
 Because
        of the number of factors considered, it is neither practical nor meaningful
        to
        isolate a single variable and calculate the impact of changing that item.
        It is
        possible in assessing the
  24
  overall
        results of an actuarial review to observe the magnitude of deviation the
        various
        methodologies create. The various methodologies rely to differing degrees
        on
        individual key variables, and as a result some insight into the sensitivity
        of
        those key variables can be observed. It is important to note that because
        not
        all methodologies are appropriate for all years, the difference in estimates
        amongst the various methodologies does not necessarily represent a reasonable
        range around the booked reserves. Only the most recent five years are assessed
        using the full range of methodologies. These five years represent approximately
        90% of total net retained reserves. The range of the results of the various
        methodologies was from 28% below to 54% above the best estimate of $15.2
        million
        for the five years.
 
 **Uncertainty
        of estimates**
 In
        the
        years after a claim is reported, there is a significant amount of uncertainty
        over what the ultimate loss will be. Claims may not be brought until several
        years after the acts or omissions that gave rise to the claim occurred. Ultimate
        loss costs, even for similar events, vary significantly depending upon many
        factors. Therefore, the estimate of future loss costs for claims recently
        reported tends to be less accurate. As claims get older, the estimates of
        future
        loss costs may be less inaccurate, but are still subject to material
        fluctuations until the claims are paid or otherwise closed. Eventually, all
        claims in a particular year are paid or closed and no additional development,
        favorable or adverse, will be experienced because the amount of the loss
        is
        certain.
 
 **Prior
        year development**
 Another
        factor that impacts incurred losses is development related to claims reported
        in
        prior years. Favorable or adverse development occurs when subsequent estimates
        of the loss reserve liability change. A subsequent decrease in estimate results
        in favorable development; a subsequent increase in estimate results in adverse
        development. Favorable or adverse development is reflected as a decrease
        or
        increase in the current year’s losses and LAE. As shown in the reserve
        development table that follows, the original estimates of our net loss reserves
        have resulted in favorable development (redundancy) in five of the last ten
        years and adverse development (deficiency) in five of the last ten years.
 
 **Loss
        Reserve Development Table**
 The
        following table, known as the Loss Reserve Development Table, presents
        information over the preceding ten years regarding the payment of our losses
        as
        well as changes to (the development of) our estimates during that time period.
        The table includes direct losses and is net of reinsurance recoverables.
        The
        gross liability for losses before reinsurance, as shown on the balance sheet,
        and the reconciliation of that gross liability to amounts net of reinsurance
        are
        reflected at the top and bottom of the table. We do not discount our reserves
        for the time value of money. Information presented in the table is cumulative
        and, accordingly, each amount includes the effects of all changes in amounts
        for
        prior years. The table presents the development of our balance sheet reserves;
        it does not present accident year or policy year development data. Conditions
        and trends that have affected the development of liabilities in the past
        may not
        necessarily occur in the future. 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 process of
  25
  estimating
        losses. Accordingly, it may not be appropriate to extrapolate future
        redundancies or deficiencies based on this table.
 
 The
        following may be helpful in understanding the Loss Reserve Development
        Table:
 
 ●
              The
                  line titled “Reserve for unpaid losses net of reinsurance recoverables”
                  reflects PDIC’s reserve for loss and LAE less receivables from reinsurers,
                  each as reflected in the Company’s consolidated financial statements at
                  the end of such year (Balance Sheet
                  Reserves).
   ●
              The
                  section titled “Cumulative net paid, as of:” reflects the cumulative
                  amounts paid as of the end of each succeeding year with respect
                  to the
                  original Balance Sheet Reserves.
 
 ●
              The
                  section titled “Re-estimated net liability, as of:” reflects the
                  re-estimated amount of liability, the combination of cumulative
                  amounts
                  paid and an estimate of additional liability based upon claims
                  experience,
                  as of the end of each succeeding year (Net re-estimated
                  liability).
 
 ●
              The
                  line titled “Net cumulative redundancy (deficiency)” reflects the
                  difference between the original recorded Balance Sheet Reserves
                  for each
                  year and the Net re-estimated liability as of the end of the current
                  year.
  26
  
 **December
                  31,****1996**
              
              **1997**
              
              **1998**
              
              **1999**
              
              **2000**
              
              **2001**
              
              **2002**
              
              **2003**
              
              **2004**
              
              **2005**
              
              **2006**Original
                  gross liability - end of year
              
              $
              16,309
              
              $
              15,921
              
              $
              13,721
              
              $
              14,375
              
              $
              13,051
              
              $
              9,589
              
              $
              10,138
              
              $
              13,461
              
              $
              21,048
              
              $
              35,468
              
              $
              32,877Less
                  reinsurance recoverables
              
              
              (7,643
              )
              
              (5,394
              )
              
              (4,503
              )
              
              (7,142
              )
              
              (5,909
              )
              
              (2,539
              )
              
              (2,469
              )
              
              (2,163
              )
              
              (5,699
              )
              
              (17,812
              )
              
              (16,029
              )Reserve
                  for unpaid losses net of reinsurance recoverables
              
              
              8,666
              
              
              10,527
              
              
              9,218
              
              
              7,233
              
              
              7,142
              
              
              7,050
              
              
              7,669
              
              
              11,298
              
              
              15,349
              
              
              17,656
              
              
              16,848Cumulative
                  net paid, as of:One
                  year later
              
              
              5,050
              
              
              4,395
              
              
              3,199
              
              
              2,552
              
              
              1,776
              
              
              3,645
              
              
              2,878
              
              
              6,232
              
              
              8,129
              
              
              10,238Two
                  years later
              
              
              8,800
              
              
              6,865
              
              
              4,967
              
              
              3,624
              
              
              3,503
              
              
              4,400
              
              
              5,110
              
              
              9,521
              
              
              13,474Three
                  years later
              
              
              10,114
              
              
              7,846
              
              
              5,474
              
              
              3,948
              
              
              3,730
              
              
              5,316
              
              
              6,297
              
              
              12,757Four
                  years later
              
              
              10,806
              
              
              8,205
              
              
              5,589
              
              
              3,991
              
              
              4,557
              
              
              5,591
              
              
              6,824Five
                  years later
              
              
              11,057
              
              
              8,227
              
              
              5,618
              
              
              4,721
              
              
              4,619
              
              
              5,727Six
                  years later
              
              
              11,077
              
              
              8,263
              
              
              6,054
              
              
              4,762
              
              
              4,632Seven
                  years later
              
              
              11,115
              
              
              8,689
              
              
              6,063
              
              
              4,773Eight
                  years later
              
              
              11,541
              
              
              8,690
              
              
              6,073Nine
                  years later
              
              
              11,542
              
              
              8,691Ten
                  years later
              
              
              11,542Re-estimated
                  net liability, as of:One
                  year later
              
              
              11,337
              
              
              10,392
              
              
              8,359
              
              
              6,653
              
              
              5,345
              
              
              7,061
              
              
              7,330
              
              
              12,287
              
              
              16,658
              
              
              18,841Two
                  years later
              
              
              12,035
              
              
              9,815
              
              
              7,320
              
              
              5,235
              
              
              5,311
              
              
              6,885
              
              
              6,705
              
              
              13,466
              
              
              18,564Three
                  years later
              
              
              11,811
              
              
              9,439
              
              
              6,217
              
              
              5,238
              
              
              5,234
              
              
              5,699
              
              
              7,426
              
              
              15,221Four
                  years later
              
              
              11,950
              
              
              8,647
              
              
              6,217
              
              
              5,131
              
              
              4,754
              
              
              5,808
              
              
              7,687Five
                  years later
              
              
              11,422
              
              
              8,652
              
              
              6,120
              
              
              4,853
              
              
              4,714
              
              
              5,991Six
                  years later
              
              
              11,427
              
              
              8,562
              
              
              6,146
              
              
              4,863
              
              
              4,735Seven
                  years later
              
              
              11,414
              
              
              8,690
              
              
              6,151
              
              
              4,866Eight
                  years later
              
              
              11,542
              
              
              8,706
              
              
              6,153Nine
                  years later
              
              
              11,558
              
              
              8,707Ten
                  years later
              
              
              11,558Net
                  cumulative redundancy (deficiency)
              
              
              (2,892
              )
              
              1,820
              
              
              3,065
              
              
              2,367
              
              
              2,407
              
              
              1,059
              
              
              (18
              )
              
              (3,923
              )
              
              (3,215
              )
              
              (1,185
              )Gross
                  re-estimated liability - latest
              
              
              19,036
              
              
              14,414
              
              
              11,363
              
              
              10,975
              
              
              9,472
              
              
              8,330
              
              
              11,363
              
              
              20,734
              
              
              30,442
              
              
              34,357Re-estimated
                  reinsurance recoverables
              
              
              (7,478
              )
              
              (5,707
              )
              
              (5,210
              )
              
              (6,109
              )
              
              (4,737
              )
              
              (2,339
              )
              
              (3,676
              )
              
              (5,513
              )
              
              (11,878
              )
              
              (15,516
              )Net
                  re-estimated liability - latest
              
              
              11,558
              
              
              8,707
              
              
              6,153
              
              
              4,866
              
              
              4,735
              
              
              5,991
              
              
              7,687
              
              
              15,221
              
              
              18,564
              
              
              18,841Gross
                  cumulative redundancy (deficiency)
              
              $
              (2,727
              )
              $
              1,507
              
              $
              2,358
              
              $
              3,400
              
              $
              3,579
              
              $
              1,259
              
              $
              (1,225
              )
              $
              (7,273
              )
              $
              (9,394
              )
              $
              1,111
 
 As
        previously discussed, the process of estimating loss and LAE reserves is
        inherently uncertain, which results in favorable and adverse development
        on
        initial estimates. Occasionally, as can be seen in the table, the estimates
        initially recorded for loss and LAE reserves based upon the actuarial studies
        prove to be significantly different from the actual results.
  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.
  27
  Statutory
        accounting principles (“Statutory”) require reserves to be reported net (i.e.
        after reinsurance). Generally accepted accounting principles (“GAAP”) 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.
 
 A
        reconciliation of the beginning and ending net liability for unpaid loss
        and LAE
        for the years ended December 31, 2006 and 2005 is provided in Note 7 to the
        consolidated financial statements.
 
 **Reinsurance
        and Reinsurance Recoverables**
 
 PDIC
        purchases third party treaty reinsurance. Treaty reinsurance provides protection
        over an entire class or line of business. Accounting for reinsurance contracts
        is complex and requires a number of significant judgments and estimates to
        be
        made regarding the calculation of amounts payable to reinsurers, amounts
        recoverable from reinsurers and the ultimate collectibility of those reinsurance
        recoverables from reinsurers. In addition, significant judgments are required
        in
        the determination of the compliance with overall risk transfer provisions
        that
        guide the accounting for reinsurance. These judgments and estimates are critical
        accounting estimates for PDIC.
 
 Under
        the
        treaty reinsurance PDIC has purchased, we cede a set proportion of premiums
        to
        our reinsurers based on a unique factor applicable to each policy limit we
        sell.
        Losses recoverable are determined based upon losses incurred in excess of
        the
        applicable reinsurance retention level.
 
 Reinsurance
        contracts that do not result in a reasonable possibility that the reinsurer
        may
        realize a significant loss from the insurance risk assumed and that do not
        provide for the transfer of significant timing risk of cash flows generally
        do
        not meet the requirements for reinsurance accounting and are accounted for
        as
        deposits. All of PDIC’s contracts have been assessed as meeting the risk
        transfer provisions of Financial Accounting Standards Board (FASB) Statement
        No.
        113, *Accounting
        for Reinsurance* (SFAS
        No. 113). Evaluating risk transfer involves significant assumptions relating
        to
        the amount and timing of expected cash flows, as well as interpretations
        of
        underlying contract terms, to determine if contracts meet the conditions
        established by SFAS No. 113. These tests include a number of subjective
        judgments. Because of this subjectivity and in the context of evolving practices
        and application of existing and future standards, we could be required in
        the
        future to adjust our accounting treatment of these transactions. This could
        have
        a material effect on our financial condition and results of
        operations.
 
 Reinsurance
        recoverables (including amounts related to case supplement reserves) and
        prepaid
        reinsurance premiums are reported as assets. Amounts recoverable from reinsurers
        are estimated in a manner consistent with the claim liability associated
        with
        the reinsured business.
 
 Ceded
        unearned premiums, otherwise referred to as prepaid reinsurance premiums
        (the
        portion of premiums representing the unexpired portion of the policy term
        as of
        a certain date) and reinsurance balances recoverable on paid and unpaid losses
        and settlement expenses are reported separately as assets, rather than being
        netted with the related liabilities, because reinsurance does not relieve
        us of
        our liability to policyholders. Such balances are subject to the credit
        risk
  28
  associated
        with the individual reinsurer. We continually monitor the financial condition
        of
        our reinsurers. Any estimate of unrecoverable amounts from troubled or insolvent
        reinsurers is charged to earnings at the time of determination that
        recoverability is in doubt. No amounts have been charged to earnings for
        2006 or
        2005 for uncollectibility of loss recoverables from reinsurers.
 
 **Investment
        Valuation**
 
 Throughout
        the year, our external investment manager buys and sells securities to maximize
        our overall investment returns in accordance with investment policies
        established and monitored by our Board of Directors and officers. PDIC’s
        portfolio is a mix of fixed-income securities that are held as available
        for
        sale or held to maturity. Available for sale securities are recorded at fair
        value based on quoted market prices or dealer quotes. Held to maturity
        securities are recorded at amortized cost. Unrealized gains and losses during
        the year on available for sale securities, net of the related tax effect,
        are
        excluded from earnings and reflected in other comprehensive income (loss)
        and
        the cumulative effect is reported as a separate component of common
        stockholders’ equity until realized.
 
 Fixed
        maturities deemed to have declines in value that are other-than-temporary
        are
        written down to carrying values equal to their estimated fair values. On
        a
        quarterly basis, securities with an unrealized loss are reviewed to determine
        whether the decline in the fair value of any investment below cost is
        other-than-temporary. Considerations relevant to this determination include
        the
        persistence and magnitude of the decline of the issuer, issuer-specific
        financial conditions rather than general market or industry conditions and
        extraordinary events including negative news releases and rating agency
        downgrades. Risks and uncertainties are inherent in our assessment methodology
        for determining whether a decline in value is other-than-temporary. Risks
        and
        uncertainties could include, but are not limited to, incorrect or overly
        optimistic assumptions about future prospects, inadequacy of any underlying
        collateral, unfavorable changes in economic or social conditions and unfavorable
        changes in interest rates or credit ratings.
 
 Impairment
        losses result in a reduction of the underlying investment’s cost basis.
        Significant changes in these factors could result in a considerable charge
        for
        impairment losses as reported in the consolidated financial
        statements.
 
 Part
        of
        our evaluation of whether particular securities are other-than-temporarily
        impaired involves assessing whether we have both the intent and ability to
        continue to hold securities in an unrealized loss position. We have not sold
        any
        securities during 2006 or 2005 with the exception of five securities that
        were
        purchased and sold during 2006 to maximize return on short-term investments.
        Accordingly, we believe that we have the ability to continue to hold securities
        in an unrealized loss position until our cost may be recovered.
 
 **Deferred
        Taxes**
 
 Deferred
        tax assets and liabilities are recognized for the future tax consequences
        attributable to differences between the financial statement carrying amount
        of
        existing assets and liabilities and their respective tax bases. Deferred
        tax
        assets and liabilities are measured using enacted tax rates
  29
  expected
        to apply to taxable income in the years in which those temporary differences
        are
        expected to be recovered or settled. The effect on deferred tax assets and
        liabilities of a change in tax rates is recognized in income in the period
        that
        includes the enactment date. At December 31, 2006, net deferred tax assets
        were
        $1.238 million.
 
 Deferred
        tax assets are regularly assessed for recoverability. A valuation allowance
        is
        provided when it is more likely than not that some portion of the deferred
        tax
        assets will not be realized. In assessing the recoverability of deferred
        tax
        assets, management considers whether it is more likely than not that some
        portion or all of the deferred tax assets will not be realized. The ultimate
        realization of deferred tax assets is dependent upon the generation of future
        taxable income during the periods in which those temporary differences become
        deductible. Management considers the scheduled reversal of deferred tax
        liabilities, projected future taxable income and tax planning strategies
        in
        making this assessment. Based upon the projections for future taxable income
        over the periods which the deferred tax assets are deductible as well as
        our
        2006 taxable income, management believes it is more likely than not the Company
        will realize the benefits of these deductible differences. The amount of
        deferred tax assets considered realizable could be reduced if estimates of
        future taxable income during the carryforward period are reduced.
 
 
 **Item
                  7.**
              **Financial
                  Statements.**
 
 The
        financial statements, notes, and independent auditor’s report of the Company for
        the year ended December 31, 2006, are set forth in Exhibit 20.1 attached
        hereto
        and are here incorporated by reference.
 
 
 **Item
                  8.**
              **Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure.**
 
 None.
 
 
 **Item
                  8A.**
              **Controls
                  and Procedures.**
 
 An
        evaluation was performed under the supervision and with the participation
        of the
        Company’s management, including the Chief Executive Officer and Vice President
        of Finance, of the effectiveness of the design and operation of the Company’s
        disclosure controls and procedures (as defined in Rule 13a-15(e) under the
        Securities Exchange Act of 1934) as of the end of the period covered by this
        Annual Report on Form 10-KSB (the “Evaluation Date”). Based on and as of the
        Evaluation Date, the Company’s management, including the Chief Executive Officer
        and Vice President of Finance, concluded that the Company’s disclosure controls
        and procedures were not effective to ensure that information relating to
        the
        Company (including its consolidated subsidiaries) required to be included
        in the
        Company’s periodic filings with the Securities and Exchange Commission is
        properly recorded, processed, summarized and reported in a timely manner.
        The
        reason for this conclusion was the existence
  30
  of
        a
        single material weakness in the Company’s internal control over financial
        reporting described below. In all other respects, the Company’s management,
        including the Chief Executive Officer and Vice President of Finance, concluded
        that the disclosure controls and procedures were effective as of the Evaluation
        Date.
 
 After
        the
        Evaluation Date, the Company’s management, including the Chief Executive Officer
        and Vice President of Finance, learned that two separate errors had occurred
        in
        the Company’s calculation of ceded premium. Specifically, the two errors,
        identified by the Company’s independent auditors, arose from the use of the
        wrong increased limit factors in the calculation of ceded premium for policies
        with effective dates on and after April 1, 2006. The errors when taken together
        had an after-tax impact of approximately $9,000, an amount which we believe
        is
        immaterial to the financial statements.
 
 The
        two
        errors, when taken separately, and if not remedied in a timely manner, had
        the
        potential to have a material impact on the Company’s financial results as of the
        Evaluation Date or to create a material change in a past or future reporting
        period. Therefore, the Company’s management, including the Chief Executive
        Officer and Vice President of Finance, concluded that the Company’s disclosure
        controls and procedures were not effective to ensure that all material
        information relating to the Company’s periodic filings with the Securities and
        Exchange Commission was properly recorded, processed, summarized and reported
        in
        a timely manner. Upon reaching that conclusion, the Company’s management
        undertook to remedy the errors and the causes of the errors as described
        below.
 
 The
        first
        error caused the Company to calculate a cession of $394,000 less than was
        required. The mistake arose from improper programming of a query report for
        calculation of ceded premium for the policies with effective dates on and
        after
        April 1, 2006. The Company remedied the mistake by revising its computer
        software and instituted additional controls over the input and use of the
        increased limit factors.
 
 The
        second error caused the Company to calculate a cession of $357,000 greater
        than
        was required. The error was caused by a mistake in communication to the
        compliance section of two limit factors for the Select policy form for use
        outside of Michigan. The Company remedied this error by correcting the specific
        communication and instituting additional controls over similar communications
        and use of factors in the future.
 
 The
        Company’s management, including the Chief Executive Officer and Vice President
        of Finance, reviewed the use of increased limit factors in other periods
        and
        concluded that no similar errors had occurred in the prior use of the factors.
        The Company has now incorporated additional controls and procedures to detect
        and correct similar errors on a timely basis.
 
 Except
        as
        described above, during the last fiscal quarter there were no changes in
        the
        Company’s disclosure controls and procedures that has materially affected, or is
        reasonably likely to materially affect, the Company’s disclosure controls and
        procedures.
  31
  
 **Item
                  8B.**
              **Other
                  Information.**
 
 Not
        Applicable.
 
  32
  **Part
        III**
 
 **Item
                  9.**
              **Directors,
                  Executive Officers, Promoters, Control Persons and Corporate Governance;
                  Compliance with Section 16(a) of the Exchange
                  Act.**
 
 **Outside
        Directors with Terms Expiring at the Company’s 2009 Annual Shareholders’
Meeting**
 
 *David
        W. Crooks* (age
        58)
        has been a director of the Company since 2001 and was a director of PDIC
        from
        1993 to 2001. He currently serves as a member of the Audit Committee, Executive
        Committee, Special Committee and Governance Committee of the Company. 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
        LLP 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 cleanup in the Cadillac Industrial
        Park. Mr. Crooks holds degrees from Denison University and Vanderbilt School
        of
        Law. He also graduated from the United States Air Force pilot training school
        and served as a military pilot. Mr. Crooks was admitted to the State Bar
        of
        Michigan in 1977.
 
 *Thomas
        F. Dickinson* (age
        50)
        has been a director of the Company since 2003. He currently serves as a member
        of the Audit Committee and Executive Committee of the Company. 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 FinCor Holdings, Inc.
        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. At 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
        53)
        has been a director of the Company since 2003 and currently serves as chair
        of
        the Compensation Committee and member of the Special Committee. Mr. Krueger
        is
        currently President and Chief Operating Officer for Wolverine World Wide,
        Inc.
        Wolverine World Wide, Inc. is a New York Stock Exchange listed international
        marketer of footwear and accessories with annual sales of over $1 billion.
        Wolverine has owned-operations and subsidiaries in Canada and all keyEuropean
        countries and licensees and distributors which serve
  33
  consumers
        in more than 160 countries. Mr. Krueger practiced law at Warner Norcross
&
Judd LLP from 1978 through 1996 in the field 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 the Best 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.
 
 **Outside
        Directors with Terms Expiring at the Company’s 2008 Annual Shareholders’
Meeting**
 
 *Joseph
        A. Fink* (age
        64)
        has been a director of the Company since 2002. He currently serves as a member
        of the Compensation Committee and as PDIC’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 in Who’s Who in American Law and Who’s Who in the Law, is
        named in Best Lawyers in America for 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 OFIS as well as numerous insurance industry clients before
        OFIS. 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.
 
 *Thomas
        J. Ryan* (age
        59)
        has been a director of the Company since 2001 and was a director of PDIC
        from
        1995 to 2001. He currently serves as a member of the Governance Committee
        of the
        Company. He is a member of the American Bar Association, the State Bar of
        Michigan, Oakland County Bar Association, and the Oakland Ancient Order of
        Hibernians. He is a past President of the State Bar of Michigan, serving
        as its
        66th President from September 2000 to September 2001. Mr. Ryan also was 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, the City of Keego Harbor and
        the
        Township of Southfield and City Attorney for the City of the Village of
        Clarkston and the City of Orchard Lake Village. In addition to the Oakland
        County Bar Association, he served as a member of the Oakland/Livingston Legal
        Aid Board of Directors and was its Vice President from 1994 to 1995. Mr.
        Ryan
        served on the Oakland County Bar Association Board of Directors and was its
        President from 1993 to 1994. He received his undergraduate degree from the
        University of Notre Dame and his law degree from the University of Detroit.
        He
        has been in the private practice of law since January 1977. Mr. Ryan was
        admitted to the State Bar of Michigan in 1973.
  34
  
 **Outside
        Directors with Terms Expiring at the Company’s 2007 Annual Shareholders’
Meeting**
  *Julius
        A. Otten* (age
        68)
        has been a director of Professionals Direct since 2002 and currently serves
        as
        the Chair of the Audit Committee. Mr. Otten currently serves on 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 North Pointe Holdings
        Corp.
        and the chair of their audit committees. 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 OFIS 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 Ross School of Business at The University of Michigan where
        he
        has served on the Board of the Paton Accounting Fund and the Paton Accounting
        Center.
 
 *Tracy
        T. Larsen* (age 47)
        is nominated for a term ending in 2010. He has been a director of the Company
        since 2001 and was a director of PDIC from 1996 to 2001. He currently serves
        as
        a member of the Executive Committee and Special Committee of the Company.
        Mr.
        Larsen is the managing partner of the Grand Rapids office of Barnes &
Thornburg LLP and an attorney at law. Prior to joining Barnes & Thornburg
        LLP 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
        in
        Who's Who in American Law, and has been named in Best Lawyers of America
        and
        America’s Leading Business Lawyers. His legal expertise encompasses all aspects
        of corporate and securities law, with an emphasis on mergers, acquisitions
        and
        corporate finance. Mr. Larsen is a graduate of Hope College (A.B. summa cum
        laude, 1981) and Indiana University School of Law (J.D. magna cum laude,
        1984).
        He holds numerous academic distinctions and honors, including being named
        Phi
        Beta Kappa and Baker Scholar and being elected to the Order of the Coif and
        the
        Order of the Barristers. While at Indiana University, Mr. Larsen served as
        the
        Executive Editor of the Indiana Law Journal and was a member of the National
        Moot Court Team. He was admitted to the State Bar of Michigan in
        1984.
 
 *Mary
        L. Ursul* (age 48)
        has been a director of the Company since 2002 and was a director of PDIC
        from
        1995 to 2000. Ms. Ursul joined the Company in 2000 as an executive officer
        and
        served as Vice President and Secretary until September 2005. In 2006, Ms.
        Ursul
        joined FinCor Holdings, Inc. and is currently serving as its Vice President
        of
        Marketing, Business Development and Strategic Planning. FinCor Holdings is
        a
        holding company with its principal subsidiary
  35
  being
        MHA
        Insurance Company, a medical malpractice insurance company. 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. She is a current member of the State Bar of Michigan.
        Ms. Ursul received a B.S. degree in nursing from New York University in 1981
        and
        a law degree from the University of Detroit School of Law. 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.
 
 **Executive
        Officers**
 
 *Stephen
        M. Tuuk* (age
        53)
        has been a director of the Company since 2001 and was a director of PDIC
        from
        1993 to 2001. His current term expires at the Company’s 2008 Annual
        Shareholders’ Meeting. He currently serves as the Chair of the Governance
        Committee and as the Chair of the Executive Committee of the Company. Mr.
        Tuuk
        has served as President, Chief Executive Officer and Chairman of the Board
        of
        the Company 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 Association of Bar-Related Insurance Companies.
        Mr. Tuuk was an associate from 1984 to 1989, a full-time member from 1990
        to
        1992 and a part-time member from 1993 to 1995 at Miller, Canfield, Paddock
        and
        Stone, 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.
 
 *Stephen
        M. Westfield* (age
        45)
        was a director of the Company from 2002 until 2006. Mr. Westfield joined
        the
        Company 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 the Company and PDIC. Effective October 1, 2005,
        he was
        also appointed Secretary of the Company. Before joining the Company, 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.
   36
  **Compliance
        with Section 16(a) of the Exchange Act**
 
 Section
        16(a) of the Securities Exchange Act of 1934 requires the Company'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 the Securities and Exchange Commission regulations to furnish
        the Company with copies of all Section 16(a) reports they file. Based on
        its
        review of the copies of the Section 16(a) reports received by the Company
        (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, 2006, our directors and officers filed all reports required by Section
        16(a)
        in a timely manner.
 
 **Code
        of Ethics**
 
 The
        Company has adopted a Code of Ethics that applies to the Chief Executive
        Officer
        and Vice President of Finance.
 
 **Audit
        Committee Financial Expert**
 
 The
        Board
        of Directors has determined that Julius Otten is an audit committee financial
        expert, as that term is defined in Item 407(d)(5)(ii) 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.
 
 
 **Item
                  10.**
              **Executive
                  Compensation.**
 
 **Summary
        of Executive Compensation**
 
 The
        following table sets forth for the fiscal year ended December 31, 2006, the
        cash and non-cash compensation awarded to, earned by or paid to executive
        officers. Except as set forth below, no other executive officers of the Company
        earned more than $100,000 in total annual salary and bonus for 2006 in all
        capacities in which such person served.
 
 **SUMMARY
                  COMPENSATION TABLE****Name
                  and****Principal
                  Position**
              
              **Year**
              
              **Salary**
              
              **Non-Equity
                  Incentive Plan Compensation**
              
              **All
                  Other**
                **Compensation****(1)**
              
              **Total**Stephen
                  M. Tuuk,
                President
                  and Chief Executive Officer
              
              2006
              
              $246,320
              
              $61,446
              
              $10,000
              
              $317,766Stephen
                  M. Westfield,
                Vice
                  President, Secretary and Treasurer
              
              2006
              
              135,820
              
              13,558
              
              3,396
              
              152,774
 
 (1)
              Consisting
                  of the Company’s 50% matching contribution under its 401(k)
                  plan.
 
  37
  ***Annual
        Bonus Plan***
 
 The
        Board
        of Directors and Compensation Committee approved an Annual Bonus Plan for
        executive officers that used return on equity measured over a three-year
        period
        as the key factor in determining eligibility and amount of any bonus. The
        Compensation Committee established a minimum weighted three year return on
        equity of 10% as the minimum financial target for executive officers to be
        eligible for any bonus. Return on equity is calculated based on prior year-end
        shareholder equity and the current year net income as reflected on the audited
        financial statements. At the target return on equity of 15%, the potential
        bonuses for Messrs. Tuuk and Westfield would be 45% and 20% of base salary,
        respectively. Generally, no bonus would be paid if the most recent year return
        on equity is less than five percent, however, the Compensation Committee
        may
        waive this limitation.
 
 ***Executive
        Officer Employment Agreements***
 
 The
        Company has employment agreements with its executive officers as described
        below.
 
 *Agreement
        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.
 
 *Agreement
        with Mr. Westfield.* The
        Company has an employment termination and severance agreement with
        Mr. Westfield which provides that the Company and Mr. Westfield may end his
        employment at any time and for any reason. If the Company ends Mr. Westfield's
        employment without cause, then it must pay Mr. Westfield’s base salary and
        benefits for 12 months from the date of termination. Upon termination of
        employment and for 12 months thereafter, Mr. Westfield may not compete against
        the Company, PDIC or any of the subsidiaries in any state in which they are
        doing business.
 
 **Equity
        Compensation Plans**
 
 The
        Company administers the Professionals Direct, Inc. Outside Directors’ Deferred
        Compensation Plan. The Outside Directors’ Deferred Compensation Plan is an
        unfunded, supplemental nonqualified deferred compensation plan. Directors
        who
        are not employees of the Company or its subsidiaries are eligible to participate
        in the Outside Directors’ Deferred Compensation Plan unless excluded from
        participation by the Compensation Committee pursuant to an individual agreement
        or arrangement. Amounts deferred under the Outside Directors’ Deferred
        Compensation Plan are credited on the books of the Company to an account
        established for that director as a number of stock units equal to the cash
        amount of deferred
  38
  director’s
        fees divided by the market value of one share of the Company common stock
        on the
        date the deferred director’s fees would have been payable. In 2006, no directors
        deferred fees pursuant to the Outside Directors’ Deferred Compensation
        Plan.
 
 The
        Company administers the Professionals Direct, Inc. Employee and Director
        Stock
        Purchase Plan (the “Stock Purchase Plan”). The purpose of the Stock Purchase
        Plan is to encourage employees and directors of the Company and its subsidiaries
        to promote the best interests of the Company and align the interests of
        employees and directors with those of the Company’s shareholders by permitting
        employees and directors to purchase shares of the Company common stock at
        a
        price less than the market price. All employees and directors of the Company
        or
        its subsidiaries are eligible to participate in the Stock Purchase Plan,
        except
        temporary employees. An employee or director who wishes to participate in
        the
        Stock Purchase Plan must authorize the Company to make regular payroll
        deductions from the employee’s payroll, or from the director’s fees, as
        applicable, to be used for the purchase of stock pursuant to the Stock Purchase
        Plan. The purchase price of each share is equal to 90% of the market value
        of
        shares of the Company common stock on the annual stock purchase date, unless
        the
        compensation committee determines to use a higher price. The compensation
        committee may determine the maximum level of individual participation annually,
        in its discretion. However, in no event may a participant purchase the Company
        common stock under the Stock Purchase Plan in an amount less than $10,000
        per
        year or in excess of $60,000 per year. In addition, no participant is permitted
        to purchase shares under the Stock Purchase Plan if the participant, immediately
        after purchasing such shares, would own stock possessing 5% or more of the
        total
        combined voting power or value of all classes of stock of the Company or
        any of
        its subsidiaries. In 2006, no purchases were made pursuant to the Stock Purchase
        Plan.
 
 Except
        as
        described above, the Company had no equity compensation plans, stock options
        and
        made no long-term incentive plan awards in 2006.
 
  39
  **Compensation
        of Directors**
 
 Each
        director who is not an employee is paid a quarterly fee of $3,000, $700 for
        each
        Board meeting attended and $350 for each committee meeting attended. 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.
 
 **DIRECTOR
                  COMPENSATION****Name**
              
              **Fees
                  Earned or****Paid
                  in Cash**
              
              **Total**David
                  W. Crooks
              
              
              $20,750
              
              $
              20,750Thomas
                  F. Dickinson
              
              
              18,300
              
              
              18,300Joseph
                  A. Fink
              
              
              16,900
              
              
              16,900Blake
                  W. Krueger
              
              
              19,250
              
              
              19,250Tracy
                  T. Larsen
              
              
              16,550
              
              
              16,550Julius
                  A. Otten
              
              
              24,100
              
              
              24,100Thomas
                  J. Ryan
              
              
              16,200
              
              
              16,200Mary
                  L. Ursul
              
              
              15,500
              
              
              15,500
 
 
  40
  
 **Item
                  11.**
              **Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters.**
 
 The
        following table shows the number of shares of the Company’s stock beneficially
        owned on December 31, 2006, by each of the Company's directors and nominees
        for director, each of the executive officers, and all of the Company's directors
        and executive officers as a group. No shareholder known to management of
        the
        Company beneficially owned more than 5% of the shares of the Company’s stock
        outstanding on December 31, 2006. As a group, the Company's directors,
        nominees for director and executive officers owned 20.2% of the Company’s
        outstanding stock on December 31, 2006.
 
 **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
              10,200
              
              3.0%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%Mary
                  L. Ursul
              14,500
              
              4.4%All
                  Executive Officers, Directors and
                Nominees
                  for Director as a group (10 persons)
              67,375
              
              20.2%
 
 (1)
              The
                  address of each beneficial owner is 5211 Cascade Road, S.E., Grand
                  Rapids,
                  Michigan, 49546.(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
  41
 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 share 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 333,300 shares of common stock
                  outstanding.
 
 
 **Item
                  12.**
              **Certain
                  Relationships and Related Transactions, and Director
                  Independence.**
 
 **Transactions
        with Related Persons, Promoters and Certain Control
        Persons**
 
 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 2006
        reinsurance treaty with PDIC. During 2006, premiums of $146,000 were ceded
        to
        and $184,000 in losses were paid by LRC. As of December 31, 2006, unearned
        premiums ceded to LRC were $63,000.
 
 Tracy
        T.
        Larsen is a member of the Board of Directors of the Company and a partner
        in the
        law firm Barnes & Thornburg LLP. Barnes & Thornburg has been retained by
        the Company to provide certain legal services, the fees for which are expected
        to be less than $50,000 in 2007. As a partner of Barnes & Thornburg, Mr.
        Larsen will receive a small fraction of the fees received by the law firm,
        the
        amount of which is expected to be less than $1,000. All director’s fees received
        by Mr. Larsen from the Company are remitted to Barnes &
Thornburg.
 
 **Director
        Independence**
 
 The
        Company has adopted the definition of independent director enacted by the
        NASDAQ
        Stock Market, set forth in NASDAQ Rule 4200(a)(15). Applying this standard
        for
        independence, each outside director and each nominee for director is
        independent. Stephen M. Tuuk is the only director that is not an outside
        director.
  42
  
 **Item
                  13.**
              **Exhibits.**
 
 The
        following documents are filed as exhibits to this report on Form
        10-KSB:
 
 Exhibit
                  No.
              
              Document3.1
              
              Amended
                  and Restated Articles of Incorporation. Previously filed as an
                  exhibit to
                  the Company’s Registration Statement on Form 10-SB filed on July 8,
                  2002. Here incorporated by reference.3.2
              
              Amended
                  and Restated Bylaws. Previously filed as an exhibit to the Company’s
                  Registration Statement on Form 10-SB filed on July 8, 2002. Here
                  incorporated by reference.4.1
              
              Certificate
                  Evidencing Floating Rate Capital Securities.
                  Previously filed as an exhibit to the Company’s Annual Report on Form
                  10-KSB filed on March 28, 2003. Here incorporated by
                  reference.4.2
              
              Floating
                  Rate Junior Subordinated Deferrable Interest Debenture. Previously
                  filed
                  as an exhibit to the Company’s Annual Report on Form 10-KSB filed on
                  March 28, 2003. Here incorporated by reference.4.3
              
              Indenture.
                  Previously filed as an exhibit to the Company’s Annual Report on Form
                  10-KSB filed on March 28, 2003. Here incorporated by
                  reference.4.4
              
              Amended
                  and Restated Declaration of Trust. Previously filed as an exhibit
                  to the
                  Company’s Annual Report on Form 10-KSB filed on March 28, 2003. Here
                  incorporated by reference.4.5
              
              Guarantee
                  Agreement. Previously filed as an exhibit to the Company’s Annual Report
                  on Form 10-KSB filed on March 28, 2003. Here incorporated by
                  reference.4.6
              
              Certificate
                  Evidencing Floating Rate Capital Securities. Previously filed as
                  an
                  exhibit to the Company’s Quarterly Report on Form 10-QSB filed on August
                  15, 2005. Here incorporated by reference.4.7
              
              Floating
                  Rate Junior Subordinated Deferrable Interest Debenture. Previously
                  filed
                  as an exhibit to the Company’s Quarterly Report on Form 10-QSB filed on
                  August 15, 2005. Here incorporated by reference.4.8
              
              Indenture.
                  Previously filed as an exhibit to the Company’s Quarterly Report on Form
                  10-QSB filed on August 15, 2005. Here incorporated by
                  reference.4.9
              
              Amended
                  and Restated Declaration of Trust. Previously filed as an exhibit
                  to the
                  Company’s Quarterly Report on Form 10-QSB filed on August 15, 2005. Here
                  incorporated by reference.4.10
              
              Guarantee
                  Agreement. Previously filed as an exhibit to the Company’s Quarterly
                  Report on Form 10-QSB filed on August 15, 2005. Here incorporated
                  by
                  reference.10.1
              
              Form
                  of Indemnification Agreement.Previously
                  filed as an exhibit to the Company’s Registration Statement on Form 10-SB
                  filed on July 8, 2002. Here incorporated by
                  reference.10.2
              
              Employment
                  Agreement with Stephen M. Tuuk. Previously filed as an exhibit
                  to the
                  Company’s Registration Statement on Form 10-SB filed on April 30,
                  2002. Here incorporated by
                  reference.
 
  43
  
 10.3
              
              Employment
                  Agreement with Stephen M. Westfield. Previously filed as an exhibit
                  to the
                  Company’s Registration Statement on Form 10-SB filed on April 30,
                  2002. Here incorporated by reference.10.4
              
              Professionals
                  Direct, Inc. Outside Directors’ Deferred Compensation Plan. Previously
                  filed as Appendix A to the Company’s 2005 Schedule 14A Proxy Statement
                  filed on April 19, 2005. Here incorporated by
                  reference.10.5
              
              Professionals
                  Direct, Inc. Employee and Director Stock Purchase Plan. Previously
                  filed
                  as Appendix B to the Company’s 2005 Schedule 14A Proxy Statement filed on
                  April 19, 2005. Here incorporated by reference.10.6
              
              Office
                  Lease dated March 22, 2006 between Professionals Direct Insurance
                  Services, Inc. and Fairplain Development Co. Previously filed as
                  an
                  exhibit to the Company’s Quarterly Report on Form 10-QSB filed on May 15,
                  2006.14
              
              Code
                  of Ethics20.1
              
              Financial
                  Statements, Notes, and Independent Auditor’s Report of the Company for the
                  year ended December 31, 2006.21
              
              Subsidiaries.23.1
              
              Consent
                  of Independent Registered Public Accounting Firm24
              
              Powers
                  of Attorney.31.1
              
              Certification
                  of Chief Executive Officer,as
                  required by Rule 13a-14(a) of the Securities Exchange Act of
                  1934.31.2
              
              Certification
                  of Vice President of Finance, as required by Rule 13a-14(a) of
                  the
                  Securities Exchange Act of 1934.32
              
              Certification
                  of Chief Executive Officer and Vice President of Finance, as required
                  by
                  Rule 13a-14(b) of the Securities Exchange Act of 1934. This exhibit,
                  except those portions expressly incorporated by reference in this
                  filing,
                  is furnished for the information of the Commission and is not deemed
                  “filed” as part of this filing.
 
 
 **Item
                  14.**
              **Principal
                  Accountant Fees and
                  Services.**
 
 The
        Board
        of Directors has selected BDO Seidman, LLP as the Company's principal
        Independent Registered Public Accounting Firm for 2007. 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 the Company’s
        principal accountant, BDO Seidman LLP, for the audit of the Company’s annual
        financial statements, for the review of financial statements included in
        the
        Company’s Forms 10-QSB and
  44
  for
        services provided in connection with statutory and regulatory filings for
        each
        of the last two fiscal years were $99,250 and $103,761 in 2006 and 2005,
        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 the Company’s principal accountant, BDO Seidman LLP, for each of the
        last two fiscal years were $39,767 and $40,217 in 2006 and 2005,
        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 the Company’s
        financial statements for the year ended December 31, 2006, 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 the Company by the Company’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 the *de
        minimus* exception set forth in Section 210.2-01(c)(7)(i) of Regulation S-X of the
        Securities Exchange Act of 1934.
 
  45
  **SIGNATURES**
 
 In
        accordance with Section 13 or 15(d) of the Exchange Act, the registrant
        caused this report to be signed on its behalf by the undersigned, thereunto
        duly
        authorized.
 
 PROFESSIONALS
                  DIRECT, INC.Date:March
                  30, 2007
              /s/
                Stephen M. TuukStephen
                  M. Tuuk, President and Chief Executive
                Officer
                  (authorized to sign on behalf of company)Date:March
                  30, 2007
              /s/
                Stephen M. WestfieldStephen
                  M. Westfield, Vice President of Finance
                (principal
                  financial and accounting officer)
 
 
 In
        accordance with the Exchange Act, this report has been signed below by the
        following persons on behalf of the registrant and in the capacities and on
        the
        dates indicated.
 
 
 Date:  March
                  30, 2007
              /s/
                Stephen M. TuukStephen
                  M. Tuuk, DirectorDate:  March
                  30, 2007
              *Blake
                  W. Krueger, DirectorDate:  March
                  30, 2007
              *David
                  W. Crooks, Director
  46
  
 Date:  March
                  30, 2007
              
              *Thomas
                  J. Ryan, DirectorDate:  March
                  30, 2007
              
              *Tracy
                  T. Larsen, DirectorDate:  March
                  30, 2007
              
              *Thomas
                  F. Dickinson, DirectorDate:  March
                  30, 2007
              
              *Joseph
                  A. Fink, DirectorDate:  March
                  30, 2007
              
              *Mary
                  L. Ursul, DirectorDate:  March
                  30, 2007
              
              *Julius
                  A. Otten, DirectorDate:  March
                  30, 2007
              *By:
              /s/
                Stephen M. TuukStephen
                  M. Tuuk
                Attorney-in-Fact
 
 
  47
  **Exhibit
        Index**
 
 Exhibit
                No.
              
              Document3.1
              
              Amended
                  and Restated Articles of Incorporation. Previously filed as an
                  exhibit to
                  the Company’s Registration Statement on Form 10-SB filed on July 8,
                  2002. Here incorporated by reference.3.2
              
              Amended
                  and Restated Bylaws. Previously filed as an exhibit to the Company’s
                  Registration Statement on Form 10-SB filed on July 8, 2002. Here
                  incorporated by reference.4.1
              
              Certificate
                  Evidencing Floating Rate Capital Securities. Previously filed as
                  an
                  exhibit to the Company’s Annual Report on Form 10-KSB filed on
                  March 28, 2003. Here incorporated by reference.4.2
              
              Floating
                  Rate Junior Subordinated Deferrable Interest Debenture. Previously
                  filed
                  as an exhibit to the Company’s Annual Report on Form 10-KSB filed on
                  March 28, 2003. Here incorporated by reference.4.3
              
              Indenture.
                  Previously filed as an exhibit to the Company’s Annual Report on Form
                  10-KSB filed on March 28, 2003. Here incorporated by
                  reference.4.4
              
              Amended
                  and Restated Declaration of Trust. Previously filed as an exhibit
                  to the
                  Company’s Annual Report on Form 10-KSB filed on March 28, 2003. Here
                  incorporated by reference.4.5
              
              Guarantee
                  Agreement. Previously filed as an exhibit to the Company’s Annual Report
                  on Form 10-KSB filed on March 28, 2003. Here incorporated by
                  reference.4.6
              
              Certificate
                  Evidencing Floating Rate Capital Securities. Previously filed as
                  an
                  exhibit to the Company’s Quarterly Report on Form 10-QSB filed on August
                  15, 2005. Here incorporated by reference.4.7
              
              Floating
                  Rate Junior Subordinated Deferrable Interest Debenture. Previously
                  filed
                  as an exhibit to the Company’s Quarterly Report on Form 10-QSB filed on
                  August 15, 2005. Here incorporated by reference.4.8
              
              Indenture.
                  Previously filed as an exhibit to the Company’s Quarterly Report on Form
                  10-QSB filed on August 15, 2005. Here incorporated by
                  reference.4.9
              
              Amended
                  and Restated Declaration of Trust. Previously filed as an exhibit
                  to the
                  Company’s Quarterly Report on Form 10-QSB filed on August 15, 2005. Here
                  incorporated by reference.4.10
              
              Guarantee
                  Agreement. Previously filed as an exhibit to the Company’s Quarterly
                  Report on Form 10-QSB filed on August 15, 2005. Here incorporated
                  by
                  reference.10.1
              
              Form
                  of Indemnification Agreement. Previously filed as an exhibit to
                  the
                  Company’s Registration Statement on Form 10-SB filed on July 8, 2002.
                  Here incorporated by reference.10.2
              
              Employment
                  Agreement with Stephen M. Tuuk. Previously filed as an exhibit
                  to the
                  Company’s Registration Statement on Form 10-SB filed on April 30,
                  2002. Here incorporated by reference.10.3
              
              Employment
                  Agreement with Stephen M. Westfield. Previously filed as an exhibit
                  to the
                  Company’s Registration Statement on Form 10-SB filed on April 30, 2002.
                  Here incorporated by reference.
 
  
  
 10.4
              
              Professionals
                  Direct, Inc. Outside Directors’ Deferred Compensation Plan. Previously
                  filed as Appendix A to the Company’s 2005 Schedule 14A Proxy Statement
                  filed on April 19, 2005. Here incorporated by
                  reference.10.5
              
              Professionals
                  Direct, Inc. Employee and Director Stock Purchase Plan. Previously
                  filed
                  as Appendix B to the Company’s 2005 Schedule 14A Proxy Statement filed on
                  April 19, 2005. Here incorporated by reference.10.6
              
              Office
                  Lease dated March 22, 2006 between Professionals Direct Insurance
                  Services, Inc. and Fairplain Development Co. Previously filed as
                  an
                  exhibit to the Company’s Quarterly Report on Form 10-QSB filed on May 15,
                  2006.14
              
              Code
                  of Ethics20.1
              
              Financial
                  Statements, Notes, and Independent Auditor’s Report of the Company for the
                  year ended December 31, 2006.21
              
              Subsidiaries.23.1
              
              Consent
                  of Independent Registered Public Accounting Firm24
              
              Powers
                  of Attorney.31.1
              
              Certification
                  of Chief Executive Officer, as required by Rule 13a-14(a) of the
                  Securities Exchange Act of 1934.31.2
              
              Certification
                  of Vice President of Finance, as required by Rule 13a-14(a) of
                  the
                  Securities Exchange Act of 1934.32
              
              Certification
                  of Chief Executive Officer and Vice President of Finance, as required
                  by
                  Rule 13a-14(b) of the Securities Exchange Act of 1934. This exhibit,
                  except those portions expressly incorporated by reference in this
                  filing,
                  is furnished for the information of the Commission and is not deemed
                  “filed” as part of this filing.