Well, I guess I will have to defer to you. In general, I never paid attention to0 how my husband cradled or held my two boys. And likely, they were on his lap and not his knee. And I never thought about it at all for myself. My head doesn't go there. And most parents don't.
Erect penis with baby on it, odd. And pinching nipples, odd. Think both are fine to set a boundary about regardless of his reaction.
I don't know if you are overly paranoid and that does happen. OR if he is indeed setting of legit warning bells for you. I agree that your only option is to speak to him. I am not thrilled with any parents drinking 'too much' around their kids. That is a good starting point if this is a trigger to your feeling like he is inappropriate.
I also agree thought that your number one priority is your child's safety. Do you have much by the way of family support?
Sounds to me like you have a right to be concerned. He may not be meaning to be inappropriate but he is coming off that way. The peck on the lips not a big deal. However, him holding her in the way you say he is and the pinching nipples is not ok. A father should teach their daughter that this behavior is wrong to help protect her from others who maybe dangerous.
Have you tried speaking to him? Is there anything else that is concerning you? Does he watch your daughter on his own at all?
He is "legally her father," what does that mean? Does he pay for the kids' upkeep? Do you live together? If you went away with the kids, would he have the right to get you to move back? Have you ever had any documents written by a lawyer that you have both signed that talk about child care, child support, and whether or not you can take the kids away?
There is nothing wrong with a parent holding a child in his lap. But you clearly think he is doing stuff he should not. "Too affectionate" when drinking (why are you and the kids even around him when he is drinking?) and pinching the nipples do not sound desirable, even if he also pinches his own nipples.
Are you putting up with this behavior because you have nowhere else to go? If he is not your husband, you do not owe him contact with the children, unless he has some specific legal right.
I'm an American and I would not be troubled by a parent kissing a child on the lips (a peck, not a passionate seeming kiss), from a sexual point of view (although I would not want anyone to be kissing my 14-month old on the lips for fear of cold viruses, etc.) But I would have a real problem with someone who has "morning wood" at that moment, placing the child on his crotch.