Exhibit
      13















































**2006**


**Annual
      Report**














***PRESIDENT’S
      MESSAGE***








TO
      OUR
      SHAREHOLDERS:





We
      are
      pleased to present our 2005 results in this annual report.





Professionals
      Direct is in the business of providing insurance programs to lawyers.
      Professionals Direct operates as a service provider in more than 40 states
      and
      as an insurance underwriter in 36 states. It is a nationally recognized source
      for lawyers professional liability and for other insurance products for the
      legal community. Both 2004 and 2005 represented a maturation of our business
      model after large percentage growth increases in 2002 and 2003. In the past
      two
      years, Professionals Direct improved the sustainability of its presence in
      this
      niche.





In
      2005,
      Professionals Direct earned $502,000 or $1.51 per share. Book value per share
      increased to $31.79 per share. The book value per share represents a significant
      increase over the $10 acquisition price paid in the July, 2001
      demutualization.





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





Sincerely,







Stephen
      M. Tuuk


President
      and Chief Executive Officer








**Professionals
      Direct, Inc.**





**2006
      Annual Report**





**Contents**
            **Page**Professionals
                Direct, Inc.
            A-2A
                Message to our Shareholders
            A-2Five-Year
                Summary of Selected Financial Data
            A-3Management’s
                Discussion and Analysis
            A-5Report
                of Independent Registered Public Accounting Firm
            A-15Consolidated
                Financial Statements
            A-16Notes
                to Consolidated Financial Statements
            A-20











**Professionals
      Direct, Inc.**





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





**A
      Message to our Shareholders**





This
      2006
      Annual Report contains audited financial statements and a detailed financial
      review. This is Professionals Direct, Inc.’s 2006 Annual Report to Shareholders.
      Although attached to our proxy statement, this report is not part of our proxy
      statement, is not deemed to be soliciting material, and is not deemed to be
      filed with the Securities and Exchange Commission (the “SEC”) except to the
      extent that it is expressly incorporated by reference in a document filed with
      the SEC.





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








A-2


**Five
      Year Summary of Selected Financial Data**





The
      following table provides selected consolidated financial and operating data
      (unaudited) for Professionals Direct and its subsidiaries as of December 31,
      2005, 2004, 2003, 2002 and 2001 and for the years then ended. The consolidated
      financial and operating data are derived from, and should be read in conjunction
      with, Professionals Direct’s Consolidated Financial Statements and Notes
      thereto.





**Years
                Ended****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001****(in
                thousands of dollars, except for per share and ratio
                data)****Revenue
                Data:**Direct
                premiums written
            
            $
            25,902
            
            $
            24,009
            
            $
            24,294
            
            $
            10,404
            
            $
            7,066Net
                premiums written
            
            
            16,401
            
            
            14,085
            
            
            20,118
            
            
            8,479
            
            
            5,956Net
                premiums earned
            
            
            15,375
            
            
            16,203
            
            
            15,927
            
            
            6,790
            
            
            5,648Fees
                and commissions earned
            
            
            792
            
            
            731
            
            
            619
            
            
            474
            
            
            665Net
                investment income
            
            
            1,171
            
            
            893
            
            
            926
            
            
            1,410
            
            
            1,506Finance
                and other income earned
            
            
            153
            
            
            152
            
            
            127
            
            
            116
            
            
            121Total
                Revenues
            
            
            17,491
            
            
            17,979
            
            
            17,599
            
            
            8,790
            
            
            7,940**Losses
                and Expense Data:**Losses
                and loss adjustment expenses
            
            
            12,521
            
            
            11,937
            
            
            7,737
            
            
            4,851
            
            
            2,265Operating
                and administrative expenses
            
            
            3,785
            
            
            4,804
            
            
            5,420
            
            
            3,511
            
            
            3,922Interest
            
            
            506
            
            
            447
            
            
            300
            
            
            200
            
            
            99Total
                Expenses
            
            
            16,812
            
            
            17,188
            
            
            13,457
            
            
            8,562
            
            
            6,286Income
                before federal income taxes and policyholder dividend
            
            
            679
            
            
            791
            
            
            4,142
            
            
            228
            
            
            1,654Policyholder
                dividend
            
            
            0
            
            
            0
            
            
            0
            
            
            316
            
            
            297Income
                (loss) before federal income taxes
            
            
            679
            
            
            791
            
            
            4,142
            
            
            (88
            )
            
            1,357Federal
                income tax expense (benefit)
            
            
            177
            
            
            260
            
            
            1,442
            
            
            (62
            )
            
            527Net
                Income (Loss)
            
            $
            502
            
            $
            531
            
            $
            2,700
            
            $
            (26
            )
            $
            830**Selected
                Balance Sheet Data:**
              (at
                year end)Total
                investments and cash
            
            $
            43,407
            
            $
            37,863
            
            $
            36,410
            
            $
            22,451
            
            $
            19,341Total
                assets
            
            
            71,348
            
            
            54,441
            
            
            46,359
            
            
            30,770
            
            
            25,572Total
                liabilities
            
            
            60,746
            
            
            44,153
            
            
            36,496
            
            
            23,455
            
            
            18,286Total
                shareholders’ equity
            
            
            10,602
            
            
            10,288
            
            
            9,863
            
            
            7,315
            
            
            7,286**Per
                Share Data:**Net
                income (loss)
            
            $
            1.51
            
            $
            1.59
            
            $
            8.10
            
            $
            (0.08
            )
            $
            2.49Shareholders’
                equity
            
            $
            31.79
            
            $
            30.85
            
            $
            29.57
            
            $
            21.93
            
            $
            21.84**Selected
                GAAP Ratios:**Return
                on prior year equity
            
            
            4.9
            %
            
            5.4
            %
            
            36.9
            %
            
            (.4
            %)
            
            23.6
            %Return
                on current year revenue
            
            
            2.9
            %
            
            3.0
            %
            
            15.3
            %
            
            (.3
            %)
            
            10.5
            %Return
                on current year assets
            
            
            0.7
            %
            
            1.0
            %
            
            5.8
            %
            
            (.1
            %)
            
            3.2
            %





A-3





**Years
                Ended****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001****(in
                thousands of dollars, except for per share and ratio
                data)****Statutory
                (SAP) Ratio Data:**Loss
                ratio (1)
            
            
            81.5
            %
            
            76.2
            %
            
            49.2
            %
            
            76.9
            %
            
            41.6
            %Expense
                ratio (2)
            
            
            22.9
            %
            
            33.9
            %
            
            30.8
            %
            
            37.0
            %
            
            37.2
            %Combined
                ratio (3)
            
            
            104.4
            %
            
            110.1
            %
            
            80.0
            %
            
            113.9
            %
            
            78.8
            %Operating
                ratio (4)
            
            
            96.7
            %
            
            104.5
            %
            
            74.2
            %
            
            93.4
            %
            
            61.5
            %A.
                M. Best Industry operating ratio (5)
            
            
            Not
                available
            
            
            94.0
            %
            
            92.2
            %
            
            95.9
            %
            
            104.1
            %Statutory
                surplus (6)
            
            
            $17,539
            
            
            $16,074
            
            
            $16,132
            
            
            $10,473
            
            
            $9,370Earned
                surplus (7)
            
            
            15,008
            
            
            13,543
            
            
            13,601
            
            
            7,942
            
            
            6,839Ratio
                of statutory net premiums written to statutory surplus
            
            
            93.5
            %
            
            87.6
            %
            
            124.7
            %
            
            81.0
            %
            
            63.6
            %





(1)
            Calculated
                by dividing losses and loss adjustment expenses by net premiums
                earned.(2)
            Calculated
                by dividing other underwriting expenses by net premiums
                written.(3)
            The
                sum of the statutory loss ratio and the expense ratio.(4)
            Calculated
                by taking the combined ratio and subtracting the ratio of net investment
                income divided by net premiums earned. An operating ratio of more
                than
                100% indicates that an insurance company is unable to recoup underwriting
                losses with investment earnings.(5)
            As
                reported by A. M. Best, Best's Aggregate & Averages -
                Property/Casualty (Commercial Casualty Composite).(6)
            Statutory
                surplus includes $2.531 million in surplus certificates, interest
                on which
                is not accrued until approved for payment by the Michigan Office
                of
                Financial and Insurance Services.(7)
            Statutory
                surplus less surplus contributed under surplus
                certificates.





A-4


**Management’s
      Discussion and Analysis**





The
      following discussion and analysis for the years ended December 31, 2005 and
      2004
      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**





Net
      premiums earned and operating and administrative expenses incurred decreased
      because cessions to reinsurers and related ceding commissions earned increased
      effective January 1, 2004. Losses and loss adjustment expenses increased because
      of adjustments to prior years’ loss estimates. The following table and
      discussion compares the financial results for 2005 and 2004:





**Years
                Ended****2005**
            
            **2004**
            
            **Change**
            
            **Percent**
              **Change****(in
                thousands of dollars, except for per share data)****Revenues:**Net
                premiums earned
            
            $
            15,375
            
            $
            16,203
            
            $
            (828
            )
            
            (5.1
            %)Fees
                and commissions earned
            
            
            792
            
            
            731
            
            
            61
            
            
            8.3
            %Net
                investment income earned
            
            
            1,171
            
            
            893
            
            
            278
            
            
            31.1
            %Finance
                and other income earned
            
            
            153
            
            
            152
            
            
            1
            
            
            0.7
            %Total
                Revenues
            
            
            17,491
            
            
            17,979
            
            
            (488
            )
            
            (2.7
            %)**Expenses:**Losses
                and loss adjustment expenses
            
            
            12,521
            
            
            11,937
            
            
            584
            
            
            4.9
            %Operating
                and administrative
            
            
            3,785
            
            
            4,804
            
            
            (1,019
            )
            
            (21.2
            %)Interest
            
            
            506
            
            
            447
            
            
            59
            
            
            13.2
            %Total
                Expenses
            
            
            16,812
            
            
            17,188
            
            
            (376
            )
            
            (2.2
            %)Income
                before federal income tax expense
            
            
            679
            
            
            791
            
            
            (112
            )
            
            (14.2
            %)Federal
                income tax expense
            
            
            177
            
            
            260
            
            
            (83
            )
            
            (31.9
            %)Net
                Income
            
            $
            502
            
            $
            531
            
            $
            (29
            )
            
            (5.5
            %)**Selected
                Balance Sheet Data:**
              (at
                year end)Total
                investments and cash
            
            $
            43,407
            
            $
            37,863
            
            $
            5,544
            
            
            14.6
            %Total
                assets
            
            
            71,348
            
            
            54,441
            
            
            16,907
            
            
            31.1
            %Total
                liabilities
            
            
            60,746
            
            
            44,153
            
            
            16,593
            
            
            37.6
            %Total
                shareholders’ equity
            
            
            10,602
            
            
            10,288
            
            
            314
            
            
            3.1
            %**Per
                Share Data:**Net
                income
            
            $
            1.51
            
            $
            1.59
            
            $
            (0.08
            )
            
            (5.0
            %)Shareholders’
                equity
            
            $
            31.79
            
            $
            30.85
            
            $
            0.94
            
            
            3.1
            %





A-5


**Results
      of Operations (000 omitted)** :





The
      following is a summary and analysis of the material revenue and expense
      components of our operational results for 2005 with comparisons to 2004.





***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. Direct premiums written and ending gross unearned
      premium were proportionately higher in 2005 than in 2004. However, net premiums
      earned in 2005 did decrease from 2004, primarily because beginning ceded
      unearned premium was 134.5% higher in 2005 than 2004, the result of decreasing
      our retention beginning with 2004 business.





The
      effects of these changes are seen in the table below:





**Years
                Ended****2005**
            
            **2004**
            
            **Change**
            
            **Percent**
              **Change****(in
                thousands of dollars)**Beginning
                gross unearned premium
            
            $
            10,738
            
            $
            10,468
            
            $
            270
            
            
            2.6
            %Beginning
                ceded unearned premium
            
            
            (4,163
            )
            
            (1,775
            )
            
            (2,388
            )
            
            (134.5
            %)Beginning
                net unearned premium
            
            
            6,575
            
            
            8,693
            
            
            (2,118
            )
            
            (24.4
            %)Direct
                premiums written
            
            
            25,902
            
            
            24,009
            
            
            1,893
            
            
            7.9
            %Ceded
                premiums written
            
            
            (9,501
            )
            
            (9,924
            )
            
            423
            
            
            4.3
            %Net
                premiums written
            
            
            16,401
            
            
            14,085
            
            
            2,316
            
            
            16.4
            %Ending
                gross unearned premium
            
            
            11,776
            
            
            10,738
            
            
            1,038
            
            
            9.7
            %Ending
                ceded unearned premium
            
            
            (4,175
            )
            
            (4,163
            )
            
            (12
            )
            
            (0.3
            %)Ending
                net unearned premium
            
            
            7,601
            
            
            6,575
            
            
            1,026
            
            
            15.6
            %Net
                premiums earned
            
            $
            15,375
            
            $
            16,203
            
            $
            (828
            )
            
            (5.1
            %)





Direct
      premiums written were 7.9% higher in 2005 than in 2004. This increase resulted
      from a 3% increase in the number of polices written and a 5% increase in the
      average premium per policy. Net premiums written in 2005 were 16.4% higher.
      This
      increase resulted from the increase in direct premiums written, a nominal
      decrease in ceded premium rates under the 2005 reinsurance treaty and the
      elimination of a ceded premium liability related to a prior treaty.





For
      policies with 2005 effective dates, PDIC maintained the same per claim retention
      as for 2004. 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. As a result of significant growth in written premium
      experienced in 2003 and the level of surplus to written premium, it was
      determined that maintaining the lower retention level of 2004 for 2005 would
      be
      in the best interest of the Company. Market factors allowed us to continue
      with
      this retention level. In 2006, we do not expect to see material changes in
      direct premiums written or in our reinsurance retention.





***Fees
      and Commissions Earned*** .
      Fees
      and commissions originate primarily from two sources. First are membership
      fees,
      which are earned by Lawyers Direct Risk Purchasing Group, Inc., 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. Fee and commission income earned was $792 in 2005, an
      increase of $61 or 8.3%, compared to 2004. Almost all of this increase was
      attributable to an increase in commission income from Services.





***Net
      Investment Income*** *.* Net
      investment income is comprised of interest on fixed maturity investments and
      realized investment gains and losses. The net investment income increase of
      $278
      or 31.1% in 2005 as


A-6


compared
      to 2004 is attributable to an increase in invested assets, increasing interest
      rates, and slightly greater duration.  Increasing rates accounted for
      approximately $203,000 of the increase with the remainder attributable to the
      increase in invested assets.





***Finance
      and Other Income Earned*** *.* Finance
      income is generated from premium financing incidental to the sale of PDIC’s
      insurance policies. Premium financing is offered to PDIC policyholders in
      Michigan and selected other states. In the fourth quarter of 2005, premium
      finance rates were increased and, as a result, finance income is expected to
      increase slightly in 2006.





***Losses
      and Loss Adjustment Expenses*** *.* 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 2005, PDIC recorded losses and loss adjustment expenses of
      $12,521, of which $11,212 was for current year losses and $1,309 was for prior
      years’ losses. For 2004, PDIC recorded losses and loss adjustment expenses of
      $11,937 of which $10,948 was for 2004 losses and $989 was for losses prior
      to
      2004. Adjustments to prior year claims estimates reflect current 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. The loss ratio for 2005 continues to be above our historic
      average. Volatility in the loss ratio can be expected given the complex nature
      of lawyers professional liability claims and multi-year settlement periods.
      Due
      to the size of our reserves, even a small percentage change in the loss reserve
      liability can have a material impact on our results of operations and loss
      ratio
      for the period in which the change occurs.





The
      loss
      ratio is the sum of the losses and loss adjustment expenses incurred expressed
      as a percentage of net premiums earned. The loss ratio for the year was 81.4%
      compared to 73.7% for 2004. Three factors impacted the 2005 loss ratio when
      compared to 2004. The first was a change in estimate for prior years’ losses,
      primarily due to additional severity on existing claims from the 2002 through
      2004 years. The second was a change in estimate for adjusting and other expense
      reserves as a result of increasing costs to defend and adjust claims over what
      we had previously reserved. The third was the previously discussed decrease
      in
      net premiums earned. The increase in estimate for prior years’ losses of $1,309
      plus the increase in adjusting and other expenses of $316 increased the 2005
      loss ratio 10.6%.





The
      losses recorded in 2005 significantly increased direct and ceded loss reserves,
      which in turn increased total assets and total liabilities as compared to 2004.
      This increase is primarily the result of two claims reserved at policy limits,
      both of which were unsettled as of December 31, 2005.





***Operating
      and Administrative Expenses*** *.* Operating
      and administrative expenses for 2005 compared to 2004 decreased $1,019 or 21.2%.
      This decrease primarily resulted from ceding commissions earned which were
      $1,697 and $1,080 in 2005 and 2004, respectively, and a decline in acquisition
      costs resulting from operating efficiencies and a reduction in commission rates
      to certain agents.





***Interest
      Expense*** *.* Interest
      expense in 2005 increased $59 from 2004, primarily because of increased interest
      rates and outstanding debt. Most line of credit debt was refinanced with trust
      preferred securities during 2005. Interest expense increased $142 on trust
      preferred securities and decreased $83 on lines of credit.





***Income
      Taxes.*** ** The
      effective federal income tax rate was 26.1% for 2005 compared to 32.9% for
      2004.
      While the 2004 effective rate approximated the expected rate, the 2005 effective
      rate is lower because of tax-exempt interest.





**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. The management fees paid by PDIC
      are pre-approved by the Office of Financial and Insurance Services (“OFIS”), the
      regulatory body in Michigan responsible for the oversight of the insurance
      subsidiary. Under the 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 repaid in full. The
      management fees paid by the remaining subsidiaries are determined from
      time-to-time by the Board of Directors. The 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


A-7


invested
      assets. The primary uses of cash, on both a short-term and long-term basis,
      are
      losses, loss adjustment expenses, operating expenses, reinsurance premiums,
      taxes, debt repayment and acquisition of investments.





Trends
      or
      uncertainties that may impact short-term or long-term liquidity include changes
      in the cost and availability of reinsurance, changes in interest rates and
      changes in investment income. As the costs of obtaining reinsurance may change
      in the future, we intend to adjust the rates we charge our customers. However,
      such rate changes may be limited by competition or regulation. We believe that
      we will be able to manage these reinsurance costs so the impact on overall
      liquidity is minimized.





When
      interest rates decline, the cost of borrowing decreases and the market value
      of
      our investment portfolio, which primarily consists of debt securities, generally
      increases. At the same time, the overall yield on new investments tends to
      decrease. When interest rates increase, the opposite effects are realized.
      While
      interest rates continue to be low, they are starting to increase. We believe
      that it is unlikely material gains will be realized on portfolio assets or
      be a
      source of liquidity during 2006.





At
      December 31, 2005, we had cash and cash equivalents of $9,309. A substantial
      portion of this was or will be invested in bonds in the first quarter of 2006.
      Remaining cash and cash equivalents are expected to be used to fund operations
      and loss and reinsurance payments.





Our
      net
      cash flow from operations for 2005 was $6,062 compared to $4,164 for
      2004 . This
      increase can be attributed to an increase in retained premium and an increase
      in
      recoveries from reinsurers. This cash flow was partially invested in fixed
      maturities which resulted in negative cash flow from investing activities of
      $1,660 for the year. Cash provided by financing activities was $513, the result
      of net repayments under the lines of credit offset by the proceeds from the
      issuance of trust preferred securities. Last year net borrowings decreased
      $1,767.





To
      provide additional liquidity, we have three 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. This
      line had $170 outstanding at December 31, 2005. The second line is for $1,000,
      which can be used for potential acquisitions, and bears interest at 1% over
      the
      bank’s prime rate. The third line is a $3,000 declining balance facility that
      matures October 1, 2006. As a result of the declining balance feature, the
      maximum credit available under this facility at December 31, 2005 was $1,950.
      The second and third lines have no amounts outstanding as of December 31, 2005.
      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, 2005. The bank has a security interest in substantially
      all
      assets of the Company, Services and Finance. In addition, the shares of PDIC
      are
      pledged, subject to the rights of policyholders under insurance laws and the
      rights of insurance regulators.





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





**Critical
      Accounting Estimates and Judgments**





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











A-8




Amounts
        recoverable from reinsurers are estimated in a manner consistent with the
        provisions of the reinsurance agreement and the establishment of the liability
        for loss and loss adjustment expenses.




**Loss
      and Loss Adjustment Expense Reserves**





PDIC
      maintains reserves for payment of losses and loss adjustment expenses for
      reported claims and for claims incurred but not reported arising from policies
      that have been issued. 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. The determination of reserves involves actuarial and statistical
      projections of what PDIC expects to be the cost of the ultimate settlement
      and
      administration of such claims based on facts and circumstances then known,
      estimates of future trends in claim severity, and other variable factors such
      as
      inflation and changing judicial theories of liability.





Management
      estimates of the loss reserve liability are reviewed by independent actuaries
      twice each year. Several variables and methodologies are used to calculate
      the
      appropriate amount of the loss reserve liability that should be recorded. 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





The
      key
      actuarial methodologies used include:





●
            Incurred
                development method●
            Paid
                development method●
            Case
                development method●
            Incurred
                Bornhuetter-Ferguson method●
            Paid
                Bornhuetter-Ferguson method●
            Frequency/severity
                method





Small
      changes to any of the assumptions regarding the key variables can significantly
      alter the outcome of the actuarial analysis. 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
      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 four years
      are
      assessed using the full range of methodologies. These four years represent
      approximately 90% of total net retained reserves. The range of the results
      of
      the various methodologies was from 22% below to 55% above the best estimate
      of
      $15.9 million for the four years.





An
      in-depth review of loss reserves is undertaken on a semi-annual basis. However,
      management continually reviews and updates the data underlying the estimation
      of
      its loss reserves and makes adjustments when we believe the emerging data
      supports a change. Any adjustments necessary are reflected in current
      operations. As a result of the variety of variables and methodologies that
      are
      considered, there is a significant risk that actual incurred losses will develop
      differently from these estimates.





In
      the
      years after a claim is reported, there is a significant amount of uncertainty
      over what the ultimate loss will be. Therefore, the estimate of future loss
      costs for claims recently reported tends to be less accurate. As claims get
      older, the estimate 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.





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 loss adjustment expenses. As shown in
      the reserve development table that follows, the original estimates of our net
      loss reserves have resulted in favorable development (redundancy) in six of
      the
      last ten years and adverse development in four of the last ten years
      (deficiency).


A-9


The
      estimation of ultimate liability for losses and loss adjustment expenses is
      an
      inherently uncertain process and does not represent an exact calculation of
      that
      liability. 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 reserves ***(commonly
      referred to as 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. 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. Case supplement reserves as a percentage of total reserves
      at
      December 31, 2005 were 41.6%. PDIC does not discount its reserves to recognize
      the time value of money.





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





Each
      quarter, PDIC computes its estimated liability using appropriate principles
      and
      procedures. Because the establishment of loss reserves is an inherently
      uncertain process, however, there can be no assurance that losses will not
      exceed reserves. Adjustments in aggregate reserves, if any, are reflected in
      the
      operating results of the period during which such adjustments are made. As
      required by insurance regulatory authorities, PDIC annually receives a statement
      of opinion from its appointed actuary concerning the reasonableness of its
      reserves. At December 31, 2005, the recorded reserves were $17 greater than
      the
      point estimate of our independent actuary.





A
      reconciliation of the beginning and ending net liability for unpaid losses
      and
      loss adjustment expenses for the years ended December 31, 2005 and 2004 is
      provided in Note 7 to the consolidated financial statements included in this
      report.





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 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 the Company’s reserve for losses and loss adjustment expenses,
                less the receivables from reinsurers, each as showing in the Company’s
                consolidated financial statements at the end of each year (the 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
                previously recorded Balance Sheet Reserves.●
            The
                section titled “Re-estimated net liability, as of:” reflects the
                re-estimated amount of the liability previously recorded as Balance
                Sheet
                Reserves that includes the cumulative amounts paid and an estimate
                of
                additional liability based upon claims experience as of the end of
                each
                succeeding year (the Net Re-estimated
                Liability).





A-10





●
            The
                line titled “Net cumulative redundancy (deficiency)” reflects the
                difference between the previously recorded Balance Sheet Reserve
                for each
                applicable year and the Net Re- estimated Liability relating thereto
                as of
                the end of the most recent fiscal
                year.





**December
                    31,****1995**
                
                **1996**
                
                **1997**
                
                **1998**
                
                **1999**
                
                **2000**
                
                **2001**
                
                **2002**
                
                **2003**
                
                **2004**
                
                **2005****(in
                    thousands)**Original
                    gross liability - end of year
                
                $
                11,728
                
                $
                16,309
                
                $
                15,921
                
                $
                13,721
                
                $
                14,375
                
                $
                13,051
                
                $
                9,589
                
                $
                10,138
                
                $
                13,461
                
                $
                21,048
                
                $
                35,468Less:
                    reinsurance recoverables
                
                
                (4,067
                )
                
                (7,643
                )
                
                (5,394
                )
                
                (4,503
                )
                
                (7,142
                )
                
                (5,909
                )
                
                (2,539
                )
                
                (2,469
                )
                
                (2,163
                )
                
                (5,699
                )
                
                (17,812
                )Reserve
                    for unpaid losses net of reinsurance recoverables
                
                
                7,661
                
                
                8,666
                
                
                10,527
                
                
                9,218
                
                
                7,233
                
                
                7,142
                
                
                7,050
                
                
                7,669
                
                
                11,298
                
                
                15,349
                
                
                17,656Cumulative
                    net paid, as of:One
                    year later
                
                
                4,236
                
                
                5,050
                
                
                4,395
                
                
                3,199
                
                
                2,552
                
                
                1,776
                
                
                3,645
                
                
                2,878
                
                
                6,232
                
                
                8,129Two
                    years later
                
                
                7,625
                
                
                8,800
                
                
                6,865
                
                
                4,967
                
                
                3,624
                
                
                3,503
                
                
                4,400
                
                
                5,110
                
                
                9,521Three
                    years later
                
                
                9,719
                
                
                10,114
                
                
                7,846
                
                
                5,474
                
                
                3,948
                
                
                3,730
                
                
                5,316
                
                
                6,297Four
                    years later
                
                
                10,308
                
                
                10,806
                
                
                8,205
                
                
                5,589
                
                
                3,991
                
                
                4,557
                
                
                5,591Five
                    years later
                
                
                10,738
                
                
                11,057
                
                
                8,227
                
                
                5,618
                
                
                4,721
                
                
                4,619Six
                    years later
                
                
                10,832
                
                
                11,077
                
                
                8,263
                
                
                6,054
                
                
                4,762Seven
                    years later
                
                
                10,786
                
                
                11,115
                
                
                8,689
                
                
                6,063Eight
                    years later
                
                
                10,791
                
                
                11,541
                
                
                8,690Nine
                    years later
                
                
                10,792
                
                
                11,542Ten
                    years later
                
                
                10,792Re-estimated
                    net liability, as of:One
                    year later
                
                
                9,778
                
                
                11,337
                
                
                10,392
                
                
                8,359
                
                
                6,653
                
                
                5,345
                
                
                7,061
                
                
                7,330
                
                
                12,287
                
                
                16,658Two
                    years later
                
                
                11,051
                
                
                12,035
                
                
                9,815
                
                
                7,320
                
                
                5,235
                
                
                5,311
                
                
                6,885
                
                
                6,705
                
                
                13,466Three
                    years later
                
                
                11,221
                
                
                11,811
                
                
                9,439
                
                
                6,217
                
                
                5,238
                
                
                5,234
                
                
                5,699
                
                
                7,426Four
                    years later
                
                
                10,998
                
                
                11,950
                
                
                8,647
                
                
                6,217
                
                
                5,131
                
                
                4,754
                
                
                5,808Five
                    years later
                
                
                11,236
                
                
                11,422
                
                
                8,652
                
                
                6,120
                
                
                4,853
                
                
                4,714Six
                    years later
                
                
                11,038
                
                
                11,427
                
                
                8,562
                
                
                6,146
                
                
                4,863Seven
                    years later
                
                
                11,038
                
                
                11,414
                
                
                8,690
                
                
                6,151Eight
                    years later
                
                
                11,053
                
                
                11,542
                
                
                8,706Nine
                    years later
                
                
                10,792
                
                
                11,558Ten
                    years later
                
                
                10,792Net
                    cumulative redundancy (deficiency)
                
                
                (3,131
                )
                
                (2,892
                )
                
                1,821
                
                
                3,067
                
                
                2,370
                
                
                2,428
                
                
                1,242
                
                
                243
                
                
                (2,168
                )
                
                (1,309
                )Gross
                    re-estimated liability - latest
                
                
                16,857
                
                
                19,036
                
                
                14,413
                
                
                11,360
                
                
                10,952
                
                
                9,431
                
                
                8,121
                
                
                11,176
                
                
                18,420
                
                
                31,599Re-estimated
                    reinsurance recoverables
                
                
                (6,065
                )
                
                (7,478
                )
                
                (5,707
                )
                
                (5,209
                )
                
                (6,089
                )
                
                (4,717
                )
                
                (2,313
                )
                
                (3,750
                )
                
                (4,954
                )
                
                (14,941
                )Net
                    re-estimated liability - latest
                
                
                10,792
                
                
                11,558
                
                
                8,706
                
                
                6,151
                
                
                4,863
                
                
                4,714
                
                
                5,808
                
                
                7,426
                
                
                13,466
                
                
                16,658Gross
                    cumulative redundancy (deficiency)
                
                $
                (5,129
                )
                $
                (2,727
                )
                $
                1,508
                
                $
                2,361
                
                $
                3,423
                
                $
                3,620
                
                $
                1,468
                
                $
                (1,038
                )
                $
                (4,959
                )
                $
                (10,551
                )





As
      previously discussed, the process of estimating loss and loss adjustment expense
      reserves is inherently uncertain, which results in favorable and adverse
      development on initial estimates. The table above illustrates such uncertainty.
      Another variable in the process of estimating reserves is the quality of the
      claims administration. The underlying claims must be promptly analyzed to
      accurately estimate the potential loss. Prior to 1997, PDIC’s claims were
      administered by an outside claims administrator. Beginning in 1997, PDIC hired
      its own employees to administer the claims. At the same time, PDIC engaged
      a new
      actuarial firm.





An
      independent actuary that specializes in the lawyers’ professional liability
      industry performs a semi-annual study for PDIC that results in a recommended
      level for loss and loss adjustment expense reserves. The actuary reviews PDIC’s
      historical claim payment data and premiums data. In addition, the actuary
      performs statistical analyses based upon many factors, including the size of
      the
      firms insured, the ages of the attorneys, the practice areas of the


A-11


attorneys,
      and the nature of the underlying errors that drive the claims. The actuary
      also
      considers the terms of PDIC’s reinsurance contracts. Ultimately, based on this
      examination, the actuary provides PDIC with an estimate of the reserves that
      should be recorded. These estimates vary from study to study based on new
      information available about previous claims and uncertainties inherent in new
      claims. Occasionally, as can be seen in the table, the estimates initially
      recorded for losses and loss adjustment expenses based upon the actuarial
      studies prove to be significantly different from actual results.





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





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





Statutory
      accounting principles (“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.





**Market
      for Common Stock and Dividends**





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, 2005, there were approximately 685 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.





***Recent
      Sales of Unregistered Securities*** .
      On June
      30, 2005, the Company issued a junior subordinated debenture (the “Debenture”)
      having a principal amount of $3,093,000 to Professionals Direct Statutory
      Trust II (the “Trust”). Cumulative interest on the Debenture accrues from
      June 30, 2005, and is payable quarterly in arrears. The rate is fixed at 7.785%
      until September 15, 2010, thereafter it is variable at a rate of three-month
      LIBOR (London Interbank Offering Rate) plus 3.625%. The Debenture is subordinate
      and junior to all senior indebtedness (as defined in the Indenture) of the
      Company with the exception of other Trust Preferred Securities. The Debenture
      matures on September 15, 2035, but may be redeemed in whole or in part beginning
      September 15, 2010.





On
      June
      30, 2005, the Trust sold capital securities (“Capital Securities”) for $3
      million to investors and issued common securities (“Common Securities”) for
      $93,000 to the Company. All of the proceeds from the sale of Capital Securities
      and Common Securities were invested in the Debenture. Capital Securities and
      Common Securities represent undivided beneficial interests in the Debenture,
      which is the sole asset of the Trust. Holders of Capital Securities and Common
      Securities are entitled to receive distributions from the Trust on terms which
      correspond to those of the Debenture. Distributions by the Trust and payments
      on
      liquidation of the Trust or redemption of Capital Securities are guaranteed
      by
      the Company to the extent the Trust has funds available (the “Guarantee”). The
      Company’s obligations under the Guarantee, taken together with its obligations
      under the Debenture and the Indenture, constitute a full and unconditional
      guarantee of all of the Trust’s obligations under the Capital Securities issued
      by the Trust.





A-12


The
      trust
      preferred securities were issued in reliance on an exemption from registration
      under Section 4(2) of the federal Securities Act of 1933.





***Equity
      Compensation Plans*** .
      The
      following table provides information about Professionals Direct’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, 2005.





EQUITY
      COMPENSATION PLANS





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 Professionals Direct’s
                  capitalization.
  **New
          Accounting Standards**
 
 In
          December 2004, Financial Accounting Standards Board (FASB) issued Statement
          No.
          123(R), “Share-Based Payment” to expand and clarify Statement No. 123,
“Accounting for Stock-Based Compensation” in several areas. SFAS 123(R) requires
          companies to measure the cost of employee services received in exchange
          for an
          award of an equity instrument based on the grant-date fair value of the
          award.
          SFAS 123(R) becomes effective January 1, 2006 and will be applied prospectively.
          While the Company’s Employee and Director Stock Purchase Plan may be subject to
          this standard, any effect is expected to be immaterial to the Company’s
          financial statement.


**Forward-Looking
      Statements**





This
      report contains forward-looking statements, including, but not limited to,
      statements relating to the Company’s business objectives and strategy. Such
      forward-looking statements are based on current expectations, management
      beliefs, certain assumptions made by the Company’s management, and estimates and
      projections about the Company’s industry. Words such as “anticipates”,
“believes”, “estimates”, “expects”, “forecasts”, “intends”, “judgment”,
“objective”, “predicts”, “projects”, “seeks”, and 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
      reinsurers are based substantially on estimates and the amounts so determined
      are inherently forward-looking.





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





●
            Future
                economic conditions and the legal and regulatory environment in the
                markets served by the Company’s subsidiaries;●
            Reinsurance
                market conditions, including changes in pricing and availability
                of
                reinsurance;





A-13


●
              Financial
                  market conditions, including, but not limited to, changes in interest
                  rates and the values of investments;●
              Inflation;●
              Credit
                  worthiness of the issuers of investment securities, reinsurers
                  and others
                  with whom the Company and its subsidiaries do business;●
              Estimates
                  of loss reserves and trends in losses and loss adjustment
                  expenses;●
              Changing
                  competition;●
              The
                  Company’s ability to execute its business plan;●
              The
                  effects of war and terrorism on investment and reinsurance
                  markets;●
              The
                  effects of hurricanes, earthquakes and other natural disasters
                  on
                  investment and reinsurance markets;●
              Changes
                  in financial ratings issued by independent organizations, including
                  A.M.
                  Best, Standard & Poors and Moody’s;●
              The
                  Company’s ability to enter new markets successfully and capitalize on
                  growth opportunities;●
              The
                  Company’s ability to comply with internal control audit requirements that
                  are expected to become effective in 2007; and●
              Changes
                  in the laws, rules and regulations governing insurance holding
                  companies
                  and insurance companies, as well as applicable tax and accounting
                  matters.





Changes
      in any of these factors, or others, could have an adverse affect on the business
      or results of operations 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.





A-14


**Report
        of Independent Registered Public Accounting Firm**








The
      Board
      of Directors


Professionals
      Direct Inc. and Subsidiaries


Grand
      Rapids, Michigan





We
      have
      audited the accompanying consolidated balance sheet of Professionals Direct
      Inc.
      and Subsidiaries as of December 31, 2005, and the related consolidated
      statements of income and comprehensive income, shareholders’ equity and cash
      flows for the two years in the period then ended. These consolidated financial
      statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these consolidated financial
      statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. The Company
      is not required to have, nor were we engaged to perform, an audit of its
      internal control over financial reporting. Our audits included consideration
      of
      internal control over financial reporting as a basis for designing audit
      procedures that are appropriate in the circumstances, but not for the purpose
      of
      expressing an opinion on the effectiveness of the Company’s internal control
      over financial reporting. Accordingly, we express no such opinion. An audit
      also
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the financial statements, assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall financial statement presentation. We believe that our audits provide
      a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the consolidated financial position of Professionals
      Direct Inc. and Subsidiaries as of December 31, 2005, and the consolidated
      results of their operations and their cash flows for the two years in the period
      then ended in conformity with accounting principles generally accepted in the
      United States of America.








/s/
      BDO
      Seidman, LLP





Grand
      Rapids, Michigan


March
      3,
      2006, except for Note 15 which is as of March 21, 2006








A-15


**PROFESSIONALS
      DIRECT INC. AND SUBSIDIARIES**


CONSOLIDATED
      BALANCE SHEET





*December
                31,*
            
            **2005***Assets
                (Note 9)*
            
            **(000)**Fixed
                maturities held to maturity, at amortized cost (Note 3)
            
            **$**
            **4,312**Fixed
                maturities available for sale, at fair value (Note 3)
            
            
            **29,496**Other
                invested asset, at cost which approximates fair value
            
            
            **290**Total
                investments
            
            
            **34,098**Cash
                and cash equivalents
            
            
            **9,309**Receivables:Premiums
                (Note
                4)
            
            
            **1,394**Amounts
                due from
                reinsurers (Note 8)
            
            
            **17,875**Investment
                income
            
            
            **399**Other
            
            
            **109**Prepaid
                reinsurance premiums
            
            
            **4,175**Property
                and equipment, net (Note 6)
            
            
            **353**Deferred
                acquisition costs (Note 14)
            
            
            **1,378**Net
                deferred federal income taxes (Note 13)
            
            
            **1,578**Intangible
                assets, net (Note 5)
            
            
            **630**Other
                assets
            
            
            **50****37,750***Total
                Assets*
            
            **$**
            **71,348***Liabilities
                and Shareholders’ Equity**Liabilities*Loss
                and loss adjustment expense reserves (Note 7)
            
            **$**
            **35,468**Unearned
                premiums
            
            
            **11,776**Amounts
                due to reinsurers
            
            
            **1,855**Lines
                of credit (Note 9)
            
            
            **170**Unearned
                ceding commissions (Note 14)
            
            
            **714**Accrued
                expenses and other liabilities
            
            
            **1,383**Accrued
                interest
            
            
            **1,653**Federal
                income taxes payable
            
            
            **196**Surplus
                certificates (Note 11)
            
            
            **2,531**Trust
                preferred securities (Note 10)
            
            
            **5,000***Total
                Liabilities*
            
            
            **60,746**Commitments
                and Contingencies****(Notes
                8, 9 and 15)Shareholders’
                Equity****(Note
                11)Preferred
                stock, no par (500,000 shares authorized, no shares
                issued)
            
            
            **-**Common
                stock, no par (5,000,000 shares authorized, 333,500 shares issued
                and
                outstanding)
            
            
            **3,206**Retained
                earnings
            
            
            **7,801**Accumulated
                other comprehensive loss (Note 18)
            
            
            **(405**
            **)***Total
                Shareholders’ Equity*
            
            
            **10,602***Total
                Liabilities and Shareholders’ Equity*
            
            **$**
            **71,348**


*See
          accompanying notes to consolidated financial
          statements*
 
 A-16


**PROFESSIONALS
      DIRECT INC. AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF INCOME


AND
      COMPREHENSIVE INCOME





*Year
                ended December 31,*
            
            **2005**
            
            2004**(000)**
            
            (000)*Revenues*Net
                premiums earned (Note 8)
            
            **$**
            **15,375**
            
            $
            16,203Fees
                and commissions earned
            
            
            **792**
            
            
            731Net
                investment income (Note 3)
            
            
            **1,171**
            
            
            893Finance
                and other income earned
            
            
            **153**
            
            
            152*Total
                Revenues*
            
            
            **17,491**
            
            
            17,979*Expenses*Losses
                and loss adjustment expensesincurred
                (Notes 7 and 8)
            
            
            **12,521**
            
            
            11,937Operating
                and administrative (Note 14)
            
            
            **3,785**
            
            
            4,804Interest
            
            
            **506**
            
            
            447*Total
                Expenses*
            
            
            **16,812**
            
            
            17,188Income
                before federal income tax expense
            
            
            **679**
            
            
            791Federal
                Income Tax Expense****(Note
                13)
            
            
            **177**
            
            
            260*Net
                Income*
            
            
            **502**
            
            
            531Other
                Comprehensive Loss****(Note
                18)
            
            
            **(188**
            **)**
            
            (106
            )*Comprehensive
                Income*
            
            **$**
            **314**
            
            $
            425*Per
                share of common stock (not in thousands):**Basic
                and diluted net income per share*
            
            **$**
            **1.51**
            
            $
            1.59*Basic
                and diluted comprehensive income per share*
            
            
            **.94**
            
            
            1.27





*See
        accompanying notes to consolidated financial statements*


A-17


**PROFESSIONALS
      DIRECT INC. AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY





Common
                shares
              
              Common
                stock
                par
                  value
              
              Retained
                earnings
              
              Accumulated
                other
                comprehensive
                loss
              
              Total(000)
              
              (000)
              
              (000)
              
              (000)**Balance**,
                  January 1, 2004
              
              
              333,500
              
              $
              3,206
              
              $
              6,768
              
              $
              (111
              )
              $
              9,863Net
                  income for the year
              
              
              -
              
              
              -
              
              
              531
              
              
              -
              
              
              531Net
                  depreciation on available for sale securities, net of taxes (Note
                  18)
              
              
              -
              
              
              -
              
              
              -
              
              
              (106
              )
              
              (106
              )**Balance**,
                  December 31, 2004
              
              
              333,500
              
              $
              3,206
              
              $
              7,299
              
              $
              (217
              )
              $
              10,288Net
                  income for the year
              
              
              -
              
              
              -
              
              
              502
              
              
              -
              
              
              502Net
                  depreciation on available for sale securities, net of taxes (Note
                  18)
              
              
              -
              
              
              -
              
              
              -
              
              
              (188
              )
              
              (188
              )**Balance**,
                  December 31, 2005
              
              
              333,500
              
              
              3,206
              
              
              7,801
              
              
              (405
              )
              
              10,602




*See
        accompanying notes to consolidated financial statements*
 
 A-18


**PROFESSIONALS
      DIRECT INC. AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF CASH FLOWS





*Year
                ended December 31,*
            
            **2005**
            
            2004**(000)**
            
            (000)*Operating
                Activities*Net
                income
            
            **$**
            **502**
            
            $
            531Adjustments
                to reconcile net income to net cash from operating
                activities:Deferred
                federal income tax expense
            
            
            **(43**
            **)**
            
            (267
            )Realized
                gains
            
            
            **-**
            
            
            (5
            )Depreciation
            
            
            **147**
            
            
            152Amortization
            
            
            **631**
            
            
            868Changes
                in operating assets and liabilities:Premiums
                receivable
            
            
            **(292**
            **)**
            
            150Amounts
                due from reinsurers
            
            
            **(11,596**
            **)**
            
            (3,913
            )Investment
                income receivable
            
            
            **5**
            
            
            (47
            )Other
                receivable
            
            
            **239**
            
            
            (16
            )Prepaid
                reinsurance premiums
            
            
            **(12**
            **)**
            
            (2,388
            )Federal
                income taxes recoverable
            
            
            **561**
            
            
            (561
            )Deferred
                acquisition costs
            
            
            **37**
            
            
            214Other
                assets
            
            
            **(47**
            **)**
            
            23Loss
                and loss adjustment expense reserves
            
            
            **14,420**
            
            
            7,587Unearned
                premiums
            
            
            **1,038**
            
            
            270Amounts
                due to reinsurers
            
            
            **(181**
            **)**
            
            1,543Unearned
                ceding commissions
            
            
            **(72**
            **)**
            
            675Accrued
                expenses and other liabilities
            
            
            **396**
            
            
            (482
            )Accrued
                interest
            
            
            **133**
            
            
            136Federal
                income taxes payable
            
            
            **196**
            
            
            (306
            )Net
                cash from operating activities
            
            
            **6,062**
            
            
            4,164*Investing
                Activities*Cost
                of available for sale fixed maturities acquired
            
            
            **(5,207**
            **)**
            
            (11,917
            )Cost
                of held to maturity fixed maturities acquired
            
            
            **(4,072**
            **)**
            
            (252
            )Proceeds
                from sales or maturities of fixed maturities available for
                sale
            
            
            **7,821**
            
            
            7,207Cost
                of property and equipment acquired
            
            
            **(202**
            **)**
            
            (47
            )Net
                cash for investing activities
            
            
            **(1,660**
            **)**
            
            (5,009
            )*Financing
                Activities*Net
                repayments under lines of credit
            
            
            **(2,337**
            **)**
            
            (1,767
            )Payment
                of debt issue costs
            
            
            **(150**
            **)**
            
            -Proceeds
                from issuance of trust preferred securities
            
            
            **3,000**
            
            
            -Net
                cash from (for) financing activities
            
            
            **513**
            
            
            (1,767
            )*Net
                Increase (Decrease) in Cash and Cash Equivalents*
            
            
            **4,915**
            
            
            (2,612
            )Cash
                and Cash Equivalents, beginning of year
            
            
            **4,394**
            
            
            7,006Cash
                and Cash Equivalents, end of year
            
            **$**
            **9,309**
            
            $
            4,394*Supplemental
                Disclosures of Cash Flow Information*Federal
                income tax payments (recoveries) - net
            
            **$**
            **(537**
            **)**
            $
            1,387Interest
                payments
            
            
            **373**
            
            
            311





*See
        accompanying notes to consolidated financial statements*


A-19





**PROFESSIONALS
      DIRECT INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





**1.**
            **Organization
                of the Company and Nature of
                Business**





Professionals
      Direct Inc. (Company) is an insurance holding company with four subsidiaries
      (see Note 2). One of the subsidiaries, Professionals Direct Insurance Company
      (PDIC) is the former Michigan Lawyers Mutual Insurance Company (the Mutual).
      The
      Mutual was originally formed in the State of Michigan on June 4, 1987, for
      the
      principal purpose of providing professional liability insurance on a claims-made
      basis to attorneys practicing in Michigan. PDIC continues to provide
      professional liability insurance to attorneys and law firms in Michigan and
      other states. In 2005, 36% of premiums were written in Michigan, 9% in Florida,
      7% each in Arizona, Colorado and Pennsylvania with the balance in twenty-three
      additional states with no other state exceeding 7%.





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








**2.**
            **Basis
                of Presentation and Significant Accounting
                Policies**





*Basis
      of Presentation*





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





*Principles
      of Consolidation*





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


Professionals
        Direct Statutory Trust I and Professionals Direct Statutory Trust II are
        accounted for under the equity method in the accompanying financial statements.
        They are not consolidated because the Company is not the primary
        beneficiary.
  All
        significant intercompany transactions and balances have been
        eliminated.





*Investments*





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





Held
      to
      maturity securities are recorded at amortized cost. Unrealized gains and losses
      are excluded from comprehensive income.





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





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





A-20


**PROFESSIONALS
      DIRECT INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





*Other
      Invested Asset*





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





*Cash
      and Cash Equivalents*





Cash
      and
      cash equivalents include money market mutual funds and investments with original
      maturities of three months or less and are stated at cost, which approximates
      fair value.





*Property
      and Equipment*





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





*Intangible
      Assets*





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





*Revenue
      Recognition*





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





*Commission
      Income*





Commissions
      are recognized when the respective policies become effective.





*Deferred
      Acquisition Costs and Unearned Ceding Commissions*




Acquisition
        costs, consisting of commissions, premium taxes and other underwriting costs
        are
        deferred and amortized ratably over the terms of the policies, generally
        one
        year. The recoverability of deferred acquisition costs is assessed and such
        costs are reduced if a premium deficiency exists. Unearned ceding commissions
        are deferred and amortized ratably over the terms of the
        treaties.
  *Unearned
      Premiums*





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





*Loss
      and Loss Adjustment Expenses*





Unpaid
      losses and loss adjustment expenses (LAE) are provided for as claims are
      incurred. The provision for unpaid losses and loss adjustment expenses includes:
      (1) the accumulation of individual case estimates for claims and claim
      adjustment expenses reported prior to the close of the accounting period; (2)
      estimates for unreported claims based on historical and industry data; (3)
      estimates of expenses for investigating and adjusting


A-21


**PROFESSIONALS
      DIRECT INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





claims
      based on the experience of the Company and the industry; and (4) estimates
      of
      additional development of these losses over case basis estimates based upon
      past
      experience.





Inherent
      in the estimates of ultimate claims are expected trends in claim severity,
      frequency and other factors that may vary as claims are settled. The amount
      of
      uncertainty in the estimates for liability coverage is significantly affected
      by
      such factors as the amount of claim experience relative to the development
      period, knowledge of the actual facts and circumstances and the amount of risk
      retained. The liability for losses and loss adjustment expenses is necessarily
      an estimate and while it is believed to be adequate, the ultimate liability
      could exceed or be less than such estimate. The methods for making such
      estimates and for establishing the resulting liability are continually reviewed,
      and any adjustments are reflected in current operations.





*Reinsurance*





In
      the
      normal course of business, the Company seeks to reduce the risk of loss that
      may
      arise from significant events that cause unfavorable underwriting results by
      reinsuring certain levels of risk with reinsurers.





Amounts
      recoverable from reinsurers are estimated in a manner consistent with the
      provisions of the reinsurance agreement and the establishment of the liability
      for loss and loss adjustment expenses. Premiums earned, losses and loss
      adjustment expenses and policy acquisition costs are reported net of the amounts
      related to reinsurance ceded to other companies. Amounts recoverable from
      reinsurers related to the portions of the liabilities for losses and loss
      adjustment expenses and unearned premiums ceded are reported as
      assets.





*Federal
      Income Taxes*





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





*Use
      of Estimates*





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





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





*Earnings
      Per Share of Common Stock*





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





***Certain
      Significant Risks***





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





A-22


**PROFESSIONALS
      DIRECT INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





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





*Credit
      Risk* - is the
      risk that issuers of securities owned by the Company will default, or other
      parties, including reinsurers and customers which owe the Company money, will
      not pay. The Company has a concentration of amounts due from customers in the
      State of Michigan as approximately 36% of current year revenues were derived
      from customers in Michigan. The Company manages this risk by adhering to a
      conservative investment strategy, by maintaining sound reinsurance and credit
      and collection policies, and by providing for any amounts deemed
      uncollectible.





*Interest
      Rate Risk* - is the
      risk that interest rates will change and cause a decrease in the value of an
      insurer’s investments. The Company mitigates this risk by attempting to match
      the maturity schedule of its assets with the expected payout of its liabilities.
      To the extent that liabilities come due more quickly than assets mature or
      the
      Company liquidates investments to meet operating needs, the Company would have
      to sell assets prior to maturity and recognize a gain or loss. At December
      31,
      2005, the estimated fair value of the Company’s bond portfolio was less than its
      cost, however the Company believes that it has the ability to hold securities
      to
      maturity and therefore minimize the risk of loss recognition.





***Fair
      Value of Financial Instruments***





The
      following methods and assumptions were used to estimate the fair value of each
      class of financial instrument for which it is practicable to estimate that
      value:





**Fixed
      maturity securities**


The
      fair
      values of fixed maturity securities are based on quoted market prices, when
      available or based on values obtained from investment brokers.





**Cash
      and cash equivalents**


The
      carrying amount is a reasonable estimate of fair value.





**Premiums
      and Finance Receivables and Accounts Payable and Accrued
      Expenses**


The
      carrying amount is considered to be a reasonable estimate of fair value due
      to
      their short-term nature.





**Surplus
      Certificates**


The
      carrying amount is a reasonable estimate of fair value due to the restrictive
      nature and limited marketability of the notes.





**Notes
      Payable**


The
      fair
      value of amounts outstanding on the Company’s line of credit arrangements is
      equal to the unpaid balance of the notes due to the variable rate of interest
      on
      the arrangement.





**Trust
      Preferred Securities**


The
      carrying value of the issue dated June 30, 2005 is a reasonable estimate of
      fair
      value based on interest rates as of December 31, 2005.





The
      carrying value of the issue dated December 4, 2002 is a reasonable estimate
      of
      fair value due to its variable rate of interest.








**3.**
            **Investments**





A
      summary
      of amortized cost, gross unrealized gains and losses, and fair value of fixed
      maturities is as follows:


A-23


**PROFESSIONALS
      DIRECT INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





Gross
                unrealized*December
                31, 2005*
            
            Amortized
                cost
            
            Gains
            
            Losses
            
            Fair
                value(000)
            
            (000)
            
            (000)
            
            (000)Fixed
                maturities held to maturity:Obligations
                of states and political subdivisions
            
            $
            4,312
            
            $
            11
            
            $
            30
            
            $
            4,293Fixed
                maturities available for sale:U.S.
                treasury securities and obligations of U.S. government
                agencies
            
            
            6,185
            
            
            -
            
            
            94
            
            
            6,091Obligations
                of states and political subdivisions
            
            
            11,752
            
            
            -
            
            
            357
            
            
            11,395Corporate
                securities
            
            
            10,775
            
            
            4
            
            
            182
            
            
            10,597Mortgage
                and other asset-backed securities
            
            
            1,415
            
            
            2
            
            
            4
            
            
            1,413Total
                fixed maturities
            
            $
            34,439
            
            $
            17
            
            $
            667
            
            $
            33,789





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





*December
                31, 2005*
            
            Amortized
                cost
            
            Fair
                value(000)
            
            (000)Fixed
                maturities held to maturity, other than mortgage and other
                asset-backed securities:Due
                after five years through ten years
            
            $
            1,667
            
            $
            1,674Due
                after ten years
            
            
            2,645
            
            
            2,619Total
                fixed maturities held to maturity
            
            
            4,312
            
            
            4,293Fixed
                maturities available for sale, other than mortgage and other
                asset-backed securities:Due
                in one year or less
            
            
            8,044
            
            
            7,968Due
                after one year through five years
            
            
            14,962
            
            
            14,575Due
                after five years through ten years
            
            
            4,505
            
            
            4,392Due
                after ten years
            
            
            1,201
            
            
            1,148Total
                fixed maturities available for sale
            
            
            28,712
            
            
            28,083Mortgage
                and other asset-backed securities
            
            
            1,415
            
            
            1,413$
            34,439
            
            $
            33,789





Proceeds
      from sales of available for sale fixed maturities were $7,170,000 and $6,325,011
      in 2005 and 2004, respectively, on which gross gains of $0 and $4,932 were
      realized in 2005 and 2004, respectively. There were no realized losses in either
      year.





A-24


**PROFESSIONALS
      DIRECT INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





**Other
      than Temporary Impairments of Securities and Unrealized Losses on
      Investments**





At
      December 31, 2005, the Company had 67 securities deemed to be temporarily
      impaired. These investments had unrealized losses of less than 7% each and
      no
      single security loss exceeded $40,000. Forty-seven investments have had
      unrealized losses for more than one year, which losses aggregated $549,000
      at
      December 31, 2005.


In
        concluding that investments with unrealized losses are not
        other-than-temporarily impaired, positive evidence consisted of: 1) no specific
        events related to credit risk of the issuer caused concern; 2) interest payments
        are current; 3) market prices have risen; 4) changes in market value are
        normal
        relative to fluctuations in overall interest rates; and 5) the Company has
        the
        intent and ability to hold the security until the anticipated recovery in
        value
        occurs.


The
      fair
      value and amount of unrealized losses segregated by the time period the
      investment has been in an unrealized loss position is as follows:





December
                31, 2005
            
            Less
                than 12 months
            
            Greater
                than 12 monthsFair
                value of
              investments
                with
              unrealized
              losses
            
            Gross
              unrealized
              losses
            
            Fair
                value of
              investments
                with
              unrealized
              losses
            
            Gross
              unrealized
              losses(000)
            
            (000)
            
            (000)
            
            (000)Debt
                Securities:U.S.
                treasury securities and obligations of U.S. government
                agencies
            
            $
            1,065
            
            $
            11
            
            **$**
            4,525
            
            $
            83Obligations
                of states and political subdivisions
            
            
            2,021
            
            
            23
            
            
            9,374
            
            
            334Corporate
                securities
            
            
            2,525
            
            
            51
            
            
            7,030
            
            
            131Mortgage
                and other asset-backed securities
            
            
            1,193
            
            
            3
            
            
            22
            
            
            1Totals
            
            $
            6,804
            
            $
            88
            
            $
            20,951
            
            $
            549





At
      December 31, 2005, investments with a fair value of $2,965,438 and amortized
      cost of $2,993,847 were on deposit with regulatory authorities, as required
      by
      law.





Net
      investment income was comprised of the following components:





*Year
                ended December 31,*
            
            **2005**
            
            2004**(000)**
            
            (000)Investment
                income:Fixed
                maturities
            
            **$**
            **1,054**
            
            $
            927Short-term
                investments
            
            
            **219**
            
            
            59Net
                realized gains (losses)
            
            
            **-**
            
            
            5**1,273**
            
            
            991Less
                investment expenses
            
            
            **102**
            
            
            98Net
                investment income
            
            **$**
            **1,171**
            
            $
            893





No
      individual investment exceeds ten percent of shareholders’
equity.


A-25


**PROFESSIONALS
      DIRECT INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





**4.**
            **Premiums
                and Deductibles Receivable and Allowance for Doubtful
                Accounts**





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





Deductible
      receivables are amounts due from policyholders under the terms of the policy
      when the Company pays indemnity or expenses on behalf of a policyholder. There
      are typically a limited number of policyholders with deductible balances
      outstanding. We record an allowance for doubtful accounts based on specifically
      identified amounts that we believe to be uncollectible. After all attempts
      to
      collect a receivable have failed, the receivable is written off against the
      allowance. The allowance for doubtful accounts at December 31, 2005 and 2004
      was
      $20,000 and $25,000, respectively.








**5.**
            **Intangible
                Assets**





Intangible
      assets consist of the following:





*December
                31,*
            
            2005(000)Cost:Debt
                issue costs
            
            $
            289Covenants
                not to compete
            
            
            310Renewal
                rights and customer lists
            
            
            5261,125Less
                accumulated amortization
            
            
            495Net
                intangible assets
            
            $
            630





Intangible
      assets include debt issue costs of $150,237 and $93,848 incurred in 2005 and
      2002, respectively, in connection with the issuance of trust preferred
      securities (see Note 10), and $45,000 incurred in 2003 in connection with
      additional bank financing. In 2002, the Company purchased the renewal rights
      to
      the direct written lawyers professional liability policies of Interlex Insurance
      Company for $309,000. In conjunction with this purchase, the Company obtained
      certain non-competition covenants from Interlex and its employees for $132,428
      and acquired the renewal rights and a covenant not to compete from a former
      Interlex agent for $49,371.





The
      renewal rights are being amortized on a straight line basis over fifteen years.
      The covenants are being amortized over the associated duration of the covenant
      up to 51 months. Debt issue costs are being amortized by the effective interest
      method over the term of the repayment period ranging from 3 to 30 years, and
      have been included in interest expense. Amortization expense incurred related
      to
      intangible assets during 2005 and 2004 amounted to $65,789 and $93,542,
      respectively. Intangible assets are assessed for impairment at least quarterly,
      or more often if circumstances suggest that an impairment of the carrying value
      of the asset may exist. No impairment was deemed to have occurred during 2005
      or
      2004.


A-26


**PROFESSIONALS
      DIRECT INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





Future
      amortization expense is as follows:





*Year
                ending December 31,*(000)2006
            
            $
            622007
            
            
            432008
            
            
            432009
            
            
            432010
            
            
            43Thereafter
            
            
            396$
            630








**6.**
            **Property
                and Equipment**





Property
      and equipment consist of the following:





*December
                31,*
            
            2005(000)Cost:Computer
                equipment
            
            $
            287Furniture
                and other
                equipment
            
            
            258Computer
                software
            
            
            1,237Leasehold
                improvements
            
            
            471,829Less
                accumulated depreciation and amortization
            
            
            1,476Net
                property and equipment
            
            $
            353








**7.**
            **Loss
                and Loss Adjustment Expense
                Reserves**





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





*December
                31,*
            
            **2005**
            
            2004**(000)**
            
            (000)**Balance,**beginning of year
            
            $
            **21,048**
            
            $
            13,461Less
                reinsurance balances recoverable
            
            
            **(5,699**
            **)**
            
            (2,163
            )Net
                balance, beginning of year
            
            
            **15,349**
            
            
            11,298Incurred
                related to:Current
                year
            
            
            **11,212**
            
            
            10,948Prior
                years
            
            
            **1,309**
            
            
            989Total
                incurred
            
            
            **12,521**
            
            
            11,937Paid
                related to:Current
                year
            
            
            **2,085**
            
            
            1,654Prior
                years
            
            
            **8,129**
            
            
            6,232Total
                paid
            
            
            **10,214**
            
            
            7,886Net
                balance, end of year
            
            
            **17,656**
            
            
            15,349Plus
                reinsurance balances recoverable
            
            
            **17,812**
            
            
            5,699**Balance,**end of year
            
            $
            **35,468**
            
            $
            21,048





A-27


**PROFESSIONALS
      DIRECT INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





The
        2005
        increase in incurred losses related to prior years is primarily attributable
        to
        years 2002, 2003 and 2004 and resulted from increases in reserves caused
        by
        increased loss severity. The 2004 increase in incurred losses related to
        prior
        years resulted from similar adverse loss development on primarily the 2002
        and
        2003 years.





**8.**
            **Reinsurance**





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





In
      2005
      and 2004, the Company’s net retention on the majority of the policies issued was
      $250,000 per claim.





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





*December
                31,*
            
            **2005****(000)**Paid
                loss and loss adjustment expenses
            
            **$**
            **63**Unpaid
                loss and loss adjustment expenses
            
            
            **17,812****$**
            **17,875**





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





**2005**
            
            2004**Written**
            
            **Earned**
            
            Written
            
            Earned**(000)**
            
            **(000)**
            
            (000)
            
            (000)Direct
            
            **$**
            **25,902**
            ****
            **$**
            **24,864**
            
            $
            24,009
            
            
            23,739Ceded
            
            
            **(9,501**
            **)**
            ****
            **(9,489**
            **)**
            
            (9,924
            )
            
            (7,536
            )Net
                Premiums
            
            **$**
            **16,401**
            ****
            **$**
            **15,375**
            
            $
            14,085
            
            
            16,203





As
      a
      result of reinsurance ceded, losses and loss adjustment expenses incurred were
      reduced by $14,813,363 and $5,309,163 in 2005 and 2004, respectively. This
      increase in ceded losses is primarily the result of two claims that together
      have been reserved at policy limits. Both of these cases remain unresolved
      as of
      December 31, 2005.





The
      Company holds collateral under related reinsurance agreements in the form of
      irrevocable letters of credit with various banks. At December 31, 2005, the
      balance of these letters of credit was $4,221,774.








**9.**
            **Lines
                of Credit**





At
      December 31, 2005, the Company owed $170,000 under a $1.8 million line of credit
      that bears interest at .5% over the bank’s prime rate (effectively 7.75% at
      December 31, 2005). At December 31, 2005, the Company


A-28


**PROFESSIONALS
      DIRECT INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





had
      available a second line of credit of $1,000,000 that bears interest at 1.0%
      over
      the bank’s prime rate (effectively 8.25% at December 31, 2005). The Company had
      available a third line of credit of $3,000,000 that bears interest at 1.25%
      over
      the bank’s prime rate (effectively 8.5% at December 31, 2005). This line of
      credit has a declining balance facility and matures October 1, 2006. As a result
      of the declining balance feature, the maximum credit available under this
      facility at December 31, 2005 was $1,950,000. All of the lines of credit grant
      a
      security interest in substantially all assets of the Company, Services and
      Finance. In addition, the Company provided a pledge of its shares of PDIC.
      All
      of the lines of credit impose financial covenants. The Company was in compliance
      with all covenants as of December 31, 2005.








**10.**
            **Trust
                Preferred Securities**





**Issue
      dated June 30, 2005:**





On
      June
      30, 2005, the Company issued a junior subordinated debenture (the “Debenture”)
      having a principal amount of $3,093,000 to Professionals Direct Statutory Trust
      II (the “Trust”). Cumulative interest on the Debenture accrues from June 30,
      2005, and is payable quarterly in arrears. The rate is fixed at 7.785% until
      September 15, 2010, thereafter it is variable at a rate of three-month LIBOR
      (London Interbank Offering Rate) plus 3.625%. The Debenture is subordinate
      and
      junior to all senior indebtedness (as defined in the indenture) of the Company
      with the exception of other Trust Preferred Securities. The Debenture matures
      on
      September 15, 2035, but may be redeemed in whole or in part beginning on
      September 15, 2010.





On
      June
      30, 2005, the Trust sold capital securities (“Capital Securities”) for $3
      million to investors and issued common securities (“Common Securities”) for
      $93,000 to the Company. All of the proceeds from the sale of Capital Securities
      and Common Securities were invested in the Debenture. Capital Securities and
      Common Securities represent undivided beneficial interests in the Debenture,
      which is the sole asset of the Trust. Holders of Capital Securities and Common
      Securities are entitled to receive distributions from the Trust on terms which
      correspond to those of the Debenture. Distributions by the Trust and payments
      on
      liquidation of the Trust or redemption of Capital Securities are guaranteed
      by
      the Company to the extent the Trust has funds available (the “Guarantee”). The
      Company’s obligations under the Guarantee, taken together with its obligations
      under the Debenture and the Indenture, constitute a full and unconditional
      guarantee of all of the Trust’s obligations under the Capital Securities issued
      by the Trust.





**Issue
      Dated December 4, 2002:**





On
      December 4, 2002, the Company issued a floating rate junior subordinated
      debenture (the “Debenture”) having a principal amount of $2,062,000 to
      Professionals Direct Statutory Trust I (the “Trust”). Cumulative interest on the
      Debenture accrues from December 4, 2002, and is payable quarterly in arrears.
      The rate is variable at LIBOR (London Interbank Offering Rate) plus 4.00% (not
      to exceed 12.50%). At December 31, 2005, interest accrued at an annual rate
      per
      annum equal to 8.44%. The Debenture is subordinate and junior to all senior
      indebtedness (as defined in the indenture) of the Company with the exception
      of
      other Trust Preferred Securities. The Debenture matures on December 4, 2032,
      but
      may be redeemed in whole or in part beginning on December 4, 2007.





On
      December 4, 2002, the Trust sold floating rate capital securities (“Capital
      Securities”) for $2 million to investors and issued floating rate common
      securities (“Common Securities”) for $62,000 to the Company. All of the proceeds
      from the sale of Capital Securities and Common Securities were invested in
      the
      Debenture. Capital Securities and Common Securities represent undivided
      beneficial interests in the Debenture, which is the sole asset of the Trust.
      Holders of Capital Securities and Common Securities are entitled to receive
      distributions from the Trust on terms which correspond to those of the
      Debenture. Distributions by the Trust and payments on liquidation of the Trust
      or redemption of Capital Securities are guaranteed by the Company to the extent
      the Trust has funds available (the “Guarantee”). The Company’s obligations under
      the Guarantee, taken together with its obligations under the Debenture and
      the
      Indenture, constitute a full and unconditional guarantee of all of the Trust’s
      obligations under the Capital Securities issued by the Trust.





A-29


**PROFESSIONALS
      DIRECT INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





**11.**
            **Surplus
                Certificates**





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





Certificates
      have a principal value of $1,000 each and bear simple interest at the rate
      of
      5.25% per annum from the issuance date until paid. Principal and accrued
      interest thereon may be paid only from surplus earnings, and then only upon
      the
      written consent of the OFIS and in such amounts as are determined by the Board
      of Directors. Subject to these conditions for repayment, certificates are
      redeemable by the holder after they have been outstanding for ten years. To
      date, the Company has received approval to pay certain interest on certificates
      issued prior to December 31, 1993. Interest payments during 2005 and 2004 to
      these certificate holders amounted to $621 and $0, respectively.  At
      December 31, 2005 interest accrued and unpaid was approximately
      $1,628,000.





During
      the Conversion in 2001, 1,814 surplus certificates were converted to common
      stock and interest totaling $540,798 was paid on these converted certificates.
      At December 31, 2005, 2,531 certificates remain outstanding.





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





On
      January 26, 2006, the OFIS approved the redemption of certificates and interest
      thereon aggregating $300,000.








**12.**
            **Statutory
                Information**





*Dividend
      Restrictions*





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





*Statutory
      Information*





At
      December 31, 2005, statutory surplus of PDIC was $17.5 million. The State of
      Michigan requires insurance companies domiciled in Michigan to have minimum
      statutory surplus of $7 million. Statutory net income for the years ended
      December 31, 2005 and 2004 was $203,336 and $38,988, respectively.





*Risk-Based
      Capital*





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


A-30


**PROFESSIONALS
      DIRECT INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





**13.**
            **Federal
                Income Taxes**





Federal
      income tax expense consists of:





*Year
                ended December 31,*
            
            **2005**
            
            2004**(000)**
            
            (000)Current
            
            **$**
            **220**
            
            $
            527Deferred
            
            
            **(43**
            **)**
            
            (267
            )**$**
            **177**
            
            $
            260





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





*Year
                ended December 31,*
            
            **2005**
            
            2004**(000)**
            
            (000)Operations
            ****
            **$**
            **177**
            
            $
            260Equity
                - accumulated other comprehensive loss
            
            
            **(97**
            **)**
            
            (55
            )





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





*Year
                ended December 31,*
            
            **2005**
            
            2004Federal
                statutory tax rate
            
            
            **34.0**
            **%**
            
            34.0
            %Reduction
                in income taxes relating to tax-exempt municipal bond
                interest
            
            
            **(7.9**
            **)**
            
            (1.1
            )Effective
                tax rate
            
            
            **26.1**
            **%**
            
            32.9
            %





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





*December
                31,*
            
            2005(000)Deferred
                tax assets:Loss
                reserve discounting
            
            $
            438Unearned
                premium reserves
            
            
            517Interest
                on surplus certificates
            
            
            544Other
            
            
            305Total
                gross deferred tax assets
            
            
            1,804Deferred
                tax liabilities:Deferred
                acquisition costs
            
            
            (226
            )Net
                deferred federal income tax asset
            
            $
            1,578





A-31


**PROFESSIONALS
      DIRECT INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





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








**14.**
            **Deferred
                Acquisition Costs and Unearned Ceding
                Commission**





Changes
      in deferred acquisition costs are summarized as follows:





*Year
                ended December 31,*
            
            **2005**
            
            2004**(000)**
            
            (000)**Balance,**beginning of year
            
            **$**
            **1,415**
            
            $
            1,629Amounts
                deferred:Commissions
            
            
            **1,186**
            
            
            1,417Premium
                taxes
            
            
            **420**
            
            
            391Internal
                underwriting expenses
            
            
            **1,425**
            
            
            1,356Total
                amounts deferred
            
            
            **4,446**
            
            
            4,793Less
                amortization
            
            
            **(3,068**
            **)**
            
            (3,378
            )**Balance,**end of year
            
            **$**
            **1,378**
            
            $
            1,415





Changes
      in unearned ceding commission are summarized as follows:





*Year
                ended December 31,*
            
            **2005**
            
            2004**(000)**
            
            (000)**Balance,**beginning of year
            
            **$**
            **786**
            
            $
            111Ceding
                commissions deferred
            
            
            **1,624**
            
            
            1,755Less
                amortization
            
            
            **(1,696**
            **)**
            
            (1,080
            )**Balance,**end of year
            ****
            **$**
            **714**
            
            $
            786








**15.**
            **Commitments
                and Contingencies**





The
      Company has entered into operating leases for office space and equipment. Rental
      expense for these items totaled $209,145 and $200,242 in 2005 and 2004,
      respectively. Future net minimum lease payments under noncancelable leases
      are
      as follows:





*Year
                ending December 31,*(000)2006
            
            $
            1212007
            
            
            212008
            
            
            6$
            148





A-32




**PROFESSIONALS
      DIRECT INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


The
      Company purchased an annuity policy from a life insurance company for purposes
      of funding a structured claim settlement. At December 31, 2005, the Company
      remains contingently liable for this settlement in the amount of
      $396,000.


On
        March
        21, 2006, the Company entered into a non-cancelable lease for office space.
        The
        lease is for ten years beginning July 1, 2006 with fixed annual increases
        in
        minimum lease payments. Lease payments are waived for the first year. This
        lease
        will be accounted for in accordance with Financial
        Accounting Standards Board (FASB) Statement No. 13 *,
        Accounting for Leases,* which
        requires that lease expense be equal to the pro-rata portion of the fixed
        lease
        payments over the term of the lease rather than as paid. Future net minimum
        lease payments will be as follows:




*Year
                ending December 31,*(000)2006
            
            $
            292007
            
            
            1192008
            
            
            1792009
            
            
            1832010
            
            
            187Thereafter
            
            
            1,094$
            1,791








**16.**
            **Benefit
                Plans**





The
      Company maintains a 401(k) defined contribution employee benefit plan covering
      substantially all employees meeting eligibility requirements. The Company
      matches 50% of employee contributions up to an annual maximum of 5% of an
      employee’s salary. The Company’s expense under this plan was $54,160 and $53,027
      in 2005 and 2004, respectively.





Effective
      January 1, 2001, the Company established a Savings & Retirement Plan. This
      plan was established to facilitate employee purchases of Company stock upon
      demutualization. There has been no activity in this plan. Effective December
      31,
      2005, the Company has merged the Savings & Retirement Plan into the 401(k)
      plan.





The
      Company established an Outside Directors Deferred Compensation Plan and an
      Employee and Director Stock Purchase Plan effective March 23, 2005 and approved
      by shareholders May 11, 2005. Each plan authorizes the issuance of 35,000
      shares. The Deferred Compensation Plan permits deferral of up to 100% of
      directors’ fees converted to shares based on their fair market value. The Stock
      Purchase Plan permits employees and directors to purchase Company stock at
      90%
      of fair market value. During 2005, there was no activity in either
      plan.








**17.**
            **Related
                Party Transaction**





The
      Company’s president serves on the Board of Directors and is treasurer of Lawyers
      Reinsurance Company (“Lawyers Re”), in which the Company has an investment. Lawyers
      Re is a participant in the reinsurance treaties of PDIC. During 2005 and 2004,
      premiums of $336,000 and $253,000 were ceded to Lawyers Re. During 2005,
      $155,000 in losses were paid by Lawyers Re. As of December 31, 2005, unearned
      premiums ceded to Lawyers Re were $147,000.





A-33


**PROFESSIONALS
      DIRECT INC. AND SUBSIDIARIES**


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS





**18.**
            **Other
                Comprehensive Income
                (Loss)**





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





*Year
                ended December 31,*
            
            **2005**
            
            2004**(000)**
            
            (000)Increase
                in unrealized holding loss on securities
            ****
            **$**
            **(285**
            **)**
            $
            (156
            )Income
                tax benefit
            
            
            **97**
            
            
            53**(188**
            **)**
            
            (103
            )Reclassification
                adjustment for gains included in net income
            
            
            **-**
            
            
            (5
            )Income
                tax benefit
            
            
            **-**
            
            
            2-
            
            
            (3
            )Other
                comprehensive income (loss)
            
            **$**
            **(188**
            **)**
            $
            (106
            )





A-34





**PROFESSIONALS
      DIRECT, INC. DIRECTORS AND EXECUTIVE OFFICERS**








At
      December 31, 2005




**Board
        of Directors**
 
 David
        W.
        Crooks - Value
        Added Consultants ,
        Ltd.
 (general
        business consulting)
 
 Tracy
        T.
        Larsen - Barnes & Thornburg, LLP
 (a
        full-service law firm)
 
 Thomas
        J.
        Ryan - Thomas J. Ryan, P.C.
 (attorney
        at law)
 
 Joseph
        A.
        Fink - Member, Dickinson Wright, PLLC
 (a
        full-service law firm)
 
 Julius
        A.
        Otten - Independent consultant
 (consulting
        on matters in the insurance industry)
 
 Thomas
        F.
        Dickinson - President and Chief Executive Officer of FinCor Holdings, Inc.
        / MHA
        Insurance Company
 (medical
        liability insurance provider)
 
 Blake
        W.
        Krueger - President and Chief Operating Officer of Wolverine World Wide,
        Inc.
 (international
        marketer of footwear and accessories)
 
 Mary
        L.
        Ursul - Senior Director of Business Development/Strategic Planning of FinCor
        Holdings, Inc. / MHA Insurance Company
 (medical
        liability insurance provider)
 
 Stephen
        M. Tuuk - President and Chief Executive Officer of Professionals Direct,
        Inc.
 
 Stephen
        M. Westfield - Vice President, Secretary and Treasurer of Professionals Direct,
        Inc.
 
 **Executive
        Officers**
 
 Stephen
        M. Tuuk - Chairman, President and Chief Executive
 
 Stephen
        M. Westfield - Vice President, Secretary and Treasurer