form10k.htm

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 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 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 71% of the gross direct property and casualty insurance premiums written by the Insurance Subsidiaries during 2011 were attributable to business produced directly or indirectly by B&L. The remaining 29% of 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 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 by the Insurance Subsidiaries.

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 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:

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.

Approximately 64% of current net reinsurance premium earned in 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 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 so that only major catastrophic events would be expected to have a material impact on the Company’s operations or financial position.

The consolidated balance sheets include the estimated liability for unpaid losses and loss adjustment expenses ("LAE") of the Insurance 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 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, 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 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 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 a combination of case basis and bulk reserves representing the Company’s estimate of the costs associated with the claims handling 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

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. 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 29 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, 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 lower for the year ended December 31, 2011.

For policies inforce at December 31, 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 $1.6 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 and 2009 each include $28.7 million, $23.4 million and $15.8 million, respectively, related to such deductible provisions inforce during these years.

The Company is cedent under numerous reinsurance treaties covering its varied product lines. Treaties are written on an annual basis, each with its own renewal date throughout the year. Treaty renewals are expected to occur annually in the foreseeable future. Because the Company occasionally offers multiple year policies and because losses from 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 and 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 2011. The table on page 12 is a summary of the re-estimated liability, before consideration of reinsurance, for the ten years prior to 2011 as well as the related re-estimated reinsurance ceded for the same periods.

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

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

Provision for losses and LAE:
Claims occurring during the current year		225,251			154,775			108,935
Claims occurring during prior years		(9,696	)		(8,823	)		(9,584	)
		215,555			145,952			99,351
Payments of losses and LAE:
Claims occurring during the current year		71,699			56,394			41,302
Claims occurring during prior years		72,393			74,182			84,777
		144,092			130,576			126,079
Other reserve adjustment		-			-			(1,652	)
Liability for losses and LAE at end of year		290,092			218,629			203,253

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

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

	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	)

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, 2010, losses reported which were previously unknown at December 31, 2010 (incurred but not reported), unallocated loss expense paid related to accident years 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.

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

directly establish case reserves related to this portion of the Company's business. The Company does, however, establish additional reserves for reinsurance losses to supplement case reserves reported by the ceding companies, when considered necessary. Involuntary residual market premiums and losses are included in the property and casualty 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 dependent on the adequacy of loss reserving by these entities.

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 $6.6 million in 2010 to $13.5 million in 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 development for reinsurance, with a $2.3 million savings during 2011, is heavily dependent on the establishment of case basis and IBNR reserves by other insurance and reinsurance 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.

Our goal is to produce an overall estimate of reserves which is sufficient and as close to expected ultimate losses as possible. The $9.7 million in net savings developed during 2011 represents approximately 35% of pre-tax net loss before realized capital losses for 2011 but only 4.4% of December 31, 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, 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. 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. 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.

The table on page 11 presents the development of GAAP balance sheet insurance reserves for each year-end 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 "cumulative redundancy" represents the aggregate change in the estimates of each calendar year end reserve through December 31, 2011. For example, the 2001 liability has developed 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 2010 have produced redundancies as of December 31, 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 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

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, 2011, the Company had paid $92.5 million of losses and LAE that had been incurred, but not paid, as of December 31, 2001; thus an estimated $32.0 million (26%) of losses incurred through 2001 remain unpaid as of the current financial statement date ($124.5 million incurred less $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, 2001 through December 31, 2010, as of December 31, 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.

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.

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	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

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. The Company’s fleet transportation offerings also include certain public livery risks, principally large and medium sized operators of bus fleets. In 2011, fleet transportation products generated approximately 63% of direct premium written and assumed 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, 2011, the Company’s modeled estimate of its largest zonal exposure to a PML from a single event is approximately 16% of consolidated surplus before state and federal tax credits and reinstatement premiums which would reduce the impact to approximately 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.

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. 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.

	2011		2010

State and municipal obligations	31.7	%	33.0	%
Corporate securities	15.4		14.3
U.S. government obligations	12.2		10.8
Short-term and money markets	14.3		7.8
Residential mortgage-backed securities	3.6		6.3
Foreign government obligations	3.6		3.4
Commercial mortgage-backed securities	1.9		2.5
Government sponsored entities	0.1		0.5
Total fixed maturities	82.8		78.6
Equity securities	8.0		8.1
Limited partnerships (equity basis)	9.2		13.3
	100.0	%	100.0	%

Fixed maturity and short-term securities comprised 77.6% of the market value of the Company’s total invested assets at December 31, 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 was $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, 2011, investment grade bonds and short-term instruments held by insurance subsidiaries equaled 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 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.

The market value of the consolidated fixed maturity portfolio was $.5 million greater than cost at December 31, 2011, before income taxes, which compares to a $3.0 million unrealized gain at December 31, 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. In 2011, the net effect of OTTI adjustments to fixed maturity securities was $.6 million with securities owned at year end having a $.1 million non credit related loss treated as unrealized. In 2010, there were no OTTI adjustments to fixed maturity securities. The current net unrealized gain consists of $3.7 million of gross unrealized gains and $3.2 million of gross unrealized losses.

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 13.8% of the market value of the consolidated investment portfolio at December 31, 2011, but only 8.0% of the related adjusted cost basis, as long-term holdings have appreciated significantly. The Company’s equity securities portfolio consists of over 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 $3.3 million at December 31, 2011 (.6% of total 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 $32.8 million pre-tax unrealized gain at the current year end using original cost and over $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 has 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. Sales of equity securities during 2011 generated both gains and losses but netted to a realized gain of $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, decreased investment gains from equity securities by 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 were $40.4 million, before tax at December 31, 2011 compared to $49.2 million at December 31, 2010. The current net unrealized gain consists of $41.7 million of gross unrealized gains and $1.3 million of gross unrealized losses.

For several years, the Company has invested in various limited partnerships engaged in securities trading activities, real estate development 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, 2011, the aggregate original investment in the limited partnerships was $30.0 million and the aggregate carrying value was $54.7 million.

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

The Company follows the equity method of accounting for 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.

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 at historically low levels during 2011. As a result, pre-tax net investment income decreased $.6 million, or 5% and after tax income decreased $.5 million, or 6% during 2011. A comparison of consolidated investment yields, before consideration of investment management expenses, is as follows:

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 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 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.

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.

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.

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 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 63% of the outstanding shares of voting Class A common stock and 33% of the outstanding shares of non-voting Class B common stock. These parties effectively control the 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 has not experienced any significant reinsurance losses for 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”, 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 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

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 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 result in a commensurate decline in the Company’s shareholders 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.

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, 2011, there were approximately 400 record holders of Class A Common Stock and approximately 1,000 record holders of Class B Common Stock.

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.

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

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

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

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

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

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

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

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

Cash dividends per share 2		1.00			2.25			1.00			1.00			1.65

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

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

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

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

Book value per share 1		21.49			24.90			25.31			22.32			24.98

Underwriting ratios 4

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

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

Combined		118.3	%		99.0	%		90.6	%		94.4	%		91.1	%

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 2011, cash flow from operations totaled $54.3 million compared to $49.5 million in 2010. This comparative increase in operating cash flow resulted from increases in net premiums collected and lower federal tax payments largely offset by corresponding increases in losses paid in 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 decreased from 4.5 to 3.1 years during 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, 2011 included $85.4 million in short-term and cash equivalent investments which are readily convertible to cash without market penalty and an additional $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 2011 equaled approximately 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, 2011, $84.7 million, or 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 $30 million unsecured line of credit and has $10.0 million of drawings outstanding on this line at December 31, 2011, the proceeds of which were used principally for treasury stock repurchases, dividend payments and other corporate expenditures.

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.

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.

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.

The Company produced an overall savings on the handling of 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.

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.

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.

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.

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

	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

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

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

									Cash
	Class A				Class B				Dividends
	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
Third Quarter		24.49		20.00		25.65		20.63		.25
Second Quarter		25.75		19.71		26.35		20.00		.25
First Quarter		26.52		20.88		26.64		22.42		.50

		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

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

2010	$	98,381	$	(12,720	)		(12.9	%)
2009		32,174		169			.5	%
2008		27,486		(1,370	)		(5.0	%)
2007		11,522		(1,652	)		(14.3	%)
2006		5,259		1,910			36.3	%
2005 & prior		43,807		3,967			9.1	%

	$	218,629	$	(9,696	)		(4.4	%)

	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