UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of

The Securities Exchange Act of 1934

For the fiscal year ended Commission file number 0-5534

~~For the fiscal year ended~~	~~Commission file number~~ ~~0-5534~~
~~December 31, 2010~~

December 31, 2011

BALDWIN & LYONS, INC.

(Exact name of registrant as specified in its charter)

Indiana (State or other jurisdiction of Incorporation or ~~organization)~~organization	35-0160330 (I.R.S. Employer Identification No.)
1099 North Meridian Street, Indianapolis, Indiana (Address of principal executive offices)	46204 (Zip Code)

Registrant's telephone number, including area code: (317) 636-9800

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

(Title of class)

Class A Common Stock, No Par Value

Class B Common Stock, No Par Value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ___ No ü

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ___ No ü

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ü No ___

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form ~~10-K.~~10-K._____ ü

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ____ Accelerated filer ü Non-accelerated filer ____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ___ No ü

The aggregate market value of Class A and Class B Common Stock held by non-affiliates of the Registrant as of June 30, ~~2010,~~2011, based on the closing trade prices on that date, was approximately ~~$173,047,000.~~$199,155,221.

The number of shares outstanding of each of the issuer's classes of common stock as of March 1, ~~2011:~~2012:

Common Stock, No Par Value: Class A (voting) 2,623,109 shares

Class B (nonvoting) ~~12,201,482~~12,225,348 shares

The Index to Exhibits is located on pages 80 and 81.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for Annual Meeting of Shareholders to be held May ~~10, 2011~~8, 2012 are incorporated by reference into Part III.

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PART I

Item 1. BUSINESS

Baldwin & Lyons, Inc. was incorporated under the laws of the State of Indiana in 1930. Through its divisions and subsidiaries, Baldwin & Lyons, Inc. (referred to herein as "B&L") engages in marketing and underwriting property and casualty insurance and the assumption of property and casualty reinsurance. B&L’s principal subsidiaries are: Protective Insurance Company (referred to herein as "Protective"), with licenses in all 50 states, the District of Columbia and all Canadian provinces; Protective Specialty Insurance Company (referred to herein as “Protective Specialty”), which is currently approved for excess and surplus lines business in ~~40 states;~~46 states and licensed in Indiana; Sagamore Insurance Company (referred to herein as "Sagamore"), which is licensed in 47 states and approved for excess and surplus lines business in one additional state; B&L Brokerage Services, Inc., (referred to herein as "BLBS"), an Indiana ~~based~~domiciled insurance broker licensed in all 50 states; and B&L Insurance, Ltd. (referred to herein as "BLI"), which is domiciled and licensed in Bermuda. Protective, Protective Specialty, Sagamore and BLI are collectively referred to herein as the "Insurance Subsidiaries." The "Company", as used herein, refers to Baldwin & Lyons, Inc. and all its subsidiaries unless the context clearly indicates otherwise.

Approximately ~~59%~~71% of the gross direct property and casualty insurance premiums written ~~and assumed~~ by the Insurance Subsidiaries during ~~2010~~2011 were attributable to business produced directly or indirectly by B&L. ~~Approximately 16% of gross premium is assumed from several non-affiliated insurance and reinsurance companies through policies of reinsurance and retrocessions.~~ The remaining ~~25% consists primarily~~29% of ~~business which was~~the gross direct property and casualty insurance premiums written by the Insurance Subsidiaries during 2011was originated through an extensive network of independent agents on both a retail and wholesale ~~basis.~~basis and through a limited number of arrangements with managing general agencies.

The Insurance Subsidiaries cede portions of their gross premiums written to several non-affiliated reinsurers under excess of loss and quota-share treaties and by facultative (individual policy-by-policy) placements. Reinsurance is ceded to spread the risk of loss among several reinsurers. In addition to the assumption of reinsurance, described below, the Insurance Subsidiaries participate in numerous mandatory government-operated reinsurance pools which require insurance companies to provide coverages on assigned risks. These assigned risk pools allocate participation to all insurers based upon each insurer's portion of premium writings on a state or national level. Assigned risk premium typically comprises less than 1% of gross direct premium written and ~~assumed.~~assumed by the Insurance Subsidiaries.

The Insurance Subsidiaries serve a variety of specialty markets as follows:

Fleet Transportation

The Insurance Subsidiaries provide coverage for larger companies in the motor carrier industry which retain substantial amounts of self-insurance, for independent contractors utilized by ~~large~~ trucking companies, for medium-sized and small trucking companies on a first dollar or small deductible basis and for public livery concerns, principally covering fleets of commercial buses. This group of products is collectively referred to as fleet transportation. Large fleet trucking products are marketed largely by the B&L agency organization directly to fleet transportation clients but also through relationships with non-affiliated brokers and, to a lesser degree, through specialized independent agents. Broker or agent intermediaries are typically used for smaller accounts. The principal types of fleet transportation insurance marketed by the Insurance Subsidiaries are:

~~Casualty insurance including~~Commercial motor vehicle liability, physical damage and other liability insurance.

Workers' compensation insurance.

Specialized accident (medical and indemnity) insurance for independent contractors.

Non-trucking motor vehicle liability insurance for independent contractors.

Fidelity and surety bonds.

Inland Marine consisting principally of cargo insurance.

“Captive” insurance company products, which are provided through BLI in Bermuda.

B&L also performs a variety of additional services, primarily for the Company’s insureds, including risk surveys and analyses, safety program design and monitoring, government compliance assistance, loss control and cost studies and research, development, and consultation in connection with new insurance programs including development of computerized systems to assist customers in monitoring their accident data. Extensive claims handling services are also provided, primarily to clients with self-insurance programs.

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Reinsurance Assumptions

The Company accepts cessions and retrocessions from selected insurance and reinsurance companies, ~~principally reinsuring against catastrophic~~providing reinsurance coverage for both property and casualty events.

Approximately 64% of current net reinsurance premium earned in ~~2010 emanated from~~2011 was related to property coverages, principally reinsuring against catastrophic events. Approximately two-thirds of this premium was produced through a small number of retrocessions ~~spread worldwide among several geographic regions. All major retrocessions are~~with Lloyds of London syndicates with the balance produced through an exclusive managing general agency partnership. Property reinsurance is concentrated in upper layers of coverage ~~and contain loss limits~~ so that only major catastrophic events would be expected to have a material impact on the Company’s operations or financial position.

The remaining 36% of net reinsurance assumptions are produced through several non-affiliated reinsurance brokers. For 2010, approximately 75% of broker produced business related to coverage for weather-related losses which attach at lower levels, primarily covering weather events in the United States, excluding Florida and United States earthquake. The remaining 25% of broker produced businesspremium earned during 2011 relates to domestic professional liability ~~reinsurance~~coverages provided to small and medium sized insurance ~~companies.~~companies and produced through a network of independent brokers.

Private Passenger Automobile Insurance

The Company markets private passenger automobile liability and physical damage coverages to individuals through a network of independent agents in thirty states.

Commercial Property and Business Owners Liability

The Company markets commercial property and business owners liability coverages on a limited basis through a managing general agent in the state of Florida.

Professional Liability

The Company markets Miscellaneous Professional Liability coverages through wholesale and retail agents on both an admitted and surplus lines basis throughout the United States.

Property/Casualty Losses and Loss Adjustment Expenses

Losses and loss adjustment expenses incurred typically comprise nearly two-thirds of the Company’s operating expenses. A discussion of this expense category follows.

The consolidated balance sheets include the estimated liability for unpaid losses and loss adjustment expenses ("LAE") of the Insurance ~~Subsidiaries.~~Subsidiaries before the application of reinsurance credits (gross reserves). The liabilities for losses and LAE are determined using case basis evaluations and statistical projections and represent estimates of the Company’s ultimate net exposure for all unpaid losses and LAE incurred through December 31 of each year. These estimates are subject to the effects of trends in claim severity and frequency and are continually reviewed and, as experience develops and new information becomes known, the liability is adjusted as necessary. Such adjustments, either positive or negative, are reflected in current operations as recorded.

The Company’s reserves for losses and loss expenses ~~(“reserves”)~~ are determined based on evaluations of individual reported claims and by actuarial estimation processes using historical experience, current economic information and, when necessary, available industry statistics. Reserves are evaluated in three basic categories (1) “case basis”, (2) “incurred but not reported” and (3) “loss adjustment expense” reserves. Case basis loss reserves, which comprise approximately 65% of total gross reserves at December 31, ~~2010,~~2011, are established for specific known loss occurrences at amounts dependent upon criteria such as type of coverage, severity of injury or property damage and the underlying policy limits, as examples. Case basis reserves are estimated by experienced claims adjusters using established Company guidelines and are monitored by claims management. Incurred but not reported reserves, which are established for those losses which have occurred, but have not yet been reported to the Company, are computed on a “bulk” ~~basis.~~basis and comprise approximately 29% of total gross reserves at December 31, 2011. Common actuarial methods are employed in the establishment of incurred but not reported loss reserves using ~~company~~Company historical loss data, consideration of changes in the Company’s business and study of current economic trends affecting ultimate claims costs. Loss adjustment expense reserves, or reserves for the costs associated with the investigation and settlement of a claim, are ~~also~~a combination of case basis and bulk reserves representing the Company’s estimate of the costs associated with the claims handling ~~process.~~process and comprise approximately 6% of total gross reserves at December 31, 2011. Loss adjustment expense reserves include amounts ultimately allocable to individual claims as well as amounts required for the general overhead of the claims handling operation which are not specifically allocable to individual claims. Historical analyses of the ratio of loss adjusting expenses to losses paid on prior closed claims and study of current economic trends affecting loss settlement costs are used to estimate the loss adjustment reserve needs related to

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the established loss reserves. Each of these reserve categories contain elements of uncertainty which assure variability when compared to the ultimate costs to settle the

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underlying claims for which the reserves are established. For a more detailed discussion of the three categories of reserves, see “Loss and Loss Expense Reserves” under the caption, “Critical Accounting Policies” beginning on page 2829 in Management’s Discussion and Analysis.

The reserving process requires management to continuously monitor and evaluate the life cycle of claims. Our claims range from the very routine private passenger automobile “fender bender” to the highly complex and costly claims involving large tractor-trailer rigs and large-scale losses resulting from catastrophic events. Reserving for each class of claims requires a set of assumptions based upon historical experience, knowledge of current industry trends and seasoned judgment. The high limits provided by the Company’s fleet transportation liability policies provide for greater volatility in the reserving process for more serious claims. Court rulings, legislative actions, geographic location of the claim under consideration and trends in jury awards also play a significant role in the estimation process of larger claims. The Company continuously reviews and evaluates loss developments subsequent to each measurement date and adjusts its reserve estimation assumptions, as necessary, in an effort to achieve the best possible estimate of the ultimate remaining loss costs at any point in time.

Loss reserves related to certain permanent total disability (PTD) workers' compensation claims have been discounted to present value using tables provided by the National Council on Compensation Insurance which are based upon a pretax interest rate of 3.5% and adjusted for those portions of the losses retained by the insured. The loss and LAE reserves at December 31, ~~2010~~2011 have been reduced by approximately $6.5 million as a result of such discounting. Had the Company not discounted loss and LAE reserves, pretax income would have been approximately $.2 million ~~higher~~lower for the year ended December 31, ~~2010.~~2011.

For policies inforce at December 31, ~~2010,~~2011, the maximum amount for which the Company insures a fleet transportation risk is $10 million, less applicable self-insured retentions, although for the majority of policies written, the maximum limits provided by the Company are $5 million. Any limits above $10 million required by customers are either placed directly by Baldwin & Lyons, Inc. with excess carriers or are written by the Company but 100% reinsured. Certain coverages, such as workers’ compensation, provide essentially unlimited exposure, although the Company protects itself to the extent believed prudent through the purchase of excess reinsurance for these coverages. After giving effect to current treaty and facultative reinsurance arrangements the Company’s maximum exposure to loss from a single occurrence ranges from approximately $.25 million to ~~$1.9~~$1.6 million for the vast majority of risks insured although, for certain losses occurring in current and prior policy years, maximum exposure could be as high as $3.7 million for a single occurrence. Reinsurance agreements effective since June 3, 2004 include provisions for aggregate deductibles that must be exceeded before the Company can recover under the terms of the treaties. The Company retains a higher percentage of the direct premium (and, therefore, cedes less premium to reinsurers) in consideration of these deductible provisions. Net premiums earned and losses incurred by the Company for 2011, 2010 ~~2009~~ and ~~2008~~2009 each include $28.7 million, $23.4 million ~~$15.8 million~~ and ~~$22.6~~$15.8 million, respectively, related to such deductible provisions inforce during these years.

The Company ~~has revised~~is cedent under numerous reinsurance treaties covering its ~~treaty arrangements several times in prior years in response to changing market conditions. The current treaty arrangements~~varied product lines. Treaties are ~~effective until July 2, 2011 and cover~~written on an annual basis, each with its own renewal date throughout the ~~entire policy period for all business written from inception of the treaty on July 3, 2010 through that date.~~year. Treaty renewals are expected to occur annually in the foreseeable future. Because the Company occasionally offers multiple year policies and because losses from ~~fleet transportation business~~many of its products take years to develop, losses reported in the current year may be covered by a number of older reinsurance treaties with higher or lower loss retentions than those provided by current treaty provisions.

The table on page 5 sets forth a reconciliation of beginning and ending loss and LAE liability balances, for 2011, 2010 ~~2009~~ and ~~2008.~~2009. That table is presented net of reinsurance recoverable to correspond with income statement presentation. However, a reconciliation of these net reserves to those gross of reinsurance recoverable, as presented in the balance sheet, is also shown. The table on page 11 shows the development of the estimated liability, net of reinsurance recoverable, for the ten years prior to ~~2010.~~2011. The table on page 12 is a summary of the re-estimated liability, before consideration of reinsurance, for the ten years prior to ~~2010~~2011 as well as the related re-estimated reinsurance ceded for the same periods.

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RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT	RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT										RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT
EXPENSES (GAAP BASIS)	EXPENSES (GAAP BASIS)										EXPENSES (GAAP BASIS)

		Year Ended December 31										Year Ended December 31
		2010			2009			2008				2011			2010			2009
NET OF REINSURANCE RECOVERABLE:		(in thousands)										(in thousands)
Liability for losses and LAE at the
Beginning of the year		$	203,253		$	231,633		$	244,500			$	218,629		$	203,253		$	231,633

Provision for losses and LAE:
Claims occurring during the current year			154,775			108,935			132,829				225,251			154,775			108,935
Claims occurring during prior years			(8,823	)		(9,584	)		(17,077	)			(9,696	)		(8,823	)		(9,584	)
			145,952			99,351			115,752				215,555			145,952			99,351
Payments of losses and LAE:
Claims occurring during the current year			56,394			41,302			51,649				71,699			56,394			41,302
Claims occurring during prior years			74,182			84,777			76,970				72,393			74,182			84,777
			130,576			126,079			128,619				144,092			130,576			126,079

Other reserve adjustment			-			(1,652	)		-				-			-			(1,652	)

Liability for losses and LAE at end of year			218,629			203,253			231,633				290,092			218,629			203,253

Reinsurance recoverable on unpaid losses
at end of the year			125,891			155,778			157,925				131,464			125,891			155,778

Liability for losses and LAE, gross of
reinsurance recoverable, at end of the year		$	344,520		$	359,031		$	389,558			$	421,556		$	344,520		$	359,031

The reconciliation above shows that a savings of ~~$8.8~~$9.7 million was developed in the liability for losses and LAE recorded at December 31, ~~2009,~~2010, with comparative developments for the two previous calendar years. The following table is a summary of the ~~$8.8~~$9.7 million reserve savings by accident year (dollars in thousands):

Years in Which Losses Were Incurred	Reserve at December 31, 2009		(Savings) Deficiency Recorded During 2010			% (Savings) Deficiency			Reserve at December 31, 2010		(Savings) Deficiency Recorded During 2011			% (Savings) Deficiency

2010									$	98,381	$	(12,720	)		(12.9	%)
2009	$	67,633	$	1,924			2.8	%		32,174		169			.5	%
2008		43,760		(1,221	)		(2.8	%)		27,486		(1,370	)		(5.0	%)
2007		19,368		(3,292	)		(17.0	%)		11,522		(1,652	)		(14.3	%)
2006		10,768		246			2.3	%		5,259		1,910			36.3	%
2005		14,895		(3,080	)		(20.7	%)
2004 & prior		46,829		(3,400	)		(7.3	%)
2005 & prior										43,807		3,967			9.1	%
	$	203,253	$	(8,823	)		(4.3	%)
									$	218,629	$	(9,696	)		(4.4	%)

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The (savings) deficiency recorded for these loss years was derived from varied sources, as follows (dollars in thousands):

2004 & Prior 2005 2006 2007 2008 2009

Losses and allocated loss expenses developed on cases known to exist at December 31, 2009 $ 1,129 $ 424 $ 1,140 $ 1,479 $ 1,969 $ 3,775
Losses and allocated loss expenses reported on cases unknown at December 31, 2009 1,059 - 115 2 691 2,704
Unallocated loss expenses paid 134 401 267 254 587 2,255
Change in reserves for incurred but not reported losses and allocated and unallocated loss expenses (5,645 ) (3,677 ) (1,601 ) (3,001 ) (3,973 ) (7,578 )
Net (savings) deficiency on losses from directly-produced business (3,323 ) (2,852 ) (79 ) (1,266 ) (726 ) 1,156
(Savings)deficiency reported under reinsurance assumption agreements and residual markets (77 ) (228 ) 325 (2,026 ) (495 ) 768

Net savings $ (3,400 ) $ (3,080 ) $ 246 $ (3,292 ) $ (1,221 ) $ 1,924

	2005 &Prior			2006		2007			2008			2009			2010

Losses and allocated loss expenses developed on cases known to exist at December 31, 2010	$	3,594		$	1,333	$	(830	)	$	740		$	4,693		$	(455	)
Losses and allocated loss expenses reported on cases unknown at December 31, 2010		281			10		11			208			516			3,405
Unallocated loss expenses paid		515			112		218			793			478			1,855

Change in reserves for incurred but not reported losses and allocated and unallocated loss expenses		(260	)		389		(608	)		(2,983	)		(6,620	)		(18,395	)
Net (savings) deficiency on losses from directly- produced business		4,130			1,844		(1,209	)		(1,242	)		(933	)		(13,590	)
(Savings) deficiency reported under voluntary reinsurance assumption agreements and residual markets		(163	)		66		(443	)		(128	)		1,102			870

Net savings	$	3,967		$	1,910	$	(1,652	)	$	(1,370	)	$	169		$	(12,720	)

Loss and loss expense developments (savings) deficiency, presented separately by ~~major product line,~~segment, were as follows for the years ended December 31 (dollars in thousands):

	2010			2009			2008
										2011			2010			2009
Property and casualty insurance	$	(7,090	)	$	(14,110	)	$	(16,841	)	$	(7,417	)	$	(6,567	)	$	(13,526	)
Involuntary residual markets		523			584			(31	)
Reinsurance assumed		(2,256	)		3,942			(205	)
Reinsurance											(2,279	)		(2,256	)		3,942
Totals	$	(8,823	)	$	(9,584	)	$	(17,077	)	$	(9,696	)	$	(8,823	)	$	(9,584	)

In the first table on page 6, the amounts identified as "Net (savings) deficiency on losses from directly-produced business" consist of development on cases known at December 31, ~~2009,~~2010, losses reported which were previously unknown at December 31, ~~2009~~2010 (incurred but not reported), unallocated loss expense paid related to accident years ~~2009~~2010 and prior and changes in the reserves for incurred but not reported losses and loss expenses. Bulk loss reserves are established to provide for potential future adverse development on cases known to the Company and for cases unknown at the reserve date. Changes in the reserves for incurred but not reported losses and loss expenses occur based upon information received on known and newly reported cases during the current year and the effect of that development on the application of standard actuarial methods used by the Company.

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Also shown in the table are amounts representing the ~~"(Savings)~~"(savings) deficiency reported under reinsurance assumption agreements and residual markets". These amounts relate to the Company's participation in ~~property catastrophe~~both voluntary reinsurance policies and ~~treaties.~~treaties and government mandated pools. The Company records its share of losses from these policies, treaties and ~~treaties~~pools based on reports from the reinsured companies, retrocessionaires and ~~retrocessionaires~~residual market administrators and does not

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directly establish case reserves related to this ~~segment~~portion of the Company's business. The Company does, however, establish additional reserves for ~~property~~ reinsurance losses to supplement case reserves reported by the ceding companies, when considered necessary. ~~While involuntary~~Involuntary residual market premiums and losses are included in the property and casualty ~~segment, they are shown separately in this presentation because reserves~~segment. Development on residual market business was $1.1 million, $.5 million and $.6 million for the years ended December 31, 2011, 2010 and 2009, respectively. Reserves on this business are established by the regulatory entities and, accordingly, development on these losses is ~~outside~~dependent on the ~~control~~adequacy of ~~the Company.~~loss reserving by these entities.

~~Directly produced property~~The Property and casualty insurance segment has historically constituted the largest portion of net reserve development savings. As shown, the savings from this segment ranged from ~~$7.1~~$6.6 million in 2010 to ~~$16.8~~$13.5 million in ~~2008.~~2009. This fluctuation reflects the variability associated with the larger claims covered by the Company, as well as fluctuations in the Company’s net retentions. The Company continues to incorporate more recent loss development data into its loss reserving formulae; however, the change from excess of loss to quota share treaties beginning in 2005, the widely fluctuating use of facultative reinsurance on larger risks, and the dynamic nature of losses associated with the fleet transportation business as well as the timing of settlement of large claims increases the likelihood of variability in loss developments from period to period. As discussed elsewhere, the Company has historically experienced savings in its loss developments owing to, among other things, its long-standing policy of reserving for the ultimate value of losses quickly and realistically and a willingness to settle claims based upon a seasoned evaluation of its exposures. While the Company’s basic assumptions have remained consistent, we continue to update loss data to reflect changing trends which can be expected to result in fluctuations in loss developments over time.

The ~~developments~~development for reinsurance, ~~assumed and involuntary residual markets,~~ with a $2.3 million savings ~~and a $.5 million deficiency~~ during ~~2010, respectively, are~~2011, is heavily dependent on the establishment of case basis and IBNR reserves by other insurance and reinsurance ~~companies and by managers of state run residual market pools.~~companies. While the Company evaluates the sufficiency of such reserving, considering the number of different entities involved and the fact that the Company must rely on external sources of information, the savings or deficiency developed from these products will likely fluctuate from year to year. We have found this to be particularly true during years when large catastrophic events occur near year ~~end, such as was the case in 2008 with the occurrence of Hurricane Ike in September.~~end.

Factors affecting the development of environmental claims are more fully discussed in the following paragraphs. The Company has little exposure to environmental losses and activity during the three year period ending ~~2010~~2011 has been insignificant.

Our goal is to produce an overall estimate of reserves which is sufficient and as close to expected ultimate losses as possible. The ~~$8.8~~$9.7 million in net savings developed during ~~2010~~2011 represents approximately ~~48%~~35% of pre-tax net ~~income~~loss before realized capital ~~gains~~losses for ~~2010~~2011 but only ~~4.3%~~4.4% of December 31, ~~2009~~2010 net loss and LAE reserves, which is well within the acceptable range of variation for the Company’s diverse and complex book of business. The Company has maintained a consistent, conservative posture in its reserving process and has not significantly altered its assumptions used in the reserving process since the mid - 1980's. This process has proven to be fully adequate with no overall deficiencies developed since 1985. There were no significant changes in trends related to the numbers of claims incurred (other than correlative variances with premium volume), average settlement amounts, numbers of claims outstanding at period ends or the averages per claim outstanding during the year ended December 31, ~~2010~~2011 for most lines of business. However, the average settlement amounts of severe fleet transportation claims have tended to increase in recent years.

As described on page 4, changes have occurred in the Company's net per accident exposure under reinsurance agreements in place during the periods presented in the previous table. It is much more difficult to reserve for losses where policy limits are as high as $10 million per accident as opposed to those losses related to business which carries lower policy limits, such as private passenger automobile. ~~There~~This is because there are fewer policy limit losses in the Company's historical loss database on which to project future loss developments and the larger and more complex the loss, the greater the likelihood that litigation will become involved in the settlement process. ~~As such,~~Consequently, the level of uncertainty in the reserving process is much greater when dealing with larger losses and will routinely result in fluctuations among accident year developments.

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The differences between the liability for losses and LAE reported in the accompanying ~~2010~~2011 consolidated financial statements prepared in accordance with generally accepted accounting principles ("GAAP") and that reported in the annual statements filed with state and provincial insurance departments in the United States and Canada in accordance with statutory accounting practices ("SAP") are as follows (dollars in thousands):

Liability reported on a SAP basis - net of reinsurance recoverable $ 296,232

Add differences:

Liability reported on a SAP basis - net of reinsurance recoverable $ 223,969

   Add differences:
     Reinsurance recoverable on unpaid losses and LAE 125,891
     Additional reserve for residual market losses not
       reported to the Company at the current year end 360

   Deduct differences:
     Estimated salvage and subrogation recoveries recorded on
       a cash basis for SAP and on an accrual basis for GAAP (5,700 )

   Liability reported on a GAAP basis $ 344,520

      Reinsurance recoverable on unpaid losses and LAE                                                                                                 131,464

Additional reserve for residual market losses not

reported to the Company at the current year end 360

Deduct differences:

Estimated salvage and subrogation recoveries recorded on

a cash basis for SAP and on an accrual basis for GAAP (6,500)

Liability reported on a GAAP basis $ 421,556

Ten Year Historical Development Tables:

The table on page 11 presents the development of GAAP balance sheet insurance reserves for each year-end ~~2000~~from 2001 through 2010, as of December 31, 2011, net of all reinsurance credits. The top line of the table shows the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and LAE for claims arising in all prior years that were unpaid at the respective balance sheet date, including losses that had been incurred, but not yet reported, to the Company.

The upper portion of the table shows the re-estimated amount of the previously recorded liability based on additional information available to the Company as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of individual claims and as claims are settled and paid.

The "cumulative redundancy" represents the aggregate change in the estimates of each calendar year end reserve through December 31, ~~2010.~~2011. For example, the ~~2000~~2001 liability has developed ~~an $11.0~~a $12.9 million redundancy over ten years. That amount has been reflected in income over those ten years, as shown on the table. The effect on income of changes in estimates of the liability for losses and LAE during each of the past three years is shown in the table on page 5.

Historically, the Company’s loss developments have been favorable. Reserve developments for all years ended in the period 1986 through ~~2009~~2010 have produced redundancies as of December 31, ~~2010.~~2011. In addition to refinements in reserving methods, loss reserve developments since 1985 have been favorably affected by several other factors. Perhaps the most significant single factor has been the improvement in safety programs by the fleet transportation industry in general and by the Company’s insureds specifically. Statistics produced by the American Trucking Association show that driver quality has improved markedly in the past decade resulting in fewer fatalities and serious accidents. The Company’s experience also shows that improved safety and hiring programs have a dramatic impact on the frequency and severity of fleet transportation accidents and, more recently, the introduction of numerous safety devices using state-of-the-art technology has reduced rear end and cross over accidents which often produce the most serious injuries. Significant trucking industry and regulatory initiatives, such as CSA 2010, have provided strong motivation to trucking companies to upgrade their driver roster, increase monitoring of driver behavior and improve equipment maintenance, all resulting in fewer accidents. Higher self-insured retentions also play a part in reduced insurance losses. Higher retentions not only raise the excess insurance entry point but also encourage fleet transportation company management to focus even more intensely on safety programs.

The establishment of bulk reserves requires the use of historical data where available and generally a minimum of ten years of such data is required to provide statistically valid samples. As previously mentioned, numerous factors must be considered in reviewing historical data including inflation, legislative actions, new coverages provided and trends noted in the current book of business which are different from those present in the historical data. Clearly, the Company's book of business in ~~2010~~2011 is different from that which generated much of the ten-year historical loss data used to establish reserves in recent years. Management has noted trends toward significantly higher settlements and jury awards associated with the more serious fleet transportation liability claims over the past several years. The inflationary factors affecting these claims appear to be more subjective in nature and not in line with compensatory equity. In addition to the factors mentioned above, savings realized in recent years upon the closing of claims, as reflected in the tables on pages 5 and 11, are attributable to the Company’s experience in specializing in long-haul trucking business for over 50 years as well as its long-standing policy

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of reserving for losses realistically and a willingness to settle claims based upon a seasoned evaluation of the underlying exposures. The Company will continue to review the trends noted and, should it appear that such trends are permanent and projectable, they will be reflected in future reserving method refinements.

The lower section of the table on page 11 shows the cumulative amount paid with respect to the previously recorded calendar year end liability as of the end of each succeeding year. For example, as of December 31, ~~2010,~~2011, the Company had paid ~~$84.6~~$92.5 million of losses and LAE that had been incurred, but not paid, as of December 31, ~~2000;~~2001; thus an estimated ~~$24.3~~$32.0 million ~~(22%~~(26%) of losses incurred through ~~2000~~2001 remain unpaid as of the current financial statement date ($~~108.9~~124.5 million incurred less ~~$84.6~~$92.5 million paid). The payment patterns shown in this table demonstrate the “long-tail” nature of much of the Company’s business whereby many claims do not settle for more than ten years.

In evaluating this information, it is important to note that the method of presentation causes some development experience to be duplicated. For example, the amount of any redundancy or deficiency related to losses settled in 2005, but incurred in 2002, will be included in the cumulative development amount for each of the years-end 2002, 2003, and 2004. As such, this table does not present accident or policy year development data which readers may be more accustomed to analyzing. Rather, this table is intended to present an evaluation of the Company’s ability to establish its liability for losses and loss expenses at a given balance sheet date. It is important to note that conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it would not be appropriate to extrapolate future redundancies or deficiencies based on this table.

The table presented on page 12 presents loss development data on a gross (before consideration of reinsurance) basis for the same ten year period December 31, ~~2000~~2001 through December 31, ~~2009,~~2010, as of December 31, ~~2010,~~2011, with a reconciliation of the data to the net amounts shown in the table on page 11. Readers are reminded that the gross data presented on page 12 requires significantly more subjectivity in the estimation of incurred but not reported and loss expense reserves because of the high limits provided by the Company to its fleet transportation customers, much of which has been covered by excess of loss and facultative reinsurance. This is particularly true of excess of loss treaties where the Company retains risk in only the lower, more predictable, layers of coverage. Accordingly, one would generally expect more variability in development on a gross basis than on a net basis. The difference between loss developments before consideration of reinsurance, as presented on page 12, and those net of reinsurance, as shown on page 11 do not impact the Company’s operating results as all such differences are borne by reinsurers.

Environmental Matters:

Given the Company's principal business is insuring fleet transportation companies, on occasion claims involving a trucking accident which has resulted in the spill of a pollutant are made. Certain of the Company's policies may cover these situations on the basis that they were caused by an accident that resulted in the immediate and isolated spill of a pollutant. These claims are typically reported and fully resolved within a short period of time.

However, the Company has received a few environmental claims that did not result from a "sudden and accidental" event. Most of these claims were made under policies issued in the 1970's primarily to one account which was involved in the business of hauling and disposing of hazardous waste. Although the Company had pollution exclusions in its policies during that period, the courts have, at times, refused to recognize such exclusions in environmental cases.

In general, establishing reserves for environmental claims, other than those associated with “sudden and accidental” losses, is subject to uncertainties that are greater than those represented by other types of claims. Factors contributing to those uncertainties include a lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure, unresolved legal issues regarding policy coverage, and the extent and timing of any such contractual liability. Courts have reached different and sometimes inconsistent conclusions as to when the loss occurred and what policies provide coverage, what claims are covered, whether there is an insured obligation to defend, how policy limits are determined, how policy exclusions are applied and interpreted, and whether cleanup costs represent insured property damage.

However, as previously noted, very few environmental claims have been reported to the Company. In addition, a review of the businesses of our past and current insureds indicates that exposure to further claims of an environmental nature is limited because the vast majority of the Company's accounts are not currently, and have not in the past been, involved in the hauling of hazardous substances. Also, the revision of the pollution exclusion in the Company's policies since 1986 has, and is expected to, further limit exposure to claims from that point forward.

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The Company has never been presented with an environmental claim relating to asbestos and, based on the types of business the Company has insured over the years, it is not expected that the Company will have any significant asbestos exposure.

The Company's reserves for unpaid losses and loss expenses at December 31, ~~2010~~2011 did not include significant amounts for liability related to environmental damage claims. The Company does not foresee significant future exposure to environmental damage claims and accordingly has established no reserve for incurred but not reported environmental losses at December 31, ~~2010.~~2011.

Space intentionally left blank

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ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS
(Dollars in thousands)


Year Ended December 31	2001		2002		2003		2004		2005		2006		2007		2008		2009		2010		2011

Liability for Unpaid
Losses and LAE, Net
of Reinsurance
Recoverables	$	137,406	$	144,267	$	162,424	$	207,137	$	242,130	$	249,495	$	244,500	$	231,633	$	203,253	$	218,629	$	290,092

Liability Reestimated
as of:
One Year Later		127,398		130,681		147,468		193,445		225,183		228,211		227,423		222,049		194,430		208,933
Two Years Later		118,055		125,731		142,771		180,455		209,774		207,818		216,730		208,702		198,220
Three Years Later		118,712		124,693		137,502		171,332		200,955		199,503		206,445		210,562
Four Years Later		119,925		124,714		134,661		171,225		198,376		192,678		210,170
Five Years Later		120,757		124,507		135,418		171,005		191,846		198,023
Six Years Later		121,406		124,609		136,623		167,590		195,348
Seven Years Later		121,599		124,606		135,415		170,951
Eight Years Later		121,409		124,809		138,191
Nine Years Later		122,274		127,462
Ten Years Later		124,515

Cumulative Redundancy	$	12,891	$	16,805	$	24,233	$	36,186	$	46,782	$	51,472	$	34,330	$	21,071	$	5,033	$	9,696




Cumulative Amount of
Liability Paid Through:
One Year Later	$	30,249	$	39,956	$	38,234	$	60,343	$	59,581	$	58,956	$	76,970	$	84,777	$	74,182	$	72,393
Two Years Later		55,724		57,522		62,380		84,265		94,947		100,990		124,870		120,628		107,413
Three Years Later		64,489		69,959		74,198		102,692		117,522		127,011		145,857		142,731
Four Years Later		71,038		76,408		82,479		116,198		136,652		143,612		157,724
Five Years Later		75,878		81,121		91,607		124,176		148,039		151,662
Six Years Later		79,668		85,064		96,009		128,592		154,573
Seven Years Later		83,405		88,239		99,410		132,775
Eight Years Later		86,465		91,379		102,797
Nine Years Later		89,374		94,460
Ten Years Later		92,482

ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS
(Dollars in thousands)

Year Ended December 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Liability for Unpaid
  Losses and LAE, Net
  of Reinsurance
  Recoverables $ 119,905 $ 137,406 $ 144,267 $ 162,424 $ 207,137 $ 242,130 $ 249,495 $ 244,500 $ 231,633 $ 203,253 $ 218,629

Liability Reestimated
  as of:
    One Year Later 119,018 127,398 130,681 147,468 193,445 225,183 228,211 227,423 222,049 194,430
    Two Years Later 112,558 118,055 125,731 142,771 180,455 209,774 207,818 216,730 208,702
    Three Years Later 103,251 118,712 124,693 137,502 171,332 200,955 199,503 206,445
    Four Years Later 105,508 119,925 124,714 134,661 171,225 198,376 192,678
    Five Years Later 106,757 120,757 124,507 135,418 171,005 191,846
    Six Years Later 107,364 121,406 124,609 136,623 167,590
    Seven Years Later 108,040 121,599 124,606 135,415
    Eight Years Later 107,921 121,409 124,809
    Nine Years Later 107,893 122,274
    Ten Years Later 108,892

Cumulative Redundancy $ 11,013 $ 15,132 $ 19,458 $ 27,009 $ 39,547 $ 50,284 $ 56,817 $ 38,055 $ 22,931 $ 8,823

Cumulative Amount of
  Liability Paid Through:
    One Year Later $ 31,132 $ 30,249 $ 39,956 $ 38,234 $ 60,343 $ 59,581 $ 58,956 $ 76,970 $ 84,777 $ 74,182
    Two Years Later 47,060 55,724 57,522 62,380 84,265 94,947 100,990 124,870 120,628
    Three Years Later 58,618 64,489 69,959 74,198 102,692 117,522 127,011 145,857
    Four Years Later 64,574 71,038 76,408 82,479 116,198 136,652 143,612
    Five Years Later 69,316 75,878 81,121 91,607 124,176 148,039
    Six Years Later 72,751 79,668 85,064 96,009 128,592
    Seven Years Later 76,126 83,405 88,239 99,410
    Eight Years Later 79,408 86,465 91,379
    Nine Years Later 82,431 89,374
    Ten Years Later 84,573

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ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS
(Dollars in thousands)

Year Ended December 31	2001			2002			2003		2004		2005		2006		2007		2008		2009		2010		2011

Direct and Assumed:

Liability for Unpaid Losses
and Loss Adjustment
Expenses	$	246,816		$	277,309		$	342,449	$	440,172	$	430,273	$	409,412	$	378,616	$	389,558	$	359,030	$	344,520	$	421,556

Liability Reestimated as of
December 31, 2010		263,418			295,140			317,736		362,213		320,684		294,735		303,673		305,815		305,197		328,515

Cumulative (Deficiency) Redundancy		(16,602	)		(17,831	)		24,713		77,959		109,589		114,677		74,943		83,743		53,833		16,005


Ceded:

Liability for Unpaid Losses
and Loss Adjustment
Expenses		109,410			133,042			180,025		233,035		188,143		159,917		134,116		157,925		155,777		125,891		131,464

Liability Reestimated as of
December 31, 2010		138,903			167,678			179,545		191,262		125,336		96,712		93,503		95,253		106,977		119,582

Cumulative (Deficiency) Redundancy		(29,493	)		(34,636	)		480		41,773		62,807		63,205		40,613		62,672		48,800		6,309


Net:

Liability for Unpaid Losses
and Loss Adjustment
Expenses		137,406			144,267			162,424		207,137		242,130		249,495		244,500		231,633		203,253		218,629		290,092

Liability Reestimated as of
December 31, 2010		124,515			127,462			138,191		170,951		195,348		198,023		210,170		210,562		198,220		208,933

Cumulative Redundancy		12,891			16,805			24,233		36,186		46,782		51,472		34,330		21,071		5,033		9,696

ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS
(Dollars in thousands)

Year Ended December 31 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Direct and Assumed:

Liability for Unpaid Losses
and Loss Adjustment
Expenses $ 182,124 $ 246,816 $ 277,309 $ 342,449 $ 440,172 $ 430,273 $ 409,412 $ 378,616 $ 389,558 $ 359,030 $ 344,520

Liability Reestimated as of
  December 31, 2010 214,125 260,848 291,461 314,229 358,034 319,626 292,149 303,195 308,417 305,437

Cumulative (Deficiency) Redundancy (32,001 ) (14,032 ) (14,152 ) 28,220 82,138 110,647 117,263 75,421 81,141 53,593

Ceded:

Liability for Unpaid Losses
  and Loss Adjustment
  Expenses 62,219 109,410 133,042 180,025 233,035 188,143 159,917 134,116 157,925 155,777 125,891

Liability Reestimated as of
  December 31, 2010 105,233 138,574 166,652 178,814 190,444 127,780 99,471 96,750 99,715 111,007

Cumulative (Deficiency) Redundancy (43,014 ) (29,164 ) (33,610 ) 1,211 42,591 60,363 60,446 37,366 58,210 44,770

Net:

Liability for Unpaid Losses
  and Loss Adjustment
  Expenses 119,905 137,406 144,267 162,424 207,137 242,130 249,495 244,500 231,633 203,253 218,629

Liability Reestimated as of
  December 31, 2010 108,892 122,274 124,809 135,415 167,590 191,846 192,678 206,445 208,702 194,430

Cumulative Redundancy 11,013 15,132 19,458 27,009 39,547 50,284 56,817 38,055 22,931 8,823

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Marketing

The Company's primary marketing areas are outlined on pages 2 and 3.

Historically, the Company has focused its fleet transportation marketing efforts on large and medium trucking fleets, with its largest market share in the larger trucking fleets (over 150 power units). These fleets self-insure a significant portion of their risk and self-insurance plans are a specialty of the Company. The indemnity contract provided to self-insured customers is designed to cover all aspects of fleet transportation liability, including third party liability, property damage, physical damage, cargo and workers' compensation, arising from vehicular accident or other casualty loss. The self-insured program is supplemented with large deductible workers' compensation policies in states which do not allow for self-insurance of this coverage. The Company also offers work-related accident insurance, on a group basis, to independent contractors under contract to a fleet sponsor as well as workers’ compensation coverage to employees of independent contractors who are fleet owners. In addition, the Company offers a program of coverages for "small fleet" trucking concerns (owner-operators generally with one to six power units). This program is currently being marketed in thirty-one states through independent agents utilizing much of the technology developed in conjunction with marketing private passenger automobile insurance. ~~More recently, the Company has expanded its~~The Company’s fleet transportation offerings toalso include certain public livery risks, principally large and medium sized operators of bus fleets. In ~~2010,~~2011, fleet transportation products generated approximately 63% of direct premium written and assumed ~~for~~by the Company.

Since 1992, the Company has accepted reinsurance cessions and retrocessions, principally property coverages for catastrophe exposures, from selected insurers and reinsurers. The Company is committed to participation in this market, although participation levels depend on the adequacy of pricing, which can vary widely from time to time. In determining the volume of catastrophe reinsurance that it will accept, the Company first determines the exposure that it is willing to accept from a single “probable maximum loss” (PML), generally defined as a 1-in-250 year event (.4% probability of occurrence based on sophisticated modeling programs), within a given geographic area. As retrocessions are considered, computer models of geographic exposure are evaluated against these maximums and programs are only considered if they do not cause aggregate exposure to exceed the predetermined limits. As of December 31, ~~2010,~~2011, the Company’s modeled estimate of its largest zonal exposure to a PML from a single event is approximately ~~14%~~16% of consolidated surplus before state and federal tax credits and reinstatement premiums which would reduce the impact to approximately 8%9% of surplus. Beginning in 2010, the Company has accepted reinsurance cessions for a limited amount of professional liability coverages from small and medium sized insurance companies.

Since 1995, the Company has sold private passenger automobile insurance. This program is currently being marketed in ~~thirty~~nine mid-western and southern states through independent agents. Sagamore utilizes state-of-the-art technology extensively in marketing its private passenger automobile insurance products in order to provide superior service to its agents and insureds.

Beginning in the second quarter of 2009, the Company began underwriting a limited program of commercial property and business owners’ liability policies in the state of Florida, utilizing its excess and surplus lines authority and the services of a managing general agency.

Beginning in the first quarter of 2010, the Company began underwriting miscellaneous professional liability coverages through wholesale and retail agents and brokers on both an admitted and surplus lines basis. The distribution platform for this product was expanded in 2011 to include limited programs with a managing general agent as well as retail agents.

Investments

The Company’s investment portfolio is essentially divided between (1) funds which are considered necessary to support insurance underwriting activities and (2) excess capital funds. ~~In general, funds~~Funds invested in fixed maturity and short-term securities are more than sufficient to cover underwriting operations while equity securities and limited partnerships are utilized to invest excess capital funds to achieve higher long-term returns. The following discussion will concentrate on the different investment strategies for these two major categories.

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At December 31, ~~2010~~2011 the financial statement value of the Company's investment portfolio was approximately ~~$635~~$638 million, including ~~$41~~$82 million of money market funds classified as cash equivalents. The adjusted cost of the portfolio was ~~$583~~$597 million with the ~~$52~~$41 million difference representing unrealized appreciation.

~~- 13 -~~

A comparison of the allocation of assets within the Company's investment portfolio, using adjusted cost as a basis, is as follows as of December 31:

	2010			2009			2011		2010

Obligations of states and political subdivisions		33.0	%		31.9	%
State and municipal obligations							31.7	%	33.0	%
Corporate securities		14.3			12.4		15.4		14.3
U.S. government obligations		10.8			9.5		12.2		10.8
Short-term and money markets		7.8			15.1		14.3		7.8
Residential mortgage-backed securities		6.3			8.4		3.6		6.3
Foreign government obligations		3.4			1.3		3.6		3.4
Commercial mortgage-backed securities		2.5			1.0		1.9		2.5
Government sponsored entities		0.5			1.0		0.1		0.5
Total fixed maturities		78.6			80.6		82.8		78.6
Equity securities		8.1			7.3		8.0		8.1
Limited partnerships (equity basis)		13.3			12.1		9.2		13.3
		100.0	%		100.0	%	100.0	%	100.0	%

Fixed Maturity and Short-Term Investments

Fixed maturity and short-term securities comprised ~~72.6%~~77.6% of the market value of the Company’s total invested assets at December 31, ~~2010.~~2011. Excluding U.S. government obligations, the fixed maturity portfolio is widely diversified with no concentrations in any single industry, geographic location or municipality. The largest amount invested in any single issuer ~~(non-index fund)~~ was ~~$5.7~~$5.5 million (1.0% of total invested assets) although most individual investments, other than municipal bonds, are less than $750,000. The Company’s fixed maturity portfolio has a very short duration and, accordingly, the Company does not actively trade fixed maturity securities but typically holds such investments until maturity. Exceptions exist in the rare instances where the underlying credit for a specific issue is deemed to be diminished. In such cases, the security will be considered for disposal prior to maturity. In addition, fixed maturity securities may be sold when realignment of the portfolio is considered beneficial (i.e. moving from taxable to non-taxable issues) or when valuations are considered excessive compared to alternative investments.

The Investment Committee has determined that the Company’s insurance subsidiaries will, at all times, hold high grade fixed maturity securities and short-term investments with a market value equal to at least 100% of reserves for losses and loss expenses and unearned premiums, net of applicable reinsurance credits. At December 31, ~~2010,~~2011, investment grade bonds and short-term instruments held by insurance subsidiaries equaled ~~169%~~142% of designated underwriting liabilities, thus providing a substantial margin above this conservative guideline.

The Company's concentration of fixed maturity funds in relatively short-term investments provides it with a level of liquidity which is more than adequate to provide for its anticipated cash flow needs. The structure of the investment portfolio also provides the Company with the ability to restrict premium writings during periods of intense competition, which typically result in inadequate premium rates, and allows the Company to respond to new opportunities in the marketplace as they arise.

The following comparison of the Company's fixed maturity and short-term investment portfolios, using par value as a basis, shows the changes in contractual maturities in the portfolio during ~~2010.~~2011. Note that the expected average maturity of the portfolio is less than the contractual maturity average life shown below because the Company has, in some cases, the right to put obligations and borrowers have, in some cases, the right to call or prepay obligations with or without call or prepayment penalties.

2010 2009
Less than one year 41.2 % 55.6 %
1 to 5 years 41.6 29.4
5 to 10 years 4.2 3.4
More than 10 years 13.0 11.6
100.0 % 100.0 %

Average life of portfolio (years) 4.5 3.8

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	2011		2010
Less than one year	48.8	%	41.2	%
1 to 5 years	41.4		41.6
5 to 10 years	2.8		4.2
More than 10 years	7.0		13.0
	100.0	%	100.0	%

Average life of portfolio (years)	3.1		4.5

Approximately ~~$36.2~~$35.6 million of fixed maturity investments ~~(5.7%~~(5.6% of total invested assets) consists of bonds rated as less than investment grade at year end. These investments include a diversified portfolio of ~~over 57~~nearly 100 investments, including ~~catastrophe bonds.~~insurance linked securities.

The market value of the consolidated fixed maturity portfolio was ~~$3.0~~$.5 million greater than cost at December 31, ~~2010,~~2011, before income taxes, which compares to a ~~$4.7~~$3.0 million unrealized gain at December 31, ~~2009. Each individual issue with a market value less than cost at year end was determined to result from interest rate increases and not from credit quality.~~2010. The Company analyzes fixed maturity securities for other-than-temporary impairment (“OTTI”) in accordance with the Financial Accounting Standards Board (“FASB”) OTTI guidance issued in April 2009. As has been the Company’s consistent policy, other-than-temporary impairment is considered for any individual issue which has sustained a decline in current market value of at least 20% below original or adjusted cost, and the decline is ongoing for more than 6 months, regardless of the evaluation of the creditworthiness of the issuer or the specific issue. Additionally, the Company takes into account any known subjective information in evaluating for impairment without consideration to the Company’s 20% threshold. ~~There was no~~In 2011, the net effect of ~~other-than-temporary impairment~~OTTI adjustments to fixed maturity securities ~~for the year.~~was $.6 million with securities owned at year end having a $.1 million non credit related loss treated as unrealized. In ~~2009, the net effect of other-than-temporary impairment~~2010, there were no OTTI adjustments to fixed maturity ~~securities, including recovery of prior write downs upon sale or disposal, which added to investment gains, was $3.9 million.~~securities. The current net unrealized gain consists of ~~$4.7~~$3.7 million of gross unrealized gains and ~~$1.7~~$3.2 million of gross unrealized losses.

Equity Securities

Because of the large amount of high quality fixed maturity investments owned, relative to the Company’s loss and loss expense reserves and other liabilities, amounts invested in equity securities are not needed to fund current operations and, accordingly, can be committed for long periods of time. Equity securities comprise ~~15.1%~~13.8% of the market value of the consolidated investment portfolio at December 31, ~~2010,~~2011, but only ~~8.1%~~8.0% of the related adjusted cost basis, as long-term holdings have appreciated significantly. The Company’s equity securities portfolio consists of over ~~100~~140 separate issues with diversification from large to small capitalization issuers and among several industries. The largest single equity issue owned has a market value of ~~$3.6~~$3.3 million at December 31, ~~2010~~2011 (.6% of total ~~investments)~~invested assets).

In general, the Company maintains a buy-and-hold philosophy with respect to equity securities. Many current holdings have been continuously owned for more than ten years, accounting for the fact that the portfolio, in total, carries a ~~$41.6~~$32.8 million pre-tax unrealized gain at the current year end using original cost and over ~~$49.2~~$40.4 million in unrealized gains using cost adjusted for other-than-temporary impairment. An individual equity security will be disposed of when it is determined by investment managers or the Investment Committee that there is little potential for future appreciation. All equity securities are considered to be available for sale although portfolio turnover ishas historically been very low. Securities are not sold to meet any quarterly or annual earnings quotas but, rather, are disposed of only when market conditions are deemed to dictate, regardless of the impact, positively or negatively, on current period earnings. In addition, equity securities may be sold when realignment of the portfolio is considered beneficial or when valuations are considered excessive compared to alternative investments. ~~During 2010, the Company disposed~~Sales of equity securities ~~which were considered to have less than average near term potential for improvement. These sales~~during 2011 generated both gains and losses but netted to a realized gain of ~~$5.5~~$5.0 million before taxes.

The net effect of other-than-temporary impairment adjustments, including recovery of prior year write downs upon sale or disposal, ~~increased~~decreased investment gains from equity securities by ~~$1.6~~less than $.1 million for the year before taxes. The reclassification of unrealized losses to realized losses occurred on each individual issue where the current market value was at least 20% below original or adjusted cost, and the decline was ongoing for more than 6 months at the date of write-down, regardless of the evaluation of the issuer or the potential for recovery. Additionally, the Company takes into account any known subjective information in evaluating for impairment without consideration to the Company’s 20% threshold. Net unrealized gains on the equity security portfolio ~~increased to $49.2~~were $40.4 million, before tax at December 31, ~~2010 from $44.3~~2011 compared to $49.2 million ~~last year end reflecting a continued recovery of equity markets in~~at December 31, 2010. The current net unrealized gain consists of ~~$49.5~~$41.7 million of gross unrealized gains and ~~$.3~~$1.3 million of gross unrealized losses.

- 15 -

Limited Partnerships

For several years, the Company has invested in various limited partnerships engaged in securities trading activities, real estate development ~~and~~or small venture capital funding, as an alternative to direct equity investments. The funds used for these investments are part of the Company’s excess capital strategy. At December 31, ~~2010,~~2011, the aggregate original investment in the limited partnerships was ~~$30.7~~$30.0 million and the aggregate ~~market~~carrying value was ~~$77.4~~$54.7 million.

~~- 15 -~~

As a group, these investments experienced ~~fair~~decreases in value ~~increases~~ during ~~2010,~~2011, with the aggregate of the Company’s share of such ~~gains~~losses reported by the limited partnerships totaling approximately ~~$8.2~~$21.9 million. The ~~current year limited partnership~~decrease in value ~~increase~~ is composed of estimated realized ~~income~~losses of ~~$6.8~~$1.3 million and ~~an increase~~decreases in estimated unrealized gains of ~~$1.4~~$20.6 million. On an inception-to-date basis, active limited partnerships have produced estimated realized income of ~~$30.3~~$28.9 million and estimated unrealized ~~gains~~losses of ~~$16.4~~$4.2 million.

The Company follows the equity method of accounting for ~~these~~its limited partnership investments and, accordingly, records the total change in value as a component of net gains or losses on investments. However, readers are cautioned that, to the extent that reported increases in equity value are unrealized, they can be reduced or eliminated quickly by volatile market conditions. Further, assets purchased with reinvested realized gains can also diminish in value. In addition, a significant minority of the investments included in the limited partnerships do not have readily ascertainable fair market values and, accordingly, values assigned by the general partners may not be realizable upon the sale or disposal of the related assets, which may not occur for several years. Limited partnerships also are highly illiquid investments and the Company’s ability to withdraw funds is generally subject to significant restrictions.

Investment Yields

~~The interest rate environment~~

Interest rates, particularly those on the short end of the yield curve where the vast majority of the Company’s fixed maturity investments are maintained, continued ~~to decline~~at historically low levels during ~~2010, particularly for bonds and short term investments.~~2011. As a result, pre-tax net investment income decreased ~~$2.6~~$.6 million, or ~~19%~~5% and after tax income decreased ~~$3.1~~$.5 million, or ~~26%~~6% during ~~2010.~~2011. A comparison of consolidated investment yields, before consideration of investment management expenses, is as follows:

	2010			2009			2011		2010
Before federal tax:
Investment income		2.6	%		3.3	%	2.4	%	2.6	%
Investment income plus investment gains (losses)		5.8			9.6		(0.9)		5.8

After federal tax:
Investment income		2.0			2.7		1.8		2.0
Investment income plus investment gains (losses)		4.0			6.8		(0.4)		4.0

Readers are also directed to the Results of Operations beginning on page 24 of this document for additional details of investment operations.

Regulatory Framework

The Company’s businesses are currently subject to insurance industry regulation by each of the fifty states in which the Company’s subsidiaries are licensed. In addition, minor portions of the Company’s business are subject to regulation by Bermudian and Canadian federal and provincial authorities. There can be no assurance that ~~in response to current economic conditions,~~ laws and regulations will not be changed by one or more of these regulatory bodies in ways that will require the Company to modify its business models and objectives. In particular, the United States federal government has undertaken a substantial review and revision of the regulation and supervision of financial institutions, including insurance companies as well as tax laws and regulation, which could impact the Company’s operations and performance. While it is currently expected that federal government regulation will be focused on the largest financial companies, additional regulations are ~~expected~~likely to increase the cost of compliance to the Company. Further, while management is not aware of any significant pending changes, the Company is also subject to regulatory risks from changes to state and federal tax laws that may affect the treatment of insurance related deductions or income recognition.

Additionally, changes in laws and regulations governing the insurance industry could have an impact on the Company’s ability to generate income from its insurance ~~company~~ operations. The Company is obliged to comply with numerous complex and varied governmental regulations in order to maintain its authority to write insurance business. While the Company has

- 16 -

consistently maintained each of its licenses without exception, failure to maintain compliance could result in governmental regulators temporarily preventing the Company from writing new business and therefore having a detrimental effect on the Company. Also, the ability for the Company’s insurance subsidiaries to increase insurance rates is heavily regulated for significant portions of the Company’s business and such rate increases can be denied or delayed for substantial periods by regulators.

~~- 16 -~~

Employees

As of December 31, ~~2010,~~2011, the Company had ~~299~~330 employees, ~~representing a decrease~~an increase of 231 employees from the prior year end.

Competition

The insurance brokerage and agency business is highly competitive. B&L competes with a large number of insurance brokerage and agency firms and individual brokers and agents throughout the country, many of which are considerably larger than B&L. B&L also competes with insurance companies which write insurance directly with their customers.

Insurance underwriting is also highly competitive. The Insurance Subsidiaries compete with other stock and mutual companies and inter-insurance exchanges (reciprocals). There are numerous insurance companies offering the lines of insurance which are currently written or may in the future be written by the Insurance Subsidiaries. Many of these companies have been in business for longer periods of time, have significantly larger volumes of business, offer more diversified lines of insurance coverage and have significantly greater financial resources than the Company. In many cases, competitors are willing to provide coverage for rates lower than those charged by the Insurance Subsidiaries. Many potential clients self-insure workers' compensation and other risks for which the Company offers coverage, and some concerns have organized "captive" insurance companies as subsidiaries through which they insure their own operations. Some states have workers' compensation funds that preclude private companies from writing this business in those states. Federal law also authorizes the creation of "Risk Retention Groups" which may write insurance coverages similar to those offered by the Company.

The Company believes it has a competitive advantage in its major lines of business as the result of the extensive experience of its long-tenured management and staff, its superior service and products, its willingness to custom build insurance programs for its customers and the extensive use of technology with respect to its insureds and independent agent force. However, the Company is not “top-line” oriented and will readily sacrifice premium volume during periods of unrealistic rate competition. Accordingly, should competitors determine to “buy” market share with unprofitable rates, the Company’s Insurance Subsidiaries will generally experience a decline in business until pricing returns to profitable levels.

Availability of Documents

This Form 10-K as well as the Company’s Audit Committee Charter and Code of Conduct will be sent to shareholders without charge upon written request to the Company’s Investor Contact at the corporate address. These documents, along with all other filings with the Securities and Exchange Commission are available for review, download or printing from the Company’s web site at www.baldwinandlyons.com.

Item 101(b), (c)(1)(i) and (vii), and (d) of Regulation S-K:

Reference is made to Note J to the consolidated financial statements which ~~provides~~provide information concerning industry segments and is filed herewith under Item 8, Financial Statements and Supplementary Data.

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Item 1A. RISK FACTORS

The Company operates in the Property and Casualty insurance industry where many of its competitors are larger with far greater resources. Further, this industry is heavily regulated. Changes in laws and regulations governing the insurance industry could have a significant impact on the Company’s ability to generate income from its insurance ~~company~~ operations. The Company’s principal subsidiaries are regulated and licensed in all 50 of the United States, the District of Columbia, all Canadian provinces and Bermuda. The Company is obliged to comply with numerous complex and varied governmental regulations in order to maintain its authority to write insurance business. Failure to maintain compliance could result in various governmental regulators preventing the Company from writing new business and therefore having a material impact on the Company. Further, the ability for the Company’s insurance subsidiaries to adjust insurance rates is regulated for significant portions of the Company’s business and such rate adjustments can be denied or delayed for substantial periods by regulators.

The Company has two classes of common stock with unequal voting rights. The Company is effectively controlled by its principal stockholders and management, which limits other stockholders’ ability to influence operations. The Company’s executive officers, directors and principal stockholders and their affiliates control nearly ~~70%~~63% of the outstanding shares of voting Class A common stock and ~~39%~~33% of the outstanding shares of non-voting Class B common stock. These parties effectively control the ~~Company;~~Company, direct its affairs, exert significant influence in the election of directors and approval of significant corporate transactions. The interests of these stockholders may conflict with those of other stockholders, limit marketability of the stock and this concentration of voting power has the potential to delay, defer or prevent a change in control.

The Company limits its risk of loss from policies of insurance issued by its Insurance Subsidiaries through the purchase of reinsurance coverage from other insurance companies. Such reinsurance does not relieve the Company from its responsibility to policyholders should the reinsurers be unable to meet their obligations to the Company under the terms of the underlying reinsurance agreements. As a result, we are subject to credit risk relating to our ability to recover amounts due from reinsurers. While the ~~company~~Company has not experienced any significant reinsurance losses for ~~almost~~over twenty five years, certain of our historical reinsurance carriers have experienced deteriorating financial conditions or have been downgraded by rating agencies. If we are not able to collect the amounts due to us from reinsurers, the resultant credit losses could materially adversely affect our results of operations, equity, business and insurer financial strength.

Operating in the Property and Casualty insurance industry, the Company is exposed to loss from policies of insurance issued to its policyholders. A large portion of losses recorded by the Company are estimates of future loss payments to be made. Such estimates of future loss payments may prove to be inadequate. Reserves represent our best estimate at a given point in time. Insurance reserves are not an exact calculation of liability but instead are complex estimates derived by us, generally utilizing a variety of reserve estimation techniques from numerous assumptions and expectations about future events, many of which are highly uncertain, such as estimates of claims severity, frequency of claims, inflation, claims handling, case reserving policies and procedures, underwriting and pricing policies, changes in the legal and regulatory environment and the lag time between the occurrence of an insured event and the time of its ultimate settlement. Many of these uncertainties are not precisely quantifiable and require significant judgment on our part. As trends in underlying claims develop, particularly in so-called “long tail” ~~or long duration coverages,~~, we are sometimes required to revise our reserves. This results in a charge to our earnings in the amount of the adjusted reserves, recorded in the period the change in estimate is made. These charges can be substantial and can potentially have a material ~~effect,~~impact, either positively or negatively, on our calendar year results of operations and shareholders’ equity.

A significant portion of the risk underwritten by the insurance subsidiaries covers property losses resulting from catastrophic events on a worldwide basis. The occurrence and valuation of loss events for this business is highly unpredictable and a single catastrophic event could result in a materially significant loss to the Company. Catastrophe losses are an inevitable part of our business. Various events can cause catastrophe losses, including hurricanes, windstorms, earthquakes, hail, explosions, severe winter weather, and fires, and their frequency and severity are inherently unpredictable. In addition, longer-term natural catastrophe trends may be changing and new types of catastrophe losses may be developing due to climate change, a phenomenon that has been associated with extreme weather events linked to rising temperatures, and includes effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain, and snow. The extent of our losses from catastrophes is a function of both the total amount of our insured exposures in the affected areas and the severity of the events themselves. In addition, as in the case of catastrophic losses generally, it can take many months, or even years, for the ultimate cost to us to be finally determined. As our claim experience develops on a particular

- 18 -

catastrophe, we may be required to adjust our reserves to reflect our revised estimates of the total cost of claims. While the eventual occurrence of catastrophic losses is expected, we are prohibited by U.S. generally accepted accounting principles from establishing reserves for the expected future occurrence of these losses (such as is done in the life insurance industry). Accordingly, upon the occurrence of such a loss, it will likely have a material adverse impact on the Company’s results of operations in the quarter in which it occurs.

The Company derives a significant percentage of its direct premium volume from FedEx Ground Systems, Inc (“FedEx Ground”) and certain of its subsidiaries and related entities, and from insurance coverage provided to independent service providers under contract with FedEx Ground. While the loss of this major customer could severely reduce the Company’s revenue and earnings potential, insurance programs provided to FedEx Ground and programs provided to the independent service providers under contract with FedEx Ground are not necessarily dependent upon to one another and, therefore, could be viewed as separate entities.

The Company, through its Insurance Subsidiaries, requires collateral from its insureds covering the insureds’ obligations for self-insured retentions or deductibles related to policies of insurance provided. Should the Company, as surety, become responsible for such insured obligations, the collateral held may prove to be insufficient. In this regard, FedEx Ground and certain of its subsidiaries and related entities, utilizes significant self-insured retentions and deductibles under policies of insurance provided by the Company’s insurance subsidiaries. In the case of FedEx Ground, the Company has determined that the financial strength of the customer is sufficient to allow for holding only partial collateral at this time. Should the Company become responsible for this customer’s self-insured retention and deductible obligations, the collateral held could be insufficient and the Company could sustain a significant operating loss.

Given the Company’s significant interest-bearing investment portfolio, a drop in interest rates would likely have an adverse impact on the Company’s earnings and financial position. Conversely, an increase in interest rates could have a significant temporary impact on the market value of the Company’s fixed maturity investment portfolio. The functioning of the fixed income markets, the values of the investments the Company holds and the Company’s ability to liquidate them may be adversely affected if those markets are disrupted by a change in interest rates or otherwise affected by significant negative factors, including, without limitation: local, national, or international events, such as regulatory changes, wars, or terrorist attacks; a recession, depression, or other adverse developments in either the U.S. or other economies that adversely affects the value of securities held in the Company’s portfolio; financial weakness or failure of one or more financial institutions that play a prominent role in securities markets or act as a counterparty for various financial instruments, which could further disrupt the markets; inactive markets for specific kinds of securities, or for the securities of certain issuers or in certain sectors, which could result in decreased valuations and impact the Company’s ability to sell a specific security or a group of securities at a reasonable price when desired; a significant change in inflation expectations, or the onset of deflation or stagflation. If the fixed-income portfolio were to suffer a decrease in value to a substantial degree, the Company’s liquidity, financial position, and financial results could be materially adversely affected. Under these circumstances, the Company’s income from these investments could be materially reduced, and declines in the value of certain securities could further reduce the Company’s results of operations, equity, business and insurer financial strength.

The Company has a large portfolio of equity securities and limited partnership investments which can fluctuate in value with a wide variety of market conditions. A decline in the aggregate value of the equity securities and limited partnership investments would ~~be expected to~~ result in a commensurate decline ~~both in the value of the Company’s equity securities and limited partnership investments and~~ in the Company’s shareholders ~~equity.~~equity, either through the income statement or directly to surplus. The resultant decline could, at least temporarily, materially adversely affect the Company’s results of operations, equity, business and insurer financial strength.

Item 2. PROPERTIES

The Company leases office space at 1099 North Meridian Street, Indianapolis, Indiana. This building is located approximately one mile from downtown Indianapolis. The lease, renewed in August, 2008, covers approximately 81,000 square feet and expires in August, 2013, with an option to renew for an additional five years.

The Company owns two buildings and the adjacent real estate approximately two miles and eleven miles from its main office. The buildings contain approximately 3,300 and 15,000 square feet of usable space respectively, and are used primarily as off-site data storage and as a contingent back up and disaster recovery site.

- 19 -

The Company's entire operations are conducted from these facilities. The current facilities are expected to be adequate for the Company's operations for the foreseeable future.

Item 3. LEGAL PROCEEDINGS

In the ordinary, regular and routine course of their business, the Company and its Insurance Subsidiaries are frequently involved in various matters of litigation relating principally to claims for insurance coverage provided. No currently pending matter is deemed by management to be material to the Company.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Nothing to report.

~~- 20 -~~

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company’s Class A and Class B common stocks are traded on The NASDAQ Stock Market® under the symbols BWINA and BWINB, respectively.

The Class A and Class B common shares have identical rights and privileges except that Class B shares have no voting rights other than on matters for which Indiana law requires class voting.

As of December 31, ~~2010,~~2011, there were approximately 400 record holders of Class A Common Stock and approximately 1,000 record holders of Class B Common Stock.

The table below sets forth the range of high and low sale prices for the Class A and Class B Common Stock for ~~2010~~2011 and ~~2009,~~2010, as reported by NASDAQ and published in the financial press. The quotations reflect interdealer prices without retail markup, markdown or commission and do not necessarily represent actual transactions.

									Cash										Cash
	Class A				Class B				Dividends		Class A				Class B				Dividends
	High		Low		High		Low		Declared		High		Low		High		Low		Declared

2011:
Fourth Quarter											$	25.43	$	21.41	$	24.40	$	20.22	$	.25
Third Quarter												26.50		23.00		25.58		20.02		.25
Second Quarter												27.00		20.72		24.46		21.51		.25
First Quarter												22.39		19.99		24.54		21.22		.25

2010:
Fourth Quarter	$	23.96	$	20.11	$	25.68	$	22.80	$	1.25		23.96		20.11		25.68		22.80		1.25
Third Quarter		24.49		20.00		25.65		20.63		.25		24.49		20.00		25.65		20.63		.25
Second Quarter		25.75		19.71		26.35		20.00		.25		25.75		19.71		26.35		20.00		.25
First Quarter		26.52		20.88		26.64		22.42		.50		26.52		20.88		26.64		22.42		.50

2009:
Fourth Quarter		24.38		21.10		24.98		21.38		.25
Third Quarter		22.70		17.32		24.39		19.19		.25
Second Quarter		20.69		17.25		21.52		17.76		.25
First Quarter		18.00		15.40		20.76		14.28		.25

The Company has paid quarterly cash dividends continuously since 1974. The current regular quarterly dividend rate is $.25 per share. The Company expects to continue its policy of paying regular cash dividends although there is no assurance as to future dividends because they are dependent on future earnings, capital requirements and financial conditions and are subject to regulatory restrictions. At times, the Company has paid an extra cash dividend in recognition of the Company’s more than adequate capitalization and favorable earnings. The Board intends to address the subject of dividends at each of its future meetings considering the Company’s earnings, returns on investments and its capital needs; however, shareholders should not expect extra dividends, if any, in the future to follow any predetermined pattern.

- 2120 -

Corporate Performance

The following graph shows a five year comparison of cumulative total return for the Corporation’s Class B common shares, the NASDAQ Insurance Stock Index and the Russell 2000 Index. The basis of comparison is a $100 investment at December 31, ~~2005,~~2006, in each of (i) Baldwin & Lyons, Inc., (ii) Nasdaq Insurance Stocks, and (iii) the Russell 2000 Index. All dividends are assumed to be reinvested.

Period Ending
Index 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10
Baldwin & Lyons, Inc. 100.00 116.15 132.61 92.13 131.20 137.37
NASDAQ Insurance Index 100.00 113.85 114.83 103.81 107.23 126.67
Russell 2000 100.00 118.37 116.51 77.15 98.11 124.46

		Period Ending
Index	12/31/06	12/31/07	12/31/08	12/31/09	12/31/10	12/31/11
Baldwin & Lyons, Inc.	100.00	114.18	79.33	112.96	118.27	114.49
NASDAQ Insurance Index	100.00	100.86	91.18	94.19	111.26	117.53
Russell 2000	100.00	98.43	65.18	82.89	105.14	100.75

- 2221 -

Item 6. SELECTED FINANCIAL DATA

	Year Ended December 31															Year Ended December 31
	2010			2009			2008			2007			2006			2011			2010			2009			2008			2007
	(Dollars in thousands, except per share data)															(Dollars in thousands, except per share data)

Direct and assumed premiums written	$	295,802		$	250,159		$	221,942		$	207,367		$	197,064		$	334,526		$	295,802		$	250,159		$	221,942		$	207,367

Net premiums earned		214,738			181,300			182,299			179,065			169,766			244,570			214,738			181,300			182,299			179,065

Net investment income		11,335			13,971			17,063			19,595			19,548			10,729			11,335			13,971			17,063			19,595

Net gains (losses) on investments		16,485			30,816			(47,750	)		40,096			17,064			(17,803	)		16,485			30,816			(47,750	)		40,096

Losses and loss expenses incurred		145,952			99,351			115,752			107,781			112,604			215,555			145,952			99,351			115,752			107,781

Net income (loss)		25,015			44,802			(7,713	)		55,131			38,185			(28,175	)		25,015			44,802			(7,713	)		55,131

Earnings per share -- net income (loss) 1		1.69			3.04			(.51	)		3.63			2.54			(1.90	)		1.69			3.04			(.51	)		3.63

Cash dividends per share 2		2.25			1.00			1.00			1.65			2.55			1.00			2.25			1.00			1.00			1.65

Investment portfolio 3		635,174			622,085			545,491			650,538			626,753			637,681			635,174			622,085			545,491			650,538

Total assets		837,946			851,315			777,743			842,833			853,719			887,031			837,946			851,315			777,743			842,833

Shareholders' equity		368,735			372,943			330,067			380,718			357,627			319,061			368,735			372,943			330,067			380,718

Cost of treasury shares purchased		-			880			8,908			-			401			-			-			880			8,908			-

Book value per share 1		24.90			25.31			22.32			24.98			23.60			21.49			24.90			25.31			22.32			24.98

Underwriting ratios 4

Losses and loss expenses		68.0	%		54.8	%		63.5	%		60.2	%		66.3	%		88.1	%		68.0	%		54.8	%		63.5	%		60.2	%

Underwriting expenses		31.0	%		35.8	%		30.9	%		30.9	%		26.6	%		30.2	%		31.0	%		35.8	%		30.9	%		30.9	%

Combined		99.0	%		90.6	%		94.4	%		91.1	%		92.9	%		118.3	%		99.0	%		90.6	%		94.4	%		91.1	%

1 Earnings and book value per share are adjusted for the dilutive effect of stock options outstanding.

2 ~~Inclues extra dividends of $1.25, $.65, and $1.70 for 2010, 2007, and 2006, respectively.~~

3 ~~Inclues money market instruments classified with cash in the Consolidated Balance Sheets.~~

2	Includes extra dividends of $1.25 and $.65 for 2010 and 2007, respectively.

4 ~~Data is for all coverages combined, does not include fee income and is presented based upon U.S. generally accepted accounting principles.~~

3	Includes money market instruments classified with cash in the Consolidated Balance Sheets.

4	Data is for all coverages combined, does not include fee income and is presented based upon U.S. generally accepted accounting principles.

- 2322 -

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Liquidity and Capital Resources

The primary sources of the Company’s liquidity are (1) funds generated from insurance operations including net investment income, (2) proceeds from the sale of investments and (3) proceeds from maturing investments. The Company generally experiences positive cash flow from operations resulting from the fact that premiums are collected on insurance policies in advance of the disbursement of funds in payment of claims. Operating costs of the insurance subsidiaries, other than loss and loss expense payments, generally average less than 30% of net premiums earned on a consolidated basis and the remaining amount is available for investment for varying periods of time depending on the type of insurance coverage provided. Because losses are often settled in periods subsequent to when they are incurred, operating cash flows may, at times, become negative as loss settlements on claim reserves established in prior years exceed current revenues. During ~~2010,~~2011, cash flow from operations totaled ~~$49.5~~$54.3 million compared to ~~$30.7~~$49.5 million in ~~2009.~~2010. This comparative increase in operating cash flow resulted from increases in ~~gross~~net premiums collected and ~~to a lesser extent, decreases~~lower federal tax payments largely offset by corresponding increases in losses paid in ~~2010, as well as the timing of premiums ceded to reinsurers.~~2011.

For several years, the Company’s investment philosophy has emphasized the purchase of short-term bonds with maximum quality and liquidity. As flat yield curves have not provided a strong incentive to lengthen maturities in recent years, the Company has continued to maintain its fixed maturity portfolio at short-term levels. The average contractual life of the Company’s bond and short-term investment portfolio ~~increased~~decreased from ~~3.8~~4.5 to ~~4.5~~3.1 years during ~~2010.~~2011. The average duration of the Company’s fixed maturity portfolio is shorter than the contractual maturity average and much shorter than the duration of the Company’s liabilities. The Company also remains an active participant in the equity securities market using capital which is in excess of amounts considered necessary to fund current operations. The long-term horizon for the Company’s equity investments allows it to invest in positions where ultimate value, and not short-term market fluctuation, is the primary focus. Investments made by the Company’s domestic insurance subsidiaries are regulated by guidelines promulgated by the National Association of Insurance Commissioners which are designed to provide protection for both policyholders and shareholders.

The Company’s assets at December 31, ~~2010~~2011 included ~~$45.6~~$85.4 million in short-term and cash equivalent investments which are readily convertible to cash without market penalty and an additional ~~$140.0~~$152.0 million of fixed maturity investments (at par) maturing in less than one year. The Company believes that these liquid investments, plus the expected cash flow from current operations, are more than sufficient to provide for projected claim payments and operating cost demands. In the event competitive conditions produce inadequate premium rates and the Company chooses to further restrict volume, the liquidity of its investment portfolio would permit management to continue to pay claims as settlements are reached without requiring the disposal of investments at a loss, regardless of interest rates in effect at the time. In addition, the Company’s reinsurance program is structured to avoid significant cash outlays that accompany large losses.

Net premiums written by the Company’s insurance subsidiaries for ~~2010~~2011 equaled approximately ~~46%~~56% of the combined statutory surplus of these subsidiaries. Premium writings of 100% to 200% of surplus are generally considered acceptable by regulatory authorities. Further, the statutory capital of each of the insurance subsidiaries substantially exceeds minimum risk based capital requirements set by the National Association of Insurance Commissioners. Accordingly, the Company has the ability to significantly increase its business without seeking additional capital to meet regulatory guidelines.

At December 31, ~~2010, $74.8~~2011, $84.7 million, or ~~20%~~27% of shareholders’ equity, represented net assets of the Company’s insurance subsidiaries which, at that time, could not be transferred in the form of dividends, loans or advances to the parent company because of minimum statutory capital requirements. However, management believes that these restrictions pose no material liquidity concerns for the Company. The financial strength and stability of the subsidiaries permit ready access by the parent company to short-term and long-term sources of credit. The Company maintains a ~~$20~~$30 million unsecured line of credit and has ~~$15.0~~$10.0 million of drawings outstanding on this line at December 31, ~~2010,~~2011, the proceeds of which were used principally for treasury stock repurchases, dividend payments and ~~extra dividend payments.~~other corporate expenditures.

- 23 -

Results of Operations

2011 Compared to 2010

Direct premiums written for 2011 totaled $274.1 million, an increase of $24.4 million (10%) from 2010. The increase is primarily attributable to $23.7 million (13%) in premiums generated by fleet transportation products and $9.5 million in premiums generated by professional liability business. Premiums ceded to reinsurers on direct business increased $8.2 million (11%) during 2011 to $84.1 million, as the consolidated percentage of premiums ceded to direct premiums written remained relatively level at 30.7% for 2011 compared to 30.4 % for 2010.

Written premiums assumed from other insurers and reinsurers totaled $60.4 million during 2011, an increase of $14.3 million (31%) from 2010. The increase is related almost entirely to the expansion of the Company’s professional liability reinsurance business which was launched in 2010. Premium ceded related to the reinsurance assumed business remained level with the 3% average rate from 2010.

After giving effect to changes in unearned premiums, net premiums earned totaled $244.6 million for 2011 compared to $214.7 million for 2010, an increase of 13.9%. These changes are in line with expectations and result from product expansion and continuing marketing efforts in the Property and Casualty Insurance segment and from the continued growth of professional liability reinsurance within the Reinsurance segment.

Pre-tax investment income of $10.7 million during 2011 was 5% lower than the 2010 total as pre-tax yields were down nearly 8% on average, reflecting continuing depressed worldwide available rates, principally on short-term investments. After tax investment income decreased by a similar 6% during 2011, compared to the prior year.

Net losses on investments, before taxes, totaled $17.8 million in 2011 compared to net gains on investments of $16.5 million during 2010. The net losses in 2011 are attributable to $21.9 million in limited partnerships net losses partially offset by $4.1 million in fixed maturity and equity security net direct trading gains. Limited partnership ventures utilized by the Company are primarily engaged in the trading of public and private securities, including foreign securities and, to a lesser extent, small venture capital activities and real estate development. The aggregate of the Company’s share of losses in these entities represented a 29% decline in value for 2011 compared to an appreciation in value of 12% for 2010. To the extent that accounting rules require the limited partnerships to include realized and unrealized gains or losses in their net income, the Company’s proportionate share of net income will include the results as reported to the Company by the various general partners. During 2011, approximately $20.6 million (94%) of the net loss was attributable to a reduction in unrealized gains and only 6% resulted from realized transactions. Recoveries of $1.3 million on previously impaired available-for-sale securities that were sold in 2011 are included in the fixed maturity and equity security net gains stated above.

Losses and loss expenses incurred during 2011 increased $69.6 million (48%) to $215.6 million with virtually all of the increase attributable to catastrophe losses of $66.6 million with the remainder attributable to increased premium volume. The 2011 consolidated loss and loss expense ratio was 88.1% compared to 68.0% for 2010. The Company's loss and loss expense ratios for major product lines are summarized in the following table.

	2011			2010
Fleet transportation		68.8	%		58.8	%
Private passenger automobile		72.2			85.0
Commercial multi-peril		50.8			47.0
Professional liability		68.6			N/M
Property reinsurance		202.9			94.9
Casualty reinsurance		60.6			68.0
Residual market and all other		144.3			127.7
All lines		88.1			68.0

The fleet transportation loss ratio was impacted by factors such as fluctuations in premium volume, the levels of self-insured retentions and the high policy limits which allow for more volatility in losses. The property reinsurance loss ratio was higher in 2011 as the result of a historically unprecedented number of significant world-wide catastrophe losses. Losses from large catastrophic events during 2011 totaled $66.6 million compared to $25.2 million during 2010, itself a historically severe year for international catastrophic events.

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~~Results~~

The Company produced an overall savings on the handling of ~~Operations~~prior year claims during 2011 of $9.7 million. This net savings is included in the computation of loss ratios shown in the previous table, as is the $8.8 million savings produced during 2010 on prior year claims. The $7.4 million net savings attributable to the property and casualty insurance business was distributed among all of the Company’s products, with the majority attributable to the Company's fleet transportation and personal automobile businesses, and is generally consistent with recent prior years. Because of the high limits provided by the Company to its fleet transportation insureds, the length of time necessary to settle larger, more complex claims and the volatility of the fleet transportation liability insurance business, the Company believes it is important to take a conservative posture in its reserving process. As claims are settled in years subsequent to their occurrence, the Company's claim handling process has, historically, tended to produce savings from the reserves provided. Changes in both gross premium volumes and the Company's reinsurance structure for its fleet transportation business can have a significant impact on future loss developments and, as a result, loss and loss expense ratios and prior year reserve development may not be consistent year to year.

Other operating expenses for 2011, before credits for allowances from reinsurers, increased $6.0 million (8%) to $84.8 million. This increase is due primarily to a $6.2 million increase in commission expense partially offset by decreases in salary related expenses and taxes, licenses and fees. The higher commissions reflect expansion of the Company’s distribution channels to additional non-affiliated agents.

Reinsurance ceded credits were $1.4 million (14%) higher in 2011, resulting from increased gross premiums written on business ceded to other companies under quota share reinsurance treaties which provide commissions to the Insurance Subsidiaries. After consideration of these expense offsets, operating expenses increased $4.6 million, or 7% from the prior year, well below the increase in net premiums earned, as noted above.

A portion of the Company’s fleet transportation business is produced by the direct sales efforts of Baldwin & Lyons, Inc. employees and, accordingly, this business does not incur commission expense on a consolidated basis. Rather, the expenses of the agency operations, including salaries and bonuses of salesmen, travel expenses, etc. are included in operating expenses. In general, commissions paid by the insurance subsidiaries to the parent company exceed related acquisition costs incurred in the production of the property and casualty insurance business. The ratio of net operating expenses of the insurance subsidiaries to net premiums earned was 30.2% in 2011 and 31.0% in 2010. Including the agency operations and corporate expenses, and after elimination of inter-company commissions, the ratio of operating expenses to operating revenue (defined as total revenue less gains (losses) on investments) was 28.1% for 2011 compared with 29.5% for 2010 with the decreases in both cases attributable to the fact that expenses grew at a slower pace than premium volume.

The effective federal tax rate on the consolidated pre-tax loss for 2011 was 37.8%. The effective rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.

Due to an unprecedented amount of significant catastrophic losses coupled with significant net investment losses, the Company experienced net loss for 2011 of $28.2 million compared to net income of $25.0 million for 2010. Diluted earnings per share loss of $1.90 were recorded in 2011 compared to per share income of $1.69 in 2010.

2010 Compared to 2009

Direct premiums written for 2010 totaled $249.7 million, an increase of $40.6 million (19%) from 2009. The increase is primarily attributable to $25.2 million (16%) in premiums generated by fleet transportation products and $12.7 million (67%) in premiums generated by new product lines including commercial property and business owners’ liability business. Premiums ceded to reinsurers on direct business increased $17.3 million (29%) during 2010 to $75.9 million as the consolidated percentage of premiums ceded to direct premiums written increased to 30.4% for 2010 from 28.0 % for 2009. This increase is reflective of overall product expansion within fleet transportation business, increased use of reinsurance for certain products and the Company's expansion into commercial property and business owners’ liability business.

Written premiums assumed from other insurers and reinsurers totaled $46.1 million during 2010, an increase of $5.1 million (12%) from 2009. The increase reflects the Company’s launch of a professional liability assumed business. Premium ceded related to the reinsurance assumed business declined from 4% in 2009 to 3% in 2010 reflecting slightly better pricing for the coverage.

After giving effect to changes in unearned premiums, net premiums earned totaled $214.7 million for 2010 compared to $181.3 million for 2009. These changes are in line with expectations and result from product expansion and continuing

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marketing efforts in the Property and Casualty Insurance segment and from program changes, effective January 1, 2010, in the Reinsurance segment including the introduction of professional liability reinsurance.

Pre-tax investment income of $11.3 million reflects a decrease during 2010 compared to 2009 as pre-tax yields were down 21% on average reflecting continuing depressed worldwide available rates, principally on short-term investments. After tax investment income decreased by 26% during 2010, compared to the prior year.

Net gains on investments, before taxes, totaled $16.5 million in 2010 compared to net gains on investments of $30.8 million last year. The gains in 2010 are attributable to $8.3 million in fixed maturity and equity security net direct trading gains and $8.2 million in limited partnerships net gains. Limited partnership ventures utilized by the Company are primarily engaged in the trading of public and private securities, including foreign securities and, to a lesser extent, small venture capital activities and real estate development. The aggregate of the Company’s share of earnings in these entities represented a return of 12% for 2010 compared to a return of 57% for 2009. To the extent that accounting rules require the limited partnerships to include realized and unrealized gains or losses in their net income, the Company’s proportionate share of net income will include the results as reported to the Company by the various general partners. Recoveries of $1.6 million on previously impaired available-for-sale securities that were sold in 2010 are included in the fixed maturity and equity security net gains stated above.

Losses and loss expenses incurred during 2010 increased $46.6 million (47%) to $146.0 million with the majority of the increase attributable to increases in catastrophe losses, including major earthquakes and windstorms, of $25.2 million with the remainder attributable to increased premium volume. The 2010 consolidated loss and loss expense ratio was 68.0% compared to 54.8% for 2009. The Company's loss and loss expense ratios for major product lines are summarized in the following table.

2010 2009
Fleet transportation 58.8 % 56.0 %
Private passenger automobile 85.0 70.6
Commercial multiple peril 47.0 63.9
Property reinsurance 94.9 40.9
All lines 68.0 54.8

	2010			2009
Fleet transportation		58.8	%		56.0	%
Private passenger automobile		85.0			70.6
Commercial multi-peril		47.0			63.9
Reinsurance		94.9			40.9
All lines		68.0			54.8

The fleet transportation loss ratio was impacted by factors such as fluctuations in premium volume, the levels of self-insured retentions and the Company’s higher net retention under reinsurance treaties in recent years allow for more volatility in losses. The increase in the private passenger automobile loss ratio is due primarily to higher current year losses. The Reinsurance loss ratio was higher in 2010 as the result of increases in catastrophe losses, including major earthquakes and windstorms.

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The Company produced an overall savings on the handling of prior year claims during 2010 of $8.8 million. This net savings is included in the computation of loss ratios shown in the previous table, as is the $9.6 million savings produced during 2009 on prior year claims. The $6.6 million net savings attributable to direct business was distributed among all of the Company’s products, with the majority attributable to the Company's fleet transportation businesses, and is generally consistent with recent prior years. Because of the high limits provided by the Company to its fleet transportation insureds, the length of time necessary to settle larger, more complex claims and the volatility of the fleet transportation liability insurance business, the Company believes it is important to take a conservative posture in its reserving process. As claims are settled in years subsequent to their occurrence, the Company's claim handling process has, historically, tended to produce savings from the reserves provided. Changes in both gross premium volumes and the Company's reinsurance structure for its fleet transportation business can have a significant impact on future loss developments and, as a result, loss and loss expense ratios and prior year reserve development may not be consistent year to year.

Other operating expenses for 2010, before credits for allowances from reinsurers, increased $4.4 million (6%) to $78.8 million. This increase is due primarily to a $3.9 million increase in commission expense. The higher commissions reflect expansion of the Company’s distribution channels to additional non-affiliated agents. Other increases related primarily to investments in the Company’s IT structure in support of existing, new and potential product lines.

Reinsurance ceded credits were $4.7 million (88%) higher in 2010, resulting from the Company ceding a higher percentage of the gross premium to other companies under reinsurance treaties, principally for workers’ compensation coverages. After

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consideration of these expense offsets, operating expenses remained flat decreasing $.3 million, or less than 1% from the prior year.

A portion of the Company’s fleet transportation business is produced by direct sales efforts of Baldwin & Lyons, Inc. employees and, accordingly, this business does not incur commission expense on a consolidated basis. Instead, the expenses of the agency operations, including salaries and bonuses of salesmen, travel expenses, etc. are included in operating expenses. In general, commissions paid by the insurance subsidiaries to the parent company exceed related acquisition costs incurred in the production of the property and casualty insurance business. The ratio of net operating expenses of the insurance subsidiaries to net premiums earned was 31.0% in 2010 and 35.8% in 2009. Including the agency operations and corporate expenses, and after elimination of inter-company commissions, the ratio of operating expenses to operating revenue (defined as total revenue less gains (losses) on investments) was 29.5% for 2010 compared with 34.2% for 2009.

The effective federal tax rate on consolidated income for 2010 was 28.1%. The effective rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.

As a result of the factors mentioned above, and primarily the increase in catastrophic losses and a decline in realized investment gains, the Company experienced net income for 2010 of $25.0 million compared to net income of $44.8 million for 2009. Diluted earnings per share income of $1.69 were recorded in 2010 compared to $3.04 in 2009.

~~2009 Compared to 2008~~

Direct premiums written for 2009 totaled $209.1 million, an increase of $26.3 million (14%) from 2008. The increase is primarily attributable to $19.0 million in premiums generated by new product lines and a $6.1 million (30%) increase in the Company's private passenger automobile business. New product premiums are derived from commercial property and business owners’ liability business. Premiums ceded to reinsurers on direct business increased $18.8 million (47%) during 2009 to $58.6 million as the consolidated percentage of premiums ceded to direct premiums written increased to 28.0% for 2009 from 21.8% for 2008. This increase is reflective of expansion of the workers’ compensation component of fleet transportation business, increased use of facultative reinsurance and the Company's expansion into commercial property and business owners’ liability business.

Premiums assumed from other insurers and reinsurers totaled $41.0 million during 2009, an increase of $1.9 million (5%) from 2008. The small increase reflects an overall slight decline in exposures and single to low double digit rate increases. Premium ceded related to the reinsurance assumed business declined from 14% in 2008 to 4% in 2009 as reductions in exposures in the Company’s book of United States business resulted in a decline in the need for reinsurance protection.

After giving effect to changes in unearned premiums, net premiums earned remained relatively flat at $181.3 million for 2009 compared to $182.3 million for 2008. Increases in net premiums earned were recorded on the Company’s reinsurance

~~- 26 -~~

business ($5.1 million or 14.4%) and private passenger automobile business ($1.8 million or 8.2%). The new commercial property and business owners’ liability business generated $2.8 million in net premium earned. These increases were offset by a $10.7 million (8.6%) decrease in net premium earned on fleet transportation products as higher reinsurance ceded reduced level gross premium writings within the fleet transportation products, as noted above.

Pre-tax investment income of $14.0 million reflects a decrease during 2009 compared to 2008 as pre-tax yields were down 11% on average reflecting worldwide lower available rates, principally on short-term investments. After tax investment income decreased by 20% during 2009, compared to the prior year.

Net gains on investments, before taxes, totaled $30.8 million in 2009 compared to a net loss on investments of $47.7 million in 2008. The gains in 2009 are attributable to $5.2 million in fixed maturity and equity security net direct trading gains and $25.6 million in limited partnerships net gains. Limited partnership ventures utilized by the Company are primarily engaged in the trading of public and private securities, including foreign securities and, to a lesser extent, small venture capital activities and real estate development. The aggregate of the Company’s share of earnings in these entities represented a positive return of 57% for 2009 versus a negative return of 43% for 2008. To the extent that accounting rules require the limited partnerships to include realized and unrealized gains or losses in their net income, the Company’s proportionate share of net income will include the results as reported to the Company by the various general partners. Adjustments attributable to "other-than-temporary impairment" of $2.5 million in recoveries during 2009 increased fixed maturity and equity security net gains as stated above.

Losses and loss expenses incurred during 2009 decreased $16.4 million (14%) to $99.4 million. The decrease in losses incurred is due primarily to lower current year loss activity from directly-produced business and lower losses from reinsurance, including a $4.0 million drop in hurricane losses from 2008. Partially offsetting these decreases was a $2.5 million increase in losses from the Company’s private passenger automobile product. The 2009 consolidated loss and loss expense ratio was 54.8% compared to 63.5% for 2008. The Company's loss and loss expense ratios for major product lines are summarized in the following table.

2009 2008
Fleet Transportation 56.0 % 63.6 %
Private Passenger Automobile 70.6 64.5
Reinsurance 40.9 63.7
All lines 54.8 63.5

The fleet transportation loss ratio for 2009 was impacted by lower current year losses primarily from the independent contractor product. Factors such as fluctuations in premium volume, the levels of self-insured retentions and the Company’s higher net retention under reinsurance treaties in recent years allow for more volatility in losses. The increase in the private passenger automobile loss ratio is due primarily to higher current year losses and also reflects the higher premium volume in 2009. The Reinsurance loss ratio was lower in 2009 as the result of a lack of 2009 hurricane losses as well as a drop in United States tornado and hail losses experienced compared to 2008.

The Company produced an overall savings on the handling of prior year claims during 2009 of $9.6 million. This net savings is included in the computation of loss ratios shown in the previous table, as is the $17.1 million savings produced during 2008 on prior year claims. This net savings included a $4.6 million deficiency attributable to reinsurance, principally resulting from increases to Hurricane Ike losses not reported to the Company until 2009. The $14.2 million net savings attributable to direct business was distributed among all of the Company’s products, with the majority attributable to the Company's independent contractor and large fleet transportation businesses, and is generally consistent with recent prior years. Because of the high limits provided by the Company to its fleet transportation insureds, the length of time necessary to settle larger, more complex claims and the volatility of the fleet transportation liability insurance business, the Company believes it is important to take a conservative posture in its reserving process. As claims are settled in years subsequent to their occurrence, the Company's claim handling process has, historically, tended to produce savings from the reserves provided. Changes in both gross premium volumes and the Company's reinsurance structure for its fleet transportation business can have a significant impact on future loss developments and, as a result, loss and loss expense ratios and prior year reserve development may not be consistent year to year.

Other operating expenses for 2009, before credits for allowances from reinsurers, increased $12.7 million (21%) to $74.4 million. This increase is due primarily to a $5.3 million increase in commission expense and a $4.3 million increase in salary and salary-related expenses. The higher commissions reflect expansion of the Company’s distribution channels to

~~- 27 -~~

include non-affiliated agents and the higher salary expense relates primarily to employees hired in support of both existing and new product lines, including the formation of an in-house actuarial department. Other increases related primarily to investments in the Company’s IT structure in support of existing, new and potential product lines.

Reinsurance ceded credits were $2.3 million (74%) higher in 2009, resulting from the Company ceding a higher percentage of the gross premium to other companies under reinsurance treaties, principally for workers’ compensation coverages. After consideration of these expense offsets, operating expenses increased $10.5 million, or 18% from the prior year.

A portion of the Company’s fleet transportation business is produced by direct sales efforts of Baldwin & Lyons, Inc. employees and, accordingly, this business does not incur commission expense on a consolidated basis. Instead, the expenses of the agency operations, including salaries and bonuses of salesmen, travel expenses, etc. are included in operating expenses. In general, commissions paid by the insurance subsidiaries to the parent company exceed related acquisition costs incurred in the production of the property and casualty insurance business. The ratio of net operating expenses of the insurance subsidiaries to net premiums earned was 35.8% in 2009 and 30.9% in 2008. Including the agency operations and corporate expenses, and after elimination of inter-company commissions, the ratio of operating expenses to operating revenue (defined as total revenue less gains (losses) on investments) was 34.2% for 2009 compared with 28.6% for 2008.

~~The effective federal tax rate on consolidated income for 2009 was 30.3%. The effective rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.~~

As a result of the factors mentioned above, and primarily the change in net gains and losses on investments, the Company experienced net income for 2009 of $44.8 million compared to a net loss of $7.7 million for 2008. Diluted earnings per share income of $3.04 were recorded in 2009 compared to a net loss of $.51 in 2008. Earnings per share from operations, defined as income before gains or losses on investments, were $1.68 compared to $1.55 in 2008.

Critical Accounting Policies

The Company’s significant accounting policies which are material and/or subject to significant degrees of judgment are highlighted below.

Investment Valuation

All marketable securities are included in the Company’s balance sheet at current fair market value.

Approximately ~~76%~~72% of the Company’s assets are composed of investments at December 31, ~~2010.~~2011. Approximately ~~88%~~91% of these investments are publicly-traded, owned directly and have readily-ascertainable market values. The remaining ~~12%~~9% of investments are composed primarily of minority interests in several limited partnerships. These limited partnerships are engaged in the trading of public and non-public equity securities and debt, hedging transactions, real estate development and venture capital investment. These partnerships, themselves, do not have readily-determinable market values. Rather, the ~~fair~~ values recorded are those provided to the Company by the respective partnerships based on the underlying assets of the partnerships. While the majority of the underlying assets at December 31, ~~2010~~2011 are publicly-traded securities, ~~some~~those which are not publically traded have been valued by the respective partnerships using their experience and judgment.

Under FASB guidance, if a fixed maturity security is in an unrealized loss position and the Company has the intent to sell the security, or it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to net realized losses on investments in the consolidated statements of operations. For impaired fixed maturity securities that the Company does not intend to sell or it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in net realized losses on investments in the consolidated statements of operations and the non-credit component of the other-than-temporary impairment is recognized directly in shareholder’s equity (accumulated other comprehensive income).

In determining if and when an equity security’s decline in market value below cost is other-than-temporary, we first make an objective analysis of each individual equity security where current market value is less than cost. For any equity security where the unrealized loss exceeds 20% of original or adjusted cost, and where that decline has existed for a period of at least six months, the decline is treated as an other-than-temporary impairment, without any subjective evaluation as to

~~- 28 -~~

possible future recovery. For individual issues where the decline in value is less than 20% but the amount of the decline is considered significant, we will also evaluate the market conditions, trends of earnings, price multiples and other key measures for the securities to determine if it appears that the decline is other-than-temporary. In those instances, the Company also considers its intent and ability to hold equity investments until ~~recovery.~~recovery can be reasonably expected. For any decline which is considered to be other-than-temporary, we recognize an impairment loss in the current period earnings as an investment loss. Declines which are considered to be temporary are recorded as a reduction in shareholders’ equity, net of related federal income tax credits.

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It is important to note that all ~~investments~~available for sale securities included in the Company’s financial statements are valued at current fair market values. The evaluation process for determination of other-than-temporary decline in value of investments, as described above, does not change these valuations but, rather, determines when a decline in value will be recognized in the income statement (other-than-temporary decline) as opposed to a charge to shareholders’ equity (temporary decline). ~~Subsequent recoveries~~Another aspect of this accounting policy which is important to understand is that any subsequent recovery in value of investments which have incurred other-than-temporary impairment adjustments are accounted for as unrealized gains until the security is actually disposed of or sold. At December 31, ~~2010,~~2011, unrealized gains include ~~$9.5~~$6.8 million of appreciation on investments previously adjusted for other-than-temporary impairment, compared to ~~$7.6~~$8.2 million of impairment write-downs at that date. This evaluation process is subject to risks and uncertainties since it is not always clear what has caused a decline in value of an individual security or since some declines may be associated with general market conditions or economic factors which relate to an industry, in general, but not necessarily to an individual issue. The Company has attempted to minimize many of these uncertainties by adopting a largely objective evaluation process as described above. However, to the extent that certain declines in value are reported as unrealized at December 31, ~~2010,~~2011, it is possible that future earnings charges will result should the declines in value increase or persist or should the security actually be disposed of while market values are less than cost. At December 31, ~~2010,~~2011, the total gross unrealized loss included in the Company’s investment portfolio was approximately ~~$2.1~~$4.5 million. No individual issue constituted a material amount of this total. Had this entire amount been considered other-than-temporary at December 31, ~~2010,~~2011, there would have been no impact on total shareholders’ equity or book value since the decline in value of these securities was already recognized as a reduction to shareholders’ equity at December 31, ~~2010.~~2011.

Reinsurance Recoverable

Reinsurance ceded transactions were as follows for the years ended December 31 (dollars in thousands):

	2010		2009		2008		2011		2010		2009
Premium ceded (reduction to premium earned)	$	73,119	$	60,818	$	46,514	$	85,493	$	73,119	$	60,818
Losses ceded (reduction to losses incurred)		17,581		22,025		53,398		56,600		17,581		22,025
Commissions from reinsurers (reduction to operating expenses)		10,081		5,352		3,084		11,503		10,081		5,352

A discussion of the Company’s reinsurance strategies is presented in Item 1, Business, on page 2.3.

Amounts recoverable under the terms of reinsurance contracts comprise approximately ~~15%~~16% of total Company assets as of December 31, ~~2010.~~2011. In order to be able to provide the high limits required by the Company’s ~~fleet transportation company~~ insureds, we share a significant amount of the insurance risk of the underlying contracts with various insurance entities through the use of reinsurance contracts. Some reinsurance contracts provide that a loss be shared among the Company and its reinsurers on a predetermined pro-rata basis (“quota-share”) while other contracts provide that the Company keep a fixed amount of the loss, similar to a deductible, with reinsurers taking all losses above this fixed amount (“excess of loss”). Some risks are covered by a combination of quota-share and excess of loss contracts. The computation of amounts due from reinsurers is based upon the terms of the various contracts and follows the underlying estimation process for loss and loss expense reserves, as described below. Accordingly, the uncertainties inherent in the loss and loss expense reserving process also affect the amounts recorded as recoverable from reinsurers. Estimation uncertainties are greatest for claims which have occurred but which have not yet been reported to the Company. Further, the high limits provided by the Company’s insurance policies for fleet transportation liability, ~~and~~ workers’ compensation and professional liability risks provide more variability in the estimation process than lines of business with lower coverage limits.

~~- 29 -~~

It should be noted, however, that a change in the estimate of amounts due from reinsurers on unpaid claims will not, in itself, result in charges or credits to losses incurred. This is because any change in estimated recovery follows the estimate of the underlying loss. Thus, it is the computation of the gross underlying loss that is critical.

As with any receivable, credit risk exists in the recoverability of reinsurance. This ismay be even more pronounced than in normal receivable situations since recoverable amounts are not generally due until the loss is settled which, in some cases, may be many years after the contract was written. If a reinsurer is unable, in the future, to meet its financial commitments under the terms of the contracts, the Company would be responsible ~~for~~to satisfy the reinsurer's portion of the loss. The

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financial condition of each of the Company’s reinsurers is initially determined upon the execution of a given treaty and only reinsurers with the superior credit ratings available are utilized. However, as noted above, reinsurers are often not called upon to satisfy their obligations for several years and changes in credit worthiness can occur in the interim period. Reviews of the current financial strength of each reinsurer are made ~~continually~~frequently and, should impairment in the ability of a reinsurer be determined to exist, current year operations would be charged in amounts sufficient to provide for the Company’s additional liability. Such charges are included in other operating expenses, rather than losses and loss expenses incurred, since the inability of the Company to collect from reinsurers is a credit loss rather than a deficiency associated with the loss reserving process.

Loss and Loss Expense Reserves

The Company’s loss and loss expense reserves for each segment are shown in the following table on both a gross (before consideration of reinsurance) and on a net of reinsurance basis at December 31, ~~2010~~2011 and ~~2009~~2010 (dollars in thousands).

	Direct and Assumed				Net				Direct and Assumed				Net
Line of Business (Segment)	2010		2009		2010		2009		2011		2010		2011		2010

Property and casualty insurance	$	291,532	$	319,531	$	165,640	$	163,753	$	330,683	$	296,367	$	199,219	$	170,476
Reinsurance assumed		48,153		34,814		48,153		34,814
Involuntary residual markets		4,836		4,686		4,836		4,686
Reinsurance										90,873		48,153		90,873		48,153

	$	344,520	$	359,031	$	218,629	$	203,253	$	421,556	$	344,520	$	290,092	$	218,629

The Company’s reserves for losses and loss expenses (“reserves”) are determined based on complex estimation processes using historical experience, current economic information and, when necessary, available industry statistics. Reserves are evaluated in three basic categories (1) “case basis”, (2) “incurred but not reported” and (3) “loss adjustment expense” reserves. Case basis reserves are established for specific known loss occurrences at amounts dependent upon various criteria such as type of coverage, severity and the underlying policy limits, as examples. Case basis reserves are generally estimated by experienced claims adjusters using established Company guidelines and are subject to review by claims management. Incurred but not reported reserves, which are established for those losses which have occurred, but have not yet been reported to the Company, are not linked to specific claims but are computed on a “bulk” basis. Common actuarial methods are employed in the establishment of incurred but not reported loss reserves using company historical loss data, consideration of changes in the Company’s business and study of current economic trends affecting ultimate claims costs. Loss adjustment expense reserves, or reserves for the costs associated with the investigation and settlement of a claim, are also bulk reserves representing the Company’s estimate of the costs associated with the claims handling process. Loss adjustment expense reserves include amounts ultimately allocable to individual claims as well as amounts required for the general overhead of the claims handling operation that are not specifically allocable to individual claims. Historical analyses of the ratio of loss adjusting expenses to losses paid on prior closed claims and review of current economic trends affecting loss settlement costs are used to estimate the loss adjustment reserve needs related to the established loss reserves. Each of these reserve categories contain elements of uncertainty which assure variability when compared to the ultimate costs to settle the underlying claims for which the reserves are established. The reserving process requires management to continuously monitor and evaluate the life cycle of claims based on the class of business and the nature of claims. The Company’s claims range from the very routine private passenger automobile “fender bender” to the highly complex and costly third party bodily injury claim involving large tractor-trailer rigs. Reserving for each class of claims requires a set of assumptions based upon historical experience, knowledge of current industry trends and seasoned judgment. The high limits provided in many of the Company’s ~~fleet transportation liability~~ policies provide for greater volatility in the reserving process for more serious claims. Court rulings, legislative actions and trends in jury awards also play a significant role in the estimation process of larger claims. The Company continuously reviews and evaluates loss developments subsequent to

~~- 30 -~~

each measurement date and adjusts its reserve estimation assumptions, as necessary, in an effort to achieve the best possible estimate of the ultimate remaining loss costs at any point in time. Changes to previously established reserve amounts are charged or credited to losses and loss expenses incurred in the accounting periods in which they are determined. Note C to the consolidated financial statements includes additional information relating to loss and loss adjustment expense reserve development.

The Company’s methods for determining loss and loss expense reserves are essentially identical for interim and annual ~~reporting.~~reporting periods.

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A detailed analysis and discussion for each of the above basic reserve categories follows.

Reserves for known losses (Case reserves)

The Company’s reserves for known claims are determined on an individual case basis and can range from the routine private passenger “fender bender” valued at a few hundred dollars to the very complex long-haul trucking claim involving multiple vehicles, severe injuries and extensive property damage costing several millions of dollars to settle. Each known claim, regardless of complexity, is handled by a claims adjuster experienced with claims of this nature and a “case” reserve, appropriate for the individual loss occurrence, is established. For very routine “short-tail” claims such as private passenger physical damage, the Company records an initial reserve that is based upon historical loss settlements adjusted for current trends. As information regarding the loss occurrence is gathered in the claim handling process, the initial reserve is adjusted to reflect the anticipated ultimate cost to settle the claim. For more complex claims which can tend toward being “long-tail” in nature, an experienced claims adjuster will review the facts and circumstances surrounding the loss occurrence to make a determination of the reserve to be established. Many of the more complex claims involve litigation and necessitate an evaluation of potential jury awards in addition to the factual information to determine the value of each claim. Each claim is ~~continually~~frequently monitored and the recorded reserve is increased or decreased relative to information gathered during the settlement life cycle.

Reserves for incurred but not reported losses

The Company uses both standard actuarial techniques common to most insurance companies as well as techniques developed by the Company in consideration of its specialty business products. For its short-tail lines of business, the Company uses predominantly the incurred or paid loss development factor methods. The Company has found that the use of accident quarter loss development triangles, rather than those based upon accident year, are most responsive to claim settlement trends and fluctuations in premium exposures for its short-tail lines. A minimum of 12 running accident quarters is used to project the reserve necessary for incurred but not reported losses for its short-tail lines.

The Company also uses the loss development factor approach for its long-tail lines of business. A minimum of 15 accident years is included in the loss development triangles used to calculate link ratios and the selected loss development factors used to determine the reserves for incurred but not reported losses. A minimum of 20 accident years is used for long-tail workers’ compensation reserve projections. ~~More~~Significant emphasis is placed on the use of tail factors for the Company’s long-tail lines of business.

For the Company’s fleet transportation risks, which are covered by ~~annually-changing~~frequently changing reinsurance agreements and which contain wide-ranging self-insured retentions (“SIR”) as low as $25,000 per loss occurrence and as high as several million dollars per occurrence, traditional actuarial methods are supplemented by other methods in consideration of the Company’s exposures to loss. In situations where the Company’s reinsurance structure, the insured’s SIR selections, policy volume, and other factors are changing, current accident period loss exposures may not be homogenous with historical loss data to allow for reliable projection of future developed losses. Therefore, the Company supplements the above-described actuarial methods with loss ratio reserving techniques developed from our databases to arrive at the reserve for losses incurred but not reported for the calendar/accident period under review. Management relies on its extensive historical pricing and loss history databases to produce reserve factors unique to this specialty business. As losses for a given calendar/accident period develop with the passage of time, management evaluates such development on a quarterly basis and adjusts reserve factors, as necessary, to reflect current judgment with regard to the anticipated ultimate incurred losses. This process continues until all losses are settled for each period subject to this method.

Reserves for loss adjustment expenses

While certain of the Company’s products involve case basis reserving for allocated loss adjustment expenses, the majority of such reserves are determined on a bulk basis. The Company uses historical analysis of the ratios of allocated loss adjustment expenses paid to losses paid on closed claims to arrive at the expected ultimate incurred loss adjustment expense factors ~~for~~applicable to each ~~of its major products.~~affected product. Once

~~- 31 -~~

developed, the factors are applied to the expected ultimate incurred losses, including IBNR, on all open claims. The resulting ultimate incurred allocated loss adjustment expense is then reduced by amounts paid to date on all open claims to arrive at the reserve for allocated loss adjustment expenses to be incurred in the future for the handling of specific claims.

For those loss adjustment expenses not specific to individual claims (general claims handling expenses referred to as unallocated ~~LAE)~~loss adjustment expenses) the Company uses standard industry loss adjustment expenses paid to losses paid (net of reinsurance) ratio analysis to establish the necessary reserves. The selected factors are applied to 100% of IBNR reserves

- 30 -

and to case reserves with consideration given for that portion of loss adjustment expense already paid at the reserve measurement date. Such factors are monitored and revised, as necessary, on a quarterly basis.

The reserving process requires management to continuously monitor and evaluate the life cycle of claims based on the class of business and the nature of claims. As previously noted, our claims ~~range~~vary widely in scope and complexity. Reserving for each class of claims requires a set of assumptions based upon historical experience, knowledge of current industry trends and seasoned judgment. The high limits provided in the Company’s fleet transportation liability policies provide for greater volatility in the reserving process for more serious claims. Court rulings, legislative actions and trends in jury awards also play a significant role in the estimation process of larger claims. The Company continuously reviews and evaluates loss developments subsequent to each measurement date and adjusts its reserve estimations, as necessary, in an effort to achieve the best possible estimate of the ultimate remaining loss costs at any point in time.

Sensitivity Analysis - Potential impact on reserve volatility from changes in key assumptions

Management is aware of the potential for variation from the reserves established at any particular point in time. Redundancies or deficiencies could develop in future valuations of the currently established loss and loss expense reserve estimates under a variety of reasonably possible scenarios. The Company’s reserve selections are developed to be a “best estimate” of unpaid loss at a point in time and, due to the unique nature of our exposures, particularly in the large fleet transportation excess product where insured’s policies of insurance combine large self-insured retentions with high policy limits, ranges of reserve estimates are not established during the reserving process. However, basic assumptions that could potentially impact future volatility of our valuations of current loss and loss expense reserve estimates include, but are not limited to, the following:

Consistency in the individual case reserving processes

The selection of loss development factors in the establishment of bulk reserves for incurred but reported losses and loss expenses

Projected future loss trend

Expected loss ratios for the current book of business, particularly the Company’s fleet transportation products, where the number of accounts insured, selected self-insured retentions, policy limits and reinsurance structure may vary widely period to period

Under reasonably possible scenarios, it is conceivable that the Company’s selected loss reserve estimates could be 10%, or more, redundant or deficient. The majority of the Company’s reserves for losses and loss expenses, on either a gross or a net of reinsurance basis, relates to ~~the~~its fleet transportation ~~product.~~products. Perhaps the most significant example of sensitivity to variation in the key assumptions is the loss ratio selection for the Company’s fleet transportation products for policies subject to certain ~~recent~~ major reinsurance treaties (approximately ~~$80.7~~$103.8 million, or approximately ~~28%~~32% of carried direct reserves for directly produced property and casualty business).

A 10 percentage point increase ~~or decrease~~ in the loss factors actually utilized in the Company’s reserve determination at December 31, ~~2010~~2011 would increase orgross loss reserves by approximately $33.8 million whereas a 10 percentage point decrease would decrease gross loss reserves by approximately ~~$25.9~~$32.3 million. On a net basis, a 10 percentage point increase in loss ratio would increase net loss reserves by approximately ~~$11.5~~$16.0 million whereas a 10 percentage point decrease would decrease net loss reserves by approximately ~~$13.0~~$18.2 million. Similarly, a 20 percentage point increase would increase gross loss reserves by approximately ~~$51.8~~$69.3 million whereas a decrease would decrease gross loss reserves by approximately ~~$48.1~~$57.2 million. On a net basis, a 20 percentage point increase in loss ratio would increase net loss reserves by approximately ~~$21.2~~$31.5 million whereas a 20 percentage point decrease would decrease net loss reserves by approximately ~~$24.6~~$27.1 million with the lower impact from loss ratio increases attributable to minimum and maximum premium rate factors included in the various reinsurance contracts.

- 3231 -

Federal Income Tax Considerations

The liability method is used in accounting for federal income taxes. Using this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The provision for deferred federal income tax was based on items of income and expense that were reported in different years in the financial statements and tax returns and were measured at the tax rate in effect in the year the difference originated. Net deferred tax liabilities reported at December 31, ~~2010~~2011 and ~~2009~~2010 consisted of (dollars in thousands):

	2010			2009			2011		2010
Total deferred tax liabilities	$	29,466		$	27,249		$	21,068	$	29,466
Total deferred tax assets		22,694			22,205			28,187		22,694
Net deferred tax liabilities	$	(6,772	)	$	(5,044	)

Net deferred tax assets (liabilities)							$	7,119	$	(6,772	)

Deferred tax assets at December 31, ~~2010,~~2011, include approximately ~~$14.8~~$18.4 million related to the timing of deductibility of loss and loss expense reserves, the majority of which ~~$8.8 million~~ relates to policy liability discounts required by the Internal Revenue Code which are perpetual in nature and, in the absence of the termination of business, will not, in the aggregate, reverse to a material degree in the foreseeable future. An additional ~~$2.7~~$2.9 million relates to impairment adjustments made to investments, as required by accounting regulations. The sizable unrealized gains in the Company’s investment portfolios would allow for the recovery of this deferred tax at any time. Unearned premiums discount and deferred ceding commissions represent ~~$2.3~~$2.4 and ~~$1.3~~$2.0 million of deferred tax assets, respectively. The balance of deferred tax assets, approximately ~~$1.6~~$2.5 million, consists of various normal operating expense accruals and is not considered to be material. As a result of its analysis, management has determined that no valuation allowance is necessary at December 31, ~~2010.~~2011.

FASB provides guidance for recognizing and measuring uncertain tax positions and prescribes a threshold condition that a tax position must meet for any of the benefit of the uncertain tax position to be recognized in the financial statements. Based on this guidance, we regularly analyze tax positions taken or expected to be taken in a tax return based on the threshold condition prescribed. Tax positions that do not meet or exceed this threshold condition are considered uncertain tax positions. We accrue interest related to these uncertain tax positions which is recognized in income tax expense. Penalties, if any, related to uncertain tax positions would be recorded in income tax expenses.

Forward-Looking Information

Any forward-looking statements in this report including, without limitation, statements relating to the Company’s plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including, without limitation, the following: (i) the Company’s plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of the Company; (ii) the Company’s business is highly competitive and the entrance of new competitors into or the expansion of the operations by existing competitors in the Company’s markets and other changes in the market for insurance products could adversely affect the Company’s plans and results of operations; and (iii) other risks and uncertainties indicated from time to time in the Company’s filings with the Securities and Exchange Commission.

Impact of Inflation

To the extent possible, the Company attempts to recover the ~~costs~~impact of inflation to loss costs and operating expenses by increasing the premiums it charges. Within the fleet transportation business, a majority of the Company’s premiums are charged as a percentage of an insured’s gross revenue or payroll. As these charging bases increase with inflation, premium revenues are immediately increased. The remaining premium rates charged are adjustable only at periodic intervals and often require state regulatory approval. Such periodic increases in premium rates may lag far behind cost increases.

To the extent inflation influences yields on investments, the Company is also affected. The Company’s short-term and fixed investment portfolios are structured in direct response to available interest rates over the yield curve. As available market interest rates fluctuate in response to the presence or absence of inflation, the yields on the Company’s investments are

- 3332 -

impacted. Further, as inflation affects current market rates of return, previously committed investments might increase or decline in value depending on the type and maturity of investment (see additional comments under Market Risk, following).

Inflation must also be considered by the Company in the creation and review of loss and loss adjustment expense reserves since portions of these reserves are expected to be paid over extended periods of time. The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and loss adjustment expenses.

Market Risk

The Company operates within the property and casualty insurance industry and, accordingly, has significant invested assets which are exposed to various market risks. These market risks relate to interest rate fluctuations, ~~equities~~equity security market prices and, to a far lesser extent, foreign currency rate fluctuations. All of the Company's invested assets, with the exception of investments in limited partnerships, are classified as available for sale.

~~The~~Based on the structure of the Company’s investment portfolio, the most potentially significant of the three identified market risks relates to prices in the ~~equities~~equity security market. Though not the largest category of the Company's invested assets, equity securities have a high potential for short-term price fluctuation. The market value of the Company's equity positions at December 31, ~~2010~~2011 was ~~$96.7~~$88.1 million or approximately ~~15%~~14% of invested assets. This market valuation includes ~~$49.2~~$40.4 million of appreciation over the adjusted cost basis of the equity security investments. Funds invested in the equities market are not considered to be assets necessary for the Company to conduct its daily operations and, therefore, can be committed for extended periods of time. The long-term nature of the Company's equity investments allows it to invest in positions where ultimate value, and not short-term market fluctuations, is the primary focus.

Reference is made to the discussion of limited partnership investments in ~~the~~ Critical Accounting Policies ~~portion~~presented on page 27 of this report. All of the market risks, attendant to equity securities, apply to the underlying assets in these partnerships, and to a greater degree because of the generally more aggressive investment philosophies utilized by the partnerships. In addition, these investments are illiquid. There is no primary or secondary market on which these limited partnerships trade and, in most cases, the Company is prohibited from disposing of its limited partnership interests for some period of time and must seek approval from the general partner for any such disposal. Distributions of earnings from these partnerships are largely at the sole discretion of the general partners and distributions are generally not received by the Company for many years after the earnings have been reported. Finally, through the application of the equity method of accounting, the Company’s share of net income reported by the limited partnerships may include significant amounts of unrealized appreciation on the underlying investments. As such, the likelihood that reported income from limited partnership investments will be ultimately returned to the Company in the form of cash is markedly lower than the Company’s other investments, where ~~income~~appreciation is reported only when a security is actually sold.

The Company's fixed maturity portfolio totaled ~~$415.6~~$409.5 million at December 31, ~~2010.~~2011. Approximately ~~62%~~68% of this portfolio is made up of U.S. Government and government agency obligations and state and municipal debt securities; ~~83%~~90% of the portfolio matures within 5 years; and the average ~~life~~contractual maturity of the Company's fixed maturity investments is approximately ~~4.5~~3.1 years. Although the Company is exposed to interest rate risk on its fixed maturity investments, given the anticipated duration of the Company's liabilities (principally insurance loss and loss expense reserves) relative to investment maturities, even a 100 to 200 basis point increase in interest rates would not have even a moderate impact on the Company's ability to conduct daily operations or to meet its ~~obligations.~~obligations and would, in fact, result in significantly higher investment income in a relatively short period of time as short term investments and maturing bonds could be reinvested in the higher yielding securities very quickly.

There is an inverse relationship between interest rate fluctuations and the fair value of the Company's fixed maturity investments. Additionally, the fair value of interest rate sensitive instruments may be affected by the financial strength of the issuer, prepayment options, relative values of alternative investments, liquidity of the investment and other general market conditions. The Company monitors its sensitivity to interest rate risk by measuring the change in fair value of its fixed maturity investments relative to hypothetical changes in interest rates.

The following tables present the estimated effects on the fair value of financial instruments at December 31 due to an instantaneous change in yield rates of varying magnitudes on a static balance sheet to determine the effect such a change in rates would have on current fair value. The analysis presents the sensitivity of the fair value of the Company’s financial instruments to selected changes in market rates and prices. The range of change chosen reflects the Company’s view of

- 33 -

changes that the Company believes are reasonably possible over a one-year period. The Company’s selection of the range of values chosen to represent changes in interest rates should not be construed as the Company’s prediction of future market

~~- 34 -~~

events, but rather an illustration of the impact of such events. The equity portfolio was compared to the S&P 500 index due to its correlation with the vast majority of the Company’s current equity portfolio. The limited partnership portfolio was compared to the S&P 500 and Indian BSE 500 indices due to their significant correlation with the vast majority of our limited partnership portfolio. As previously indicated, several other factors can impact the fair values of fixed maturity investments and, therefore, significant variations in market interest rates could produce quite different results from the hypothetical estimates presented below.

The following tables present the estimated effects on the fair value of financial instruments at December 31 due to an instantaneous change in yield rates of 100 basis points and a 10% decline in the S&P 500 and Indian BSE 500 indices (dollars in thousands).

			Increase (Decrease)								Increase (Decrease)
	Fair		Interest			Equity			Fair		Interest			Equity
	Value		Rate Risk			Risk			Value		Rate Risk			Risk
2010:
2011:
U.S. government obligations	$	62,998	$	(911	)	$	-		$	73,137	$	(1,000	)	$	-
Government sponsored entities		3,324		(55	)		-			349		(3	)		-
Residential mortgage-backed securities		37,101		(855	)		-			21,872		(542	)		-
Commercial mortgage-backed securities		14,714		(339	)		-			11,300		(280	)		-
Obligations of states and
political subdivisions		192,706		(3,563	)		-
State and municipal obligations										190,035		(2,983	)		-
Corporate securities		84,417		(1,889	)		-			91,646		(1,785	)		-
Foreign government obligations		20,294		(603	)		-			21,121		(652	)		-
Total fixed maturities		415,554		(8,215	)		-			409,460		(7,245	)		-
Equity securities:
Financial institutions		11,477		-			(1,148	)		9,428		-			(943	)
Industrial & Miscellaneous		85,180		-			(8,518	)		78,657		-			(7,866	)
Total equity securities		96,657		-			(9,666	)		88,085		-			(8,809	)
Limited partnerships		77,352		-			(9,621	)		54,705		-			(3,747	)
Short-term		4,225		-			-			3,675		-			-
Total fixed maturities and other investments	$	593,788	$	(8,215	)	$	(19,287	)	$	555,925	$	(7,245	)	$	(12,556	)


2009:
2010:
U.S. government obligations	$	54,632	$	(929	)	$	-		$	62,998	$	(911	)	$	-
Government sponsored entities		5,883		(113	)		-			3,324		(55	)		-
Residential mortgage-backed securities		48,377		(1,135	)					37,101		(855	)		-
Commercial mortgage-backed securities		5,652		(133	)		-			14,714		(339	)		-
Obligations of states and
political subdivisions		185,469		(2,848	)		-
State and municipal obligations										192,706		(3,563	)		-
Corporate securities		72,185		(1,804	)		-			84,417		(1,889	)		-
Foreign government obligations		7,724		(131	)		-			20,294		(603	)		-
Total fixed maturities		379,922		(7,093	)		-			415,554		(8,215	)		-
Equity securities:				-
Financial institutions		10,584		-			(1,059	)		11,477		-			(1,148	)
Industrial & Miscellaneous		75,302		-			(7,531	)		85,180		-			(8,518	)
Total equity securities		85,886		-			(8,590	)		96,657		-			(9,666	)
Limited partnerships		69,436		-			(9,040	)		77,352		-			(9,621	)
Short-term		3,703		-			-			4,225		-			-
Total fixed maturities and other investments	$	538,947	$	(7,093	)	$	(17,630	)	$	593,788	$	(8,215	)	$	(19,287	)

- 3534 -

The following tables present the estimated effects on the fair value of financial instruments at December 31 due to an instantaneous change in yield rates of 150 basis points and a 15% decline in the S&P 500 and Indian BSE 500 indices (dollars in thousands).

			Increase (Decrease)								Increase (Decrease)
	Fair		Interest			Equity			Fair		Interest			Equity
	Value		Rate Risk			Risk			Value		Rate Risk			Risk
2010:
2011:
U.S. government obligations	$	62,998	$	(1,358	)	$	-		$	73,137	$	(1,491	)	$	-
Government sponsored entities		3,324		(82	)		-			349		(5	)		-
Residential mortgage-backed securities		37,101		(1,259	)		-			21,872		(891	)		-
Commercial mortgage-backed securities		14,714		(499	)		-			11,300		(461	)		-
Obligations of states and
political subdivisions		192,706		(5,228	)		-
State and municipal obligations										190,035		(4,356	)		-
Corporate securities		84,417		(2,825	)		-			91,646		(2,657	)		-
Foreign government obligations		20,294		(894	)		-			21,121		(931	)		-
Total fixed maturities		415,554		(12,145	)		-			409,460		(10,792	)		-
Equity securities:
Financial institutions		11,477		-			(1,722	)		9,428		-			(1,414	)
Industrial & Miscellaneous		85,180		-			(12,777	)		78,657		-			(11,799	)
Total equity securities		96,657		-			(14,499	)		88,085		-			(13,213	)
Limited partnerships		77,352		-			(14,431	)		54,705		-			(5,620	)
Short-term		4,225		-			-			3,675		-			-
Total fixed maturities and other investments	$	593,788	$	(12,145	)	$	(28,930	)	$	555,925	$	(10,792	)	$	(18,833	)


2009:
2010:
U.S. government obligations	$	54,632	$	(1,384	)	$	-		$	62,998	$	(1,358	)	$	-
Government sponsored entities		5,883		(168	)		-			3,324		(82	)		-
Residential mortgage-backed securities		48,377		(1,680	)		-			37,101		(1,259	)		-
Commercial mortgage-backed securities		5,652		(196	)		-			14,714		(499	)		-
Obligations of states and
political subdivisions		185,469		(3,948	)		-
State and municipal obligations										192,706		(5,228	)		-
Corporate securities		72,185		(2,670	)		-			84,417		(2,825	)		-
Foreign government obligations		7,724		(195	)		-			20,294		(894	)		-
Total fixed maturities		379,922		(10,241	)		-			415,554		(12,145	)		-
Equity securities:
Financial institutions		10,584		-			(1,588	)		11,477		-			(1,722	)
Industrial & Miscellaneous		75,302		-			(11,296	)		85,180		-			(12,777	)
Total equity securities		85,886		-			(12,884	)		96,657		-			(14,499	)
Limited partnerships		69,436		-			(13,560	)		77,352		-			(14,431	)
Short-term		3,703		-			-			4,225		-			-
Total fixed maturities and other investments	$	538,947	$	(10,241	)	$	(26,444	)	$	593,788	$	(12,145	)	$	(28,930	)

The Company's exposure to foreign currency risk is not material.

- 3635 -

Contractual Obligations

The table below sets forth the amounts of the Company's contractual obligations at December 31, ~~2010.~~2011.

	Payments Due by Period										Payments Due by Period
	Total		Less than 1 year		1 - 3 Years		3 - 5 Years		More Than 5 Years		Total		Less than 1 year		1 - 3 Years		3 - 5 Years		More Than 5 Years
	(dollars in millions)										(dollars in millions)
Loss and loss expense reserves	$	344.5	$	112.7	$	97.8	$	41.0	$	93.0	$	421.6	$	138.3	$	118.9	$	49.3	$	115.1

Investment commitments		1.2		1.2		-		-		-		10.0		10.0		-		-		-

Operating leases		4.1		1.5		2.6		-		-		2.5		1.5		1.0		-		-

Borrowings		15.0		15.0		-		-		-		10.0		10.0		-		-		-

Total	$	364.8	$	130.4	$	100.4	$	41.0	$	93.0	$	444.1	$	159.8	$	119.9	$	49.3	$	115.1

The Company’s loss and loss expense reserves do not have contractual maturity dates and the exact timing of the payment of claims cannot be predicted with certainty. However, based upon historical payment patterns, we have included an estimate of when we might expect our direct loss and loss expense reserves (without the benefit of reinsurance recoveries) to be paid in the preceding table. Timing of the collection of the related reinsurance recoverable, estimated to be ~~$127.2~~$138.4 million at December 31, ~~2010,~~2011, would approximate that of the above projected direct reserve payout.

The investment commitments in the above table relate to maximum unfunded capital obligations for limited partnership investments at December 31, ~~2010.~~2011.

Borrowings are made under a line of credit with a current expiration of ~~June~~September 23, ~~2011;~~2014; however, it is expected that this line of credit will be renewed for a multiple year period prior to maturity.

- 3736 -

ANNUAL REPORT ON FORM 10-K

ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

YEAR ENDED DECEMBER 31, ~~2010~~2011

BALDWIN & LYONS, INC.

INDIANAPOLIS, INDIANA

- 3837 -

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

Baldwin & Lyons, Inc.

We have audited the accompanying consolidated balance sheets of Baldwin & Lyons, Inc. and subsidiaries (the “Company”) as of December 31, ~~2010~~2011 and ~~2009,~~2010, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, ~~2010.~~2011. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Baldwin & Lyons, Inc. and subsidiaries at December 31, ~~2010~~2011 and ~~2009,~~2010, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, ~~2010,~~2011, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Baldwin & Lyons, Inc.’s internal control over financial reporting as of December 31, ~~2010,~~2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March ~~11, 2011~~13, 2012 expressed an unqualified opinion thereon.

~~/s/~~

�� /s/ ERNST & YOUNG LLP

Indianapolis, Indiana

March ~~11, 2011~~14, 2012

- 38 -

Consolidated Balance Sheets
Baldwin & Lyons, Inc. and Subsidiaries

	December 31
	2011		2010
	(dollars in thousands)
Assets
Investments:
Fixed maturities	$	409,460	$	415,554
Equity securities		88,085		96,657
Limited partnerships		54,705		77,352
Short-term and other		3,675		4,225
		555,925		593,788

Cash and cash equivalents		89,726		38,223
Accounts receivable--less allowance (2011, $659; 2010, $621)		74,094		42,953
Accrued investment income		4,337		4,046
Reinsurance recoverable		138,404		127,228
Prepaid reinsurance premiums		3,059		3,199
Deferred policy acquisition costs		4,578		4,826
Property and equipment--less accumulated depreciation
(2011, $13,486; 2010, $11,685)		12,991		13,869
Notes receivable from employees		1,302		1,414
Other assets		10,405		8,400
Current federal income taxes recoverable		3,354		-
Deferred federal income taxes		7,119		-
	$	905,294	$	837,946

Liabilities and Shareholders' Equity
Reserves:
Losses and loss expenses	$	421,556	$	344,520
Unearned premiums		39,919		29,819
		461,475		374,339

Reinsurance payable		28,330		28,986
Short-term borrowings		10,000		15,000
Accounts payable and other liabilities		86,428		37,455
Current federal income taxes payable		-		6,659
Deferred federal income taxes		-		6,772
		586,233		469,211
Shareholders' equity:
Common stock, no par value:
Class A voting -- authorized 3,000,000 shares;
outstanding -- 2011 - 2,623,109; 2010 - 2,623,109 shares		112		112
Class B non-voting -- authorized 20,000,000 shares;
outstanding -- 2011 - 12,225,348; 2010 - 12,187,009 shares		522		520
Additional paid-in capital		48,751		47,874
Unrealized net gains on investments		26,592		33,894
Retained earnings		243,084		286,335
		319,061		368,735
	$	905,294	$	837,946

- 39 -

Consolidated Statements of Operations
Baldwin & Lyons, Inc. and Subsidiaries


	Year Ended December 31
	2011			2010			2009
	(dollars in thousands, except per share data)
Revenue:
Net premiums earned	$	244,570		$	214,738		$	181,300
Net investment income		10,729			11,335			13,971
Commissions and other income		6,098			6,911			6,562
Net realized gains (losses) on investments, excluding
impairment losses		(15,897	)		16,527			33,662
Total other-than-temporary impairment losses on investments		(1,987	)		(42	)		(2,846	)
Portion of other-than-temporary impairment losses
recognized in other comprehensive income		81			-			-
Net realized gains (losses) on investments		(17,803	)		16,485			30,816
		243,594			249,469			232,649
Expenses:
Losses and loss expenses incurred		215,555			145,952			99,351
Other operating expenses		73,328			68,704			69,032
		288,883			214,656			168,383
Income (loss) before federal income taxes		(45,289	)		34,813			64,266

Federal income taxes (benefits)		(17,114	)		9,798			19,464
Net income (loss)	$	(28,175	)	$	25,015		$	44,802

Per share data:
Diluted earnings (losses)	$	(1.90	)	$	1.69		$	3.04

Basic earnings (losses)	$	(1.90	)	$	1.69		$	3.04

Cash dividends paid	$	1.00		$	2.25		$	1.00

Consolidated Balance Sheets

Baldwin & Lyons, Inc. and Subsidiaries

December 31
2010 2009
(dollars in thousands)
Assets
Investments:
   Fixed maturities $ 415,554 $ 379,922
   Equity securities 96,657 85,886
   Limited partnerships 77,352 69,436
   Short-term and other 4,225 3,703
593,788 538,947

Cash and cash equivalents 38,223 79,504
Accounts receivable--less allowance (2010, $621; 2009, $566) 42,953 32,535
Accrued investment income 4,046 3,786
Reinsurance recoverable 127,228 155,451
Prepaid reinsurance premiums 3,199 10,651
Deferred policy acquisition costs 4,826 4,905
Property and equipment--less accumulated depreciation
   (2010, 11,685; 2009, $9,551 13,869 13,332
Notes receivable from employees 1,414 2,054
Other assets 8,400 10,150
$ 837,946 $ 851,315

Liabilities and Shareholders' Equity
Reserves:
   Losses and loss expenses $ 344,520 $ 359,031
   Unearned premiums 29,819 25,912
374,339 384,943

Reinsurance payable 28,986 21,705
Short-term borrowings 15,000 10,000
Accounts payable and other liabilities 37,455 50,173
Current federal income taxes 6,659 6,507
Deferred federal income taxes 6,772 5,044
469,211 478,372
Shareholders' equity:
   Common stock, no par value:
      Class A voting -- authorized 3,000,000 shares;
          outstanding -- 2010, 2,623,109; 2009, 2,623,109 shares 112 112
      Class B non-voting -- authorized 20,000,000 shares;
          outstanding -- 2010, 12,187,009; 2009, 12,109,878 shares 520 517
   Additional paid-in capital 47,874 46,337
   Unrealized net gains on investments 33,894 31,886
   Retained earnings 286,335 294,091
368,735 372,943
$ 837,946 $ 851,315

- 40 -

Consolidated Statements of Operations
Baldwin & Lyons, Inc. and Subsidiaries

Year Ended December 31
2010 2009 2008
(dollars in thousands, except per share data)
Revenue:
Net premiums earned $ 214,738 $ 181,300 $ 182,299
Net investment income 11,335 13,971 17,063
Commissions and other income 6,911 6,562 5,317
Net realized gains (losses) on investments, excluding
impairment losses 16,527 33,662 (35,868 )
Total other-than-temporary impairment losses on investments (42 ) (2,846 ) (11,881 )
Net realized gains (losses) on investments 16,485 30,816 (47,749 )
249,469 232,649 156,930
Expenses:
Losses and loss expenses incurred 145,952 99,351 115,752
Other operating expenses 68,704 69,032 58,577
214,656 168,383 174,329
Income (loss) before federal income taxes 34,813 64,266 (17,399 )

Federal income taxes (benefits) 9,798 19,464 (9,686 )
Net income (loss) $ 25,015 $ 44,802 $ (7,713 )

Per share data:
Diluted earnings $ 1.69 $ 3.04 $ ( .51 )

Basic earnings $ 1.69 $ 3.04 $ ( .51 )

Cash dividends paid $ 2.25 $ 1.00 $ 1.00

Consolidated Statements of Shareholders' Equity
Baldwin & Lyons, Inc. and Subsidiaries



	2011			2010			2009
	(dollars in thousands)

Shareholders' equity at beginning of year	$	368,735		$	372,943		$	330,067
Comprehensive income:
Net income (loss)		(28,175	)		25,015			44,802
Change in unrealized gains (losses) on investments		(7,302	)		2,008			12,476
Foreign exchange adjustment		(230	)		441			1,001
Total comprehensive income (loss)		(35,707	)		27,464			58,279

Other changes affecting shareholders' equity:
Cash dividends paid to shareholders		(14,846	)		(33,212	)		(14,744	)
Issuance of common stock		879			1,540			221
Cost of treasury shares in excess of original issue proceeds		-			-			(880	)
Total other changes		(13,967	)		(31,672	)		(15,403	)
Total changes		(49,674	)		(4,208	)		42,876

Shareholders' equity at end of year:	$	319,061		$	368,735		$	372,943

- 41 -

Consolidated Statements of Shareholders' Equity

Baldwin & Lyons, Inc. and Subsidiaries

2010 2009 2008
(dollars in thousands)

Shareholders' equity at beginning of year $ 372,943 $ 330,067 $ 380,718
Comprehensive income:
    Net income (loss) 25,015 44,802 (7,713 )
    Change in unrealized gains (losses) on investments 2,008 12,476 (17,466 )
    Foreign exchange adjustment 441 1,001 (1,468 )
Total comprehensive income (loss) 27,464 58,279 (26,647 )

Other changes affecting shareholders' equity:
    Cash dividends paid to shareholders (33,212 ) (14,744 ) (15,096 )
    Issuance of common stock 1,540 221 -
    Cost of treasury shares in excess of original issue proceeds - (880 ) (8,908 )
Total other changes (31,672 ) (15,403 ) (24,004 )
Total changes (4,208 ) 42,876 (50,651 )

Shareholders' equity at end of year: $ 368,735 $ 372,943 $ 330,067

Consolidated Statements of Cash Flows
Baldwin & Lyons, Inc. and Subsidiaries

	2011			2010			2009
	(dollars in thousands)
Operating activities
Net income (loss)	$	(28,175	)	$	25,015		$	44,802
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Change in accounts receivable and unearned premium		(27,227	)		(6,511	)		5,066
Change in accrued investment income		(291	)		(260	)		1,233
Change in reinsurance recoverable on paid losses		698			(1,787	)		2,577
Change in losses and loss expenses reserves net of reinsurance		71,348			15,499			(28,569	)
Change in other assets, other liabilities and current income taxes		18,430			24,984			21,324
Amortization of net policy acquisition costs		29,209			23,967			23,475
Net policy acquisition costs deferred		(28,961	)		(23,888	)		(26,054	)
Provision for deferred income taxes		(9,340	)		46			9,561
Bond amortization		5,673			4,211			3,643
(Gain) loss on sale of property		(36	)		5			14
Depreciation		4,274			4,013			3,355
Net realized (gains) losses on investments		17,803			(16,485	)		(30,816	)
Compensation expense related to restricted stock		879			674			1,085
Net cash provided by operating activities		54,284			49,483			30,696

Investing activities
Purchases of fixed maturities and equity securities		(270,696	)		(346,435	)		(220,769	)
Purchases of limited partnership interests		-			(7	)		(7	)
Distributions from limited partnerships		757			297			1,022
Proceeds from maturities		144,745			166,307			105,336
Proceeds from sales of fixed maturities		128,018			105,206			121,722
Proceeds from sales of equity securities		16,883			15,743			13,328
Net sales (purchases) of short-term investments		841			(160	)		30,118
Decrease in principal of notes receivable from employees		106			611			143
Purchases of property and equipment		(3,488	)		(4,767	)		(5,307	)
Proceeds from disposals of property and equipment		129			212			188
Net cash provided by (used in) investing activities		17,295			(62,993	)		45,774

Financing activities
Dividends paid to shareholders		(14,846	)		(33,212	)		(14,744	)
Drawings on line of credit		-			8,000			11,000
Repayment on line of credit		(5,000	)		(3,000	)		(10,000	)
Cost of treasury shares		-			-			(880	)
Net cash used in financing activities		(19,846	)		(28,212	)		(14,624	)

Effect of foreign exchange rates on cash and cash equivalents		(230	)		441			1,001

Increase (decrease) in cash and cash equivalents		51,503			(41,281	)		62,847
Cash and cash equivalents at beginning of year		38,223			79,504			16,657
Cash and cash equivalents at end of year	$	89,726		$	38,223		$	79,504

- 42 -

Consolidated Statements of Cash Flows

Baldwin & Lyons, Inc. and Subsidiaries

2010 2009 2008
(dollars in thousands)
Operating activities
   Net income (loss) $ 25,015 $ 44,802 $ (7,713 )
   Adjustments to reconcile net income (loss) to net cash
      provided by operating activities:
         Change in accounts receivable and unearned premium (6,511 ) 5,066 (165 )
         Change in accrued investment income (260 ) 1,233 (257 )
         Change in reinsurance recoverable on paid losses (1,787 ) 2,577 (3,453 )
         Change in losses and loss expenses reserves net of reinsurance 15,499 (28,569 ) (12,786 )
         Change in other assets, other liabilities and current income taxes 24,984 21,324 (18,543 )
         Amortization of net policy acquisition costs 23,967 23,475 20,353
         Net policy acquisition costs deferred (23,888 ) (26,054 ) (19,485 )
         Provision for deferred income taxes 46 9,561 (14,129 )
         Bond amortization 4,211 3,643 3,427
         (Gain) loss on sale of property 5 14 (17 )
         Depreciation 4,013 3,355 2,976
         Net realized (gains) losses on investments (16,485 ) (30,816 ) 47,749
         Compensation expense related to restrict stock 674 1,085 -
Net cash provided by operating activities 49,483 30,696 (2,043 )

Investing activities
   Purchases of fixed maturities and equity securities (346,435 ) (220,769 ) (276,737 )
   Purchases of limited partnership interests (7 ) (7 ) (16,199 )
   Distributions from limited partnerships 297 1,022 3,657
   Proceeds from maturities 166,307 105,336 31,623
   Proceeds from sales of fixed maturities 105,206 121,722 161,814
   Proceeds from sales of equity securities 15,743 13,328 45,813
   Net sales (purchases) of short-term investments (160 ) 30,118 10,972
   Purchase of subsidiary - - (2,661 )
   Decrease in principal of notes receivable from employees 611 143 29
   Purchases of property and equipment (4,767 ) (5,307 ) (5,348 )
   Proceeds from disposals of property and equipment 212 188 72
Net cash provided by (used in) investing activities (62,993 ) 45,774 (46,965 )

Financing activities
   Dividends paid to shareholders (33,212 ) (14,744 ) (15,096 )
   Drawings on line of credit 8,000 11,000 9,000
   Repayment on line of credit (3,000 ) (10,000 ) -
   Cost of treasury shares - (880 ) (8,908 )
Net cash used in financing activities (28,212 ) (14,624 ) (15,004 )

   Effect of foreign exchange rates on cash and cash equivalents 441 1,001 (1,468 )

Increase (decrease) in cash and cash equivalents (41,281 ) 62,847 (65,480 )
Cash and cash equivalents at beginning of year 79,504 16,657 82,137
Cash and cash equivalents at end of year $ 38,223 $ 79,504 $ 16,657

~~- 43 -~~

Notes to Consolidated Financial Statements

Baldwin & Lyons, Inc. and Subsidiaries

(Dollars in thousands, except share and per share data)

Note A - Summary of Significant Accounting Policies

Basis of Presentation: The consolidated financial statements include the accounts of Baldwin & Lyons, Inc. and its wholly owned subsidiaries (the “Company"). All significant inter-company transactions and accounts have been eliminated in consolidation.

Use of Estimates: Preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results will differ from those estimates.

Cash and Cash Equivalents: The Company considers investments in money market funds to be cash equivalents. Carrying amounts for these instruments approximate their fair values.

Investments: Carrying amounts for fixed maturity securities represent fair value and are based on quoted market prices, where available, or broker/dealer quotes for specific securities where quoted market prices are not available. Equity securities are carried at quoted market prices (fair value). The Company accounts for investments in limited partnerships using the equity method of accounting, which requires an investor in a limited partnership to record its proportionate share of the limited partnership’s net income. To the extent that the limited partnership investees include both realized and unrealized investment gains or losses in the determination of net income or loss, then the Company would also recognize, through its statement of operations, its proportionate share of the investee’s unrealized as well as realized investment gains or losses.

Other investments, if any, are carried at either market value or cost, depending on the nature of the investment. Short-term investments are carried at cost which approximates their fair values.

Realized gains and losses on disposals of investments are determined by specific identification of cost of investments sold and are included in income. All fixed maturity and equity securities are considered to be available for sale; the related unrealized net gains or losses (net of applicable tax effect) are reflected directly in shareholders’ equity.

In accordance with the Financial Accounting Standard Board’s (“FASB”) other than temporary impairment (“OTTI”) guidance, if a fixed maturity security is in an unrealized loss position and the Company has the intent to sell the fixed maturity security, or it is more likely than not that the Company will have to sell the fixed maturity security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to net realized losses on investments in the consolidated statements of operations. For impaired fixed maturity securities that the Company does not intend to sell or in cases where it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in net realized losses on investments in the consolidated statements of operations and the non-credit component of the other-than-temporary impairment is recognized directly in shareholder’s equity (accumulated other comprehensive income). Furthermore, unrealized losses caused by non-credit related factors related to fixed maturity securities for which the Company expects to fully recover the amortized cost basis continue to be recognized in accumulated other comprehensive income.

The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the fixed maturity security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the appropriate effective interest rate.

The unrealized net gains or losses (net of applicable tax effect) related to equity securities are reflected directly in shareholders’ equity, unless a decline in value is determined to be other-than-temporary, in which case the loss is charged to income. In determining if and when a decline in market value below cost is other-than-temporary, an objective analysis is made of each individual security where current market value is less than cost. For any equity security where the unrealized loss exceeds 20% of original or adjusted cost, and where that decline has existed for a period of at least six months, the decline is treated as an other-than-temporary impairment, subject to an evaluation as to possible future recovery, and the

- 4443 -

Note A - Significant Accounting Policies (continued)

Company’s intent and ability to retain the equity security for a period of time sufficient to allow for such recovery in fair value. Additionally, the Company takes into account any known subjective information in evaluating for impairment without consideration to the Company’s quantitative criteria defined above.

Property and Equipment: Property and equipment is carried at cost, less accumulated depreciation. Depreciation is computed principally by the straight-line method.

Goodwill and Other Intangible Assets: Goodwill is not amortized. It is instead tested for impairment in accordance with FASB guidance, at the reporting-unit level. Goodwill is tested annually (during the fourth quarter) or more often if events or circumstances, such as adverse changes in the business climate, indicate there may be impairment. Intangible assets determined to have indefinite lives are not amortized but instead are tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Other acquired intangible assets determined to have finite lives, such as customer relationships and employment agreements, are amortized over their estimated useful lives in a manner that best reflects the economic benefits of the intangible asset. In addition, impairment testing is performed on these amortizing intangible assets if impairment indicators are noted.

Reserves for Losses and Loss Expenses: The reserves for losses and loss expenses, minor portions of which are discounted, are determined using case basis evaluations and statistical analyses and represent estimates of the ultimate cost of all reported and unreported losses which are unpaid at year end. These reserves include estimates of future trends in claim severity and frequency and other factors which could vary as the losses are ultimately settled. Although it is not possible to measure the degree of variability inherent in such estimates, management believes that the reserves for losses and loss expenses are adequate. The estimates are continually reviewed and as adjustments to these reserves become necessary, such adjustments are reflected in current operations.

Recognition of Revenue and Costs: Premiums are earned over the period for which insurance protection is provided. A reserve for unearned premiums, computed by the daily pro-rata method, is established to reflect amounts applicable to subsequent accounting periods. Commissions to unaffiliated companies and premium taxes applicable to unearned premiums are deferred and expensed as the related premiums are earned. The Company does not defer acquisition costs which are not directly variable with the production of premium. If it is determined that expected losses and deferred expenses will likely exceed the related unearned premiums, the asset representing deferred policy acquisition costs is reduced and an expense is charged against current operations to reflect any such premium deficiency. In the event that the expected premium deficiency exceeds deferred policy acquisition costs, an additional liability would be recorded with a corresponding expense to current operations for the amount of the excess premium deficiency. Anticipated investment income is considered in determining recoverability of deferred acquisition costs.

Reinsurance: Reinsurance premiums, commissions, expense reimbursements and reserves related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other insurers have been reported as a reduction of premium earned. Amounts applicable to reinsurance ceded for unearned premium and claim loss reserves have been reported as reinsurance recoverable assets. Certain reinsurance contracts provide for additional or return premiums and commissions based upon profits or losses to the reinsurer over prescribed periods. Estimates of additional or return premiums and commissions are adjusted quarterly to recognize actual loss experience to date as well as projected loss experience applicable to the various contract periods. Estimates of reinstatement premiums on reinsurance contracts covering catastrophic events are, to the extent reasonably determinable, recorded concurrently with the related loss.

Should impairment in the ability of a reinsurer to satisfy its obligations to the Company be determined to exist, current year operations would be charged in amounts sufficient to provide for the Company’s additional liability. Such charges, when incurred, are included in other operating expenses, rather than losses and loss expenses incurred, since the inability of the Company to collect from reinsurers is a credit risk rather than a deficiency associated with the loss reserving process.

The Company accounts for foreign and domestic reinsurance using the periodic method. Under the periodic method, premiums are recognized as revenue ratably over the contract term, and claims, including an estimate of claims incurred but not reported, are recognized as they occur.

- 4544 -

Note A - Significant Accounting Policies (continued)

Federal Income Taxes: A consolidated federal income tax return is filed by the Company and includes all wholly owned subsidiaries.

Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement and tax return bases of assets and liabilities based on enacted tax rates and laws. The deferred tax benefits of the deferred tax assets are recognized to the extent realization of such benefits is more likely than not. Deferred income tax expense or benefit generally represents the net change in deferred income tax assets and liabilities during the year. Current income tax expense represents the tax liability associated with revenues and expenses currently taxable or deductible on various income tax returns for the year reported.

Restricted Stock: Restricted shares vest ratably over the vesting period from the date of grant and are accelerated for retirement eligible recipients due to the non-substantive post-grant date vesting clause per ~~ASC~~Accounting Standard Codification (“ASC”) 715, Compensation-Retirement Benefits. Restricted stock is valued based on the closing price of the stock on the day the award is granted. Non-vested restricted shares will be forfeited should an executive’s employment terminate for any reason other than death, disability, or retirement as defined by the Compensation Committee.

Earnings Per Share: Diluted earnings per share of common stock are based on the average number of shares of Class A and Class B common stock outstanding during the year, adjusted for the dilutive effect, if any, of restricted stock awards outstanding. Basic earnings per share are presented exclusive of the effect of share-based awards outstanding.

Comprehensive Income: The Company records accumulated other comprehensive income from unrealized gains and losses on available-for-sale securities as a separate component of shareholders’ equity. Foreign exchange adjustments are generally not material and the Company has no defined benefit pension plan. A reclassification adjustment to other comprehensive income is made for gains during the period included in net income.

Fair Value Measurements: In January 2010, the FASB issued revised accounting guidance that clarifies and provides additional disclosure requirements related to recurring and non-recurring fair value measurements. The guidance requires separate disclosures for the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements, along with an explanation for the transfers. Additionally, a separate disclosure is required for purchases, sales, issuances and settlements on a gross basis for Level 3 fair value measurements. The guidance also provides additional clarification for both the level of disaggregation reported for each class of assets or liabilities and disclosures of inputs and valuation techniques used to measure fair value for both recurring and non-recurring fair value measurements for assets and liabilities categorized as Level 2 or Level 3. The new disclosures and clarifications of existing disclosures ~~are~~were effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which ~~are~~were effective for fiscal years beginning after December 15, 2010. ~~The Company does not anticipate that the adoption of the guidance, effective January 1, 2011, will have any impact on the consolidated financial position or results of operations.~~

Pending Accounting Standards: In October 2010, the FASB issued updated guidance to address the diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred. If application of this guidance would result in the capitalization of acquisition costs that had not previously been capitalized by a reporting entity, the entity may elect not to capitalize those costs. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2011. The Company is currently evaluating the impact that the adoption of the guidance, effective January 1, 2012, will have on the consolidated financial statements. We expect no adjustments.

In May 2011, the FASB issued updated accounting guidance that changes the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between GAAP and International Financial Reporting Standards. The guidance also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. We are currently evaluating the impact that the adoption of the guidance effective January 1, 2012, will have on our consolidated financial statements. We expect no significant adjustments.

- 45 -

In June 2011, the FASB issued revised accounting guidance that eliminates the option to present the components of other comprehensive income as part of the statement of shareholders' equity. Instead, comprehensive income must be reported in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. The guidance will be effective for public companies during the interim and annual periods beginning after December 15, 2011. This new guidance is to be applied retrospectively. We expect no significant adjustments.

Reclassification: Certain prior year balances have been reclassified to conform to the current year presentation.

- 46 -

Note B - Investments	Note B - Investments
The following is a summary of available-for-sale securities at December 31:

The following is a summary of available for sale securities at December 31:														The following is a summary of available for sale securities at December 31:

											Net													Net
				Cost or		Gross		Gross			Unrealized						Cost or		Gross		Gross			Unrealized
		Fair		Amortized		Unrealized		Unrealized			Gains				Fair		Amortized		Unrealized		Unrealized			Gains
		Value		Cost		Gains		Losses			(Losses)				Value		Cost		Gains		Losses			(Losses)
2010:
2011:
U.S. government obligations		$	62,998	$	62,882	$	150	$	(34	)	$	116			$	73,137	$	73,009	$	139	$	(11	)	$	128
Government sponsored entities			3,324		3,325		7		(8	)		(1	)			349		345		4		-			4
Residential mortgage-backed securities			37,101		36,513		847		(259	)		588				21,872		21,778		619		(525	)		94
Commercial mortgage-backed securities			14,714		14,417		405		(108	)		297				11,300		11,388		116		(204	)		(88	)
Obligations of states and
political subdivisions			192,706		192,236		1,006		(536	)		470
State and municipal obligations																190,035		188,991		1,275		(231	)		1,044
Corporate securities			84,417		83,121		1,931		(635	)		1,296				91,646		91,949		1,429		(1,732	)		(303	)
Foreign government obligations			20,294		20,095		354		(155	)		199				21,121		21,483		168		(530	)		(362	)
Total fixed maturities			415,554		412,589		4,700		(1,735	)		2,965				409,460		408,943		3,750		(3,233	)		517
Equity securities:
Financial institutions			11,477		4,945		6,559		(27	)		6,532				9,428		4,955		4,778		(305	)		4,473
Industrial & Miscellaneous			85,180		42,532		42,947		(299	)		42,648				78,657		42,736		36,921		(1,000	)		35,921
Total equity securities			96,657		47,477		49,506		(326	)		49,180				88,085		47,691		41,699		(1,305	)		40,394
Total available-for-sale securities		$	512,211	$	460,066	$	54,206	$	(2,061	)		52,145			$	497,545	$	456,634	$	45,449	$	(4,538	)		40,911

							Applicable federal income taxes					(18,251	)								Applicable federal income taxes				(14,319	)

							Net unrealized gains - net of tax				$	33,894									Net unrealized gains - net of tax			$	26,592

2009:
2010:
U.S. government obligations		$	54,632	$	54,615	$	86	$	(69	)	$	17			$	62,998	$	62,882	$	150	$	(34	)	$	116
Government sponsored entities			5,883		5,825		72		(14	)		58				3,324		3,325		7		(8	)		(1	)
Residential mortgage-backed securities			48,377		48,068		572		(263	)		309				37,101		36,513		847		(259	)		588
Commercial mortgage-backed securities			5,652		5,655		-		(3	)		(3	)			14,714		14,417		405		(108	)		297
Obligations of states and
political subdivisions			185,469		182,536		2,940		(7	)		2,933
State and municipal obligations																192,706		192,236		1,006		(536	)		470
Corporate securities			72,185		70,791		1,572		(178	)		1,394				84,417		83,121		1,931		(635	)		1,296
Foreign government obligations			7,724		7,695		29		-			29				20,294		20,095		354		(155	)		199
Total fixed maturities			379,922		375,185		5,271		(534	)		4,737				415,554		412,589		4,700		(1,735	)		2,965
Equity securities:
Financial institutions			10,584		4,919		5,787		(122	)		5,665				11,477		4,945		6,559		(27	)		6,532
Industrial & Miscellaneous			75,302		36,649		38,849		(196	)		38,653				85,180		42,532		42,947		(299	)		42,648
Total equity securities			85,886		41,568		44,636		(318	)		44,318				96,657		47,477		49,506		(326	)		49,180
Total available-for-sale securities		$	465,808	$	416,753	$	49,907	$	(852	)		49,055			$	512,211	$	460,066	$	54,206	$	(2,061	)		52,145

							Applicable federal income taxes					(17,169	)								Applicable federal income taxes				(18,251	)

							Net unrealized gains - net of tax				$	31,886									Net unrealized gains - net of tax			$	33,894

- 47 -

Note B – Investments (continued)

The following table summarizes, for fixed maturity and equity security investments in an unrealized loss position at December 31, the aggregate fair value and gross unrealized loss categorized by the duration those securities have been continuously in an unrealized loss position.

	2010								2009							2011							2010
	Number of Securities			Fair Value		Gross Unrealized Loss			Number of Securities		Fair Value		Gross Unrealized Loss			Number of Securities		Fair Value		Gross Unrealized Loss			Number of Securities		Fair Value		Gross Unrealized Loss
Fixed maturity securities:
12 months or less		214		$	152,505	$	(1,525	)		109	$	70,568	$	(411	)		206	$	86,470	$	(2,303	)		214	$	152,505	$	(1,525	)
Greater than 12 months		16			5,460		(210	)		4		6,220		(123	)		44		11,930		(930	)		16		5,460		(210	)
Total fixed maturities		230			157,965		(1,735	)		113		76,788		(534	)		250		98,400		(3,233	)		230		157,965		(1,735	)
Equity securities:
12 months or less		3			1,676		(66	)		21		2,032		(147	)		35		8,317		(1,275	)		3		1,676		(66	)
Greater than 12 months		7	��		2,394		(260	)		8		2,913		(171	)		4		216		(30	)		7		2,394		(260	)
Total equity securities		10			4,070		(326	)		29		4,945		(318	)		39		8,533		(1,305	)		10		4,070		(326	)
Total		240		$	162,035	$	(2,061	)		142	$	81,733	$	(852	)		289	$	106,933	$	(4,538	)		240	$	162,035	$	(2,061	)

Unrealized losses in the Company’s fixed maturity portfolio are generally the result of interest rate fluctuations as well as the disruption of credit markets occasioned by ~~recent~~ financial market turmoil. The average unrealized loss for all fixed maturity securities in a loss position at December 31, ~~2010~~2011 is approximately 1%3% of original or adjusted cost. The Company does not intend to sell any fixed maturity securities and it is not more likely than not that the Company will have to sell any fixed maturity security before recovery of its amortized cost basis. For equity securities, the Company has evaluated the near-term prospects of the investment in relation to the severity and duration of the impairment and based on that evaluation the Company has the ability and intent to hold these investments until a recovery of fair value. Therefore, the Company does not believe the unrealized losses represent an other-than-temporary impairment as of December 31, ~~2010.~~2011.

The fair value and the cost or amortized cost of fixed maturity investments, at December 31, ~~2010,~~2011, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers have, in some cases, the right to call or prepay obligations with or without call or prepayment penalties. Pre-refunded municipal bonds are classified based on their pre-refunded call dates.

	Fair Value				Cost or Amortized Cost				Fair Value				Cost or Amortized Cost

One year or less	$	141,965	34.2	%	$	141,752	34.4	%	$	154,646	37.8	%	$	154,472	37.8	%
Excess of one year to five years		192,242	46.3			190,592	46.2			205,224	50.1			204,552	50.0
Excess of five years to ten years		17,354	4.2			16,978	4.1			7,731	1.9			7,836	1.9
Excess of ten years		12,178	2.8			12,337	2.9			3,240	0.8			3,255	0.7
Total maturities		363,739	87.5			361,659	87.6			370,841	90.6			370,115	90.4
Mortgage-backed securities		51,815	12.5			50,930	12.4
Asset-backed securities										38,619	9.4			38,828	9.6
	$	415,554	100.0	%	$	412,589	100.0	%	$	409,460	100.0	%	$	408,943	100.0	%

- 48 -

Note B – Investments (continued)

Major categories of investment income for the years ended December 31 are summarized as follows:

		2011			2010			2009
Fixed maturities		$	11,016		$	11,838		$	14,151
Equity securities			1,738			1,433			1,327
Money market funds			36			39			162
Short-term and other			24			32			328
			12,814			13,342			15,968
Investment expenses			(2,085	)		(2,007	)		(1,997	)
	Net investment income	$	10,729		$	11,335		$	13,971

2010 2009 2008
Fixed maturities $ 11,838 $ 14,151 $ 14,417
Equity securities 1,433 1,327 1,712
Money market funds 39 162 1,332
Short-term and other 32 328 1,649
13,342 15,968 19,110
Investment expenses (2,007 ) (1,997 ) (2,047 )
Net investment income $ 11,335 $ 13,971 $ 17,063

~~- 48 -~~

~~Note B – Investments (continued)~~

Gains and losses on investments, including equity method earnings from limited partnerships, for the years ended December 31 are summarized below:

	2010			2009			2008			2011			2010			2009
Fixed maturities:
Gross gains	$	4,005		$	8,646		$	3,333		$	6,443		$	4,005		$	8,646
Gross losses		(1,215	)		(1,505	)		(6,806	)		(6,805	)		(1,215	)		(1,505	)
Net gains (losses)		2,790			7,141			(3,473	)		(362	)		2,790			7,141

Equity securities:
Gross gains		7,447			1,533			4,463			7,409			7,447			1,533
Gross losses		(1,958	)		(3,426	)		(12,943	)		(2,960	)		(1,958	)		(3,426	)
Net gains (losses)		5,489			(1,893	)		(8,480	)		4,449			5,489			(1,893	)

Limited partnerships - net gain (loss)		8,206			25,568			(33,562	)		(21,890	)		8,206			25,568

Other - net gain (loss)		-			-			(2,234	)

Total net gains (losses)	$	16,485		$	30,816		$	(47,749	)	$	(17,803	)	$	16,485		$	30,816

Shareholders' equity includes approximately ~~$30,000,~~$15,600, net of deferred federal income taxes, of undistributed earnings ~~yet undistributed by~~from limited partnerships as of December 31, ~~2010.~~2011.

Gain and loss activity for fixed maturity and equity security investments, as shown in the previous table, include adjustments for other-than-temporary impairment for the years ended December 31 ~~and is~~ summarized as follows:

	2010			2009			2008			2011			2010			2009

Cumulative charges to income at beginning of year	$	9,235		$	11,698		$	2,734		$	7,604		$	9,235		$	11,698

Writedowns based on objective and subjective criteria		42			2,846			11,881			1,906			42			2,846
Recovery of prior writedowns upon sale or disposal		(1,673	)		(5,309	)		(2,917	)		(1,332	)		(1,673	)		(5,309	)
Net pre-tax realized gain (loss)											(574	)		1,631			2,463

Cumulative charges to income at end of year	$	7,604		$	9,235		$	11,698		$	8,178		$	7,604		$	9,235

Net pre-tax realized gain (loss)	$	1,631		$	2,463		$	(8,964	)

Addition (reduction) to earnings per share from net
after-tax realized gain (loss)	$	.07		$	.11		$	(.39	)	$	(.03	)	$	.07		$	.11

Unrealized gain on investments previously
written down at end of the year - see note below	$	9,535		$	9,379		$	7,211		$	6,782		$	9,535		$	9,379

Note: Recovery in market value of an investment which has previously been adjusted for other-than-temporary impairment is treated as an unrealized gain until the investment matures or is sold.

- 49 -

Note B – Investments (continued)

There is no primary or secondary market for the Company’s investments in limited partnerships and, in most cases, the Company is prohibited from disposing of its limited partnership interests for some period of time and generally must seek approval from the general partner for any such disposal. Distributions of earnings from these partnerships are largely at the sole discretion of the general partners and distributions are generally not received by the Company for many years after the earnings have been reported. The Company has commitments to contribute an additional ~~$1,200~~$10,024 to various limited partnerships as of December 31, ~~2010.~~

~~- 49 -~~

~~Note B – Investments (continued)~~2011.

The Company has invested a total of $24,000 in three limited partnerships, with an aggregate estimated ~~market~~ value of ~~$55,933~~$37,260 at December 31, ~~2010,~~2011, that are managed by organizations in which two directors of the Company are executive officers, directors and owners. The Company’s ownership interest in these limited partnerships ranges from 3% to ~~25%~~16%. These limited partnerships added ($18,673), $7,464 ~~$18,591~~ and ~~($25,502),~~$18,591, net of fees, to investment gains (losses) in 2011, 2010 ~~2009~~ and ~~2008,~~2009, respectively. During 2011, 2010 ~~2009~~ and ~~2008,~~2009, the Company has recorded management fees of $793, $820 ~~$632~~ and ~~$781,~~$632, respectively, and performance-based fees of $0, $687 ~~$1,247~~ and ~~$0,~~$1,247, respectively, to these organizations for management of these limited partnerships. The Company has been informed that the fee rates applied to its investments in these limited partnerships are the same as, or lower than, the fee rates charged to unaffiliated customers for similar investments.

The Company utilized the services of a broker-dealer firm of which two directors of the Company are executive officers and owners. This broker-dealer serves as agent for purchases and sales of securities and manages an equity securities portfolio and fixed maturity portfolio with market values of approximately ~~$1,887~~$1,684 and ~~$19,378,~~$19,026, respectively, at December 31, ~~2010.~~2011. The Company has been informed that commission and management rates charged by this broker-dealer to the Company are commensurate with rates charged to non-affiliated customers for similar investments. Total commissions and net fees earned by the broker-dealer and affiliates on these transactions and for advice and consulting were approximately $174, $155 and $173 during 2011, 2010 and ~~$171 during 2010,~~ 2009, ~~and 2008,~~ respectively.

The Company’s limited partnerships include one significant investment which invests in public and private equity markets in India. This limited partnership investment’s value as of December 31, 2011 and 2010 was $23,465 and ~~2009 was~~ $33,197, ~~and $29,676,~~ respectively. At December 31, ~~2010,~~2011, the Company’s estimated ownership interest in this limited partnership investment was less than 4%. The Company's share of earnings from this limited partnership investment was ($9,732), $3,521 and $10,915 in 2011, 2010 and ~~($25,955) in 2010,~~ 2009, ~~and 2008,~~ respectively.

The summarized financial information of the significant limited partnership investment as of and for the years ended December 31 is as follows:

	2010		2009		2011			2010		2009
Total assets	$	963,207	$	914,927	$	633,165		$	963,207	$	914,927
Total partners' capital		895,207		843,633		579,568			895,207		843,633
Net increase in partners' capital resulting from operations		98,279		333,120		(266,314	)		98,279		333,120

The fair value of regulatory deposits with various insurance departments in the United States and Canada totaled $41,758 and $34,338 at December 31, ~~2010.~~2011 and 2010, respectively.

Short-term investments at December 31, ~~2010~~2011 include ~~$4,021~~$2,982 in ~~foreign~~ time certificates of ~~deposit.~~deposit by a Bermuda bank.

The Company’s fixed maturities are over 91% invested in investment grade fixed maturity investments. The Company has a total of ~~$24,300 (par value),~~$36,500, representing 1116 different investments, of fixed maturity investments which were originally issued with guarantees by three different third party insurance companies, with the largest exposure to a single investment being ~~$4,000.~~$5,500. The average S&P credit rating of such investments, with consideration of the guarantee, is AA. The average S&P underlying credit rating of such investments, without consideration of the guarantee, is AA. The Company does not have any direct exposure to any guarantor.

Approximately ~~$36,200~~$35,600 of fixed maturity investments ~~(5.7%~~(5.6% of total invested assets) consists of bonds rated as less than investment grade at year end. These investments include a diversified portfolio of over 40 investments including catastrophe bonds and have a ~~$784~~$1,297 net unrealized ~~gain~~loss position at December 31, ~~2010.~~2011.

- 50 -

Note C - Loss and Loss Expense Reserves

Activity in the reserves for losses and loss expenses is summarized as follows. All amounts are shown net of reinsurance, unless otherwise indicated.

	2010			2009			2008			2011			2010			2009
Reserves at the beginning of the year	$	203,253		$	231,633		$	244,500		$	218,629		$	203,253		$	231,633

Provision for losses and loss expenses:
Claims occurring during the current year		154,775			108,935			132,829			225,251			154,775			108,935
Claims occurring during prior years		(8,823	)		(9,584	)		(17,077	)		(9,696	)		(8,823	)		(9,584	)
Total incurred		145,952			99,351			115,752			215,555			145,952			99,351

Loss and loss expense payments:
Claims occurring during the current year		56,394			41,302			51,649			71,699			56,394			41,302
Claims occurring during prior years		74,182			84,777			76,970			72,393			74,182			84,777
Total paid		130,576			126,079			128,619			144,092			130,576			126,079

Other reserve adjustment		-			(1,652	)		-			-			-			(1,652	)

Reserves at the end of the year		218,629			203,253			231,633			290,092			218,629			203,253

Reinsurance recoverable on unpaid losses at the end of the year		125,891			155,778			157,925			131,464			125,891			155,778
Reserves, gross of reinsurance
recoverable, at the end of the year	$	344,520		$	359,031		$	389,558
Reserves, gross of reinsurance recoverable,
at the end of the year										$	421,556		$	344,520		$	359,031

The table above shows that a savings of ~~$8,823~~$9,696 was developed during ~~2010~~2011 in the settlement of claims occurring on or before December 31, ~~2009~~2010 with comparative developments for the two previous calendar years. The net savings for each year are composed of individual claim savings and deficiencies which, in the aggregate have resulted from the settlement of claims at amounts lower than previously reserved and from changes in estimates of losses incurred but not reported as part of the normal reserving process.

The major components of the developments shown above are as follows for the years ended December 31:

2010 2009 2008

Directly produced property and casualty insurance $ (6,567 ) $ (13,526 ) $ (16,872 )
Reinsurance assumed (2,256 ) 3,942 (205 )
Totals $ (8,823 ) $ (9,584 ) $ (17,077 )

The major components of the developments shown above are as follows for the years ended December 31 (savings) deficiency:

	2011			2010			2009

Property and casualty insurance	$	(7,417	)	$	(6,567	)	$	(13,526	)
Reinsurance		(2,279	)		(2,256	)		3,942
Total	$	(9,696	)	$	(8,823	)	$	(9,584	)

Favorable loss development is influenced by the Company’s long-standing policy of reserving for losses realistically and a willingness to settle claims based upon a seasoned evaluation of its exposures. Loss reserves pertaining to the Company’s property reinsurance business are established largely by the ceding reinsurers although the Company may adjust such reserves if management determines that additional reserves ~~are~~could be necessary. Accordingly, the fluctuation in loss developments related to reinsurance ~~assumed~~ will tend to be more pronounced than those experienced on directly produced business which is reserved entirely by Company personnel. In addition, changes in the Company’s net retention under reinsurance treaties will impact developments as more or less business is retained. These trends were considered in the establishment of the Company’s reserves at December 31, ~~2010~~2011 and ~~2009.~~2010.

- 51 -

Note C - Loss and Loss Expense Reserves (continued)

The Company has not changed its original estimate for the loss sustained as a result of the terrorist attacks of September 11, 2001. Therefore, there is no impact on the loss developments shown in the above table except for payments against the original established reserves. The Company has paid $11,800 to date and carries a remaining reserve of $8,200 at December 31, 2010.

The Company participates in mandatory residual market pools in various states. The Company records the results from participation in these pools as the information is reported to the Company and also records an additional provision in the financial statements for operating periods unreported by the pools.

Loss reserves on certain permanent total disability workers’ compensation reserves have been discounted to present value at pre-tax rates not exceeding 3.5%. At December 31, ~~2010~~2011 and ~~2009,~~2010, loss reserves have been reduced by approximately ~~$6,463~~$6,642 and ~~$6,656,~~$6,463, respectively. Discounting is applied to these claims since the amount of periodic payments to be made during the lifetime of claimants is fixed and determinable.

Loss reserves have been reduced by estimated salvage and subrogation recoverable of approximately ~~$6,370~~$7,158 and ~~$5,724~~$6,370 at December 31, ~~2010~~2011 and ~~2009,~~2010, respectively.

Note D – Reinsurance

The insurance subsidiaries cede portions of their gross premiums written to certain other insurers under excess of loss and quota share treaties and by facultative placements. Reinsurance treaties with other companies permit the recovery of a portion of related direct losses. Management determines the amount of net exposure it is willing to accept generally on a product line basis. Certain treaties covering ~~most~~ fleet transportation risks include annual deductibles which must be exceeded before the Company can recover under the terms of the treaty. The Company retains a higher percentage of the direct premium in consideration of these deductible provisions. The Company remains liable to the extent the reinsuring companies are unable to meet their obligations under reinsurance contracts.

The Company also serves as an assuming reinsurer on treaties with direct writing insurance companies ~~for catastrophic property coverages~~ as well as under retrocessions from other ~~reinsurers. The retrocessions are comprised primarily of catastrophe treaties.~~reinsurers for catastrophic property coverages. Accordingly, the occurrence of catastrophic events can have a significant impact on the Company's operations. The Company also assumes reinsurance from direct writing insurance companies for casualty insurance coverages. In addition, the insurance subsidiaries participate in certain mandatory residual market pools which require insurance companies to provide coverages on assigned risks. The assigned risk pools allocate participation to all insurers based upon each insurer’s portion of premium writings on a state or national level. Historically, the operation of these assigned risk pools have resulted in net losses allocated to the Company although such losses have not been material in relation to the Company’s operations.

The following table summarizes the impact of reinsurance ceded and assumed on the Company’s net premium written and earned for the most recent three years:

	Premiums Written									Premiums Earned									Premiums Written									Premiums Earned
	2010			2009			2008			2010			2009			2008			2011			2010			2009			2011			2010			2009
Direct	$	249,699		$	209,129		$	182,810		$	245,912		$	200,341		$	188,285		$	274,101		$	249,699		$	209,129		$	270,002		$	245,912		$	200,341
Ceded on direct		(75,907	)		(58,643	)		(39,828	)		(71,869	)		(59,330	)		(41,214	)		(84,130	)		(75,907	)		(58,643	)		(83,580	)		(71,869	)		(59,330	)
Net direct		173,792			150,486			142,982			174,043			141,011			147,071			189,971			173,792			150,486			186,422			174,043			141,011

Assumed		46,103			41,030			39,132			41,945			41,777			40,528			60,425			46,103			41,030			60,061			41,945			41,777
Ceded on assumed		(1,250	)		(1,488	)		(5,300	)		(1,250	)		(1,488	)		(5,300	)		(1,913	)		(1,250	)		(1,488	)		(1,913	)		(1,250	)		(1,488	)
Net assumed		44,853			39,542			33,832			40,695			40,289			35,228			58,512			44,853			39,542			58,148			40,695			40,289

Net	$	218,645		$	190,028		$	176,814		$	214,738		$	181,300		$	182,299		$	248,483		$	218,645		$	190,028		$	244,570		$	214,738		$	181,300

Net losses and loss expenses incurred for 2011, 2010 ~~2009~~ and ~~2008~~2009 have been reduced by ceded reinsurance recoveries of approximately $56,600, $17,581, ~~$22,025,~~ and ~~$53,398,~~$22,025, respectively. Ceded reinsurance premiums and loss recoveries for the purchase of catastrophe reinsurance coverage on the Company’s net direct business were not material.

- 52 -

Note D – Reinsurance (continued)

Net losses and loss expenses incurred for 2011, 2010 ~~2009~~ and ~~2008~~2009 include approximately $88,934, $38,318, ~~$17,070,~~ and ~~$22,003,~~$17,070, respectively, relating to reinsurance assumed from non-affiliated insurance or reinsurance ~~companies, including involuntary residual market pools.~~companies.

Components of reinsurance recoverable at December 31 are as follows:

	2011		2010
Case unpaid losses, net of valuation allowance	$	72,914	$	59,520
Incurred but not reported unpaid losses and loss expenses		56,262		63,967
Paid losses and loss expenses		3,043		3,741
Unearned premiums		6,185		-
	$	138,404	$	127,228

2010 2009
Case unpaid losses, net of valuation allowance $ 59,520 $ 87,467
Incurred but not reported unpaid losses and loss expenses 63,967 66,030
Paid losses and loss expenses 3,741 1,954
$ 127,228 $ 155,451

Note E - Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows:

	2010			2009			2011		2010
Deferred tax liabilities:
Unrealized gain on fixed income and equity security investments	$	18,251		$	17,169		$	14,319	$	18,251
Limited partnership investments		5,737			5,252			-		5,737
Deferred acquisition costs		3,034			2,748			3,576		3,034
Salvage and subrogation		1,995			1,785			2,275		1,995
Other		449			295			898		449
Total deferred tax liabilities		29,466			27,249			21,068		29,466

Deferred tax assets:
Loss and loss expense reserves		14,781			15,274			18,377		14,781
Limited partnership investments								1,459		-
Unearned premiums discount		2,331			1,814			2,361		2,331
Other-than-temporary investment declines		2,661			3,232			2,902		2,661
Deferred compensation		1,344			637			845		1,344
Deferred ceding commission		1,345			1,032			1,974		1,345
Other		232			216			269		232
Total deferred tax assets		22,694			22,205			28,187		22,694

Net deferred tax assets (liabilities)	$	(6,772	)	$	(5,044	)	$	7,119	$	(6,772	)

A summary of the difference between federal income tax expense computed at the statutory rate and that reported in the consolidated financial statements is as follows:

		2010			2009			2008			2011			2010			2009

Statutory federal income rate applied to pretax income (loss)	Statutory federal income rate applied to pretax income (loss)	$	12,185		$	22,493		$	(6,090)		$	(15,851	)	$	12,185		$	22,493
Tax effect of (deduction):
Tax-exempt investment income			(1,296	)		(2,682	)		(3,649	)		(1,145	)		(1,296	)		(2,682	)
Net addition to (reduction of) tax positions			(826	)		(405	)		(192	)		(174	)		(826	)		(405	)
Other			(265	)		58			245			56			(265	)		58
Federal income tax expense (benefit)		$	9,798		$	19,464		$	(9,686	)	$	(17,114	)	$	9,798		$	19,464

- 53 -

Note E - Income Taxes (continued)

Federal income tax expense consists of the following:
	2010		2009		2008			2011			2010		2009
Taxes (credits) on pre-tax income (loss):
Current	$	9,752	$	9,903	$	4,443		$	(8,205	)	$	9,752	$	9,903
Deferred		46		9,561		(14,129	)		(8,909	)		46		9,561
	$	9,798	$	19,464	$	(9,686	)	$	(17,114	)	$	9,798	$	19,464

The components of the provision for deferred federal income taxes (credits) are as follows:	The components of the provision for deferred federal income taxes (credits) are as follows:										The components of the provision for deferred federal income taxes (credits) are as follows:

		2010			2009			2008				2011			2010			2009
Limited partnerships		$	485		$	7,671		$	(13,052	)		$	(7,196	)	$	485		$	7,671
Discounts of loss and loss expense reserves			(107	)		946			354				(2,546	)		(107	)		946
Unearned premium discount			(517	)		(611	)		384				(30	)		(517	)		(611	)
Deferred compensation			(735	)		(410	)		1,313				499			(735	)		(410	)
Other-than-temporary investment declines			571			862			(3,137	)			(240	)		571			862
Deferred acquisitions costs and ceding commission			(27	)		903			(304	)			(87	)		(27	)		903
Other			376			200			313				691			376			200
	Provision for deferred federal income tax	$	46		$	9,561		$	(14,129	)	Provision for deferred federal income tax	$	(8,909	)	$	46		$	9,561

Cash flows related to federal income taxes paid, net of refunds received, for 2011, 2010 and 2009 were $2,859, $9,000, and ~~2008 were $9,000,~~ $6,037 ~~and $11,186,~~ respectively.

The Company is required to establish a valuation allowance for any portion of the gross deferred tax asset that management believes will not be realized. Management has determined that no such valuation allowance is necessary at December 31, ~~2010~~2011 or ~~2009.~~2010. As of December 31, ~~2010,~~2011, the Internal Revenue Service had completed examinations and settled all audits through the Company’s 2004 tax year.

~~The Company follows the FASB guidance on accounting for uncertainty in income taxes for recognizing and measuring uncertain tax positions.~~ The Company’s tax positions are uncertain only as to the timing of deductibility and therefore, if recognized would have no impact on the Company’s effective tax rate. The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income tax expense and changes in such accruals would impact the Company’s effective tax rate. Amounts accrued for the payment of interest at December 31, 2011, 2010 ~~2009~~ and ~~2008~~2009 were not material.

A reconciliation of the beginning and ending amounts of unrecognized federal income taxes (credits), which would have no impact on the Company’s effective tax rate, excludes interest, which is treated as income tax expense under the Company’s accounting policy, is as follows:


	2010			2009			2011		2010
Balance at January 1	$	6,600		$	5,955		$	6,000	$	6,600
Reductions for tax positions of the current year		(271	)		(850	)		-		(271	)
Additions for tax positions of prior years		-			1,833
Reductions for tax positions of prior years		(329	)		-			-		(329	)
Settlements with tax authorities		-			(338	)
Balance at December 31	$	6,000		$	6,600		$	6,000	$	6,000

As of December 31, 2011, certain tax years remain open to examination by the IRS and various state and local authorities. While it is difficult to determine when other tax settlements will actually occur, it is reasonably possible that one could occur in the next year and the Company’s unrecognized tax benefits could change within a range of approximately $0 to $6,000.

- 54 -

Note F - Shareholders' Equity	Note F - Shareholders' Equity

Changes in common stock outstanding and additional paid-in capital are as follows:	Changes in common stock outstanding and additional paid-in capital are as follows:																Changes in common stock outstanding and additional paid-in capital are as follows:
														Additional												Additional
		Class A						Class B						Paid-in				Class A				Class B				Paid-in
		Shares			Amount			Shares			Amount			Capital				Shares		Amount		Shares		Amount		Capital
Balance at January 1, 2008			2,650,059		$	113			12,592,555		$	537		$	47,899
Treasury shares purchased			(26,950	)		(1	)		(429,304	)		(18	)		(1,587	)
Balance at December 31, 2008			2,623,109			112			12,163,251			519			46,312
Balance at January 1, 2009																			2,623,109	$	112		12,163,251	$	519	$	46,312
Treasury shares purchased			-			-			(53,373	)		(2	)		(195	)		-		-		(53,373	)	(2	)	(195	)
Restricted stock grant			-			-			-			-			220			-		-		-		-		220
Balance at December 31, 2009			2,623,109			112			12,109,878			517			46,337			2,623,109		112		12,109,878		517		46,337
Restricted stock grant			-			-			77,131			3			1,537			-		-		77,131		3		1,537
Balance at December 31, 2010			2,623,109		$	112			12,187,009		$	520		$	47,874			2,623,109		112		12,187,009		520		47,874
Restricted stock grant																			-		-		38,339		2		877
Balance at December 31, 2011																			2,623,109	$	112		12,225,348	$	522	$	48,751

The Company's Class A and Class B common stock has a stated value of approximately $.04 per share.

Note G - Other Operating Expenses

Details of other operating expenses for the years ended December 31:											Details of other operating expenses for the years ended December 31:

		2010			2009			2008				2011			2010			2009
Amortization of gross deferred policy acquisition costs		$	34,048		$	28,827		$	23,437			$	40,712		$	34,048		$	28,827
Other underwriting expenses			23,894			23,794			19,745				25,290			23,894			23,794
Expense allowances from reinsurers			(10,081	)		(5,352	)		(3,084	)			(11,503	)		(10,081	)		(5,352	)
	Total underwriting expenses		47,861			47,269			40,098		Total underwriting expenses		54,499			47,861			47,269

Operating expenses of non-insurance companies			20,843			21,763			18,479				18,829			20,843			21,763
	Total other operating expenses	$	68,704		$	69,032		$	58,577		Total other operating expenses	$	73,328		$	68,704		$	69,032

Note H - Employee Benefit Plans

The Company maintains a defined contribution 401(k) Employee Savings and Profit Sharing Plan ~~("the Plan"~~(the “Plan”) which covers nearly all employees who have completed one year of service. The Company's contributions to the Plan for 2011, 2010 and 2009 were $1,452, $1,497 and ~~2008 were $1,497,~~ $1,292, ~~and $1,183,~~ respectively.

Note I - Stock Purchase and Option Plans

In accordance with the terms of the 1981 Stock Purchase Plan (1981 Plan), the Company is obligated to repurchase shares issued under the 1981 Plan, at a price equal to 90% of the book value of the shares at the end of the quarter immediately preceding the date of repurchase. No shares have ever been repurchased under the 1981 Plan. At December 31, ~~2010,~~2011, there were 124,099 shares (Class A) and 380,458 shares (Class B) outstanding which ~~are~~remain eligible for repurchase by the Company.

The Company maintains two stock option plans and one restricted stock unit plan which are described below.

Director Option Plan:

Under the Director Option Plan (the ~~Director Plan)~~“Director Plan”), which is shareholder approved, the Company has reserved 300,000 shares of Class B common stock for the granting of discounted and market value options to non-employee directors. Approximately ~~146,000~~167,000 shares of Class B common stock are available for future grants. No options were granted to directors during the three year period ended December 31, ~~2010.~~2011. Additionally, no discounted options were outstanding or

- 55 -

Note I - Stock Purchase and Option Plans (continued)

exercised at any time during this three year period. Accordingly, no compensation cost was charged against income for the Director Plan for 2011, 2010 ~~2009~~ and ~~2008.~~2009.

Employee Option Plan:

Under the Employee Option Plan (the ~~Employee Plan)~~“Employee Plan”), which is shareholder approved, the Company has reserved 1,125,000 shares of Class B common stock for the granting of discounted and market value options to employees. Approximately 259,000 shares of Class B common stock are available for future grants. No options were granted to employees during the three year period ended December 31, ~~2010.~~2011. Additionally, no options were outstanding or exercised at any time during this period. Accordingly, no compensation cost was charged against income for the Employee Plan for 2011, 2010 ~~2009~~ and ~~2008.~~2009.

The Company's policy is to issue new shares to satisfy share option exercises.

Restricted Stock:

Effective June 11, 2009, the Company issued 20,900 shares of class B restricted stock to the Company’s outside directors. The restricted shares became fully vested on May 5, 2010 and were distributed to directors on that date. The shares represent the annual retainer compensation for outside directors for the period July 1, 2009 through June 30, 2010. Each share was valued at $21.05 per share representing a total value of $440. Compensation expense related to the above stock grant was recognized over the period in which the directors rendered the services.

Effective May 4, 2010, the Company issued 17,754 shares of class B restricted stock to the Company’s outside directors. ~~These~~The restricted shares became fully vested on May 4, 2011 and were distributed to directors on that date. The shares represent the annual retainer compensation for outside directors for the period July 1, 2010 through June 30, 2011. Each share was valued at $24.78 per share representing a total value of $440. Compensation expense related to the above stock grant was recognized over the period in which the directors rendered the services.

Effective May 10, 2011, the Company issued 19,558 shares of class B restricted stock to the Company’s outside directors. These restricted shares represent the annual retainer compensation for outside directors for the period July 1, 2011 through June 30, 2012 and will vest on May ~~4, 2011.~~10, 2012. Vesting will be accelerated only on the condition of death, disability, or change in control of the Company. Each restricted share is valued at ~~$24.78~~$22.50 per share representing a total value of $440. Compensation expense related to the above stock grant is to be recognized over the period in which the directors render the services which will also coincide with the vesting period.

Director compensation cost associated with restricted stock grants of $440, $440 and $220 was charged against income for the restricted stock units for 2011, 2010 and 2009, respectively.

Effective February 9, 2010, the Company issued 40,061 shares of class B restricted stock to certain of the Company’s executives. The restricted shares will be paid solely in the Company’s class B stock. The restricted shares represent compensation to certain executives under the Company’s 2009 Executive Incentive Bonus Plan and additional stock awards approved by the Board of Directors. The restricted shares will vest ratably over a three year period from the date of grant and are accelerated for retirement eligible recipients due to the non-substantive post-grant date vesting clause per ASC 715, Compensation-Retirement Benefits. Restricted stock was valued based on the closing price of the stock on the day the award was granted. Each share was valued at $23.08 per share representing a total value of $925. Non-vested restricted shares will be forfeited should an executive’s employment terminate for any reason other than death, disability, or retirement as defined by the Compensation Committee.

Effective February 9, 2011, the Company issued 14,473 shares of class B restricted stock to certain of the Company’s executives. The restricted shares will be paid solely in the Company’s class B stock. The restricted shares represent compensation to certain executives under the Company’s 2010 Executive Incentive Bonus Plan. The restricted shares will vest ratably over a three year period from the date of grant and are accelerated for retirement eligible recipients due to the non-substantive post-grant date vesting clause per ASC 715, Compensation-Retirement Benefits. Restricted stock was valued based on the closing price of the stock on the day the award was granted. Each share was valued at $23.39 per share representing a total value of $339. Non-vested restricted shares will be forfeited should an executive’s employment terminate for any reason other than death, disability, or retirement as defined by the Compensation Committee.

- 56 -

Note I - Stock Purchase and Option Plans (continued)

During 2002 and 2001, the Company offered loans to certain employees for the sole purpose of purchasing the Company's Class B common stock in the open market. Principal and interest totaling ~~$1,414~~$1,302 and ~~$2,054~~$1,414 relating to such loans was outstanding at December 31, ~~2010~~2011 and ~~2009,~~2010, respectively. Loans carry interest rates ranging from 4.75% to 6%, payable annually. The underlying securities, with value in excess of the related debt, serve as collateral for these full-recourse loans, which must be repaid no later than 10 years from the date of issue. This loan program was terminated in 2002.

~~- 56 -~~

Note J - Reportable Segments

The Company has two reportable business segments in its operations: property and casualty insurance and reinsurance. The property and casualty insurance segment provides multiple line insurance coverage primarily to fleet transportation companies and to independent contractors who contract with fleet transportation companies. ~~In addition,~~Additionally, the Company offers individual personal automobile coverage, professional liability coverages and business owners’ ~~policies~~ and commercial property ~~business.~~policies. The reinsurance segment accepts cessions from other insurance companies as well as retrocessions from selected reinsurance companies, ~~principally reinsuring against catastrophes.~~providing property catastrophe and casualty reinsurance coverages.

The Company evaluates performance and allocates resources based on past or expected results from insurance underwriting operations before income taxes. Underwriting gain or loss does not include net investment income or gains or losses on the Company's investment portfolio. All investment-related revenues are managed at the corporate level. Underwriting gain or loss for the property and casualty insurance segment includes revenue and expense from the Company's agency operations since the agency operations serve as a primary direct marketing facility for this segment. Management does not identify or allocate assets to reportable segments when evaluating segment performance and depreciation expense is not material for any of the reportable segments. The accounting policies of each reportable segment are the same as those described in the summary of significant accounting policies.

The following table provides certain profit and loss information for each reportable segment for the years ended December 31:

		2010			2009		2008			2011			2010			2009
Direct and assumed premium written:
Property and casualty insurance		$	249,699		$	209,129	$	182,810		$	274,101		$	249,699		$	209,129
Property reinsurance			46,103			41,030		39,132
Reinsurance											60,425			46,103			41,030
	Totals	$	295,802		$	250,159	$	221,942	Totals	$	334,526		$	295,802		$	250,159

Net premium earned:
Property and casualty insurance		$	174,043		$	141,011	$	147,071		$	186,422		$	174,043		$	141,011
Property reinsurance			40,695			40,289		35,228
Reinsurance											58,148			40,695			40,289
	Totals	$	214,738		$	181,300	$	182,299	Totals	$	244,570		$	214,738		$	181,300

Underwriting gain (loss):
Property and casualty insurance		$	26,308		$	22,190	$	20,022		$	19,646		$	26,308		$	22,190
Property reinsurance			(6,725	)		12,065		6,718
Reinsurance											(45,113	)		(6,725	)		12,065
	Totals	$	19,583		$	34,255	$	26,740	Totals	$	(25,467	)	$	19,583		$	34,255

- 57 -

Note J - Reportable Segments (continued)

The following table reconciles reportable segment profits to the Company’s consolidated income (loss) before federal income taxes:

		2010			2009			2008				2011			2010			2009
Profit:
Underwriting gain		$	19,583		$	34,255		$	26,740
Underwriting gain (loss)												$	(25,467	)	$	19,583		$	34,255
Net investment income			11,335			13,971			17,063				10,729			11,335			13,971
Net realized gains (losses) on investments			16,485			30,816			(47,749	)			(17,803	)		16,485			30,816
Corporate expenses			(12,590	)		(14,776	)		(13,453	)			(12,748	)		(12,590	)		(14,776	)
	Income (loss) before federal income taxes	$	34,813		$	64,266		$	(17,399	)	Income (loss) before federal income taxes	$	(45,289	)	$	34,813		$	64,266

~~- 57 -~~

~~Note J - Reportable Segments (continued)~~

The Company, through its subsidiaries, is licensed to do business in all 50 states of the United States, all Canadian provinces and Bermuda. Canadian and Bermuda operations are currently not significant.

One customer of the property and casualty insurance segment, FedEx Ground Systems, Inc (“FedEx Ground”) and certain of its subsidiaries and related entities represents approximately $23,347, $20,187 ~~$14,822~~ and ~~$13,773~~$14,822 of the Company’s consolidated direct and assumed premium written in 2011, 2010 ~~2009~~ and ~~2008,~~2009, respectively. An additional $129,508, $115,625 and $107,724 for 2011, 2010 and ~~$99,589 for 2010,~~ 2009, ~~and 2008,~~ respectively, is placed with the Company by a non-affiliated broker on behalf of independent contractors of this same customer.

Note K - Earnings Per Share

The following is a reconciliation of the denominators used in the calculation of basic and diluted earnings per share for the years ended December 31:

	2010		2009		2008		2011		2010		2009

Average share outstanding for basic earnings per share		14,782,624		14,741,487		15,080,149		14,818,354		14,782,624		14,741,487

Dilutive effect of share equivalents		16,078		11,992		-		-		16,078		11,992

Average shares outstanding for diluted earnings per share		14,798,702		14,753,479		15,080,149		14,818,354		14,798,702		14,753,479

During 2011 the Company sustained a net loss. Accordingly, the anti-dilutive effect of 19,983 shares was excluded from the calculation of the average shares outstanding.

Note L - Concentrations of Credit Risk

The Company writes policies of excess insurance attaching above a self-insured retention ("SIR") and also writes policies that contain large, per-claim deductibles. Those losses and claims that fall within the SIR or deductible limits are obligations of the insured; however, the Company writes surety bonds in favor of various regulatory agencies guaranteeing the insureds’ payment of claims within the SIR. Further, losses and claims under large deductible policies are payable by the Company with reimbursement due the Company from the insureds. The Company requires collateral from its insureds to serve as a source of reimbursement if the Company is obligated to pay claims within the SIR by reason of an insured’s default or if the insured fails to reimburse the Company for deductible amounts paid by the Company.

Acceptable collateral may be provided in the form of letters of credit on Company approved banks, Company approved marketable securities or cash. At December 31, ~~2010,~~2011, the Company held collateral in the aggregate amount of ~~$210,637.~~$241,466.

- 58 -

Note L - Concentrations of Credit Risk (continued)

The amount of collateral required of an insured is determined by the financial condition of the insured, the type of obligations guaranteed by the Company, estimated reserves for incurred losses within the SIR or deductible that have been reported to the insured or the Company, estimated incurred but not reported losses, and estimates for losses that are expected to occur, within the SIR or deductible, prior to the next collateral adjustment date. In general, the Company attempts to hold collateral equal to 100% of the ultimate losses that would be paid by or due the Company in the event of an insured’s default. Periodic audits are conducted by the Company to evaluate its exposure and the collateral required. If a deficiency in collateral is noted as the result of an audit, additional collateral is requested immediately. Because collateral amounts contain numerous estimates of the Company’s exposure, are adjusted only periodically and are sometimes reduced based on the financial condition of the insured, the amount of collateral held by the Company at a given point in time may not be sufficient to fully reimburse the Company for all of its guarantees or amounts due in the event of an insured’s default. Further, the Company is not fully collateralized for the guarantees made for, or the deductible amounts that may be due from FedEx Ground and certain of its subsidiaries and related entities, and in the event of their default, such default may have a material adverse impact on the Company. The Company estimates its uncollateralized exposure related to this customer to be as much as ~~31%~~32% of shareholders' equity at December 31, ~~2010.~~2011.

~~- 58 -~~

~~Note L - Concentrations of Credit Risk (continued)~~

In addition, the Company's balance sheet includes paid and estimated unpaid amounts recoverable from reinsurers under various agreements totaling ~~$127,228~~$138,404 at December 31, ~~2010,~~2011, as more fully discussed in Note D - Reinsurance. These recoverables are largely uncollateralized. The three largest estimated amounts due from individual reinsurers were ~~$24,789, $18,894,~~$40,562, $15,722, and ~~$13,839~~$13,436 at December 31, ~~2010.~~2011.

Investments in limited partnerships include an aggregate of ~~$55,933~~$37,260 invested in three limited partnerships, New Vernon India Fund, New Vernon Global Opportunity Fund and New Vernon Aegir Fund which are managed by organizations in which three directors of the Company are executive officers, directors and owners.

Note M – Acquisition and related Goodwill and Intangibles

On October 31, 2008, the Company purchased Transportation Specialty Insurance Agency, Inc., (“TIA”) of Toledo, Ohio for a cash purchase price of $3,500. TIA is a commercial lines specialty insurance agency primarily focusing on the needs of the transportation industry including trucking independent contractors as well as fleet trucking companies. TIA is part of the Company’s property and casualty insurance segment. As part of the purchase, the Company recorded goodwill of $3,152 and intangible assets related to customer relationships and employment agreements of $179 which are included in Other Assets in the consolidated balance ~~sheet. Related to this acquisition, the Company had~~sheet and has recorded amortization of intangible assets of $35, $41 and $47 during 2011, 2010 and ~~$8 during 2010,~~ 2009, ~~and 2008,~~ respectively.

Note N – Debt

The Company ~~has~~maintains a revolving line of credit with a $30,000 limit, with an expiration date of September 23, 2014. Interest on this line of credit is referenced to LIBOR and can be fixed for periods of up to one year at the Company’s option. Outstanding drawings on this line of credit were $10,000 and $15,000 ~~and $10,000 outstanding~~ as of December 31, ~~2010~~2011 and December 31, 2009, respectively under the Company’s revolving line of credit which expires on June 23, 2011. Borrowing under the line carry variable interest rates which ranged from .76% to .80%, and averaged .79%, at2010, respectively. At December 31, ~~2010.~~2011, the effective interest rate was 1.19%. The Company has ~~$5,000~~$20,000 remaining unused under the ~~revolving~~ line of ~~credit.~~credit at December 31, 2011. The current outstanding borrowings were used principally for treasury stock repurchases and extra dividend payments.

- 59 -

Note O – Fair Value

Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The following tables summarize fair value measurements by level for assets measured at fair value on a recurring basis:

As of December 31, ~~2010:~~2011

Description	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3

U.S. government obligations	$	62,998	$	62,998	$	-	$	-	$	73,137	$	73,137	$	-	$	-
Government sponsored entities		3,324		-		3,324		-		349		-		349		-
Residential mortgage-backed securities		37,101		-		37,101		-		21,872		-		21,872		-
Commercial mortgage-backed securities		14,714		-		14,714		-		11,300		-		11,300		-
Obligations of states and
political subdivisions		192,706		-		192,706		-
State and municipal obligations										190,035		-		190,035		-
Corporate securities		84,417		-		67,175		17,242		90,141		-		73,091		17,050
Options embedded in convertible securities										1,505		-		1,505		-
Foreign government obligations		20,294		-		20,294		-		21,121		-		21,121		-
Total fixed maturities		415,554		62,998		335,314		17,242		409,460		73,137		319,273		17,050
Equity securities		96,657		96,657		-		-		88,085		88,085		-		-
Short term		4,225		4,021		204				3,675		2,982		693
Cash equivalents		41,385		-		41,385		-		81,756		-		81,756		-
	$	557,821	$	163,676	$	376,903	$	17,242	$	582,976	$	164,204	$	401,722	$	17,050

~~- 59 -~~

~~Note O – Fair Value (continued)~~

As of December 31, ~~2009:~~2010:

Description	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3

U.S. government obligations	$	54,632	$	54,632	$	-	$	-	$	62,998	$	62,998	$	-	$	-
Government sponsored entities		5,883		-		5,883		-		3,324		-		3,324		-
Residential mortgage-backed securities		48,377		-		48,377		-		37,101		-		37,101		-
Commercial mortgage-backed securities		5,652		-		5,652		-		14,714		-		14,714		-
Obligations of states and
political subdivisions		185,469		-		185,469		-
State and municipal obligations										192,706		-		192,706		-
Corporate securities		72,185		-		57,298		14,887		84,417		-		67,175		17,242
Foreign government obligations		7,724		-		7,724		-		20,294		-		20,294		-
Total fixed maturities		379,922		54,632		310,403		14,887		415,554		62,998		335,314		17,242
Equity securities		85,886		85,886		-		-		96,657		96,657		-		-
Short term		3,703		3,600		103		-		4,225		4,021		204
Cash equivalents		83,138		-		83,138		-		41,385		-		41,385		-
	$	552,649	$	144,118	$	393,644	$	14,887	$	557,821	$	163,676	$	376,903	$	17,242

- 60 -

Note O – Fair Value (continued)

Level inputs, as defined by the FASB guidance, are as follows:

Level Input:		Input Definition:
Level 1		Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Level 2		Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date.
Level 3		Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

The Level 3 assets consist of an investment portfolio of insurance-linked securities. The insurance-linked securities are valued using the average of estimated market quotes from multiple insurance-linked securities brokers. The broker quotes include Level 3 inputs which are significant to the valuation of the insurance-linked securities. There were no Level 3 sales, no transfers in to Level 3 and no transfers out of Level 3 during 2011 or 2010. A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs is as follows for the years ended December 31:

	2010			2009			2011			2010
Beginning of period balance	$	14,887		$	14,981		$	17,242		$	14,887
Total gain or losses (realized or unrealized)
Total gains or losses (realized or unrealized)
Included in earnings (or changes in net assets)		1,938			231			387			1,938
Included in other comprehensive income		(397	)		268			-			(397	)
Purchases, issuances, and settlements		814			(593	)
Transfers in and/or out of Level 3		-			-
Purchases								6,522			9,136
Settlements								(7,101	)		(8,322	)
End of period balance	$	17,242		$	14,887		$	17,050		$	17,242

~~- 60 -~~

~~Note O – Fair Value (continued)~~

Quoted market prices are obtained for these disclosures whenever possible. Where quoted market prices are not available, fair values are estimated using present value or other valuation techniques. These techniques are significantly affected by our assumptions, including discount rates and estimates of future cash flows. Potential taxes and other transaction costs have not been considered in estimating fair values.

Non-financial instruments such as real estate, property and equipment, other assets, deferred income taxes and intangible assets, and certain financial instruments such as policy reserve liabilities are excluded from the fair value disclosures. Therefore, the fair value amounts cannot be aggregated to determine the underlying economic value to the Company.

The carrying amounts reported in the consolidated balance sheets for cash, accounts receivables, reinsurance recoverable, notes receivable, accounts payable and accrued expenses, income taxes payable, short term borrowings and unearned income approximate fair value because of the short term nature of these items.

There were no significant transfers of assets between ~~level~~Level 1 and ~~level~~Level 2 during 2011, 2010 and 2009.

Transfers between levels, if any, are recorded as of the beginning of the reporting period.

Note P - Quarterly Results of Operations (Unaudited)

Quarterly results of operations are as follows:
Results by Quarter
2010 2009
1st 2nd 3rd 4th 1st 2nd 3rd 4th

Net premiums earned $ 51,166 $ 53,523 $ 52,588 $ 57,461 $ 44,164 $ 41,042 $ 45,077 $ 51,017
Net investment income 3,024 2,944 2,865 2,502 3,259 3,478 3,256 3,978
Net gains (losses) on investments 3,189 (2,858 ) 10,271 5,882 (1,232 ) 12,494 15,441 4,113
Losses and loss expenses incurred 43,032 31,152 36,084 35,684 23,888 22,087 26,714 26,662

Net income 545 4,986 9,234 10,250 5,441 14,125 14,340 10,896

Net income per share - diluted $ .04 $ .33 $ .62 $ .69 $ .37 $ .96 $ .97 $ .74

- 61 -

Note P - Quarterly Results of Operations (Unaudited)

Quarterly results of operations are as follows:
	Results by Quarter
	2011											2010
	1st			2nd			3rd			4th		1st		2nd			3rd		4th

Net premiums earned	$	57,601		$	62,344		$	60,429		$	64,196	$	51,166	$	53,523		$	52,588	$	57,461
Net investment income		2,653			2,644			2,779			2,652		3,024		2,944			2,865		2,502
Net gains (losses) on investments		(1,469	)		(1,963	)		(17,460	)		3,088		3,189		(2,858	)		10,271		5,882
Losses and loss expenses incurred		65,673			55,166			48,637			46,079		43,032		31,152			36,084		35,684

Net income (loss)		(15,198	)		(5,504	)		(12,971	)		5,498		545		4,986			9,234		10,250

Net income (loss) per share - diluted	$	(1.02	)	$	(.38	)	$	(.87	)	$	.37	$	.04	$	.33		$	.62	$	.69

Note Q - Statutory (Unaudited)

Net income (loss) of the insurance subsidiaries, as determined in accordance with statutory accounting practices, was ($19,120), $12,542 and $22,855 for 2011, 2010 and ~~$19,064 for 2010,~~ 2009, ~~and 2008,~~ respectively. Consolidated statutory surplus for these subsidiaries was ~~$366,461~~$313,705 and ~~$356,658~~$366,461 at December 31, ~~2010~~2011 and ~~2009,~~2010, respectively, of which ~~$55,935~~$51,025 may be transferred by dividend or loan to the parent company during calendar year ~~2011~~2012 with proper notification to, but without approval from, regulatory authorities. An additional ~~$234,373~~$176,580 of shareholders’ equity of such insurance subsidiaries could, under existing regulations, be advanced or loaned to the parent company with prior notification to and approval from regulatory ~~authorities.~~authorities, although it is unlikely that transfers of this size would be practical.

Minimum statutory surplus necessary for the insurance subsidiaries to satisfy statutory risk based capital requirements was ~~$74,786~~$84,732 at December 31, ~~2010.~~2011.

~~- 61 -~~

Note R - Leases

The Company leases office space and certain computer and related equipment using noncancelable operating leases. Lease expense for 2011, 2010 and 2009 was $1,483, $1,386 and ~~2008 was $1,386,~~ $1,465, ~~and $1,325,~~ respectively. At December 31, ~~2010,~~2011, future lease payments for operating leases with initial or remaining noncancelable terms of one year or more consisted of the following:

2012	$	1,502
2013		1,015
2014		49
2015		10
2016		-
Thereafter		-
Total minimum payments required	$	2,576

2011 $ 1,489
2012 1,508
2013 1,024
2014 36
2015 -
Thereafter -
Total minimum payments required $ 4,057

- 62 -

Note S – Accumulated Other Comprehensive Income

A reconciliation of the components of accumulated other comprehensive income at December 31 is as follows:

2010 2009
Investments:
    Total unrealized gain before federal income taxes $ 52,145 $ 49,055
    Deferred tax liability (18,251 ) (17,169 )
Net unrealized gains on investments 33,894 31,886

Foreign exchange adjustment:
    Gross unrealized gains 678 1,541
    Deferred tax liability (237 ) (540 )
Net unrealized gains on foreign exchange adjustment 441 1,001

Accumulated other comprehensive income $ 34,335 $ 32,887

	2011			2010
Investments:
Total unrealized gain before federal income taxes	$	40,911		$	52,145
Deferred tax liability		(14,319	)		(18,251	)
Net unrealized gains on investments		26,592			33,894

Foreign exchange adjustment:
Gross unrealized gains		1,759			1,988
Deferred tax liability		(616	)		(696	)
Net unrealized gains on foreign exchange adjustment		1,143			1,292

Accumulated other comprehensive income	$	27,735		$	35,186

Other comprehensive income (loss) reclassification adjustments for the years ended December 31 are as follows:

	2010		2009		2008			2011			2010		2009
Investments:
Pre-tax holding gains (losses) on debt and equity
securities arising during period	$	11,369	$	24,442	$	(41,058	)	$	(7,146	)	$	11,369	$	24,442
Applicable federal income taxes (credits)		3,979		8,555		(14,370	)		(2,501	)		3,979		8,555
		7,390		15,887		(26,688	)		(4,645	)		7,390		15,887

Pre-tax gains (losses) on debt and equity securities
included in net income (loss) during period		8,280		5,248		(14,188	)		4,088			8,280		5,248
Applicable federal income taxes (credits)		2,898		1,837		(4,966	)		1,431			2,898		1,837
		5,382		3,411		(9,222	)		2,657			5,382		3,411

Change in unrealized gains (losses) on investments	$	2,008	$	12,476	$	(17,466	)	$	(7,302	)	$	2,008	$	12,476

~~- 62 -~~

Note T - Subsequent Events

We have evaluated subsequent events for recognition or disclosure in the consolidated financial statements filed on Form 10-K with the U.S. Securities and Exchange Commission and no events have occurred during this period which require recognition or disclosure in this document.

- 63 -

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

No response to this item is required.

Item 9A. CONTROLS AND PROCEDURES

The Company’s management, under the direction of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has performed an evaluation of its disclosure controls and procedures (as defined by Exchange Act rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based on this evaluation, the Company's CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective in ensuring that information required to be disclosed by the company is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. In addition, there have not been any significant changes in internal controls or other factors that could significantly affect internal controls subsequent to the date of the Company's most recent evaluation.

Management's Responsibility For Financial Statements

Management is responsible for the preparation of the Company’s consolidated financial statements and related information appearing in this report. Management believes that the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements reasonably present the Company’s financial position and results of operations in conformity with U.S. generally accepted accounting principles. Management has included in the Company’s financial statements amounts that are based upon estimates and judgments which it believes are reasonable under the circumstances.

Ernst & Young LLP, an independent registered public accounting firm, audits the Company’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board and provides an objective, independent review of the fairness of reported operating results and financial position.

The Board of Directors of the Company has an Audit Committee composed of three non-management Directors. The committee meets periodically with financial management, the internal auditors and the independent registered public accounting firm to review accounting, control, auditing and financial reporting matters.

Management's Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of management, including the chief executive officer and the chief financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, management concluded that the Company’s internal control over financial reporting was effective as of December 31, ~~2010.~~2011. The effectiveness of the Company's internal control over financial reporting as of December 31, ~~2010~~2011 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.

- 64 -

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

Baldwin & Lyons, Inc.

We have audited Baldwin & Lyons, Inc.’s and subsidiaries (the “Company’s”) internal control over financial reporting as of December 31, ~~2010,~~2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). ~~Baldwin & Lyons, Inc.’s~~The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with ~~U.S.~~ generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with ~~U.S.~~ generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Baldwin & Lyons, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2010,~~2011, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Baldwin & Lyons, Inc. and subsidiaries as of December 31, ~~2010~~2011 and ~~2009,~~2010, and the related consolidated statements of operations, shareholders’ equity, , and cash flows for each of the three years in the period ended December 31, ~~2010,~~2011, and our report dated March ~~11, 2011~~13, 2012 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Indianapolis, Indiana

March ~~11, 2011~~14, 2012

- 65 -

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information with respect to the directors of the Registrant to be provided under this item is omitted from this Report because the Registrant will file with the Commission a definitive proxy statement pursuant to Regulation 14A involving the election of directors not later than 120 days after the close of its fiscal year.

The information required by Item 10 of this Report with respect to directors which will appear in the definitive proxy statement is incorporated by reference herein.

The executive officers of the Company will serve until the next annual meeting of the Board of Directors and until their respective successors are elected and qualified. Except as otherwise indicated, the occupation of each officer during the past five years has been in his current position with the Company.

The following summary sets forth certain information concerning the Company's executive ~~officers:~~officers as of December 31, 2011:

Name	Age		Title	Served in Such Capacity Since
Gary W. Miller		7071	Executive Chairman		1997 (1)
Joseph J. DeVito		5960	CEO, President and COO		2007 (2)
G. Patrick Corydon		6263	Executive Vice President and CFO		1979 (3)
Mark L. Bonini		5152	Executive Vice President		2001 (4)
Craig C. Morfas		5152	Senior Vice President and Secretary		2008 (5)

(1) Mr. Miller was elected Executive Chairman in December, 2010. He was elected Chairman and CEO in 1997 and has served in various capacities since 1965.

(2) Mr. DeVito was elected Chief Executive Officer in December, 2010. He was elected President and Chief Operating Officer in 2007, Executive Vice President in 2001 and has served in various capacities since 1981.

(3) Mr. Corydon was elected Executive Vice President in 2008 and previously served as Senior Vice President from 1997 and has been CFO since 1979.

(4) Mr. Bonini was elected Executive Vice President in February, 2011. He was elected Vice President of the Company in 2001.

(5) Mr. Morfas was elected Senior Vice President in February, 2011. He was elected Vice President of the Company in 2007 and Secretary of the Company in 2008. In February, 2012, he was elected Executive Vice President.

Item 11. EXECUTIVE COMPENSATION *

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT *

Item 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE *

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES *

~~120 days after the close of its fiscal year. The information required by these items of this Report which will appear in the definitive proxy statement is incorporated by reference herein.~~

* The information to be provided under Items 11, 12, 13 and 14 is omitted from this Report because the Registrant will file with the Commission a definitive proxy statement pursuant to Regulation 14A involving the election of directors not later than 120 days after the close of its fiscal year. The information required by these items of this Report which will appear in the definitive proxy statement is incorporated by reference herein.

- 66 -

PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

~~(a)~~

1.(a)

1. List of Financial Statements--The following consolidated financial statements of the registrant and its subsidiaries (including the Report of Independent Registered Public Accounting Firm) are submitted in Item 8 of this report.

Consolidated Balance Sheets - December 31, ~~2010~~2011 and ~~2009~~

2010

Consolidated Statements of Operations - Years ended December 31, 2011, 2010 ~~2009~~ and ~~2008~~

2009

Consolidated Statements of Shareholders’ Equity - Years ended December 31, 2011, 2010 ~~2009~~ and ~~2008~~

2009

Consolidated Statements of Cash Flows - Years ended December 31, 2011, 2010 ~~2009~~ and ~~2008~~

2009

Notes to Consolidated Financial Statements

List of Financial Statement Schedules--The following consolidated financial statement schedules of Baldwin & Lyons, Inc. and subsidiaries are included in Item 15(d):

Pursuant to Article 7:

Schedule I--Summary of Investments--Other than Investments in Related Parties

Schedule II--Condensed Financial Information of the Registrant

Schedule III--Supplementary Insurance Information

Schedule IV--Reinsurance

Schedule VI--Supplemental Information Concerning Property/Casualty Insurance Operations

All other schedules to the consolidated financial statements required by Article 7 and Article 5 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted.

- 67 -

~~Listing of Exhibits:~~

Listing of Exhibits:

Number & Caption from Exhibit Table of Item 601 of Regulation S-K	Exhibit Number and Description

(3) (Articles of Incorporation & By Laws)	EXHIBIT 3(i) – Articles of Incorporation of Baldwin & Lyons, Inc., as amended (Incorporated as an exhibit by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1986)
	EXHIBIT 3(ii)-- By-Laws of Baldwin & Lyons, Inc., as restated (Incorporated as an exhibit by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated May 4, 2004)
(10) (Material Contracts)	EXHIBIT 10(a)-- 1981 Employee Stock Purchase Plan (Incorporated as an exhibit by reference to Exhibit A to the Company's definitive Proxy Statement for its Annual Meeting held May 5, 1981)
	EXHIBIT 10(b)-- Baldwin & Lyons, Inc. Employee Discounted Stock Option Plan (Incorporated as an exhibit by reference to Appendix A to the Company’s definitive Proxy Statement for its Annual Meeting held May 2, 1989)
	EXHIBIT 10(c)-- Baldwin & Lyons, Inc. Deferred Directors Fee Option Plan (Incorporated as an exhibit by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989)
	EXHIBIT 10(d)-- Baldwin & Lyons, Inc. Amended Employee Discounted Stock Option Plan (Incorporated as an exhibit by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992)
	EXHIBIT 10(e)-- Baldwin & Lyons, Inc. Restated Employee Discounted Stock Option Plan. (Incorporated as an exhibit by reference to Exhibit 10(f) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997)
	EXHIBIT 10(f)-- Baldwin & Lyons, Inc. Executive Incentive Bonus Plan (Incorporated as an exhibit by reference to the Company's definitive Proxy Statement for its Annual Meeting held May 5, 2009)
	EXHIBIT 10(g)-- Baldwin & Lyons, Inc. Managing General Agency Agreement with Paladin Catastrophe Management LLC

- 68 -

Number & Caption from Exhibit Table of Item 601 of Regulation S-K	Exhibit Number and Description

(14) (Code of ethics)	EXHIBIT 14-- Code of Business Conduct of Baldwin & Lyons, Inc. (Incorporated as an exhibit by reference to Exhibit 14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005)
(21) (Subsidiaries of the registrant)	EXHIBIT 21-- Subsidiaries of Baldwin & Lyons, Inc.

(23) (Consents of experts and counsel)	EXHIBIT 23-- Consent of Ernst & Young LLP
(24) (Powers of Attorney)	EXHIBIT 24-- Powers of Attorney for certain Officers and Directors
(31) (Certification)	EXHIBIT 31.1-- Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act
	EXHIBIT 31.2-- Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act
(32) (Certification)	EXHIBIT ~~32.1--~~32-- Certification of CEO ~~pursuant to Section 906 of the Sarbanes-~~ ~~Oxley Act~~ and ~~18 U.S.C. 1350~~
	~~EXHIBIT 32.2--~~ ~~Certification of~~ CFO pursuant to Section 906 of the Sarbanes-Oxley Act and 18 U.S.C. 1350

(b)	A report on Form 8-K was filed by the Company in the fourth quarter of ~~2010~~2011 to announce its third quarter earnings press release.

(c)	Exhibits. The response to this portion of Item 15 is submitted as a separate section of this report.

(d)	Financial Statement Schedules. The response to this portion of Item 15 is submitted on pages 70 through 76 of this report.

- 69 -

SCHEDULE I -- SUMMARY OF INVESTMENTS-	SCHEDULE I -- SUMMARY OF INVESTMENTS-							SCHEDULE I -- SUMMARY OF INVESTMENTS-
OTHER THAN INVESTMENTS IN RELATED PARTIES	OTHER THAN INVESTMENTS IN RELATED PARTIES							OTHER THAN INVESTMENTS IN RELATED PARTIES

Form 10-K - Year Ended December 31, 2010
Form 10-K - Year Ended December 31, 2011								Form 10-K - Year Ended December 31, 2011

Baldwin & Lyons, Inc. and Subsidiaries	Baldwin & Lyons, Inc. and Subsidiaries							Baldwin & Lyons, Inc. and Subsidiaries
(Dollars in thousands)	(Dollars in thousands)							(Dollars in thousands)


Column A		Column B		Column C		Column D			Column B		Column C		Column D

						Amount At							Amount At
						Which Shown							Which Shown
				Fair		In The Balance					Fair		In The Balance
Type of Investment		Cost		Value		Sheet (A)			Cost		Value		Sheet (A)

Fixed Maturities:
Bonds:
U.S. government obligations		$	62,882	$	62,998	$	62,998			73,009		73,137		73,137
Government sponsored entities			3,325		3,324		3,324			345		349		349
Mortgage-backed securities			50,930		51,815		51,815			33,166		33,172		33,172
Obligations of states and
political subdivisions			192,236		192,706		192,706
State and municipal obligations										188,991		190,035		190,035
Foreign governments			20,095		20,294		20,294			21,483		21,121		21,121
All other corporate bonds			83,121		84,417		84,417
Corporate securities										91,949		91,646		91,646
Total fixed maturities			412,589		415,554		415,554			408,943		409,460		409,460

Equity Securities:
Common Stocks:
Industrial, miscellaneous and all other			47,477		96,657		96,657			47,691		88,085		88,085
Total equity securities			47,477		96,657		96,657			47,691		88,085		88,085

Limited partnerships			77,352		77,352		77,352			54,705		54,705		54,705

Short-term:
Certificates of deposit			4,021		4,021		4,021			2,982		2,982		2,982
Commercial paper			204		204		204			693		693		693
Total short-term and other			4,225		4,225		4,225			3,675		3,675		3,675

Total investments		$	541,643	$	593,788	$	593,788		$	515,014	$	555,925	$	555,925

(A) Investments presented above do not include $41,385 of money market funds classified with cash and
(A) Investments presented above do not include $81,756 of money market funds classified with cash and
cash equivalents in the balance sheet.

- 70 -

SCHEDULE II	SCHEDULE II					SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT	CONDENSED FINANCIAL INFORMATION OF REGISTRANT					CONDENSED FINANCIAL INFORMATION OF REGISTRANT

Form 10-K	Form 10-K					Form 10-K

Baldwin & Lyons, Inc.	Baldwin & Lyons, Inc.					Baldwin & Lyons, Inc.
(Dollars in thousands)	(Dollars in thousands)					(Dollars in thousands)

Condensed Balance Sheets
		December 31					December 31
		2010		2009			2011		2010
Assets
Investment in subsidiaries		$	386,433	$	376,447		$	334,328	$	386,433
Due from affiliates			3,866		4,260			5,282		3,866
Investments other than subsidiaries:
Fixed maturities			11,265		10,679			11,353		11,265
Limited partnerships			704		809			291		704
			11,969		11,488			11,644		11,969
Cash and cash equivalents			12,546		8,182			5,690		12,546
Accounts receivable			5,986		5,744			5,890		5,986
Notes receivable from employees			1,414		2,054			1,302		1,414
Other assets			5,747		5,894			6,392		5,747

Total assets		$	427,961	$	414,069		$	370,528	$	427,961

Liabilities and shareholders' equity

Liabilities:
Premiums payable		$	27,147	$	15,019		$	26,367	$	27,147
Deposits from insureds			15,196		12,863			13,682		15,196
Notes payable to bank			15,000		10,000			10,000		15,000
Current payable federal income taxes			335		693			368		335
Other liabilities			1,548		2,551			1,050		1,548
			59,226		41,126
								51,467		59,226
Shareholders' equity:
Common stock:
Class A			112		112			112		112
Class B			520		517			522		520
Additional paid-in capital			47,874		46,337			48,751		47,874
Unrealized net gains on investments			33,894		31,886			26,592		33,894
Retained earnings			286,335		294,091			243,084		286,335
			368,735		372,943			319,061		368,735

Total liabilities and shareholders' equity		$	427,961	$	414,069		$	370,528	$	427,961




See notes to condensed financial statements

- 71 -

SCHEDULE II	SCHEDULE II										SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT	CONDENSED FINANCIAL INFORMATION OF REGISTRANT										CONDENSED FINANCIAL INFORMATION OF REGISTRANT

Form 10-K	Form 10-K										Form 10-K

Baldwin & Lyons, Inc.	Baldwin & Lyons, Inc.										Baldwin & Lyons, Inc.
(Dollars in thousands)	(Dollars in thousands)										(Dollars in thousands)

Condensed Statements of Operations
		Year Ended December 31										Year Ended December 31
		2010			2009			2008				2011			2010			2009
Revenue:
Commissions and service fees		$	21,913		$	19,182		$	18,539			$	20,974		$	21,913		$	19,182
Dividends from subsidiaries			15,000			15,000			13,000				14,000			15,000			15,000
Net investment income			135			506			476				100			135			506
Net realized gains (losses) on investments			(100	)		37			543				67			(100	)		37
Other			284			92			657				98			284			92
			37,232			34,817			33,215				35,239			37,232			34,817

Expenses:
Salary and related items			12,869			14,145			12,946				12,281			12,869			14,145
Other			5,615			5,274			5,120				5,550			5,615			5,274
			18,484			19,419			18,066				17,831			18,484			19,419
Income before federal income taxes
and equity in undistributed
income of subsidiaries			18,748			15,398			15,149				17,408			18,748			15,398
Federal income tax (benefit)			1,195			(496	)		671				1,004			1,195			(496	)
			17,553			15,894			14,478				16,404			17,553			15,894
Equity in undistributed income (loss)
of subsidiaries			7,462			28,908			(22,191	)			(44,579	)		7,462			28,908

Net income (loss)		$	25,015		$	44,802		$	(7,713	)		$	(28,175	)	$	25,015		$	44,802






See notes to condensed financial statements

- 72 -

SCHEDULE II	SCHEDULE II										SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT	CONDENSED FINANCIAL INFORMATION OF REGISTRANT										CONDENSED FINANCIAL INFORMATION OF REGISTRANT

Form 10-K	Form 10-K										Form 10-K

Baldwin & Lyons, Inc.	Baldwin & Lyons, Inc.										Baldwin & Lyons, Inc.
(Dollars in thousands)	(Dollars in thousands)										(Dollars in thousands)

Condensed Statements of Cash Flows
		Year Ended December 31										Year Ended December 31
		2010			2009			2008				2011			2010			2009

Net cash provided by operating activities		$	32,296		$	18,309		$	15,072			$	13,255		$	32,296		$	18,309

Investing activities:
Purchases of long-term investments			(10,889	)		(6,803	)		(8,747	)			(10,025	)		(10,889	)		(6,803	)
Sales or maturities of long-term investments			9,910			7,343			7,552				9,704			9,910			7,343
Decrease in notes receivable from employees			611			143			29				106			611			143
Distributions from limited partnerships			23			23			833				444			23			23
Net disposals (purchases) of property and equipment			413			(2,124	)		(751	)			(622	)		413			(2,124	)
Purchase of Transport Insurance Agency			-			-			(3,500	)
Other			212			188			73				128			212			188
Net cash provided by (used in) investing activities			280			(1,230	)		(4,511	)			(265	)		280			(1,230	)

Financing activities:
Dividends paid to shareholders			(33,212	)		(14,744	)		(15,096	)			(14,846	)		(33,212	)		(14,744	)
Drawing on line of credit			8,000			11,000			9,000				-			8,000			11,000
Repayment on line of credit			(3,000	)		(10,000	)		-				(5,000	)		(3,000	)		(10,000	)
Cost of treasury shares			-			(880	)		(8,908	)			-			-			(880	)
Capitalization of subsidiary			-			-			(1,344	)
Net cash used in financing activities			(28,212	)		(14,624	)		(16,348	)			(19,846	)		(28,212	)		(14,624	)
Increase (decrease) in cash and cash equivalents			4,364			2,455			(5,787	)			(6,856	)		4,364			2,455
Cash and cash equivalents at beginning of year			8,182			5,727			11,514				12,546			8,182			5,727
Cash and cash equivalents at end of year		$	12,546		$	8,182		$	5,727			$	5,690		$	12,546		$	8,182


See notes to condensed financial statements

See notes to condensed financial statements

Note to Condensed Financial Statements--Basis of Presentation

The Company's investment in subsidiaries is stated at cost plus equity in the undistributed earnings of subsidiaries since the date of acquisition. The Company's share of net income of its subsidiaries is included in income using the equity method. These financial statements should be read in conjunction with the Company's consolidated financial statements.

- 73 -

SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION

							Form 10-K

Baldwin & Lyons, Inc. and Subsidiaries

(Dollars in thousands)


Column A	Column B		Column C		Column D		Column E		Column F		Column G		Column H		Column I		Column J		Column K


	As of December 31								Year Ended December 31
			Reserves
			for Unpaid				Other						Benefits,		Amortization
	Deferred		Claims				Policy						Claims,		of Deferred
	Policy		and Claim				Claims and		Net		Net		Losses and		Policy		Other		Net
	Acquisition		Acquisition		Unearned		Benefits		Premium		Investment		Settlement		Acquisition		Operating		Premiums
Segment	Costs		Expenses		Premiums		Payable		Earned		Income		Expenses		Costs		Expenses		Written
											(A)		(A)				(A) (B)
Property/Casualty
Insurance

2011	$	4,578	$	421,556	$	39,919	$	---	$	244,570	$	10,729	$	215,555	$	40,712	$	13,786	$	248,483

2010		4,826		344,520		29,819		---		214,738		11,335		145,952		34,048		13,813		218,645

2009		4,905		359,031		25,912		---		181,300		13,971		99,351		28,827		18,442		190,028

SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION

Form 10-K

   Baldwin & Lyons, Inc. and Subsidiaries

(Dollars in thousands)

Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K

As of December 31
Year Ended December 31
Reserves
for Unpaid Other Benefits, Amortization
Deferred Claims Policy Claims, of Deferred
Policy and Claim Claims and Net Net Losses and Policy Other Net
Acquisition Adjustment Unearned Benefits Premium Investment Settlement Acquisition Operating Premiums
Segment Costs Expenses Premiums Payable Earned Income Expenses Costs Expenses Written
(A) (A) (A) (B)
Property/Casualty
Insurance

    2010 $ 4,826 $ 344,520 $ 29,819 --- $ 214,738 $ 11,335 $ 145,952 $ 34,048 $ 13,813 $ 218,645

    2009 4,905 359,031 25,912 --- 181,300 13,971 99,351 28,827 18,442 190,028

    2008 2,326 389,558 17,183 --- 182,299 17,063 115,752 23,437 16,661 176,814

(A) Allocations of certain expenses have been made to investment income, settlement expenses and other operating expenses and are based on a number of assumptions and estimates. Results among these ~~catagories~~categories would change if different methods were applied.

(B) Commissions paid to the Parent Company have been eliminated for this presentation. Commission allowances relating to reinsurance ceded are offset against other operating expenses.

- 74 -

SCHEDULE IV -- REINSURANCE	SCHEDULE IV -- REINSURANCE											SCHEDULE IV -- REINSURANCE

Form 10-K	Form 10-K											Form 10-K

Baldwin & Lyons, Inc. and Subsidiaries	Baldwin & Lyons, Inc. and Subsidiaries											Baldwin & Lyons, Inc. and Subsidiaries

(Dollars in thousands)	(Dollars in thousands)											(Dollars in thousands)

Column A		Column B		Column C		Column D		Column E		Column F			Column B		Column C		Column D		Column E		Column F

										% of											% of
				Ceded		Assumed				Amount					Ceded		Assumed				Amount
		Direct		to Other		from Other		Net		Assumed to			Direct		to Other		from Other		Net		Assumed to
		Premiums		Companies		Companies		Amount		Net			Premiums		Companies		Companies		Amount		Net

Premiums Earned -
Property/casualty insurance:

Years Ended December 31:

2011													$	270,002	$	85,493	$	60,061	$	244,570		23.8

2010		$	245,912	$	73,119	$	41,945	$	214,738		19.0			245,912		73,119		41,945		214,738		19.0

2009			200,341		60,818		41,777		181,300		22.2			200,341		60,818		41,777		181,300		22.2

2008			188,285		46,514		40,528		182,299		19.3

Note: Included in Ceded to Other Companies is $1,913, $1,250 and $1,488 for 2011, 2010 and ~~$5,300 for 2010,~~ 2009, ~~and 2008,~~ respectively, relating to retrocessions associated with premiums assumed from other companies. Amount Assumed to Net percentage above considers the impact of this retrocession.

- 75 -

SCHEDULE VI--SUPPLEMENTAL INFORMATION

CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS

Form 10-K

Baldwin & Lyons, Inc. and Subsidiaries

(Dollars in thousands)

Column A

Column B

Column C

Column D

Column E

Column F

Column G

Column H

Column I

Column J

Column K

As of December 31

Year Ended December 31

Reserves

Claims and Claim

Amortiza-

for Unpaid

Discount,

Adjustment Expenses

tion of

Deferred

Claims

if any

Incurred Related to

Deferred

Paid Claims

AFFILIATION

Policy

and Claim

Deducted

Net

(1)

(2)

Policy

and Claim

Net

WITH

Acquisi-

Adjustment

Unearned

Earned

Investment

Current

Prior

Acquisition

Adjustment

Premiums

REGISTRANT

tion Costs

Expenses

Column C

Premiums

Income

Year

Years

Costs

Expenses

Written

Consolidated Property/Casualty Subsidiaries:

(A)

2011

$4,578

$421,556

$6,642

$39,919

$244,570

$10,729

225,251

(9,696)

$40,712

$144,092

$248,483

2010

4,826

344,520

6,463

29,819

214,738

11,335

154,775

(8,823)

34,048

130,576

218,645

2009

4,905

359,031

6,656

25,912

181,300

13,971

108,935

(9,584)

28,827

126,079

190,028

SCHEDULE VI--SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS

Form 10-K

Baldwin & Lyons, Inc. and Subsidiaries

(Dollars in thousands)

Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K

As of December 31 Year Ended December 31

Reserves Claims and Claim Amortiza-
for Unpaid Discount, Adjustment Expenses tion of
Deferred Claims if any Incurred Related to Deferred Paid Claims
AFFILIATION Policy and Claim Deducted Net (1) (2) Policy and Claim Net
WITH Acquisi- Adjustment in Unearned Earned Investment Current Prior Acquisition Adjustment Premiums
REGISTRANT tion Costs Expenses Column C Premiums Premiums Income Year Years Costs Expenses Written

Consolidated Property/Casualty Subsidiaries: (A)
2010 $4,826 $344,520 $6,463 $29,819 $214,738 $11,335 $154,775 $(8,823 ) $34,048 $130,576 $218,645
2009 4,905 359,031 6,656 25,912 181,300 13,971 108,935 (9,584 ) 28,827 126,079 190,028
2008 2,326 389,558 5,342 17,183 182,299 17,063 132,829 (17,077 ) 23,437 128,619 176,814

~~(A) Loss reserves on certain reinsurance assumed and permanent total disability worker's compensation claims have been discounted to present value using pretax interest rates not exceeding 3.5%.~~

- 76 -

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

BALDWIN & LYONS, INC.

March ~~11, 2011~~14, 2012	By /s/ Joseph DeVito
		Joseph DeVito, Director, Chief Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

March ~~11, 2011~~14, 2012	By /s/ Gary W. Miller
		Gary W. Miller, Director and Executive Chairman

March ~~11, 2011~~14, 2012	By /s/ G. Patrick Corydon
		G. Patrick Corydon, Executive Vice President and CFO (Principal Financial and Accounting Officer)

March ~~11, 2011~~14, 2012	By /s/ Joseph DeVito
		Joseph DeVito, Director, Chief Executive Officer and President

March ~~11, 2011~~14, 2012	By /s/ Stuart D. Bilton (*)
		Stuart D. Bilton, Director

March ~~11, 2011~~14, 2012	By /s/ Otto N. Frenzel IV (*)
		Otto N. Frenzel IV, Director

March ~~11, 2011~~14, 2012	By /s/John M. ~~O'Mara~~O’Mara (*)
		John M. O'Mara, Director

- 77 -

SIGNATURES (CONTINUED)

March ~~11, 2011~~14, 2012	By /s/ Thomas H. Patrick (*)
		Thomas H. Patrick, Director

March ~~11, 2011~~14, 2012	By /s/ John Pigott (*)
		John Pigott, Director

March ~~11, 2011~~14, 2012	By /s/ Kenneth D. Sacks (*)
		Kenneth D. Sacks, Director

March ~~11, 2011~~14, 2012	By /s/ Nathan Shapiro (*)
		Nathan Shapiro, Director

March ~~11, 2011~~14, 2012	By /s/ Norton Shapiro (*)
		Norton Shapiro, Director

March ~~11, 2011~~14, 2012	By /s/ Robert Shapiro (*)
		Robert Shapiro, Director

March ~~11, 2011~~14, 2012	By /s/ Steven A. Shapiro (*)
		Steven A. Shapiro, Director

March ~~11, 2011~~14, 2012	By /s/ John D. Weil (*)
		John D. Weil, Director

(*) By Craig C. Morfas, Attorney-in-Fact

- 78 -

ANNUAL REPORT ON FORM 10-K

ITEM 15(c)--CERTAIN EXHIBITS

YEAR ENDED DECEMBER 31, ~~2010~~2011

BALDWIN & LYONS, INC.

INDIANAPOLIS, INDIANA

- 79 -

BALDWIN & LYONS, INC.

Form 10-K for the Fiscal Year

Ended December 31, ~~2010~~2011

INDEX TO EXHIBITS

Exhibit No.	Begins on sequential page number of Form 10-K
EXHIBIT 3(i)-- Articles of Incorporation of Baldwin & Lyons, Inc. as amended (Incorporated as an exhibit by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1986)	N/A
EXHIBIT 3(ii)-- By-Laws of Baldwin & Lyons, Inc., as restated (Incorporated as an exhibit by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated May 4, 2004)	N/A
EXHIBIT 10(a)-- 1981 Employees Stock Purchase Plan (Incorporated as an exhibit by reference to Exhibit A to the Company's definitive Proxy Statement for its Annual Meeting held May 5, 1981)	N/A
EXHIBIT 10(b)-- Baldwin & Lyons, Inc. Employee Discounted Stock Option Plan (Incorporated as an exhibit by reference to Appendix A to the Company's definitive Proxy Statement for its Annual Meeting held May 2, 1989)	N/A
EXHIBIT 10(c)-- Baldwin & Lyons, Inc. Deferred Directors Fee Option Plan (Incorporated as an exhibit by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989)	N/A
EXHIBIT 10(d)-- Baldwin & Lyons, Inc. Amended Employee Discounted Stock Option Plan (Incorporated as an exhibit by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989)	N/A
EXHIBIT 10(e)-- Baldwin & Lyons, Inc. Restated Employee Discounted Stock Option Plan (Incorporated as an exhibit by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997)	N/A
EXHIBIT 10(f)-- Baldwin & Lyons, Inc. Executive Incentive Bonus Plan (Incorporated as an exhibit by reference to the Company's definitive Proxy Statement for its Annual Meeting held May 5, 2009)	N/A
EXHIBIT 10(g)-- Baldwin & Lyons, Inc. Managing General Agency Agreement with Paladin Catastrophe Management LLC	N/A

- 80 -

INDEX TO EXHIBITS (CONTINUED)
Exhibit No.	Begins on sequential page number of Form 10-K
EXHIBIT 14-- Code of Business Conduct, as amended May 3, 2005 (Incorporated as an exhibit by reference to Exhibit 14 to the Company's Annual Report on Form 10-K for the year ended December 31, 2005)	N/A
EXHIBIT 21-- Subsidiaries of Baldwin & Lyons, Inc.	p. 82
EXHIBIT 23-- Consent of Ernst & Young LLP	p. 83

EXHIBIT 24-- Powers of Attorney for certain Officers and Directors	p. 85 and 86
EXHIBIT 31.1-- Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	p. 87 and 88
EXHIBIT 31.2-- Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	p. 89 and 90
EXHIBIT 32.1-- Certification of CEO ~~pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~	~~p. 91~~
~~EXHIBIT 32.2--~~ ~~Certification of~~and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	~~p. 92~~91

- 81 -

Liability reported on a SAP basis - net of reinsurance recoverable	$	223,969

Add differences:
Reinsurance recoverable on unpaid losses and LAE		125,891
Additional reserve for residual market losses not
reported to the Company at the current year end		360

Deduct differences:
Estimated salvage and subrogation recoveries recorded on
a cash basis for SAP and on an accrual basis for GAAP		(5,700	)

Liability reported on a GAAP basis	$	344,520

	Period Ending
Index	12/31/05		12/31/06		12/31/07		12/31/08		12/31/09		12/31/10
Baldwin & Lyons, Inc.		100.00		116.15		132.61		92.13		131.20		137.37
NASDAQ Insurance Index		100.00		113.85		114.83		103.81		107.23		126.67
Russell 2000		100.00		118.37		116.51		77.15		98.11		124.46

2011	$	1,489
2012		1,508
2013		1,024
2014		36
2015		-
Thereafter		-
Total minimum payments required	$	4,057