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, 2000 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, 2001, was approximately $800,435,690 (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, 2001, the Registrant had issued and outstanding an aggregate of 54,198,623 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 9, 2001 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 2000, private passenger automobile insurance and commercial automobile insurance accounted for 90.2% and 3.7%, respectively, of the total Company's gross premiums written. The percentage of gross automobile insurance premiums written during 2000 by state was 90.0% in California, 3.3% in Texas, 3.2% in Florida, 1.5% in Oklahoma, 1.0% in Illinois 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 6.1% of gross written premiums in 2000, of which approximately 23% 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 2000, 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 ("AMI"), American Mercury Lloyds Insurance Company ("AML") and Mercury County Mutual Insurance Company ("MCM"). 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). AMI and AML, which accounted for approximately 5% of the Company's 2000 net written premiums, were rated A- (Excellent) in 2000 by A.M. Best. MCM, which produced no premium for the Company in 2000, was unrated by A.M. Best in 2000.

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. During 2000, the Company opened branch offices in Richmond, Virginia and Latham, New York. 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 2,600 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

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Georgia and Mercury Insurance Company of Illinois, received authority in late 1989 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 an 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. ("AFIMC"), 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. Concord's results of operations are included in the consolidated financial statements of the Company effective October 31, 1999.

During 2000, the Company acquired the authority and right to manage and control Elm County Mutual Insurance Company, a mutual insurance company organized under Chapter 17 of the Texas Insurance Code. The acquisition was made through the purchase of a management agreement from Employers Reinsurance Corporation, a Missouri corporation with its principal place of business in Overland Park, Kansas. Effective January 2, 2001, Elm's name was changed to Mercury County Mutual Insurance Company. The effective date of the transaction was September 30, 2000. MCM's results of operations, which are immaterial to the Company, are included in the consolidated results of the Company effective September 30, 2000.

Prior to January 1, 2001, Mercury General furnished management services to its California, Georgia, Illinois and Oklahoma subsidiaries. Following December 31, 2000, these management services are provided by a subsidiary of Mercury Casualty Company. Mercury General, its subsidiaries, AML, Concord and MCM, are referred to as the "Company" unless the context indicates otherwise. Mercury General Corporation individually is referred to as "Mercury General." All of the subsidiaries as a group, including AML and MCM, but excluding AFIMC and Concord, are referred to as the "Insurance Companies." 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, 2000, "good drivers" (as defined by the California Insurance Code) accounted for approximately 75% of all voluntary private passenger automobile policies in force in California, while the higher risk categories accounted for approximately 25%. The renewal rate in California (the rate of acceptance of offers to renew) averages approximately 96%.

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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 approximately 4% 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, written by AMI, was insignificant at December 31, 2000.

The Company also offers non-standard private passenger automobile coverage in Texas through Concord. Non-standard policies in force, written through Concord, are not a significant portion of the Company's total premiums in force at December 31, 2000.

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, 2000 was not significant.

The Company's Illinois and Georgia private passenger automobile business in force is primarily standard and preferred risks and is not a significant portion of the Company's total premiums in force at December 31, 2000.

Production and Servicing of Business

The Company sells its policies through more than 2,000 independent agents, of which approximately 900 are located in California, approximately 300 are located in Florida and approximately 550 others represent AMI in Oklahoma and Texas. The remainder are located in Georgia and Illinois. 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 18%, 19% and 19% during 2000, 1999 and 1998, respectively, of the Company's total direct premiums written. This agency was sold during 1998 to a large national broker. 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 2000, total commissions and bonuses incurred were 16.4% of net 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. During 2000 the Company began television advertising and discontinued advertising on the radio. The Company intends to continue the current level of advertising during the year 2001. 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).

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Claims

Claims operations are conducted by the Company. The claims staff in California, Georgia, Illinois, Florida, Oklahoma and Texas 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 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,
                                                       ------------------------
                                                        2000    1999     1998
                                                        ----    ----     ----
                                                        (Amounts in thousands)
Net reserves for losses and loss adjustment
 expenses, beginning of year.....................   $418,800  $385,816  $386,270
Incurred losses and loss adjustment expenses:
      Provision for insured events of the
         current year............................    878,144   781,316   693,877
       Increase (decrease) in provision for
         insured events of prior years...........     23,637     7,787    (9,409)
                                                    --------  --------  --------
         Total incurred losses and loss adjustment
           expenses..............................    901,781   789,103   684,468
                                                    --------  --------  --------

Payments:
      Losses and loss adjustment expenses attribu-
        table to insured events of the current
        year.....................................    562,163   492,314   437,612
      Losses and loss adjustment expenses attribu-
        table to insured events of prior years...    294,615   263,805   247,310
                                                    --------  --------  --------

         Total payments..........................    856,778   756,119   684,922
                                                    --------  --------  --------

Net reserves for losses and loss adjustment
 expenses at the end of the period...............    463,803   418,800   385,816
Reinsurance recoverable .........................     28,417    16,043    20,160
                                                    --------  --------  --------
Gross liability at end of year...................   $492,220  $434,843  $405,976
                                                    ========  ========  ========

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The increase in the provision for insured events of prior years in 2000 and 1999 largely relates to an increase in the ultimate liability for bodily injury and physical damage claims over what was originally estimated. The increases in these claims relate to increased severity over what was originally recorded and are the result of inflationary trends in health care costs, auto parts and body shop labor costs.

The decrease in the provision for insured events of prior years in 1998 largely relates to 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 bodily injury loss severity for calendar year 1997. In addition, a new law, effective January 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.

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 2000 include approximately $1 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 statutory accounting principles ("SAP") is shown in the following table:

                                              December 31,
                                      ------------------------------
                                        2000        1999       1998
                                        ----        ----       ----
                                           (Amounts in thousands)
Reserves reported on a SAP basis.....  $463,803   $418,800    $385,816
Reinsurance recoverable..............    28,417     16,043      20,160
                                       --------   --------    --------
Reserves reported on a GAAP basis....  $492,220   $434,843    $405,976
                                       ========   ========    ========

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 1990 through 2000. 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 middle portion of the table shows the re- estimated 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

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estimate changes as more information becomes known about the frequency and severity of claims for individual years. The bottom line shows the redundancy
(deficiency) that exists when the original reserve estimates are greater (less)
than the re-estimated reserves at December 31, 2000.

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.

                                                                     As of December 31,
                              -----------------------------------------------------------------------------------------------
                               1990    1991      1992     1993     1994     1995     1996     1997    1998     1999     2000
                              ----     ----      ----     ----     ----     ----     ----     ----    ----     ----     ----
                                                                 (Amounts in thousands)
Net reserves for
 losses and loss
 adjustment expenses........   $301,354 $280,157 $239,203 $214,525 $223,392 $250,990 $311,754 $386,270 $385,816 $418,800 $463,803
Paid (cumulative)
 as of:
  One year later............    181,781  151,866  135,188  143,272  145,664  167,226  206,390  247,310  263,805  294,615
  Two years later...........    238,030  197,640  184,119  187,641  198,967  225,158  291,552  338,016  366,908
  Three years later.........    254,884  213,824  197,371  204,606  214,403  248,894  316,505  369,173
  Four years later..........    261,058  218,067  201,365  207,704  219,596  253,708  324,337
  Five years later..........    263,011  220,057  202,383  209,930  220,852  255,688
  Six years later...........    262,741  220,313  203,578  210,281  221,771
  Seven years later.........    262,770  221,098  203,461  210,767
  Eight years later.........    263,527  220,974  203,657
  Nine years later..........    263,422  220,975
  Ten years later...........    263,461

Net reserves re-estimated
 as of:
  One year later............    285,212  230,991  204,479  204,451  216,684  247,122  324,572  376,861  393,603  442,437
  Two years later...........    265,618  218,404  204,999  207,089  222,861  254,920  329,210  378,057  407,047
  Three years later.........    259,624  220,620  203,452  210,838  221,744  257,958  327,749  383,588
  Four years later..........    264,259  221,118  204,603  210,890  222,957  257,196  329,339
  Five years later..........    264,127  221,264  203,705  211,192  221,947  256,395
  Six years later...........    263,336  220,721  204,161  210,739  221,942
  Seven years later.........    263,045  220,974  203,775  210,719
  Eight years later.........    263,341  220,895  203,928
  Nine years later..........    263,292  221,070
  Ten years later...........    263,505
Net Cumulative Redundancy
  (deficiency)..............     37,849   59,087   35,275    3,806    1,450   (5,405) (17,585)   2,682  (21,231) (23,637)

                                                                  As of December 31,
                               ---------------------------------------------------------------------------------------
                                         1992     1993     1994     1995     1996     1997     1998     1999     2000
                                         ----     ----     ----     ----     ----     ----     ----     ----     ----
                                                      (Amounts in thousands)
Gross liability - end of year           240,183  215,301  227,499  253,546  336,685  409,061  405,976  434,843  492,220
Reinsurance recoverable                    (980)    (776)  (4,107)  (2,556) (24,931) (22,791) (20,160) (16,043) (28,417)
                                        -------  -------  -------  -------  -------  -------  -------  -------  -------
Net liability - end of year             239,203  214,525  223,392  250,990  311,754  386,270  385,816  418,800  463,803
                                        ======= ======== ========  ======= ========  =======  =======  =======  =======
Gross re-estimated liability - latest   209,307  218,470  235,315  266,552  357,443  409,051  429,212  459,701
Re-estimated recoverable - latest        (5,379)  (7,751) (13,373) (10,157) (28,104) (25,463) (22,165) (17,264)
                                        -------  -------  -------  -------  -------  -------  -------  -------
Net re-estimated liability - latest     203,928  210,719  221,942  256,395  329,339  383,588  407,047  442,437
                                        =======  =======  =======  =======  =======  =======  =======  =======
Gross cumulative redundancy (deficiency) 30,876   (3,169)  (7,816) (13,006) (20,758)      10  (23,236) (24,858)
                                        =======  =======  =======  =======  =======  =======  =======  =======

For the calendar years 1998 and 1999, the Company's previously estimated loss reserves produced a deficiency which was reflected in the following years incurred losses. The Company attributes a large portion of the deficiency to an increase in the ultimate liability for bodily injury and physical damage claims over what was originally estimated. The increases in these claims relate to increased severity over what was originally recorded and are the result of inflationary trends in health care costs, auto parts and body shop labor costs.

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For the calendar year 1997, the Company's previously estimated loss reserves produced a small 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 bodily injury loss severity for calendar year 1997. In addition, a new law, effective January 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 1990 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,
                                      --------------------------------------------
                                       2000      1999      1998     1997     1996
                                       ----      ----      ----     ----     ----
Loss Ratio......................       72.2%     66.5%     61.1%    63.5%    66.6%
Expense Ratio...................       26.4      26.5      26.3     24.7     24.0
                                       ----      ----      ----     ----     ----
Combined Ratio..................       98.6%     93.0%     87.4%    88.2%    90.6%
                                       ====      ====      ====     ====     ====
Industry combined ratio (all
  writers) (1)..................      108.7%(2) 102.6%    100.1%    99.5%   101.0%
Industry combined ratio (excluding
  direct writers) (1)...........        N.A.    102.3%     99.1%   100.1%   102.6%


(1)     Source: A.M. Best, Aggregates & Averages (1997 through 2000), for all
        property and casualty insurance companies (private passenger
        automobile line only, after policyholder dividends).
(2)     Source:  A.M. Best, "Best's Review, January 2001," "Review Preview."

(N.A.)  Not available.

        Under GAAP, the loss ratio is computed in the same manner as under

statutory accounting, but the expense ratio is determined by matching underwriting expenses to the period that net premiums were earned, rather than by when net premiums were 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,
                                              ------------------------------------------------
                                               2000       1999       1998      1997       1996
                                               ----       ----       ----      ----       ----
Loss Ratio                                     72.2%      66.4%      61.0%     63.5%      66.5%
Expense Ratio                                  26.3       26.8       26.6      25.1       24.4
                                               ----       ----       ----      ----       ----
Combined Ratio                                 98.5%      93.2%      87.6%     88.6%      90.9%
                                               ====       ====       ====      ====       ====

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,
                                             ---------------------------------------------------
                                             2000        1999         1998       1997       1996
                                             ----        ----         ----       ----       ----
                                                 (Amounts in thousands, except ratios)
Net premiums written.....                $1,272,447  $1,206,171   $1,144,051 $1,086,241  $795,873
Policyholders' surplus...                $  954,753  $  853,794   $  767,223 $  679,359  $594,799
Ratio....................                  1.3 to 1    1.4 to 1     1.5 to 1   1.6 to 1  1.3 to 1

Risk Based Capital

In December 1993, the NAIC adopted a risk-based capital formula for casualty insurance

9

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. 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, 2000. Each of the companies exceeded the highest level of minimum required capital.

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 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, 2000, 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 became effective January 1, 2001. Certain state laws may differ from codification. The Company estimates that it would realize a surplus increase of approximately $33 million at December 31, 2000 under codification. This increase primarily relates to the establishment of a net deferred tax asset and does not include any adjustment for the elimination of the reserve for the excess of statutory reserves over statement reserves for the California domiciled companies. For its California domiciled companies, the Company is not able to recognize a surplus increase of $9 million for the elimination of the excess of statutory reserves over statement reserves prescribed by codification because California law requires the establishment of a statutory reserve.

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 ("AMT") was imposed on casualty companies. Changes in loss experience, growth rates and profitability produce significant changes in the Company's exposure to AMT 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. Due to AMT considerations, the Company has recently begun to purchase a greater percentage of taxable securities. At year-end, approximately 74% 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, 2000.

The nominal average maturity of the bond portfolio is 15.0 years at December 31, 2000,

10

but the call-adjusted average maturity of the portfolio is shorter, approximately 9.4 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 6.8 years at December 31, 2000. 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.

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. As the result of a liquidating dividend, the Company realized a gain of $347,000 on the same equity security in 2000. Equity holdings consist primarily of perpetual preferred stocks and dividend bearing common stocks on which dividend income is partially tax-sheltered by the 70% corporate dividend exclusion.

The California energy crisis has created credit problems for Southern California Edison and Pacific Gas & Electric. The Company has no investment in Pacific Gas & Electric. The Company's investment in Southern California Edison or Southern California Edison subsidiaries is less than one half of one percent of total investments and is carried on the financial statements at current market value.

The following table summarizes the investment results of the Company for the five years ended December 31, 2000:

                                                                  Year ended December 31,
                                            -----------------------------------------------------------------
                                                   2000(1)     1999(1)       1998(1)    1997(1)   1996(1)
                                                   ----        ----          ----       ----      ----
                                                                   (Amounts in thousands)
Averaged invested assets (includes
 short-term cash investments (2))............    $1,710,176   $1,595,466  $1,473,843 $1,263,167 $970,677
Net investment income:
       Before income taxes...................       106,466       99,374      96,169     86,812   70,180
       After income taxes....................        95,154       89,598      87,199     77,917   63,371
Average annual return on investments:
       Before income taxes...................           6.2%         6.2%        6.5%       6.9%     7.2%
       After income taxes....................           5.6%         5.6%        5.9%       6.2%     6.5%
Net realized investment gains (losses) after
   income taxes..............................         2,564       (7,754)     (2,552)     3,232   (2,062)
Net increase (decrease) in unrealized
   gains/losses on all investments after
   income taxes..............................    $   70,342   $  (90,667) $    5,065 $   27,175 $ (6,271)

(1) Includes AMI for the month of December 1996 and the full years 1997 through 2000 and MCM for the last three months of 2000.
(2) Fixed maturities and equities at cost.

11

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

                                                       December 31,
                             ------------------------------------------------------------------
                                      2000                 1999                  1998
                              ------------------   -------------------    -------------------
                               Amortized Market      Amortized Market       Amortized Market
                                Cost      Value      Cost       Value       Cost       Value
                                ----      -----      ----       -----       ----       -----
                                                 (Amounts in thousands)
Taxable Bonds..........       $  151,281 $  152,704  $   21,461 $   20,779  $   28,339 $   29,163
Tax-Exempt State and
 Municipal Bonds.......        1,292,711  1,336,555   1,300,896  1,269,604   1,174,630  1,251,475
Sinking Fund Preferred
 Stocks................           19,905     20,215      31,408     31,671      42,471     44,270
                               ---------  ---------   ---------  ---------   ---------   --------
   Total Fixed Maturity
    Investments........        1,463,897  1,509,474   1,353,765  1,322,054   1,245,440  1,324,908

Equity Investments incl.
 Perpetual Preferred
 Stocks................          250,593    252,510     238,856    209,843     220,449    219,745
Short-term Cash Invest-
 ments.................           32,977     32,977      43,568     43,568      45,992     45,992
                               ---------  ---------   ---------  ---------   ---------  ---------
Total Investments......       $1,747,467 $1,794,961  $1,636,189 $1,575,465  $1,511,881 $1,590,645
                               =========  =========  ========== ==========   =========  =========

At December 31, 2000, the Company had a net unrealized gain on all investments of $47,494,000 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 Company's competitors having greater shares of the California market sell insurance either directly and/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 1996 through 1998 time period created a favorable environment for automobile insurance writers. Many major automobile insurers attempted to capitalize on the favorable climate by increasing their marketing efforts and reducing rates in attempts to capture more business. These industry wide rate reductions and increased severity trends on collision and physical damage coverages contributed to the deterioration of industry loss ratios in 1999 and 2000 (See Operating Ratios - Loss and Expense). Most competitors have recently filed for and implemented rate increases. Consequently, the Company believes that the industry is now entering a period of rising premium rates and reduced underwriting capacity.

12

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, 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. According to a recent study released by the California DOI, the combined results for the Company's California subsidiaries included in the study, tied the Company for best among the largest seven automobile insurers in California when measured by consumer complaints. The Company's California subsidiaries included in the study had 1.3 million earned cars, as defined by the California Department of Insurance, in 1999 and only 24 justified complaints, a ratio of 1.8 for every 100,000 cars. The Company had no justified complaints on its homeowners business.

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

The Company encounters similar competition in each state and other lines of business 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, which is rated A++ by A.M. Best, 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 had in place a treaty reinsurance agreement 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 was $5 million per risk. This treaty was revised effective October 1, 2000. The revised treaty provides $4 million coverage in excess of $1 million for each risk.

13

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. For California, the Company has reduced 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. Although the Company's catastrophe exposure to earthquakes has been reduced, the Company continues to have catastrophe exposure for fire following an earthquake.

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.

MCM has reinsurance treaties with several different reinsurers. 100% of all risks written by MCM are ceded to reinsurers. The Company also holds a formal guarantee from ERC which reimburses MCM if any of the reinsurers fail to satisfy their obligations under their respective reinsurance agreements.

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.

14

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 Oklahoma DOI conducted an examination of AMI as of December 31, 1998. The exam resulted in no material findings or recommendations. The state of Texas will also conduct periodic examinations of AMI and MCM.

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 2000 and 1999, those contributions amounted to $579,800 and $528,000, 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, and investments, 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

15

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 of the Holding Company Act. Regulatory approval was obtained from California, Oklahoma and Texas before the acquisition of AMI was completed. Approval was granted by Texas for the Mercury County Mutual transaction.

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 0.5% of the direct automobile insurance premium written by the Company was for assigned risk business. In 2000, assigned risks represented 0.2% of total automobile direct premiums written and 0.2% 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 decreased in 1999 and again in 2000. The Company attributes these decreases 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 which became effective 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.

16

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 are assigned to insurance companies in proportion to each insurer's share of the California private passenger automobile insurance market. The volume and profitability of the program, including the annual assessment, are insignificant to the consolidated financial results of the Company. 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 four 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, (3) the number of years of driving experience of the insured and (4) whatever optional factors are determined by the Insurance Commissioner to have a substantial relationship to risk of loss and adopted by regulation. 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 on 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 affected the 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 similar to 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

17

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.

Third Party "Bad Faith" Legislation

Recent initiatives to reinstate third party "bad faith" lawsuits have been unsuccessful. 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 the most recent information provided by the CEA, the Company's maximum total exposure to CEA assessments at April 30, 2000, is approximately $14.6 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 the entire facility.

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 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 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.

18

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, 2001:

Name                  Age             Position
----                  ---             --------
George Joseph          79     Chairman of the Board, President and
                              Chief Executive Officer
Cooper Blanton, Jr.    74     Executive Vice President
Bruce E. Norman        52     Senior Vice President in charge of
                              Marketing
Joanna Y. Moore        45     Vice President and Chief Claims Officer
Kenneth G. Kitzmiller  54     Vice President in charge of Underwriting
Gabriel Tirador        36     Vice President and Chief Financial
                              Officer
Judy A. Walters        54     Vice President - Corporate Affairs and
                              Secretary
Peter R. Simon         41     Vice President - Information Systems

Mr. Joseph, President and Chief Executive Officer of the Company and Chairman of its Board of Directors, has served as Chairman and Chief Executive Officer since 1961. He was named President in October 2000. Mr. Joseph has more than 45 years experience in the property and casualty insurance business.

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 Directors of those companies. In January 1999 he was named Chairman of the Board of AMIC and President in April 2000. 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

19

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 fourteen 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.

1999                                                 High        Low
                                                     ----        ---

         1st Quarter..............................   $45.500    $31.875
         2nd Quarter..............................   $40.000    $31.938
         3rd Quarter..............................   $36.375    $26.375
         4th Quarter..............................   $28.875    $20.938

2000                                                 High        Low
                                                     ----        ---

         1st Quarter..............................   $29.688    $21.063
         2nd Quarter..............................   $30.250    $23.563
         3rd Quarter..............................   $28.375    $23.375
         4th Quarter..............................   $44.875    $26.125

2001                                                 High        Low
                                                     ----        ---

         1st Quarter (January 1 - March 15).......   $43.813    $32.625

Dividends

Following the public offering of its common stock in November 1985, the Company has paid regular quarterly dividends on its common stock. During 2000 and 1999, the Company paid dividends on its common stock of $0.96 per share and $0.84 per share, respectively. On January 26, 2001, the Board of Directors declared a $0.265 quarterly dividend payable on March 29, 2001 to stockholders of record on March 15, 2001.

20

The common stock dividend rate has been increased seventeen 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 2001 of up to approximately $94 million. See Note 11 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, 2001 was 262. The approximate number of beneficial holders as of March 15, 2001 was 7,500 according to the Bank of New York, the Company's transfer agent.

21

Item 6. Selected Consolidated Financial Data

                                                            Year ended December 31,
                                      ------------------------------------------------------------------
                                          2000           1999          1998          1997         1996
                                          ----           ----          ----          ----         ----
                                                  (Amounts in thousands, except per share data)
Income Data:
Premiums earned..................     $1,249,259     $1,188,307    $1,121,584     $1,031,280    $754,724
Net investment income............        106,466         99,374        96,169         86,812      70,180
Realized investment gains(losses)          3,944        (11,929)       (3,926)         4,973      (3,173)
Realized gain from sale of
  subsidiary.....................             --             --         2,586             --          --
Other............................          6,349          4,924         5,710          4,881       3,233
                                       ---------      ---------     ---------      ---------     -------

         Total Revenues..........      1,366,018      1,280,676     1,222,123      1,127,946     824,964
                                       ---------      ---------     ---------      ---------     -------

Losses and loss adjustment
  expenses.......................        901,781        789,103       684,468        654,729     501,858
Policy acquisition costs.........        268,657        267,399       252,592        224,883     160,019
Other operating expenses.........         59,733         50,675        44,941         33,579      24,493
Interest.........................          7,292          4,960         4,842          4,976       2,004
                                       ---------      ---------     ---------      ---------     -------
         Total Expenses..........      1,237,463      1,112,137       986,843        918,167     688,374
                                       ---------      ---------     ---------      ---------     -------
Income before income taxes.......        128,555        168,539       235,280        209,779     136,590
Income taxes.....................         19,189         34,830        57,754         53,473      30,826
                                       ---------      ---------     ---------      ---------     -------
Net Income.......................     $  109,366     $  133,709    $  177,526     $  156,306    $105,764
                                       =========      =========     =========      =========     =======

Per Share Data:
Basic earnings per share *.......     $     2.02     $     2.45    $     3.23     $     2.84    $   1.93
                                       =========      =========     =========      =========     =======
Diluted earnings per share *.....     $     2.02     $     2.44    $     3.21     $     2.82    $   1.92
                                       =========      =========     =========      =========     =======
Dividends paid *.................     $      .96     $      .84    $      .70     $      .58    $    .48
                                       =========      =========     =========      =========     =======

                                                                  December 31,
                                      --------------------------------------------------------------------
                                        2000            1999          1998          1997          1996
                                        ----            ----          ----          ----          ----
                                                (Amounts in thousands, except per share data)
Balance Sheet Data:
Total investments................     $1,794,961     $1,575,465    $1,590,645     $1,448,248    $1,168,287
Premiums receivable..............        123,070        115,654       107,950        104,216        83,748
Total assets.....................      2,142,263      1,906,367     1,877,025      1,725,532     1,419,927
Unpaid losses and loss
 adjustment expenses.............        492,220        434,843       405,976        409,061       336,685
Unearned premiums................        365,579        340,846       327,129        309,376       260,878
Notes payable....................        107,889         92,000        78,000         75,000        75,000
Deferred income tax
 liability (asset)...............          8,336        (28,541)       22,639         19,722         6,349
Shareholders' equity.............      1,032,905        909,591       917,375        799,592       641,222
Book value per share*............          19.08          16.73         16.80          14.51         11.69

*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. Further expansion into Texas occurred with the Concord Insurance Services, Inc. transaction in December 1999 and the Mercury County Mutual Insurance Company ("MCM") transaction in September 2000.

During 2000, approximately 91% of the Company's direct premiums written 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. The rate change made effective May 1, 1994 resulted in a substantial increase in new business being submitted to the Company. Since March 31, 1994, Private Passenger Automobile ("PPA") policies in force in California have increased from approximately 300,000 to 771,000 at December 31, 2000, an annual rate of increase of approximately 15%. Policy count growth for the year 2000 was down negligibly from 1999 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) miles driven per year, (3) years of driving experience 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

23

1997. The Company's plan was approved by the California DOI and became effective October 1, 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, 2000 Compared to Year Ended December 31, 1999

Premiums earned in 2000 of $1,249.3 million increased 5.1% and net premiums written in 2000 of $1,272.4 million increased 5.5% over amounts recorded in 1999. Contributing to the overall premium written growth were initial automobile premiums in Texas from the recent Concord agency transaction, and increases in California homeowner premiums, California non-standard automobile premiums and Florida automobile premiums. The Company's core California private passenger automobile premiums were relatively flat and AMI experienced a decline in premium volume.

The Company believes that downward pressure on premium rates due to highly competitive conditions in the California private passenger auto market has resulted in higher loss ratios. To improve loss ratios many California auto insurers have either filed for rate increases recently or will do so in the immediate future. The Company has filed for a 6.9% rate increase in both its non-standard automobile line and its private passenger automobile line written by Mercury Casualty Company in California. The combined premium volume for these two lines was $297.6 million in 2000 representing approximately 29% of the California private passenger business written in 2000. Despite the proposed increase, the Company believes that its rates will remain among the lowest in the market. During 2000, the Company continued its marketing efforts for name recognition and lead generation. The Company feels that its marketing effort combined with price and reputation for service make the Company very competitive in California.

The GAAP loss ratio (loss and loss adjustment expenses related to premiums earned) was 72.2% in 2000 and 66.4% in 1999. The major reason for the less favorable result is an increase in severity for California automobile claims which is the result of inflationary trends in health care costs, auto parts and body shop labor costs.

The GAAP expense ratio in 2000 (policy acquisition costs and other operating expenses related to premiums earned) was 26.3% compared with 26.8% in 1999. The decrease was due mainly to a reduction in base and contingent commissions, which are tied to loss performance, partially offset by an increase in advertising spending.

Total losses and expenses in 2000, excluding interest expense of $7.3 million, were $1,230.2 million, resulting in an underwriting gain (premiums earned less losses, policy acquisition costs and other operating expenses) for the period of $19.1 million compared with an underwriting gain of $81.1 million in 1999.

Investment income in 2000 was $106.5 million compared with $99.4 million in 1999. The after-tax yield on average investments of $1,710.2 million (cost basis) was 5.56%, compared with 5.62% on average investments of $1,595.5 million in 1999. The effective tax rate on investment income in 2000 was 10.6%, compared with 9.8% in 1999. The higher tax rate in 2000 reflects a modest shift in the Company's portfolio mix from non-taxable to taxable issues. Bonds matured and called in 2000 totaled $45.6 million compared with $49.2 million in 1999. Approximately $22.9 million of bonds are expected to mature or be called in 2001.

Realized investment gains in 2000 were $3.9 million compared with realized losses of $11.9 million in 1999. The gains realized in 2000 were designed to utilize capital loss tax benefits.

24

Included in 1999 losses was a $6.0 million write-down of a preferred stock investment that became other than temporarily impaired during the third quarter.

The income tax provision of $19.2 million in 2000 represented an effective rate of 14.9%, compared with an effective rate of 20.7% in 1999. The lower rate in 2000 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 2000 was $109.4 million or $2.02 per share (diluted), compared with $133.7 or $2.44 per share (diluted), in 1999. Diluted per share results are based on 54.3 million average shares in 2000 and 54.8 million shares in 1999. Basic per share results were $2.02 in 2000 and $2.45 in 1999.

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 continued 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 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.

25

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. Bonds matured and called in 1999 totaled $49.2 million, compared to $65.3 million in 1998.

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.

Liquidity and Capital Resources

Net cash provided from operating activities in 2000, was $153.1 million, while funds derived from the sale, redemption or maturity of investments was $273.7 million, of which approximately 50% was represented by the sale of fixed maturities. The amortized cost of fixed-maturity investments increased by $110.1 million during the year. Equity investments, including perpetual preferred stocks, increased by $11.7 million at cost, while short-term cash investments decreased by $10.6 million. The amortized cost of fixed- maturities available for sale that were sold, called or matured during the year was $191.8 million.

The market value of all investments held at market as "Available for Sale" exceeded the amortized cost of $1,747.5 million at December 31, 2000 by $47.5 million. That unrealized gain, reflected in shareholders' equity, as Accumulated Other Comprehensive Income, net of applicable tax effects, was $30.9 million at December 31, 2000 compared with an unrealized loss of $39.5 million at December 31, 1999. The increase in market values since December 31, 1999 reflects principally the substantial decrease in intermediate and long term interest rates during 2000.

The Company's unrestricted cash and short term investments totaled $35.9 million at December 31, 2000. Together with funds generated internally, such liquid assets are more than adequate to pay claims without the sale of long term investments.

As of December 31, 2000, the average rating of the $1,444.0 million bond portfolio (at amortized cost) was AA-, while the average effective maturity, giving effect to anticipated early call provisions, approximates 9.4 years. The modified duration of the bond portfolio at year-end was 6.8 years. Duration measures the length of time it takes to receive all cash flows produced by a bond, including reinvestment of interest income. 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

26

maturity alone. Bond holdings are broadly diversified geographically and by obligor. Traditionally, it has been the Company's policy not to invest in high yield or "junk" bonds. At December 31, 2000 bond holdings rated below investment grade totaled $19.1 million at market (cost $20.6 million), or less than 1% of total assets.

Fixed maturity investments of $1,463.9 million (amortized cost), include $19.9 million (amortized cost) of sinking fund preferred stocks, principally utility issues. The market value of all fixed maturities exceeded cost by $45.6 million at December 31, 2000.

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 $252.5 million at market (cost $250.6 million), including perpetual preferred issues, are largely confined to the public utility and banking sectors and represent about 24.4% of total shareholders' equity.

The Company had outstanding debt at December 31, 2000 of $108 million. Of this amount, $75 million has been borrowed under a three year revolving credit bank loan and is due November 21, 2001. 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 and 2000, the Company did not extend the maturity for an additional one year period. The Company will reevaluate refinancing or extending the current 2001 maturity date of this loan during 2001. 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 rates effective at December 31, 2000, the net interest cost on the loan approximates 6.96%.

The Company also maintains a $30 million line of credit, of which $27 million was drawn at December 31, 2000 and is due October 26, 2001. 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. The interest rate is variable and is optionally related to the Federal Funds rate or the Eurodollar London Interbank rate (LIBOR). Based on rates effective at December 31, 2000, the net interest cost on the loan approximates 7.51%. The loan covenants are similar to the Company's $75 million loan discussed above.

The Company regularly evaluates repayment and refinancing for its outstanding debt, including the amounts outstanding under its $75 million loan and the $30 million line of credit that become due and payable in 2001.

As part of the Elm County Mutual transaction the Company agreed to make annual $1 million payments to Employers Reinsurance Corporation over 7 years beginning September 30, 2001. At December 31, 2000, the Company is carrying a note payable for $5.4 million, which represents the discounted value of the seven annual payments using a 7% rate. An additional $500,000 note payable to Employers Reinsurance Corporation is due during the first quarter of 2001 and represents the remainder of the initial purchase price.

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

27

lower yielding tax-exempt bonds, the proceeds of the $30 million credit facility and internal cash generation. During 2000, the Company purchased 314,900 shares of the common stock in the open market at an average price of $22.16. Since the inception of the program in 1998 through December 31, 2000, the Company has purchased 1,266,100 shares of common stock at an average price of $31.36. 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 2000, was 6.72%.

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, 2000. Each of the Companies' policyholders' surplus exceeded the highest level of minimum required capital.

As of December 31, 2000, 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 the most current information provided by the CEA, the Company's maximum total exposure to CEA assessments at April 30,2000, is approximately $14.6 million.

Industry and regulatory guidelines suggest that the ratio of a property and casualty

28

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 Insurance Companies of $954.8 million at December 31, 2000, and net written premiums for the twelve months ended on that date of $1,272.4 million, the ratio of writings to surplus was approximately 1.3 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. This standard, adopted by the Company on January 1, 2001 will have no impact on the Consolidated Financial Statements.

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, 2000 comprised 84% of total investments at market value. Tax-exempt bonds represent 89% 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 14% of total investments at market. The remaining 2% of the investment portfolio consists 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. During 2000, interest rates declined, which increased the value of the Company's fixed income investments, resulting in a total pretax unrealized gain of $45.6 million on the fixed maturity holdings.

During 2000, lower market interest reduced the duration of the Company's bond portfolio. Bond investments made by the Company typically have call options attached, which reduce the duration of the asset as interest rates decline. Consequently, the average modified duration of the portfolio declined from 7.8 years at December 31, 1999 to 6.8 years at December 31, 2000. Given a hypothetical parallel increase of 100 basis points in interest rates, the fair value of the bond portfolio would decrease by approximately $101.3 million.

At December 31, 2000, 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 $94.6 million in common stocks and $157.9 million in non-sinking fund preferred stocks. The common stock equity assets are

29

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 most of the year 2000, non-sinking fund preferred stocks were not actively traded by the market, though lower interest rates intrinsically benefit their market values. At December 31, 2000, the duration on the Company's non-sinking fund preferred stock portfolio was 10.3 years. This implies that an upward parallel shift in the yield curve by 100 basis points would reduce the asset value at December 31, 2000 by approximately $16.3 million, everything else remaining the same.

The remainder of the equity portfolio, representing 5% 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 0.46. 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 $8.7 million.

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.

30

Quarterly Data

Summarized quarterly financial data for 2000 and 1999 is as follows (in thousands except per share data):

                                                  Quarter Ended
                                     ----------------------------------------

                                     March 31   June 30   Sept. 30    Dec. 31
                                     --------   -------   --------    -------
2000
----
Earned premiums..................... $304,655  $312,187   $315,108   $317,309
Income before income taxes ......... $ 36,038  $ 30,232   $ 32,045   $ 30,240
Net income.......................... $ 29,938  $ 26,002   $ 27,421   $ 26,005
Basic earnings per share............ $    .55  $    .48   $    .51   $    .48
Diluted earnings per share.......... $    .55  $    .48   $    .51   $    .48
Dividends declared per share........ $    .24  $    .24   $    .24   $    .24

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

31

Item 8. Financial Statements

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                          Page

Independent Auditors' Report............................................    33
Consolidated Financial Statements:
       Consolidated Balance Sheets as of December 31, 2000 and 1999.....    34
       Consolidated Statements of Income for Each of the Years in the
        Three-Year Period Ended December 31, 2000.......................    35
       Consolidated Statements of Comprehensive Income for each of the
           Years in the Three-Year Period Ended December 31, 2000.......    36
       Consolidated Statements of Shareholders' Equity for Each of the
           Years in the Three-Year Period Ended December 31, 2000.......    37
       Consolidated Statements of Cash Flows for Each of the Years in
        the Three-Year Period Ended December 31, 2000...................    38
       Notes to Consolidated Financial Statements.......................    40

32

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, 2000 and 1999, 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, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.

KPMG LLP

Los Angeles, California
February 2, 2001

33

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2000 AND 1999

AMOUNTS EXPRESSED IN THOUSANDS, except share amounts

                                    ASSETS

                                                               2000        1999
                                                               ----        ----
Investments:
   Fixed maturities available for sale (amortized cost
    $1,463,897 in 2000 and $1,353,765 in 1999)...........  $1,509,474  $1,322,054
   Equity securities available for sale (cost $250,593
    in 2000 and $238,856 in 1999)........................     252,510     209,843
   Short-term cash investments, at cost, which
    approximates market..................................      32,977      43,568
                                                            ---------   ---------
              Total investments..........................   1,794,961   1,575,465
Cash.....................................................       5,935       8,052
Receivables:
   Premiums receivable...................................     123,070     115,654
   Premium notes.........................................      14,205      13,375
   Accrued investment income ............................      25,707      23,815
   Other.................................................      36,410      19,235
                                                           ----------   ---------
                                                              199,392     172,079
Deferred policy acquisition costs .......................      71,126      63,975
Fixed assets, net .......................................      35,208      34,221
Current income taxes ....................................          --       1,796
Deferred income taxes....................................          --      28,541
Other assets.............................................      35,641      22,238
                                                            ---------   ---------
                                                           $2,142,263  $1,906,367
                                                            =========   =========

                     LIABILITIES AND SHAREHOLDERS' EQUITY


Losses and loss adjustment expenses......................  $  492,220  $  434,843
Unearned premiums........................................     365,579     340,846
Notes payable............................................     107,889      92,000
Loss drafts payable......................................      49,954      40,063
Accounts payable and accrued expenses....................      39,715      53,121
Current income tax.......................................       3,471          --
Deferred income taxes....................................       8,336          --
Other liabilities........................................      42,194      35,903
                                                            ---------   ---------
              Total liabilities..........................   1,109,358     996,776
                                                            ---------   ---------
Shareholders' equity:
   Common stock without par value or stated value.
   Authorized 70,000,000 shares; issued and outstanding
   54,193,423 shares in 2000 and 54,425,323  in 1999.....      52,162      50,963
   Accumulated other comprehensive income (loss).........      30,871     (39,471)
   Unearned ESOP compensation............................      (2,000)     (3,000)
   Retained earnings.....................................     951,872     901,099
                                                            ---------   ---------
              Total shareholders' equity.................   1,032,905     909,591
                                                            ---------   ---------
   Commitments and contingencies ........................
                                                           $2,142,263  $1,906,367
                                                            =========   =========

See accompanying notes to consolidated financial statements.

34

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

Three years ended December 31, 2000

Amounts expressed in thousands, except per share data

                                                        2000        1999        1998
                                                        ----        ----        ----
Revenues:
  Earned premiums...............................    $1,249,259   $1,188,307  $1,121,584
  Net investment income ........................       106,466       99,374      96,169
  Net realized investment gains (losses)........         3,944      (11,929)     (3,926)
  Net realized gain from sale of subsidiary.....            --           --       2,586
  Other.........................................         6,349        4,924       5,710
                                                     ---------    ---------   ---------

       Total revenues...........................     1,366,018    1,280,676   1,222,123
                                                     ---------    ---------   ---------
Expenses:
  Losses and loss adjustment expenses...........       901,781      789,103     684,468
  Policy acquisition costs .....................       268,657      267,399     252,592
  Other operating expenses......................        59,733       50,675      44,941
  Interest .....................................         7,292        4,960       4,842
                                                     ---------    ---------   ---------

       Total expenses...........................     1,237,463    1,112,137     986,843
                                                     ---------    ---------   ---------

  Income before income taxes....................       128,555      168,539     235,280

Income taxes ...................................        19,189       34,830      57,754
                                                     ---------    ---------   ---------

  Net income....................................    $  109,366      133,709  $  177,526
                                                     =========    =========   =========

Basic earnings per share........................    $     2.02         2.45  $     3.23
                                                     =========    =========   =========

Diluted earnings per share......................    $     2.02         2.44  $     3.21
                                                     =========    =========   =========

See accompanying notes to consolidated financial statements.

35

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three Years ended December 31, 2000

Amounts expressed in thousands

                                                            2000         1999       1998
                                                            ----         ----       ----
Net income..............................................   $109,366    $133,709   $177,526

Other comprehensive income (loss), before tax:
   Unrealized gains (losses) on securities:
      Unrealized holding gains (losses) arising
       during period ...................................    109,432    (146,637)    12,397
      Less: reclassification adjustment for net
       losses (gains) included in net income............     (1,214)      7,149     (4,605)
                                                            -------     -------    -------
      Other comprehensive income (loss),
       before tax ......................................    108,218    (139,488)     7,792

Income tax expense (benefit) related to unrealized
 holding gains (losses) arising during period...........     38,301     (51,323)     4,339
Income tax expense (benefit) related to
 reclassification adjustment for (gains) losses
 included in net income ................................       (425)      2,502     (1,612)
                                                            -------     -------    -------

Comprehensive income, net of tax........................   $179,708    $ 43,042   $182,591
                                                            =======     =======    =======

See accompanying notes to consolidated financial statements

36

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Three years ended December 31, 2000

Amounts expressed in thousands

                                                    2000       1999      1998
                                                    ----       ----      ----
Common stock, beginning of year................ $   50,963  $ 48,830  $ 47,412
Proceeds of stock options exercised............      1,304       565     1,216
Tax benefit on sales of incentive stock
 options.......................................        549       152       748
Release of common stock by the ESOP............       (358)     (254)      (30)
Purchase and retirement of common stock........       (296)     (330)     (516)
Issuance of restricted common stock............         --     2,000        --
                                                 ---------   -------   -------
Common stock, end of year......................     52,162    50,963    48,830
                                                 ---------   -------   -------

Accumulated other comprehensive income,
beginning of year..............................     (39,471)   51,196    46,131

Net increase (decrease) in other comprehensive
 income........................................     70,342   (90,667)    5,065
                                                 ---------   -------   -------
Accumulated other comprehensive income (loss),
 end of year...................................     30,871   (39,471)   51,196
                                                 ---------   -------   -------

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

Retained earnings, beginning of year...........    901,099   821,349   706,049
Purchase and retirement of common stock........     (6,683)   (8,105)  (23,775)
Net income.....................................    109,366   133,709   177,526
Dividends paid to shareholders.................    (51,910)  (45,854)  (38,451)
                                                 ---------   -------   -------
Retained earnings, end of year.................    951,872   901,099   821,349
                                                 ---------   -------   -------

       Total shareholders' equity.............. $1,032,905  $909,591  $917,375
                                                 =========   =======   =======

See accompanying notes to consolidated financial statements.

37

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Years Ended December 31, 2000

Amounts expressed in thousands

                                                              2000        1999       1998
                                                              ----        ----       ----
Cash flows from operating activities:
   Net income ..........................................   $ 109,366   $ 133,709  $ 177,526
   Adjustments to reconcile net income to net cash
    provided from operating activities:
   Increase (decrease) in unpaid losses and loss
    adjustment expenses ................................      41,719      28,867     (3,085)
   Increase in unearned premiums.........................     15,389      13,717     17,753
   (Increase) decrease in premium notes receivable.........     (831)        364       (177)
   Increase in premiums receivable.........................     (7,417)   (7,704)    (3,734)
   Increase in deferred policy acquisition costs...........     (7,151)   (2,028)    (4,683)
   Increase in loss drafts payable.........................      9,891     1,630      6,375
   Decrease (increase) in accrued income taxes,
     excluding deferred tax on change in unrealized gain       2,153       1,577     (8,957)
   (Decrease) increase in accounts payable and accrued
     expenses...........................................     (13,407)     (1,223)     2,801
   Depreciation.........................................       6,926       6,896      5,444
   Net realized investment (gains) losses...............      (3,944)     11,929      3,926
   Net realized gain from sale of subsidiary............          --          --     (2,586)
   Bond accretion, net..................................      (7,337)     (5,450)    (4,146)
   Other, net...........................................       7,713       6,793      6,778
                                                           ---------     -------    -------
           Net cash provided from operating activities..     153,070     189,077    193,235
   Cash flows from investing activities:
   Fixed maturities available for sale:
    Purchases...........................................    (294,827)   (215,960)  (295,723)
    Sales...............................................     137,448      54,537    111,779
    Calls or maturities.................................      54,914      58,411     84,445
   Equity securities available for sale:
    Purchases...........................................     (83,372)   (475,525)  (800,620)
    Sales...............................................      81,294     445,330    745,275
   Elm County Mutual Insurance Company (ELM)
    transaction less cash acquired (See Note 9).........      (5,138)         --         --
   Proceeds from sale of subsidiary less cash
    transferred.........................................          --          --     11,018
   Concord transaction (See note 8).....................          --      (3,665)        --
   (Increase) decrease in receivable from securities....         (200)       613       (347)
   Decrease in short-term cash investments, net.........       10,591      2,424     12,059
   Purchase of fixed assets.............................       (8,342)    (9,268)    (7,164)
   Sale of fixed assets.................................        1,031        916        444
                                                             --------    -------   --------
           Net cash used in investing activities........   $ (106,601) $(142,187) $(138,834)

(Continued)

38

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Years Ended December 31, 2000

Amounts expressed in thousands

(Continued)

                                                           2000       1999       1998
                                                           ----       ----       ----
Cash flows from financing activities:
   Additions to notes payable........................   $ 37,000     17,000   $  3,000
   Principal payments on notes payable...............    (27,000)    (3,000)        --
   Dividends paid to shareholders....................    (51,910)   (45,854)   (38,451)
   Proceeds from stock options exercised.............      1,303        565      1,217
   Purchase and retirement of common stock...........     (6,979)    (8,436)   (24,291)
   Net increase (decrease) of ESOP loan..............     (1,000)    (1,000)     3,000
                                                         -------    -------    -------
            Net cash used in financing activities....    (48,586)   (40,725)   (55,525)
                                                         -------    -------    -------
   Net (decrease) increase in cash...................     (2,117)     6,165     (1,124)
   Cash:
     Beginning of the year...........................      8,052      1,887      3,011
                                                         -------    -------    -------
     End of the year.................................   $  5,935   $  8,052   $  1,887
                                                         =======    =======    =======

See accompanying notes to consolidated financial statements.

39

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2000 and 1999

(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 2000 and 1999 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), American Mercury Lloyds Insurance Company (AML) and Mercury County Mutual Insurance Company (MCM). AML is not owned by MGC, but is controlled by MGC through its attorney-in-fact, AFIMC. MCM is not owned by the Company but is controlled through a management contract. 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 10. 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. The results of MCM are included in the financial statements effective September 30, 2000. MCM is discussed further in Note 9. All of the subsidiaries as a group, including AML and MCM, 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.

40

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2000 and 1999

(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 non- sinking 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 million write-down of a preferred stock investment that became other than temporarily impaired during the third quarter of 1999. As the result of a liquidating dividend, the Company realized a gain of $347,000 on the same equity security in 2000.

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.

41

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2000 and 1999

(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 2000, 1999 and 1998 were $1,272,447,000, $1,206,171,000 and $1,144,051,000, respectively.

One agent produced direct premiums written of approximately 18%, 19% and 19% of the Company's total direct premiums written during 2000, 1999 and 1998, respectively. The owner of this agency sold it during 1998 to a large national broker. 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.

42

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2000 and 1999

(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 16 contains the required disclosures which make up the calculation of basic and diluted earnings per share.

43

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2000 and 1999

(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. Implemented in 1999, SOP 98-1 provided less than a $.01 contribution to diluted earnings per share in both 2000 and 1999.

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 adopted this new Standard on January 1, 2001 and it will have no impact on the

44

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2000 and 1999

(1) Significant Accounting Policies (Continued)

Consolidated Financial Statements.

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 Statement of Financial Accounting Standards No. 109 (SFAS No. 109),"Accounting for Income Taxes".

Reinsurance

In accordance with Statement of Financial Accounting Standards No. 113 (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, 2000, the cash balance includes $3,000,000 of restricted cash related to the Concord transaction (See Note 8).

Interest paid during 2000, 1999, and 1998 was $7,357,000, $4,758,000 and $4,494,000, respectively. Income taxes paid were $14,609,000 in 2000, $33,102,000 in 1999 and $65,984,000 in 1998.

The tax benefit realized on stock options exercised and included in cash provided from operations in 2000, 1999 and 1998 was $550,000, $152,000 and $748,000, respectively.

In 2000, notes payable with a discounted value of $5,889,000 were issued as part of the consideration for the right to manage and control Elm County Mutual Insurance Company (ELM) (See Note 9).

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.

45

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 3000 and 1999

(1) Significant Accounting Policies (Continued)

Stock-Based Compensation

The Company accounts for stock-based compensation under the accounting methods prescribed 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 15.

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)
                                                    -----------------------------
                                                       2000       1999      1998
                                                       ----       ----      ----
Interest and dividends on fixed maturities........  $ 86,644  $  78,559   $75,602
Dividends on equity securities....................    17,136     18,885    18,027
Interest on short-term cash investments...........     3,380      2,840     3,460
                                                     -------    -------    ------
       Total investment income....................   107,160    100,284    97,089
Investment expense................................       694        910       920
                                                     -------   --------    ------
       Net investment income......................  $106,466  $  99,374   $96,169
                                                     =======   ========    ======

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


                                                       Year ended December 31,
                                                       (Amounts in thousands)
                                                    ------------------------------
                                                       2000       1999      1998
                                                       ----       ----      ----
Net realized investment gains (losses):
       Fixed maturities..........................   $    549  $     67    $   914
       Equity securities.........................      3,395   (11,996)    (4,840)
                                                     -------   -------     ------
                                                    $  3,944  $(11,929)   $(3,926)
                                                     =======   =======     ======

46

MERCURY GENERAL CORPORATION

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2000 and 1999

(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)
                                                    ------------------------------
                                                       2000       1999      1998
                                                       ----       ----      ----
Fixed maturities available for sale:
       Gross realized gains......................   $ 1,740   $    865    $   394
       Gross realized losses.....................      (908)      (259)      (370)
                                                    -------   --------    -------
             Net.................................   $   832   $    606    $    24
                                                    =======   ========    =======

Equity securities available for sale:
       Gross realized gains......................   $ 5,259   $  5,506    $ 9,452
       Gross realized losses.....................    (1,621)   (11,536)   (14,166)
                                                     ------    -------     ------
             Net.................................   $ 3,638   $ (6,030)   $(4,714)
                                                     ======    =======     ======

         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)
                                                    -----------------------------
                                                       2000       1999      1998
                                                       ----       ----      ----
Net increase (decrease) in net unrealized
investment gains and losses:
       Fixed maturities available for sale........  $77,288   $(111,179)  $12,076
       Income tax expense (benefit)...............   27,051     (38,912)    4,227
                                                     ------     -------    ------
                                                    $50,237   $ (72,267)  $ 7,849
                                                     ======     =======    ======

       Equity securities..........................  $30,930   $ (28,309)  $(4,283)
       Income tax expense (benefit)...............   10,825      (9,909)   (1,499)
                                                     ------     -------   -------
                                                    $20,105   $ (18,400)  $(2,784)
                                                     ======     =======    ======

47

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2000 and 1999

(2) Investments and Investment Income (Continued)

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

                                                             December 31,
                                                        (Amounts in thousands)
                                                        ----------------------
                                                            2000          1999
                                                            ----          ----
Fixed maturities available for sale:
       Unrealized gains...............................    $ 60,318    $  21,193
       Unrealized losses..............................     (14,741)     (52,904)
       Tax effect.....................................     (15,952)      11,099
                                                          --------    ---------
                                                          $ 29,625    $ (20,612)
                                                          ========     ========

Equity securities available for sale:
       Unrealized gains...............................    $ 16,799    $   1,817
       Unrealized losses..............................     (14,882)     (30,830)
       Tax effect.....................................        (671)      10,154
                                                          --------    ---------
                                                          $  1,246    $ (18,859)
                                                          ========    =========

          Net unrealized investment gains (losses)
           (classified as accumulated other comprehensive
           income/(loss) on the balance sheet)........    $ 30,871    $ (39,471)
                                                          ========    =========

The amortized costs and estimated market values of investments in fixed maturities available for sale as of December 31, 2000 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..............  $    7,897    $    187    $    16   $    8,068
Obligations of states and political
  subdivisions...........................   1,315,024      57,686     13,318    1,359,392
Corporate securities.....................     121,071       1,838      1,110      121,799
Redeemable preferred stock...............      19,905         607        297       20,215
                                           ----------    --------    -------   ----------
    Totals...............................  $1,463,897    $ 60,318    $14,741   $1,509,474
                                           ==========    ========    =======   ==========

48

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2000 and 1999

(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, 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
                                                 ===========     =========      ========   ===========

At December 31, 2000, 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, 2000 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 ........................  $     6,478   $     6,530
   Due after one year through five years...........       90,899        92,324
   Due after five years through ten years..........      157,491       160,819
   Due after ten years.............................    1,209,029     1,249,801
                                                     -----------   -----------
                                                     $ 1,463,897   $ 1,509,474
                                                     ===========   ===========

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.

49

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2000 and 1999

(3) Fixed Assets

A summary of fixed assets follows:

                                                         December 31,
                                                   (Amounts in thousands)
                                                   ----------------------
                                                       2000        1999
                                                       ----        ----
          Land.............................         $  6,084   $  6,084
          Buildings........................           23,291     22,932
          Furniture and equipment..........           46,666     40,413
          Leasehold improvements...........              598        565
                                                    --------   --------
                                                      76,639     69,994
          Less accumulated depreciation....          (41,431)   (35,773)
                                                    --------   --------
          Net fixed assets.................         $ 35,208   $ 34,221
                                                    ========   ========

(4)    Deferred Policy Acquisition Costs

Policy acquisition costs incurred and amortized are as follows:

                                                   Year ended December 31,
                                                   (Amounts in thousands)
                                              --------------------------------
                                                 2000        1999        1998
                                                 ----        ----        ----
Balance, beginning of year.................   $  63,975   $  61,947   $  57,264
Costs deferred during the year.............     275,808     269,427     257,275
Amortization charged to expense............    (268,657)   (267,399)   (252,592)
                                              ---------   ---------   ---------
Balance, end of year.......................   $  71,126   $  63,975   $  61,947
                                              =========   =========   =========

(5) Notes Payable

Notes payable at December 31, 2000 consist of two revolving credit facilities and a note payable associated with the Elm County Mutual transaction (Note 9). A November 21, 1996 credit facility from a consortium of banks, provides for an aggregate commitment of $75 million, of which $75 million has been drawn and is outstanding at December 31, 2000 and 1999. The $75 million notes are due November 21, 2001. This due date may be extended annually for additional periods of one year. The other outstanding debt on credit facilities consists of a 364 day $30 million line of credit with Bank of America dated October 27, 2000. The outstanding draw at December 31, 2000 on this line of credit is $27 million and is due on October 26, 2001.

The $75 million and $30 million credit facilities are subject to a commitment fee on the undrawn balances of 0.15% and 0.125%, respectively. The interest rate is variable and is optionally related to the Federal Funds rate, Bank of New York prime rate or the Eurodollar London Interbank rate (LIBOR) for the $75 million facility and to the Federal Funds rate or LIBOR for the $30 million facility. Based on current effective rates, net interest cost on the $75 million loan and the $27 million draw at December 31, 2000 is approximately 6.96% and 7.51%, respectively.

50

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2000 and 1999

(5) Notes Payable (Continued)

The terms of the loan agreements include certain affirmative and negative covenants, all of which are met by the Company at December 31, 2000.

As part of the Elm County Mutual transaction, the Company agreed to make annual $1 million payments to Employers Reinsurance Corporation over 7 years beginning September 30, 2001. At December 31, 2000, the Company is carrying a note payable for $5.4 million, which represents the discounted value of the seven annual payments using a 7% rate. An additional $500,000 note payable to Employers Reinsurance Corporation is due during the first quarter of 2001 and represents the remainder of the initial purchase price.

(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)
                                             --------------------------
                                             2000      1999       1998
                                             ----      ----       ----
Federal
      Current...........................  $ 20,270   $ 36,535   $ 57,237
      Deferred..........................    (1,236)    (2,123)       190
                                          --------   --------   --------
                                          $ 19,034   $ 34,412   $ 57,427
                                          ========   ========   ========
State
      Current...........................  $    155   $    418   $    327
      Deferred..........................        --         --         --
                                          --------   --------   --------
                                          $    155   $    418   $    327
                                          ========   ========   ========
Total
      Current...........................  $ 20,425   $ 36,953   $ 57,564
      Deferred..........................    (1,236)    (2,123)       190
                                          --------   --------   --------
           Total........................  $ 19,189   $ 34,830   $ 57,754
                                          ========   ========   ========

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)
                                                      ------------------------
                                                      2000      1999      1998
                                                      ----      ----      ----
Computed tax expense at 35% .....................  $ 44,994  $ 58,989   $82,348
Tax-exempt interest income.......................   (27,295)  (25,398)  (23,496)
Dividends received deduction.....................    (3,152)   (3,953)   (5,437)
Reduction of losses incurred deduction for 15% of
 income on securities purchased after
 August 7, 1986                                       4,496     4,348     4,245
Other, net.......................................       146       844        94
                                                   --------  --------   -------
     Income tax expense .........................  $ 19,189  $ 34,830   $57,754
                                                   ========  ========   =======

51

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2000 and 1999

(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)
                                                      ----------------------
                                                         2000        1999
                                                         ----        ----
Deferred tax assets
       20% of net unearned premium..................   $ 25,920     24,264
       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....................................      9,445      8,383
       Other deferred tax assets....................      5,966      3,288
                                                       --------   --------
         Total gross deferred tax assets............     41,331     57,188
          Less valuation allowance..................         --         --
                                                       --------   --------
          Net deferred tax assets...................     41,331     57,188
                                                       --------   --------

Deferred tax liabilities
       Deferred acquisition costs...................    (27,623)   (22,391)
       Tax liability on net unrealized gain on
        securities carried at market value..........    (16,623)        --
       Tax depreciation in excess of book
        depreciation................................     (1,167)    (1,351)
       Accretion on bonds...........................     (2,962)    (2,008)
       Other deferred tax liabilities...............     (1,292)    (2,897)
                                                       --------   --------
         Total gross deferred tax liabilities.......    (49,667)   (28,647)
                                                       --------   --------
         Net deferred tax assets (liabilities)......   $ (8,336)  $ 28,541
                                                       ========   ========

52

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2000 and 1999

(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)
                                                -------------------------
                                                2000       1999       1998
                                                ----       ----       ----
Gross reserves for losses and loss
 adjustment expenses at beginning of year..  $434,843   $405,976   $409,061
Less reinsurance recoverable...............   (16,043)   (20,160)   (22,791)
                                             --------   --------   --------
Net reserves, beginning of year............   418,800    385,816    386,270

Incurred losses and loss adjustment expenses
  related to:
    Current year...........................   878,144    781,316    693,877
    Prior years............................    23,637      7,787     (9,409)
                                             --------   --------   --------
Total incurred losses and loss adjustment
 expenses..................................   901,781    789,103    684,468
                                             --------   --------   --------

Loss and loss adjustment expense payments
  related to:
    Current year...........................   562,163    492,314    437,612
    Prior years............................   294,615    263,805    247,310
                                             --------   --------   --------
Total payments.............................   856,778    756,119    684,922
                                             --------   --------   --------

Net reserves for losses and loss adjustment
  expenses at end of year..................   463,803    418,800    385,816
Reinsurance recoverable....................    28,417     16,043     20,160
                                             --------   --------   --------
Gross reserves, end of year................  $492,220   $434,843   $405,976
                                             ========   ========   ========

Increases in prior years incurred losses in 2000 a nd 1999 relate to increases in the severity estimates on bodily injury and p hysical damage coverages over what was originally recorded in the prior year. The increases in these claims relate to increased severity over what was recorded and are the result of inflationary trends in health care costs, auto parts and body shop labor costs.

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

53

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2000 and 1999

(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, written directly by a Texas County Mutual Insurance Company, was assumed 100% by an unaffiliated reinsurer. Effective January 1, 2000, the Company replaced Concord's existing reinsurer (for new and renewal business) and assumed 100% of the risks produced by Concord. The Company has expanded Concord's product line to include standard and preferred risks.

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

(9) Elm County Mutual Insurance Company Transaction

Effective September 30, 2000, the Company completed a transaction with Employers Reinsurance Corporation purchasing the authority and right to manage and control Elm County Mutual Insurance Company. Effective January 2, 2001, the name was changed to Mercury County Mutual Insurance Company ("MCM"). The results of operations of MCM, which are not material to the Company, are included in the consolidated financial statements of the Company effective September 30, 2000.

In 2001, the Company began writing Texas automobile risks that were previously placed through third-party Texas county mutual insurers and 100% reinsured by the Company, directly with MCM. Risks produced by the Company that are written directly through MCM will be 100% ceded to affiliated Mercury Companies.

The MCM 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.

(10) 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.

54

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2000 and 1999

(10) Sale of Subsidiary (Continued)

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.

(11) 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 2001, the direct insurance subsidiaries of the Company are permitted to pay approximately $94 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. During 2000 and 1999, the Insurance Companies paid dividends to Mercury General Corporation of $62.5 million and $61 million, respectively.

(12) 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, 2000, 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 $103,937,000, $135,667,000 and $173,473,000 for the years ended December 31, 2000, 1999 and 1998, respectively. The statutory policyholders' surplus of the Insurance Companies, as reported to regulatory authorities, as of December 31, 2000 and 1999 was $954,753,000 and $853,794,000, respectively.

The Company has estimated the Risk-Based Capital Requirements of each of its insurance subsidiaries as of December 31, 2000 according to the formula issued by the NAIC. Each of the Companies' policyholders' surplus exceeded the highest level of minimum required capital.

Codification

Codification became effective January 1, 2001. The Company estimates that it would realize a surplus increase of approximately $33 million at December 31, 2000 under Codification. This increase primarily relates to the establishment of a net deferred tax asset and does not include any adjustment for the elimination of the reserve for the excess of statutory reserves over

55

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2000 and 1999

(12) Statutory Balances and Accounting Practices (Continued)

statement reserves for the California domiciled Companies. For its California domiciled Companies, the Company is not able to recognize a surplus increase of $9 million for the elimination of the excess of statutory reserves over statement reserves prescribed by Codification because California law still requires a statutory reserve.

(13) 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 $4,138,000, $3,320,000 and $2,074,000 for the years ended December 31, 2000, 1999 and 1998, respectively.

The annual rental commitments, expressed in thousands, are shown as follows:

                          Rent
Year                     Expense
----                     -------
2001.................... $3,814
2002.................... $2,837
2003.................... $1,889
2004.................... $1,675
2005.................... $1,311
Thereafter.............. $2,950

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 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.

(14) 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, 2000, 1999 and 1998.

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 $1,805,000, $1,878,000, and $1,648,000 for the plan years ended December 31, 2000, 1999 and 1998.

56

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2000 and 1999

(14) Profit Sharing Plan (Continued)

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 $3,000,000, $4,000,000, and $5,000,000 at December 31, 2000, 1999 and 1998, 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 $642,000, $746,000, and $970,000 in 2000, 1999 and 1998, respectively.

The ESOP shares as of December 31 were as follows:

                                               2000         1999
                                               ----         ----
Allocated shares                              46,000        23,000
Shares committed-to-be released               23,000        23,000
Unreleased shares                             46,000        69,000
                                          ----------    ----------
Total ESOP shares                            115,000       115,000
                                          ==========    ==========
Market value of unreleased shares at
 December 31,                             $2,018,000    $1,535,000
                                          ==========    ==========

(15) Common Stock

Dividends paid per-share in 2000, 1999 and 1998 were $0.96, $0.84 and $0.70, respectively and dividends paid in total in 2000, 1999 and 1998 were $51,910,000, $45,854,000 and $38,451,000, respectively.

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 1985 Plan. Under the 1995 Plan, 5,400,000 shares of Common Stock are

57

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2000 and 1999

(15) Common Stock (Continued)

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, 2000 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 $395,000, $542,000 and $454,000 in 2000, 1999 and 1998, respectively, and earnings per share (basic and diluted) would have been reduced by $.01 in 2000, 1999 and 1998. 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 2000, 1999 and 1998: dividend yield of 2.2 percent for 2000, 3.8 percent for 1999 and 2.0 percent for 1998, expected volatility of 33.4 percent in 2000, 31.6 percent in 1999 and 32.7 percent for 1998 and expected lives of 7 years for all years. The risk-free interest rates used were 6.4 percent for the options granted during 2000, 5.6 percent for the options granted during 1999 and 5.4 percent for the options granted during 1998.

A summary of the status of the Company's plans as of December 31, 2000, 1999 and 1998 and changes during the years ending on those dates is presented below:

                                                        2000                  1999                   1998
                                                 -------------------    -----------------    ---------------------
                                                            Weighted             Weighted                 Weighted
                                                             Average              Average                  Average
                                                            Exercise             Exercise                 Exercise
                                                   Shares    Price       Shares    Price       Shares       Price
                                                 ---------  --------    -------- --------     --------    --------
Outstanding at beginning of year                  597,875   $ 22.370    539,146  $ 20.575      629,621    $ 16.269
Granted during the year                            77,000     26.386    102,100    28.800       73,000      45.385
Exercised during the year                         (83,000)    15.706    (37,371)   15.129     (144,475)     10.329
Canceled or expired                               (53,200)    31.144     (6,000)   15.625      (19,000)     51.484
                                                 --------              --------               --------
Outstanding at end of year                        538,675     23.104    597,875    22.370      539,146      20.575
                                                 ========              ========               ========

Options exercisable at year-end                   346,855               329,575                265,146
Weighted-average fair value of
 options granted during the year                 $   9.95              $   8.12               $  16.37

58

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2000 and 1999

(15) Common Stock (Continued)

The following table summarizes information regarding the stock options outstanding at December 31, 2000:

                      Number       Weighted Avg.     Weighted Avg.     Number        Weighted Avg.
Range of            Outstanding      Remaining         Exercise      Exercisable       Exercise
Exercise Prices     at 12/31/00   Contractual Life       Price       at 12/31/00         Price
----------------   -------------  ----------------   -------------   -----------    -------------
$15.00 to 15.9375     220,475         3.61             $15.405          220,475       $15.405
$21.75 to 29.77       232,200         7.22              23.545          100,880        23.921
$31.22 to 44.8209      86,000         8.01              38,884           25,500        40.147
                      -------                                           -------
$15.00 to 44.8209     538,675         5.87              22.662          346,855        19.701
                      =======                                           =======

(16) Earnings Per Share

A reconciliation of the numerator and denominator used in the basic and diluted earnings per share calculation is presented below:

                                2000                             1999                        1998
                    -----------------------------   -----------------------------  ----------------------------
                      (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  $ 109,366    54,100    $2.02    $133,709    54,596     $2.45    $177,526    55,003    $3.23

Effect of dilutive
 securities
       Options               --       158                   --       219                    --       351

Diluted EPS
-----------
Income available to
 common stockholders
 after assumed
 conversions          $ 109,366    54,258    $2.02    $133,709    54,815     $2.44    $177,526    55,354    $3.21
                      =========    ======    =====    ========    ======     =====    ========    ======    =====

The diluted weighted shares excludes incremental shares of 51,000, 28,000 and 0 for 2000, 1999 and 1998, respectively. These shares are excluded due to their antidilutive effect.

59

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 9, 2001, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 2000, 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, 2000 are contained herein as listed in the Index to Consolidated Financial Statements on page 32.

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.

60

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 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.

                                61

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.
10.34       Credit agreement dated as of October 27, 2000 between Mercury
            General Corporation and Bank of America, N.A.
10.35       Management Agreement effective January 1, 2001 between
            Mercury Insurance Services LLC and Mercury Casualty Company,
            Mercury Insurance Company, California Automobile Insurance
            Company and California General Underwriters Insurance
            Company.
10.36       Management Agreement effective January 1, 2001 between
            Mercury Insurance Services LLC and American Mercury Insurance
            Company.
10.37       Management Agreement effective January 1, 2001 between
            Mercury Insurance Services LLC and Mercury Insurance Company
            of Georgia.
10.38       Management Agreement effective January 1, 2001 between
            Mercury Insurance Services LLC and Mercury Indemnity Company
            of Georgia.
10.39       Management Agreement effective January 1, 2001 between
            Mercury Insurance Services LLC and Mercury Insurance Company
            of Illinois.
10.40       Management Agreement effective January 1, 2001 between
            Mercury Insurance Services LLC and Mercury Indemnity Company
            of Illinois.

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, 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, 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

62

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
                                           Chairman of the Board, President and
                                                Chief Executive Officer

March 16, 2001

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
       ---------                       -----                    ----

                               Chairman of the Board,
                                 President and Chief
                                  Executive Officer
 /s/ GEORGE JOSEPH            (Principal Executive Officer)   March 27, 2001
------------------------
     George Joseph
                                Vice President and
                              Chief Financial Officer
 /s/ GABRIEL TIRADOR        (Principal Financial Officer)     March 27, 2001
------------------------
     Gabriel Tirador

 /s/ NATHAN BESSIN                    Director                March 27, 2001
-----------------------
     Nathan Bessin

 /s/ BRUCE A. BUNNER                  Director                March 27, 2001
-----------------------
     Bruce A. Bunner

 /s/ MICHAEL D. CURTIUS               Director                March 27, 2001
-----------------------
     Michael D. Curtius

                                       63

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


 /s/ RICHARD E. GRAYSON                    Director            March 27, 2001
-------------------------
     Richard E. Grayson

 /s/ GLORIA JOSEPH                         Director            March 27, 2001
-------------------------
     Gloria Joseph

 /s/ CHARLES MCCLUNG                       Director            March 27, 2001
-------------------------
     Charles McClung

 /s/ DONALD P. NEWELL                      Director            March 27, 2001
-------------------------
     Donald P. Newell

 /s/ DONALD R. SPUEHLER                    Director            March 27, 2001
-------------------------
     Donald R. Spuehler

64

INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES

The Board of Directors
Mercury General Corporation:

Under date of February 2, 2001, we reported on the consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 2000 and 1999, 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, 2000, as contained in the annual report on Form 10-K for the year 2000. 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 2, 2001

S-1

SCHEDULE I

MERCURY GENERAL CORPORATION

SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES

December 31, 2000

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.......................  $    7,897  $    8,068    $    8,068
      States, municipalities................   1,315,024   1,359,392     1,359,392
      All other corporate bonds.............     121,071     121,799       121,799
    Redeemable preferred stock..............      19,905      20,215        20,215
                                               ---------   ---------     ---------

      Total fixed maturities available for
        sale................................   1,463,897   1,509,474     1,509,474
                                               ---------   ---------     ---------

Equity securities:
    Common stocks:
      Public utilities......................      59,445      69,880        69,880
      Banks, trust and insurance companies..       5,974       8,153         8,153
      Industrial, miscellaneous and
       all other............................      15,792      16,576        16,576
    Nonredeemable preferred stocks..........     169,382     157,901       157,901
                                               ---------   ---------     ---------

      Total equity securities available for
        sale................................     250,593     252,510       252,510
                                               ---------   ---------     ---------

Short-term investments......................      32,977                    32,977
                                               ---------                 ---------

      Total investments.....................  $1,747,467                $1,794,961
                                               =========                 =========

S-2

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-3

SCHEDULE II
MERCURY GENERAL CORPORATION

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

BALANCE SHEETS

December 31, 2000 and 1999

Amounts in thousands

ASSETS

                                                               2000          1999
                                                               ----          ----
Investments:
    Fixed maturities available for sale (amortized
        cost $2,150 in 2000 and $2,130 in 1999).........  $    2,080     $    2,126
    Equity securities, available for sale (cost
        $26,702 in 2000 and $25,831 in 1999)............      25,566         22,985
    Short-term cash investments.........................       3,486          5,956
    Investment in subsidiaries..........................   1,111,382        975,488
                                                           ---------      ---------
              Total investments.........................   1,142,514      1,006,555

Amounts due from affiliates.............................       8,806          8,320
Income taxes............................................       8,373          9,288
Other assets............................................       2,912          2,371
                                                           ---------      ---------
                                                          $1,162,605     $1,026,534
                                                           =========      =========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Notes payable...........................................  $  107,889     $   92,000
Accounts payable and accrued expenses...................      12,695         18,459
Other liabilities.......................................       9,116          6,484
                                                           ---------      ---------
       Total liabilities................................     129,700        116,943
                                                           ---------      ---------

Shareholders' equity:
    Common stock........................................      52,162         50,963
    Accumulated other comprehensive income (loss).......      30,871        (39,471)
    Unearned ESOP compensation..........................      (2,000)        (3,000)
    Retained earnings...................................     951,872        901,099
                                                           ---------      ---------
              Total shareholders' equity................   1,032,905        909,591
                                                           ---------      ---------

                                                          $1,162,605     $1,026,534
                                                           =========      =========

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, 2000

Amounts in thousands

                                                    2000         1999           1998
                                                    ----         ----           ----
Revenues:
  Net investment income......................... $  2,230       $  1,867      $   1,956
  Management fee income from subsidiaries.......  216,413        208,245        186,387
  Other.........................................       12             11             94
                                                  -------        -------        -------

      Total revenues............................  218,655        210,123        188,437
                                                  -------        -------        -------

Expenses:
  Loss adjustment expenses......................  136,835        128,474        115,242
  Policy acquisition costs......................   34,567         35,527         33,550
  Other operating expenses......................   46,274         45,302         38,815
  Interest......................................    7,292          4,958          4,839
                                                  -------        -------        -------

      Total expenses............................  224,968        214,261        192,446
                                                  -------        -------        -------

  Loss before income taxes and equity in net
   income of subsidiaries.......................   (6,313)        (4,138)        (4,009)

Income tax benefit..............................   (2,446)        (1,380)        (2,010)
                                                  -------        -------        -------

  Loss before equity in net income
   of subsidiaries..............................   (3,867)        (2,758)        (1,999)

Equity in net income of subsidiaries............  113,233        136,467        179,525
                                                  -------        -------        -------

      Net income................................ $109,366       $133,709      $ 177,526
                                                  =======        =======        =======

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, 2000

Amounts in thousands

                                                       2000        1999        1998
                                                       ----        ----        ----
Cash flows from operating activities:
  Net cash used by operating activities............ $ (9,120)   $(10,705)  $ (5,295)

Cash flows from investing activities:
  Capital contribution to controlled entity........   (3,000)     (7,550)        --
  Dividends from subsidiaries......................   62,500      61,000     55,000
  Elm County Mutual Insurance Company (ELM)
   transaction ....................................   (7,000)         --         --
  Fixed maturities, at market:
    Purchases......................................   (2,042)     (2,008)    (2,700)
    Sales..........................................       --          --      3,849
    Calls or maturities............................    2,028         854        731
  Equity securities:
    Purchases......................................   (4,067)    (41,004)   (75,180)
    Sales..........................................    3,359      36,759     79,852
    Calls..........................................       --       1,119        222
  Increase in payable for securities...............       --          --        203
  (Increase) decrease in short term cash
  investments, net ................................    2,470       3,233     (2,484)
                                                     -------     -------    -------
      Net cash provided by investing
       activities..................................   54,248      52,403     59,493

Cash flows from financing activities:
  Additions to notes payable.......................   37,000      17,000      3,000
  Principal payments on notes payable..............  (27,000)     (3,000)        --
  Dividends paid to shareholders...................  (51,910)    (45,854)   (38,452)
  Purchase and retirement of common stock..........   (6,979)     (8,435)   (24,291)
  Stock options exercised..........................    1,853         717      1,964
  Net decrease of ESOP loan........................   (1,000)     (1,000)     3,000
                                                     -------     -------    -------
     Net cash used in financing activities.........  (48,036)    (40,572)   (54,779)

Net increase (decrease) in cash....................   (2,908)      1,126       (581)
Cash:
  Beginning of the year............................   (2,484)     (3,610)    (3,029)
                                                     -------     -------    -------
  End of the year ................................. $ (5,392)   $ (2,484)  $ (3,610)
                                                     =======     =======    =======

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, 2000 and 1999

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. Effective January 1, 2001 these management services are provided by a subsidiary of Mercury Casualty Company.

Dividends Received From Subsidiaries

Dividends of $62,500,000, $61,000,000, and $55,000,000 were received by the Company from its wholly-owned subsidiaries in 2000, 1999 and 1998, respectively, and are recorded as a reduction to Investment in Subsidiaries.

Cash Overdraft

At December 31, 2000 and 1999, the Company had cash overdrafts of $5,392,000 and $2,484,000 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, 2000

                              Amounts in thousands

                                                 Ceded to
                                    Gross         other                  Net
                                    amount      companies   Assumed    amount
                                    ------      ---------   -------    ------
Property and Liability insurance earned premiums
     2000.......................   $1,233,263    $ 8,659    $24,655  $1,249,259
     1999.......................   $1,186,385    $ 8,844    $10,766  $1,188,307
     1998.......................   $1,130,597    $14,352    $ 5,339  $1,121,584

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.

          10.34     Credit agreement dated as of October 27, 2000 between
                    Mercury General Corporation and Bank of America, N.A.

          10.35     Management agreement effective January 1, 2001 between
                    Mercury Insurance Services LLC and Mercury Casualty Company,
                    Mercury Insurance Company, California Automobile Insurance
                    Company and California General Underwriters Insurance
                    Company.

          10.36     Management Agreement effective January 1, 2001 between
                    Mercury Insurance Services LLC and American Mercury
                    Insurance Company.

          10.37     Management Agreement effective January 1, 2001 between
                    Mercury Insurance Services LLC and Mercury Insurance Company
                    of Georgia.

          10.38     Management Agreement effective January 1, 2001 between
                    Mercury Insurance Services LLC and Mercury Indemnity Company
                    of Georgia.

          10.39     Management Agreement effective January 1, 2001 between
                    Mercury Insurance Services LLC and Mercury Insurance Company
                    of Illinois.

          10.40     Management Agreement effective January 1, 2001 between
                    Mercury Insurance Services LLC and Mercury Indemnity Company
                    of Illinois.

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, 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, 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 10.34

CREDIT AGREEMENT

Dated as of October 27, 2000

between

MERCURY GENERAL CORPORATION

and

BANK OF AMERICA, N.A.


TABLE OF CONTENTS

                                                                                                              Page
                                                                                                              ----
ARTICLE I.DEFINITIONS AND ACCOUNTING TERMS.................................................................     1
                       1.01      Defined Terms.............................................................     1
                       1.02      Other Interpretive Provisions.............................................    11
                       1.03      Accounting Terms..........................................................    12
                       1.04      Rounding..................................................................    12
                       1.05      References to Agreements and Laws.........................................    12

ARTICLE II.THE COMMITMENT AND LOAN.........................................................................    12
                       2.01      Loans.....................................................................    12
                       2.02      Borrowings, Conversions and Continuations of Loans........................    12
                       2.03      Prepayments...............................................................    14
                       2.04      Reduction or Termination of Commitment....................................    14
                       2.05      Repayment of Loans........................................................    14
                       2.06      Interest..................................................................    14
                       2.07      Fees......................................................................    15
                       2.08      Computation of Interest and Fees..........................................    15
                       2.09      Evidence of Debt..........................................................    15
                       2.10      Payments Generally........................................................    15
                       2.11      Extension of Maturity Date................................................    16

ARTICLE III.TAXES, YIELD PROTECTION AND ILLEGALITY.........................................................    16
                       3.01      Taxes.....................................................................    16
                       3.02      Illegality................................................................    17
                       3.03      Inability to Determine Eurodollar Rate....................................    17
                       3.04      Increased Cost and Reduced Return; Capital Adequacy.......................    18
                       3.05      Funding Losses............................................................    18
                       3.06      Requests for Compensation.................................................    19
                       3.07      Survival..................................................................    19

ARTICLE IV.CONDITIONS PRECEDENT TO LOANS...................................................................    19
                       4.01      Conditions of Initial Loan................................................    19
                       4.02      Conditions to all Loans...................................................    20

ARTICLE V.REPRESENTATIONS AND WARRANTIES...................................................................    21
                       5.01      Existence, Qualification and Power; Compliance with Laws..................    21
                       5.02      Authorization; No Contravention...........................................    21
                       5.03      Governmental Authorization................................................    21
                       5.04      Binding Effect............................................................    21
                       5.05      Financial Statements; No Material Adverse Effect..........................    21
                       5.06      Litigation................................................................    22
                       5.07      No Default................................................................    22
                       5.08      Ownership of Property; Liens..............................................    22
                       5.09      Environmental Compliance..................................................    22

(i)

                       5.10      Insurance.................................................................    22
                       5.11      Taxes.....................................................................    22
                       5.12      ERISA Compliance..........................................................    23
                       5.13      Subsidiaries..............................................................    23
                       5.14      Margin Regulations; Investment Company Act; Public Utility Holding
                                 Company Act...............................................................    23
                       5.15      Licenses, Franchises, Etc.................................................    24
                       5.16      Labor Relations...........................................................    24
                       5.17      Burdensome Obligations....................................................    24
                       5.18      Disclosure................................................................    24

ARTICLE VI.AFFIRMATIVE COVENANTS...........................................................................    24
                       6.01      Financial Statements......................................................    24
                       6.02      Certificates; Other Information...........................................    25
                       6.03      Notices..................................................................     26
                       6.04      Payment of Obligations....................................................    26
                       6.05      Preservation of Existence, Etc............................................    26
                       6.06      Maintenance of Properties.................................................    27
                       6.07      Maintenance of Insurance..................................................    27
                       6.08      Compliance with Laws......................................................    27
                       6.09      Books and Records.........................................................    27
                       6.10      Inspection Rights.........................................................    27
                       6.11      Compliance with ERISA.....................................................    27
                       6.12      Use of Proceeds...........................................................    27

ARTICLE VII.NEGATIVE COVENANTS.............................................................................    27
                       7.01      Liens.....................................................................    28
                       7.02      Indebtedness.............................................................     29
                       7.03      Mergers, Acquisitions and Dispositions....................................    29
                       7.04      Change in Nature of Business..............................................    29
                       7.05      Transactions with Affiliates..............................................    29
                       7.06      Burdensome Agreements.....................................................    30
                       7.07      Use of Proceeds...........................................................    30
                       7.08      ERISA.....................................................................    30
                       7.09      Fiscal Year...............................................................    30
                       7.10      Issuance of Stock by Subsidiaries.........................................    30
                       7.11      Reinsurance Agreements....................................................    30
                       7.12      Articles of Incorporation and Bylaws......................................    30
                       7.13      Financial Covenants.......................................................    31

ARTICLE VIII.EVENTS OF DEFAULT AND REMEDIES................................................................    31
                       8.01      Events of Default.........................................................    31
                       8.02      Remedies Upon Event of Default............................................    33

ARTICLE IX.MISCELLANEOUS...................................................................................    33
                       9.01      Amendments; Etc...........................................................    33

(ii)

9.02      Notices and Other Communications; Facsimile Copies........................    33
9.03      No Waiver; Cumulative Remedies............................................    34
9.04      Attorney Costs, Expenses and Taxes........................................    34
9.05      Indemnification by the Borrower...........................................    35
9.06      Payments Set Aside........................................................    35
9.07      Successors and Assigns....................................................    35
9.08      Confidentiality...........................................................    37
9.09      Set-Off...................................................................    37
9.10      Interest Rate Limitation..................................................    38
9.11      Counterparts..............................................................    38
9.12      Integration...............................................................    38
9.13      Survival of Representations and Warranties................................    38
9.14      Severability..............................................................    38
9.15      Governing Law.............................................................    38
9.16      Waiver of Right to Trial by Jury..........................................    39
9.17      ENTIRE AGREEMENT..........................................................    39

(iii)

SCHEDULES

5.06 Litigation
5.13 Subsidiaries
7.01 Existing Liens
7.02 Existing Indebtedness
9.02 Lending Office, Addresses for Notices

EXHIBITS

Form of

A Loan Notice
B Note
C Compliance Certificate
D Opinion of Counsel

(iv)

CREDIT AGREEMENT

This CREDIT AGREEMENT ("Agreement") is entered into as of October 27, 2000, by and between MERCURY GENERAL CORPORATION, a California corporation (the "Borrower"), and BANK OF AMERICA, N.A., a national banking association (the "Lender").

The Borrower has requested that the Lender provide a revolving credit facility, and the Lender is willing to do so on the terms and conditions set forth herein.

In consideration of the mutual covenants and agreements herein contained, the parties hereto covenant and agree as follows:

ARTICLE 1.
DEFINITIONS AND ACCOUNTING TERMS

1.01 Defined Terms. As used in this Agreement, the following terms shall have the meanings set forth below:

"Acquisition" means, with respect to any Person, the purchase or other acquisition by such Person, by any means whatsoever (including by devise, bequest, gift, through a dividend or otherwise and whether in a single transaction or in a series of related transactions), of (i) the capital stock of, or other equity securities of, any other Person if, immediately thereafter, such other Person would be either a Subsidiary of such Person or otherwise under the control of such Person, (ii) any business, going concern or division or segment thereof, or (iii) the property of any other Person other than in the ordinary course of business, provided, however that no acquisition of all or substantially all of the assets of such other Person shall be deemed to be in the ordinary course of business.

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

"Affiliate" means, as to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. A Person shall be deemed to be "controlled by" any other Person if such other Person possesses, directly or indirectly, power (a) to vote 5% or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managing general partners; or (b) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise.

"Agreement" means this Credit Agreement.

"Annual Statements" has the meaning set forth in Section 5.05(c).

"Applicable Insurance Code" means, with respect to any Insurance Subsidiary, the insurance code of any jurisdiction where such Insurance Subsidiary is domiciled or is conducting an insurance business, as


in effect from time to time and including any successor code or statute thereto, together with the regulations issued thereunder.

"Applicable Insurance Regulatory Authority" means, with respect to any Insurance Subsidiary, the insurance department or similar Governmental Authority located in the jurisdiction in which such Insurance Subsidiary is domiciled and, to the extent that it has any regulatory authority over such Insurance Subsidiary, in each other jurisdiction in which such Insurance Subsidiary is licensed.

"Applicable Rate" means the following percentages per annum (expressed in basis points):

====================================================
  Commitment      Eurodollar Rate +    Base Rate +
     Fee
====================================================
    12.5                75                  0
====================================================

"Attorney Costs" means and includes all fees and disbursements of any law firm or other external counsel and the allocated cost of internal legal services and all disbursements of internal counsel.

"Audited Financial Statements" means the audited consolidated balance sheet of the Borrower and its Subsidiaries for the fiscal year ended December 31, 1999, and the related consolidated statements of income and cash flows for such fiscal year of the Borrower.

"Base Rate" means for any day a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate plus 1/2 of 1% and (b) the rate of interest in effect for such day as publicly announced from time to time by the Lender as its "prime rate." Such rate is a rate set by the Lender based upon various factors including the Lender's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such rate announced by the Lender shall take effect at the opening of business on the day specified in the public announcement of such change.

"Base Rate Loan" means a Loan which bears interest based on the Base Rate.

"Borrower" has the meaning set forth in the introductory paragraph hereto.

"Business Day" means any day other than a Saturday, Sunday, or other day on which commercial banks are authorized to close under the Laws of, or are in fact closed in, the state where the Lending Office is located and, if such day relates to any Eurodollar Rate Loan, means any such day on which dealings in Dollar deposits are conducted by and between banks in the offshore London interbank market.

"Capital Lease Obligations" means, with respect to any Person, the obligations of such Person with respect to leases which, in accordance with GAAP, are required to be capitalized on the financial statements of such Person.

"Change of Control" means, with respect to the Borrower, an event or series of events by which:

(a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of the Borrower or its

2

Subsidiaries, or any Person acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan), other than George Joseph or Gloria Joseph, becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 20% or more of the voting securities of the Borrower; or

(b) during any period of 12 consecutive months, a majority of the members of the board of directors of the Borrower cease to be composed of individuals (i) who were members of that board on the first day of such period, (ii) whose election or nomination to that board was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or (iii) whose election or nomination to that board was approved by individuals referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board.

"Closing Date" means the first date all the conditions precedent in Section 4.01 are satisfied by the Borrower or waived by the Lender.

"Code" means the Internal Revenue Code of 1986.

"Commitment" means the obligation of the Lender to make Loans to the Borrower in an aggregate principal amount at any one time not to exceed $30,000,000, as such amount may be reduced or adjusted from time to time in accordance with this Agreement.

"Compliance Certificate" means a certificate substantially in the form of Exhibit C.

"Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or undertaking to which such Person is a party or by which it or any of its property is bound.

"Debtor Relief Laws" means the Bankruptcy Code of the United States of America, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States of America or other applicable jurisdictions from time to time in effect affecting the rights of creditors generally.

"Default" means any event that, with the giving of any notice, the passage of time, or both, would be an Event of Default.

"Default Rate" means an interest rate equal to (a) the Base Rate plus (b)

the Applicable Rate, if any, applicable to Base Rate Loans plus (c) 2% per

annum; provided, however, that with respect to a Eurodollar Rate Loan, the Default Rate shall be an interest rate equal to the interest rate (including any Applicable Rate) otherwise applicable to such Loan plus 2% per annum, in each case to the fullest extent permitted by applicable Laws.

"Disposition" means, with respect to any Person, any sale, ceding, assignment, transfer or other disposition by such Person, by any means, of (a) any Operating Entity, or (b) any other property of such Person, provided, however, that the term "Disposition" shall not include any sale, ceding, assignment,

3

transfer or other disposition by a Person that is a corporation (i) to a wholly-owned Subsidiary of that Person or (ii) as a dividend to that Person's shareholders.

"Dollar" and "$" means lawful money of the United States of America.

"EBITDA" means, for any period, Net Income of the Borrower and its Non-Insurance Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP, plus the sum of, without duplication, (i) Interest

Expense, (ii) provision for income taxes of the Borrower and its Non-Insurance Subsidiaries and (iii) depreciation, amortization and other non-cash charges of the Borrower and its Non-Insurance Subsidiaries, each to the extent deducted in determining such Net Income for such period.

"Environmental Laws" means all Laws relating to environmental, health, safety and land use matters applicable to any property.

"ERISA" means the Employee Retirement Income Security Act of 1974 and any regulations issued pursuant thereto.

"ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Borrower within the meaning of Section 414(b) or
(c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code).

"ERISA Event" means (a) a Reportable Event with respect to a Pension Plan;
(b) a withdrawal by the Borrower or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations that is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the Borrower or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Sections 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Borrower or any ERISA Affiliate.

"Eurodollar Base Rate" has the meaning set forth in the definition of Eurodollar Rate.

"Eurodollar Rate" means for any Interest Period with respect to any Eurodollar Rate Loan, a rate per annum determined by the Lender pursuant to the following formula:

Eurodollar Rate = Eurodollar Base Rate


1.00 - Eurodollar Reserve Percentage

Where,

"Eurodollar Base Rate" means, for such Interest Period:

4

(a) the rate per annum equal to the rate determined by the Lender to be the offered rate that appears on the page of the Telerate screen (or any successor) that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or

(b) if the rate referenced in the preceding subsection (a) does not appear on such page or service or such page or service shall cease to be available, the rate per annum equal to the rate determined by the Lender to be the offered rate on such other page or other service that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or

(c) if the rates referenced in the preceding subsections (a) and (b) are not available, the rate per annum determined by the Lender as the rate of interest (rounded upward to the next 1/100th of 1%) at which deposits in Dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of the Eurodollar Rate Loan being made, continued or converted and with a term equivalent to such Interest Period would be offered by the Lender's London Branch to major banks in the offshore Dollar market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period.

"Eurodollar Reserve Percentage" means, for any day during any Interest Period, the reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day applicable to the Lender under regulations issued from time to time by the Board of Governors of the Federal Reserve System for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"). The Eurodollar Rate for each outstanding Eurodollar Rate Loan shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage.

"Eurodollar Rate Loan" means a Loan bearing interest based on the Eurodollar Rate.

"Event of Default" means any of the events or circumstances specified in Article VIII; provided that any requirement expressly set forth therein for the giving of notice, the lapse of time or any other condition has been satisfied.

"Existing Credit Agreement" means that certain Revolving Credit Agreement dated as of October 30, 1998, as amended, modified and/or restated prior to the date hereof, among the Borrower, the lenders party thereto and certain agents, including The Bank of New York.

"Federal Funds Rate" means, for any day, the rate per annum (rounded upwards to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank on the Business Day next succeeding such day; provided that
(a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published

5

on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate charged to the Lender on such day on such transactions as determined by the Lender.

"GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or such other principles as may be approved by a significant segment of the accounting profession, that are applicable to the circumstances as of the date of determination, consistently applied. If at any time any change in GAAP would affect the computation of any financial ratio or requirement set forth in any Loan Document, and either the Borrower or the Lender shall so request, the Lender and the Borrower shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in GAAP (subject to the approval of the Lender), provided that, until so amended, (a) such ratio or requirement shall continue to be computed in accordance with GAAP prior to such change therein and (b) the Borrower shall provide to the Lender financial statements and other documents required under this Agreement or as reasonably requested hereunder setting forth a reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in GAAP.

"Governmental Authority" means any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, administrative tribunal, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government, including any Applicable Insurance Regulatory Authority, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing.

"Guaranty Obligation" means, as to any Person, any (a) any obligation, contingent or otherwise, of such Person guarantying or having the economic effect of guarantying any Indebtedness or other obligation payable or performable by another Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of such Person, direct or indirect, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation, (ii) to purchase or lease property, securities or services for the purpose of assuring the obligee in respect of such Indebtedness or other obligation of the payment or performance of such Indebtedness or other obligation, (iii) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation, or (iv) entered into for the purpose of assuring in any other manner the obligees in respect of such Indebtedness or other obligation of the payment or performance thereof or to protect such obligees against loss in respect thereof (in whole or in part), or (b) any Lien on any assets of such Person securing any Indebtedness or other obligation of any other Person, whether or not such Indebtedness or other obligation is assumed by such Person; provided, however, that the term "Guaranty Obligation" shall not include (x) amounts potentially owed on or with respect to insurance policies issued or sold in the ordinary course of business, (y) premiums for any such policies, to the extent attributable for a period after a particular date upon which Guaranty Obligations are being determined, or (z) endorsements of instruments for deposit or collection in the ordinary course of business. The amount of any Guaranty Obligation shall be deemed to be an amount equal to the stated or determinable amount of the related primary obligation, or portion thereof, in respect of which such Guaranty Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by the guarantying Person in good faith.

"Indebtedness" means, as to any Person, at a particular time, all items which constitute, without duplication, (a) indebtedness for borrowed money or the deferred purchase price of property (other than trade

6

payables and accrued expenses incurred in the ordinary course of business and not more than 90 days past due), (b) indebtedness evidenced by notes, bonds, debentures or similar instruments, (c) obligations with respect to any conditional sale or title retention agreement, (d) indebtedness arising under acceptance facilities and the amount available to be drawn under all letters of credit issued for the account of such Person and, without duplication, all drafts drawn thereunder to the extent such Person shall not have reimbursed the issuer in respect of the issuer's payment of such drafts, (e) all liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof (other than carriers', warehousemen's, mechanics', repairmen's or other like non-consensual statutory Liens arising in the ordinary course of business), (f) Capital Lease Obligations and (g) Guaranty Obligations; provided that, for purposes of this definition, (i) "Indebtedness" shall not include obligations in respect of interest rate caps, collars, swaps or other similar agreements, and (ii) Indebtedness under clauses (c) or (e) shall be taken at the lesser of the principal amount of such Indebtedness and the value of the property subject to the Lien referred to therein.

"Indemnified Liabilities" has the meaning set forth in Section 9.05.

"Indemnitees" has the meaning set forth in Section 9.05.

"Insurance Subsidiary" means each Subsidiary of the Borrower set forth on Schedule 5.13 under the heading "Insurance Subsidiaries."

"Interest Coverage Ratio" means, at any date of determination, the ratio of
(i) the sum of (x) EBITDA of the Borrower and its Non-Insurance Subsidiaries for the immediately preceding four fiscal quarters of the Borrower plus (y) the

greater of (1) 10% of Statutory Surplus of the Insurance Subsidiaries at such date of determination and (2) Statutory Net Income of the Insurance Subsidiaries for the immediately preceding four fiscal quarters of the Borrower to (ii) Interest Expense for the immediately preceding four fiscal quarters of the Borrower.

"Interest Expense" means, for any period, the sum of, without duplication, all interest and commitment fees (adjusted to give effect to all interest rate swap, cap or other interest rate hedging agreements and fees and expenses paid in connection with the same, all as determined in accordance with GAAP), paid or accrued in respect of all Indebtedness of the Borrower and its Subsidiaries, determined on a consolidated basis in accordance with GAAP during such period.

"Interest Payment Date" means, (a) as to any Loan other than a Base Rate Loan, the last day of each Interest Period applicable to such Loan; provided, however, that if any Interest Period for a Eurodollar Rate Loan exceeds three months, the respective dates that fall every three months after the beginning of such Interest Period shall also be Interest Payment Dates; and (b) as to any Base Rate Loan, the last Business Day of each March, June, September and December and the Maturity Date.

"Interest Period" means as to each Eurodollar Rate Loan, the period commencing on the date such Eurodollar Rate Loan is disbursed or converted to or continued as a Eurodollar Rate Loan and ending on the date one, two, three or six months thereafter, as selected by the Borrower in its Loan Notice; provided that:

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

7

(ii) any Interest Period that begins on the last Business Day of a 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 Business Day of the calendar month at the end of such Interest Period; and

(iii) no Interest Period shall extend beyond the scheduled Maturity Date.

"IRS" means the United States Internal Revenue Service.

"Laws" means, collectively, all applicable international, foreign, Federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of any Governmental Authority.

"Lending Office" means the office or offices of the Lender described as such on Schedule 9.02, or such other office or offices as the Lender may from time to time notify the Borrower.

"Leverage Ratio" means, as of any date, the ratio of (a) consolidated Indebtedness of the Borrower and its Subsidiaries on such date, to (b) the sum of (i) consolidated Indebtedness of the Borrower and its Subsidiaries on such date, plus (ii) Adjusted Net Worth on such date.

"Lien" means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge, preference, priority or other security interest or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable Laws of any jurisdiction), including the interest of a purchaser of accounts receivable.

"Loan" has the meaning set forth in Section 2.01.

"Loan Documents" means this Agreement, any Note, each Loan Notice and each Compliance Certificate.

"Loan Notice" means a notice of (a) a borrowing of a Loan, (b) a conversion of a Loan from one Type to the other, or (c) a continuation of a Loan as the same Type, pursuant to Section 2.02(a), which, if in writing, shall be substantially in the form of Exhibit A.

"Material Adverse Effect" means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, condition (financial or otherwise) or prospects of the Borrower or the Borrower and its Subsidiaries taken as a whole; (b) a material impairment of the ability of the Borrower to perform its obligations under any Loan Document to which it is a party; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Borrower of any Loan Document to which it is a party.

8

"Maturity Date" means (a) October 26, 2001, or such later date to which the tenor of the Commitment may be extended in accordance with the terms hereof, or (b) such earlier date upon which the Commitment may be terminated in accordance with the terms hereof.

"Multiemployer Plan" means any employee benefit plan of the type described in Section 4001(a)(3) of ERISA, to which the Borrower or any ERISA Affiliate makes or is obligated to make contributions, or during the preceding three calendar years, has made or been obligated to make contributions.

"NAIC" means the National Association of Insurance Commissions, or any association or Governmental Authority successor to the functions thereof.

"Net Income" means, for any period, for the Borrower and its Subsidiaries on a consolidated basis, the net income of the Borrower and its Subsidiaries from continuing operations after extraordinary items (excluding gains or losses from Dispositions of assets) for that period.

"Non-Insurance Subsidiary" means each Subsidiary of the Borrower set forth on Schedule 4.1 under the heading "Non-Insurance Subsidiaries."

"Note" means a promissory note made by the Borrower in favor of the Lender evidencing Loans made by the Lender, substantially in the form of Exhibit B.

"Obligations" means all advances to, and debts, liabilities, obligations, covenants and duties of, the Borrower arising under any Loan Document, whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become due, now existing or hereafter arising and including interest that accrues after the commencement by or against the Borrower of any proceeding under any Debtor Relief Laws naming the Borrower as the debtor in such proceeding.

"Operating Entity" means (a) any Person, (b) any business or operating unit of any Person that is, or could be, operated separately and apart from the other businesses and operations of such Person, or (c) any other line of business or business segment.

"Organization Documents" means, (a) with respect to any corporation, the certificate or articles of incorporation and the bylaws; (b) with respect to any limited liability company, the articles of formation and operating agreement; and (c) with respect to any partnership, joint venture, trust or other form of business entity, the partnership, joint venture or other applicable agreement of formation and any agreement, instrument, filing or notice with respect thereto filed in connection with its formation with the secretary of state or other department in the state of its formation, in each case as amended from time to time.

"Outstanding Amount" means, with respect to Loans on any date, the aggregate outstanding principal amount thereof after giving effect to any borrowings and prepayments or repayments of Loans occurring on such date.

"PBGC" means the Pension Benefit Guaranty Corporation.

"Pension Plan" means any "employee pension benefit plan" (as such term is defined in Section 3(2) of ERISA), other than a Multiemployer Plan, that is subject to Title IV of ERISA and is sponsored or maintained by the Borrower or any ERISA Affiliate or to which the Borrower or any ERISA Affiliate

9

contributes or has an obligation to contribute, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding five plan years.

"Person" means any individual, trustee, corporation, general partnership, limited partnership, limited liability company, joint stock company, trust, unincorporated organization, bank, business association, firm, joint venture or Governmental Authority.

"Plan" means any "employee benefit plan" (as such term is defined in
Section 3(3) of ERISA) established by the Borrower or any ERISA Affiliate.

"Reinsurance Agreement" means any agreement, contract, treaty, certificate or other arrangement under which any Insurance Subsidiary agrees to transfer or cede to another insurer all or part of the liabilities assumed, or the assets held, by such Insurance Subsidiary under one or more policies of insurance (including, without limitation, any agreement, contract, treaty, certificate or other arrangement that is treated as such by any Applicable Insurance Regulatory Authority of such Insurance Subsidiary).

"Reportable Event" means any of the events set forth in Section 4043(c) of ERISA, other than events for which the 30 day notice period has been waived.

"Reporting Insurance Subsidiary" means on any date, each Insurance Subsidiary which, as of the end of the fiscal quarter immediately preceding such date, (a) had a Statutory Surplus of at least 5% of consolidated Statutory Surplus of the Insurance Subsidiaries at the end of such fiscal quarter or (b) accounted for at least 5% of consolidated net premiums written by the Insurance Subsidiaries for the four fiscal quarters immediately preceding such date.

"Responsible Officer" means the chairman of the board and chief executive officer, president, chief financial officer, treasurer, assistant treasurer or secretary of the Borrower. Any document or certificate hereunder that is signed by a Responsible Officer of the Borrower shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of the Borrower and such Responsible Officer shall be conclusively presumed to have acted on behalf of the Borrower.

"Restricted Payment" means any dividend or other distribution (whether in cash, securities or other property) with respect to any capital stock of the Borrower or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such capital stock or of any option, warrant or other right to acquire any such capital stock.

"SAP" means, with respect to each Insurance Subsidiary, statutory accounting principles in effect from time to time prescribed or permitted by the Applicable Insurance Regulatory Authority in the preparation of the financial statements of such Subsidiary.

"Statutory Net Income" means, with respect to the Insurance Subsidiaries for any period, the consolidated statutory net income of the Insurance Subsidiaries for such period computed in accordance with SAP and consistent with that reported on line 16, page 4, column 1 of the Summary of Operations Statement in the Annual Statement.

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"Statutory Capital and Surplus" means, at any date, the combined statutory capital and surplus of the Insurance Subsidiaries determined as of such date in accordance with SAP.

"Statutory Surplus" means, with respect to the Insurance Subsidiaries at any date of determination, the consolidated statutory surplus of the Insurance Subsidiaries on such date computed in accordance with SAP and consistent with that reported on line 27, page 3, column 1 of the Liabilities, Surplus and Other Funds Statement in the Annual Statement.

"Subsidiary" of a Person means a corporation, partnership, joint venture, limited liability company or other business entity of which a majority of the shares of securities or other interests having ordinary voting power for the election of directors or other governing body (other than securities or interests having such power only by reason of the happening of a contingency) are at the time beneficially owned, or the management of which is otherwise controlled, directly, or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise specified, all references herein to a "Subsidiary" or to "Subsidiaries" shall refer to a Subsidiary or Subsidiaries of the Borrower.

"Threshold Amount" means $5,000,000.

"Type" means, with respect to a Loan, its character as a Base Rate Loan or a Eurodollar Rate Loan.

"Unfunded Pension Liability" means the excess of a Pension Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Pension Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year.

1.02 Other Interpretive Provisions.

(a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms.

(b) (i) The words "herein" and "hereunder" and words of similar import when used in any Loan Document shall refer to such Loan Document as a whole and not to any particular provision thereof.

(ii) Unless otherwise specified herein, Article, Section, Exhibit and Schedule references are to this Agreement.

(iii) The term "including" is by way of example and not limitation.

(iv) The term "documents" includes any and all instruments, documents, agreements, certificates, notices, reports, financial statements and other writings, however evidenced.

(c) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including;" the words "to" and "until" each mean "to but excluding;" and the word "through" means "to and including."

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(d) Section headings herein and the other Loan Documents are included for convenience of reference only and shall not affect the interpretation of this Agreement or any other Loan Document.

1.03 Accounting Terms. All accounting terms not specifically or completely defined herein shall be construed in conformity with, and all financial data required to be submitted pursuant to this Agreement shall be prepared in conformity with, (a) GAAP applied on a consistent basis, as in effect from time to time, applied in a manner consistent with that used in preparing the Audited Financial Statements or (b) to the extent such terms apply solely to one or more Insurance Subsidiaries, SAP applied on a consistent basis, as in effect from time to time, applied in a manner consistent with that used in preparation of the Annual Statements, except as otherwise specifically prescribed herein.

1.04 Rounding. Any financial ratios required to be maintained by the Borrower pursuant to this Agreement shall be calculated by dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such ratio is expressed in this Agreement and rounding the result up or down to the nearest number (with a round-up if there is no nearest number).

1.05 References to Agreements and Laws. Unless otherwise expressly provided herein, (a) references to agreements (including the Loan Documents) and other contractual instruments shall be deemed to include all subsequent amendments, restatements, extensions, supplements and other modifications thereto, but only to the extent that such amendments, restatements, extensions, supplements and other modifications are not prohibited by any Loan Document; and
(b) references to any Law shall include all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting such Law.

ARTICLE II.
THE COMMITMENT AND LOAN

2.01 Loans. Subject to the terms and conditions set forth herein, the Lender agrees to make loans (each such loan, a "Loan") to the Borrower from time to time on any Business Day during the period from the Closing Date to the Maturity Date, in an aggregate amount not to exceed at any time outstanding the amount of the Commitment. Within the limits of the Commitment, and subject to the other terms and conditions hereof, the Borrower may borrow under this Section 2.01, prepay under Section 2.03, and reborrow under this Section
2.01. A Loan may be a Base Rate Loan or a Eurodollar Rate Loan, as further provided herein.

2.02 Borrowings, Conversions and Continuations of Loans.

(a) Each borrowing, each conversion of a Loan from one Type to the other, and each continuation of a Loan as the same Type shall be made upon the Borrower's irrevocable notice to the Lender, which may be given by telephone. Each such notice must be received by the Lender not later than noon, Dallas time (i) two Business Days prior to the requested date of any borrowing of, conversion to or continuation of a Eurodollar Rate Loan or of any conversion of a Eurodollar Rate Loan to a Base Rate Loan, and (ii) on the requested date of any borrowing of a Base Rate Loan.

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Notwithstanding anything to the contrary contained herein, but subject to the provisions of Section 9.02(d), any such telephonic notice may be given by a Responsible Officer of the Borrower or by an individual who has been authorized in writing to do so by a Responsible Officer of the Borrower. Each such telephonic notice must be confirmed promptly by delivery to the Lender of a written Loan Notice, appropriately completed and signed by a Responsible Officer of the Borrower. Each borrowing of, conversion to or continuation of a Eurodollar Rate Loan shall be in a principal amount of $250,000 or a whole multiple of $50,000 in excess thereof. Each borrowing of or conversion to a Base Rate Loan shall be in a principal amount of $100,000 or a whole multiple of $50,000 in excess thereof. Each Loan Notice (whether telephonic or written) shall specify (i) whether the Borrower is requesting a borrowing, a conversion of a Loan from one Type to the other, or a continuation of a Loan as the same Type, (ii) the requested date of the borrowing, conversion or continuation, as the case may be (which shall be a Business Day), (iii) the principal amount of the Loan to be borrowed, converted or continued, (iv) the Type of Loan to be borrowed or to which an existing Loan is to be converted, and (v) if applicable, the duration of the Interest Period with respect thereto. If the Borrower fails to specify a Type of Loan in a Loan Notice or if the Borrower fails to give a timely notice requesting a conversion or continuation, then the applicable Loan shall be made or continued as, or converted to, a Base Rate Loan. Any such automatic conversion to a Base Rate Loan shall be effective as of the last day of the Interest Period then in effect with respect to the applicable Eurodollar Rate Loan. If the Borrower requests a borrowing of, conversion to, or continuation of a Eurodollar Rate Loan in any such Loan Notice, but fails to specify an Interest Period, it will be deemed to have specified an Interest Period of one month.

(b) Upon satisfaction of the applicable conditions set forth in
Section 4.02 (and, if a borrowing is the initial Loan, Section 4.01), the Lender shall make the proceeds of each Loan available to the Borrower either by (i) crediting the account of the Borrower on the books of the Lender with the amount of such proceeds or (ii) wire transfer of such proceeds, in each case in accordance with instructions provided to the Lender by the Borrower.

(c) Except as otherwise provided herein, a Eurodollar Rate Loan may be continued or converted only on the last day of the Interest Period for such Eurodollar Rate Loan. During the existence of a Default or Event of Default, no Loan may be requested as, converted to or continued as Eurodollar Rate Loans without the consent of the Lender, and the Lender may demand that any or all of the then outstanding Eurodollar Rate Loans be converted immediately to Base Rate Loans.

(d) The Lender shall promptly notify the Borrower of the interest rate applicable to any Eurodollar Rate Loan upon determination of such interest rate. The determination of the Eurodollar Rate by the Lender shall be conclusive in the absence of manifest error. The Lender shall notify the Borrower of any change in the Lender's prime rate used in determining the Base Rate promptly following the public announcement of such change.

(e) After giving effect to all borrowings, all conversions of Loans from one Type to the other, and all continuations of Loans as the same Type, there shall not be more than five Interest Periods in effect.

2.03 Prepayments.

(a) The Borrower may, upon notice to the Lender, at any time or from time to time voluntarily prepay any Loan in whole or in part without premium or penalty; provided that (i) such

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notice must be received by the Lender not later than noon, Dallas time, (A) two Business Days prior to any date of prepayment of a Eurodollar Rate Loan, and (B) on the date of prepayment of a Base Rate Loan; and (ii) any prepayment of any Loan shall be in a principal amount of $3,000,000 or a whole multiple of $1,000,000 in excess thereof. Each such notice shall specify the date and amount of such prepayment and the Type(s) of Loan(s) to be prepaid. If such notice is given by the Borrower, the Borrower shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein. Any prepayment of a Eurodollar Rate Loan shall be accompanied by all accrued interest thereon, together with any additional amounts required pursuant to Section 3.05.

(b) If for any reason the Outstanding Amount of all Loans at any time exceeds the Commitment then in effect, the Borrower shall immediately prepay Loans in an aggregate amount equal to such excess.

2.04 Reduction or Termination of Commitment. The Borrower may, upon notice to the Lender, terminate the Commitment, or permanently reduce the Commitment to an amount not less than the then Outstanding Amount of all Loans; provided that (i) any such notice shall be received by the Lender not later than noon, Dallas time, five Business Days prior to the date of termination or reduction, and (ii) any such partial reduction shall be in an aggregate amount of $3,000,000 or any whole multiple of $1,000,000 in excess thereof. Once reduced in accordance with this Section, the Commitment may not be increased. All commitment fees accrued until the effective date of any termination of the Commitment shall be paid on the effective date of such termination.

2.05 Repayment of Loans. The Borrower shall repay to the Lender on the Maturity Date the aggregate principal amount of Loans outstanding on such date.

2.06 Interest.

(a) Subject to the provisions of subsection (b) below, (i) each Eurodollar Rate Loan shall bear interest on the outstanding principal amount thereof for each Interest Period at a rate per annum equal to the Eurodollar Rate for such Interest Period plus the Applicable Rate; and (ii) each Base Rate Loan shall bear interest on the outstanding principal amount thereof from the applicable borrowing date at a rate per annum equal to the Base Rate plus the Applicable Rate.

(b) While any Event of Default exists or after acceleration, the Borrower shall pay interest on the principal amount of all outstanding Obligations (including past due interest) at a fluctuating rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable law. Accrued and unpaid interest on past due amounts (including interest on past due interest) shall be due and payable upon demand.

(c) Interest on each Loan shall be due and payable in arrears on each Interest Payment Date applicable thereto and at such other times as may be specified herein. Interest hereunder shall be due and payable in accordance with the terms hereof before and after judgment, and before and after the commencement of any proceeding under any Debtor Relief Law.

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2.07 Fees. In addition to any other fees payable pursuant to this Agreement:

(a) Commitment Fee. The Borrower shall pay to the Lender a commitment fee equal to the Applicable Rate times the actual daily amount by which the Commitment exceeds the Outstanding Amount of Loans. The commitment fee shall accrue at all times from the Closing Date until the Maturity Date and shall be due and payable quarterly in arrears on the last Business Day of each March, June, September and December, commencing with the first such date to occur after the Closing Date, and on the Maturity Date. The commitment fee shall be calculated quarterly in arrears, and if there is any change in the Applicable Rate during any quarter, the actual daily amount shall be computed and multiplied by the Applicable Rate separately for each period during such quarter that such Applicable Rate was in effect. The commitment fee shall accrue at all times, including at any time during which one or more of the conditions in Article IV is not met.

(b) Arrangement Fee. On the Closing Date, the Borrower shall pay a non-refundable and fully-earned arrangement fee in the amount of $35,000 to Lender.

2.08 Computation of Interest and Fees. Computation of interest on Base Rate Loans shall be calculated on the basis of a year of 365 or 366 days, as the case may be, and the actual number of days elapsed. Computation of all other types of interest and all fees shall be calculated on the basis of a year of 360 days and the actual number of days elapsed which results in a higher yield to the Lender than a method based on a year of 365 or 366 days. Interest shall accrue on each Loan for the day on which the Loan is made, and shall not accrue on a Loan, or any portion thereof, for the day on which the Loan or such portion is paid, provided that any Loan that is repaid on the same day on which it is made shall bear interest for one day.

2.09 Evidence of Debt. The Loans made by the Lender shall be evidenced by one or more accounts or records maintained by the Lender in the ordinary course of business. The accounts or records maintained by the Lender shall be conclusive absent manifest error of the amount of the Loans made by the Lender to the Borrower and the interest and payments thereon. Any failure so to record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Borrower hereunder to pay any amount owing with respect to the Loans. Upon the request of the Lender, the Loans may be evidenced by a Note, in addition to such accounts or records. The Lender may attach schedules to its Note and endorse thereon the date, Type (if applicable), amount and maturity of the Loans and payments with respect thereto.

2.10 Payments Generally.

(a) All payments to be made by the Borrower shall be made without condition or deduction for any counterclaim, defense, recoupment or setoff. Except as otherwise expressly provided herein, all payments by the Borrower hereunder shall be made to the Lender at the applicable Lending Office in Dollars and in immediately available funds not later than 2:00 p.m., Dallas time, on the date specified herein. All payments received by the Lender after 2:00 p.m., Dallas time, shall be deemed received on the next succeeding Business Day and any applicable interest or fee shall continue to accrue.

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(b) Subject to the definition of "Interest Period," if any payment to be made by the Borrower shall come due on a day other than a Business Day, payment shall be made on the next following Business Day, and such extension of time shall be reflected in computing interest or fees, as the case may be.

(c) Nothing herein shall be deemed to obligate the Lender to obtain the funds for any Loan in any particular place or manner or to constitute a representation by the Lender that it has obtained or will obtain the funds for any Loan in any particular place or manner.

2.11 Extension of Maturity Date.

(a) Not earlier than 60 days prior to, nor later than 30 days prior to, the existing Maturity Date, the Borrower may, upon notice to the Lender, request an extension of the existing Maturity Date. Within 15 days of delivery of such notice (but not earlier than 30 days prior to the existing Maturity Date), the Lender shall notify the Borrower whether or not it consents to such extension (which consent may be given or withheld in the Lender's sole and absolute discretion). If the Lender fails to respond within the above time period, it shall be deemed not to have consented to such extension.

(b) If the Lender consents to such extension, the Maturity Date shall be extended to a date 364 days from the existing Maturity Date, effective as of the existing Maturity Date (the "Extension Effective Date"). As a condition precedent to such extension, the Borrower shall deliver to the Lender a certificate dated as of the Extension Effective Date signed by a Responsible Office of the Borrower (i) certifying and attaching the resolutions adopted by the Borrower approving or consenting to such extension and, (ii) certifying that, before and after giving effect to such extension, the representations and warranties contained in Article V are true and correct on and as of the Extension Effective Date and no Default or Event of Default exists.

ARTICLE III.
TAXES, YIELD PROTECTION AND ILLEGALITY

3.01 Taxes.

(a) Any and all payments by the Borrower to or for the account of the Lender under any Loan Document shall be made free and clear of and without deduction for any and all present or future taxes, duties, levies, imposts, deductions, assessments, fees, withholdings or similar charges, and all liabilities with respect thereto, excluding taxes imposed on or measured by the Lender's net income, and franchise taxes imposed on it (in lieu of net income taxes), by the jurisdiction (or any political subdivision thereof) under the Laws of which the Lender is organized or maintains a lending office (all such non-excluded taxes, duties, levies, imposts, deductions, assessments, fees, withholdings or similar charges, and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by any Laws to deduct any Taxes from or in respect of any sum payable under any Loan Document to the Lender, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section), the Lender receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with

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applicable Laws, and (iv) within 30 days after the date of such payment, the Borrower shall furnish to the Lender the original or a certified copy of a receipt evidencing payment thereof.

(b) In addition, the Borrower agrees to pay any and all present or future stamp, court or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made under any Loan Document or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, any Loan Document (hereinafter referred to as "Other Taxes").

(c) If the Borrower shall be required to deduct or pay any Taxes or Other Taxes from or in respect of any sum payable under any Loan Document to the Lender, the Borrower shall also pay to the Lender, at the time interest is paid, such additional amount that the Lender specifies as necessary to preserve the after-tax yield (after factoring in all taxes, including taxes imposed on or measured by net income) the Lender would have received if such Taxes or Other Taxes had not been imposed.

(d) The Borrower agrees to indemnify the Lender for (i) the full amount of Taxes and Other Taxes (including any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section) paid by the Lender, (ii) amounts payable under Section 3.01(c) and (iii) any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, in each case whether or not such Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. Payment under this subsection (d) shall be made within 30 days after the date the Lender makes a demand therefor.

3.02 Illegality. If the Lender determines that any Law has made it unlawful, or that any Governmental Authority has asserted that it is unlawful, for the Lender or its Lending Office to make, maintain or fund Eurodollar Rate Loans, or materially restricts the authority of the Lender to purchase or sell, or to take deposits of, Dollars in the applicable offshore Dollar market, or to determine or charge interest rates based upon the Eurodollar Rate, then, on notice thereof by the Lender to the Borrower, any obligation of the Lender to make or continue Eurodollar Rate Loans or to convert Base Rate Loans to Eurodollar Rate Loans shall be suspended until the Lender notifies the Borrower that the circumstances giving rise to such determination no longer exist. Upon receipt of such notice, the Borrower shall, upon demand from the Lender, prepay or, if applicable, convert all Eurodollar Rate Loans to Base Rate Loans, either on the last day of the Interest Period thereof, if the Lender may lawfully continue to maintain such Eurodollar Rate Loans to such day, or immediately, if the Lender may not lawfully continue to maintain such Eurodollar Rate Loans. Upon any such prepayment or conversion, the Borrower shall also pay interest on the amount so prepaid or converted. The Lender agrees to designate a different Lending Office if such designation will avoid the need for such notice and will not, in the good faith judgment of the Lender, otherwise be materially disadvantageous to the Lender.

3.03 Inability to Determine Eurodollar Rate. If the Lender determines in connection with any request for a Eurodollar Rate Loan or a conversion to or continuation thereof that (a) Dollar deposits are not being offered to banks in the applicable offshore Dollar market for the applicable amount and Interest Period of such Eurodollar Rate Loan, (b) adequate and reasonable means do not exist for determining the Eurodollar Base Rate for such Eurodollar Rate Loan, or (c) the Eurodollar Base Rate for such Eurodollar Rate Loan does not

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adequately and fairly reflect the cost to the Lender of funding such Eurodollar Rate Loan, the Lender will promptly notify the Borrower. Thereafter, the obligation of the Lender to make or maintain Eurodollar Rate Loans shall be suspended until the Lender revokes such notice. Upon receipt of such notice, the Borrower may revoke any pending request for a borrowing, conversion or continuation of a Eurodollar Rate Loan or, failing that, will be deemed to have converted such request into a request for a borrowing of a Base Rate Loan in the amount specified therein.

3.04 Increased Cost and Reduced Return; Capital Adequacy.

(a) If the Lender determines that as a result of the introduction of or any change in or in the interpretation of any Law, or the Lender's compliance therewith, there shall be any increase in the cost to the Lender of agreeing to make or making, funding or maintaining Eurodollar Rate Loans, or a reduction in the amount received or receivable by the Lender in connection with any of the foregoing (excluding for purposes of this subsection (a) any such increased costs or reduction in amount resulting from (i) Taxes or Other Taxes (as to which Section 3.01 shall govern), (ii) changes in the basis of taxation of overall net income or overall gross income by the United States or any foreign jurisdiction or any political subdivision of either thereof under the Laws of which the Lender is organized or has its Lending Office, and (iii) reserve requirements utilized in the determination of the Eurodollar Rate), then from time to time upon demand of the Lender, the Borrower shall pay to the Lender such additional amounts as will compensate the Lender for such increased cost or reduction.

(b) If the Lender determines that the introduction of any Law regarding capital adequacy or any change therein or in the interpretation thereof, or compliance by the Lender (or its Lending Office) therewith, has the effect of reducing the rate of return on the capital of the Lender or any corporation controlling the Lender as a consequence of the Lender's obligations hereunder (taking into consideration its policies with respect to capital adequacy and the Lender's desired return on capital), then from time to time upon demand of the Lender, the Borrower shall pay to the Lender such additional amounts as will compensate the Lender for such reduction.

3.05 Funding Losses. Upon demand of the Lender from time to time, the Borrower shall promptly compensate the Lender for and hold the Lender harmless from any loss, cost or expense incurred by it as a result of:

(a) any continuation, conversion, payment or prepayment of any Loan other than a Base Rate Loan on a day other than the last day of the Interest Period for such Loan (whether voluntary, mandatory, automatic, by reason of acceleration, or otherwise); or

(b) any failure by the Borrower (for a reason other than the failure of the Lender to make a Loan) to prepay, borrow, continue or convert any Loan other than a Base Rate Loan on the date or in the amount notified by the Borrower, including any loss of anticipated profits and any loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain such Loan or from fees payable to terminate the deposits from which such funds were obtained. The Borrower shall also pay any customary administrative fees charged by the Lender in connection with the foregoing.

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For purposes of calculating amounts payable by the Borrower to the Lender under this Section 3.05, the Lender shall be deemed to have funded each Eurodollar Rate Loan at the Eurodollar Base Rate used in determining the Eurodollar Rate for such Loan by a matching deposit or other borrowing in the offshore London interbank market for a comparable amount and for a comparable period, whether or not such Eurodollar Rate Loan was in fact so funded.

3.06 Requests for Compensation. A certificate of the Lender claiming compensation under this Article III and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of clearly demonstrable error. In determining such amount, the Lender may use any reasonable averaging and attribution methods.

3.07 Survival. All of the Borrower's obligations under this Article III shall survive termination of the Commitment and payment in full of all the other Obligations.

ARTICLE IV.
CONDITIONS PRECEDENT TO LOANS

4.01 Conditions of Initial Loan. The obligation of the Lender to make its initial Loan hereunder is subject to satisfaction of the following conditions precedent:

(a) The Lender's receipt of the following, each of which shall be originals or facsimiles (followed promptly by originals) unless otherwise specified, each properly executed by a Responsible Officer of the Borrower, each dated the Closing Date (or, in the case of certificates of governmental officials, a recent date before the Closing Date) and each in form and substance satisfactory to the Lender and its legal counsel:

(i) executed counterparts of this Agreement, sufficient in number for distribution to the Lender and the Borrower;

(ii) if requested by the Lender, a Note executed by the Borrower in favor of the Lender, in a principal amount equal to the amount of the Commitment;

(iii) such certificates of resolutions or other action, incumbency certificates and/or other certificates of Responsible Officers of the Borrower as the Lender may require to establish the identities of and verify the authority and capacity of each Responsible Officer thereof authorized to act as a Responsible Officer in connection with this Agreement and the other Loan Documents to which the Borrower is a party;

(iv) such evidence as the Lender may reasonably require to verify that the Borrower is duly organized or formed, validly existing, in good standing and qualified to engage in business in each jurisdiction in which it is required to be qualified to engage in business, including certified copies of the Borrower's Organization Documents, certificates of good standing and/or qualification to engage in business;

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(v) a certificate signed by a Responsible Officer of the Borrower certifying (A) that the conditions specified in Sections 4.02(a) and (b) have been satisfied and (B) that there has been no event or circumstance since the date of the Audited Financial Statements which has or could be reasonably expected to have a Material Adverse Effect;

(vi) an opinion of counsel to the Borrower substantially in the form of Exhibit D;

(vii) evidence that the Existing Credit Agreement has been or concurrently with the initial Loan will be terminated and all Indebtedness outstanding thereunder has been or concurrently with the initial Loan will be repaid in full; and

(viii) such other assurances, certificates, documents, consents or opinions as the Lender reasonably may require.

(b) Any fees required to be paid on or before the Closing Date shall have been paid.

(c) The Borrower shall have paid all Attorney Costs of the Lender to the extent invoiced prior to or on the Closing Date, plus such additional amounts of Attorney Costs as shall constitute its reasonable estimate of Attorney Costs incurred or to be incurred by it through the closing proceedings (provided that such estimate shall not thereafter preclude a final settling of accounts between the Borrower and the Lender).

4.02 Conditions to all Loans. The obligation of the Lender to honor any Loan Notice (other than a Loan Notice requesting only a conversion of a Loan to the other Type, or a continuation of a Loan as the same Type, but subject to Section 2.2(c)) is subject to the following conditions precedent:

(a) The representations and warranties of the Borrower contained in Article V, or which are contained in any document furnished at any time under or in connection herewith or therewith, shall be true and correct on and as of the date of such Loan, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they shall be true and correct as of such earlier date.

(b) No Default or Event of Default shall exist, or would result from such proposed Loan.

(c) The Lender shall have received a Loan Notice in accordance with the requirements hereof.

(d) The Lender shall have received, in form and substance satisfactory to it, such other assurances, certificates, documents or consents related to the foregoing as the Lender reasonably may require.

Each Loan Notice (other than a Loan Notice requesting only a conversion of a Loan to the other Type or a continuation of a Loan as the same Type) submitted by the Borrower shall be deemed to be a representation and warranty that the conditions specified in Sections 4.02(a) and (b) have been satisfied on and as of the date of the applicable Loan.

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ARTICLE V.
REPRESENTATIONS AND WARRANTIES

The Borrower represents and warrants to the Lender that:

5.01 Existence, Qualification and Power; Compliance with Laws. Each of the Borrower and its Subsidiaries (a) is an entity duly organized or formed, validly existing and in good standing under the Laws of the jurisdiction of its incorporation or organization, (b) has all requisite power and authority and all governmental licenses, authorizations, consents and approvals to own its assets, carry on its business and, in the case of the Borrower, to execute, deliver, and perform its obligations under the Loan Documents, (c) is duly qualified and is licensed and in good standing under the Laws of each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification or license, and (d) is in compliance with all Laws, except in each case referred to in clause (c) or this clause (d), to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect.

5.02 Authorization; No Contravention. The execution, delivery and performance by the Borrower of each Loan Document have been duly authorized by all necessary corporate or other organizational action, and do not and will not (a) contravene the terms of any of the Borrower's Organization Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, any Contractual Obligation to which it is a party or any order, injunction, writ or decree of any Governmental Authority to which it or its property is subject; or (c) violate any Law, including any Applicable Insurance Code.

5.03 Governmental Authorization. Except for information filings required to be made in the ordinary course of business which are not a condition to the validity or enforceability of the Loan Documents against the Borrower or the Borrower's performance under the Loan Documents, no approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority is necessary or required in connection with the execution, delivery or performance by, or enforcement against, the Borrower of this Agreement or any other Loan Document.

5.04 Binding Effect. This Agreement has been, and each other Loan Document, when delivered hereunder, will have been duly executed and delivered by the Borrower. This Agreement constitutes, and each other Loan Document when so delivered will constitute, a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, except as such enforceability may be limited by applicable Debtor Relief Laws and by general principles of equity, regardless of whether enforcement is sought in an action at law or in equity, and the discretion of the court before which any action or proceeding therefor may be brought.

5.05 Financial Statements; No Material Adverse Effect.

(a) The Audited Financial Statements heretofore delivered to the Lender (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; (ii) fairly present the financial condition of the

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Borrower and its Subsidiaries as of the date thereof and their results of operations for the period covered thereby in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; and (iii) show all material indebtedness and other liabilities, direct or contingent, of the Borrower and its Subsidiaries as of the date thereof, including liabilities for taxes, material commitments and Indebtedness in accordance with GAAP consistently applied throughout the period covered thereby.

(b) Since the date of the Audited Financial Statements, there has been no event or circumstance that has or could reasonably be expected to have a Material Adverse Effect.

(c) The consolidated Annual Statements dated as of December 31, 1999 of each of Mercury Casualty Company, California Automobile Insurance Company, Mercury Indemnity Company of Georgia, and Mercury Insurance Company of Illinois and the consolidated Annual Statements dated as of December 31, 1999 of each of American Mercury Insurance Company and American Mercury Lloyd's Insurance Company (together with the related notes and schedules thereto, the "Annual Statements") heretofore delivered to the Lender, fairly present the financial condition and results of operations of the Insurance Subsidiaries included therein as of the date thereof and for the period covered thereby and have been prepared in accordance with SAP.

5.06 Litigation. Except as specifically disclosed in Schedule 5.06, there are no actions, suits, proceedings, claims or disputes pending or, to the knowledge of the Borrower after due and diligent investigation, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, by or against the Borrower or any of its Subsidiaries or against any of their properties or revenues which (a) purport to affect or pertain to this Agreement or any other Loan Document, or any of the transactions contemplated hereby, or (b) if determined adversely, could reasonably be expected to have a Material Adverse Effect.

5.07 No Default. Neither the Borrower nor any Subsidiary is in default under or with respect to any Contractual Obligation which could be reasonably expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing or would result from the consummation of the transactions contemplated by this Agreement or any other Loan Document.

5.08 Ownership of Property; Liens. The Borrower and each Subsidiary has good record and marketable title to, or valid leasehold interests in, all tangible and intangible property necessary or used in the ordinary conduct of its business, except for such defects in title as would not, individually or in the aggregate, have a Material Adverse Effect. The property of the Borrower and its Subsidiaries is subject to no Liens, other than Liens permitted by Section 7.01.

5.09 Environmental Compliance. The Borrower has reasonably concluded that existing Environmental Laws and claims alleging potential liability or responsibility for violation of any Environmental Laws will not, individually or in the aggregate, have a Material Adverse Effect.

5.10 Insurance. The properties of the Borrower and its Subsidiaries are insured with financially sound and reputable insurance companies not Affiliates of the Borrower, in such amounts,

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with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where the Borrower or its Subsidiaries operate.

5.11 Taxes. The Borrower and its Subsidiaries have filed all Federal, state and other material tax returns and reports required to be filed, and have paid all Federal, state and other material taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable, except those which are being contested in good faith by appropriate proceedings and for which adequate reserves have been provided in accordance with GAAP. There is no proposed tax assessment against the Borrower or any Subsidiary that would, if made, have a Material Adverse Effect.

5.12 ERISA Compliance.

(a) Each Plan that is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS or an application for such a letter is currently being processed by the IRS with respect thereto and, to the best knowledge of the Borrower, nothing has occurred which would prevent, or cause the loss of, such qualification. The Borrower and each ERISA Affiliate have made all required contributions to each Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to
Section 412 of the Code has been made with respect to any Plan.

(b) There are no pending or, to the best knowledge of the Borrower, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan that could be reasonably be expected to have a Material Adverse Effect. There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan that has resulted or could be reasonably expected to result in a Material Adverse Effect.

(c) Except for events or conditions that have not resulted in or could not reasonably be expected to result in a Material Adverse Effect, (i) no ERISA Event has occurred or is reasonably expected to occur; (ii) no Pension Plan has any Unfunded Pension Liability; (iii) neither the Borrower nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability under Title IV of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) neither the Borrower nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and no event has occurred which, with the giving of notice under
Section 4219 of ERISA, would result in such liability) under Sections 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v) neither the Borrower nor any ERISA Affiliate has engaged in a transaction that could be subject to Sections 4069 or 4212(c) of ERISA.

5.13 Subsidiaries. As of the Closing Date, the Borrower has no Subsidiaries other than the Insurance Subsidiaries and the Non- Insurance Subsidiaries set forth on Schedule 5.13.

5.14 Margin Regulations; Investment Company Act; Public Utility Holding Company Act.

(a) The Borrower is not engaged and will not engage, principally or as one of its important activities, in the business of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board), or extending credit for the purpose of purchasing or carrying margin stock.

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(b) None of the Borrower, any Person controlling the Borrower, or any Subsidiary (i) is a "holding company," or a "subsidiary company" of a "holding company," or an "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, or (ii) is or is required to be registered as an "investment company" under the Investment Company Act of 1940.

5.15 Licenses, Franchises, Etc. Each of the Borrower and its Subsidiaries possesses or has the right to use all licenses, franchises, copyrights, trademarks, servicemarks, patents, trade names, service names, and other rights as are material and necessary for the conduct of its business, and with respect to which it is in compliance, with no known conflict with the valid rights of others which could reasonably be expected to have a Material Adverse Effect. No event has occurred which permits or, to the best knowledge of the Borrower, after notice or the lapse of time or both, or any other condition, could reasonably be expected to permit, the revocation or termination of any such license, franchise, copyright, trademark, servicemark, patent, trade name, service name, or other right which revocation or termination could reasonably be expected to have a Material Adverse Effect.

5.16 Labor Relations. There are no material controversies pending between the Borrower or any of its Subsidiaries and any of their respective employees that could reasonably be expected to have a Material Adverse Effect.

5.17 Burdensome Obligations. Neither the Borrower nor any of its Subsidiaries is a party to or bound by any license, franchise, or Contractual Obligation, or subject to any restriction which, in the opinion of the management of the Borrower or such Subsidiary, is so unusual or burdensome, in the context of its business, as in the foreseeable future might materially and adversely affect or impair the revenue or cash flows of the Borrower or such Subsidiary or the ability of the Borrower to perform its obligations under the Loan Documents. The Borrower does not presently anticipate that future expenditures by the Borrower or any of its Subsidiaries needed to meet the provisions of federal or state statutes, orders, rules or regulations will be so burdensome as to be reasonably expected to have a Material Adverse Effect.

5.18 Disclosure. No representation or warranty made by the Borrower in any Loan Document and no certificate or report furnished to the Lender by or on behalf of the Borrower in connection with any Loan Document contains any untrue statement of a material fact or, to the best knowledge of the Borrower, omits any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.

ARTICLE VI.
AFFIRMATIVE COVENANTS

So long as the Commitment shall be in effect, or any Loan or other Obligation shall remain unpaid or unsatisfied, the Borrower shall, and shall (except in the case of the covenants set forth in Sections 6.01, 6.02, 6.03 and 6.12) cause each Subsidiary to:

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6.01 Financial Statements. Deliver to the Lender, in form and detail satisfactory to the Lender:

(a) as soon as available, but in any event within 105 days after the end of each fiscal year of the Borrower, a copy of the Borrower's 10-K for such fiscal year and a consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such fiscal year, and the related consolidated statements of income and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, prepared in accordance with GAAP and in reasonable detail, audited and accompanied by a report and opinion of a "big 5" firm or other independent certified public accountants of nationally recognized standing reasonably acceptable to the Lender, which report and opinion shall not be subject to any qualifications or exceptions as to the scope of the audit nor to any qualifications and exceptions not reasonably acceptable to the Lender;

(b) as soon as available, but in any event within 60 days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower, a copy of the Borrower's 10-Q for such fiscal quarter and a consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such fiscal quarter, and the related consolidated statements of income and cash flows for such fiscal quarter and for the portion of the Borrower's fiscal year then ended, setting forth in each case in comparative form the figures for the corresponding fiscal quarter of the previous fiscal year and the corresponding portion of the previous fiscal year, all in reasonable detail and certified by a Responsible Officer of the Borrower as fairly presenting the financial condition, results of operations and cash flows of the Borrower and its Subsidiaries in accordance with GAAP, subject only to normal year-end audit adjustments and the absence of footnotes; and

(c) As soon as practicable after the filing thereof but in any case not later than 105 days after the close of each fiscal year of the Borrower and 60 days after the close of each fiscal quarter of the Borrower, copies of the annual and quarterly statutory statements filed by the Borrower or any Reporting Insurance Subsidiary with the department of insurance of the state of domicile of each Reporting Insurance Subsidiary or any other Governmental Authority.

6.02 Certificates; Other Information. Deliver to the Lender, in form and detail satisfactory to the Lender:

(a) after request by the Lender therefor, concurrently with the delivery of the financial statements referred to in Section 6.01(a), a certificate of its independent certified public accountants certifying such financial statements and stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default under
Section 7.13 hereof or, if any such Default or Event of Default shall exist, stating the nature of such Default or Event of Default;

(b) concurrently with the delivery of the financial statements referred to in Sections 6.01(a) and (b), a duly completed Compliance Certificate signed by a Responsible Officer of the Borrower;

(c) promptly after any request by the Lender, copies of any detailed audit reports, management letters or recommendations submitted to the board of directors (or the audit committee of the board of directors) of the Borrower by independent accountants in connection with the accounts or books of the Borrower or any Subsidiary, or any audit of any of them;

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(d) promptly after the same are available, copies of each annual report, proxy or financial statement or other report or communication sent to the stockholders of the Borrower generally, and copies of all annual, regular, periodic and special reports and registration statements which the Borrower may file or be required to file with the Securities and Exchange Commission under Section 13 or 15(d) of the Securities Exchange Act of 1934, and not otherwise required to be delivered to the Lender pursuant hereto; and

(e) promptly, such additional information regarding the business, financial or corporate affairs of the Borrower or any Subsidiary as the Lender may from time to time request.

6.03 Notices. Within 10 days after the Borrower obtains knowledge thereof, notify the Lender:

(a) of the occurrence of any Default or Event of Default;

(b) of any matter that has resulted or, if decided adversely to the Borrower or any Subsidiary, could reasonably be expected to result in a Material Adverse Effect, including (i) breach or non-performance of, or default under, a Contractual Obligation of the Borrower or any Subsidiary;
(ii) any dispute, litigation, investigation, proceeding or suspension between the Borrower or any Subsidiary and any Governmental Authority; or
(iii) the commencement of, or any material development in, any litigation or proceeding affecting the Borrower or any Subsidiary pursuant to any applicable Environmental Laws;

(c) of any litigation, investigation or proceeding affecting the Borrower or any Subsidiary which, if decided adversely to the Borrower or any Subsidiary, could reasonably be expected to have a Material Adverse Effect, or in which injunctive relief or similar relief is sought, which relief, if granted, could be reasonably expected to have a Material Adverse Effect;

(d) of any material change in accounting policies or financial reporting practices by the Borrower or any Subsidiary; and

(e) of the occurrence of any ERISA Event;

Each notice pursuant to this Section shall be accompanied by a statement of a Responsible Officer of the Borrower setting forth details of the occurrence referred to therein and stating what action the Borrower has taken and proposes to take with respect thereto. Each notice pursuant to Section 6.03(a) shall describe with particularity any and all provisions of this Agreement or other Loan Document that have been breached.

6.04 Payment of Obligations. Pay and discharge as the same shall become due and payable, all its obligations and liabilities, including (a) all tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by the Borrower or such Subsidiary; (b) all lawful claims which, if unpaid, would by law become a Lien upon its property, other than Liens permitted by
Section 7.01; and (c) all Indebtedness, as and when due and payable, but subject to any subordination provisions contained in any instrument or agreement evidencing such Indebtedness.

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6.05 Preservation of Existence, Etc. Preserve, renew and maintain in full force and effect its legal existence and good standing under the Laws of the jurisdiction of its organization, except in a transaction permitted by Section 7.03 or which could not reasonably be expected to have a Material Adverse Effect; take all reasonable action to maintain all rights, privileges, permits, licenses and franchises necessary or desirable in the normal conduct of its business, except in a transaction permitted by Section 7.03 or which could not reasonably be expected to have a Material Adverse Effect; and preserve or renew all of its registered patents, trademarks, trade names and service marks, the non-preservation of which could reasonably be expected to have a Material Adverse Effect.

6.06 Maintenance of Properties. (a) Maintain, preserve and protect all of its material properties and equipment necessary in the operation of its business in good working order and condition, ordinary wear and tear excepted and (b) make all necessary repairs thereto and renewals and replacements thereof except where the failure to do so could not reasonably be expected to have a Material Adverse Effect.

6.07 Maintenance of Insurance. Maintain with financially sound and reputable insurance companies not Affiliates of the Borrower, insurance with respect to its properties and business against loss or damage of the kinds customarily insured against by Persons engaged in the same or similar business, of such types and in such amounts as are customarily carried under similar circumstances by such other Persons.

6.08 Compliance with Laws. Comply in all material respects with the requirements of all Laws applicable to it or to its business or property, except in such instances in which (i) such requirement of Law is being contested in good faith or a bona fide dispute exists with respect thereto; or (ii) the failure to comply therewith could not be reasonably expected to have a Material Adverse Effect.

6.09 Books and Records. (a) Maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP (or SAP in the case of any Insurance Subsidiary) consistently applied shall be made of all financial transactions and matters involving the assets and business of the Borrower or such Subsidiary, as the case may be; and (b) maintain such books of record and account in material conformity with all applicable requirements of any Governmental Authority having regulatory jurisdiction over the Borrower or such Subsidiary, as the case may be.

6.10 Inspection Rights. Permit representatives and independent contractors of the Lender to visit and inspect any of its properties, to examine its corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss its affairs, finances and accounts with its directors, officers, and independent public accountants, all at the expense of the Borrower and at such reasonable times during normal business hours and as often as may be reasonably desired, upon reasonable advance notice to the Borrower; provided, however, that when an Event of Default exists the Lender (or any of its representatives or independent contractors) may do any of the foregoing at the expense of the Borrower at any time during normal business hours and without advance notice.

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6.11 Compliance with ERISA. Do, and cause each of its ERISA Affiliates to do, each of the following: (a) maintain each Plan in compliance in all material respects with the applicable provisions of ERISA, the Code and other Federal or state law; (b) cause each Plan which is qualified under Section 401(a) of the Code to maintain such qualification; and (c) make all required contributions to any Plan subject to Section 412 of the Code.

6.12 Use of Proceeds. Use the proceeds of the Loans first to repay Indebtedness owing under the Existing Credit Agreement and then for working capital and other general corporate purposes not in contravention of any Law or of any Loan Document.

ARTICLE VII.
NEGATIVE COVENANTS

So long as the Commitment shall be in effect, or any Loan or other Obligation shall remain unpaid or unsatisfied, the Borrower shall not, directly or indirectly:

7.01 Liens. Create, incur, assume or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, other than the following:

(a) Liens, if any, pursuant to any Loan Document;

(b) Liens existing on the date hereof and listed on Schedule 7.01 and any renewals or extensions thereof, provided that the property covered thereby is not increased and any renewal or extension of the obligations secured or benefitted thereby is permitted by Section 7.02(a);

(c) Liens for taxes not yet due or which are being contested in good faith and by appropriate proceedings, if adequate reserves with respect thereto are maintained on the books of the applicable Person in accordance with GAAP;

(d) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings, if adequate reserves with respect thereto are maintained on the books of the applicable Person;

(e) pledges or deposits in the ordinary course of business in connection with workers' compensation, unemployment insurance and other social security legislation, other than any Lien imposed by ERISA;

(f) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business;

(g) easements, rights-of-way, restrictions and other similar encumbrances affecting real property which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the applicable Person;

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(h) Liens securing judgments for the payment of money in an aggregate amount not in excess of the Threshold Amount (except to the extent covered by independent third-party insurance as to which the insurer has acknowledged in writing its obligation to cover), unless any such judgment remains undischarged for a period of more than 30 consecutive days during which execution is not effectively stayed;

(i) Liens on real property owned by any Subsidiary on the date hereof or acquired by any Subsidiary after the date hereof securing Indebtedness permitted by Section 7.02(b) that was or is incurred in connection with the acquisition of such real property, provided that each such Lien is limited to the real property so acquired;

(j) Liens on personal property owned by the Borrower or any Subsidiary on the date hereof or acquired by the Borrower or any Subsidiary after the date hereof securing Indebtedness permitted by Section 7.02(c) that was or is incurred in connection with the acquisition of such personal property, provided that each such Lien is limited to the personal property so acquired; and

(k) Banker's Liens arising in the ordinary course of business.

7.02 Indebtedness. Permit any Subsidiary to create, incur, assume or suffer to exist any Indebtedness, except:

(a) Indebtedness outstanding on the date hereof and listed on Schedule 7.02 and any refinancings, refundings, renewals or extensions thereof; provided that the amount of such Indebtedness is not increased at the time of such refinancing, refunding, renewal or extension except by an amount equal to a reasonable premium or other reasonable amount paid, and fees and expenses reasonably incurred, in connection with such refinancing and by an amount equal to any existing commitments unutilized thereunder;

(b) Indebtedness, including Capital Lease Obligations, secured by Liens permitted by Section 7.01(i) in an aggregate outstanding amount not to exceed $25,000,000 at any time;

(c) Indebtedness, including Capital Lease Obligations, secured by Liens permitted by Section 7.01(j) in an aggregate outstanding amount not to exceed $25,000,000 at any time; and

(d) Indebtedness incurred by any Subsidiary in the ordinary course of business that is owed to Borrower or any Subsidiary.

7.03 Mergers, Acquisitions and Dispositions. Consolidate or merge into or with any Person, or make any Acquisition or Disposition, or enter into any binding agreement to do any of the foregoing which is not contingent on obtaining the consent of the Lender, or permit any Subsidiary of the Borrower to do any of the foregoing, except that
(a) a Subsidiary of the Borrower may consolidate and merge with another wholly-owned Subsidiary of the Borrower, if (i) immediately before and after giving effect thereto no Default or Event of Default shall or would exist and (ii) any such consolidation or merger would not cause any Applicable Insurance Regulatory Authority to restrict the ability of any Insurance Subsidiary to make Restricted Payments, and (b) the Borrower may make Acquisitions and Dispositions, if (i) the aggregate consolidated amount of any capital stock or property so

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acquired in any calendar year (determined on the basis of the fair market value of any capital stock or property acquired), or the aggregate consolidated amount of any assets sold, leased or otherwise disposed of in any calendar year (determined on the basis of the fair market value of any assets so sold, leased or disposed of) would not exceed 15% of the combined Statutory Capital and Surplus of the Insurance Subsidiaries as of the end of the immediately preceding calendar year, (ii) an Event of Default would not exist before or after giving effect thereto and (iii) any such Acquisition or Disposition would not cause any Applicable Insurance Regulatory Authority to restrict the ability of any Insurance Subsidiary to make Restricted Payments, provided, however, that the foregoing shall not limit Dispositions of investment securities as part of the management of a securities portfolio of the Borrower or any of its Subsidiaries.

7.04 Change in Nature of Business. Engage, or permit any Subsidiary to engage, in any material line of business substantially different from those lines of business conducted by the Borrower and its Subsidiaries on the date hereof.

7.05 Transactions with Affiliates. Enter into, or permit any Subsidiary to enter into, any transaction of any kind with any Affiliate of the Borrower on a basis less favorable to the Borrower or such Subsidiary in any material respect than if such transaction were not with an Affiliate of the Borrower other than (a) advances made to employees of the Borrower or any Subsidiary in the ordinary course of business in connection with their employment, (b) transactions in which the aggregate rental value, remuneration or other consideration (including the value of a loan) together with the aggregate rental value, remuneration or other consideration (including the value of a loan) of all such other transactions consummated in the year during which such transaction is proposed to be consummated, does not exceed $5,000,000,
(c) management or similar agreements entered into among the Borrower and any Subsidiary in the ordinary course of business, (d) transactions effected pursuant to the agreement dated October 7, 1985, by and among the Borrower, George Joseph and Gloria Joseph with respect to the ownership by George Joseph and Gloria Joseph of the Borrower's common stock, (e) payments to officers or directors of the Borrower or any Subsidiary in the ordinary course of their employment,
(f) dividends otherwise permitted by this Agreement or (g) the provision by the Borrower to its Subsidiaries of funds for use in connection with the business, operations and general corporate purposes of such Subsidiaries.

7.06 Burdensome Agreements. Enter into, or permit any Subsidiary to enter into, any Contractual Obligation that limits the ability (a) of any Subsidiary to make Restricted Payments to the Borrower or to otherwise transfer property to the Borrower or (b) of the Borrower or any Subsidiary to create, incur, assume or suffer to exist Liens on property of such Person.

7.07 Use of Proceeds. Use the proceeds of any Loan, whether directly or indirectly, and whether immediately, incidentally or ultimately, to purchase or carry margin stock (within the meaning of Regulation U of the Board), other than any shares of outstanding stock of the Borrower that are returned to the status of authorized and unissued shares and retired, or to extend credit to others for the purpose of purchasing or carrying margin stock or to refund indebtedness originally incurred for such purpose.

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7.08 ERISA. At any time engage, or permit any ERISA Affiliate to engage, in a transaction which could be subject to Section 4069 or 4212(c) of ERISA, or permit any Plan to (a) engage in any non-exempt "prohibited transaction" (as defined in Section 4975 of the Code); (b) fail to comply with ERISA or any other applicable Laws; or (c) incur any material "accumulated funding deficiency" (as defined in Section 302 of ERISA), which, with respect to each event listed above, could be reasonably expected to have a Material Adverse Effect.

7.09 Fiscal Year. Change, or permit any Subsidiary to change, its fiscal year from that in effect on the date hereof.

7.10 Issuance of Stock by Subsidiaries. Permit any Subsidiary to issue, directly or indirectly, any additional capital stock or other equity interests other than to Borrower or a wholly-owned Subsidiary.

7.11 Reinsurance Agreements. Permit any Insurance Subsidiary to enter into a treaty to cede any of its obligations to any reinsurer that could reasonably be expected to have a Material Adverse Effect.

7.12 Articles of Incorporation and Bylaws. Amend or otherwise modify its articles of incorporation or bylaws in any way which would adversely affect the interests of the Lender under any of the Loan Documents, or permit any of its Subsidiaries so to do.

7.13 Financial Covenants.

(a) Adjusted Net Worth. Permit Adjusted Net Worth at any time to be less than the sum of (a) $700,000,000, plus (b) an amount equal to 50% of the consolidated Net Income of the Borrower and its Subsidiaries for each fiscal quarter ending after September 30, 2000 (with no deduction for a net loss in any such fiscal quarter).

(b) Interest Coverage Ratio. Permit the Interest Coverage Ratio as of the end of any fiscal quarter of the Borrower to be less than 4.0 to 1.0.

(c) Leverage Ratio. Permit the Leverage Ratio at any time to be greater than .25 to 1.0.

(d) Statutory Surplus. Permit Statutory Surplus at any time to be less than $600,000,000.

ARTICLE VIII.
EVENTS OF DEFAULT AND REMEDIES

8.01 Events of Default. Any of the following events shall constitute an Event of Default:

(a) Non-Payment. The Borrower fails to pay (i) when and as required to be paid herein, any amount of principal of any Loan, or (ii) within three days after the same becomes due, any

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interest on any Loan, or any commitment or other fee due hereunder, or (iii) within five days after the same becomes due, any other amount payable hereunder or under any other Loan Document; or

(b) Specific Covenants. The Borrower fails to perform or observe any term, covenant or agreement contained in any of Section 6.10 or 6.12 or Article VII; or

(c) Other Defaults. The Borrower fails to perform or observe any other covenant or agreement (not specified in subsection (a) or (b) above) contained in any Loan Document on its part to be performed or observed and such failure continues for 30 days; or

(d) Representations and Warranties. Any representation or warranty made or deemed made by the Borrower herein, in any other Loan Document, or in any document delivered in connection herewith or therewith proves to have been incorrect in any material respect when made or deemed made; or

(e) Cross-Default. The Borrower or any Subsidiary (i) fails to make any payment when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) in respect of any Indebtedness (other than the Indebtedness hereunder) having an aggregate principal amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than the Threshold Amount, or (ii) fails to observe or perform any other agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event occurs, the effect of which default or other event is to cause, or to permit the holder or holders of such Indebtedness or the beneficiary or beneficiaries of such Guaranty Obligation (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to be demanded or to become due or to be repurchased or redeemed (automatically or otherwise) prior to its stated maturity, or such Guaranty Obligation to become payable or cash collateral in respect thereof to be demanded; or

(f) Insolvency Proceedings, Etc. The Borrower or any Subsidiary institutes or consents to the institution of any proceeding under any Debtor Relief Law, or makes an assignment for the benefit of creditors; or applies for or consents to the appointment of any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer for it or for all or any material part of its property; or any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer is appointed without the application or consent of such Person and the appointment continues undischarged or unstayed for 60 calendar days; or any proceeding under any Debtor Relief Law relating to any such Person or to all or any part of its property is instituted without the consent of such Person and continues undismissed or unstayed for 60 calendar days, or an order for relief is entered in any such proceeding; or

(g) Inability to Pay Debts; Attachment. (i) The Borrower or any Subsidiary becomes unable or admits in writing its inability or fails generally to pay its debts as they become due, or (ii) any writ or warrant of attachment or execution or similar process is issued or levied against all or any material part of the property of any such Person and is not released, vacated or fully bonded within 30 days after its issue or levy; or

(h) Judgments. There is entered against the Borrower or any Subsidiary (i) a final judgment or order for the payment of money in an aggregate amount exceeding the Threshold

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Amount (to the extent not covered by independent third-party insurance as to which the insurer does not dispute coverage), or (ii) any non-monetary final judgment that has, or would reasonably be expected to have, a Material Adverse Effect and, in the case of either clause (i) or clause
(ii) preceding, (A) enforcement proceedings are commenced by any creditor upon such judgment or order, or (B) there is a period of 10 consecutive Business Days during which a stay of enforcement of such judgment, by reason of a pending appeal or otherwise, is not in effect; or

(i) Licenses and Permits. Any license, franchise, permit, right, approval or agreement of the Borrower or any Subsidiary to own or operate any Operating Entity owned or operated by the Borrower or such Subsidiary
(i) is not renewed, or is suspended or revoked and (ii) the non-renewal, suspension or revocation thereof would have a Material Adverse Effect; or

(j) ERISA. (i) An ERISA Event occurs with respect to a Pension Plan or Multiemployer Plan which has resulted or could reasonably be expected to result in liability of the Borrower under Title IV of ERISA to the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of the Threshold Amount, or (ii) the Borrower or any ERISA Affiliate fails to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under
Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of the Threshold Amount; or

(k) Invalidity of Loan Documents. Any Loan Document, at any time after its execution and delivery and for any reason other than the agreement of the Lender or satisfaction in full of all the Obligations, ceases to be in full force and effect, or is declared by a court of competent jurisdiction to be null and void, invalid or unenforceable in any respect; or the Borrower denies that it has any or further liability or obligation under any Loan Document, or purports to revoke, terminate or rescind any Loan Document; or

(l) Change of Control. There occurs any Change of Control.

8.02 Remedies Upon Event of Default. If any Event of Default occurs, the Lender may

(a) declare the commitment of the Lender to make Loans to be terminated, whereupon such commitment shall be terminated;

(b) declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other Obligations owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrower; and

(c) exercise all rights and remedies available to it under the Loan Documents or applicable law; provided, however, that upon the occurrence of any event specified in subsection (f) of Section 8.01, the obligation of the Lender to make Loans shall automatically terminate, the unpaid principal amount of all outstanding Loans and all interest and other Obligations as aforesaid shall automatically become due and payable without further act of the Lender.

ARTICLE IX.
MISCELLANEOUS

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9.01 Amendments; Etc. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent to any departure by the Borrower therefrom, shall be effective unless in writing signed by the Lender and the Borrower and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

9.02 Notices and Other Communications; Facsimile Copies.

(a) General. Unless otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including by facsimile transmission) and mailed, faxed or delivered, to the address, facsimile number or (subject to subsection (c) below) electronic mail address specified for notices on Schedule 9.02; or to such other address as shall be designated by either party in a notice to the other party. All such notices and other communications shall be deemed to be given or made upon the earlier to occur of (i) actual receipt by the intended recipient and (ii) (A) if delivered by hand or by courier, when signed for by the intended recipient; (B) if delivered by mail, four Business Days after deposit in the mails, postage prepaid; (C) if delivered by facsimile, when sent and receipt has been confirmed by telephone; and (D) if delivered by electronic mail (which form of delivery is subject to the provisions of subsection (c) below), when delivered; provided, however, that notices and other communications to the Lender pursuant to Article II shall not be effective until actually received by such Person. Any notice or other communication permitted to be given, made or confirmed by telephone hereunder shall be given, made or confirmed by means of a telephone call to the intended recipient at the number specified on Schedule 9.02, it being understood and agreed that a voicemail message shall in no event be effective as a notice, communication or confirmation hereunder.

(b) Effectiveness of Facsimile Documents and Signatures. Loan Documents may be transmitted and/or signed by facsimile. The effectiveness of any such documents and signatures shall, subject to applicable Law, have the same force and effect as manually-signed originals and shall be binding on the Borrower and the Lender. The Lender may also require that any such documents and signatures be confirmed by a manually-signed original thereof; provided, however, that the failure to request or deliver the same shall not limit the effectiveness of any facsimile document or signature.

(c) Limited Use of Electronic Mail. Electronic mail and internet and intranet websites may be used only to distribute routine communications, such as financial statements and other information, and to distribute Loan Documents for execution by the parties thereto, and may not be used for any other purpose.

(d) Reliance by Lender. The Lender shall be entitled to rely and act upon any notices (including telephonic Loan Notices) purportedly given by or on behalf of the Borrower even if (i) such notices were not made in a manner specified herein, were incomplete or were not preceded or followed by any other form of notice specified herein, or (ii) the terms thereof, as understood by the recipient, varied from any confirmation thereof. The Borrower shall indemnify the Lender, its Affiliates, and their respective officers, directors, employees, agents and attorneys-in-fact from all losses, costs, expenses and liabilities resulting from the reliance by such Person on each notice purportedly given by or on behalf of the Borrower. All telephonic notices to and other communications with the Lender may be recorded by the Lender, and the Borrower hereby consents to such recording.

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9.03 No Waiver; Cumulative Remedies. No failure by the Lender to exercise, and no delay by any such Person in exercising, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein or therein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.

9.04 Attorney Costs, Expenses and Taxes. The Borrower agrees (a) to pay or reimburse the Lender for all costs and expenses incurred in connection with the development, preparation, negotiation and execution of this Agreement and the other Loan Documents and any amendment, waiver, consent or other modification of the provisions hereof and thereof (whether or not the transactions contemplated hereby or thereby are consummated), and the consummation and administration of the transactions contemplated hereby and thereby, including all Attorney Costs, and (b) to pay or reimburse the Lender for all costs and expenses incurred in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or the other Loan Documents (including all such costs and expenses incurred during any "workout" or restructuring in respect of the Obligations and during any legal proceeding, including any proceeding under any Debtor Relief Law), including all Attorney Costs. The foregoing costs and expenses shall include all search, filing, recording, title insurance and appraisal charges and fees and taxes related thereto, and other out-of-pocket expenses incurred by the Lender and the cost of independent public accountants and other outside experts retained by the Lender. Any amount payable to Lender under this Section shall bear interest from the second Business Day following the date of demand for payment at the Default Rate. The agreements in this Section shall survive termination of the Commitment and repayment of all the other Obligations.

9.05 Indemnification by the Borrower. Whether or not the transactions contemplated hereby are consummated, the Borrower agrees to indemnify, save and hold harmless the Lender, its Affiliates, and their respective directors, officers, employees, counsel, agents and attorneys-in-fact (collectively the "Indemnitees") from and against: (a) any and all claims, demands, actions or causes of action that are asserted against any Indemnitee by any Person relating directly or indirectly to a claim, demand, action or cause of action that such Person asserts or may assert against the Borrower, any Affiliate of the Borrower or any of their respective officers or directors; (b) any and all claims, demands, actions or causes of action that may at any time be asserted or imposed against any Indemnitee, arising out of or relating to, the Loan Documents, any predecessor loan documents, the Commitment, the use or contemplated use of the proceeds of any Loan, or the relationship of the Borrower and the Lender under this Agreement or any other Loan Document; (c) any administrative or investigative proceeding by any Governmental Authority arising out of or related to a claim, demand, action or cause of action described in subsection (a) or (b) above; and (d) any and all liabilities (including liabilities under indemnities), losses, costs or expenses (including Attorney Costs) that any Indemnitee suffers or incurs as a result of the assertion of any foregoing claim, demand, action, cause of action or proceeding, or as a result of the preparation of any defense in connection with any foregoing claim, demand, action, cause of action or proceeding, in all cases, whether or not arising out of the negligence of an Indemnitee, and whether or not an Indemnitee is a party to such claim, demand, action, cause of action or proceeding (all the foregoing, collectively, the "Indemnified Liabilities"); provided that no Indemnitee shall be entitled to indemnification for any claim caused by its own gross negligence or willful misconduct or for any loss asserted against it by another Indemnitee. The agreements in this Section shall survive the termination of the Commitment and repayment of all the other Obligations.

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9.06 Payments Set Aside. To the extent that the Borrower makes a payment to the Lender, or the Lender exercises its right of set-off, and such payment or the proceeds of such set-off or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Lender in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any proceeding under any Debtor Relief Law or otherwise, then to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred.

9.07 Successors and Assigns.

(a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby and, to the extent expressly contemplated hereby, the Indemnitees) any legal or equitable right, remedy or claim under or by reason of this Agreement.

(b) The Lender may assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of the Commitment and the Loans at the time owing to it) pursuant to documentation acceptable to the Lender and the assignee. From and after the effective date specified in such documentation, such Eligible Assignee shall be a party hereto and, to the extent of the interest assigned by the Lender, have the rights and obligations of the Lender under this Agreement, and the Lender shall, to the extent of the interest so assigned, be released from its obligations under this Agreement (and, in the case of an assignment of all of the Lender's rights and obligations under this Agreement, shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 3.07, 9.04 and 9.05). Upon request, the Borrower (at its expense) shall execute and deliver new or replacement Notes to the Lender and the assignee, and shall execute and deliver any other documents reasonably necessary or appropriate to give effect to such assignment and to provide for the administration of this Agreement after giving effect thereto.

(c) The Lender may, without the consent of, or notice to, the Borrower (unless such sale is to an insurance company, in which case the consent of the Borrower thereto, as more fully prescribed in
Section 9.07(f), shall be required but shall not be unreasonably withheld or delayed), sell participations to one or more banks or other entities (a "Participant") in all or a portion of the Lender's rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the outstanding Loans owing to it); provided that (i) the Lender's obligations under this Agreement shall remain unchanged, (ii) the Lender shall remain solely responsible to the Borrower for the performance of such obligations and (iii) the Borrower shall continue to deal solely and directly with the Lender in connection with the Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which the Lender sells such a participation may (at the sole discretion of the Lender) provide that the Lender will not, without the consent of the Participant, agree to certain types of amendments, waivers or other modifications of the Loan Documents. Subject to subsection (d) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 3.01, 3.04 and 3.05 to the same extent as if it were the Lender and had acquired its interest by assignment pursuant to subsection (b) of this Section. To the extent

36

permitted by law, each Participant also shall be entitled to the benefits of Section 9.09 as though it were the Lender.

(d) A Participant shall not be entitled to receive any greater payment under Section 3.01, 3.04, or 3.05 than the Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower's prior written consent. A Participant that is a "foreign corporation, partnership or trust" within the meaning of the Code shall not be entitled to the benefits of Section 3.01 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to provide to the Lender such tax forms prescribed by the IRS as are necessary or desirable to establish an exemption from, or reduction of, U.S. withholding tax.

(e) The Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement (including under the Note, if any) to secure obligations of the Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release the Lender from any of its obligations hereunder or substitute any such pledgee or assignee for the Lender as a party hereto.

(f) If the consent of the Borrower to an Eligible Assignee is required hereunder, the Borrower shall be deemed to have given its consent five Business Days after the date notice thereof has been delivered by the Lender unless such consent is expressly refused by the Borrower prior to such fifth Business Day.

(g) As used herein, the following terms have the following meanings:

"Eligible Assignee" means (a) an Affiliate of the Lender; (c) an Approved Fund; and (d) any other Person (other than a natural Person) approved by the Borrower (such approval not to be unreasonably withheld or delayed); provided that no such approval shall be required if (x) such Person is taking delivery of an assignment in connection with physical settlement of a credit derivatives transaction or (y) an Event of Default has occurred and is continuing.

"Fund" means any Person (other than a natural Person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.

"Approved Fund" means any Fund that is administered or managed by
(a) the Lender or (b) an Affiliate of the Lender.

9.08 Confidentiality. The Lender agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential); (b) to the extent requested by any regulatory authority; (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process; (d) to any other party to this Agreement;
(e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder; (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or participant in, or any prospective assignee of or participant in, any of its rights or obligations under this Agreement or (ii) any direct or indirect contractual

37

counterparty or prospective counterparty (or such contractual counterparty's or prospective counterparty's professional advisor) to any credit derivative transaction relating to obligations of the Borrower; (g) with the consent of the Borrower; (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Lender on a nonconfidential basis from a source other than the Borrower; or
(i) to any nationally recognized rating agency that requires access to information about the Lender's or its Affiliates' investment portfolio in connection with ratings issued with respect to the Lender or its Affiliates. For the purposes of this Section, "Information" means all information received from the Borrower relating to the Borrower or its business, other than any such information that is available to the Lender on a nonconfidential basis prior to disclosure by the Borrower; provided that, in the case of information received from the Borrower after the date hereof, such information is clearly identified in writing at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.

9.09 Set-Off. In addition to any rights and remedies of the Lender provided by law, upon the occurrence and during the continuance of any Event of Default, the Lender is authorized at any time and from time to time, without prior notice to the Borrower, any such notice being waived by the Borrower to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing by, the Lender to or for the credit or the account of the Borrower against any and all Obligations owing to the Lender, now or hereafter existing, irrespective of whether or not the Lender shall have made demand under this Agreement or any other Loan Document and although such Obligations may be contingent or unmatured. The Lender agrees promptly to notify the Borrower after any such set-off and application made by the Lender; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application.

9.10 Interest Rate Limitation. Notwithstanding anything to the contrary contained in any Loan Document, the interest paid or agreed to be paid under the Loan Documents shall not exceed the maximum rate of non-usurious interest permitted by applicable Law (the "Maximum Rate"). If the Lender shall receive interest in an amount that exceeds the Maximum Rate, the excess interest shall be applied to the principal of the Loans or, if it exceeds such unpaid principal, refunded to the Borrower. In determining whether the interest contracted for, charged, or received by the Lender exceeds the Maximum Rate, the Lender may, to the extent permitted by applicable Law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the contemplated term of the Obligations. Chapter 346 of the Texas Finance Code (which governs certain revolving credit accounts) shall not apply to the transactions contemplated by the Loan Documents.

9.11 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument, and it shall not be necessary for each party hereto to execute the same counterpart.

9.12 Integration. This Agreement, together with the other Loan Documents, comprises the complete and integrated agreement of the parties on the subject matter hereof and thereof and supersedes all prior agreements, written or oral, on such subject matter. In the event of any conflict between the provisions of this Agreement and those of any other Loan Document, the provisions of this Agreement shall control; provided that the inclusion of supplemental rights or remedies in favor of the Lender in any other Loan Document shall not be

38

deemed a conflict with this Agreement. Each Loan Document was drafted with the joint participation of the respective parties thereto and shall be construed neither against nor in favor of any party, but rather in accordance with the fair meaning thereof.

9.13 Survival of Representations and Warranties. All representations and warranties made hereunder and in any other Loan Document or other document delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery hereof and thereof. Such representations and warranties have been or will be relied upon by the Lender, regardless of any investigation made by the Lender or on its behalf and notwithstanding that the Lender may have had notice or knowledge of any Default or Event of Default at the time of any Loan, and shall continue in full force and effect as long as any Loan or any other Obligation shall remain unpaid or unsatisfied.

9.14 Severability. Any provision of this Agreement and the other Loan Documents to which the Borrower is a party that 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 thereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

9.15 Governing Law.

(a) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF TEXAS APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE; PROVIDED THAT THE LENDER SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.

(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF TEXAS SITTING IN DALLAS COUNTY OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF SUCH STATE, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE BORROWER AND THE LENDER EACH CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. THE BORROWER AND THE LENDER EACH IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF ANY LOAN DOCUMENT OR OTHER DOCUMENT RELATED THERETO. THE BORROWER AND THE LENDER EACH WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY THE LAW OF SUCH STATE.

9.16 Waiver of Right to Trial by Jury. EACH PARTY TO THIS AGREEMENT HEREBY
EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER ANY LOAN DOCUMENT OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO ANY LOAN DOCUMENT, OR THE TRANSACTIONS RELATED THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER FOUNDED IN CONTRACT OR TORT OR OTHERWISE; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY

39

COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE SIGNATORIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.

9.17 ENTIRE AGREEMENT. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

[REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURE PAGE FOLLOWS.]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written.

BANK OF AMERICA, N.A.

By  /s/ Joan L. D'Amico
  --------------------------------
    Name:  Joan L. D'Amico
    Title: Managing Director

MERCURY GENERAL CORPORATION

By  /s/ Gabriel Tirador
  --------------------------------
    Name:  Gabriel Tirador
    Title: Chief Financial Officer

Signature Page To Credit Agreement


EXHIBIT 10.35

MANAGEMENT AGREEMENT

This Agreement is entered into on January 10, 2001, effective as of the 1/st/ day of January, 2001, by and among Mercury Casualty Company, Mercury Insurance Company, California Automobile Insurance Company and California General Underwriters Insurance Company, Inc. (hereinafter collectively referred to as "Insurers") and Mercury Insurance Services, LLC (hereinafter referred to as "Manager").

In consideration of the promises, conditions, and covenants herein contained, the parties agree as follows:

1. The Manager promises to manage the Insurers, and to conduct on their behalf any and all duties of management as shall be necessary for the complete operation of the Insurers.

2. The Insurers promise and hereby delegate to the Manager all of the duties of management which they are allowed to so delegate by the laws of the State of California, including, but not limited to, the following duties: to issue and underwrite insurance policies, which the Insurers may be so authorized to do by law, in accordance with the rules and regulations as delineated in the underwriting manuals of the Insurers, settle and adjust any and all losses and claims, defend lawsuits, establish premium rates, establish and choose sales agents and brokers, determine agents' and brokers' commissions, prepare the records necessary for the conduct of the insurance business, furnish all forms, supplies and agents' manuals necessary for the conduct of the insurance business.

3. The Manager promises to perform all of the operating functions on behalf of the Insurers including, but not limited to, the following:

A. To acquire, license and appoint sales agents and brokers for the production of the insurance business of and for the Insurers, provided that the Insurers shall retain the right to refuse the appointment of any agent or broker and the right to terminate any agent or broker.

B. To issue and underwrite policies on behalf of the Insurers and to choose and obtain the necessary application and policy forms.

C. To furnish for the Insurers all of the operating forms, printing supplies, agents' manuals and any other related items which may become necessary for the operation of the insurance business.

D. To pay on behalf of the Insurers all of their operating expenses, including but not limited to rent, supplies, salaries of all personnel, telephone, advertising costs, costs of settling and adjusting all insurance claims, legal defense costs, court costs, costs of loss analysis, accounting costs (other than auditing), premium collection costs; provided, however, the Insurer shall pay, and be responsible for,

1

the costs of management fees, premium taxes, losses, reserves for unpaid losses, reserves for unpaid loss adjustment expense, audit fees, assigned risk or similar assessments, bureau fees, Fair Plan or similar assessments, directors' fees, agents' commissions, reinsurance premiums, investment counsel fees, assessments by the California Insurance Guarantee Association, membership fees in the California Association of Insurance Companies, any assessments by that Association, political contributions, premiums paid for insurance policies in which the Insurer is the beneficiary and the owner, such as fidelity bonds, taxes of all types and costs which may be levied on insurance companies by the governmental authorities having jurisdiction over the same and agents' bonuses (contingency commissions).

4. The Manager shall be reimbursed monthly, on a cost basis, for all expenses incurred on behalf of the Insurers.

5. The ownership and legal title to the insurance policies, insurance policy records, data processing tapes, disks, programs and documentation, and account records of the Insurers, compiled on behalf of the Insurers by the Manager, shall remain in and with the Insurers, however, the Manager shall have joint custody with the Insurers of said records.

6. This Agreement shall be in effect until terminated by either party upon ninety (90) days prior written notice to the nonterminating party.

7. Allocation method for shared expenses (facilities, equipment, personnel, computers, etc.) are to be consistent with statutory accounting principles.

8. All underwriting, claims and investment services provided the Insurers are to be based upon the written criteria, standards and guidelines of the Insurers. However, the Insurers shall have the ultimate and final authority over decisions and policies; to include, but not be limited to, the acceptance, rejection or canceling of risks, the payment or non-payment of claims and the purchase and sale of securities.

9. Notwithstanding any other provision of this Agreement, it is understood that the business and affairs of the Insurers shall be managed by its Board of Directors, and to the extent delegated by such Board, by its appropriately designated officers. The Board of Directors and officers of the Manager shall not have any management prerogatives with respect to the business affairs and operations of the Insurers.

[Signature Page Follows]

2

IN WITNESS WHEREOF, we have set our hands this 10th day of January, 2001.

MERCURY CASUALTY COMPANY                MERCURY INSURANCE COMPANY

By: /s/  George Joseph                  By: /s/  George Joseph
  ------------------------------          ------------------------------
     George Joseph, President                George Joseph, President

CALIFORNIA AUTOMOBILE                   CALIFORNIA GENERAL
INSURANCE COMPANY                       UNDERWRITERS INSUR. CO., INC.

By: /s/  George Joseph                  By: /s/  George Joseph
  ------------------------------          ------------------------------
     George Joseph, President                George Joseph, President

MERCURY INSURANCE SERVICES, LLC

By: /s/  George Joseph
  ------------------------------
     George Joseph, President

3

EXHIBIT 10.36

EXPENSE REIMBURSEMENT AND SERVICES AGREEMENT

THIS AGREEMENT is made and entered into on this 10th day of January, 2001 by and between AMERICAN MERCURY INSURANCE COMPANY, an Oklahoma corporation (hereinafter referred to as "AMIC") and MERCURY INSURANCE SERVICES, LLC, a California limited liability company (hereinafter referred to as "MIS").

WHEREAS, the parties recognize that "economies of scale" make it less expensive to consolidate certain corporate functions relating to the payment of operating expenses and the furnishing of certain services by MIS to AMIC; and

WHEREAS, the parties desire to enter into this Agreement to provide for the reimbursement to MIS of expenses paid or incurred by MIS on behalf of AMIC and the rendering of certain services by MIS to AMIC.

NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the parties agree as follows:

ARTICLE I
EFFECTIVE DATE

1.01 Effective Date of Agreement. This Agreement shall be effective from and after the 1st day of January, 2001, and shall remain in effect until terminated as provided herein.

ARTICLE II
EXPENSE REIMBURSEMENT

2.01 Payment of Expenses of AMIC. The parties agree that in the event AMIC desires that MIS pay certain expenses of AMIC, or in the event MIS incurs expenses in relation to and on behalf of AMIC, AMIC shall repay to MIS the actual expenses paid or incurred by MIS therefor. AMIC shall be entitled to approve all expenses paid or incurred by MIS on AMIC's behalf. The presentment to MIS of an invoice for payment shall be deemed AMIC's approval of the payment by MIS of such expense.

2.02 Expenses to be Reimbursed. AMIC's expenses which shall be paid by, and subsequently reimbursed to, MIS shall include, but not be limited to, the following: 1) salaries for all AMIC personnel; 2) operating expenses, including, but not limited to, rent, supplies, telephone, advertising costs, outside accounting expenses; 3) payroll-related expenses, including employment taxes relating to AMIC personnel; 4) expenses relating to employment benefits, including employee bonuses, health and life insurance plans, retirement plans, employee savings plans, and profit sharing

1

plans for AMIC personnel; and 5) such other expenses incurred for the operation of AMIC as agreed to between the parties.

2.03 Expenses Which are the Responsibility of AMIC. The parties agree that the following expenses shall be the sole responsibility of, and shall be paid directly by, AMIC: 1) premium taxes; 2) losses under policies issued by AMIC; 3) reserves for unpaid losses and loss adjustment expenses; 4) outside audit fees; 5) assigned risk fees, bureau fees, FAIR Plan and similar assessments; 6) agent commissions, contingency bonuses, and fees associated with the licensing and appointment of insurance agents; 7) reinsurance premiums; 8) investment fees; 9) assessments by state guarantee associations; 10) membership fees in trade associations; 11) political contributions; 12) premiums paid for insurance policies in which AMIC is the beneficiary and owner; 13) taxes of any kind which may be levied upon AMIC by governmental authorities or through the Tax Allocation Agreement between the members of the Mercury Insurance Group; 14) fixed and leased assets, and associated maintenance expenses; 15) legal costs and professional fees; and 16) such other expenses as determined by AMIC.

2.04 Monthly Reimbursements. AMIC shall reimburse MIS on a monthly basis for all expenses paid by MIS on AMIC's behalf during the previous month. The parties may mutually agree to an alternate reimbursement schedule. MIS shall provide a quarterly and annual report to AMIC showing all expenses reimbursed during the prior year.

ARTICLE III
SERVICES TO AMIC

3.01 Services to be Provided to AMIC. MIS agrees to provide services to AMIC as AMIC requests in relation to the following areas: 1) Human Resources, payroll, employee benefits and personnel matters; 2) financial accounting; 3) legal; 4) actuarial; 5) computer operations; 6) investments; 7) asset purchasing; 8) automobile fleet operations; and 9) general management assistance. AMIC shall be the sole judge of what services it purchases from MIS. The parties may mutually agree to MIS providing additional services to AMIC.

3.02 Payment for Services. AMIC agrees to pay MIS the actual cost incurred by MIS in providing such services. Such fees for services shall be paid on a monthly basis for all services performed by MIS during the previous month. The parties may mutually agree to an alternate payment schedule. MIS shall provide a quarterly and annual report to AMIC showing all services performed for AMIC during the prior year.

ARTICLE IV
PROVISIONS APPLICABLE TO EXPENSES AND SERVICES

4.01 Ownership of Records. The ownership and legal title to the insurance policies,

2

insurance policy records, data processing tapes, disks, programs, documentation, account records, and any other books and records related to the reimbursement of expenses or services provided hereunder shall remain in and with AMIC, however MIS may have access to such records at all reasonable times.

4.02 Right of Audit. Either party may audit the books and records of the other party in relation to the expenses reimbursed or the services performed hereunder, at the reviewing company's own expense, upon reasonable prior notice and during normal business hours.

4.03 Independent Contractor Status. The relationship of MIS and AMIC shall be that of an independent contractor rather than employer and employee and nothing contained in this Agreement or in the rules and regulations of either company shall be construed to create the relationship of employer and employee or agent and principal between MIS and AMIC.

4.04 Right of Offset. Either party may offset amounts owed by it against amounts owed to it by the other party under this or any other agreement between the parties.

4.05 Confidentiality. Each party agrees to treat any proprietary and nonpublic information obtained as a consequence of this Agreement regarding the other party, its clients, products, practices and personnel as confidential and proprietary in nature and not to be shared with any other entity without the express written prior permission of such party. The parties agree that a party aggrieved by a breach of this provision shall be entitled to injunctive relief, and any other remedies afforded by law.

ARTICLE V
TERMINATION

5.01 Termination of Agreement. This Agreement, or any individual service provided herein, may be terminated by either party upon ninety (90) days prior written notice to the other party, and any necessary notice to any applicable state insurance department. Upon termination, MIS shall provide a final invoice for expenses reimbursed or services performed prior to termination. AMIC shall pay such invoice within sixty (60) days of receipt thereof.

ARTICLE VI
MISCELLANEOUS PROVISIONS

6.01 Construction of Agreement. The parties agree that the terms of this Agreement were negotiated by the parties, and the provisions of this Agreement shall not be construed against any party merely on the basis that such party may have drafted the particular provision.

6.02 Applicable Law. This Agreement and the rights of the parties hereunder shall be

3

governed by, construed and enforced in accordance with the laws of the State of Oklahoma, including the laws governing the choice of law.

6.03 Assignment. This Agreement may not be assigned by either party except with the express written consent of the other party. Nothing in this Agreement is intended to confer upon any person other than the parties hereto, their permitted assigns and their successors, any rights or remedies under or by reason of this Agreement.

6.04 Binding Agreement. This Agreement shall be binding upon and inure to the benefit of the respective heirs, personal representatives, successors or assigns of the parties hereto.

6.05 Entire Agreement. This Agreement contains the entire Agreement of the parties hereto and no representations, inducements, promises, or Agreements, oral or otherwise, between the parties not embodied or incorporated herein shall be of any force of effect. This Agreement shall supersede any agreement previously entered into between the parties regarding the same subject matter.

6.06 Modification. This Agreement may only be amended by a written amendment or addendum executed by both parties hereto.

6.07 Nonwaiver. No failure of either party to exercise any power or right given either party hereunder or to insist upon strict compliance by either party with its obligations hereunder, and no custom or practice of the parties at variance with the terms hereof, shall constitute a waiver of either party's right to demand exact compliance with the terms hereof.

6.08 Notices. Except as noted, all notices and consents required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if and when delivered personally, transmitted by first class certified mail, return receipt requested, postage prepaid, or sent by a nationally recognized express courier service, postage delivery charges prepaid, as follows:

To AMIC:                           To MIS:

2000 Classen Blvd.                 4484 Wilshire Blvd.
Oklahoma City, OK 73125            Los Angeles, CA 90010
Attention: President               Attention: President

Either party may from time to time change its address for notices, by giving notice of a new address to the other party in accordance with this Section.

IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first written above.

4

AMERICAN MERCURY INSURANCE              MERCURY INSURANCE SERVICES,
     COMPANY                                LLC


By: /s/ Cooper Blanton, Jr.             By: /s/ George Joseph
    ---------------------------------       ----------------------------
     Cooper Blanton, Jr., President          George Joseph, President

5

EXHIBIT 10.37

MANAGEMENT AGREEMENT

This Agreement is effective as of the 1/st/ day of January, 2001, by Mercury Insurance Company of Georgia (hereinafter referred to as "Insurer") and Mercury Insurance Services, LLC (hereinafter referred to as "Manager").

In consideration of the promises, conditions, and covenants herein contained, the parties agree as follows:

1. The Manager promises to manage the Insurer, and to conduct on its' behalf any and all duties of management as shall be necessary for the complete operation of the Insurer.

2. The Insurer promises and hereby delegates to the Manager all of the duties of management which they are allowed to so delegate by the laws of the State of Georgia, including, but not limited to, the following duties: to issue and underwrite insurance policies, which the Insurer may be so authorized to do by law, in accordance with the rules and regulations as delineated in the underwriting manuals of the Insurer, settle and adjust any and all losses and claims, defend lawsuits, establish premium rates, establish and choose sales agents and brokers, determine agents' and brokers' commissions, prepare the records necessary for the conduct of the insurance business, furnish all forms, supplies and agents' manuals necessary for the conduct of the insurance business.

3. The Manager promises to perform all of the operating functions on behalf of the Insurer including, but not limited to, the following:

A. To acquire, license and appoint sales agents and brokers for the production of the insurance business of and for the Insurer, provided that the Insurer shall retain the right to refuse the appointment of any agent or broker and the right to terminate any agent or broker.

B. To issue and underwrite policies on behalf of the Insurer and to choose and obtain the necessary application and policy forms.

C. To furnish for the Insurer all of the operating forms, printing supplies, agents' manuals and any other related items which may become necessary for the operation of the insurance business.

D. To pay on behalf of the Insurer all of their operating expenses, including but not limited to rent, supplies, salaries of all personnel, telephone, advertising costs, costs of settling and adjusting all insurance claims, legal defense costs, court costs, costs of loss analysis, accounting costs (other than auditing), premium collection costs; provided, however, the Insurer shall pay, and be responsible for, the costs of management fees, premium taxes, losses, reserves for unpaid losses, reserves for unpaid loss adjustment expense, audit fees, assigned risk or similar assessments, bureau fees, Fair Plan or similar assessments, directors' fees, agents'

1

commissions, reinsurance premiums, investment counsel fees, assessments by the applicable Insurance Guarantee Association, membership fees in insurance trade association of insurance companies, premiums paid for insurance policies in which the Insurer is the beneficiary and the owner, such as fidelity bonds, taxes of all types and costs which may be levied on insurance companies by the governmental authorities having jurisdiction over the same and agents' bonuses (contingency commissions).

4. The Manager shall be reimbursed monthly for all expenses incurred on behalf of the Insurer.

5. The ownership and legal title to the insurance policies, insurance policy records, data processing tapes, disks, programs and documentation, and account records of the Insurer, compiled on behalf of the Insurer by the Manager, shall remain in and with the Insurer, however, the Manager shall have joint custody with the Insurer of said records.

6. The Manager shall, within ninety (90) days after expiration of each calendar year, furnish the Insurer's Board of Directors a written statement of amounts received under or on account of this Agreement and amounts expended under or on account of this Agreement during the calendar year, including the emoluments received therefrom by the respective directors, officers, and other principal management personnel of the Manager, which such classification of items and further detail as the Insurer's Board of Directors may reasonably require.

7. This Agreement shall be in effect until terminated by either party upon ninety (90) days prior written notice to the nonterminating party.

MERCURY INSURANCE COMPANY OF                 MERCURY INSURANCE
     GEORGIA                                   SERVICES, LLC

By: /s/  Cooper Blanton                      By: /s/  George Joseph
   ------------------------------               -----------------------------
     Cooper Blanton, President                    George Joseph, President

2

EXHIBIT 10.38

MANAGEMENT AGREEMENT

This Agreement is effective as of the 1st day of January, 2001, by Mercury Indemnity Company of Georgia (hereinafter referred to as "Insurer") and Mercury Insurance Services, LLC (hereinafter referred to as "Manager").

In consideration of the promises, conditions, and covenants herein contained, the parties agree as follows:

1. The Manager promises to manage the Insurer, and to conduct on its' behalf any and all duties of management as shall be necessary for the complete operation of the Insurer.

2. The Insurer promises and hereby delegates to the Manager all of the duties of management which they are allowed to so delegate by the laws of the State of Georgia, including, but not limited to, the following duties: to issue and underwrite insurance policies, which the Insurer may be so authorized to do by law, in accordance with the rules and regulations as delineated in the underwriting manuals of the Insurer, settle and adjust any and all losses and claims, defend lawsuits, establish premium rates, establish and choose sales agents and brokers, determine agents' and brokers' commissions, prepare the records necessary for the conduct of the insurance business, furnish all forms, supplies and agents' manuals necessary for the conduct of the insurance business.

3. The Manager promises to perform all of the operating functions on behalf of the Insurer including, but not limited to, the following:

A. To acquire, license and appoint sales agents and brokers for the production of the insurance business of and for the Insurer, provided that the Insurer shall retain the right to refuse the appointment of any agent or broker and the right to terminate any agent or broker.

B. To issue and underwrite policies on behalf of the Insurer and to choose and obtain the necessary application and policy forms.

C. To furnish for the Insurer all of the operating forms, printing supplies, agents' manuals and any other related items which may become necessary for the operation of the insurance business.

D. To pay on behalf of the Insurer all of their operating expenses, including but not limited to rent, supplies, salaries of all personnel, telephone, advertising costs, costs of settling and adjusting all insurance claims, legal defense costs, court costs, costs of loss analysis, accounting costs (other than auditing), premium collection costs; provided, however, the Insurer shall pay, and be responsible for, the costs of management fees, premium taxes, losses, reserves for unpaid losses, reserves for unpaid loss adjustment expense, audit fees, assigned risk or similar assessments, bureau fees, Fair Plan or similar assessments, directors' fees, agents'

1

commissions, reinsurance premiums, investment counsel fees, assessments by the applicable Insurance Guarantee Association, membership fees in insurance trade association of insurance companies, premiums paid for insurance policies in which the Insurer is the beneficiary and the owner, such as fidelity bonds, taxes of all types and costs which may be levied on insurance companies by the governmental authorities having jurisdiction over the same and agents' bonuses (contingency commissions).

4. The Manager shall be reimbursed monthly for all expenses incurred on behalf of the Insurer.

5. The ownership and legal title to the insurance policies, insurance policy records, data processing tapes, disks, programs and documentation, and account records of the Insurer, compiled on behalf of the Insurer by the Manager, shall remain in and with the Insurer, however, the Manager shall have joint custody with the Insurer of said records.

6. The Manager shall, within ninety (90) days after expiration of each calendar year, furnish the Insurer's Board of Directors a written statement of amounts received under or on account of this Agreement and amounts expended under or on account of this Agreement during the calendar year, including the emoluments received therefrom by the respective directors, officers, and other principal management personnel of the Manager, which such classification of items and further detail as the Insurer's Board of Directors may reasonably require.

7. This Agreement shall be in effect until terminated by either party upon ninety (90) days prior written notice to the nonterminating party.

MERCURY INSURANCE COMPANY OF                 MERCURY INSURANCE
     GEORGIA                                    SERVICES, LLC

By: /s/  Cooper Blanton                      By: /s/  George Joseph
   ------------------------------               -----------------------------
     Cooper Blanton, President                    George Joseph, President

2

EXHIBIT 10.39

MANAGEMENT AGREEMENT

This Agreement is entered into by and between MERCURY INSURANCE COMPANY OF ILLINOIS, (hereinafter referred to as Insurer), and MERCURY INSURANCE SERVICES, LLC (hereinafter referred to as Manager).

In consideration of the promises, conditions and covenants herein contained, the parties agree as follows:

SECTION I

EFFECTIVE DATE

This Agreement shall become effective January 1, 2001.

SECTION II

CONDITIONS OF EFFECTIVENESS

The Agreement or any amendment thereto shall become effective only if the following shall have first occurred:

A. The Illinois Department of Insurance, if required, shall have approved of and/or acknowledged in writing this Agreement or any amendment thereto; and

B. The boards of directors of the Manager and the Insurer shall have approved this Agreement by a majority vote

SECTION III

SERVICES AND FACILITIES

A. Commencing on the Effective Date and until the termination of this Agreement, the Manager shall provide the services and facilities as are described hereunder to the Insurer. Such services and facilities as are provided hereunder shall be subject to the control and approval of the Board of Directors of the Insurer, and shall be performed in the manner and for the consideration set forth herein by the Manager, and such services shall be performed in accordance with applicable laws and regulations in all of the jurisdictions in which the Insurer conducts business. It is recognized that the Insurer may be governed by laws and regulations which are particularly applicable to its business and this Manager, by virtue of this Agreement, recognizes its responsibility to perform in accordance with such laws or regulations including, but not limited to, compliance with any order or orders issued by any governmental agency affecting the Insurer; and the Manager hereby acknowledges that in such case it will immediately conform to same in the performance of its services as hereinafter set forth. The Board of Directors of the Insurer shall retain responsibility for the performance of services provided pursuant to

1

this Agreement by the Manager and, in connection therewith, shall require the Manager to perform in accordance with the standards of performance set forth herein.

B. The Manager promises to manage the Insurer, and to conduct on its behalf any and all duties of management as shall be necessary for the complete operation of the Insurer.

C. The Insurer hereby delegates to the Manager all of the duties of management which it is allowed to so delegate by the laws of the State of Illinois, including but not limited to the following duties: to issue and underwrite insurance policies, which the Insurer may be so authorized to do by law, in accordance with the rules and regulations as delineated in the underwriting manuals of the Insurer, settle and adjust any and all losses and claims, defend lawsuits, establish premium rates, establish and choose sales agents and brokers, determine agents' and brokers' commissions, prepare the records necessary for the conduct of the insurance business, furnish all forms, supplies and agents' manuals necessary for the conduct of the insurance business.

D. The Manager promises to perform all of the operating functions on behalf of the Insurer, including but not be limited to the following:

1. To acquire, license and appoint sales agents and brokers for the production of the insurance business of and for the Insurer, provided that the Insurer shall retain the right to refuse the appointment of any agent or broker and the right to terminate any agent or broker.

2. To issue and underwrite policies on behalf of the Insurer and to choose and obtain the necessary applications and policy forms.

3. To furnish for the Insurer all of the operating forms, printing supplies, agents' manuals and any other related items which may become necessary for the operation of the insurance business.

4. To provide all personnel reasonably required by the Insurer and to fill all such positions in the Insurer with the advice and consent of the Board of Directors of the Insurer, all of which personnel shall be compensated exclusively by the Manager.

5. To provide all facilities necessary for the conduct of the Insurer's business, including but not limited to real estate, office space and personal property, including furniture, fixtures and equipment. The office space, furniture, fixtures and equipment utilized by the Insurer in the conduct of its business may be owned or leased by the Manager or the Insurer.

6. To pay on behalf of the Insurer all of its operating expenses, including but not limited to rent, supplies, salaries of all personnel, telephone, advertising costs, costs of settling and adjusting all insurance claims, legal defense costs, court

2

costs, costs of loss analysis, accounting costs (other than auditing), and premium collection costs; provided, however, that the Insurer shall pay, and be responsible for, the costs of management fees, premium taxes, losses, reserves for unpaid losses, reserves for unpaid loss adjustment expense, audit fees, assigned risk or similar assessments, bureau fees, Fair Plan or similar assessments, directors' fees, agents' commissions, reinsurance premiums, outside investment counsel fees, assessments by the Illinois Insurance Guaranty Fund or similar state guaranty funds, membership fees in trade associations, any assessments by such associations, political contributions (to the extent not prohibited by applicable laws), premiums paid for insurance policies in which the Insurer is the beneficiary and owner, such as fidelity bonds, taxes of all types and costs which may be levied on insurance companies by the governmental authorities having jurisdiction over the same, and agents' bonuses (contingency commissions).

D. The Manager promises to deposit all premiums received directly into a bank account of the Insurer.

E. The Manager shall make all books, records and documents pertaining to the Insurer's business available to the Illinois Director of Insurance or his designees.

G. Without limiting the generality of the foregoing provisions regarding the duties of the Manager, the Manager hereby expressly agrees to take all steps necessary to preserve the Insurer's exemption from the privilege tax imposed by Section 409 of the Illinois Insurance Code, including but not limited to:

1. Maintaining the Insurer's principal place of business within the State of Illinois;

2. Maintaining within the State of Illinois officers and personnel knowledgeable of and responsible for the Insurer's operation, books, records, administration, and annual statement;

3. Conducting within the State of Illinois substantially all underwriting, policy issuing, and servicing relating to the Insurer's Illinois policyholders; and

4. Complying with the provisions of Section 133(2) of the Illinois Insurance Code.

H. This Agreement is not intended to supersede or replace the policy making decisions of or the supervisory responsibilities of the Board of Directors of the Insurer. Nor it is intended that substantial control of the Insurer or of any of the powers vested in the Board of Directors, a committee thereof or agents appointed by said Board of Directors, shall have the right, at all times, to cause the books and records of the Manager to be inspected and/or audited as they relate to the business of the Insurer.

3

SECTION IV

INVESTMENT ADVISORY SERVICES

The Manager agrees to act as investment advisor to the Insurer with respect to the investment of the Insurer's assets, and, in general, to supervise the investment and reinvestment of cash, securities or other property comprising the assets of the Insurer, subject at all times to the direction and control of the Board of Directors (or responsible committee thereof) of the Insurer, all as more fully set forth herein.

In connection with the Manager's performance of investment advisory services for the Insurer, the following provisions shall apply:

A. The Insurer shall at all times maintain a custodian (referred to hereinafter as the "Custodian") for its securities and appropriate bank or custodial accounts for the purpose of handling cash involved in the Insurer's investment transactions.

B. The Manager shall obtain and evaluate pertinent information about significant economic developments and gather statistical and financial data affecting the investments of the Insurer and such investments which the Manager considers may be suitable for inclusion in the Insurer's investment portfolio.

C. At mutually agreeable intervals, the Manager shall furnish reports to the Investment Committee of the Insurer setting forth (i) a list of the Insurer's securities, showing the costs, market value, maturity date and other pertinent information regarding each such security, (ii) a summary of the investment transactions effected on behalf of the Insurer since the closing date of the preceding report, and (iii) the Manager's recommendations as to what securities should be acquired or sold in light of prevailing economic and securities market conditions.

D. After reviewing the Manager's periodic investment reports, the Investment Committee of the Insurer will advise the Manager which of the Manager's investment recommendations it has accepted or rejected. If the Manager is notified in writing of the Insurer's acceptance of the Manager's recommendations, such notification shall constitute authorization to the Manager to effect the recommended investment transactions.

E. All investment transactions authorized by the Insurer's Investment Committee shall be carried out by the Manager through the Custodian, but the Manager may designate a broker or brokers to carry out said transactions. All instructions or directions of the Manager to the Custodian shall, unless otherwise agreed to by the Manager and the Custodian, be made in writing, or orally and confirmed in writing as soon as practicable thereafter, and the Manager shall instruct all brokers, dealers or other persons executing investment orders to forward to the Custodian copies of all brokerage or dealer confirmations promptly after execution of all transactions.

4

F. The Manager is authorized to enter into an agreement with the Custodian to use the Depository Trust Company's Institutional Delivery System for trade confirmation and settlements.

G. The Insurer shall notify its Custodian of the appointment of the Manager as investment advisor by delivering a copy of this Agreement to its Custodian.

H. It is understood and agreed that the Manager's services in recommending investments shall be advisory only, and shall not in any way be deemed a delegation by the Insurer or its Board of Directors of their fiduciary powers, discretion or judgment in the selection, retention or disposition of any investments.

I. The investment advisory services provided by the Manager under this Section, and all actions taken hereunder by it, shall at all times conform to the requirements imposed by the insurance laws and regulations of the State of Illinois, including, but not limited to, Article VIII regarding allowable investments for domestic insurance companies and Section 133 as it pertains to the keeping of securities in Illinois.

SECTION V

COMPENSATION

As compensation for the services to be provided by the Manager under this Agreement, the Manager shall be reimbursed monthly for all expenses incurred on behalf of the Insurer in providing personnel, facilities and services contemplated by this Agreement.

SECTION VI

OWNERSHIP OF RECORDS

The ownership and legal title to the insurance policies, insurance policy records, data processing tapes, disks, programs and documentation, and account records of the Insurer, compiled on behalf of the Insurer by the Manager, shall remain in and with the Insurer. However, the Manager shall have joint custody with the Insurer of said records.

SECTION VII

TERM OF AGREEMENT

A. Except as provided in paragraphs B and C below, this Agreement shall be in effect until terminated by either party upon ninety (90) days prior written notice to the nonterminating party.

B. The Insurer may terminate its participation under this Agreement immediately in the event that:

5

(1) The Manager shall have defaulted in the performance of any obligation under this Agreement and shall have failed to remedy within 30 days of receipt of written notice thereof from the Insurer asserting such default as grounds for termination of this Agreement; or

C. The Manager may terminate its obligations to the Insurer under this Agreement immediately in the event that:

(1) The Insurer shall have defaulted in the performance of any obligation under this Agreement and shall have failed to remedy such default within 30 days of receipt of written notice thereof from the Manager asserting such default as grounds for termination of this Agreement: or

(2) The Insurer is dissolved or determined insolvent.

IN WITNESS WHEREOF, we have set our hands and seals this 10th day of January, 2001.

MERCURY INSURANCE COMPANY               MERCURY INSURANCE SERVICES,
   OF ILLINOIS                              LLC

By: /s/  Cooper Blanton                 By: /s/  George Joseph
   ------------------------------          -----------------------------
     Cooper Blanton, President               George Joseph, President

6

EXHIBIT 10.40

MANAGEMENT AGREEMENT

This Agreement is entered into by and between MERCURY INDEMNITY COMPANY OF ILLINOIS, (hereinafter referred to as Insurer), and MERCURY INSURANCE SERVICES, LLC (hereinafter referred to as Manager).

In consideration of the promises, conditions and covenants herein contained, the parties agree as follows:

SECTION I

EFFECTIVE DATE

This Agreement shall become effective January 1, 2001.

SECTION II

CONDITIONS OF EFFECTIVENESS

The Agreement or any amendment thereto shall become effective only if the following shall have first occurred:

A. The Illinois Department of Insurance, if required, shall have approved of and/or acknowledged in writing this Agreement or any amendment thereto; and

B. The boards of directors of the Manager and the Insurer shall have approved this Agreement by a majority vote

SECTION III

SERVICES AND FACILITIES

A. Commencing on the Effective Date and until the termination of this Agreement, the Manager shall provide the services and facilities as are described hereunder to the Insurer. Such services and facilities as are provided hereunder shall be subject to the control and approval of the Board of Directors of the Insurer, and shall be performed in the manner and for the consideration set forth herein by the Manager, and such services shall be performed in accordance with applicable laws and regulations in all of the jurisdictions in which the Insurer conducts business. It is recognized that the Insurer may be governed by laws and regulations which are particularly applicable to its business and this Manager, by virtue of this Agreement, recognizes its responsibility to perform in accordance with such laws or regulations including, but not limited to, compliance with any order or orders issued by any governmental agency affecting the Insurer; and the Manager hereby acknowledges that in such case it will immediately conform to same in the performance of its services as hereinafter set forth. The Board of Directors of the Insurer shall retain responsibility for the performance of services provided pursuant to

1

this Agreement by the Manager and, in connection therewith, shall require the Manager to perform in accordance with the standards of performance set forth herein.

B. The Manager promises to manage the Insurer, and to conduct on its behalf any and all duties of management as shall be necessary for the complete operation of the Insurer.

C. The Insurer hereby delegates to the Manager all of the duties of management which it is allowed to so delegate by the laws of the State of Illinois, including but not limited to the following duties: to issue and underwrite insurance policies, which the Insurer may be so authorized to do by law, in accordance with the rules and regulations as delineated in the underwriting manuals of the Insurer, settle and adjust any and all losses and claims, defend lawsuits, establish premium rates, establish and choose sales agents and brokers, determine agents' and brokers' commissions, prepare the records necessary for the conduct of the insurance business, furnish all forms, supplies and agents' manuals necessary for the conduct of the insurance business.

D. The Manager promises to perform all of the operating functions on behalf of the Insurer, including but not be limited to the following:

1. To acquire, license and appoint sales agents and brokers for the production of the insurance business of and for the Insurer, provided that the Insurer shall retain the right to refuse the appointment of any agent or broker and the right to terminate any agent or broker.

2. To issue and underwrite policies on behalf of the Insurer and to choose and obtain the necessary applications and policy forms.

3. To furnish for the Insurer all of the operating forms, printing supplies, agents' manuals and any other related items which may become necessary for the operation of the insurance business.

4. To provide all personnel reasonably required by the Insurer and to fill all such positions in the Insurer with the advice and consent of the Board of Directors of the Insurer, all of which personnel shall be compensated exclusively by the Manager.

5. To provide all facilities necessary for the conduct of the Insurer's business, including but not limited to real estate, office space and personal property, including furniture, fixtures and equipment. The office space, furniture, fixtures and equipment utilized by the Insurer in the conduct of its business may be owned or leased by the Manager or the Insurer.

6. To pay on behalf of the Insurer all of its operating expenses, including but not limited to rent, supplies, salaries of all personnel, telephone, advertising costs, costs of settling and adjusting all insurance claims, legal defense costs, court

2

costs, costs of loss analysis, accounting costs (other than auditing), and premium collection costs; provided, however, that the Insurer shall pay, and be responsible for, the costs of management fees, premium taxes, losses, reserves for unpaid losses, reserves for unpaid loss adjustment expense, audit fees, assigned risk or similar assessments, bureau fees, Fair Plan or similar assessments, directors' fees, agents' commissions, reinsurance premiums, outside investment counsel fees, assessments by the Illinois Insurance Guaranty Fund or similar state guaranty funds, membership fees in trade associations, any assessments by such associations, political contributions (to the extent not prohibited by applicable laws), premiums paid for insurance policies in which the Insurer is the beneficiary and owner, such as fidelity bonds, taxes of all types and costs which may be levied on insurance companies by the governmental authorities having jurisdiction over the same, and agents' bonuses (contingency commissions).

D. The Manager promises to deposit all premiums received directly into a bank account of the Insurer.

E. The Manager shall make all books, records and documents pertaining to the Insurer's business available to the Illinois Director of Insurance or his designees.

G. Without limiting the generality of the foregoing provisions regarding the duties of the Manager, the Manager hereby expressly agrees to take all steps necessary to preserve the Insurer's exemption from the privilege tax imposed by Section 409 of the Illinois Insurance Code, including but not limited to:

1. Maintaining the Insurer's principal place of business within the State of Illinois;

2. Maintaining within the State of Illinois officers and personnel knowledgeable of and responsible for the Insurer's operation, books, records, administration, and annual statement;

3. Conducting within the State of Illinois substantially all underwriting, policy issuing, and servicing relating to the Insurer's Illinois policyholders; and

4. Complying with the provisions of Section 133(2) of the Illinois Insurance Code.

H. This Agreement is not intended to supersede or replace the policy making decisions of or the supervisory responsibilities of the Board of Directors of the Insurer. Nor it is intended that substantial control of the Insurer or of any of the powers vested in the Board of Directors, a committee thereof or agents appointed by said Board of Directors, shall have the right, at all times, to cause the books and records of the Manager to be inspected and/or audited as they relate to the business of the Insurer.

3

SECTION IV

INVESTMENT ADVISORY SERVICES

The Manager agrees to act as investment advisor to the Insurer with respect to the investment of the Insurer's assets, and, in general, to supervise the investment and reinvestment of cash, securities or other property comprising the assets of the Insurer, subject at all times to the direction and control of the Board of Directors (or responsible committee thereof) of the Insurer, all as more fully set forth herein.

In connection with the Manager's performance of investment advisory services for the Insurer, the following provisions shall apply:

A. The Insurer shall at all times maintain a custodian (referred to hereinafter as the "Custodian") for its securities and appropriate bank or custodial accounts for the purpose of handling cash involved in the Insurer's investment transactions.

B. The Manager shall obtain and evaluate pertinent information about significant economic developments and gather statistical and financial data affecting the investments of the Insurer and such investments which the Manager considers may be suitable for inclusion in the Insurer's investment portfolio.

C. At mutually agreeable intervals, the Manager shall furnish reports to the Investment Committee of the Insurer setting forth (i) a list of the Insurer's securities, showing the costs, market value, maturity date and other pertinent information regarding each such security, (ii) a summary of the investment transactions effected on behalf of the Insurer since the closing date of the preceding report, and (iii) the Manager's recommendations as to what securities should be acquired or sold in light of prevailing economic and securities market conditions.

D. After reviewing the Manager's periodic investment reports, the Investment Committee of the Insurer will advise the Manager which of the Manager's investment recommendations it has accepted or rejected. If the Manager is notified in writing of the Insurer's acceptance of the Manager's recommendations, such notification shall constitute authorization to the Manager to effect the recommended investment transactions.

E. All investment transactions authorized by the Insurer's Investment Committee shall be carried out by the Manager through the Custodian, but the Manager may designate a broker or brokers to carry out said transactions. All instructions or directions of the Manager to the Custodian shall, unless otherwise agreed to by the Manager and the Custodian, be made in writing, or orally and confirmed in writing as soon as practicable thereafter, and the Manager shall instruct all brokers, dealers or other persons executing investment orders to forward to the Custodian copies of all brokerage or dealer confirmations promptly after execution of all transactions.

4

F. The Manager is authorized to enter into an agreement with the Custodian to use the Depository Trust Company's Institutional Delivery System for trade confirmation and settlements.

G. The Insurer shall notify its Custodian of the appointment of the Manager as investment advisor by delivering a copy of this Agreement to its Custodian.

H. It is understood and agreed that the Manager's services in recommending investments shall be advisory only, and shall not in any way be deemed a delegation by the Insurer or its Board of Directors of their fiduciary powers, discretion or judgment in the selection, retention or disposition of any investments.

I. The investment advisory services provided by the Manager under this Section, and all actions taken hereunder by it, shall at all times conform to the requirements imposed by the insurance laws and regulations of the State of Illinois, including, but not limited to, Article VIII regarding allowable investments for domestic insurance companies and Section 133 as it pertains to the keeping of securities in Illinois.

SECTION V

COMPENSATION

As compensation for the services to be provided by the Manager under this Agreement, the Manager shall be reimbursed monthly for all expenses incurred on behalf of the Insurer in providing personnel, facilities and services contemplated by this Agreement.

SECTION VI

OWNERSHIP OF RECORDS

The ownership and legal title to the insurance policies, insurance policy records, data processing tapes, disks, programs and documentation, and account records of the Insurer, compiled on behalf of the Insurer by the Manager, shall remain in and with the Insurer. However, the Manager shall have joint custody with the Insurer of said records.

SECTION VII

TERM OF AGREEMENT

A. Except as provided in paragraphs B and C below, this Agreement shall be in effect until terminated by either party upon ninety (90) days prior written notice to the nonterminating party.

B. The Insurer may terminate its participation under this Agreement immediately in the event that:

5

(1) The Manager shall have defaulted in the performance of any obligation under this Agreement and shall have failed to remedy within 30 days of receipt of written notice thereof from the Insurer asserting such default as grounds for termination of this Agreement; or

C. The Manager may terminate its obligations to the Insurer under this Agreement immediately in the event that:

(1) The Insurer shall have defaulted in the performance of any obligation under this Agreement and shall have failed to remedy such default within 30 days of receipt of written notice thereof from the Manager asserting such default as grounds for termination of this Agreement: or

(2) The Insurer is dissolved or determined insolvent.

IN WITNESS WHEREOF, we have set our hands and seals this 10th day of January, 2001.

MERCURY INDEMNITY COMPANY               MERCURY INSURANCE SERVICES,
   OF ILLINOIS                              LLC


By: /s/ Cooper Blanton                  By: /s/ George Joseph
   ------------------------------          -----------------------------
     Cooper Blanton, President               George Joseph, President

6

21.1 Subsidiaries of the Company

Mercury Casualty Company
Mercury Insurance Company
Mercury Insurance Company of Illinois
Mercury Indemnity Company of Illinois
Mercury Insurance Company of Georgia
Mercury Indemnity Company of Georgia
Mercury Insurance Services LLC
Mercury County Mutual Insurance Company* California Automobile Insurance Company
California General Underwriters Insurance Company, Inc. Concord Insurance Services, Inc. *
American Mercury Insurance Company
American Mercury Lloyds Insurance Company* AFI Management Company, Inc.
American Mercury MGA, Inc.

* Controlled by Mercury General Corporation


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 2, 2001, relating to the consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 2000 and 1999, 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, 2000, and all related schedules, which report appears in the December 31, 2000, annual report on Form 10-K of Mercury General Corporation.

/s/ KPMG LLP

Los Angeles, California
March 28, 2001