Exhibit 13

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| | Professionals
          Direct, Inc.
| | ------------------------------------

2004
Annual Report

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PRESIDENT'S MESSAGE

TO OUR SHAREHOLDERS:

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

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

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

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

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

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

Sincerely,



Stephen M. Tuuk
President and Chief Executive Officer

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Professionals Direct, Inc.

2004 Annual Report

|Contents                                          | Page
|------------------------------------------------- | ----
|                                                  |     
|Professionals Direct, Inc.                        | 2   
|                                                  |     
|A Message to our Shareholders                     | 2   
|                                                  |     
|Five-Year Summary of Selected Financial Reporting | 3   
|                                                  |     
|Management's Discussion and Analysis              | 5   
|                                                  |     
|Report of Independent Public Accountants          | 14  
|                                                  |     
|Consolidated Financial Statements                 | 15  
|                                                  |     
|Notes to Consolidated Financial Statements        | 19  

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Professionals Direct, Inc.

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

A Message to our Shareholders

This 2004 Annual Report contains audited financial statements and a detailed financial review. This is Professionals Direct, Inc.'s 2004 Annual Report to Shareholders. Although attached to our proxy statement, this report is not part of our proxy statement, is not deemed to be soliciting material, and is not deemed to be filed with the Securities and Exchange Commission (the "SEC") except to the extent that it is expressly incorporated by reference in a document filed with the SEC.

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

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Five Year Summary of Selected Financial Data

The following table provides selected consolidated financial and operating data (unaudited) for Professionals Direct and its subsidiaries as of December 31, 1999, 2000, 2001, 2002 and 2003 and for the years then ended. The consolidated financial and operating data are derived from, and should be read in conjunction with, Professionals Direct's Consolidated Financial Statements and Notes thereto.

|                                                                                 | Years Ended                                                
|-------------------------------------------------------------------------------- | -----------------------------------------------------------
|                                                                                 | 2003                                                       
|                                                                                 |                                                            
|                                                                                 | (in thousands of dollars, except for ratios and ratio data)
|                                                                                 |                                                            
|Revenue Data:                                                                    |                                                            
|                                                                                 |                                                            
|Direct premiums written                                                          | $24,294                                                    
|                                                                                 |                                                            
|Net premiums written                                                             | 20,118                                                     
|                                                                                 |                                                            
|Net premiums earned                                                              | 15,927                                                     
|                                                                                 |                                                            
|Fees and commissions earned                                                      | 619                                                        
|                                                                                 |                                                            
|Net investment income                                                            | 926                                                        
|                                                                                 |                                                            
|Finance and other income earned                                                  | 127                                                        
|                                                                                 |                                                            
|Total Revenues                                                                   | 17,599                                                     
|                                                                                 |                                                            
|Losses and Expenses:                                                             |                                                            
|                                                                                 |                                                            
|Losses and loss adjustment expenses                                              | 7,737                                                      
|                                                                                 |                                                            
|Operating expenses                                                               | 5,420                                                      
|                                                                                 |                                                            
|Interest expense                                                                 | 300                                                        
|                                                                                 |                                                            
|Total Expenses                                                                   | 13,457                                                     
|                                                                                 |                                                            
|Income before federal income taxes and
policyholder dividend                     | 4,142                                                      
|                                                                                 |                                                            
|Policyholder dividend                                                            | 0                                                          
|                                                                                 |                                                            
|Income (loss) before federal income taxes                                        | 4,142                                                      
|                                                                                 |                                                            
|Federal income taxes (benefit)                                                   | 1,442                                                      
|                                                                                 |                                                            
|Net income (loss)                                                                | $2,700                                                     
|                                                                                 |                                                            
|Selected Balance Sheet Data:
   (at year end)                                    |                                                            
|                                                                                 |                                                            
|Total investments and cash                                                       | 36,410                                                     
|                                                                                 |                                                            
|Total assets                                                                     | 46,359                                                     
|                                                                                 |                                                            
|Total liabilities                                                                | 36,496                                                     
|                                                                                 |                                                            
|Total shareholders' equity (2003-2001) or
    policyholders' surplus (2000-1999) | 9,863                                                      
|                                                                                 |                                                            
|Per Share Data: (1)                                                              |                                                            
|                                                                                 |                                                            
|Net Income (loss)                                                                | $8.10                                                      
|                                                                                 |                                                            
|Book value                                                                       | $29.57                                                     
|                                                                                 |                                                            
|Selected GAAP Ratios:                                                            |                                                            
|                                                                                 |                                                            
|Return on prior year equity                                                      | 36.9%                                                      
|                                                                                 |                                                            
|Return on current year revenue                                                   | 15.3%                                                      
|                                                                                 |                                                            
|Return on current year assets                                                    | 5.8%                                                       

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|                                                             | Years Ended                                                
|------------------------------------------------------------ | -----------------------------------------------------------
|                                                             | 2003                                                       
|                                                             |                                                            
|                                                             | (in thousands of dollars, except for ratios and ratio data)
|                                                             |                                                            
|Statutory (SAP) Ratio Data:                                  |                                                            
|                                                             |                                                            
|Loss Ratio (2)                                               | 49.2%                                                      
|                                                             |                                                            
|Expense Ratio (3)                                            | 30.8%                                                      
|                                                             |                                                            
|Combined ratio (4)                                           | 80.0%                                                      
|                                                             |                                                            
|Operating Ratio (5)                                          | 74.2%                                                      
|                                                             |                                                            
|A. M. Best Industry% operating ratio (6)                     | N/A                                                        
|                                                             |                                                            
|Statutory surplus (7)                                        | 16,132                                                     
|                                                             |                                                            
|Earned surplus (8)                                           | 13,601                                                     
|                                                             |                                                            
|Ratio of statutory net written premiums to
statutory surplus | 124.7%                                                     

| | (1) | The Company became a shareholder owned company on July 1, 2001, following the conversion and demutualization of its predecessor, Michigan Lawyers Mutual Insurance Company. Accordingly, per share data is presented only for 2002 and 2003, the only years of operations as a shareholder owned company.                                                                  
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | Calculated by dividing losses and loss adjustment expenses by net premiums earned.                                                                                                                                                                                                                                                                                         
| | (3) | Calculated by dividing other underwriting expenses by net premiums written.                                                                                                                                                                                                                                                                                                
| | (4) | The sum of the statutory loss and loss adjustment expense ratio and the total underwriting expense ratio.                                                                                                                                                                                                                                                                  
| | (5) | Calculated by taking the combined ratio and subtracting the ratio of net investment income divided by net premiums earned. An operating ratio of more than 100% indicates that an insurance company is unable to recoup underwriting losses with investment earnings.                                                                                                      
| | (6) | As reported by A. M. Best, Best's Aggregate & Averages - Property - Casualty (Other Liability Quantitative Analysis Report).                                                                                                                                                                                                                                               
| | (7) | Statutory surplus includes $4.619 million in surplus certificates for 1999. As of December 31, 2000, statutory surplus includes $4.345 million in surplus certificates. For 2003, 2002 and 2001, statutory surplus includes $2.531 million in surplus certificates. In all years, interest on the surplus certificates was not accrued until actually approved by the OFIS.
| | (8) | Statutory surplus less surplus contributed under surplus certificates.                                                                                                                                                                                                                                                                                                     

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Management's Discussion and Analysis

The following discussion and analysis for the years ended December 31, 2003 and 2002 should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this report. The following discussion of our financial condition and results of operations contains certain forward-looking statements. A discussion of the limitations of forward looking statements appears at the end of this section.

Introduction

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

|                                                             | Years Ended                                         
|------------------------------------------------------------ | ----------------------------------------------------
|                                                             | 2003                                                
|                                                             | (in thousands of dollars, except for per share data)
|                                                             |                                                     
|Revenue Data:                                                |                                                     
|                                                             |                                                     
|Net premiums earned                                          | 15,927                                              
|                                                             |                                                     
|Fees and commissions earned                                  | 619                                                 
|                                                             |                                                     
|Net investment income                                        | 926                                                 
|                                                             |                                                     
|Finance and other income earned                              | 127                                                 
|                                                             |                                                     
|Total Revenues                                               | 17,599                                              
|                                                             |                                                     
|Losses and Expenses:                                         |                                                     
|                                                             |                                                     
|Losses and loss adjustment expenses                          | 7,737                                               
|                                                             |                                                     
|Operating expenses                                           | 5,420                                               
|                                                             |                                                     
|Interest expense                                             | 300                                                 
|                                                             |                                                     
|Total Expenses                                               | 13,457                                              
|                                                             |                                                     
|Income before federal income taxes and
policyholder dividend | 4,142                                               
|                                                             |                                                     
|Policyholder dividend                                        | 0                                                   
|                                                             |                                                     
|Income (loss) before federal income taxes                    | 4,142                                               
|                                                             |                                                     
|Federal income taxes (benefit)                               | 1,442                                               
|                                                             |                                                     
|Net income (loss)                                            | $2,700                                              
|                                                             |                                                     
|Selected Balance Sheet Data:
   (at year end)                |                                                     
|                                                             |                                                     
|Total investments and cash                                   | $36,410                                             
|                                                             |                                                     
|Total assets                                                 | 46,359                                              
|                                                             |                                                     
|Total liabilities                                            | 36,496                                              
|                                                             |                                                     
|Total shareholders' equity                                   | 9,863                                               
|                                                             |                                                     
|Per Share Data:                                              |                                                     
|                                                             |                                                     
|Net Income (loss)                                            | $8.10                                               
|                                                             |                                                     
|Book value                                                   | $29.57                                              

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Results of Operations (000 omitted):

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

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

|                        | Years Ended              
|----------------------- | -------------------------
|                        | 2003                     
|                        | (in thousands of dollars)
|                        |                          
|Direct premiums written | $24,294                  
|                        |                          
|Net premiums written    | 20,118                   

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

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

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

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

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

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

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

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

Net Investment Income.In 2003, we earned investment income primarily from yields on fixed income investments of PDIC. Investment income decreased $484 or 34% in 2003 as compared to 2002. The decrease is primarily due to the reduction in realized capital gains. Gains from the sale of securities for 2003 totaled $172 and in 2002 were $727. During the fourth quarter of 2002, PDIC, in order to take advantage of favorable bond market conditions, sold virtually all of its bonds and realized gains of $724. While similar market conditions were present during 2003, the magnitude of the gain that could be realized was much less. Exclusive of the gains, investment income increased $71. The increase is largely attributable to the overall increase in the size of the investment portfolio as the overall percentage yield on fixed income investments declined from 2002 to 2003.

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

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

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

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

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

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

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

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

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

When interest rates decline, the cost of borrowing decreases, and the market value of our investment portfolio, which primarily consists of debt securities, generally increases. At the same time, however, the overall yield on new investments tends to decrease. When interest rates increase, the opposite effects are realized. Interest rates continue to be at historically low levels. If interest rates begin to increase, it will be unlikely that we will realize any gains on portfolio assets during 2004. However, we are hopeful that lower gains will be offset by increased interest earned, thus reducing the impact on liquidity.

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

At December 31, 2003, we had cash and cash equivalents of $7,006. This represents that portion of total assets necessary to be kept liquid to meet demand for operations and loss and reinsurance payments. It is expected that this will be maintained in cash and other short-term instruments to meet cash flow needs for 2004.

We have three lines of credit available through the same financial institution that also provide liquidity. All of the lines of credit grant a security interest in substantially all assets of the Company, Services and Finance. In addition the Company provided a pledge of its shares of PDIC generally subject to the rights of policyholders under insurance laws and the rights of insurance regulators. One line of credit is a $1,800 revolving line of credit which is used to assist Finance with its financing of insurance premiums. It bears interest at .5% over the bank's prime rate. The second line of credit is a $1,000 line of credit which can be used to provide financing for potential acquisitions. It bears interest at 1% over the bank's prime rate. The third line of credit is a $3,000 facility that requires quarterly principal payments of $150 beginning April 1, 2004 and matures October 1, 2006. The lines of credit require, among other things, that we maintain a minimum tangible net worth of $7,500, that 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.

Based on historical trends, market conditions and our business plans, we believe that our existing resources and sources of funds will be sufficient to meet our short-term and long-term liquidity needs over the next year and beyond. Because economic, market and regulatory conditions may change, however, there can be no assurance that

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Critical Accounting Estimates and Judgments

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

Loss and Loss Adjustment Expense Reserves

PDIC is required by applicable insurance laws and regulations to maintain reserves for payment of losses and loss adjustment expenses for reported claims and for claims incurred but not reported, arising from policies that have been issued. These laws and regulations require that PDIC provide for the ultimate cost of those claims without regard to how long it takes to settle them or the time value of money. The determination of reserves involves actuarial and statistical projections of what PDIC expects to be the cost of the ultimate settlement and administration of such claims based on facts and circumstances then known, estimates of future trends in claim severity, and other variable factors such as inflation and changing judicial theories of liability. As part of the process of establishing those estimates, the following should be noted:

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

(b)          In the first several years after a claim is reported, there is a significant amount of uncertainty over what the ultimate loss will be. Therefore, estimating the loss reserve liability for claims recently reported tends to be more difficult. As claims get older, the loss reserve liability may be estimated with less inaccuracy, but are still be subject to material fluctuations until the claim is paid or otherwise closed. Eventually, all the claims in a particular year are closed and no additional development, favorable or adverse, will be experienced because the amount of the claims is certain.

(c)          One factor that impacts year to year incurred losses is the existence of reserve development from prior years. Favorable or adverse development occurs when subsequent estimates of the loss reserve liability change from their initial estimate. A subsequent decrease in the estimate results in favorable development. A subsequent increase in the estimate results in adverse development. Development, either favorable or adverse, is reflected as a decrease or increase in the current year loss and loss adjustment expense total.

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

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

Each quarter, PDIC computes its estimated liability using appropriate principles and procedures. PDIC's independent actuary also reviews its reserves twice a year. Because the establishment of loss reserves is an inherently uncertain process, however, there can be no assurance that losses will not exceed reserves. Adjustments in aggregate reserves, if any, are reflected in the operating results of the period during which such adjustments are

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A reconciliation of the beginning and ending net liability for unpaid losses and loss adjustment expenses for the years ended December 31, 2003 and 2002 is provided in Note 7 to the consolidated financial statements included in this report.

The following table shows the development of the reserve for unpaid losses and loss adjustment expenses (excluding unallocated loss adjustment expenses) for report years 1993 through 2003 for PDIC. The top line of the table shows the reserve for unpaid losses and loss adjustment expense at the respective balance sheet dates. The upper portion of the table shows the cumulative amounts paid in successive years. The lower portion of the table shows the reestimated amount of losses based on experience as of the end of each succeeding year. The estimates change as claims settle and more information becomes known about the ultimate frequency and severity of claims for individual years. A redundancy (deficiency) exists when the reestimated liability at each December 31 is less (greater) than the prior year's liability estimate. The "cumulative redundancy" (deficiency) for a calendar year represents the difference between the initial and current year estimate for each calendar year.

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

|                                                            | Report Year Ended December 31,
|----------------------------------------------------------- | ------------------------------
|                                                            | 1993                          
|                                                            | (in thousands)                
|Reserve for unpaid losses and
     loss adjustment expenses | $3,321                        
|                                                            |                               
|Cumulative amount of liability
     paid through:           |                               
|One year later                                              | 976                           
|Two years later                                             | 2,239                         
|Three years later                                           | 2,963                         
|Four years later                                            | 3,040                         
|Five years later                                            | 3,512                         
|Six years later                                             | 3,551                         
|Seven years later                                           | 3,551                         
|Eight years later                                           | 3,551                         
|Nine years later                                            | 3,551                         
|Ten years later                                             | 3,551                         
|                                                            |                               
|Reestimated net liability as of:                            |                               
|One year later                                              | 3,177                         
|Two years later                                             | 3,155                         
|Three years later                                           | 3,375                         
|Four years later                                            | 3,505                         
|Five years later                                            | 3,679                         
|Six years later                                             | 3,625                         
|Seven years later                                           | 3,598                         
|Eight years later                                           | 3,551                         
|Nine years later                                            | 3,551                         
|Ten years later                                             | 3,551                         
|                                                            |                               
|Net cumulative (deficiency)
     redundancy                 | (230)                         

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

---

An independent actuary that specializes in the lawyers' professional liability industry performs a semi-annual study for PDIC that results in a recommended reserve level for losses and loss adjustment expenses. The actuary reviews PDIC's historical claim payment data and premiums data. In addition, the actuary performs statistical analyses based upon many factors, including the size of the firms insured, the ages of the attorneys, the practice areas of the attorneys, and the nature of the underlying errors that drive the claims. The actuary also considers the terms of PDIC's reinsurance contracts. Ultimately, based on this examination, the actuary provides PDIC with an estimate of the reserves that should be recorded. These estimates vary from study to study based on new information available about previous claims and uncertainties inherent in new claims. Occasionally, as can be seen in the table, the estimates initially recorded for losses and loss adjustment expenses based upon the actuarial studies 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 require reserves to be reported net (i.e. after reinsurance). Generally accepted accounting principles require reserves to be reported gross (i.e. before reinsurance) with a corresponding asset established for the reinsurance recoverable. When compared on a net basis, Statutory and GAAP reserves are identical.

Market for Common Stock and Dividends

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

Holders. As of December 31, 2003, there were approximately 790 record holders of the Company's common stock.

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

Recent Sales of Unregistered Securities. All of the Company's outstanding shares were sold in an offering conducted pursuant to the Conversion. The offering was completed on June 29, 2001. The Company offered 290,000 shares through a subscription offering and engaged Donnelly, Penman, French, Haggarty & Co. as its placement agent to offer and sell 43,500 shares through a best efforts offering. A total of 333,500 shares of common stock were issued under the offering. The net cash proceeds from the offering were $1,391,952 (after placement agent expenses of $129,048) and were used as additional surplus to fund the Company's growth in written premiums. In addition to cash, the Company received 1,814 Surplus Certificates, valued at $1,000 each, that were exchanged in lieu of payment for the shares. The common stock sold pursuant to the offering was issued in reliance on an exemption from registration under Section 3(a)(11) of the federal Securities Act of 1933 and Rule 147 promulgated thereunder. As such, the shares were only offered and sold to bona fide residents of Michigan and could not be transferred to any person that was not a bona fide resident of Michigan during the nine-month period following the last sale in the Offering.

---

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

Equity Compensation Plans. As of December 31, 2003, no equity securities of the Company were authorized for issuance under compensation plans.

Forward-Looking Statements

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

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

| |  | future economic conditions and the legal and regulatory environment in the markets served by the Company's subsidiaries;                                   
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                            
| |  | re-insurance market conditions, including changes in pricing and availability of re-insurance;                                                             
| |   |                                                                                                                                                            
| |  | financial market conditions, including, but not limited to, changes in interest rates and the values of investments;                                       
| |   |                                                                                                                                                            
| |  | inflation;                                                                                                                                                 
| |   |                                                                                                                                                            
| |  | credit worthiness of the issuers of investment securities, reinsurers and others with whom the Company and its subsidiaries do business;                   
| |   |                                                                                                                                                            
| |  | estimates of loss reserves and trends in losses and loss adjustment expenses;                                                                              
| |   |                                                                                                                                                            
| |  | changing competition;                                                                                                                                      
| |   |                                                                                                                                                            
| |  | the company's ability to execute its business plan;                                                                                                        
| |   |                                                                                                                                                            
| |  | the effects of war and terrorism on investment and reinsurance markets;                                                                                    
| |   |                                                                                                                                                            
| |  | changes in financial ratings issued by independent organizations, including A.M. Best, Standard & Poors and Moody's;                                       
| |   |                                                                                                                                                            
| |  | the company's ability to enter new markets successfully and capitalize on growth opportunities; and                                                        
| |   |                                                                                                                                                            
| |  | changes in the laws, rules and regulations governing insurance holding companies and insurance companies, as well as applicable tax and accounting matters.

---

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

---

Independent Auditor's Report

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

We have audited the accompanying consolidated balance sheet of Professionals Direct Inc. and Subsidiaries as of December 31, 2003, and the related consolidated statements of income and comprehensive income, shareholders' equity and cash flows for the two years in the period then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Professionals Direct Inc. and Subsidiaries as of December 31, 2003, and the consolidated results of their operations and their cash flows for the two years in the period then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ BDO Seidman, LLP

Grand Rapids, Michigan
March 4, 2004

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

|December 31,                                                                                        |  |  |   | 2003   |  
|--------------------------------------------------------------------------------------------------- |  |  | - | ------ | -
|                                                                                                    |  |  |   |        |  
|Assets (Note 9)                                                                                     |  |  |   | (000)  |  
|                                                                                                    |  |  |   |        |  
|Fixed maturities available for sale, at fair value (Note 3)                                         |  |  | $ | 29,136 |  
|Other invested asset, at cost which approximates fair value                                         |  |  |   | 268    |  
|                                                                                                    |  |  |   |        |  
|Total investments                                                                                   |  |  |   | 29,404 |  
|                                                                                                    |  |  |   |        |  
|Cash and cash equivalents                                                                           |  |  |   | 7,006  |  
|Receivables:                                                                                        |  |  |   |        |  
|Premiums (Note 4)                                                                                   |  |  |   | 1,252  |  
|Amounts due from reinsurers (Note 8)                                                                |  |  |   | 2,366  |  
|Deductibles (Note 4)                                                                                |  |  |   | 33     |  
|Investment income                                                                                   |  |  |   | 357    |  
|Ceding commissions                                                                                  |  |  |   | 298    |  
|Prepaid reinsurance premiums                                                                        |  |  |   | 1,775  |  
|Property and equipment, net (Note 6)                                                                |  |  |   | 404    |  
|Deferred acquisition costs (Note 14)                                                                |  |  |   | 1,629  |  
|Net deferred federal income taxes (Note 13)                                                         |  |  |   | 1,132  |  
|Intangible assets, net (Note 5)                                                                     |  |  |   | 678    |  
|Other assets                                                                                        |  |  |   | 25     |  
|                                                                                                    |  |  |   |        |  
|                                                                                                    |  |  |   | 16,955 |  
|                                                                                                    |  |  |   |        |  
|Total Assets                                                                                        |  |  | $ | 46,359 |  
|                                                                                                    |  |  |   |        |  
|Liabilities and Shareholders' Equity                                                                |  |  |   |        |  
|                                                                                                    |  |  |   |        |  
|Liabilities                                                                                         |  |  |   |        |  
|Loss and loss adjustment expense reserves (Note 7)                                                  |  |  | $ | 13,461 |  
|Unearned premiums                                                                                   |  |  |   | 10,468 |  
|Amounts due to reinsurers                                                                           |  |  |   | 493    |  
|Lines of credit (Note 9)                                                                            |  |  |   | 4,274  |  
|Unearned ceding commission (Note 14)                                                                |  |  |   | 111    |  
|Accrued expenses and other liabilities                                                              |  |  |   | 1,469  |  
|Accrued interest                                                                                    |  |  |   | 1,383  |  
|Federal income taxes payable                                                                        |  |  |   | 306    |  
|Surplus certificates (Note 11)                                                                      |  |  |   | 2,531  |  
|Trust preferred securities (Note 10)                                                                |  |  |   | 2,000  |  
|                                                                                                    |  |  |   |        |  
|Total Liabilities                                                                                   |  |  |   | 36,496 |  
|                                                                                                    |  |  |   |        |  
|Commitments and Contingencies(Notes 8, 9 and 15)                                                    |  |  |   |        |  
|                                                                                                    |  |  |   |        |  
|Shareholders' Equity(Note 11)                                                                       |  |  |   |        |  
|Preferred stock, no par (500,000 shares authorized, no shares issued)                               |  |  |   | -      |  
|Common stock, no par (5,000,000 shares authorized, 333,500 shares
          issued and outstanding) |  |  |   | 3,206  |  
|Retained Earnings                                                                                   |  |  |   | 6,768  |  
|Accumulated other comprehensive loss (Note 18)                                                      |  |  |   | (111   | )
|                                                                                                    |  |  |   |        |  
|Total Shareholders' Equity                                                                          |  |  |   | 9,863  |  
|                                                                                                    |  |  |   |        |  
|Total Liabilities and Shareholders' Equity                                                          |  |  | $ | 46,359 |  

See accompanying notes to consolidated financial statements.

---

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

|Year ended December 31,                                                           |   | 2003   |   |   | 2002  |  
|--------------------------------------------------------------------------------- | - | ------ | - | - | ----- | -
|                                                                                  |   | (000)  |   |   | (000) |  
|Revenues                                                                          |   |        |   |   |       |  
|Net premiums earned (Note 8)                                                      | $ | 15,927 |   | $ | 6,790 |  
|Fees and commissions earned                                                       |   | 619    |   |   | 474   |  
|Net investment income (Note 3)                                                    |   | 926    |   |   | 1,410 |  
|Finance and other income earned                                                   |   | 127    |   |   | 116   |  
|                                                                                  |   |        |   |   |       |  
|Total revenues                                                                    |   | 17,599 |   |   | 8,790 |  
|                                                                                  |   |        |   |   |       |  
|Expenses                                                                          |   |        |   |   |       |  
|Losses and loss adjustment expenses
          incurred (Notes 7 and 8)            |   | 7,737  |   |   | 4,851 |  
|Operating and administrative (Note 14)                                            |   | 5,420  |   |   | 3,511 |  
|Interest                                                                          |   | 300    |   |   | 200   |  
|                                                                                  |   |        |   |   |       |  
|Total expenses                                                                    |   | 13,457 |   |   | 8,562 |  
|                                                                                  |   |        |   |   |       |  
|Income before federal income tax expense (benefit)
     and policyholder dividend |   | 4,142  |   |   | 228   |  
|Policyholder dividend (Note 19)                                                   |   | -      |   |   | 316   |  
|                                                                                  |   |        |   |   |       |  
|Income (loss) before federal income tax expense (benefit)                         |   | 4,142  |   |   | (88   | )
|                                                                                  |   |        |   |   |       |  
|Federal Income Tax Expense (Benefit)(Note 13)                                     |   | 1,442  |   |   | (62   | )
|                                                                                  |   |        |   |   |       |  
|Net Income (Loss)                                                                 |   | 2,700  |   |   | (26   | )
|                                                                                  |   |        |   |   |       |  
|Other Comprehensive Income (Loss)(Note 18)                                        |   | (152   | ) |   | 55    |  
|                                                                                  |   |        |   |   |       |  
|Comprehensive Income                                                              | $ | 2,548  |   | $ | 29    |  
|                                                                                  |   |        |   |   |       |  
|Per share of common stock (not in thousands):                                     |   |        |   |   |       |  
|Basic and diluted net income (loss) per share                                     | $ | 8.10   |   |   | (0.08 | )
|Basic and diluted comprehensive income per share                                  |   | 7.64   |   |   | 0.09  |  

See accompanying notes to consolidated financial statements.

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

|                                                                                    | Common
shares |         | Common
stock
par value |       | Retained
earnings | Accumulated
other
comprehensive
income (loss) |   |       | Total |  
|----------------------------------------------------------------------------------- | ------------- | ------- | ---------------------- | ----- | ----------------- | --------------------------------------------- | - | ----- | ----- | -
|                                                                                    |               |         |                        | (000) |                   | (000)                                         |   | (000) |       |  
|                                                                                    |               |         |                        |       |                   |                                               |   |       |       |  
|Balance, January 1, 2002                                                            |               | 333,500 | $                      | 3,206 | $                 | 4,094                                         | $ | (14   | )     | $
|                                                                                    |               |         |                        |       |                   |                                               |   |       |       |  
|Net loss for the year                                                               |               | -       |                        | -     |                   | (26                                           | ) | -     |       |  
|                                                                                    |               |         |                        |       |                   |                                               |   |       |       |  
|Net appreciation on available
     for sale securities, net of
     taxes (Note 18) |               | -       |                        | -     |                   | -                                             |   | 55    |       |  
|                                                                                    |               |         |                        |       |                   |                                               |   |       |       |  
|Balance, December 31, 2002                                                          |               | 333,500 | $                      | 3,206 | $                 | 4,068                                         | $ | 41    |       | $
|                                                                                    |               |         |                        |       |                   |                                               |   |       |       |  
|Net income for the year                                                             |               |         |                        |       |                   | 2,700                                         |   |       |       |  
|                                                                                    |               |         |                        |       |                   |                                               |   |       |       |  
|Net depreciation on available
     for sale securities, net of
     taxes (Note 18) |               |         |                        |       |                   |                                               |   | (152  | )     |  
|                                                                                    |               |         |                        |       |                   |                                               |   |       |       |  
|Balance, December 31, 2003                                                          |               | 333,500 | $                      | 3,206 | $                 | 6,768                                         | $ | (111  | )     | $

See accompanying notes to consolidated financial statements.

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

|Year ended December 31,                                                                     |   | 2003    |   |   | 2002    |  
|------------------------------------------------------------------------------------------- | - | ------- | - | - | ------- | -
|                                                                                            |   | (000)   |   |   | (000)   |  
|Operating Activities                                                                        |   |         |   |   |         |  
|Net income (loss)                                                                           | $ | 2,700   |   | $ | (26     | )
|Adjustments to reconcile net income (loss) to net cash from operating
          activities: |   |         |   |   |         |  
|Deferred federal income tax expense                                                         |   | (269    | ) |   | -       |  
|Realized gains                                                                              |   | (173    | ) |   | (727    | )
|Depreciation                                                                                |   | 181     |   |   | 160     |  
|Amortization                                                                                |   | 620     |   |   | 205     |  
|Changes in operating assets and liabilities:                                                |   |         |   |   |         |  
|Premiums receivable                                                                         |   | (540    | ) |   | 22      |  
|Amounts due from reinsurers                                                                 |   | 587     |   |   | (231    | )
|Deductibles receivable                                                                      |   | 19      |   |   | (16     | )
|Investment income receivable                                                                |   | (92     | ) |   | (244    | )
|Ceding commissions receivable                                                               |   | (57     | ) |   | (2      | )
|Federal income taxes recoverable                                                            |   | 57      |   |   | 120     |  
|Prepaid reinsurance premiums                                                                |   | (760    | ) |   | (490    | )
|Deferred acquisition costs                                                                  |   | (816    | ) |   | (665    | )
|Other assets                                                                                |   | 5       |   |   | 78      |  
|Loss and loss adjustment expense reserves                                                   |   | 3,323   |   |   | 549     |  
|Unearned premiums                                                                           |   | 4,952   |   |   | 2,179   |  
|Unearned ceding commissions                                                                 |   | 111     |   |   | (70     | )
|Amounts due to reinsurers                                                                   |   | 123     |   |   | 268     |  
|Federal income taxes payable                                                                |   | 306     |   |   | -       |  
|Accrued expenses and other liabilities                                                      |   | 396     |   |   | 379     |  
|Accrued interest                                                                            |   | 141     |   |   | 142     |  
|                                                                                            |   |         |   |   |         |  
|Net cash from operating activities                                                          |   | 10,814  |   |   | 1,701   |  
|                                                                                            |   |         |   |   |         |  
|Investing Activities                                                                        |   |         |   |   |         |  
|Cost of fixed maturities acquired                                                           |   | (21,678 | ) |   | (34,083 | )
|Proceeds from sales or maturities of fixed maturities                                       |   | 9,902   |   |   | 18,442  |  
|Cost of property and equipment acquired                                                     |   | (118    | ) |   | (334    | )
|Cost of intangible assets acquired                                                          |   | -       |   |   | (491    | )
|                                                                                            |   |         |   |   |         |  
|Net cash for investing activities                                                           |   | (11,894 | ) |   | (16,466 | )
|                                                                                            |   |         |   |   |         |  
|Financing Activities                                                                        |   |         |   |   |         |  
|Net borrowings (repayments) under lines of credit                                           |   | 3,689   |   |   | (348    | )
|Payment of debt issue costs                                                                 |   | (45     | ) |   | (94     | )
|Proceeds from issuance of trust preferred securities                                        |   | -       |   |   | 2,000   |  
|                                                                                            |   |         |   |   |         |  
|Net cash from financing activities                                                          |   | 3,644   |   |   | 1,558   |  
|                                                                                            |   |         |   |   |         |  
|Net Increase (Decrease) in Cash and Cash Equivalents                                        |   | 2,564   |   |   | (13,207 | )
|                                                                                            |   |         |   |   |         |  
|Cash and Cash Equivalents, beginning of year                                                |   | 4,442   |   |   | 17,649  |  
|                                                                                            |   |         |   |   |         |  
|Cash and Cash Equivalents, end of year                                                      | $ | 7,006   |   | $ | 4,442   |  
|                                                                                            |   |         |   |   |         |  
|Supplemental Disclosures of Cash Flow Information                                           |   |         |   |   |         |  
|Federal income tax payments (receipts)                                                      | $ | 1,110   |   | $ | (182    | )
|Interest payments                                                                           |   | 159     |   |   | 58      |  

See accompanying notes to consolidated financial statements.

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.          Organization of the Company and Nature of Business

Professionals Direct Inc. (Company) is an insurance holding company with five subsidiaries (see Note 2). One of the subsidiaries, Professionals Direct Insurance Company (PDIC) is the former Michigan Lawyers Mutual Insurance Company (the Mutual). The Mutual was originally formed in the State of Michigan on June 4, 1987, for the principal purpose of providing professional liability insurance on a claims-made basis to attorneys practicing in Michigan. PDIC continues to provide professional liability insurance to attorneys and law firms in Michigan and other states. In 2003, 38% of premiums were written in Michigan, 12% each in Arizona and Florida with the balance in twenty-two additional states with no other state exceeding 7%.

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

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

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

2.          Basis of Presentation and Significant Accounting Policies

Basis of Presentation

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

Principles of Consolidation

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

All significant intercompany transactions and balances have been eliminated.

Investments

The Company classifies marketable investment securities in one of three categories: trading, available for sale, or held to maturity. Trading securities are bought and held principally for the purpose

---

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

of selling them in the near term. Held to maturity securities are those securities which the Company has the ability and intent to hold until maturity. All other securities are classified as available for sale. All of the Company's marketable securities are classified as available for sale.

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

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

Other Invested Asset

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

Cash and Cash Equivalents

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

Property and Equipment

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

Intangible Assets

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

Revenue Recognition

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

Commission Income

Commissions are recognized when the respective policies become effective.

---

PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred Acquisition Costs and Unearned Ceding Commissions

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

Unearned Premiums

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

Loss and Loss Adjustment Expenses

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

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

Federal Income Taxes

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

Use of Estimates

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

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

Earnings Per Share of Common Stock

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

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

New Accounting Standards

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

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

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

Certain Significant Risks

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

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

Credit Risk - is the risk that issuers of securities owned by the Company will default, or other parties, including reinsurers and customers which owe the Company money, will not pay. The Company has a concentration of amounts due from customers in the State of Michigan as approximately 38% of current year revenues were derived from customers in Michigan. The Company manages this risk by adhering to a conservative investment strategy, by maintaining sound reinsurance and credit and collection policies, and by providing for any amounts deemed uncollectible.

Interest Rate Risk - is the risk that interest rates will change and cause a decrease in the value of an insurer's investments. The Company mitigates this risk by attempting to match the maturity schedule of its assets with the expected payout of its liabilities. To the extent that liabilities come due more quickly than assets mature or the Company liquidates investments to meet operating needs, the Company would have to sell assets prior to maturity and recognize a gain or loss. At December 31, 2003, the estimated fair value of the Company's bond portfolio was less than its cost.

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.          Investments

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

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

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

|December 31, 2003                                                             |   | Amortized
cost |   | Fair value | 
|----------------------------------------------------------------------------- | - | -------------- | - | ---------- | 
|                                                                              |   | (000)          |   | (000)      | 
|Fixed maturities, other than mortgage and other asset-backed
     securities: |   |                |   |            | 
|Due in one year or less                                                       | $ | 3,880          | $ | 3,894      | 
|Due after one year through five years                                         |   | 16,428         |   | 16,431     | 
|Due after five years through ten years                                        |   | 5,576          |   | 5,422      | 
|Due after ten years                                                           |   | 1,921          |   | 1,885      | 
|                                                                              |   |                |   |            | 
|                                                                              |   | 27,805         |   | 27,632     | 
|                                                                              |   |                |   |            | 
|Mortgage and other asset-backed securities                                    |   | 1,499          |   | 1,504      | 
|                                                                              |   |                |   |            | 
|                                                                              | $ | 29,304         | $ | 29,136     | 

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

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

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net investment income was comprised of the following components:

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

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

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

4.          Premiums and Deductibles Receivable and Allowance for Doubtful Accounts

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

Deductible receivables are amounts due from policyholders under the terms of the policy when the Company pays indemnity on behalf of a policyholder. There are typically a limited number of policyholders with balances outstanding for deductible. We record an allowance for doubtful accounts based on specifically identified amounts that we believe to be uncollectible. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. The allowance for doubtful accounts at December 31, 2003 and 2002 was $30,000.

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.          Intangible Assets

Intangible assets consist of the following:

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

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

The renewal rights are being amortized on a straight line basis over fifteen years. The covenants are being amortized over the associated duration of the covenant ranging from 15 to 51 months. Debt issue costs are being amortized by the effective interest method over the term of the repayment period ranging from 3 to 30 years.

Future amortization expense expected is as follows:

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

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.          Property and Equipment

Property and equipment consist of the following:

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

7.          Loss and Loss Adjustment Expense Reserves

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

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

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.          Reinsurance

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

In 2003 and 2002, the Company's net retention on the majority of the policies issued was $500,000 and $600,000, respectively, per claim.

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

|December 31,                             |  |  |   | 2003  |  
|---------------------------------------- |  |  | - | ----- | -
|                                         |  |  |   | (000  | )
|                                         |  |  |   |       |  
|Paid loss and loss adjustment expenses   |  |  | $ | 203   |  
|Unpaid loss and loss adjustment expenses |  |  |   | 2,163 |  
|                                         |  |  |   |       |  
|                                         |  |  | $ | 2,366 |  

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

|             |   | 2003    |   | 2002   |  
|------------ | - | ------- | - | ------ | -
|             |   |         |   |        |  
|             |   | Written |   | Earned |  
|             |   | (000)   |   | (000)  |  
|             |   |         |   |        |  
|Direct       | $ | 24,294  | $ | 19,342 | $
|Ceded        |   | (4,176  | ) | (3,415 | )
|             |   |         |   |        |  
|Net Premiums | $ | 20,118  | $ | 15,927 | $

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

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

9.          Lines of Credit

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

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

10.          Trust Preferred Securities

On December 4, 2002, the Company issued a floating rate junior subordinated debenture (the "Debenture") having a principal amount of $2,062,000 to Professionals Direct Statutory Trust I (the "Trust"). Cumulative interest on the principal sum of the Debenture accrues from December 4, 2002, and it is payable quarterly in arrears on March 4, June 4, September 4 and December 4 of each year at a variable rate per annum equal to LIBOR (London Interbank Offering Rate) plus 4.00% (not to exceed 12.50%). At December 31, 2003, interest accrued at an annual rate per annum equal to 5.18%. Interest is computed on the actual number of days elapsed in a year of twelve 30 day months. The Debenture ranks subordinate and junior in right of payment to all Indebtedness (as defined) of the Company. The Debenture matures on December 4, 2032, but may be redeemed in whole or in part beginning on December 4, 2007, or earlier upon the occurrence of certain special events defined in the Indenture governing the Debenture.

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

11.          Surplus Certificates

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

Certificates have a principal value of $1,000 each and bear simple interest at the rate of 5.25% per annum from the issuance date until paid. Principal and accrued interest thereon may be paid only from surplus earnings, and then only upon the written consent of the Michigan Department of Financial and Insurance Services and in such amounts as are determined by the board of directors. Subject to these

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

conditions for repayment, certificates are redeemable by the holder after they have been outstanding for ten years. To date, the Company has received approval to pay certain interest on certificates issued prior to December 31, 1993. Interest payments during 2003 and 2002 to these certificate holders amounted to $0 and $2,125, respectively.

During the Conversion in 2001, 1,814 surplus certificates were converted to common stock and interest totaling $540,798 was paid on these converted certificates. At December 31, 2003, 2,531 certificates remain outstanding.

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

12.          Statutory Information

Dividend Restrictions

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

Statutory Information

At December 31, 2003, statutory surplus of PDIC was $16.1 million. The State of Michigan requires insurance companies domiciled in Michigan to have minimum statutory surplus of $7 million. Statutory net income (loss) for the years ended December 31, 2003 and 2002 was $1,674,932 and $(471,111), respectively.

Risk-Based Capital

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

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.          Federal Income Taxes

Federal income tax expense (benefit) consists of:

|Year ended December 31, |   | 2003  |   |   | 2002  |  
|----------------------- | - | ----- | - | - | ----- | -
|                        |   | (000) |   |   | (000) |  
|                        |   |       |   |   |       |  
|Current                 | $ | 1,542 |   | $ | (62   | )
|Deferred                |   | (100  | ) |   | -     |  
|                        |   |       |   |   |       |  
|                        | $ | 1,442 |   | $ | (62   | )

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

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

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

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

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

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

14.          Deferred Acquisition Costs and Unearned Ceding Commissions

Changes in deferred acquisition costs are summarized as follows:

|Year ended December 31,             |   | 2003   |   | 2002  |  
|----------------------------------- | - | ------ | - | ----- | -
|                                    |   | (000)  |   | (000) |  
|                                    |   |        |   |       |  
|Balance, beginning of year          | $ | 813    | $ | 149   |  
|                                    |   |        |   |       |  
|Amounts deferred:                   |   |        |   |       |  
|Commissions                         |   | 1,733  |   | 293   |  
|Premium taxes                       |   | 396    |   | 132   |  
|General and administrative expenses |   | 1,652  |   | 1,109 |  
|                                    |   |        |   |       |  
|Total amounts deferred              |   | 4,594  |   | 1,683 |  
|                                    |   |        |   |       |  
|Less amortization                   |   | (2,965 | ) | (870  | )
|                                    |   |        |   |       |  
|Balance, end of year                | $ | 1,629  | $ | 813   |  

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Changes in unearned ceding commissions are summarized as follows:

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

15.          Commitments and Contingencies

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

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

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

16.          Employee Benefit Plans

The Company maintains a 401(k) defined contribution employee benefit plan covering substantially all employees meeting eligibility requirements. The Company matches 50% of employee contributions up to an annual maximum of 5% of an employee's salary. The Company's expense under this plan was $46,781 and $52,613 in 2003 and 2002, respectively.

Effective January 1, 2001, the Company established a Savings & Retirement Plan. This plan was established to facilitate employee purchases of Company stock upon demutualization. There has been no subsequent activity in this plan.

17.          Related Party Transaction

The Company's president serves on the Board of Directors and is treasurer of Lawyers Reinsurance Company ("Lawyers Re"), in which the Company has an investment. Lawyers Re is a

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PROFESSIONALS DIRECT INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

18.          Other Comprehensive Income (Loss)

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

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

19.          Policyholder Dividend

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

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|                                                           
|-----------------------------------------------------------
|PROFESSIONALS DIRECT, INC. DIRECTORS AND EXECUTIVE OFFICERS

At December 31, 2003

Board of Directors

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

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

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

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

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

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

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

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

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

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

Executive Officers

Stephen M. Tuuk - Chairman, President and Chief Executive

Mary L. Ursul - Vice President and Secretary

Stephen M. Westfield - Vice President and Treasurer

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