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 December 31, 1999 Commission File No. 0-3681

MERCURY GENERAL CORPORATION
(Exact name of registrant as specified in its charter)

               California                         95-221-1612
      (State or other jurisdiction              (I.R.S. Employer
      of incorporation or organization)         Identification No.)


4484 Wilshire Boulevard, Los Angeles, California          90010
     (Address of principal executive offices)           (Zip Code)

Registrant's telephone number, including area code: (323)937-1060

Securities registered pursuant to Section 12(b) of the Act

Title of Class                        Name of Exchange on Which Registered
--------------                      -----------------------------------------
 Common Stock                                   New York Stock Exchange

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

NONE

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 period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X 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. [_]

The aggregate market value of the Registrant's voting stock held by non-affiliates of the Registrant at March 15, 2000, was approximately $586,059,802 (based upon the closing sales price on the New York Stock Exchange for such date, as reported by the Wall Street Journal).

At March 15, 2000, the Registrant had issued and outstanding an aggregate of 54,116,423 shares of its Common Stock.

Documents Incorporated by Reference

Portions of the definitive proxy statement for the Annual Meeting of Shareholders of Registrant to be held on May 10, 2000 are incorporated herein by reference into Part III hereof.


Item 1. Business

General

Mercury General Corporation ("Mercury General") and its subsidiaries (collectively, "the Company") are engaged primarily in writing all risk classifications of automobile insurance in a number of states, principally California. During 1999, private passenger automobile insurance and commercial automobile insurance accounted for 91.9% and 3.7%, respectively, of the total Company's direct premiums written. The percentage of direct automobile insurance premiums written during 1999 by state was 92.9% in California, 2.5% in Florida, 1.6% in Oklahoma, 1.0% in Illinois, 1.0% in Texas, and 1.0% in Georgia. The Company also writes homeowners insurance, mechanical breakdown insurance, commercial and dwelling fire insurance and commercial property insurance. The non-automobile lines of insurance accounted for 4.4% of direct written premiums in 1999, of which approximately 35% was in commercial lines.

The Company offers automobile policyholders the following types of coverage: bodily injury liability, underinsured and uninsured motorist, property damage liability, comprehensive, collision and other hazards specified in the policy. The Company's published maximum limits of liability for bodily injury are $250,000 per person, $500,000 per accident and, for property damage, $250,000 per accident. Subject to special underwriting approval, the combined policy limits may be as high as $1,000,000 for vehicles written under the Company's commercial automobile plan. However, under the majority of the Company's automobile policies, the limits of liability are equal to or less than $100,000 per person, $300,000 per accident and $50,000 for property damage.

In 1999, A.M. Best & Co. ("A.M. Best") assigned a rating of A+ (Superior) to all of the Company's insurance subsidiaries except American Mercury Insurance Company ("AMIC") and American Mercury Lloyds Insurance Company ("AML"). This is the second highest of the fifteen rating categories in the A.M. Best rating system, which range from A++ (Superior) to F (In Liquidation). AMIC and AML, which accounted for approximately 5% of the Company's 1999 net written premiums, were rated A-(Excellent) in 1999 by A.M. Best.

The principal executive offices of Mercury General are located in Los Angeles, California. The home office of its California insurance subsidiaries and the Company's computer and operations center is located in Brea, California. The Company maintains branch offices in a number of locations in California as well as a branch office in Clearwater, Florida. The non-California insurance subsidiaries maintain offices in Vernon Hills, Illinois, Atlanta, Georgia and Oklahoma City, Oklahoma. The Company also maintains offices in Austin, Dallas, Fort Worth, Houston and San Antonio Texas, for a Texas insurance agency that it controls (See Organization). The Company has approximately 2,500 employees.

Organization

Mercury General, an insurance holding company, is the parent of Mercury Casualty Company ("Mercury Casualty"), a California automobile insurer founded in 1961 by George Joseph, its Chief Executive Officer. Its insurance operations in California are conducted through three California insurance company subsidiaries, Mercury Casualty, Mercury Insurance Company ("Mercury Insurance"), and California Automobile Insurance Company. Two subsidiaries, Mercury Insurance Company of Georgia and Mercury Insurance Company of Illinois, received authority in late 1989

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to write automobile insurance in those two states. In 1992, Mercury Indemnity Company of Georgia and Mercury Indemnity Company of Illinois were formed to write preferred risk automobile insurance in those two states. Through the Company's first acquisition in December 1996, three additional subsidiaries were added to the group: American Fidelity Insurance Company, domiciled in Oklahoma; Cimarron Insurance Company, domiciled in Kansas; and AFI Management Company, Inc., a Texas corporation which serves as the attorney-in-fact for American Fidelity Lloyds Insurance Company, a Texas insurer. Accordingly, their operations are included in the consolidated financial statements of the Company effective December 1, 1996. During 1997, the names of American Fidelity Insurance Company and American Fidelity Lloyds Insurance Company were changed to American Mercury Insurance Company and American Mercury Lloyds Insurance Company, respectively. In June 1998, Cimarron Insurance Company was sold for cash. Cimarron's results, which are not material to the Company's operations, are included in the Company's 1998 operating results up to the sale date.

In December 1999, the Company completed a transaction that, in effect, transferred control of Concord Insurance Services, Inc. ("Concord"), a Texas insurance agency headquartered in Houston, Texas, to the Company. The effective date of the transaction was October 31, 1999. Concord's results of operations, which are not material to the Company, are included in the consolidated financial statements of the Company effective October 31, 1999.

Mercury General furnishes management services to its California, Georgia, Illinois and Oklahoma subsidiaries. Mercury General, its subsidiaries, AML and Concord, are referred to as the "Company" unless the context indicates otherwise. Mercury General Corporation individually is referred to as "Mercury General." The term "California Companies" refers to Mercury Casualty, Mercury Insurance and California Automobile Insurance Company.

Underwriting

The Company sets its own automobile insurance premium rates, subject to rating regulations issued by the Insurance Commissioners of the applicable states. Automobile insurance rates on voluntary business in California have been subject to prior approval by the California Department of Insurance ("DOI") since November 1989. The Company uses its own extensive data base to establish rates and classifications. The California DOI has in effect rating factor regulations that influence the weight the Company ascribes to various classifications of data.

At December 31, 1999, "good drivers" (as defined by the California Insurance Code) accounted for approximately 74% of all voluntary private passenger automobile policies in force in California, while the higher risk categories accounted for approximately 26%. The renewal rate in California (the rate of acceptance of offers to renew) averages approximately 95%.

In October 1998, the Company began offering a monthly pay policy through its California Automobile Insurance Company subsidiary targeted at higher risk drivers who do not fall into existing risk classifications. This business accounts for less than 2% of the total voluntary private passenger automobile policies in-force in California.

The Company's Oklahoma and Texas private passenger automobile business in force, underwritten through AMI, is primarily standard and preferred risks. AMI began offering a non-standard policy during 1998 in Texas. The amount of non-standard policies in force at December 31, 1999 was insignificant.

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The Company's Florida private passenger automobile business in force, underwritten by Mercury Casualty Company, is primarily standard and preferred risks. In December 1999, the Company began offering homeowners insurance to Florida residents. The amount of Florida homeowners policies in force at December 31, 1999 was not significant.

Production and Servicing of Business

The Company sells its policies through more than 1,800 independent agents, of which approximately 900 are located in California, approximately 300 are located in Florida and approximately 590 others represent AMI in Oklahoma and Texas. Approximately half of the agents in California have represented the Company for more than ten years. The agents, most of whom also represent one or more competing insurance companies, are independent contractors selected and appointed by the Company.

One agency produced approximately 19%, 19% and 18% during 1999, 1998 and 1997, respectively, of the Company's total direct premiums written. This agency was sold during 1998 to a large national broker. The buyer has continued producing business for the Company at levels consistent with premium levels for recent prior years. No other agent accounted for more than 2% of direct premiums written.

The Company believes that its agents' compensation is higher than the industry average. During 1999 total commissions and bonuses incurred averaged 16.9% of direct premiums written.

The Company has had in place since the fourth quarter of 1995 a newspaper and direct mail advertising program. In April 1998, the advertising program was expanded to include radio and billboard advertising. While the majority of the advertising costs are borne by the Company, a portion of these costs are borne by the Company's agents based upon the number of account leads generated by the advertising. The Company intends to continue or may even expand the current level of advertising program during the year 2000. The Company believes that its advertising program is important to create brand awareness and to remain competitive in the current insurance climate (See Competitive Conditions).

Claims

Claims operations are conducted by the Company. The claims staff in California, Georgia, Illinois, Florida and Oklahoma administers all claims and directs all legal and adjustment aspects of the claims process. The Company adjusts most claims without the assistance of outside adjusters.

Loss and Loss Adjustment Expense Reserves

The Company maintains reserves for the payment of losses and loss adjustment expenses for both reported and unreported claims. Loss reserves are estimated based upon a case-by-case evaluation of the type of claim involved and the expected development of such claim. The amount of loss reserves and loss adjustment expense reserves for unreported claims are determined on the basis of historical information by line of insurance. Inflation is reflected in the reserving process through analysis of cost trends and reviews of historical reserving results.

The ultimate liability may be greater or lower than stated loss reserves. Reserves are closely monitored and are analyzed quarterly by the Company's actuarial consultants using new

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information on reported claims and a variety of statistical techniques. The Company does not discount to a present value that portion of its loss reserves expected to be paid in future periods. The Tax Reform Act of 1986 does, however, require the Company to discount loss reserves for Federal income tax purposes.

The following table sets forth a reconciliation of beginning and ending reserves for losses and loss adjustment expenses, net of reinsurance deductions, as shown on the Company's consolidated financial statements for the periods indicated.

                                                                     Year ended December 31,
                                                             ----------------------------------------
                                                                 1999          1998            1997
                                                                 ----          ----            ----
                                                                       (Amounts in thousands)
Net reserves for losses and loss adjustment
 expenses, beginning of year.....................                $385,816       $386,270       $311,754
Incurred losses and loss adjustment expenses:
      Provision for insured events of the
         current year............................                 781,316        693,877        641,911
      Increase (decrease) in provision for
         Insured events of prior years...........                   7,787         (9,409)        12,818
                                                                  -------        -------        -------
         Total incurred losses and loss adjustment
           expenses..............................                 789,103        684,468        654,729
                                                                  -------        -------        -------
Payments:
      Losses and loss adjustment expenses attribu-
        table to insured events of the current
        year.....................................                 492,314        437,612        373,823
Losses and loss adjustment expenses attribu-
        table to insured events of prior years...                 263,805        247,310        206,390
                                                                  -------        -------        -------

        Total payments...........................                 756,119        684,922        580,213
                                                                  -------        -------        -------

Net reserves for losses and loss adjustment
 expenses at the end of the period...............                 418,800        385,816        386,270
Reinsurance recoverable .........................                  16,043         20,160         22,791
                                                                  -------        -------        -------
Gross liability at end of year...................                $434,843       $405,976       $409,061
                                                                  =======        =======        =======

The AMI purchase agreement includes an indemnification by the seller on the loss and loss adjustment expense reserves of AMI at the acquisition date, excluding the mechanical breakdown line, to avoid any impact on the Company's financial statements from any future adverse development on the acquisition date loss reserves.

Losses incurred through 1999 include approximately $0.5 million of adverse development related to acquisition date loss reserves of AMI. As per guidance provided by Financial Accounting Standards Board (FASB) release EITF D-54, the Company has recorded the effects of the reserve guarantee separately rather than netting the effect directly against the loss reserve and loss expense accounts.

The difference between the reserves reported in the Company's consolidated financial statements prepared in accordance with generally accepted accounting principles ("GAAP") and those reported in the statements filed with the Department of Insurance in accordance with

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statutory accounting principles ("SAP") is shown in the following table:

                                                                    December 31,
                                                             1999         1998          1997
                                                             ----         ----          ----
                                                                (Amounts in thousands)
Reserves reported on a SAP basis.........                  $418,800      $385,816      $386,270
Reinsurance recoverable..................                    16,043        20,160        22,791
                                                           --------      --------      --------
Reserves reported on a GAAP basis........                  $434,843      $405,976      $409,061
                                                           ========      ========      ========

Under SAP reserves are stated net of reinsurance recoverable in contrast to GAAP where reserves are stated gross of reinsurance recoverable.

The following table represents the development of loss reserves for the period 1989 through 1999. The top line of the table shows the reserves at the balance sheet date net of reinsurance recoverable for each of the indicated years. This represents the estimated amount of losses and loss adjustment expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the Company. The upper portion of the table shows the cumulative amounts paid as of successive years with respect to that reserve liability. The lower portion of the table shows the reestimated amount of the previously recorded reserves based on experience as of the end of each succeeding year, including cumulative payments made since the end of the respective year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. A redundancy (deficiency) exists when the original reserve estimate is greater (less) than the re-estimated reserves at December 31, 1999.

In evaluating the information in the table, it should be noted that each amount includes the effects of all changes in amounts for prior periods. This table does not present accident or policy year development data. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table.

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                                                                  As of December 31,
                            _______________________________________________________________________________________________
                             1989     1990    1991      1992     1993     1994     1995     1996     1997    1998     1999
                             ----     ----    ----      ----     ----     ----     ----     ----     ----    ----     ----
                                                                   (Amounts in thousands)
Net reserves for
 losses and loss
 adjustment expenses.          $291,408 $301,354 $280,157 $239,203 $214,525 $223,392 $250,990 $311,754 $386,270 $385,816 $418,800
Paid (cumulative)
 as of:
  One year later.....           167,850  181,781  151,866  135,188  143,272  145,664  167,226  206,390  247,310  263,805
  Two years later....           227,503  238,030  197,640  184,119  187,641  198,967  225,158  283,914  338,016
  Three years later..           249,371  254,884  213,824  197,371  204,606  214,403  248,894  308,867
  Four years later...           256,659  261,058  218,067  201,365  207,704  219,596  253,708
  Five years later...           259,147  263,011  220,057  202,383  209,930  220,852
  Six years later....           259,781  262,741  220,313  203,578  210,281
  Seven years later..           259,769  262,770  221,098  203,461
  Eight years later..           259,769  263,527  220,974
  Nine years later...           260,444  263,422
  Ten years later....           260,336
Net reserves re-estimated as of:
  One year later.....           269,934  285,212  230,991  204,479  204,451  216,684  247,122  324,572  376,861  393,603
  Two years later....           269,652  265,618  218,404  204,999  207,089  222,861  254,920  329,210  378,057
  Three years later..           259,635  259,624  220,620  203,452  210,838  221,744  257,958  327,749
  Four years later...           256,694  264,259  221,118  204,603  210,890  222,957  257,196
  Five years later...           260,365  264,127  221,264  203,705  211,192  221,947
  Six years later....           260,402  263,336  220,721  204,161  210,739
  Seven years later..           260,098  263,045  220,974  203,775
  Eight years later..           260,031  263,341  220,895
  Nine years later...           260,233  263,292
  Ten years later....           260,203
Net Cumulative Redundancy
  (deficiency).......           31,205   38,062   59,262   35,428    3,786    1,445   (6,206) (15,995)   8,213   (7,787)

                                                                          As of December 31,
                        ------------------------------------------------------------------------------------------------
                                                   1992     1993     1994     1995     1996    1997    1998     1999
                                                   ----     ----     ----     ----     ----    ----    ----     ----
                                                                           (Amounts in thousands)
Gross liability - end of year                    240,183  215,301  227,499  253,546  336,685  409,061  405,976  434,843
Reinsurance recoverable                             (980)    (776)  (4,107)  (2,556) (24,931) (22,791) (20,160) (16,043)
                                                 -------  -------  -------  -------  -------  -------  -------  -------
Net liability - end of year                      239,203  214,525  223,392  250,990  311,754  386,270  385,816  418,800
                                                 ======= ======== ========  ======= ========  =======  =======  =======
Gross re-estimated liability - latest            209,951  218,028  234,858  266,865  355,302  402,926  415,055
Re-estimated recoverable - latest                 (6,176)  (7,289) (12,911)  (9,669) (27,553) (24,869) (21,452)
                                                 -------  -------  -------  -------  -------  -------  -------
Net re-estimated liability - latest              203,775  210,739  221,947  257,196  327,749  378,057  393,603
                                                 =======  =======  =======  =======  =======  =======  =======
Gross cumulative redundancy (deficiency)          30,232   (2,727)  (7,359) (13,319) (18,617)   6,135   (9,079)
                                                 =======  =======  =======  =======  =======  =======  =======

For the calendar year 1998, the Company's previously estimated loss reserves produced a deficiency which was reflected in 1999 incurred losses. The Company attributes a large portion of the deficiency to an increase in the ultimate liability for bodily injury claims over what was established as a reserve on accident year 1998 and 1997 claims at calendar year-end 1998. The Company has experienced a general downward trend in the average bodily injury cost per claim. The actual decreases in average costs for the bodily injury claims for the 1998 and 1997 accident years proved to be less significant when developed through year-end 1999 than was originally projected for at year-end 1998.

For the calendar year 1997, the Company's previously estimated loss reserves produced a redundancy. The Company attributes the favorable loss development primarily to the effect of Proposition 213, a California initiative passed in November 1996 that prevents uninsured motorists, drunk drivers and fleeing felons from collecting awards for "pain and suffering." See Regulations - California Financial Responsibility Law. This new law produced an overall reduction in loss severity for calendar year 1997. In addition, a new law, effective January

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1, 1997 requiring proof of insurance before registration of a motor vehicle resulted in a much smaller pool of uninsured motorists, thereby decreasing the frequency of uninsured motorists claims. See Regulations-California Financial Responsibility Law.

For the calendar years 1995 and 1996, the Company's previously estimated loss reserves produced deficiencies. These deficiencies relate to increases in the Company's ultimate estimates for loss adjustment expenses which are based principally on the Company's actual experience. The adverse development on such reserves reflects the increases in the legal expenses of defending the Company's insureds arising from the Company's policy of aggressively defending, including litigating, exaggerated bodily injury claims arising from minimal impact automobile accidents.

For the calendar years 1989 through 1994, the Company's previously estimated loss reserves produced redundancies. The Company attributes this favorable loss development to several factors. First, the Company had completed its development of a full complement of claims personnel early in this period. Second, during 1988, the California Supreme Court reversed what was known as the "Royal Globe" doctrine, which, since 1978, had permitted third party plaintiffs to sue insurers for alleged "bad faith" in resolving claims, even when the plaintiff had voluntarily agreed to a settlement. This doctrine had placed undue pressures on claims representatives to settle legitimate disputes at unfairly high settlement amounts. After the reversal of Royal Globe, the Company believes that it has been able to achieve fairer settlements, because both parties are in a more equal bargaining position (See Third Party "Bad Faith" Legislation). Third, during the years 1988 through 1990, the volume of business written in the Assigned Risk Program expanded substantially as rates were suppressed at grossly inadequate levels. Following the California Insurance Commissioner's approval of an 85% temporary rate increase in September 1990, the volume of assigned risk business had declined by nearly 80%. Many of the claims associated with the high volume of assigned risk business in the 1988-1990 period were later found to be fraudulent or grossly exaggerated and were settled in subsequent periods for substantially less than had been initially reserved.

Operating Ratios

Loss and Expense Ratios

Loss and underwriting expense ratios are used to interpret the underwriting experience of property and casualty insurance companies. Losses and loss adjustment expenses, on a statutory basis, are stated as a percentage of premiums earned because losses occur over the life of a policy. Underwriting expenses on a statutory basis are stated as a percentage of premiums written rather than premiums earned because most underwriting expenses are incurred when policies are written and are not spread over the policy period. The statutory underwriting profit margin is the extent to which the combined loss and underwriting expense ratios are less than 100%. The Company's loss ratio, expense ratio and combined ratio, and the private passenger automobile industry combined ratio, on a statutory basis, are shown in the following table. The Company's ratios include lines of insurance other than private passenger automobile. Since these other lines represent only a small percentage of premiums written, the Company believes its ratios can be compared to the industry ratios included in the table.

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                                                     Year ended December 31,
                                    ---------------------------------------------------------
                                           1999        1998         1997      1996     1995
                                    ---------------------------------------------------------
Loss Ratio......................        66.5%         61.1%      63.5%      66.6%    67.8%
Expense Ratio...................        26.5          26.3       24.7       24.0     24.0
                                        ----          ----       ----       ----     ----
Combined Ratio..................        93.0%         87.4%      88.2%      90.6%    91.8%
                                        ====          ====       ====       ====     ====
Industry combined ratio (all
  writers) (1)..................       102.8%(2)     100.1%      99.5%     101.0%    101.3%
Industry combined ratio (excluding
  direct writers) (1)...........        N.A.          99.1%     100.1%     102.6%    102.0%


(1)      Source: A.M. Best, Aggregates & Averages (1996 through 1999), for all
         property and casualty insurance companies (private passenger automobile
         line only, after policyholder dividends).
(2)      Source:  A.M. Best, "Best's Review, January 2000," "Review Preview."

(N.A.)   Not available.

         Under generally accepted accounting principles ("GAAP"), the loss ratio

is computed in the same manner as under statutory accounting, but the expense ratio is determined by dividing underwriting expenses by net premiums earned, rather than by net premiums written. The following table sets forth the Company's loss ratio, expense ratio and combined ratio under GAAP for the last five years.

                                                            Year ended December 31,
                                              -----------------------------------------------
                                               1999       1998      1997     1996        1995
                                               ----       -----     -----    ----        ----
Loss Ratio                                     66.4%      61.0%     63.5%      66.5%     67.6%
Expense Ratio                                  26.8       26.6      25.1       24.4      24.4
                                               ----       ----      ----       ----      ----
Combined Ratio                                 93.2%      87.6%     88.6%      90.9%     92.0%
                                               ====       ====      ====       ====      ====

Premiums to Surplus Ratio

The following table shows, for the periods indicated, the insurance companies' statutory ratios of net premiums written to policyholders' surplus. While there is no statutory requirement applicable to the Company which establishes a permissible net premium writings to surplus ratio, widely recognized guidelines established by the National Association of Insurance Commissioners ("NAIC") indicate that this ratio should be no greater than 3 to 1.

                                                                     Year ended December 31,
                                                      -----------------------------------------------------------
                                                        1999        1998        1997        1996          1995
                                                        ----        ----        ----        ----          ----
                                                               (Amounts in thousands, except ratios)
Net premiums written.......................         $1,206,171   $1,144,051   $1,086,241   $795,873    $636,590
Policyholders' surplus.....................         $  853,794   $  767,223   $  679,359   $594,799    $479,114
Ratio......................................           1.4 to 1     1.5 to 1     1.6 to 1   1.3 to 1    1.3 to 1

Risk-Based Capital Requirements

In December 1993, the NAIC adopted a risk-based capital formula for casualty insurance companies which establishes recommended minimum capital requirements for casualty companies.

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The formula has been designed to capture the widely varying elements of risks undertaken by writers of different lines of insurance having differing risk characteristics, as well as writers of similar lines where differences in risk may be related to corporate structure, investment policies, reinsurance arrangements and a number of other factors. Based on the formula adopted by the NAIC, the Company has estimated the Risk-Based Capital Requirements of each of its insurance subsidiaries as of December 31, 1999. Each of the companies exceeded the highest level of minimum required capital.

Codification of Statutory Accounting Principles

The Insurance Companies prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the various state insurance departments. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (NAIC), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. As of December 31, 1999, there were no material permitted statutory accounting practices utilized by the Insurance Companies. During 1998, the NAIC approved the codification of statutory accounting practices. Codification will become effective for the year ended December 31, 2001. The Company has estimated that its total surplus, at December 31, 1999 would have increased by approximately $84 million if codified accounting rules, as currently stated, were effective. The primary items that would cause the increase are the elimination of excess of statutory reserves over statement reserves and the establishment of a net deferred tax asset.

Investments and Investment Results

The investments of the Company are made by the Company's Chief Investment Officer under the supervision of the Company's Board of Directors. The Company follows an investment policy which is regularly reviewed and revised. The Company's policy emphasizes investment grade, fixed income securities and maximization of after-tax yields. The Company does not invest with a view to achieving realized gains. However, sales of securities are undertaken, with resulting gains or losses, in order to enhance after-tax yield and keep the portfolio in line with current market conditions. Tax considerations are important in portfolio management, and have been made more so since 1986 when the alternative minimum tax was imposed on casualty companies. Changes in loss experience, growth rates and profitability produce significant changes in the Company's exposure to alternative minimum tax liability, requiring appropriate shifts in the investment asset mix between taxable bonds, tax-exempt bonds and equities in order to maximize after-tax yield. The optimum asset mix is subject to continuous review. At year-end, approximately 81% of the Company's portfolio, at market values, was invested in medium to long term, investment grade tax-exempt revenue and municipal bonds. The average Standard & Poor's rating of the Company's bond holdings was AA at December 31, 1999.

The nominal average maturity of the bond portfolio is 16.3 years at December 31, 1999, but the call-adjusted average maturity of the portfolio is shorter, approximately 11.5 years, because holdings are heavily weighted with high coupon issues which are expected to be called prior to maturity. The modified duration of the bond portfolio reflecting anticipated early calls was 7.8 years at December 31, 1999. Duration is a measure of how long it takes, on average, to receive all the cash flows produced by a bond, including reinvestment of interest. Because of its sensitivity to interest rates, it is a proxy for a bond's price volatility. The longer the duration, the greater the price volatility in relation to changes in interest rates.

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Holdings of lower than investment grade bonds constitute approximately 1% of total investments. The Company continually evaluates the recoverability of its investment holdings. When a decline in value of fixed maturities or equity securities is considered other than temporary, a loss is recognized in the Consolidated Statement of Income. During 1999, the Company realized a loss of approximately $6.0 million on one equity security where the decline in market value was considered other than temporary. Equity holdings consist primarily of perpetual preferred stocks and relatively high yielding electric utility common stocks on which dividend income is partially tax-sheltered by the 70% corporate dividend exclusion.

The following table summarizes the investment results of the Company for the five years ended December 31, 1999.

                                                                 Year ended December 31,
                                                      ------------------------------------------------------------------------
                                                         1999(1)         1998(1)         1997(1)         1996(1)       1995
                                                         ----            ----            ----            ----          ----
                                                                                (Amounts in thousands)
Averaged invested assets (includes
 short-term cash investments 2)....                  $1,595,466       $1,473,843       $1,263,167       $970,677      $828,726
Net investment income:
       Before income taxes.........                      99,374           96,169           86,812         70,180        62,964
       After income taxes..........                      89,598           87,199           77,917         63,371        57,035
Average annual return on investments:
       Before income taxes.........                         6.2%             6.5%             6.9%           7.2%          7.6%
       After income taxes..........                         5.6%             5.9%             6.2%           6.5%          6.9%
Net realized investment gains
 (losses) after income taxes.......                      (7,754)          (2,552)           3,232         (2,062)          681
Net increase (decrease) in un-
 realized gains/losses on all invest-
  ments after income taxes..........                 $  (90,667)      $    5,065       $   27,175       $ (6,271)     $ 37,960

(1) Includes AMI for the month of December 1996 and the full years 1997 through 1999.
(2) Fixed maturities and equities at cost.

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The following table sets forth the composition of the investment portfolio of the Company at the dates indicated:

                                                                             December 31,
                                               -------------------------------------------------------------------------
                                                           1999                 1998                  1997
                                                   ------------------   -------------------    -------------------
                                                    Amortized Market      Amortized Market       Amortized Market
                                                    Cost       Value      Cost       Value       Cost       Value
                                                    ----       -----      ----       -----       ----       -----
                                                                        (Amounts in thousands)
Taxable Bonds................................  $   21,461   $   20,779  $   28,339  $   29,163   $   50,096  $   50,662
Tax-Exempt State and Municipal Bonds.........   1,300,896    1,269,604   1,174,630   1,251,475    1,021,259   1,085,613
Sinking Fund Preferred Stocks................      31,408       31,671      42,471      44,270       76,239      78,711
                                               ----------   ----------  ----------  ----------   ----------  ----------
   Total Fixed Maturity Investments..........   1,353,765    1,322,054   1,245,440   1,324,908    1,147,594   1,214,986

Equity Investments incl.
 Perpetual Preferred Stocks..................     238,856      209,843     220,449     219,745      169,943     173,522
Short-term Cash Investments..................      43,568       43,568      45,992      45,992       59,740      59,740
                                               ----------   ----------  ----------  ----------   ----------  ----------

Total Investments............................  $1,636,189   $1,575,465  $1,511,881  $1,590,645   $1,377,277  $1,448,248
                                               ==========   ==========  ==========  ==========   ==========  ==========

At December 31, 1999, the Company had a net unrealized loss on all investments of $60,724,000 before income taxes.

Competitive Conditions

The property and casualty insurance industry is highly competitive. The insurance industry consists of a large number of companies, many of which operate in more than one state, offering automobile, homeowners and commercial property insurance, as well as insurance coverage in other lines. Many of the Company's competitors have larger volumes of business and greater financial resources than the Company. Based on regularly published statistical compilations, the Company in 1999 was the sixth largest writer of private passenger automobile insurance in California. All of the insurance companies having greater shares of the California market sell insurance either directly or through exclusive agents, rather than through independent agents.

The property and casualty insurance industry is highly cyclical, characterized by periods of high premium rates and shortages of underwriting capacity followed by periods of severe price competition and excess capacity. In the Company's view, the overall profitability of the California marketplace during the past several years has created a favorable environment for automobile insurance writers. Many major automobile insurers have attempted to capitalize on the favorable climate by increasing their marketing efforts and reducing rates in attempts to capture more business. The Company believes that industry wide rate reductions have contributed to the deterioration of loss ratios in 1999 (See Operating Ratios -Loss and Expense). Consequently, the Company believes that competitors will be less likely to institute rate decreases in the near future than they have been over the last few years.

Price and reputation for service are the principal means by which the Company competes with other automobile insurers. The Company believes that it has a good reputation for service,

12

and it has, historically, been among the lowest-priced insurers doing business in California according to surveys conducted by the California DOI. In addition to good service and competitive pricing, for those insurers dealing through independent agents, as the Company does, the marketing efforts of agents is a means of competition.

All rates charged by private passenger automobile insurers are subject to the prior approval of the California Insurance Commissioner. See "Regulation - Automobile Insurance Rating Factor Regulations."

The Company encounters similar competition in each state in which it operates outside California.

Reinsurance

The Company no longer maintains reinsurance for its liability coverage in California. Effective January 1, 1994, the Company terminated its liability reinsurance coverage with Employers Reinsurance Corporation ("ERC") because of rising premiums and under utilization of such coverage. The Company regularly evaluates the need for liability reinsurance.

The Company maintained property reinsurance under a treaty which was effective April 1, 1995 through December 31, 1998, with National Reinsurance Corporation, which is rated A+ by A.M. Best. The treaty provided $900,000 coverage in excess of $100,000 for each risk subject to a maximum of $2,700,000 for any one occurrence. A second layer of coverage provided an additional $1,000,000 in excess of the first $1,000,000 per risk subject to a maximum of $2,000,000 for any one occurrence. This treaty was replaced with Swiss Re effective January 1, 1999. The new treaty provides $750,000 coverage in excess of $250,000 for each risk subject to a maximum of $2,250,000 for any one occurrence. A second layer of coverage provides an additional $1,000,000 in excess of the first $1,000,000 per risk.

Effective January 1, 2000, the Company maintains property and liability excess per risk coverage, through Swiss Re for its Florida homeowners line of business. The treaty provides $200,000 coverage in excess of $100,000 for each risk subject to a maximum of $600,000 for any one occurrence. A second layer of coverage provides an additional $1,200,000 in excess of the first $300,000 per risk subject to a maximum of $1,200,000 for any one occurrence.

The Company maintains treaty reinsurance with Swiss Re, effective October 1, 1998, where risks written under personal umbrella policies are ceded to Swiss Re on a 100% quota share basis. The maximum coverage is $5 million per risk.

Prior to 1998, the Company maintained catastrophe reinsurance for property and automobile physical damage business. Effective October 1, 1998, the Company did not renew this catastrophe reinsurance. The reinsurance program was not renewed because the Company believes it has adequate capitalization to absorb catastrophe losses in these lines. The Company periodically reviews its requirements for catastrophic reinsurance particularly in areas that are prone to catastrophes such as Florida and California. In addition, the Company expects a significant reduction in its catastrophe exposure from earthquakes due to the placement, beginning in the second quarter of 1998, of earthquake risks written in conjunction with California homeowners policies, with the California Earthquake Authority (CEA). See Regulation -California Earthquake Authority.

13

ERC reinsures AMI through working layer treaties for property and casualty losses in excess of $200,000. For the years 1990 through 1996 the mechanical breakdown line of business was reinsured with Constitution Reinsurance Corporation through a quota-share treaty covering 50% to 85% of the business written depending on the year the policy incepted. For policies effective on or after January 1, 1997, AMI is retaining the full exposure. AMI has other reinsurance treaties and facultative arrangements in place for various smaller lines of business.

If the reinsurers were unable to perform their obligations under the reinsurance treaty, the Company would be required, as primary insurer, to discharge all obligations to its insureds in their entirety.

Regulation

The Company's business in California is subject to regulation and supervision by the California DOI, which has broad regulatory, supervisory and administrative powers.

The powers of the California DOI primarily include the prior approval of insurance rates and rating factors and the establishment of standards of solvency which must be met and maintained. The regulation and supervision by the California DOI are designed principally for the benefit of policyholders and not for insurance company shareholders. The California DOI conducts periodic examinations of the Company's insurance subsidiaries. The last examination conducted of the California Companies was as of December 31, 1997. The reports on the results of that examination recommended no adjustments to the statutory financial statements as filed by the Company.

The insurance subsidiaries outside California, including AMI, are subject to the regulatory powers of the insurance departments of those states. Those powers are similar to the regulatory powers in California enumerated above. Generally, the regulations relate primarily to standards of solvency and are designed for the benefit of policyholders and not for insurance company shareholders.

In California, insurance rates have required prior approval since November 1989. Georgia is also a prior approval state, while Illinois only requires that rates be filed with the Department of Insurance prior to their use. Texas, Oklahoma and Florida have a modified version of prior approval laws. In all states, the insurance code provides that rates must not be "excessive, inadequate or unfairly discriminatory."

The Georgia DOI conducted an examination of Mercury Insurance Company of Georgia and Mercury Indemnity Company of Georgia as of December 31, 1997. The reports on the results of that examination recommended no adjustments to the statutory financial statements as filed by the Company. The Illinois DOI conducted an examination of Mercury Insurance Company of Illinois and Mercury Indemnity Company of Illinois as of December 31, 1995. The reports on that audit have recommended no changes to the statutory financial statements as filed. The states of Oklahoma and Texas will also conduct periodic examinations of AMI.

The operations of the Company are dependent on the laws of the state in which it does business and changes in those laws can materially affect the revenue and expenses of the Company. The Company retains its own legislative advocates in California. The Company also makes financial contributions to officeholders and candidates. In 1999 and 1998, those

14

contributions amounted to $528,000 and $1,137,000, respectively. The Company believes in supporting the political process and intends to continue to make such contributions in amounts which it determines to be appropriate.

Insurance Guarantee Association

In 1969, the California Insurance Guarantee Association (the "Association") was created pursuant to California law to provide for payment of claims for which insolvent insurers of most casualty lines are liable but which cannot be paid out of such insurers' assets. The Company is subject to assessment by the Association for its pro-rata share of such claims based on premiums written in the particular line in the year preceding the assessment by insurers writing that line of insurance in California. Such assessments are based upon estimates of losses to be incurred in liquidating an insolvent insurer. In a particular year, the Company cannot be assessed an amount greater than 1% of its premiums written in the preceding year. There have been no assessments imposed during the past five years. Assessments are recouped through a mandated surcharge to policyholders the year after the assessment. Insurance subsidiaries in the other states are subject to the provisions of similar insurance guaranty associations. No material assessments were imposed in the last five years in those states either.

Holding Company Act

The California Companies are subject to regulation by the California DOI pursuant to the provisions of the California Insurance Holding Company System Regulatory Act (the "Holding Company Act"). Pursuant to the Holding Company Act, the California DOI may examine the affairs of each company at any time. The Holding Company Act requires disclosure of any material transactions among the companies. Certain transactions and dividends defined to be of an "extraordinary" type may not be effected if the California DOI disapproves the transaction within 30 days after notice. Such transactions include, but are not limited to, certain reinsurance transactions and sales, purchases, exchanges, loans and extensions of credit, andinvestments, in the net aggregate, involving more than the lesser of 3% of the Company's admitted assets or 25% of surplus as to policyholders, as of the preceding December 31. An extraordinary dividend is a dividend which, together with other dividends or distributions made within the preceding 12 months, exceeds the greater of 10% of the insurance company's policyholders' surplus as of the preceding December 31 or the insurance company's net income for the preceding calendar year. An insurance company is also required to notify the California DOI of any dividend after declaration, but prior to payment.

The Holding Company Act also provides that the acquisition or change of "control" of a California domiciled insurance company or of any person who controls such an insurance company cannot be consummated without the prior approval of the Insurance Commissioner. In general, a presumption of "control" arises from the ownership of voting securities and securities that are convertible into voting securities, which in the aggregate constitute 10% or more of the voting securities of a California insurance company or of a person that controls a California insurance company, such as Mercury General. A person seeking to acquire "control," directly or indirectly, of the Company must generally file with the Insurance Commissioner an application for change of control containing certain information required by statute and published regulations and provide a copy of the application to the Company. The Holding Company Act also effectively restricts the Company from consummating certain reorganizations or mergers without prior regulatory approval.

The insurance subsidiaries in Georgia, Illinois, Oklahoma and Texas are subject to holding company acts in those states, the provisions of which are substantially similar to those

15

of the Holding Company Act. Regulatory approval was obtained from California, Oklahoma and Texas before the acquisition of AMI was completed.

Assigned Risks

Automobile liability insurers in California are required to sell bodily injury liability, property damage liability, medical expense and uninsured motorist coverage to a proportionate number (based on the insurer's share of the California automobile casualty insurance market) of those drivers applying for placement as "assigned risks." Drivers seek placement as assigned risks because their driving records or other relevant characteristics, as defined by Proposition 103, make them difficult to insure in the voluntary market. During the last five years, approximately 0.6% of the direct automobile insurance premium written by the Company was for assigned risk business. In 1999, assigned risks represented 0.2% of total automobile direct premiums written and 0.3% of total automobile direct premium earned. Premium rates for assigned risk business are set by the California DOI. In October 1990, more stringent rules for gaining entry into the plan were approved, resulting in a substantial reduction in the number of assigned risks insured by the Company since 1991. Effective January 1, 1994, the California Insurance Code requires that rates established for the plan be adequate to support the plan's losses and expenses. The last rate increase approved by the Commissioner approximated 4.8% and became effective June 1, 1995. The Commissioner approved a rate decrease of 28.3% effective February 1, 1999. Even with the rate decrease, the number of assignments was less in 1999 than in 1998. The Company attributes this decrease to the competitive voluntary market.

California Automobile Insurance Low Cost Program

In 1999, California enacted a pilot low cost automobile program ("LCP") for low income good drivers in San Francisco City and County and Los Angeles County to be implemented by July 1, 2000. The program provides a low limit policy (bodily injury liability coverage of $10,000 per person and $20,000 per occurrence and property damage liability coverage of $3,000) that satisfies financial responsibility requirements, to those good drivers with income that does not exceed 150% of the federal poverty level.

The LCP is administered by the California Automobile Assigned Risk Plan ("CAARP") which is the same entity that administers the assigned risk program for California. LCP policies will be assigned to insurance companies in proportion to each insurer's share of the California private passenger automobile insurance market. In addition, the Company will be assessed an annual fee to cover the costs of administering the program. The Company is not currently able to accurately assess the volume and profitability of this business or the amount of the assessments. The LCP will expire on January 1, 2004, unless reenacted by the California legislature.

Automobile Insurance Rating Factor Regulations

Since 1989, California Proposition 103 has required that property and casualty insurance rates be approved by the Insurance Commissioner prior to their use, and that no rate be approved which is excessive, inadequate, unfairly discriminatory or otherwise in violation of the provisions of the initiative. The proposition specified three statutory factors required to be applied in "decreasing order of importance" in determining rates for private passenger automobile insurance: (1) the insured's driving safety record, (2) the number of miles the insured drives annually, and (3) the number of years of driving experience of the

16

insured. The law also gave the Insurance Commissioner discretion to adopt other factors by regulation that have a substantial relationship to risk of loss. The statute further provided that insurers are required to give at least a 20% discount to "good drivers," as defined, from rates that would otherwise be charged to such drivers and that no insurer may refuse to insure a "good driver."

The Company, and most other insurers, historically charged different rates for residents of different geographical areas within California. The rates for urban areas, particularly in Los Angeles, have been generally substantially higher than for suburban and rural areas. The Company's geographical rate differentials have been derived by actuarial analysis of the claims costs in a given area.

In September 1996, the California Insurance Commissioner issued new permanent rating factor regulations which replaced emergency regulations which have been in use since their issuance in 1989. They required all automobile insurers in California to submit new rating plans complying with the regulations in early 1997. The Company submitted its new proposed rating plan in March 11, 1997.

The Company's plan, and the new plans of most other California automobile insurers, were approved by the Department in October 1997. The Company's plan became effective October 1, 1997. The rate changes resulting from implementation of that plan have not materially affectedthe Company's competitive position or its profitability.

California Financial Responsibility Law

Effective January 1, 1997 California enacted a new law which requires proof of insurance for the registration (new or renewal) of a motor vehicle. It also provides for substantial penalties for failure to supply proof of insurance if a driver is stopped for a traffic violation. Media attention to the new law resulted in a surge of new business applications during the first half of 1997. The renewal experience of this new business has been similarto that of the Company's existing business.

In November 1996 an initiative sponsored by the California Insurance Commissioner was overwhelmingly approved by the California voters. It provides that uninsured drivers who are injured in an automobile accident are able to recover only actual, out-of-pocket medical expenses and lost wages and are not entitled to receive awards for general damages, i.e., "pain and suffering." This restriction also applies to drunk drivers and fleeing felons. The law has helped in controlling loss costs.

17

Third Party "Bad Faith" Legislation

In October 1999, California enacted legislation to restore the right of an injured party to sue the responsible party's insurance company for alleged "bad faith" in resolving a claim. Under this legislation, such a lawsuit would be permitted only if the insurance company rejected a settlement offer, and the injured party obtained a larger judgement or arbitration award against the insured party. Unlike the "Royal Glove" doctrine that had been overturned by the California Supreme Court in 1988 (see "Loss and Loss Adjustment Expense Reserves" at pg. 4), the new legislation would not permit a third party plaintiff to sue an insurer for bad faith if the plaintiff had voluntarily agreed to a settlement. In addition, there could be no "bad faith" suits for claims under $50,000, if the parties agreed to an arbitration procedure.

The new law was scheduled to take effect on January 1, 2000. In December 1999, however, referenda on this legislation qualified for the March 2000 ballot, thereby placing the laws "on hold" until after a vote on the legislation. At the election held on March 7, 2000, the California voters rejected this legislation.

New legislation or voter proposed initiatives could be enacted to reinstate third party "bad faith" lawsuits. If such legislation is enacted, it could have a significant detrimental effect on the Company's operating results. This would particularly be the case if the Company had difficulty in implementing rate increases to compensate for increased loss costs.

California Earthquake Authority

The California Earthquake Authority (CEA) is a Quasi-Governmental organization that was established to provide a market for earthquake coverage to California homeowners. During the second quarter of 1998, the Company began placing all new and renewal earthquake coverage offered with its homeowners policy through the California Earthquake Authority. The Company receives a small fee for placing business with the CEA.

Upon the occurrence of a major seismic event, the CEA has the ability to assess participating companies for losses. These assessments are made after CEA capital has been expended and are based upon each company's participation percentage multiplied by the amount of the total assessment. Based upon information provided by the CEA, the Company's maximum total exposure to CEA assessments at October 28, 1999, is approximately $11.5 million.

Item 2. Properties

The home office of the California insurance subsidiaries and the Company's computer facilities are located in Brea, California in an 80,000 square foot office building owned by the Company.

Since December 1986, Mercury General's executive offices are located in a 36,000 square foot office building in Los Angeles, California, owned by Mercury Casualty. The Company occupies approximately 95% of the building and leases the remaining office space to others.

In October 1992, the Company purchased a 158,000 square foot office building in Brea, California. The Company occupies approximately 81% of the facility and leases the remaining office space to others.

The Company leases all of its other office space. Office location is not material to the Company's operations, and the Company anticipates no difficulty in extending these leases

18

or obtaining comparable office space.

Item 3. Legal Proceedings

The Company is, from time to time, named as a defendant in various lawsuits incidental to its insurance business. In most of these actions, plaintiffs assert claims for punitive damages which are not insurable under California judicial decisions. The Company vigorously defends these actions, unless a reasonable settlement appears appropriate. The Company believes that adverse results, if any, in the actions currently pending should not have a material effect on the Company's operations or financial position.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders by the Company during the fourth quarter of the fiscal year covered by this report.

EXECUTIVE OFFICERS OF THE COMPANY

The following table sets forth certain information concerning the executive officers of the Company as of March 16, 2000:

Name                  Age             Position
----                  ---             --------
George Joseph          78     Chairman of the Board and Chief
                              Executive Officer
Michael D. Curtius     49     President and Chief Operating Officer
Cooper Blanton, Jr.    73     Executive Vice President
Bruce E. Norman        51     Senior Vice President in charge of
                              Marketing
Joanna Y. Moore        44     Vice President and Chief Claims Officer
Kenneth G. Kitzmiller  53     Vice President in charge of Underwriting
Gabriel Tirador        35     Vice President and Chief Financial Officer
Judy A. Walters        53     Vice President - Corporate Affairs and  Secretary
Peter R. Simon         40     Vice President - Information Systems

Mr. Joseph, Chief Executive Officer of the Company and Chairman of its Board of Directors, has served in those capacities since 1961. Mr. Joseph has more than 45 years experience in the property and casualty insurance business.

Mr. Curtius, President and Chief Operating Officer, has been employed by the Company since 1977. In October 1987, Mr. Curtius was named Vice President and Chief Claims Officer, and in August 1991 he was appointed Executive Vice President. He was elected President and Chief Operating Officer of Mercury General and the California Companies in May 1995 and elected to the Board of Directors of Mercury General and the California Companies in 1996. In December of 1996 he was appointed Vice Chairman of AMIC. Mr. Curtius has over 20 years of experience in the insurance industry.

Mr. Blanton, Executive Vice President, joined the Company in 1966 and supervised its underwriting activities from 1967 until September 1995. He was appointed Executive Vice President of Mercury Casualty and Mercury Insurance in 1983 and was named Executive Vice President of Mercury General in 1985. In May 1995 he was named President of the Georgia and Illinois insurance company subsidiaries and in February 1996 he was elected to the Board of

19

Directors of those companies. In January 1999 he was named Chairman of the Board of AMIC. Mr. Blanton has over 40 years of experience in underwriting and other aspects of the property and casualty insurance business.

Mr. Norman, Senior Vice President in charge of Marketing, has been employed by the Company since 1971. Mr. Norman was named to this position in February 1999, and has been a Vice President since October 1985 and a Vice President of Mercury Casualty since 1983. Mr. Norman has supervised the selection and training of agents and managed relations between agents and the Company since 1977. In February 1996 he was elected to the Board of Directors of the California Companies.

Ms. Moore, Vice President & Chief Claims Officer, joined the Company in the claims department in March 1981. She was named Vice President of Claims of Mercury General in August 1991 and has held her present position since July 1995.

Mr. Kitzmiller, Vice President in charge of Underwriting, has been employed by the Company in the underwriting department since 1972. In August 1991 he was appointed Vice President of Underwriting of Mercury General and has supervised the underwriting activities of the Company since early 1996.

Mr. Tirador, Vice President and Chief Financial Officer, served as the Company's assistant controller from March 1994 to December 1996. During January 1997 to February 1998 he served as the Vice President and Controller of the Automobile Club of Southern California. He rejoined the Company in February 1998 as Vice President and Chief Financial Officer. Mr. Tirador has over thirteen years experience in the property and casualty insurance industry and is a Certified Public Accountant.

Ms. Walters has been employed by the Company since 1967, and has served as its Secretary since 1982. Ms. Walters was named Vice President - Corporate Affairs in June 1998.

Mr. Simon has been employed by the Company since 1980. He was named Vice President of Information Systems in December 1999.

PART II

Item 5. Market for the Registrant's Common Equity and Related Security Holder

Matters

Price Range of Common Stock

The common stock is traded on the New York Stock Exchange (symbol: MCY). The following table shows the high and low sales prices per share in each quarter during the past two years as reported in the consolidated transaction reporting system.

1998                                               High        Low
                                                   ----        ---

     1st Quarter..............................   $63.625    $46.000
     2nd Quarter..............................   $66.313    $58.250
     3rd Quarter..............................   $69.438    $36.563
     4th Quarter..............................   $45.625    $33.250

                              20

1999                                             High       Low
                                                 ----       ---

     1st Quarter..............................   $45.500    $32.938
     2nd Quarter..............................   $39.625    $31.938
     3rd Quarter..............................   $35.938    $26.750
     4th Quarter..............................   $28.188    $21.063

2000

1st Quarter (January 1 - March 15)....... $24.938 $21.063

Dividends

Following the public offering of its common stock in November 1985, the Company has paid regular quarterly dividends on its common stock. During 1999 and 1998, the Company paid dividends on its common stock of $0.84 per share and $0.70 per share, respectively. On January 28, 2000, the Board of Directors declared a $.24 quarterly dividend payable on March 30, 2000 to stockholders of record on March 15, 2000.

The common stock dividend rate has been increased sixteen times since dividends were initiated in January, 1986, at an annual rate of $0.05, adjusted for the two-for-one stock splits in September 1992 and September 1997. For financial statement purposes, the Company records dividends on the declaration date. The Company expects to continue the payment of quarterly dividends. The continued payment and amount of cash dividends will depend upon, among other factors, the Company's operating results, overall financial condition, capital requirements and general business conditions.

As a holding company, Mercury General is largely dependent upon dividends from its subsidiaries to pay dividends to its shareholders. These subsidiaries are subject to state laws that restrict their ability to distribute dividends. The state laws permit a casualty insurance company to pay dividends and advances within any 12-month period, without any prior regulatory approval, in an amount up to the greater of 10% of statutory earned surplus at the preceding December 31, or net income for the calendar year preceding the date the dividend is paid. Under this test, the direct insurance subsidiaries of the Company are entitled to pay dividends to Mercury General during 2000 of up to approximately $101 million. See Note 10 of Notes to Consolidated Financial Statements and "Business -- Regulation -- Holding Company Act."

Shareholders of Record

The approximate number of holders of record of the Company's common stock as of March 15, 2000 was 287. The approximate number of beneficial holders as of March 15, 2000 was 9,224 according to the Bank of New York, the Company's transfer agent.

21

Item 6. Selected Consolidated Financial Data

                                                              Year ended December 31,
                                            ---------------------------------------------------------
                                               1999         1998        1997        1996        1995
                                               ----         ----        ----        ----        ----
                                               (Amounts in thousands, except per share data)
Income Data:
Premiums earned........................     $1,188,307  $1,121,584   $1,031,280  $754,724    $616,326
Net investment income..................         99,374      96,169       86,812    70,180      62,964
Realized investment gains(losses)......        (11,929)     (3,926)       4,973    (3,173)      1,048
Realized gain from sale of
  subsidiary...........................           --         2,586         --         --          --
Other..................................          4,924       5,710        4,881     3,233       3,341
                                            ----------  ----------   ----------  --------    --------

         Total Revenues................      1,280,676   1,222,123    1,127,946   824,964     683,679
                                            ----------  ----------   ----------  --------    --------
Losses and loss adjustment
  expenses.............................        789,103     684,468      654,729   501,858     416,556
Policy acquisition costs...............        267,399     252,592      224,883   160,019     128,743
Other operating expenses...............         50,675      44,941       33,579    24,493      22,017
Interest...............................          4,960       4,842        4,976     2,004       2,040
                                            ----------  ----------   ----------  --------    --------
         Total Expenses................      1,112,137     986,843      918,167   688,374     569,356
                                            ----------  ----------   ----------  --------    --------
Income before income taxes.............        168,539     235,280      209,779   136,590     114,323
Income taxes...........................         34,830      57,754       53,473    30,826      24,022
                                            ----------  ----------   ----------  --------    --------
Net Income.............................     $  133,709  $  177,526   $  156,306  $105,764    $ 90,301
                                            ==========  ==========   ==========  ========    ========

Per Share Data:
Basic earnings per share *.............     $     2.45  $     3.23   $     2.84  $   1.93    $   1.65
                                            ==========  ==========   ==========  ========    ========
Diluted earnings per share *...........     $     2.44  $     3.21   $     2.82  $   1.92    $   1.65
                                            ==========  ==========   ==========  ========    ========
Dividends paid *.......................     $      .84  $      .70   $      .58  $    .48    $    .40
                                            ==========  ==========   ==========  ========    ========

                                                                    December 31,
                                            ----------------------------------------------------------
                                               1999         1998        1997        1996        1995
                                               ----         ----        ----        ----        ----
                                                 (Amounts in thousands, except per share data)
Balance Sheet Data:
Total investments..................         $1,575,465  $1,590,645   $1,448,248  $1,168,287 $  923,194
Premiums receivable................            115,654     107,950      104,216      83,748     58,902
Total assets.......................          1,906,367   1,877,025    1,725,532   1,419,927  1,081,656
Unpaid losses and loss adjustment
 expenses..........................            434,843     405,976      409,061     336,685    253,546
Unearned premiums..................            340,846     327,129      309,376     260,878    168,404
Notes payable......................             92,000      78,000       75,000      75,000     25,000
Deferred income tax liability
 (asset)...........................            (28,541)     22,639       19,722       6,349     10,158
Shareholders' equity...............            909,591     917,375      799,592     641,222    565,188
Book value per share*..............              16.73       16.80        14.51       11.69      10.34

*Adjusted for a two-for-one stock split effective September 1997.


22

Item 7. Management's Discussion and Analysis of Financial Condition and Results

of Operations

Overview

The operating results of property and casualty insurance companies are subject to significant fluctuations from quarter-to-quarter and from year-to- year due to the effect of competition on pricing, the frequency and severity of losses, including the effect of natural disasters on losses, general economic conditions, the general regulatory environment in those states in which an insurer operates, state regulation of premium rates and other factors such as changes in tax laws. The property and casualty industry has been highly cyclical, with periods of high premium rates and shortages of underwriting capacity followed by periods of severe price competition and excess capacity.

The Company operates primarily in the state of California, which was the only state it produced business in prior to 1990. The Company expanded its operations into Georgia and Illinois in 1990. With the acquisition of American Fidelity Insurance Group (AFI)in December 1996, now American Mercury Insurance Group (AMI), the Company expanded into the states of Oklahoma and Texas. The Company further expanded its operations into the state of Florida during 1998.

During 1999, approximately 92% of the Company's direct premiums written, including AMI, were derived from California.

In California, as in various other states, all property and casualty rates must be approved by the Insurance Commissioner before they can be used.

In February 1994, the California Insurance Commissioner approved new rates which were designed to improve the Company's competitive position for new insureds. These rate changes, which became effective on May 1, 1994, provided for decreases in premium rates for new insureds. Several rate modifications were approved and made effective subsequent to May 1, 1994. A rate change made April 1, 1998, reduced rates by approximately 7% and was primarily made to improve Mercury's competitive position in the marketplace. Except for the April 1, 1998 rate change, the rate changes made over the last several years have been substantially revenue-neutral overall, with physical damage rates being increased and bodily injury liability rates decreased. The rate change made effective May 1, 1994 resulted in a substantial increase in new business being submitted to the Company. The subsequent rate modifications have allowed the Company to maintain growth in policy count. Since March 31, 1994, Private Passenger Automobile ("PPA") policies in force in California have increased from approximately 300,000 to 775,000 at December 31, 1999, an annual rate of increase of approximately 18%. Policy count growth for the year 1999 was at a 4% rate reflecting increased competition in the marketplace.

In September 1996, the California Insurance Commissioner issued new permanent rating factor regulations designed to implement the requirements that automobile insurance rates be determined by (1) driving safety record, (2) years of driving experience, (3) miles driven per year and (4) whatever optional factors are determined by the Insurance Commissioner to have a substantial relationship to the risk of loss and adopted by regulation. The law further requires that each of the four factors be applied in decreasing order of importance.

The Company submitted a proposed rating plan in response to these regulations in March 1997. The Company's plan was approved by the California DOI and became effective October 1,

23

1997. Although the rate changes produced some minor dislocations, implementation of the new plan has not materially changed the Company's overall competitive position or its profitability.

Results of Operations

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Premiums earned in 1999 of $1,188.3 million increased 5.9% and net premiums written in 1999 of $1,206.2 million increased 5.4% over amounts recorded in 1998. These premium increases were principally attributable to larger Florida private passenger automobile insurance volume, premiums from the California non-standard automobile policy introduced in late 1998 and sales of California homeowners insurance. The Company's core California private passenger automobile insurance lines achieved only modest premium growth, entirely attributable to a larger policy count, and AMI experienced a decline in its premium volume.

The California private passenger automobile insurance marketplace continues to be extremely competitive which has placed downward pressure on rates. In April 1998, the Company reduced its average premium rate by 7%. Since 1999 was the first full year with the rate decrease in effect, average 1999 rates were lower than average 1998 rates. The Company has continued to increase its marketing efforts for both name recognition and lead generation purposes. Total amounts spent on advertising efforts during 1999 exceeded 1998 expenditures by approximately 70%. The Company believes that its advertising program is important to create brand awareness and to remain competitive in the current insurance climate.

The GAAP loss ratio in 1999 (loss and loss adjustment expenses related to premiums earned) was 66.4% compared with 61.0% in 1998. The less favorable loss ratio is primarily related to the rate decrease taken in April 1998 which had its full impact on the Company's results in 1999.

The GAAP expense ratio (policy acquisition costs and other operating expenses related to premiums earned) was 26.8% in 1999 and 26.6% in 1998. The increase in the expense ratio was primarily attributable to increased expenses associated with the advertising program that were partially offset by decreased profit-related bonuses to agents.

Total losses and expenses in 1999, excluding interest expense of $5.0 million, were $1,107.2 million, resulting in an underwriting gain for the period of $81.1 million, compared with an underwriting gain of $139.6 million in 1998.

Investment income in 1999 was $99.4 million, compared with $96.2 million in 1998. The after-tax yield on average investments of $1,595.5 million (cost basis) was 5.62%, compared with 5.92% on average investments of $1,474.0 in 1998.

The effective tax rate on investment income was 9.8% in 1999, compared to 9.3% in 1998. The higher tax rate in 1999 reflects a modest shift in the mix of the Company's equity investments from non-taxable to taxable issues. The redemption of bonds acquired during higher interest periods has been a negative influence on realized yields in each of the last several years. Due to a recent rising interest rate environment, the Company expects the impact of redemptions to be less significant in future periods. Bonds matured and called in 1999 totaled $49.2 million, compared to $65.3 million in 1998. Approximately $24.1 million of bonds are expected to mature or be called in 2000. Average yields being obtained during the first quarter of 2000 are 10 to 20 basis points higher than the average yield realized during 1999.

24

Realized investment losses in 1999 were $11.9 million, compared with realized losses of $3.9 million in 1998. Included in realized losses for 1999 is a $6.0 million write-down of a preferred stock investment that became other than temporarily impaired during the third quarter of 1999.

The income tax provision of $34.8 million in 1999 represented an effective tax rate of 20.7%, compared with an effective rate of 24.5% in 1998. The lower rate in 1999 is primarily attributable to the increased proportion of investment income which consists primarily of tax-exempt interest and tax sheltered dividend income in contrast to underwriting income, which is taxed at the full corporate rate of 35%.

Net income in 1999 was $133.7 million or $2.44 per share (diluted), compared with $177.5 million or $3.21 per share (diluted), in 1998. Diluted per share results are based on 54.8 million average shares in 1999 and 55.4 million shares in 1998. Basic per share results were $2.45 in 1999 and $3.23 in 1998.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Premiums earned in 1998 of $1,121.6 million increased 8.8%, reflecting unit growth which was somewhat offset by reduced average premiums per policy. The reduction in average premium per policy was primarily the result of the 7% rate decrease taken for California business in April 1998. In addition, a large portion of the new California business written during 1997, which grew at a rate of 28.5% due to a new law requiring proof of insurance to register a car, qualified for a discount on renewal in 1998. Consequently, the average premium per policy declined in 1998 as compared to 1997.

Net premiums written in 1998 of $1,144.1 million increased 5.3% over a year earlier, continuing a growth trend which began in the second quarter of 1994. The Company increased its marketing efforts in April 1998, launching a fully integrated radio and billboard advertising program. Although the campaign has not met expectations, the Company believes continuing the advertising program is necessary in the current competitive climate. The California automobile insurance marketplace remains intensely competitive. Most of the major direct writers, who represent the Company's chief competition, have instituted one or more rate reductions over the last twenty-four months and many have significantly increased their marketing efforts.

The loss ratio in 1998 (loss and loss adjustment expenses related to premiums earned) was 61.0%, compared with 63.5% in 1997. The favorable loss experience was largely related to the effectiveness of Proposition 213, an initiative made effective January 1, 1997 which prohibits recovery of non- economic (pain and suffering) losses by uninsured motorists or drunk drivers injured in automobile accidents. The 7% rate reduction beginning on April 1, 1998 negatively affected the Company's loss ratio during a large portion of 1998. The full impact of the rate reduction on the Company's loss ratio will be felt in 1999 and succeeding periods.

The expense ratio (policy acquisition costs and other operating expenses related to premiums earned) was 26.6% in 1998 and 25.1% in 1997. The increase in the expense ratio was largely attributable to increased base commissions and profit-related bonuses to agents, expenses associated with the advertising program implemented in April 1998, and start up costs from the Company's entry into the Florida market.

25

Total losses and expenses in 1998, excluding interest expense of $4.8 million, were $982.0 million, resulting in an underwriting gain for the period of $139.6 million, compared with an underwriting gain of $118.1 million in 1997.

Investment income in 1998 was $96.2 million, compared with $86.8 million in 1997. The after-tax yield on average investments of $1,474.0 million (cost basis) was 5.92%, compared with 6.17% on average investments of a $1,263.2 million in 1997. The effective tax rate on investment income was 9.3% in 1998, compared to 10.3% in 1997. The lower tax rate in 1998 reflects the benefits derived from replacing taxable issues held in the AMI investment portfolio, when purchased in December 1996, to non-taxable issues throughout the 1997 and 1998 fiscal years. The redemption of bonds acquired during higher interest periods has been a negative influence on realized yields in each of the last several years and is expected to continue in 1999. Bonds matured and called in 1998 totaled $65.3 million, compared with $54.0 million in 1997.

Realized investment losses in 1998 were $3.9 million, compared with realized gains of $5.0 million in 1997. The gains and losses in both years were principally incurred to enhance investment income on both fixed maturities and equity securities, including perpetual preferred stocks. The losses realized in 1998 were designed to utilize expiring capital gains tax benefits.

Realized gain from sale of subsidiaries of $2.6 million was derived from the sale for cash of Cimmaron Insurance Company, an inactive company acquired in the American Mercury Insurance Group purchase made in December 1996.

The income tax provision of $57.8 million in 1998 represented an effective tax rate of 24.5%, compared with an effective rate of 25.5% in 1997. The 1997 rate is higher primarily because the Company had a large non tax- deductible charge for ESOP compensation expense in 1997 that did not occur in 1998. ESOP compensation expense is calculated based on the current market value for the Company's stock multiplied by shares allocated to employees, however, only the Company's cost basis is deductible for tax purposes. The increase in the Company's share price on the shares allocated in 1997, which had been purchased in 1994, caused the large non-deductible charge that resulted in increasing the Company's effective tax rate in 1997. This situation did not occur in 1998 as the shares allocated to employees during 1998 had a similar cost and market value.

Net income in 1998 was $177.5 million or $3.23 per share, (basic), compared with $156.3 million, or $2.84 per share, (basic), in 1997. Basic per share results are based on 55.0 million average shares in 1998 and 55.0 million average shares in 1997. Diluted per share results were $3.21 in 1998 and $2.82 in 1997.

Liquidity and Capital Resources

Net cash provided from operating activities in 1999, was $188.9 million, while funds derived from the sale, redemption or maturity of investments was $558.3 million, of which approximately 80% was represented by the sale of equity securities. The amortized cost of fixed-maturity investments increased by $108.3 million during the year. Equity investments, including perpetual preferred stocks, increased by $18.4 million at cost, while short-term cash investments decreased by $2.4 million. The amortized cost of fixed-maturities available for sale that were sold, called or matured during the year was $112.9 million.

26

The amortized cost of all investments held at market as "Available for Sale" exceeded the market value of $1,575.5 million at December 31, 1999 by $60.7 million. That unrealized loss, reflected in shareholders' equity, as Accumulated Other Comprehensive Loss, net of applicable tax effects, was $39.5 million at December 31, 1999 compared with an unrealized gain of $51.2 million at December 31, 1998. The decrease in market values since December 31, 1998 reflects principally the substantial increase in intermediate and long term interest rates during 1999.

The Company's unrestricted cash and short term investments totaled $48.6 million at December 31, 1999. Together with funds generated internally, such liquid assets are more than adequate to pay claims without the sale of long term investments.

Traditionally, it has been the Company's policy not to invest in high yield or "junk" bonds. In 1995, the Company adopted a policy to place a small proportion of its investments in the taxable sector in bonds rated lower than investment grade, but not lower than Ba by Moody's or BB by Standard & Poor's. At December 31, 1999 bond holdings rated below investment grade totaled $16.3 million at market (cost $16.6 million), or 1% of total investments. The average rating of the $1,322.4 million bond portfolio (at amortized cost) was AA, while the average effective maturity, giving effect to anticipated early call, approximates 11.5 years. The modified duration of the bond portfolio at year-end was 7.8 years, reflecting the heavy weighting of high coupon issues, including housing issues subject to sinking funds, and other issues which are pre-refunded or are expected to be called prior to their maturity. Duration measures the length of time it takes to receive all the cash flows produced by a bond, including reinvestment of interest. Because it measures four factors (maturity, coupon rate, yield and call terms) which determine sensitivity to changes in interest rates, modified duration is considered a much better indicator of price volatility than simple maturity alone. Bond holdings are broadly diversified geographically, and, within the tax-exempt sector, consist largely of high coupon revenue issues, many of which have been pre-refunded and escrowed with U.S. Treasuries. General obligation bonds of the large eastern cities have generally been avoided. Holdings in the taxable sector consist largely of senior public utility issues. Fixed-maturity investments of $1,353.8 million (amortized cost), include $31.4 million (amortized cost) of sinking fund preferreds, principally utility issues. The cost of all fixed maturities exceeded market value by $31.7 million at December 31, 1999. The only securities held which may be considered derivatives are a small amount of adjustable rate preferred stocks.

Except for Company-occupied buildings, the Company has no direct investments in real estate and no holdings of mortgages secured by commercial real estate.

Equity holdings of $209.8 million at market (cost $238.9 million), including perpetual preferred issues, are largely confined to the public utility and banking sectors and represent about 23.1% of total shareholders' equity.

The Company had outstanding debt at December 31, 1999 of $92 million. Of this amount, $75 million has been borrowed under a three year revolving credit bank loan. The loan agreement requires the Company to meet numerous affirmative and negative covenants. The proceeds of the loan were used to repay a prior loan and to acquire AMI, with the balance contributed as capital to AMI. The loan agreement may be extended annually for additional periods of one year each to maintain the three year maturity date. Due to an increase in interest rate spreads in the loan syndication market during 1999, the Company did not extend the maturity for an

27

additional one year period. The Company will reevaluate extending the current 2002 maturity date of this loan during 2000. The interest rate is variable and is optionally related to the Federal Funds rate, Bank of New York rate (prime rate) or the Eurodollar London Interbank rate (LIBOR). Based on the current effective rates, the net interest cost on the loan approximates 6.53%.

The Company also maintains a $100 million line of credit, of which $17 million was drawn on at December 31, 1999 and is due October 26, 2000. The line of credit may be used to fund the Company's stock repurchase program authorized by the Board of Directors in August 1998 as well as for general corporate purposes. Based on the current effective rates the net interest cost on the loan approximates 6.76%. The loan covenants are the same as the Company's $75 million loan discussed above. The Company plans to extend the maturity date of this loan during 2000.

Under the stock repurchase program, the Company may purchase over a one- year period up to $200 million of Mercury General's common stock. The purchases may be made from time to time in the open market at the discretion of management. The program will be funded by the sale of lower yielding tax-exempt bonds, the proceeds of the $100 million credit facility and internal cash generation. During 1999, the Company purchased 371,200 shares of the common stock in the open market at an average price of $22.73. Since the inception of the program in 1998 through December 31, 1999, the Company has purchased 951,200 shares of common stock at an average price of $34.41. The shares purchased were retired.

In March 1994, the Company's Employee Stock Ownership Plan ("the Plan") purchased 322,000 shares of Mercury General's common stock in the open market at a price of $14.875 per share, adjusted for the two-for-one stock split effective September 16, 1997. The purchases were funded by a five year term bank loan of $5.0 million to the Plan which is guaranteed by the Company. The shares have been allocated to employees over the amortization period of the loan, with the initial allocation made in December 1994. The remaining balance of the loan of $2.0 million was retired in March 1998 with the proceeds of contributions to the Plan by the Company for the year 1997, and the remaining unallocated shares were credited to employees' ESOP balances at December 31, 1997. In August 1998, the Plan purchased 115,000 shares of Mercury General's common stock in the open market at a price of $43.05 per share. The purchases were funded by a five year term bank loan of $5 million to the Plan which is guaranteed by the Company. The shares are being allocated to the employees over a five-year period, with the initial allocation made in December 1998. Since dividends on unallocated shares held by the Plan are tax deductible if they are used for debt service, as are Company contributions to the Plan, the net, after-tax interest cost to the Company for the borrowed funds used for the Plan stock purchase is less than the effective rate of interest on the loan, which, in 1999 was 6.47%.

In December 1993, the NAIC adopted a risk-based capital formula for casualty insurance companies which establishes recommended minimum capital requirements for casualty companies. The formula has been designed to capture the widely varying elements of risks undertaken by writers of different lines of insurance having differing risk characteristics, as well as writers of similar lines where differences in risk may be related to corporate structure, investment policies, reinsurance arrangements and a number of other factors. The Company has estimated the Risk-Based Capital Requirements of each of its insurance subsidiaries as of December 31, 1999. Each of the companies' policyholders' surplus exceeded the highest level of minimum required capital.

28

As of December 31, 1999, the Company had no material commitments for capital expenditures.

The California Earthquake Authority (CEA) is a Quasi-Governmental organization that was established in 1996 to provide a market for earthquake coverage to California homeowners. During the second quarter of 1998, the Company began placing all new and renewal earthquake coverage offered with its homeowners policy through the California Earthquake Authority. The Company receives a small fee for placing business with the CEA.

Upon the occurrence of a major seismic event, the CEA has the ability to assess participating companies for losses. These assessments are made after CEA capital has been expended and are based upon each company's participation percentage multiplied by the amount of the total assessment. Based upon information provided by the CEA, the Company's maximum total exposure to CEA assessments at October 28, 1999, is approximately $11.5 million.

Industry and regulatory guidelines suggest that the ratio of a property and casualty insurer's annual net premiums written to statutory policyholders' surplus should not exceed 3.0 to 1. Based on the combined surplus of all of the licensed insurance subsidiaries of $853.8 million at December 31, 1999, and net written premiums for the twelve months ended on that date of $1,206.2 million, the ratio of writings to surplus was approximately 1.4 to 1.

Statement of Financial Accounting Standards No. 133 (SFAS NO. 133) "Accounting for Derivative Instruments and Hedging Activities" became effective for fiscal years beginning after June 15, 1999. Statement of Financial Accounting Standards No. 137 (SFAS No. 137) "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133" defers the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. The company is currently evaluating the impact that it will have on the Consolidated Financial Statements. The Company will adopt this new standard on January 1, 2001.

Year 2000

The Year 2000 issue was the result of many computer programs being written using two digits rather than four digits to define the applicable year. Computer programs that had date-sensitive software might recognize a date using "00" as the year 1900 rather than the year 2000, or as no date. This could have resulted on and after January 1, 2000 in a system failure or miscalculations causing disruptions of operation.

The Company incurred total costs of approximately $600,000 to modify its systems for Year 2000 compliance. The Company did not experience material Year 2000 problems and does not expect to incur any additional costs related to Year 2000 matters.

Item 7A. Quantitative and Qualitative Disclosures about Market Risks

The Company is subject to various market risk exposures including interest rate risk and equity price risk. The following disclosure reflects estimates of future performance and economic conditions. Actual results may differ.

The Company invests its assets primarily in fixed maturity investments, which at December 31, 1999 comprised 84% of total investments at market value. Tax-exempt bonds represent 97% of the fixed maturity investments with the remaining amount consisting of sinking fund preferred stocks and taxable bonds. Equity securities, consisting primarily of preferred stocks, account for 13% of total investments at market. The remaining 3% of the investment portfolio consists

29

of highly liquid short-term investments which are primarily U.S. Treasury backed overnight repurchase agreements and short-term money market funds.

The value of the fixed maturity portfolio is subject to interest rate risk. As market interest rates decrease, the value of the portfolio goes up with the opposite holding true in rising interest rate environments. A common measure of the interest sensitivity of fixed maturity assets is modified duration, a calculation that takes maturity, coupon rate, yield and call terms to calculate an average age of the expected cash flows. The longer the duration, the more sensitive the asset is to market interest rate fluctuations.

The Company has historically invested in fixed maturity investments with a goal towards maximizing after-tax yields and holding assets to the maturity or call date. Since assets with longer maturity dates tend to produce higher current yields, the Company's investment philosophy has resulted in a portfolio with a moderate duration. This has exposed the portfolio to interest rate risk, which, in periods of rising interest rates, as was experienced during 1999, resulted in total pre-tax realized and unrealized losses of $111.1 million on the fixed maturity holdings.

During 1999, higher market interest rates also increased the duration of the Company's fixed income portfolio. Bond investments made by the Company typically have call options attached, which increase the duration of the asset as rates increase. Consequently, the average modified duration of the portfolio increased from 5.8 years at December 31, 1998 to 7.8 years at December 31, 1999. Given a hypothetical parallel increase of 100 basis points in interest rates, the fair value of the fixed maturity portfolio would decrease by approximately $103.1million.

At December 31, 1999, the Company's strategy for equity investments is a buy and hold strategy which focuses primarily on current income with a secondary focus on capital appreciation. The value of the equity investments consists of $49.4 million in common stocks and $160.4 million in non-sinking fund preferred stocks. The common stock equity assets are typically valued for future economic prospects as perceived by the market. The non-sinking fund preferred stocks are typically valued using credit spreads to U. S. Treasury benchmarks. This causes them to be comparable to fixed income securities in terms of interest rate risk.

During 1999, higher interest rates, widening credit spreads and year-end tax loss selling adversely affected non-sinking fund preferred stock values. At December 31, 1999, the duration of the Company's non-sinking fund preferred stock portfolio was 11.5 years. This implies that an upward parallel shift in the yield curve by 100 basis points would reduce the asset value at December 31, 1999 by approximately $18.4 million, everything else remaining the same.

The remainder of the equity portfolio, representing 3% of total investments at market value, consists primarily of public utility common stocks. These assets are defensive in nature and therefore have low volatility to changes in market price as measured by their Beta. Beta is a measure of a security's systematic (non-diversifiable) risk, which is the percentage change in an individual security's return for a 1% change in the return of the market. The average Beta for the Company's common stock holdings was 0.51. Based on a hypothetical 20% reduction in the overall value of the stock market, the fair value of the common stock portfolio would decrease by approximately $5.0 million.

30

Forward-looking statements

The foregoing discussion contains forward-looking statements regarding the Company, its business, prospects and results of operations that are subject to certain risks and uncertainties posed by factors and events that could cause the Company's actual business, prospects and results of operations to differ materially from the historical information contained herein and from those that may be expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, among others, the intense competition currently existing in the California automobile insurance markets, the success of the Company in integrating and profitably operating the business of AMI, and in expanding generally in Florida and other states outside of California, the impact of potential third party "bad-faith" legislation, the ability of the Company to obtain the approval of the California Insurance Commissioner for premium rate changes for private passenger automobile policies issued in California and to obtain similar rate approvals in other states and the level of investment yields obtainable in the Company's investment portfolio in comparison to recent yields, as well as the cyclical and general competitive nature of the property and casualty insurance industry and general uncertainties regarding loss reserve estimates and legislative and regulatory changes, particularly in California.

31

Quarterly Data

Summarized quarterly financial data for 1999 and 1998 is as follows (in thousands except per share data):

                                                    Quarter Ended
                                     ----------------------------------------
                                     March 31   June 30   Sept. 30    Dec. 31
                                     --------   -------   --------    -------
1999
----
Earned premiums...................   $290,518  $295,934   $300,070   $301,785
Income before income taxes........   $ 52,484  $ 41,086   $ 33,456   $ 41,513
Net income........................   $ 40,044  $ 32,961   $ 27,696   $ 33,008
Basic earnings per share..........   $    .73  $    .60   $    .51   $    .61
Diluted earnings per share........   $    .73  $    .60   $    .51   $    .60
Dividends declared per share......   $    .21  $    .21   $    .21   $    .21

1998
----
Earned premiums...................   $274,454  $278,768   $282,198   $286,164
Income before income taxes .......   $ 70,107  $ 67,966   $ 54,596   $ 42,611
Net income........................   $ 51,414  $ 50,255   $ 41,442   $ 34,415
Basic earnings per share..........   $    .93  $    .91   $    .75   $    .63
Diluted earnings per share........   $    .93  $    .90   $    .75   $    .63
Dividends declared per share......   $   .175  $   .175   $   .175   $   .175

32

Item 8. Financial Statements

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                                 Page
Independent Auditors' Report..................................................     34
Consolidated Financial Statements:
       Consolidated Balance Sheets as of December 31, 1999 and 1998...........     35
       Consolidated Statements of Income for Each of the Years in the
        Three-Year Period Ended December 31, 1999.............................     36
       Consolidated Statements of Comprehensive Income for each of the
         Years in the Three-Year Period Ended December 31, 1999...............     37
       Consolidated Statements of Shareholders' Equity for Each of the
         Years in the Three-Year Period Ended December 31, 1999...............     38
       Consolidated Statements of Cash Flows for Each of the Years in
        the Three-Year Period Ended December 31, 1999.........................     39
       Notes to Consolidated Financial Statements.............................     41

33

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Mercury General Corporation:

We have audited the accompanying consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mercury General Corporation and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles.

KPMG LLP

Los Angeles, California
February 4, 2000

34

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1999 AND 1998

AMOUNTS EXPRESSED IN THOUSANDS, except share amounts

                                    ASSETS

                                                                   1999        1998
                                                                   ----        ----
Investments:
   Fixed maturities available for sale (amortized cost
    $1,353,765 in 1999 and $1,245,440 in 1998)...........       $1,322,054  $1,324,908
   Equity securities available for sale (cost $238,856
    in 1999 and $220,449 in 1998)........................          209,843     219,745
   Short-term cash investments, at cost, which approxi-
    mates market.........................................           43,568      45,992
                                                                ----------  ----------
              Total investments..........................        1,575,465   1,590,645
Cash.....................................................            8,052       1,887
Receivables:
   Premiums receivable...................................          115,654     107,950
   Premium notes.........................................           13,375      13,739
   Accrued investment income ............................           23,815      22,356
   Other.................................................           19,235      24,884
                                                                ----------  ----------
                                                                   172,079     168,929
Deferred policy acquisition costs .......................           63,975      61,947
Fixed assets, net .......................................           34,221      31,901
Current income taxes recoverable.........................            1,796       5,895
Deferred income taxes....................................           28,541         --
Other assets.............................................           22,238      15,821
                                                                ----------  ----------
                                                                $1,906,367  $1,877,025
                                                                ==========  ==========

                                LIABILITIES AND SHAREHOLDERS' EQUITY

Losses and loss adjustment expenses......................       $  434,843  $  405,976
Unearned premiums........................................          340,846     327,129
Notes payable............................................           92,000      78,000
Loss drafts payable......................................           40,063      38,433
Accounts payable and accrued expenses....................           53,121      53,196
Deferred income taxes....................................              --       22,639
Other liabilities........................................           35,903      34,277
                                                                ----------  ----------
              Total liabilities..........................          996,776     959,650
                                                                ----------  ----------
Shareholders' equity:
   Common stock without par value or stated value.
   Authorized 70,000,000 shares; issued and outstanding
   54,425,323 shares in 1999 and 54,684,438  in 1998.....           50,963      48,830
   Accumulated other comprehensive income (loss).........          (39,471)     51,196
   Unearned ESOP compensation............................           (3,000)     (4,000)
   Retained earnings.....................................          901,099     821,349
                                                                ----------  ----------
              Total shareholders' equity.................          909,591     917,375
                                                                ----------  ----------
   Commitments and contingencies ........................
                                                                $1,906,367  $1,877,025
                                                                ==========  ==========

See accompanying notes to consolidated financial statements.

35

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three years ended December 31, 1999

Amounts expressed in thousands, except per share data

                                                       1999         1998        1997
                                                       ----         ----        ----
Revenues:
  Earned premiums...............................    $1,188,307   $1,121,584  $1,031,280
  Net investment income ........................        99,374       96,169      86,812
  Net realized investment gains (losses)........       (11,929)      (3,926)      4,973
  Net realized gain from sale of subsidiary.....           --         2,586         --
  Other.........................................         4,924        5,710       4,881
                                                    ----------   ----------  ----------

       Total revenues...........................     1,280,676    1,222,123   1,127,946
                                                    ----------   ----------  ----------

Expenses:
  Losses and loss adjustment expenses...........       789,103      684,468     654,729
  Policy acquisition costs .....................       267,399      252,592     224,883
  Other operating expenses......................        50,675       44,941      33,579
  Interest .....................................         4,960        4,842       4,976
                                                    ----------   ----------  ----------

       Total expenses...........................     1,112,137      986,843     918,167
                                                    ----------   ----------  ----------

  Income before income taxes....................       168,539      235,280     209,779

Income taxes ...................................        34,830       57,754      53,473
                                                    ----------   ----------  ----------

  Net income....................................    $  133,709   $  177,526  $  156,306
                                                    ==========   ==========  ==========

Basic earnings per share........................    $     2.45   $     3.23  $     2.84
                                                    ==========   ==========  ==========

Diluted earnings per share......................    $     2.44   $     3.21  $     2.82
                                                    ==========   ==========  ==========

See accompanying notes to consolidated financial statements.

36

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Years ended December 31, 1999

Amounts expressed in thousands

                                                              1999        1998       1997
                                                              ----        ----       ----
Net income.............................................     $133,709    $177,526   $156,306

Other comprehensive income (loss), before tax:
   Unrealized gains (losses) on securities:
      Unrealized holding gains (losses) arising
       during period...................................     (146,637)     12,397     44,185
      Less: reclassification adjustment for net
       losses (gains) included in net income...........        7,149      (4,605)    (2,377)
                                                            --------    --------   --------
      Other comprehensive income (loss),
       before tax......................................     (139,488)      7,792     41,808

Income tax expense (benefit) related to unrealized
 holding gains (losses) arising during period..........      (51,323)      4,339     15,465
Income tax expense (benefit) related to
 reclassification adjustment for (gains) losses
 included in net income................................        2,502      (1,612)      (832)
                                                            --------    --------   --------

Comprehensive income, net of tax.......................     $ 43,042    $182,591   $183,481
                                                            ========    ========   ========

See accompanying notes to consolidated financial statements

37

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Three years ended December 31, 1999

Amounts expressed in thousands

                                                              1999       1998      1997
                                                              ----       ----      ----
Common stock, beginning of year.......................     $ 48,830   $ 47,412  $ 42,644
Proceeds of stock options exercised...................          565      1,216       999
Tax benefit on sales of incentive stock
 options..............................................          152        748       401
Release of common stock by the ESOP...................         (254)       (30)    3,368
Purchase and retirement of common stock...............         (330)      (516)      --
Issuance of restricted common stock...................        2,000        --        --
                                                           --------   --------  --------
Common stock, end of year.............................       50,963     48,830    47,412
                                                           --------   --------  --------

Accumulated other comprehensive income, beginning
 of year..............................................       51,196     46,131    18,956
Net increase (decrease) in other comprehensive
 income...............................................      (90,667)     5,065    27,175
                                                           --------   --------  --------
Accumulated other comprehensive income (loss),
 end of year..........................................      (39,471)    51,196    46,131
                                                           --------   --------  --------

Unearned ESOP compensation, beginning of year.........       (4,000)      --      (2,000)
Unearned ESOP compensation relating to common
 stock purchases by ESOP..............................         --       (5,000)      --
Amortization of unearned ESOP compensation............        1,000      1,000     2,000
                                                           --------   --------  --------
Unearned ESOP compensation, end of year...............       (3,000)    (4,000)      --
                                                           --------   --------  --------

Retained earnings, beginning of year..................      821,349    706,049   581,622
Purchase and retirement of common stock...............       (8,105)   (23,775)      --
Net income............................................      133,709    177,526   156,306
Dividends paid to shareholders........................      (45,854)   (38,451)  (31,879)
                                                           --------   --------  --------
Retained earnings, end of year........................      901,099    821,349   706,049
                                                           --------   --------  --------

       Total shareholders' equity.....................     $909,591   $917,375  $799,592
                                                           ========   ========  ========

See accompanying notes to consolidated financial statements.

38

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE YEARS ENDED DECEMBER 31, 1999
Amounts expressed in thousands

                                                                      1999        1998       1997
                                                                      ----        ----       ----
Cash flows from operating activities:
   Net income..................................................    $ 133,709   $ 177,526  $ 156,306
   Adjustments to reconcile net income to net cash
    provided from operating activities:
   Increase (decrease) in unpaid losses and loss
    adjustment expenses........................................       28,867      (3,085)    72,376
   Increase in unearned premiums...............................       13,717      17,753     48,498
   Decrease (increase) in premium notes receivable.............          364        (177)    (1,167)
   Increase in premiums receivable.............................       (7,704)     (3,734)   (20,468)
   Increase in deferred policy acquisition costs...............       (2,028)     (4,683)   (10,481)
   Increase in loss drafts payable.............................        1,630       6,375      3,026
   (Decrease) increase in accrued income taxes, excluding
     deferred tax on change in unrealized gain.................        1,577      (8,957)       469
   Increase (decrease) in accounts payable and accrued
    expenses...................................................       (1,223)      2,801     17,553
   Depreciation................................................        6,896       5,444      5,157
   Net realized investment (gains) losses......................       11,929       3,926     (4,973)
   Net realized gain from sale of subsidiary...................           --      (2,586)        --
   Bond accretion, net.........................................       (5,450)     (4,146)    (2,295)
   Other, net..................................................        6,641       6,030      8,479
                                                                   ---------   ---------  ---------
           Net cash provided from operating activities.........      188,925     192,487    272,480
Cash flows from investing activities:
    Fixed maturities available for sale:
     Purchases.................................................     (215,960)   (295,723)  (362,932)
     Sales.....................................................       54,537     111,779     71,313
     Calls or maturities.......................................       58,411      84,445     72,515
    Equity securities available for sale:
     Purchases.................................................     (475,525)   (800,620)  (608,260)
     Sales.....................................................      445,330     745,275    590,155
    Proceeds from sale of subsidiary less cash
     transferred...............................................         --        11,018        --
    Concord transaction (See note 8)...........................       (3,665)        --         --
    Decrease (increase) in receivable from securities..........          613        (347)    (3,274)
    Decrease in short-term cash investments,
     net.......................................................        2,424      12,059      6,327
    Purchase of fixed assets...................................       (9,268)     (7,164)    (6,854)
    Sale of fixed assets.......................................          916         444      1,165
                                                                   ---------   ---------  ---------
           Net cash used in investing activities...............    $(142,187)  $(138,834) $(239,845)

(Continued)

39

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Continued)

                                                              1999       1998       1997
                                                              ----       ----       ----
Cash flows from financing activities:
   Additions to notes payable........................      $ 17,000   $  3,000    $    --

   Principal payments on notes payable...............        (3,000)      --           --
   Payment of American Mercury Insurance Company
    indemnification holdback.........................          --         --        (1,750)
   Dividends paid to shareholders....................       (45,854)   (38,451)    (31,879)
   Proceeds from stock options exercised.............           717      1,965       1,400
   Purchase and retirement of common stock...........        (8,436)   (24,291)        --
   Net increase (decrease) of ESOP loan..............        (1,000)     3,000      (1,000)
                                                           --------   --------    --------
            Net cash used in financing activities....       (40,573)   (54,777)    (33,229)
                                                           --------   --------    --------
   Net increase (decrease) in cash...................         6,165     (1,124)       (594)
   Cash:
     Beginning of the year...........................         1,887      3,011       3,605
                                                           --------   --------    --------
     End of the year.................................      $  8,052   $  1,887    $  3,011
                                                           ========   ========    ========

See accompanying notes to consolidated financial statements.

40

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1999 and 1998

(1) Significant Accounting Policies

Principles of Consolidation and Presentation

The Company is primarily engaged in the underwriting of private passenger automobile insurance in the state of California. In 1999 and 1998 over 90% of the net written premiums were from California.

The consolidated financial statements include the accounts of Mercury General Corporation (the Company or MGC) and its wholly-owned subsidiaries, Mercury Casualty Company, Mercury Insurance Company, California Automobile Insurance Company, California General Underwriters Insurance Company, Inc., Mercury Insurance Company of Georgia, Mercury Insurance Company of Illinois, Mercury Indemnity Company of Georgia, Mercury Indemnity Company of Illinois, American Mercury Insurance Company (AMIC), Cimarron Insurance Company, Inc., AFI Management Company, Inc. (AFIMC), and American Mercury Lloyds Insurance Company (AML). AML is not owned by MGC, but is controlled by MGC through its attorney-in -fact, AFIMC. American Mercury MGA, Inc. (AMMGA),is a wholly owned subsidiary of AMIC. The 1998 financial statements include the results of Cimarron Insurance Company through June 5, 1998, the date it was sold to an unrelated party. This sale is discussed further in Note 9. Effective October 31, 1999 the financial statements also include Concord Insurance Services, Inc., ("Concord") a Texas insurance agency controlled by MGC. Concord is discussed further in Note 8. All of the subsidiaries as a group, including AML, but excluding AFIMC, AMMGA, and Concord, are referred to as the Insurance Companies. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP) which differ in some respects from those filed in reports to insurance regulatory authorities. All significant intercompany balances and transactions have been eliminated.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant assumptions in the preparation of these consolidated financial statements relate to loss and loss adjustment expenses. Actual results could differ from those estimates.

41

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1999 and 1998

(1) Significant Accounting Policies (Continued)

Investments

Fixed maturities available for sale include those securities that management intends to hold for indefinite periods, but which may be sold in response to changes in interest rates, tax planning considerations or other aspects of asset/liability management. Fixed maturities available for sale, which include bonds and sinking fund preferred stocks, are carried at market. Short-term investments are carried at cost, which approximates market. Investments in equity securities, which include common stocks and non-redeemable preferred stocks, are carried at market.

In most cases, the market valuations were drawn from standard trade data sources. In no case were any valuations made by the Company's management. Equity holdings, including nonsinking fund preferred stocks, are, with minor exceptions, actively traded on national exchanges, and were valued at the last transaction price on the balance sheet date.

Temporary unrealized investment gains and losses on securities available for sale are credited or charged directly to shareholders' equity as accumulated other comprehensive income, net of applicable tax effects. When a decline in value of fixed maturities or equity securities is considered other than temporary, a loss is recognized in the consolidated statements of income. Realized gains and losses are included in the consolidated statements of income based upon the specific identification method. Included in realized losses for 1999 is a $6.0 millionwrite-down of a preferred stock investment that became other than temporarily impaired during the third quarter of 1999.

Fair Value of Financial Instruments

Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", and Statement of Financial Accounting Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments", require disclosure of estimated fair value information about financial instruments, for which it is practicable to estimate that value. Under Statement of Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting for Certain Investments in Debt and Equity Securities", the Company categorizes all of its investments in debt and equity securities as available for sale. Accordingly, all investments, including cash and short-term cash investments, are carried on the balance sheet at their fair value. The carrying amounts and fair values for investment securities are disclosed in Note 2 and were drawn from standard trade data sources such as market and broker quotes. The carrying value of receivables, accounts payable and other liabilities is equivalent to the estimated fair value of those items. The estimated fair value of notes payable equals their carrying value, which was based on borrowing rates currently available to the Company for bank loans with similar terms and maturities. The terms of the notes are discussed in Note 5.

42

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1999 and 1998

(1) Significant Accounting Policies (Continued)

Premium Income Recognition

Insurance premiums are recognized as income ratably over the term of the policies. Unearned premiums are computed on the monthly pro rata basis. Unearned premiums are stated gross of reinsurance deductions, with the reinsurance deduction recorded in other assets.

Net premiums written during 1999, 1998 and 1997 were $1,206,171,000, $1,144,051,000, and $1,086,241,000, respectively.

One agent produced direct premiums written of approximately 19%, 19% and 18% of the Company's total direct premiums written during 1999, 1998 and 1997, respectively. This agency was sold during 1998 to a large national broker. The buyer has continued producing business for the Company at levels consistent with recent prior years' premium levels. No other agent accounted for more than 2% of direct premiums written.

Premium Notes

Premium notes receivable represent the balance due to the Company from policyholders who elect to finance their premiums over the policy term. The Company requires both a downpayment and monthly payments as part of its financing program. Premium finance fees are charged to policyholders who elect to finance premiums. The fees are charged at rates that vary with the amount of premium financed. Premium finance fees are recognized over the term of the premium note based upon the effective yield.

Deferred Policy Acquisition Costs

Acquisition costs related to unearned premiums, which consist of commissions, premium taxes and certain other underwriting costs, which vary directly with and are directly related to the production of business, are deferred and amortized to income ratably over the terms of the policies. Deferred acquisition costs are limited to the amount which will remain after deducting from unearned premiums and anticipated investment income, the estimated losses and loss adjustment expenses and the servicing costs that will be incurred as the premiums are earned. The Company does not defer advertising expenses.

43

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1999 and 1998

(1) Significant Accounting Policies (Continued)

Losses and Loss Adjustment Expenses

The liability for losses and loss adjustment expenses is based upon the accumulation of individual case estimates for losses reported prior to the close of the accounting period, plus estimates, based upon past experience, of ultimate developed costs which may differ from case estimates and of unreported claims. The liability is stated net of anticipated salvage and subrogation recoveries. The amount of reinsurance recoverable is included in other receivables.

Estimating loss reserves is a difficult process as there are many factors that can ultimately affect the final settlement of a claim and, therefore, the reserve that is needed. Changes in the regulatory and legal environment, results of litigation, medical costs, the cost of repair materials and labor rates can all impact ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably predictable than long-tail liability claims. Management believes that the liability for losses and loss adjustment expenses is adequate to cover the ultimate net cost of losses and loss adjustment expenses incurred to date. Since the provisions are necessarily based upon estimates, the ultimate liability may be more or less than such provisions.

Depreciation

Buildings and furniture and equipment are depreciated over 30-year and 3-year to 10-year periods, respectively, on a combination of straight-line and accelerated methods. Automobiles are depreciated over 5 years, using an accelerated method.

Earnings per Share

During 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share", which requires presentation of basic and diluted earnings per share for all publicly traded companies effective for fiscal years ending after December 15, 1997. Note 15 contains the required disclosures which make up the calculation of basic and diluted earnings per share.

44

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1999 and 1998

(1) Significant Accounting Policies (Continued)

Comprehensive Income

Statement of Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting Comprehensive Income," effective for fiscal years beginning after December 15, 1997 was adopted by the Company during 1998. The Company is reporting comprehensive income for the same periods presented on the Consolidated Statements of Income. The implementation of SFAS No. 130 had no effect on the financial position or results of operations of the Company.

Segment Reporting

Statement of Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures about Segments of an Enterprise and Related Information," became effective for fiscal years beginning after December 15, 1997. SFAS 131 establishes standards for the way information about operating segments is reported in financial statements. The Company does not have any operations that require separate disclosure as operating segments.

Recently Issued Accounting Standards

Statement of Position 97-3 (SOP 97-3), "Accounting by Insurance and Other Enterprises for Insurance Related Assessments", provides guidance on the timing of recognition and measurement of liabilities for insurance related assessments. SOP 97-3 prescribes liability recognition when three conditions are met: (1) an assessment has been imposed or information available prior to the issuance of the financial statements indicates that it is probable that an assessment will be imposed, (2) the event obligating an entity to pay an imposed or probable assessment has occurred on or before the date of the financial statements and
(3) the amount of the assessment can be reasonably estimated. It is effective for financial statements with fiscal years beginning after December 15, 1998. The Company initially adopted SOP 97-3 in 1999 with no impact to the Financial Statements.

Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" is effective for financial statements beginning after December 15, 1998. SOP 98-1 requires that the cost of internally developed computer software be capitalized. The implementation of SOP 98-1 in 1999 provided less than a $.01 contribution to 1999 earnings per share (diluted).

Statement of Financial Accounting Standards No. 133 (SFAS No. 133) "Accounting for Derivative Instruments and Hedging Activities" became effective for fiscal years beginning after June 15, 1999. Statement of Financial Accounting Standards No. 137 (SFAS No. 137) "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133" defers the effective date of SFAS 133 to fiscal years beginning after June 15, 2000. The Company is currently evaluating the impact that it will have on the Consolidated Financial Statements. The Company will adopt this new Standard on January 1, 2001.

45

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1999 and 1998

(1) Significant Accounting Policies (Continued)

Income Taxes

Deferred income taxes result from temporary differences in the recognition of income and expense for tax and financial reporting purposes. The Company accounts for income taxes in accordance with SFAS 109, "Accounting for Income Taxes".

Reinsurance

In accordance with SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," the liabilities for unearned premiums and unpaid losses are stated in the accompanying consolidated financial statements before deductions for ceded reinsurance. The ceded amounts are immaterial and are carried in other assets and other receivables. Earned premiums are stated net of deductions for ceded reinsurance.

The Insurance Companies, as primary insurers, would be required to pay losses in their entirety in the event that the reinsurers were unable to discharge their obligations under the reinsurance agreements.

Statements of Cash Flows

At December 31, 1999, the cash balance includes $3,000,000 of restricted cash related to the Concord transaction (See Note 8).

Interest paid during 1999, 1998, and 1997 was $4,758,000, $4,494,000 and $5,077,000, respectively. Income taxes paid were $33,102,000 in 1999, $65,984,000 in 1998 and $52,611,000 in 1997.

The subsidiary sold in 1998 consisted primarily of invested assets totaling $8,408,000 at the sale date.

In 1998, non-cash financing activities included receipt of $276,000 of common stock tendered at market value to exercise stock options.

On December 30, 1997, the Company paid $1,750,000 of principal plus $87,500 of interest to the seller of AMI. This amount represented repayment of a one year note which secured the seller's guaranty of the collectibility of certain assets of AMI.

Stock-Based Compensation

The Company accounts for stock-based compensation under the accounting methods prescribed

46

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1999 and 1998

(1) Significant Accounting Policies (Continued)

by Accounting Principles Board (APB) Opinion No. 25, as allowed by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation"(SFAS No. 123). Disclosure of stock-based compensation determined in accordance with SFAS No. 123 is presented in Note 14.

Reclassifications

Certain reclassifications have been made to the prior year balances to conform to the current year presentation.

(2) Investments and Investment Income

A summary of net investment income is shown in the following table:

                                                           Year ended December 31,
                                                           (Amounts in thousands)
                                                       -----------------------------
                                                          1999      1998       1997
                                                          ----      ----       ----
Interest and dividends on fixed maturities........     $ 78,559   $75,602    $67,948
Dividends on equity securities....................       18,885    18,027     16,317
Interest on short-term cash investments...........        2,840     3,460      3,321
                                                        -------   -------    -------
       Total investment income....................      100,284    97,089     87,586
Investment expense................................          910       920        774
                                                       --------   -------    -------
       Net investment income......................     $ 99,374   $96,169    $86,812
                                                       ========   =======    =======

A summary of net realized investment gains (losses) is as follows:

                                                           Year ended December 31,
                                                           (Amounts in thousands)
                                                       -----------------------------
                                                          1999      1998       1997
                                                          ----      ----       ----
Net realized investment gains (losses):
       Fixed maturities..........................      $     67   $   914    $ 1,400
       Equity securities.........................       (11,996)   (4,840)     3,573
                                                       --------   -------    -------
                                                       $(11,929)  $(3,926)   $ 4,973
                                                       ========   =======    =======

47

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1999 and 1998

(2) Investments and Investment Income (Continued)

Gross gains and losses realized on the sales of investments (excluding calls and other than temporarily impaired securities) are shown below:

                                                           Year ended December 31,
                                                           (Amounts in thousands)
                                                       ------------------------------
                                                         1999       1998       1997
                                                         ----       ----       ----
Fixed maturities available for sale:
       Gross realized gains......................      $    865   $   394    $   849
       Gross realized losses.....................          (259)     (370)      (389)
                                                       --------   -------    -------
             Net.................................      $    606   $    24    $   460
                                                       ========   =======    =======

Equity securities available for sale:
       Gross realized gains......................      $  5,506   $ 9,452    $ 7,257
       Gross realized losses.....................       (11,536)  (14,166)    (3,565)
                                                       --------   -------    -------
             Net.................................      $ (6,030)  $(4,714)   $ 3,692
                                                       ========   =======    =======

A summary of the net increase (decrease) in unrealized investment gains and losses less applicable income tax expense (benefit), is as follows:

                                                          Year ended December 31,
                                                          (Amounts in thousands)
                                                       -----------------------------
                                                         1999       1998       1997
                                                         ----       ----       ----
Net increase (decrease) in net unrealized
 investment gains and losses:
       Fixed maturities available for sale........     $(111,179)  $12,076   $38,077
       Income tax expense (benefit)...............       (38,912)    4,227    13,327
                                                       ---------   -------   -------
                                                       $ (72,267)  $ 7,849   $24,750
                                                       =========   =======   =======

       Equity securities..........................     $ (28,309)  $(4,283)  $ 3,731
       Income tax expense (benefit)...............        (9,909)   (1,499)    1,306
                                                       ---------   -------   -------
                                                       $ (18,400)  $(2,784)  $ 2,425
                                                       =========   =======   =======

48

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1999 and 1998

(2) Investments and Investment Income (Continued)

Accumulated unrealized gains and losses on securities available for sale is as follows:

                                                                       December 31,
                                                                  (Amounts in thousands)
                                                                  ----------------------
                                                                     1999         1998
                                                                     ----         ----
Fixed maturities available for sale:
       Unrealized gains.......................................    $ 21,193     $ 80,651
       Unrealized losses......................................     (52,904)      (1,183)
       Tax effect.............................................      11,099      (27,814)
                                                                  --------     --------
                                                                  $(20,612)    $(51,654)
                                                                  --------     --------

Equity securities available for sale:
       Unrealized gains.......................................    $  1,817     $  5,934
       Unrealized losses......................................     (30,830)      (6,638)
       Tax effect.............................................      10,154          246
                                                                  --------     --------
                                                                  $(18,859)    $   (458)
                                                                  ========     ========

         Net unrealized investment gains (losses)
          (classified as accumulated other comprehensive
          income/(loss) on the balance sheet).................    $(39,471)    $ 51,196
                                                                  ========     ========

The amortized costs and estimated market values of investments in fixed maturities available for sale as of December 31, 1999 are as follows:

                                                              Gross       Gross     Estimated
                                                 Amortized  Unrealized  Unrealized    Market
                                                    Cost      Gains       Losses      Value
                                                 ---------  ----------  ----------  ---------
                                                            (Amounts in thousands)
U.S. Treasury securities and
  obligations of U.S. government
  corporations and agencies..............      $    8,354    $     20    $   179   $    8,195
Obligations of states and political
  subdivisions...........................       1,307,893      20,548     52,209    1,276,232
Corporate securities.....................           6,110           1        154        5,957
Redeemable preferred stock...............          31,408         624        362       31,670
                                               ----------    --------    -------   ----------
     Totals..............................      $1,353,765    $ 21,193    $52,904   $1,322,054
                                               ==========    ========    =======   ==========

49

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1999 and 1998

(2) Investments and Investment Income (Continued)

The amortized costs and estimated market values of investments in fixed maturities available for sale as of December 31, 1998 are as follows:

                                                              Gross        Gross    Estimated
                                                Amortized   Unrealized  Unrealized   Market
                                                  Cost        Gains        Losses     Value
                                                ---------   ----------  ----------  ---------
                                                           (Amounts in thousands)
U.S. Treasury securities and
  obligations of U.S. government
  corporations and agencies..............      $   10,206    $    223    $     1   $   10,428
Obligations of states and political
  subdivisions...........................       1,179,043      78,003        933    1,256,113
Public utilities.........................             881          55         --          936
Corporate securities.....................          12,839         336         14       13,161
Redeemable preferred stock...............          42,471       2,034        235       44,270
                                               ----------    -------     -------   ----------
    Totals...............................      $1,245,440    $ 80,651    $ 1,183   $1,324,908
                                               ==========    ========    =======   ==========

Traditionally, it has been the Company's policy not to invest in high yield or non-investment grade bonds. In 1995, the Company adopted a policy allowing a small percentage of its investments to be placed in bonds rated lower than investment grade, but not lower than Ba by Moody's or BB by Standard & Poor's.

At December 31, 1999 bond holdings rated below investment grade totaled approximately 1% of total investments. The average Standard and Poor's rating of the bond portfolio is AA. The amortized cost and estimated market value of fixed maturities available for sale at December 31, 1999, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

                                                                       Estimated
                                                          Amortized      Market
                                                            Cost         Value
                                                          ---------    ---------
                                                          (Amounts in thousands)
                                                          ----------------------
Fixed maturities available for sale:
   Due in one year or less ........................    $   17,480      $   17,657
   Due after one year through five years...........        21,756          22,074
   Due after five years through ten years..........        89,126          89,847
   Due after ten years.............................     1,225,403       1,192,476
                                                       ----------      ----------
                                                       $1,353,765      $1,322,054
                                                       ==========      ==========

The Company utilizes repurchase agreements for investing funds overnight. All repurchase agreements utilized require U.S. Treasury securities or obligations of U.S. government corporations or agencies as collateral.

50

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1999 and 1998

(3) Fixed Assets

A summary of fixed assets follows:

                                                         December 31,
                                                   (Amounts in thousands)
                                                   ----------------------
                                                       1999        1998
                                                       ----        ----
          Land.............................         $ 6,084     $ 6,084
          Buildings........................          22,932      22,461
          Furniture and equipment..........          40,413      33,120
          Leasehold improvements...........             565         410
                                                    -------     -------
                                                     69,994      62,075
          Less accumulated depreciation....         (35,773)    (30,174)
                                                    -------     -------
          Net fixed assets.................         $34,221     $31,901
                                                    =======     =======

(4)    Deferred Policy Acquisition Costs

Policy acquisition costs incurred and amortized are as follows:

                                                 Year ended December 31,
                                                 (Amounts in thousands)
                                              ------------------------------
                                                 1999      1998       1997
                                                 ----      ----       ----
Balance, beginning of year.................   $ 61,947  $ 57,264  $  46,783
Costs deferred during the year.............    269,427   257,275    235,364
Amortization charged to expense............   (267,399) (252,592)  (224,883)
                                               -------   -------  ---------
Balance, end of year.......................   $ 63,975  $ 61,947  $  57,264
                                              ========  ========  =========

(5) Notes Payable Notes payable at December 31, 1999 consist of two revolving credit facilities with a consortium of banks. A November 21, 1996 credit facility provides for an aggregate commitment of $75 million, of which $75 million has been drawn and is outstanding. The $75 million notes are due November 21, 2002. This due date may be extended annually for additional periods of one year to maintain the three-year maturity date. The other outstanding debt consists of a 364 day $100 million line of credit dated October 28, 1999. The outstanding draw at December 31, 1999 on this line of credit is $17 million and is due on October 26, 2000.

The $75 million and $100 million credit facilities are subject to a commitment fee on the undrawn balances of 0.15% and 0.125%, respectively. In addition, the $100 million credit facility imposes a utilization fee of 0.05% on the outstanding debt of both lines of credit if the aggregate principal outstanding balance of both lines of credit exceeds 66 2/3% of the sum of the aggregate commitments. For both debts, the interest rate is variable and is optionally related to the Federal Funds rate, Bank of New York prime rate or the Eurodollar London

51

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1999 and 1998

(5) Notes Payable (Continued)

Interbank rate (LIBOR). Based on current effective rates, net interest cost on the $75 million loan and the $17 million draw at December 31, 1999 is approximately 6.53% and 6.76%, respectively.

The terms of the loan agreements include certain affirmative and negative covenants, all of which are met by the Company at December 31, 1999.

(6) Income Taxes

The Company and its subsidiaries file a consolidated Federal income tax return. The provision for income tax expense (benefit) consists of the following components:

                                                Year ended December 31,
                                                 (Amounts in thousands)
                                                -----------------------
                                                1999      1998      1997
                                                ----      ----      ----
Federal
    Current................................   $36,535   $57,237   $54,447
    Deferred...............................    (2,123)      190    (1,265)
                                               ------    ------    ------
                                              $34,412   $57,427   $53,182
                                               ======    ======    ======
State


    Current................................   $   418   $   327   $   291
    Deferred...............................        --        --        --
                                               ------    ------    ------
                                              $   418   $   327   $   291
                                               ======    ======    ======

Total
    Current................................   $36,953   $57,564   $54,738
    Deferred...............................    (2,123)      190    (1,265)
                                               ------    ------    ------
         Total.............................   $34,830   $57,754   $53,473
                                               ======    ======    ======

The income tax provision reflected in the consolidated statements of income is less than the expected federal income tax on income before income taxes as shown in the table below:

                                                      Year ended December 31,
                                                      (Amounts in  thousands)
                                                      ------------------------
                                                      1999      1998      1997
                                                      ----      ----      ----
Computed tax expense at 35% .....................  $ 58,989  $ 82,348  $ 73,423
Tax-exempt interest income.......................   (25,398)  (23,496)  (19,188)
Dividends received deduction.....................    (3,953)   (5,437)   (5,389)
Reduction of losses incurred deduction for 15% of
 income on securities purchased after
 August 7, 1986                                       4,348     4,245     3,640
Other, net.......................................       844        94       987
                                                     ------    ------    ------
     Income tax expense .........................  $ 34,830  $ 57,754  $ 53,473
                                                     ======    ======    ======

52

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1999 and 1998

(6) Income Taxes (Continued)

The "temporary differences" that give rise to a significant portion of the deferred tax asset (liability) relate to the following:

                                                              December 31,
                                                        (Amounts in thousands)
                                                       ------------------------
                                                              1999       1998
                                                              ----       ----
Deferred tax assets
       20% of net unearned premium                         $ 24,264   $ 22,951
       Tax asset on net unrealized loss on
        securities carried at market value........           21,253         --
       Discounting of loss reserves and salvage
        and subrogation recoverable for tax
      purposes....................................            8,383      6,732
       Write-down of other than temporarily
        impaired investments......................            2,116         --
       Other deferred tax assets..................            1,172      1,101
                                                           --------   --------
         Total gross deferred tax assets..........           57,188     30,784
          Less valuation allowance................               --         --
                                                           --------   --------
          Net deferred tax assets.................           57,188     30,784
                                                           --------   --------

Deferred tax liabilities
       Deferred acquisition costs                           (22,391)   (21,681)
       Tax liability on net unrealized gain on
        securities carried at market value........               --    (27,567)
       Tax depreciation in excess of book
        depreciation..............................           (1,351)    (1,545)
       Accretion on bonds.........................           (2,008)    (1,467)
       Other deferred tax liabilities.............           (2,897)    (1,163)
                                                           --------   --------
         Total gross deferred tax liabilities.....          (28,647)   (53,423)
                                                           --------   --------
         Net deferred tax assets (liabilities)....         $ 28,541   $(22,639)
                                                           ========   ========

53

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1999 and 1998

(7) Reserves for Losses and Loss Adjustment Expenses

Activity in the reserves for losses and loss adjustment expenses is summarized as follows:

                                                Year ended December 31,
                                                (Amounts in thousands)
                                                ----------------------
                                               1999      1998      1997
                                               ----      ----      ----
Gross reserves for losses and loss
 adjustment expenses at beginning of year.. $405,976  $409,061  $336,685
Less reinsurance recoverable...............  (20,160)  (22,791)  (24,931)
                                             -------   -------   -------
Net reserves, beginning of year............  385,816   386,270   311,754

Incurred losses and loss adjustment
  expenses related to:
    Current year...........................  781,316   693,877   641,911
    Prior years............................    7,787    (9,409)   12,818
                                             -------   -------   -------
Total incurred losses and loss adjustment
 expenses..................................  789,103   684,468   654,729
                                             -------   -------   -------

Loss and loss adjustment expense
  payments related to:
    Current year...........................  492,314   437,612   373,823
    Prior years............................  263,805   247,310   206,390
                                             -------   -------   -------
Total payments.............................  756,119   684,922   580,213
                                             -------   -------   -------

Net reserves for losses and loss adjustment
 expenses at end of year...................  418,800   385,816   386,270
Reinsurance recoverable....................   16,043    20,160    22,791
                                             -------   -------   -------
Gross reserves, end of year................ $434,843  $405,976  $409,061
                                             =======   =======   =======

Increases in prior years incurred losses in 1999 relate to a reduction in the Company's estimate of the decrease in average bodily injury cost per claim. In prior years, the average bodily injury cost had trended downward and the Company had factored this trend into its 1998 year-end reserve estimates. The actual amount of reduction in average claim costs proved to be less when developed through year-end 1999 than was originally anticipated at year-end 1998.

Decreases in prior years incurred losses in 1998 reflects the favorable loss experience during these years attributed to a number of combined factors which have produced favorable frequency and severity trends.

The increase in prior years incurred losses in 1997 reflects increases in the Company's estimate of loss adjustment expenses.

54

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1999 and 1998

(8) Concord Transaction

In December 1999, the Company completed a transaction that, in effect, transferred control of Concord Insurance Services, Inc. ("Concord"), a Texas insurance agency headquartered in Houston, Texas, to the Company. The effective date of the transaction was October 31, 1999. Concords' results of operations, which are not material to the Company, are included in the Consolidated Financial Statements of the Company effective October 31, 1999.

Concord produces annually approximately $20 million of non-standard auto business in the state of Texas and performs all duties associated with an insurance company, including underwriting and claims management. However, Concord as an agent assumes no underwriting risk. Through December 31, 1999, the Concord business was assumed 100% by an unaffiliated reinsurer. Effective January 1, 2000, the Company replaced Concord's existing reinsurer (for new and renewal business) and is assuming 100% of the risks produced by Concord. The Company plans to expand Concord's product line.

The transaction was accounted for using the purchase method of accounting, and resulted in an immaterial amount of goodwill that will be amortized using the straight-line method over a ten-year period.

(9) Sale of Subsidiary

In June 1998, the Company sold its 100% interest in Cimarron Insurance Company for $11.1 million in cash. The Company realized a pre-tax gain of approximately $2.6 million on this transaction.

Cimarron ceased writing new business in 1997 and all renewal business was underwritten and retained by American Mercury Insurance Company. The consolidated results for 1998 include $0.2 million of revenue and $0.1 million of net income from the operations of Cimarron up to the sale date of June 5, 1998.

(10) Dividend Restrictions

The Insurance Companies are subject to the financial capacity guidelines established by the Office of the Commissioner of Insurance of their domiciliary states. The payment of dividends from statutory unassigned surplus of the Insurance Companies is restricted, subject to certain statutory limitations. For the year 2000, the direct insurance subsidiaries of the Company are permitted to pay approximately $101 million in dividends to the Company without the prior approval of the Commissioner of Insurance of the state of domicile. The above statutory regulations may have the effect of indirectly limiting the ability of the Company to pay dividends.

55

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES NOTES TO

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1999 and 1998

(11) Statutory Balances and Accounting Practices

The Insurance Companies prepare their statutory financial statements in accordance with accounting practices prescribed or permitted by the various state insurance departments. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners (NAIC), as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. As of December 31, 1999, there were no material permitted statutory accounting practices utilized by the Insurance Companies.

The Insurance Companies' statutory net income, as reported to regulatory authorities, was $135,667,000, $173,473,000 and $147,255,000, for the years ended December 31, 1999, 1998 and 1997, respectively. The statutory policyholders' surplus of the Insurance Companies, as reported to regulatory authorities, as of December 31, 1999 and 1998 was $853,794,000 and $767,223,000, respectively.

The Company has estimated the Risk-Based Capital Requirements of each of its insurance subsidiaries as of December 31, 1999 according to the formula issued by the NAIC. Each of the companies' policyholders' surplus exceeded the highest level of minimum required capital.

Codification (unaudited)

During 1998, the NAIC approved the codification of statutory accounting practices. Codification will become effective for the year ended December 31, 2001. The Company has estimated that its total surplus, at December 31, 1999 would have increased by approximately$84 million if codified accounting rules, as currently stated, were effective. The primary items that would cause the increase are the elimination of excess of statutory reserves over statement reserves and the establishment of a net deferred tax asset.

(12) Commitments and Contingencies

The Company is obligated under various noncancellable lease agreements providing for office space and equipment rental that expire at various dates through the year 2008. Total rent expense under these lease agreements, all of which are operating leases, was $3,320,000,$2,074,000 and $1,885,000 for the years ended December 31, 1999, 1998 and 1997, respectively.

Mercury Casualty Company will receive minimum future rentals on various noncancellable operating leases on a building in Brea, California. The annual rental commitments, expressed in thousands, are shown as follows:

                          Rent        Rent
Year                     Expense     Income
----                     -------     ------
2000.................... $3,577      $(186)
2001.................... $3,121         --
2002.................... $2,330         --
2003.................... $1,393         --
2004.................... $1,176         --
Thereafter.............. $3,784         --

56

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1999 and 1998

(12) Commitments and Contingencies (Continued)

The Company and its subsidiaries are defendants in various lawsuits generally incidental to their business. In most of these actions, plaintiffs assert claims for exemplary and punitive damages which are not insurable under California judicial decisions. The Company vigorously defends these actions unless a reasonable settlement appears appropriate. Management does not expect the ultimate disposition of these lawsuits to have a material effect on the Company's consolidated operations or financial position.

(13) Profit Sharing Plan

The Company, at the option of the Board of Directors, may make annual contributions to an employee profit sharing plan. The contributions are not to exceed the greater of the Company's net income for the plan year or its retained earnings at that date. In addition, the annual contributions may not exceed an amount equal to 15% of the compensation paid or accrued during the year to all participants under the plan. The annual contribution was $1,100,000 for each plan year ended December 31, 1999 and 1998 and $1,000,000 for the plan year ended December 31, 1997.

The Profit Sharing Plan also includes an option for employees to make salary deferrals under Section 401(k) of the Internal Revenue Code. Company matching contributions, at a rate set by the Board of Directors, totaled $1,878,000, $1,648,000, and $1,349,000 for the plan years ended December 31, 1999, 1998 and 1997.

Effective March 11, 1994 the Profit Sharing Plan also includes a leveraged employee stock ownership plan (ESOP) that covers substantially all employees. The Company makes annual contributions to the ESOP equal to the ESOP's debt service less dividends received by the ESOP. Dividends received by the ESOP on unallocated shares are used to pay debt service and the ESOP shares serve as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to employees, based on the proportion of debt service paid in the year. The Company accounts for its ESOP in accordance with Statement of Position 93-6. Accordingly, the debt of the ESOP, which was $4,000,000, $5,000,000, and $2,000,000 at December 31, 1999, 1998 and 1997, respectively, is recorded in the balance sheet as other liabilities. The shares pledged as collateral are reported as unearned ESOP compensation in the shareholders' equity section of the balance sheet. As shares are committed to be released from collateral, the Company reports compensation expense equal to the market price of the shares, and reduces unearned ESOP compensation by the original cost of the shares. The difference between the market price and cost of the shares is charged to common stock. As shares are committed to be released from collateral, the shares become outstanding for earnings-per-share computations. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of accrued interest. ESOP compensation expense was $746,000, $970,000, and $5,368,000 in 1999, 1998 and 1997, respectively. The ESOP shares as of December 31 were as follows:

57

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Continued) December 31, 1999 and 1998

(13)   Profit Sharing Plan (Continued)
                                                    1999           1998
                                                    ----           ----
     Allocated shares                              23,000            --
     Shares committed-to-be released               23,000         23,000
     Unreleased shares                             69,000         92,000
                                                ---------      ---------
     Total ESOP shares                            115,000        115,000
                                               ==========      =========
     Market value of unreleased shares at
      December 31,                             $1,535,000     $4,031,000
                                                =========      =========

(14)   Common Stock

In September 1997, the common stock of the Company was split two-for-one. All share information has been adjusted accordingly.

The Company adopted a stock option plan in October 1985 (the "1985 Plan") under which 5,400,000 shares were reserved for issuance. Options granted during 1985 were exercisable immediately. Subsequent options granted become exercisable 20% per year beginning one year from the date granted. All options were granted at the market price on the date of the grant and expire in 10 years.

In May 1995 the Company adopted The 1995 Equity Participation Plan (the "1995 Plan") which succeeds the Company's 1985 Plan. Under the 1995 Plan, 5,400,000 shares of Common Stock are authorized for issuance upon exercise of options, stock appreciation rights and other awards, or upon vesting of restricted or deferred stock awards. During 1995, the Company granted incentive stock options under both the 1995 Plan and the 1985 Plan. The options granted become exercisable 20% per year beginning one year from the date granted and were granted at the market price on the date of the grant. The options expire in 10 years. At December 31, 1999 no awards other than options have been granted.

As explained in Note 1, the Company applies APB Opinion No. 25 in accounting for its stock option plan. Accordingly, no compensation cost has been recognized in the Consolidated Statements of Income. Had compensation cost for the Company's Plans been determined based on the fair value at the grant dates consistent with the method of SFAS No. 123, the Company's net income would have been reduced by $542,000, $454,000, and $363,000 in 1999, 1998 and 1997, respectively, and earnings per share (basic and diluted) would have been reduced by .01 in 1999 and 1998 and would have remained the same in 1997. Calculations of the fair value under the method prescribed by SFAS No. 123 were made using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1999, 1998 and 1997: dividend yield of 3.8 percent for 1999 and 2.0 percent for prior years, expected volatility of 31.6 percent in 1999, 32.7 percent for 1998 and 30 percent for 1997 and expected lives of 7 years for all years. The risk-free interest rates used were 5.6 percent for the options granted during 1999, 5.4 percent for the options granted during 1998, and 6.4 percent for the options granted during 1997.

58

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1999 and 1998

(14) Common Stock(Continued)

A summary of the status of the Company's plans as of December 31, 1999, 1998 and 1997 and changes during the years ending on those dates is presented below:

                                                        1999                  1998                   1997
                                                 -------------------    -------------------    -------------------
                                                            Weighted             Weighted               Weighted
                                                             Average              Average                Average
                                                            Exercise             Exercise               Exercise
                                                   Shares    Price       Shares    Price       Shares     Price
                                                  -------  ---------    -------  ----------   -------   ----------
Outstanding at beginning of year                  539,146   $20.575     629,621     $16.269    717,350   $14.452
Granted during the year                           102,100    28.800      73,000      45.385     45,000    27.406
Exercised during the year                         (37,371)   15.129    (144,475)     10.329   (116,729)    8.553
Canceled or expired                                (6,000)   15.625     (19,000)     51.484    (16,000)   21.750
                                                  -------               -------                -------
Outstanding at end of year                        597,875    22.370     539,146      20.575    629,621    16.269
                                                  =======               =======                =======
Options exercisable at year-end                   329,575               265,146                277,021
Weighted-average fair value of
 options granted during the year                    $8.12                $16.37                  $9.91

The following table summarizes information regarding the stock options outstanding at December 31, 1999:

                      Number       Weighted Avg.     Weighted Avg.     Number        Weighted Avg.
Range of            Outstanding      Remaining         Exercise      Exercisable       Exercise
Exercise Prices     at 12/31/99   Contractual Life       Price       at 12/31/99         Price
-----------------   -----------   ----------------    -----------    -----------     ------------
$15.00 to 15.9375     303,475         4.80             $15.487          247,475       $15.476
$21.75 to 27.4006     189,900         7.47              23.894           71,300        24.198
$31.22 to 44.8209     104,500         8.99              39.588           10,800        43.239
                      -------                                           -------
$15.00 to 44.8209     597,875         6.38              22.370          329,575        18.273
                      =======                                           =======

59

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1999 and 1998

(15) Earnings Per Share

A reconciliation of the numerator and denominator, adjusted for a two-for-one stock split effective September 1997, used in the basic and diluted earnings per share calculation is presented below:

                                    1999                               1998                               1997
                       --------------------------------    -----------------------------      ---------------------------
                       (000's)    (000's)                  (000's)    (000's)                 (000's)   (000's)
                                   Weighted                            Weighted                          Weighted
                        Income     Shares                   Income     Shares                  Income    Shares
                       (Numera-   (Denomi-  Per-Share      (Numera-   (Denomi-  Per-Share     (Numera-  (Denomi-   Per-Share
                          tor)     nator)    Amount          tor)      nator)    Amount         tor)     nator)    Amount
                       --------   --------  ---------      --------   --------- ----------    --------- --------  ----------

Basic EPS
---------
Income available to
 common stockholders   $133,709  54,596      $2.45        $177,526    55,003     $3.23        $156,306    54,997    $2.84

Effect of dilutive
 securities
     Options              --        219                        --        351                    --           386

Diluted EPS
-----------
Income available to
 common stockholders
 after assumed
 conversions          $133,709   54,815      $2.44        $177,526    55,354     $3.21        $156,306    55,383    $2.82
                      ========   ======      =====        ========    ======     =====        ========    ======    =====

60

Item 9. Changes in and Disagreements with Accountants on Accounting and

Financial Disclosure

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

Item 11. Executive Compensation

Item 12. Security ownership of Certain Beneficial Owners and Management

Item 13. Certain Relationships and Related Transactions

Information regarding executive officers of the Company is included in Part I. For this and other information called for by Items 10, 11, 12 and 13, reference is made to the Company's definitive proxy statement for its Annual Meeting of Shareholders, to be held on May 10, 2000, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1999, and which is incorporated herein by reference.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report:

1. Financial Statements: The Consolidated Financial Statements for the year ended December 31, 1999 are contained herein as listed in the Index to Consolidated Financial Statements on page 33.

2. Financial Statement Schedules:

Title

Independent Auditors' Report on Financial Statement Schedules Schedule I -- Summary of Investments -- Other than Investments in Related Parties
Schedule II -- Condensed Financial Information of Registrant

Schedule IV -- Reinsurance

All other schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or Notes thereto.

61

3. Exhibits:

 3.1&&      Articles of Incorporation of the Company, as amended to
            date.
 3.2@@@     By-laws of the Company, as amended to date.
 4.1*       Shareholders' Agreement dated as of October 7, 1985
            among the Company, George Joseph and Gloria Joseph.
10.1&&      Form of Agency Contract.
10.2#       Management Agreement, as amended, effective July 1,
            1992, among the Company, Mercury Casualty Company,
            Mercury Insurance Company and California Automobile
            Insurance Company.
10.3##      Profit Sharing Plan, as Amended and Restated as of
            March 11, 1994.
10.7**      Amendment 1994-I to the Mercury General Corporation
            Profit Sharing Plan.
10.8**      Amendment 1994-II to the Mercury General Corporation
            Profit Sharing Plan.
10.9&       Amendment 1996-I to the Mercury General Corporation
            Profit Sharing Plan.
10.10&      Amendment 1997-I to the Mercury General Corporation
            Profit Sharing Plan.
10.11&&     Amendment 1998-I to the Mercury General Corporation
            Profit Sharing Plan.
10.12&      Revolving Credit Agreement by and among Mercury General
            Corporation, the Lenders Party Thereto and The Bank of
            New York, as Agent dated as of November 21, 1996.
10.18@@     Management Agreement effective January 1, 1995 between
            the Company and Mercury Insurance Company of Illinois.
10.19@@     Management Agreement effective January 1, 1995 between
            the Company and Mercury Indemnity Company of Illinois.
10.20@@     Management Agreement effective January 1, 1995 between
            the Company and Mercury Insurance Company of Georgia.
10.21@@     Management Agreement effective January 1, 1995 between
            the Company and Mercury Indemnity Company of Georgia
10.22@      The 1995 Equity Participation Plan.
10.23&      Stock Purchase Agreement between Mercury General
            Corporation as Purchaser and AFC as Seller dated
            November 15, 1996.
10.24&&     Management Agreement effective January 1, 1997 between
            the Company and American Mercury Insurance Company,
            AFI Management Co., Inc. and Cimarron Insurance
            Company.
10.25&&&    Amendment to Revolving Credit Agreement by and
            among Mercury General Corporation, the Lender
            Party thereto and The Bank of New York, as Agent,
            dated as of November 21, 1996.
10.26&&&    Revolving Credit Agreement by and among Mercury
            General Corporation, the Lender Party thereto and
            The Bank of New York, as Agent, dated as of
            October 30, 1998.
10.27       ESOP Master Trust Agreement between the Company and BNY
            Western Trust Company, as Trustee, effective January 1,
            1998.
10.28       ESOP Loan Agreement between Union Bank and BNY Western
            Trust Company, as Trustee, of the Mercury General
            Corporation ESOP Master Trust dated as of September 29,
            1998.
10.29       Continuing Guaranty, dated as of August 29, 1998,
            executed by Mercury General Corporation in favor of
            Union Bank.
10.30       Amendment 1999-I and Amendment 1999-II to the Mercury
            General Corporation Profit Sharing Profit sharing Plan.

10.31       Amendment and Restatement to and of Revolving Credit
            Agreement by and among Mercury General Corporation, the
            Lender's Party hereto and The Bank of New York, as
            Agent, dated as of October 29, 1999.
10.32       Multiple Line Excess of Loss Reinsurance Agreement
            between Swiss Reinsurance America Corporation and
            Mercury Casualty Company, effective January 1, 1999.
10.33       Multiple Line Excess of Loss Reinsurance Agreement
            between Swiss Reinsurance America Corporation and
            American Mercury Insurance Company, effective January
            1, 2000.

21.1 Subsidiaries of the Company.
23.1 Accountants' Consent.
27.1 Financial Data Schedule.

62

* This document was filed as an exhibit to Registrant's Registration Statement on Form S-1, File No. 33-899, and is incorporated herein by this reference.

# This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1992, and is incorporated herein by this reference.

## This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1993, and is incorporated herein by this reference.

** This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1994, and is incorporated herein by this reference.

@ This document was filed as an exhibit to Registrant's Form S-8 filed on March 8, 1996 and is incorporated herein by this reference.

@@ This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1995, and is incorporated herein by this reference.

@@@ This document was filed as an exhibit to Registrant's Form 8-K filed on September 14, 1999 and is incorporated herein by this reference.

& This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1996 and is incorporated herein by this reference.

&& This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1997 and is incorporated herein by this reference.

&&& This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1998 and is incorporated herein by this reference.

(b) Reports on Form 8-K:
None

63

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.

MERCURY GENERAL CORPORATION

                                         By /s/ GEORGE JOSEPH
                                            --------------------------------
                                                George Joseph
                                             Chief Executive Officer and
                                               Chairman of the Board

March 16, 2000

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.

        Signature                           Title                    Date
        ---------                           -----                    ----

                                   Chief Executive Officer
                                             and
                                     Chairman of the Board
 /s/   GEORGE JOSEPH              (Principal Executive Officer)   March 16, 2000
--------------------------
       George Joseph

                                    Vice President and
                                  Chief Financial Officer
 /s/   GABRIEL TIRADOR          (Principal Financial Officer)     March 16, 2000
--------------------------
       Gabriel Tirador


 /s/   NATHAN BESSIN                      Director                March 16, 2000
--------------------------
       Nathan Bessin


 /s/   BRUCE A. BUNNER                    Director                March 16, 2000
--------------------------
       Bruce A. Bunner


 /s/   MICHAEL D. CURTIUS                 Director                March 16, 2000
-------------------------
       Michael D. Curtius

                                       64

         Signature                         Title                 Date
         ---------                         -----                 ----

 /s/   RICHARD E. GRAYSON                  Director            March 16, 2000
---------------------------
       Richard E. Grayson


 /s/   GLORIA JOSEPH                       Director            March 16, 2000
---------------------------
       Gloria Joseph


 /s/   CHARLES MCCLUNG                     Director            March 16, 2000
---------------------------
       Charles McClung


 /s/   DONALD P. NEWELL                    Director            March 16, 2000
---------------------------
       Donald P. Newell


 /s/   DONALD R. SPUEHLER                  Director            March 16, 2000
---------------------------
       Donald R. Spuehler

65

INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES

The Board of Directors
Mercury General Corporation:

Under date of February 4, 2000, we reported on the consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the years in the three- year period ended December 31, 1999, as contained in the annual report on Form 10-K for the year 1999. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedules as listed under Item 14(a)2. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.

In our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

KPMG LLP

Los Angeles, California
February 4, 2000

S-1

SCHEDULE I

MERCURY GENERAL CORPORATION

SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES

December 31, 1999

Amounts in Thousands

                                                                       Amount at
                                                                      which shown
                                                                        in the
Type of Investment                                Cost      Value    balance sheet
------------------                                ----      -----    -------------
Fixed maturities available for sale
    Bonds:
      U.S. Government.......................  $    8,354  $    8,195    $    8,195
      States, municipalities................   1,307,893   1,276,231     1,276,231
      All other corporate bonds.............       6,110       5,957         5,957
    Redeemable preferred stock..............      31,408      31,671        31,671
                                              ----------  ----------    ----------

      Total fixed maturities available for
        sale................................   1,353,765   1,322,054     1,322,054
                                              ----------  ----------    ----------
Equity securities:
    Common stocks:
      Public utilities......................      55,551      49,184        49,184
      Banks, trust and insurance companies..           9           9             9
      Industrial, miscellaneous and
       all other............................         190         219           219
    Nonredeemable preferred stocks..........     183,106     160,431       160,431
                                              ----------  ----------    ----------

      Total equity securities available for
        sale................................     238,856     209,843       209,843
                                              ----------  ----------    ----------

Short-term investments......................      43,568                    43,568
                                              ----------                ----------

      Total investments.....................  $1,636,189                $1,575,465
                                              ==========                ==========

S-2

SCHEDULE I

MERCURY GENERAL CORPORATION

SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES

December 31, 1998

Amounts in Thousands

                                                                       Amount at
                                                                      which shown
                                                                        in the
Type of Investment                                Cost      Value    balance sheet
------------------                                ----      -----    -------------
Fixed maturities available for sale
    Bonds:
      U.S. Government.......................  $   10,206  $   10,428    $   10,428
      States, municipalities................   1,179,043   1,256,113     1,256,113
      Public utilities......................         881         936           936
      All other corporate bonds.............      12,839      13,161        13,161
    Redeemable preferred stock..............      42,471      44,270        44,270
                                              ----------   ---------    ----------

      Total fixed maturities available for
        sale................................   1,245,440   1,324,908     1,324,908
                                              ----------   ---------    ----------

Equity securities:
    Common stocks:
      Public utilities......................      38,260      40,650        40,650
      Banks, trust and insurance companies..       1,666       1,813         1,813
      Industrial, miscellaneous and
       all other............................       5,233       5,372         5,372
    Nonredeemable preferred stocks..........     175,290     171,910       171,190
                                              ----------   ---------    ----------

      Total equity securities available for
        sale................................     220,449     219,745       219,745
                                              ----------   ---------    ----------

Short-term investments......................      45,992                    45,992
                                              ----------                ----------

      Total investments.....................  $1,511,881                $1,590,645
                                              ==========                ==========

S-3

SCHEDULE II
MERCURY GENERAL CORPORATION

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

BALANCE SHEETS

December 31, 1999 and 1998

Amounts in thousands

                                     ASSETS
                                                               1999          1998
                                                               ----          ----
Investments:
    Fixed maturities available for sale (amortized
        cost $2,130 in 1999 and $1,002 in 1998)......     $    2,126     $      980
    Equity securities, available for sale (cost
        $25,831 in 1999 and $22,885 in 1998).........         22,985         22,274
    Short-term cash investments......................          5,956          9,189
    Investment in subsidiaries.......................        975,488        979,695
                                                           ---------      ---------
              Total investments......................      1,006,555      1,012,138

Amounts due from affiliates..........................          8,320          8,544
Income taxes.........................................          9,288          3,693
Other assets.........................................          2,371          1,963
                                                          ----------     ----------
                                                          $1,026,534     $1,026,338
                                                          ==========     ==========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Notes payable........................................     $   92,000     $   78,000
Accounts payable and accrued expenses................         18,459         22,353
Other liabilities....................................          6,484          8,610
                                                          ----------     ----------
       Total liabilities.............................        116,943        108,963
                                                          ----------     ----------

Shareholders' equity:
    Common stock.....................................         50,963         48,830
    Accumulated other comprehensive income (loss)....        (39,471)        51,196
    Unearned ESOP compensation.......................         (3,000)        (4,000)
    Retained earnings................................        901,099        821,349
                                                          ----------     ----------
              Total shareholders' equity............         909,591        917,375
                                                          ----------     ----------

                                                          $1,026,534     $1,026,338
                                                          ==========     ==========

See notes to condensed financial information

S-4

SCHEDULE II, Continued

MERCURY GENERAL CORPORATION

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENTS OF INCOME

Three years ended December 31, 1999

                             Amounts in thousands

                                                    1999        1998      1997
                                                    ----        ----      ----
Revenues:
  Net investment income......................    $  1,867    $  1,956  $  2,139
  Management fee income from subsidiaries....     208,245     186,387   162,352
  Other......................................          11          94        --
                                                  -------     -------  --------

      Total revenues.........................     210,123     188,437   164,491
                                                  -------     -------  --------

Expenses:
  Loss adjustment expenses...................     128,474     115,242   102,889
  Policy acquisition costs...................      35,527      33,550    31,543
  Other operating expenses...................      45,302      38,815    28,454
  Interest...................................       4,958       4,839     4,972
                                                  -------     -------  --------

      Total expenses.........................     214,261     192,446   167,858
                                                  -------     -------  --------

  Loss before income taxes and equity in net
   income of subsidiaries....................      (4,138)     (4,009)   (3,367)

Income tax benefit...........................      (1,380)     (2,010)     (528)
                                                  -------     -------  --------
  Loss before equity in net income
   of subsidiaries...........................      (2,758)     (1,999)   (2,839)

Equity in net income of subsidiaries.........     136,467     179,525   159,145
                                                  -------     -------  --------

      Net income.............................    $133,709    $177,526  $156,306
                                                  =======     =======  ========

See notes to condensed financial information.

S-5

SCHEDULE II, Continued

MERCURY GENERAL CORPORATION

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

STATEMENTS OF CASH FLOWS

Three Years ended December 31, 1999

Amounts in thousands

                                                                        1999       1998      1997
                                                                        ----       ----      ----
Cash flows from operating activities:
  Net cash provided from operating activities......                   $ 50,295    $ 49,705   $ 42,590

Cash flows from investing activities:
  Capital contribution to controlled entity........                     (7,550)         --         --
  Fixed maturities, at market:
    Purchases......................................                     (2,008)     (2,700)    (3,556)
    Sales..........................................                         --       3,849      2,398
    Calls or maturities............................                        854         731      1,234
  Equity securities:
    Purchases......................................                    (41,004)    (75,180)   (71,446)
    Sales..........................................                     36,759      79,852     59,786
    Calls..........................................                      1,119         222        358
  Increase (decrease) in payable for securities....                         --         203     (1,493)
  (Increase) decrease in short term cash
  investments, net ................................                      3,233      (2,484)     1,385
                                                                      --------    --------   --------
      Net cash provided by (used) in investing
       activities..................................                     (8,597)      4,493    (11,334)

Cash flows from financing activities:
  Additions to notes payable.......................                     17,000       3,000         --
  Principal payments on notes payable..............                     (3,000)         --         --
  Payment of AMI indemnification holdback..........                         --          --     (1,750)
  Dividends paid to shareholders...................                    (45,854)    (38,452)   (31,879)
  Purchase and retirement of common stock..........                     (8,435)    (24,291)        --
  Stock options exercised..........................                        717       1,964      1,400
  Net increase (decrease) of ESOP loan.............                     (1,000)      3,000     (1,000)
                                                                      --------    --------   --------
     Net cash provided by (used) in financing
      activities...................................                    (40,572)    (54,779)   (33,229)

Net increase (decrease) in cash....................                      1,126        (581)    (1,973)
Cash:
  Beginning of the year............................                     (3,610)     (3,029)    (1,056)
                                                                      --------    --------   --------
  End of the year .................................                   $ (2,484)   $ (3,610)  $ (3,029)
                                                                      ========    ========   ========

See notes to condensed financial information.

S-6

SCHEDULE II, Continued

MERCURY GENERAL CORPORATION

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

NOTES TO CONDENSED FINANCIAL INFORMATION

December 31, 1999 and 1998

The accompanying condensed financial information should be read in conjunction with the consolidated financial statements and notes included in this statement.

Management Fee Income

Under a management agreement, the Company performs management services which include all underwriting and claims servicing functions for its subsidiaries. The Company is compensated by monthly reimbursement of expenses incurred.

Dividends Received From Subsidiaries

Dividends of $61,000,000, $55,000,000, and $33,500,000 were received by the Company from its wholly-owned subsidiaries in 1999, 1998 and 1997, respectively, and are recorded as a reduction to Investment in Subsidiaries.

Cash Overdraft

At December 31, 1999 and 1998, the Company had cash overdrafts of $2,484,000 and $3,610,000 respectively which are classified in "other liabilities" in the accompanying condensed balance sheet.

S-7

SCHEDULE IV

MERCURY GENERAL CORPORATION

REINSURANCE

Three years ended December 31, 1999

                              Amounts in thousands

                                               Ceded to
                                    Gross       other                  Net
                                    amount    companies    Assumed    amount
                                    -------   ---------    -------    -------
Property and Liability insurance
     1999.......................   $1,186,385    $ 8,844    $10,766  $1,188,307
     1998.......................   $1,130,597    $14,352    $ 5,339  $1,121,584
     1997.......................   $1,055,114    $24,241    $   407  $1,031,280

S-8

EXHIBIT INDEX

3.1&&     Articles of Incorporation of the Company, as amended to
          date.
3.2@@@    By-laws of the Company, as amended to date.
4.1*      Shareholders' Agreement dated as of October 7, 1985 among
          the Company, George Joseph and Gloria Joseph.
10.1&&    Form of Agency Contract.
10.2#     Management Agreement, as amended, effective July 1, 1992,
          among the Company, Mercury Casualty Company, Mercury
          Insurance Company and California Automobile Insurance
          Company.
10.3##    Profit Sharing Plan, as Amended and Restated as of March 11,
          1994.
10.7**    Amendment 1994-I to the Mercury General Corporation Profit
          Sharing Plan.
10.8**    Amendment 1994-II to the Mercury General Corporation Profit
          Sharing Plan.
10.9&     Amendment 1996-I to the Mercury General Corporation Profit
          Sharing Plan.
10.10&    Amendment 1997-I to the Mercury General Corporation Profit
          Sharing Plan.
10.11&&   Amendment 1998-I to the Mercury General Corporation Profit
          Sharing Plan.
10.12&    Revolving Credit Agreement by and among Mercury General
          Corporation, the Lenders Party Thereto and The Bank of New
          York, as Agent dated as of November 21, 1996.
10.18@@   Management Agreement effective January 1, 1995 between the
          Company and Mercury Insurance Company of Illinois.
10.19@@   Management Agreement effective January 1, 1995 between the
          Company and Mercury Indemnity Company of Illinois.
10.20@@   Management Agreement effective January 1, 1995 between the
          Company and Mercury Insurance Company of Georgia.
10.21@@   Management Agreement effective January 1, 1995 between the
          Company and Mercury Indemnity Company of Georgia.
10.22@    The 1995 Equity Participation Plan.
10.23&    Stock Purchase Agreement between Mercury General Corporation
          as Purchaser and AFC as Seller dated November 15, 1996.
10.24&&   Management Agreement effective January 1, 1997 between the
          Company and American Mercury Insurance Company,
          AFI Management Co., Inc. and Cimarron Insurance Company.
10.25&&&  Amendment to Revolving Credit Agreement by and among Mercury
          General Corporation, the Lender Party thereto and The Bank
          of New York, as Agent, dated as of November 21, 1996.
10.26&&&  Revolving Credit Agreement by and among Mercury General
          Corporation, the Lender Party thereto and The Bank of New
          York, as Agent, dated as of October 30, 1998.
10.27     ESOP Master Trust Agreement between the Company and BNY
          Western Trust Company, as Trustee, effective January 1,
          1998.
10.28     ESOP Loan Agreement between Union Bank and BNY Western Trust
          Company, as Trustee, of the Mercury General Corporation ESOP
          Master Trust dated as of September 29, 1998.
10.29     Continuing Guaranty, dated as of August 29, 1998, executed
          by Mercury General Corporation in favor of Union Bank.
10.30     Amendment 1999-I and Amendment 1999-II to the Mercury
          General Corporation Profit Sharing Plan.
10.31     Amendment and Restatement to and of Revolving Credit
          Agreement by and among Mercury General Corporation, the
          Lender's Party hereto and The Bank of New York, as Agent,
          dated as of October 29, 1999.
10.32     Multiple Line Excess of Loss Reinsurance Agreement between
          Swiss Reinsurance America Corporation and Mercury Casualty
          Company, effective January 1, 1999.

10.33     Multiple Line Excess of Loss Reinsurance Agreement between
          Swiss Reinsurance America Corporation and American Mercury
          Insurance Company, effective January 1, 2000.

21.1 Subsidiaries of the Company.
23.1 Accountants' Consent.
27.1 Financial Data Schedule.

* This document was filed as an exhibit to Registrant's Registration Statement on Form S-1, File No. 33-899, and is incorporated herein by this reference.

# This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1992, and is incorporated herein by this reference.

## This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1993, and is incorporated herein by this reference.

** This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1994, and is incorporated herein by this reference.

@ This document was filed as an exhibit to Registrant's Form S-8 filed on March 8, 1996 and is incorporated herein by this reference.

@@ This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1995, and is incorporated herein by this reference.

@@@ This document was filed as an exhibit to Registrant's Form 8-K filed on September 14, 1999 and is incorporated herein by this reference.

& This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1996 and is incorporated herein by this reference.

&& This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1997 and is incorporated herein by this reference.

&&& This document was filed as an exhibit to Registrant's Form 10-K for the fiscal year ended December 31, 1998 and is incorporated herein by this reference.

(b) Reports on Form 8-K:

None


EXHIBIT 3.2@@@

AMENDED AND RESTATED BYLAWS

OF

MERCURY GENERAL CORPORATION


AMENDED AND RESTATED BYLAWS

OF

MERCURY GENERAL CORPORATION

ARTICLE I
OFFICES

Section 1. PRINCIPAL OFFICES. The Board of Directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office is located outside this state, and the corporation has one or more business offices in this state, the Board of Directors shall likewise fix and designate a principal business office in the State of California.

Section 2. OTHER OFFICES. The Board of Directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business.

ARTICLE II

MEETINGS OF SHAREHOLDERS

Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at any place within or outside the State of California designated by the Board of Directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation.

Section 2. ANNUAL MEETINGS OF SHAREHOLDERS. The annual meeting of shareholders shall be held each year on a date and at a time designated by the Board of Directors. At each annual meeting directors shall be elected and any other proper business may be transacted.

Section 3. SPECIAL MEETINGS. A special meeting of the shareholders may be called at any time by the Board of Directors, or by the Chairman of the Board, or by the President, or by one or more shareholders holding shares in the aggregate entitled to cast not less than 10% of the votes at any such meeting.

If a special meeting is called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the Chairman of the Board, the President, any Vice President or the Secretary of the corporation. The officer receiving such request forthwith shall cause notice to be given to the shareholders entitled to vote, in accordance with the provisions of Sections 4 and 5 of this Article II, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the Board of Directors may be held.

2

Section 4. NOTICE OF SHAREHOLDERS' MEETINGS. All notices of meetings of shareholders shall be sent or otherwise given in accordance with
Section 5 of this Article II not less than ten (10) nor more than sixty (60) days before the date of the meeting being noticed. The notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, or (ii) in the case of the annual meeting those matters which the Board of Directors, at the time of giving the notice, intends to present for action by the shareholders. The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees which, at the time of the notice, management intends to present for election.

If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California, (ii) an amendment of the articles of incorporation, pursuant to
Section 902 of such Code, (iii) a reorganization of the corporation, pursuant to
Section 1201 of such Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of such Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares pursuant to Section 2007 of such Code, the notice shall also state the general nature of such proposal.

Section 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any meeting of shareholders shall be given either personally or by first-class mail or telegraphic or other written communication, charges prepaid, addressed to the shareholder at the address of such shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or has been so given, notice shall be deemed to have been given if sent by first-class mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where such office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication.

If any notice addressed to a shareholder at the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of such notice.

An affidavit of the mailing or other means of giving any notice of any shareholders' meeting shall be executed by the Secretary, Assistant Secretary or any transfer agent of the corporation giving such notice, and shall be filed and maintained in the minute book of the corporation.

Section 6. QUORUM. The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting of shareholders shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum.

Section 7. ADJOURNED MEETING AND NOTICE THEREOF. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by

3

the vote of the majority of the shares represented at such meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at such meeting, except as provided in Section 6 of this Article II.

When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty-five (45) days from the date set for the original meeting, in which case the Board of Directors shall set a new record date. Notice of any such adjourned meeting, if required, shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 4 and 5 of this Article II. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting.

Section 8. VOTING. The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of
Section 11 of this Article II, subject to the provisions of Sections 702 to 704, inclusive, of the Corporations Code of California (relating to voting shares held by a fiduciary, in the name of a corporation or in joint ownership). Such vote may be by voice vote or by ballot; provided, however, that all elections for directors must be by ballot upon demand by a shareholder at any election and before the voting begins. Any shareholder entitled to vote on any matter (other than the election of directors) may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares such shareholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and voting on any matter (other than the election of directors), provided that the shares voting affirmatively must also constitute at least a majority of the required quorum, shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the California General Corporation Law or the articles of incorporation.

At a shareholders' meeting involving the election of directors, no shareholder shall be entitled to cumulate votes (i. e., cast for any candidate a number of votes greater than the number of the shareholder's shares) unless such candidate or candidates' names have been placed in nomination prior to commencement of the voting and a shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such notice, then every shareholder entitled to vote may cumulate such shareholder's votes for candidates in nomination and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which such shareholder's shares are entitled, or distribute the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected.

Section 9. WAIVER OF NOTICE OR CONSENT BY ABSENT SHAREHOLDERS. The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting, or an approval of the minutes thereof. The waiver of notice or consent need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters

4

specified in the second paragraph of Section 4 of this Article II, the waiver of notice or consent shall state the general nature of such proposal. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting.

Attendance of a person at a meeting shall also constitute a waiver of notice of such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters not included in the notice of the meeting if such objection is expressly made at the meeting.

Section 10. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. In the case of election of directors, such consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors; provided, however, that a director may be elected at any time to fill a vacancy not created by removal and not filled by the directors by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be filed with the Secretary of the corporation and shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares or a personal representative of the shareholder or their respective proxy holder, may revoke the consent by a writing received by the Secretary of the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary.

Unless the consents of all shareholders entitled to vote have been solicited in writing, the Secretary shall give prompt notice of any corporate action approved by the shareholders without a meeting by less than unanimous consent, to those shareholders entitled to vote who have not consented in writing. Such notice shall be given in the manner specified in Section 5 of this Article II. In the case of approval of (i) contracts or transactions in which a director has a direct or indirect financial interest, pursuant to
Section 310 of the Corporations Code of California, (ii) indemnification of agents of the corporation, pursuant to Section 317 of such Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of such Code, or
(iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares pursuant to Section 2007 of such Code, such notice shall be given at least ten (10) days before the consummation of any such action authorized by any such approval.

Section 11. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, AND GIVING CONSENTS. For purposes of determining the shareholders entitled to notice of any meeting or to vote or entitled to give consent to corporate action without a meeting, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days prior to the date of any such meeting nor more than sixty (60) days prior to such action without a meeting, and in such case only shareholders of record at the close of business on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date fixed as aforesaid, except as otherwise provided in the California General Corporation Law.

If the Board of Directors does not so fix a record date:

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(a) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice if given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held.

(b) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the Board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action of the Board has been taken, shall be at the close of business on the day on which the Board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later.

Section 12. PROXIES. Every person entitled to vote for directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the Secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder's attorney in fact. A validly executed proxy which does not 'state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, prior to the vote pursuant thereto, by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy presented to the meeting and executed by, or attendance at the meeting and voting in person by, the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of such proxy is received by the corporation before the vote pursuant thereto is counted; provided, however, that no such proxy shall be valid after the expiration of eleven (I 1) months from the date of such proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 705 (e) and (f) of the Corporations Code of California.

Section 13. INSPECTORS OF ELECTION. Before any meeting of shareholders, the Board of Directors may appoint any persons other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the holders of a mojority of shares or their proxies present at the meeting shall determine whether one (1) or three
(3) inspectors are to be -appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill such vacancy.

The duties of these inspectors shall be as follows:

(a) Determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies;

(b) Receive votes, ballots or consents;

(c) Hear and determine all challenges and questions in any way arising in connection with the right to vote;

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(d) Count and tabulate all votes or consents;

(e) Determine when the polls shall close;

(f) Determine the result; and

(g) Do any other acts that may be proper to conduct the election or vote with fairness to all shareholders.

Section 14. NOTICE FOR PROPOSALS BY SHAREHOLDERS.

(a) Nominations of persons for election to the Board of Directors of the corporation and the proposal of business to be considered by the shareholders may be made at an annual meeting of shareholders
(i) pursuant to the corporation's notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any shareholder of the corporation who was a shareholder of record at the time of giving of notice provided for in this Bylaw, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Bylaw.

(b) For nominations or other business to be properly brought before an annual meeting by a shareholder pursuant to clause
(iii) of paragraph (a) of this Bylaw, the shareholder must have given timely notice thereof in writing to the Secretary of the corporation and such other business must otherwise be a proper matter for shareholder action. To be timely, a shareholder's notice shall be delivered to the Secretary at the principal executive offices of the corporation not later than 120 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event no annual meeting was held, or the date of the meeting changed more than 30 days from the prior year, such number of days as the Board of Directors may determine in its sole discretion, such determination to be communicated by the corporation to shareholders of the corporation no later than 30 days before such deadline by public announcement or by any other means determined by the Board of Directors, in its sole discretion, to be appropriate for the notification of shareholders. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a shareholder's notice as described above. Such shareholder's notice shall set forth (i) as to each person whom the shareholder proposes to nominate for election or re-election as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities and Exchange Act of 1934 (the "Exchange Act") and Rule 14A-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the nomination or proposal is made and (iii) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (a) the name and address of such shareholder, as they appear on the corporation's books, and of such beneficial owner and (b) the class and number of shares of the corporation which are owned beneficially and of record by such shareholder and such beneficial owner.

(c) Notwithstanding the foregoing provisions of this Bylaw, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and

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regulations thereunder with respect to matters set forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect any rights of shareholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.

ARTICLE III

DIRECTORS

Section 1. POWERS. Subject to the provisions of the California General Corporation Law and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors.

Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the directors shall have the power and authority to:

(a) Select and remove all officers, agents, and employees of the corporation, 'prescribe such powers and duties for them as may not be inconsistent with law, the articles of incorporation or these bylaws, fix their compensation, and require from them security for faithful service.

(b) Change the principal executive office or the principal business office in the State of California from one location to another; cause the corporation to be qualified to do business in any other state, territory, dependency, or foreign country and conduct business within or outside the State of California; designate any place within or without the State for the holding of any shareholders' meeting or meetings, including annual meetings; adopt, make and use a corporate seal, and prescribe the forms of certificates of stock, and alter the form of such seal and of such certificates from time to time as in their judgment they may deem best, provided that such forms shall at all times comply with the provisions of law.

(c) Authorize the issuance of shares of stock of the corporation from time to time, upon such terms as may be lawful, in consideration of money paid, labor done or services actually rendered, debts or securities cancelled or tangible or intangible property actually received.

(d) Borrow money and incur indebtedness for the purposes of the corporation, and cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations, or other evidences of debt and securities therefor.

Section 2. NUMBER AND QUALIFICATION OF DIRECTORS. The number of directors of the corporation shall be not less than five (5) nor more than nine (9). The exact number of directors shall be eight (8) until changed, within the limits specified above, by a bylaw amending this Section 2, duly adopted by the Board of Directors or by the shareholders. Such indefinite number of directors may be changed, or a definite number fixed without provision for an indefinite number, by a duly adopted amendment to the Articles of Incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote;

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provided, however, that an amendment reducing the number or the minimum number of directors to a number less than five cannot be adopted if the votes cast against its adoption at a meeting of the shareholders, or the shares not consenting in the case of action by written consent, are equal to more than 16-2/3 % of the outstanding shares entitled to vote. No amendment may change the stated maximum number of authorized directors to a number greater than two times the stated minimum number of directors minus one.

Section 3. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be elected at each annual meeting of the shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified.

Section 4. VACANCIES. Vacancies in the Board of Directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, except that a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present, or by the written consent of holders of all outstanding shares entitled to vote. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified.

A vacancy or vacancies in the Board of Directors shall be deemed to exist in the case of the death, resignation or removal of any director, or if the Board of Directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, or if the authorized number of directors be increased, or if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be voted for at that meeting.

The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election by written consent, other than to till a vacancy created by removal, shall require the consent of a majority of the outstanding shares entitled to vote.

Any director may resign upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors. A resignation shall be effective upon the giving of the notice, unless the notice specifies a later time for its effectiveness. If the resignation of a director is effective at a future time, the Board of Directors may elect a successor to take office when the resignation becomes effective.

No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of his term of office.

Section 5. PLACE OF MEETINGS AND TELEPHONIC MEETINGS. Regular meetings of the Board of Directors may be held at any place within or without the State that has been designated from time to time by resolution of the board. In the absence of such designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board shall be held at any place within or without the State that has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in such meeting can hear one another, and all such directors shall be deemed to be present in person at such meeting.

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Section 6. ANNUAL MEETINGS. Immediately following each annual meeting of shareholders, the Board of Directors shall hold a regular meeting for the purpose of organization, any desired election of officers and the transaction of other business. Notice of this meeting shall not be required.

Section 7. OTHER REGULAR MEETINGS. Other regular meetings of the Board of Directors shall be held without call at such time as shall from time to time be fixed by the Board of Directors. Such regular meetings may be held without notice.

Section 8. SPECIAL MEETINGS. Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the Chairman of the Board or the President or any Vice President or the Secretary or any two directors.

Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at his or her address as it is shown upon the records of the corporation, In case such notice is mailed, it shall be deposited in the United States mail at least four (4) days prior to the time of the holding of the meeting. In case such notice is delivered personally, or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours prior to the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated to either the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose of the meeting nor the place if the meeting is to be held at the principal executive office of the corporation.

Section 9. DISPENSING WITH NOTICE. The transactions of any meeting of the Board of Directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum be present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes thereof. The waiver of notice or consent need not specify the purpose of the meeting. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Notice of a meeting need not be given to any director who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director.

Section 10. QUORUM. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as hereinafter provided. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors, subject to the provisions of Section 310 of the Corporations Code of California (approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 (appointment of committees), and Section 317
(e) (indemnification of directors). A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting.

Section 11. ADJOURNMENT. A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place.

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Section 12. NOTICE OF ADJOURNMENT. Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty-four (24) hours, in which case notice of such time and place shall be given prior to the time of the adjourned meeting, in the manner specified in Section 8 of this Article III, to the directors who were not present at the time of the adjournment.

Section 13. ACTION WITHOUT MEETING. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the board shall individually or collectively consent in writing to such action. Such action by written consent shall have the same force and effect as a unanimous vote of the Board of Directors. Such written consent or consents shall be tiled with the minutes of the proceedings of the board.

Section 14. FEES AND COMPENSATION OF DIRECTORS. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation for such services.

ARTICLE IV

COMMITTEES

Section 1. COMMITTEES OF DIRECTORS. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. Any such committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to:

(a) the approval of any action which, under the General Corporation Law of California, also requires shareholders' approval or approval of the outstanding shares;

(b) the filling of vacancies on the Board of Directors or in any committee;

(c) the fixing of compensation of the directors for serving on the board or on any committee;

(d) the amendment or repeal of bylaws or the adoption of new bylaws;

(e) the amendment or repeal of any resolution of the Board of Directors which by its express terms is not so amendable or repealable;

(f) a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the Board of Directors; or

(g) the appointment of any other committees of the Board of Directors or the members thereof.

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Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Sections 5 (place of meetings), 7 (regular meeting), 8 (special meetings and notice), 9 (dispensing with notice), 10 (quorum), 11 (adjournment), 12 (notice of adjournment) and 13 (action without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the Board of Directors and its members, except that the time of regular meetings of committees may be determined by resolution of the Board of Directors as well as the committee, special meetings of committees may also be called by resolution of the Board of Directors and notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws.

ARTICLE V

OFFICERS

Section 1. OFFICERS. The officers of the corporation shall be a Chief Executive Officer, a President, a Secretary and a Chief Financial Officer. The corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board, one or more Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article V. Any number of offices may be held by the same person.

Section 2. ELECTION OF OFFICERS. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 3 of this Article V, shall be chosen by the Board of Directors, and each shall serve at the pleasure of the Board, subject to the rights, if any, of an officer under any contract of employment.

Section 3. SUBORDINATE OFFICERS, ETC. The Board of Directors may empower the Chief Executive Officer to appoint all officers, other than the President, as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the Bylaws or as the Board of Directors or the Chief Executive Officer, as the case may be, may from time to time determine.

Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, of any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board of Directors, at any regular or special meeting thereof, or, except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors.

Any officer may resign at any time by giving written notice to the corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any such resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party.

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Section 5. VACANCIES IN OFFICE. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be tilled in the manner prescribed in these Bylaws for regular appointments to such office.

Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such officer be elected, shall, if present, preside at all meetings of the Board of Directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by the Bylaws. If there is no Chief Executive Officer, the Chairman of the Board shall in addition be the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in Section 7 of this Article V.

Section 7. CHIEF EXECUTIVE OFFICER. The Board of Directors shall appoint a Chief Executive Officer. In the absence of such appointment, the Chairman of the Board shall be the Chief Executive Officer of the Corporation. The Chief Executive Officer shall have the general responsibility for implementation of the policies of the Corporation, as determined by the Board of Directors, and for the management of the business and affairs of the Corporation. He shall preside at all meetings of the shareholders and, in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board of Directors.

Section 8. PRESIDENT. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board or the Chief Executive Officer, the President shall be the chief operating officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the operations and the officers of the corporation. He shall have the general powers and duties of management usually vested in the office of President of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or the Bylaws.

Section 9. VICE PRESIDENTS. In the absence or disability of the President, the Vice Presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice President shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors or the Bylaws, the President or the Chairman of the Board if there is no President.

Section 10. SECRETARY. The Secretary shall keep or cause to be kept, at the principal executive officer or such other place as the Board of Directors may order, a book of minutes of all meetings and actions of directors, committees of directors and shareholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at directors' and committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof.

The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation.

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The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board of Directors required by the Bylaws or by law to be given, and he shall keep the seal of the corporation, if one be adopted, in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by the Bylaws.

Section 10. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall be open at all reasonable times to inspection by any director.

The Chief Financial Officer shall deposit all moneys and other values in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the President and directors, whenever they request it, an account of all of his transactions as Chief Financial Officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws.

ARTICLE VI

INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES

AND OTHER AGENTS

Section 1. SCOPE OF INDEMNIFICATION.

(a) The corporation shall, to the broadest and maximum extent permitted by law, indemnify each person who was or is a party or is threatened to be made a party to any proceeding by reason of the fact that such person is or was a director of the corporation, or is or was serving at the request of the corporation as a director of another corporation or other enterprise, against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding. In addition, the corporation shall, to the broadest and maximum extent permitted by law, promptly upon demand pay to such person any and all expenses (including attorneys' fees)incurred in defending or settling any such proceeding in advance of the final disposition of such proceeding upon receipt of an undertaking by or on behalf of the director to repay such amount if it shall ultimately be determined by a final judgment or other final adjudication that such person is not entitled to be indemnified by the corporation as authorized as this Section 1.

(b) If a claim under paragraph a. of this Section 1 is not paid in full by the corporation within 45 days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall also be entitled to be paid the expenses of prosecuting such claim, including attorneys' fees. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the California Corporations Code for the corporation to indemnify the claimant for the amount claimed, but the burden or proving such defense by clear and convincing evidence shall be on the corporation.

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(c) The Board of Directors may in its discretion provide by resolution for such indemnification of, or advance of expenses to, officers, employees or agents of the corporation, and likewise may refuse to provide for such indemnification or advance of expenses except to the extent such indemnification is mandatory under the California General Corporation Law.

Section 2. NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and to the advancement of expenses conferred in this Article VI shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the corporation's articles of incorporation or any bylaw, agreement, vote of shareholders or disinterested directors or otherwise.

Section 3. TERM AND HEIRS. The rights to indemnification and advancement of expenses conferred in this Article VI shall continue as to any person who has ceased to be a director with respect to any acts or omissions that occurred during the time such person was a director and shall inure to the benefit of the heirs, executors and administrators of each such person.

Section 4. SEVERABILITY. If any provision of this Article VI shall be found, in any proceeding or appeal therefrom or in any other circumstances or as to any person entitled to indemnification hereunder to be unenforceable, ineffective or invalid for any reason, the enforceability, effect and validity of the remaining parts or of such parts in other circumstances shall not be affected, except as otherwise required by applicable law.

Section 5. AMENDMENTS. The provisions of this Article VI shall be deemed to constitute an agreement between the corporation and each of the persons entitled to indemnification hereunder, for as long as such provisions remain in effect. Any amendment to the provisions of this Article VI which limits or otherwise adversely affects the scope of indemnification or rights of any such persons hereunder shall, as to such persons, apply only to claims or causes of action based on actions or events occurring after such amendment and delivery of notice of such amendment is given to the person or persons so affected. Until notice of such amendment is given to. the person or persons whose rights hereunder are affected, such amendment shall have no effect on such rights of such persons hereunder. Any person entitled to indemnification under the provisions of this Article VI shall as to any act or omission occurring prior to the date of receipt of such notice, be entitled to indemnification to the same extent as had such provisions continued as Bylaws of the corporation without such amendment."

ARTICLE VII

RECORDS AND REPORTS

Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The corporation shall keep at its principal executive office, or at the office of its transfer agent or registrar, if either be appointed and as determined by resolution of the Board of Directors, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each shareholder.

A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation may (i) inspect and copy the records of shareholders' names and addresses and shareholdings during usual business hours upon five (5) business days prior written demand upon the corporation, and/or (ii) obtain from the transfer agent of the corporation, upon written demand and upon the tender of such transfer agent's usual charges for such

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list, a list of the shareholders' names and addresses, who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which such list has been compiled or as of a date specified by the shareholder subsequent to the date of demand. Such list shall be made available to such shareholder or shareholders by the transfer agent on or before the later of five (5) business days after the demand is received or the date specified therein as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section I may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making such demand.

Section 2. MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall keep at its principal executive office, or if its principal executive office is not in the State of California at its principal business office in this state, the original or a copy of the bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside this state and the corporation has no principal business office in this state, the Secretary shall, upon the written request of any shareholder, furnish to such shareholder a copy of the bylaws as amended to date.

Section 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The accounting books and records and minutes of proceedings of the shareholders and the Board of Directors and any committee or committees of the Board of Directors shall be kept at such place or places designated by the Board of Directors, or, in the absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. Such minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as the holder of a voting trust certificate. Such inspection may be made in person or by an agent or attorney, and shall include the right to copy and make extracts. The foregoing rights of inspection shall extend to the records of each subsidiary corporation of the corporation.

Section 4. INSPECTION BY DIRECTORS. Every director shall have the absolute right at any reasonable time to inspect all books, records and documents of every kind and the physical properties of the corporation and each of its subsidiary corporations. Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy And make extracts.

Section 5. ANNUAL REPORT TO SHAREHOLDERS. The Board of Directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty days (120) after the close of the fiscal year adopted by the corporation. The annual report shall contain a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year, accompanied by any report thereon of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that such statements were prepared without audit from the books and records of the corporation. Such report shall be sent at least fifteen (15) days prior to the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in Section 5 of Article 11 of these bylaws for giving notice to shareholders of the corporation.

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Section 6. FINANCIAL STATEMENTS. A copy of any annual financial statement and any income statement of the corporation for each quarterly period of each fiscal year, and any accompanying balance sheet of the corporation as of the end of each such period, that has been prepared by the corporation shall be kept on file in the principal executive office of the corporation for twelve (12) months and each such statement shall be exhibited at all reasonable times to any shareholder demanding an examination of any such statement or a copy shall be mailed to any such shareholder.

If the corporation has not sent to the shareholders an annual report for the last fiscal year, a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year shall, upon the written request of any shareholder made more than one hundred twenty (120) days after the close of such fiscal year, be delivered or mailed to such shareholder within thirty (30) days after such request.

If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation make a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the current fiscal year ended more than thirty (30) days prior to the date of the request, and a balance sheet of the corporation as of the end of such period, the Chief Financial Officer shall cause such statement to be prepared, if not already prepared, and shall deliver personally or mail such statement or statements to the person making the request within thirty (30) days after the receipt of such request.

The corporation also shall, upon the written request of any shareholder, mail to the shareholder a copy of the last annual, semi-annual or quarterly income statement which it has prepared and a balance sheet as of the end of such period.

The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report thereon, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that such financial statements were prepared without audit from the books and records of the corporation.

ARTICLE VIII

GENERAL CORPORATE MATTERS

Section 1. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action, (other than action by shareholders by written consent without a meeting) the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days prior to any such action, and in such case only shareholders of record on the date so fixed are entitled to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date fixed as aforesaid. except as otherwise provided in the California General Corporation Law.

If the Board of Directors does not so fix a record date, the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such action, whichever is later.

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Section 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board of Directors.

Section 3. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board of Directors, except as otherwise provided in these bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific instances; and, unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or to any amount.

Section 4. CERTIFICATES FOR SHARES. A certificate or certificates for shares of the capital stock of the corporation shall be issued to each shareholder when any such shares are fully paid, and the Board of Directors may authorize the issuance of certificates or shares as partly paid provided that such certificates shall state the amount of the consideration to be paid therefor and the amount paid thereon. All certificates shall be signed in the name of the corporation by the Chairman of the Board or Vice Chairman of the Board or the President or Vice President and by the Chief Financial Officer or an Assistant Treasurer or the Secretary or any Assistant Secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue.

Section 5. LOST CERTIFICATES. Except as hereinafter in this
Section 5 provided, no new certificates for shares shall be issued in lieu of an old certificate unless the latter is surrendered to the corporation and cancelled at the same time. The Board of Directors may in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of a new certificate in lieu thereof, upon such terms and conditions as the board may require, including provision for indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate.

Section 6. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The Chairman of the Board, the President, or any Vice President, or any other person authorized by resolution of the Board of Directors by any of the foregoing designated officers, is authorized to vote on behalf of the corporation any and all shares of any other corporation or corporations, foreign or domestic, standing in the name of the corporation. The authority herein granted to said officers to vote or represent on behalf of the corporation any and all shares held by the corporation in any other corporation or corporations may be exercised by any such officer in person or by any person authorized to do so by proxy duly executed by said officer.

ARTICLE IX

AMENDMENTS

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Section 1. AMENDMENT BY SHAREHOLDERS. New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of two thirds of the outstanding shares entitled to vote.

Section 2. AMENDMENT BY DIRECTORS. Subject to the rights of the shareholders as provided in Section 1 of this Article IX, to adopt, amend or repeal bylaws, bylaws may be adopted, amended or repealed by the Board of Directors; provided, however, that the Board of Directors may adopt a bylaw or amendment thereof changing the authorized number of directors only for the purpose of fixing the exact number of directors within the limits specified in the Articles of Incorporation or Section 2 of Article III of these bylaws.

ARTICLE X

GENERAL

Section 1. GOVERNING LAW. This corporation is organized under the provisions of the California General Corporation Law (Corporations Code Sections 100-2319)as in effect on the date of filing of its original articles of incorporation, namely January 20, 1961. Upon such filing the California Secretary of State assigned the following corporation number to this corporation: 408367. The corporate affairs of this corporation shall be governed by and conducted in accordance with the provisions of the California General Corporation Law, as the same presently exist and are from time to time hereafter amended or superseded, except in those instances where the articles of incorporation or bylaws of this corporation, now or through amendment hereafter, may adopt alternative rules which are permissible under the California General Corporation Law. Any provision (or portion thereof)in these bylaws which is not permissible under the California General Corporation Law or is inconsistent with the articles of incorporation of this corporation (as they may from time to time be amended and supplemented)is void, but the balance of these bylaws shall nevertheless be valid and effective.

Section 2. CONSTRUCTION AND DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the California General Corporation Law shall govern the construction of these bylaws. Without limiting the generality of the foregoing, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person.

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CERTIFICATE OF SECRETARY

I, the undersigned, do hereby certify:

(1) That I am duly elected and acting Secretary of Mercury General Corporation, a California corporation; and

(2) That the foregoing bylaws constitute the bylaws of said corporation as duly adopted and restated by the board of directors of said corporation as of July 30, 1999.

IN WITNESS WHEREOF, I have' hereunto subscribed my name this ___ day of September, 1999.


Judy Walters, Secretary

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EXHIBIT 10.27

MASTER TRUST AGREEMENT

between

MERCURY GENERAL CORPORATION

and

BNY WESTERN TRUST COMPANY

Dated as of January 1, 1998

Account Number(s) ____________________



TABLE OF CONTENTS

                                                                                Page
                                                                                ----

                                   SECTION 1
                         ESTABLISHMENT OF MASTER TRUST
1.1  The Master Trust..........................................................  2
1.2  Appointment of Master Custodian...........................................  2
1.3  Establishment of Separate Funds...........................................  2
1.4  Participating Plans.......................................................  3
1.5  Title to Assets...........................................................  3
1.6  Acceptance of Trust.......................................................  3

                                   SECTION 2
                           INVESTMENT OF MASTER FUND

2.1  Appointment of Investment Managers and Investment Committee...............  4
2.2  Discretionary Funds.......................................................  4
2.3  Directed Funds............................................................  5
2.4  Settlement of Securities Transactions.....................................  6
2.5  Cash Balances.............................................................  6
2.6  Appointment of Administrative Agent.......................................  7
2.7  Transfer Among Funds......................................................  7
2.8  Transfers to Collective Trusts............................................  7
2.9  Insurance Contracts.......................................................  8

                                   SECTION 3
                            POWERS OF MASTER TRUSTEE

3.1  In General................................................................  9
3.2  At Direction of Named Fiduciary........................................... 11
3.3  With Respect to Participant-Directed Funds................................ 11
3.4  Administrative Powers..................................................... 11

                                   SECTION 4
                           REGISTRATION OF EMPLOYER STOCK

                                   SECTION 5
            ACCOUNTS TO BE MAINTAINED BY THE MASTER TRUSTEE; PAYMENTS FROM
                                THE MASTER TRUST

5.1  Accounts.................................................................. 13
5.2  No Separate Recordkeeping................................................. 14
5.3  Payments; Disputes........................................................ 14


5.4  Direct Deposit of Payments..............................................  14
5.5  Administrative Committee's Responsibility...............................  14
5.6  Returned and Uncashed Payments..........................................  15
5.7  No Liability for Contributions..........................................  15

                                   SECTION 6
                          VALUATION OF THE MASTER FUND

6.1  Valuation...............................................................  15
6.2  Units...................................................................  16

                                   SECTION 7
        ADMINISTRATIVE EXPENSES, TAXES AND MASTER TRUSTEE'S COMPENSATION

7.1  In General..............................................................  16
7.2  Fees of Investment Managers.............................................  17

                                   SECTION 8
      MASTER TRUSTEE'S AND BNY (NEW YORK)'S LIABILITY; NO DUTY TO REVIEW;
                                INDEMNIFICATION

8.1  Liability of Master Trustee and BNY (New York)..........................  17
8.2  No Duty to Review.......................................................  18
8.3  Reliance on Certain Appraisals..........................................  18
8.4  Indemnification of Master Trustee and BNY (New York)....................  18
8.5  Limitation of Indemnity.................................................  18
8.6  Indemnification of Successor Trustee....................................  18

                                   SECTION 9
                    SETTLEMENT OF MASTER TRUSTEE'S ACCOUNTS

9.1  Annual Accounting.......................................................  19
9.2  Other Accountings.......................................................  19
9.3  Settlement of Accounts..................................................  19
9.4  Waiver of Rights........................................................  20

                                   SECTION 10
                    SEGREGATION OF PARTS OF THE MASTER TRUST

10.1  Segregation............................................................  20
10.2  Segregated Property....................................................  20

2

                                   SECTION 11
 RESIGNATION AND REMOVAL OF MASTER TRUSTEE; RESIGNATION AND REMOVAL OF BNY (NEW
                          YORK) AS INVESTMENT MANAGER
11.1  Resignation and Removal of Master Trustee........................................  21
11.2  Resignation and Removal of BNY (New York) as Investment Manager..................  21

                                   SECTION 12
             EVIDENCE OF ACTION BY COMPANY, INVESTMENT MANAGERS AND
INVESTMENT AND ADMINISTRATIVE COMMITTEES, AND OF APPOINTMENT OF NAMED FIDUCIARY,
        INVESTMENT MANAGERS AND INVESTMENT AND ADMINISTRATIVE COMMITTEES

                                   SECTION 13
  AMENDMENT OF AGREEMENT, TERMINATION OF TRUST, TERMINATION OF PARTICIPATING PLAN

13.1  Amendment of Agreement...........................................................  23
13.2  Termination of Master Trust......................................................  23
13.3  Termination of Participating Plan................................................  23
13.4  Exclusive Benefit................................................................  23

                                   SECTION 14
                    INALIENABILITY OF BENEFITS AND INTERESTS

14.1  Of the Participants..............................................................  24
14.2  Of the Participating Plans.......................................................  24

                                   SECTION 15
        NO MERGER, CONSOLIDATION OR TRANSFER OF PLAN ASSETS OR LIABILITIES.............  24

                                   SECTION 16
                    SPECIAL PROVISIONS RELATING TO ESOP FEATURE

16.1  Employer Stock Fund..............................................................  24
16.2  Acquisition Loan.................................................................  25
16.3  Suspense Account.................................................................  26
16.4  ESOP Contributions...............................................................  26
16.5  Tender for Employer Stock........................................................  26
16.6  Voting Employer Stock; Options and Other Rights..................................  28

SECTION 17 GOVERNING LAW

3

MASTER TRUST AGREEMENT

THIS AGREEMENT made as of January 1, l998 by and between MERCURY GENERAL CORPORATION, a California corporation (hereinafter referred to as the "Company"), and BNY WESTERN TRUST COMPANY, a trust company organized pursuant to the laws of the State of California (the "Master Trustee");

W I T N E S S E T H:

WHEREAS, the Company and certain of its subsidiaries and affiliates have heretofore adopted or may hereafter adopt various qualified deferred compensation plans for the benefit of its or their employees, as set out in Exhibit A hereto, as amended from time to time (each such plan is referred to herein as a "Participating Plan", and the Company and any such subsidiary or affiliate are referred to herein as the Participating Plan's "Employer"); and

WHEREAS, each Participating Plan set forth on Exhibit A hereto provides, among other things, for the financing by means of a trust fund of all or a part of the benefits to be paid pursuant to the Plan to certain employees (herein called "Participants") of the Employer and their beneficiaries (hereinafter called "Beneficiaries"); and

WHEREAS, one or more of the Participating Plans contains an employee stock ownership plan feature(hereinafter referred to as the "ESOP Feature") within the meaning of Section 4975(e)(7) of the Internal Revenue Code of 1986, as amended (the "Code"), and Section 407(d)(6) of the Employee Retirement Income Security Act of 1974, as amended (the "Act"), which allows the Participating Plan to enter into loans guaranteed by the Company that are exempt from the prohibited transaction rules pursuant to Section 4975(d)(6) of the Code and
Section 408(b)(3) of the Act (each an "Acquisition Loan") to purchase shares of common and/or convertible preferred stock of the Company or any subsidiary or affiliate thereof qualifying as "employer securities" within the meaning of
Section 409(l) of the Code and Section 407(d)(5) of the Act ("Employer Stock"), and each Participating Plan is intended to qualify under Section 401(a) of the Code; and

WHEREAS, the Company and the Master Trustee wish to establish a Master Trust in which the assets of the Participating Plans may be pooled and commingled, solely for investment purposes, to facilitate the investment of such assets on a diversified basis and in accordance with the other requirements of the Act; and

WHEREAS, the Master Trustee, with the consent of the Company, intends to appoint the Master Trustee's New York affiliate, The Bank of New York ("BNY (New York)") as Master Custodian of the assets of the Participating Plans pursuant to the terms of the Master Custody Agreement submitted to the Company herewith;

NOW, THEREFORE, the Company and the Master Trustee agree as follows:


SECTION 1

ESTABLISHMENT OF MASTER TRUST

1.1 The Master Trust. The Company hereby establishes with the Master Trustee, a trust (hereinafter referred to as the "Master Trust") which shall comprise all of the funds and other assets delivered herewith to the Master Trustee, together with such other sums of money and such property acceptable to the Master Trustee as shall from time to time be paid or delivered to the Master Trustee hereafter, all investments made therewith and proceeds thereof and the earnings and profits thereon. All such funds and property, together with such investments, proceeds and earnings and profits, less the payments or other distributions which, at the time of reference, shall have been made by the Master Trustee as authorized herein, are referred to as the "Master Funds." Each Participating Plan shall constitute a part of the Master Trust.

1.2 Appointment of Master Custodian. The Company hereby authorizes the Master Trustee to appoint BNY (New York) as Master Custodian of the assets of the Participating Plans in accordance with and pursuant to the terms of the Master Custody Agreement submitted to the Company herewith. The Company also hereby authorizes the Master Trustee to delegate to BNY (New York) such powers, authorities, duties, obligations and responsibilities as the Master Trustee may from time to time deem appropriate. By executing this Agreement, the Company consents to such appointment. The Company or the Named Fiduciary (as defined in
Section 1.3) or the Administrative Committee or Investment Committee or anyone acting pursuant to their instructions may communicate, as is necessary, directly with BNY (New York).

1.3 Establishment of Separate Funds. The Master Fund shall consist initially of two funds: (1) a general fund consisting of all the assets of each Participating Plan that are not attributable to an ESOP Feature and (2) an Employer Stock Fund established pursuant to Section 16.1 consisting of the assets of each Participating Plan held by the Master Trustee pursuant to an ESOP Feature, which shall be invested and reinvested as provided in Section 16. At any time and from time to time the Master Trustee shall, if so directed by the Committee appointed by the Company's Board of Directors under the terms of each of the Participating Plans to act as the named fiduciary with respect to control or management of the operation and administration of the Participating Plans (hereinafter referred to as the "Named Fiduciary"), establish within the general fund one or more investment funds, each of which shall be invested or reinvested as provided in Section 2. The term "Fund", as used herein, shall mean the initial funds or any other investment fund so established, depending upon the fund to which such provision is being applied at the time, and the term "Master Fund" shall refer to all such funds in the aggregate. The functions of the Named Fiduciary may be divided among more than one person or persons (in which case the term "Named Fiduciary" shall refer to any such person or persons, as the context requires), and the same person or persons may serve as the Named Fiduciary and the Investment Committee and/or the Administrative Committee as hereinafter defined. The Master Trustee shall hold, manage, administer, value, make purchases and sales for, distribute, account for, and otherwise deal with each Fund separately.

2

1.4 Participating Plans. As of the date of establishment of any Fund and as of any Valuation Date, as defined in Section 6 below, the Master Trustee shall accept the transfer to such Fund of all or any portion of the assets of any Participating Plan, provided that:

Either (i) a determination letter has been received from the Internal

Revenue Service stating that the Participating Plan meets the requirements of
Section 40l(a) of the Code, or (ii) a request for such a determination letter

has been filed and the Master Trustee believes such Plan to meet the requirements of Section 40l(a) of the Code; and

In the case of the Participating Plan of a subsidiary or affiliate of the Company, such subsidiary or affiliate has joined in and has become a party to the Master Trust, and the Company has consented thereto, all by means of a joinder agreement substantially in the form of Exhibit B hereto.

Each subsidiary or affiliate of the Company joining in and adopting the Master Trust appoints the Company as its agent for purposes of this Agreement and agrees that (i) it shall be bound by the decisions, actions and

directions of the Company, the Named Fiduciary, and any Investment Manager, Investment Committee or Administrative Committee (as hereinafter defined) under this Agreement, and BNY (New York) (if appointed as an investment manager as provided below), (ii) the Company has the sole authority to enforce this

Agreement on behalf of such subsidiary or affiliate, and (iii) the Master

Trustee and any affiliate to whom it has delegated any responsibility pursuant to Section 1.2 shall be fully protected in relying upon such decisions, actions and direction and shall in no event be required to give notice to or otherwise deal with such subsidiary or affiliate except by dealing with the Company as agent of such subsidiary or affiliate.

The Master Trust shall, to the extent of each Participating Plan's interest in any Fund, constitute a part of such Plan. The Master Trustee shall be promptly notified by the Employer of each Participating Plan of any and all amendments made to such Plan, and of any determination or other action taken by the Internal Revenue Service with respect to its qualification under Section 40l(a) of the Code.

1.5 Title to Assets. No Participating Plan and no Participants or their Beneficiaries shall have any right, title or interest in or to any specific assets of the Master Fund, but shall have an undivided beneficial interest in the Master Fund valued in accordance with Section 6 hereof. Ownership of all the individual assets of the Master Fund shall be by the Master Trustee. The Master Trustee shall not issue any certificate or other documentation representing any interest in the Master Fund or part thereof.

1.6 Acceptance of Trust. The Master Trustee hereby accepts the Master Trust created by this Agreement on the terms and conditions herein set forth.

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SECTION 2

INVESTMENT OF MASTER FUND

2.1 Appointment of Investment Managers and Investment Committee. At the time each Fund is established, and from time to time thereafter, the Company shall determine and advise the Master Trustee and BNY (New York) whether the investment of such Fund is to be managed (a) by BNY (New York) in its sole

discretion as an investment manager as defined in Section 3(38) of the Act, (b)

by an investment manager who (i) is duly appointed by the Named Fiduciary, and

(ii) qualifies as an investment manager under Section 3(38) of the Act (an

"Investment Manager"), or (c) by an Investment Committee appointed by the Named

Fiduciary (the "Investment Committee"). Any Fund that is managed by BNY (New York) is hereinafter referred to as a "Discretionary Fund", and any Fund that is managed by an Investment Manager or Investment Committee is hereinafter referred to as a "Directed Fund". The term "Investment Manager" shall also refer to BNY (New York) in its capacity as an investment manager hereunder. BNY (New York)'s appointment as an investment manager shall not be effective unless and until (i) it is duly appointed by the Named Fiduciary in writing and (ii) it provides the Named Fiduciary with a written acceptance of such appointment and an acknowledgement that it is a fiduciary for such Fund under Section 3(21) of the Act.

In the event the Investment Manager of any Directed Fund resigns or is removed, the Named Fiduciary shall promptly notify the Master Trustee of such resignation or removal and of the appointment of a successor to such Investment Manager. Upon resignation or removal of an Investment Manager neither the Master Trustee nor BNY (New York) shall have or be deemed to have any responsibility to manage and control any asset held in the Directed Fund of such former Investment Manager, except as set out in the sentence immediately following. If an Investment Committee has been appointed, the Master Trustee shall treat such Fund as managed by the Investment Committee pending notification from the Named Fiduciary of the appointment of a different successor to the former Investment Manager; if no Investment Committee has been appointed and if no notification of the appointment of such a successor is received within seven days of notification to the Master Trustee of the former Investment Manager's resignation or removal, BNY (New York) shall be deemed appointed as investment manager and thereafter treat such Directed Fund as a Discretionary Fund unless and until it receives other instructions from the Named Fiduciary as to the investment of such Fund, and BNY (New York) shall be entitled to additional compensation in accordance with its regular fee schedule for discretionary accounts.

2.2 Discretionary Funds.

(a) Permitted Investments. The Master Trustee shall invest and reinvest, as directed by BNY (New York), any Discretionary Fund, without distinction between principal and income, in such property (real, personal or mixed) as BNY (New York), in its sole discretion, shall deem suitable for such Fund, including without limitation: any and all common stocks, preferred stocks, bonds, debentures, mortgages on real or personal property wherever situated, equipment trust certificates, notes or other evidence of indebtedness, or any other securities, certificates of deposit, demand or time deposits (including any such deposits, demand or time deposits with BNY Western Trust Company or The Bank of New York), shares of investment

4

companies and mutual funds (irrespective of whether BNY Western Trust Company or The Bank of New York is performing services therefor), interests in partnerships and trusts, insurance policies and contracts, repurchase agreements, and any other property or joint or other part interest in property (including, without limitation, part interests in bonds and mortgages or notes and mortgages), United States or foreign, whether situated within or outside the United States (provided that, except as provided in Section 3.3 hereof, the indicia of ownership thereof are not maintained outside the jurisdiction of the district courts of the United States), and of any kind, class or character, and irrespective in any case of whether BNY Western Trust Company or The Bank of New York or another, individually or as trustee or agent, is acting as participator of any part interest in property that may be acquired. Such investment and reinvestment shall not be restricted to property authorized for investment by trustees under any present or future law. A Discretionary Fund may be invested and reinvested whether or not the property acquired is productive of income, is marketable or constitutes a wasting asset. Without limiting the generality of the foregoing, a Discretionary Fund may be invested in stocks of any classification, bonds or other securities issued or guaranteed by the Company or a subsidiary or affiliate thereof, including Employer Stock, or in real property which is owned by or leased to the Company, or any subsidiary or affiliate thereof. Nothing herein contained, however, shall be deemed to purport to authorize any investment or reinvestment in violation of the requirements of the Act. The Master Trustee shall have no power, duty or authority to invest any Discretionary Fund, except pursuant to the direction of BNY (New York).

(b) Brokerage Commissions. In placing or directing securities transactions for a Discretionary Fund, the primary objective of BNY (New York) will be to obtain the most favorable net results, taking into account such factors as the best net price available, the size of and difficulty in executing the order, and the reliability, efficiency and financial responsibility of the broker or dealer. When it can be done consistently with this goal, BNY (New York) may allocate orders to brokers or dealers who also provide brokerage or research services (as defined in Section 28(e) of the Securities Exchange Act of l934). The Company understands that such brokerage and research services may be useful to other accounts managed by BNY (New York) and, similarly, research generated through commissions paid by such other accounts may be useful in connection with a Discretionary Fund.

(c) Funding Policy. The Named Fiduciary shall advise the Master Trustee and BNY (New York) in writing of any funding policy and method or investment guidelines which have been established to carry out the objectives of each Participating Plan, and shall promptly advise the Master Trustee and BNY (New York) of any changes therein.

2.3 Directed Funds.

(a) Permitted Investments. Each Directed Fund shall be invested and reinvested, without distinction between principal and income, in any property authorized in Section 2.2(a) above as the Master Trustee may be directed by an Investment Manager or the Investment Committee with respect to any Fund managed by such Investment Manager or Investment Committee.

(b) Investment Instructions. An Investment Manager or the Investment Committee at any time and from time to time may issue orders directly to a broker for the

5

purchase or sale of securities for any Directed Fund that it manages. The Investment Manager or Investment Committee will promptly give or cause to be given to the Master Trustee or, if so advised in writing, to BNY (New York) notice of the issuance of such order and the broker will confirm such order or cause it to be confirmed to the Master Trustee or, as the case may be, BNY (New York). Such notice and confirmation may be given in writing, by telecopy or by any other electronic means using a code for the authentication of messages, and may include Trade Reports issued by the Institutional Delivery System of Depository Trust Company. Receipt of a matching notice and confirmation or of such Trade Report shall be authority for the Master Trustee or, as the case may be, BNY (New York) to settle such trade. The Master Trustee shall have no power, duty or authority to invest any Directed Fund, except pursuant to the direction of an Investment Manager or Investment Committee. Except as provided in Section 2.1, in the absence of directions or authorization from the Investment Manager or Investment Committee, neither the Master Trustee nor BNY (New York) shall have any power, duty or authority to invest any Directed Fund.

2.4 Settlement of Securities Transactions. When the Master Trustee or BNY (New York), as the case may be, is instructed to deliver property against payment, delivery of the property and receipt of payment may not be simultaneous. The risk of non-receipt of payment shall be the Master Trust's and neither the Master Trustee nor BNY (New York), as the case may be, shall have any liability therefor. All credits to the Master Trust of the anticipated proceeds of sales and redemptions of property and of anticipated income from property shall be conditional upon receipt by the Master Trustee or BNY (New York), as the case may be, of final payment and may be reversed to the extent final payment is not received. At the discretion of the Master Trustee or BNY (New York), as the case may be, the Master Trust may make use of such conditional credits. To the extent such credits do not become unconditional by receipt of final payment, the Master Trust shall reimburse the Master Trustee or BNY (New York), as the case may be, upon demand for the amount of such conditional credits so used. When the Master Trustee or BNY (New York), as the case may be, is instructed to receive property, it is authorized to accept documents in lieu of such property as long as such documents contain the agreement of the issuer thereof to hold such property subject to the Master Trustee's sole order. The Master Trustee or BNY (New York), as the case may be, may, in its respective discretion, advance funds to the Master Trust to facilitate the settlement of any trade. In the event of such an advance, the Master Trust shall immediately, and in no event later than three (3) days after the date of such advance, reimburse the Master Trustee or BNY (New York), as the case may be, for the amount thereof.

2.5 Cash Balances. BNY (New York) may direct the investment of all or any portion of any cash balances in any Discretionary Fund, and an Investment Manager or the Investment Committee may, with the prior acceptance of BNY (New York), by written authorization delegate to BNY (New York) authority to invest all or any portion of any cash balances in any Directed Fund, in the discretion of BNY (New York), including, without limitation, investments in part interests in obligations, irrespective of whether BNY Western Trust Company, The Bank of New York or another, individually or as trustee or agent, is acting as a participator. The Master Trustee shall not be liable for interest on any cash balances in any Discretionary Fund or Directed Fund that it holds uninvested pending receipt of directions from BNY (New York), the Investment Manager or the Investment Committee, as applicable. Neither the Master Trustee nor BNY (New York) shall be liable for interest on any cash balances in any

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Directed Fund that the Master Trustee holds uninvested pending receipt of directions from the Investment Manager or Investment Committee in the absence of authorization from the latter to invest the same at BNY (New York)'s direction in its sole discretion, nor liable for interest on any cash balances it may be authorized to direct the investment of in its sole discretion and may hold uninvested as it deems to be in the best interests of the Master Fund.

2.6 Appointment of Administrative Agent. The Named Fiduciary shall certify to the Master Trustee the name of any third party administrator (the "Administrative Agent") appointed by it or the Company to receive, cumulate and communicate investment and distribution directions with respect to Participant- Directed Funds from Participants, and to whom the Named Fiduciary has delegated such responsibility and authority as it shall communicate to the Master Trustee. For the purposes of this Agreement, such Administrative Agent shall be a delegee of the Named Fiduciary in accordance with Section 405(c)(1)(B) of the Act. The Master Trustee may rely on such certification and delegation until notified in writing to the contrary by the Named Fiduciary.

2.7 Transfer Among Funds. The Administrative Committee or the Administrative Agent shall direct the Master Trustee with respect to the allocation of assets to the Funds and with respect to transfers among the Funds. The Master Trustee or BNY (New York) shall have no duty to invest, and shall not be liable for interest on, any such assets it holds uninvested pending receipt of directions from the Administrative Committee or the Administrative Agent to allocate contributions among the Funds.

2.8 Transfers to Collective Trusts. Notwithstanding any provision of any Participating Plan or of this Agreement to the contrary, BNY (New York) may, in its sole discretion with respect to any Discretionary Fund and, if authorized or directed by the Investment Manager or Investment Committee of any Directed Fund, with respect to such Directed Fund, transfer all or any part of the assets of such Fund to, or withdraw the same from, any collective investment trust that shall be or shall have been created and administered by The Bank of New York or any of its affiliates, or if such Investment Manager is a bank, by such Investment Manager, for the collective investment of the property of employee benefit trusts of which The Bank of New York (or its affiliate) or such Investment Manager is trustee or agent, provided that such trust is qualified under the provisions of Section 40l(a) of the Code and exempt under the provisions of Section 50l(a) of the Code. To that end, the Master Trustee and BNY (New York) are each hereby expressly authorized to permit the commingling of any or all of the assets of such Fund with the assets of other trusts eligible to participate in such collective investment trust. BNY (New York) or any Investment Manager holding such trust funds shall have with respect to such funds the powers of the Master Trustee and BNY (New York) set forth in Sections 2.2(a), 3.1, 3.2 and 3.4. Neither the Master Trustee nor BNY (New York) shall have any responsibility for the custody or safekeeping of assets transferred to the collective investment trust of such an Investment Manager. To the extent that property of the Master Fund is invested in any collective investment trust as provided above, the declaration of trust pertaining thereto, as amended from time to time, and the trust thereby created, shall be a part of this Agreement and of each Participating Plan. The Master Trustee shall have, with respect to the interest of such Fund in such collective investment trust, the powers conferred by this Agreement to the extent that such powers are not inconsistent with the provisions of such declaration of trust. For purposes of any valuation of the Master Fund or any valuation of the

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interest or of the account of any Participant or Beneficiary under any Participating Plan, the interest of the Master Trust in such collective investment trust shall be valued at the times and in the manner prescribed by the declaration by which such trust was created. A copy of the declaration of trust as presently in effect of any collective investment trust to which the assets of any Participating Plan are transferred pursuant to this Section 2.8 shall be provided to the Named Fiduciary and copies of amendments thereto shall be forwarded to the Named Fiduciary promptly after their adoption.

2.9 Insurance Contracts.

(a) Procuring and Holding Contracts. The Master Trustee, upon written direction of the Named Fiduciary, shall pay from the Master Trust such sums to such insurance company or companies as the Named Fiduciary may direct for the purpose of procuring individual or group annuity contracts or other insurance contracts (hereinafter referred to as "Contracts"). The Named Fiduciary shall prepare, or cause to be prepared in such form as it shall prescribe, the application for any Contract to be applied for. The Master Trustee shall receive and hold in the Master Trust, subject to the provisions hereinafter set forth in this Section, all Contracts obtained, the proceeds of any sale, assignment or surrender of any such Contract, and any and all dividends and other payments of any kind received with respect to any such Contract.

(b) Exercising Rights under Contracts. The Master Trustee shall be the complete and absolute owner of Contracts held in the Master Trust, provided that the Named Fiduciary shall have power, without the consent of any other person, to exercise any and all of the rights, options or privileges that belong to the Master Trustee as such absolute owner or that are granted by the terms of any such Contract or by the terms of this Agreement, and the Master Trustee shall not exercise any of the foregoing powers or take any other action permitted by any such Contract other than upon the written direction of the Named Fiduciary. The Master Trustee shall have no duty to exercise any of such powers or to take any such action unless and until it shall have received such direction. The Master Trustee, upon the written direction of the Named Fiduciary, shall deliver any Contract held in the Master Trust to such person or persons as may be specified in the direction.

(c) Payment of Premiums. Upon the written direction of the Named Fiduciary, the Master Trustee shall pay from the Master Trust premiums, assessments, dues, charges and interest, if any, upon any Contract held in the Master Trust. The Master Trustee shall have no duty to make any such payment unless and until it shall have received such direction.

(d) Payments under Contract. Any sums paid out by any insurance company under the terms of a Contract held in the Master Trust either to the Master Trustee, or, in accordance with its direction, to any other person or persons designated as payees in such Contract shall be a full and complete discharge of the liability to pay such sums, and the insurance company shall have no obligation to look to the disposition of any sums so paid. No insurance company shall be required to look into the terms of this Agreement, or to question any action of the Master Trustee or to see that any action of the Master Trustee is authorized by the terms of this Agreement.

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(e) Liability of Master Trustee; Indemnification. Anything contained herein to the contrary notwithstanding, to the extent permitted by law, neither the Master Trustee nor BNY (New York) shall be liable for the refusal of any insurance company to issue or change any Contract or to take any other action requested by the Master Trustee; for any assets invested in a Contract at the direction of the Named Fiduciary; for the form, terms, genuineness, validity, sufficiency or effect of any Contract held in the Master Trust; for the act of any person or persons that may render any such Contract null and void; for the failure of any insurance company to pay the proceeds of any such Contract as and when the same shall become due and payable; for any delay in payment resulting from any provision contained in any such Contract nor for the fact that for any reason whatsoever (other than the negligence or willful misconduct of the Master Trustee or BNY (New York)) any Contract shall lapse or otherwise become uncollectible. The Company hereby agrees to indemnify the Master Trustee and BNY (New York), as the case may be, and to hold each harmless from and against any claim, liability, loss, damage or expense that may be asserted against the Master Trustee or BNY (New York) by reason of any action taken or omitted by the Master Trustee or BNY (New York) in connection with any Contract at the direction of the Named Fiduciary.

SECTION 3

POWERS OF MASTER TRUSTEE

3.1 In General. The Master Trustee is authorized and empowered, at the direction of BNY (New York) with respect to a Discretionary Fund, and at the direction of an Investment Manager or the Investment Committee, with respect to a Directed Fund managed by such Investment Manager or Committee, upon such conditions, at such prices and in such manner, as BNY (New York) shall direct in the case of a Discretionary Fund, and as the Investment Manager or Investment Committee shall direct in the case of a Directed Fund, to:

(1) purchase or subscribe for any securities or other property, including Employer Stock, and to retain in trust such securities or other property;

(2) sell, exchange, convey, transfer or otherwise dispose of any property, real or personal, at any time held by the Master Trustee, by private contract or at public auction, for cash or on credit, and no person dealing with the Master Trustee shall be bound to see to the application of the purchase money or to inquire into the validity, expediency or propriety of any such sale or other disposition; provided, however, that the Master Trustee shall have no power to tender Employer Stock held by the Master Trustee in the Employer Stock Fund (as defined in Section 16.1), except in accordance with Section 16.5;

(3) grant options to purchase securities held in the Fund ("covered call options") and other property held in the Fund and options to sell securities and other property to the Fund, as well as combinations of such options to purchase and such options to sell; and to acquire options to purchase securities and other property for the Fund and options to sell securities and other property held in the Fund, as well as combinations of such options to purchase and such options to sell;

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(4) sell or exercise any conversion privileges, subscription rights, warrants or other options and to make any payments incidental thereto, and to consent to or otherwise participate in corporate reorganizations, mergers, consolidations or other changes affecting corporate securities and to delegate discretionary powers and to pay any assessments or charges in connection therewith; but the Company understands that, where warrants, options, tenders or other rights have fixed expiration dates, in order for the Master Trustee or, upon appointment of BNY (New York) as Master Custodian, for BNY (New York) to act with respect to a Directed Fund, it must receive instructions at its offices, addressed as the Master Trustee or BNY (New York), as the case may be, may from time to time request, by no later than noon (at the Master Trustee's office or, if so notified by BNY (New York), at BNY (New York)'s office) at least one business day prior to the last scheduled date to act with respect thereto (or such earlier date or time as the Master Trustee or BNY (New York), as the case may be, may direct); provided, however, that the Master Trustee shall have no power to exercise such rights with respect to Employer Stock held by the Master Trustee in the Employer Stock Fund, except in accordance with
Section 16.5;

(5) compromise, compound, settle or arbitrate any claim, debt or obligation due to or from it as Master Trustee and to reduce the rate of interest on, extend or otherwise modify, or to foreclose upon default or otherwise enforce any such obligation; to bid in property on foreclosure or to take a deed in lieu of foreclosure with or without paying consideration therefor and in connection therewith to release the obligation on the bond secured by the mortgage, and, in the case of a Discretionary Fund, to abandon any property determined by BNY (New York) to be worthless;

(6) vote upon any stocks, bonds or other securities and to give general or special proxies or powers of attorney with or without power of substitution, and to enter into any voting trust or similar agreement; provided that, in the case of a Directed Fund, unless the Master Trustee or BNY (New York), as the case may be, is instructed otherwise, all proxies and proxy materials relating to securities held in the Master Fund shall be signed by the Master Trustee or BNY (New York), as the case may be, without indication of voting preference, and forwarded to the Investment Manager or Investment Committee for the making of all decisions with respect thereto; and provided further that Employer Stock held by the Master Trustee in the Employer Stock Fund shall be voted by the Master Trustee in the manner provided in Section 16.6;

(7) manage, administer, operate, lease for any period of years, regardless of any restrictions on leases made by fiduciaries, develop, improve, repair, alter, demolish, mortgage, pledge, grant options with respect to or otherwise deal with any real property or interest therein at any time held by it;

(8) for the purposes of the Master Trust, engage in transactions involving financial futures, including but not limited to stock index futures, and options on financial futures; and in carrying out such transactions to open accounts to trade in and to make or take delivery of financial futures, to provide original, variation, maintenance and other required margin in the form of moneys, securities, or otherwise, and to exercise options; and

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(9) generally exercise any of the powers of an owner with respect to stocks, bonds, securities or other property held in any Fund; except as limited under Sections 16.5 and 16.6 with respect to Employer Stock held by the Master Trustee in the Employer Stock Fund.

3.2 At Direction of Named Fiduciary. The Master Trustee is authorized and empowered to, or to so authorize and empower BNY (New York) to, with the approval of the Named Fiduciary with respect to any Fund:

(1) for the purposes of the Master Trust, borrow money from any person or persons, including BNY Western Trust Company or The Bank of New York (except that an Acquisition Loan shall not be obtained from BNY Western Trust Company or The Bank of New York), to issue the Master Trust's promissory note or notes therefor, and to secure the repayment thereof by pledging, mortgaging or otherwise encumbering any property in its possession, including, with respect to an Acquisition Loan, ESOP Stock (as defined in Section 16.3); and

(2) designate The Bank of New York to act on its behalf in lending securities held in the Master Fund to brokers, dealers, banks or other financial institutions, for such additional compensation as the Named Fiduciary and The Bank of New York shall agree, all on such terms as are consistent with the Act.

3.3 With Respect to Participant-Directed Funds. The Master Trustee is authorized and empowered, at the direction of the Administrative Committee, as defined in Section 5.1, or the Administrative Agent (which direction may include standing instructions) with respect to any Participant-Directed Fund, to sell, or to purchase, any property held in such Funds, as appropriate to effectuate transfers among Funds in accordance with Section 2.7, and/or distributions from Funds in accordance with Section 5.3. If the Master Trustee is not able to execute fully Participants' investment directions at a particular time, the Master Trustee shall execute the instructions to the extent possible.

3.4 Administrative Powers. The Master Trustee is authorized and empowered to, or to so authorize and empower BNY (New York) to, in its sole administrative discretion with respect to both Discretionary and Directed Funds, to:

(1) determine the fair market value of Employer Stock; provided, however, in the case of Employer Stock not readily tradable on an established securities exchange, any valuation of such Employer Stock (including valuation at the time of an initial public offering of Employer Stock) shall be provided to the Master Trustee by the Named Fiduciary in accordance with the provisions of Section 6;

(2) make, execute, acknowledge and deliver any and all documents of transfer and conveyance and any and all other instruments that may be necessary or appropriate to carry out the powers granted herein;

(3) collect all interest, dividends and other income payable with respect to property in the Master Fund, and to surrender securities at maturity or when advised of earlier call for redemption, provided that neither the Master Trustee nor BNY (New York) shall be liable for failure to surrender any security in a Directed Fund for redemption prior to maturity or take other action if notice of such redemption or other action was not provided to the Master

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Trustee or BNY (New York), as the case may be, by the issuer, the Investment Manager, the Investment Committee or one of the nationally recognized bond or corporate action services to which the Master Trustee or BNY (New York) subscribes;

(4) exchange securities in temporary form for securities in definitive form, and to effect an exchange of shares where the par value of stock is changed;

(5) hold property in its vaults, at a domestic or (to the extent permitted by regulations issued by the Secretary of Labor under Section 404(b) of the Act) foreign central depository or clearing corporation, in non- certificated form with the issuer, on Federal Book Entry at the Federal Reserve Bank of New York, with a custodian appointed pursuant to clause (6) below, or, with the approval of the Named Fiduciary, at any other location;

(6) appoint another bank as custodian for any foreign securities or other foreign assets constituting part of the Master Fund, and arrange for the custody of such securities or assets and the indicia of ownership thereof to be held outside the jurisdiction of the district courts of the United States by such other bank and/or its agents, to the extent permitted by regulations issued by the Secretary of Labor under Section 404(b) of the Act and pay the reasonable expenses and compensation of such bank from the Master Fund;

(7) hold property of the Master Trust in its own name or in the name of a nominee, including the nominee of any central depository, clearing corporation, or custodian with which securities of the Master Trust may be deposited (and the Company agrees to hold the Master Trustee or BNY (New York), as the case may be, and any such nominee harmless from any liability as a holder of record), and hold any investment in bearer form, but the books and records of the Master Trustee or BNY (New York), as the case may be, shall at all times show that all such investments are part of the Master Trust;

(8) form corporations and to create trusts under the laws of any state for the purpose of acquiring and holding title to any securities or other property, all on such terms and conditions as it deems advisable;

(9) employ suitable agents, including auditors and legal counsel (who may be counsel to the Company or to the Master Trustee or BNY (New York) in its corporate capacity) or other advisers, without liability for any loss occasioned by any such agent selected with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character with like aims, and to pay their reasonable expenses and compensation from the Master Fund; and

(10) take any action with respect to the Master Fund that it deems necessary in carrying out the purposes of this Agreement.

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SECTION 4

REGISTRATION OF EMPLOYER STOCK

In the event that the Master Trustee holds any Employer Stock which is not registered under Section 12 of the Securities Exchange Act of 1934, then in the event that the Master Trustee is required to dispose of any Employer Stock, or certain other securities issued or issuable with respect to any Participating Employer or other securities by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise, under circumstances which, in the opinion of the Master Trustee, require registration of such securities under the Securities Act of l933 and/or qualification of such securities under the Blue Sky laws of any state or states, then the Company, at its own expense, will promptly take or cause to be taken any and all action necessary or appropriate to effect such registration and/or qualification; in such event, the Master Trustee shall not be required to dispose of such securities until such registration and qualification are complete and effective, and the Master Trustee shall not be liable for any loss or depreciation of the Fund resulting from any delay attributable thereto. The Company will indemnify and hold the Master Trustee and its officers and directors harmless with respect to any claim, liability, loss, damage or expense incurred as a result of such registration or qualification or as a result of any information in connection therewith furnished by the Company or as a result of any failure by the Company to furnish any such information. The provisions of this section relating to the Master Trustee shall also apply to BNY (New York) to the extent it holds any Master Trust assets as Master Custodian.

SECTION 5

ACCOUNTS TO BE MAINTAINED BY THE MASTER TRUSTEE; PAYMENTS FROM THE MASTER TRUST

5.1 Accounts. The Master Trustee shall maintain separate accounts for each Participating Plan, which shall at all times reflect each Participating Plan's equitable share in the Master Fund, to which shall be credited all contributions received from such Plan's Employer and against which shall be charged all payments made pursuant to the written directions of the named fiduciary authorized to direct and make payments from the Participating Plans (the "Administrative Committee"). The Master Trustee may maintain one or more accounts for the purpose of making disbursements and such other purposes, if any, as may be reasonably required for the convenient administration of any Participating Plan or of the Master Trust. The Master Trustee may maintain any such account at The Bank of New York or one of its affiliates. Disbursements and payments of the Master Trust may be made by wire transfer or checks of the Master Trustee or an affiliate of the Master Trustee acting as the agent of the Master Trustee, and the parties acknowledge and agree that the Master Trust shall not be credited with earnings on the amount required to make disbursements or payments between the time such amount is transferred from the Master Trust at the direction of the Administrative Committee to make such disbursement or payment and the time the check is presented for payment (referred to as "disbursement account earnings"). Any disbursement account earnings shall be retained by and

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constitute compensation to the Master Trustee and its affiliates in addition to that listed at Exhibit C or Exhibit D, as applicable.

5.2 No Separate Recordkeeping. The Master Trustee shall not be require to maintain any separate records or accounts with respect to the Participants in any Participating Plan (or their Beneficiaries), and any such records or accounts required to be maintained pursuant to the terms of any such Plan shall be maintained by the Employer or by the named fiduciary authorized to direct and make payments from each Participating Plan.

5.3 Payments; Disputes. The Master Trustee, from time to time, upon receipt of an order from the Administrative Committee, shall make payments from the Master Fund to such persons (including the Administrative Committee or any member of such Committee), and in such amounts as the Committee shall direct, and amounts paid pursuant to such direction thereafter no longer shall constitute a part of the Master Trust. Each such order shall be in writing and shall specify the Participating Plan to whose account the payment is to be charged. Orders from the Administrative Committee need not specify the purpose of the payments so ordered, and the Master Trustee shall not be responsible in any way respecting the purpose or propriety of such payments or for the administration of the Participating Plans. Any such order shall constitute a certification that the payment directed is one which the Administrative Committee is authorized to direct, and the Master Trustee need make no further investigation. Payments by the Master Trustee may be made (i) by its check to

the order of the payee and mailed to the payee at the address last furnished to the Master Trustee by the Administrative Committee or by the payee, or if no such address has been so furnished, to the payee in care of the Company, or (ii)

by direct deposit to an account of the payee in accordance with Section 5.4. If a dispute arises as to who is entitled to or should receive any benefit or payment, the Master Trustee may withhold or cause to be withheld such payment until the dispute has been resolved. Should it be necessary in order to comply with any such distribution request by the Administrative Committee for the Master Trustee to sell any Employer Stock held in the Employer Stock Fund described in Section 16.1, the Master Trustee shall exercise its put rights, if applicable, pursuant to the terms of Section 16.1. In exercising such put rights, the Master Trustee shall be under no duty to perform its own valuation of the Employer Stock or otherwise verify the accuracy of such determination provided by the Administrative Committee pursuant to Section 6. The Company shall indemnify and hold the Master Trustee harmless from and against any actions, claims or losses resulting from any inaccuracies in the determination of the fair market value of the Employer Stock as provided to the Master Trustee by the Administrative Committee.

5.4 Direct Deposit of Payments. At the request of any Participant or Beneficiary, the Master Trustee shall deposit periodic payments directly into the bank account of such person, provided that such person and its depository bank shall have entered into a depository agreement with the Master Trustee that is satisfactory to the Master Trustee. The Company hereby agrees to indemnify the Master Trustee and its affiliates and to hold them harmless from and against any claim, liability, loss, damage or expense that may be asserted against them as a result of making any such deposit.

5.5 Administrative Committee's Responsibility. In directing the Master Trustee to make payments out of the Master Trust, the Administrative Committee shall follow

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the provisions of each Participating Plan, so that it shall be impossible, either during the existence or upon the discontinuance of such plan, for any part of the Master Fund to be used for or diverted to purposes other than for the exclusive benefit of the Participants in such Plan or their Beneficiaries, at any time prior to the satisfaction of all liabilities with respect to such Participants and Beneficiaries under such Plan, or for any part thereof to be paid or applied to the use of any Employer except, upon the termination of a Participating Plan, to the extent of any surplus resulting from an actuarial error.

5.6 Returned and Uncashed Payments. In the event that any payment ordered by the Administrative Committee shall be distributed by the Master Trustee in accordance with Section 5.3 or Section 5.4 and (i) such payment shall

be returned to the Master Trustee because the payee or the payee's account cannot be located at such address, or (ii) any check so mailed shall not be

presented for payment within six months of the date thereof, the Master Trustee shall promptly notify the Committee of such return or failure to present. Upon the expiration of 60 days after such notification such payment order shall become void, and unless and until a further order of such Committee is received by the Master Trustee with respect to such payment, the Master Trustee shall return such payment to the Master Trust and continue to administer the Master Trust and the account of such Plan as if such order had not been made. The Master Trustee shall not be obligated to search for or ascertain the whereabouts of any such person (or his duly appointed representative).

5.7 No Liability for Contributions. Neither the Master Trustee nor BNY (New York), as the case may be, shall be under any duty to enforce payment of any contribution and shall not be responsible for the adequacy of the Master Trust to meet and discharge any liabilities under any Participating Plan.

SECTION 6

VALUATION OF THE MASTER FUND

6.1 Valuation. As of the inception of the Master Fund, as of the close of the last business day of each month thereafter, and as of such other time or times as the Master Trustee may deem appropriate (the "Valuation Date"), the Master Trustee shall determine the market value of the of the Master Fund and of the interests of the various Participating Plans therein. For the purposes of this Section, a business day shall mean a day on which securities are traded on the New York Stock Exchange. Such determination may be made either by the Master Trustee itself or by such person or persons believed by the Master Trustee to be competent to make such determination as the Master Trustee may select, but in accordance with a method consistently followed and uniformly applied. The Master Trustee's determination of the value of the Master Fund and of the interest of each Participating Plan therein shall be conclusive and binding upon all Participating Plans and all Employers, the Named Fiduciary, the Administrative Committee, and Participants in such Plans and their Beneficiaries. If Employer Stock held in the Employer Stock Fund pursuant to an ESOP Feature is not readily tradable on an established market within the meaning of Section 409(h) of the Code, the Administrative Committee shall provide the Master Trustee with a determination of the value of the Employer Stock prior to any such Valuation Date. Such valuation shall be made by an independent appraiser that satisfies the requirements of Section 401(a)(28)(C) of the Code. Such valuation shall be deemed to be correct

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by the Master Trustee, and the Master Trustee shall be under no duty to perform its own valuation of the shares of Employer Stock or otherwise verify the accuracy of such determination provided by the Administrative Committee. The Company shall indemnify and hold the Master Trustee harmless from and against any actions, claims or losses resulting from any inaccuracies in the determination of the fair market value of the Employer Stock as provided to the Master Trustee by the Administrative Committee .

6.2 Units. The interest of each Participating Plan in the Master Fund shall be represented by whole and fractional units which shall be equal undivided interests in such Fund without priority or preference one over the other. The original unit of participation upon the establishment of the Master Fund shall be $l000, or such other amount as the Master Trustee may determine at that time. As of any Valuation Date the Master Trustee may make a uniform change in the size of all outstanding units of the Master Fund, by creating either a larger number of smaller units or a smaller number of larger units. As of each Valuation Date the Master Trustee shall determine the value per unit in the Master Fund by dividing the value of the Master Fund as determined in accordance with this Section by the number of existing units in the Fund. Transfers of cash and/or property to or from the separate accounts of the various Participating Plans shall be made only as of a Valuation Date and shall be based upon the value of a unit as of such Valuation Date, and the number of units charged or credited to the accounts of such Participating Plans shall be adjusted accordingly.

SECTION 7

ADMINISTRATIVE EXPENSES, TAXES AND MASTER TRUSTEE'S COMPENSATION

7.1 In General.All brokerage costs and transfer taxes incurred in connection with the investment and reinvestment of any Fund, all income taxes or other taxes of any kind whatsoever which may be levied or assessed under existing or future laws upon or in respect of such Fund, all expenses incurred in connection with the acquisition or holding of real or personal property, any interest therein or mortgage thereon, all other administrative expenses incurred by the Master Trustee or BNY (New York), as the case may be, in the performance of their respective duties, including fees for legal services rendered to the Master Trustee or BNY (New York), as the case may be, the compensation of the Master Trustee set forth in Exhibit C attached hereto, as the same may be amended from time to time as provided in this Section, and the investment management fees of BNY (New York) (if any) set forth at Exhibit D attached hereto, as the same may be amended from time to time, in respect of assets of a Discretionary Fund or assets of a Directed Fund that are invested pursuant to Sections 2.1 and 2.5 at the direction of BNY (New York), and all other proper charges and disbursements of the Master Trustee or BNY (New York), as the case may be, shall be paid by the Fund, and, until paid, shall constitute a charge upon the Fund. Any amount paid from the Master Fund which is specifically allocable to a particular Participating Plan shall be charged against the separate account reflecting the equitable share of such Participating Plan. From time to time the Master Trustee may provide the Company with written notice of an amendment to Exhibit C or Exhibit D. Such amendment shall become effective on the 60th day after the Master Trustee mails it to the Company unless the Company shall have provided the Master Trustee with written notice of objection thereto.

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7.2 Fees of Investment Managers. The Named Fiduciary may direct the Master Trustee to pay from the Master Fund the fees of any Investment Manager and the administrative expenses of any Participating Plan, including but not limited to actuarial fees.

SECTION 8

MASTER TRUSTEE'S AND BNY (NEW YORK)'S LIABILITY; NO DUTY TO REVIEW;
INDEMNIFICATION

8.1 Liability of Master Trustee and BNY (New York). With respect to a Discretionary Fund, neither the Master Trustee nor BNY (New York) shall be liable for any loss to or diminution of the Discretionary Fund resulting from any action taken or omitted by the Master Trustee or BNY (New York), as the case may be, except if due to any failure of the Master Trustee or BNY (New York) to act in accordance with the requirements of Part 4 of Title I of the Act. With respect to any Directed Fund hereunder and the Employer Stock Fund, neither the Master Trustee nor BNY (New York) shall be liable for the making, retention or sale of any investment or reinvestment made or received by it at the direction of a Named Fiduciary (including an ESOP Feature Participant acting in the capacity of a Named Fiduciary with respect to tender instructions under Section 16.5), an Investment Manager or the Investment Committee, as herein provided, nor for any loss to or diminution of the Fund resulting from any action taken, or from any act omitted, by the Master Trustee or BNY (New York) at the direction of a Named Fiduciary, an Investment Manager or the Investment Committee as herein provided. Neither the Master Trustee nor BNY (New York) shall be liable for any loss to or diminution of the Fund resulting from any action taken or omitted by the Master Trustee or BNY (New York), other than at the direction of an Investment Manager or the Investment Committee, except if due to any failure of the Master Trustee or BNY (New York) to act in accordance with the requirements of Part 4 of Title I of the Act. Neither the Master Trustee nor BNY (New York) shall be responsible for the adequacy of the funding policy of any Participating Plan of which it is advised pursuant to Section 2.2(c) or the diversification of the investments of any Participating Plan. Responsibility for monitoring adherence to funding policies and for investment diversification, and for advising the Master Trustee or BNY (New York) accordingly with respect to any Discretionary Fund and advising the Investment Manager or Investment Committee accordingly with respect to any Directed Fund, shall rest solely with the Named Fiduciary.

The Master Trustee and BNY (New York) may from time to time consult with legal counsel, who may be counsel to the Company or to the Master Trustee or to BNY (New York) in its corporate capacity, and shall be fully protected in acting upon the advice of counsel.

To protect the Trust Fund from expenses which might otherwise be incurred, the Company shall have sole authority to enforce this Agreement on behalf of all persons claiming any interest in the Master Trust or under the applicable Plan, and no other person may institute or maintain any action or proceeding against the Master Trustee or BNY (New York) or the Master Trust in the absence of written authority from the Company or a judgment of a court of competent jurisdiction that in refusing authority the Company acted fraudulently or in bad faith.

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8.2 No Duty to Review. Supervision of Investment Managers and the Investment Committee shall be the exclusive responsibility of the Named Fiduciary. Neither the Master Trustee nor BNY (New York) shall be under any duty or obligation to review any investment or reinvestment made or received at the direction of an Investment Manager or the Investment Committee nor to make any recommendation as to the disposition or continued retention thereof. Without limiting the generality of the foregoing, in the case of any transaction which is both directed by and executed by or through an Investment Manager or the Investment Committee, the Investment Manager or Investment Committee shall have entire responsibility for assuring that the transaction does not violate the prohibitions of any applicable state or federal law, including Sections 406 and 407 of the Act.

8.3 Reliance on Certain Appraisals. To the extent that the Master Trustee or BNY (New York), as the case may be, shall be required to value the assets of the Master Fund for any purpose, including without limitation any valuation pursuant to Section 6, any accounting pursuant to Section 9 and any segregation of assets pursuant to Section l0 hereof, the Master Trustee or BNY (New York), as the case may be, may rely for all purposes of this Agreement upon any certified appraisal or other form of valuation submitted to it by any Investment Manager, the Administrative Committee or the Investment Committee and, with respect to any insurance contract referred to in Section 2.9 hereof, by the insurance company issuing such contract, and, with respect to an interest in any venture capital organization, the manager of such organization.

8.4 Indemnification of Master Trustee and BNY (New York). The Company recognizes that a burden of litigation may be imposed upon the Master Trustee or BNY (New York) as the result of some act or transaction fo which it has no responsibility or over which it has no control under this Agreement. Accordingly, the Company hereby agrees to indemnify the Master Trustee, individually and as Master Trustee under this Agreement, and BNY (New York), individually and as Master Custodian under the Master Custody Agreement, and their respective directors, officers and employees, and to hold them harmless from and against any claim, liability, loss, damage or expense which may be asserted against it or them by reason of any action taken or omitted by or on behalf of the Master Trustee or BNY (New York) at the direction of any Investment Manager or Investment Committee, the Named Fiduciary or the Administrative Committee or by virtue of being the holder of the Master Trust.

8.5 Limitation of Indemnity. Nothing herein is intended to or shall be construed to relieve the Master Trustee or BNY (New York) from any responsibility or liability it may have under Part 4 of Title I of the Act.

8.6 Indemnification of Successor Trustee. If BNY Western Trust Company is at any time acting as a successor trustee or if either BNY Western Trust Company or The Bank of New York succeeds to responsibilities hereunder for management of plan assets with respect to the Master Fund (or any portion thereof), the Company hereby agrees to hold BNY Western Trust Company and The Bank of New York harmless from and against any tax, claim, liability, loss, damage or expense incurred by or assessed against it as such successor, as a direct or indirect result of any act or omission of a predecessor trustee or any other person charged under any agreement affecting Master Fund assets with investment responsibility with respect to such assets.

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SECTION 9

SETTLEMENT OF MASTER TRUSTEE'S ACCOUNTS

9.1 Annual Accounting. The Master Trustee shall keep accurate and detailed accounts of all investments, receipts, disbursements and other transactions hereunder, accounting separately for each Fund, and all accounts, books and records relating thereto shall be open to inspection and audit at all reasonable times by any person designated by the Company or the Named Fiduciary. Within 90 days after the close of each fiscal year of the Master Trust (or such other date as may be agreed upon in writing between the Company and the Master Trustee), and within l20 days after the effective date of the removal or resignation of the Master Trustee as provided in Section 11 hereof, the Master Trustee shall file with the Company a written account, setting forth all investments, receipts, disbursements and other transactions effected by it during the year ending on such date (but not including any part of such year for which such an account has previously been filed) and certified as to the accuracy of the information set forth therein. Such account may incorporate by reference any and all schedules and other statements setting forth investments, receipts, disbursements and other transactions effected during the period for which such account is rendered which the Master Trustee has furnished to the Company prior to the filing of such account. Each account so filed (and copies of any schedules and statements incorporated therein by reference as aforesaid) shall be open to inspection at the offices of the Company and the Master Trustee during their respective regular business hours by the Named Fiduciary and the Employer of each Participating Plan to which it relates, by any person designated by either of the foregoing, by Participants and Beneficiaries of each such Plan, and by any Administrative Committee, Investment Manager or Investment Committee affected thereby, for a period of 60 days immediately following the date on which the account is filed with the Company. If for any reason an account required of the Master Trustee hereunder shall not be filed within the applicable time specified in the preceding sentence, such account may be filed by the Master Trustee after the expiration of such time, provided such account otherwise complies with the requirements of this Agreement, and such account so filed shall be open to inspection as aforesaid by any of the parties aforementioned for a period 90 days immediately following the date on which the account is filed. In the event that any assets of the Fund have been transferred to a collective investment trust pursuant to Section 2.8 hereof, such account shall include a copy of the latest annual written account of such collective investment trust.

9.2 Other Accountings. The Master Trustee shall provide to the Company from time to time such other reports as may be agreed upon between the Master Trustee and the Company. The Company agrees to examine each such report promptly and to file any exceptions thereto within 90 days of the date thereof.

9.3 Settlement of Accounts. Upon the expiration of the 60-day or 90- day period, as the case may be, referred to in Section 9.1 or 9.2, the Master Trustee and BNY (New York) shall be forever released and discharged from all liability and accountability to anyone with respect to the account or report, including, without limitation, all acts and omissions of the Master Trustee or BNY (New York) shown or reflected in such account or report, except with respect to any acts or omissions as to which the Company, the Named Fiduciary or the Administrative Committee shall have filed written objections with the Master Trustee within such 60-day or 90-day period, as the case may be. Nothing herein contained shall impair the

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right of the Master Trustee to a judicial settlement of any account of proceedings rendered by it. In any proceeding for such judicial settlement the only necessary parties shall be the Master Trustee, the Company, the Named Fiduciary, the Administrative Committee and any other party or parties whose participation is required by law, and any judgment, decree or final order entered therein shall be conclusive on all persons having or claiming an interest in the Master Trust or any Participating Plan.

9.4 Waiver of Rights. The provisions of this Agreement set forth the Company's rights to obtain and object to an accounting. The Company hereby waives any other or different rights it may have under the laws of California, New York and any other state where the Master Trust may be administered.

SECTION 10

SEGREGATION OF PARTS OF THE MASTER TRUST

10.1 Segregation. The equitable share of a Participating Plan in the Master Trust shall be segregated and withdrawn from the Master Trust upon the occurrence of any of the following events:

(a) Receipt by the Master Trustee of notice that such Participating Plan has been held by the Internal Revenue Service or by any court of competent jurisdiction not to qualify under Section 401(a) of the Code, or a successor provision, or of other information giving the Master Trustee reason to believe that such Plan may not be so qualified; or

(b) Receipt by the Master Trustee of notice from the Company that such Participating Plan has been terminated or that the Employer of such Participating Plan has terminated its joinder in the Master Trust.

The equitable share in the Master Trust of all or any part of a Participating Plan or the proportionate share of any Participant or group of Participants and their Beneficiaries may be segregated and withdrawn from the Master Trust upon the direction of the Named Fiduciary setting forth the portion of such Participating Plan's equitable share to be so treated or the Participants and Beneficiaries for whose accounts such segregation and withdrawal are to be carried out. The Master Trustee may condition its transfer or distribution of any assets upon the Master Trustee's receiving assurances satisfactory to it that the approval of appropriate governmental or other authorities has been secured and that all notice and other procedures required by applicable law have been complied with.

10.2 Segregated Property. Segregation and withdrawal of the equitable share of a Participating Plan or a Participant or group of Participants shall be made as of the Valuation Date immediately following the date of the notice or instruction referred to in Section 10.1, based upon the units in the Master Trust credited to the Participating Plan's account as of such date. The selection of the particular assets to be segregated pursuant to Section 10.1 shall be made by the Named Fiduciary. Such property shall be held as a separate trust fund for the exclusive benefit of the Participants of the withdrawing Plan (or of the withdrawing Participant

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or group of Participants) and their Beneficiaries, under a separate agreement of trust substantially identical to this Agreement.

SECTION 11

RESIGNATION AND REMOVAL OF MASTER TRUSTEE; RESIGNATION AND REMOVAL OF BNY (NEW

YORK) AS INVESTMENT MANAGER

11.1 Resignation and Removal of Master Trustee. The Master Trustee may resign at any time upon 60 days' notice in writing to the Company and the Named Fiduciary. The Master Trustee may be removed by the Company at any time upon 60 days' notice in writing to the Master Trustee and the Named Fiduciary. If within such 60-day period a successor to the Master Trustee shall not have been appointed, the resigning or removed Master Trustee may apply to any court of competent jurisdiction for the appointment of such successor. Any successor master trustee shall have the same powers and duties as those conferred upon the Master Trustee hereunder (other than those relating to the collective investment trust of The Bank of New York) and subject to receipt by the Master Trustee of written acceptance of such appointment by the successor master trustee, the Master Trustee shall assign, transfer and pay over to such successor master trustee the moneys and properties then constituting the Master Fund, withdrawing any part of any Fund then held in The Bank of New York's collective investment trust. The Master Trustee may reserve such sum of money as it may deem advisable for payment of its and BNY (New York)'s reasonable fees and expenses in connection with the settlement of their account or otherwise. Payment of such fees and expenses may be withdrawn from such reserve. Any balance of such reserve remaining after the payment of such fees and expenses shall be paid over to the successor master trustee. If such reserve shall be insufficient to pay such charges, such resigning or removed Master Trustee shall be entitled to recover the amount of any deficiency from the Company or from the successor master trustee or from both the Company and the successor master trustee. All provisions of this Agreement shall apply to any successor master trustee appointed as aforesaid with the same force and effect as if such successor had been originally named herein as the Master Trustee.

11.2 Resignation and Removal of BNY (New York) as Investment Manager.

BNY (New York) may resign as an investment manager to a Discretionary Fund at any time upon 30 days' notice in writing to the Named Fiduciary. BNY (New York) may be removed by the Named Fiduciary at any time upon 30 days' notice in writing to BNY (New York) and the Master Trustee. In the event that BNY (New York) is removed as investment manager of a Discretionary Fund, the Named Fiduciary shall provide BNY (New York) and the Master Trustee with written notice of the appointment of a successor investment manager. Upon the removal of BNY (New York) as the investment manager of a Discretionary Fund, neither the Master Trustee nor BNY (New York) shall be deemed to have any responsibility to manage and control any asset held in the former Discretionary Fund, except as set out in the following sentence. If an Investment Committee has been appointed, the Master Trustee shall treat such Fund as managed by the Investment Committee pending notification from the Named Fiduciary of the appointment of a different successor to BNY (New York); if no Investment Committee has been appointed and if no notification of the appointment of such a successor is received within seven days of notification to the Master Trustee of BNY (New York)'s removal, BNY (New

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York) shall thereafter continue to treat such Fund as a Discretionary Fund unless and until it receives other instructions from the Named Fiduciary as to the investment of such Fund.

SECTION 12

EVIDENCE OF ACTION BY COMPANY, INVESTMENT MANAGERS AND INVESTMENT AND
ADMINISTRATIVE COMMITTEES, AND OF APPOINTMENT OF NAMED FIDUCIARY, INVESTMENT
MANAGERS AND INVESTMENT AND ADMINISTRATIVE COMMITTEES

Except as otherwise herein provided, any action by the Company or any other Employer pursuant to any of the provisions of this Agreement shall be evidenced by a resolution of its Board of Directors (which may include a resolution authorizing one or more officers to act on such Employer's behalf) certified by its Secretary or any Assistant Secretary, and the Master Trustee and BNY (New York) shall be fully protected in acting in accordance with such resolution so certified to it. The Company shall furnish the Master Trustee from time to time with certified copies of resolutions of its Board of Directors or of other corporate action appointing and terminating the office of the Named Fiduciary and the Administrative Committee, and appointing and terminating any Investment Committee, and appointing successors. The Named Fiduciary shall furnish the Master Trustee with a copy of the instrument duly appointing and terminating any Investment Committee, and appointing and terminating successors thereto. The Named Fiduciary shall file with the Master Trustee a copy of the instrument duly appointing each Investment Manager, who shall file with the Master Trustee a copy of his written acceptance of his appointment and acknowledgment that he is a "fiduciary" with respect to the Participating Plans within the meaning of Section 3(21) of the Act and due evidence of his qualification under Section 3(38) (B) of the Act, and a copy of the instrument, if any, designating BNY (New York) as investment manager of a Discretionary Fund in accordance with Section 2.1. Any such appointment shall continue to be effective until receipt by the Master Trustee of written notice to the contrary from the Named Fiduciary. Each Investment Manager and the Investment Committee shall furnish the Master Trustee from time to time with a certificate setting forth the name and specimen signature of each person authorized to act on its behalf. Unless otherwise provided in a certificate from the Named Fiduciary, all orders, requests and instructions to the Master Trustee from the Named Fiduciary or the Administrative Committee shall be in writing or by telecopy signed by two authorized persons, and all orders, requests and instructions to the Master Trustee from an Investment Manager or the Investment Committee shall be in writing, by telecopy or by any other electronic means using a code for the authentication of messages, and signed or transmitted by an authorized representative of the Investment Manager or Investment Committee, and the Master Trustee and BNY (New York) shall be fully protected in acting in accordance with any such order, request, or instruction. The Master Trustee and BNY (New York) shall have the right to rely on and shall be fully protected in acting in accordance with any resolution, order, request or instruction which it believes to be genuine and which purports to have been signed or transmitted in accordance with this section.

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SECTION 13

AMENDMENT OF AGREEMENT, TERMINATION OF TRUST, TERMINATION OF PARTICIPATING PLAN

13.1 Amendment of Agreement. Subject to the restrictions set forth below, the Company reserves the right at any time and from time to time to modify, amend or terminate, in whole or in part, any or all of the provisions of this Agreement; provided, however, that no such modification or amendment which affects the rights, duties or responsibilities of the Master Trustee or BNY (New York) may be made without the written consent of the Master Trustee, for itself or on behalf of BNY (New York), as applicable.

13.2 Termination of Master Trust. In the event of the termination of the Master Trust, the Master Trustee shall continue to administer the Master Trust as hereinabove provided until all of the purposes for which it has been established have been accomplished or the Master Trustee has disposed of the Master Fund after the payment of or other provision for all expenses incurred in the administration of the Master Trust (including any compensation to which the Master Trustee may be entitled), all in accordance with the written order of the Company or any successor thereto. Until the final distribution of the Master Fund, the Master Trustee shall continue to have and may exercise all of the powers and discretion conferred upon it by this Agreement. Upon any such termination, or the resignation or removal of the Master Trustee under Section 11 hereof, Section 7.1 and all indemnities herein, including without limitation those set forth in Sections 2.9(e), 3.4(7), 4, 5.4, 6.1, 8.3, 8.4 and 8.6 hereof, shall remain in full force and effect.

13.3 Termination of Participating Plan. Upon receipt of notice from the Company that any Participating Plan is terminated in whole or in part, with respect to all or any group of Participants and their Beneficiaries under the Plan, the Master Fund, or the portion thereof with respect to which the Plan is terminated, shall, subject to the provisions of Section 7 hereof, be segregated in accordance with Section l0 and held and/or disposed of by the Master Trustee in accordance with the written order of the Administrative Committee. The Master Trustee may condition its delivery, transfer or distribution of any assets upon the Master Trustee's receiving assurances satisfactory to it that the approval of appropriate governmental or other authorities has been secured and that all notice and other procedures required by applicable law have been complied with.

13.4 Exclusive Benefit. Anything in this Agreement to the contrary notwithstanding, at no time prior to the satisfaction of all liabilities with respect to the Participants of any Participating Plan and their Beneficiaries shall any part of the equitable share of such Participating Plan in the Master Fund be used for or diverted to purposes other than for the exclusive benefit of such Participants and their Beneficiaries, and defraying reasonable expenses of administering the Participating Plans; provided, however, that nothing herein contained shall preclude the return to an Employer of any contribution whose return is permitted by Section 403(c) of the Act or successor legislation.

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SECTION 14

INALIENABILITY OF BENEFITS AND INTERESTS

14.1 Of the Participants. No distribution or payment under this Agreement to any Participant or Beneficiary under any Participating Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, whether voluntary or involuntary, and no attempt so to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the same shall be valid or recognized by the Master Trustee, nor shall any such distribution or payment be in any way liable for or subject to the debts, contracts, liabilities, engagements or torts of any person entitled to such distribution or payment, except in the case of any voluntary and revocable assignment of any benefit payment permitted by law or any "Qualified Domestic Relations Order" as defined in Section 414(p) of the Code and except to such extent as may otherwise be required by law. If the Master Trustee is notified by the Administrative Committee that any such Participant or Beneficiary has been adjudicated bankrupt or has purported to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge any such distribution or payment, voluntarily or involuntarily, the Master Trustee shall, if so directed by the Committee, hold or apply such distribution or payment or any part thereof to or for the benefit of such Participant or Beneficiary in such manner as the Committee shall direct.

14.2 Of the Participating Plans. The equitable share of a Participating Plan in the Master Fund shall not be subject in any manner to anticipation, alienation, sale, transfer, pledge, encumbrance or charge whether voluntary or involuntary, except to such extent as may otherwise be required by law.

SECTION 15

NO MERGER, CONSOLIDATION OR TRANSFER OF PLAN ASSETS OR LIABILITIES

Anything herein to the contrary notwithstanding, the Master Trust shall under no circumstances be so operated as to permit, and nothing herein contained shall be deemed to authorize, any merger, consolidation, or transfer of the assets or liabilities of a Participating Plan with or to any other Participating Plan except in compliance with the provisions of the Act and the Code which are applicable to such mergers, consolidations, or transfers, including without limitation Sections 208 and 4043(B)(8) of the Act and Sections 40l(a)(l2), 4l4(l) and 6058(b) of the Code and Regulations promulgated pursuant to the foregoing Sections.

SECTION 16

SPECIAL PROVISIONS RELATING TO ESOP FEATURE

16.1 Employer Stock Fund. The Named Fiduciary hereby directs the Master Trustee to establish and maintain a separate fund for purposes of the ESOP Feature (the "Employer Stock Fund") that shall be invested primarily in Employer Stock. For the purposes of exercising the powers granted to the Master Trustee under Section 3.1, the Employer Stock Fund

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shall be deemed to be a Directed Fund, subject to the provisions of this Section
16. The Investment Committee shall direct the Master Trustee to invest and reinvest the assets of the Employer Stock Fund, without distinction between principal and income, primarily in Employer Stock. The Master Trustee, at the direction of the Investment Committee may retain appropriate cash or cash equivalent reserves to cover liquidity needs. Notwithstanding any otherwise applicable fiduciary standard relating to (i) diversification of Fund assets,

(ii) the income history provided by the Employer Stock or (iii) the possible

volatility in the fair market value of Employer Stock, the Investment Committee is expressly authorized to direct the Master Trustee to hold 100% of the assets of the Employer Stock Fund in shares of Employer Stock. Subject to the foregoing, the Master Trustee and the Investment Committee shall manage the Employer Stock Fund in a manner consistent with the Act, the Code and applicable securities laws. The Master Trustee shall have the right to require the Company to purchase Employer Stock for its current fair market value (the "put right") as described in this Section 16.1. This put right shall apply only to the extent that the Employer Stock is not readily tradable on an established securities market in accordance with federal and state securities laws and regulations. The put right shall be exercisable by written notice to the Named Fiduciary during the first 60 days of any calendar year or within 60 days of receipt of a determination of the value of the Employer Stock from the Administrative Committee as provided in Section 6.1. Prior to any sale or other transfer of Employer Stock by the Master Trustee (if at the time of such sale or other transfer the Employer Stock is not readily tradable on an established securities market), the Master Trustee must first offer the Employer Stock to the Company and the Administrative Committee at its current fair market value as determined by an independent appraiser who meets the requirements of Section 401(a)(28)(C) of the Code and is otherwise acceptable to the Master Trustee.

16.2 Acquisition Loan. The Master Trustee, if so directed by the Company or the Named Fiduciary pursuant to directions that are consented to by the Master Trustee (which consent shall not to be unreasonably withheld), may enter into one or more Acquisition Loans with any lender (including a party in interest as defined in Section 3(14) of the Act) to finance the acquisition of Employer Stock, or to repay a prior Acquisition Loan. The Master Trustee shall purchase and continue to hold such Employer Stock in the Employer Stock Fund for the benefit of ESOP Feature Participants pursuant to the provisions of the ESOP Feature until otherwise directed by the Named Fiduciary; subject, however, to the requirements of the Code and the Act to the extent applicable to an ESOP. The Master Trustee may refinance any Acquisition Loan and, in connection with any such refinancing, shall repay any such Acquisition Loan; provided that such refinancing or any change in the terms of an Acquisition Loan used to acquire Employer Stock may be done only at the direction or with the consent of the Company or the Named Fiduciary. The Master Trustee may secure an Acquisition Loan by pledging the Employer Stock acquired with the proceeds of such Loan ("ESOP Stock"). No other assets of the Master Fund may be pledged by the Master Trustee as collateral for an Acquisition Loan.

Pursuant to directions from the Named Fiduciary, Employer contributions made pursuant to an ESOP Feature ("ESOP Contributions"), earnings attributable to such ESOP Contributions and cash dividends on ESOP Stock shall be used to amortize any outstanding Acquisition Loan, unless the Master Trustee is directed to do otherwise by the Named Fiduciary. The Master Trustee shall apply dividends on Employer Stock held in accounts other than in the Suspense Account (as defined in Section 16.3) as directed by the Named Fiduciary; provided, however, that no dividends on Employer Stock that is allocated to an ESOP Feature Participant

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may be used to repay an Acquisition Loan unless Employer Stock with a fair market value not less than the amount of such dividends is allocated to such ESOP Feature Participant pursuant to the terms of the ESOP Feature. Notwithstanding the foregoing, if the Master Trustee is unable to pay any such Acquisition Loan when due, the Master Trustee may sell unallocated shares of ESOP Stock to repay the Acquisition Loan without the direction or consent of the Named Fiduciary. Should it be necessary for the Master Trustee, at the direction of the Investment Committee or otherwise, to sell any Employer Stock held in the Employer Stock Fund to comply with any such repayment, the Master Trustee shall exercise its put rights pursuant to the terms of Section 16.1.

16.3 Suspense Account. The Master Trustee shall hold ESOP Stock in a separate account ("Suspense Account") until released from such Suspense Account pursuant to directions from the Administrative Committee and the provisions of the ESOP Feature and allocated to the individual accounts of ESOP Feature Participants that are maintained by the Administrative Committee.

16.4 ESOP Contributions. To the extent that ESOP Contributions are made in cash, the Master Trustee shall apply such contribution to amortize any outstanding Acquisitions Loans to the extent directed to do so pursuant to
Section 16.2. Unless otherwise directed by the Named Fiduciary, the Master Trustee shall use any cash ESOP Contribution that is not used to pay principal or interest on an Acquisition Loan pursuant to Section 16.2 to purchase Employer Stock either from other shareholders, on the open market, from the Company or otherwise. Notwithstanding the preceding sentence, BNY (New York), if authorized, may direct the Master Trustee to temporarily invest any such cash ESOP Contribution in accordance with Section 2.5 pending its investment in Employer Stock. To the extent that an ESOP Contribution is made in Employer Stock, the Master Trustee shall retain such Employer Stock in the Employer Stock Fund until otherwise directed by the Named Fiduciary.

16.5 Tender for Employer Stock. To the extent not otherwise inconsistent with the Master Trustee's fiduciary duties under the Act, all tender or exchange decisions with respect to Employer Stock held by the Master Trustee in the Employer Stock Fund shall be made by ESOP Feature Participants, acting as Named Fiduciaries with respect to both allocated and unallocated shares of Employer Stock ("Shares"), in accordance with the provisions of this
Section 16.5:

(a) In the event the Master Trustee receives an offer (including a tender offer for Shares subject to Section 14(d)(1) of the Securities Exchange Act of 1934 (the "1934 Act")or subject to Rule 13e-4 promulgated under the 1934 Act) to purchase or exchange any Shares held by the Master Trustee in the Employer Stock Fund, the Master Trustee will advise in writing each ESOP Feature Participant who has Shares allocated to his individual account under the ESOP Feature of the terms of the offer as soon as practicable after its commencement and will furnish each such ESOP Feature Participant with a form by which he may confidentially instruct the Master Trustee whether or not to tender or exchange Shares allocated to his account and a proportionate amount of any unallocated Shares. The materials furnished by the Master Trustee shall include (i) a

notice from the Master Trustee that the Master Trustee will not tender or exchange any Shares (allocated or unallocated) for which timely instructions are not received by the Master Trustee and (ii) such related documents that are

prepared by any person and provided

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to shareholders of the Company pursuant to the 1934 Act. The Company and the Named Fiduciary will cooperate with the Master Trustee to ensure that ESOP Feature Participants receive the requisite information in a timely manner.

(b) The Master Trustee shall tender or not tender Shares, or exchange Shares, allocated to any ESOP Participant's individual account (including fractional Shares) only as and to the extent instructed by such Participant as a Named Fiduciary. With respect to Shares allocated to a deceased Participant, such Participant's Beneficiary, as a Named Fiduciary, shall be entitled to direct the Master Trustee as if such Beneficiary were the Participant. If the Master Trustee does not timely receive tender or exchange instructions for allocated Shares, the Master Trustee shall treat non-receipt as a direction not to tender or exchange such Shares. Any instructions received by the Master Trustee from Participants or Beneficiaries shall be held by the Master Trustee in strict confidence and shall not be divulged to any person, except as otherwise required by law.

(c) Each ESOP Feature Participant who is entitled to direct the Master Trustee whether or not to tender or exchange allocated Shares shall, as Named Fiduciaries, separately direct the Master Trustee with respect to the tender or exchange of a proportionate share of unallocated Shares. Such direction (treating non-receipt of directions as a direction not to tender or exchange) shall be made with respect to the aggregate number of unallocated Shares attributed to the ESOP Feature of the applicable Participating Plan multiplied by a fraction, the numerator of which is the number of Shares allocated to the Participant's individual account under the ESOP Feature of the Participating Plan and the denominator of which is the total number of Shares allocated to the individual accounts of all ESOP Feature Participants in such Participating Plan. Fractional Shares shall be rounded to the nearest 1/1000/th/ of a Share.

(d) In the event that, under the terms of a tender offer or otherwise, any Shares tendered for sale, exchange or transfer pursuant to such offer may be withdrawn from such offer, the Master Trustee shall follow such instructions from Participants entitled to give instructions under this Section 16.5, as Named Fiduciaries, respecting the withdrawal of such Shares from such offer.

(e) In the event that an offer for fewer than all of the Shares held by the Master Trustee is received by the Master Trustee, each ESOP Feature Participant who has been allocated any Shares subject to such offer shall be entitled to direct the Master Trustee as to the acceptance or rejection of such offer (as provided in paragraphs (a)-(d) of this Section 16.5) with respect to the largest portion of such Employer Stock as may be possible given the total number of Shares the Master Trustee may sell, exchange or transfer pursuant to the offer based on instructions received by the Master Trustee from all other Participants who shall timely instruct the Master Trustee pursuant to this
Section 16.5, each on a pro rata basis in accordance with the number of such Shares allocated to the Participants' accounts.

(f) In the event that an offer shall be received by the Master Trustee and instructions shall be solicited from Participants pursuant to paragraphs (a)-(d) of this Section 16.5 regarding such offer, and prior to termination of such offer another offer is received by the Master Trustee for the Shares subject to the first offer, the Master Trustee shall use its best efforts under the circumstances to solicit instructions from the Participants
(i) with respect to

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Shares tendered for sale, exchange or transfer pursuant to the first offer, whether to withdraw such tender, if possible and, if withdrawn, whether to tender any Shares so withdrawn for sale, exchange or transfer pursuant to the second offer and (ii) with respect to securities not tendered pursuant to the

first offer, whether to tender or not to tender such securities pursuant to the second offer.

(g) Funds received by the Master Trustee in exchange for tendered Shares shall be credited to the account, including the Suspense Account, from which such Shares were tendered. Unless the Named Fiduciary directs otherwise, the Master Trustee shall invest such proceeds in Employer Stock as soon as practicable. Notwithstanding the previous sentence, BNY (New York), if authorized, may direct the Master Trustee to temporarily invest the proceeds of any tender of unallocated Shares in accordance with Section 2.5 pending investment in Employer Stock.

16.6 Voting Employer Stock; Options and Other Rights. To the extent not otherwise inconsistent with the Master Trustee's fiduciary duties under the Act, all voting rights on Shares held by the Master Trustee shall be exercised by the Master Trustee in accordance with the following provisions of this
Section 16.6:

(a) As soon as practicable before each annual or special shareholder's meeting of the Company (or an affiliate or subsidiary, if applicable), the Master Trustee shall furnish to each ESOP Feature Participant a copy of the proxy solicitation material sent generally to shareholders, together with forms requesting confidential instructions on how the Shares allocated to such Participant's account (including fractional Shares) are to be voted. The Company and the Named Fiduciary shall cooperate with the Master Trustee to ensure that Participants receive the requisite information in a timely manner. The materials furnished to the Participants shall include a notice from the Master Trustee that any allocated Shares for which timely instructions are not received by the Master Trustee will be voted by the Master Trustee as directed by the Named Fiduciary in its discretion. Upon timely receipt of such instructions, the Master Trustee (after combining votes of fractional Shares to give effect to the greatest extent to Participants' instructions) shall vote the Shares as instructed. If voting instructions for Shares allocated to any Participant's account are not timely received by the Master Trustee for a particular shareholder's meeting, such Shares shall be voted by the Master Trustee as directed by the Named Fiduciary in its discretion. The instructions received by the Master Trustee from Participants or Beneficiaries shall be held by the Master Trustee in strict confidence and shall not be divulged or released to any person, except as otherwise required by law.

(b) With respect to all corporate matters submitted to shareholders. all Shares allocated to Participants' accounts shall be voted only in accordance with directions of such Participants as Named Fiduciaries. Each Participant shall be entitled to direct the voting of Shares (including fractional Shares) allocated to his account. With respect to shares allocated to the account of a deceased Participant, such Participant's Beneficiary, as Named Fiduciary, shall be entitled to direct the voting with respect to such allocated Shares as if such Beneficiary were the Participant. If, however, voting instructions for Shares allocated to any Participant's account are not timely received by the Master Trustee for a particular shareholder's meeting, such Shares shall be voted by the Master Trustee as directed by the Named Fiduciary in its discretion.

28

(c) Shares that are unallocated to any Participant's account shall be voted by the Master Trustee as directed by the Named Fiduciary in its discretion.

SECTION 17

GOVERNING LAW

This Agreement shall be administered and construed according to the internal substantive laws (and not the choice of law rules) of the State of California, except as may otherwise be required by Section 5l4 of the Act. The invalidity, illegality or unenforceability of any provision of this Agreement shall in no way affect the validity, legality or enforceability of any other provision. The Master Trust shall at all times be maintained as a domestic trust in the United States.

IN WITNESS WHEREOF, this Agreement has been executed and made effective as of the date first above written, by the duly authorized officers of the Company and BNY Western Trust Company.

(Corporate Seal)                    MERCURY GENERAL CORPORATION

Attest:

By______________________________    By______________________________
   Name:                               Name:
   Title:                              Title:

(Corporate Seal)                    BNY WESTERN TRUST COMPANY

Attest:

By______________________________    By______________________________
   Name:                               Name:

Title: Title:

29

STATE OF            )
                    :  ss.
COUNTY OF           )

On _________________________, l997, before me, the undersigned, a Notary Public for the State of California, personally appeared __________________ and __________________ who declared to me that they are officers of MERCURY GENERAL CORPORATION, referred to as the Company under the Master Trust Agreement; that as officers they are duly authorized to execute Trust Agreements for the Company; that they have read the foregoing Master Trust Agreement and know its contents; and that they have executed said Agreement.

WITNESS my hand and official seal.


Notary Public

(Seal)


STATE OF CALIFORNIA )

: ss.

COUNTY OF )

On _______________________, l997, before me, the undersigned, a Notary Public for the State of California, personally appeared ___________________ and _________________ who declared to me that they are officers, namely:
__________________ and _______________________, respectively, of BNY WESTERN TRUST COMPANY, a California trust company, the Master Trustee under the Master Trust Agreement; that as officers they are duly authorized to execute Trust Agreements for BNY WESTERN TRUST COMPANY; that they have read the Master Trust Agreement and know its contents; and that they have executed said Agreement.

WITNESS my hand and official seal.


Notary Public

(Seal)


EXHIBIT A

PARTICIPATING PLANS

1. Mercury General Corporation Profit Sharing Plan


EXHIBIT B

JOINDER AGREEMENT

AGREEMENT made this ______ day of ____________, l9__, by and among
[Name of Affiliate] (hereinafter called the "Employer"), a corporation organized pursuant to the laws of ______________, BNY WESTERN TRUST COMPANY, a trust company organized pursuant to the laws of the State of California, and MERCURY GENERAL CORPORATION (the "Company"), a corporation organized pursuant to the laws of California.

W I T N E S S E T H:

WHEREAS, the Employer is a subsidiary or affiliate of the Company and has previously adopted a_____________________ Plan for the benefit of its employees (hereinafter referred to as the "Plan"), which Plan as amended to date and as currently in effect is set out in Exhibit A annexed hereto, and wishes BNY Western Trust Company to serve as trustee of the trust that funds benefits under the Plan; and

WHEREAS, BNY Western Trust Company is currently serving as trustee of the trust for the plans of the Company, its Subsidiaries and Affiliates under the Master Trust Agreement dated January 1, l998, (the "Master Trust");

NOW, THEREFORE, the parties hereto agree as follows:

The Employer hereby joins in and becomes a party to the Master Trust, and adopts the same as part of the Plan. The Company hereby consents to such joinder.


IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and their corporate seals to be affixed hereto and attested as of the day and year first above written.

                                    [Name of Affiliate]

Attest:

By_______________________________   By_______________________________
   Name:                               Name:
   Title:                              Title:

                                    BNY WESTERN TRUST COMPANY

Attest:

By_______________________________   By_______________________________
   Name:                               Name:
   Title:                              Title:

                                    MERCURY GENERAL CORPORATION

Attest:

By_______________________________   By_______________________________
   Name:                               Name:

Title: Title:

2

EXHIBIT C

FEE SCHEDULE

BNY WESTERN TRUST COMPANY

January 1, 1998


EXHIBIT D

FEE SCHEDULE

INVESTMENT MANAGEMENT FEES

THE BANK OF NEW YORK

January 1, 1998

[Include management fees for Collective Trust, if applicable


EXHIBIT 10.28

EXECUTION COPY


ESOP LOAN AGREEMENT

between

UNION BANK OF CALIFORNIA, N.A.

and

BNY WESTERN TRUST COMPANY,
AS TRUSTEE OF THE
MERCURY GENERAL CORPORATION
PROFIT SHARING PLAN MASTER TRUST

Dated as of

September 29, 1998



TABLE OF CONTENTS

                                                                      Page
                                                                      ----
ARTICLE I     DEFINITIONS AND CONSTRUCTION..........................     1
     1.1      Definitions...........................................     1
     1.2      Accounting Terms and Determinations...................    10
     1.3      Computation of Time Periods...........................    10
     1.4      Construction..........................................    10
     1.5      Exhibits and Schedules................................    11
     1.6      No Presumption Against any Party......................    11
     1.7      Independence of Provisions............................    11

ARTICLE II    TERMS OF THE LOAN.....................................    11
     2.1      The Loan..............................................    11
     2.2      Principal Payments....................................    12
     2.3      Interest Rates; Payments of Interest..................    12
     2.4      Maturity Date.........................................    13
     2.5      Conversion or Continuation Requirements...............    13
     2.6      LIBOR Costs...........................................    14
     2.7      Illegality; Impossibility.............................    15
     2.8      Disaster..............................................    16
     2.9      Increased Risk-Based Capital Cost.....................    16
     2.10     Note; Statements......................................    17
     2.11     Holidays..............................................    17
     2.12     Time and Place of Payments............................    17

ARTICLE III   CONDITIONS TO LOAN....................................    18
     3.1      Conditions Precedent to the Loan......................    18

ARTICLE IV    REPRESENTATIONS AND WARRANTIES OF BORROWER............    19
     4.1      Due Organization......................................    19
     4.2      Requisite Power.......................................    19
     4.3      Binding Agreements....................................    19
     4.4      No Conflict...........................................    20
     4.5      Litigation............................................    20
     4.6      Consents..............................................    20
     4.7      Use of Proceeds.......................................    20
     4.8      Tax Returns...........................................    20
     4.9      Burdensome Agreements, etc............................    20
     4.10     Financial Information.................................    20
     4.11     Existing Defaults.....................................    21
     4.12     Casualty..............................................    21

i

     4.13     Investment Company Act................................    21
     4.14     Public Utility Holding Company Act....................    21
     4.15     Disclosure............................................    21
     4.16     No Default............................................    21
     4.17     Compliance With Laws..................................    21
     4.18     Borrower..............................................    21
     4.19     Regulation U..........................................    22
     4.20     Liens.................................................    22
     4.21     Debt..................................................    22

 ARTICLE V    AFFIRMATIVE COVENANTS.................................    22
     5.1      Punctual Payments.....................................    22
     5.2      Tax Returns...........................................    22
     5.3      Maintenance of Records................................    22
     5.4      Records Retention.....................................    22
     5.5      Payment of Taxes......................................    23
     5.6      Compliance with Laws..................................    23
     5.7      Use of Funds..........................................    23
     5.8      Notice to Bank........................................    23
     5.9      Compliance Certificate................................    24

ARTICLE VI    NEGATIVE COVENANTS....................................    24
     6.1      Sale of Assets........................................    24
     6.2      Guaranty; Pledge......................................    24
     6.3      Prohibited Transactions...............................    24
     6.4      Debt..................................................    24
     6.5      Liens.................................................    24
     6.6      Misrepresentations....................................    24

ARTICLE VII   EVENTS OF DEFAULT AND REMEDIES........................    25
     7.1      Events of Default.....................................    25
     7.2      Acceleration..........................................    26
     7.3      Cumulative Remedies...................................    27

ARTICLE VIII  MISCELLANEOUS.........................................    27
     8.1      Modifications in Writing..............................    27
     8.2      No Waivers............................................    27
     8.3      Notices, etc..........................................    27
     8.4      Bank Expenses; Documentary Taxes; Indemnification.....    27
     8.5      Sale of Participation.................................    28
     8.6      Headings..............................................    28
     8.7      Execution in Counterparts.............................    28
     8.8      Binding Effect; Assignment............................    28
     8.9      Severability of Provisions............................    28

ii

8.10     Publicity.............................................    28
8.11     Complete Agreement....................................    28
8.12     Governing Law.........................................    28
8.13     Dispute Resolution....................................    29

iii

EXHIBITS

Exhibit 2.5(b) - Form of Notice of Continuation or Conversion Exhibit 5.10 - Form of Compliance Certificate

iv

ESOP LOAN AGREEMENT

This ESOP LOAN AGREEMENT, dated as of September 29, 1998, is entered into by and between Bank and Borrower.

The parties hereto hereby agree as follows:

ARTICLE I

DEFINITIONS AND CONSTRUCTION

1.1 Definitions. For purposes of this Agreement, the following initially capitalized terms shall have the following meanings:

"Adjusted Net Worth" means, as at any date of determination, the sum of all amounts which would be included under Shareholders' equity on a Consolidated balance sheet of Mercury determined in accordance with GAAP (without adjusting the value of securities held by Mercury or its Subsidiaries to market value as contemplated under FASB 115 for securities designated as "available for sale").

"Agreement" means this ESOP Loan Agreement between Borrower and Bank, together with any and all amendments, extensions, restatements, addenda or supplements hereto, and any exhibits or schedules hereto or thereto.

"Ancillary Documents" means:

(a) the Note;

(b) the Guaranty;

(c) the ESOP Contributions Agreement;

(d) the Alternative Dispute Resolution Agreement, dated as of even date herein, between Borrower and Bank;

(e) the Alternative Dispute Resolution Agreement, dated as of even date herein, between Mercury and Bank; and

(f) any and all amendments, restatements, replacements, extensions, renewals or continuations of any of the foregoing.

1

"Applicable Base Lending Rate Margin" and "Applicable LIBOR
Lending Rate Margin" mean the correlative percentage, per annum, set forth in the table opposite the applicable Leverage Ratio, as disclosed in the latest Compliance Certificate delivered pursuant to Section 5.10:

Applicable                      Applicable
                             LIBOR Lending      Base Lending Rate
Leverage Ratio:              Rate Margin:            Margin:
---------------              ------------       -----------------
less than or equal to
     0.10:1.00               35.0 basis points  0 basis points

greater than 0.10:1.00
but less than or equal to
     0.15:1.00               40.0 basis points  0 basis points

greater than 0.15:1.00       52.5 basis points  0 basis points

"Asset" means any interest of a Person in any kind of property or asset, whether real, personal, or mixed real and personal, and whether tangible or intangible.

"Bank" means Union Bank of California, N.A.

"Bank Expenses" means (i) all expenses of Bank paid or incurred in connection with Bank's due diligence and investigation of Borrower, including appraisal, filing, recording, documentation, publication and search fees and other such expenses, and all reasonable attorneys' fees and expenses (including attorneys' fees incurred pursuant to proceedings arising under the Bankruptcy Code) incurred in connection with the structuring, negotiation, drafting, preparation, execution and delivery of this Agreement, the Ancillary Documents, and any and all other documents, instruments and agreements entered into in connection herewith; (ii) all expenses of Bank, including reasonable attorneys' fees and expenses (including attorneys' fees incurred pursuant to proceedings arising under the Bankruptcy Code) paid or incurred in connection with the negotiation, preparation, execution and delivery of any waiver, forbearance, consent, amendment or addition to this Agreement or any Ancillary Document, or the termination hereof and thereof; (iii) all costs or expenses paid or advanced by Bank which are required to be paid by Borrower under this Agreement or the Ancillary Documents, including taxes and insurance premiums of every nature and kind of Borrower; and (iv) if an Event of Default occurs, all expenses paid or incurred by Bank, including attorneys' fees and expenses (including attorneys' fees incurred pursuant to proceedings arising under the Bankruptcy Code), costs of collection, suit, arbitration, judicial reference and other enforcement proceedings, and any other out-of-pocket expenses incurred in connection therewith or resulting therefrom, whether or not suit is brought, or in connection with any refinancing or restructuring of the Obligations and the liabilities of

2

Borrower under this Agreement, any of the Ancillary Documents, or any other document, instrument or agreement entered into in connection herewith in the nature of a "workout."

"Bank Statement Date" shall mean such date which falls ten days prior to (a) each Interest Payment Date, (b) ten days prior to each Principal Payment Date (if other than an Interest Payment Date), and (c) ten days prior to the Maturity Date (if other than an Interest Payment Date).

"Base Lending Rate" means the sum of the Base Rate plus the
Applicable Base Lending Rate Margin.

"Base Lending Rate Portion" means any portion of the Loan bearing interest at the Base Lending Rate.

"Base LIBOR" applicable to any Interest Period for a LIBOR Lending Rate Portion means the offered rate per annum (rounded upward to the nearest one-hundredth of one percent (.01%)), if any, to banks in the LIBOR market quoted by Bank at 11:00 a.m. California time, two (2) LIBOR Business Days prior to the first day of such Interest Period for Dollar deposits of an amount comparable to the principal amount of the LIBOR Lending Rate Portion for which the LIBOR Lending Portion is being determined with maturities comparable to the Interest Period for which such LIBOR Lending Rate will apply.

"Base Rate" means: the higher of (i) the Federal Funds Rate plus one-half percentage point (.50%) (50 basis points) or (ii) the Reference Rate.

"Borrower" shall mean BNY Western Trust Company, as the Trustee of the Mercury General Corporation Profit Sharing Plan Master Trust.

"Bridge Loan" shall mean the loan made by Mercury to Borrower pursuant to that certain ESOP Loan Agreement dated as of August 7, 1998, between Mercury and Borrower, which loan shall be repaid in full with the proceeds of the Loan.

"Business Day" means any day other than a Saturday, a Sunday, or a day on which commercial banks in the City of Los Angeles, California are authorized or required by law or executive order or decree to close.

"Change in Control" means the time at which (i) any Person (including a Person's Affiliates and associates) or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934) (other than the shareholders of Borrower on the Closing Date) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934) of a percentage (based on voting power, in the event different classes of stock shall have different voting powers) of the voting stock of Mercury equal to more than fifty (50%), or such Person or group shall otherwise obtain the power to control the election of the Board of Directors of Mercury, (ii) there shall be consummated any

3

consolidation or merger of Mercury pursuant to which Mercury's common stock (or other capital stock) would be converted into cash, securities or other property, other than a merger or consolidation of Mercury in which the holders of such common stock (or other capital stock) immediately prior to the merger have the same proportionate ownership, directly or indirectly, of common stock of the surviving corporation immediately after the merger as they had of Mercury's common stock immediately prior to such merger, or (iii) all or substantially all of Mercury's Assets shall be sold, leased, conveyed or otherwise disposed of as an entirety or substantially as an entirety to any Person (including an Affiliate or associate of Mercury) in one or a series of transactions.

"Closing Date" means September 29, 1998.

"Committee" means the Committee established pursuant to Article VIII of the Plan.

"Compliance Certificate" means a certificate of compliance to be delivered quarterly in accordance with Section 5.10, substantially in the form of Exhibit 5.10.

"Consolidated" means Mercury and its Subsidiaries which are consolidated for financial reporting purposes.

"Contractual Obligation" means, as applied to any Person, any provision of any security issued by that Person or of any material indenture, mortgage, deed of trust, contract, undertaking, agreement, or other instrument to which that Person is a party or by which it or any of its owned properties is bound or to which it or any of its owned properties is subject.

"Debt" means, with respect to any Person, the aggregate amount

of, without duplication: (i) all obligations for borrowed money; (ii) all obligations evidenced by bonds, debentures, notes, or other similar instruments;
(iii) all obligations to pay the deferred purchase price of property or services; (iv) all capitalized lease obligations; (v) all obligations or liabilities of others secured by a Lien on any Asset owned by such Person, whether or not such obligation or liability is assumed; and (vi) all obligations or liabilities of others guaranteed by such Person.

"Dollars" and "$" means United States of America dollars or such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts in the United States of America.

"ERISA" means the Employee Retirement Income Security Act of 1974, as supplemented or amended from time to time, or any successor statute, and any and all regulations and rules promulgated thereunder.

4

"ESOP" means the employee stock ownership plan, as such term is

used in Section 4975(e)(7) of the Internal Revenue Code, which was created by the ESOP Documents.

"ESOP Contributions Agreement" means that certain ESOP Contributions Agreement, dated as of even date herewith, between Borrower and Mercury, as amended from time to time.

"ESOP Documents" means the Plan, the Trust Agreement, all amendments thereto, all determination letters issued by the Internal Revenue Service with respect to the Plan or the Trust Agreement, resolutions and directives to Trustee by the Committee authorizing Trustee to enter into this Agreement and the Ancillary Documents to which Borrower is a party, and a verification executed by a Responsible Officer of Mercury attesting to the membership and the signatures of the members of the Committee.

"ESOP Stock" means the outstanding common stock of Mercury acquired by Borrower with the proceeds of the Bridge Loan.

"Event of Default" shall have the meaning set forth in Section 7.1.

"Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and any successor statute, and the rules and regulations thereunder.

"Federal Funds Rate" means for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of San Francisco, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by Bank from three Federal funds brokers of recognized standing selected by it.

"Federal Reserve Board" means the Board of Governors of the Federal Reserve System, or any successor thereto.

"Governing Documents" means the certificate or articles of incorporation, by-laws, or other organizational or governing documents of any Person.

"Governmental Authority" means any federal, state, local or other governmental department, commission, board, bureau, agency, central bank, court, tribunal or other instrumentality or authority or subdivision thereof, domestic or foreign, exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.

5

"Guaranty" means that certain Continuing Guaranty, dated as of even date herewith, executed by Mercury, in favor of Bank, guaranteeing the Obligations.

"Insolvency Proceeding" means any proceeding commenced by or against any Person, under any provision of the Bankruptcy Code, or under any other bankruptcy or insolvency law, including, but not limited to, assignments for the benefit of creditors, formal or informal moratoriums, compositions, or extensions with some or all creditors.

"Interest Payment Date" means:

(i) with respect to each Base Lending Rate Portion, the last Business Day of each and every March, June, September and December commencing the first such day after the making of such Loan, and the Maturity Date; and

(ii) with respect to each LIBOR Lending Rate Portion, the last day of the Interest Period with respect thereto, and in the case of an Interest Period greater than three months, at three-month intervals after the first day of such Interest Period and the last day of such Interest Period.

"Interest Period" means, with respect to each LIBOR Lending Rate Portion, the period commencing on the date of such LIBOR Lending Rate Portion and ending on the numerically corresponding day one (1), two (2), three (3) or six (6) months thereafter as Borrower may elect pursuant to the applicable Notice of Conversion or Continuation; provided, however, that:

(a) any Interest Period which would otherwise end on a day which is not a LIBOR Business Day shall be extended to the next succeeding LIBOR Business Day unless such LIBOR Business Day falls in another calendar month in which case such Interest Period shall end on the immediately preceding LIBOR Business Day;

(b) any Interest Period which begins on the last LIBOR Business Day of the calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last LIBOR Business Day of the calendar month in which it would have ended if there were a numerically corresponding day in such calendar month; and

(c) no Interest Period may extend beyond the Maturity Date.

"Internal Revenue Code" means the Internal Revenue Code of 1986, as supplemented and amended from time to time, or any successor statute, and any and all regulations and rules promulgated thereunder.

6

"Investment" means, as applied to any Person, any direct or indirect purchase or other acquisition by that Person of, or beneficial interest in, stock or other securities of any other Person, or any direct or indirect loan, advance (other than advances to employees for moving, travel, and payroll expenses, drawing accounts and similar expenditures in the ordinary and usual course of business) or capital contribution by that Person to any other Person, including all indebtedness and accounts receivable due from that other Person which are not current assets or did not arise from sales to that other Person in the ordinary and usual course of business. The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments, except as permitted by GAAP, for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment.

"Lending Office" means Bank's office located at its address set forth on the signature pages hereof, or such other office of Bank as it may hereafter designate as its Lending Office by notice to Borrower.

"Leverage Ratio" means, as of the date of determination, the ratio of (a) Consolidated Debt of Mercury on such date, to (b) the sum of (i) Consolidated Debt of Mercury on such date, plus (ii) Adjusted Net Worth on such date.

"LIBOR Business Day" means any Business Day on which major commercial banks are open for international business (including dealings in Dollar deposits) in Los Angeles, California and London, England.

"LIBOR Lending Rate" means, with respect to a LIBOR Lending Rate Portion, the rate per annum (rounded upwards if necessary to the nearest whole one-hundredth of one percent (.01%)), determined as the sum of: (a) the quotient of: (i) Base LIBOR for the relevant Interest Period of such LIBOR Lending Rate Portion; divided by (ii) the number equal to one hundred percent (100%) minus the LIBOR Reserve Percentage with respect to such Interest Period; plus (b) the Applicable LIBOR Lending Rate Margin. The LIBOR Lending Rate shall

be adjusted automatically on the effective date of any change in the LIBOR Reserve Percentage, such adjustment to affect any LIBOR Lending Rate Portion outstanding on such effective date to the extent such change is applied retroactively to eurocurrency funding of a member bank in the Federal Reserve System. Each determination of a LIBOR Lending Rate by Bank, including, but not limited to, any determination as to the applicability or allocability of reserves to eurocurrency liabilities or as to the amount of such reserves, shall be conclusive and final in the absence of manifest error.

"LIBOR Lending Rate Portion" means any portion of the Loan bearing interest at the LIBOR Lending Rate.

"LIBOR Reserve Percentage" means, for any Interest Period of any LIBOR Lending Rate Portion, the daily average of the stated maximum rate (rounded upward to the nearest one-hundredth of one percent (.01%)), as determined by Bank in accordance

7

with its usual procedures (which determination shall be conclusive in the absence of manifest error), at which reserves are required to be maintained during such Interest Period (including supplemental, marginal, and emergency reserves) under Regulation D by Bank against "Eurocurrency liabilities" (as such term is defined in Regulation D), but without benefit or credit of proration, exemptions, or offsets that might otherwise be available to Bank from time to time under Regulation D. Without limiting the generality of the foregoing, "LIBOR Reserve Percentage" shall include any other reserves required to be maintained by Bank against (i) any category of liabilities that includes deposits by reference to which the LIBOR Lending Rate for a LIBOR Lending Rate Portion is being determined and (ii) any category of extension of credit or other assets that includes LIBOR Lending Rate Portion.

"Lien" means any lien, deed of trust, mortgage, pledge, security

interest, charge, or encumbrance of any kind, including any conditional sale or other title retention agreement, any lease in the nature thereof, and any agreement to give or refrain from giving any lien, mortgage, pledge, security interest, charge or other encumbrance of any kind.

"Loan" means the loan made by Bank to Borrower pursuant to

Section 2.1.

"Material Adverse Effect" means a material adverse effect on (i) the business, Assets, condition (financial or otherwise), results of operations, or prospects of Borrower or Mercury, (ii) the ability of Borrower to perform its obligations under this Agreement (including, without limitation, repayment of the Obligations as they come due) or the ability of Mercury to perform its obligations under the Guaranty, or (iii) the validity or enforceability of this Agreement, the Ancillary Documents, or the rights or remedies of Bank hereunder and thereunder.

"Maturity Date" means March 15, 2003.

"Mercury" means Mercury General Corporation, a California corporation.

"Mercury Agreement" means that certain Revolving Credit Agreement, dated as of November 21, 1996, among Mercury, The Bank of New York, as agent, and the lenders party thereto, as amended by that certain Amendment No. 1 to Revolving Credit Agreement, dated as of February 20, 1998, that certain Amendment No. 2 to Revolving Credit Agreement, dated as of July 14, 1998, and as the same may be further amended or restated from time to time hereafter.

"Note" means that certain ESOP Term Note, dated as of even date

herewith, in the original principal amount of Five Million Dollars ($5,000,000), executed by Borrower to the order of Bank to evidence the Loan, and any amendments thereto or restatements, substitutions, refinancings or replacements thereof.

8

"Notice of Conversion or Continuation" means a written notice given pursuant to the terms of Section 2.5(b), substantially in the form of Exhibit 2.5(b).

------- ------

               "Obligations" means any and all debt and obligations of Borrower
                -----------

owing to Bank and to its successors and assigns, previously, now, or hereafter incurred, and howsoever evidenced, whether direct or indirect, absolute or contingent, joint or several, liquidated or unliquidated, voluntary or involuntary, due or not due, legal or equitable, whether incurred before, during, or after any Insolvency Proceeding, and whether recovery thereof is or becomes barred by a statute of limitations or is or becomes otherwise unenforceable or unallowable as claims in any Insolvency Proceeding, together with all interest thereupon (including all interest accruing during the pendency of an Insolvency Proceeding). The Obligations shall include, without limiting the generality of the foregoing, all principal and interest owing under the Loan, all Bank Expenses, any other fees and expenses due hereunder, and all other indebtedness evidenced by this Agreement and/or the Note.

"Person" means and includes natural persons, corporations, limited partnerships, general partnerships, limited liability companies, limited liability partnerships, limited liability partnerships, joint stock companies, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof.

"Plan" means the Mercury General Corporation Profit Sharing Plan,

Amended and Restated as of January 1, 1987, as amended from time to time.

"Principal Payment Date" means the date on which each installment of principal is due with respect to the Loan, which date shall be the 15th day of March of every year during the term of this Agreement, commencing March 15, 1999.

"Reference Rate" means the variable rate of interest announced by Bank at its corporate headquarters as its reference rate and which serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto. The Reference Rate is determined by Bank from time to time as a means of pricing credit extensions to some customers and is neither directly tied to some external rate of interest or index nor necessarily the lowest rate of interest charged by Bank at any given time for any particular class of customers or credit extensions.

"Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System, as such regulation may be amended or supplemented from time to time.

"Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as such regulation may be amended or supplemented from time to time.

9

"Responsible Officer" means either the president or chief financial officer of a Person, or such other officer, employee, or agent of such Person designated by a Responsible Officer in a writing delivered to Bank.

"Subsidiary" means, as to any Person, any corporation, limited liability company, partnership, trust or other entity (whether now existing or hereafter organized or acquired) of which such Person or one or more Subsidiaries of such Person at the time owns or controls directly or indirectly more than 50% of the shares of stock or partnership or other ownership interest having general voting power under ordinary circumstances to elect a majority of the board of directors, managers or trustees or otherwise exercising control of such corporation, limited liability company, partnership, trust or other entity (irrespective of whether at the time stock or any other form of ownership of any other class or classes shall have or might have voting power by reason of the happening of any contingency).

"Trust Agreement" means The Master Trust Agreement between Mercury and Trustee, dated as of January 1, 1998, as amended from time to time.

"Trustee" means BNY Western Trust Company, in its capacity as Borrower, or any successor in such capacity.

"Unmatured Event of Default" means an event, act, or occurrence which, with the giving of notice or the lapse of time (or both), would become an Event of Default.

1.2 Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP.

1.3 Computation of Time Periods. In this Agreement, with respect to the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding." Periods of days referred to in this Agreement shall be counted in calendar days unless otherwise stated.

1.4 Construction. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular and to the singular include the plural, references to any gender include any other gender, the part includes the whole, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the

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inclusive meaning represented by the phrase "and/or." References in this Agreement to "determination" by Bank include good faith estimates by Bank (in the case of quantitative determinations), and good faith beliefs by Bank (in the case of qualitative determinations). The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. Article, section, subsection, clause, exhibit and schedule references are to this Agreement, unless otherwise specified. Any reference in this Agreement or any of the Ancillary Documents to this Agreement or any of the Ancillary Documents includes any and all permitted alterations, amendments, changes, extensions, modifications, renewals, or supplements thereto or thereof, as applicable.

1.5 Exhibits and Schedules. All of the exhibits and schedules attached hereto shall be deemed incorporated herein by reference.

1.6 No Presumption Against any Party. Neither this Agreement, any of the Ancillary Documents, any other document, agreement, or instrument entered into in connection herewith, nor any uncertainty or ambiguity herein or therein shall be construed or resolved using any presumption against any party hereto, whether under any rule of construction or otherwise. On the contrary, this Agreement, the Ancillary Documents, and the other documents, instruments, and agreements entered into in connection herewith have been reviewed by each of the parties and their counsel and shall be construed and interpreted according to the ordinary meanings of the words used so as to accomplish fairly the purposes and intentions of all parties hereto.

1.7 Independence of Provisions. All agreements and covenants hereunder, under the Ancillary Documents, and the other documents, instruments, and agreements entered into in connection herewith shall be given independent effect such that if a particular action or condition is prohibited by the terms of any such agreement or covenant, the fact that such action or condition would be permitted within the limitations of another agreement or covenant shall not be construed as allowing such action to be taken or condition to exist.

ARTICLE II

TERMS OF THE LOAN

2.1 The Loan. Subject to the terms and conditions hereof, Bank agrees to make a loan to Borrower on the Closing Date in the principal amount of Five Million Dollars ($5,000,000) as a Base Lending Rate Portion. Borrower hereby irrevocably authorizes and directs Bank to pay all of the proceeds of the Loan to BNY Western Trust Company by wire transfer pursuant to the following wire transfer instructions:

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The Bank of New York
BK of NYC/CTR/BBK
ABA #021-000-018

Beneficiary Account #:   1OC111-363
Beneficiary Name:        Master Custody/Master Trust-L.A.
Reference:               FFC: Account #744671
Reference:               FBO: Mercury General Corp. ESOP

2.2 Principal Payments. Borrower shall make annual principal reduction payments on the Loan to Bank on each and every Principal Payment Date, in the amount of One Million Dollars ($1,000,000) each. Borrower may prepay the Loan, or any portion thereof, at any time and from time to time in minimum amounts of Five Hundred Thousand Dollars ($500,000) plus increments of One

Hundred Thousand Dollars ($100,000) in excess thereof. All prepayments shall include accrued interest on the amount prepaid to the date of prepayment, calculated in accordance with Section 2.3, and shall be applied toward principal reduction payments required under this Section 2.2 in inverse order of maturity. All prepayments shall be without penalty or premium except as otherwise required by Section 2.6 with respect to LIBOR Lending Rate Portions. Borrower shall give Bank at least three (3) Business Days' prior written notice of any prepayment of a Base Lending Rate Portion and at least three (3) LIBOR Business Days' prior written notice of any prepayment of a LIBOR Lending Rate Portion.

2.3 Interest Rates; Payments of Interest.

(a) Interest Rate Options. Borrower shall from time to time designate one or both of the following two options in accordance with Section 2.5(b) to apply to all or any portion of the unpaid principal balance of the Loan: (i) the Base Lending Rate; or (ii) the LIBOR Lending Rate; provided, however, there shall be no more than three (3) LIBOR Lending Rate Portions outstanding at any time.

(b) Default Rate. If any payment of principal or interest on the Loan due hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), in addition to and not in substitution of any of Bank's other rights and remedies with respect to such nonpayment, the entire unpaid principal balance of the Loan shall bear interest at a rate equal to the otherwise applicable rate plus two (2) percentage points (200 basis points), effective on the day following the date of nonpayment and continuing until such overdue payment is paid in full. In addition, interest, and other amounts due hereunder not paid when due shall bear interest at the Base Lending Rate plus two (2) percentage points (200 basis points), effective on the day following the date of nonpayment and continuing until such overdue payment is paid in full.

(c) Change in Lending Rate Margins. Changes in the Applicable Base Lending Rate Margin and the Applicable LIBOR Lending Rate Margin, as the case may be, resulting from a change in the Leverage Ratio, shall become effective on the 45th day

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following the last day of each fiscal quarter of Mercury, and shall be based on the Leverage Ratio disclosed in the Compliance Certificate with respect to such fiscal quarter; provided, however, for purposes of determining the aforementioned margins, if Mercury fails to deliver to Bank an accurately completed Compliance Certificate within sixty (60) days following the end of each fiscal quarter of Mercury, or ninety (90) days following the end of each fiscal year of Mercury, the Leverage Ratio shall be conclusively presumed to be greater than 0.15:1.0 until the applicable Compliance Certificate has been so completed and delivered to Bank.

(d) Computation of Interest. All computations of interest with respect to LIBOR Lending Rate Portions, shall be calculated on the basis of a year of three hundred sixty (360) days for the actual days elapsed in such period. All computations of interest with respect to Base Lending Rate Portions shall be calculated on the basis of a year of three hundred sixty-five (365) (except in a leap year, in which case, three hundred sixty-six (366)) days for the actual days elapsed in such period. In the event that the Reference Rate announced is, from time to time, changed, adjustment in the rate of interest payable hereunder on all outstanding Base Lending Rate Portions shall be made as of 12:01 a.m. (California time) on the effective date of the change in the Base Rate. Any and all interest not paid when due shall be added to the principal balance of the Loan and shall bear interest thereafter as provided for in
Section 2.3(b).

(e) Maximum Interest Rate. In no event shall the interest rate and other charges hereunder exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event that such a court determines that Bank has received interest and other charges hereunder in excess of the highest rate applicable hereto, such excess shall be deemed received on account of, and shall automatically be applied to reduce, the Obligations, other than interest, in the inverse order of maturity, and the provisions hereof shall be deemed amended to provide for the highest permissible rate. If there are no Obligations outstanding, Bank shall refund to Borrower such excess.

(f) Payments of Interest. All accrued but unpaid interest on the Loan, calculated in accordance with this Section 2.3, shall be due and payable, in arrears, on each and every Interest Payment Date.

2.4 Maturity Date. On the Maturity Date, Borrower shall pay Bank the entire unpaid principal balance of the Loan together with all accrued but unpaid interest thereon.

2.5 Conversion or Continuation Requirements.

(a) Borrower shall have the option to: (i) convert, at any time, all or any portion of any of the Loan, in minimum amounts of Five Hundred Thousand Dollars ($500,000) plus integral multiples of One Hundred Thousand

Dollars ($100,000) in excess

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thereof, from a portion bearing interest at one of the interest rate options available pursuant to Section 2.3(a) to another; or (ii) upon the expiration of any Interest Period applicable to a LIBOR Lending Rate Portion, to continue all or any portion of such LIBOR Lending Rate Portion as a LIBOR Lending Rate Portion with the succeeding Interest Period of such continued LIBOR Lending Rate Portion commencing on the expiration date of the Interest Period previously applicable thereto; provided, however, that a LIBOR Lending Rate Portion may only be converted to a Base Lending Rate Portion or continued as a LIBOR Lending Rate Portion on the expiration date of the Interest Period applicable thereto; provided further, however, that no outstanding portion of the Loan may be continued as, or be converted into, a LIBOR Lending Rate Portion in the event that, on the earlier of the date of the delivery of the Notice of Conversion or Continuation or the telephonic notice in respect thereof, any Event of Default or Unmatured Event of Default is continuing; provided further, however, that if Borrower fails to deliver the appropriate Notice of Conversion or Continuation or the telephonic notice in respect thereof pursuant to the required notice period before the expiration of the Interest Period of a LIBOR Lending Rate Portion, such LIBOR Lending Rate Portion shall automatically be converted to a Base Lending Rate Portion; provided further, however, that no outstanding portion of a Loan may be continued as, or be converted into, a LIBOR Lending Rate Portion in the event that, after giving effect to any such conversion or continuation, there would be more than three (3) LIBOR Lending Rate Portions outstanding.

(b) Borrower shall give telephonic notice of any proposed continuation or conversion pursuant to this Section 2.5 followed by a Notice of Conversion or Continuation, given by facsimile or personal service, delivered to Bank at the address set forth in the Notice of Conversion or Continuation, no later than 11:00 a.m., California time, on the Business Day which is the proposed conversion date (in the case of a conversion to a Base Lending Rate Portion) and no later than 9:00 a.m. California time, three (3) LIBOR Business Days in advance of the proposed conversion or continuation date (in the case of a conversion to, or a continuation of, a LIBOR Lending Rate Portion). If such Notice of Conversion or Continuation is received by Bank not later than 11:00
a.m., California time, on a LIBOR Business Day, such day shall be treated as the first LIBOR Business Day of the required notice period. In any other event, such notice will be treated as having been received at the opening of business of the next LIBOR Business Day. A Notice of Conversion or Continuation shall specify:
(1) the proposed conversion or continuation date (which shall be a Business Day or a LIBOR Business Day, as applicable); (2) the amount of the Loan to be converted or continued; (3) the nature of the proposed conversion or continuation; and (4) in the case of a conversion to or continuation of a LIBOR Lending Rate Portion, the requested Interest Period.

(c) Bank shall not incur any liability to Borrower in acting upon any telephonic notice referred to above which Bank believes in good faith to have been given by a Responsible Officer of Borrower or for otherwise acting in good faith under this Section 2.5. Any Notice of Conversion or Continuation (or telephonic notice in respect thereof) shall be irrevocable and Borrower shall be bound to convert or continue in accordance therewith.

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2.6 LIBOR Costs. Borrower shall reimburse Bank for any increase in Bank's costs (which shall include, but not be limited to, taxes, other than taxes imposed on the overall net income of Bank fees or charges), or any loss or expense (including, without limitation, any loss or expense incurred by reason of the liquidation or re-employment of deposits or other funds acquired by Bank to fund or maintain outstanding the principal amount of the Loan) incurred by it directly or indirectly resulting from the making of any LIBOR Lending Rate Portion due to: (a) the modification, adoption, or enactment of any law, rule, regulation or treaty or the interpretation thereof by any governmental or other authority (whether or not having the force of law) which becomes effective after the date hereof; (b) the modification or new application of any law, regulation or treaty or the interpretation thereof by any governmental or other authority (whether or not having the force of law) which becomes effective after the date hereof; (c) compliance by Bank with any request or directive (whether or not having the force of law) of any monetary or fiscal agency or authority which becomes effective after the date hereof; (d) violations by Borrower of the terms of this Agreement; or (e) any prepayment of a LIBOR Lending Rate Portion at any time prior to the end of the applicable Interest Period, including pursuant to
Section 7.2.

The amount of such costs, losses, or expenses shall be determined solely by Bank based upon the assumption that Bank funded one hundred percent (100%) of each LIBOR Lending Rate Portion in the LIBOR market. In attributing Bank's general costs relating to its eurocurrency operations to any transaction under this Agreement or averaging any costs over a period of time, Bank may use any reasonable attribution or averaging methods which it deems appropriate and practical. Bank shall notify Borrower of the amount due Bank pursuant to this
Section 2.6 in respect of any LIBOR Lending Rate Portion as soon as practicable but in any event within forty-five (45) days after the last day of the Interest Period of such LIBOR Lending Rate Portion, and Borrower shall pay to Bank the amount due within fifteen (15) days of its receipt of such notice. A certificate as to the amounts payable pursuant to the foregoing sentence together with whatever detail is reasonably available to Bank shall be submitted by Bank to Borrower. Such determination shall, if not objected to within ten (10) days, be conclusive and binding upon Borrower in the absence of manifest error. If Bank claims increased costs, loss, or expenses pursuant to this Section 2.6, then Bank, if requested by Borrower, shall use reasonable efforts to take such steps that Borrower reasonably requests, including designating different Lending Offices, as would eliminate or reduce the amount of such increased costs, losses, or expenses, so long as taking such steps would not, in the reasonable judgment of Bank, otherwise be disadvantageous to Bank. Any recovery by Bank or its Lending Office of amounts previously borne by Borrower pursuant to this
Section 2.6 shall be promptly remitted, without interest (unless Bank received interest on such recovered amounts), to Borrower by Bank.

2.7 Illegality; Impossibility. Notwithstanding anything herein to the contrary, if Bank determines (which determination shall be conclusive) that any law, rule, regulation, treaty or directive, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Bank (or its

15

Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for Bank (or its Lending Office) to fund or maintain a LIBOR Lending Rate Portion in the LIBOR market or to continue such funding or maintaining, then Bank shall give notice of such circumstances to Borrower and

(a) in the case of each and every LIBOR Lending Rate Portion which is outstanding, Borrower shall, if requested by Bank, prepay such LIBOR Lending Rate Portion(s) on or before the date specified in such request, together with interest accrued thereon, and the date so specified shall be deemed to be the last day of the Interest Period of that LIBOR Lending Rate Portion, and concurrent with any such prepayment, Bank shall make a Base Lending Rate Portion to Borrower in the principal amount equal to the principal amount of the LIBOR Lending Rate Portions so prepaid, and (b) Bank shall not be obligated to make any further LIBOR Lending Rate Portions until Bank determines that it would no longer be unlawful or impossible to do so.

2.8 Disaster. Notwithstanding anything herein to the contrary, if Bank determines (which determination shall be conclusive) that (a) Bank is unable to determine the LIBOR Lending Rate with respect to any Notice of Conversion or Continuation selecting the LIBOR Lending Rate because quotations of interest rates for the relevant deposits are not being provided in the relevant amounts or for the relative maturities or (b) the LIBOR Lending Rate will not adequately reflect the cost to Bank of making or funding LIBOR Lending Rate Portions, then (i) Bank shall promptly give notice of such determination to

Borrower, (ii) the right of Borrower to select the LIBOR Lending Rate shall be suspended until Bank notifies Borrower that the circumstances causing such suspension no longer exist, and (iii) all LIBOR Lending Rate Portions, together with interest accrued thereon, shall be converted to Base Lending Rate Portions on the last day of the Interest Period applicable to each such LIBOR Lending Rate Portion.

2.9 Increased Risk-Based Capital Cost. If the amount of capital required or expected to be maintained by Bank or any Person directly or indirectly owning or controlling Bank (each a "Control Person"), shall be affected by:

(a) the introduction or phasing in of any law, rule or regulation after the date hereof,

(b) any change after the date hereof in the interpretation of any existing law, rule or regulation by any central bank or United States or foreign governmental authority charged with the administration thereof, or

(c) compliance by Bank or such Control Person with any directive, guideline or request from any central bank or United States or foreign governmental authority (whether or not having the force of law) promulgated or made after the date hereof,

and Bank shall have reasonably determined that such introduction, phasing in, change or compliance shall have had or will thereafter have the effect of reducing (x) the rate of return

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on Bank's or such Control Person's capital, or (y) the asset value to Bank or such Control Person of the Loan made or maintained by Bank, in either case to a level below that which Bank or such Control Person could have achieved or would thereafter be able to achieve but for such introduction, phasing in, change or compliance (after taking into account Bank's or such Control Person's policies regarding capital), in either case by an amount which Bank in its reasonable judgment deems material, then, within ten (10) days after demand by Bank, accompanied by a statement setting forth the calculations of any additional amount payable under this Section, Borrower shall pay to Bank or such Control Person such additional amount or amounts as shall be sufficient to compensate Bank or such Control Person, as the case may be, for such reduction.

2.10 Note; Statements. The Loan and Borrower's obligation to repay the same shall be evidenced by the Note, this Agreement and the books and records of Bank. All payments of principal or interest with respect to the Loan shall be evidenced by notations made by Bank on such books and records showing the date and amount of each such payment of principal or interest; provided, however, that any failure by Bank to make such notations shall not relieve Borrower of its liability for repayment of the Obligations in full. On or prior to each Bank Statement Date, Bank shall render a statement to Borrower (with a copy to Mercury) of all principal and interest owing on the Loan, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrower and Bank unless, within thirty
(30) days after receipt thereof by Borrower, Borrower notifies Bank, in accordance with the procedures set forth in Section 8.3, of any objections thereto specifying the error or errors, if any, contained in any such statement.

2.11 Holidays. Any payment of principal or interest in respect of the Loan which would otherwise become due on a day other than a Business Day, shall instead become due on the next succeeding Business Day and such adjustment shall be reflected in the computation of interest; provided, however, that in the event that such due date shall, subsequent to the specification thereof by Bank, for any reason no longer constitute a Business Day, Bank may change such specified due date in accordance with this Section 2.11.

2.12 Time and Place of Payments.

(a) All payments due hereunder to Bank shall be made available to Bank in immediately available Dollars, not later than 12:00 p.m. Los Angeles time on the day such payment is due, to the following address:

UNION BANK OF CALIFORNIA, N.A.
Commercial Loan Operations

1980 Saturn Street
Monterey Park, California 1755-7417 Attention: Department 77225 Supervisor Telefacsimile: (323) 724-6198 Telephone: (323) 720-7050

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Wire Instructions:

UNION BANK OF CALIFORNIA, N.A.
Monterey Park, California

Account No.: 070-196-431 Account Name: Wire Transfer Clearing

Attn:         Commercial Loan Operations
              Department 77225 Supervisor
Reference:    Mercury General ESOP
              (BNY Western Trust)
ABA No.:      122-000-496

(b) Bank shall have the right to charge any account maintained by Borrower with Bank for the amount of any payment due or past due hereunder, including principal and interest owing on the Loan and all Bank Expenses.

ARTICLE III

CONDITIONS TO LOAN

3.1 Conditions Precedent to the Loan. Bank's obligation hereunder to make the Loan is subject to the fulfillment, to the satisfaction of Bank and its counsel, of each of the following conditions on or before the Closing Date:

(a) Bank shall have received this Agreement and the Ancillary Documents, all duly executed, and acknowledged, recorded and filed, as Bank may require.

(b) Bank shall have received from counsel to the Committee and Mercury a favorable written opinion, dated the Closing Date, in form and substance satisfactory to Bank and to Bank's counsel;

(c) Bank shall have received true and complete copies of the ESOP Documents, certified by the Secretary of Mercury;

(d) Bank shall have received signature and incumbency certificates respecting the members of the Committee, dated as of the Closing Date;

(e) Bank shall have received a certificate executed by Borrower, dated as of the Closing Date, certifying that no Event of Default or Unmatured Event of Default has occurred and is continuing or will occur from the execution and delivery of this Agreement and the Ancillary Documents to which Borrower is a party, or the performance by Borrower of its obligations hereunder or thereunder;

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(f) Bank shall have received a certificate from the Committee and executed by its members, dated as of the Closing Date, attesting to its authorizing the execution and delivery of this Agreement and the Ancillary Documents to which Borrower is a party, and authorizing Borrower to execute same;

(g) Bank shall have received an acknowledgement executed by a Responsible Officer of Trustee that the persons executing this Agreement and the Ancillary Documents to which Borrower is a party are trust officers and vice presidents authorized to execute such documents on behalf of Borrower;

(h) Bank shall have received a signature and incumbency certificate respecting the Responsible Officers of Mercury executing the Ancillary Documents to which Mercury is a party, dated as of the Closing Date;

(i) Bank shall have received a certificate of the secretary of Mercury, dated as of the Closing Date, certifying true and correct copies of resolutions duly adopted by the board of directors of Mercury authorizing the execution, delivery and performance of the Ancillary Documents to which Mercury is a party, and authorizing specific Responsible Officers of Mercury to execute the same on behalf of Mercury;

(j) Bank shall have received full payment of all Bank Expenses which are due and payable as of the Closing Date;

(k) the representations and warranties of Borrower set forth in Article IV of this Agreement shall be true and correct;

(l) Bank shall have received Borrower's information return, Form 5500 Series, together with all schedules and attachments thereto, most recently filed with the Internal Revenue Service; and

(m) Bank shall have received such other instruments, agreements and documents as Bank may request in connection with the transactions contemplated by this Agreement and the Ancillary Documents, all in form and substance satisfactory to Bank and its counsel.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF BORROWER

In order to induce Bank to enter into this Agreement, Borrower makes the following representations and warranties which shall be true and correct as of the Closing Date, and at all times until the Obligations have been fully satisfied, performed and

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indefeasibly paid in full, such representations and warranties to survive the execution and delivery of this Agreement and the making of the Loan.

4.1 Due Organization. Borrower is a duly organized and validly existing trust in good standing under the laws of the State of California.

4.2 Requisite Power. Borrower has all requisite trust power and all domestic governmental licenses, authorizations, consents, and approvals necessary to own and operate its properties and to carry on its business as now conducted and as proposed to be conducted. Borrower has all requisite power to borrow the sums provided for in this Agreement and the Note, to execute and deliver this Agreement and the Ancillary Documents, and to carry out the transactions contemplated hereby and thereby. The execution, delivery, and performance of this Agreement and the Ancillary Documents have been duly authorized by the Committee and do not require any consent or approval of any other Person.

4.3 Binding Agreements. This Agreement and the Ancillary Documents have been duly executed and delivered by Borrower, to the extent Borrower is a party thereto, and constitute the legal, valid, and binding obligation of Borrower enforceable against Borrower in accordance with their terms, except as the enforceability thereof may be affected by: (a) laws affecting the enforcement of creditors' rights generally; and (b) the limitation of certain remedies by equitable principles of general applicability.

4.4 No Conflict. The execution, delivery, and performance by Borrower of this Agreement and the Ancillary Documents to which Borrower is a party do not and will not violate any of the ESOP Documents or any provision of law or regulation or any order, writ, judgment, or decree of any domestic Governmental Authority, court, arbitration board or tribunal binding on Borrower, or result in the breach of, constitute a default under, contravene any provisions of, or result in the creation of any Lien upon any of the Assets owned by Borrower pursuant to any Contractual Obligation to which Borrower or its properties are bound.

4.5 Litigation. There is no litigation, investigation, or proceeding in any court or before any arbitrator or regulatory commission, board, administrative agency, or other governmental authority pending, or threatened, against or affecting Borrower, or any of Borrower's Assets, which involves litigation or proceedings which, if adversely determined, would have a Material Adverse Effect.

4.6 Consents. No consent, license, permit, approval, or authorization of, exemption by, notice to, report to, or registration, filing or declaration with, any domestic court, Governmental Authority, or agency is required in connection with the execution, delivery, and performance this Agreement and the Ancillary Documents.

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4.7 Use of Proceeds. The proceeds of the Loan shall be used solely for the purpose of repaying the Bridge Loan and to repay the Loan pursuant and subject to the terms hereof.

4.8 Tax Returns. All tax and/or information returns required to have been filed by Borrower in any jurisdiction have been filed; all taxes, assessments, fees and other governmental charges upon Borrower or upon any of its Assets, incomes, or franchises, which are due and payable have been paid, or adequate reserves have been provided for payment thereof.

4.9 Burdensome Agreements, etc. Borrower is not a party to any unusual or unduly burdensome agreement or undertaking which may have a Material Adverse Effect.

4.10 Financial Information. Borrower has furnished and/or may furnish to Bank certain written financial information concerning Borrower. There are no statements or conclusions therein which, at the time provided, are based upon or include misleading information or fail to take into account material information regarding the matters covered therein. Borrower has no reason to believe that any of the statements or conclusions included therein are not true and correct in all material respects at the time provided. There has been no change since December 31, 1997 in Borrower's financial condition or results of operations sufficient to have a Material Adverse Effect. Borrower has no contingent obligations, liabilities for taxes or other outstanding financial obligations which are material in the aggregate, except as disclosed to Bank.

4.11 Existing Defaults. As of the Closing Date, Borrower is not in default under any term of any mortgage, deed of trust, indenture, or any other agreement to which it is a party or by which it or any of its properties may be bound.

4.12 Casualty. As of the Closing Date, neither the Assets nor the operations of Borrower are presently affected by any fire, explosion, strike, lockout or other labor dispute, act of God or other casualty (whether or not covered by insurance), which would have a Material Adverse Effect.

4.13 Investment Company Act. Borrower is not, and immediately after the application by Borrower of the proceeds of the Loan, will not be, an "investment company" required to register under the Investment Company Act of 1940, as amended.

4.14 Public Utility Holding Company Act. Borrower is not: (i) a "holding company" nor a "subsidiary company" or "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended; or (ii) subject to any state law or regulation regulating public utilities or similar entities.

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4.15 Disclosure. At the time provided, no representation or warranty of Borrower contained in this Agreement and no representation of Borrower contained in any other written document, certificate, or statement furnished to Bank by or on behalf of Borrower for use in connection with the transactions contemplated by this Agreement contains any untrue statement of a material fact or omits to state a material fact.

4.16 No Default. No Event of Default and no Unmatured Event of Default is continuing or will result from the execution and delivery of this Agreement and the Ancillary Documents to which Borrower is a party or the performance by Borrower of its obligations hereunder or thereunder.

4.17 Compliance With Laws. Borrower is in compliance with all applicable laws, rules and regulations to the extent that failure to be in compliance could have a Material Adverse Effect.

4.18 Borrower. Borrower is a validly existing trust established by Mercury and is exempt from federal income taxation under Section 501(a) of the Internal Revenue Code and satisfies the applicable requirements of Section 401(a) of the Internal Revenue Code. Borrower is in compliance with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, and the Internal Revenue Code, non-compliance with which would jeopardize the qualified status of the ESOP as a "qualified plan".

4.19 Regulation U. The making of the Loan and the transactions contemplated by this Agreement and the Ancillary Documents are exempt from the requirements of, and do not violate, Regulation U.

4.20 Liens. Borrower has good and marketable title to, or valid leasehold interests in, all of its Assets, free and clear of all Liens except for Liens in favor of Bank.

4.21 Debt. Borrower has no Debt other than the Bridge Loan (which

will be repaid in full with the proceeds of the Loan) and Debt in favor of Bank.

ARTICLE V

AFFIRMATIVE COVENANTS

Until the Obligations have been fully satisfied, performed and indefeasibly paid in full, Borrower covenants and agrees that it shall:

5.1 Punctual Payments. Punctually pay the interest and principal on the Loan at the times and place and in the manner specified in this Agreement and the Note, and other fees or liabilities due under this Agreement and the Ancillary Documents.

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5.2 Tax Returns. At the request of Bank, furnish Bank with copies of all federal income tax and/or information returns which are filed after the Closing Date by Borrower.

5.3 Maintenance of Records. Maintain a standard and modern system of accounting with ledger and account cards and/or computer tapes, discs, printouts and records pertaining to its Assets which contain information as may from time to time be requested by Bank. Borrower shall permit Bank and any of its employees, officers or agents, upon reasonable notice or, if an Event of Default or Unmatured Event of Default is continuing, then upon demand, during Borrower's usual business hours, or the usual business hours of third Persons having control thereof, (a) to have access to and examine all of Borrower's books and records relating to the Obligations, any collateral securing the Obligations, Borrower's financial condition and the results of Borrower's operations, and, in connection therewith, permit Bank or any of its agents, employees or officers to copy and make extracts therefrom, and all costs and expenses in so doing shall be a part of Bank Expenses.

5.4 Records Retention. Permit Bank to destroy all invoices, records and other documents submitted by Borrower in connection with the transactions contemplated by this Agreement at any time following six (6) months from the time such items are delivered to Bank.

5.5 Payment of Taxes. Pay all federal, state, local and foreign taxes, assessments, and other governmental charges imposed upon Borrower or any of Borrower's Assets or in respect of any of Borrower's franchises, operations, income, or profits before any penalty or interest accrues thereon. Borrower shall make due and timely payment or deposit of all federal, state and local taxes, assessments or contributions required of it by law, and will execute and deliver to Bank, on demand, appropriate certificates attesting to the payment or deposit thereof. Borrower will make timely payment or deposit of all F.I.C.A. payments and withholding taxes required of it by applicable laws, and will, upon request, furnish Bank with proof satisfactory to Bank indicating that Borrower has made such payments or deposits. If Borrower fails to pay any such assessment, tax, contribution, or make such deposit, or furnish the required proof, Bank may, in its sole and absolute discretion and without notice to Borrower, (a) make payment of the same or any part thereof, or (b) set up such reserves in Borrower's account as Bank deems necessary to satisfy the liability therefor, or both. Bank may conclusively rely on the usual statements of the amount owing or other official statements issued by the appropriate governmental agency. Each amount paid or deposited by Bank shall constitute Bank Expenses and an advance to Borrower. Nothing herein contained shall preclude Borrower from contesting, in good faith and by appropriate proceedings, the imposition of any assessments and taxes and to withhold payment of such contested amounts pending the resolution of such proceedings.

5.6 Compliance with Laws. Comply with all federal, state, and local laws and regulations applicable to Borrower.

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5.7 Use of Funds. Use the proceeds of the Loan solely to repay the Bridge Loan and to repay the Loan pursuant and subject to the terms hereof.

5.8 Notice to Bank. Promptly, upon Borrower acquiring knowledge thereof, give written notice to Bank of:

(a) all litigation affecting Borrower or Mercury, if adversely determined, could reasonably be expected to have a Material Adverse Effect;

(b) any dispute which may exist between Borrower or Mercury, on the one hand, and any Governmental Authority or law enforcement authority, on the other, if the determination of such dispute could have a Material Adverse Effect;

(c) any proposal by any public authority to acquire the Assets or business of Borrower or Mercury, or to compete with Borrower or Mercury;

(d) any Event of Default or Unmatured Event of Default; and

(e) any other matter which has resulted or is reasonably likely to result in a Material Adverse Effect.

5.9 Compliance Certificate. Deliver to Bank as soon as it receives it from Mercury, a Compliance Certificate from the Chief Financial Officer of Mercury, stating, among other things, that they have each reviewed the provisions of this Agreement and the Ancillary Documents and that there exists no Event of Default or Unmatured Event of Default, and containing the calculations and other details necessary to demonstrate the Leverage Ratio for the most recently completed fiscal quarter.

ARTICLE VI

NEGATIVE COVENANTS

Borrower covenants and agrees that until the Obligations have been fully satisfied, performed and indefeasibly paid in full, Borrower shall not:

6.1 Sale of Assets. Directly or indirectly, sell, assign, transfer, convey or otherwise dispose of its Assets, whether now owned or hereafter acquired, except in the ordinary course of its operations, in connection with routine claims for benefits or as otherwise required by law.

6.2 Guaranty; Pledge. Directly or indirectly, assume, guarantee, endorse, or otherwise become liable or contingently liable upon the obligations of any other Person, or pledge its credit or Assets in any manner to secure the obligations of any other Person.

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6.3 Prohibited Transactions. Directly or indirectly, enter into or permit to exist any transaction described in Section 406 of ERISA which is not exempt by reason of Section 408 of ERISA, and any transaction described in
Section 4975(c) of the Internal Revenue Code which is not exempt by reason of
Section 4975(d) of the Internal Revenue Code.

6.4 Debt. Directly or indirectly, incur, create, assume, permit or

suffer to exist any Debt except for Debt owing to Bank permitted pursuant to this Agreement.

6.5 Liens. Create, incur, assume or suffer to exist any Lien (including the lien of an attachment, judgment or execution) on any of its Assets (including the ESOP Stock), whether now owned or hereafter acquired, except in favor of Bank.

6.6 Misrepresentations. Furnish Bank any certificate or other document that contains any untrue statement of material fact or that fails to state a material fact.

ARTICLE VII

EVENTS OF DEFAULT AND REMEDIES

7.1 Events of Default. The occurrence of any of the following events, acts, or occurrences shall constitute an event of default (an "Event of Default") hereunder:

(a) Borrower fails to pay within ten (10) days of the date when due the full amount of any payment of interest on the Loan due hereunder; or

(b) Borrower fails to pay on the date when due the full amount of any payment of principal on the Loan or any other amounts due hereunder; or

(c) Borrower fails to observe or perform any of the covenants and agreements set forth in Article VI, or Mercury fails to observe or perform any of the covenants and agreements set forth in Section 16 of the Guaranty;

(d) Borrower or Mercury fail to observe or perform any other term, covenant, condition, agreement or obligation to be observed or performed by it under this Agreement and/or the Ancillary Documents to which Borrower or Mercury is a party and such failure is not cured or remedied within ten (10) days following the sooner to occur of, (i) notice by Bank to Borrower and Mercury of such occurrence, or (ii) Borrower or Mercury obtaining knowledge of such occurrence;

(e) Any financial statement, representation, warranty or certification made or furnished by Borrower in any statement, document, letter or other writing or instrument furnished or delivered to Bank pursuant to or in connection with this

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Agreement or the Ancillary Documents, or as an inducement to Bank to enter into this Agreement, at any time proves to have been false, incorrect, or incomplete when made or effective or reaffirmed, as the case may be;

(f) Any of the Ancillary Documents fails to be in full force and effect for any reason, or a default or event of default occurs under any Ancillary Document, or an event of default occurs under the Mercury Agreement which results in the acceleration of the obligations thereunder owing by Mercury;

(g) Borrower or Mercury fails to pay when due or within any applicable grace period any payment in respect of Debt or other extensions of credit or financial arrangements (other than under this Agreement);

(h) Any event or condition occurs that: (i) results in the acceleration of the maturity of Debt or other financial arrangements of Borrower or Mercury; or (ii) permits (or, with the giving of notice or lapse of time or both, would permit) the holder or holders of such Debt or extensions of credit or financial accommodations or any Person acting on behalf of such holder or holders to accelerate the maturity thereof;

(i) Borrower or Mercury commences a voluntary Insolvency Proceeding seeking liquidation, reorganization or other relief with respect to itself or its Debt or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or consents to any such relief or to the appointment of or taking possession by any such official in an involuntary Insolvency Proceeding or fails generally to pay its Debt as it becomes due, or takes any action to authorize any of the foregoing;

(j) An involuntary Insolvency Proceeding is commenced against Borrower or Mercury seeking liquidation, reorganization or other relief with respect to it or its Debt or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property and any of the following events occur: (i) the petition commencing the Insolvency Proceeding is not timely controverted; (ii) the petition commencing the Insolvency Proceeding is not dismissed within thirty (30) calendar days of the date of the filing thereof; (iii) an interim trustee is appointed to take possession of all or a substantial portion of the Assets of, or to operate all or any substantial portion of the business of, Borrower or Mercury; or (iv) an order for relief shall have been issued or entered therein;

(k) Borrower or Mercury suffers (i) any money judgment in excess of any applicable insurance coverage or (ii) any writ, warrant of attachment, or similar process which could reasonably be expected to have a Material Adverse Effect;

(l) A judgment creditor obtains possession of any of the material Assets of Borrower or Mercury by any means, including levy, distraint, replevin, or self-help,

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or any order, judgment or decree is entered decreeing the dissolution of Borrower or Mercury; or

(m) Any Change of Control occurs.

7.2 Acceleration. Upon the occurrence of an Event of Default, Bank may declare the Obligations to be forthwith due and payable, whereupon all such sums shall become and be immediately due and payable without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived by Borrower. Notwithstanding that the Obligations shall become and be immediately due and payable upon the occurrence of an Event of Default, as set forth in this Section 7.2, the payments made with respect to the Loan by Borrower during a plan year shall not exceed an amount equal to the sum of the contributions by Mercury to Borrower and the earnings received during or prior to the year less such payments in prior years as provided in Treasury Regulations Section 54.4975-7(b)(5).

7.3 Cumulative Remedies. In addition, Bank shall have available to it all remedies provided under the Ancillary Documents and by law. Bank's remedies hereunder and thereunder are cumulative and Bank shall have the right to enforce one or more remedies partially, successively or concurrently.

ARTICLE VIII

MISCELLANEOUS

8.1 Modifications in Writing. No amendment, modification, supplement, termination, or waiver of or to any provision of this Agreement, nor consent to any departure by Borrower therefrom, shall be effective unless the same shall be in writing and signed by Bank. Any waiver of any provision of this Agreement, and any consent to any departure by Borrower from the terms of any provisions therefrom, shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on Borrower in any case shall entitle Borrower to any other or further notice or demand in similar or other circumstances.

8.2 No Waivers. No failure or delay by Bank in exercising any right power or privilege hereunder or under any Ancillary Document shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege.

8.3 Notices, etc. All notices, demands, instructions, and other communications required or permitted to be given to or made upon any party hereto shall be in writing and (except for financial statements and other related informational documents to be furnished pursuant hereto which may be sent by first-class mail, postage prepaid) shall be

27

personally delivered or sent by registered or certified mail, postage prepaid, return receipt requested, or by telecopy or telegram (with messenger delivery specified) Each such notice, request or other communication shall be deemed given on the second Business Day after mailing, upon receipt when personally delivered, or, where permitted by law, upon receipt of confirmation of transmission when transmitted by facsimile. Unless otherwise specified in a notice sent or delivered in accordance with the foregoing provisions of this
Section 8.3, notices, demands, instructions and other communications in writing shall be given to or made upon the respective parties hereto at their respective addresses (or to their respective telecopier numbers) indicated on the signature pages hereof.

8.4 Bank Expenses; Documentary Taxes; Indemnification.

(a) Borrower shall pay all Bank Expenses within five (5) Business Days after presentation of a statement or invoice therefor.

(b) Borrower shall pay all and indemnify Bank against any and all transfer taxes, documentary taxes, assessments, or similar charges payable to any Governmental Authority and imposed by reason of the execution and delivery of this Agreement, any of the Ancillary Documents, or any other document, instrument or agreement entered into in connection herewith.

8.5 Sale of Participation. Bank shall be entitled to sell participation interests in the Loan to Persons not party to this Agreement without being required to so advise Borrower so long as Bank is entitled to represent the interests of such Persons. Except as otherwise expressly agreed in writing by Borrower, Bank shall not, by reason of the sale of any participation interest, be relieved of any of its obligations hereunder.

8.6 Headings. Article and Section headings used in this Agreement are for convenience of reference only and shall not affect the construction of this Agreement.

8.7 Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same Agreement.

8.8 Binding Effect; Assignment. This Agreement shall be binding upon, and inure to the benefit of, Borrower and Bank, and their respective successors and assigns; provided, however, that Borrower may not assign its rights hereunder or in connection herewith or any interest herein (voluntarily, by operation of law, or otherwise) without the prior written consent of Bank and any such prohibited assignment shall be void.

8.9 Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining

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provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction.

8.10 Publicity. Except for filings with bank regulatory bodies in the ordinary course of business, any publicity release, advertisement, filing, public statement, or announcement made by or at the behest of Bank or Borrower regarding this Agreement or the financing provided hereunder which makes reference to Bank or Borrower, or describes the financing provided by Bank to Borrower, shall be first reviewed by both Borrower and Bank and must be reasonably satisfactory to both Borrower and Bank.

8.11 Complete Agreement. This Agreement, together with the exhibits to this Agreement, is intended by the parties as a final expression of their agreement and is intended as a complete statement of the terms and conditions of their agreement.

8.12 Governing Law. This Agreement shall be deemed to have been made in the State of California and the validity of this Agreement, the construction, interpretation, and enforcement thereof, and the rights of the parties hereto shall be determined under, governed by, and construed in accordance with the internal laws of the State of California without regard to principles of conflicts of law.

8.13 Dispute Resolution. This Agreement is subject to that certain Alternative Dispute Resolution Agreement, dated as of even date herewith, between Borrower and Bank.

[Remainder of this page intentionally left blank.]

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IN WITNESS WHEREOF, Bank and Borrower have caused this Agreement to be executed and delivered as of the date first hereinabove set forth.

BNY WESTERN TRUST COMPANY, AS
TRUSTEE OF THE MERCURY GENERAL
CORPORATION PROFIT SHARING PLAN
MASTER TRUST

By ____________________________________

Title: ___________________________

Address for Notices:

BNY Western Trust Company
700 S. Flower Street, 2nd Floor
Los Angeles, California 90017
Attn: Linda S. McAtee
Telephone: (213) 630-6362
Facsimile: (213) 630-6392

With a copy to:

MERCURY GENERAL CORPORATION
4484 Wilshire Boulevard
Los Angeles, California 90010
Attn: Chief Financial Officer
Telephone: (213) 857-7150
Facsimile: (213) 857-7110

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UNION BANK OF CALIFORNIA, N.A.

By ____________________________________

Title: Vice President

Address for Notices and Lending Office:

Union Bank of California, N.A.
Attn: James R. Fothergill
350 California Street, 6th Floor
San Francisco, California 94104
Telephone: (415) 705-7035
Facsimile: (415) 705-7037

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EXHIBIT 10.29

CONTINUING GUARANTY

THIS CONTINUING GUARANTY (this "Guaranty"), dated as of August 29, 1998, is executed and delivered by Mercury General Corporation, a California corporation ("Guarantor"), in favor of Union Bank of California, N.A. ("Bank"), with reference to the following facts:

A. Bank has agreed to extend certain financial accommodations to BNY Western Trust Company, as Trustee of the Mercury General Corporation Profit Sharing Plan Master Trust ("Borrower"), pursuant to the terms of that certain ESOP Loan Agreement of even date herewith between Bank and Borrower (the "Loan Agreement").

B. The financial accommodations that are to be extended to Borrower pursuant to the Loan Agreement will materially benefit Guarantor by allowing a larger percentage of the Guarantor's issued and outstanding voting common stock to be owned by and held for the benefit of Guarantor's employees.

C. In order to induce Bank to enter into the Loan Agreement, and in consideration thereof, Guarantor has agreed to guarantee the Guaranteed Obligations (as hereafter defined), pursuant to the terms of this Guaranty.

NOW, THEREFORE, in consideration of the foregoing, Guarantor hereby agrees, in favor of Bank, as follows:

1. Definitions and Construction.

(a) Definitions. All initially capitalized terms used hereinnot otherwise defined herein shall have the meaning ascribed thereto in the Loan Agreement. As used in this Guaranty:

"Bankruptcy Code" means The Bankruptcy Reform Act of 1978 (11 U.S.C. Sections 101-1330), as amended or supplemented from time to time, and any successor statute, and any and all rules issued or promulgated in connection therewith.

"ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor statute, and any and all regulations thereunder.

"ERISA Event" means (a) a Reportable Event with respect to a Plan or Multiemployer Plan, (b) the withdrawal of a member of the ERISA Group from a Plan during a plan year in which it was a "substantial employer" (as defined in

1

Section 4001(a)(2) of ERISA), (c) the providing of notice of intent to terminate a Plan in a distress termination (as described in Section 4041(c) of ERISA), (d) the institution by the PBGC of proceedings to terminate a Plan or Multiemployer Plan, (e) any event or condition (i) that provides a basis under Section 4042(a)(1), (2), or (3) of ERISA for the termination of or the appointment of a trustee to administer, any Plan or Multiemployer Plan, of (ii) that may result in termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, (f) the partial or complete withdrawal within the meaning of Sections 4203 and 4205 of ERISA of a member of the ERISA Group from a Multiemployer Plan, or (g) providing any security to any Plan under Section 401(a)(29) of the IRC by a member of the ERISA Group.

"ERISA Group" means Guarantor and all members of a controlled group of corporations and all trades or business (whether or not incorporated) under common control which, together with Guarantor are treated as a single employer under Section 414 of the Internal Revenue Code.

"Financial Statement(s)" means, with respect to any accounting period of any Person, statements of income and statements of cash flows of such Person for such period, and balance sheets of such Person as of the end of such period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year or, if such period is a full fiscal year, corresponding figures from the preceding annual audit, all prepared in reasonable detail and in accordance with GAAP, subject to year-end adjustments in the case of monthly Financial Statements. Financial Statement(s) shall include the schedules thereto and annual Financial Statements shall also include the footnotes thereto.

"GAAP" means generally accepted accounting principles in the

United States of America, consistently applied, which are in effect as of the date of this Agreement. If any changes in accounting principles from those in effect on the date hereof are hereafter occasioned by promulgation of rules, regulations, pronouncements or opinions by or are otherwise required by the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or successors thereto or agencies with similar functions), and any of such changes results in a change in the method of calculation of, or affects the results of such calculation of, any of the financial covenants, standards or terms found herein, then the parties hereto agree to enter into and diligently pursue negotiations in order to amend such financial covenants, standards or terms so as to equitably reflect such changes, with the desired result that the criteria for evaluating financial condition and results of operations of Guarantor and the Subsidiaries shall be the same after such changes as if such changes had not been made.

"Guaranteed Obligations" means any and all obligations, indebtedness, or liabilities of any kind or character owed by Borrower or Guarantor to Bank pursuant to and evidenced by the Loan Documents, including all such obligations,

2

indebtedness, or liabilities, whether for principal, interest (including any interest which, but for the application of the provisions of the Bankruptcy Code, would have accrued on such amounts), premium, reimbursement obligations, fees, costs, expenses (including, attorneys' fees and costs and attorneys' fees and costs pursuant to 11 U.S.C.), or indemnity obligations, whether heretofore, now, or hereafter made, incurred, or created, whether voluntarily or involuntarily made, incurred, or created, whether secured or unsecured (and if secured, regardless of the nature or extent of the security), whether absolute or contingent, liquidated or unliquidated, determined or indeterminate, whether Borrower is liable individually or jointly with others, and whether recovery is or hereafter becomes barred by any statute of limitations or otherwise becomes unenforceable for any reason whatsoever, including any act or failure to act by Bank.

"Loan Documents" means the Loan Agreement and the Ancillary Documents.

"Multiemployer Plan" means a "multiemployer plan" as defined in (S) 4001(a)(3) of ERISA or (S) 3(37) of ERISA to which any member of the ERISA Group has contributed, or was obligated to contribute, within the preceding six plan years (while a member of such ERISA Group) including for these purposes any Person which ceased to be a member of the ERISA Group during such six year period.

"PBGC" means the Pension Benefit Guaranty Corporation or any

entity succeeding to any or all of its functions under ERISA.

"Plan" means an "employee benefit plan" as defined in (S) 3(3) of

ERISA in which any personnel of any member of the ERISA Group participate or from which any such personnel may derive a benefit, excluding any Multiemployer Plan, but including any plan either established or maintained by any member of the ERISA Group or to which such Person contributes under the laws of any foreign country.

"Reportable Event" means any of the events described in Section 4043(c) of ERISA other than a Reportable Event as to which the provision of 30 days notice to the PBGC is waived under applicable regulations.

"Retiree Health Plan" means an "employee welfare benefit plan" within the meaning of Section 3(1) of ERISA that provides benefits to individuals after termination of their employment, other than as required by
Section 601 of ERISA.

"Solvent" means, with respect to any Person on the date any determination thereof is to be made, that on such date: (a) the present fair valuation of the property and assets of such Person is greater than such Person's probable liability in respect of existing debts; (b) such Person does not intend to, and does not believe that it will, incur debts beyond such Person's ability to pay as such debts mature; and (c) such

3

Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, which would leave such Person with property and assets remaining which would constitute unreasonably small capital after giving effect to the nature of the particular business or transaction. For purposes of this definition (i) the "fair valuation" of any property or assets means the amount realizable within a reasonable time, either through collection or sale of such property or assets at their regular market value, which is the amount obtainable by a capable and diligent Person from an interested buyer willing to purchase such property or assets within a reasonable time under ordinary circumstances; and (ii) the term "debts" includes any payment obligation, whether or not reduced to judgment, equitable or legal, matured or unmatured, liquidated or unliquidated, disputed or undisputed, secured or unsecured, absolute, fixed or contingent.

"Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the present value of all benefits under such Plan exceeds (ii) the fair market value of all Plan assets allocable to such benefits (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or an appointed trustee under Title IV of ERISA.

(b) Construction. Unless the context of this Guaranty clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, and the term "including" is not limiting. The words "hereof," "herein," "hereby," "hereunder," and other similar terms refer to this Guaranty as a whole and not to any particular provision of this Guaranty. Any reference herein to any of the Loan Documents includes any and all alterations, amendments, extensions, modifications, renewals, or supplements thereto or thereof, as applicable. Neither this Guaranty nor any uncertainty or ambiguity herein shall be construed or resolved against Bank or Guarantor, whether under any rule of construction or otherwise. On the contrary, this Guaranty has been reviewed by Guarantor, Bank, and their respective counsel, and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of Bank and Guarantor.

2. Guaranteed Obligations. Guarantor hereby irrevocably and unconditionally guarantees to Bank, as and for its own debt, until final and indefeasible payment thereof has been made, (a) payment of the Guaranteed Obligations, in each case when and as the same shall become due and payable, whether at maturity, pursuant to a mandatory prepayment requirement, by acceleration, or otherwise; it being the intent of Guarantor that the guaranty set forth herein shall be a guaranty of payment and not a guaranty of collection; and (b) the punctual and faithful performance, keeping, observance, and fulfillment by Borrower of all of the agreements, conditions, covenants, and obligations of Borrower contained in the Loan Documents. Upon the occurrence of an Event of Default, Guarantor hereby further agrees that it shall be immediately liable

4

hereunder for the payment of the entire unpaid principal balance of the Loan, and all accrued but unpaid interest thereon, and all Bank Expenses, notwithstanding the fact Borrower may not be liable for such amounts pursuant to Treasury Regulation Section 54.4975-7(b)(5).

3. Continuing Guaranty. This Guaranty includes Guaranteed Obligations arising under successive transactions continuing, compromising, extending, increasing, modifying, releasing, or renewing the Guaranteed Obligations, changing the interest rate, payment terms, or other terms and conditions thereof, or creating new or additional Guaranteed Obligations after prior Guaranteed Obligations have been satisfied in whole or in part. To the maximum extent permitted by law, Guarantor hereby waives any right to revoke this Guaranty as to future indebtedness. If such a revocation is effective notwithstanding the foregoing waiver, Guarantor acknowledges and agrees that (a) no such revocation shall be effective until written notice thereof has been received by Bank, (b) no such revocation shall apply to any Guaranteed Obligations in existence on such date (including, any subsequent continuation, extension, or renewal thereof, or change in the interest rate, payment terms, or other terms and conditions thereof), (c) no such revocation shall apply to any Guaranteed Obligations made or created after such date to the extent made or created pursuant to a legally binding commitment of Bank in existence on the date of such revocation, (d) no payment by Guarantor, Borrower, or from any other source, prior to the date of such revocation shall reduce the maximum obligation of Guarantor hereunder, and (e) any payment by Borrower or from any source other than Guarantor, subsequent to the date of such revocation, shall first be applied to that portion of the Guaranteed Obligations as to which the revocation is effective and which are not, therefore, guaranteed hereunder, and to the extent so applied shall not reduce the maximum obligation of Guarantor hereunder.

4. Performance Under This Guaranty. In the event that Borrower fails to make any payment of any Guaranteed Obligations on or before the due date thereof, or if Borrower shall fail to perform, keep, observe, or fulfill any other obligation referred to in clause (b) of Section 2 hereof in the manner provided in the Loan Documents, Guarantor immediately shall cause such payment to be made or each of such obligations to be performed, kept, observed, or fulfilled.

5. Primary Obligations. This Guaranty is a primary and original obligation of Guarantor, is not merely the creation of a surety relationship, and is an absolute, unconditional, and continuing guaranty of payment and performance which shall remain in full force and effect without respect to future changes in conditions, including any change of law. Guarantor agrees that it is directly, and jointly and severally with any other guarantor of the Guaranteed Obligations, liable to Bank, that the obligations of Guarantor hereunder are independent of the obligations of Borrower or any other guarantor, and that a separate action may be brought against Guarantor whether such action is brought against Borrower or any other guarantor or whether Borrower or any

5

such other guarantor is joined in such action. Guarantor agrees that its liability hereunder shall be immediate and shall not be contingent upon the exercise or enforcement by Bank of whatever remedies it may have against Borrower or any other guarantor, or the enforcement of any lien or realization upon any security Bank may at any time possess. Guarantor agrees that any release which may be given by Bank to Borrower or any other guarantor shall not release Guarantor. Guarantor consents and agrees that Bank shall be under no obligation to marshal any assets of Borrower or any other guarantor in favor of Guarantor, or against or in payment of any or all of the Guaranteed Obligations.

6. Waivers.

(a) To the maximum extent permitted by law, Guarantor hereby waives: (1) notice of acceptance hereof; (2) notice of any loans or other financial accommodations made or extended under the Loan Documents or the creation or existence of any Guaranteed Obligations; (3) notice of the amount of the Guaranteed Obligations, subject, however, to Guarantor's right to make inquiry of Bank to ascertain the amount of the Guaranteed Obligations at any reasonable time; (4) notice of any adverse change in the financial condition of Borrower or of any other fact that might increase Guarantor's risk hereunder;
(5) notice of presentment for payment, demand, protest, and notice thereof as to any promissory notes or other instruments among the Loan Documents; (6) notice of any event of default under the Loan Documents; and (7) all other notices (except if such notice is specifically required to be given to Guarantor hereunder or under any Loan Document to which Guarantor is a party) and demands to which Guarantor might otherwise be entitled.

(b) To the maximum extent permitted by law, Guarantor hereby waives the right by statute or otherwise to require Bank to institute suit against Borrower or to exhaust any rights and remedies which Bank has or may have against Borrower. In this regard, Guarantor agrees that it is bound to the payment of all Guaranteed Obligations, whether now existing or hereafter accruing, as fully as if such Guaranteed Obligations were directly owing to Bank by Guarantor. Guarantor further waives any defense arising by reason of any disability or other defense (other than the defense that the Guaranteed Obligations shall have been fully and finally performed and indefeasibly paid) of Borrower, including whether any of the Guaranteed Obligations constitute a prohibited transaction under ERISA with respect to Borrower or whether Borrower might be limited in the amounts it could pay to Bank pursuant to Treasury Regulation Section 54.4975-7(b)(5), or by reason of the cessation from any cause whatsoever of the liability of Borrower in respect thereof.

(c) To the maximum extent permitted by law, Guarantor hereby waives: (1) any rights to assert against Bank any defense (legal or equitable), set-off, counterclaim, or claim which Guarantor may now or at any time hereafter have against Borrower or any other party liable to Bank; (2) any defense, set- off, counterclaim, or

6

claim, of any kind or nature, arising directly or indirectly from the present or future lack of perfection, sufficiency, validity, or enforceability of the Guaranteed Obligations or any security therefor, including any limitation, stay, discharge, or bar of the Guaranteed Obligations under the Bankruptcy Code or any other laws affecting Creditors' rights; (3) any defense arising by reason of any claim or defense based upon an election of remedies by Bank including any defense based upon an election of remedies by Bank under the provisions of Sections 580d and 726 of the California Code of Civil Procedure, or any similar law of California or any other jurisdiction; (4) the benefit of any statute of limitations affecting Guarantor's liability hereunder or the enforcement thereof, and any act which shall defer or delay the operation of any statute of limitations applicable to the Guaranteed Obligations shall similarly operate to defer or delay the operation of such statute of limitations applicable to Guarantor's liability hereunder.

(d) To the maximum extent permitted by law, until the Guaranteed Obligations have been indefeasibly paid, performed and satisfied in full, Guarantor hereby waives: (1) any right of subrogation Guarantor has or may have as against Borrower with respect to the Guaranteed Obligations; (2) any right to proceed against Borrower, now or hereafter, for contribution, indemnity, reimbursement, and any other suretyship rights and claims, whether direct or indirect, liquidated or contingent, whether arising under express or implied contract or by operation of law, which Guarantor may now have or hereafter have as against the Borrower with respect to the Guaranteed Obligations; and (3) any rights to recourse to or with respect to any Asset of Borrower.

(e) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER PROVISION SET FORTH IN THIS GUARANTY, GUARANTOR HEREBY ABSOLUTELY, KNOWINGLY, UNCONDITIONALLY, AND EXPRESSLY WAIVES AND AGREES NOT TO ASSERT ANY AND ALL BENEFITS OR DEFENSES ARISING DIRECTLY OR INDIRECTLY UNDER ANY ONE OR MORE OF CALIFORNIA CIVIL CODE SECTIONS 2799, 2808, 2809, 2810, 2815, 2819, 2820, 2821, 2822, 2825, 2839, 2845, 2848, 2849, AND 2850, CALIFORNIA CODE OF CIVIL PROCEDURE SECTIONS 580a, 580b, 580c, 580d, AND 726, CALIFORNIA UNIFORM COMMERCIAL CODE SECTIONS 3116, 3118, 3119, 3419, 3605, 9504, AND 9507, AND CHAPTER 2 OF TITLE 14 OF PART 4 OF DIVISION 3 OF THE CALIFORNIA CIVIL CODE.

7. Releases. Guarantor consents and agrees that, without notice to or by Guarantor and without affecting or impairing the obligations of Guarantor hereunder, Bank may, by action or inaction:

(a) compromise, settle, extend the duration or the time for the payment of, or discharge the performance of, or may refuse to or otherwise not enforce the Loan Documents;

7

(b) release all or any one or more parties to any one or more of the Loan Documents or grant other indulgences to Borrower in respect thereof;

(c) amend or modify in any manner and at any time (or from time to time) any of the Loan Documents; or

(d) release or substitute any other guarantor, if any, of the Guaranteed Obligations, or enforce, exchange, release, or waive any security for the Guaranteed Obligations or any other guaranty of the Guaranteed Obligations, or any portion thereof.

8. No Election. Bank shall have the right to seek recourse against Guarantor to the fullest extent provided for herein, and no election by Bank to proceed in one form of action or proceeding, or against any party, or on any obligation, shall constitute a waiver of Bank's right to proceed in any other form of action or proceeding or against other parties unless Bank has expressly waived such right in writing. Specifically, but without limiting the generality of the foregoing, no action or proceeding by Bank under any document or instrument evidencing the Guaranteed Obligations shall serve to diminish the liability of Guarantor under this Guaranty except to the extent that Bank finally and unconditionally shall have realized indefeasible payment by such action or proceeding.

9. Indefeasible Payment. The Guaranteed Obligations shall not be considered indefeasibly paid for purposes of this Guaranty unless and until all payments to Bank are no longer subject to any right on the part of any person, including Borrower, Borrower as a debtor in possession, or any trustee (whether appointed under the Bankruptcy Code or otherwise) of Borrower's assets to invalidate or set aside such payments or to seek to recoup the amount of such payments or any portion thereof, or to declare same to be fraudulent or preferential. Upon such full and final performance and indefeasible payment of the Guaranteed Obligations whether by Guarantor or Borrower, Bank shall have no obligation whatsoever to transfer or assign its interest in the Loan Documents to Guarantor. In the event that, for any reason, any portion of such payments to Bank is set aside or restored, whether voluntarily or involuntarily, after the making thereof, then the obligation intended to be satisfied thereby shall be revived and continued in full force and effect as if said payment or payments had not been made, and Guarantor shall be liable for the full amount Bank is required to repay plus any and all costs and expenses (including attorneys' fees) paid by Bank in connection therewith. If this Guaranty shall have been cancelled or surrendered prior to the revival of Guarantor's liability pursuant to the preceding sentence, then this shall be reinstated in full force and effect, and Guarantor agrees to execute and deliver to Bank any additional documents, instruments or agreements reasonably required by Bank to reinstate the Guaranty or such

8

liens and/or security interests. Guarantor's obligations under this Section 9 shall survive any termination or cancellation of this Guaranty.

10. Financial Condition of Borrower. Guarantor represents and warrants to Bank that Guarantor is currently informed of the financial condition of Borrower and of all other circumstances which a diligent inquiry would reveal and which bear upon the risk of nonpayment of the Guaranteed Obligations. Guarantor further represents and warrants to Bank that Guarantor has read and understands the terms and conditions of the Loan Documents. Guarantor hereby covenants that Guarantor will continue to keep informed of Borrower's financial condition, the financial condition of other guarantors, if any, and of all other circumstances which bear upon the risk of nonpayment or nonperformance of the Guaranteed Obligations.

11. Subordination. Guarantor hereby agrees that, during the continuance of an Event of Default, any and all present and future indebtedness of Borrower owing to Guarantor shall be postponed in favor of and subordinated to payment, in full, in cash, of the Guaranteed Obligations. In this regard, during the continuance of an Event of Default, no payment of any kind whatsoever shall be made with respect to such indebtedness until the Guaranteed Obligations have been indefeasibly paid in full.

12. Payments; Application. All payments to be made hereunder by Guarantor shall be made in Dollars in immediately available funds, and shall be made without deduction (whether for taxes or otherwise) or offset. All payments made by Guarantor hereunder shall be applied as follows: first, to all Bank Expenses; second, to all accrued and unpaid interest, premium, if any, and fees owing to Bank constituting Guaranteed Obligations; and third, to the balance of the Guaranteed Obligations.

13. Indemnification. Guarantor agrees to indemnify Bank and hold Bank harmless against all obligations, demands, or liabilities asserted by any party and against all losses in any way suffered, incurred, or paid by Bank as a result of or in any way arising out of, following, or consequential to Bank's transactions with Borrower except such losses caused by Bank's willful misconduct or gross negligence.

14. Representations and Warranties. Guarantor hereby represents and warrants to Bank that:

(a) Organization. Guarantor is a corporation duly organized and existing under the laws of California, and has the power and authority to own its own Assets, and to transact the business in which it is engaged, and is properly licensed, qualified to do business and in good standing in every jurisdiction where the conduct of its business requires it to be so qualified.

9

(b) No Conflict. The execution, delivery and performance of this Guaranty are within Guarantor's powers, are not in conflict with the terms of the Governing Documents of Guarantor, and do not result in a breach of or constitute a default under any material contract, obligation, indenture or other instrument to which Guarantor is a party or by which Guarantor is bound or affected, including without limitation, the Mercury Agreement. There is no law, rule or regulation, nor is there any judgment, decree or order of any court or governmental authority binding on Guarantor which would be contravened by the execution, delivery, performance or enforcement of this Guaranty and the other Loan Documents to which Guarantor is a party.

(c) Authorization. Guarantor has taken all corporate action necessary to authorize the execution and delivery of this Guaranty and the other Loan Documents to which Guarantor is a party, and the consummation of the transactions contemplated hereby and thereby. Upon their execution and delivery in accordance with their respective terms, this Guaranty and the other Loan Documents to which Guarantor is a party will constitute legal, valid and binding agreements and obligations of Guarantor enforceable against Guarantor in accordance with their respective terms, except as enforceability may be limited by bankruptcy, insolvency, fraudulent conveyance, and similar laws and equitable principles affecting the enforcement of creditors' rights generally.

(d) Approvals. No approval, consent, exemption or other action by, or notice to or filing with, any Governmental Authority is necessary in connection with the execution, delivery, performance or enforcement of this Guaranty and the other Loan Documents to which Guarantor is a party except as may have been obtained by Guarantor and certified copies of which have been delivered to Bank.

(e) Solvency. Guarantor is Solvent. No transfer of property is being made by Guarantor or any Subsidiary and no obligation is being incurred by Guarantor or any Subsidiary in connection with the transactions contemplated by the Loan Agreement or this Guaranty with the intent to hinder, delay, or defraud either present or future creditors of Guarantor or any Subsidiary.

(f) ERISA. Neither Guarantor nor any member of the ERISA Group maintains or contributes to any Plan or Multiemployer Plan, other than those listed on Schedule 1. Guarantor and each member of the ERISA Group have satisfied the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and Multiemployer Plan to which it is obligated to contribute. No ERISA Event has occurred not has any other event occurred that may result in an ERISA Event that reasonably could be expected to result in a Material Adverse Effect. None of Guarantor, any member of the ERISA Group, or any fiduciary of any Plan is subject to any direct or indirect liability with respect to any Plan (other than to make regularly scheduled required contributions and to pay Plan benefits in the normal course) under any applicable law,

10

treaty, rule, regulation, or agreement in an amount which could reasonably be expected to result in a Material Adverse Effect. Neither Guarantor nor any member of the ERISA Group is required to provide security to any Plan under
Section 401(a)(29) of the Internal Revenue Code. Each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and Under GAAP.

(g) Qualification of Borrower. Borrower is an "employee stock ownership plan" within the meaning of Internal Revenue Code Section 4975(e)(7).

(h) No Default. No Event of Default and no Unmatured Event of Default is continuing or will result from the execution and delivery of the Loan Agreement, this Guaranty and the other Ancillary Documents, or the performance by Borrower or Guarantor of their obligations hereunder or thereunder, as applicable.

15. Affirmative Covenants of Guarantor. Until the Guaranteed Obligations have been fully satisfied, performed and indefeasibly paid in full, Guarantor covenants and agrees that it shall:

(a) Books and Records. Maintain, and cause each of its Subsidiaries to maintain, adequate books and records in accordance with GAAP, and permit any officer, employee or agent of Bank, at any reasonable time, to inspect, audit and examine such books and records, and to make copies of the same.

(b) Reports Concerning Borrower. Furnish or cause to be furnished to Bank:

(i) on or before 60 days following the end of each of the first three fiscal quarters of each fiscal year, and on or before 90 days following the end of each fiscal year, a certificate of the Committee, or at its designation, a Responsible Officer of Guarantor, stating that it has reviewed the provisions of the Loan Agreement, and that a review of the activities of Borrower during such year or quarterly period, as the case may be, has been made with a view to determining whether Borrower has fulfilled all of its obligations under the Loan Agreement, and that Borrower has observed and performed each undertaking contained in the Loan Agreement and that, to the best of its knowledge after due inquiry, no Event of Default or Unmatured Event of Default is continuing, or if any Event of Default or Unmatured Event of Default is continuing, specifying the nature thereof, and the action which the Committee shall direct Borrower to take with respect thereto;

(ii) notice, as soon as possible and in any event within five (5) days after the Committee has knowledge of (i) the occurrence of an Event of Default or Unmatured Event of Default, or (ii) any event of default as defined in any evidence of other Debt of Borrower, or under any agreement, indenture or other instrument under

11

which such Debt has been issued, irrespective of whether such Debt is accelerated or such default waived. In either event, the Committee shall also supply Bank with a statement setting forth the details of such Event of Default, Unmatured Event of Default or event of default with respect to other Debt, and the action which the Committee shall direct Borrower to take with respect thereto;

(iii) prompt written notice of any condition or event which has resulted or might reasonably result in (i) a Material Adverse Effect; or
(ii) a breach of or noncompliance with any term, condition or covenant contained in the Loan Agreement or any of the Ancillary Documents;

(iv) prompt written notice of any claims, proceedings or disputes against Borrower which, if adversely determined, would have a Material Adverse Effect; and

(v) promptly, such other information in such form as the Bank may request concerning the business or condition (financial or otherwise) of Borrower.

(c) Assets. Maintain, keep and preserve, and cause each Subsidiary to maintain, keep and preserve, all of its material Assets (tangible or intangible) which are necessary to the operation its business in good repair and condition (ordinary wear and tear excepted).

(d) Taxes and Other Liabilities. Pay and discharge when due, and cause each Subsidiary to pay and discharge when due, any and all assessments and taxes, both real or personal and including federal and state income taxes, which if unpaid, could reasonably be expected to have a Material Adverse Effect, unless and to the extent that such assessments and taxes shall be contested in good faith and by appropriate proceedings diligently conducted by Guarantor or such Subsidiaries and adequate reserves as required by GAAP have been set aside with respect thereto, and by reason of nonpayment, no property is subject to a material risk of loss or forfeiture, and any and all other Permitted Debt (as defined in the Mercury Agreement).

(e) Employee Benefits. (i)(A) Promptly, and in any event within 10 Business Days after Guarantor or any of the Subsidiaries knows or has reason to know that an ERISA Event has occurred that reasonably could be expected to result in a Material Adverse Effect, deliver or cause to be delivered a written statement of the Chief Financial Officer of Guarantor describing such ERISA Event and any action that is being taken with respect thereto by Guarantor, any such Subsidiary, or member of the ERISA Group, and any action taken or threatened by the IRS, Department of Labor, or PBGC. Guarantor or such Subsidiary, as applicable, shall be deemed to know all facts known by the administrator of any Plan of which it is the plan sponsor; (ii) promptly and in any event within 3 Business Days after the filing thereof with the IRS, a copy of each funding

12

waiver request filed with respect to any Plan and all communications received by Guarantor, any member of the ERISA Group with respect to such request; and (iii) promptly and in any event within 3 Business Days after receipt by Guarantor, any of its Subsidiaries or, to the knowledge of Guarantor, any member of the ERISA Group, of the PBGC's intention to terminate a Plan or to have a trustee appointed to administer a Plan, copies of each such notice.

(ii) Cause to be delivered to Bank, upon Bank's request, each of the following: (i) a copy of each Plan (or, where any such plan is not in writing, complete description thereof) (and if applicable, related trust agreements of other funding instruments) and all amendments thereto, all written interpretations thereof and written descriptions thereof that have been distributed to employees or former employees of Guarantor or its Subsidiaries;
(ii) the most recent determination letter issued by the IRS with respect to each Plan; (iii) for the three most recent plan years, annual reports on Form 5500 Series required to be filed with any governmental agency for each Plan; (iv) all actuarial reports prepared for the last three plan years for each Plan; (v) a listing of all Multiemployer Plans, with the aggregate amount of the most recent annual contributions required to be made by Guarantor or any member of the ERISA Group to each such plan and copies of the collective bargaining agreements requiring such contributions; (vi) any information that has been provided to Guarantor or any member of the ERISA Group regarding withdrawal liability under any Multiemployer Plan; and (vii) the aggregate amount of the most recent annual payments made to former employees of Guarantor or its Subsidiaries under any Retiree Health Plan.

(f) Borrower's Legal Existence. Preserve and maintain Borrower's legal existence and all of Borrower's rights, privileges, licenses, permits and franchises necessary or desirable in the ordinary and usual course of its operations.

(f) Further Assurances. Execute and deliver, or cause to be executed and delivered, upon the request of Bank and at Guarantor's expense, such additional documents, instruments and agreements as Bank may reasonably determine to be necessary or advisable to carry out the provisions of this Agreement and the Loan Documents, and the transactions and actions contemplated hereunder and thereunder.

16. Negative Covenants of Guarantor. Until the Guaranteed Obligations have been fully satisfied, performed and indefeasibly paid in full, Guarantor covenants and agrees that it shall not:

(a) Debt. Create, incur, assume or suffer to exist any Debt

that would result in Guarantor being not in compliance with the provisions of
Section 7.13 or Section 7.14 of the Mercury Agreement (as in effect as of the date hereof), or permit any Subsidiary to create, incur, assume or suffer to exist any Debt, except Debt permitted under Section 8.1 of the Mercury Agreement (as in effect as of the date hereof).

(b) Liens. Create, incur, assume or suffer to exist any Lien (including the lien of an attachment, judgment or execution) on any of its Assets, whether now owned or

13

hereafter acquired, except Permitted Liens (as defined in the Mercury Agreement as in effect as of the date hereof).

(c) Merger, Consolidation, Transfer of Assets. Wind up, liquidate or dissolve, reorganize, merge or consolidate with or into any other Person, or acquire all or substantially all of the assets or the business of any other Person, or permit any Subsidiary to do so, unless such acquisition is permitted under Section 8.3 of the Mercury Agreement (as in effect as of the date hereof) without obtaining the consent of the Required Lenders (as defined in the Mercury Agreement as in effect as of the date hereof).

(d) Asset Sales. Conduct any Asset Sale involving material Assets, or permit any Subsidiary to do so, other than the sale or other disposition of Assets which are worn, obsolete, or no longer used or useful in the conduct of its business.

14

(e) Character of Business. Engage in any business activities or operations substantially different from or unrelated to its present business activities and operations, or permit any Subsidiary to do so.

(f) Transactions Under ERISA. Directly or indirectly:

(i) engage, or permit any Subsidiary to engage, in any prohibited transaction which is reasonably likely to result in a civil penalty or excise tax described in Sections 406 of ERISA or 4975 of the Internal Revenue Code for which a statutory or class exemption is not available or a private exemption has not been previously obtained from the Department of Labor;

(ii) permit to exist with respect to any Plan any accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of the Internal Revenue Code), whether or not waived;

(iii) fail, or permit any Subsidiary to fail, to pay timely required contributions or installments due with respect to any waived funding deficiency to any Plan;

(iv) terminate, or permit any Subsidiary to terminate, any Plan where such event would result in any liability of Borrower, any of its Subsidiaries or any member of ERISA Group under Title IV of ERISA;

(v) fail, or permit any Subsidiary to fail, to make any required contribution or payment to any Multiemployer Plan;

(vi) fail, or permit any Subsidiary to fail, to pay to a Plan or Multiemployer Plan any required installment or any other payment required under Section 412 of the Internal Revenue Code on or before the due date for such installment or other payment;

(vii) amend, or permit any Subsidiary to amend, a Plan resulting in an increase in current liability for the plan year such that either of Borrower, any Subsidiary of Borrower or any the member of the ERISA Group is required to provide security to such Plan under Section 401(a)(29) of the Internal Revenue Code; or

(viii) withdraw, or permit any Subsidiary to withdraw, from any Multiemployer Plan where such withdrawal is reasonably likely to result in any liability of any such entity under Title IV of ERISA;

which, individually or in the aggregate, results in or reasonably would be expected to result in a claim against or liability of Guarantor, any of its Subsidiaries or any member of the ERISA Group in excess of $100,000.

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17. Notices. All notices or demands by Guarantor or Bank to the other relating to this Guaranty shall be made in accordance with Section 8.3 of the Loan Agreement. Any notice or demand to Guarantor shall be addressed as follows:

To Guarantor:       Mercury General Corporation
                    4484 Wilshire Boulevard
                    Los Angeles, California 90010
                    Telefacsimile: (213) 857-7116
                    Attention: Chief Financial Officer

With a Copy to:     Latham & Watkins
                    701 B Street, Suite 2100
                    San Diego, California 92101
                    Telefacsimile: (619) 696-7419
                    Attn: Donald P. Newell, Esq.

18. Cumulative Remedies. No remedy under this Guaranty or under any of the Loan Documents is intended to be exclusive of any other remedy, but each and every remedy shall be cumulative and in addition to any and every other remedy given hereunder or under any of the Loan Documents, and those provided by law or in equity.

19. Books and Records. Guarantor agrees that Bank's books and records showing the account between Bank and Borrower shall be admissible in any action or proceeding for the purpose of establishing the items therein set forth and shall constitute prima facie proof thereof.

20. Modifications in Writing. No amendment, modification, supplement, termination, or waiver of or to any provision of this Guaranty, nor consent to any departure by Guarantor therefrom, shall be effective unless the same shall be in writing and signed by Bank. Any waiver of any provision of this Agreement, and any consent to any departure by Guarantor from the terms of any provisions therefrom, shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on Guarantor in any case shall entitle Guarantor to any other or further notice or demand in similar or other circumstances.

21. Failure or Delay. No failure or delay on the part of Bank in the exercise of any power, right, remedy or privilege under this Guaranty shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right, remedy or privilege preclude other or further exercise of any other power, right, remedy or privilege.

22. Bank Expenses. Guarantor agrees to pay all Bank Expenses within ten days of demand therefor by Bank, and if not paid by such date, same shall immediately thereafter bear interest at the rate set forth in Section 2.3(b) of the Loan Agreement.

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23. Headings. Section headings used in this Guaranty are for convenience of reference only and shall not affect the construction of this Guaranty.

24. Binding Effect; Assignment. This Guaranty shall be binding upon, and inure to the benefit of, Guarantor and Bank, and their respective successors and assigns; provided, however, that Guarantor may not assign its rights hereunder or in connection herewith or any interest herein (voluntarily, by operation of law, or otherwise) without the prior written consent of Bank and any such prohibited assignment shall be void.

25. Severability of Provisions. Any provision of this Guaranty which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction.

26. Complete Agreement. This Guaranty is intended by the parties as a final expression of their agreement and is intended as a complete statement of the terms and conditions of their agreement.

27. Governing Law. This Guaranty shall be deemed to have been made in the State of California and the validity of this Agreement, the construction, interpretation, and enforcement thereof, and the rights of the parties hereto shall be determined under, governed by, and construed in accordance with the internal laws of the State of California without regard to principles of conflicts of law.

28. Dispute Resolution. This Guaranty is subject to that certain Alternative Dispute Resolution Agreement, dated as of even date herewith, between Guarantor and Bank.

IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be executed and delivered as of the date first hereinabove set forth.

MERCURY GENERAL CORPORATION, a California
corporation

By____________________________________________

Title:___________________________________

17

Schedule 1

Employee Benefit Plans

18

EXHIBIT 10.30

AMENDMENT 1999-1

MERCURY GENERAL CORPORATION
PROFIT SHARING PLAN

WHEREAS, Mercury General Corporation (the "Company") maintains the Mercury General Corporation Profit Sharing Plan (the "Plan"); and

WHEREAS, pursuant to Section 9.1 of the Plan, the Company has the right to amend the Plan, and

WHEREAS, the Company deems it advisable to modify the Plan's provisions concerning hardship withdrawals;

NOW, THEREFORE, Section 7.3 of the Plan is hereby amended to provide as follows, effective for any hardship withdrawal requested on or after the date of execution of this Amendment 1999-1:

"7.3 - Hardship Withdrawals

(a) Subject to the approval of the Committee and guidelines promulgated by the Committee, withdrawals from the Participant's Compensation Deferral Account, Company Contributions Account, Employer Matching Contributions Account, ESOP Account and Rollover Account (collectively, his "Accounts") may be permitted, subject to the approval of the


Committee and guidelines promulgated by the Committee, to meet a financial hardship resulting from:

(1) Uninsured medical expenses previously incurred by the Participant, or the Participant's spouse or dependent or necessary to obtain such medical care;

(2) The purchase (excluding mortgage payments) of a principal residence of the Participant;

(3) The payment of tuition for the next twelve months of post- secondary education for the Participant, or the Participant's spouse, children or dependents;

(4) The prevention of eviction of the Participant from his principal residence, or foreclosure on the mortgage of the Participant's principal residence; and

(5) Any other event described in Treasury Regulations or rulings as an immediate and heavy financial need and approved by the Company as a reason for permitting distribution under this Section.

The Committee shall determine, in a non-discriminatory manner, whether a Participant has a financial hardship. A distribution may be made under this
Section 7.3(a) only if such distribution does not exceed the amount required to meet the immediate financial need created by the hardship and is not reasonably available from other resources of the Participant.

(b) Notwithstanding the foregoing, a Participant may receive a hardship withdrawal from his Accounts only if the Participant is entitled to full vesting of his or her Company Contributions Account, ESOP Account and Employer Matching Contributions Account under the provisions of Section 6.2. A hardship withdrawal will be deducted first from the Participant's Company Contributions Account until it is exhausted, then the Participant's


Employer Matching Contributions Account until it is exhausted, then the Participant's ESOP Account until it is exhausted, then the Participant's Rollover Account until it is exhausted, and lastly from the Compensation Deferral Account until it is exhausted. The withdrawal amount under Section 7.3(a) shall not in any event exceed the value of the Participant's Accounts available for hardship withdrawal as of the Valuation Date immediately following the Committee's acceptance of the Participant's written application for a hardship withdrawal. In addition, the withdrawal amount from a Participant's Compensation Deferral Account shall not exceed the value of the Participant's Compensation Deferrals to such Account, less previous withdrawals and excluding earnings. Payment of the withdrawal shall be in a single sum no later than the end of the second month following the date on which the withdrawal is approved by the Committee.

(c) If a Participant withdraws any amount from any of his Accounts pursuant to this Section, he shall be unable to elect that any Compensation Deferrals or other employee contributions (excluding mandatory employee contributions under a defined benefit plan) be made on his behalf under this Plan or under any other plan maintained by the Company or a Related Company until one year after receipt of the withdrawal. For purposes of the preceding sentence, a plan includes any qualified plan or nonqualified plan of deferred compensation and any stock purchase plan or stock option plan, but does not include cafeteria plans or any other health or welfare benefit plans. In addition, a Participant who withdraws any amount from his Compensation Deferral Account pursuant to this Section shall be unable to elect any Compensation Deferrals under this Plan or under any other plan maintained by the Company or a Related Company for the Participant's taxable year immediately following the taxable year of


the withdrawal to any extent that such Compensation Deferral would exceed the applicable limit under Section 402(g) of the Code for such taxable year, reduced by the amount of such Participant's Compensation Deferrals for the taxable year of the withdrawal.

(d) A Participant shall not be permitted to make any withdrawals from his Accounts pursuant to this section until he has obtained all distributions, other than hardship distributions, and all non-taxable loans currently available under all qualified profit sharing and retirement plans maintained by the Company or a Related Company."

IN WITNESS WHEREOF, this Amendment 1999-1 is hereby adopted this ____ day of March, 1999.

MERCURY GENERAL CORPORATION

By /s/ [ILLEGIBLE]
   -----------------

Its CEO
    ----------------


AMENDMENT 1999-2

MERCURY GENERAL CORPORATION
PROFIT SHARING PLAN

WHEREAS, Mercury General Corporation (the "Company") maintains the Mercury General Corporation Profit Sharing Plan (the "Plan"); and

WHEREAS, pursuant to Section 9.1 of the Plan, the Company is authorized to amend the Plan; and

WHEREAS, the Company deems it desirable to modify the Plan's provisions regarding each Participant's right to direct investments in his Company Contribution Account and his Employer Matching Contributions Account;

NOW, THEREFORE effective as of the first business day in January 1, 2000, (or as soon thereafter as the Committee makes available Participant directed investments of the Company Contributions Account and the Employer Matching Contributions Account) the Plan is hereby amended to effect these changes as follows:

1. The second sentence of Section 3.10(a) is amended to read as follows:

"The Committee may, in its sole discretion, establish and maintain separate Investment Funds under this Plan for (i) Participants' Company Contributions Accounts, Participants' Compensation Deferral Accounts, Employer Matching Contributions Accounts, Rollover Accounts, AFI Matching Contribution Accounts, and any other Accounts as to which the Participant


exercises control as described in subsection (c) below (collectively, the "Self-Directed Accounts"), and (ii) Participants' ESOP Accounts."

2. The first sentence of Section 3.10(b) is amended to read as follows:

"Pursuant to rules established by the Committee and subject to the provisions of this Section, each Participant shall have the right and obligation to designate in which of the Investment Funds his Company Contributions Account, Compensation Deferral Account, Employer Matching Contributions Account, Rollover Account, AFI Matching Contribution Account, and any other Account as to which he is permitted exercise of control as described in subsection (c) below (collectively, his "Self-Directed Accounts") will be invested, and to change such designation."

3. The phrase "(his "Self-Directed Accounts")" is deleted from
Section 7.1(b)(1).

IN WITNESS WHEREOF, this Amendment 1999-2 is hereby adopted this 31st

day of December, 1999.

MERCURY GENERAL CORPORATION

By: /s/ George Joseph
   --------------------------
Its: CEO
    -------------------------


RESOLUTIONS

WHEREAS, this Corporation maintains the Mercury General Corporation Profit Sharing Plan (the "Plan"); and

WHEREAS, this Corporation, acting through this Board of Directors, has the right to amend the Plan; and

WHEREAS, it is in the best interests of this Corporation, the Plan and the Plan's Participants to amend to Plan in order to permit each Participant to direct the investments in his Company Contribution Account and his Employer Matching Contributions Account; and

WHEREAS, there has been presented to this Board of Directors a form of amendment which would make the changes to the Plan which are necessary to accomplish the transfer of right to direct such investments;

NOW, THEREFORE, BE IT RESOLVED, that Amendment 1999-2, in substantially the form presented to this Board of Directors, is hereby approved and adopted; and

BE IT FURTHER RESOLVED, that such Amendment shall be effective as of the first business day of January, 2000, or as soon as the Committee makes available Participant-directed investments of the Company Contributions Account and the Employer Matching Contributions Account; and


BE IT FURTHER RESOLVED, that the officers of this Corporation are authorized and instructed to take such other and further action as may be

appropriate to carry out the intent of these resolutions.


EXHIBIT 10.31

AMENDMENT AND RESTATEMENT
TO AND OF
REVOLVING CREDIT AGREEMENT

by and among

MERCURY GENERAL CORPORATION,
THE LENDERS PARTY HERETO,

and

THE BANK OF NEW YORK, AS AGENT
UNION BANK OF CALIFORNIA, AS CO-AGENT
and
BANK ONE, NA, AS CO-AGENT
with
BNY CAPITAL MARKETS, INC.,
AS LEAD ARRANGER


$100,000,000

Dated as of October 29, 1999


AMENDMENT AND RESTATEMENT
TO AND OF
REVOLVING CREDIT AGREEMENT

AMENDMENT AND RESTATEMENT (this "Restatement") dated as of October 29, 1999, to and of the Revolving Credit Agreement, dated as of October 30, 1998, by and among MERCURY GENERAL CORPORATION, a California corporation (the "Borrower"), the lenders from time to time party thereto (collectively, together with their respective assigns, the "Lenders", and each a "Lender"), and THE BANK OF NEW YORK, as Agent for the Lenders (in such capacity, together with its successors in such capacity, the "Agent").

RECITALS

A. Simultaneously with the execution and delivery hereof: (i) each of The Chase Manhattan Bank and Credit Lyonnais New York Branch (each, a "Withdrawing Lender" and together, the "Withdrawing Lenders") is terminating its Commitment under the Credit Agreement and shall no longer be deemed a party thereto; (ii) Bank of America, N.A. (the "New Lender") has agreed to become a "Lender" under the Credit Agreement and to make loans to the Borrower in the amount set forth opposite its name on Exhibit A hereto and the Borrower desires to accept the Commitment of the New Lender and to cause the New Lender to be added as a "Lender" to the Loan Agreement as amended hereby, and the Agent and the Lenders that are not terminating their Commitments under the Credit Agreement (collectively, the "Existing Lenders"; the New Lender and the Existing Lenders are hereinafter referred to collectively as the "Lenders") are agreeable to the addition of the New Lender; and (iii) the Existing Lenders desire to change their respective Commitments to the amount set forth opposite their respective names on Exhibit A hereto and the Borrower desires to accept such changed Commitments.

B. In addition, the Borrower has requested that the Maturity Date be extended for an additional 364-day period from the current Maturity Date and the Lenders agree to such extension subject to the terms and conditions set forth below, including an increase in the Applicable Margin with respect to Eurodollar Advances and the Commitment Fee.

C. Capitalized terms used herein that are defined in the Credit Agreement and are not otherwise defined herein shall have the respective meanings ascribed thereto in the Credit Agreement.

Accordingly, in consideration of the Recitals and the covenants, conditions and agreements hereinafter set forth, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows:


Article 1. Change in Commitments.

Section 1.1 From and after the date hereof, the Commitment of each Lender shall be the amount set forth opposite such Lender's name on Exhibit A hereto as the same may be reduced pursuant to the terms of the Credit Agreement, and, with respect to each Existing Lender, such amount shall supersede and be deemed to amend the amount of its respective Commitment as set forth opposite its name on Exhibit A to the Credit Agreement.

Section 1.2 The parties hereto acknowledge that the Commitment of each of the Withdrawing Lenders under the Credit Agreement has been terminated and the Withdrawing Lenders shall have no further duties or obligations under the Credit Agreement after the date hereof.

Section 1.3 The New Lender agrees with the Borrower, the Existing Lenders and the Agent that (i) the New Lender will abide by the terms of the Credit Agreement as amended hereby, (ii) the Credit Agreement shall be binding upon, inure to the benefit of, and be enforceable by and against the New Lender, and (ii) the New Lender shall be deemed to be a "Lender" under, and as such term is defined in, the Credit Agreement.

Section 1.4 If any Loans are outstanding under the Credit Agreement on the date hereof, the Lenders shall on the date hereof, at the direction of the Agent, make appropriate adjustments among themselves in order to insure that the amount (and type) of the Loans outstanding from each Lender under the Credit Agreement (as of the date hereof) are proportionate to each Lender's Commitment Percentage, after giving effect to the reallocation of the Commitments of the Lenders.

Article 2. Extension of Maturity Date.

Notwithstanding the procedures set forth in Section 2.17 of the Credit Agreement, the Agent and each of the Lenders hereby consents to the extension of the Maturity Date for a period of 364 days from the current Maturity Date. Accordingly, the new Maturity Date shall be October 27, 2000.

Article 3. Amendments to the Credit Agreement.

Section 3.1 The Credit Agreement is hereby amended by restating in its entirety the definition of "Applicable Margin" contained in Section 1.1 of the Credit Agreement to read as follows:

"Applicable Margin": (i) with respect to the unpaid principal balance of ABR Advances, the applicable percentage set forth below in the column entitled "ABR Advances", (ii) with respect to the unpaid principal balance of Eurodollar Advances, the applicable percentage set forth below in the column entitled "Eurodollar Advances", and
(iii) with respect to the Commitment Fee, the applicable percentage set forth below in the column entitled "Commitment Fee"; in each case opposite the applicable Pricing Level:

2

                                  ABR               Eurodollar              Commitment
Pricing Level                     Advances          Advances                Fee
-------------                     --------          ----------              ----------
Pricing Level I                      0%                0.6000%                  .1250%
Pricing Level II                     0%                0.6500%                  .1250%
Pricing Level III                    0%                0.7750%                  .1250%
Pricing Level IV                     0%                0.9000%                  .1250%

Section 3.2. The Credit Agreement is hereby amended by restating in its entirety the definition of "Maturity Date" contained in Section 1.1 of the Credit Agreement to read as follows:

"Maturity Date": October 27, 2000 (or any date subsequent thereto resulting from an extension of the Maturity Date pursuant to Section 2.17), or such earlier date on which the Notes shall become due and payable, whether by acceleration or otherwise.

Section 3.3. Exhibit A to the Credit Agreement is deleted in its entirety and Exhibit A hereto is substituted therefor.

Section 3.4. In order to evidence the Loans, as amended hereby, the Borrower shall execute and deliver to each Lender, simultaneously with the execution and delivery hereof, a promissory note payable to the order of such Lender in substantially the form of Exhibit B hereto (hereinafter referred to individually as a "SUBSTITUTED NOTE" and collectively as the "SUBSTITUTED NOTES"). Each of the Existing Lenders shall, promptly after the execution and delivery by the Borrower of its applicable Substituted Note as herein provided, mark the Notes delivered to it in connection with the Credit Agreement "Replaced by Substituted Note" and return such Notes to the Borrower. Exhibit B to the Credit Agreement is deleted in its entirety and Exhibit B hereto is substituted therefor.

Section 3.5. Schedule 1.1 to the Credit Agreement is deleted in its entirety and Schedule 1.1 hereto is substituted therefor.

Section 3.6. All references in the Credit Agreement and the other Loan Documents to: (i) the "Credit Agreement", and also in the case of the Credit Agreement to "this Agreement", shall be deemed to refer to the Credit Agreement, as amended and restated hereby, (ii) the "Note(s)" shall be deemed to refer to the Substituted Note(s), and (iii) the "Loan Documents" shall be deemed to include this Restatement and the Substituted Notes.

Section 3.7 The Credit Agreement and the other Loan Documents shall each be deemed amended, supplemented and restated hereby to the extent necessary, if any, to give effect to the provisions of this Restatement.

Article 4. Conditions to Effectiveness of this Restatement.

This Restatement shall become effective on the date of the fulfillment (to the satisfaction of the Agent) of the following conditions precedent:

3

(a) The Agent shall have received this Restatement, duly executed by a duly authorized officer or officers of the Borrower, the Agent and each Lender.

(b) The Borrower shall have executed and delivered to each Lender its Substituted Note.

(c) The Agent shall have received a certificate of the Secretary or Assistant Secretary of the Borrower (i) attaching a true and complete copy of the resolutions of its Board of Directors and of all documents evidencing all other necessary corporate action (in form and substance satisfactory to the Agent) taken by it to authorize this Restatement and the Substituted Notes, (ii) certifying that its certificate of incorporation and by-laws have not been amended since October 30, 1998, or, if so, setting forth the same, and (iii) setting forth the incumbency of its officer or officers who may sign this Restatement, including therein a signature specimen of such officer or officers.

(d) The Agent shall have received such other documents as it shall reasonably request.

Article 5. Representations and Warranties.

The Borrower hereby (i) reaffirms and admits the validity and enforceability of the Credit Agreement and the other Loan Documents and all of its obligations thereunder, and agrees and admits that it has no defense or offset against any of its obligations under the Loan Documents, (ii) represents and warrants that there exists no Default or Event of Default immediately after giving effect to this Restatement, and (iii) represents and warrants that the representations and warranties contained in the Loan Documents, including the Credit Agreement as amended by this Restatement, are true and correct in all material respects on and as of the date hereof.

Article 6. Miscellaneous.

Section 6.1 Except as amended and restated hereby, the Credit Agreement and the other Loan Documents are hereby ratified and confirmed in all respects and shall remain in full force and effect in accordance with their respective terms.

Section 6.2 This Restatement may be executed in any number of counterparts, each of which shall be an original and all of which shall constitute one agreement. It shall not be necessary in making proof of this Restatement to produce or account for more than one counterpart signed by the party against which enforcement is sought.

Section 6.3 THIS RESTATEMENT IS BEING DELIVERED IN AND IS INTENDED TO BE PERFORMED IN THE STATE OF NEW YORK AND SHALL BE CONSTRUED AND ENFORCEABLE AND BE GOVERNED BY, THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.

4

AS EVIDENCE of the agreement by the parties hereto to the terms and conditions herein contained, each such party has caused this Restatement to be executed on its behalf as of the date first written above.

MERCURY GENERAL CORPORATION

By:_________________________________________
Name:_______________________________________
Title:______________________________________

THE BANK OF NEW YORK, in its capacity
as a Lender and in its capacity as the Agent

By:_________________________________________
Name:_______________________________________
Title:______________________________________

CONSENTED TO:

UNION BANK OF CALIFORNIA, N.A.

By:_________________________________________ Name:_______________________________________ Title:______________________________________

BANK ONE, NA, (F/K/A THE FIRST
NATIONAL BANK OF CHICAGO)

By:_________________________________________ Name:_______________________________________ Title:______________________________________

FLEET NATIONAL BANK

By:_________________________________________ Name:_______________________________________ Title:______________________________________

BANK OF AMERICA, N.A.

By:_________________________________________ Name:_______________________________________ Title:______________________________________

Signature Page to Mercury General Corporation Amendment and Restatement to and of Revolving Credit Agreement


MERCURY GENERAL EXHIBIT A

List of Commitments

Bank                              Commitment                 Commitment Percentage
----                              ----------                 ---------------------
The Bank of New York              $ 20,500,000                       20.50%
Union Bank of California, N.A     $ 20,250,000                       20.25%
Bank One, NA                      $ 20,250,000                       20.25%
Fleet National Bank               $ 19,500,000                       19.50%
Bank of America, N.A.             $ 19,500,000                       19.50%

TOTAL                             $100,000,000                         100%


MERCURY GENERAL EXHIBIT B

FORM OF NOTE

__________ __, ____
New York, New York

FOR VALUE RECEIVED, on the Maturity Date, MERCURY GENERAL CORPORATION, a California corporation (the "Borrower"), hereby promises to pay to the order of ________________ (the "Lender"), at the office of The Bank of New York, as Agent (the "Agent"), located at One Wall Street, New York, New York or at such other place as the Agent may specify from time to time, in lawful money of the United States of America, the outstanding principal balance of the Lender's Loans to the Borrower, together with interest from the date hereof, on the unpaid principal balance hereof, payable at the rate or rates and at the time or times provided for in the Revolving Credit Agreement, dated as of October 30, 1998, among the Borrower, the Lenders from time to time party thereto and the Agent (as the same may be amended, modified or supplemented from time to time, the "Agreement"). Capitalized terms used herein that are defined in the Agreement shall have the meanings therein defined. In no event shall interest payable hereon exceed the Highest Lawful Rate.

This Note is one of the Notes referred to in the Agreement and is entitled to the benefits of, and is subject to the terms set forth in, the Agreement. The principal of this Note is payable in the amounts and under the circumstances, and its maturity is subject to acceleration upon the terms, set forth in the Agreement. Except as otherwise provided in the Agreement, if any payment on this Note becomes due and payable on a day which is not a Business Day, the maturity thereof shall be extended to the next Business Day and interest shall be payable at the applicable rate or rates specified in the Agreement during such extension period.

The (i) date and amount of each Loan made by the Lender, (ii) its character as an ABR Advance, a Eurodollar Advance, or a combination thereof, (iii) the interest rate and Interest Period applicable to Eurodollar Advances, and (iv) each payment and prepayment of the principal thereof, shall be recorded by the Lender on its books and, prior to any transfer of this Note, indorsed by the Lender on the schedule attached hereto or any continuation thereof, provided that the failure of the Lender to make any such recordation or indorsement shall not affect the obligations of the Borrower to make payment when due of any amount owing hereunder.

Presentment for payment, demand, protest, notice of protest and notice of dishonor and all other demands and notices in connection with the delivery, performance and enforcement of this Note are hereby waived, except as specifically otherwise provided in the Agreement.

This Note is being delivered in, is intended to be performed in, shall be construed and interpreted in accordance with, and be governed by the internal laws of, the State of New York, without regard to principles of conflicts of law.


This Note may only be amended by an instrument in writing executed pursuant to the provisions of Section 11.1 of the Agreement.

MERCURY GENERAL CORPORATION

By:______________________________
Name:____________________________
Title:___________________________

2

SCHEDULE TO NOTE

                                               Interest
                                               Rate on
                                               Eurodollar
                                               Advances
                Type of       Amount of        (without        Interest
                Advance       principal        regard to       Period (if
                (ABR or       Amount of        paid or         Applicable      Eurodollar       Notation
Date            Eurodollar    Advance          prepaid         Margin)         Advance)         Made By
----            ----------    ---------        ----------      ----------      ----------       --------


                         MERCURY GENERAL SCHEDULE 1.1

                            LIST OF LENDING OFFICES
                            -----------------------

DOMESTIC LENDING OFFICES                   EURODOLLAR LENDING OFFICES
------------------------                   --------------------------

1.  The Bank of New York                   The Bank of New York
    One Wall Street                        One Wall Street
    Agency Function Administration         Agency Function Administration
    18th New York                          18th Floor
    New York, New York 10286               New York, New York 10286
    Att: Patricia A. Hylton                Att: Patricia A. Hylton
    Telephone: (212) 635-4693 (212)        Telephone: (212) 635-4693
    Telecopy: (212) 635-6365(60r7)         Telecopy: (212) 635-6365(60r7)

2.  Union Bank of California, N.A.         Union Bank of California, N.A.
    Insurance Industries Group             Insurance Industries Group
    350 California Street - 6/th/ Floor    350 California Street - 6/th/ Floor
    Att: James R. Fothergill,              Att: James R. Fothergill,
         Vice President                         Vice President
    Telephone: (415) 705-7035              Telephone: (415) 705-7035
    Telecopy: (415) 705-7037               Telecopy: (415) 705-7037

3.  Bank One, NA                           Bank One, NA
    1 Bank One Plaza                       1 Bank One Plaza
    16/th/ Floor IL 1-0085                 16/th/ Floor IL 1-0085
    Chicago, Il 60670                      Chicago, Il 60670
    Att: Thomas W. Doddridge               Att: Thomas W. Doddridge
         First Vice President                   First Vice President
    Telephone:  (312) 732-3881             Telephone:  (312) 732-3881
    Telecopy:  (312) 732-4033              Telecopy:  (312) 732-4033

4.  Financial Institutions                 Financial Institutions
    Fleet National Bank                    Fleet National Bank
    25th Floor CTMOO250                    25th Floor CTMOO250
    777 Main Street                        777 Main Street
    Hartford, CT 06115                     Hartford, CT 06115
    Att: David Albanesi                    Att: David Albanesi
         Vice President                         Vice President
    Telephone: 860-986-7932                Telephone: 860-986-7932
    Facsimile: 860-986-1264                Facsimile: 860-986-1264

5.  Bank of America, N.A.                  Bank of America, N.A.
    901 Main Street                        901 Main Street
    66th Floor                             66th Floor
    Dallas, Texas 75202                    Dallas, Texas 75202
    Att: Joan D'Amico                      Att: Joan D'Amico
    Telephone: 214-209-3307                Telephone: 214-209-3307
    Facsimile: 214-209-3742                Facsimile: 214-209-3742

2

Exhibit 10.32

MULTIPLE LINE EXCESS OF LOSS
REINSURANCE AGREEMENT
NO. TM670A,B

EFFECTIVE JANUARY 1, 1999

between

MERCURY CASUALTY COMPANY
Brea, California

and

SWISS REINSURANCE AMERICA CORPORATION
New York, New York


MULTIPLE LINE EXCESS OF LOSS REINSURANCE AGREEMENT NO. TM670A,B

ARTICLE         CONTENTS                                              PAGE
-------         --------                                              ----
                PREAMBLE                                                 1
I               INTENT                                                   1
II              COVER                                                    1
III             EFFECTIVE DATE AND TERMINATION                           2
IV              TERRITORY                                                2
V               ULTIMATE NET LOSS                                        2
VI              LOSS IN EXCESS OF POLICY LIMITS                          3
VII             EXTRA CONTRACTUAL OBLIGATIONS                            3
VIII            DEFINITION OF RISK                                       4
IX              EXCLUSIONS                                               5
X               SPECIAL ACCEPTANCE                                      11
XI              LOSS OCCURRENCE                                         12
XII             REPORTS AND REMITTANCES                                 14
XIII            CLAIMS                                                  14
XIV             SALVAGE AND SUBROGATION                                 15
XV              ACCESS TO RECORDS                                       16
XVI             TAXES                                                   16
XVII            CURRENCY                                                16
XVIII           OFFSET                                                  16
XIX             ERRORS OR OMISSIONS                                     17
XX              DISPUTE RESOLUTION                                      17
XXI             INSOLVENCY                                              19
XXII            SPECIAL TERMINATION                                     20
XXIII           AMENDMENTS                                              21
                SIGNATURES                                              21

ATTACHMENTS:    EXHIBIT A - FIRST MULTIPLE LINE EXCESS OF LOSS COVER
                EXHIBIT B - SECOND MULTIPLE LINE EXCESS OF LOSS COVER

                INSOLVENCY FUNDS EXCLUSION CLAUSE
                POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE
                POLLUTION AND SEEPAGE EXCLUSION CLAUSE
                NUCLEAR INCIDENT EXCLUSION CLAUSE  - PHYSICAL DAMAGE -
                 REINSURANCE - U.S.A.
                NUCLEAR INCIDENT EXCLUSION CLAUSE  - PHYSICAL DAMAGE -
                 REINSURANCE - CANADA
                NUCLEAR INCIDENT EXCLUSION CLAUSE - REINSURANCE - NO. 4
                POLLUTION LIABILITY EXCLUSION CLAUSE - REINSURANCE
                NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY -
                 REINSURANCE  - U.S.A.
                NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY -
                 REINSURANCE - CANADA


MULTIPLE LINE EXCESS OF LOSS
REINSURANCE AGREEMENT
NO. TM670A,B
(hereinafter referred to as the "Agreement")

between

MERCURY CASUALTY COMPANY
Brea, California
(hereinafter referred to as the "Company")

and

SWISS REINSURANCE AMERICA CORPORATION
New York, New York
(hereinafter referred to as the "Reinsurer")

ARTICLE I - INTENT

A. The Company will reinsure with the Reinsurer and the Reinsurer will accept from the Company such reinsurance in accordance with the terms and conditions set forth in Exhibits A and B which are attached hereto and made part of this Agreement, such Exhibits being entitled for the purposes of identification as follows:

EXHIBIT A - FIRST MULTIPLE LINE EXCESS OF LOSS COVER
EXHIBIT B - SECOND MULTIPLE LINE EXCESS OF LOSS COVER

B. This Agreement is solely between the Company and the Reinsurer, and nothing contained in this Agreement shall create any obligations or establish any rights against the Reinsurer in favor of any person or entity not a party hereto.

C. The performance of obligations by both parties under this Agreement shall be in accordance with a fiduciary standard of good faith and fair dealing.

ARTICLE II - COVER

A. The Reinsurer shall indemnify the Company on an excess of loss basis in respect of the Company's Ultimate Net Loss paid or to be paid by the Company as a result of losses occurring during the term of this Agreement, for Policies in force as of January 1, 1999, and new and renewal Policies becoming effective on or after said date, subject to the terms and conditions contained herein.

B. The term "Policies" shall mean each of the Company's binders, policies and contracts of insurance or reinsurance on the business covered hereunder.

1.


ARTICLE III - EFFECTIVE DATE AND TERMINATION

A. This Agreement shall become effective with respect to losses occurring on and after 12:01 a.m., Pacific Standard Time, January 1, 1999, and shall remain in full force until terminated. This Agreement may be terminated at any time by either party giving to the other 90 days prior written notice by certified mail of its intention to do so.

B. Upon termination of this Agreement, the Reinsurer shall be liable for losses occurring prior to the date of termination; however, the Reinsurer shall have no liability for losses occurring subsequent to the termination of this Agreement.

C. If this Agreement shall terminate while a Property loss covered hereunder is in progress, it is agreed that, subject to the other conditions of this Agreement, the Reinsurer shall indemnify the Company as if the entire loss had occurred during the time this Agreement is in force provided the loss covered hereunder started before the date of termination.

ARTICLE IV - TERRITORY

A. As respects Property Business, this Agreement applies to risks located in the United States of America, its territories and possessions, and Canada, except that with respect to Multiple Peril Policies covered hereunder, the territorial limits of this Agreement shall be those of the original Policies when such Policies are written to cover risks primarily located in the United States of America, its territories and possessions, and Canada.

B. As respects Casualty Business, this Agreement applies to Policies issued by the Company within the United States of America, its territories and possessions, and Canada and shall apply to losses covered hereunder wherever occurring.

ARTICLE V - ULTIMATE NET LOSS

A. The term "Ultimate Net Loss" shall mean the actual sum paid or to be paid by the Company in settlement of losses or liability after making deductions for all recoveries, including subrogation, salvages, and claims upon other reinsurances, whether collectible or not, which inure to the benefit of the Reinsurer under this Agreement, and shall include Loss Adjustment Expenses incurred by the Company.

B. The term "Ultimate Net Loss" shall include 90% of Extra Contractual Obligations, as defined herein.

2.


C. The term "Loss Adjustment Expenses" shall mean all expenses incurred by the Company in connection with the investigation, settlement, defense or litigation of any claim or loss covered by the Policies reinsured under this Agreement, and shall include Declaratory Judgment Expenses. However, the term "Loss Adjustment Expenses" shall not include the salaries and expenses of Company employees, office expenses and other overhead expenses.

D. The term "Declaratory Judgment Expenses" shall mean all legal expenses, incurred in the representation of the Company in litigation brought to determine the Company's defense and/or indemnification obligations, that are allocable to any specific claim or loss applicable to Policies subject to this Agreement. In addition, the Company shall promptly notify the Reinsurer of any Declaratory Judgment Expenses subject to this Agreement.

E. All recoveries, salvages or payments recovered or received subsequent to a loss settlement under this Agreement shall be applied as if recovered or received prior to the aforesaid settlement and all necessary adjustments to the loss settlement shall be made by the parties hereto.

F. Nothing in this Article shall be construed to mean that losses are not recoverable hereunder until the Ultimate Net Loss of the Company has been ascertained.

ARTICLE VI - LOSS IN EXCESS OF POLICY LIMITS

A. In the event the Company is liable to a policyholder as the result of a settlement or judgment rendered against the policyholder which is in excess of the Policy limit, 90% of that portion of the award made to the third party claimant which is in excess of the Company's Policy limit shall be added to the amount of the Company's Policy limit and the sum thereof shall be considered one loss, subject to the provision in Paragraph B. below and all other provisions set forth in this Agreement.

B. With respect to coverage provided under this Article, recoveries from any insurance or reinsurance other than this Agreement, shall inure to the benefit of the Reinsurer and shall be deducted to arrive at the amount of the Company's Ultimate Net Loss.

ARTICLE VII - EXTRA CONTRACTUAL OBLIGATIONS

A. "Extra Contractual Obligations" are defined as those liabilities not covered under any other provision of this Agreement and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the Policy limit, or by reason of alleged or actual negligence, fraud or bad faith in

3.


rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action.

B. The date on which an Extra Contractual Obligation is incurred by the Company shall be deemed, in all circumstances, to be the date of the original accident, casualty, disaster or loss occurrence.

C. However, coverage hereunder as respects Extra Contractual Obligations shall not apply where the loss has been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder.

D. Extra Contractual Obligations shall not include loss arising out of engineering or other services or any other non-claims related activity provided to the insured by the Company.

E. Recoveries, collectibles or retention from any other form of insurance or reinsurance including deductibles or self-insured retention which protect the Company against Extra Contractual Obligations shall inure to the benefit of the Reinsurer and shall be deducted from the total amount of Extra Contractual Obligations for purposes of determining the loss hereunder.

ARTICLE VIII - DEFINITION OF RISK

The Company shall be the sole judge of what constitutes one risk provided, however, that:

A. A risk shall never be less than all insurable values within exterior walls and under one roof regardless of fire divisions, the number of Policies involved, and whether there is a single, multiple or unrelated named insureds involved in such risk.

B. When two or more buildings are situated at the same general location, the Company shall identify on its records at the time of acceptance by the Company, those individual buildings and all insurable values contained therein that are considered to constitute each risk. If such identification is not made, each building and all insurable values contained therein shall be considered to be a separate risk.

C. A risk shall be determined from the standpoint of the predominant peril and such peril shall be noted in the Company's records.

4.


ARTICLE IX - EXCLUSIONS

I. AS RESPECTS PROPERTY BUSINESS COVERED UNDER THIS AGREEMENT, THIS AGREEMENT DOES NOT COVER:

A. THE FOLLOWING GENERAL CATEGORIES

1. All Lines of Business not specifically listed in Section I - Business Covered of Exhibits A and B.

2. Policies issued with a deductible or self-insured retention of $25,000 or more except Policies covering the Company's own building coverage that are written with a self-insured retention less than or equal to $1,000,000; provided this exclusion shall not apply to Policies which customarily provide a percentage deductible on the perils of earthquake or windstorm.

3. Reinsurance assumed, except inter-company reinsurance.

4. Ex-gratia Payments.

5. Loss or damage occasioned by war, invasion, revolution, bombardment, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, martial law, or confiscation by order of any government or public authority, but not excluding loss or damage which would be covered under a standard form of Policy containing a standard war exclusion clause.

6. Insolvency Funds as per the attached Insolvency Funds Exclusion Clause, which is made part of this Agreement.

7. Pool, Syndicate and Association business as per the attached Pools, Associations and Syndicates Exclusion Clause, which is made part of this Agreement.

8. Risks where the total insured value exceeds $20,000,000.

9. System performance.

B. THE FOLLOWING CLASSES OF BUSINESS AND TYPES OF RISKS

1. Mortgage Impairment.

2. Growing and/or standing crops.

3. Mortality and Health covering birds, animals or fish.

4. All onshore and offshore gas and oil drilling rigs.

5.


5. Petrochemical operations engaged in the production, refining or upgrading of petroleum or petroleum derivatives or natural gas.

6. Satellites.

7. All railroad business.

8. As respects Inland Marine business:
a. Registered Mail and Armored Car Policies.
b. Jeweler's Block Policies.
c. Furrier's Customers Policies.
d. Rolling Stock.
e. Parcel Post when written to cover banks and financial institutions.
f. Commercial Negative Film Insurance and Cast and/or Non-Appearance Insurance.
g. Garment Contractors Policies.
h. Mining Equipment while underground.
i. Radio and Television Broadcasting Towers except for existing exposures present at the inception of this Agreement.
j. Motor Truck Cargo Insurance written for common carriers operating beyond a radius of 200 miles.
k. Cargo Insurance written to cover ocean, lake or inland waterway vessels.
l. Watercraft.

9. Any collection of fine arts where the insurable value is equal to or exceeds $1,000,000.

10. Bridges, tunnels and dams.

11. Personal Multiple Peril (Section II only).

C. THE FOLLOWING PERILS

1. Flood and/or Earthquake when written as such.

2. Difference in Conditions, however styled.

3. Pollution and Seepage as per the attached Pollution and Seepage Exclusion Clause which is made part of this Agreement.

4. Nuclear Incident Exclusion Clauses which are attached and made part of this Agreement:
a. Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance - U.S.A.
b. Nuclear Incident Exclusion Clause - Physical Damage -Reinsurance - Canada.
c. Nuclear Incident Exclusion Clause - Reinsurance - No. 4.

6.


D. In the event the Company is inadvertently bound on any risk which is excluded under this Agreement and identified below, the reinsurance provided under this Agreement shall apply to such risk until discovery by the Company within its Home Office of the existence of such risk and for 30 days thereafter, and shall then cease unless within the 30 day period, the Company has received from the Reinsurer written notice of its approval of such risk.

As respects Classes of Business and Types of Risks:

Items 1. through 11. of Section B. of this Part I.

II. AS RESPECTS CASUALTY BUSINESS COVERED UNDER THIS AGREEMENT, THIS AGREEMENT DOES NOT COVER:

A. THE FOLLOWING GENERAL CATEGORIES

1. Ex-gratia payments.

2. Risks subject to a deductible or a self-insured retention excess of $25,000.

3. Loss or damage caused directly or indirectly by: (a) enemy attack by armed forces including action taken by military, naval or air forces in resisting an actual or an immediately impending enemy attack; (b) invasion; (c) insurrection; (d) rebellion; (e) revolution; (f) intervention; (g) civil war; and (h) usurped power.

4. Reinsurance assumed by the Company except inter-company reinsurance.

5. Business derived from any Pool, Association, including Joint Underwriting Association, Syndicate, Exchange, Plan, Fund or other facility directly as a member, subscriber or participant, or indirectly by way of reinsurance or assessments; provided this exclusion shall not apply to Automobile assigned risks which may be currently or subsequently covered hereunder.

6. Pollution Liability as per the attached Pollution Liability Exclusion Clause - Reinsurance.

7. Insolvency Funds as per the attached Insolvency Funds Exclusion Clause.

8. Nuclear Incident Exclusion Clauses which are attached and made part of this Agreement:
a. Nuclear Incident Exclusion Clause - Liability - Reinsurance - U.S.A.

7.


b. Nuclear Incident Exclusion Clause - Liability - Reinsurance - Canada.
c. Nuclear Incident Exclusion Clause - Reinsurance - No. 4.

B. THE FOLLOWING INSURANCE COVERAGES

1. Fiduciary Liability.

2. Fidelity and Surety.

3. Credit and Financial Guarantee.

4. Securities and Exchange Liability.

5. Retroactive coverage.

6. Personal and Commercial Excess or Umbrella Liability.

7. Malpractice or Professional Liability except incidental Malpractice Liability.

8. Errors and Omissions Liability except as provided under the Printers Program.

9. Directors' and Officers' Liability.

10. Advertisers', Broadcasters' and Telecasters' Liability as respects Personal Injury Liability except as provided under Commercial Package Policies.

11. Liquor Law Liability except Host Liquor Law Liability and Liquor Law Liability under Businessowners Policies written for the American Legion.

12. Kidnap, Extortion and Ransom Liability.

13. Boiler and Machinery Insurance.

14. Protection and Indemnity (Ocean Marine).

15. Personal Automobile Liability.

16. Automobile Collision.

17. Workers Compensation and Employers Liability.

C. THE FOLLOWING RISKS AS RESPECTS HIRED AND NON-OWNED AUTOMOBILE LIABILITY

1. Vehicles used in or while in practice or preparation for, a prearranged racing, speed, exhibition or demolition contest.

8.


2. All vehicles classified as "Public Automobiles" except church buses, social service agency automobiles, van pools and vehicles used for the transportation of employees.

3. Fire, police, emergency or municipal vehicles.

4. Motorcycles.

5. The rental or leasing of vehicles to others.

6. Logging trucks.

7. Vehicles regularly used to haul property of others and operating beyond a 200 mile radius.

8. Newspaper delivery trucks.

9. Vehicles engaged in the transportation or distribution of fireworks, fuses, explosives, ammunitions, natural or artificial fuel, gas, or liquefied petroleum gases or gasoline.

D. THE FOLLOWING AS RESPECTS LIABILITY OTHER THAN AUTOMOBILE

1. The manufacturing, mining, refining, processing, distribution, installation, removal or encapsulment of asbestos.

2. Risks involving known exposure to the following substances:
a. dioxin.
b. polychlorinated biphenols.
c. asbestos.

3. Liability as respects Products and Completed Operations:
a. The manufacture, labeling or re-labeling, importation or wholesale distribution of:
(i) Drugs or pharmaceuticals.
(ii) Cosmetics.
(iii) Herbicides, insecticides or pesticides.
(iv) Petrochemical or electrical equipment used for heating, lighting or cooking.
(v) Industrial or toxic chemicals.
(vi) Valves, gaskets or seals of a hydraulic, petrochemical or high pressure nature.
(vii) Medical supplies.
(viii) Heavy machinery and equipment.
(ix) Power tools.
(x) Medical equipment used for diagnostic or life sustaining purposes.
b. The manufacture or importing of motorized or self-propelled vehicles and equipment.

9.


c. The manufacturing, importing, packing, canning, bottling or processing of foodstuffs except Retail Businessowners Policies on premises where sales are made.
d. The blending, mixing, processing or importing of animal feed.
e. The manufacture, sale, distribution, handling, servicing or maintenance of aircraft, aerospacecraft, missiles, satellites or any component or components thereof.

4. Ownership, operation or use of vessels exceeding 50 feet in length.

5. All railway operations except sidetrack agreements.

6. Amusement parks, carnivals or circuses.

7. Public assembly exposure in excess of 5,000.

8. Gas, electric and water utility companies.

9. Subaqueous operations.

10. Mining.

11. Blasting operations.

12. Demolition of buildings or structures in excess of two stories.

13. Shoring, underpinning or moving of buildings or structures.

14. Manufacture, sale, rental, lease, erection or repair of scaffolds.

15. Construction of bridges, tunnels or dams.

16. a. Manufacturers or importers of fireworks, fuses, or any substance, as defined and noted below, intended for use as an explosive.
b. Loading of fireworks, fuses, or any explosive substance defined below into containers for use as explosive objects, propellant charges or detonation devices and the storage thereof.
c. Manufacturers or importers of any product in which fireworks, fuses, or any explosive substance defined below is an ingredient.
d. Handling, storage, transportation or use of fireworks, fuses, or any explosive substance defined below.

NOTE: An explosive substance is defined as any substance manufactured for the express purpose of exploding as

10.


differentiated from commodities used industrially and which are only incidentally explosive.

17. Manufacture, production, refining, storage, wholesale distribution or transportation of natural or artificial fuel, gas, butane, propane or liquefied petroleum gases or gasoline.

18. Onshore and offshore gas and oil drilling operations.

19. Ownership, maintenance or use of any airport or aircraft, including fueling, or any device or machine intended for and/or aiding in the achievement of atmospheric flight, projection or orbit.

20. Municipalities.

E. Those exclusions set forth under Items 6. and 17. of Section D. shall not apply if the exposure is incidental to the regular operations of the insured covered hereunder.

F. In the event the Company is inadvertently bound on any risk which is excluded under this Agreement and identified below, the reinsurance provided under this Agreement shall apply to such risk until discovery by the Company within its Home Office of the existence of such risk and for 30 days thereafter, and shall then cease unless within the 30 day period, the Company has received from the Reinsurer written notice of its approval of such risk:

1. As respects Hired and Non-Owned Automobile Liability:

Items 2. through 9. of Section C. of this Part II.

2. As respects Liability Other Than Automobile:

Items 3. through 20. of Section D. of this Part II.

ARTICLE X - SPECIAL ACCEPTANCE

Risks which are beyond the terms, conditions or limitations of this Agreement may be submitted to the Reinsurer for special acceptance hereunder; and such risks, if accepted in writing by the Reinsurer, shall be subject to all of the terms, conditions and limitations of this Agreement, except as modified by the special acceptance. Premiums and losses derived from any special acceptance shall be included with other data for rating purposes under this Agreement.

11.


ARTICLE XI - LOSS OCCURRENCE

As respects Property Business covered under this Agreement:

A. The term "Loss Occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one Loss Occurrence shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event except that the term "Loss Occurrence" shall be further defined as follows:

1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto.

2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company, occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period.

3. As regards earthquake (the epicentre of which need not necessarily be within the territorial confines referred to in the opening paragraph of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's Loss Occurrence.

4. As regards Freeze, only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting of frozen pipes and tanks) may be included in the Company's Loss Occurrence.

B. For all Loss Occurrences the Company may choose the date and time when any such period of consecutive hours commences provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss and provided that only one such period of 168 consecutive hours shall apply with respect to one

12.


event except for those Loss Occurrences referred to in 1. and 2. above, where only one such period of 72 consecutive hours shall apply with respect to one event, regardless of the duration of the event.

C. No individual losses occasioned by an event that would be covered by 72 hours clauses may be included in any Loss Occurrence claimed under the 168 hours provision.

As respects Casualty Business covered under this Agreement:

The term "Loss Occurrence" shall mean any accident or occurrence or series of accidents or occurrences arising out of any one event and happening within the term and scope of this Agreement. Without limiting the generality of the foregoing, the term "Loss Occurrence" shall be held to include:

A. As respects Products Bodily Injury and Products Property Damage Liability, injuries to all persons and all damage to property of others occurring during a Policy Period and proceeding from or traceable to the same causative agency shall be deemed to arise out of one Loss Occurrence, and the date of such Loss Occurrence shall be deemed to be the commencing date of the Policy Period. For the purpose of this provision, each annual period of a Policy which continues in force for more than one year shall be deemed to be a separate Policy Period.

B. As respects Bodily Injury Liability (other than Automobile and Products), said term shall also be understood to mean, as regards each original assured, injuries to one or more than one person resulting from infection, contagion, poisoning, or contamination proceeding from or traceable to the same causative agency.

C. As respects Property Damage Liability (other than Automobile and Products), said term shall also, subject to Provisions 1. and 2. below, be understood to mean loss or losses caused by a series of operations, events, or occurrences arising out of operations at one specific site and which cannot be attributed to any single one of such operations, events or occurrences, but rather to the cumulative effect of the same. In assessing each and every Loss Occurrence within the foregoing definition, it is understood and agreed that:

1. the series of operations, events or occurrences shall not extend over a period longer than 12 consecutive months; and

2. the Company may elect the date on which the period of not exceeding 12 consecutive months shall be deemed to have commenced.

In the event that the series of operations, events or occurrences extend over a period longer than 12 consecutive months, then each consecutive period of 12 months, the first of which commences on the

13.


date elected under 2. above, shall form the basis of claim under this Agreement.

D. As respects those Policies of the Company which provide aggregate limits of liability, the total of all individual losses occurring during any one Policy year which proceed from or are traceable to the same causative agency.

ARTICLE XII - REPORTS AND REMITTANCES

A. The Company shall furnish the Reinsurer with all necessary data respecting premiums and losses for as long as one of the parties hereto has a claim against the other arising from this Agreement.

B. Within 45 days after the close of each calendar month, the Company shall submit an account to the Reinsurer summarizing Subject Earned Premium underwritten and produced through the Commercial Property and Personal Lines Departments, and the reinsurance premium due as respects Property Business under Exhibits A and B and Casualty Business under Exhibit A. Such reinsurance premium shall be remitted within 45 days after the close of each calendar month. The reinsurance premium for Casualty Business under Exhibit B shall be paid in advance at January 1 of each year.

C. Payment by the Reinsurer of its portion of loss and Loss Adjustment Expenses paid by the Company shall be made by the Reinsurer to the Company within 15 days after proof of payment is received by the Reinsurer.

D. As respects Property Business covered under this Agreement, the Company shall furnish the following to the Reinsurer with respect to occurrences designated as catastrophes by the Property Claim Services:

1. Prompt preliminary estimate of amount recoverable from the Reinsurer;

2. Within 30 days after the close of each quarter the amount of losses and Loss Adjustment Expenses paid, less all recoveries, including salvage and subrogation, at the end of each quarter segregated by Line of Business;

3. Within 30 days after the close of each quarter the amount of losses and Loss Adjustment Expenses outstanding at the end of each quarter segregated by Line of Business.

ARTICLE XIII - CLAIMS

A. The Company shall promptly notify the Reinsurer of each claim which may involve the reinsurance provided hereunder and of all subsequent

14.


developments relating thereto, stating the amount claimed and estimate of the Company's Ultimate Net Loss and Loss Adjustment Expenses. Notwithstanding the provisions set forth in any other Article herein, prompt notification of loss shall be considered a condition precedent to liability under this Agreement.

B. As respects Casualty Business covered under this Agreement, the Company shall advise the Reinsurer of all claims which:

1. Are reserved by the Company for an amount in excess of 50% of its retention;

2. Originate from fatal injuries;

3. Originate from the following kinds of bodily injury:

a. Brain injuries resulting in impairment of physical function;

b. Spinal injuries resulting in a partial or total paralysis of upper or lower extremities;

c. Amputation or permanent loss of use of upper or lower extremities;

d. Severe burn injuries;

e. Loss of sight in one or both eyes;

f. All other injuries likely to result in a permanent disability rate of 50% or more.

C. The Company shall have the responsibility to investigate, defend or negotiate settlements of all claims and lawsuits related to Policies written by the Company and reinsured under this Agreement. The Reinsurer, at its own expense, may associate with the Company in the defense or control of any claim, suit or other proceeding which involves or is likely to involve the reinsurance provided under this Agreement, and the Company shall cooperate in every respect in the defense of any such claim, suit or proceeding.

ARTICLE XIV - SALVAGE AND SUBROGATION

A. In the event of the payment of any indemnity by the Reinsurer under this Agreement, the Reinsurer shall be subrogated, to the extent of such payment, to all of the rights of the Company against any person or entity legally responsible for damages of the loss. The Company agrees to enforce such rights; but, in case the Company refuses or neglects to do so, the Reinsurer is hereby authorized and empowered to bring any appropriate action in the name of the Company or their policyholders or otherwise to enforce such rights.

15.


B. From any amount recovered by subrogation, salvage or other means, there shall first be deducted the expenses incurred in effecting the recovery. The balance shall then be used to reimburse the excess carriers in the inverse order to that in which their respective liabilities attached, before being used to reimburse the Company for its primary loss.

ARTICLE XV - ACCESS TO RECORDS

The Reinsurer or its duly authorized representatives shall have the right to examine, at the offices of the Company at a reasonable time, during the currency of this Agreement or anytime thereafter, all books and records of the Company relating to business which is the subject of this Agreement.

ARTICLE XVI - TAXES

The Company shall be liable for all taxes on premiums paid to the Reinsurer under this Agreement, except income or profit taxes of the Reinsurer, and shall indemnify and hold the Reinsurer harmless for any such taxes which the Reinsurer may become obligated to pay to any local, state or federal taxing authority.

ARTICLE XVII - CURRENCY

Wherever the word "dollars" or the "$" symbol is used in this Agreement, it shall mean dollars of the United States of America, excepting in those cases where the Policy is issued by the Company in Canadian dollars, in which case it shall mean dollars of Canada. In the event the Company is involved in a loss requiring payment in United States and Canadian currency, the Company's retention and the limit of liability of the Reinsurer shall be apportioned between the two currencies in the same proportion as the amount of net loss in each currency bears to the total amount of net loss paid by the Company. For the purposes of this Agreement, where the Company receives premiums or pays losses in currencies other than United States or Canadian currency, such premiums and losses shall be converted into United States dollars at the actual rates of exchange at which the premiums and losses are entered in the Company's books.

ARTICLE XVIII - OFFSET

Each party to this Agreement together with their successors or assigns shall have and may exercise, at any time, the right to offset any balance or balances due the other (or, if more than one, any other). Such offset may include balances due under this Agreement and any other agreements heretofore or hereafter entered into between the parties regardless of whether such balances arise from premiums, losses or

16.


otherwise, and regardless of capacity of any party, whether as assuming insurer and/or ceding insurer, under the various agreements involved, provided however, that in the event of insolvency of a party hereto, offsets shall only be allowed in accordance with the provisions of Section 7427 of the Insurance Law of the State of New York to the extent such statute or any other applicable law, statute or regulation governing such offset shall apply.

ARTICLE XIX - ERRORS OR OMISSIONS

Errors or omissions of a ministerial nature on the part of the Company shall not invalidate the reinsurance under this Agreement, provided such errors or omissions are corrected promptly after discovery thereof; but the liability of the Reinsurer under this Agreement or any exhibits, addenda, or endorsements attached hereto shall in no event exceed the limits specified herein nor be extended to cover any risks, perils, lines of business or classes of insurance generally or specifically excluded herein.

ARTICLE XX - DISPUTE RESOLUTION

Part I - Choice Of Law And Forum

Any dispute arising under this Agreement shall be resolved in the State of New York or at another mutually agreed location, and the laws of the State of New York shall govern the interpretation and application of this Agreement.

Part II - Mediation

If a dispute between the Company and the Reinsurer, arising out of the provisions of this Agreement or concerning its interpretation or validity and whether arising before or after termination of this Agreement has not been settled through negotiation, both parties agree to try in good faith to settle such dispute by nonbinding mediation, before resorting to arbitration.

Part III - Arbitration

A. Resolution of Disputes - As a condition precedent to any right arising hereunder, any dispute not resolved by mediation between the Company and the Reinsurer arising out of the provisions of this Agreement or concerning its interpretation or validity, whether arising before or after termination of this Agreement, shall be submitted to arbitration in the manner hereinafter set forth.

B. Composition of Panel - Unless the parties agree upon a single arbitrator within 15 days after the receipt of a notice of intention to arbitrate, all disputes shall be submitted to an arbitration

17.


panel composed of two arbitrators and an umpire chosen in accordance with Paragraph C. hereof.

C. Appointment of Arbitrators - The members of the arbitration panel shall be chosen from persons knowledgeable in the insurance and reinsurance business. Unless a single arbitrator is agreed upon, the party requesting arbitration (hereinafter referred to as the "claimant") shall appoint an arbitrator and give written notice thereof by certified mail, to the other party (hereinafter referred to as the "respondent") together with its notice of intention to arbitrate. Within 30 days after receiving such notice, the respondent shall also appoint an arbitrator and notify the claimant thereof by certified mail. Before instituting a hearing, the two arbitrators so appointed shall choose an umpire. If, within 20 days after the appointment of the arbitrator chosen by the respondent, the two arbitrators fail to agree upon the appointment of an umpire, each of them shall nominate three individuals to serve as umpire, of whom the other shall decline two and the umpire shall be chosen from the remaining two by drawing lots. The name of the individual first drawn shall be the umpire.

D. Failure of Party to Appoint an Arbitrator - If the respondent fails to appoint an arbitrator within 30 days after receiving a notice of intention to arbitrate, the claimant's arbitrator shall appoint an arbitrator on behalf of the respondent, such arbitrator shall then, together with the claimant's arbitrator, choose an umpire as provided in Paragraph C. of Part III of this Article.

E. Involvement of Other Reinsurers - If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting the one party; provided, however, nothing herein shall impair the right of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers under the terms of this Agreement from several to joint.

F. If the Company is involved in a dispute under the terms of this Agreement and in one or more separate disputes with one or more other reinsurers in which common questions of law or fact are in issue, the Company or the Reinsurer, at its option, may join with such other reinsurers in a common arbitration proceeding under the terms of this Article. If the Company and such other reinsurers have commenced arbitration, the Reinsurer may at its option join such proceeding for the determination of the dispute between the Company and the Reinsurer.

G. Submission of Dispute to Panel - Unless otherwise extended by the arbitration panel or agreed to by the parties, each party shall submit its case to the panel within 30 days after the selection of the umpire.

18.


H. Procedure Governing Arbitration - All proceedings before the panel shall be informal and the panel shall not be bound by the formal rules of evidence. The panel shall have the power to fix all procedural rules relating to the arbitration proceeding. In reaching any decision, the panel shall give due consideration to the customs and usages of the insurance and reinsurance business.

I. Arbitration Award - The arbitration panel shall render its decision within 60 days after termination of the proceeding, which decision shall be in writing, stating the reasons therefor. The decision of the majority of the panel shall be final and binding on the parties to the proceeding.

J. Cost of Arbitration - Unless otherwise allocated by the panel, each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other parties the expense of the umpire and the arbitration.

ARTICLE XXI - INSOLVENCY

A. In the event of insolvency of the Company, the reinsurance provided by this Agreement shall be payable by the Reinsurer on the basis of the liability of the Company as respects Policies covered hereunder, without diminution because of such insolvency, directly to the Company or its liquidator, receiver, conservator or statutory successor except as provided in Sections 4118(a)(1)(A) and 1114(c) of the New York Insurance Law.

B. The Reinsurer shall be given written notice of the pendency of each claim or loss which may involve the reinsurance provided by this Agreement within a reasonable time after such claim or loss is filed in the insolvency proceedings. The Reinsurer shall have the right to investigate each such claim or loss and interpose, at its own expense, in the proceedings where the claim or loss is to be adjudicated, any defense which it may deem available to the Company, its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer.

C. In addition to the offset provisions set forth in Article XVIII - Offset, any debts or credits, liquidated or unliquidated, in favor of or against either party on the date of the receivership or liquidation order (except where the obligation was purchased by or transferred to be used as an offset) are deemed mutual debts or credits and shall be set off with the balance only to be allowed or paid. Although such claim on the part of either party against the other may be unliquidated or undetermined in amount on the date of the entry of the receivership or liquidation order, such claim will

19.


be regarded as being in existence as of such date and any claims then in existence and held by the other party may be offset against it.

D. Nothing contained in this Article is intended to change the relationship or status of the parties to this Agreement or to enlarge upon the rights or obligations of either party hereunder except as provided herein.

ARTICLE XXII - SPECIAL TERMINATION

A. Notwithstanding the termination provisions set forth in Article III - Effective Date and Termination, this Agreement shall be:

1. Terminated automatically and simultaneously upon the happening of any of the following events:

a. Entry of an order of liquidation, rehabilitation, receivership or conservatorship with respect to the Company or the Reinsurer by any court or regulatory authority;

b. Assignment of this Agreement by either party;

c. Any transfer of control of either party by change in ownership or otherwise;

d. General reinsurance of any portion of the Company's business it retains net for its own account, as determined under the provisions of this Agreement without prior consent of the Reinsurer.

2. Terminated in accordance with the provisions set forth in this Paragraph, upon the discovery of the following event:

A reduction of 50% or more of the Company's or the Reinsurer's policyholders surplus during any calendar year. Such reduction shall be determined by calculating the difference between the Company's or the Reinsurer's prior year annual statement and each subsequent quarterly statutory statement within such current calendar year.

As respects the event set forth in this Paragraph A.2., the Company or the Reinsurer shall be obligated to notify the other party in writing within 30 days after the filing of its quarterly statement. Upon receipt of such notification the other party shall have the right to terminate this Agreement, by giving not less than 30 days notice of its intention to do so.

B. Any notice of termination pursuant to provisions set forth in Paragraph A.2.
above shall be sent by certified mail, return receipt

20.


requested. Such notice period shall commence upon the other party's receipt of the notice of termination.

C. In the event of termination, the Reinsurer shall not be liable for losses occurring subsequent to the date of termination.

ARTICLE XXIII - AMENDMENTS

This Agreement may be amended by mutual consent of the parties expressed in an addendum; and such addendum, when executed by both parties, shall be deemed to be an integral part of this Agreement and binding on the parties hereto.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the following dates:

In Brea, California, this            day of                      , 1999.

ATTEST:                            MERCURY CASUALTY COMPANY


_______________________            ________________________________________

And in New York, New York, this         day of                   , 1999.

ATTEST:                            SWISS REINSURANCE AMERICA CORPORATION


_______________________            ________________________________________
Member of Management                      Member of Senior Management

21.


EXHIBIT A

FIRST MULTIPLE LINE EXCESS OF LOSS COVER

IS ATTACHED TO AND FORMS

PART OF

REINSURANCE AGREEMENT NO. TM670A,B


EXHIBIT A - FIRST MULTIPLE LINE EXCESS OF LOSS COVER

SECTION          SUBJECT                                PAGE
-------          -------                                ----

  1              BUSINESS COVERED                       A-1

  2              LIMIT AND RETENTION                    A-1

  3              REINSURANCE PREMIUM                    A-2

             EXHIBIT A - FIRST MULTIPLE LINE EXCESS OF LOSS COVER


SECTION 1 - BUSINESS COVERED
----------------------------

Under this Exhibit, the indemnity for reinsured loss applies to those Policies issued by the Company with respect to the following Property and Casualty Business except as excluded under Article IX - Exclusions of this Agreement.

PROPERTY BUSINESS

NAIC
CODE:   LINES OF BUSINESS:

01      Fire
02      Allied Lines
04      Homeowners (Section I only)
05      Commercial Multiple Peril (Section I only)

CASUALTY BUSINESS

CLASSES OF INSURANCE

1. Hired and Non-Owned Automobile Liability:

Bodily Injury Liability, Property Damage Liability, Medical Payments, Uninsured Motorists, Underinsured Motorists and No-Fault Coverage.

2. Liability Other Than Automobile:

Bodily Injury Liability, Property Damage Liability, Personal and Advertising Injury Liability, and Medical Payments Coverage when written as part of a Commercial Package Policy.

SECTION 2 - LIMIT AND RETENTION

A. As respects Property Business covered under this Exhibit involving one or more than one Line of Business, the Company shall retain the first $250,000 of Ultimate Net Loss as respects each risk in any one Loss Occurrence. The Reinsurer shall then be liable for the amount by which the Company's Ultimate Net Loss exceeds the Company's retention of $250,000, but the liability of the Reinsurer shall never exceed $750,000 each risk any one Loss Occurrence, nor shall

A-1

the Reinsurer's liability from all risks in each Loss Occurrence exceed $2,250,000.

B. As respects Casualty Business covered under this Exhibit involving one or more than one Class of Insurance, the Company shall retain the first $250,000 of Ultimate Net Loss as respects any one Loss Occurrence. The Reinsurer shall then be liable for the amount by which the Company's Ultimate Net Loss exceeds the Company's retention of $250,000, but the liability of the Reinsurer shall never exceed $750,000 with respect to any one Loss Occurrence.

C. In the event both a Property and Casualty loss are involved in the same Loss Occurrence, it is understood that the Company shall retain for its own account only the first $250,000 of the combined Property and Casualty Ultimate Net Loss, provided only one Property risk may be combined in the same Loss Occurrence. Such loss and the Company's retention thereon shall be apportioned to each Property and Casualty loss in the same proportion that the Company's Ultimate Net Loss for each such Property and Casualty loss bears to the Company's combined Ultimate Net Loss from both losses. The Reinsurer shall reimburse the Company for the difference between the Company's first $250,000 of Ultimate Net Loss under each Property and Casualty loss and the Company's pro rated retention on each Property and Casualty loss.

D. As respects Casualty Business covered under this Exhibit the Company warrants that the maximum limit of liability, per occurrence set forth under each Policy subject to this Exhibit shall not exceed $1,000,000.

SECTION 3 - REINSURANCE PREMIUM

A. The Company shall pay to the Reinsurer a premium for the reinsurance provided under 1) the Property and Casualty business underwritten and produced through the Company's Commercial Property Department and 2) the Property business underwritten and produced through the Company's Personal Lines Department, all of which are covered under this Exhibit, at the rates set forth below. Each rate shall be applied to the combined total of the Company's Subject Earned Premium which shall be defined as the Subject Earned Premium as respects Property and Casualty business, underwritten and produced through the Company's Commercial Property Department plus the Subject Earned Premium as respects Property business only, underwritten and produced through the Company's Personal Lines Department, for the monthly period being reported.

Department                Business Covered                  Rate
----------                ----------------                  ----

Commercial Property       Property and Casualty             2.76%

Personal Lines            Property                          0.92%
                                                            ----
                                                 Total      3.68%

A-2

B. The term "Subject Earned Premium" as used herein is equal to the sum of the Net Premiums Written on the business covered hereunder during the period under consideration, plus the unearned premium reserve as respects premiums in force at the beginning of such period, less the unearned premium reserve as respects premiums in force at the end of the period, said unearned premium is to be calculated on a monthly pro rata basis.

C. The term "Net Premiums Written" shall mean gross premiums written less returns, allowances and reinsurances which inure to the benefit of the Reinsurer.

D. The following percentages of the Company's premium shall be allocated to the business covered under this Exhibit:

Homeowners                  Section I - 90%          Section II -  0%

Businessowners              Section I - 65%          Section II - 35%

Commercial
  Multiple Peril            Section I:               Section II:
 Actual Issued Premium,                              Actual Issued Premium,
 subject to a minimum                                subject to a minimum
 of 75%                                              of 25%

This Exhibit A is attached to and forms part of Reinsurance Agreement No.
TM670A,B issued to MERCURY CASUALTY COMPANY.

A-3

EXHIBIT B

SECOND MULTIPLE LINE EXCESS OF LOSS COVER

IS ATTACHED TO AND FORMS

PART OF

REINSURANCE AGREEMENT NO. TM670A,B


EXHIBIT B - SECOND MULTIPLE LINE EXCESS OF LOSS COVER

SECTION                 SUBJECT                     PAGE
-------                 -------                     ----

  1                     BUSINESS COVERED            B-1

  2                     LIMIT AND RETENTION         B-1

  3                     REINSURANCE PREMIUM         B-2

             EXHIBIT B - SECOND MULTIPLE LINE EXCESS OF LOSS COVER


SECTION 1 - BUSINESS COVERED
----------------------------

Under this Exhibit, the indemnity for reinsured loss applies to those Policies issued by the Company with respect to the following Property and Casualty Business except as excluded under Article IX - Exclusions of this Agreement.

PROPERTY BUSINESS

NAIC
CODE:   LINES OF BUSINESS:

01      Fire
02      Allied Lines
04      Homeowners (Section I only)
05      Commercial Multiple Peril (Section I only)

CASUALTY BUSINESS

CLASSES OF INSURANCE

1. Hired and Non-Owned Automobile Liability:

Bodily Injury Liability, Property Damage Liability, Medical Payments, Uninsured Motorists, Underinsured Motorists and No-Fault Coverage.

2. Liability Other Than Automobile:

Bodily Injury Liability, Property Damage Liability, Personal and Advertising Injury Liability, and Medical Payments Coverage when written as part of a Commercial Package Policy.

SECTION 2 - LIMIT AND RETENTION

A. As respects Property Business covered under this Exhibit involving one or more than one Line of Business, the Company shall retain the first $1,000,000 of Ultimate Net Loss as respects each risk in any one Loss Occurrence. The Reinsurer shall then be liable for the amount by which the Company's Ultimate Net Loss exceeds the Company's retention of $1,000,000, but the liability of the

B-1

Reinsurer shall never exceed $1,000,000 each risk any one Loss Occurrence, nor shall the Reinsurer's liability from all risks in each Loss Occurrence exceed $1,000,000.

B. As respects Casualty Business covered under this Exhibit involving one or more than one Class of Insurance, the Company shall retain the first $1,000,000 of Ultimate Net Loss as respects any one Loss Occurrence. The Reinsurer shall then be liable for the amount by which the Company's Ultimate Net Loss exceeds the Company's retention of $1,000,000, but the liability of the Reinsurer shall never exceed $1,000,000 with respect to any one Loss Occurrence.

C. Reinsurance of the Company's retention, set forth in Paragraphs A. and B.
above, shall not be deducted in arriving at the Company's Ultimate Net Loss herein.

D. As respects Casualty Business covered under this Exhibit the Company warrants that the maximum limit of liability, per occurrence set forth under each Policy subject to this Exhibit shall not exceed $1,000,000.

SECTION 3 - REINSURANCE PREMIUM

A. As respects Property Business underwritten and produced through the Company's Commercial Property and Personal Lines Departments, the Company shall pay to the Reinsurer a premium for the reinsurance provided under this Exhibit, at the rates set forth below. Notwithstanding the provisions of Paragraph B. below, each rate shall be applied to the combined total of the Company's Subject Earned Premium for both the Property and Casualty Business covered under this Exhibit which shall be defined as the Subject Earned Premium as respects Property and Casualty business, underwritten and produced through the Company's Commercial Property Department plus the Subject Earned Premium as respects Property business only, underwritten and produced through the Company's Personal Lines Department, for the monthly period being reported.

Department                   Rate
----------                   ----

Commercial Property          0.42%

Personal Lines               0.13%
                             ----

                    Total    0.55%

B. As respects Casualty Business underwritten and produced through the Company's Commercial Property Department, the Company shall pay to the Reinsurer an annual flat premium of $25,000 for the reinsurance provided.

B-2

C. The term "Subject Earned Premium" as used herein is equal to the sum of the Net Premiums Written on the business covered hereunder during the period under consideration, plus the unearned premium reserve as respects premiums in force at the beginning of such period, less the unearned premium reserve as respects premiums in force at the end of the period, said unearned premium is to be calculated on a monthly pro rata basis.

D. The term "Net Premiums Written" shall mean gross premiums written less returns, allowances and reinsurances which inure to the benefit of the Reinsurer.

E. The following percentages of the Company's premium shall be allocated to the business covered under this Exhibit:

Homeowners                     Section I - 90%         Section II -  0%

Businessowners                 Section I - 65%         Section II - 35%

Commercial
  Multiple Peril               Section I:              Section II:
 Actual Issued Premium,                                Actual Issued Premium,
 subject to a minimum                                  subject to a minimum
 of 75%                                                of 25%

This Exhibit B is attached to and forms part of Reinsurance Agreement No.
TM670A,B issued to MERCURY CASUALTY COMPANY.

B-3

SUPPLEMENT TO THE ATTACHMENTS

DEFINITION OF IDENTIFICATION TERMS USED WITHIN THE ATTACHMENTS

A. Wherever the term "Company" or "Reinsured" or "Reassured" or whatever other term is used to designate the reinsured company or companies within the various attachments to the reinsurance agreement, the term shall be understood to mean Company or Reinsured or Reassured or whatever other term is used in the attached reinsurance agreement to designate the reinsured company or companies.

B. Wherever the term "Agreement" or "Contract" or "Policy" or whatever other term is used to designate the attached reinsurance agreement within the various attachments to the reinsurance agreement, the term shall be understood to mean Agreement or Contract or Policy or whatever other term is used to designate the attached reinsurance agreement.

C. Wherever the term "Reinsurer" or "Reinsurers" or "Underwriters" or whatever other term is used to designate the reinsurer or reinsurers in the various attachments to the reinsurance agreement, the term shall be understood to mean Reinsurer or Reinsurers or Underwriters or whatever other term is used to designate the reinsuring company or companies.



INSOLVENCY FUNDS EXCLUSION CLAUSE

This Agreement excludes all liability of the Company arising by contract, operation of law, or otherwise from its participation or membership, whether voluntary or involuntary, in any insolvency fund or from reimbursement of any person for any such liability. "Insolvency fund" includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, which provides for any assessment of or payment or assumption by any person of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part.


POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE

SECTION A

Excluding:

(a) All Business derived directly or indirectly from any Pool, Association or Syndicate which maintains its own reinsurance facilities.

(b) Any Pool or Scheme (whether voluntary or mandatory) formed after March 1, 1968, for the purpose of insuring Property whether on a country-wide basis or in respect of designated areas. This Exclusion shall not apply to so- called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage.

SECTION B

It is agreed that business, written by the Company for the same perils, which is known at the time to be insured by or in excess of underlying amounts placed in the following Pools, Associations or Syndicates, whether by way of insurance or reinsurance is excluded hereunder:

Industrial Risk Insurers (successor to Factory Insurance Association and Oil Insurance Association); Associated Factory Mutuals; Improved Risk Mutuals.

Any Pool, Association or Syndicate formed for the purpose of writing Oil, Gas or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs.

United States Aircraft Insurance Group, Canadian Aircraft Insurance Group, Associated Aviation Underwriters, American Aviation Underwriters.

SECTION B does not apply:

(a) Where the Total Insured Value over all interests of the risk in question is less than $250,000,000.

(b) To interests traditionally underwritten as Inland Marine or Stock and/or Contents written on a Blanket basis.

(c) To Contingent Business Interruption, except when the Company is aware that the key location is known at the time to be insured in any Pool, Association or Syndicate named above.

(d) To risks as follows: Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (other than Railroad Schedules) and Builders Risks on the classes of risks specified in this subsection (d) only.


POLLUTION AND SEEPAGE EXCLUSION CLAUSE

This Reinsurance does not apply to:

1. Pollution, seepage, contamination or environmental impairment insurances (hereinafter collectively referred to as "pollution"), however styled;

2. Loss or damage caused directly or indirectly by pollution, unless said loss or damage follows as a result of a loss caused directly by a peril covered hereunder;

3. Expenses resulting from any governmental direction or request that material present in or part of or utilized on an insured's property be removed or modified, except as provided in 5. below;

4. Expenses incurred in testing for and/or monitoring pollutants;

5. Expenses incurred in removing debris, unless (A) the debris results from a loss caused directly by a peril covered hereunder, and (B) the debris to be removed is itself covered hereunder, and (C) the debris is on the insured's premises, subject, however, to a limit of $5,000 plus 25% of (i) the property damage loss, any risk, any one location, any one original insured, and (ii) any deductible applicable to the loss;

6. Expenses incurred to extract pollutants from land or water at the insured's premises unless (A) the release, discharge, or dispersal of pollutants results from a loss caused directly by a peril covered hereunder, and (B) such expenses shall not exceed $10,000;

7. Loss of income due to any increased period of time required to resume operations resulting from enforcement of any law regulating the prevention, control, repair, clean-up or restoration of environmental damage;

8. Claims under 5. and/or 6. above, unless notice thereof is given to the Company within 180 days after the date of the loss occurrence to which such claims relate.

"Pollutants" means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

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Where no pollution exclusion has been accepted or approved by an insurance regulatory authority for use in a policy that is subject to this Agreement or where a pollution exclusion that has been used in a policy is overturned, either in whole or in part, by a court having jurisdiction, there shall be no recovery for pollution under this Agreement unless said pollution loss or damage follows as a result of a loss caused directly by a peril covered hereunder.

Nothing herein shall be deemed to extend the coverage afforded by this reinsurance to property or perils specifically excluded or not covered under the terms and conditions of the original policy involved.

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NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - U.S.A.

N.M.A. 1119

1. This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.

2. Without in any way restricting the operation of paragraph 1. of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to:

I. Nuclear reactor power plants including all auxiliary property on the site, or

II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and critical facilities as such, or

III. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material," and for reprocessing, salvaging, chemically separating, storing or disposing of spent nuclear fuel or waste materials, or

IV. Installations other than those listed in paragraph 2. III. above using substantial quantities of radioactive isotopes or other products of nuclear fission.

3. Without in any way restricting the operation of paragraphs 1. and 2. of this Clause, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith, except that this paragraph 3. shall not operate:

(a) where the Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or

(b) where the said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However, on and after 1st January, 1960, this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof.

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4. Without in any way restricting the operation of paragraphs 1., 2. and 3. of this Clause, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against.

5. It is understood and agreed this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard.

6. The term "special nuclear material" shall have the meaning given to it by the Atomic Energy Act of 1954 or by any law amendatory thereof.

7. Reassured to be sole judge of what constitutes:

(a) substantial quantities, and

(b) the extent of installation, plant or site.

NOTE: - Without in any way restricting the operation of paragraph 1. hereof, it is understood and agreed that

(a) all policies issued by the Reassured on or before 31st December, 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December, 1960 whichever first occurs whereupon all the provisions of this Clause shall apply,

(b) with respect to any risk located in Canada policies issued by the Reassured on or before 31st December, 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December, 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.

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NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - CANADA

N.M.A. 1980

1. This Agreement does not cover any loss or liability accruing to the Company directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.

2. Without in any way restricting the operation of paragraph 1. of this clause, this Agreement does not cover any loss or liability accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to:

a. Nuclear reactor power plants including all auxiliary property on the site, or

b. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and critical facilities as such, or

c. Installations for fabricating complete fuel elements or for processing substantial quantities of prescribed substances, and for reprocessing, salvaging, chemically separating, storing or disposing of spent nuclear fuel or waste materials, or

d. Installations other than those listed in c. above using substantial quantities of radioactive isotopes or other products of nuclear fission.

3. Without in any way restricting the operation of paragraphs 1. and 2. of this clause, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith, except that this paragraph 3. shall not operate:

a. where the Company does not have knowledge of such nuclear reactor power plant or nuclear installation, or

b. where the said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused.

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4. Without in any way restricting the operation of paragraphs 1., 2. and 3. of this clause, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against.

5. This clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Company to be the primary hazard.

6. The term "prescribed substances" shall have the meaning given to it by the Atomic Energy Control Act R.S.C. 1974 or by any law amendatory thereof.

7. Company to be sole judge of what constitutes:

a. substantial quantities, and

b. the extent of installation, plant or site.

8. Without in any way restricting the operation of paragraphs 1., 2., 3. and 4. of this clause, this Agreement does not cover any loss or liability accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, caused by any nuclear incident as defined in The Nuclear Liability Act, nuclear explosion or contamination by radioactive material.

NOTE: Without in any way restricting the operation of paragraphs 1., 2., 3. and
4. of this clause, paragraph 8. of this clause shall apply to all original contracts of the Company whether new, renewal or replacement which become effective on or after December 31, 1984.

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NUCLEAR INCIDENT EXCLUSION CLAUSE - REINSURANCE - NO. 4

1. This Reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association.

2. Without in any way restricting the operations of Nuclear Incident Exclusion Clauses, - Liability, - Physical Damage, - Boiler and Machinery and paragraph
1. of this Clause, it is understood and agreed that for all purposes of the reinsurance assumed by the Reinsurer from the Reinsured, all original insurance policies or contracts of the Reinsured (new, renewal and replacement) shall be deemed to include the applicable existing Nuclear Clause and/or Nuclear Exclusion Clause(s) in effect at the time and any subsequent revisions thereto as agreed upon and approved by the Insurance Industry and/or a qualified Advisory or Rating Bureau.


POLLUTION LIABILITY EXCLUSION CLAUSE - REINSURANCE

This Reinsurance excludes:

(1) Any loss occurrence arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants:

a) At or from premises owned, rented or occupied by an original assured; or

b) At or from any site or location used for the handling, storage, disposal, processing or treatment of waste; or

c) Which are at any time transported, handled, stored, treated, disposed of, or processed as waste; or

d) At or from any site or location on which any original assured is performing operations:

(i) If the pollutants are brought on or to the site or location in connection with such operations; or

(ii) If the operations are to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize the pollutants.

(2) Any liability, loss, cost or expense arising out of any governmental direction or request to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants.

"Pollutants" means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

Subparagraphs a) and d)(i) of paragraph (1) of this exclusion do not apply to loss occurrences caused by heat, smoke or fumes from a hostile fire. As used herein, "hostile fire" means one which becomes uncontrollable or breaks out from where it was intended to be.

"Original assured" as used herein means all insureds as defined in the policy issued by the Company.


NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A.

N.M.A. 1590

1. This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association.

2. Without in any way restricting the operation of paragraph 1. of this Clause it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (new, renewal and replacement) of the classes specified in Clause II. in this paragraph 2. from the time specified in Clause III. in this paragraph 2. shall be deemed to include the following provision (specified as the Limited Exclusion Provision):

LIMITED EXCLUSION PROVISION*

I. It is agreed that the policy does not apply under any liability coverage, to injury, sickness, disease, death or destruction, bodily injury or property damage with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability.

II. Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liabilities Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies.

III. The inception dates and thereafter of all original policies as described in II. above, whether new, renewal or replacement, being policies which either

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(a) become effective on or after 1st May, 1960, or

(b) become effective before that date and contain the Limited Exclusion Provision set out above; provided this paragraph 2. shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Reassured on New York risks, until 90 days following approval of the Limited Exclusion Provision by the Governmental Authority having jurisdiction thereof.

3. Except for those classes of policies specified in Clause II. of paragraph 2. and without in any way restricting the operation of paragraph 1. of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages:

Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad) Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability)

shall be deemed to include with respect to such coverages, from the time specified in Clause V. of this paragraph 3., the following provision (specified as the Broad Exclusion Provision):

BROAD EXCLUSION PROVISION*

It is agreed that the policy does not apply:

I. Under any Liability Coverage to injury, sickness, disease, death or destruction, bodily injury or property damage

(a) with respect to which an insured under the policy is also an insured under nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or

-2-

(b) resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization.

II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to immediate medical or surgical relief, first aid, to expenses incurred with respect to bodily injury, sickness, disease or death, bodily injury resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization.

III. Under any Liability Coverage, to injury, sickness, disease, death or destruction, bodily injury or property damage resulting from the hazardous properties of nuclear material, if

(a) the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured or (2) has been discharged or dispersed therefrom;

(b) the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or

(c) the injury, sickness, disease, death or destruction, bodily injury or property damage arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories, or possessions or Canada, this exclusion (c) applies only to injury to or destruction of property at such nuclear facility, property damage to such nuclear facility and any property thereat.

-3-

IV. As used in this endorsement:

"hazardous properties" include radioactive, toxic or explosive properties; "nuclear material" means source material, special nuclear material or byproduct material; "source material," "special nuclear material," and "byproduct material" have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; "spent fuel" means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; "waste" means any waste material (1) containing byproduct material other than the tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed for its source material content and (2) resulting from the operation by any person or organization of any nuclear facility included within the definition of nuclear facility under paragraph (a) or (b) thereof; "nuclear facility" means

(a) any nuclear reactor,

(b) any equipment or device designed or used for (1) separating the isotopes of uranium or plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste,

(c) any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235,

(d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste

and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; "nuclear reactor" means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material; with respect to injury to or destruction of property, the word "injury" or "destruction" includes all forms of radioactive contamination of property; "property damage" includes all forms of radioactive contamination of property.

V. The inception dates and thereafter of all original policies affording coverages specified in this paragraph 3., whether new, renewal or replacement, being policies which become effective on or after 1st May, 1960, provided this paragraph 3. shall not be applicable to

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(i) Garage and Automobile Policies issued by the Reassured on New York risks, or

(ii) Statutory liability insurance required under Chapter 90, General Laws of Massachusetts,

until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof.

4. Without in any way restricting the operations of paragraph 1. of this Clause, it is understood and agreed that paragraphs 2. and 3. above are not applicable to original liability policies of the Reassured in Canada, and that with respect to such policies, this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters' Association or the Independent Insurance Conference of Canada.

*NOTE: The words printed in BOLD TYPE in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words.

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NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA

N.M.A. 1979

1. This Agreement does not cover any loss or liability accruing to the Company as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association.

2. Without in any way restricting the operation of Paragraph 1. of this Clause, it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of the following classes, namely,

Personal Liability
Farmers' Liability
Storekeepers' Liability

which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision:

Limited Exclusion Provision -

This Policy does not apply to bodily injury or property damage with respect to which the Insured is also insured under a contract of nuclear energy liability insurance (whether the Insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other group or pool of insurers or would be an Insured under any such policy but for its termination upon exhaustion of its limits of liability.

With respect to property, loss of use of such property shall be deemed to be property damage.

3. Without in any way restricting the operation of Paragraph 1. of this Clause, it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of any class whatsoever (other than Personal Liability, Farmers' Liability, Storekeepers' Liability or Automobile Liability contracts), which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision:

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Broad Exclusion Provision -

It is agreed that this Policy does not apply:

(a) to liability imposed by or arising under the Nuclear Liability Act; nor

(b) to bodily injury or property damage with respect to which an Insured under this Policy is also insured under a contract of nuclear energy liability insurance (whether the Insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Association of Canada or any other insurer or group or pool of insurers or would be an Insured under any such policy but for its termination upon exhaustion of its limit of liability; nor

(c) to bodily injury or property damage resulting directly or indirectly from the nuclear energy hazard arising from:

(i) the ownership, maintenance, operation or use of a nuclear facility by or on behalf of an Insured;

(ii) the furnishing of an Insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility; and

(iii) the possession, consumption, use, handling, disposal or transportation of fissionable substances, or of other radioactive material (except radioactive isotopes, away from a nuclear facility, which have reached the final stage of fabrication so as to be usable for any scientific, medical, agricultural, commercial or industrial purpose) used, distributed, handled or sold by an Insured.

As used in this Policy:

(1) The term "nuclear energy hazard" means the radioactive, toxic, explosive, or other hazardous properties of radioactive material;

(2) The term "radioactive material" means uranium, thorium, plutonium, neptunium, their respective derivatives and compounds, radioactive isotopes of other elements and any other substances that the Atomic Energy Control Board may, by regulation, designate as being prescribed substances capable of releasing atomic energy, or as being requisite for the production, use or application of atomic energy;

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(3) The term "nuclear facility" means:

(a) any apparatus designed or used to sustain nuclear fission in a self- supporting chain reaction or to contain a critical mass of plutonium, thorium and uranium or any one or more of them;

(b) any equipment or device designed or used for (i) separating the isotopes of plutonium, thorium and uranium or any one or more of them, (ii) processing or utilizing spent fuel, or (iii) handling, processing or packaging waste;

(c) any equipment or device used for the processing, fabricating or alloying of plutonium, thorium or uranium enriched in the isotope uranium 233 or in the isotope uranium 235, or any one or more of them if at any time the total amount of such material in the custody of the Insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235;

(d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste radioactive material;

and includes the site on which any of the foregoing is located, together with all operations conducted thereon and all premises used for such operations.

(4) The term "fissionable substance" means any prescribed substance that is, or from which can be obtained, a substance capable of releasing atomic energy by nuclear fission.

(5) With respect to property, loss of use of such property shall be deemed to be property damage.

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Exhibit 10.33

MULTIPLE LINE EXCESS OF LOSS
REINSURANCE AGREEMENT
NO. TM696A,B

EFFECTIVE JANUARY 1, 2000

between

AMERICAN MERCURY INSURANCE COMPANY
Los Angeles, California

and

SWISS REINSURANCE AMERICA CORPORATION
Armonk, New York


MULTIPLE LINE EXCESS OF LOSS REINSURANCE AGREEMENT NO. TM696A,B

ARTICLE         CONTENTS                                              PAGE
-------         --------                                              ----
                PREAMBLE                                                 1
I               INTENT                                                   1
II              BUSINESS COVERED                                         1
III             EFFECTIVE DATE AND TERMINATION                           2
IV              TERRITORY                                                2
V               ULTIMATE NET LOSS                                        3
VI              LOSS IN EXCESS OF POLICY LIMITS                          3
VII             EXTRA CONTRACTUAL OBLIGATIONS                            4
VIII            DEFINITION OF RISK                                       5
IX              EXCLUSIONS                                               5
X               LOSS OCCURRENCE                                         12
XI              REPORTS AND REMITTANCES                                 14
XII             CLAIMS                                                  15
XIII            SALVAGE AND SUBROGATION                                 15
XIV             ACCESS TO RECORDS                                       16
XV              TAXES                                                   16
XVI             CURRENCY                                                16
XVII            OFFSET                                                  17
XVIII           ERRORS OR OMISSIONS                                     17
XIX             SPECIAL ACCEPTANCE                                      17
XX              DISPUTE RESOLUTION                                      17
XXI             INSOLVENCY                                              19
XXII            SPECIAL TERMINATION                                     20
XXIII           AMENDMENTS                                              21
                SIGNATURES                                              22

ATTACHMENTS: EXHIBIT A - FIRST MULTIPLE LINE EXCESS OF LOSS COVER EXHIBIT B - SECOND MULTIPLE LINE EXCESS OF LOSS COVER

INSOLVENCY FUNDS EXCLUSION CLAUSE
POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE
TOTAL INSURED VALUE EXCLUSION CLAUSE
POLLUTION AND SEEPAGE EXCLUSION CLAUSE
NUCLEAR INCIDENT EXCLUSION CLAUSE  - PHYSICAL DAMAGE -
 REINSURANCE - U.S.A.
NUCLEAR INCIDENT EXCLUSION CLAUSE  - PHYSICAL DAMAGE -
 REINSURANCE - CANADA

NUCLEAR INCIDENT EXCLUSION CLAUSE - REINSURANCE - NO. 4 POLLUTION LIABILITY EXCLUSION CLAUSE - REINSURANCE NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A.
NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA


MULTIPLE LINE EXCESS OF LOSS
REINSURANCE AGREEMENT
NO. TM696A,B
(hereinafter referred to as the "Agreement")

between

AMERICAN MERCURY INSURANCE COMPANY
Los Angeles, California
(hereinafter referred to as the "Company")

and

SWISS REINSURANCE AMERICA CORPORATION
Armonk, New York
(hereinafter referred to as the "Reinsurer")

ARTICLE I - INTENT

A. The Company will reinsure with the Reinsurer and the Reinsurer will accept from the Company such reinsurance in accordance with the terms and conditions set forth in Exhibits A and B which are attached hereto and made a part of this Agreement, such Exhibits being entitled for the purposes of identification as follows:

EXHIBIT A - FIRST MULTIPLE LINE EXCESS OF LOSS COVER
EXHIBIT B - SECOND MULTIPLE LINE EXCESS OF LOSS COVER

B. This Agreement is solely between the Company and the Reinsurer, and nothing contained in this Agreement shall create any obligations or establish any rights against the Reinsurer in favor of any person or entity not a party hereto.

C. The performance of obligations by both parties under this Agreement shall be in accordance with a fiduciary standard of good faith and fair dealing.

ARTICLE II - BUSINESS COVERED

A. The Reinsurer shall indemnify the Company on an excess of loss basis in respect of the Company's Ultimate Net Loss paid or to be paid by the Company as a result of losses occurring during the term of this Agreement, for Policies in force as of January 1, 2000, and new and renewal Policies becoming effective on or after said date, subject to the terms and conditions contained herein.

1.


B. This Agreement is solely between the Company and the Reinsurer, and nothing contained in this Agreement shall create any obligations or establish any rights against the Reinsurer in favor of any person or entity not a party hereto.

C. The performance of obligations by both parties under this Agreement shall be in accordance with a fiduciary standard of good faith and fair dealing.

D. The term "Policies" shall mean each of the Company's binders, policies and contracts of insurance or reinsurance on the business covered hereunder.

E. Under this Agreement, the indemnity for reinsured loss applies only to the following Property and Casualty Business except as excluded under Article IX
- Exclusions of this Agreement.

NAIC
CODE:   PROPERTY AND CASUALTY LINE OF BUSINESS:

04      Homeowners Section I and Section II

ARTICLE III - EFFECTIVE DATE AND TERMINATION

A. This Agreement shall become effective with respect to losses occurring on and after 12:01 a.m., Pacific Standard Time, January 1, 2000, and shall remain in full force until terminated. This Agreement may be terminated at any time by either party giving to the other 90 days prior written notice by certified mail of its intention to do so.

B. Upon termination of this Agreement, the Reinsurer shall be liable for losses occurring prior to the date of termination; however, the Reinsurer shall have no liability for losses occurring subsequent to the termination of this Agreement.

C. If this Agreement shall terminate while a Property loss covered under this Agreement is in progress, it is agreed that, subject to the other conditions of this Agreement, the Reinsurer shall indemnify the Company as if the entire loss had occurred during the time this Agreement is in force provided the loss covered hereunder started before the date of termination.

ARTICLE IV - TERRITORY

This Agreement applies only to risks located and polices issued in the State of Florida.

2.


ARTICLE V - ULTIMATE NET LOSS

A. The term "Ultimate Net Loss" shall mean the actual sum paid or to be paid by the Company in settlement of losses or liability after making deductions for all recoveries, including subrogation, salvages, and claims upon other reinsurances, whether collectible or not, which inure to the benefit of the Reinsurer under this Agreement, and shall include Loss Adjustment Expenses incurred by the Company.

B. As respects Casualty Business covered under this Agreement, the term "Ultimate Net Loss" shall include 90% of Extra Contractual Obligations, as defined herein, but only as respects business covered under this Agreement.

C. The term "Loss Adjustment Expenses" shall mean all expenses incurred by the Company in connection with the investigation, settlement, defense or litigation of any claim or loss covered by the Policies reinsured under this Agreement, but shall exclude the salaries and expenses of Company employees, office expenses and other overhead expenses.

D. The term "Declaratory Judgment Expenses" shall mean all legal expenses, incurred in the representation of the Company in litigation brought to determine the Company's defense and/or indemnification obligations, that are allocable to any specific claim or loss applicable to Policies subject to this Agreement. In addition, the Company shall promptly notify the Reinsurer of any Declaratory Judgment Expenses subject to this Agreement.

E. All recoveries, salvages or payments recovered or received subsequent to a loss settlement under this Agreement shall be applied as if recovered or received prior to the aforesaid settlement and all necessary adjustments to the loss settlement shall be made by the parties hereto.

F. Nothing in this Article shall be construed to mean that losses are not recoverable hereunder until the Ultimate Net Loss of the Company has been ascertained.

ARTICLE VI - LOSS IN EXCESS OF POLICY LIMITS

A. As respects Casualty Business covered under this Agreement, in the event the Company is liable to a policyholder as the result of a settlement or judgment rendered against the policyholder which is in excess of the Policy limit, 90% of that portion of the award made to the third party claimant which is in excess of the Company's Policy limit shall be added to the amount of the Company's Policy limit and the sum thereof shall be considered one loss, subject to the

3.


provision in Paragraph B. below and all other provisions set forth in this Agreement.

B. With respect to coverage provided under this Article, recoveries from any insurance or reinsurance other than this Agreement, shall inure to the benefit of the Reinsurer and shall be deducted to arrive at the amount of the Company's Ultimate Net Loss.

ARTICLE VII - EXTRA CONTRACTUAL OBLIGATIONS

This Article shall apply as respects Casualty Business covered under this Agreement.

A. "Extra Contractual Obligations" are defined as those liabilities not covered under any other provision of this Agreement and which arise from the handling of any claim on business covered hereunder, such liabilities arising because of, but not limited to, the following: failure by the Company to settle within the Policy limit, or by reason of alleged or actual negligence, fraud or bad faith in rejecting an offer of settlement or in the preparation of the defense or in the trial of any action against its insured or reinsured or in the preparation or prosecution of an appeal consequent upon such action.

B. The date on which an Extra Contractual Obligation is incurred by the Company shall be deemed, in all circumstances, to be the date of the original accident, casualty, disaster or loss occurrence.

C. However, coverage hereunder as respects Extra Contractual Obligations shall not apply where the loss has been incurred due to the fraud of a member of the Board of Directors or a corporate officer of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder.

D. Extra Contractual Obligations shall not include loss arising out of engineering or other services or any other non-claims related activity provided to the insured by the Company.

E. Recoveries, collectibles or retention from any other form of insurance or reinsurance including deductibles or self-insured retention which protect the Company against Extra Contractual Obligations shall inure to the benefit of the Reinsurer and shall be deducted from the total amount of Extra Contractual Obligations for purposes of determining the loss hereunder.

4.


ARTICLE VIII - DEFINITION OF RISK

The Company shall be the sole judge of what constitutes one risk provided, however, that:

A. A risk shall never be less than all insurable values within exterior walls and under one roof regardless of fire divisions, the number of Policies involved, and whether there is a single, multiple or unrelated named insureds involved in such risk.

B. When two or more buildings are situated at the same general location, the Company shall identify on its records at the time of acceptance by the Company, those individual buildings and all insurable values contained therein that are considered to constitute each risk. If such identification is not made, each building and all insurable values contained therein shall be considered to be a separate risk.

C. A risk shall be determined from the standpoint of the predominant peril and such peril shall be noted in the Company's records.

ARTICLE IX - EXCLUSIONS

I. AS RESPECTS PROPERTY BUSINESS COVERED UNDER THIS AGREEMENT THIS AGREEMENT DOES NOT COVER:

A. THE FOLLOWING GENERAL CATEGORIES

1. All Lines of Business not specifically listed in Article II - Business Covered.

2. Policies issued with a deductible of $25,000 or more; provided this exclusion shall not apply to Policies which customarily provide a percentage deductible on the perils of earthquake or windstorm.

3. Reinsurance assumed, except pro rata local agency reinsurance on specific risks.

4. Ex-gratia Payments.

5. Loss or damage occasioned by war, invasion, revolution, bombardment, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, martial law, or confiscation by order of any government or public authority, but not excluding loss or damage which would be covered under a standard form of Policy containing a standard war exclusion clause.

5.


6. Insolvency Funds as per the attached Insolvency Funds Exclusion Clause, which is made part of this Agreement.

7. Pool, Syndicate and Association business as per the attached Pools, Associations and Syndicates Exclusion Clause, which is made part of this Agreement.

8. Risks where the Total Insured Value, per risk, exceeds the figure specified as per the attached Total Insured Value Exclusion Clause, which is made part of this Agreement.

9. System Performance.

B. THE FOLLOWING CLASSES OF BUSINESS AND TYPES OF RISKS

1. Mortgage Impairment.

2. Growing and/or standing crops.

3. Mortality and Health covering birds, animals or fish.

4. All onshore and offshore gas and oil drilling rigs.

5. Petrochemical operations engaged in the production, refining or upgrading of petroleum or petroleum derivatives or natural gas.

6. Satellites.

7. All railroad business.

8. As respects Inland Marine business:

a. Registered Mail and Armored Car Policies.
b. Jeweler's Block Policies.
c. Furrier's Customers Policies.
d. Rolling Stock.
e. Parcel Post when written to cover banks and financial institutions.
f. Commercial Negative Film Insurance.
g. Garment Contractors Policies.
h. Mining Equipment while underground.
i. Radio and Television Broadcasting Towers.
j. Motor Truck Cargo Insurance written for common carriers operating beyond a radius of 200 miles.

9. Any collection of Fine Arts where the insured value is equal to or exceeds $1,000,000.

6.


C. THE FOLLOWING PERILS

1. Flood and/or Earthquake when written as such.

2. Difference in Conditions, however styled.

3. Pollution and Seepage as per the attached Pollution and Seepage Exclusion Clause which is made part of this Agreement.

4. Nuclear Incident Exclusion Clauses which are attached and made part of this Agreement:

a. Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance - U.S.A.
b. Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance - Canada.
c. Nuclear Incident Exclusion Clause - Reinsurance - No. 4.

D. In the event the Company is inadvertently bound on any risk which is excluded under this Agreement and identified below, the reinsurance provided under this Agreement shall apply to such risk until discovery by the Company within its Home Office of the existence of such risk and for 30 days thereafter, and shall then cease unless within the 30 day period, the Company has received from the Reinsurer written notice of its approval of such risk.

As respects Classes of Business and Types of Risks:

Items 1 through 9 of Section B of this Article.

II. AS RESPECTS CASUALTY BUSINESS COVERED UNDER THIS AGREEMENT THIS AGREEMENT DOES NOT COVER:

A. THE FOLLOWING GENERAL CATEGORIES

1. Ex-gratia payments.

2. Risks subject to a deductible or a self-insured retention excess of $25,000.

3. Loss or damage caused directly or indirectly by: (a) enemy attack by armed forces including action taken by military, naval or air forces in resisting an actual or an immediately impending enemy attack; (b) invasion; (c) insurrection; (d) rebellion; (e) revolution; (f) intervention; (g) civil war; and (h) usurped power.

4. Reinsurance assumed by the Company.

5. Business derived from any Pool, Association, including Joint Underwriting Association, Syndicate, Exchange, Plan, Fund or

7.


other facility directly as a member, subscriber or participant, or indirectly by way of reinsurance or assessments; provided this exclusion shall not apply to Automobile or Workers Compensation assigned risks which may be currently or subsequently covered hereunder.

6. Pollution Liability as per the attached Pollution Liability Exclusion Clause - Reinsurance.

7. Insolvency Funds as per the attached Insolvency Funds Exclusion Clause.

8. Nuclear Incident Exclusion Clauses which are attached and made part of this Agreement:

a. Nuclear Incident Exclusion Clause - Liability - Reinsurance - U.S.A.
b. Nuclear Incident Exclusion Clause - Liability - Reinsurance - Canada.
c. Nuclear Incident Exclusion Clause - Reinsurance - No. 4.

B. THE FOLLOWING INSURANCE COVERAGES

1. Fiduciary Liability.

2. Fidelity and Surety.

3. Credit and Financial Guarantee.

4. Securities and Exchange Liability.

5. Retroactive coverage.

6. Personal and Commercial Excess or Umbrella Liability.

7. Malpractice or Professional Liability except incidental Malpractice Liability.

8. Errors and Omissions Liability.

9. Directors' and Officers' Liability.

10. Advertisers', Broadcasters' and Telecasters' Liability as respects Personal Injury Liability except as provided under Commercial Package Policies or Commercial General Liability Coverage Forms.

11. Liquor Law Liability except Host Liquor Law Liability.

12. Kidnap, Extortion and Ransom Liability.

8.


13. Boiler and Machinery Insurance.

14. Protection and Indemnity (Ocean Marine).

15. Personal Automobile Liability.

16. Automobile Collision.

17. Workers Compensation and Employers Liability.

C. THE FOLLOWING RISKS AS RESPECTS AUTOMOBILE LIABILITY AND AUTOMOBILE COLLISION

1. Vehicles used in or while in practice or preparation for, a prearranged racing, speed, exhibition or demolition contest.

2. All vehicles classified as "Public Automobiles" except church buses, social service agency automobiles, van pools and vehicles used for the transportation of employees.

3. Fire, police, emergency or municipal vehicles.

4. Motorcycles.

5. The rental or leasing of vehicles to others.

6. Logging trucks.

7. Vehicles regularly used to haul property of others and operating beyond a 200 mile radius.

8. Newspaper delivery trucks.

9. Vehicles engaged in the transportation or distribution of fireworks, fuses, explosives, ammunitions, natural or artificial fuel, gas, or liquefied petroleum gases or gasoline.

D. THE FOLLOWING AS RESPECTS LIABILITY OTHER THAN AUTOMOBILE

1. The manufacturing, mining, refining, processing, distribution, installation, removal or encapsulment of asbestos.

2. Risks involving known exposure to the following substances:

a. dioxin.
b. polychlorinated biphenols.
c. asbestos.

9.


3. Liability as respects Products and Completed Operations:

a. The manufacture, labeling or re-labeling, importation or wholesale distribution of:
(i) Drugs or pharmaceuticals.
(ii) Cosmetics.
(iii) Herbicides, insecticides or pesticides.
(iv) Petrochemical or electrical equipment used for heating, lighting or cooking.
(v) Industrial or toxic chemicals.
(vi) Valves, gaskets or seals of a hydraulic, petrochemical or high pressure nature.
(vii) Medical supplies.
(viii) Heavy machinery and equipment.
(ix) Power tools.
(x) Medical equipment used for diagnostic or life sustaining purposes.
b. The manufacture or importing of motorized or self-propelled vehicles and equipment.
c. The manufacturing, importing, packing, canning, bottling or processing of foodstuffs.
d. The blending, mixing, processing or importing of animal feed.
e. The manufacture, sale, distribution, handling, servicing or maintenance of aircraft, aerospacecraft, missiles, satellites or any component or components thereof.

4. Ownership, operation or use of vessels exceeding 50 feet in length.

5. All railway operations except sidetrack agreements.

6. Amusement parks, carnivals or circuses.

7. Public assembly exposure in excess of 5,000.

8. Gas, electric and water utility companies.

9. Subaqueous operations.

10. Mining.

11. Blasting operations.

12. Demolition of buildings or structures in excess of two stories.

13. Shoring, underpinning or moving of buildings or structures.

14. Manufacture, sale, rental, lease, erection or repair of scaffolds.

10.


15. Construction of bridges, tunnels or dams.

16. a. Manufacturers or importers of fireworks, fuses, or any substance, as defined and noted below, intended for use as an explosive.
b. Loading of fireworks, fuses, or any explosive substance defined below into containers for use as explosive objects, propellant charges or detonation devices and the storage thereof.
c. Manufacturers or importers of any product in which fireworks, fuses, or any explosive substance defined below is an ingredient.
d. Handling, storage, transportation or use of fireworks, fuses, or any explosive substance defined below.

NOTE: An explosive substance is defined as any substance manufactured for the express purpose of exploding as differentiated from commodities used industrially and which are only incidentally explosive.

17. Manufacture, production, refining, storage, wholesale distribution or transportation of natural or artificial fuel, gas, butane, propane or liquefied petroleum gases or gasoline.

18. Onshore and offshore gas and oil drilling operations.

19. Ownership, maintenance or use of any airport or aircraft, including fueling, or any device or machine intended for and/or aiding in the achievement of atmospheric flight, projection or orbit.

20. Municipalities.

E. Those exclusions set forth under Items 6. and 17. of Section D. and Item 2.
of Section E. shall not apply if the exposure is incidental to the regular operations of the insured covered hereunder.

F. In the event the Company is inadvertently bound on any risk which is excluded under this Agreement and identified below, the reinsurance provided under this Agreement shall apply to such risk until discovery by the Company within its Home Office of the existence of such risk and for 30 days thereafter, and shall then cease unless within the 30 day period, the Company has received from the Reinsurer written notice of its approval of such risk:

1. As respects Automobile Liability And Collision:

Items 2. through 9. of Section C. of this Article.

2. As respects Liability Other Than Automobile:

11.


ARTICLE X - LOSS OCCURRENCE

As respects Property Business covered under this Agreement:

A. The term "Loss Occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one Loss Occurrence shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out of and directly occasioned by the same event except that the term "Loss Occurrence" shall be further defined as follows:

1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto.

2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company, occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period.

3. As regards earthquake (the epicentre of which need not necessarily be within the territorial confines referred to in the opening paragraph of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's Loss Occurrence.

4. As regards Freeze, only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting of frozen pipes and tanks) may be included in the Company's Loss Occurrence.

B. For all Loss Occurrences the Company may choose the date and time when any such period of consecutive hours commences provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss and provided that only one such

12.


period of 168 consecutive hours shall apply with respect to one event except for those Loss Occurrences referred to in 1. and 2. above, where only one such period of 72 consecutive hours shall apply with respect to one event, regardless of the duration of the event.

C. No individual losses occasioned by an event that would be covered by 72 hours clauses may be included in any Loss Occurrence claimed under the 168 hours provision.

As respects Casualty Business covered under this Agreement:

The term "Loss Occurrence" shall mean any accident or occurrence or series of accidents or occurrences arising out of any one event and happening within the term and scope of this Agreement. Without limiting the generality of the foregoing, the term "Loss Occurrence" shall be held to include:

A. As respects Products Bodily Injury and Products Property Damage Liability, injuries to all persons and all damage to property of others occurring during a Policy Period and proceeding from or traceable to the same causative agency shall be deemed to arise out of one Loss Occurrence, and the date of such Loss Occurrence shall be deemed to be the commencing date of the Policy Period. For the purpose of this provision, each annual period of a Policy which continues in force for more than one year shall be deemed to be a separate Policy Period.

B. As respects Bodily Injury Liability (other than Automobile and Products), said term shall also be understood to mean, as regards each original assured, injuries to one or more than one person resulting from infection, contagion, poisoning, or contamination proceeding from or traceable to the same causative agency.

C. As respects Property Damage Liability (other than Automobile and Products), said term shall also, subject to Provisions 1. and 2. below, be understood to mean loss or losses caused by a series of operations, events, or occurrences arising out of operations at one specific site and which cannot be attributed to any single one of such operations, events or occurrences, but rather to the cumulative effect of the same. In assessing each and every Loss Occurrence within the foregoing definition, it is understood and agreed that:

1. the series of operations, events or occurrences shall not extend over a period longer than 12 consecutive months; and

2. the Company may elect the date on which the period of not exceeding 12 consecutive months shall be deemed to have commenced.

13.


In the event that the series of operations, events or occurrences extend over a period longer than 12 consecutive months, then each consecutive period of 12 months, the first of which commences on the date elected under 2. above, shall form the basis of claim under this Agreement.

D. As respects those Policies of the Company which provide aggregate limits of liability, the total of all individual losses occurring during any one Policy year which proceed from or are traceable to the same causative agency.

ARTICLE XI - REPORTS AND REMITTANCES

A. The Company shall furnish the Reinsurer with all necessary data respecting premiums and losses for as long as one of the parties hereto has a claim against the other arising from this Agreement.

B. Within 45 days after the close of each calendar month, the Company shall submit an account to the Reinsurer summarizing Subject Earned Premium for the Homeowners Portfolio, and the reinsurance premium due as respects this portfolio under Exhibits A and B. Such reinsurance premium shall be remitted within 45 days after the close of each calendar month.

C. Payment by the Reinsurer of its portion of loss and Loss Adjustment Expenses paid by the Company shall be made by the Reinsurer to the Company within 15 days after proof of payment is received by the Reinsurer.

D. As respects Property Business covered under this Agreement, the Company shall furnish the following to the Reinsurer with respect to occurrences designated as catastrophes by the Property Claim Services:

1. Prompt preliminary estimate of amount recoverable from the Reinsurer;

2. Within 30 days after the close of each quarter the amount of losses and Loss Adjustment Expenses paid, less all recoveries, including salvage and subrogation, at the end of each quarter segregated by Line of Business;

3. Within 30 days after the close of each quarter the amount of losses and Loss Adjustment Expenses outstanding at the end of each quarter segregated by Line of Business.

14.


ARTICLE XII - CLAIMS

A. The Company shall promptly notify the Reinsurer of each claim which may involve the reinsurance provided hereunder and of all subsequent developments relating thereto, stating the amount claimed and estimate of the Company's Ultimate Net Loss and Loss Adjustment Expenses. Notwithstanding the provisions set forth in any other Article herein, prompt notification of loss shall be considered a condition precedent to liability under this Agreement.

B. As respects Casualty Business covered under this Agreement, the Company shall advise the Reinsurer of all claims which:

1. Are reserved by the Company for an amount in excess of 50% of its retention;

2. Originate from fatal injuries;

3. Originate from the following kinds of bodily injury:

a. Brain injuries resulting in impairment of physical function;

b. Spinal injuries resulting in a partial or total paralysis of upper or lower extremities;

c. Amputation or permanent loss of use of upper or lower extremities;

d. Severe burn injuries;

e. Loss of sight in one or both eyes;

f. All other injuries likely to result in a permanent disability rate of 50% or more.

C. The Company shall have the responsibility to investigate, defend or negotiate settlements of all claims and lawsuits related to Policies written by the Company and reinsured under this Agreement. The Reinsurer, at its own expense, may associate with the Company in the defense or control of any claim, suit or other proceeding which involves or is likely to involve the reinsurance provided under this Agreement, and the Company shall cooperate in every respect in the defense of any such claim, suit or proceeding.

ARTICLE XIII - SALVAGE AND SUBROGATION

A. In the event of the payment of any indemnity by the Reinsurer under this Agreement, the Reinsurer shall be subrogated, to the extent of such payment, to all of the rights of the Company against any person or entity legally responsible for damages of the loss. The Company

15.


agrees to enforce such rights; but, in case the Company refuses or neglects to do so, the Reinsurer is hereby authorized and empowered to bring any appropriate action in the name of the Company or their policyholders or otherwise to enforce such rights.

B. From any amount recovered by subrogation, salvage or other means, there shall first be deducted the expenses incurred in effecting the recovery. The balance shall then be used to reimburse the excess carriers in the inverse order to that in which their respective liabilities attached, before being used to reimburse the Company for its primary loss.

ARTICLE XIV - ACCESS TO RECORDS

The Reinsurer or its duly authorized representatives shall have the right to examine, at the offices of the Company at a reasonable time, during the currency of this Agreement or anytime thereafter, all books and records of the Company relating to business which is the subject of this Agreement.

ARTICLE XV - TAXES

The Company shall be liable for all taxes on premiums paid to the Reinsurer under this Agreement, except income or profit taxes of the Reinsurer, and shall indemnify and hold the Reinsurer harmless for any such taxes which the Reinsurer may become obligated to pay to any local, state or federal taxing authority.

ARTICLE XVI - CURRENCY

Wherever the word "dollars" or the "$" symbol is used in this Agreement, it shall mean dollars of the United States of America, excepting in those cases where the Policy is issued by the Company in Canadian dollars, in which case it shall mean dollars of Canada. In the event the Company is involved in a loss requiring payment in United States and Canadian currency, the Company's retention and the limit of liability of the Reinsurer shall be apportioned between the two currencies in the same proportion as the amount of net loss in each currency bears to the total amount of net loss paid by the Company. For the purposes of this Agreement, where the Company receives premiums or pays losses in currencies other than United States or Canadian currency, such premiums and losses shall be converted into United States dollars at the actual rates of exchange at which the premiums and losses are entered in the Company's books.

16.


ARTICLE XVII - OFFSET

Each party to this Agreement together with their successors or assigns shall have and may exercise, at any time, the right to offset any balance or balances due the other (or, if more than one, any other). Such offset may include balances due under this Agreement and any other agreements heretofore or hereafter entered into between the parties regardless of whether such balances arise from premiums, losses or otherwise, and regardless of capacity of any party, whether as assuming insurer and/or ceding insurer, under the various agreements involved, provided however, that in the event of insolvency of a party hereto, offsets shall only be allowed in accordance with the provisions of
Section 7427 of the Insurance Law of the State of New York to the extent such statute or any other applicable law, statute or regulation governing such offset shall apply.

ARTICLE XVIII - ERRORS OR OMISSIONS

Errors or omissions of a ministerial nature on the part of the Company shall not invalidate the reinsurance under this Agreement, provided such errors or omissions are corrected promptly after discovery thereof; but the liability of the Reinsurer under this Agreement or any exhibits, addenda, or endorsements attached hereto shall in no event exceed the limits specified herein nor be extended to cover any risks, perils, lines of business or classes of insurance generally or specifically excluded herein.

ARTICLE XIX - SPECIAL ACCEPTANCE

Risks which are beyond the terms, conditions or limitations of this Agreement may be submitted to the Reinsurer for special acceptance hereunder; and such risks, if accepted in writing by the Reinsurer, shall be subject to all of the terms, conditions and limitations of this Agreement, except as modified by the special acceptance. Premiums and losses derived from any special acceptance shall be included with other data for rating purposes under this Agreement.

ARTICLE XX - DISPUTE RESOLUTION

Part I - Choice Of Law And Forum

Any dispute arising under this Agreement shall be resolved in the State of New York, and the laws of the State of New York shall govern the interpretation and application of this Agreement.

17.


Part II - Mediation

If a dispute between the Company and the Reinsurer, arising out of the provisions of this Agreement or concerning its interpretation or validity and whether arising before or after termination of this Agreement has not been settled through negotiation, both parties agree to try in good faith to settle such dispute by nonbinding mediation, before resorting to arbitration.

Part III - Arbitration

A. Resolution of Disputes - As a condition precedent to any right arising hereunder, any dispute not resolved by mediation between the Company and the Reinsurer arising out of the provisions of this Agreement or concerning its interpretation or validity, whether arising before or after termination of this Agreement, shall be submitted to arbitration in the manner hereinafter set forth.

B. Composition of Panel - Unless the parties agree upon a single arbitrator within 15 days after the receipt of a notice of intention to arbitrate, all disputes shall be submitted to an arbitration panel composed of two arbitrators and an umpire chosen in accordance with Paragraph C hereof.

C. Appointment of Arbitrators - The members of the arbitration panel shall be chosen from persons knowledgeable in the insurance and reinsurance business. Unless a single arbitrator is agreed upon, the party requesting arbitration (hereinafter referred to as the "claimant") shall appoint an arbitrator and give written notice thereof by certified mail, to the other party (hereinafter referred to as the "respondent") together with its notice of intention to arbitrate. Within 30 days after receiving such notice, the respondent shall also appoint an arbitrator and notify the claimant thereof by certified mail. Before instituting a hearing, the two arbitrators so appointed shall choose an umpire. If, within 20 days after the appointment of the arbitrator chosen by the respondent, the two arbitrators fail to agree upon the appointment of an umpire, each of them shall nominate three individuals to serve as umpire, of whom the other shall decline two and the umpire shall be chosen from the remaining two by drawing lots. The name of the individual first drawn shall be the umpire.

D. Failure of Party to Appoint an Arbitrator - If the respondent fails to appoint an arbitrator within 30 days after receiving a notice of intention to arbitrate, the claimant's arbitrator shall appoint an arbitrator on behalf of the respondent, such arbitrator shall then, together with the claimant's arbitrator, choose an umpire as provided in Paragraph C. of Part III of this Article.

E. Involvement of Other Reinsurers - If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute

18.


and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting the one party; provided, however, nothing herein shall impair the right of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers under the terms of this Agreement from several to joint.

F. If the Company is involved in a dispute under the terms of this Agreement and in one or more separate disputes with one or more other reinsurers in which common questions of law or fact are in issue, the Company or the Reinsurer, at its option, may join with such other reinsurers in a common arbitration proceeding under the terms of this Article. If the Company and such other reinsurers have commenced arbitration, the Reinsurer may at its option join such proceeding for the determination of the dispute between the Company and the Reinsurer.

G. Submission of Dispute to Panel - Unless otherwise extended by the arbitration panel or agreed to by the parties, each party shall submit its case to the panel within 30 days after the selection of the umpire.

H. Procedure Governing Arbitration - All proceedings before the panel shall be informal and the panel shall not be bound by the formal rules of evidence. The panel shall have the power to fix all procedural rules relating to the arbitration proceeding. In reaching any decision, the panel shall give due consideration to the customs and usages of the insurance and reinsurance business.

I. Arbitration Award - The arbitration panel shall render its decision within 60 days after termination of the proceeding, which decision shall be in writing, stating the reasons therefor. The decision of the majority of the panel shall be final and binding on the parties to the proceeding.

J. Cost of Arbitration - Unless otherwise allocated by the panel, each party shall bear the expense of its own arbitrator and shall jointly and equally bear with the other parties the expense of the umpire and the arbitration.

ARTICLE XXI - INSOLVENCY

A. In the event of insolvency of the Company, the reinsurance provided by this Agreement shall be payable by the Reinsurer on the basis of the liability of the Company as respects Policies covered hereunder, without diminution because of such insolvency, directly to the Company or its liquidator, receiver, conservator or statutory successor except as provided in Sections 4118(a)(1)(A) and 1114(c) of the New York Insurance Law.

19.


B. The Reinsurer shall be given written notice of the pendency of each claim or loss which may involve the reinsurance provided by this Agreement within a reasonable time after such claim or loss is filed in the insolvency proceedings. The Reinsurer shall have the right to investigate each such claim or loss and interpose, at its own expense, in the proceedings where the claim or loss is to be adjudicated, any defense which it may deem available to the Company, its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer.

C. In addition to the offset provisions set forth in Article XXI - Offset, any debts or credits, liquidated or unliquidated, in favor of or against either party on the date of the receivership or liquidation order (except where the obligation was purchased by or transferred to be used as an offset) are deemed mutual debts or credits and shall be set off with the balance only to be allowed or paid. Although such claim on the part of either party against the other may be unliquidated or undetermined in amount on the date of the entry of the receivership or liquidation order, such claim will be regarded as being in existence as of such date and any claims then in existence and held by the other party may be offset against it.

D. Nothing contained in this Article is intended to change the relationship or status of the parties to this Agreement or to enlarge upon the rights or obligations of either party hereunder except as provided herein.

ARTICLE XXII - SPECIAL TERMINATION

A. Notwithstanding the termination provisions set forth in Article III - Effective Date and Termination, this Agreement shall be:

1. Terminated automatically and simultaneously upon the happening of any of the following events:

a. Entry of an order of liquidation, rehabilitation, receivership or conservatorship with respect to the Company or the Reinsurer by any court or regulatory authority;

b. Assignment of this Agreement by either party;

c. Any transfer of control of either party by change in ownership or otherwise;

d. General reinsurance of any portion of the Company's business it retains net for its own account, as determined under the

20.


provisions of this Agreement without prior consent of the Reinsurer.

2. Terminated in accordance with the provisions set forth in this Paragraph, upon the discovery of the following event:

A reduction of 50% or more of the Company's policyholders surplus during any calendar year. Such reduction shall be determined by calculating the difference between the Company's prior year annual statement and each subsequent quarterly statutory statement within such current calendar year.

As respects the event set forth in this Paragraph A.2., the Company shall be obligated to notify the Reinsurer in writing within 30 days after the filing of its quarterly statement. Upon receipt of such notification the Reinsurer shall have the right to terminate this Agreement, by giving not less than 30 days notice of its intention to do so.

B. Any notice of termination pursuant to provisions set forth in Paragraph A.2.
above shall be sent by certified mail, return receipt requested. Such notice period shall commence upon the other party's receipt of the notice of termination.

C. In the event of termination, the Reinsurer shall not be liable for losses occurring subsequent to the date of termination.

ARTICLE XXIII - AMENDMENTS

This Agreement may be amended by mutual consent of the parties expressed in an addendum; and such addendum, when executed by both parties, shall be deemed to be an integral part of this Agreement and binding on the parties hereto.

21.


IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the following dates:

In Los Angeles, California, this day of , 2000.

ATTEST: AMERICAN MERCURY INSURANCE COMPANY

_____________________                   ______________________________________

And in Armonk, New York, this          day of                    , 2000.

ATTEST:                                 SWISS REINSURANCE AMERICA CORPORATION


_____________________                   ______________________________________
Member of Management                          Member of Senior Management

22.


EXHIBIT A

FIRST MULTIPLE LINE EXCESS OF LOSS COVER

IS ATTACHED TO AND FORMS

PART OF

REINSURANCE AGREEMENT NO. TM696A,B


EXHIBIT A - FIRST MULTIPLE LINE EXCESS OF LOSS COVER

SECTION            SUBJECT                     PAGE
-------            -------                     ----

   1               BUSINESS COVERED            A-1

   2               LIMIT AND RETENTION         A-1

   3               REINSURANCE PREMIUM         A-2

   4               CONTINGENT COMMISSION       A-3


EXHIBIT A - FIRST MULTIPLE LINE EXCESS OF LOSS COVER

SECTION 1 - BUSINESS COVERED

Under this Exhibit, the indemnity for reinsured loss applies to those Policies issued by the Company with respect to the following Property and Casualty Business except as excluded under Article IX - Exclusions of this Agreement.

PROPERTY BUSINESS

NAIC
CODE:   LINE OF BUSINESS:

04      Homeowners (Section I)

CASUALTY BUSINESS

NAIC
CODE:   LINE OF BUSINESS:

04      Homeowners (Section II)

SECTION 2 - LIMIT AND RETENTION

A. As respects Property Business covered under this Exhibit involving one or more than one Line of Business, the Company shall retain the first $100,000 of Ultimate Net Loss as respects each risk in any one Loss Occurrence. The Reinsurer shall then be liable for the amount by which the Company's Ultimate Net Loss exceeds the Company's retention of $100,000, but the liability of the Reinsurer shall never exceed $200,000 each risk any one Loss Occurrence, nor shall the Reinsurer's liability from all risks in each Loss Occurrence exceed $600,000.

B. As respects Casualty Business covered under this Exhibit involving one or more than one Class of Insurance, the Company shall retain the first $100,000 of Ultimate Net Loss as respects any one Loss Occurrence. The Reinsurer shall then be liable for the amount by which the Company's Ultimate Net Loss exceeds the Company's retention of $100,000, but the liability of the Reinsurer shall never exceed $200,000 with respect to any one Loss Occurrence.

C. In the event both a Property and Casualty loss are involved in the same Loss Occurrence, it is understood that the Company shall retain for its own account only the first $100,000 of the combined Property and Casualty Ultimate Net Loss, provided only one Property risk may

A-1

be combined in the same Loss Occurrence. Such loss and the Company's retention thereon shall be apportioned to each Property and Casualty loss in the same proportion that the Company's Ultimate Net Loss for each such Property and Casualty loss bears to the Company's combined Ultimate Net Loss from both losses. The Reinsurer shall reimburse the Company for the difference between the Company's first $100,000 of Ultimate Net Loss under each Property and Casualty loss and the Company's pro rated retention on each Property and Casualty loss.

D. As respects Casualty Business covered under this Exhibit the Company warrants that the maximum limit of liability, per occurrence set forth under each Policy subject to this Exhibit shall not exceed $1,000,000.

SECTION 3 - REINSURANCE PREMIUM

A. The Company shall pay to the Reinsurer a premium for the reinsurance provided for the Homeowners business underwritten and produced through the Company's Personal Lines Department, all of which is covered under this Exhibit, at the rates set forth below. The rate shall be applied to the combined total of the Company's Subject Earned Premium which shall be defined as the Subject Earned Premium as respects Section I and II of Homeowners business underwritten and produced through the Company's Personal Lines Department, for the monthly period being reported.

Department                 Business Covered                 Rate
----------                 ----------------                 ----

Personal Lines             Homeowners (Section I & II)      14.0%
(Florida Only)

B. The term "Subject Earned Premium" as used herein is equal to the sum of the Net Premiums Written on the business covered hereunder during the period under consideration, plus the unearned premium reserve as respects premiums in force at the beginning of such period, less the unearned premium reserve as respects premiums in force at the end of the period, said unearned premium is to be calculated on a monthly pro rata basis.

C. The term "Net Premiums Written" shall mean gross premiums written less returns, allowances and reinsurances which inure to the benefit of the Reinsurer.

D. The following percentages of the Company's premium shall be allocated to the business covered under this Exhibit:

Homeowners Section I - 90% Section II - 10%

A-2

SECTION 4 - CONTINGENT COMMISSION

A. The Reinsurer shall allow the Company a contingent commission of 25% of the profit, if any, accruing to the Reinsurer hereunder, such profit to be computed on the following formula:

CONTINGENT COMMISSION COMPUTATION FOR THE PERIOD

INCOME

1. Earned Premiums received by the Reinsurer during the Period.

OUTGO

2. Incurred Losses of the Reinsurer during the Period.

3. Allowance for Reinsurer's management expenses during the Period of 12.5% of the Earned Premiums received by the Reinsurer during the Period.

4. Deficit, if any, brought forward from the preceding Period.

The amount by which Income exceeds Outgo is profit.

The amount by which Outgo exceeds Income is deficit.

B. The term "Incurred Losses" means all losses and Loss Adjustment Expenses paid less recoveries, including salvage and subrogation, during the current Period for which computation is being made plus all losses and Loss Adjustment Expenses outstanding at the end of the current Period less all losses and Loss Adjustment Expenses outstanding at the close of the preceding Period.

C. The term "Earned Premiums" means the total of the Net Premiums Written, ceded during the current Period plus the unearned premiums at the close of the preceding Period less the unearned premiums at the close of the current Period, said unearned premiums to be calculated on a monthly pro rata basis.

D. The term "Period" means the actual time covered by each adjustment of commission.

E. The first calculation of commission adjustment shall cover the period January 1, 2000 through December 31, 2002 and thereafter each subsequent calculation shall cover a Period of three consecutive calendar years.

A-3

F. The first provisional computation of profit or loss for the first calendar year within the first Period shall be made by the Company as of March 1, 2002, thereafter, provisional computations of profit or loss shall be made by the Company within 60 days after the close of each calendar year within each Period. Such provisional calculations shall cover the results from the inception date of each Period to the end of the calendar year immediately preceding the date of computation.

G. If, for any Period, the Income of the plan exceeds the total of the Items shown under Outgo of the plan, the Reinsurer shall pay to the Company, within 30 days after verification of the Company's calculations, 25% of the difference. If, for any Period, the total of the Items shown under Outgo of the plan exceeds the Income of the plan, the difference shall be carried forward to the next Period's calculation of commission adjustment as a deficit.

H. In the event reserves for losses and Loss Adjustment Expenses used in any previous calculation of adjusted commission shall have been underestimated or overestimated, as proven by subsequent developments, such previous calculations shall be revised at the request of either party. The Company shall refund to the Reinsurer, or the Reinsurer shall pay to the Company, such amount as will give effect to the revision(s).

I. In case notice of termination has been given, no further adjustments of commission shall be made until the expiration of all liability and the settlement of all losses covered under this Agreement.

This Exhibit A is attached to and forms part of Reinsurance Agreement No.
TM696A,B issued to AMERICAN MERCURY INSURANCE COMPANY.

A-4

EXHIBIT B

SECOND MULTIPLE LINE EXCESS OF LOSS COVER

IS ATTACHED TO AND FORMS

PART OF

REINSURANCE AGREEMENT NO. TM696A,B


EXHIBIT B - SECOND MULTIPLE LINE EXCESS OF LOSS COVER

SECTION          SUBJECT                    PAGE
-------          -------                    ----

  1              BUSINESS COVERED           B-1

  2              LIMIT AND RETENTION        B-1

  3              REINSURANCE PREMIUM        B-2

             EXHIBIT B - SECOND MULTIPLE LINE EXCESS OF LOSS COVER


SECTION 1 - BUSINESS COVERED
----------------------------

Under this Exhibit, the indemnity for reinsured loss applies to those Policies issued by the Company with respect to the following Property and Casualty Business except as excluded under Article IX - Exclusions of this Agreement.

PROPERTY BUSINESS

NAIC
CODE:   LINE OF BUSINESS:

04      Homeowners (Section I)

CASUALTY BUSINESS

NAIC
CODE:   LINE OF BUSINESS:

04      Homeowners (Section II)

SECTION 2 - LIMIT AND RETENTION

A. As respects Property Business covered under this Exhibit involving one or more than one Line of Business, the Company shall retain the first $300,000 of Ultimate Net Loss as respects each risk in any one Loss Occurrence. The Reinsurer shall then be liable for the amount by which the Company's Ultimate Net Loss exceeds the Company's retention of $300,000, but the liability of the Reinsurer shall never exceed $1,200,000 each risk any one Loss Occurrence, nor shall the Reinsurer's liability from all risks in each Loss Occurrence exceed $1,200,000.

B. As respects Casualty Business covered under this Exhibit involving one or more than one Class of Insurance, the Company shall retain the first $300,000 of Ultimate Net Loss as respects any one Loss Occurrence. The Reinsurer shall then be liable for the amount by which the Company's Ultimate Net Loss exceeds the Company's retention of $300,000, but the liability of the Reinsurer shall never exceed $1,200,000 with respect to any one Loss Occurrence.

C. Reinsurance of the Company's retention, set forth in Paragraphs A. and B.
above, shall not be deducted in arriving at the Company's Ultimate Net Loss herein.

B-1

D. As respects Casualty Business covered under this Exhibit the Company warrants that the maximum limit of liability, per occurrence set forth under each Policy subject to this Exhibit shall not exceed $1,000,000.

SECTION 3 - REINSURANCE PREMIUM

A. As respects Homeowners Business underwritten and produced through the Company's Personal Lines Department, the Company shall pay to the Reinsurer a premium for the reinsurance provided under this Exhibit, at the rate set forth below. The rate shall be applied to the combined total of the Company's Subject Earned Premium for both Section I and Section II of the Homeowners Business covered under this Exhibit which shall be defined as the Subject Earned Premium as respects Homeowners business, underwritten and produced through plus the Company's Personal Lines Department, for the monthly period being reported.

Department           Business Covered            Rate
----------           ----------------            ----

Personal Lines       Homeowners                  3.0%
(Florida Only)

B. The term "Subject Earned Premium" as used herein is equal to the sum of the Net Premiums Written on the business covered hereunder during the period under consideration, plus the unearned premium reserve as respects premiums in force at the beginning of such period, less the unearned premium reserve as respects premiums in force at the end of the period, said unearned premium is to be calculated on a monthly pro rata basis.

C. The term "Net Premiums Written" shall mean gross premiums written less returns, allowances and reinsurances which inure to the benefit of the Reinsurer.

D. The following percentages of the Company's premium shall be allocated to the business covered under this Exhibit:

Homeowners Section I - 90% Section II - 10%

This Exhibit B is attached to and forms part of Reinsurance Agreement No.
TM696A,B issued to AMERICAN MERCURY INSURANCE COMPANY.

B-2

SUPPLEMENT TO THE ATTACHMENTS

DEFINITION OF IDENTIFICATION TERMS USED WITHIN THE ATTACHMENTS

A. Wherever the term "Company" or "Reinsured" or "Reassured" or whatever other term is used to designate the reinsured company or companies within the various attachments to the reinsurance agreement, the term shall be understood to mean Company or Reinsured or Reassured or whatever other term is used in the attached reinsurance agreement to designate the reinsured company or companies.

B. Wherever the term "Agreement" or "Contract" or "Policy" or whatever other term is used to designate the attached reinsurance agreement within the various attachments to the reinsurance agreement, the term shall be understood to mean Agreement or Contract or Policy or whatever other term is used to designate the attached reinsurance agreement.

C. Wherever the term "Reinsurer" or "Reinsurers" or "Underwriters" or whatever other term is used to designate the reinsurer or reinsurers in the various attachments to the reinsurance agreement, the term shall be understood to mean Reinsurer or Reinsurers or Underwriters or whatever other term is used to designate the reinsuring company or companies.



INSOLVENCY FUNDS EXCLUSION CLAUSE

This Agreement excludes all liability of the Company arising by contract, operation of law, or otherwise from its participation or membership, whether voluntary or involuntary, in any insolvency fund or from reimbursement of any person for any such liability. "Insolvency fund" includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, howsoever denominated, established or governed, which provides for any assessment of or payment or assumption by any person of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part.


POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE

SECTION A

Excluding:

(a) All Business derived directly or indirectly from any Pool, Association or Syndicate which maintains its own reinsurance facilities.

(b) Any Pool or Scheme (whether voluntary or mandatory) formed after March 1, 1968, for the purpose of insuring Property whether on a country-wide basis or in respect of designated areas. This Exclusion shall not apply to so- called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage.

SECTION B

It is agreed that business, written by the Company for the same perils, which is known at the time to be insured by or in excess of underlying amounts placed in the following Pools, Associations or Syndicates, whether by way of insurance or reinsurance is excluded hereunder:

Industrial Risk Insurers (successor to Factory Insurance Association and Oil Insurance Association); Associated Factory Mutuals; Improved Risk Mutuals.

Any Pool, Association or Syndicate formed for the purpose of writing Oil, Gas or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs.

United States Aircraft Insurance Group, Canadian Aircraft Insurance Group, Associated Aviation Underwriters, American Aviation Underwriters.

SECTION B does not apply:

(a) Where the Total Insured Value over all interests of the risk in question is less than $250,000,000.

(b) To interests traditionally underwritten as Inland Marine or Stock and/or Contents written on a Blanket basis.

(c) To Contingent Business Interruption, except when the Company is aware that the key location is known at the time to be insured in any Pool, Association or Syndicate named above.

(d) To risks as follows: Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (other than Railroad Schedules) and Builders Risks on the classes of risks specified in this subsection (d) only.


TOTAL INSURED VALUE EXCLUSION CLAUSE

It is the mutual intention of the parties to exclude risks, other than Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (except Railroad schedules) and Builders Risk on the above classes where, at the time of the cession, the Total Insured Value over all interests exceeds $250,000,000. However, the Company shall be protected hereunder, subject to the other terms and conditions of this Agreement, if subsequently to cession being made the Company becomes acquainted with the true facts of the case and discovers that the mutual intention has been inadvertently breached, the Company shall at the first opportunity, and certainly by next anniversary of the original policy, exclude the risk in question.

It is agreed that this mutual intention does not apply to Contingent Business Interruption or to interest traditionally underwritten as Inland Marine or to Stock and/or Contents written on a blanket basis except where the Company is aware that the Total Insured Value of $250,000,000 is already exceeded for buildings, machinery, equipment and direct use and occupancy at the key location.

It is understood and agreed that this Clause shall not apply hereunder where the Company writes 100% of the risk.

Notwithstanding anything contained herein to the contrary, it is the mutual intention of the parties in respect of bridges and tunnels to exclude such risks where the Total Insured Value over all interests exceeds $250,000,000.


POLLUTION AND SEEPAGE EXCLUSION CLAUSE

This Reinsurance does not apply to:

1. Pollution, seepage, contamination or environmental impairment insurances (hereinafter collectively referred to as "pollution"), however styled;

2. Loss or damage caused directly or indirectly by pollution, unless said loss or damage follows as a result of a loss caused directly by a peril covered hereunder;

3. Expenses resulting from any governmental direction or request that material present in or part of or utilized on an insured's property be removed or modified, except as provided in 5. below;

4. Expenses incurred in testing for and/or monitoring pollutants;

5. Expenses incurred in removing debris, unless (A) the debris results from a loss caused directly by a peril covered hereunder, and (B) the debris to be removed is itself covered hereunder, and (C) the debris is on the insured's premises, subject, however, to a limit of $5,000 plus 25% of (i) the property damage loss, any risk, any one location, any one original insured, and (ii) any deductible applicable to the loss;

6. Expenses incurred to extract pollutants from land or water at the insured's premises unless (A) the release, discharge, or dispersal of pollutants results from a loss caused directly by a peril covered hereunder, and (B) such expenses shall not exceed $10,000;

7. Loss of income due to any increased period of time required to resume operations resulting from enforcement of any law regulating the prevention, control, repair, clean-up or restoration of environmental damage;

8. Claims under 5. and/or 6. above, unless notice thereof is given to the Company within 180 days after the date of the loss occurrence to which such claims relate.

"Pollutants" means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

-1-

Where no pollution exclusion has been accepted or approved by an insurance regulatory authority for use in a policy that is subject to this Agreement or where a pollution exclusion that has been used in a policy is overturned, either in whole or in part, by a court having jurisdiction, there shall be no recovery for pollution under this Agreement unless said pollution loss or damage follows as a result of a loss caused directly by a peril covered hereunder.

Nothing herein shall be deemed to extend the coverage afforded by this reinsurance to property or perils specifically excluded or not covered under the terms and conditions of the original policy involved.

-2-

NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - U.S.A.

N.M.A. 1119

1. This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.

2. Without in any way restricting the operation of paragraph 1. of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to:

I. Nuclear reactor power plants including all auxiliary property on the site, or

II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and critical facilities as such, or

III. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material," and for reprocessing, salvaging, chemically separating, storing or disposing of spent nuclear fuel or waste materials, or

IV. Installations other than those listed in paragraph 2. III. above using substantial quantities of radioactive isotopes or other products of nuclear fission.

3. Without in any way restricting the operation of paragraphs 1. and 2. of this Clause, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith, except that this paragraph 3. shall not operate:

(a) where the Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or

(b) where the said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However, on and after 1st January, 1960, this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof.

-1-

4. Without in any way restricting the operation of paragraphs 1., 2. and 3. of this Clause, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against.

5. It is understood and agreed this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard.

6. The term "special nuclear material" shall have the meaning given to it by the Atomic Energy Act of 1954 or by any law amendatory thereof.

7. Reassured to be sole judge of what constitutes:

(a) substantial quantities, and

(b) the extent of installation, plant or site.

NOTE: - Without in any way restricting the operation of paragraph 1. hereof, it is understood and agreed that

(a) all policies issued by the Reassured on or before 31st December, 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December, 1960 whichever first occurs whereupon all the provisions of this Clause shall apply,

(b) with respect to any risk located in Canada policies issued by the Reassured on or before 31st December, 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December, 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.

-2-

NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - CANADA

N.M.A. 1980

1. This Agreement does not cover any loss or liability accruing to the Company directly or indirectly, and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.

2. Without in any way restricting the operation of paragraph 1. of this clause, this Agreement does not cover any loss or liability accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to:

a. Nuclear reactor power plants including all auxiliary property on the site, or

b. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and critical facilities as such, or

c. Installations for fabricating complete fuel elements or for processing substantial quantities of prescribed substances, and for reprocessing, salvaging, chemically separating, storing or disposing of spent nuclear fuel or waste materials, or

d. Installations other than those listed in c. above using substantial quantities of radioactive isotopes or other products of nuclear fission.

3. Without in any way restricting the operation of paragraphs 1. and 2. of this clause, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith, except that this paragraph 3. shall not operate:

a. where the Company does not have knowledge of such nuclear reactor power plant or nuclear installation, or

b. where the said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused.

-1-

4. Without in any way restricting the operation of paragraphs 1., 2. and 3. of this clause, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against.

5. This clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Company to be the primary hazard.

6. The term "prescribed substances" shall have the meaning given to it by the Atomic Energy Control Act R.S.C. 1974 or by any law amendatory thereof.

7. Company to be sole judge of what constitutes:

a. substantial quantities, and

b. the extent of installation, plant or site.

8. Without in any way restricting the operation of paragraphs 1., 2., 3. and 4. of this clause, this Agreement does not cover any loss or liability accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, caused by any nuclear incident as defined in The Nuclear Liability Act, nuclear explosion or contamination by radioactive material.

NOTE: Without in any way restricting the operation of paragraphs 1., 2., 3. and
4. of this clause, paragraph 8. of this clause shall apply to all original contracts of the Company whether new, renewal or replacement which become effective on or after December 31, 1984.

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NUCLEAR INCIDENT EXCLUSION CLAUSE - REINSURANCE - NO. 4

1. This Reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association.

2. Without in any way restricting the operations of Nuclear Incident Exclusion Clauses, - Liability, - Physical Damage, - Boiler and Machinery and paragraph
1. of this Clause, it is understood and agreed that for all purposes of the reinsurance assumed by the Reinsurer from the Reinsured, all original insurance policies or contracts of the Reinsured (new, renewal and replacement) shall be deemed to include the applicable existing Nuclear Clause and/or Nuclear Exclusion Clause(s) in effect at the time and any subsequent revisions thereto as agreed upon and approved by the Insurance Industry and/or a qualified Advisory or Rating Bureau.


POLLUTION LIABILITY EXCLUSION CLAUSE - REINSURANCE

This Reinsurance excludes:

(1) Any loss occurrence arising out of the actual, alleged or threatened discharge, dispersal, release or escape of pollutants:

a) At or from premises owned, rented or occupied by an original assured; or

b) At or from any site or location used for the handling, storage, disposal, processing or treatment of waste; or

c) Which are at any time transported, handled, stored, treated, disposed of, or processed as waste; or

d) At or from any site or location on which any original assured is performing operations:

(i) If the pollutants are brought on or to the site or location in connection with such operations; or

(ii) If the operations are to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize the pollutants.

(2) Any liability, loss, cost or expense arising out of any governmental direction or request to test for, monitor, clean up, remove, contain, treat, detoxify or neutralize pollutants.

"Pollutants" means any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.

Subparagraphs a) and d)(i) of paragraph (1) of this exclusion do not apply to loss occurrences caused by heat, smoke or fumes from a hostile fire. As used herein, "hostile fire" means one which becomes uncontrollable or breaks out from where it was intended to be.

"Original assured" as used herein means all insureds as defined in the policy issued by the Company.


NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - U.S.A.

N.M.A. 1590

1. This reinsurance does not cover any loss or liability accruing to the Reassured as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association.

2. Without in any way restricting the operation of paragraph 1. of this Clause it is understood and agreed that for all purposes of this reinsurance all the original policies of the Reassured (new, renewal and replacement) of the classes specified in Clause II. in this paragraph 2. from the time specified in Clause III. in this paragraph 2. shall be deemed to include the following provision (specified as the Limited Exclusion Provision):

LIMITED EXCLUSION PROVISION*

I. It is agreed that the policy does not apply under any liability coverage, to injury, sickness, disease, death or destruction, bodily injury or property damage with respect to which an insured under the policy is also an insured under a nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability.

II. Family Automobile Policies (liability only), Special Automobile Policies (private passenger automobiles, liability only), Farmers Comprehensive Personal Liabilities Policies (liability only), Comprehensive Personal Liability Policies (liability only) or policies of a similar nature; and the liability portion of combination forms related to the four classes of policies stated above, such as the Comprehensive Dwelling Policy and the applicable types of Homeowners Policies.

III. The inception dates and thereafter of all original policies as described in II. above, whether new, renewal or replacement, being policies which either

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(a) become effective on or after 1st May, 1960, or

(b) become effective before that date and contain the Limited Exclusion Provision set out above; provided this paragraph 2. shall not be applicable to Family Automobile Policies, Special Automobile Policies, or policies or combination policies of a similar nature, issued by the Reassured on New York risks, until 90 days following approval of the Limited Exclusion Provision by the Governmental Authority having jurisdiction thereof.

3. Except for those classes of policies specified in Clause II. of paragraph 2. and without in any way restricting the operation of paragraph 1. of this Clause, it is understood and agreed that for all purposes of this reinsurance the original liability policies of the Reassured (new, renewal and replacement) affording the following coverages:

Owners, Landlords and Tenants Liability, Contractual Liability, Elevator Liability, Owners or Contractors (including railroad) Protective Liability, Manufacturers and Contractors Liability, Product Liability, Professional and Malpractice Liability, Storekeepers Liability, Garage Liability, Automobile Liability (including Massachusetts Motor Vehicle or Garage Liability)

shall be deemed to include with respect to such coverages, from the time specified in Clause V. of this paragraph 3., the following provision (specified as the Broad Exclusion Provision):

BROAD EXCLUSION PROVISION*

It is agreed that the policy does not apply:

I. Under any Liability Coverage to injury, sickness, disease, death or destruction, bodily injury or property damage

(a) with respect to which an insured under the policy is also an insured under nuclear energy liability policy issued by Nuclear Energy Liability Insurance Association, Mutual Atomic Energy Liability Underwriters or Nuclear Insurance Association of Canada, or would be an insured under any such policy but for its termination upon exhaustion of its limit of liability; or

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(b) resulting from the hazardous properties of nuclear material and with respect to which (1) any person or organization is required to maintain financial protection pursuant to the Atomic Energy Act of 1954, or any law amendatory thereof, or (2) the insured is, or had this policy not been issued would be, entitled to indemnity from the United States of America, or any agency thereof, under any agreement entered into by the United States of America, or any agency thereof, with any person or organization.

II. Under any Medical Payments Coverage, or under any Supplementary Payments Provision relating to immediate medical or surgical relief, first aid, to expenses incurred with respect to bodily injury, sickness, disease or death, bodily injury resulting from the hazardous properties of nuclear material and arising out of the operation of a nuclear facility by any person or organization.

III. Under any Liability Coverage, to injury, sickness, disease, death or destruction, bodily injury or property damage resulting from the hazardous properties of nuclear material, if

(a) the nuclear material (1) is at any nuclear facility owned by, or operated by or on behalf of, an insured or (2) has been discharged or dispersed therefrom;

(b) the nuclear material is contained in spent fuel or waste at any time possessed, handled, used, processed, stored, transported or disposed of by or on behalf of an insured; or

(c) the injury, sickness, disease, death or destruction, bodily injury or property damage arises out of the furnishing by an insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility, but if such facility is located within the United States of America, its territories, or possessions or Canada, this exclusion (c) applies only to injury to or destruction of property at such nuclear facility, property damage to such nuclear facility and any property thereat.

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IV. As used in this endorsement:

"hazardous properties" include radioactive, toxic or explosive properties; "nuclear material" means source material, special nuclear material or byproduct material; "source material," "special nuclear material," and "byproduct material" have the meanings given them in the Atomic Energy Act of 1954 or in any law amendatory thereof; "spent fuel" means any fuel element or fuel component, solid or liquid, which has been used or exposed to radiation in a nuclear reactor; "waste" means any waste material (1) containing byproduct material other than the tailings or wastes produced by the extraction or concentration of uranium or thorium from any ore processed for its source material content and (2) resulting from the operation by any person or organization of any nuclear facility included within the definition of nuclear facility under paragraph (a) or (b) thereof; "nuclear facility" means

(a) any nuclear reactor,

(b) any equipment or device designed or used for (1) separating the isotopes of uranium or plutonium, (2) processing or utilizing spent fuel, or (3) handling, processing or packaging waste,

(c) any equipment or device used for the processing, fabricating or alloying of special nuclear material if at any time the total amount of such material in the custody of the insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235,

(d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste

and includes the site on which any of the foregoing is located, all operations conducted on such site and all premises used for such operations; "nuclear reactor" means any apparatus designed or used to sustain nuclear fission in a self-supporting chain reaction or to contain a critical mass of fissionable material; with respect to injury to or destruction of property, the word "injury" or "destruction" includes all forms of radioactive contamination of property; "property damage" includes all forms of radioactive contamination of property.

V. The inception dates and thereafter of all original policies affording coverages specified in this paragraph 3., whether new, renewal or replacement, being policies which become

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effective on or after 1st May, 1960, provided this paragraph 3. shall not be applicable to

(i) Garage and Automobile Policies issued by the Reassured on New York risks, or

(ii) Statutory liability insurance required under Chapter 90, General Laws of Massachusetts,

until 90 days following approval of the Broad Exclusion Provision by the Governmental Authority having jurisdiction thereof.

4. Without in any way restricting the operations of paragraph 1. of this Clause, it is understood and agreed that paragraphs 2. and 3. above are not applicable to original liability policies of the Reassured in Canada, and that with respect to such policies, this Clause shall be deemed to include the Nuclear Energy Liability Exclusion Provisions adopted by the Canadian Underwriters' Association or the Independent Insurance Conference of Canada.

*NOTE: The words printed in BOLD TYPE in the Limited Exclusion Provision and in the Broad Exclusion Provision shall apply only in relation to original liability policies which include a Limited Exclusion Provision or a Broad Exclusion Provision containing those words.

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NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - CANADA

N.M.A. 1979

1. This Agreement does not cover any loss or liability accruing to the Company as a member of, or subscriber to, any association of insurers or reinsurers formed for the purpose of covering nuclear energy risks or as a direct or indirect reinsurer of any such member, subscriber or association.

2. Without in any way restricting the operation of Paragraph 1. of this Clause, it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of the following classes, namely,

Personal Liability
Farmers' Liability
Storekeepers' Liability

which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision:

Limited Exclusion Provision -

This Policy does not apply to bodily injury or property damage with respect to which the Insured is also insured under a contract of nuclear energy liability insurance (whether the Insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Insurance Association of Canada or any other group or pool of insurers or would be an Insured under any such policy but for its termination upon exhaustion of its limits of liability.

With respect to property, loss of use of such property shall be deemed to be property damage.

3. Without in any way restricting the operation of Paragraph 1. of this Clause, it is agreed that for all purposes of this Agreement all the original liability contracts of the Company, whether new, renewal or replacement, of any class whatsoever (other than Personal Liability, Farmers' Liability, Storekeepers' Liability or Automobile Liability contracts), which become effective on or after 31st December 1984, shall be deemed to include, from their inception dates and thereafter, the following provision:

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Broad Exclusion Provision -

It is agreed that this Policy does not apply:

(a) to liability imposed by or arising under the Nuclear Liability Act; nor

(b) to bodily injury or property damage with respect to which an Insured under this Policy is also insured under a contract of nuclear energy liability insurance (whether the Insured is unnamed in such contract and whether or not it is legally enforceable by the Insured) issued by the Nuclear Association of Canada or any other insurer or group or pool of insurers or would be an Insured under any such policy but for its termination upon exhaustion of its limit of liability; nor

(c) to bodily injury or property damage resulting directly or indirectly from the nuclear energy hazard arising from:

(i) the ownership, maintenance, operation or use of a nuclear facility by or on behalf of an Insured;

(ii) the furnishing of an Insured of services, materials, parts or equipment in connection with the planning, construction, maintenance, operation or use of any nuclear facility; and

(iii) the possession, consumption, use, handling, disposal or transportation of fissionable substances, or of other radioactive material (except radioactive isotopes, away from a nuclear facility, which have reached the final stage of fabrication so as to be usable for any scientific, medical, agricultural, commercial or industrial purpose) used, distributed, handled or sold by an Insured.

As used in this Policy:

(1) The term "nuclear energy hazard" means the radioactive, toxic, explosive, or other hazardous properties of radioactive material;

(2) The term "radioactive material" means uranium, thorium, plutonium, neptunium, their respective derivatives and compounds, radioactive isotopes of other elements and any other substances that the Atomic Energy Control Board may, by regulation, designate as being prescribed substances capable of releasing atomic energy, or as being requisite for the production, use or application of atomic energy;

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(3) The term "nuclear facility" means:

(a) any apparatus designed or used to sustain nuclear fission in a self- supporting chain reaction or to contain a critical mass of plutonium, thorium and uranium or any one or more of them;

(b) any equipment or device designed or used for (i) separating the isotopes of plutonium, thorium and uranium or any one or more of them, (ii) processing or utilizing spent fuel, or (iii) handling, processing or packaging waste;

(c) any equipment or device used for the processing, fabricating or alloying of plutonium, thorium or uranium enriched in the isotope uranium 233 or in the isotope uranium 235, or any one or more of them if at any time the total amount of such material in the custody of the Insured at the premises where such equipment or device is located consists of or contains more than 25 grams of plutonium or uranium 233 or any combination thereof, or more than 250 grams of uranium 235;

(d) any structure, basin, excavation, premises or place prepared or used for the storage or disposal of waste radioactive material;

and includes the site on which any of the foregoing is located, together with all operations conducted thereon and all premises used for such operations.

(4) The term "fissionable substance" means any prescribed substance that is, or from which can be obtained, a substance capable of releasing atomic energy by nuclear fission.

(5) With respect to property, loss of use of such property shall be deemed to be property damage.

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EXHIBIT 21.1

SUBSIDIARIES - MERCURY GENERAL CORPORATION

Mercury Casualty Company (100% owned)
Mercury Insurance Company (100% owned by Mercury Casualty Company) California General Underwriters Insurance Company, Inc. (100% owned by Mercury Casualty Company)
California Automobile Insurance Company (100% owned) Mercury Insurance Company of Georgia (100% owned by California Automobile Insurance Company)
Mercury Indemnity Company of Georgia (100% owned) Mercury Insurance Company of Illinois (100% owned) Mercury Indemnity Company of Illinois (100% owned by Mercury Insurance Company of Illinois)
American Mercury Insurance Company (100% owned) American Mercury Lloyds Insurance Company * AFI Management Company, Inc. (100% owned by American Fidelity Ins. Company) ** American Mercury MGA, Inc. (100% owned by American Mercury Insurance Company) Concord Insurance Services, Inc. *

* Controlled by Mercury General Corporation

** Attorney-in-fact for American Fidelity Lloyds Insurance Co., whose results

are consolidated with Mercury General Corporation.


EXHIBIT 23.1

The Board of Directors
Mercury General Corporation:

We consent to incorporation by reference in the Registration Statement No. 333-01583 on Form S-8 of Mercury General Corporation of our reports dated February 4, 2000, relating to the consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows and related schedules for each of the years in the three year period ended December 31, 1999, which reports appear in the December 31, 1999 annual report on Form 10-K of Mercury General Corporation.

KPMG LLP

Los Angeles, California

March 28, 2000


ARTICLE 7
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM MERCURY GENERAL CORPORATION AND IS QUALIFIED IN ITS ENTIRETY REFERENCE TO SUCH FINANCIAL STATEMENTS.
MULTIPLIER: 1,000


PERIOD TYPE YEAR
FISCAL YEAR END DEC 31 1999
PERIOD START JAN 01 1999
PERIOD END DEC 31 1999
DEBT HELD FOR SALE 1,322,054
DEBT CARRYING VALUE 0
DEBT MARKET VALUE 0
EQUITIES 209,843
MORTGAGE 0
REAL ESTATE 0
TOTAL INVEST 1,575,465
CASH 8,052
RECOVER REINSURE 0
DEFERRED ACQUISITION 63,975
TOTAL ASSETS 1,906,367
POLICY LOSSES 434,843
UNEARNED PREMIUMS 340,846
POLICY OTHER 0
POLICY HOLDER FUNDS 0
NOTES PAYABLE 92,000
PREFERRED MANDATORY 50,963
PREFERRED 0
COMMON 0
OTHER SE 858,628
TOTAL LIABILITY AND EQUITY 1,906,367
PREMIUMS 1,188,307
INVESTMENT INCOME 99,374
INVESTMENT GAINS (11,929)
OTHER INCOME 4,924
BENEFITS 789,103
UNDERWRITING AMORTIZATION 267,399
UNDERWRITING OTHER 50,675
INCOME PRETAX 168,539
INCOME TAX 34,830
INCOME CONTINUING 133,709
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET INCOME 133,709
EPS BASIC 2.45
EPS DILUTED 2.44
RESERVE OPEN 385,816
PROVISION CURRENT 781,316
PROVISION PRIOR 7,787
PAYMENTS CURRENT 492,314
PAYMENTS PRIOR 263,805
RESERVE CLOSE 418,800
CUMULATIVE DEFICIENCY (7,787)