SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 1996 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: (213)937-1060

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

NONE

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

Common Stock
(Title of Class)

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. [X]

The aggregate market value of the Registrant's voting stock held by non- affiliates of the Registrant at March 18, 1997, was approximately $837,029,058 (based upon the closing sales price of such date, as reported by the Wall Street Journal).

At March 18, 1997, the Registrant had issued and outstanding an aggregate of 27,531,425 shares of its Common Stock.

Documents Incorporated by Reference

Proxy statement for the Annual Meeting of Stockholders of Registrant to be held on May 14, 1997 (only portions of which are incorporated by reference).


Item 1. Business

General

The Company is engaged primarily in writing all risk classifications of automobile insurance in California, which in 1996 accounted for approximately 97% of the Company's direct premiums written. In 1990, the Company commenced writing small amounts of automobile insurance in Georgia and Illinois. In December 1996 the Company acquired American Fidelity Insurance Group (AFI), which is headquartered in Oklahoma City, Oklahoma. AFI is licensed in 36 states but writes predominantly in Texas, Oklahoma and Kansas. AFI's primary lines of insurance are private passenger and commercial automobile and automobile mechanical breakdown. One month of AFI's operations are included in the Company's 1996 consolidated financial statements. During 1996, private passenger automobile insurance and commercial automobile insurance accounted for 93.8% and 4.0%, respectively, of the Company's direct premiums written. The Company also writes homeowners insurance, commercial and dwelling fire insurance and commercial property insurance. The non-automobile lines of insurance accounted for 2.3% of direct premiums written in 1996, of which approximately 51% 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. Under the majority of the Company's automobile policies, however, the limits of liability are less than $100,000 per person, $300,000 per accident and $50,000 for property damage.

In 1996, A.M. Best & Co. rated Mercury Casualty Company and Mercury Insurance Company, the Company's chief operating subsidiaries, A+ (Superior). 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). AFI was rated A- (Excellent) in 1996 by A.M. Best.

The principal executive offices of Mercury General Corporation 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. The non-California subsidiaries maintain offices in Vernon Hills, Illinois, Atlanta, Georgia, Oklahoma City, Oklahoma and Cimarron, Kansas. The Company has approximately 1800 employees.

Organization

Mercury General Corporation ("Mercury General"), an insurance holding company, is the parent of Mercury Casualty Company, 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 Company ("Mercury Casualty"), Mercury Insurance Company ("Mercury Insurance"), and California Automobile Insurance Company. Two subsidiaries, Mercury Insurance Company of Georgia and Mercury Insurance Company of Illinois, received authority in late 1989 to write automobile insurance in those two states. In 1992, Mercury Indemnity Company of Georgia and Mercury Indemnity Company of Illinois were formed to write preferred risk automobile insurance in those two states. Through the Company's first acquisition in December 1996, three additional subsidiaries were added to the group: American Fidelity Insurance Company, domiciled in Oklahoma; Cimarron Insurance Company, domiciled in Kansas; and, AFI Management Company, Inc., a Texas corporation which serves as the attorney-in-fact for American Fidelity Lloyds Insurance Company (AFL), a Texas insurer. Accordingly, their operations are included in the consolidated financial statements of the Company effective December 1, 1996.

Mercury General furnishes management services to its California, Georgia and Illinois subsidiaries. Mercury General, its subsidiaries, and AFL, are referred to as the "Company" unless the context indicates otherwise, Mercury General Corporation individually is referred to as "Mercury General." The term California Companies refers to Mercury Casualty Company, Mercury Insurance Company 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 approval by the DOI since November 1989. The Company uses its own extensive data base to establish rates and classifications.

On February 25, 1994, the California Department of Insurance (DOI) approved a revised rating plan and rates for the California Companies which became effective on May 1, 1994. These rates were designed to improve the California Companies' competitive position for new insureds and included a modest overall rate reduction. Further rate modifications were approved and made effective on October 15, 1995 and April 15, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview."

In September 1996 the DOI issued new rating factor regulations, replacing expired emergency regulations issued in 1989. See "Regulation - Automobile Insurance Rating Factor Regulations."

Approximately 80% of the Company's new applications for automobile insurance in California during 1996 were placed in the lowest risk classifications, known as "good drivers" (as defined by the California Insurance Code), while approximately 20% of new applications were accepted in higher risk classifications at increased rate levels. Policies are reclassified at the time of renewal and may be changed to a higher or lower risk classification.

At December 31, 1996, "good drivers" accounted for approximately three quarters of all voluntary private passenger automobile policies in force in

2

California, while the higher risk categories accounted for approximately one quarter. The renewal rate in California (the rate of acceptance of offers to renew) averages approximately 95%.

AFI's private passenger automobile business in force is predominantly standard and preferred type risks, although they plan to offer more non-standard programs in the future.

Production and Servicing of Business

The Company sells its policies through more than 1500 independent agents, of which approximately 800 are located in California and approximately 600 others represent AFI in Oklahoma, Kansas and Texas. Approximately half of the agents in California have represented the Company for more than ten years. The agents, most of whom also represent one or more competing insurance companies, are independent contractors selected and appointed by the Company.

One agency produced direct premiums written of approximately 17%, 15% and 13% during 1996, 1995 and 1994, respectively, of the Company's total direct premiums. 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 1996 total commissions and bonuses incurred averaged 16.0% of direct premiums written. The Company is not responsible for any of its agents' expenses.

Traditionally, any advertising done has been handled by the individual agents. During the fourth quarter of 1995, the Company began its first advertising program in major newspapers in Southern California. While the Company plans, coordinates and executes the program, the agents are responsible for the cost of the advertisements. The program has been satisfactory and was expanded to Northern California in early 1996. The program was temporarily suspended during the first quarter of 1997 due to a large influx of new business. See "Regulation- Financial Responsibility Law."

Claims

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

Loss and Loss Adjustment Expense Reserves

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

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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,
                                                                         ---------------------------
                                                                         1996        1995       1994
                                                                         ----        ----       ----
                                                                           (Amounts in thousands)
Net reserves for losses and loss adjustment
 expenses, beginning of year.......................................    $250,990    $223,392   $214,525
Reserves acquired from purchase of American
 Fidelity Insurance Company.........................................     24,231       --         --
Incurred losses and loss adjustment expenses:
      Provision for insured events of the
         current year...............................................    505,726     423,264    370,631
      Decrease in provision for insured events
         of prior years.............................................     (3,868)     (6,708)   (10,074)
                                                                       --------    --------   --------
         Total incurred losses and loss adjustment
           expenses.................................................    501,858     416,556    360,557
                                                                       --------    --------   --------

Payments:
      Losses and loss adjustment expenses attribu-
        table to insured events of the current
        year........................................................    298,099     243,294    208,418
      Losses and loss adjustment expenses attribu-
        table to insured events of prior years......................    167,226     145,664    143,272
                                                                       --------    --------   --------

        Total payments..............................................    465,325     388,958    351,690
                                                                       --------    --------   --------

Net reserves for losses and loss adjustment
 expenses at the end of the period..................................    311,754     250,990    223,392
Reinsurance recoverable.............................................     24,931       2,556      4,107
                                                                       --------    --------   --------
Gross liability at end of year......................................   $336,685    $253,546   $227,499
                                                                       ========    ========   ========

The purchase agreement includes an indemnification by the seller on the loss and loss adjustment expense reserves of AFI 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.

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 DOI in accordance with statutory accounting principles (SAP) is shown in the table on the following page.

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                                                                     December 31,
                                                           ------------------------------
                                                              1996       1995      1994
                                                              ----       ----      ----
                                                               (Amounts in thousands)
Reserves reported on a SAP basis......................      $311,754   $250,990  $223,392
Reinsurance recoverable...............................        24,931      2,556    $4,107
                                                            --------   --------  --------
Reserves reported on a GAAP basis.....................      $336,685    253,546  $227,499
                                                            ========   ========  ========

The following table represents the development of loss reserves for the period 1987 through 1996. The top line of the table shows the reserves at the balance sheet date net of reinsurance recoverable for each of the indicated years. This represents the estimated amount of losses and loss adjustment expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the Company. The upper portion of the table shows the cumulative amounts paid as of successive years with respect to that reserve liability. The lower portion of the table shows the 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 estimate changes as more information becomes known about the frequency and severity of claims for individual years. A redundancy (deficiency) exists when the original reserve estimate is greater (less) than the re-estimated reserves at December 31, 1996.

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,
                                    -----------------------------------------------------------------------------------------
                                      1987     1988     1989     1990     1991     1992     1993    1994     1995    1996
                                    ------     ----     ----     ----     ----     ----     ----    ----     ----    --------
                                                                    (Amounts in thousands)
Net reserves for
 losses and loss
 adjustment expenses.               $178,605 $241,037 $291,408 $301,354 $280,157 $239,203 $214,525 $223,392 $250,990 $311,754
Paid (cumulative)
 as of:
   One year later.....               112,099  139,874  167,850  181,781  151,866  135,188  143,272  145,664  167,226
   Two years later....               147,641  195,453  227,503  238,030  197,640  184,119  187,641  198,967
   Three years later..               166,477  218,335  249,371  254,884  213,824  197,371  204,606
   Four years later...               175,232  226,384  256,659  261,058  218,067  201,365
   Five years later...               177,328  229,168  259,147  263,011  220,057
   Six years later....               177,938  229,773  259,781  262,741
   Seven years later..               178,178  229,815  259,769
   Eight years later..               178,215  229,693
   Nine years later...               178,103

Net reserves re-estimated as of:
   One year later.....               173,325  230,249  269,934  285,212  230,991  204,479  204,451  216,684  247,122
   Two years later....               175,876  233,607  269,652  265,618  218,404  204,999  207,089  222,861
   Three years later..               179,157  234,757  259,635  259,624  220,620  203,452  210,838
   Four years later...               180,084  228,909  256,694  264,259  221,118  204,603
   Five years later...               177,591  228,326  260,365  264,127  221,264
   Six years later....               177,335  230,102  260,402  263,336
   Seven years later..               178,364  229,998  260,098
   Eight years later..               178,303  229,809
   Nine years later...               178,145
Net Cumulative Redundancy
   (deficiency).......                   460   11,228   31,310   38,018   58,893   34,600    3,687      531    3,868

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                                                                   As of December 31,
                                    -----------------------------------------------------------------------------------
                                    1987    1988    1989     1990     1991     1992     1993     1994     1995     1996
                                    ----    ----    ----     ----     ----     ----     ----     ----     ----     ----
                                                                 (Amounts in thousands)
Gross liability - end of year                                                 240,183  215,301  227,499  253,546  336,685
Reinsurance recoverable                                                          (980)    (776)  (4,107)  (2,556) (24,931)
                                                                              -------  -------  -------  -------  -------
Net liability - end of year                                                   239,203  214,525  223,392  250,990  311,754
                                                                              =======  =======  =======  =======  =======
Gross re-estimated liability - latest                                         209,988  217,237  234,199  254,892
Re-estimated recoverable - latest                                              (5,385)  (6,399) (11,338)  (7,770)
                                                                              -------  -------  -------  -------
Net re-estimated liability - latest                                           204,603  210,838  222,861  247,122
                                                                              =======  =======  =======  =======
Gross cumulative redundancy                                                    39,005    9,310    7,762    9,082
                                                                              =======  =======  =======  =======

For the calendar years 1987 through 1995, 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. 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 Insurance Commissioner's approval of an 85% temporary rate increase in September 1990, the volume of assigned risk business has 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. Fourth, a number of factors have combined to produce favorable frequency and severity trends in recent years, and actuarial assumptions based on historical trends have proved to be conservative.

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 1992 ratios exclude the effect of a rate refund made pursuant to a settlement with the

6

California DOI related to the 1988 initiative, Proposition 103. The Company's ratios include lines of insurance other than private passenger automobile written by Mercury Casualty Company and AFI. 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.

                                                   Year ended December 31,
                                        ---------------------------------------------
                                         1996      1995      1994      1993     1992
                                        -------   -------   -------   ------   ------
Loss Ratio...........................     66.6%     67.8%     68.4%    61.3%    60.8%
Expense Ratio........................     24.0      24.0      24.6     24.8     24.2
                                          ----      ----      ----     ----     ----
Combined Ratio.......................     90.6%     91.8%     93.0%    86.1%    85.0%
                                          ====      ====      ====     ====     ====
 Industry combined ratio (all
  writers) (1).......................    101.9%(2) 102.3%    101.8%   101.8%   102.4%
Industry combined ratio (excluding
  direct writers) (1)................     N.A.     103.5%    102.5%   103.2%   104.9%
- ------------------------------------

(1) Source: A.M. Best, Aggregates & Averages (1996), for all property and casualty insurance companies (private passenger automobile line only, after policyholder dividends).

(2) Source: A.M. Best, "Best's Review, January 1997," "Review and Preview."

(N.A.) Not available.

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,
                               --------------------------------------------------
                               1996         1995       1994      1993        1992
                               ----         ----       ----      ----        ----
                                    (Amounts in thousands, except ratios)
Net premiums written (1)..   $795,873      $636,590   $550,838   $484,097   $455,685
Policyholders' surplus....   $594,799       479,114   $411,898   $314,136   $294,374
Ratio.....................   1.3 to 1      1.3 to 1   1.3 to 1   1.5 to 1   1.6 to 1

(1) The 1992 amounts exclude the effect of the Proposition 103 settlement.

Risk-Based Capital Requirements

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

7

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, 1996. Each of the companies exceeded the highest level of recommended capital requirements.

Investments and Investment Results

The investments of the Company are made by the Company's Chief Financial 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, and does not maintain a trading account. However, sales of securities are undertaken, with resulting gains or losses, in order to enhance after-tax yield and keep its portfolio in line with current market conditions. Tax considerations are important in portfolio management, and have been made more so since 1986 when the alternative minimum tax was imposed on casualty companies. Changes in loss experience, growth rates and profitability produce significant changes in the Company's exposure to alternative minimum tax liability, requiring appropriate shifts in the investment asset mix between taxable bonds, tax-exempt bonds and equities in order to maximize after-tax yield. The optimum asset mix is subject to continuous review. At year-end, approximately 68% 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 A at December 31, 1996.

The nominal average maturity of the bond portfolio excluding AFI, was 16.8 years at December 31, 1996, but the call-adjusted average maturity of the portfolio is shorter, approximately 8.7 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 5.9 years at December 31, 1996 excluding AFI. 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 1.3% of total investments. All but $1.5 million of such holdings were downgraded to their current ratings subsequent to purchase. Equity holdings consist primarily of perpetual preferred stocks and relatively high yielding electric utility common stocks on which dividend income is partially tax-sheltered by the 70% corporate dividend exclusion.

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The following table summarizes the investment results of the Company for the five years ended December 31, 1996.

                                                               Year ended December 31,
                                                   ------------------------------------------------
                                                   1996(1)    1995       1994       1993       1992
                                                   ----       ----       ----       ----       ----
                                                                (Amounts in thousands)
Averaged invested assets (includes
 short-term cash investments)..(2)                $975,058   $827,861   $727,866   $683,874   $649,001
Net investment income:
       Before income taxes.........                 70,180     62,964     54,586     54,121     52,994
       After income taxes..........                 63,371     57,035     49,787     48,223     46,376
Average annual return on investments:
       Before income taxes..............               7.2%       7.6%       7.5%       7.9%       8.2%
       After income taxes...............               6.5%       6.9%       6.8%       7.1%       7.2%
Net realized investment gains
 (losses) after income taxes......                $ (2,062)  $    681   $ (6,485)  $  1,954   $  3,415
Net increase (decrease) in un-
 realized gains on all invest-
 ments after income taxes.........                $ (6,271)  $ 37,960   $(36,503)  $    556   $ (2,501)

(1) Includes AFI for the month of December 1996.

(2) Fixed maturities at cost, equities at market.

The following table sets forth the composition of the investment portfolio of the Company at the dates indicated, including AFI at December 31, 1996.

                                                                     December 31,
                                             -----------------------------------------------------------
                                                     1996              1995                 1994
                                             ------------------- -----------------   -------------------
                                              Amortized Market    Amortized Market     Amortized Market
                                                Cost       Value    Cost    Value      Cost      Value
                                                ----       -----    ----    -----      ----      -----
                                                               (Amounts in thousands)
Taxable Bonds...........................     $ 76,494   $ 76,113 $ 21,518 $ 22,539   $ 18,332   $ 18,128
Tax-Exempt State and
 Municipal Bonds........................      781,586    808,761  630,811  663,163    529,592    520,748
Sinking Fund Preferred
 Stocks.................................       66,713     69,234   90,080   94,081    108,858    105,421
                                           ---------- ---------- -------  --------   --------   --------
  Total Fixed Maturity
   Investments..........................      924,793    954,108  742,409  779,783    656,782    644,297
Equity Investments incl.
 Perpetual Preferred
 Stocks.................................      148,264    148,112  113,478  114,915     91,726     84,622
Short-term Cash Invest-
 ments..................................       66,067     66,067   28,496   28,496     22,695     22,695
                                           ---------- ---------- -------- --------   --------   --------
Total Investments.......                   $1,139,124 $1,168,287 $884,383 $923,194   $771,203   $751,614
                                           ========== =========  ======== ========   ========   ========

At December 31, 1996, the Company had a net unrealized gain on all investments of $29,163,000 before income taxes.

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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 concerning insurance company operations, the Company in 1995 was the seventh largest writer of private passenger automobile insurance in California. All of the insurance companies having greater shares of the California market sell insurance either directly or through exclusive agents, rather than through independent agents.

The property and casualty insurance industry is highly cyclical, character- ized 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, competitive pressures have become more pronounced in the last several years. The current level of profits makes the market attractive for new companies, although some of the small companies who entered the California private passenger automobile market in recent years have already experienced unsatisfactory results.

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 Department of Insurance. In the most recent survey conducted in 1996, the Company's rates for most classes of insureds were among the lowest available in most territories throughout the state. 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.

The current and future competitive climate for private passenger automobile insurance in California remains uncertain. All rates charged by private passenger automobile insurers are subject to the prior approval of the California Insurance Commissioner. New rating factor regulations have recently been issued but the filings required under those regulations have not yet been approved. See "Regulation - Automobile Insurance Rating Factor Regulations."

AFI encounters similar competition in each state in which it principally operates.

Reinsurance

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

The Company maintains property reinsurance under a treaty which was effective April 1, 1995 with National Reinsurance Corporation, which is rated A+ by A.M. Best & Co. The treaty provides $900,000 coverage in excess of $100,000 for each risk subject to a maximum of $2,700,000 for any one occurrence. A

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second layer of coverage provides 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.

Prior to February 1, 1995, ERC provided catastrophe reinsurance for property and auto physical damage business. Under the treaty, ERC agreed to pay 95% of $9,000,000 in excess of $1,000,000 for any single occurrence and 95% of $18,000,000 for all occurrences in one calendar year. Effective February 1, 1995, the treaty with ERC was amended to provide coverage for 95% of $7,500,000 in excess of $5,000,000 each occurrence subject to an aggregate limit of 95% of $15,000,000 for all occurrences. Effective April 1, 1995 this treaty was replaced with a new catastrophe treaty covering all physical damage and property lines with several reinsurers arranged through E.W. Blanch Company, a reinsurance intermediary. The main reinsurers are rated A or better by A.M. Best. Under the new treaty, the first layer of protection is 95% of $7,500,000 in excess of $10,000,000, for a single occurrence, with a second layer providing 95% of $12,500,000 in excess of $17,500,000. Effective September 1, 1996 the treaty was replaced to provide coverage under two new layers through the same principal reinsurers. Under the new treaty coverage is provided for 95% of $10,000,000 in excess of $15,000,000 per occurrence in the first layer and 95% of $15,000,000 in excess of $25,000,000 in the second layer.

Employers Reinsurance Corporation reinsures AFI through working layer treaties for property and casualty losses in excess of $150,000. 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%- 85% of the business written depending on the year the policy incepted. For policies effective on or after January 1, 1997, AFI is retaining the full exposure. AFI has other reinsurance treaties and facultative arrangements in place for various smaller lines of business.

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

Regulation

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

The powers of the 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 DOI are designed principally for the benefit of policyholders and not for insurance company shareholders. The DOI conducts periodic examinations of the Company's insurance subsidiaries. The DOI recently conducted an examination of the California insurance subsidiaries as of December 31, 1994. The reports on the results of that examination recommended no adjustments to the statutory financial statements as filed by the Company.

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

In California, insurance rates have required prior approval since November 1989. Georgia and Kansas are also prior approval states, while Illinois only requires that rates be filed with the Department of Insurance prior to their use. Texas and Oklahoma 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 recently conducted an examination of Mercury Insurance Company of Georgia and Mercury Indemnity Company of Georgia as of December 31, 1994. The reports on that audit have recommended no changes to the statutory financial statements as filed. The DOI of Illinois 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 not been issued but the auditors have indicated there will be no changes recommended to the statutory financial statements as filed. The states of Oklahoma, Kansas and Texas will also conduct periodic examinations of AFI.

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 1996 and 1995, those contributions amounted to $548,000 and $209,000, respectively. The Company believes in supporting the political process and intends to continue to make such contributions in amounts which it determines are appropriate and lawful.

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. The only assessment imposed during the past five years was an immaterial amount in 1994. 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 5 years in those states either.

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Holding Company Act

The Company's California subsidiaries are subject to regulation by the 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 DOI may examine the affairs of each company at any time. The Holding Company Act requires disclosure of any material transactions by or among the companies. Certain transactions defined to be of an "extraordinary" type may not be effected without the prior approval of the DOI. Such transactions include, but are not limited to, sales, purchases, exchanges, loans and extensions of credit, and investments made within the immediately preceding 12 months involving, in the net aggregate, more than the lesser of 5% of the company's admitted assets or 25% of surplus as to policyholders, as of the preceding December 31. Effective January 1, 1997 the threshold for a material or extraordinary transaction was amended to a single measure of one half of one percent of admitted assets as of the preceding December 31st. There will no longer be any aggregation of transactions in the determination of the threshold except in the case of dividends. An extraordinary dividend is a dividend which, together with other dividends or distributions made within the preceding 12 months, exceeds the greater of 10% of the insurance company's policyholders' surplus as of the preceding December 31 or the insurance company's net income for the preceding calendar year. An insurance company is also required to notify the 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 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, Kansas and Texas are subject to holding company acts in those states, the provisions of which are substantially similar to those of California. Regulatory approval was obtained from California, Oklahoma and Texas before the acquisition of AFI was completed.

Assigned Risks

Automobile liability insurers in California are required to sell bodily injury liability, property damage liability, medical expense and uninsured motorist coverage to a proportionate number (based on the insurer's share of the California automobile casualty insurance market) of those drivers applying for placement as "assigned risks." Drivers seek placement as assigned risks because

13

their driving records or other relevant characteristics make them difficult to insure in the voluntary market. During the last five years, approximately 0.9% of the direct automobile insurance premium written was for assigned risk business. In 1996, assigned risks represented 0.6% of total automobile direct premiums written and 0.8% of total automobile direct premium earned. Premium rates for assigned risk business are set by the 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.

Automobile Insurance Rating Factor Regulations

Commencing November 8, 1989, Proposition 103 required that property and casualty insurance rates must be approved by the Commissioner prior to their use, and that no rate shall be approved which is excessive, inadequate, unfairly discriminatory or otherwise in violation of the provisions of the initiative. The proposition specified three statutory factors required to be applied in "decreasing order of importance" in determining rates for private passenger automobile insurance: (1) the insured's driving safety record, (2) the number of miles the insured drives annually, and (3) the number of years of driving experience of the insured. The new law also gave the Commissioner discretion to adopt other factors by regulation that have a substantial relationship to risk of loss. The new 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 the emergency regulations which have been in use since their issuance in 1989. The new regulations require all automobile insurers in California to submit new rating plans complying with the regulations by February 18, 1997. The Company does not expect the newly filed rating plan, if approved by the Commissioner, to have a material effect on its competitive position or its profitability. However, the Company has not been able to review the filings of its competitors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview."

California Financial Responsibility Law

Effective January 1, 1997 California has 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

14

one is stopped for a traffic violation. Media attention to the new law has resulted in a surge of new business applications in January. Although the initial demand has tapered off, it has produced a backlog of applications, which are being processed. The persistence of this new business is uncertain, but the new law could produce additional growth considering the large proportion of uninsured motorists in California. The Company has suspended its advertising program while it works to eliminate the backlog of new business.

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

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 sq.ft. office building owned by the Company.

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

In October 1992 the Company purchased a 158,000 square foot office building in Brea, California. The Company occupies approximately 43% of the facility and leases the remaining office space to others.

The Company leases all of its other offices under short-term leases. 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 California judicial decisions. The Company vigorously defends these actions, unless a reasonable settlement appears appropriate. The Company believes that adverse results, if any, in the actions currently pending should not have a material effect on the Company's operations or financial position.

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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 certain information concerning the executive officers of the Company as of March 21, 1997:

NAME                     AGE               POSITION
- ----                     ---               --------

George Joseph             75   Chairman of the Board and Chief
                                Executive Officer
Michael D. Curtius        47   President and Chief Operating Officer
Cooper Blanton, Jr.       70   Executive Vice President
Keith L. Parker           69   Vice President and Chief Financial Officer
Bruce E. Norman           48   Vice President in charge of Marketing
Joanna Y. Moore           41   Vice President and Chief Claims Officer
Kenneth G. Kitzmiller     50   Vice President in charge of Underwriting
Donna J. Moore            41   Vice President and Controller
Judy A. Walters           50   Secretary

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

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

Mr. Blanton, Executive Vice President, joined the Company in 1966 and supervised its underwriting activities from 1967 until September 1995. He was appointed Executive Vice President of Mercury Casualty and Mercury Insurance in 1983 and was named Executive Vice President of Mercury General in 1985. In May of 1995 he was named President of the Georgia and Illinois insurance company subsidiaries and in February of 1996 he was elected to the Board of Directors of those companies. Mr. Blanton has over 40 years of experience in underwriting and other aspects of the property and casualty insurance business.

Mr. Parker, Vice President and Chief Financial Officer, has been employed by the Company or its subsidiaries since 1970 and has held his present position since October 1985. Mr. Parker has over 40 years of investment management experience and has been primarily responsible for management of the Company's investment portfolio since 1972.

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Mr. Norman, Vice President in charge of Marketing, has been employed by the Company since 1971. Mr. Norman was named to this position in October 1985, and has been 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 of 1996 he was elected to the Board of Directors of the California Companies.

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

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

Ms. Donna Moore, Vice President and Controller, joined the Company in June 1983 as its Controller. She was appointed Vice President in October 1985. Ms. Moore has over 15 years of experience in the insurance industry and is a Certified Public Accountant in the state of California.

Ms. Walters has been employed by the Company since 1967, and has served as its Secretary since 1982.

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PART II

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

Holder Matters

Price Range of Common StocK

The following table shows the price range per share in each quarter as reported on the Nasdaq National Market until October 9, 1996 and on the New York Stock Exchange since that date. These quotations do not include adjustments for retail mark-ups, mark-downs or commissions.

                                                   High        Low
                                                   ----        ---
1995

     1st Quarter...............................   $34.250     $28.250
     2nd Quarter...............................   $35.000     $28.750
     3rd Quarter...............................   $39.000     $31.750
     4th Quarter...............................   $39.750     $37.750

1996                                               High        Low
                                                   ----        ---
     1st Quarter...............................   $52.000     $41.500
     2nd Quarter...............................   $47.750     $40.750
     3rd Quarter...............................   $47.750     $39.750
     4th Quarter...............................   $58.250     $47.000

1997
     1st Quarter (January 1 - March 14)........   $65.000     $52.250

Dividends

Following the public offering of its Common Stock in November 1985, the Company has paid regular quarterly dividends on its common stock. On February 7, 1997, the Directors declared a $0.29 quarterly dividend ($1.16 annually) payable on March 31, 1997 to stockholders of record on March 17, 1997. The dividend rate has been increased thirteen times since dividends were initiated in January, 1986, at an annual rate of $0.10, adjusted for the two-for-one stock split in September 1992. 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 ten percent 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

18

entitled to pay dividends to Mercury General during 1997 of up to approximately $61.5 million. See Note 9 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 1, 1997 was 230. The approximate number of beneficial holders as of March 17, 1997 was 5,231 according to the Bank of New York, the Company's transfer agent.

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Item 6. Selected Consolidated Financial Data

                                                                       Year ended December 31,
                                                       -------------------------------------------------------
                                                          1996        1995       1994        1993       1992
                                                       ----------   --------   ---------   --------   --------
                                                            (Amounts in thousands, except per share data)
Income Data:
Premiums earned.....................................    $754,724    $616,326   $529,390    $474,093   $455,508
Net investment income...............................      70,180      62,964     54,586      54,121     52,994
Realized investment gains(losses)                         (3,173)      1,048     (9,853)      3,006      5,174
Other...............................................       3,233       3,341      3,123       2,544      1,606
                                                        --------    --------   --------    --------   --------

   Total Revenues...................................     824,964     683,679    577,246     533,764    515,282
                                                        --------    --------   --------    --------   --------

Losses and loss adjustment
  expenses..........................................     501,858     416,556    360,557     289,208    276,088
Policy acquisition costs............................     160,019     128,743    112,682      99,738     94,672
Other operating expenses............................      24,493      22,017     20,566      18,564     16,688
Impact of rate refund...............................          --          --         --          --     18,621
Interest............................................       2,004       2,040      1,025         793      1,192
                                                        --------    --------   --------    --------   --------

   Total Expenses...................................     688,374     569,356    494,830     408,303    407,261
                                                        --------    --------   --------    --------   --------

Income before income taxes..........................     136,590     114,323     82,416     125,461    108,021
Income taxes........................................      30,826      24,022     16,121      29,252     24,695
                                                        --------    --------   --------    --------   --------
   Net Income.......................................    $105,764    $ 90,301   $ 66,295    $ 96,209   $ 83,326
                                                        ========    ========   ========    ========   ========

Per Share Data:
Net income per share................................    $   3.86        3.31   $   2.43    $   3.52   $   3.06
                                                        ========    ========   ========    ========   ========
Dividends paid                                          $    .96         .80   $    .70    $    .60   $    .50
                                                        ========    ========   ========    ========   ========

                                                                            December 31,
                                                         ---------------------------------------------------
                                                         1996       1995         1994       1993        1992
                                                         ----       ----         ----       ----        ----
                                                            (Amounts in thousands, except per share data)
Balance Sheet Data:
Total investments...................................  $1,168,287    $923,194    $751,614   $740,480    $661,672
Premiums receivable.................................      83,748      58,902      48,741     38,227      35,454
Total assets........................................   1,419,927   1,081,656     911,693    863,962     775,402
Unpaid losses and loss adjust-
 ment expenses......................................     336,685     253,546     227,499    215,301     240,183
Unearned premiums...................................     260,878     168,404     148,654    128,828     117,524
Notes payable.......................................      75,000      25,000      25,000     15,000      15,000
Deferred income tax liability
  (asset)...........................................       6,349      10,158     (10,190)     8,758         466
Shareholders' equity................................     641,222     565,188     457,161    450,275     353,704
Book value per share................................       23.37       20.67       16.75      16.44       12.95


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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 did business only in the state of California until 1990, when it began operations in Georgia and Illinois. In December 1996, the American Fidelity Insurance Group (AFI) was acquired for cash. The results of operations of AFI for the month of December only are included in the Company's consolidated statements of income. AFI writes automobile (approximately 54% of AFI's direct premiums) and other casualty lines of insurance principally in Oklahoma, Texas and Kansas, and is headquartered in Oklahoma City, Oklahoma. Total direct premiums written by AFI in 1996 were $90.4 million; of that amount $5.5 million of premiums were written in December. The Group is licensed in 36 states.

During 1996, approximately 98% of the Company's direct premiums written, excluding AFI, 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 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. Further rate modifications were approved and made effective on October 15, 1995 and April 15, 1996. The rate changes made over the last three years have been substantially revenue-neutral overall, with physical damage rates being increased and bodily injury liability rates decreased. The rate changes have 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 by approximately 190,000 to 494,000 at December 31, 1996, an annual rate of increase of over 20%, compared with an annualized growth rate of 4.1% over the prior fifteen month period.

In September 1996, the California Insurance Commissioner issued new permanent rating factor regulations designed to implement the requirements that automobile insurance rates be determined by (1) driving safety record, (2) years of driving experience, (3) miles driven per year and (4) whatever optional factors are determined by the 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.

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The new permanent regulations replace emergency regulations which have been in use since their issuance in 1989. They require all automobile insurers in California to submit new rating plans complying with the regulations in early 1997. In January 1997, in response to a court ruling on the issue of surcharges imposed on drivers not complying with California's financial responsibility law, the Commissioner amended the regulations to exclude such non-compliance as a rating factor.

The statistical methodology prescribed by the regulations for determining rating factor weightings are technical and complex. The January amendment required the Company to rework its rate filing. The Company submitted its new proposed rating plan on March 11, 1997.

The filings must be reviewed and approved by the Department, and the companies will have ninety days following approval to place their new rates in effect. The Company does not expect the newly filed rating plan, if approved by the Commissioner, to have a material effect on its competitive position or its profitability. However, the Company has not yet been able to review the filings of its competitors.

Results of Operations

Year Ended December 31, 1996 Compared to Year Ended December 31, 1995

Premiums earned in 1996 of $754.7 million (including $5.2 million contributed by AFI in December 1996) increased 22.5%, primarily reflecting unit growth. Average premium per policy for the year was substantially unchanged. Net premiums written in 1996 of $795.9 million (including $4.5 million contributed by AFI) increased 25.0% over a year earlier, continuing a growth trend which began in the second quarter of 1993.

The loss ratio in 1996 (loss and loss adjustment expenses related to premiums earned) was 66.5%, compared with 67.6% in 1995. The 1996 and 1995 loss ratios reflect small contributions from favorable loss reserve development from prior periods.

The expense ratio (policy acquisition costs and other operating expenses related to premiums earned) was 24.4% in 1996 and 1995. The consolidation of one month of operating results of AFI in 1996 had no material effect on either the loss or expense ratios.

Total losses and expenses in 1996, excluding interest expense of $2.0 million, were $686.4 million, resulting in an underwriting gain for the period of $68.4 million, compared with an underwriting gain of $49.0 million in 1995.

Investment income in 1996, including a contribution from AFI of $400,000 for the final month of the year, was $70.2 million, compared with $63.0 million in 1995. The after-tax yield on average investments of $975.1 million, including AFI, (fixed maturities at cost, equities at market) was 6.50%, compared with 6.89% on average investments of $827.9 million in 1995. The effective tax rate on investment income was 9.7% in 1996, compared with 9.4% in 1995. The effective tax rate was increased and the effective after-tax yield was reduced slightly by

22

the inclusion of AFI for the month of December 1996. The effective tax rate on investment income in 1996, excluding AFI, was 9.6%, and the after-tax yield was 6.56%. The slightly higher tax rate on investment income in 1996 reflects an increase in the proportion of investment income derived from dividends on equities, principally perpetual preferred stocks. The redemption of bonds acquired during higher interest periods has been a negative influence on realized yields in each of the last several years and will continue in 1997. Bonds matured and called in 1996 totaled $72.9 million, compared with $71.0 million in 1995, and approximately $48.6 million of calls and maturities are expected in 1997. Average yields being obtained during the first quarter of 1997 on new investments are some 50 basis points lower than the average yield realized in 1996.

Realized investment losses in 1996 were $3.2 million, compared with realized gains of $1.0 million in 1995. The 1996 losses reflect principally yield-enhancing swaps of both fixed maturities and equity securities, including perpetual preferred stocks, designed to utilize expiring capital gains tax benefits. The 1995 gains arose in part from the early redemption of fixed- maturity investments.

The income tax provision of $30.8 million in 1996 represented an effective tax rate of 22.6%, compared with an effective rate of 21.0%, in 1995. The increase in the rate is attributable principally to the greater contribution from underwriting gains, which are fully taxable and increased by $19.4 million during 1996, whereas the predominantly tax-free investment income increased $7.2 million.

Net income in 1996 was $105.8 million, or $3.86 per share, compared with $90.3 million, or $3.31 per share, in 1995. Per share results are based on 27.4 million average shares in 1996 and $27.3 million average shares in 1995.

Year Ended December 31, 1995 Compared to Year Ended December 31, 1994

Premiums earned in 1995 increased 16.4%, primarily reflecting unit growth. Average premium per policy for the year was substantially unchanged. Net premiums written in 1995 increased 15.6% over a year earlier, continuing a growth trend which began in the second quarter of 1993.

The loss ratio in 1995 (loss and loss adjustment expenses related to premiums earned) was 67.6%, compared with 68.1% in 1994. In contrast to the previous several years, the 1995 and 1994 loss ratios reflect smaller contributions from favorable loss reserve development from prior periods.

The expense ratio (policy acquisition costs and other operating expenses related to premiums earned) was 24.4%, compared with 25.2% in 1994. The improvement reflects both economies related to greater premium volume and smaller provisions for agent and employee incentive bonuses in 1995.

Total losses and expenses, excluding interest expense of $2.0 million, were $567.4 million, resulting in an underwriting gain for the period of $49.0 million, compared with an underwriting gain of $35.6 million in 1994.

23

Investment income in 1995 was $63.0 million, compared with $54.6 million in 1994. The after-tax yield on average investments of $827.9 million (fixed maturities at cost, equities at market) was 6.89%, compared with 6.84% on average investments of $727.9 million in 1994. The effective tax rate on investment income was 9.4% in 1995, compared with 8.8% in 1994. The slightly higher tax rate reflects an increase in the proportion of investment income derived from dividend income on equities, principally perpetual preferred stocks, compared to tax-exempt income. The maintenance of above-average yields during a period of declining interest rates is, in part, the result of the bond restructuring program undertaken in 1994 when bonds acquired in lower interest rate environments were sold with proceeds reinvested at significantly higher rates. The redemption of bonds acquired during higher interest periods has been a negative influence on realized yields which will continue in 1996 and 1997. Bonds matured and called in 1995 totaled $71.0 million, compared with $53.4 million in 1994, and approximately $83.1 million of calls and maturities are expected in 1996. Average yields being obtained during the first quarter of 1996 on new investments are some 50-75 basis points lower than the average 1995 portfolio yield.

Realized investment gains in 1995 were $1.0 million, compared with realized losses of $9.9 million in 1994. The 1994 losses reflect principally yield- enhancing swaps of both fixed maturities and equity securities, including perpetual preferred stocks, undertaken to recapture capital gains taxes paid in prior years. The 1995 gains arose in part from the early redemption of fixed- maturity investments.

The income tax provision of $24.0 million in 1995 represented an effective tax rate of 21.0%, compared with an effective rate of 19.6%, in 1994. The increase in the rate is attributable principally to the realization of capital gains in 1995, in contrast to the realization of losses in 1994.

Net income in 1995 was $90.3 million, or $3.31 per share, compared with $66.3 million, or $2.43 per share, in 1994. Per share results are based on 27.3 million average shares in both years.

Year Ended December 31, 1994 Compared to Year Ended December 31, 1993

Premiums earned in 1994 increased 11.7%, reflecting unit growth. Average premium per policy was substantially unchanged by the May 1, 1994 rate revisions. Direct premiums written in the first half of 1994 increased 10.7% over a year earlier, continuing the growth trend which began in the second quarter of 1993. During the last half of 1994, this increase accelerated to 14.1% over the prior year as a result of the May 1, 1994 rate revisions.

The loss ratio in 1994 was 68.1%, compared with 61.0% in 1993. The higher loss ratio in 1994 reflects a much smaller contribution from favorable loss reserve development from prior periods and a reduction in the estimate of salvage and subrogation recoverable for prior accident years. The major earthquake which struck Southern California on January 17, 1994 resulted in net loss claims, after reinsurance recoveries, of approximately $1.2 million, which added less than 0.25% to the 1994 loss ratio. Earthquake losses were immaterial as the Company writes only a small amount of homeowners' insurance. Approximately one half of

24

the net earthquake losses incurred were related to the Company's principal line, automobile insurance, while the other half was related to the homeowners' line.

The expense ratio (policy acquisition costs and other expenses related to premiums earned) was 25.2%, compared with 25.0% in 1993.

Total losses and expenses, excluding interest expense of $1,025,000, were $493.8 million, resulting in an underwriting gain for the period of $35.6 million, compared with an underwriting gain of $66.6 million in 1993.

Investment income in 1994 was $54.6 million, compared with $54.1 million in 1993. The after-tax yield on average investments of $727.9 million (fixed maturities at cost, equities at market) was 6.84%, compared with 7.05% on average investments of $683.9 million in 1993. The effective tax rate on investment income was 8.8% in 1994, compared with 10.9% in 1993, reflecting an increase in the proportion of tax-exempt interest income. The decline in realized investment yields reflects principally the redemption and maturity of bonds and preferred stocks acquired in higher interest rate environments.

Realized investment losses in 1994 were $9.9 million, compared with realized gains of $3.0 million in 1993. The losses reflect principally yield- enhancing swaps of both fixed maturities and equity securities, including perpetual preferred stocks. The 1993 gains arose in significant part from the redemption of fixed-maturity investments. The realized capital losses were undertaken to recapture capital gains taxes paid in prior years.

The income tax provision of $16.1 million in 1994 represented an effective tax rate of 19.6%, compared with an effective rate of 23.3%, in 1993. The decrease in the rate is attributable principally to the decrease in fully taxable underwriting income, and the resulting higher proportion of tax exempt investment income.

Net income in 1994 was $66.3 million, or $2.43 per share, compared with $96.2 million, or $3.52 per share, in 1993. Per share results are based on 27.3 million average shares in 1994 and 27.4 million average shares in 1993.

Liquidity and Capital Resources

Net cash provided from operating activities in 1996, including $9.7 million from AFI, was $196.6 million, while funds derived from the sale, redemption or maturity of investments was $531.5 million, of which approximately 75% was represented by the sale of equity securities. The amortized cost of fixed- maturity investments increased by $182.4 million during the year. Equity investments, including perpetual preferred stocks, increased by $34.8 million at cost, and short-term cash investments increased by $37.6 million. The amortized cost of fixed-maturities available for sale that were sold, called or matured during the year was $133.2 million.

The market value of all investments held at market as "Available for Sale" exceeded the amortized cost of $1,139.1 million at December 31, 1996 by $29.2 million. That unrealized gain, reflected in shareholders' equity net of applicable tax effects, was $19.0 million at December 31, 1996 compared with an

25

unrealized gain of $25.2 million at December 31, 1995. The decrease in market values since December 31, 1995 reflects principally the increase in intermediate and long term interest rates during 1996.

The Company's cash and short term investments totaled $69.7 million at December 31, 1996. Together with funds generated internally, such liquid assets are more than adequate to pay claims without the sale of long term investments.

Traditionally, it has been the Company's policy not to invest in high yield or "junk" bonds. In 1995, the Company adopted a policy to place a small proportion of its investments in the taxable sector in bonds rated lower than investment grade, but not lower than Ba by Moody's or BB by Standard & Poor's. At December 31, 1996 bond holdings rated below investment grade totaled $15.2 million at market (cost $14.9 million), or 1.3% of total investments. All but $1.5 million of such holdings were downgraded to their current ratings subsequent to purchase. The average rating of the $789.6 million bond portfolio, excluding AFI, (at amortized cost) was A, while the average effective maturity, giving effect to anticipated early call, approximates 8.7 years. The modified duration of the bond portfolio at year-end, excluding AFI, was 5.9 years, reflecting the heavy weighting of high coupon issues, including housing issues subject to sinking funds, and other issues which are pre-refunded or are expected to be called prior to their maturity. Duration measures the length of time it takes to receive all the cash flows produced by a bond, including reinvestment of interest. Because it measures four factors (maturity, coupon rate, yield and call terms) which determine sensitivity to changes in interest rates, modified duration is a much better indicator of price volatility than simple maturity alone. Bond holdings are broadly diversified geographically, and, within the tax-exempt sector, consist largely of high coupon revenue issues, many of which have been pre-refunded and escrowed with U.S. Treasuries. General obligation bonds of the large eastern cities have generally been avoided.

Holdings in the taxable sector consist largely of senior public utility issues. Fixed-maturity investments of $924.8 million, including $68.5 million held by AFI, (at amortized cost) include $66.7 million of sinking fund preferreds, principally utility issues. The market value of all fixed maturities exceeded cost by $29.3 at December 31, 1996. The only securities held which may be considered derivatives are a small amount of adjustable rate preferred stocks.

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

Equity holdings of $148.1 million at market (cost $148.3 million), including perpetual preferred issues, are largely confined to the public utility and banking sectors and represent about 23.1% of total shareholders' equity.

The only significant debt of the Company at December 31, 1996 was a three year, $75,000,000 revolving credit bank loan. The loan agreement requires the Company to meet numerous affirmative and negative covenants. The proceeds of the loan were used to repay a prior loan and to acquire American Fidelity Insurance Company, with the balance contributed to the Company's new insurance subsidiaries. The loan agreement may be extended annually for additional periods

26

of one year each to maintain the three year maturity date. The interest rate is variable and is optionally related to the Federal Funds Rate, Bank of New York Rate (prime rate) or the Eurodollar London Interbank Rate (LIBOR). Based on the rates effective through June 25, 1997, LIBOR plus .50, the net interest cost on the loan approximates 6.08%.

In March 1994, the Company's Employee Stock Ownership Plan (the Plan) purchased 161,000 shares of Mercury's common stock in the open market at a price of $29.75 per share. The purchases were funded by a $5.0 million bank loan to the Plan which is guaranteed by the Company. The shares are being allocated to employees over a five year period, with the initial allocation made in December 1994, and the debt is being retired by Company contributions to the Plan over the same time period. 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 nominal 6.98% fixed rate of interest on the loan.

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, 1996. Each of the companies' policyholders' surplus exceeded the highest level of recommended capital requirements.

As of December 31, 1996, the Company had no material commitments for capital expenditures.

Industry and regulatory guidelines suggest that the ratio of a property and casualty insurer's annual net premiums written to statutory policyholders' surplus should not exceed 3.0 to 1. Based on the combined surplus of all of the licensed insurance subsidiaries of $594.8 million at December 31, 1996, and net written premiums for the twelve months ended on that date of $795.9 million, the ratio of writings to surplus was approximately 1.3 to 1.

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 success of the Company in integrating and profitably operating the business of AFI, the impact of the permanent rating factor regulations recently adopted by the California Insurance Commissioner for private passenger automobile policies issued in California and the level of investment yields obtainable in the

27

Company's investment portfolio in comparison to recent yields, as well as the cyclical and competitive nature of the property and casualty insurance industry and general uncertainties regarding loss reserve estimates and legislative and regulatory changes. Such risks and uncertainties and other factors are discussed above and in periodic filings with the Securities and Exchange Commission.

Supplementary Data

Summarized quarterly financial data for 1996 and 1995 is as follows (in thousands except per share data):

                                                                Quarter Ended
                                                   ----------------------------------------
                                                   March 31   June 30    Sept. 30   Dec. 31
                                                   --------   --------   --------   -------



1996
- ----
Earned premiums.................................   $169,563   $181,254   $193,298   $210,609
Income before income taxes......................   $ 27,421   $ 34,185   $ 38,078   $ 36,906
Net income......................................   $ 21,911   $ 26,583   $ 28,993   $ 28,277
Earnings per share..............................   $    .80   $    .97   $   1.06   $   1.03
Dividends declared per share....................   $    .24   $    .24   $    .24   $    .24

1995
- ----
Earned premiums.................................   $144,676   $151,732   $157,179   $162,739
Income before income taxes .....................   $ 22,449   $ 28,679   $ 32,305   $ 30,890
Net income......................................   $ 18,500   $ 22,407   $ 25,157   $ 24,237
Earnings per share..............................   $    .68   $    .82   $    .92   $    .89
Dividends declared per share....................   $    .20   $    .20   $    .20   $    .20

28

Item 8. Financial Statements

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                           PAGE
Independent Auditors' Report............................................    30
Consolidated Financial Statements:
    Consolidated Balance Sheets as of December 31, 1996 and 1995........    31
    Consolidated Statements of Income for Each of the Years in the
    Three-Year Period Ended December 31, 1996...........................    32
    Consolidated Statements of Shareholders' Equity for Each of the
     Years in the Three-Year Period Ended December 31, 1996.............    33
    Consolidated Statements of Cash Flows for Each of the Years in
    the Three-Year Period Ended December 31, 1996.......................    34
    Notes to Consolidated Financial Statements..........................    36

29

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, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mercury General Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles.

KPMG PEAT MARWICK LLP

Los Angeles, California
February 21, 1997

30

MERCURY GENERAL CORPORATION

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1996 AND 1995

AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT SHARE AMOUNTS

A S S E T S

                                                                        1996       1995
                                                                        ----       ----
Investments:
   Fixed maturities available for sale (amortized cost
    $924,793 in 1996 and $742,409 in 1995).........................  $  954,108   $  779,783
   Equity securities available for sale (cost $148,264 in
    1996 and $113,478 in 1995).....................................     148,112      114,915
   Short-term cash investments, at cost, which approxi-
    mates market...................................................      66,067       28,496
                                                                     ----------   ----------
             Total investments.....................................   1,168,287      923,194
Cash...............................................................       3,605        2,872
Receivables:
   Premiums receivable.............................................      83,748       58,902
   Premium notes...................................................      12,395       11,728
   Accrued investment income.......................................      18,410       15,870
   Other...........................................................      29,655        6,108
                                                                     ----------   ----------
                                                                        144,208       92,608
Deferred policy acquisition costs..................................      46,783       33,809
Fixed assets, net..................................................      30,060       27,464
Other assets.......................................................      26,984        1,709
                                                                     ----------   ----------
                                                                     $1,419,927   $1,081,656
                                                                     ==========   ==========
                         LIABILITIES AND SHAREHOLDERS' EQUITY

Losses and loss adjustment expenses................................  $  336,685   $  253,546
Unearned premiums..................................................     260,878      168,404
Notes payable......................................................      75,000       25,000
Loss drafts payable................................................      29,032       20,071
Accounts payable and accrued expenses..............................      36,463       25,412
Current income taxes...............................................       1,590          388
Deferred income taxes..............................................       6,349       10,158
Other liabilities..................................................      32,708       13,489
                                                                     ----------   ----------
             Total liabilities.....................................     778,705      516,468
                                                                     ----------   ----------
Shareholders' equity:
   Common stock without par value or stated value.
    Authorized 30,000,000 shares; issued and outstanding
     27,503,925 shares in 1996 and 27,442,675 in 1995..............      42,644       40,895
Net unrealized investment gains....................................      18,956       25,227
Unearned ESOP compensation.........................................      (2,000)      (3,084)
Retained earnings..................................................     581,622      502,150
                                                                     ----------   ----------
             Total shareholders' equity............................     641,222      565,188
                                                                     ----------   ----------
Commitments and contingencies......................................
                                                                     $1,419,927   $1,081,656
                                                                     ==========   ==========

See accompanying notes to consolidated financial statements.

31

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

THREE YEARS ENDED DECEMBER 31, 1996

AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA

                                                                 1996       1995      1994
                                                               --------   ---------   -----
Revenues:
  Earned premiums............................................. $754,724   $616,326   $529,390
  Net investment income ......................................   70,180     62,964     54,586
  Net realized investment gains (losses)(note 2)..............   (3,173)     1,048     (9,853)
  Other.......................................................    3,233      3,341      3,123
                                                               --------   --------   --------

       Total revenues.........................................  824,964    683,679    577,246
                                                               --------   --------   --------

Expenses:
  Losses and loss adjustment expenses.........................  501,858    416,556    360,557
  Policy acquisition costs ...................................  160,019    128,743    112,682
  Other operating expenses....................................   24,493     22,017     20,566
  Interest....................................................    2,004      2,040      1,025
                                                               --------   --------   --------

       Total expenses.........................................  688,374    569,356    494,830
                                                               --------   --------   --------

  Income before income taxes..................................  136,590    114,323     82,416

Income taxes .................................................   30,826     24,022     16,121
                                                               --------   --------   --------

  Net income.................................................. $105,764   $ 90,301   $ 66,295
                                                               ========   ========   ========

Earnings per share ........................................... $   3.86      $3.31      $2.43
                                                               ========   ========   ========

See accompanying notes to consolidated financial statements.

32

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

THREE YEARS ENDED DECEMBER 31, 1996

AMOUNTS EXPRESSED IN THOUSANDS

                                                                                     1996        1995        1994
                                                                                   ---------   ---------   --------

Common stock, beginning of year..................................................  $ 40,895    $ 40,250   $ 40,014
Proceeds of stock options exercised..............................................     1,104         384        206
Tax benefit on sales of incentive stock
 options.........................................................................       220          74         69
Release of common stock by the ESOP..............................................       425         187        (39)
                                                                                   --------    --------    -------
Common stock, end of year........................................................    42,644      40,895     40,250
                                                                                   --------    --------    -------

Net unrealized investment gains (losses) on
 securities, beginning of year...................................................    25,227     (12,733)    23,770
Net increase (decrease) in unrealized invest-
 ment gains (losses) on securities...............................................    (6,271)     37,960    (36,503)
                                                                                   --------    --------    -------
Net unrealized investment gains (losses) on
 securities, end of year.........................................................    18,956      25,227    (12,733)
                                                                                   --------    --------    -------

Unearned ESOP compensation relating to common
 stock purchases by ESOP.........................................................    (3,084)     (4,042)    (5,000)
Amortization of unearned ESOP compensation.......................................     1,084         958        958
                                                                                   --------    --------    -------
Unearned ESOP compensation, end of year..........................................    (2,000)     (3,084)    (4,042)
                                                                                   --------    --------    -------

Retained earnings, beginning of year.............................................   502,150     433,686     386,491
Net income.......................................................................   105,764      90,301      66,295
Dividends paid to shareholders...................................................   (26,292)    (21,837)    (19,100)
                                                                                   --------    --------    --------
Retained earnings, end of year...................................................   581,622     502,150     433,686
                                                                                   --------    --------    --------

       Total shareholders' equity................................................  $641,222    $565,188    $457,161
                                                                                   ========    ========    ========

See accompanying notes to consolidated financial statements.

33

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE YEARS ENDED DECEMBER 31, 1996
Amounts expressed in thousands

                                                                  1996         1995             1994
                                                               ----------   ----------   ------------------
Cash flows from operating activities:
   Net income                                                  $ 105,764    $  90,301            $  66,295
   Adjustments to reconcile net income to net cash
    provided from operating activities:
      Increase in unpaid losses and loss adjustment
       expenses                                                   35,947       26,047               12,198
      Increase in unearned premiums                               42,276       19,750               19,826
      Increase in premium notes receivable                          (667)        (166)              (1,618)
      Increase in premiums receivable                            (15,460)     (10,161)             (10,514)
      Increase in deferred policy acquisition costs               (7,080)      (3,741)              (4,345)
      Increase in loss drafts payable                              5,179        2,292                3,018
      Increase (decrease) in accrued income taxes,
       excluding deferred tax on change in unrealized
       gain                                                        1,016        4,995               (3,260)
      Increase (decrease) in accounts payable and accrued
       expenses                                                    8,385        3,487               (2,698)
       Depreciation                                                4,067        3,736                3,486
       Net realized investment (gains) losses                      3,173       (1,048)               9,853
       Bond amortization (accretion), net                         (1,112)        (103)               1,466
       Other, net                                                 15,136        1,169               (1,523)
                                                               ---------    ---------           ----------
              Net cash provided from operating activities        196,624      136,558               92,184

Cash flows from investing activities:
      Fixed maturities available for sale:
        Purchases                                               (243,779)    (204,360)            (239,193)
        Sales                                                     41,353       47,824              111,773
        Calls or maturities                                       91,834       70,954               53,351
      Equity securities available for sale:
        Purchases                                               (437,128)    (386,343)            (120,537)
        Sales                                                    398,306      365,696              108,949
      Purchase of AFI, less cash acquired                        (33,629)          --                   --
      Decrease (increase) in short-term cash investments,
       net                                                       (32,077)      (5,801)               7,046
      Purchase of fixed assets                                    (5,971)      (4,115)              (3,711)
      Sale of fixed assets                                           167          494                  268
                                                               ---------    ---------            ---------
         Net cash used in investing activities                 $(220,924)   $(115,651)           $ (82,054)

(Continued)

34

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(CONTINUED)

                                                  1996        1995         1994
                                                ---------   ---------   ----------
Cash flows from financing activities:
   Additions to notes payable                   $ 75,000    $     --      $ 25,000
   Principal payments on notes payable           (25,000)         --       (15,000)
   Dividends paid to shareholders                (26,291)    (21,837)      (19,100)
   Proceeds from stock options exercised           1,324         458           275
                                                --------    --------      --------
           Net cash provided by (used in)
             financing activities                 25,033     (21,379)       (8,825)
                                                --------    --------      --------

Net increase (decrease) in cash                      733        (472)        1,305
Cash:
   Beginning of the year                           2,872       3,344         2,039
                                                --------    --------      --------
   End of the year                              $  3,605    $  2,872      $  3,344
                                                ========    ========      ========

See accompanying notes to consolidated financial statements.

35

MERCURY GENERAL CORPORATION

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1996 and 1995

(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.

The consolidated financial statements include the accounts of Mercury General Corporation (the Company) 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 and Mercury Indemnity Company of Illinois. Effective December 1, 1996 the financial statements also include newly acquired companies American Fidelity Insurance Company, Cimarron Insurance Company, Inc., AFI Management Company, Inc. (AFIMC), and American Fidelity Lloyds Insurance Company (AFL). AFL is not owned by MGC, but is controlled by MGC through its attorney-in-fact, AFIMC. The acquisition is discussed further in Note 8. Collectively, the newly-acquired companies, including AFL, are referred to as AFI. All of the subsidiaries as a group, including AFL, but excluding AFIMC, 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. Actual results could differ from those estimates.

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.

36

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1996 and 1995

(1) Significant Accounting Policies (Continued)

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.

Temporary unrealized investment gains and losses on securities available for sale are credited or charged directly to shareholders' equity, 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 statement of income. Realized gains and losses are included in the consolidated statements of income based upon the specific identification method.

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 SFAS No. 115, 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 estimated fair value is equivalent to the carrying value of receivables, accounts payable and other liabilities. 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.

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. The liability is stated gross of reinsurance deductions, with the reinsurance deduction recorded in other assets.

Net premiums written during 1996, 1995 and 1994 were $795,873,000, $636,590,000 and $550,838,000, respectively.

37

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1996 and 1995

(1) Significant Accounting Policies (Continued)

One agent produced direct premiums written of approximately 17%, 15% and 13% of the Company's total direct premiums written during 1996, 1995 and 1994, respectively.

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.

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 law, 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

38

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1996 and 1995

(1) Significant Accounting Policies (Continued)

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 5- 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

Earnings per share are computed by dividing earnings by the weighted average number of common shares outstanding of 27,397,173 for 1996, 27,311,707 for 1995, and 27,273,192 for 1994.

Income Taxes

Deferred income taxes result from temporary differences in the recognition of income and expense for tax and financial reporting purposes.

Reinsurance

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

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

Statements of Cash Flows

Interest paid during 1996, 1995, and 1994 was $1,882,000, $1,970,000, and $1,001,000, respectively. Income taxes paid were $30,550,000 in 1996, $18,954,000 in 1995, and $19,315,000 in 1994.

39

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1996 and 1995

(1) Significant Accounting Policies (Continued)

The balance sheet of AFI at acquisition date included the following assets:
investments of $75,310,000, cash of $1,362,000, receivables of $44,418,000 and other assets of $31,124,000. Liabilities assumed in the acquisition included unearned premiums of $50,199,000, loss and loss adjustment expense reserves of $47,039,000 and other liabilities of $19,985,000.

Stock-Based Compensation

During October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which is effective for fiscal years beginning after December 15, 1995. The Company accounts for stock-based compensation under the accounting methods prescribed by Accounting Principles Board (APB) Opinion No. 25, as allowed by SFAS No. 123. Disclosure of stock-based compensation determined in accordance with SFAS No. 123 is presented in Footnote
13. Accordingly, adoption of this pronouncement did not have a material effect on the financial statements of the Company.

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)
                                                                ---------------------------
                                                                 1996      1995       1994
                                                                -------   -------   -------
Interest and dividends on fixed maturities...................   $55,132   $50,099   $46,636
Dividends on equity securities...............................    13,385    11,855     7,483
Interest on short-term cash investments......................     2,126     1,456       894
                                                                -------   -------   -------
       Total investment income...............................    70,643    63,410    55,013
Investment expense...........................................       463       446       427
                                                                -------   -------   -------
       Net investment income.................................   $70,180   $62,964   $54,586
                                                                =======   =======   =======

40

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1996 and 1995

(2) Investments and Investment Income (Continued)

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

                                                                                                Year ended December 31,
                                                                                                 (Amounts in thousands)
                                                                                               1996       1995        1994
                                                                                             --------    -------    ---------
Net realized investment gains (losses):
 Fixed maturities..................................................................          $   963     $   (57)    $(4,574)
 Equity securities.................................................................           (4,136)      1,105      (5,279)
                                                                                             -------     -------     -------
                                                                                             $(3,173)    $ 1,048     $(9,853)
                                                                                             =======     =======     =======

Gross gains and losses realized on the sales of investments (excluding calls) are shown below:

                                                                                                 Year ended December 31,
                                                                                                 (Amounts in thousands)
                                                                                             -------------------------------
                                                                                               1996       1995        1994
                                                                                             --------    -------    --------
Fixed maturities available for sale:
 Gross realized gains..............................................................          $   515     $   346     $   718
 Gross realized losses.............................................................           (1,237)       (822)     (5,633)
                                                                                             -------     -------     -------
   Net.............................................................................          $  (722)    $  (476)    $(4,915)
                                                                                             =======     =======     =======

Equity securities available for sale:
 Gross realized gains..............................................................          $ 2,925     $ 5,154     $   472
 Gross realized losses.............................................................           (7,115)     (4,049)     (5,751)
                                                                                             -------     -------     -------
   Net.............................................................................          $(4,190)    $ 1,105     $(5,279)
                                                                                             =======     =======     =======

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

                                                                                                Year ended December 31,
                                                                                                 (Amounts in thousands)
                                                                                             -------------------------------
                                                                                               1996       1995        1994
                                                                                             --------    -------    --------
Net increase (decrease) in net unrealized
 investment gains (losses):
  Fixed maturities available for sale..............................................          $(8,059)    $49,859     $(48,873)
  Income tax expense (benefit).....................................................           (2,821)     17,451      (17,106)
                                                                                             -------     -------     --------
                                                                                             $(5,238)    $32,408     $(31,767)
                                                                                             =======     =======     ========

  Equity securities................................................................          $(1,589)    $ 8,541     $ (7,285)
  Income tax expense (benefit).....................................................             (556)      2,989     $ (2,549)
                                                                                             -------     -------     --------
                                                                                             $(1,033)    $ 5,552     $ (4,736)
                                                                                             =======     =======     ========

41

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1996 and 1995

(2) Investments and Investment Income (Continued)

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

                                                                                           December 31,
                                                                                      (Amounts in thousands)
                                                                                      ----------------------
                                                                                         1996        1995
                                                                                         ----        ----
Fixed maturities available for sale:
 Unrealized gains...................................................................   $ 34,555    $ 41,326
 Unrealized losses..................................................................     (5,240)     (3,952)
 Tax effect.........................................................................    (10,260)    (13,081)
                                                                                       --------    --------
                                                                                       $ 19,055    $ 24,293
                                                                                       --------    --------

Equity securities available for sale:
 Unrealized gains...................................................................   $  2,347    $  3,135
 Unrealized losses..................................................................     (2,499)     (1,698)
 Tax effect.........................................................................         53        (503)
                                                                                       --------    --------
                                                                                       $    (99)        934
                                                                                       --------    --------

  Net unrealized investment gains...................................................   $ 18,956    $ 25,227
                                                                                       ========    ========

The amortized cost and estimated market values of investments in fixed maturities available for sale as of December 31, 1996 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.....................     $ 34,218     $    33     $  366    $ 33,885
Obligations of states and political
  subdivisions..................................      781,586      30,817      3,642     808,761
Public utilities................................       12,908         229         87      13,050
Corporate securities............................       29,368         114        304      29,178
Redeemable preferred stock......................       66,713       3,362        841      69,234
                                                     --------     -------    -------    --------
     Totals.....................................     $924,793     $34,555    $ 5,240    $954,108
                                                     ========     =======    =======    ========

42

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996 and 1995

(2) Investments and Investment Income (Continued)

The amortized cost and estimated market values of investments in fixed maturities available for sale as of December 31, 1995 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.....................................   $  3,659        $    82        $    3      $  3,738
Obligations of states and political
  subdivisions..................................................    630,811         34,197         1,845       663,163
Public utilities................................................     10,177            783             2        10,958
Corporate securities............................................      7,682            242            81         7,843
Redeemable preferred stock......................................     90,080          6,022         2,021        94,081
                                                                   --------        -------        ------      --------
     Totals.....................................................   $742,409        $41,326        $3,952      $779,783
                                                                   ========        =======        ======      ========

Traditionally, it has been the Company's policy not to invest in high yield or non-investment grade bonds. In 1995, the Company adopted a policy allowing a small percentage of its investments to be placed in bonds rated lower than investment grade, but not lower than Ba by Moody's or BB by Standard & Poor's. At December 31, 1996 bond holdings rated below investment grade totaled approximately 1.3% of total investments. All but $1.5 million of such holdings were downgraded subsequent to purchase. The average Standard and Poor's rating of the bond portfolio is A.

The amortized cost and estimated market value of fixed maturities available for sale at December 31, 1996, 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....................   $ 47,288    $ 48,583
   Due after one year through five years......    207,804     214,782
   Due after five years through ten years.....    405,721     415,942
   Due after ten years........................    263,980     274,801
                                                 --------    --------
                                                 $924,793    $954,108
                                                 ========    ========

43

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996 and 1995

(2) Investments and Investment Income (Continued)

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.

(3) Fixed Assets

A summary of fixed assets follows:

                                               December 31,
                                          (Amounts in thousands)
                                        --------------------------
                                              1996        1995
                                              ----        ----
Land................................       $  6,128    $  6,084
Buildings...........................         21,430      20,432
Furniture and equipment.............         23,287      18,410
Leasehold improvements..............          1,238       1,128
                                           --------    --------
                                             52,083      46,054
Less accumulated depreciation.......        (22,023)    (18,590)
                                           --------    --------
 Net fixed assets...................       $ 30,060    $ 27,464
                                           ========    ========

(4) Deferred Policy Acquisition Costs

Policy acquisition costs incurred and amortized to income are as follows:

                                               Years ended December 31,
                                                (Amounts in thousands)
                                          ----------------------------------
                                               1996       1995       1994
                                               ----       ----       ----
Balance, beginning of year................. $  33,809  $  30,068  $  25,723
DAC acquired in purchase of AFI............     5,850         --         --
Costs deferred during the year.............   167,143    132,484    117,027
Amortization charged to expense............  (160,019)  (128,743)  (112,682)
                                            ---------   --------   --------
Balance, end of year....................... $  46,783  $  33,809  $  30,068
                                            =========   ========   ========

(5) Notes Payable

Notes payable at December 31, 1996 consists of three unsecured notes payable under a credit agreement dated November 21, 1996. The combined principal amount on the notes of $75,000,000 is payable on November 21, 1999. The loan agreement may be extended annually for additional periods of one year each to maintain the three year maturity date. 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). Based on the rates effective through June 25, 1997, the net interest cost on the loan at December 31, 1996 is approximately 6.08%.

44

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996 and 1995

(5) Notes Payable (Continued)

The terms of the loan agreement include certain affirmative and negative covenants, all of which are met by the Company at December 31, 1996.

(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)
                  -----------------------------
                    1996       1995      1994
                  --------   --------   -------
Federal
    Current....   $31,880    $24,016    $15,318
    Deferred...    (1,139)       (92)       707
                  -------    -------    -------
                  $30,741    $23,924    $16,025
                  =======    =======    =======
State
    Current....   $    85    $    98    $    96
    Deferred...        --         --         --
                  -------    -------    -------
                  $    85    $    98    $    96
                  =======    =======    =======
Total
    Current....   $31,965    $24,114    $15,414
    Deferred...    (1,139)       (92)       707
                  -------    -------    -------
       Total...   $30,826    $24,022    $16,121
                  =======    =======    =======

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)
                                                                     ------------------------------
                                                                       1996       1995      1994
                                                                     --------   --------   --------
Computed tax expense at 35% ..................................       $ 47,807   $40,013    $ 28,846
Tax-exempt interest income....................................        (15,626)  (13,718)    (12,216)
Dividends received deduction..................................         (4,949)   (4,936)     (4,253)
Reduction of losses incurred deduction for 15% of
 income on securities purchased after August 7, 1986..........          2,974     2,546       2,220
Other, net....................................................            620       117       1,524
                                                                     --------   --------   --------
     Income tax expense.......................................        $30,826   $24,022    $ 16,121
                                                                      =======   =======    ========

45

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996 and 1995

(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)
                                                                           ------------------------------
                                                                             1996        1995       1994
                                                                           --------   --------    -------
Deferred tax assets
      Discounting of loss reserves and salvage
       and subrogation recoverable for tax
       purposes.........................................................   $  6,123    $ 5,030    $ 5,030
      Tax benefit on net unrealized loss on
       securities carried at market value...............................         --         --      6,856
      Other deferred tax assets.........................................      1,358        638        534
                                                                           --------   --------    -------
        Total gross deferred tax assets.................................      7,481      5,668     12,420
         Less valuation allowance.......................................         --         --         --
                                                                           --------   --------    -------
         Net deferred tax assets........................................      7,481      5,668     12,420
                                                                           --------   --------    -------

Deferred tax liabilities
      Tax liability on net unrealized gain on
       securities carried at market value...............................    (10,207)   (13,584)        --
      Tax depreciation in excess of book
       depreciation.....................................................     (1,270)    (1,184)    (1,192)
      Accretion on bonds................................................       (784)      (742)      (574)
      Other deferred tax liabilities....................................     (1,569)      (316)      (464)
                                                                           --------   --------    -------
                                                                           --------    -------    -------
         Total gross deferred tax liabilities...........................    (13,830)   (15,826)    (2,230)
                                                                           --------   --------    -------
         Net deferred tax assets (liabilities)..........................   $ (6,349)  $(10,158)   $10,190
                                                                           ========   ========    =======

46

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996 and 1995

(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)
                                                     --------------------------------------
                                                       1996           1995           1994
                                                     --------       --------       --------
Gross reserves for losses and loss
 adjustment expenses at beginning of year..........  $253,546       $227,499       $215,301
  Less reinsurance recoverable.....................    (2,556)        (4,107)          (776)
                                                     --------       --------       --------
Net reserves, beginning of year....................   250,990        223,392        214,525

Reserves acquired in purchase of AFI...............    24,231             --             --

Incurred losses and loss adjustment expenses
 related to:
  Current year.....................................   505,726        423,264        370,631
  Prior years......................................    (3,868)        (6,708)       (10,074)
                                                     --------       --------       --------
 Total incurred losses and loss adjustment
  expenses.........................................   501,858        416,556        360,557
                                                     --------       --------       --------

Loss and loss adjustment expense payments
 related to:
  Current year.....................................   298,099        243,294        208,418
  Prior years......................................   167,226        145,664        143,272
                                                     --------       --------       --------
Total payments.....................................   465,325        388,958        351,690
                                                     --------       --------       --------

Net reserves for losses and loss adjustment
 expenses at end of year...........................   311,754        250,990        223,392
Reinsurance recoverable............................    24,931          2,556          4,107
                                                     --------       --------       --------
Gross reserves, end of year........................  $336,685       $253,546       $227,499
                                                     ========       ========       ========

Decreases in incurred losses relating to prior years reflects the favorable loss experience during these years attributable to a number of combined factors which have produced favorable frequency and severity trends in recent years. In addition, actuarial assumptions based on historical trends have proved to be conservative.

47

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1996 and 1995

(8) Acquisition of American Fidelity Insurance Company

Effective November 30, 1996 the Company acquired all of the issued and outstanding common stock of American Fidelity Insurance Company, including its subsidiaries as described in Note 1, for $35.0 million. The acquisition was paid for in cash with funds raised by increasing the Company's notes payable under the bank credit agreement discussed in Note 5. On December 30, 1996 the Company contributed an additional $15.0 million to AFI. The acquisition was accounted for using the purchase method and resulted in a minimal amount of negative goodwill. The purchase agreement includes an indemnification by the seller on the loss and loss adjustment expense reserves of AFI 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.

AFI writes property and casualty insurance, primarily in Oklahoma, Kansas and Texas, where the companies are domiciled. Its primary lines are automobile and mechanical breakdown insurance. The results of operations for the month of December are included in the consolidated financial statements of the Company.

The following unaudited proforma consolidated results of operations for 1996 and 1995 give effect to the acquisition as though it had occurred at the beginning of each year presented:

                                Pro Forma Results for the year ended
                                            December 31,
                                      (Amounts in thousands,
                                      except per share data)
                                      ----------------------
                                     1996                1995
                                     ----                ----
Revenues                             $891,243            $756,728
Pretax operating income              $136,912            $117,092
Income before income taxes           $133,691            $118,293
Net income per share                 $3.79               $3.39

(9) Dividend Restrictions

The Insurance Companies are subject to the financial capacity guidelines established by the Office of the Commissioner of Insurance of their domicile states. The payment of dividends from statutory unassigned surplus of the Insurance Companies is restricted, subject to certain statutory limitations. For the year 1997, the direct insurance subsidiaries of the Company are permitted to pay approximately $61,471,000 in dividends to the Company without the prior approval of the Commissioner of Insurance of the state of domicile.

48

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1996 and 1995

(9) Dividend Restrictions (Continued)

The above statutory regulations may have the effect of indirectly limiting the ability of the Company to pay dividends.

(10) 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, 1996, there were no material permitted statutory accounting practices utilized by the Insurance Companies. The NAIC is working on a project to codify statutory accounting practices, the result of which is expected to constitute the only source of "prescribed" statutory accounting practices. When complete, that project will most likely change the definition of prescribed versus permitted statutory accounting practices and may result in changes to the accounting policies that insurance enterprises use to prepare their statutory financial statements.

The Insurance Companies' statutory net income, as reported to regulatory authorities, was $97,979,000, $86,210,000, and $62,861,000 for the years ended December 31, 1996, 1995 and 1994, respectively. The statutory policyholders' surplus of the Insurance Companies, as reported to regulatory authorities, as of December 31, 1996 and 1995 was $594,799,000 and $479,114,000, respectively.

The Company has estimated the Risk-Based Capital Requirements of each of its insurance subsidiaries as of December 31, 1996 according to the formula issued by the NAIC. Each of the companies' policyholders' surplus exceeded the highest level of recommended capital requirements.

(11) 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 2002. Total rent expense under these lease agreements, all of which are operating leases, was $1,583,000, $1,461,000 and $1,492,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Mercury Casualty

49

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1996 and 1995

(11) Commitments and Contingencies (Continued)

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

                          Rent        Rent
Year                    Expense      Income
----                    -------      ------
1997...................  $1,599       $(486)
1998...................  $1,505       $(280)
1999...................  $1,555       $(238)
2000...................  $  973       $ (91)
2001...................  $  525       $  --
Thereafter.............  $   15       $  --

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

(12) 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 $1,000,000 for each of the plan years ended December 31, 1996, 1995 and 1994.

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 $955,000, $773,000, and $762,000 for the plan years ended December 31, 1996, 1995 and 1994.

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

50

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 1996 and 1995

(12) Profit Sharing Plan (Continued)

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, 1996, 1995 and 1994, 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 current 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 $1,509,000, $1,145,000 and $919,000 in 1996, 1995 and 1994, respectively. The ESOP shares as of December 31 were as follows:

                                             1996         1995
                                             ----         ----
Allocated shares                              64,400       32,200
Shares committed-to-be released               32,200       32,200
Unreleased shares                             64,400       96,600
                                          ----------   ----------
Total ESOP shares                            161,000      161,000
                                          ==========   ==========
Market value of unreleased shares at
 December 31,                             $3,381,000   $4,613,000
                                          ==========   ==========

(13) Common Stock

The Company adopted a stock option plan in October 1985 (the "1985 Plan") under which 2,700,000 shares were reserved for issuance. Options granted during 1985 were exercisable immediately. Subsequent options granted become exercisable 20% per year beginning one year from the date granted. All options were granted at the market price on the date of the grant and expire in 10 years.

In May 1995 the Company adopted The 1995 Equity Participation Plan (the "1995 Plan") which succeeds the Company's 1985 Plan. Under the 1995 Plan, 2,700,000 shares of Common Stock are authorized for issuance upon exercise of options, stock appreciation rights and other awards, or upon vesting of restricted or deferred stock awards. During 1995, the Company granted incentive stock options under both the 1995 Plan and the 1985 Plan. The options granted during 1996, 1995 and 1994 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.

51

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

December 31, 1996 and 1995

(13) Common Stock (Continued)

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 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 $295,000 and $116,000 in 1996 and 1995, respectively, and earnings per share would have been reduced by $.01 in each year. 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 1996 and 1995: dividend yield of 2.0 percent for both years, expected volatility of 30 percent for both years and expected lives of 7 years for both years. The risk-free interest rates used were 5.5 and 6.4 percent for the options granted during 1996 and 7.4 and 6.4 percent for the options granted during 1995.

A summary of the status of the Company's plans as of December 31, 1994, 1995 and 1996 and changes during the years ending on those dates is presented below:

                                                   1996                        1995                     1994
                                          ----------------------        -------------------      ------------------
                                                        Weighted                   Weighted                Weighted
                                                         Average                    Average                 Average
                                                        Exercise                   Exercise                Exercise
                                           Shares         Price          Shares     Price         Shares     Price
                                          -------       --------        -------    --------      -------   --------
Outstanding at beginning of year          365,325        $24.234        237,925     $18.602      264,740    $17.428
Granted during the year                    60,000         46.156        155,000       31.09        4,000     27.000
Exercised during the year                 (61,250)        15.425        (27,600)     14.177      (27,815)     7.393
Canceled or expired                        (2,400)        27.000             --          --       (3,000)    30.125
                                          -------                       -------                  -------
Outstanding at end of year                361,675         28.904        365,325      24.234      237,925     18.602
                                          =======                       =======                  =======

Options exercisable at year-end           134,075                       141,725                  142,725
Weighted-average fair value of options
 granted during the year                   $16.22                        $11.50                      N/A

The following table summarizes information regarding the stock options outstanding at December 31, 1996:

                         Number        Weighted Avg.      Weighted Avg.        Number         Weighted Avg.
Range of               Outstanding      Remaining           Exercise         Exercisable        Exercise
Exercise Prices        at 12/31/96   Contractual Life         Price          at 12/31/96         Price
- ---------------        -----------   ----------------     -------------      -----------      -------------
$6.75 to 8.00             69,625          1.67 years         $ 7.864            69,625           $ 7.864
$30.00 to 31.875         232,050          7.58                30.756            64,450            30.544
$43.50 to 48.8125         60,000          9.33                46.156              --                  --
                         -------                                               -------
$6.75 to 48.8125         361,675          6.73                28.904           134,075            18.766
                         =======                                               =======

52

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

Section 16(a) of the Securities Exchange Act of 1934 requires the directors, officers and certain other employees of the registrant, and persons who own more than ten percent of a registered class of the registrant's equity securities, ("Reporting Persons") to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock of the registrant. Due dates for these reports have been established and the registrant is required to disclose any failure to file by these dates during 1996. To the registrant's knowledge, all of these requirements were satisfied.

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 14, 1997, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1996, 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, 1996 are contained herein as listed in the Index to Consolidated Financial Statements on page 29.

2. Financial Statement Schedules:

Title

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

53

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.

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.
10.4##   ESOP Feature Trust Agreement between the Company and Wells Fargo
         Bank, N.A., as Trustee, effective March 1, 1994.
10.5##   ESOP Loan Agreement between Union Bank and Wells Fargo Bank,
         N.A., as Trustee, of the Mercury General Corporation ESOP
         Feature Trust dated as of March 11, 1994.
10.6##   Continuing Guaranty, dated as of March 11, 1994, executed by
         Mercury General Corporation in favor of Union Bank.
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    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.
10.12**  Property Per Risk Excess of Loss Reinsurance Agreement between
         National Reinsurance Corporation and Mercury Casualty Company,
         effective April 1, 1995.
10.13**  Endorsement No. 1 to the Property Per Risk Excess of Loss
         Agreement effective April 1, 1995.
10.14@@  Endorsement No. 2 to the Property Per Risk Excess of Loss
         Agreement effective April 1, 1995.
10.15@@  Endorsement No. 3 to the Property Per Risk Excess of Loss
         Agreement effective April 1, 1995.
10.16@@  Management Agreement effective January 1, 1995 between the
         Company and Mercury Insurance Company of Illinois.
10.17@@  Management Agreement effective January 1, 1995 between the
         Company and Mercury Indemnity Company of Illinois.
10.18@@  Management Agreement effective January 1, 1995 between the
         Company and Mercury Insurance Company of Georgia.
10.19@@  Management Agreement effective January 1, 1995 between the
         Company and Mercury Indemnity Company of Georgia.

                                54

10.20@  The 1995 Equity Participation Plan.
10.21   Stock Purchase Agreement between Mercury General Corporation as
        Purchaser and AFC as Seller dated November 15, 1996.
21.1    Subsidiaries of the Company.
23.1    Accountants' Consent.
27.1    Financial Data Schedule

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

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

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

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

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

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

(b) Reports on Form 8-K:
None

55

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

March 22, 1996

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

    Signature                           Title                      Date
    ---------                           -----                      ----
                                Chief Executive Officer
                                         and
                                 Chairman of the Board
     GEORGE JOSEPH           (Principal Executive Officer)    March 18, 1997
- --------------------------
     George Joseph


                                Chief Financial Officer
     KEITH L. PARKER        (Principal Financial Officer)     March 18, 1997
- --------------------------
     Keith L. Parker


                            Vice President and Controller
     DONNA J. MOORE         (Principal Accounting Officer)    March 18, 1997
- --------------------------
     Donna J. Moore


      NATHAN BESSIN                   Director                March 18, 1997
- --------------------------
      Nathan Bessin


     BRUCE A. BUNNER                  Director                March 18, 1997
- --------------------------
     Bruce A. Bunner


    MICHAEL D. CURTIUS                Director                March 18, 1997
- --------------------------
    Michael D. Curtius

56

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

    RICHARD E. GRAYSON                Director                 March 18, 1997
- --------------------------
    Richard E. Grayson


      GLORIA JOSEPH                   Director                 March 18, 1997
- ---------------------------
      Gloria Joseph


      CHARLES MCCLUNG                 Director                 March 18, 1997
- ---------------------------
      Charles McClung


      DONALD P. NEWELL                Director                 March 18, 1997
- ---------------------------
      Donald P. Newell


    DONALD R. SPUEHLER                Director                 March 18, 1997
- ---------------------------
    Donald R. Spuehler

57

AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES

The Board of Directors
Mercury General Corporation:

Under date of February 21, 1997, we reported on the consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, as contained in the annual report on Form 10-K for the year 1996. 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 PEAT MARWICK LLP

Los Angeles, California
February 21, 1997

S-1

SCHEDULE I

MERCURY GENERAL CORPORATION

SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES

DECEMBER 31, 1996

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.........................       $ 34,218     $   33,885        $   33,885
      States, Municipalities..................        781,586        808,761           808,761
      Public utilities........................         12,908         13,050            13,050
      All other corporate bonds...............         29,368         29,178            29,178
    Redeemable preferred stock................         66,713         69,234            69,234
                                                   ----------       --------        ----------

      Total fixed maturities available for
        sale..................................        924,793        954,108           954,108
                                                   ----------       --------        ----------

Equity securities:
    Common stocks:
      Public utilities........................         20,726         21,360            21,360
      Banks, trust and insurance companies....            544            493               493
      Industrial, Miscellaneous and
       all other..............................          1,535          2,209             2,209
    Nonredeemable preferred stocks............        125,459        124,050           124,050
                                                   ----------       --------        ----------

      Total equity securities available for
        sale..................................        148,264        148,112           148,112
                                                   ----------       --------        ----------

Short-term investments........................         66,067                           66,067
                                                   ----------                       ----------

      Total investments.......................     $1,139,124                       $1,168,287
                                                   ==========                       ==========

S-2

SCHEDULE I, CONTINUED

MERCURY GENERAL CORPORATION

SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES

DECEMBER 31, 1995

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..........................   $  3,659    $  3,738        $  3,738
      States, Municipalities...................    630,811     663,163         663,163
      Public utilities.........................     10,177      10,958          10,958
      All other corporate bonds................      7,682       7,843           7,843
     Redeemable preferred stock................     90,080      94,081          94,081
                                                  --------    --------        --------

      Total fixed maturities available for
       sale....................................    742,409     779,783         779,783
                                                  --------    --------        --------

Equity securities:
    Common stocks:
      Public utilities.........................     18,787      19,714          19,714
      Banks, trust and insurance companies.....        535         469             469
      Industrial, Miscellaneous and
       all other...............................      1,133       1,524           1,524
     Nonredeemable preferred stocks............     93,023      93,208          93,208
                                                  --------    --------        --------

      Total equity securities available for
       sale....................................    113,478     114,915         114,915
                                                  --------    --------        --------

Short-term investments.........................     28,496                      28,496
                                                  --------                    --------

      Total investments........................   $884,383                    $923,194
                                                  ========                    ========

S-3

SCHEDULE II

MERCURY GENERAL CORPORATION

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

BALANCE SHEETS

December 31, 1996 and 1995

Amounts in thousands

ASSETS

                                                                          1996       1995
                                                                        --------   --------
Investments:
      Fixed maturities available for sale (amortized
        cost $3,003 in 1996 and $3,771 in 1995)......................   $  3,012   $  3,770
      Equity securities, available for sale (cost
        $17,169 in 1996 and $12,943 in 1995).........................     16,877     12,841
      Short-term cash investments....................................      8,090      4,746
      Investment in subsidiaries.....................................    697,059    574,224
                                                                        --------   --------
              Total investments......................................    725,038    595,581

Amounts due from affiliates..........................................      5,014      3,834
Income taxes.........................................................      1,988      2,615
Other assets.........................................................      2,303      2,110
                                                                        --------   --------
                                                                        $734,343   $604,140
                                                                        ========   ========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Notes payable........................................................   $ 75,000    $25,000
Accounts payable and accrued expenses................................     12,311      8,611
Other liabilities....................................................      5,807      5,341
                                                                        --------   --------
       Total liabilities.............................................     93,118     38,952
                                                                        --------   --------
Shareholders' equity:
       Common stock..................................................     42,644     40,895
       Net unrealized investment gains ..............................     18,959     25,227
    Unearned ESOP compensation.......................................     (2,000)    (3,084)
    Retained earnings................................................    581,622    502,150
                                                                        --------   --------
        Total shareholders' equity...................................    641,225    565,188
                                                                        --------   --------
                                                                        $734,343   $604,140
                                                                        ========   ========

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, 1996

Amounts in thousands

                                                                  1996       1995       1994
                                                                --------   --------   --------
Revenues:
  Net investment income......................................   $  1,489   $  1,824   $  1,389
  Management fee income from subsidiaries....................    118,657    101,823    101,858
  Other......................................................          8         27       (704)
                                                                --------   --------   --------
      Total revenues.........................................    120,154    103,674    102,543
                                                                --------   --------   --------
Expenses:
  Loss adjustment expenses...................................     79,934     68,048     68,771
  Policy acquisition costs...................................     20,345     17,087     17,953
  Other operating expenses...................................     19,336     16,627     15,544
  Interest...................................................      2,004      2,040      1,025
                                                                --------   --------   --------
      Total expenses.........................................    121,619    103,802    103,293
                                                                --------   --------   --------
  Loss before income taxes and equity in net
   income of subsidiaries....................................     (1,465)      (128)      (750)

Income tax benefit...........................................       (536)      (386)      (506)
                                                                --------   --------   --------

  Income (loss) before equity in net income
   of subsidiaries...........................................       (929)       258       (244)

Equity in net income of subsidiaries.........................    106,693     90,043     66,539
                                                                --------   --------   --------
   Net income................................................   $105,764   $ 90,301   $ 66,295
                                                                ========   ========   ========

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, 1996

AMOUNTS IN THOUSANDS

                                                                    1996        1995        1994
                                                                  --------    --------    --------
Cash flows from operating activities:
  Net cash provided from operating activities...................  $ 32,510    $ 25,526    $ 20,367

Cash flows from investing activities:
  Acquisition of American Fidelity Insurance
   Company......................................................   (34,991)         --          --
  Capital contribution to subsidiaries..........................   (15,000)       (500)    (10,000)
  Fixed maturities, at market:
    Purchases...................................................      (807)     (1,051)       (547)
    Sales.......................................................       475         335          --
    Calls or maturities.........................................     1,072         349       2,632
  Equity securities:
    Purchases...................................................   (47,597)    (49,390)    (20,105)
    Sales.......................................................    42,934      48,675      16,461
  Increase in short term cash investments, net..................    (3,344)     (2,708)       (365)
  Other, net....................................................        --          --          31
                                                                  --------    --------    --------
      Net cash used in investing activities.....................   (57,258)     (4,290)    (11,893)

Cash flows from financing activities:
  Additions to notes payable....................................    75,000          --      25,000
  Principal payments on notes payable...........................   (25,000)         --     (15,000)
  Dividends paid to shareholders................................   (26,291)    (21,837)    (19,100)
  Stock options exercised.......................................     1,324         458         275
                                                                  --------    --------    --------
     Net cash used in financing activities......................    25,033     (21,379)     (8,825)

Net increase (decrease) in cash................................        284        (143)       (351)
Cash:
  Beginning of the year........................................     (1,340)     (1,197)       (846)
                                                                  --------    --------    --------
  End of the year..............................................   $ (1,056)   $ (1,340)   $ (1,197)
                                                                  ========    ========    ========

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, 1996 and 1995

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 for its subsidiaries which include all underwriting and claims servicing functions. The Company is compensated by monthly reimbursement of expenses paid.

Dividends Received From Subsidiaries

Dividends of $27,700,000, $24,500,000, and $20,000,000 were received by the Company from its wholly-owned subsidiaries in 1996, 1995 and 1994, respectively, and are recorded as a reduction to Investment in Subsidiaries.

Cash Overdraft

At December 31, 1996 and 1995, the Company had cash overdrafts of $1,056,000 and $1,340,000, 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, 1996

AMOUNTS IN THOUSANDS

                                                  Ceded to
                                       Gross       other                 Net
                                       amount    companies   Assumed    amount
                                      --------   ---------   -------   --------
Property and Liability insurance
   1996............................   $757,447      $3,138      $415   $754,724
   1995............................   $619,404      $3,444      $366   $616,326
   1994............................   $530,224      $1,321      $487   $529,390

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.
10.4##   ESOP Feature Trust Agreement between the Company and Wells Fargo
         Bank, N.A., as Trustee, effective March 1, 1994.
10.5##   ESOP Loan Agreement between Union Bank and Wells Fargo Bank, N.A.,
         as Trustee, of the Mercury General Corporation ESOP Feature Trust
         dated as of March 11, 1994.
10.6##   Continuing Guaranty, dated as of March 11, 1994, executed by
         Mercury General Corporation in favor of Union Bank.
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    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.
10.12**  Property Per Risk Excess of Loss Reinsurance Agreement between
         National Reinsurance Corporation and Mercury Casualty Company,
         effective April 1, 1995.
10.13**  Endorsement No. 1 to the Property Per Risk Excess of Loss
         Agreement effective April 1, 1995.
10.14@@  Endorsement No. 2 to the Property Per Risk Excess of Loss
         Agreement effective April 1, 1995.
10.15@@  Endorsement No. 3 to the Property Per Risk Excess of Loss
         Agreement effective April 1, 1995.
10.16@@  Management Agreement effective January 1, 1995 between the
         Company and Mercury Insurance Company of Illinois.
10.17@@  Management Agreement effective January 1, 1995 between the
         Company and Mercury Indemnity Company of Illinois.
10.18@@  Management Agreement effective January 1, 1995 between the
         Company and Mercury Insurance Company of Georgia.
10.19@@  Management Agreement effective January 1, 1995 between the
         Company and Mercury Indemnity Company of Georgia.
10.20@   The 1995 Equity Participation Plan.
10.21    Stock Purchase Agreement between Mercury General Corporation as
         Purchaser and AFC as Seller dated November 15, 1996.
21.1     Subsidiaries of the Company.
23.1     Accountants' Consent.
27.1     Financial Data Schedule


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

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

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

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

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

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

(b) Reports on Form 8-K:
None


EXHIBIT 10.9

AMENDMENT 1996-I TO

MERCURY GENERAL CORPORATION
PROFIT SHARING PLAN

WHEREAS, Mercury General Corporation (the "Company") maintains the Mercury General Corporation Profit Sharing Plan (the "Plan"); and

WHEREAS, pursuant to Section 9.1 of the Plan, the Company has the right to amend the Plan; and

WHEREAS, the Internal Revenue Service has requested certain changes in the Plan as a condition for issuing a favorable determination letter with respect to the Plan.

NOW, THEREFORE, the Plan is hereby amended as follows, effective as of January 1, 1987:

1. Section 3.6(a) of the Plan is amended by changing the period at the end of the last sentence thereunder to a comma, and inserting the following immediately thereafter:

"which percentage of Compensation may be expressed in increments of 1/4 of 1%."

2. The second sentence of Section 3.6(b) of the Plan is amended to read as follows:

1

"For purposes of the preceding sentence, the Company, in its sole discretion, may treat all or any part of its Company Contributions and Employer Matching Contributions as Compensation Deferrals if the conditions of Treasury Regulations Section 1.401(k)-1(b)(5) are satisfied."

3. Section 3.6(b) of the Plan is further amended by adding the following at the end thereof:

"For purposes of this Section 3.6, (1) all elective contributions that are made under two or more plans that are aggregated for purposes of Code Section 401(a)(4) or 410(b) (other than Code Section
410(b)(2)(A)(ii)) shall be treated as made under a single plan which must satisfy Code Sections 401(a)(4) and 410(b) as though they were a single plan; (2) if this Plan and one or more other plans are permissively aggregated for purposes of Section 401(k) of the Code, such aggregated plans must also satisfy Section 401(a)(4) and 410(b) of the Code as though they were a single plan; and (3) the actual deferral percentage of a Highly Compensated Employee shall be determined by treating all cash or deferred arrangements under which the Highly Compensated Employee is eligible (other than those that may not be permissively aggregated) as a single arrangement."

2

4. Section 3.6(d)(l) of the Plan is amended by deleting the last sentence thereunder and by inserting the following in lieu thereof:

"The amount of excess Compensation Deferrals to be distributed or recharacterized shall be reduced by excess Compensation Deferrals previously distributed under Section 3.5(b) for the taxable year ending with or within such Plan Year and by excess Employer Matching Contributions distributed or recharacterized for the Plan Year beginning in such taxable year. Recharacterized excess Compensation Deferrals shall remain subject to the nonforfeitability requirements and distribution limitations that apply to Compensation Deferrals."

5. Section 3.7(b) of the Plan is amended by adding the following at the end thereof:

"For purposes of this Section 3.7, the test for multiple use of the alternative limitation provided under Treasury Regulation Section 1.401(m)-2(b) shall be applied. An excess Contribution Deferral that is recharacterized shall be taken into account in the Plan Year in which the contribution would have been received in cash by the Participant had the Participant not elected to defer the amounts; an Employer Matching

3

Contribution shall be taken into account for a Plan Year only if it is paid to the Trust Fund by the end of the 12th month following the close of that year; and Employer Matching Contributions or Company Contributions which are used to meet the requirements of Section 401(k)(3)(A) of the Code shall not be taken into account. All contributions that are made under two or more plans that are aggregated for purposes of Sections 401(a)(4) and 410(b) of the Code (other than Section 410(b)(2)(A) of the Code) shall be treated as made under a single plan. Further, if this Plan and one or more other plans are permissively aggregated for purposes of Section 401(m) of the Code, such aggregated plans must also satisfy Sections 401(a)(4) and 410(b) of the Code as though they were a single plan. The contribution percentage of a Highly Compensated Employee who is eligible to participate in more than one plan maintained by the Company or Related Company to which the Employer Matching Contributions are made shall be calculated by treating all plans subject to Section 401(m) of the Code under which the Highly Compensated Employee is eligible to participate (other than those that may not be permissively aggregated) as a single plan. The method of correction for multiple use, if any, shall be made by reducing the actual deferral percentage, the actual contribution percentage of Highly Compensated Employees, or a combination of

4

the two, in the manner described in Treasury Regulation Section 1.401(m)-(2)(c)(3)."

6. Section 3.7(c)(1) of the Plan is amended by inserting the following immediately after the penultimate sentence thereunder:

"The vested portion of any excess contributions, together with any earnings attributable thereto through the date of distribution, shall be distributed to the Participant within the 2-1/2 month period following the close of the Plan Year to the extent feasible, and in all events no later than 12 months after the close of the Plan Year. Failure to correct any excess contributions within the 2-1/2 month period following the close of the Plan Year shall result in the excise tax described in Section 1.401(m)-1(e)(5) of the Treasury Regulations. The earnings attributable to the vested portion of any excess contributions shall be determined in accordance with Treasury Regulations."

7. Section 4.2 of the Plan is amended by inserting the following immediately after the penultimate sentence thereunder:

"The terms of any Acquisition Loan, and the repayment of principal and interest thereon, shall in all events

5

comply with Section 54.4975-7(b)(5) of the Treasury Regulations. Furthermore, any assets of the ESOP Fund attributable to Leveraged Shares acquired by the ESOP Trustee in a transaction to which Section 1042 of the Code applies cannot accrue for the benefit of any person described in Section 409(n)(1) of the Code during the nonallocation period described in Section 409(n)(2)(C) of the Code."

8. Section 4.4(g) of the Plan is amended in its entirety to read as follows:

"(g) Except as otherwise required or permitted by the Code, the put options under this Section 4.4 shall satisfy the requirements of Sections 54.4975-7(b) and 54.4975-11(a)(7)(i) of the Treasury Regulations to the extent, if any, that such requirements apply to such put options."

9. Section 7.1(d)(1) is amended by adding the following at the end thereof:

"Distribution of a Participant's ESOP Account under this Section 7.1(d)(1) shall, subject to Section 4.5, be made in shares of Stock, cash, or a combination of both, as determined by the Committee; provided, however, that if the nonforfeitable balance in the

6

Participant's Accounts as adjusted, if required, under Section 3.9 plus any contributions to the Participant's Accounts during the Plan Year exceeds $3,500, the Committee shall notify the Participant of his right to demand distribution of his ESOP Account entirely in whole shares of Stock (with the value of any fractional share paid in cash)."

10. Section 7.1(e) of the Plan is amended by adding the following at the end thereof:

"An explanation of the Participant's right to defer distribution of the nonforfeitable balance of his Accounts shall be provided to the Participant no less than 30 days and no more than 90 days before the date such distribution is to be made (consistent with such regulations as the Secretary of the Treasury may prescribe). If the Participant does not so consent, the distribution of the amounts payable shall be delayed pursuant to the first sentence of this subsection (e). However, to the extent that the nonforfeitable balance of a terminating Participant's Accounts is a distribution to which Sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than 30 days after the notice described in the preceding sentence is given, provided that: (1) the Committee clearly informs the Participant that the

7

Participant has the right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) the Participant, after receiving the notice, affirmatively elects an immediate distribution."

11. Section 7.2(c) of the Plan is amended by adding the following at the end thereof:

"In either event, such benefit payable to the surviving Spouse shall commence immediately. Notwithstanding the foregoing, if the single- sum value of the benefit payable to the surviving Spouse is $3,500 or less, such benefit shall be paid to the surviving Spouse in a single- sum."

12. Section 7.2(d) of the Plan is amended in its entirety to read as follows:

"(d) For purposes of this Section 7.2, the following terms shall have the meaning specified below:
(1) Election Period: For a Participant who separates from service before attaining age 35, the Election Period commences one year before his Break in Employment and ends one year after his Break in Employment. For any other Participant, the Election Period is whichever of the

8

following periods ends last: (1) the period beginning with the first day of the Plan Year in which the Participant reaches age 32, and ending with the day before the first day of the Plan Year in which the Participant reaches age 35, or (2) the period ending 1 year after the individual becomes a Participant. A Participant may elect to waive the Qualified Joint and Survivor Annuity or Qualified Preretirement Survivor Annuity commencing the first day of the Plan Year in which he attains age 35. Prior to such time a Participant shall not be allowed to waive the Qualified Joint and Survivor Annuity or Qualified Preretirement Survivor Annuity unless the Participant incurs a Break in Employment, in which case the period during which an election to waive may be made shall commence on the date of his Break in Employment. A Participant may revoke his waiver at any time.
(2) Qualified Election: A waiver of a Qualified Joint and Survivor Annuity or a Qualified Preretirement Survivor Annuity. The waiver must be in writing and must be consented to by the Participant's Spouse. The Spouse's consent to a waiver must be witnessed by a Plan representative or notary public. Notwithstanding this consent requirement, if the Participant establishes to the satisfaction of a Plan representative that such written consent may not be obtained because there is no Spouse or the Spouse cannot be located, a waiver will be deemed a Qualified Election. The Participant's waiver and the

9

Spouse's consent shall state the specific nonspouse Beneficiary or Beneficiaries, which may not be modified without subsequent consent from the Spouse (unless the Spouse's initial consent expressly provides otherwise), and the Spouse's consent shall acknowledge the effect of the Participant's election. A revocation of a prior waiver may be made by a Participant without the consent of the Spouse at any time before the commencement of benefits. The number of revocations shall not be limited.
(3) Qualified Joint and Survivor Annuity: An annuity that commences immediately for the life of the Participant with a survivor annuity for the life of the Spouse which is not less than 50 percent and not more than 100 percent of the amount of the annuity which is payable during the joint lives of the Participant and the Spouse and which is the amount of benefit that can be purchased with the Participant's vested Account. For a Participant who is not married, Qualified Joint and Survivor Annuity means a straight life annuity.
(4) Qualified Preretirement Survivor Annuity: The benefit described in Section 7.2(c).
(5) Spouse (surviving Spouse): The spouse or surviving spouse of the Participant, provided that a former spouse will be treated as the spouse of surviving spouse to the extent provided under a qualified domestic relations order as described in Section 414(p) of the Code."

10

13. Section 7.2(e) of the Plan is amended in its entirety to read as follows:

"(e)(1) In the case of a Qualified Joint and Survivor annuity as described in Section 7.2(d)(3), the Committee shall provide each Participant within a reasonable period prior to the commencement of benefits a written explanation of: (i) the terms and conditions of a Qualified Joint and Survivor Annuity; (ii) the Participant's right to make and the effect of an election to waive the Qualified Joint and Survivor Annuity form of benefit; (iii) the rights of the Participant's Spouse with regard to such Spouse's required consent to the Participant's waiver; and (iv) the Participant's right to make, and the effect of, a revocation of a previous election to waive the Qualified Joint and Survivor Annuity. This explanation shall be provided to the Participant no less than 30 days and no more than 90 days before the date benefit payments would commence (and consistent with such regulations as the Secretary of the Treasury may prescribe). The written explanation shall include an explanation of the eligibility conditions, other material features, and relative values of the optional forms of benefits under the Plan, as well as a general explanation of the relative financial effect on a Participant's benefit of the waiver of the Qualified Joint and Survivor Annuity.

(2) In the case of a Qualified Preretirement Survivor Annuity as described in Section 7.2(c), the Committee shall

11

provide each Participant within the Election Period a written explanation of the Qualified Preretirement Survivor Annuity in such terms and in such manner as would be comparable to the explanation provided for meeting the requirements of
Section 7.2(e)(1) applicable to a Qualified Joint and Survivor Annuity."

14. Section B.5(b) of Appendix B to the Plan is amended by adding the following at the end thereof:

"With respect to Plan Years commencing on or after January 1, 1989, the $200,000 limitation in the foregoing sentence shall not apply; instead, the limitations described in the Plan's definition of `Compensation' under Section 1.2 shall apply with respect to such Plan Years."

IN WITNESS WHEREOF, the Company has caused this document to be executed by its duly authorized officer this ________ day of ________________, 19___.

MERCURY GENERAL CORPORATION

By_________________________
Its________________________

12

EXHIBIT 10.10

AMENDMENT 1997-1

MERCURY GENERAL CORPORATION
PROFIT SHARING PLAN

WHEREAS, Mercury General Corporation (the "Company") maintains the Mercury General Corporation Profit Sharing Plan (the "Plan"); and

WHEREAS, pursuant to Section 9.1 of the Plan, the Company has the right to amend the Plan; and

WHEREAS, the Company recently acquired American Fidelity Insurance Company ("AFI"), employees of which were Participants in the American Fidelity Companies Employees Savings Plan ("American Fidelity Plan"); and

WHEREAS, this Company agreed to accept to accept a direct transfer of assets and liabilities from the American Fidelity Plan to this Plan on behalf of those employees of AFI who did not have outstanding loan balances from the American Fidelity Plan at the time of such transfer;

NOW, THEREFORE, the Plan is hereby amended to add the following "American Fidelity Appendix," which sets forth Plan provisions applicable to the transfer of assets and liabilities from the American Fidelity Plan, effective as of the date of such transfer of assets and liabilities:


"AMERICAN FIDELITY APPENDIX

1. TRANSFER OF ASSETS AND LIABILITIES. This Plan hereby accepts a transfer of assets and liabilities from the American Fidelity Companies Employees Savings Plan ("American Fidelity Plan"). The assets and liabilities transferred shall be the assets and liabilities attributable as of the date of transfer to the Participants in the American Fidelity Plan who were employees of American Fidelity Insurance Company ("AFI") as of the date of the acquisition by the Company of AFI, excluding, however, all assets and liabilities attributable to employees of AFI who, as of the date of the transfer of assets and liabilities, had any outstanding loan balance under the American Fidelity Plan.

2. ACCOUNTS. The Committee under this Plan shall credit the amounts transferred from the American Fidelity Plan to appropriate accounts established for the employees involved in the transfer. In the discretion of the Committee, the amounts transferred from the American Fidelity Plan may be commingled with the corresponding accounts under this Plan, or may be kept as separate, non- commingled accounts. The accounts under the American Fidelity Plan and the corresponding accounts under this Plan (if any) are set forth below:

2

AMERICAN FIDELITY                  MERCURY GENERAL
PLAN ACCOUNTS                      PLAN ACCOUNTS
-----------------                  ---------------
Employer                           Company Contribution
Contributions                      and/or Employer Matching

Employee Contribution              (None)

Rollover                           Rollover

Contribution Deferral              401(k)

3. INVESTMENTS. Initially upon the transfer of assets and liabilities to this Plan, the Committee shall determine which of the investment funds under this Plan the transferred amounts should be invested. Following such initial investment, each Participant shall be allowed to reallocate the amounts credited to the Participants' accounts among the various investment funds permitted under this Plan, according to this Plan's generally-applicable rules concerning such elections, including but not limited to the dates on which changes in investment funds are generally permitted under this Plan, and the generally-applicable rules concerning the timing and form of employee notifications concerning investment changes.

4. DISTRIBUTION. As required by Internal Revenue Code Section
411(d)(6), the distribution options available to the former Participants in the American Fidelity Plan shall remain available to such Participants under this Plan. Accordingly, the following rules shall apply to such Participants:

3

a. Accounts with an aggregate vested balance of $3,500 or less shall be paid in a lump sum.

b. If such a Participant has an aggregate vested account balance in excess of $3,500, then the Participant may elect among the following distribution options:

(1) lump sum distribution;

(2) substantially equal payments in monthly, quarterly, semi-annual or annual installments;

(3) purchase of an annuity contract issued by an insurance company selected by the Committee.

Notwithstanding the foregoing, the automatic form of distribution to such a Participant shall be the qualified joint and survivor annuity form of distribution. The rules concerning the qualified joint and survivor annuity shall be the same rules as set forth in the Plan for pre-1991 account balances, including but not limited to the rules concerning waiver of the qualified joint and survivor annuity, and the required consent to such waiver by the spouse of the Participant, if any.

If the Committee does not create commingled Accounts for the amounts transferred from the American Fidelity Plan, then the distribution options set forth above with respect to former

4

American Fidelity Participants shall only apply to the non-commingled Accounts which represent the amounts transferred from the American Fidelity Plan. If the Committee creates commingled Accounts, then the above distribution options shall apply to all distributions made to former American Fidelity Plan Participants.

5. WITHDRAWAL OF AFTER-TAX CONTRIBUTIONS. Subject to the requirement of a waiver of the qualified joint and survivor annuity (and the spousal consent required for such waiver) former American Fidelity Plan Participants with amounts credited as employee contributions may withdraw all or part of the benefit represented by such employee contributions."

IN WITNESS WHEREOF, this Amendment 1997-1 is hereby adopted this ____ day of ____________, 1997

MERCURY GENERAL CORPORATION

By________________________________________

Its_______________________________________

5

EXHIBIT 10.11



REVOLVING CREDIT AGREEMENT

BY AND AMONG

MERCURY GENERAL CORPORATION,

THE LENDERS PARTY HERETO,

AND

THE BANK OF NEW YORK, AS AGENT


$75,000,000

DATED AS OF NOVEMBER 21, 1996


REVOLVING CREDIT AGREEMENT, dated as of November 21, 1996, by and among MERCURY GENERAL CORPORATION, a California corporation (the "BORROWER"), the lenders party hereto (collectively, together with their respective assigns, the "LENDERS", and each a "LENDER") and THE BANK OF NEW YORK, as agent for the Lenders (in such capacity, the "AGENT").

1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION

1.1. Definitions

As used in this Agreement, terms defined in the preamble have the meanings therein indicated, and the following terms have the following meanings:

"ABR Advances": the Loans (or any portions thereof) at such time as they (or such portions) are made and/or being maintained at a rate of interest based upon the Alternate Base Rate.

"Accountants": KPMG Peat Marwick (or any successor thereto), or such other firm of certified public accountants of recognized national standing selected by the Borrower and reasonably satisfactory to the Agent.

"Acquisition": 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": 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 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").

1

"Advance": an ABR Advance or a Eurodollar Advance, as the case may be.

"Affected Advance": defined in Section 2.9.

"Affected Principal Amount": in the event that (i) the Borrower shall fail for any reason to borrow, convert or continue after it shall have notified the Agent of its intent to do so in any instance in which it shall have requested a Eurodollar Advance, an amount equal to the principal amount of such Eurodollar Advance; (ii) a Eurodollar Advance shall terminate pursuant to the provisions hereof prior to the last day of the Interest Period applicable thereto, an amount equal to the principal amount of such Eurodollar Advance; and
(iii) the Borrower shall prepay or repay all or any part of the principal amount of a Eurodollar Advance prior to the last day of the Interest Period applicable thereto, an amount equal to the principal amount of such Eurodollar Advance so prepaid or repaid.

"Affiliate": as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, control of a Person shall mean the power, direct or indirect, (i) to vote 5% or more of the securities or other interests having ordinary voting power for the election of directors or other managing Persons thereof or (ii) to direct or cause the direction of the management and policies of such Person, whether by contract or otherwise.

"Aggregate Commitments": on any date, the sum of all Commitments on such date.

"Agreement": this Revolving Credit Agreement, as the same may be amended, supplemented or otherwise modified from time to time.

"Alternate Base Rate": on any date, a rate of interest per annum equal to the higher of (i) the Federal Funds Rate in effect on such date plus 1/2 of 1% or (ii) the BNY Rate in effect on such date.

"Annual Statement": defined in Section 4.13(b).

"Applicable Insurance Code": 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": 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 In surance Subsidiary is licensed.

"Applicable Lending Office": in respect of any Lender, (i) in the case of such Lender's ABR Advances, its Domestic Lending Office and (ii) in the case of such Lender's Eurodollar Advances, its Eurodollar Lending Office.

2

"Applicable Margin": (i) with respect to the unpaid principal balance of ABR Advances, the applicable percentage set forth below in the column entitled "ABR Advances", (ii) with respect to the unpaid principal balance of Eurodollar Advances, the applicable percentage set forth below in the column entitled "Eurodollar Advances", and (iii) with respect to the Commitment Fee, the applicable percentage set forth below in the column entitled "Commitment Fee"; in each case opposite the applicable Pricing Level:

3

                      ABR         Eurodollar    Commitment
Pricing Level         Advances    Advances      Fee
- -------------------   --------    ----------    -----------

Pricing Level I       0%          0.5000%       .1875%
Pricing Level II      0%          0.6250%       .2500%

Changes in the Applicable Margin resulting from a change in Pricing Level shall become effective upon the earlier of the delivery by the Borrower to the Agent of a certificate pursuant to Section 7.1(d) and the date such certificate is required to be delivered pursuant to such Section.

"Assignment and Acceptance Agreement": an assignment and acceptance agreement executed by an assignor and an assignee pursuant to which the assignor assigns to the assignee all or any portion of such assignor's Notes and Commitment, substantially in the form of Exhibit D.

"Assignment Fee": defined in Section 11.6(b).

"Authorized Signatory": as to (i) any Person which is a corporation, the chairman of the board, the president, any vice president, the chief financial officer or any other duly authorized officer (acceptable to the Agent) of such Person and (ii) any Person which is not a corporation, the general partner or other managing Person thereof.

"Benefited Lender": defined in Section 11.8.

"BNY": The Bank of New York.

"BNY Rate": a rate of interest per annum equal to the rate of interest publicly announced in New York City by BNY from time to time as its prime commercial lending rate, such rate to be adjusted automatically (without notice) on the effective date of any change in such publicly announced rate.

"Borrowing Date": any Business Day specified in (i) a Borrowing Request as a date on which the Borrower requests the Lenders to make Loans.

"Borrowing Request": a request for Loans in the form of Exhibit C.

"Business Day": for all purposes other than as set forth in clause
(ii) below, (i) any day other than a Saturday, Sunday or a day on which commercial banks located in New York City and Los Angeles are authorized or required by law or other governmental action to close and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Advances, any day which is a Business Day described in clause (i) above and which is also a day on which dealings in foreign currency and exchange and Eurodollar funding between banks may be carried on in London, England.

4

"Capital Lease Obligations": 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.

"Code": the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto, and the rules and regulations issued thereunder, as from time to time in effect.

"Commitment": in respect of any Lender, such Lender's under taking during the Commitment Period to make Loans, subject to the terms and conditions hereof, in an aggregate outstanding principal amount not exceeding the amount set forth next to the name of such Lender in Exhibit A under the heading "Commitments", as such amount may be reduced pursuant to Section 2.4.

"Commitment Fee": defined in Section 3.1.

"Commitment Period": the period from the Effective Date until the Business Day immediately preceding the Maturity Date.

"Commitment Percentage": as to any Lender, the percentage set forth opposite the name of such Lender in Exhibit A under the heading "Commitment Percentage".

"Compensatory Interest Payment": defined in Section 2.7(c).

"Consolidated": the Borrower and its Subsidiaries which are consolidated for financial reporting purposes.

"Consolidated Statutory Capital and Surplus": at any date the consolidated statutory capital and surplus of the Borrower and its Subsidiaries determined as of such date in accordance with SAP.

"Consolidating": the Borrower and its Subsidiaries taken separately.

"Contingent Obligation": as to any Person (the "secondary obligor"), any obligation, without duplication, of such secondary obligor (i) guaranteeing or in effect guaranteeing any return on any investment made by another Person, or (ii) guaranteeing or in effect guaranteeing any indebtedness, lease, dividend or other obligation ("primary obligation") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such secondary obligor, whether contingent, (A) to purchase any such primary obligation or any Property constituting direct or indirect security therefor, (B) to advance or supply funds (x) for the purchase or payment of any such primary

5

obligation or (y) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (C) to purchase Property, securities or services primarily for the purpose of assuring the beneficiary of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, (D) otherwise to assure or hold harmless the beneficiary of such primary obligation against loss in respect thereof, and (E) in respect of the liabilities of any partnership in which such secondary obligor is a general partner, except to the extent that such liabilities of such partnership are nonrecourse to such secondary obligor and its separate Property, provided, however, that the term "Contingent Obligation" shall not include (1) amounts potentially owed on or with respect to insurance policies issued or sold in the ordinary course of business, (2) premiums for any such policies, to the extent attributable to a period after a particular date upon which Contingent Obligations are being determined or (3) the indorsement of instruments for deposit or collection in the ordinary course of business. The amount of any Contingent Obligation of a Person shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith.

"Control Person": defined in Section 2.12.

"Conversion/Continuation Date": the date on which (i) a Eurodollar Advance is converted to an ABR Advance, (ii) the date on which an ABR Advance is converted to a Eurodollar Advance or (iii) the date on which a Eurodollar Advance is continued as a new Eurodollar Advance.

"Default": any event or condition which constitutes an Event of Default or which, with the giving of notice, the lapse of time, or any other condition, would, unless cured or waived, become an Event of Default.

"Disposition": 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, transfer or other disposition by a Person that is a corporation (i) to a wholly-owned Subsidiary of that Person or (2) as a dividend to that Person's shareholders.

"Dollars" and "$": lawful currency of the United States of America.

"Domestic Lending Office": in respect of any Lender, initially, the office or offices of such Lender designated as such on Schedule 1.1; thereafter, such other office of such Lender through which it shall be making or maintaining ABR Advances, as reported by such Lender to the Agent and the Borrower.

"EBITDA": 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

6

deducted in determining such net income for such period.

"Effective Date": November 21, 1996.

"Employee Benefit Plan": an employee benefit plan within the meaning of Section 3(3) of ERISA maintained, sponsored or contributed to by the Borrower, any of its Subsidiaries or any ERISA Affiliate.

"Environmental Laws": any and all federal, state and local laws relating to the environment, the use, storage, transporting, manufacturing, handling, discharge, disposal or recycling of hazardous substances, materials or pollutants or industrial hygiene, and including, without limitation, (i) the Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 USCA (S)9601 et seq.; (ii) the Resource Conservation and Recovery

Act of 1976, as amended, 42 USCA (S)6901 et seq.; (iii) the Toxic Substance

Control Act, as amended, 15 USCA (S)2601 et. seq.; (iv) the Water Pollution

Control Act, as amended, 33 USCA (S)1251 et. seq.; (v) the Clean Air Act, as

amended, 42 USCA (S)7401 et seq.; (vi) the Hazardous Material Transportation Act, as amended, 49 USCA (S)1801 et seq. and (viii) all rules, regulations,

judgments, decrees, injunctions and restrictions thereunder and any analogous state law.

"ERISA": the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations issued thereunder, as from time to time in effect.

"ERISA Affiliate": when used with respect to an Employee Benefit Plan, ERISA, the PBGC or a provision of the Code pertaining to employee benefit plans, any Person that is a member of any group of organizations within the meaning of Sections 414(b), (c), (m) or (o) of the Code of which the Borrower or any of its Subsidiaries is a member.

"Eurodollar Advances": collectively, the Loans (or any portions thereof) at such time as they (or such portions) are made and/or being maintained at a rate of interest based upon the Eurodollar Rate.

"Eurodollar Lending Office": in respect of any Lender, initially the office, branch or affiliate of such Lender designated as such on Schedule 1.1 (or, if no such office branch or affiliate is specified, its Domestic Lending Office); thereafter, such other office, branch or affiliate of such Lender through which it shall be making or maintaining Eurodollar Advances, as reported by such Lender to the Agent and the Borrower.

"Eurodollar Rate": with respect to the Interest Period applicable to any Eurodollar Advance, a rate of interest per annum, as determined by the Agent, obtained by

7

dividing (and then rounding to the nearest 1/16 of 1% or, if there is no nearest 1/16 of 1%, then to the next higher 1/16 of 1%):

(a) the rate, as reported by BNY to the Agent, quoted by BNY to leading banks in the interbank eurodollar market as the rate at which BNY is offering Dollar deposits in an amount equal approximately to the Eurodollar Advance of BNY to which such Interest Period shall apply for a period equal to such Interest Period, as quoted at approximately 11:00 A.M. two Business Days prior to the first day of such Interest Period, by

(b) a number equal to 1.00 minus the aggregate of the then stated maximum rates during such Interest Period of all reserve requirements (including, without limitation, marginal, emergency, supplemental and special reserves), expressed as a decimal, established by the Board of Governors of the Federal Reserve System and any other banking authority to which BNY and other major United States money center banks are subject, in respect of eurocurrency funding (currently referred to as "Eurocurrency liabilities" in Regulation D of the Board of Governors of the Federal Reserve System) or in respect of any other category of liabilities including deposits by reference to which the interest rate on Eurodollar Advances is determined or any category of extensions of credit or other assets which includes loans by non-domestic offices of any Lender to United States Residents. Such reserve requirements shall include, without limitation, those imposed under such Regulation D. Eurodollar Advances shall be deemed to constitute Eurocurrency liabilities and as such shall be deemed to be subject to such reserve requirements without benefit of credits for proration, exceptions or offsets which may be available from time to time to any Lender under such Regulation D. The Eurodollar Rate shall be adjusted automatically on and as of the effective date of any change in any such reserve requirement.

"Event of Default": any of the events specified in Section 9.1, provided that any requirement for the giving of notice, the lapse of time, or any other condition has been satisfied.

"Existing Agreement": the Revolving Credit Agreement, dated as of December 20, 1994, among the Borrower, the Lenders party thereto and The Bank of New York, as Agent.

"Existing Indebtedness": all amounts due and owning under the Existing Agreement.

"Extension Request": defined in Section 2.17.

"Federal Funds Rate": for any day, a rate per annum (expressed as a decimal, rounded upwards, if necessary, to the next higher 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 of New York on the Business Day next succeeding such day, provided that (i) if the day for which such rate is to be determined 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 (ii) if such rate is not so published for any day, the Federal Funds Rate for such day shall be the average of the quotations for such day on such transactions received by BNY as determined by BNY and reported to the Agent.

8

"Financial Statements": defined in Section 4.13(a).

"GAAP": generally accepted accounting principles as from time to time in effect in the United States.

"GAAP Net Worth": 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 determined in accordance with GAAP.

"Governmental Authority": any nation or government, any state or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any court or arbitrator (including, without limitation, any Applicable Insurance Regulatory Authority).

"Hazardous Substance": any hazardous or toxic substance, material or waste, including, but not limited to, (i) those substances, materials, and wastes listed in the United States Department of Transportation Hazardous Materials Table (49 CFR 172.101) or by the Environmental Protection Agency as hazardous substances (40 CFR Part 302) and amendments thereto and replacements therefor and (ii) any substance, pollutant or material defined as, or designated in, any Environmental Law as a "hazardous substance," "toxic substance," "hazardous material," "hazardous waste," "restricted hazardous waste," "pollutant," "toxic pollutant" or words of similar import.

"Highest Lawful Rate": as to any Lender, the maximum rate of interest, if any, that at any time or from time to time may be contracted for, taken, charged or received by such Lender on the Notes held thereby or which may be owing to such Lender pursuant to this Agreement and the other Loan Documents under the laws applicable to such Lender and this transaction.

"Indebtedness": as to any Person, at a particular time, all items which constitute, without duplication, (i) indebtedness for borrowed money or the deferred purchase price of Property (other than trade payables and accrued expenses incurred in the ordinary course of business), (ii) indebtedness evidenced by notes, bonds, debentures or similar instruments, (iii) obligations with respect to any conditional sale or title retention agreement, (iv) 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, (v) 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), (vi) obligations

9

under Capital Lease Obligations and (vii) Contingent Obligations; provided that, for purposes of this definition, (a) "Indebtedness" shall not include obligations in respect of interest rate caps, collars, swaps or other similar agreements, and (b) Indebtedness under clauses (iii) or (v) 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 Person": defined in Section 11.10.

"Insurance Subsidiary": each Subsidiary of the Borrower set forth on Schedule 4.1 under the heading "Engaged in an Insurance Business."

"Intellectual Property": all copyrights, trademarks, servicemarks, patents, trade names and service names.

"Interest Coverage Ratio": 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": 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 arrangements 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": (i) as to any ABR Advance, the last day of each March, June, September and December commencing on the first of such days to occur after such ABR Advance is made or any Eurodollar Advance is converted to an ABR Advance, (ii) as to any Eurodollar Advance in respect of which the Borrower has selected an Interest Period of one, two or three months, the last day of such Interest Period, and (iii) as to any Eurodollar Advance in respect of which the Borrower has selected an Interest Period of six months, the day which is three months after the first day of such Interest Period and the last day of such Interest Period.

"Interest Period": with respect to any Eurodollar Advance requested by the Borrower, the period commencing on, as the case may be, the Borrowing Date or Conversion/Continuation Date with respect to such Eurodollar Advance and ending one, two, three or six months thereafter, as selected by the Borrower in its irrevocable Borrowing Request or its irrevocable Notice of Conversion/Continuation, provided, however, that (i) if any Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day, (ii) any Interest Period pertaining that begins on the last Business Day of a calendar month (or on a day for which there is no

10

numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month and (iii) the Borrower shall select Interest Periods so as not to have more than five different Interest Periods outstanding at any one time for all Loans.

"Leverage Ratio": as of any date, the ratio of (a) Consolidated Indebtedness of the Borrower on such date, to (b) the sum of (i) Consolidated Indebtedness of the Borrower on such date, plus (ii) Adjusted Net Worth on such date.

"Lien": any mortgage, pledge, hypothecation, assignment, deposit or preferential arrangement, encumbrance, lien (statutory or other), or other security agreement or security interest of any kind or nature whatsoever, including, without limitation, any conditional sale or other title retention agreement and any capital or financing lease having substantially the same economic effect as any of the foregoing.

"Loan Documents": collectively, this Agreement and the Notes.

"Loan" and "Loans": defined in Section 2.1.

"Margin Stock": any "margin stock", as defined in Regulation U of the Board of Governors of the Federal Reserve System, as the same may be amended or supplemented from time to time.

"Material Adverse Change": a material adverse change in (i) the financial condition, operations, business, prospects or Property of the Borrower and its Subsidiaries taken as a whole, (ii) the ability of the Borrower to perform its obligations under the Loan Documents or (iii) the ability of the Agent and the Lenders to enforce the Loan Documents, including, without limitation, as a result of a change of law since December 31, 1995.

"Material Adverse Effect": a material adverse effect on (i) the financial condition, operations, business, prospects or Property of the Borrower and its Subsidiaries taken as a whole, (ii) the ability of the Borrower to perform its obligations under the Loan Documents or (iii) the ability of the Agent and the Lenders to enforce the Loan Documents, including, without limitation, as a result of a change of law since December 31, 1995.

"Maturity Date": November 21, 1999 (or any date subsequent thereto resulting from an extension of the Maturity Date pursuant to Section 2.17), or such earlier date on which the Notes shall become due and payable, whether by acceleration or otherwise.

"Multiemployer Plan": a Pension Plan which is a multiemployer plan as defined in Section 4001(a)(3) of ERISA.

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

"Non-Insurance Subsidiary": each Subsidiary of the Borrower set forth on Schedule 4.1 under the heading "Not Engaged in an Insurance Business."

"Note" and "Notes": defined in Section 2.2.

"Notice of Conversion/Continuation": a notice substantially in the form of Exhibit G.

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

"Pension Plan": at any date of determination, any Employee Benefit Plan (including a Multiemployer Plan), the funding requirements of which (under
Section 302 of ERISA or Section 412 of the Code) are, or at any time within the six years immediately preceding such date, were in whole or in part, the responsibility of the Borrower, any of its Subsidiaries or any ERISA Affiliate.

"Permitted Liens": Liens permitted to exist under Section 8.2.

"Person": any individual, firm, partnership, joint venture, corporation, limited liability company, association, business enterprise, joint stock company, unincorporated association, trust, Governmental Authority or any other entity, whether acting in an individual, fiduciary, or other capacity, and for the purpose of the definition of "ERISA Affiliate", a trade or business.

"Pricing Level I": any time when the Leverage Ratio is less than or equal to .15:1.00.

"Pricing Level II": any time when the Leverage Ratio is greater than .15:1.00.

"Property": all types of real, personal, tangible, intangible or mixed property.

"Real Property": all real property owned or leased by the Borrower or any of its Subsidiaries.

"Reinsurance Agreement": 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).

"Remaining Interest Period": (i) in the event that the Borrower shall fail for any

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reason to borrow a Loan in respect of which it shall have requested a Eurodollar Advance or convert an Advance to, or continue an Advance as, a Eurodollar Advance after it shall have notified the Agent of its intent to do so, a period equal to the Interest Period that the Borrower elected in respect of such Eurodollar Advance; or (ii) in the event that a Eurodollar Advance shall terminate pursuant to the provisions hereof prior to the last day of the Interest Period applicable thereto, a period equal to the remaining portion of such Interest Period if such Interest Period had not been so terminated; or
(iii) in the event that the Borrower shall prepay or repay all or any part of the principal amount of a Eurodollar Advance prior to the last day of the Interest Period applicable thereto, a period equal to the period from and including the date of such prepayment or repayment to but excluding the last day of such Interest Period.

"Required Lenders": at any time when no Loans are out standing, Lenders having Commitments (or if no Commitments then exist, Lenders having Commitments on the last day on which Commitments did exist) equal to at least 66 2/3% of the aggregate Commitments of all the Lenders, and at any time when Loans are outstanding, Lenders holding Notes having an unpaid principal balance equal to at least 66 2/3% of the aggregate Loans outstanding.

"Restricted Payment": as to any Person (i) any dividend or other distribution, direct or indirect, on account of any shares of any class of Stock or other equity interest in such Person now or hereafter outstanding (other than a dividend payable solely in shares of such Stock to the holders of such shares) and (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition, direct or indirect, of any shares of any class of Stock or other equity interest in such Person now or hereafter outstanding.

"SAP": 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.

"SEC": the Securities and Exchange Commission or any Governmental Authority succeeding to the functions thereof.

"Special Counsel": Emmet, Marvin & Martin, LLP, special counsel to the Agent.

"Statutory Net Income": 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.

"Statutory Surplus": 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 25, page 3, column

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1 of the Liabilities, Surplus and Other Funds Statement in the Annual Statement.

"Stock": as to any Person, all shares, interests, partnership interests, limited liability company interests, participations, rights in or other equivalents (however designated) of such Person's equity (however designated) and any rights, warrants or options exchangeable for or convertible into such shares, interests, participations, rights or other equity.

"Subsidiary": as to any Person, any corporation, association, partnership, limited liability company, joint venture or other business entity of which such Person or any Subsidiary of such Person, directly or indirectly, either (i) in respect of a corporation, owns or controls more than 50% of the outstanding Stock having ordinary voting power to elect a majority of the board of directors or similar managing body, irrespective of whether a class or classes shall or might have voting power by reason of the happening of any contingency, or (ii) in respect of an association, partnership, limited liability company, joint venture or other business entity, is entitled to share in more than 50% of the profits and losses, however determined.

"Tax": any present or future tax, levy, impost, duty, charge, fee, deduction or withholding of any nature and whatever called, by a Governmental Authority, on whomsoever and wherever imposed, levied, collected, withheld or assessed.

"Tax on the Overall Net Income": as to any Person, a Tax imposed by the jurisdiction in which that Person's principal office (and/or, in the case of a Lender, its Domestic Lending Office) is located or by any political subdivision or taxing authority thereof or in which that Person is deemed to be doing business on all or part of the net income, profits or gains of that Person (whether worldwide, or only insofar as such income, profits or gains are considered to arise in or to relate to a particular jurisdiction, or otherwise).

"United States": the United States of America (including the States thereof and the District of Columbia).

"Unqualified Amount": defined in Section 2.7(c).

1.2. Principles of Construction

(a) All terms defined in a Loan Document shall have the meanings given such terms therein when used in the other Loan Documents or any certificate, opinion or other document made or delivered pursuant thereto, unless otherwise defined therein.

(b) As used in the Loan Documents and in any certificate, opinion or other document made or delivered pursuant thereto, accounting terms not defined in Section 1.1, and accounting terms partly defined in Section 1.1, to the extent not defined, shall have the respective meanings given to them under GAAP, or, to the extent that such terms apply solely to one or more Insurance Subsidiaries, given to them under SAP.

(c) The words "hereof", "herein", "hereto" and "hereunder" and similar words when used in a Loan Document shall refer to such Loan Document as a whole and not to any particular provision thereof, and Section, schedule and exhibit references contained

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therein shall refer to Sections thereof or schedules or exhibits thereto unless otherwise expressly provided therein.

(d) The phrase "may not" is prohibitive and not permissive.

(e) Unless the context otherwise requires, words in the singular number include the plural, and words in the plural include the singular.

(f) Unless specifically provided in a Loan Document to the contrary, references to a time shall refer to New York City time.

(g) Unless specifically provided in a Loan Document to the contrary, in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding".

(h) References in any Loan Document to a fiscal period shall refer to that fiscal period of the Borrower.

2. AMOUNT AND TERMS OF LOANS

2.1. Loans

Subject to the terms and conditions hereof, each Lender severally agrees to make revolving credit loans (each a "Loan" and, as the context may

require, collectively with all other Loans of such Lender and with the Loans of all other Lenders, the "Loans") to the Borrower from time to time during the Commitment Period, provided, however, that immediately after giving effect thereto (i) the outstanding principal balance of such Lender's Loans would not exceed such Lender's Commitment, and (b) the aggregate outstanding principal balance of all Lenders' Loans would not exceed the Aggregate Commitments. During the Commitment Period, the Borrower may borrow, prepay in whole or in part and reborrow under the Aggregate Commitments, all in accordance with the terms and conditions of this Agreement.

2.2. Notes

The Loans made by a Lender shall be evidenced by a promissory note of the Borrower, substantially in the form of Exhibit B, with appropriate insertions therein as to date and principal amount (each, as indorsed or modified from time to time, a "Note" and, collectively with the Notes of all other Lenders, the "Notes"), payable to the order of such Lender for the account of its Applicable Lending Office and representing the obligation of the

15

Borrower to pay the lesser of (a) the original amount of the Commitment of such Lender and (b) the aggregate unpaid principal balance of all Loans made by such Lender, with interest thereon as prescribed in Section 2.7. Each Note shall (i) be dated the first Borrowing Date, (ii) be stated to mature on the Maturity Date and (iii) bear interest from the date thereof on the unpaid principal balance thereof at the applicable interest rate or rates per annum determined as provided in Section 2.7. Interest on each Note shall be pay able as specified in
Section 2.7.

2.3. Procedure for Borrowing

(a) The Borrower may borrow under the Aggregate Commitments on any Business Day during the Commitment Period, provided, however, that the Borrower shall notify the Agent (by telephone or fax) no later than: 12:00 Noon three Business Days prior to the requested Borrowing Date, in the case of Eurodollar Advances, and 12:00 Noon, one Business Day prior to the requested Borrowing Date, in the case of ABR Advances, specifying in each case (i) the aggregate principal amount to be borrowed under the Aggregate Commitments, (ii) the requested Borrowing Date, (iii) whether such borrowing is to consist of one or more Eurodollar Advances, ABR Advances, or a combination thereof and (iv) if the borrowing is to consist of one or more Eurodollar Advances, the length of the Interest Period for each such Eurodollar Advance, provided, however, that no Interest Period selected in respect of any Loan shall end after the Maturity Date. If the Borrower fails to give timely notice in connection with a request for a Eurodollar Advance, the Borrower shall be deemed to have elected that such Advance shall be made as an ABR Advance. Each such notice shall be irrevocable and confirmed immediately by delivery to the Agent of a Borrowing Request. Each Advance shall be in an aggregate principal amount equal to $3,000,000 or such amount plus a whole multiple of $1,000,000 in excess thereof, or, if less, the unused amount of the Aggregate Commitments.

(b) Upon receipt of each notice of borrowing from the Borrower, the Agent shall promptly notify each Lender thereof. Subject to its receipt of the notice referred to in the preceding sentence, (i) each Lender will make the amount of its Commitment Percentage of each borrowing available to the Agent for the account of the Borrower at the office of the Agent set forth in Section 11.2 not later than 2:00 PM on the relevant Borrowing Date requested by the Borrower, in funds immediately available to the Agent at such office. The amounts so made available to the Agent on such Borrowing Date will then, subject to the satisfaction of the terms and conditions of this Agreement, as determined by the Agent, be made available on such date to the Borrower by the Agent at the office of the Agent specified in Section 11.2 by crediting the account of the Borrower on the books of such office with the aggregate of said amounts received by the Agent.

(c) Unless the Agent shall have received prior notice from a Lender (by telephone or otherwise, such notice to be promptly confirmed by fax or other writing) that such Lender will not make available to the Agent such Lender's Commitment Percentage of the Loans requested by the Borrower, the Agent may assume that such Lender has made such share available to the Agent on the Borrowing Date in accordance with this Section, provided that such Lender received notice of the proposed borrowing from the Agent, and the Agent may, in reliance upon such assumption, make available to the Borrower on the Borrowing Date a corresponding amount. If and to the extent such Lender shall not have so made its Commitment Percentage of such Loans available to the Agent, such Lender and the Borrower severally agree

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to pay to the Agent forthwith on demand such corresponding amount (to the extent not previously paid by the other), together with interest thereon for each day from the date such amount is made available to the Borrower to the date such amount is paid to the Agent, at a rate per annum equal to, in the case of the Borrower, the applicable interest rate set forth in Section 2.7 for ABR Advances, and, in the case of such Lender, the Federal Funds Rate in effect on each such day (as determined by the Agent). Such payment by the Borrower, however, shall be without prejudice to its rights against such Lender. If such Lender shall pay to the Agent such corresponding amount, such amount so paid shall constitute such Lender's Loan as part of the Loans for purposes of this Agreement, which Loan shall be deemed to have been made by such Lender on the Borrowing Date applicable to such Loans.

(d) If a Lender makes a new Loan on a Borrowing Date on which the Borrower is to repay a Loan from such Lender, such Lender shall apply the proceeds of such new Loan to make such repayment, and only the excess of the proceeds of such new Loan over the Loan being repaid need be made available to the Agent.

(e) Notices of borrowing given by telephone shall be deemed given when made by telephone and the Agent and the Lenders may rely thereon whether such notice is confirmed by the delivery of a Borrowing Request.

2.4. Termination or Reduction of Aggregate Commitments

(a) Voluntary Reductions. The Borrower shall have the right, upon at least three Business Days' prior written notice to the Agent, at any time to terminate the Aggregate Commitments or from time to time to permanently reduce the Aggregate Commitments, provided, however, that any such reduction shall be in the amount of $3,000,000 (or such lesser available amount of the Facility) or $3,000,000 plus a whole multiple of $1,000,000 in excess thereof.

(b) In General. Reductions of the Aggregate Commitments shall be applied pro rata according to the Commitment of each Lender. Simultaneously with each reduction of the Aggregate Commitments under this Section, the Borrower shall pay the Commitment Fee accrued on the amount by which the Aggregate Commitments have been reduced and prepay the Loans as required by Section 2.5(b).

2.5. Prepayments of the Loans

(a) Voluntary Prepayments. The Borrower may, at its option, prepay the Loans without premium or penalty, in full at any time or in part from time to time by notifying the Agent in writing at least one Business Day prior to the proposed prepayment date, in the case of Loans consisting of ABR Advances and at least three Business Days prior to the pro-

17

posed prepayment date, in the case of Loans consisting of Eurodollar Advances, in each case specifying whether the Loans to be prepaid consist of ABR Advances, Eurodollar Advances, or a combination thereof, the amount to be prepaid and the date of prepayment. Such notice shall be irrevocable and the amount specified in such notice shall be due and payable on the date specified, together with accrued interest to the date of such payment on the amount prepaid. Upon receipt of such notice, the Agent shall promptly notify each Lender thereof. Each partial prepayment of the Loans pursuant to this subsection shall be in an aggregate principal amount of $3,000,000 (or any smaller outstanding balance of the Loans) or $3,000,000 plus a whole multiple of $1,000,000 in excess thereof. After giving effect to any partial prepayment with respect to Eurodollar Advances which were made (whether as the result of a borrowing or a conversion) on the same date and which had the same Interest Period, the outstanding principal amount of such Eurodollar Advances shall exceed (subject to Section 2.6) $3,000,000 or such amount plus a whole multiple of $1,000,000 in excess thereof.

(b) Mandatory Prepayments of Loans Relating to Reductions of the Aggregate Commitments. Simultaneously with each reduction of the Aggregate Commitments under Section 2.4, the Borrower shall prepay the Loans by the amount, if any, by which the aggregate unpaid principal balance of the Loans exceeds the amount of the Aggregate Commitments as so reduced.

(c) In General. If any prepayment is made in respect of any Eurodollar Advance, in whole or in part, prior to the last day of the applicable Interest Period, the Borrower agrees to indemnify the Lenders in accordance with Section 2.14.

2.6. Conversions and Continuations

(a) The Borrower may elect from time to time to convert Eurodollar Advances to ABR Advances by giving the Agent at least one Business Day's prior irrevocable notice of such election (confirmed by the delivery of a Notice of Conversion/Continuation), specifying the amount to be so converted, provided, that any such conversion of Eurodollar Advances shall only be made on the last day of the Interest Period applicable thereto. In addition, the Borrower may elect from time to time to (i) convert ABR Advances to Eurodollar Advances and
(ii) to continue Eurodollar Advances by selecting a new Interest Period therefor, in each case by giving the Agent at least three Business Days' prior irrevocable notice of such election (confirmed by the delivery of a Notice of Conversion/Continuation), in the case of a conversion to, or continuation of, Eurodollar Advances, specifying the amount to be so converted and the initial Interest Period relating thereto, provided that any such conversion of ABR Advances to Eurodollar Advances shall only be made on a Business Day and any such continuation of Eurodollar Advances shall only be made on the last day of the Interest Period applicable to the Eurodollar Advances which are to be continued as such new Eurodollar Advances. The Agent shall promptly provide the Lenders with a copy of each such Notice of Conversion/Continuation. ABR Advances and Eurodollar Advances may be converted or continued pursuant to this
Section in whole or in part, provided that conversions of ABR Advances to Eurodollar Advances, or continuations of Eurodollar Advances shall be in an aggregate principal amount of $3,000,000 or such amount plus a whole multiple of $1,000,000 in excess thereof.

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(b) Notwithstanding anything in this Section to the contrary, no ABR Advance may be converted to a Eurodollar Advance and no Eurodollar Advance may be continued, if the Borrower or the Agent has knowledge that an Event of Default has occurred and is continuing either (i) at the time the Borrower shall notify the Agent of its election to convert or continue or (ii) on the requested Conversion/Continuation Date. In such event, such ABR Advance shall be automatically continued as an ABR Advance, or such Eurodollar Advance shall be automatically converted to an ABR Advance on the last day of the Interest Period applicable to such Eurodollar Advance. If an Event of Default shall have occurred and be continuing, the Agent shall, at the request of the Required Lenders, notify the Borrower (by telephone or otherwise) that all, or such lesser amount as the Required Lenders shall designate, of the outstanding Eurodollar Advances shall be automatically converted to ABR Advances, in which event such Eurodollar Advances shall be automatically converted to ABR Advances on the date such notice is given.

(c) No Interest Period selected in respect of conversion or continuation of any Eurodollar Advance shall end after the Maturity Date.

(d) Each conversion or continuation of a Eurodollar Advance shall be effected by each Lender by applying the proceeds of its new Eurodollar Advance to its Eurodollar Advances (or portion thereof) being converted or continued (it being understood that such conversion or continuation shall not constitute a borrowing for purposes of Sections 4, 5 or 6).

(e) Notices in respect of a conversion or continuation given by telephone shall be deemed given when made by telephone and the Agent and the Lenders may rely thereon whether such notice is confirmed by the delivery of a Notice of Conversion/Continuation.

2.7. Interest Rate and Payment Dates

(a) Prior to Maturity. Except as otherwise provided in Section 2.7(b), prior to maturity, the Loans shall bear interest on the outstanding principal balance thereof at the applicable interest rate or rates per annum set forth below:

   LOANS                       RATE
   -----                       ----
Made as ABR            Alternate Base Rate plus the
Advances               Applicable Margin.

Made as Eurodollar     Eurodollar Rate for the
Advances               applicable Interest Period
                       plus the Applicable Margin.

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(b) Event of Default. After the occurrence and during the continuance of a Default or an Event of Default under Section 9.1(a) or (b), the outstanding principal balance of the Loans shall bear interest at a rate per annum equal to 2% plus the rate which would otherwise be applicable under Section 2.7(a), and any overdue interest or other amount payable under the Loan Documents shall bear interest at a rate per annum equal to the Alternate Base Rate plus the Applicable Margin plus 2%. All such interest shall be payable on demand.

(c) In General. Interest on (i) ABR Advances to the extent based on the BNY Rate shall be calculated on the basis of a 365 or 366-day year (as the case may be), and (ii) ABR Advances to the extent based on the Federal Funds Rate and on Eurodollar Advances shall be calculated on the basis of a 360-day year, in each case, for the actual number of days elapsed, including the first day but excluding the last. Except as otherwise provided in Section 2.7(b), interest shall be payable in arrears on each Interest Payment Date and upon each payment (including prepayment) of the Loans. Any change in the interest rate on the Loans resulting from a change in the Alternate Base Rate or reserve requirements shall become effective as of the opening of business on the day on which such change shall become effective. The Agent shall, as soon as practicable, notify the Borrower and the Lenders of the effective date and the amount of each such change in the BNY Rate, but any failure to so notify shall not in any manner affect the obligation of the Borrower to pay interest on the Loans in the amounts and on the dates required. Each determination of the Alternate Base Rate or a Eurodollar Rate by the Agent pursuant to this Agreement shall be conclusive and binding on the Borrower absent manifest error. At no time shall the interest rate payable on the Loans, together with the Commitment Fee and all other amounts payable under the Loan Documents, to the extent the same are construed to constitute interest, exceed the Highest Lawful Rate. If in respect of any period during the term of this Agreement, any amount paid hereunder, to the extent the same shall (but for the provisions of this Section) constitute or be deemed to constitute interest, would exceed the maximum amount of interest permitted by the Highest Lawful Rate during such period (such amount being hereinafter referred to as an "Un qualified Amount"), then (i) such Unqualified Amount shall be applied or shall be deemed to have been applied as a prepayment of the Loans, and (ii) if in any subsequent period during the term of this Agreement, all amounts payable hereunder in respect of such period which constitute or shall be deemed to constitute interest shall be less than the maximum amount of interest permitted by the Highest Lawful Rate during such period, then the Borrower shall pay to the Lenders in respect of such period an amount (each a "Compensatory Interest Payment") equal to the lesser of (x) a sum which, when added to all such amounts, would equal the maximum amount of interest permitted by the Highest Lawful Rate during such period, and (y) an amount equal to the Unqualified Amount less all other Compensatory Interest Payments made in respect thereof. The Borrower acknowledges that to the extent interest payable on ABR Advances is based on the BNY Rate, such Rate is only one of the bases for computing interest on loans made by the Lenders, and by basing interest payable on ABR Advances on the BNY Rate, the Lenders have not committed to charge, and the Borrower has not in any way bargained for, interest based on a lower or the lowest rate at which the Lenders may now or in the future make loans to other borrowers.

2.8. Taxes

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(a) Payments to Be Free and Clear. Provided that all documentation, if any, then required to be delivered by any Lender or the Agent pursuant to subsection (c) below has been delivered, all sums payable by the Borrower under the Loan Documents shall be paid free and clear of and (except to the extent required by law) without any deduction or withholding on account of any Tax (other than a Tax on the Overall Net Income of any Lender (for which payment need not be free and clear but no deduction or withholding shall be made unless then required by applicable law)) imposed, levied, collected, withheld or assessed by or within the United States or any political subdivision in or of the United States or any other jurisdiction from or to which a payment is made by or on behalf of the Borrower or by any federation or organization of which the United States or any such jurisdiction is a member at the time of payment.

(b) Grossing-up of Payments. If the Borrower or any other Person is required by law to make any deduction or withholding on account of any such Tax from any sum paid or payable by the Borrower to the Agent or any Lender under any of the Loan Documents:

(i) The Borrower shall notify the Agent and such Lender of any such requirement or any change in any such requirement as soon as the Borrower becomes aware of it;

(ii) The Borrower shall pay any such Tax before the date on which penalties attach thereto, such payment to be made (if the liability to pay is imposed on the Borrower) for its own account or (if that liability is imposed on the Agent or such Lender, as the case may be) on behalf of and in the name of the Agent or such Lender;

(iii) the sum payable by the Borrower to the Agent or a Lender in respect of which the relevant deduction, withholding or payment is required shall be increased to the extent necessary to ensure that, after the making of that deduction, withholding or payment, the Agent or such Lender, as the case may be, receives on the due date therefor a net sum equal to what it would have received had no such deduction, withholding or payment been required or made; and

(iv) within 30 days after paying any sum from which it is required by law to make any deduction or withholding, and within 30 days after the due date of payment of any Tax which it is required by clause (b) above to pay, the Borrower shall deliver to the Agent and the applicable Lender evidence satisfactory to the other affected parties of such deduction, withholding or payment and of the remittance thereof to the relevant Governmental Authority;

provided that no such additional amount shall be required to be paid to any Lender under clause (iii) above except to the extent that any change after the date hereof (in the case of each

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Lender listed on the signature pages hereof) or after the date of the Assignment and Acceptance Agreement pursuant to which such Lender became a Lender (in the case of each other Lender) in any such requirement for a deduction, withholding or payment as is specified therein shall result in an increase in the rate of such deduction, withholding or payment from that in effect at the date of this Agreement or at the date of such Assignment and Acceptance, as the case may be, in respect of payments to such Lender.

(c) U.S. Tax Certificates. Each Lender that is organized under the laws of any jurisdiction other than the United States shall deliver to the Agent for transmission to the Borrower, on or prior to the Effective Date (in the case of each Lender listed on the signature pages hereof) or on the effective date of the Assignment and Acceptance Agreement pursuant to which it becomes a Lender (in the case of each other Lender), and at such other times as may be necessary in the determination of the Borrower or the Agent (each in the reasonable exercise of its discretion), such certificates, documents or other evidence, properly completed and duly executed by such Lender (including, without limitation, Internal Revenue Service Form 1001 or Form 4224 or any other certificate or statement of exemption required by Treasury Regulations Section 1.1441-4(a) or Section 1.1441-6(c) or any successor thereto) to establish that such Lender is not subject to deduction or withholding of United States federal income tax under Section 1441 or 1442 of the Code or otherwise (or under any comparable provisions of any successor statute) with respect to any payments to such Lender of principal, interest, fees or other amounts payable under any of the Loan Documents. The Borrower shall not be required to pay any additional amount to any such Lender under subsection (b)(iii) above if such Lender shall have failed to satisfy the requirements of the immediately preceding sentence; provided that if such Lender shall have satisfied such requirements on the Effective Date (in the case of each Lender listed on the signature pages hereof) or on the effective date of the Assignment and Acceptance Agreement pursuant to which it became a Lender (in the case of each other Lender), nothing in this subsection shall relieve the Borrower of its obligation to pay any additional amounts pursuant to subsection (b)(iii) above in the event that, as a result of any change in applicable law, such Lender is no longer properly entitled to deliver certificates, documents or other evidence at a subsequent date establishing the fact that such Lender is not subject to withholding as described in the immediately preceding sentence.

(d) Tax Refund. If any Lender or the Agent, as applicable, receives a refund (whether by way of direct payment or by offset) of any Tax for which a payment has been made pursuant to subsection 2.8(b)(ii) which, in the reasonable good faith judgment of such Lender or Agent, as the case may be, is allocable to such payment made under subsection 2.8(B)(ii), the amount of such refund (together with any interest received thereon) shall be paid to the Borrower to the extent payment has been made in full pursuant to subsection 2.8(b)(ii).

2.9. Substituted Interest Rate

In the event that (i) the Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that by reason of circumstances affecting the interbank eurodollar market either adequate and reasonable means do not exist for ascertaining the Eurodollar Rate applicable pursuant to Section 2.7 or (ii) the Required Lenders shall have notified the Agent that they have determined (which determination shall be conclusive and binding on the Borrower) that the applicable Eurodollar Rate will not

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adequately and fairly reflect the cost to such Lenders of maintaining or funding loans bearing interest based on such Eurodollar Rate, with respect to any portion of the Loans that the Borrower has requested be made as Eurodollar Advances or Eurodollar Advances that will result from the requested conversion or continuation of any portion of the Advances into or of Eurodollar Advances (each, an "Affected Advance"), the Agent shall promptly notify the Borrower and the Lenders (by telephone or otherwise, to be promptly confirmed in writing) of such determination, on or, to the extent practicable, prior to the requested Borrowing Date or Conversion/Continuation Date for such Affected Advances. If the Agent shall give such notice, (d) any Affected Advances shall be made as ABR Advances, (e) the Advances (or any portion thereof) that were to have been converted to or continued as Affected Advances shall be converted to or continued as ABR Advances and (f) any outstanding Affected Advances shall be converted, on the last day of the then current Interest Period with respect thereto, to ABR Advances. Until any notice under clauses (i) or (ii), as the case may be, of this Section has been withdrawn by the Agent (by notice to the Borrower promptly upon either (x) the Agent having determined that such circumstances affecting the interbank eurodollar market no longer exist and that adequate and reasonable means do exist for determining the Eurodollar Rate pursuant to Section 2.7 or (y) the Agent having been notified by such Required Lenders that circumstances no longer render the Advances (or any portion thereof) Affected Advances, no further Eurodollar Advances shall be required to be made by the Lenders, nor shall the Borrower have the right to convert or continue all or any portion of the Loans to Eurodollar Advances.

2.10. Illegality

Notwithstanding any other provisions herein, if any law, regulation, treaty or directive, or any change therein or in the interpretation or application thereof, shall make it unlawful for any Lender to make or maintain its Eurodollar Advances as contemplated by this Agreement, (i) the commitment of such Lender hereunder to make Eurodollar Advances or convert ABR Advances to Eurodollar Advances shall forthwith be suspended and (ii) such Lender's Loans then outstanding as Eurodollar Advances affected hereby, if any, shall be converted automatically to ABR Advances on the last day of the then current Interest Period applicable thereto or within such earlier period as required by law. If the commitment of any Lender with respect to Eurodollar Advances is suspended pursuant to this Section and such Lender shall notify the Agent and the Borrower that it is once again legal for such Lender to make or maintain Eurodollar Advances, such Lender's commitment to make or maintain Eurodollar Advances shall be reinstated.

2.11. Increased Costs

In the event that any law, regulation, treaty or directive hereafter enacted, promulgated, approved or issued or any change in any presently existing law, regulation, treaty or directive therein or in the interpretation or application thereof by any Governmental Au-

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thority charged with the administration thereof or compliance by any Lender (or any corporation directly or indirectly owning or controlling such Lender) with any request or directive from any central bank or other Governmental Authority:

(a) does or shall subject any Lender to any Taxes of any kind whatsoever with respect to any Eurodollar Advances or its obligations under this Agreement to make Eurodollar Advances, or change the basis of taxation of payments to any Lender of principal, interest or any other amount payable hereunder in respect of its Eurodollar Advances, including any Taxes required to be withheld from any amounts payable under the Loan Documents (except for imposition of, or change in the rate of, Tax on the Overall Net Income of such Lender or its Applicable Lending Office for any of such Advances by the jurisdiction in which such Lender is incorporated or has its principal office or such Applicable Lending Office, including, in the case of Lenders incorporated in any State of the United States, such tax imposed by the United States); or

(b) does or shall impose, modify or make applicable any reserve, special deposit, compulsory loan, assessment, increased cost or similar requirement against assets held by, or deposits of, or advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of such Lender in respect of its Eurodollar Advances which is not otherwise included in the determination of a Eurodollar Rate;

and the result of any of the foregoing is to increase the cost to such Lender of making, renewing, converting, continuing or maintaining its Eurodollar Advances or its commitment to make such Eurodollar Advances, or to reduce any amount receivable hereunder in respect of its Eurodollar Advances, then, in any such case, the Borrower shall pay such Lender, upon its demand, any additional amounts necessary to compensate such Lender for such additional cost or reduction in such amount receivable which such Lender deems to be material as determined by such Lender; provided, however, that nothing in this Section shall require the Borrower to indemnify the Lenders with respect to withholding Taxes for which the Borrower has no obligation under Section 2.8 or any other increased costs, expenses, Taxes or other matters incurred by a Lender more than 90 days prior to the date that such Lender delivers notice to the Borrower of such increased cost, expense, tax or matter. A statement setting forth the calculations of any additional amounts payable pursuant to the foregoing sentence submitted by a Lender to the Borrower shall be conclusive absent manifest error.

2.12. Capital Adequacy

If the amount of capital required or expected to be maintained by any Lender or any Person directly or indirectly owning or controlling such Lender (each a "Control Person"), shall be affected by (i) the introduction or phasing in of any law, rule or regulation after the Effective Date, (ii) any change after the Effective Date in the interpretation of any existing law, rule or regulation by any central bank or United States or foreign Governmental Authority charged with the administration thereof, or (iii) compliance by such Lender or such Control Per son with any directive, guideline or request from any central bank or United States or foreign Governmental Authority (whether or not having the force of law) promulgated or made after the Effective Date, and such Lender shall have determined that such introduction, phasing in, change or compliance shall have had or will thereafter have the effect of reducing

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(A) the rate of return on such Lender's or such Control Person's capital, or (B)
the asset value to such Lender or such Control Person of the Loans made or maintained by such Lender, in either case to a level below that which such Lender or such Control Person could have achieved or would thereafter be able to achieve but for such introduction, phasing in, change or compliance (after taking into account such Lender's or such Control Person's policies regarding capital adequacy) by an amount deemed by such Lender to be material to such Lender or Control Person, then, within ten days after demand by such Lender, accompanied by a statement setting forth the calculations of any additional amount payable under this Section, which statement shall be conclusive absent manifest error, the Borrower shall pay to such Lender or such Control Person such additional amount or amounts as shall be sufficient to compensate such Lender or such Control Person, as the case may be, for such reduction, provided, however, that nothing in this Section shall require the Borrower to compensate any Lender for any such reduction arising more than 90 days prior to the date that such Lender delivers notice thereof to the Borrower.

2.13. Lending Offices

Each Lender shall have the right at any time and from time to time to transfer its Loans to a different office, provided that such Lender shall promptly notify the Agent and the Borrower of any such change of office. Such office shall thereupon become such Lender's Domestic Lending Office or Eurodollar Lending Office, as the case may be, pro vided, however, that no such Lender shall be entitled to receive any greater amount under Sections 2.9, 2.11 and 2.12 as a result of a transfer of any such Loans to a different office of such Lender than it would be entitled to immediately prior thereto unless such claim would have arisen even if such transfer had not occurred.

2.14. Indemnification for Loss

Notwithstanding anything contained herein to the contrary, if the Borrower shall fail to borrow or convert or continue on a Borrowing Date or Conversion/Continuation Date after it shall have given notice to do so in which it shall have requested a Eurodollar Advance, or if a Eurodollar Advance shall be terminated or suspended pursuant to the provisions hereof prior to the last day of the Interest Period applicable thereto, or if, while a Eurodollar Advance is outstanding, any repayment or prepayment of such Eurodollar Advance is made for any reason (including, without limitation, as a result of acceleration or illegality) on a date which is prior to the last day of the Interest Period applicable thereto, the Borrower agrees to indemnify each Lender against, and to pay on demand directly to such Lender, any loss or expense suffered by such Lender as a result of such failure to borrow, convert or continue, termination, repayment or prepayment, including, without limitation, an amount, if greater than zero, equal to:

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A x (B-C) x D

360

where:

"A" equals such Lender's Commitment Percentage of the Affected Principal Amount;

"B" equals the Eurodollar Rate (expressed as a decimal) applicable to such Eurodollar Advances;

"C" equals the applicable Eurodollar Rate (ex pressed as a decimal) in effect on or about the first day of the applicable Remaining Interest Period, based on the applicable rates offered or bid, as the case may be, on or about such date, for deposits in an amount equal approximately to such Lender's Commitment Percentage of the Affected Principal Amount with an Interest Period equal approximately to the applicable Remaining Interest Period, as determined by such Lender;

"D" equals the number of days from and including the first day of the applicable Remaining Interest Period to but excluding the last day of such Remaining Interest Period;

and any other out-of-pocket loss or expense (including any internal processing charge customarily charged by such Lender) suffered by such Lender in connection with such Eurodollar Advance, including, without limitation, in liquidating or employing deposits acquired to fund or maintain the funding of its Commitment Percentage of the Affected Principal Amount, or redeploying funds prepaid or repaid, in amounts which correspond to its Commitment Percentage of the Affected Principal Amount. Each determination by the Agent or a Lender pursuant to this
Section shall be conclusive and binding on the Borrower absent manifest error.

2.15. Option to Fund

Each Lender has indicated that, if the Borrower elects to borrow or convert or continue to Eurodollar Advances, such Lender may wish to purchase one or more deposits in order to fund or maintain its funding of its Eurodollar Advances during the Interest Period in question; it being understood that the provisions of this Agreement relating to such funding are included only for the purpose of determining the rate of interest to be paid on such Eurodollar Advances and for purposes of determining amounts owning under Sections 2.11, 2.12 and 2.14. Each Lender shall be entitled to fund and maintain its funding of all or any part of each Eurodollar Advance made by it in any manner it sees fit, but all such determinations shall be made as if such Lender had actually funded and maintained its funding of such Eurodollar Advance during the applicable Interest Period through the purchase of deposits in an amount equal to such Eurodollar Advance and having a maturity corresponding to such Interest Period. The obligations of the Borrower under Sections 2.8, 2.9, 2.10, 2.11 and 2.12 shall survive the termination of the Aggregate Commitments, the payment of the Notes and all other amounts payable under the Loan Documents.

2.16. Use of Proceeds

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The Borrower agrees that the proceeds of the Loans shall be used solely for its general corporate purposes not inconsistent with the provisions hereof, including, without limitation, the provision by Borrower to its Subsidiaries of funds for use in connection with the business, operations and general corporate purposes of such Subsidiaries. Notwithstanding anything to the contrary contained herein, the Borrower further agrees that no part of the proceeds of any Loan will be used, directly or indirectly, for a purpose which violates any law, rule or regulation of any Governmental Authority, including the provisions of Regulations G, U or X of the Board of Governors of the Federal Reserve System, as amended.

2.17. Extension of Maturity Date

Provided that no Default or Event of Default shall exist, the Borrower may request that the Maturity Date be extended for additional periods of one year each by giving written notice thereof (each an "Extension Request") to the Agent at any time during the period which is not more than 90 days nor less than 60 days prior to any anniversary of the Effective Date and, upon receipt of each such notice, the Agent shall promptly notify each Lender thereof. The then current Maturity Date shall not be extended unless and until each Lender, in its sole and absolute discretion, shall have consented, in writing, to such request, in which event such then existing Maturity Date shall be extended to the date occurring one year from the date of the last such consent, provided, however, that if such date is not a Business Day, such extended Maturity Date shall be the immediately preceding Business Day. In the event that any Lender shall not have granted its consent to an Extension Request, the then current Maturity Date shall remain in effect. Each Lender shall endeavor to respond to each Extension Request by no later than 45 days following the receipt by such Lender from the Agent of notice of such Extension Request, provided that each Lender which shall have failed so to respond by such time shall be deemed not to have consented thereto.

2.18. Agent's Records

The Agent's records regarding the amount of each Loan, each payment by the Borrower of principal and interest on the Loans and other information relating to the Loans shall be presumptively correct absent manifest error.

2.19. Mitigation of Taxes and Costs

(a) Each Lender agrees that, if requested by the Borrower after the occurrence of an event or the existence of a condition that would require the Borrower to make payments to such Lender under Section 2.8, 2.11 or or 2.12, it will, to the extent not inconsistent with such Lender's internal policies, use reasonable efforts (subject to overall policy considerations of such Lender) (i) to make, fund or maintain the Commitments or Loans of such lender through another lending office of such Lender, or (ii) take such other reasonable measures, if as a result

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the additional amounts that would otherwise be required to be paid by the Borrower with respect to such Lender pursuant to said Sections would be materially reduced and if, as determined by such Lender in its sole discretion, the making, funding or maintaining of such Commitments or Loans through such other lending office or in accordance with such other measures, as the case may be, would not otherwise adversely affect such Commitments or Loans or the interests or such Lender.

(b) If the Borrower becomes obligated to pay additional amounts described in Section 2.8, 2.11 or 2.12 as a result of any condition described in such Sections and payment of such amount is demanded by any Lender, then, provided that no Default or Event of Default shall exist, the Borrower may, on ten Business Days' prior written notice to the Agent and such Lender, cause such Lender to (and such Lender shall) assign all of its rights and obligations under this Agreement to a Lender or other bank selected by the Borrower and acceptable to the Agent for a purchase price equal to the outstanding principal amount of such Lender's Loans and all accrued interest and fees thereon, provided that in no event shall the assigning Lender be required to pay or surrender to such purchasing Lender or other bank any of the fees received by such assigning Lender pursuant to this Agreement. The Borrower shall remain obligated to pay to such assigning Lender all additional amounts required to be paid by the Borrower pursuant to such Sections had there been no such assignment.

3. FEES; PAYMENTS

3.1. Commitment Fee

The Borrower agrees to pay to the Agent, for the account of the Lenders in accordance with each Lender's Commitment Percentage, a fee (the "Commitment Fee"), during the Commitment Period, equal to the Applicable Margin times the excess of (a) the Aggregate Commitments (excluding the amount of any cancelled or reduced portion of the Aggregate Commitments for which the Commitment Fee was paid upon each such cancellation or reduction under Section 2.4(b)) over (b) the average daily sum of the outstanding principal balance of the Loans. The Commitment Fee shall be payable quarterly in arrears on the last day of each March, June, September and December of each year, commencing on the first such day following the Effective Date, and ending on the date that the Aggregate Commitments shall expire or otherwise terminate. The Commitment Fee shall be calculated on the basis of a 360-day year for the actual number of days elapsed.

3.2. Pro Rata Treatment and Application of Principal Payments

Each payment, including each prepayment, of principal and interest on the Loans and of the Commitment Fee shall be made by the Borrower to the Agent at its office set forth in Section 11.2 in funds immediately available to the Agent at such office by 2:00 P.M. on the due date for such payment, and, promptly upon receipt thereof by the Agent, shall be remitted by the Agent in like funds as received, to the Lenders according to the Commitment Percentage of each Lender, in the case of the Commitment Fee, and pro rata according to the aggregate outstanding principal balance of the Loans, in the case of principal and interest due

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thereon. The failure of the Borrower to make any such payment by such time shall not constitute a default hereunder, provided that such payment is made on such due date, but any such payment made after 12:00 Noon on such due date shall be deemed to have been made on the next Business Day for the purpose of calculating interest on amounts outstanding on the Loans. If any payment hereunder or under the Notes shall be due and payable on a day which is not a Business Day, the due date thereof (except as otherwise provided in the definition of Interest Period) shall be extended to the next Business Day and (except with respect to payments in respect of the Commitment Fee) interest shall be payable at the applicable rate specified herein during such extension. If any payment is made with respect to any Eurodollar Advance prior to the last day of the applicable Interest Period, the Borrower shall indemnify each Lender in accordance with Section 2.14.

4. REPRESENTATIONS AND WARRANTIES

In order to induce the Agent and the Lenders to enter into this Agreement and to make the Loans, the Borrower makes the following representations and warranties to the Agent and each Lender:

4.1. Subsidiaries

The Borrower has only the Insurance Subsidiaries and Non-Insurance Subsidiaries set forth on Schedule 4.1.

4.2. Existence and Power

Each of the Borrower and its Subsidiaries is duly organized or formed and validly existing in good standing under the laws of the jurisdiction of its incorporation or formation, has all requisite power and authority to own its Property and to carry on its business as now conducted, and is in good standing and authorized to do business as a foreign corporation in each jurisdiction in which the nature of the business conducted therein or the Property owned therein makes such qualification necessary, except where such failure to qualify could not reasonably be expected to have a Material Adverse Effect.

4.3. Authority

The Borrower has full corporate power and authority to enter into, execute, deliver and perform the terms of the Loan Documents and to make the borrowings contemplated thereby all of which have been duly authorized by all proper and necessary corporate or other applicable action and are in full compliance with its Articles of Incorporation and By-Laws.

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4.4. Binding Agreement

The Loan Documents constitute the valid and legally binding obligations of the Borrower, enforceable in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws now or hereafter in effect relating to or affecting the rights and remedies of creditors' generally and by general principles of equity, regardless of whether enforcement is sought in an action at law or a proceeding in equity, and the discretion of the court before which any action or proceeding therefor may be brought.

4.5. Litigation

Except as set forth on Schedule 4.5, there are no actions, suits or proceedings at law or in equity or by or before any Governmental Authority (whether purportedly on behalf of the Borrower or any its Subsidiaries) pending or, to the knowledge of the Borrower, threatened against the Borrower or any of its Subsidiaries or any of their respective Properties or rights, which (i) could reasonably be expected to have a Material Adverse Effect, (ii) call into question the validity or enforceability of any of the Loan Documents, or (iii) could reasonably be expected to result in the rescission, termination or cancellation of any material license, franchise, right, permit or similar authorization held by the Borrower or any of its Subsidiaries.

4.6. Required Consents

Except for information filings required to be made in the ordinary course of business which are not a condition to the Borrower's performance under the Loan Documents, no consent, authorization or approval of, filing with, notice to, or exemption by, stockholders, any Governmental Authority or any other Person is required to authorize, or is required in connection with the execution, delivery and performance of the Loan Documents or is required as a condition to the validity or enforceability of the Loan Documents.

4.7. No Conflicting Agreements

Neither the Borrower nor any of its Subsidiaries is in de fault under any mortgage, indenture, contract or agreement to which it is a party or by which it or any of its Property is bound, the effect of which default could reasonably be expected to have a Material Adverse Effect. The execution, delivery or carrying out of the terms of the Loan Documents will not constitute a default under, or result in the creation or imposition of, or obligation to create, any Lien upon any Property of the Borrower or any of its Subsidiaries or result in a breach of or require the mandatory repayment of or other acceleration of payment under or pursuant to the terms of any such mortgage, indenture, contract or agreement.

4.8. Compliance with Applicable Laws

Neither the Borrower nor any of its Subsidiaries is in de fault with respect to any judgment, order, writ, injunction, decree or decision of any Governmental Authority which default could reasonably be expected to have a Material Adverse Effect. Each of the Borrower and its Subsidiaries is complying in all material respects with all statutes, regulations, rules and

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orders applicable to the Borrower or such Subsidiary of all Governmental Authorities, including, without limitation, all Applicable Insurance Codes and Environmental Laws, a violation of which could reasonably be expected to have a Material Adverse Effect.

4.9. Taxes

Each of the Borrower and its Subsidiaries has filed or caused to be filed all tax returns required to be filed and has paid, or has made adequate provision for the payment of, all taxes shown to be due and payable on said returns or in any assessments made against it (other than those being contested as required under Section 7.4) which would be material to the Borrower or any of its Subsidiaries, and no tax Liens have been filed with respect thereto. The charges, accruals and reserves on the books of the Borrower and each of its Subsidiaries with respect to all federal, state, local and other taxes are, to the best knowledge of the Borrower, adequate for the payment of all such taxes, and the Borrower knows of no unpaid assessment which is due and payable against it or any of its Subsidiaries or any claims being asserted which could reasonably be expected to have a Material Adverse Effect, except such thereof as are being contested as required under Section 7.4, and for which adequate reserves have been set aside in accordance with GAAP.

4.10. Governmental Regulations

Neither the Borrower nor any of its Subsidiaries is subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, or the Federal Power Act, and neither the Borrower nor any of its Subsidiaries is subject to any statute or regulation which prohibits or restricts the incurrence of Indebtedness under the Loan Documents, including, without limitation, statutes or regulations relative to common or contract carriers or to the sale of electricity, gas, steam, water, telephone, telegraph or other public utility services.

4.11. Federal Reserve Regulations; Use of Loan Proceeds

Neither the Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any Margin Stock. No part of the proceeds of the Loans will be used, directly or indirectly, for a purpose which violates any law, rule or regulation of any Governmental Authority, including, without limitation, the provisions of Regulations G, T, U or X of the Board of Governors of the Federal Reserve System, as amended. No part of the proceeds of the Loans will be used, directly or indirectly, to purchase or carry Margin Stock or to extend credit to others for the purpose of purchasing or carrying Margin Stock.

4.12. Plans

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Neither the Borrower nor any Subsidiary has a Pension Plan on the Effective Date.

4.13. Financial Statements

(a) The Borrower has heretofore delivered to the Agent and the Lenders copies of its Form 10-K for the fiscal year ending December 31, 1995, containing the audited Consolidated Balance Sheets of the Borrower and its Subsidiaries as of December 31, 1995 and December 31, 1994, and the related Consolidated Statements of Income, Retained Earnings and Cash Flows for the three year periods ending December 31, 1995, and its Form 10-Q for the fiscal quarter ended September 30, 1996, containing the unaudited Consolidated Balance Sheet of the Borrower and its Subsidiaries for such fiscal quarter, together with the related Consolidated Statements of Income, Retained Earnings and Cash Flows for the fiscal quarter then ended (with the applicable related notes and schedules, the "Financial Statements"). The Financial Statements fairly present the Consolidated financial condition and results of the operations of the Borrower and its Subsidiaries as of the dates and for the periods indicated therein and have been prepared in conformity with GAAP. Except as reflected in the Financial Statements or in the foot notes thereto, neither the Borrower nor any of its Subsidiaries has any obligation or liability of any kind (whether fixed, accrued, Contingent, unmatured or otherwise) which, in accordance with GAAP, should have been shown in the Financial Statements and was not. Since December 31, 1995, the Borrower and each of its Subsidiaries has conducted its business only in the ordinary course and there has been no Material Adverse Change.

(b) The Borrower has heretofore delivered to the Lenders copies of the consolidated Annual Statement, as of December 31, 1995, of Mercury Casualty Company (together with the related notes and schedules thereto, the "Annual Statement"). The Annual Statement fairly presents, the financial condition and results of operations of the Insurance Subsidiaries as of the dates and for the periods indicated therein and has been prepared in accordance with SAP.

4.14. Property

Each of the Borrower and its Subsidiaries has good and marketable title to all of its Property, title to which is material to the Borrower or such Subsidiary, subject to no Liens except Permitted Liens.

4.15. Licences, Franchises, Etc.

Each of the Borrower and its Subsidiaries possesses or has the right to use all licenses, franchises, Intellectual Property, 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, Intellectual Property, or other right which revocation or termination could reasonably be expected to have a Material Adverse Effect.

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4.16. Environmental Matters

(a) The Borrower and each of its Subsidiaries is in compliance in all material respects with the requirements of all applicable Environmental Laws, a violation of which could reasonably be expected to have a Material Adverse Effect.

(b) No Hazardous Substances have been generated or manufactured on, transported to or from, treated at, stored at or discharged from any Real Property in violation of any Environmental Laws which violation could reasonably be expected to have a Material Adverse Effect; no Hazardous Substances have been discharged into subsurface waters under any Real Property in violation of any Environmental Laws which violation could reasonably be expected to have a Material Adverse Effect; no Hazardous Substances have been discharged from any Real Property on or into Property or waters (including subsurface waters) adjacent to any Real Property in violation of any Environmental Laws which violation could reasonably be expected to have a Material Adverse Effect; and there are not now, nor ever have been, on any Real Property any underground or above ground storage tanks containing Hazardous Substances.

(c) Neither the Borrower nor any of its Subsidiaries (i) has received notice (written or oral) or otherwise learned of any claim, demand, suit, action, proceeding, event, condition, report, directive, Lien, violation, non- compliance or investigation indicating or concerning any potential or actual liability (including, without limitation, potential liability for enforcement, investigatory costs, cleanup costs, government response costs, removal costs, remedial costs, natural resources damages, Property damages, personal injuries or penalties) arising in connection with: (x) any non-compliance with or violation of the requirements of any applicable Environmental Laws, or (y) the presence of any Hazardous Substance on any Real Property (or any Real Property previously owned by the Borrower or any of its Subsidiaries) or the release or threatened release of any Hazardous Substance into the environment, (ii) to the knowledge of the Borrower has any threatened or actual liability in connection with the presence of any Hazardous Sub stance on any Real Property (or any Real Property previously owned by the Borrower or any of its Subsidiaries) or the release or threatened re lease of any Hazardous Substance into the environment,
(iii) has received notice of any federal or state investigation evaluating whether any remedial action is needed to respond to the presence of any Hazardous Substance on any Real Property (or any Real Property previously owned by the Borrower or any of its Subsidiaries) or a release or threatened release of any Hazardous Substance into the environment for which the Borrower or any of its Subsidiaries is or may be liable, or (iv) has received notice that the Borrower or any of its Subsidiaries is or may be liable to any Person under any Environmental Law.

(d) To the knowledge of the Borrower no Real Property is located in an area identified by the Secretary of Housing and Urban Development as an area having special flood

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hazards.

4.17. Labor Relations

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

4.18. Burdensome Obligations

Neither the Borrower nor any of its Subsidiaries is a party to or bound by any license, franchise, agreement, deed, lease or other instrument, 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 result in a Material Adverse Effect or Material Adverse Change.

4.19. No Misrepresentation

No representation or warranty contained in any Loan Document and no certificate or report furnished or to be furnished by the Borrower or any of its Subsidiaries in connection with the transactions contemplated thereby, contains or will contain a misstatement of material fact, or, to the best knowledge of the Borrower, omits or will omit to state a material fact required to be stated in order to make the statements therein contained not misleading in the light of the circumstances under which made.

5. CONDITIONS TO FIRST LOANS

In addition to the conditions precedent set forth in Section 6, the obligation of each Lender to make its first Loan shall be subject to the fulfillment of the following conditions precedent:

5.1. Evidence of Action

The Agent shall have received a certificate, dated the first Borrowing Date, of the Secretary or Assistant Secretary of the Borrower (i) attaching a true and complete copy of the resolutions of its Board of Directors and of all documents evidencing other necessary corporate action (in form and substance satisfactory to the Agent) taken by it to authorize the Loan Documents and the transactions contemplated thereby, (ii) attaching a true and complete copy of its Articles of Incorporation and By-Laws, (iii) setting forth the incumbency of its officer or officers who may sign the Loan Documents, including therein a signature specimen of such officer or officers and (iv) attaching a certificate of good standing of the Secretary of State of the State of California and of each other jurisdiction in which it is qualified to do business.

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5.2. This Agreement

The Agent shall have received counterparts of this Agreement signed by each of the parties hereto (or receipt by the Agent from a party hereto of a fax signature page signed by such party which shall have agreed to promptly provide the Agent with originally executed counterparts hereof).

5.3. Notes

The Agent shall have received the Notes, duly executed by an Authorized Signatory of the Borrower.

5.4. Existing Indebtedness

The Existing Indebtedness shall have been, or simultaneously with the making of the first Loans will be, paid in full, whereupon the Existing Agreement shall be deemed to have been terminated and of no further force and effect, except with respect to the provisions thereof which expressly survive the payment of the Existing Indebtedness.

5.5. Approvals

The Agent shall have received a certificate of an Authorized Signatory of the Borrower to the effect that all approvals and consents of all Persons required to be obtained in connection with the consummation of the transactions contemplated by the Loan Documents have been duly obtained and are in full force and effect, and that all required notices have been given and all required waiting periods have expired.

5.6. Opinion of Counsel to the Borrower

The Agent shall have received an opinion of Latham & Watkins, counsel to the Borrower, addressed to the Agent, the Lenders and Special Counsel, and dated the first Borrowing Date, substantially in the form of Exhibit E, and covering such additional matters as the Required Lenders may reasonably request. It is understood that such opinion is being delivered to the Agent and the Lenders upon the direction of the Borrower and that the Agent and the Lenders may and will rely upon such opinion.

5.7. Opinion of Special Counsel

The Agent shall have received an opinion of Special Counsel, addressed to the Agent and the Lenders and dated the first Borrowing Date substantially in the form of Exhibit F.

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5.8. Payment of Fees

The Borrower shall have paid to the Agent and the Lenders all fees and expenses which it shall have agreed to pay, to the extent such fees and expenses shall have become payable on or prior to the Effective Date, and shall have paid the reasonable fees and disbursements of Special Counsel which the Borrower is obligated to pay in accordance with Section 11.5 and which shall have accrued up to the Effective Date.

5.9. Other Documents

The Agent shall have received such other documents (including financial statements and projections), each in form and substance reasonably satisfactory to the Agent, as the Agent shall reasonably require in connection with the making of the first Loans.

6. CONDITIONS OF LENDING - ALL LOANS

The obligation of each Lender to make any Loan is subject to the satisfaction of the following conditions precedent as of the date of such Loan:

6.1. Compliance

On each Borrowing Date and after giving effect to the Loans to be made thereon, (i) the Borrower shall be in compliance with all of the terms, covenants and conditions thereof, (ii) there shall exist no Default or Event of Default, (iii) the representations and warranties contained in the Loan Documents shall be true and correct with the same effect as though such representations and warranties had been made on such Borrowing Date (except that Schedules 4.1 and 4.5 shall have been updated, as appropriate, in order to make the representations and warranties expressed in Sections 4.1 and 4.5 true and correct as of such Borrowing Date) and (iv) the aggregate outstanding principal balance of the Loans will not exceed the Aggregate Commitments. Each borrowing by the Borrower shall constitute a certification by the Borrower as of such Borrowing Date that each of the foregoing matters is true and correct in all respects.

6.2. Loan Closings

All documents required by the provisions of this Agreement to be executed or delivered to the Agent on or before the applicable Borrowing Date shall have been executed and shall have been delivered at the office of the Agent set forth in Section 11.2 on or before such Borrowing Date.

6.3. Borrowing Request

The Agent shall have received a Borrowing Request duly executed by an Authorized Signatory of the Borrower.

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6.4. Other Documents

The Agent shall have received such other documents as the Agent or the Lenders shall reasonably request.

7. AFFIRMATIVE COVENANTS

The Borrower agrees that, so long as this Agreement is in effect, any Loan remains outstanding and unpaid, or any other amount is owing under any Loan Document to any Lender or the Agent, the Borrower shall:

7.1. Financial Statements

Maintain, and cause each Subsidiary to maintain, a standard system of accounting in accordance with GAAP and, with respect to each Insurance Subsidiary, SAP, and furnish to the Agent and each Lender:

(a) As soon as available and, in any event, within 105 days after the close of each fiscal year, a copy of (x) the Borrower's 10-K in respect of such fiscal year, and (y) (i) the Borrower's Consolidated Balance Sheet as of the end of such fiscal year, and (ii) the related Consolidated Statements of Income and Shareholders' Equity and Cash Flows, as of and through the end of such fiscal year, setting forth in each case in comparative form the corresponding figures in respect of the previous fiscal year, all in reasonable detail, and ac companied by a report of the Borrower's auditors, which report shall be unqualified as to scope of audit and going concern or similar or other qualification and shall state that (A) such auditors audited such financial statements, (B) such audit was made in accordance with generally accepted auditing standards in effect at the time and provides a reasonable basis for such opinion, and (C) said financial statements have been prepared in accordance with GAAP;

(b) After request by the Agent therefor, simultaneously with the delivery of the certified statements required by clause (a) above, copies of a statement of the Borrower's auditors (i) confirming the computations by the Borrower (which computations shall accompany such statement and shall be in reasonable detail) with respect to the Borrower's compliance with Sections 7.11, 7.12, 7.13, and 7.14, and (ii) stating that, in making the examination necessary for their audit of the financial statements of the Borrower for such fiscal year, nothing came to their attention that caused them to believe that any Default or an Event of Default existed on the date of such statements;

(c) As soon as available, and in any event within 60 days after the end of each of the first three fiscal quarters of each fiscal year, a copy of
(x) the Borrower's 10-Q in

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respect of such fiscal quarter, and (y) (i) the Borrower's Consolidated Balance Sheet as of the end of such quarter, and (ii) the related Consolidated Statements of Income Shareholders' Equity and Cash Flows for (A) such quarter, and (B) the period from the beginning of the then current fiscal year to the end of such quarter, in each case in comparable form with the prior fiscal year, all in reasonable detail and prepared in accordance with GAAP (without footnotes and subject to year-end audit adjustments);

(d) Simultaneously with the delivery of the financial statements required by clauses (a) and (c) above, a certificate of the chief financial officer of the Borrower certifying that no Default or Event of Default shall have occurred or be continuing or, if so, specifying in such certificate all such Defaults and Events of Default, and setting forth computations in reasonable detail demonstrating compliance with Sections 7.11, 7.12, 7.13, and 7.14;

(e) As soon as practicable after the filing thereof but in any case no 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 each annual and quarterly statutory statement filed by the Borrower or any Insurance Subsidiary with the California Department of Insurance or any other Governmental Authority;

(f) Promptly upon receipt thereof, copies of any audit reports and management letters delivered in connection with the statements referred to in
Section 7.1(a); and

(g) From time to time, such other information regarding the financial position or business of the Borrower and the Subsidiaries, as either Agent, at the request of any Lender, may reasonably request.

7.2. Certificates; Other Information

Furnish to the Agent and each Lender:

(a) Prompt written notice if: (i) the Borrower becomes aware that any Indebtedness of the Borrower or any of its Subsidiaries is declared or shall become due and payable prior to its stated maturity, or is called and not paid when due, (ii) the Borrower becomes aware that a default shall have occurred under any note (other than the Notes), or the holder of any such note, or other evidence of Indebtedness, certificate or security evidencing any such Indebtedness or any obligee with respect to any other Indebtedness of the Borrower or any of its Subsidiaries has the right to declare any such Indebtedness due and payable prior to its stated maturity, or (iii) the Borrower becomes aware that there shall occur and be continuing a Default or an Event of Default or a Material Adverse Change;

(b) Promptly following the Borrower becoming aware of the same, written notice of: (i) any citation, summons, subpoena, order to show cause or other document naming the Borrower or any of its Subsidiaries a party to any proceeding before any Governmental Authority which could reasonably be expected to have a Material Adverse Effect or which calls into question the validity or enforceability of any of the Loan Documents, and include with such

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notice a copy of such citation, summons, subpoena, order to show cause or other document, (ii) any lapse or other termination of any material license, Intellectual Property, permit, franchise or other authorization issued to the Borrower or any of its Subsidiaries by any Person or Governmental Authority, and
(iii) any refusal by any Person or Governmental Authority to renew or extend any such material license, Intellectual Property, permit, franchise or other authorization, which lapse, termination, refusal or dispute could reasonably be expected to have a Material Adverse Effect;

(c) Promptly upon becoming available, copies of all regular or periodic reports (including, without limitation, current reports on Form 8-K) which the Borrower or any Subsidiary may now or hereafter be required to file with or deliver to the SEC, and copies of all material news releases sent to stockholders;

(d) Prompt written notice of any order, notice, claim or proceeding received by, or brought against, the Borrower or any of its Subsidiaries, or with respect to any of the Real Property, under any Environmental Law.

(e) Such other information as the Agent or any Lender shall reasonably request from time to time.

7.3. Legal Existence

Maintain, and cause each of its Subsidiaries so to maintain, its corporate existence, in good standing in the jurisdiction of its in corporation and in each other jurisdiction in which the failure so to do could reasonably be expected to have a Material Adverse Effect.

7.4. Taxes

Pay and discharge when due, and cause each of its Subsidiaries so to do, all Taxes, assessments and governmental charges, license fees and levies upon, or with respect to the Borrower or such Subsidiary and all Taxes upon the income, profits and Property of the Borrower and its Subsidiaries, which if unpaid, could reasonably be expected to have a Material Adverse Effect or become a Lien on the Property of the Borrower or such Subsidiary (other than a Lien described in Section 8.2(i)), unless and to the extent only that such Taxes, assessments, charges, license fees and levies shall be contested in good faith and by appropriate proceedings diligently conducted by the Borrower or such Subsidiary and, provided, that the Borrower shall give the Agent prompt notice of such contest and that such reserve or other appropriate provision as shall be required by the Accountants in accordance with GAAP shall have been made therefor.

7.5. Insurance

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Maintain, and cause each of its Subsidiaries to maintain, with financially sound and reputable insurance companies insurance on all its Property in at least such amounts and against at least such risks (but including in any event public liability, property damage, workers' compensation and business interruption coverage) as are usually insured against in the same general area by companies engaged in the same or a similar business; and furnish to the Agent, upon written request, full information as to the insurance carried.

7.6. Payment of Indebtedness and Performance of Obligations

Pay and discharge when due, and cause each of its Subsidiaries to pay and discharge, all lawful Indebtedness, obligations and claims for labor, materials and supplies or otherwise which, if unpaid, might (i) have a Material Adverse Effect, or (ii) become a Lien upon Property of the Borrower or any of its Subsidiaries other than a Permitted Lien, unless and to the extent only that the validity of such Indebtedness, obligation or claim shall be contested in good faith and by appropriate proceedings diligently conducted by the Borrower or such Subsidiary, provided that the Borrower shall give the Agent prompt notice of any such contest and that such reserve or other appropriate provision as shall be required by the Accountants in accordance with GAAP shall have been made therefor.

7.7. Condition of Property

At all times, maintain, protect and keep in good repair, working order and condition (ordinary wear and tear excepted), and cause each of its Subsidiaries so to do, all Property necessary to the operation of the Borrower's or such Subsidiary's business.

7.8. Observance of Legal Requirements

Observe and comply in all respects, and cause each of its Subsidiaries so to do, with all laws, ordinances, orders, judgments, rules, regulations, licenses, certifications, franchises, permits, directions and requirements of all Governmental Authorities, which now or at any time hereafter may be applicable to it, a violation of which could reasonably be expected to have a Material Adverse Effect, except such thereof as shall be contested in good faith and by appropriate proceedings diligently conducted by the Borrower or such Subsidiary, provided that the Borrower shall give the Agent prompt notice of such contest and that such reserve or other appropriate provision as shall be required by the Accountants in accordance with GAAP shall have been made therefor.

7.9. Inspection of Property; Books and Records; Discussions

Keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all requirements of law shall be made of all dealings and transactions in relation to its business and activities and permit representatives of the Agent and any Lender to visit its offices, to inspect any of its Property and examine and make copies or abstracts from any of its books and records at any reasonable time and as often as may reasonably be desired, and to discuss the business, operations, prospects, licenses, Property and financial condition of the Borrower and its Subsidiaries with the officers thereof and the Accountants.

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7.10. Authorizations

Maintain and cause each of its Subsidiaries to maintain, in full force and effect, all licenses, copyrights, patents, trademarks, trade names, franchises, permits, applications, reports, and other authorizations and rights, which, if not so maintained, would individually or in the aggregate have a Material Adverse Effect.

7.11. Adjusted Net Worth

As of any date of determination, have Adjusted Net Worth of not less than the sum of (a) $380,000,000, plus (b) 50% of the Consolidated net income (but not less than zero) for each full fiscal quarter ended during the period commencing on January 1, 1995 and ending on such date of determination.

7.12. GAAP Net Worth

As of any date of determination, have GAAP Net Worth of not less than the sum of (a) $330,000,000, plus (b) 50% of the Consolidated net income (but not less than zero) for each full fiscal quarter ended during the period commencing on January 1, 1995 and ending on such date of determination.

7.13. Leverage Ratio

Maintain at all times a Leverage Ratio of not more than 0.25:1.00.

7.14. Interest Coverage Ratio

Maintain at all times an Interest Coverage Ratio greater than 2.50:1.00.

8. NEGATIVE COVENANTS

The Borrower agrees that, so long as this Agreement is in effect, any Loan remains outstanding and unpaid, or any other amount is owing under any Loan Document to any Lender or the Agent, the Borrower shall not, directly or indirectly:

8.1. Indebtedness of Subsidiaries

Permit any Subsidiary of the Borrower to create, incur, assume or suffer to exist any liability for Indebtedness, except (i) Indebtedness existing on the date hereof as set forth on Schedule 8.1, but not any increases in the amount thereof, (ii) Indebtedness secured by Liens

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on Real Property acquired by such Subsidiary after the Effective Date and (iii) Indebtedness (not in excess of $25,000,000 aggregate principal amount at any time outstanding) secured by Liens permitted under Section 8.2(xi), provided that after giving effect to any Indebtedness permitted under clauses (ii) and
(iii) above, the Borrower is in compliance with the provisions of Sections 7.13, 7.14 and 8.2(vii).

8.2. Liens

Create, incur, assume or suffer to exist any Lien upon any of its Property, whether now owned or hereafter acquired, or permit any of its Subsidiaries so to do, except (i) Liens for Taxes, assessments or similar charges incurred in the ordinary course of business which are not delinquent or which are being contested in accordance with Section 7.4, provided that enforcement of such Liens is stayed pending such contest, (ii) Liens in connection with workers' compensation, unemployment insurance or other social security obligations (but not ERISA), (iii) deposits or pledges to secure bids, tenders, contracts (other than con tracts for the payment of money), leases, statutory obligations, surety and appeal bonds and other obligations of like nature arising in the ordinary course of business, (iv) zoning ordinances, easements, rights of way, minor defects, irregularities, and other similar restrictions affecting real Property which do not materially adversely affect the value of such real Property or the financial condition of the Borrower or such Subsidiary or impair its use for the operation of the business of the Borrower or such Subsidiary, (v) Liens arising by operation of law such as mechanics', materialmen's, carriers', warehousemen's liens incurred in the ordinary course of business which are not delinquent or which are being contested in accordance with Section 7.6, provided that enforcement of such Liens is stayed pending such contest, (vi) Liens arising out of judgments or decrees aggregating $5,000,000 or less in existence less than 30 days after the entry thereof or which are being contested in accordance with Section 7.6, provided that enforcement of such Liens is stayed pending such contest or the payment of which is covered by insurance as to which the carrier has acknowledged liability in writing, (vii) Liens on Real Property of any Subsidiary of the Borrower acquired after the Effective Date to secure Indebtedness permitted by Section 8.1(ii), incurred in connection with the acquisition of such Property, provided that each such Lien is limited to such Property so acquired, (viii) Liens on Property of the Borrower and its Subsidiaries existing on the Effective Date as set forth on Schedule 8.2 as renewed from time to time, but not any increases in the amounts secured thereby,
(ix) purchase money security interests in personal property, provided that each such Lien is limited to such Property so purchased, (x) banker's liens arising in the ordinary course of business and (xi) Liens on real property owned by Subsidiaries of the Borrower securing Indebtedness permitted under Section 8.1(iii), provided that such Liens are limited to the real property so owned.

8.3. 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 Required Lenders, 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 pay dividends or

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otherwise made distributions to the Borrower or any of its Subsidiaries in any manner, and (b) the Borrower may make Acquisitions and Dispositions, if (i) the aggregate consolidated amount of any Capital Stock or Property so 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 Borrower's Consolidated Statutory Capital and Surplus 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 pay dividends or otherwise make distributions to the Borrower or any of its Subsidiaries in any manner, 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.

8.4. Line of Business

Engage, or permit any Subsidiary of the Borrower to engage, in any material respect in any business other than a business in which the Borrower or any Subsidiary is engaged in on the Effective Date and any other business reasonably related thereto.

8.5. Articles of Incorporation and By-laws

Amend or otherwise modify its Articles of Incorporation or By-Laws in any way which would adversely affect the interests of the Agent and the Lenders under any of the Loan Documents, or permit any of its Subsidiaries so to do.

8.6. Fiscal Year

Change its fiscal year from that in effect on the Effective Date, or permit any of its Subsidiaries so to do.

8.7. Transactions with Affiliates

Become, or permit any Subsidiary to become, a party to any transaction 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

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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 among the Borrower and any Subsidiaries in the ordinary course of business, (D) transactions effected pursuant to the agreement, date 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 Subsidiaries 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 as contemplated by Section 2.16.

8.8. Issuance of Additional Stock by Subsidiaries

Permit any of its Subsidiaries to issue, directly or indirectly, any additional Stock or other equity interests of such Subsidiary, other than to the Borrower or to a wholly-owned Subsidiary of the Borrower.

8.9. 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.

8.10. Adoption of Pension Plans

Adopt a Pension Plan, or permit any Subsidiary so to do, unless this Agreement is amended, in form and substance satisfactory to the Required Lenders, to insert the customary provisions with respect thereto.

9. DEFAULT

9.1. Events of Default

The following shall each constitute an "Event of Default" hereunder:

(a) The failure of the Borrower to pay any installment of principal on any Note on the date when due and payable; or

(b) The failure of the Borrower to pay any installment of interest or any other fees or expenses payable under any Loan Document or otherwise to the Agent with respect to the loan facilities established hereunder within three Business Days after the date when due and payable; or

(c) The use of the proceeds of any Loan in a manner inconsistent with or in violation of Section 2.16; or

(d) The failure of the Borrower to observe or perform any covenant or agreement contained in Sections 7.11, 7.12, 7.13, 7.14 or Section 8; or

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(e) The failure to observe or perform any other term, covenant, or agreement contained in any Loan Document and such failure shall have continued unremedied for a period of 30 days after the earlier of the Borrower becoming aware of such failure and the receipt by the Borrower of notice of such failure from the Agent; or

(f) Any representation or warranty made in any Loan Document or in any certificate, report, opinion (other than an opinion of counsel) or other document delivered or to be delivered pursuant thereto, shall prove to have been incorrect or misleading (whether be cause of misstatement or omission) in any material respect when made; or

(g) Obligations of the Borrower (other than its obligations under the Notes) or any of its Subsidiaries, whether as principal, guarantor, surety or other obligor, for the payment of any Indebtedness or operating leases in excess of $5,000,000 in the aggregate (i) shall become or shall be declared to be due and payable prior to the expressed maturity thereof, or (ii) shall not be paid when due or within any grace period for the payment thereof, or (iii) any holder of any such obligation shall have the right to declare such obligation due and pay able prior to the expressed maturity thereof; or

(h) The Borrower or any of its Subsidiaries shall (i) suspend or discontinue its business, (ii) make an assignment for the benefit of creditors,
(iii) generally not be paying its debts as such debts become due, (iv) admit in writing its inability to pay its debts as they become due, (v) file a voluntary petition in bankruptcy, (vi) become insolvent (however such insolvency shall be evidenced), (vii) file any petition or answer seeking for itself any reorganization, arrangement, composition, readjustment of debt, liquidation or dissolution or similar relief under any present or future statute, law or regulation of any jurisdiction, (viii) petition or apply to any tribunal for any receiver, custodian or any trustee for any substantial part of its Property,
(ix) be the subject of any such proceeding filed against it which remains undismissed for a period of 45 days, (x) file any answer admitting or not contesting the material allegations of any such petition filed against it or any order, judgment or decree approving such petition in any such proceeding, (xi) seek, approve, consent to, or acquiesce in any such proceeding, or in the appointment of any trustee, receiver, sequestrator, custodian, liquidator, or fiscal agent for it, or any substantial part of its Property, or an order is entered appointing any such trustee, receiver, sequestrator, custodian, liquidator or fiscal agent and such order remains in effect for 45 days, (xii) any conservatorship or similar proceeding is commenced by or on behalf of the California Department of Insurance in respect of the Borrower or any Subsidiary or (xiii) take any formal action for the purpose of effecting any of the foregoing or looking to the liquidation or dissolution of the Borrower or such Subsidiary; or

(i) An order for relief is entered under the United States bankruptcy laws or any other decree or order is entered by a court having jurisdiction (i) adjudging the Borrower or any of its Subsidiaries bankrupt or insolvent, (ii) approving as properly filed a petition

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seeking reorganization, liquidation, arrangement, adjustment or composition of or in respect of the Borrower or any of its Subsidiaries under the United States bankruptcy laws or any other applicable Federal or state law, (iii) appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Borrower or any of its Subsidiaries or of any substantial part of the Property thereof, or (iv) ordering the winding up or liquidation of the affairs of the Borrower or any of its Subsidiaries, and any such decree or order continues unstayed and in effect for a period of 45 days; or

(j) Judgments or decrees against the Borrower or any of its Subsidiaries aggregating in excess of $5,000,000 shall remain unpaid, unstayed, undischarged, unbonded and undismissed for a period of 30 days unless the payment thereof is covered in full by insurance as to which the carrier has acknowledged liability in writing; or

(k) After the Effective Date (1) Any Person (other than George Joseph or Gloria Joseph), acting alone or with a group of Persons acting in concert,
(i) shall have or acquire beneficial ownership of securities (or options therefor) having 20% or more of the ordinary voting power of the Borrower, or
(ii) shall possess, directly or indirectly, the power to direct or cause the direction of the management and policies of the Borrower, whether through the ownership of voting securities, by contract or otherwise, or (2) directors of the Borrower constituting that percentage necessary to approve corporate action shall not have been directors on the date hereof or directors designated or approved by directors on the date hereof; or

(l) 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

(m) Any Loan Document shall cease, for any reason, to be in full force and effect or the Borrower shall so assert in writing or shall disavow any of its obligations thereunder.

Upon the occurrence of an Event of Default or at any time thereafter during the continuance thereof, (a) if such event is an Event of Default specified in clause (h) or (i) above, the Aggregate Commitments shall immediately and automatically terminate and the Loans, all accrued and unpaid interest thereon and all other amounts owing under the Loan Documents shall immediately become due and payable and the Agent may, and, upon the direction of the Required Lenders shall, exercise any and all remedies and other rights provided in the Loan Documents, and (b) if such event is any other Event of Default, any or all of the following actions may be taken: (i) with the consent of the Required Lenders, the Agent may, and upon the direction of the Required Lenders shall, by notice to the Borrower, declare the Aggregate Commitments to be terminated forthwith, whereupon the Aggregate Commitments shall immediately terminate, and (ii) with the consent of the Required Lenders, the Agent may, and upon the direction of the Required Lenders shall, by notice of default to the Borrower, declare the Loans, all accrued and unpaid interest thereon, and all other amounts owing under the Loan Documents to be due and payable forthwith, whereupon the same shall immediately become due and payable, and the Agent may, and upon the direction of the Required Lenders shall, exercise

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any and all remedies and other rights provided pursuant to the Loan Documents. Except as otherwise provided in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived. To the fullest extent not prohibited by applicable law, the Borrower hereby further expressly waives and covenants not to assert any appraisement, valuation, stay, extension, redemption or similar laws, now or at any time hereafter in force which might delay, prevent or otherwise impede the performance or enforcement of any Loan Document.

In the event that the Aggregate Commitments shall have been terminated or the Notes shall have been declared due and payable pursuant to the provisions of this Section, any funds received by the Agent and the Lenders from or on behalf of the Borrower shall be applied by the Agent and the Lenders in liquidation of the Loans and the obligations of the Borrower under the Loan Documents in the following manner and order: (i) first, to the payment of interest on, and then the principal portion of, any Loans which the Agent may have advanced on behalf of any Lender for which the Agent has not then been reimbursed by such Lender or the Borrower; (ii) second, to the payment of any fees or expenses due the Agent from the Borrower, (iii) third, to reimburse the Agent and the Lenders for any expenses (to the extent not paid pursuant to clause (ii) above) due from the Borrower pursuant to the provisions of Section 11.5; (iv) fourth, to the payment of accrued Commitment Fees and all other fees, expenses and amounts due under the Loan Documents (other than principal and interest on the Notes); (v) fifth, to the payment of interest due on the Notes;
(vi) sixth, to the payment of principal out standing on the Notes; and (vii) seventh, to the payment of any other amounts owing to the Agent and the Lenders under any Loan Document.

10. THE AGENT

10.1. Appointment

Each Lender hereby irrevocably designates and appoints BNY as the Agent of such Lender under the Loan Documents and each such Lender hereby irrevocably authorizes BNY, as the Agent for such Lender, to take such action on its behalf under the provisions of the Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of the Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in any Loan Document, the Agent shall not have any duties or responsibilities other than those expressly set forth therein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into the Loan Documents or otherwise exist against the Agent.

10.2. Delegation of Duties

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The Agent may execute any of its duties under the Loan Documents by or through agents or attorneys-in-fact and shall be entitled to rely upon the advice of counsel concerning all matters pertaining to such duties.

10.3. Exculpatory Provisions

Neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with the Loan Documents (except the Agent for its own gross negligence or willful misconduct), or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrower or any officer thereof contained in the Loan Documents or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, the Loan Documents or for the value, validity, effectiveness, genuineness, perfection, enforce ability or sufficiency of any of the Loan Documents or for any failure of the Borrower or any other Person to perform its obligations thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, the Loan Documents, or to inspect the properties, books or records of the Borrower. The Agent shall not be under any liability or responsibility whatsoever, as Agent, to the Borrower or any other Person as a consequence of any failure or delay in performance, or any breach, by any Lender of any of its obligations under any of the Loan Documents.

10.4. Reliance by Agent

The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, opinion, letter, cablegram, telegram, fax, telex or teletype message, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), in dependent accountants and other experts selected by the Agent. The Agent may treat each Lender, or the Person designated in the last notice filed with it under this Section, as the holder of all of the interests of such Lender in its Loans and in its Note until written notice of transfer, signed by such Lender (or the Person designated in the last notice filed with the Agent) and by the Person designated in such written notice of transfer, in form and substance satisfactory to the Agent, shall have been filed with the Agent. The Agent shall not be under any duty to examine or pass upon the validity, effectiveness, enforceability, perfection or genuineness of the Loan Documents or any instrument, document or communication furnished pursuant thereto or in connection therewith, and the Agent shall be entitled to assume that the same are valid, effective and genuine, have been signed or sent by the proper parties and are what they purport to be. The Agent shall be fully justified in failing or refusing to take any action under the Loan Documents unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under the Loan Documents in accordance with a request or direction of the Required Lenders, and such request or direction and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Notes.

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10.5. Notice of Default

The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default unless the Agent has received written notice thereof from a Lender or the Borrower. In the event that the Agent receives such a notice, the Agent shall promptly give notice thereof to the Lenders and the Borrower. The Agent shall take such action with respect to such Default or Event of Default as shall be directed by the Required Lenders, provided, however, that unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem to be in the best interests of the Lenders.

10.6. Non-Reliance on Agent and Other Lenders

Each Lender expressly acknowledges that neither the Agent nor any of its respective officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by the Agent hereinafter, including any review of the affairs of the Borrower, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own evaluation of and investigation into the business, operations, Property, financial and other condition and creditworthiness of the Borrower and made its own decision to enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, evaluations and decisions in taking or not taking action under any Loan Document, and to make such investigation as it deems necessary to inform itself as to the business, operations, Property, financial and other condition and creditworthiness of the Borrower. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, Property, financial and other condition or creditworthiness of the Borrower which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates.

10.7. Indemnification

Each Lender agrees to indemnify and reimburse the Agent in its capacity as such (to the extent not promptly reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), pro rata according to the outstanding principal balance of the Loans (or at any time when no Loans are outstanding, according to its Commitment Percentage), from

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and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever including, without limitation, any amounts paid to the Lenders (through the Agent) by the Borrower pursuant to the terms of the Loan Documents, that are subsequently rescinded or avoided, or must otherwise be restored or returned) which may at any time (including, without limitation, at any time following the payment of the Notes) be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of the Loan Documents or any other documents contemplated by or referred to therein or the transactions contemplated thereby or any action taken or omitted to be taken by the Agent under or in connection with any of the foregoing; provided, however, that no Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements to the extent resulting solely from the finally adjudicated gross negligence or willful misconduct of the Agent. Without limitation of the foregoing, each Lender agrees to reimburse the Agent promptly upon demand for its pro rata share of any unpaid fees owing to the Agent, and any costs and expenses (including, without limitation, reasonable fees and expenses of counsel) payable by the Borrower under Section 11.5, to the extent that the Agent has not been paid such fees or has not be reimbursed for such costs and expenses by the Borrower. The failure of any Lender to reimburse the Agent promptly upon demand for its pro rata share of any amount required to be by the Lenders to the Agent as provided in this Section shall not relieve any other Lender of its obligation hereunder to reimburse the Agent for its pro rata share of such amount, but no Lender shall be responsible for the failure of other Lender to reimburse the Agent for such other Lender's pro rata share of such amount. The agreements in this Section shall survive the payment of all amounts payable under the Loan Documents.

10.8. Agent in Its Individual Capacity

BNY and its respective affiliates may make loans to, accept deposits from, issue letters of credit for the account of, and generally engage in any kind of business with, the Borrower as though BNY were not Agent hereunder. With respect to the Commitment made or renewed by BNY and the Notes issued to BNY, BNY shall have the same rights and powers under the Loan Documents as any Lender and may exercise the same as though it were not the Agent, and the terms "Lender" and "Lenders" shall in each case include BNY.

10.9. Successor Agent

If at any time the Agent deems it advisable, in its sole discretion, it may submit to each of the Lenders a written notice of its resignation as Agent under the Loan Documents, such resignation to be effective upon the earlier of (i) the written acceptance of the duties of the Agent under the Loan Documents by a successor Agent and (ii) on the 30th day after the date of such notice. Upon any such resignation, the Required Lenders shall have the right to appoint from among the Lenders a successor Agent. If no successor Agent shall have been so appointed by the Required Lenders and accepted such appointment in writing within 30 days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which successor Agent shall be a commercial bank organized under the laws of the United States of America or any State thereof and having a combined capital, surplus, and undivided profits of at least $100,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall

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thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent's rights, powers, privileges and duties as Agent under the Loan Documents shall be terminated. The Borrower and the Lenders shall execute such documents as shall be necessary to effect such appointment. After any retiring Agent's resignation as Agent, the provisions of the Loan Documents shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under the Loan Documents. If at any time there shall not be a duly appointed and acting Agent, the Borrower agrees to make each payment due under the Loan Documents directly to the Lenders entitled thereto during such time.

11. OTHER PROVISIONS

11.1. Amendments and Waivers

With the written consent of the Required Lenders, the Agent and the Borrower may, from time to time, enter into written amendments, supplements or modifications of the Loan Documents and, with the consent of the Required Lenders, the Agent on behalf of the Lenders may execute and deliver to any such parties a written instrument waiving or a consent to a departure from, on such terms and conditions as the Agent may specify in such instrument, any of the requirements of the Loan Documents or any Default or Event of Default and its consequences; provided, however, that:

(a) no such amendment, supplement, modification, waiver or consent shall, without the consent of all of the Lenders, (i) increase the Commitments of any Lender or the Aggregate Commitments, (ii) extend the Maturity Date; (iii) decrease the rate, or extend the time of payment, of interest of, or change or forgive the principal amount of, or change the pro rata allocation of payments under, any Note or change or forgive the payment of any fees, (iv) change the provisions of Sections 2.11, 2.12, 2.13, 2.14, 2.15, 5, 6, 11.1 or 11.6(a), or release any security interest or collateral, except to the extent that such release is specifically provided for in any Loan Document, or release any guarantor under any guarantee or (v) change the definition of Required Lenders; and

(b) without the written consent of the Agent, no such amendment, supplement, modification or waiver shall amend, modify or waive any provision of
Section 10 or otherwise change any of the rights or obligations of the Agent hereunder or under the Loan Documents.

Any such amendment, supplement, modification or waiver shall apply equally to each of the Lenders and shall be binding upon the parties to the applicable Loan Document, the Lenders, the Agent and all future holders of the Notes. In the case of any waiver, the parties

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to the applicable Loan Document, the Lenders and the Agent shall be restored to their former position and rights hereunder and under the outstanding Notes and other Loan Documents to the extent provided for in such waiver, and any Default or Event of Default waived shall not extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. The Loan Documents may not be amended orally or by any course of conduct.

11.2. Notices

All notices, requests and demands to or upon the respective parties to the Loan Documents to be effective shall be in writing and, unless otherwise expressly provided therein, shall be deemed to have been duly given or made when delivered by hand, or when deposited in the mail, first-class postage prepaid, or, in the case of notice by fax, when sent, addressed as follows in the case of the Borrower or the Agent, at the Domestic Lending Office, in the case of each Lender, or to such other addresses as to which the Agent may be hereafter notified by the respective parties thereto or any future holders of the Notes:

The Borrower:

Mercury General Corporation
4484 Wilshire Boulevard
Los Angeles, California 90010 Attention: Keith L. Parker,
Chief Financial/Investment Officer Telephone: (213) 935-3793
Fax: (213) 857-7116

with a copy to: Donna Moore, Controller, at the same address.

The Agent:

The Bank of New York
One Wall Street
Agency Function Administration 18th Floor
New York, New York 10286
Attention: Frances Ryan
Telephone: (212) 635-4698
Fax: (212) 635-6365 or 6366 or 6367

with a copy to:

The Bank of New York
One Wall Street
17th Floor
New York, New York 10286
Attention: Christine M. Herrick,

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Vice President
Telephone: (212) 635-7853
Fax: (212) 809-9520,

except that any notice, request or demand by the Borrower to or upon the Agent or the Lenders pursuant to Sections 2.3 or 2.6 shall not be effective until received. Any party to a Loan Document may rely on signatures of the parties thereto which are transmitted by fax or other electronic means as fully as if originally signed.

11.3. No Waiver; Cumulative Remedies

No failure to exercise and no delay in exercising, on the part of the Agent or any Lender, any right, remedy, power or privilege under any Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege under any Loan Document preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges under the Loan Documents are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.

11.4. Survival of Representations and Warranties

All representations and warranties made under the Loan Documents and in any document, certificate or statement delivered pursuant thereto or in connection therewith shall survive the execution and delivery of the Loan Documents.

11.5. Payment of Expenses and Taxes

The Borrower agrees, promptly upon presentation of a statement or invoice therefor, and whether any Loan is made (i) to pay or reimburse the Agent for all its out-of-pocket costs and expenses reasonably incurred in connection with the development, preparation and execution of, the Loan Documents and the syndication thereof and any amendment, supplement or modification thereto (whether or not executed), any documents prepared in connection therewith and the consummation of the transactions contemplated thereby, including, without limitation, the reasonable fees and disbursements of Special Counsel, (ii) to pay or reimburse the Agent and the Lenders for all of their respective costs and expenses, including, without limitation, reasonable fees and disbursements of counsel, reasonably incurred in connection with (A) any Default or Event of Default and any enforcement or collection proceedings resulting therefrom or in connection with the negotiation of any restructuring or "work-out" (whether consummated or not) of the obigations of the Borrower under any of the Loan Documents, (B) the enforcement of this Section and (C) any appraisal required in connection with any real Property at any time in the future taken as collateral security for any

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obligations under the Loan Documents, (iii) to pay, indemnify, and hold each Lender and the Agent harmless from and against, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other similar taxes, if any, which may be payable or determined to be pay able in connection with the execution and delivery of, or consummation of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, the Loan Documents and any such other documents, and (iv) to pay, indemnify and hold each Lender and the Agent and each of their respective officers, directors and employees harmless from and against any and all other liabilities, obligations, claims, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever (including, without limitation, reasonable counsel fees and disbursements) with respect to the enforcement and performance of the Loan Documents, the use of the proceeds of the Loans and the enforcement and performance of the provisions of any subordination agreement in favor of the Agent and the Lenders (all the foregoing, collectively, the "indemnified liabilities") and, if and to the extent that the foregoing indemnity may be unenforceable for any reason, the Borrower agrees to make the maximum payment permitted or not prohibited under applicable law; provided, however, that the Borrower shall have no obligation hereunder to pay indemnified liabilities to the Agent or any Lender arising from the finally adjudicated gross negligence or willful misconduct of the Agent or such Lender or claims between one indemnified party and another indemnified party. The agreements in this Section shall survive the termination of the Aggregate Commitments and the payment of all amounts payable under the Loan Documents.

11.6. Assignments and Participations

(a) The Loan Documents shall be binding upon and inure to the benefit of the Borrower, the Lenders, the Agent, all future holders of the Notes and their respective successors and assigns, except that the Borrower may not assign, delegate or transfer any of its rights or obligations under the Loan Documents without the prior written consent of the Agent and each Lender.

(b) Each Lender shall have the right at any time, upon written notice to the Agent of its intent to do so, to sell, assign, transfer or negotiate all or any part of such Lender's rights and obligations under the Loan Documents to one or more of its affiliates, to one or more of the other Lenders (or to affiliates of such other Lenders) or, with the prior written consent of the Borrower (which consent shall not be unreasonably withheld or delayed and shall not be required upon the occurrence and during the continuance of an Event of Default), to sell, assign, transfer or negotiate all or any part of such Lender's rights and obligations under the Loan Documents to any other bank, insurance company, pension fund, mutual fund or other financial institution, provided that (i) each such sale, assignment, transfer or negotiation (other than sales, assignments, transfers or negotiations (x) to affiliates of such Lender or (y) of a Lender's entire interest) shall be in a minimum amount of $5,000,000 and (ii) there shall be paid to the Agent by the assigning Lender a fee (the "Assignment Fee") of $3,000, and provided, further, that any sale, assignment, transfer or negotiation by the Agent in its capacity as a Lender (other than to affiliates of such Lender) shall not result in such Lender (or any successor or affiliates thereof) retaining less than 30% of the Aggregate Commitments or Loans or in the total number of Lenders exceeding five. For each assignment, the parties to such assignment shall execute and deliver to the Agent for its acceptance and recording an

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Assignment and Acceptance Agreement. Upon such execution, delivery, acceptance and recording by the Agent, from and after the effective date specified in such Assignment and Acceptance Agreement, the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance Agreement, the assignor Lender thereunder shall be released from its obligations under the Loan Documents. Subject to Borrower's right to consent or not to consent to such an assignment as set forth above, the Borrower agrees upon written request of the Agent and at the Borrower's expense to execute and deliver (1) to such assignee, Notes, dated the effective date of such Assignment and Acceptance Agreement, in an aggregate principal amount equal to the Loans assigned to, and Commitments assumed by, such assignee and (2) to such assignor Lender, Notes, dated the effective date of such Assignment and Acceptance Agreement, in an aggregate principal amount equal to the balance of such assignor Lender's Loans and Commitments, if any, and each assignor Lender shall cancel and return to the Borrower its existing Notes. Upon any such sale, assignment or other transfer, the Commitments and the Commitment Percentages set forth in Exhibit A shall be adjusted accordingly by the Agent and a new Exhibit A shall be distributed by the Agent to the Borrower and each Lender.

(c) Each Lender may grant participations in all or any part of its Loans, its Note and its Commitment to one or more banks, insurance companies, financial institutions, pension funds or mutual funds, provided that (i) such Lender's obligations under the Loan Documents shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties to the Loan Documents for the performance of such obligations, (iii) the Borrower, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under the Loan Documents, (iv) such Lender shall continue at all times to hold at least a 50% beneficial interest in its Loans, its Note and its Commitment (unless such participations are granted to affiliates of such Lender or to other Lenders or affiliates of such other Lenders), (v) no sub-participations shall be permitted and (vi) the voting rights of any holder of any participation shall be limited to decisions that only do any of the following: (A) subject the participant to any additional obligation, (B) reduce the principal of, or interest on the Notes or any fees or other amounts payable hereunder, (C) postpone any date fixed for the payment of principal of, or interest on the Notes or any fees or other amounts payable hereunder, (D) release any security interest or collateral, except to the extent that such release is specifically provided for in any Loan Document or (E) release any guarantor under any guarantee. The Borrower acknowledges and agrees that any such participant shall for purposes of Sections 2.9, 2.11, 2.12 and 2.15 be deemed to be a "Lender"; provided, however, the Borrower shall not, at any time, be obligated to pay any participant in any interest of any Lender hereunder any sum in excess of the sum which the Borrower would have been obligated to pay to such Lender in respect of such interest had such Lender not sold such participation.

(d) If any (i) assignment is made pursuant to subsection (b) above or (ii) any

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participation is granted pursuant to subsection (c) above, shall be made to any Person that is not a U.S. Person, such Person shall furnish such certificates, documents or other evidence to the Borrower and the Agent, in the case of clause
(i) and to the Borrower and the Lender which sold such participation in the case of clause (ii), as shall be required by Section 2.9(c).

(e) No Lender shall, as between and among the Borrower, the Agent and such Lender, be relieved of any of its obligations under the Loan Documents as a result of any sale, assignment, transfer or negotiation of, or granting of participations in, all or any part of its Loans, its Commitment or its Note, except that a Lender shall be relieved of its obligations to the extent of any such sale, assignment, transfer, or negotiation of all or any part of its Loans, its Commitment or its Note pursuant to subsection (b) above.

(f) Notwithstanding anything to the contrary contained in this Section, any Lender may at any time or from time to time assign all or any portion of its rights under the Loan Documents to a Federal Reserve Bank, provided that any such assignment shall not release such assignor from its obligations thereunder.

11.7. Counterparts

Each Loan Document (other than the Notes) may be executed by one or more of the parties thereto on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same document. It shall not be necessary in making proof of any Loan Document to produce or account for more than one counterpart signed by the party to be charged. A counterpart of any Loan Document or to any document evidencing, and of any an amendment, modification, consent or waiver to or of any Loan Document transmitted by fax shall be deemed to be an originally executed counterpart. A set of the copies of the Loan Documents signed by all the parties thereto shall be deposited with each of the Borrower and the Agent. Any party to a Loan Document may rely upon the signatures of any other party thereto which are transmitted by fax or other electronic means to the same extent as if originally signed.

11.8. Adjustments; Set-off

(a) If any Lender (a "Benefited Lender") shall at any time receive any payment of all or any part of its Loans, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or in voluntarily, by set- off, pursuant to events or proceedings of the nature referred to in Section 9.1
(h) or (i), or otherwise) in a greater proportion than any such payment to and collateral received by any other Lender in respect of such other Lender's Loans, or interest thereon, such Benefited Lender shall purchase for cash from each of the other Lenders such portion of each such other Lender's Loans, and shall provide each of such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Benefited Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders, provided, however, that if all or any portion of such excess payment or benefits is thereafter recovered from such Benefited Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. The Borrower agrees that each Lender so purchasing a portion of another Lender's Loans may exercise all rights of payment (including, without limita-

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tion, rights of set-off, to the extent not prohibited by law) with respect to such portion as fully as if such Lender were the direct holder of such portion.

(b) In addition to any rights and remedies of the Lenders provided by law, upon the occurrence of an Event of Default and the acceleration of the obligations owing in connection with the Loan Documents, or at any time upon the occurrence and during the continuance of an Event of Default, under Section 9.1(a) or (b), each Lender shall have the right, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent not prohibited by applicable law, to set-off and apply against any indebtedness, whether matured or unmatured, of the Borrower to such Lender, any amount owing from such Lender to the Borrower, at, or at any time after, the happening of any of the above-mentioned events. To the extent not prohibited by applicable law, the aforesaid right of set-off may be exercised by such Lender against the Borrower or against any trustee in bankruptcy, custodian, debtor in possession, assignee for the benefit of creditors, receiver, or execution, judgment or attachment creditor of the Borrower, or against anyone else claiming through or against the Borrower or such trustee in bankruptcy, custodian, debtor in possession, assignee for the benefit of creditors, receiver, or execution, judgment or attachment creditor, notwithstanding the fact that such right of set-off shall not have been exercised by such Lender prior to the making, filing or issuance, or service upon such Lender of, or of notice of, any such petition, assignment for the benefit of creditors, appointment or application for the appointment of a receiver, or issuance of execution, subpoena, order or warrant. Each Lender agrees promptly to notify the Borrower and the Agent after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application.

11.9. Construction

The Borrower represents that it has been represented by counsel in connection with the Loan Documents and the transactions contemplated thereby and that the principle that agreements are to be construed against the draftsman shall be inapplicable.

11.10. Indemnity

The Borrower agrees to indemnify and hold harmless the Agent and each Lender and their respective affiliates, directors, officers, employees, attorneys and agents (each an "Indemnified Person") from and against any loss, cost, liability, damage or expense (including the reasonable fees and disbursements of counsel of such Indemnified Person, including all local counsel hired by any such counsel) incurred by such Indemnified Person in investigating, preparing for, defending against, or providing evidence, producing documents or taking any other action in respect of, any commenced or threatened litigation, administrative proceeding or investigation under any federal securities law or any other statute of any jurisdiction, or any

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regulation, or at common law or otherwise, which is alleged to arise out of or is based upon (i) any un true statement or alleged untrue statement of any material fact by the Borrower in any document or schedule executed or filed with any Governmental Authority by or on behalf of the Borrower; (ii) any omission or alleged omission to state any material fact required to be stated in such document or schedule, or necessary to make the statements made therein, in light of the circumstances under which made, not misleading; (iii) any acts, practices or omissions or alleged acts, practices or omissions of the Borrower or its agents relating to the use of the proceeds of any or all borrowings made by the Borrower which are alleged to be in violation of Section 2.14, or in violation of any federal securities law or of any other statute, regulation or other law of any jurisdiction applicable thereto; or (iv) any acquisition or proposed acquisition by the Borrower of all or a portion of the Stock, or all or a portion of the as sets, of any Person whether such Indemnified Person is a party thereto. The indemnity set forth herein shall be in addition to any other obligations or liabilities of the Borrower to each Indemnified Person under the Loan Documents or at common law or otherwise, and shall survive any termination of the Loan Documents, the expiration of the Commitments and the payment of all indebtedness of the Borrower under the Loan Documents, provided that the Borrower shall have no obligation under this Section to an Indemnified Person with respect to any of the foregoing to the extent found in a final judgment of a court having jurisdiction to have resulted primarily out of the gross negligence or wilful misconduct of such Indemnified Person or arising solely from claims between one such Indemnified Person and another such Indemnified Person.

11.11. Governing Law

The Loan Documents and the rights and obligations of the parties thereunder shall be governed by, and construed and interpreted in accordance with, the internal laws of the State of New York, without regard to principles of conflict of laws.

11.12. Headings Descriptive

Section headings have been inserted in the Loan Documents for convenience only and shall not be construed to be a part thereof.

11.13. Severability

Every provision of the Loan Documents is intended to be sever able, and if any term or provision thereof shall be invalid, illegal or unenforceable for any reason, the validity, legality and enforceability of the remaining provisions thereof shall not be affected or impaired thereby, and any invalidity, illegality or unenforceability in any jurisdiction shall not affect the validity, legality or enforceability of any such term or provision in any other jurisdiction.

11.14. Integration

All exhibits to a Loan Document shall be deemed to be a part thereof. Except for agreements between the Agent and the Borrower with respect to certain fees, the Loan Documents embody the entire agreement and understanding among the Borrower, the Agent and the Lenders with respect to the subject matter thereof and supersede all prior agreements and understandings among the Borrower , the Agent and the Lenders with respect to the subject


matter thereof.

11.15. Consent to Jurisdiction

The Borrower hereby irrevocably submits to the jurisdiction of any New York State or Federal court sitting in the City of New York over any suit, action or proceeding arising out of or relating to the Loan Documents. The Borrower hereby irrevocably waives, to the fullest extent permitted or not prohibited by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding brought in such a court and any claim that any such suit, action or proceeding brought in such a court has been brought in an inconvenient forum. The Borrower hereby agrees that a final judgment in any such suit, action or proceeding brought in such a court, after all appropriate appeals, shall be conclusive and binding upon it.

11.16. Service of Process

The Borrower hereby irrevocably consents to the service of process in any suit, action or proceeding by sending the same by first class mail, return receipt requested or by overnight courier service, to the address of the Borrower set forth in Section 11.2. The Borrower hereby agrees that any such service (i) shall be deemed in every respect effective service of process upon it in any such suit, action, or proceeding, and (ii) shall to the fullest extent enforceable by law, be taken and held to be valid personal service upon and personal delivery to it.

11.17. No Limitation on Service or Suit

Nothing in the Loan Documents or any modification, waiver, consent or amendment thereto shall affect the right of the Agent or any Lender to serve process in any manner permitted by law or limit the right of the Agent or any Lender to bring proceedings against the Borrower in the courts of any jurisdiction or jurisdictions in which the Borrower may be served.

11.18. WAIVER OF TRIAL BY JURY

THE AGENT, THE LENDERS AND THE BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING OUT OF, UNDER OR IN CONNECTION WITH THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREIN. FURTHER, THE BORROWER HEREBY CERTIFIES THAT NO REPRESENTATIVE OR AGENT OF THE AGENT, OR THE LENDERS, OR COUNSEL TO THE AGENT OR THE LENDERS, HAS REPRESENTED, EXPRESSLY

59

OR OTHERWISE, THAT THE AGENT OR THE LENDERS WOULD NOT, IN THE EVENT OF SUCH LITIGATION, SEEK TO ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. THE BORROWER ACKNOWLEDGES THAT THE AGENT AND THE LENDERS HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, INTER ALIA, THE PROVISIONS OF THIS SECTION.


TO EVIDENCE THE FOREGOING, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.

MERCURY GENERAL CORPORATION

By: ________________________
Name: ______________________
Title: _____________________

THE BANK OF NEW YORK,
Individually and as Agent

By: ________________________
Name: ______________________
Title: _____________________

UNION BANK OF CALIFORNIA, N.A.

By: ________________________
Name: ______________________
Title: _____________________

THE FIRST NATIONAL BANK OF
CHICAGO

By: ________________________
Name: ______________________
Title: _____________________

- 1 -

EXHIBIT 10.21

STOCK PURCHASE AGREEMENT

MERCURY GENERAL CORPORATION
as Purchaser

and

AMERICAN FIDELITY CORPORATION
as Seller

Dated

November 15, 1996


TABLE OF CONTENTS

                                                                                              PAGE
ARTICLE I...................................................................................    1
DEFINITIONS.................................................................................    1
     1.1 Defined Terms......................................................................    1
          Accounting Firm...................................................................    1
          Actuarial Firm....................................................................    1
          Action............................................................................    2
          AFA...............................................................................    2
          Affiliate.........................................................................    2
          Agreement.........................................................................    2
          Agreement Not to Compete..........................................................    2
          Ancillary Agreements..............................................................    2
          Assets............................................................................    2
          Auditor...........................................................................    2
          Balance Sheet.....................................................................    2
          Bankruptcy Exception..............................................................    2
          Bills of Sale.....................................................................    2
          Books and Records.................................................................    2
          Bulk IBNR Reserves................................................................    3
          Business..........................................................................    3
          Cameron Enterprises...............................................................    3
          Case Reserves.....................................................................    3
          Claim.............................................................................    3
          Claim Payment.....................................................................    3
          Closing...........................................................................    3
          Closing Date......................................................................    3
          Code..............................................................................    4
          Company...........................................................................    4
          Continental Agreement.............................................................    4
          Contract..........................................................................    4
          Contract Rights...................................................................    4
          Copyrights........................................................................    4
          Court Order.......................................................................    4
          Covenant Agreement................................................................    4
          Date of Loss......................................................................    4
          Default...........................................................................    4
          Disclosure Schedule...............................................................    5
          Effective Date....................................................................    5
          Effective Date Balance Sheet......................................................    5
          Effective Date Case Reserves......................................................    5
          Effective Date IBNR Reserves......................................................    5
          Effective Date Insurance Reserves.................................................    5
          Effective Date Financial Statements...............................................    5

i

Encumbrance.......................................................................    5
Environmental Laws................................................................    5
Expenses..........................................................................    6
Facilities........................................................................    6
Financial Statements..............................................................    6
Fixtures and Equipment............................................................    6
GAAP..............................................................................    6
HSR Act...........................................................................    6
IBNR Reserves.....................................................................    6
Insurance License.................................................................    6
Insurance Policies................................................................    6
Insurance Reserves................................................................    6
Interim Balance Sheet.............................................................    7
Interim Balance Sheet Date........................................................    7
Interim Balance Sheet Date Insurance Reserves.....................................    7
Interim Financial Statements......................................................    7
KPMG..............................................................................    7
Late Claim........................................................................    7
Leases............................................................................    7
Liabilities.......................................................................    7
Loss..............................................................................    7
Loss Event........................................................................    7
material adverse effect or material adverse change................................    7
Mechanical Breakdown Products.....................................................    7
Mortgages.........................................................................    8
Ocean Marine Bulk IBNR Reserves...................................................    8
Ocean Marine Case Reserves........................................................    8
Ocean Marine Claim................................................................    8
Ocean Marine Claim Payment........................................................    8
Ocean Marine IBNR Reserves........................................................    8
Ocean Marine Insurance Reserves...................................................    8
Ocean Marine Program..............................................................    9
Ocean Marine Pure IBNR Reserves...................................................    9
Office Lease......................................................................    9
ordinary course of business or ordinary course....................................    9
Patents...........................................................................    9
Permits...........................................................................    9
Permitted Encumbrances............................................................    9
Pro Forma Interim Balance Sheet...................................................    9
Pro Forma Interim Financial Statements............................................    9
Property..........................................................................   10
Proprietary Rights................................................................   10
Purchaser.........................................................................   10
Purchase Price....................................................................   10
Purchaser's Knowledge.............................................................   10
Pure IBNR Reserves................................................................   10

ii

          Regulations.......................................................................   10
          Representative....................................................................   10
          Reserve Determination Date........................................................   10
          Seller............................................................................   10
          Seller's Knowledge................................................................   10
          Services Agreement................................................................   11
          Shares............................................................................   11
          Statutory Statement...............................................................   11
          Subsidiary........................................................................   11
          Tax...............................................................................   11
          Trademark License Agreements......................................................   11
          Trademarks........................................................................   11
          Warrants..........................................................................   11
          Wire Transfer.....................................................................   12
          Year-End Financial Statement......................................................   12
     1.2 Other Defined Terms................................................................   12
ARTICLE II..................................................................................   13
PURCHASE AND SALE OF SHARES.................................................................   13
     2.1 Transfer of Shares.................................................................   13
     2.2 Purchase Price and Payment.........................................................   13
     2.3 Closing Costs; Transfer Taxes......................................................   14
     2.4 Insurance Reserves.................................................................   14
ARTICLE III.................................................................................   17
CLOSING.....................................................................................   17
     3.1 Closing............................................................................   17
     3.2 Deliveries at Closing..............................................................   17
     3.3 Other Closing Transactions.........................................................   17
ARTICLE IV..................................................................................   18
REPRESENTATIONS AND WARRANTIES OF SELLER....................................................   18
     4.1 Organization, Authorization and Execution of Seller................................   18
     4.2 Organization of the Company........................................................   18
     4.3 Capitalization of the Company......................................................   18
     4.4 Subsidiaries.......................................................................   19
     4.5 Lloyd's Plan.......................................................................   19
     4.6 Insurance Licenses and Other Permits...............................................   19
     4.7 Financial Statements...............................................................   20
     4.8 Liabilities........................................................................   21
     4.9 Accounts Receivable; Notes Receivable; Mortgages; Other Amounts....................   21
     4.10 Books and Records.................................................................   23
     4.11 Absence of Certain Changes or Events..............................................   23
     4.12 Assets............................................................................   25
     4.13 Contracts and Commitments.........................................................   26
     4.14 No Conflict or Violation..........................................................   28
     4.15 Consents and Approvals............................................................   28
     4.16 Litigation........................................................................   28
     4.17 Labor Matters.....................................................................   28

iii

     4.18 Compliance with Law...............................................................   29
     4.19 Propretiary Rights................................................................   20
     4.20 Employee Benefit Plans............................................................   30
     4.21 Tax Matters.......................................................................   35
     4.22 Insurance.........................................................................   37
     4.23 Environmental Matters.............................................................   37
     4.24 Officers..........................................................................   38
     4.25 Severance Arrangements............................................................   38
     4.26 Bank Accounts.....................................................................   38
     4.27 Ocean Marine Program..............................................................   38
     4.28 Service Agreements with Seller....................................................   38
     4.29 No Brokers........................................................................   38
     4.30 No Other Agreements to Sell the Shares or the Company.............................   39
     4.31 Material Misstatements Or Omissions...............................................   39
     4.32 No Other Representations or Warranties............................................   39
ARTICLE V...................................................................................   39
REPRESENTATIONS AND WARRANTIES OF PURCHASER.................................................   39
     5.1 Organization of Purchaser..........................................................   39
     5.2 Authorization......................................................................   39
     5.3 No Conflict or Violation...........................................................   40
     5.4 Consents and Approvals.............................................................   40
     5.5 Investment Intent..................................................................   40
     5.6 No Brokers.........................................................................   40
ARTICLE VI..................................................................................   40
COVENANTS OF SELLER AND PURCHASER...........................................................   40
     6.1 Further Assurances.................................................................   40
     6.2 Certain Filings and Consents.......................................................   41
     6.3 Access.............................................................................   41
     6.4 No Solicitation....................................................................   41
     6.5 Notification of Certain Matters....................................................   42
     6.6 Conduct of Business................................................................   42
     6.7 Public Statements and Press Releases...............................................   44
     6.8 Financial Information..............................................................   44
     6.9 Employee Matters...................................................................   44
     6.10 Employee Benefits.................................................................   45
     6.11 Modification of ERC Arrangements and Release......................................   46
     6.12 Sale of AFCC Capital Stock........................................................   47
     6.13 Transfer of Mortgage Loans........................................................   47
     6.14 Intercompany Accounts.............................................................   47
     6.15 Ocean Marine......................................................................   48
ARTICLE VII.................................................................................   48
CONDITIONS TO SELLER'S OBLIGATIONS..........................................................   48
     7.1 Representations, Warranties and Covenants..........................................   48
     7.2 Consents; Regulatory Compliance and Approval.......................................   48
     7.3 No Actions or Court Orders.........................................................   49
     7.4 Opinion of Counsel.................................................................   49

iv

     7.5 Certificates.......................................................................   50
     7.6 Corporate Documents................................................................   50
     7.7 Ancillary Agreements...............................................................   50
     7.8 Investment Representation..........................................................   50
     7.9 Mitsubishi Consent.................................................................   50
ARTICLE VIII................................................................................   50
CONDITIONS TO PURCHASER'S OBLIGATIONS.......................................................   50
     8.1 Representations, Warranties and Covenants..........................................   50
     8.2 Consents; Regulatory Compliance and Approval.......................................   50
     8.3 No Actions or Court Orders.........................................................   51
     8.4 Opinion of Counsel.................................................................   51
     8.5 Certificates.......................................................................   52
     8.6 Material Changes...................................................................   52
     8.7 Corporate Documents................................................................   52
     8.8 Conveyancing Documents; Release of Encumbrances....................................   53
     8.9 Ancillary Agreements...............................................................   53
     8.10 Consents..........................................................................   53
     8.11 ERC Release.......................................................................   53
     8.12 Intercompany Transfer.............................................................   53
     8.13 Mitsubishi Consent................................................................   53
     8.14 Ocean Marine......................................................................   53
ARTICLE IX..................................................................................   54
ACTIONS AFTER THE CLOSING...................................................................   54
     9.1 Books and Records; Tax Matters.....................................................   54
     9.2 Survival of Representations, Etc...................................................   54
     9.3 Indemnification....................................................................   55
     9.4 Payment of Holdback Amount.........................................................   58
     9.5 Post-Closing Claims Administration.................................................   59
     9.6 Post-Closing Inspection of Records.................................................   60
     9.7 Change of Name.....................................................................   61
     9.8 Ocean Marine Program...............................................................   61
     9.9 Effective Date Financial Statements................................................   63
ARTICLE X...................................................................................   65
MISCELLANEOUS...............................................................................   65
     10.1 Termination.......................................................................   65
     10.2 Assignment........................................................................   66
     10.3 Notices...........................................................................   66
     10.4 Choice of Law.....................................................................   67
     10.5 Entire Agreement; Amendments and Waivers..........................................   68
     10.6 Multiple Counterparts.............................................................   68
     10.7 Expenses..........................................................................   68
     10.8 Invalidity........................................................................   68
     10.9 Titles; Gender....................................................................   68
     10.10 Confidential Information.........................................................   68
     10.11 Cumulative Remedies..............................................................   69
     10.12 Attorneys' Fees..................................................................   69

v

10.13 Waivers of Punitive Damages......................................................   71

vi

                           LIST OF EXHIBITS

EXHIBIT A   AGREEMENT NOT TO COMPETE

EXHIBIT B   FORM OF BILLS OF SALE

EXHIBIT C   FORM OF OFFICE LEASE

EXHIBIT D   FORM OF SERVICES AGREEMENT

EXHIBIT E   FORM OF TRADEMARK LICENSE AGREEMENT

EXHIBIT F   ACCOUNTING PROCEDURES

EXHIBIT G   CALCULATION OF OCEAN MARINE PROGRAM
            NET INCOME AND NET LOSS

vii

STOCK PURCHASE AGREEMENT

This Stock Purchase Agreement is made and entered into as of November 15, 1996, by and between AMERICAN FIDELITY CORPORATION, a Nevada corporation ("Seller"), and MERCURY GENERAL CORPORATION, a California corporation ("Purchaser").

RECITALS

A. Seller owns all of the outstanding common stock of American Fidelity Insurance Company, an Oklahoma corporation (the "Company"). The Company is principally engaged in the property and casualty insurance business, both directly and through its wholly-owned subsidiary, Cimarron Insurance Company, Inc., a Kansas corporation ("Cimarron"), and its affiliate AFI Management Company, a Texas corporation ("AMC"). The Company is also engaged in the premium

finance business through its wholly-owned subsidiary American Fidelity Credit Corporation, a Kansas corporation ("AFCC"), which will not be part of the

transaction subject to this Agreement.

B. Purchaser, a publicly held property and casualty insurance holding company headquartered in California, desires to purchase all of the outstanding shares of common stock of the Company (the "Shares"), and Seller is willing to sell the Shares to Purchaser, all on the terms and conditions hereinafter set forth.

AGREEMENT

NOW, THEREFORE, in consideration of the respective covenants and promises contained herein and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows:

ARTICLE I

DEFINITIONS

1.1 Defined Terms. As used herein, the terms below shall have the following meanings. Any of such terms, unless the context otherwise requires, may be used in the singular or plural, depending upon the reference.

"Accounting Firm" shall mean Ernst & Young LLP or any successor organization.

"Actuarial Firm" shall mean any of KPMG, Milliman & Robertson or Tillinghast-Towers Perrin, as selected by Purchaser.

1

"Action" shall mean any action, claim, suit, litigation, proceeding, labor dispute, arbitral action, governmental audit, inquiry, criminal prosecution, investigation or unfair labor practice charge or complaint.

"AFA" shall mean American Fidelity Assurance Company, a wholly-

owned subsidiary of Seller.

"Affiliate" shall mean, with respect to any party, any individual corporation, partnership or other entity that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such party.

"Agreement" shall refer to this Stock Purchase Agreement including all Exhibits and Schedules hereto, as the same may be amended from time to time.

"Agreement Not to Compete" shall mean an agreement not to compete entered into between Purchaser and Seller substantially in the form of Exhibit A attached hereto.

"Ancillary Agreements" shall mean the Agreement Not to Compete, the Bills of Sale, the Office Lease, the Services Agreement and the Trademark License Agreements.

"Assets" shall mean all accounts and notes receivable, refunds, deposits, prepaid expenses, cash and cash equivalents, securities, land, buildings, improvements, leasehold improvements, Books and Records, Fixtures and Equipment, Permits, Proprietary Rights, Contract Rights, and all other assets (tangible or intangible) owned or leased by the Company or any of its Subsidiaries.

"Auditor" shall mean KPMG.

"Balance Sheet" shall mean the consolidated balance sheet of the Company and its Subsidiaries at the date indicated thereon, prepared in accordance with GAAP.

"Bankruptcy Exception" shall refer, in respect of any agreement, contract or commitment, and to the enforceability thereof, to any limitation thereon imposed by any bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or similar law affecting creditors' rights and remedies generally and by general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity).

"Bills of Sale" shall mean the instruments of transfer, each substantially in the form of Exhibit B attached hereto, pursuant to which each of Cameron Enterprises and Seller shall sell the personal property specified therein to the Company and its Subsidiaries.

"Books and Records" shall mean (a) all records and lists of the Company and each of its Subsidiaries pertaining to the Assets and Liabilities,
(b) all records and lists pertaining to the Business, customers, agents, suppliers or personnel of the Company and each of its Subsidiaries, (c) all product, business and marketing plans of the Company and each of its Subsidiaries, (d) correspondence with regulatory authorities and regulatory accounting records,

2

and (e) all books, ledgers, files, reports, plans, drawings and operating records of every kind maintained by the Company and each of its Subsidiaries, or by the Seller on behalf of the Company and its Subsidiaries, including the originals of minute books, stock books, copies of tax work papers and tax returns of the Company and each of its Subsidiaries.

"Bulk IBNR Reserves" shall mean Insurance Reserves which have been established with respect to Claims which arise out of policies for which the Company or any of its Subsidiaries is the insurer or reinsurer as a result of the occurrence of a Loss-Event and which equal, on an actuarial basis, the indicated deficiency in Case Reserves.

"Business" shall mean the business of the Company and its Subsidiaries as presently conducted.

"Cameron Enterprises" shall mean Cameron Enterprises, A Limited Partnership, an Oklahoma limited partnership.

"Case Reserves" shall mean Insurance Reserves which have been established with respect to Claims received by the Company and its Subsidiaries or an authorized agent of the Company or any of its Subsidiaries.

"Claim" shall mean a claim made by or on behalf of the insured under policies or agreements of insurance for which the Company or any of its Subsidiaries is an insurer or reinsurer or otherwise obligated (exclusive of claims made with respect to Mechanical Breakdown Products and the Ocean Marine Program), or under agreements of insurance under the Company's retrocession agreements with reinsurers, to recover insurance proceeds under such policy or agreement based upon or arising out of a Loss-Event. "Claim" shall also include any other claim by an insured, third-party claimant or otherwise arising out of such policy or agreement, including, but not limited to, amounts that are due or may become due for extra-contractual obligations, judgments in excess of policy limits, bad faith and exemplary or punitive damages. The term "Claim" shall include a "Late Claim."

"Claim Payment" shall mean, with respect to any Claim or Late Claim, the moneys paid by or on behalf of the Company and its Subsidiaries (net of any reinsurance recoveries, subrogation recoveries and salvage value realized) to satisfy such Claim or Late Claim and to pay the costs and expenses (including reasonable attorneys' fees) incurred to administer, process, defend against and settle or otherwise satisfy such Claim or Late Claim.

"Closing" shall refer to the time of the sale of the Shares on the day on which the Seller transfers, or causes the transfer of, the Shares to Purchaser pursuant to the terms of this Agreement, and "day of the Closing" shall be deemed to refer to such day.

"Closing Date" shall mean the later of December 17, 1996, or such date as is five (5) business days following the receipt by Purchaser from the Departments of Insurance of Oklahoma, Kansas and Texas of approval for the transactions contemplated hereby, provided the conditions in Articles VII and VIII are satisfied; provided, however, that such date shall be subject to extension from time to time as may be agreed by Purchaser and Seller.

3

"Code" shall mean the Internal Revenue Code of 1986, as amended,

and the rules and regulations thereunder.

"Company" shall shall mean American Fidelity Insurance Company, an Oklahoma corporation.

"Continental Agreement" shall mean that certain Agreement dated March 1, 1990, as amended by Addendum No. 1 effective January 1, 1995, between the Company and Continental Underwriters, Ltd., a Louisiana corporation.

"Contract" shall mean any agreement, contract, policy, vehicle warranty, indemnity, reinsurance treaty or agreement, note, loan, evidence of indebtedness, purchase, order, letter of credit, indenture, security or pledge agreement, franchise agreement, undertaking, practice, covenant not to compete, employment agreement, license (which is neither an Insurance License nor a Permit), instrument, obligation or commitment to which the Company or a Subsidiary is a party or is bound and which relates to and is material to the Business or the Assets of the Company or such Subsidiary, whether oral or written, but excluding all Leases.

"Contract Rights" shall mean all of the Company's or any of its Subsidiaries' rights and obligations under the Contracts listed on Schedule 4.13.

"Copyrights" shall mean registered copyrights, copyright applications and unregistered copyrights.

"Court Order" shall mean any judgment, decision, consent decree, injunction, ruling or order of any federal, state or local court or governmental agency, department or authority that is binding on any person or its property under applicable law.

"Covenant Agreement" shall mean that certain Underwriting Administration Agreement dated August 1, 1993, by and between the Company and Covenant Underwriters, Ltd., a Louisiana corporation, as amended by Addendum No. 1 effective August 1, 1993, Addendum No. 2 effective August 1, 1994, and Addendum No. 3, effective April 1, 1995.

"Date of Loss" shall mean the first date of occurrence, claim, loss or other event giving rise to a Claim or an Ocean Marine Claim; provided that with respect to environmental Claims, toxic Claims, or bodily injury or property damage Claims or Ocean Marine Claims arising from continuous or repeated exposure to conditions, where it is not possible to determine a specific date of loss, Date of Loss shall mean the policy inception date of the first policy applicable to such loss; and provided, further, that with respect to Claims under the Company's or any of its Subsidiaries' insurance policy issued to the National Education Association, the Date of Loss shall be the date a Claim is first made against the Company's insured. With respect to Claims or Ocean Marine Claims in existence on or prior to the Effective Date, the Date of Loss shall be as determined by the Company prior to the Effective Date.

"Default" shall mean (a) a breach of or default under any Contract, Lease or Permit, (b) the occurrence of an event that with the passage of time or the giving of notice or both would constitute a breach of or default under any Contract, Lease or Permit, or (c) the

4

occurrence of an event that with or without the passage of time or the giving of notice or both would give rise to a right of termination, renegotiation or acceleration under any Contract, Lease, or Permit.

"Disclosure Schedule" shall mean the schedules delivered by Seller to Purchaser which set forth the exceptions to the representations and warranties contained in Article IV hereof and certain other information called for by this Agreement. Unless otherwise specified, each reference in this Agreement to any numbered schedule is a reference to that numbered schedule which is included in the Disclosure Schedule.

"Effective Date" shall mean the last day of the calendar month next preceding the Closing Date.

"Effective Date Balance Sheet" shall mean the unaudited consolidated Balance Sheet of the Company and its Subsidiaries as of the close of business on the Effective Date, prepared in accordance with GAAP and with the accounting procedures set forth on Exhibit F attached hereto.

"Effective Date Case Reserves" shall mean the Case Reserves as recorded in the Effective Date Balance Sheet.

"Effective Date IBNR Reserves" shall mean the IBNR Reserves as recorded in the Effective Date Balance Sheet.

"Effective Date Insurance Reserves" shall mean the Insurance Reserves as recorded in the Effective Date Balance Sheet, as determined in accordance with Section 9.9.

"Effective Date Financial Statements" shall mean the unaudited Effective Date Balance Sheet and consolidated statements of operations, stockholder's equity and cash flows of the Company and its Subsidiaries for the period ended on the Effective Date.

"Encumbrance" shall mean any claim, lien, pledge, option, charge, easement, security interest, deed of trust, mortgage, right-of-way, encroachment, building or use restriction, conditional sales agreement, encumbrance or other right of third parties, whether voluntarily incurred or arising by operation of law, and includes, without limitation, any agreement to give any of the foregoing in the future, and any contingent sale or other title retention agreement or lease in the nature thereof.

"Environmental Laws" means all federal, state and local laws, rules and regulations and other requirements which in any way are related to protection of health, safety, or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including, without limitation, laws and regulations relating to emissions, discharges, releases or threatened releases of hazardous substances, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of hazardous substances, including but not limited to the Federal Water Pollution Control Act (33 U.S.C. Section 1251 et. seq.), Resource Conservation & Recovery Act (42 U.S.C. Section 6901 et
seq.), Safe Drinking Water Act (21 U.S.C. Section 349, 42 U.S.C.

5

Sections 201, 300f), Toxic Substances Control Act (15 U.S.C. Section 2601 et

seq.), Clean Air Act (42 U.S.C. Section 7401 et seq.), and Comprehensive

Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601

et seq.).

"Expenses" shall mean all reasonable expenses incurred in connection with investigating, defending or asserting any claim, action, suit or proceeding incident to any matter indemnified against under the terms of this Agreement (including court costs, court filing fees, arbitration fees or costs, witness fees, and reasonable fees and disbursements of legal counsel, investigators, expert witnesses, accountants and other professionals). "Expenses" do not include unallocated loss adjustment expenses of the Company and its Subsidiaries and Purchaser, including, without limitation, salaries of employees, rent and other internal overhead expenses.

"Facilities" shall mean all offices, warehouses, improvements, administration buildings, and all real property and related facilities which are identified or listed on Schedule 4.12.

"Financial Statements" shall mean the Year-End Financial Statements and the Interim Financial Statements, prepared in accordance with
GAAP.

"Fixtures and Equipment" shall mean all of the furniture, fixtures, furnishings, machinery, automobiles, trucks, spare parts, supplies, equipment, tooling, molds, patterns, dies and other tangible personal property owned by the Company or any of its Subsidiaries and used in connection with the Business, wherever located and including any such Fixtures and Equipment in the possession of any of agents or suppliers of the Company or any of its Subsidiaries.

"GAAP" shall mean generally accepted accounting principles in the

United States of America, as in effect from time to time, consistently applied.

"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder.

"IBNR Reserves" shall mean both Pure IBNR Reserves and Bulk IBNR Reserves.

"Insurance License" shall refer to any state or other governmental license, permit or other authorization which is currently held by the Company or any of its Subsidiaries in a particular jurisdiction to transact one or more classes or lines of insurance in that jurisdiction.

"Insurance Policies" shall mean the insurance policies related to the Assets or Business listed on Schedule 4.22.

"Insurance serves" shall mean the undiscounted dollar amounts (net of reinsurance and estimated subrogation recoveries and salvage value realized) reserved for the payment of losses and loss adjustment expenses as established by the Company and which are reasonably adequate to cover the unpaid loss and loss adjustment expense obligations of the Company and each of its Subsidiaries for Claims under the policies or agreements which are in effect on or prior to the

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Effective Date for which the Company or any of its Subsidiaries is an insurer or reinsurer, excluding those in connection with Mechanical Breakdown Products and the Ocean Marine Program. Insurance Reserves shall include Case Reserves and IBNR Reserves, and shall be determined using generally accepted actuarial methods and in accordance with the accounting principles set forth in paragraph 4 of Exhibit F attached hereto. Insurance Reserves at December 31, 2001 shall not be reduced by any estimates for subrogation recoveries or salvage value.

"Interim Balance Sheet" shall mean the unaudited Balance Sheet dated the Interim Balance Sheet Date, prepared in accordance with GAAP. The Interim Balance Sheet shall include AFCC as a Subsidiary.

"Interim Balance Sheet Date" shall mean June 30, 1996.

"Interim Balance Sheet Date Insurance Reserves" shall mean the Insurance Reserves recorded in the Interim Balance Sheet.

"Interim Financial Statements" shall mean the Interim Balance Sheet and the unaudited consolidated statement of income for the period ended on the Interim Balance Sheet Date, prepared in accordance with GAAP. The Interim Financial Statements shall include AFCC as a Subsidiary.

"KPMG" shall refer to the public accounting firm of KPMG Peat

Marwick or any successor organization.

"Late Claim" shall mean a Claim reported to the Company or any of its Subsidiaries more than three (3) years after the Closing Date and prior to December 31, 2004.

"Leases" shall mean all of the existing leases with respect to the personal or real property of the Company and each of its Subsidiaries listed on Schedule 4.12.

"Liabilities" shall mean any direct or indirect liability, loss reserves, indebtedness, obligation, commitment, expense, claim, deficiency, guaranty or endorsement of or by any person of any type, whether accrued, absolute, contingent, matured, unmatured or other.

"Loss" or "Losses" shall mean any and all losses, costs, claims, demands, obligations, Liabilities, settlement payments, damages, lawsuits, awards, judgments, fines, penalties, expenses, deficiencies or other similar charges (whether or not arising out of third-party claims).

"Loss-Event" shall mean an event, with a Date of Loss on or prior to the Effective Date, the occurrence of which is the basis for a Claim or an Ocean Marine Claim.

"material adverse effect" or "material adverse change" shall mean with respect to any person or entity, a material adverse effect on the Business, Assets, liabilities, results of operations or financial condition of such person or entity.

"Mechanical Breakdown Products" shall mean any policy, contract, agreement, service contract, or warranty, pursuant to which the Company or its Subsidiaries

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provide benefits, coverage, service or warranties with respect to mechanical breakdown related services and products.

"Mortgages" shall mean all deeds of trust, mortgages or other debt encumbrances on owned real property.

"Ocean Marine Bulk IBNR Reserves" shall mean Ocean Marine Insurance Reserves which have been established with respect to Ocean Marine Claims which arise out of policies for which the Company or any of its Subsidiaries is the insurer or reinsurer as a result of the occurrence of a Loss-Event and which equal, on an actuarial basis, the indicated deficiency in Ocean Marine Case Reserves.

"Ocean Marine Case Reserves" shall mean Ocean Marine Insurance Reserves which have been established with respect to Ocean Marine Claims received by the Company and its Subsidiaries or an authorized agent of the Company or any of its Subsidiaries.

"Ocean Marine Claim" shall mean a claim made by or on behalf of the insured under policies or agreements of insurance for which the Company or any of its Subsidiaries is an insurer or reinsurer or otherwise obligated under the Ocean Marine Program, or under agreements of insurance under the Company's retrocession agreements with reinsurers, to recover insurance proceeds under any such policy or agreement based upon or arising out of a Loss-Event. "Ocean Marine Claim" shall also include any other claim by an insured, a third-party claimant or otherwise arising out of such policy or agreement, including, but not limited to, amounts that are due or may become due for extra-contractual obligations, judgments in excess of policy limits, bad faith and exemplary or punitive damages.

"Ocean Marine Claim Payment" shall mean, with respect to any Ocean Marine Claim, the moneys paid by or on behalf of the Company and its Subsidiaries (net of any reinsurance recoveries, subrogation recoveries and salvage value realized) to satisfy such Ocean Marine Claim and to pay the costs and expenses (including reasonable attorneys' fees) incurred to administer, process, defend against and settle or otherwise satisfy such Ocean Marine Claim.

"Ocean Marine IBNR Reserves" shall mean both Ocean Marine Pure IBNR Reserves and Ocean Marine Bulk IBNR Reserves.

"Ocean Marine Insurance Reserves" shall mean the undiscounted dollar amounts (net of reinsurance recoveries, estimated subrogation recoveries and salvage value realized) reserved for the payment of losses and loss adjustment expenses, as established by the Company and which are reasonably adequate to cover the unpaid loss and loss adjustment expense obligations of the Company and each of its Subsidiaries for Ocean Marine Claims under the policies or agreements for which the Company or any of its Subsidiaries is an insurer or reinsurer in connection with the Ocean Marine Program. Ocean Marine Insurance Reserves shall include Ocean Marine Case Reserves and Ocean Marine IBNR Reserves, and shall be determined using generally accepted actuarial methods and in accordance with the accounting principles set forth in paragraph 4 of Exhibit F attached hereto.

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"Ocean Marine Program" shall mean the ocean marine insurance program operated by the Company under the management of Covenant Underwriters, Ltd., the Company's managing general agent for ocean marine insurance offered and issued by the Company pursuant to the Covenant Agreement, and administered by Continental Underwriters, Ltd. pursuant to the Continental Agreement, including all policies or agreements for ocean marine insurance in connection therewith for which the Company or any of its Subsidiaries is an insurer, reinsured or reinsurer.

"Ocean Marine Pure IBNR Reserves" shall mean Ocean Marine Insurance Reserves which have been established under the Ocean Marine Program with respect to losses which have been incurred by insureds of the Company or any of its subsidiaries as a result of the occurrence of a Loss-Event which has not been reported to the Company or any of its subsidiaries.

"Office Lease" shall mean an office lease in the form of Exhibit C attached hereto, pursuant to which AFA shall lease office space to the Company and its Subsidiaries.

"ordinary course of business" or "ordinary course" or any similar phrase shall mean the ordinary course of the Business and consistent with the past practice of the Company and its Subsidiaries.

"Patents" shall mean all patents and patent applications and registered design and registered design applications.

"Permits" shall mean all Insurance Licenses, other licenses, permits, franchises, approvals, authorizations, consents or orders of, or filings with, any governmental authority, whether foreign, federal, state or local, or any other person, necessary for the past, present or Seller's anticipated conduct of, or relating to the operation of the Business.

"Permitted Encumbrances" shall mean (a) all statutory or other liens for Taxes or assets which are not yet due or delinquent or the validity of which are being contested in good faith by appropriate proceedings; (b) all mechanic's and materialmen's liens, and other similar liens imposed by law, incurred in the ordinary course of business; (c) all laws and governmental rules, regulations, ordinances and restrictions; (d) all leases, subleases, licenses, concessions or service contracts to which the Company or any of its Subsidiaries is a party; (e) all other liens, mortgages, covenants, imperfections in title, charges, easements, restrictions and other Encumbrances which do not materially detract from or materially interfere with the value or present use of the assets subject thereto or affected thereby.

"Pro Forma Interim Balance Sheet" shall mean the Balance Sheet included in the Pro Forma Interim Financial Statements.

"Pro Forma Interim Financial Statements" shall mean the Interim Financial Statements, as adjusted to take into account an assumed sale by the Company to Seller, on January 1, 1996, for book value, of all of the outstanding capital stock of AFCC as provided in Section 6.12, and the application of the accounting principles set forth on Exhibit F attached hereto.

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"Property" shall include all property and all other assets of any nature including, without limitation, real and personal property, whether tangible or intangible, and claims, rights and choses in action.

"Proprietary Rights" shall mean all of the Copyrights, Patents, Trademarks, technology rights and licenses, computer software (including without limitation any source or object codes therefor or documentation relating thereto), trade secrets, franchises, know-how, inventions, designs, specifications, plans, drawings, and intellectual property rights of the Company and each of its Subsidiaries.

"Purchaser" shall refer to Mercury General Corporation, a California corporation having its principal executive office at 4484 Wilshire Boulevard, Los Angeles, California.

"Purchase Price" shall mean the aggregate purchase price for the Shares set forth in Section 2.2, subject to adjustment as provided in
Section 2.4.

"Purchaser's Knowledge" shall refer to the actual knowledge of individuals who, at the time of execution of this Agreement, are officers holding the position of Vice President or higher or directors of Purchaser.

"Pure IBNR Reserves" shall mean Insurance Reserves which have been established with respect to losses which have been incurred by insureds of the Company or any of its Subsidiaries as a result of the occurrence of a Loss- Event which has not been reported to the Company or any of its Subsidiaries.

"Regulation(s)" shall mean any laws, statutes, ordinances, regulations, rules, notice requirements, court decisions, agency guidelines, principles of law and orders of any foreign, federal, state or local government and any other governmental department or agency, including without limitation Environmental Laws, energy, motor vehicle safety, public utility, zoning, building and health codes, occupational safety and health and laws respecting employment practices, employee documentation, terms and conditions of employment and wages and hours.

"Representative" shall mean any officer, director, principal, attorney, agent, employee, accountant or other representative.

"Reserve Determination Date" shall mean December 31 of each year commencing December 31, 1996 and ending December 31, 2001.

"Seller" shall refer to American Fidelity Corporation, a Nevada corporation having its principal place of business at 2000 Classen Boulevard, Oklahoma City, Oklahoma.

"Seller's Knowledge" shall refer to the actual knowledge of individuals who, at the time of execution of this Agreement, are officers holding the position of Senior Vice President or higher or directors of Seller, the Company or any of its Subsidiaries, or Donna

10

DiBiaso (Actuary of the Company), Judy Garrison (Director Information Services), Tom Kordic (Director of Claims), Patricia Mullendore (Assistant Vice-President- Law of the Company), Dwight P. Tully (Director of Underwriting Services), Edward E. Young (Chief Financial Officer/Treasurer of the Company) and Doran G. Merkley (former Director of Marketing).

"Services Agreement" shall mean a services agreement between Seller, AFA and the Company substantially in the form of Exhibit D attached hereto, pursuant to which Seller and AFA shall provide services to the Company and its Subsidiaries.

"Shares" shall mean all of the outstanding shares of common stock of the Company.

"Statutory Statement" shall mean, with respect to any period, the N.A.I.C. form of Statement of the Condition and Affairs for fire and casualty insurers prepared and filed by the Company or any of its Subsidiaries with the insurance department of the state of its domicile.

"Subsidiary" shall mean (a) any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain, (b) any partnership in which the Company is a general partner, or (c) any partnership in which the Company possesses a fifty percent (50%) or greater interest in the total capital or total income of such partnership; provided, however, that the term

                                     --------  -------
"Subsidiary" shall not include AFCC unless specifically referred to as included.

               "Tax" shall mean any federal, state, local, foreign or other tax,
                ---

levy, fee, assessment or other government charge, including without limitation income, estimated income, business, occupation, franchise, property, payroll, personal property, premium, sales, transfer, use, employment, commercial rent, occupancy, franchise or withholding taxes, including interest, penalties and any other additions in connection therewith.

"Trademark License Agreements" shall mean the agreements, each substantially in the form of Exhibit E attached hereto, pursuant to which Seller shall grant each of the Company, AMC and the Lloyd's Plan certain rights to use the name "American Fidelity."

"Trademarks" shall mean registered trademarks, registered service marks, trademark and service mark applications and unregistered trademarks and service marks.

"Warrants" shall mean (a) agreements, rights to subscribe (including any preemptive rights), options, warrants, calls, commitments or rights of any character to purchase or otherwise acquire any common stock or other equity securities of the Company or any of its Subsidiaries, and (b) outstanding securities of the Company or any of its Subsidiaries that are convertible into or exchangeable for capital shares or other equity securities of the Company or any of its Subsidiaries.

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"Wire Transfer" shall mean the transfer by bank wire of immediately available funds to such bank account or accounts of the payee as the payee shall designate in writing to the payor.

"Year-End Financial Statements" shall mean the audited consolidated Balance Sheet of the Company dated December 31, 1995, and the related audited consolidated statements of income, stockholder's equity and cash flows for the year ended December 31, 1995, together with the notes thereto, each prepared in accordance with GAAP. The Year-End Financial Statements shall include AFCC as a Subsidiary.

1.2 Other Defined Terms. The following terms shall have the meanings defined for such terms in the Sections set forth below:

Term                                             Section
----                                             -------
AAA                                               10.12
Accounts Receivable                               4.9(b)
AFCC                                              Recital A
Agreed Adjustments                                9.9(b)
Agreed Changes                                    2.4(c)(ii)
Agreed Holdback Adjustment                        9.4(c)
AMC                                               Recital A
Benefit Arrangement                               4.20(a)
Cimarron                                          Recital A
Claims-Processing Standards                       9.5
Closing                                           3.1
COBRA                                             6.10(e)
Company                                           Recital A
Company Employees                                 6.10
Confidential Information                          10.10
Disputes                                          10.12
Employee Plans                                    4.20(a)
ERC                                               6.11
ERISA                                             4.20(a)
ERISA Affiliate                                   4.20(a)
Final Holdback Accounting Report                  9.4(b)
Flexible Benefit Plan                             6.10(e)
Hazardous Materials                               4.23
Holdback Amount                                   2.2(c)
Indemnification Claim                             9.3(f)
Indemnification Claim Notice                      9.3(f)
Insurance Claim Payments                          2.4(a)(1)(A)
Lloyd's Plan                                      4.5
Mitsubishi                                        7.9
Multiemployer Plan                                4.20(a)
Multiemployer Welfare Plan                        4.20(a)
Ocean Marine Agreed Changes                       9.8(c)
Ocean Marine Settlement Report                    9.8(b)

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PBGC                                              4.20(a)
Pension Plan                                      4.20(a)
Preliminary Accounting Report                     9.10
Preliminary Effective Date Balance Sheet          9.10
Preliminary Holdback Accounting Report            9.4(a)
Preliminary Report                                2.4(b)
Purchase Price                                    2.4(b)
Purchaser Indemnitees                             9.3(a)
Purchaser's 401(k) Plan                           6.10(c)
Remaining Reserve Amount                          2.4(a)(i)(B)
Reserve Deficiency                                2.4(a)(ii)
Reserve Redundancy                                2.4(a)(i)
Retirement Plan                                   6.10
Savings Plan                                      6.10
Seller Indemnitees                                9.3(c)
Seller's Report                                   9.6
Shares                                            4.3
Welfare Plan                                      4.20(a)

ARTICLE II

PURCHASE AND SALE OF SHARES

2.1 Transfer of Shares.

Upon the terms and subject to the conditions of this Agreement, at the Closing, Purchaser shall purchase from Seller, and Seller shall sell to Purchaser, the Shares, and Seller shall deliver to Purchaser certificates representing the Shares duly endorsed to Purchaser or accompanied by duly executed stock powers so as to transfer and assign to Purchaser good and valid title to the Shares and to constitute Purchaser the sole beneficial and record shareholder of the Company.

2.2 Purchase Price and Payment.

(a) The aggregate purchase price for the Shares shall be Thirty Four Million Seven Hundred Seventy Thousand Dollars ($34,770,000) (the "Purchase Price").

(b) At the Closing, Purchaser shall pay to Seller by Wire Transfer a cash amount of Thirty Three Million Twenty Thousand Dollars ($33,020,000) and an additional amount equal to interest on the Purchase Price at a rate of five percent (5%) simple interest per annum calculated from the Effective Date to the Closing Date. The Purchase Price shall be subject to adjustment as provided in
Section 2.4.

(c) The "Holdback Amount" shall be an amount equal to One Million Seven Hundred Fifty Thousand Dollars ($1,750,000) which Purchaser, at the Closing, shall retain pursuant to the provisions of Section 9.4 pending the determination of Seller's indemnification obligations, if any, as set forth in Sections 9.3(a) and (b).

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2.3 Closing Costs; Transfer Taxes. Seller shall be responsible for any documentary and transfer taxes and any sales, use or other taxes imposed by reason of the transfer of the Shares to Purchaser and any deficiency, interest or penalty asserted with respect thereto.

2.4 Insurance Reserves. Seller makes no representation or warranty to Purchaser with respect to the adequacy of the Insurance Reserves because Seller and Purchaser agree to adjust the Purchase Price set forth in
Section 2.2 and, as provided in this Section 2.4, Purchaser and Seller agree that, regardless of whether there is any event requiring indemnification pursuant to Sections 9.3(a) or (b), Seller shall pay to Purchaser the amount of any and all deficiencies in the Effective Date Insurance Reserves, and Purchaser shall pay to Seller the amount of any redundancies in the Effective Date Insurance Reserves, as hereinafter provided. The determination of whether a deficiency or redundancy existed in the Effective Date Insurance Reserves shall be made initially as of December 31, 1996, and shall be determined annually thereafter in the same manner on each Reserve Determination Date.

(a) Insurance Reserves.

(i) With respect to each Reserve Determination Date, in the event that the amount of the Company's Effective Date Insurance Reserves exceeds the sum of:

(A) the Claim Payments made by the Company and its Subsidiaries between the Effective Date and such Reserve Determination Date ("Insurance Claim Payments"), plus

(B) the amount of the Company's remaining Insurance Reserves as of such Reserve Determination Date, as determined by Purchaser (the "Remaining Reserve Amount"), plus or minus

(C) any adjustments to the total amount of Insurance Claim Payments pursuant to Section 9.6, plus

(D) the amount of any redundancy as of a prior Reserve Determination Date with respect to which a payment was made by Purchaser pursuant to this Section 2.4(a)(i), minus

(E) the amount of any deficiency as of a prior Reserve Determination Date with respect to which a payment was made by Seller pursuant to Section 2.4(a)(ii),

the amount of such excess shall be deemed a "Reserve Redundancy." Purchaser shall pay to Seller, on or prior to the April 30 following each such Reserve Determination Date, the amount of the Reserve Redundancy calculated as of such Reserve Determination Date. In the event there exists on any such April 30 a dispute which has not been resolved pursuant to Section 2.4(c), payment shall be made promptly, but in no event more than two (2) business days, after the dispute has been resolved.

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(ii) In the event that, with respect to each Reserve Determination Date, the amount of the Effective Date Insurance Reserves is less than the sum of:

(A) the Insurance Claim Payments, plus

(B) the Remaining Reserve Amount, plus or minus

(C) any adjustments to the total amount of Insurance Claim Payments pursuant to Section 9.6, plus

(D) the amount of any redundancy as of a prior Reserve Determination Date with respect to which a payment was made by Purchaser pursuant to Section 2.4(a)(i), minus

(E) the amount of any deficiency as of a prior Reserve Determination Date with respect to which a payment was made by Seller pursuant to this Section 2.4(a)(ii),

the amount of such deficiency shall be deemed a "Reserve Deficiency." Seller shall pay to Purchaser, on or prior to the April 30 following each such Reserve Determination Date, the amount of the Reserve Deficiency calculated as of such Reserve Determination Date. In the event there exists on any such April 30 a dispute which has not been resolved pursuant to Section 2.4(c), payment shall be made promptly, but in no event more than two (2) business days, after the dispute has been resolved.

(iii) Prior to each Reserve Determination Date, Purchaser shall direct the Actuarial Firm selected by Purchaser to determine the Remaining Reserve Amount as of such next succeeding Reserve Determination Date, which determination shall be subject to dispute and redetermination as provided in
Section 2.4(c). The fees of the Actuarial Firm selected by Purchaser for this determination shall be paid by Purchaser.

(iv) After December 31, 2001, with respect to Late Claims reported to the Company or any of its Subsidiaries more than three (3) years after the Closing Date but prior to December 31, 2001, Seller shall reimburse Purchaser for the amount by which (i) any Claim Payments made with respect to any such Late Claim is greater than (ii) the Insurance Reserves for such Late Claim as of December 31, 2001, up to a maximum of One-Hundred Fifty Thousand Dollars ($150,000) for each such Late Claim; provided, however, Seller shall not be obligated to make any reimbursement for a Late Claim that remains outstanding at December 31, 2004. With respect to Late Claims reported after December 31, 2001, Seller shall reimburse Purchaser for the amount of any Claim Payments with respect to such Late Claim, up to a maximum of One-Hundred Fifty Thousand Dollars ($150,000) for each such Late Claim; provided, however, Seller shall not be obligated to make any reimbursement for a Late Claim that remains outstanding at December 31, 2004.

(b) Preliminary Report. Not later than the February 15 following each Reserve Determination Date, Purchaser shall deliver to Seller a certificate (each such certificate being referred to as a "Preliminary Report") setting forth the determination of the Remaining

15

Reserve Amount by the Actuarial Firm selected by Purchaser pursuant to Section 2.4(a)(iii) and the Purchaser's determination of the Reserve Redundancy or Reserve Deficiency, as the case may be, determined in accordance with this
Section 2.4(b).

(c) Resolution of Disputes. If, with respect to each Reserve Determination Date, the amount of such Reserve Redundancy or such Reserve Deficiency, as the case may be, exceeds Ten Thousand Dollars ($10,000), then:

(i) Following receipt of each Preliminary Report, Seller may review the same and, within thirty (30) days after the date of such receipt, may deliver to Purchaser a certificate setting forth any objections to the determination of any amounts set forth in the Preliminary Report, together with a summary of the reasons therefor and calculations which, in Seller's view, are necessary to eliminate such objections, to the extent the information necessary to make such calculations is reasonably available to Seller. If Seller does not object within such 30-day period, the determinations set forth in the Preliminary Report shall be final and binding on Purchaser and Seller. In preparing its objections, Seller may, but is not required to, consult with one of the two (2) remaining Actuarial Firms. The fees of the Actuarial Firm selected by Seller for this consultation and the preparation of Seller's objections to the Preliminary Report shall be paid by Seller.

(ii) If Seller timely objects within such 30-day period, Purchaser and Seller shall use their respective reasonable best efforts to resolve within thirty (30) days after such timely objection by written agreement (the "Agreed Changes") any differences as to the determinations set forth in the Preliminary Report. If Seller and Purchaser so resolve any such differences, the determinations set forth in the Preliminary Report, as adjusted by the Agreed Changes, shall be final and binding on Purchaser and Seller.

(iii) If any objections timely raised by Seller are not resolved by the Agreed Changes within the 30-day period contemplated in this Subsection 2.4(c), then Purchaser and Seller shall submit the objections that are then unresolved to the remaining Actuarial Firm, or one of the two (2) remaining Actuarial Firms in the event Seller does not consult with an Actuarial Firm pursuant to Section 2.4(c)(i). Such remaining Actuarial Firm shall be directed by Purchaser and Seller to seek to resolve the unresolved objections as promptly as reasonably practicable and to deliver written notice to each of Purchaser and Seller setting forth its resolution of the disputed matters. The determinations set forth in the Preliminary Report as adjusted by the Agreed Changes and by the resolution of such objections by the remaining Actuarial Firm selected pursuant to this Section 2.4(c)(iii) shall be final and binding on the parties.

(iv) Upon request by Seller, Purchaser shall promptly provide to Seller verification of the amount of the Claim Payments. Seller may raise objections to the propriety of such Claim Payments only in accordance with
Section 9.6.

(d) No Further Discussion of Disputes. If, with respect to each Reserve Determination Date, the amount of such Reserve Redundancy or such Reserve Deficiency, as the case may be, set forth in the Preliminary Report is equal to or less than Ten Thousand Dollars ($10,000), then the Reserve Deficiency or the Reserve Redundancy, as the case may be, set forth in the Preliminary Report shall be final, binding and conclusive on the parties.

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(e) Books and Records. The parties hereto shall make available to Purchaser, Seller (and their respective Representatives) and, if applicable, the Actuarial Firm, such books, records and other information (including work papers) as any of the foregoing may reasonably request to prepare to review any Preliminary Report or any matters submitted to the Actuarial Firm.

(f) Costs and Fees. The reasonable fees and expenses of the Actuarial Firm utilized to resolve disputes under Section 2.4(c)(iii) shall be paid fifty percent (50%) by Purchaser and fifty percent (50%) by Seller. Any fees and expenses payable by Seller pursuant to this Section 2.4(f), at the election of Purchaser, to the extent available, may be paid and set-off from any amounts otherwise payable to Seller pursuant to this Section 2.4.

ARTICLE III

CLOSING

3.1 Closing. Upon the terms and subject to the conditions set forth herein, and subject to Section 10.1(a), the Closing of the transactions contemplated herein (the "Closing") shall be held at 10:00 a.m. local time on the Closing Date at the offices of McAfee & Taft A Professional Corporation, 211 North Robinson, Suite 1000, Oklahoma City, Oklahoma, unless the parties hereto otherwise agree.

3.2 Deliveries at Closing.

(a) Stock Certificates. To effect the purchase of the Shares, Selle shall, on the Closing Date, deliver to Purchaser certificates(s) evidencing all of the issued and outstanding shares of common stock of the Company, free and clear of any Encumbrances of any nature whatsoever, duly endorsed in blank for transfer or accompanied by stock powers duly executed in blank, together with evidence of the payment of any applicable stock transfer taxes.

(b) Certificates; Opinions. At the Closing, Seller and Purchaser shall deliver the certificates, opinions of counsel and other items described in Articles VII and VIII.

(c) Ancillary Agreements. At the Closing, and upon the terms and subject to the conditions contained herein, Purchaser and Seller shall, and Seller shall cause the Company, each of its Subsidiaries and Cameron Enterprises to, execute and deliver each of the Ancillary Agreements to which it is a party.

3.3 Other Closing Transactions.

(a) Payment of Purchase Price. At the Closing, Purchaser shall deliver to Seller the Purchase Price as provided in Section 2.2.

(b) Section 338(h)(10) Election. Seller and Purchaser shall each execute and Purchaser shall deliver to Seller an election pursuant to Section 338(h)(10) of the Code with respect to the Company and its Subsidiaries so that the Company shall be treated as a

17

member of the selling consolidated group. Seller shall be authorized to cause such election to be filed with the Internal Revenue Service.

(c) Payment for Personal Property. At the Closing, Purchaser shall, or shall cause the Company to, deliver to Seller an amount in cash equal to the price of the personal property conveyed to the Company pursuant to the Bills of Sale.

(d) Other Closing Transactions. At the Closing, each of the parties shall take such other actions required hereby to be performed by it prior to or on the Closing Date, including, without limitation, satisfying the conditions set forth in Articles VII and VIII.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF SELLER

Seller hereby represents and warrants to Purchaser as follows, except as otherwise set forth on the Disclosure Schedule, which representations and warranties are, as of the date hereof, and will be, as of the Closing Date, true and correct:

4.1 Organization, Authorization and Execution of Seller. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada. Seller has all necessary corporate power and authority and, prior to the Closing, will have taken all corporate action necessary to execute and deliver this Agreement and the Ancillary Agreements, to consummate the transactions contemplated hereby and to perform its obligations hereunder and thereunder, and no other proceedings on the part of Seller are necessary to authorize this Agreement and the Ancillary Agreements and the transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by Seller and is a legal, valid and binding obligation of Seller enforceable against Seller in accordance with its terms, except as such enforceability may be limited by the Bankruptcy Exception. Copies of the Articles of Incorporation and Bylaws of Seller, and all amendments thereto, heretofore delivered to Purchaser are accurate and complete as of the date hereof.

4.2 Organization of the Company. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Oklahoma, has full corporate power and authority to conduct its business as it is presently being conducted and to own and lease its properties and Assets. Except as set forth on Schedule 4.2, the Company has duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of its properties owned or leased or the nature of its activities makes such qualification necessary, and the failure to so qualify in any such jurisdiction so listed on Schedule 4.2 will not result in any liability to the Company. Copies of the Certificate of Incorporation and Bylaws of the Company, and all amendments thereto, heretofore delivered to Purchaser are accurate and complete as of the date hereof. Schedule 4.2 contains a true, correct and complete list of all jurisdictions in which the Company is qualified to do business as a foreign corporation.

4.3 Capitalization of the Company. The authorized capital stock of the Company consists of three-hundred thousand (300,000) shares of common stock, $15 par value per share, of which two-hundred fifty thousand (250,000) shares (the "Shares") are issued and

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outstanding and none of which are held in the Company's treasury. All of the Shares are validly issued, fully paid and non-assessable, and are owned by Seller free and clear of all Encumbrances. There are no Warrants with respect to the equity securities of the Company. The Company has no commitments or obligations to purchase or redeem any of the Shares.

4.4 Subsidiaries. The only Subsidiaries of the Company are those set forth in Schedule 4.4. Other than the Subsidiaries and the Company's interest in the Lloyd's Plan (as defined below), the Company has no direct or indirect stock or other equity or ownership interest (whether controlling or not) in any corporation, association, partnership, joint venture or other entity. Each of the Subsidiaries listed on Schedule 4.4 is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction identified on Schedule 4.4, has the requisite corporate power and authority to conduct its business as it is presently being conducted and to own and lease its properties and Assets. No corporate proceedings on the part of any Subsidiary are necessary to authorize this Agreement or the transactions contemplated hereby, or to permit Seller to enter into this Agreement, to consummate the transactions contemplated hereby and to perform its obligations hereunder. Schedule 4.4 contains a true, correct and complete list of all jurisdictions in which each Subsidiary is qualified to do business as a foreign corporation. Except as set forth on Schedule 4.4, each of the Subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of its properties owned or leased or the nature of its activities makes such qualification necessary, and the failure to so qualify in any such jurisdiction so listed on Schedule 4.4 will not result in any liability to such Subsidiary. Copies of the Certificate or Articles of Incorporation and Bylaws of each Subsidiary heretofore delivered to Purchaser are accurate and complete. Schedule 4.4 sets forth a description of all of the issued and outstanding equity securities of each of the Subsidiaries. Except as set forth in Schedule 4.4, the Company owns of record and beneficially all of the issued and outstanding capital stock of each Subsidiary free and clear of any Encumbrances. There are no Warrants with respect to the equity securities of any Subsidiary.

4.5 Lloyd's Plan. American Fidelity Lloyd's Insurance Company (the "Lloyd's Plan") is a "Lloyd's" plan insurer duly organized, validly existing and in good standing as an entity under the insurance laws of the State of Texas, has full power and authority to conduct its business by and through its attorney-in-fact as it is presently being conducted and to own and lease its properties and Assets. AMC has been duly designated and appointed attorney-in- fact by and for each of the underwriters of the Lloyd's Plan under a power of attorney duly executed by each of such underwriters. Copies of the Articles of Agreement of the Lloyd's Plan, and all amendments thereto, together with the powers of attorney, heretofore delivered to Purchaser, are accurate and complete as of the date hereof. The Lloyd's Plan and AMC, as attorney-in-fact, hold a valid certificate of authority issued pursuant to Article 18.04 of the Texas Insurance Code to transact those lines of insurance business set forth on Schedule 4.6. AMC has filed with the appropriate regulatory authorities all bonds and other documents required for the safekeeping of assets of a Lloyd's plan.

4.6 Insurance Licenses and Other Permits. (a) Schedule 4.6 sets forth separately with respect to the Company and each Subsidiary (i) each jurisdiction in which the Company or any of its Subsidiaries holds an outstanding Insurance License to transact one or more lines or classes of property and casualty insurance, (ii) the date of issuance and the scheduled expiration date of each such license, and (iii) a description of the scope and lines of

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insurance covered by each such license. Except as set forth on Schedule 4.6, (i) each such license is valid and in full force and effect, (ii) the authority of the Company or any of its Subsidiaries to write the lines and classes of insurance set forth under each such license is unrestricted (except as limited by law or regulation), (iii) neither the Company nor any of its Subsidiaries is a party to any agreement or arrangement with any governmental regulatory official limiting the Company's or any of its Subsidiaries' ability to make full use of any such license, (iv) there is no pending application or other document that would modify or amend any such license, and (v) to Seller's Knowledge, each such Insurance License is renewable at its expiration in the ordinary course of business by the payment of the standard fee. Except as set forth on Schedule 4.6, neither the Company nor any of its Subsidiaries has received any notice of any event, inquiry, investigation or proceeding that would reasonably be expected to result in the suspension, revocation or limitation of any Insurance License or otherwise impose any limitation on the conduct of the business of the Company or any of its Subsidiaries, and to Seller's Knowledge, there is no sustainable basis for any such suspension, revocation or limitation. Schedule 4.6 also sets forth each jurisdiction in which the Company or any of its Subsidiaries has an application for an Insurance License pending and the nature of the license requested, and no such application has been denied, refused or withdrawn by the Company or any of its Subsidiaries since January 1, 1995. Schedule 4.6 sets forth all pending examinations by any governmental authority having jurisdiction to regulate the insurance operations of the Company or any of its Subsidiaries and all such examinations completed since 1991 with respect to the Company and each of such Subsidiaries subject to such examinations.

(a) Schedule 4.6 sets forth a complete list of all Permits, other than Insurance Licenses, used in the operation of the Business or otherwise held by the Company or any of its Subsidiaries.

(b) The Company and each of its Subsidiaries currently has all Permits reasonably required under any Regulation in the operation of its Business or in the ownership of the Assets, and owns or possesses such Permits free and clear of all Encumbrances. Neither the Company nor any of its Subsidiaries is in Default with respect to any such Permit, nor has it received any notice of any claim of Default. Except as otherwise governed by law, all such Permits are renewable by their terms or in the ordinary course of business without the need to comply with any special qualification procedures or to pay any amounts other than routine filing fees. No present or former shareholder, director, officer or employee of the Company or any of its Subsidiaries or any Affiliate thereof, or any other person, firm, corporation or other entity, owns or has any proprietary, financial or other interest (direct or indirect) in any Permit which the Company or any of its Subsidiaries owns, possesses or uses.

4.7 Financial Statements.

(a) Seller has heretofore delivered to Purchaser the Financial Statements identified as Schedule 4.7. The Financial Statements (i) are in accordance with the Books and Records of the Company and each of its Subsidiaries, (ii) have been prepared in accordance with GAAP, and (iii) fairly and accurately present the consolidated assets, liabilities (including all reserves) and financial position of the Company as of the respective dates thereof and the consolidated results of operations and, in the case of the Year- End Financial Statements, changes in cash flows for the periods then ended. The Year-End Financial Statements have been

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examined by KPMG, independent certified public accountants, whose report thereon is included with such Year-End Financial Statements.

(b) Seller has heretofore delivered to Purchaser the Pro Forma Interim Financial Statements, showing all consolidating adjustments made to the Interim Financial Statements to reflect the sale of the stock of AFCC to Seller at January 1, 1996, and the application of the accounting principles set forth in Exhibit F attached hereto. The Pro Forma Interim Financial Statements (i) set forth all consolidating adjustments made from the Interim Financial Statements and the assumptions used with respect to such adjustments, and (ii) fairly and accurately present, in all material respects, the consolidated assets, liabilities (including all reserves) and financial position of the Company and its Subsidiaries as of the respective dates theretofore and the consolidated results of operations for the period ended June 30, 1996.

(c) Seller has heretofore delivered to Purchaser true and complete copies of the consolidated Statutory Statements of the Company, Cimarron and the Lloyd's Plan for the years ended December 31, 1993, 1994, and 1995, together with notes thereto and the reports of KPMG thereon, which have been examined by KPMG under statutory accounting principles and are true and correct in accordance with such accounting principles, and individual Statutory Statements for each of the Company, Cimarron and the Lloyd's Plan for the quarterly period ended June 30, 1996. Such Statutory Statements have been prepared in accordance with accounting practices prescribed or permitted by insurance regulatory authority of the state of domicile of each such company on a consistent basis or in accordance with all applicable N.A.I.C. guidelines.

(d) Seller has heretofore delivered to Purchaser true and complete copies of (i) all actuarial certifications relating to loss reserves of the Company and each of its Subsidiaries since January 1, 1993, and (ii) all reports prepared by actuaries of the Company and each of its Subsidiaries and independent actuaries relating to loss reserves and other financial reserves of the Company or any of its Subsidiaries since January 1, 1993.

4.8 Liabilities. Except as set forth on Schedule 4.8, neither the Company nor any of its Subsidiaries has any Liabilities due or to become due, except (a) Liabilities which are set forth or reserved for on the Pro Forma Interim Balance Sheet or described in the notes thereto which have not been paid or discharged since the Pro Forma Interim Balance Sheet Date, (b) Liabilities arising in the ordinary course of business under Contracts, Leases, Permits and other business arrangements described in the Disclosure Schedule (and under those Contracts, Leases and Permits which are not required to be disclosed on the Disclosure Schedule), and (c) Liabilities incurred since the Pro Forma Interim Balance Sheet Date in the ordinary course of business and in accordance with this Agreement, and none of which, individually or in the aggregate, has or would have a material adverse effect on the Business or the consolidated stockholder's equity of the Company or any of its Subsidiaries under GAAP.

4.9 Accounts Receivable; Notes Receivable; Mortgages; Other Amounts
Receivable

(a) Except as set forth on Schedule 4.9, the accounts receivable of the Company and each of its Subsidiaries reflected on the Interim Balance Sheet and receivables

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arising since the Interim Balance Sheet Date and on or prior to the date hereof, represent bona fide claims against the respective account debtors and, to Seller's Knowledge, all the products delivered and services performed that gave rise to said accounts were delivered or performed in accordance with the applicable orders, Contracts or customer requirements. All accounts receivable (including accrued investment income reflected on the Interim Balance Sheet), notes receivable, mortgage loans (for which the Company or its Subsidiaries is the lender) and other amounts receivable of the Company and each of its Subsidiaries reflected on the Interim Balance Sheet, shall be subject to no defenses, counterclaims or rights of setoff. Schedule 4.9 sets forth a complete and accurate list of all such notes receivable and mortgage loans (for which the Company or any of its Subsidiaries is the lender), together with the balances outstanding as of the Interim Balance Sheet Date.

(b) At least eighty-five percent (85%) of the aggregate unpaid principal amount of the accounts receivable (including accrued investment income) of the Company and its Subsidiaries to be reflected on the Effective Date Balance Sheet (the "Accounts Receivable") shall be fully collectible in the ordinary course of business without cost to the Company, its Subsidiaries or the Purchaser in connection with such efforts. For purposes of this Section 4.9(b), the term "Accounts Receivable" does not include, and no representation or warranty is made with respect to the collectibility, with or without cost, of the following:

(i) Accounts receivable attributable to billings for premiums due directly from insureds, including assigned risk premiums, which involve policy cancellation rather than collection if not paid when due, but only to the extent that the amount of any such account receivable is offset upon cancellation by the unearned premium established for such account;

(ii) Accounts receivable owed to the Company or any of its subsidiaries by account debtors, the collection of which has been classified by the Company prior to the Effective Date as doubtful and which accounts receivable shall be included in the Company's allowance for doubtful accounts included in the Effective Date Balance Sheet; provided, however, that the aggregate amount of such allowance for doubtful accounts on the Effective Date Balance Sheet may not exceed the amount of the provision for those doubtful accounts included in the Interim Balance Sheet which remain outstanding at the date of the Effective Date Balance Sheet, plus any account that subsequent to the date of the Interim Balance Sheet becomes more than ninety (90) days past due from the payment date for such account;

(iii) Accounts receivable and other amounts owed to the Company and its Subsidiaries by reinsurers under reinsurance policies, treaties and agreements to which any of the Company and its Subsidiaries is a party and which are classified as "reinsurance receivables on unpaid losses" and included in the Insurance Reserves in the Pro Forma Interim Balance Sheet; and

(iv) Accounts receivable, to the extent the collectibility of which is secured by one or more letters of credit issued by banks and other financial institutions for the benefit of the Company or any of its Subsidiaries; unless, and to the extent, the issuer of such letter of credit fails or refuses to honor a draw thereunder.

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4.10 Books and Records. The Company and each of its Subsidiaries have made and kept (and given Purchaser access to) Books and Records and accounts, which, in reasonable detail, accurately and fairly reflect the activities of the Company and such Subsidiary. The minute books of the Company and each of its Subsidiaries previously delivered to Purchaser accurately and adequately reflect all action previously taken by the shareholders, board of directors and committees of the board of directors of the Company and each such Subsidiary. The copies of the stock book records of the Company and each of its Subsidiaries previously delivered to Purchaser are true, correct and complete, and accurately reflect changes in record ownership effected in the Company's and each such Subsidiary's stock through and including the date hereof. Neither the Company nor any of its Subsidiaries has engaged in any transaction, maintained any bank account or used any corporate funds except for transactions, bank accounts and funds which have been and are reflected in the normally maintained books and records of the Company or such Subsidiary.

4.11 Absence of Certain Changes or Events. Except as set forth on Schedule 4.11, since the Interim Balance Sheet Date, there has not been any:

(a) actual or, to Seller's Knowledge, threatened adverse change in the financial condition, working capital, shareholders' equity, Assets, Liabilities, reserves, revenues, earnings or Business of the Company or any of its Subsidiaries, as determined under either GAAP or statutory accounting principles;

(b) change in accounting methods, principles or practices by the Company or any of its Subsidiaries;

(c) revaluation by the Company or any of its Subsidiaries of any material amount of the Assets, including, without limitation, writing off notes or accounts receivable;

(d) damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting the Assets or the Business;

(e) cancellation of any indebtedness or waiver or release of any right or claim of the Company or any of its Subsidiaries relating to its activities or properties which had or will have an adverse effect on the Assets or the Business;

(f) declaration, setting aside, or payment of dividends or distributions by the Company in respect of the Shares or any redemption, purchase or other acquisition of any of the Company's securities;

(g) increase in the rate of compensation payable or to become payable by the Company or any of its Subsidiaries to any director, officer or other employee of the Company or any of its Subsidiaries, including, without limitation, the making of any loan to, or the payment, grant or accrual of any bonus, incentive compensation, service award or other similar benefit to, any such person, or the addition to, modification of, or contribution to any Employee Plan, arrangement, or practice described in the Disclosure Schedule other than (i) increases in rates of compensation and contributions made in accordance with the normal

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practices of the Company or any of its Subsidiaries or (ii) the extension of coverage to others who become eligible after the Interim Balance Sheet Date;

(h) adverse change in employee relations which has or is reasonably likely to have a material adverse effect on the productivity, the financial condition, results of operations or Business of the Company or any of its Subsidiaries, or the relationships between the employees of the Company or any of its Subsidiaries and the management of the Company or such Subsidiary, respectively;

(i) amendment, cancellation or termination of any Contract, commitment, agreement, Lease, transaction or Permit relating to the Assets or the Business or entry into any Contract, commitment, agreement, Lease, transaction or Permit which is not in the ordinary course of business, including, without limitation, any employment or consulting agreements;

(j) mortgage, pledge or other encumbrance of any Assets, except purchase money mortgages arising in the ordinary course of business;

(k) sale, assignment or transfer of any of the Assets of the Company or any of its Subsidiaries, other than in the ordinary course of business;

(l) incurrence of indebtedness by the Company or any of its Subsidiaries for borrowed money or commitment to borrow money entered into by the Company or any of its Subsidiaries, or loans made or agreed to be made by the Company or any of its Subsidiaries, or indebtedness guaranteed by the Company or any of its Subsidiaries;

(m) incurrence by the Company or any of its Subsidiaries of Liabilities, except Liabilities incurred in the ordinary course of business, or any change in any assumption underlying methods of calculating any reserves of the Company or any of its Subsidiaries, except as provided in Exhibit F and any of the Schedules to this Agreement;

(n) payment, discharge or satisfaction of any Liabilities of the Company or any of its Subsidiaries, other than payment, discharge or satisfaction in the ordinary course of business, of Liabilities set forth or reserved for on the Interim Financial Statements or incurred in the ordinary course of business;

(o) capital expenditure, the execution of any Lease or the incurring of any obligation by the Company or any of its Subsidiaries to make any capital expenditure or execute any Lease;

(p) failure to pay or satisfy when due any Liability of the Company or any of its Subsidiaries, except where the failure would not have a material adverse effect on the Business;

(q) failure of the Company or any of its Subsidiaries to carry on diligently the Business in the ordinary course so as to keep available to Purchaser the services of the Company's or any of its Subsidiaries' employees, and to preserve for Purchaser the Assets and

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the Business and the goodwill of the Company's and each of its Subsidiaries' suppliers, customers, distributors and others having business relations with it;

(r) disposition or lapsing of any Proprietary Rights or any disposition or disclosure to any person of any Proprietary Rights not theretofore a matter of public knowledge;

(s) existence of any other event or condition which in any one case or in the aggregate has or might reasonably be expected to have a material adverse effect on the Business; or

(t) agreement (written or oral) by the Company or a Subsidiary to do any of the things described in the preceding clauses (a) through (s) other than as expressly provided for herein.

4.12 Assets. Except as set forth on Schedule 4.12, the Company and each of its Subsidiaries have, and, upon the consummation of the transactions contemplated hereby, will continue to have, good title to or a valid leasehold interest in, all Assets reflected on the Interim Balance Sheet, and with respect to any real property constituting a portion of such Assets, good and marketable fee simple title to such real property, in each case free and clear of all Encumbrances (other than Permitted Encumbrances in the case of personal property). Schedule 4.12 contains a complete and accurate list of all improved or unimproved real property owned or leased by the Company or any of its Subsidiaries showing the location and use thereof and a list of each office or other facility maintained by the Company or any of its Subsidiaries showing the location and use thereof. The Company and each of its Subsidiaries enjoy peaceful and undisturbed possession of all Facilities, and except as set forth on Schedule 4.12, such Facilities are not subject to any Encumbrances, including any encroachments, building or use restrictions, exceptions, reservations or limitations. There are no pending or, to Seller's Knowledge, threatened condemnation proceedings relating to any of the Facilities. The Facilities, Fixtures and Equipment and other tangible Assets owned, leased or used by the Company and each of its Subsidiaries in the conduct of their respective businesses are structurally sound with no known material defects, are in good operating condition and repair, subject to ordinary wear and tear, are adequate for the uses to which they are being put and, together with all other Assets owned, leased or used by the Company and each of its Subsidiaries, are adequate for the operation of the Business as it has been conducted by the Company and its Subsidiaries prior to the Closing Date. None of such Facilities, Fixtures and Equipment or Assets is in need of maintenance or repairs except for ordinary, routine maintenance and repairs. Except as set forth on Schedule 4.12, each of the Company and its Subsidiaries have a valid leasehold interest in all of the Assets that are leased by it, free and clear of all Encumbrances. Schedule 4.12 sets forth a list of Leases (including subleases) of personal property and all Leases (including subleases) of real property, in each case to which the Company or any of its Subsidiaries is a party, whether as lessor, lessee, guarantor or otherwise, or by which any of them or their respective properties or Assets are bound, or which otherwise relate to the operation of their respective businesses. Schedule 4.12 indicates with respect to each Lease listed thereon (i) the date of each amendment, if any, and (ii) the term, rent for each remaining year of the lease term, and renewal options (and rent during renewal options), options to purchase, termination rights and puts, a general description of the leased items, and with respect to Leases of real property, the number of square feet leased. Each

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of the Company and its Subsidiaries has in all material respects performed all obligations required to be performed by it with respect to (y) all Assets leased by it (whether as lessor or lessee) and (z) all Leases of the Facilities. Except as set forth on Schedule 4.12, there exists no Default on the part of the Company or any of its Subsidiaries under any Lease. To Seller's Knowledge, there is no Default on the part of any other party to any Lease. Subject to the Bankruptcy Exception, and except as set forth on Schedule 4.12, the Leases are valid, binding and enforceable in accordance with their respective terms and are in full force and effect, and assuming all consents required by the terms thereof or applicable law have been obtained, the Leases will continue to be valid, binding and enforceable in accordance with their respective terms and in full force and effect immediately following the consummation of the transactions contemplated hereby. Seller has delivered to Purchaser, or otherwise made available to Purchaser, originals or true copies of all Leases, as amended, and has made available for review all related files.

4.13 Contracts and Commitments.

(a) Contracts. Schedule 4.13 sets forth a complete and accurate list of all material Contracts of the following categories:

(i) Contracts not made in the ordinary course of business;

(ii) Forms of contracts with insurance agents;

(iii) Reinsurance treaties, contracts or arrangements, either as the ceding company or the assuming company, covering current policy years or prior policy years for which some obligation remains outstanding on the part of the Company or any of its Subsidiaries;

(iv) Structured settlement annuities, and related settlement agreements, for which the Company or any of its Subsidiaries that is a party to the transaction does not have a full release from further liability or obligation;

(v) Insurance policy and service contract forms on a group or individual basis for each line of insurance offered by the Company or any of its Subsidiaries;

(vi) Premium finance contract forms used by the Company or any of its Subsidiaries;

(vii) Contracts with third parties to provide insurance products or services to any group or classifications of insureds;

(viii) Contracts with third parties to provide management, administration, underwriting, risk management, claims, repair or other insurance services to the Company or any of its Subsidiaries or for the Company or any of its Subsidiaries to provide any such services to others;

(ix) Contracts to which AMC is a party relating to organization, ownership or operation of the Lloyd's Plan;

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(x) Employment contracts and severance agreements, including without limitation Contracts (A) to employ or terminate executive officers or other personnel and other contracts with present officers or directors of the Company or any of its Subsidiaries or (B) that will result in the payment by, or the creation of any Liability to pay on behalf of the Company or any of its Subsidiaries or Purchaser any severance, termination, "golden parachute," or other similar payments to any present or former personnel following termination of employment or otherwise as a result of the consummation of the transactions contemplated by this Agreement;

(xi) Labor or union contracts;

(xii) Distribution, franchise, license, technical assistance, sales, commission, consulting, agency or advertising contracts related to the Assets or the Business and which are not cancelable (without Liability) on thirty (30) calendar days' notice;

(xiii) Options with respect to any property, real or personal, whether the Company or any of its Subsidiaries shall be the grantor or grantee thereunder;

(xiv) Contracts involving future expenditures or Liabilities, actual or potential, except those Contracts which in the aggregate involve future expenditures or Liabilities of less than Fifty Thousand Dollars ($50,000), or that are otherwise material to the Business or the Assets, and which are not cancelable (without Liability) on thirty (30) calendar days' notice;

(xv) Contracts or commitments relating to commission arrangements with others, other than agreements with insurance agents;

(xvi) Promissory notes, loans, agreements, indentures, evidences of indebtedness, letters of credit, guarantees, or other instruments relating to an obligation to pay money (except those which in the aggregate relate to an obligation to pay Fifty Thousand Dollars ($50,000) or less, whether the Company or any of its Subsidiaries shall be the borrower, lender or guarantor thereunder or whereby any Assets are pledged (excluding credit provided by the Company or any of its Subsidiaries in the ordinary course of business to purchasers of its insurance products);

(xvii) Contracts containing covenants limiting the freedom of the Company or any of its Subsidiaries, or any officer, director, shareholder or Affiliate of the Company or any of its Subsidiaries, to engage in any line of business or compete with any person;

(xviii) Any Contract with an Affiliate not otherwise disclosed on Schedule 4.13.

Seller has delivered to Purchaser true, correct and complete copies of all of the Contracts or forms listed on Schedule 4.13, including all amendments and supplements thereto.

(b) Absence of Breaches and Defaults. Subject to the Bankruptcy Exception, all of the Contracts and material Leases to which the Company or any of its

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Subsidiaries is a party or by which it or any of the material Assets is bound or affected are valid, binding and enforceable in accordance with their terms. The Company and each of its Subsidiaries has fulfilled, or taken all action necessary to enable it to fulfill when due, all of its material obligations under each of such Contracts and material Leases to which it is a party. To Seller's Knowledge, or except as set forth on Schedule 4.12, all parties to such Contracts and Leases have complied in all material respects with the provisions thereof, no party is in Default thereunder and no notice of any claim of Default has been given to the Company or any of its Subsidiaries or to Seller. With respect to any material Lease, neither the Company or any of its Subsidiaries or Seller has received any notice of cancellation or termination under any option or right reserved to the lessor, or any notice of Default.

4.14 No Conflict or Violation. Except as set forth on Schedule 4.14, neither the execution, delivery and performance of this Agreement nor the consummation of the transactions contemplated hereby will result in (a) a violation of or a conflict with any provision of the Certificate or Articles of Incorporation or Bylaws of the Company or any of its Subsidiaries, (b) a breach of, or a Default under, or the creation of any right of any party to accelerate, terminate or cancel, any Contract, Permit, authorization or concession to which the Company or any of its Subsidiaries is a party or by which any of the Assets of the Company or any of its Subsidiaries are bound, (c) a violation by the Company or any of its Subsidiaries of any Regulation or Court Order which would have a material adverse effect on the Company or any of its Subsidiaries, or (d) an imposition of any material Encumbrance, restriction or charge on the Business of the Company or any of its Subsidiaries or on any of the Assets of the Company or any of its Subsidiaries.

4.15 Consents and Approvals. Except pursuant to applicable requirements of the HSR Act or with respect to matters set forth on Schedule 4.15, no consent, approval or authorization of, permit from, or declaration, filing or registration with, any governmental or regulatory authority, or any other person or entity, is required to be made or obtained by Seller, the Company or any of its Subsidiaries in connection with the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby.

4.16 Litigation. Except as set forth on Schedule 4.16, there are no Actions pending, or to Seller's Knowledge, threatened or anticipated which, if adversely decided, would, individually or in the aggregate, directly or indirectly have a material adverse effect on the Company or any of its Subsidiaries, or would prevent or delay the transactions contemplated by this Agreement or otherwise prevent Seller from performing its obligations under this Agreement, nor is there any outstanding judgment, decree, or injunction or, to Seller's Knowledge, any statute, rule or order of any domestic or foreign court, governmental department, commission or agency which has or will have, individually or in the aggregate, any such material adverse effect.

4.17 Labor Matters. No employees of the Company or any of its Subsidiaries are represented by any labor organization, and, as of the date hereof, no labor organization or group of employees of the Company or any of its Subsidiaries has made a demand for recognition, has filed a petition seeking a representation proceeding or given the Company notice of any intention to hold an election of a collective bargaining representative. There is no strike, work stoppage or labor disturbance pending or, to the best knowledge of the Company, threatened, which involves any employees of the Company or any of its Subsidiaries. No material claims are presently pending or, to Seller's Knowledge, threatened against the Company or any of its

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Subsidiaries no material claims by any governmental authority, labor organization, or employee alleging that the Company or any such Subsidiary has violated any applicable laws respecting employment practices. Seller has no reason to believe that the Company or any of its Subsidiaries is not in compliance in all material respects with their obligations under all statutes, executive orders and other governmental regulations or judicial decrees governing their employment practices, including without limitation, provisions relating to wages, hours, equal opportunity and payment of social security and other taxes.

4.18 Compliance with Law. Each of the Company and its Subsidiaries is in compliance with all foreign, federal, state and local laws and regulations applicable to its operations or with respect to which compliance is a condition of engaging in the business thereof (including, without limitation, all Environmental Laws), except to the extent that failure to comply would not have a material adverse affect on the Company or any of its Subsidiaries. Except as set forth on Schedule 4.18, to the best of Seller's Knowledge, neither the Company nor any of its Subsidiaries has received any notice asserting a failure, or possible failure, to comply with any such law, regulation or requirement the subject of which notice has not been resolved as required thereby or otherwise to the satisfaction of the party sending the notice.

4.19 Proprietary Rights.

(a) Proprietary Rights. Schedule 4.19 lists all of the Proprietary Rights of each of the Company and its Subsidiaries. Schedule 4.19 also sets forth: (i) for each Trademark, the application serial number or registration number, the class of goods covered and the expiration date for each country in which a Trademark has been registered and (ii) for each Copyright, the number and date of filing for each country in which a Copyright has been filed. Neither the Company nor any of its Subsidiaries owns or has any interest in any Patent. The Proprietary Rights listed in Schedule 4.19 are all those used by the Company or any of its Subsidiaries in connection with the Business.

(b) Royalties and Licenses. Except as set forth on Schedule 4.19, neither the Company nor any of its Subsidiaries has any obligation to compensate any person for the use of any such Proprietary Rights nor has the Company or any of its Subsidiaries granted to any person any license, option or other rights to use in any manner any of its Proprietary Rights, whether requiring the payment of royalties or not.

(c) Ownership and Protection of Proprietary Rights. The Company or one of its Subsidiaries owns or has a valid right to use each of the Proprietary Rights, and (except as provided in Section 9.7) the Proprietary Rights will not cease to be valid rights of the Company or such Subsidiary by reason of the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby. Neither the Company, any of its Subsidiaries nor Seller has received any notice of invalidity or infringement of any rights of others with respect to such Trademarks. The Company, one of its Subsidiaries or Seller has taken all reasonable and prudent steps to protect the Proprietary Rights from infringement by any other person. No other person (i) has the right to use any of the Trademarks of the Company or any of its Subsidiaries on the goods on which they are now being used either in identical form or in such near resemblance thereto as to be likely, when applied to the goods of any such person, to cause confusion with such Trademarks or to cause a mistake or to deceive, (ii) has notified the

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Company, any of its Subsidiaries or Seller that it is claiming any ownership of or right to use such Proprietary Rights, or (iii) to Seller's Knowledge, is infringing upon any such Proprietary Rights in any way. The Company or any of its Subsidiaries' use of the Proprietary Rights does not and will not conflict with, infringe upon or otherwise violate the valid rights of any third party in or to such Proprietary Rights, and no Action has been instituted against or notices received by the Company, any of its Subsidiaries or Seller that are presently outstanding alleging that the use of the Proprietary Rights by the Company or any of its Subsidiaries infringes upon or otherwise violates any rights of a third party in or to such Proprietary Rights.

4.20 Employee Benefit Plans.

(a) Definitions. The following terms, when used in this Section 4.20, shall have the following meanings:

(i) Benefit Arrangement. "Benefit Arrangement" shall mean any employment, consulting, severance or other similar contract, arrangement or policy and each plan, arrangement (written or oral), program, agreement or commitment providing for insurance coverage (including without limitation any self-insured arrangements), workers' compensation, disability benefits, supplemental unemployment benefits, vacation benefits, retirement benefits, life, health, disability or accident benefits (including without limitation any "voluntary employees' beneficiary association" as defined in Section 501(c)(9) of the Code providing for the same or other benefits) or for deferred compensation, profit-sharing bonuses, stock options, stock appreciation rights, stock purchases or other forms of incentive compensation or post-retirement insurance, compensation or benefits which (A) is not a Welfare Plan, Pension Plan or Multiemployer Plan, (B) is entered into, maintained, contributed to or required to be contributed to, as the case may be, by the Company or an ERISA Affiliate or under which the Company or any ERISA Affiliate may incur any liability, and (C) covers any employee or former employee of the Company or any ERISA Affiliate (with respect to their relationship with such entities).

(ii) Employee Plans. "Employee Plans" shall mean all Benefit Arrangements, Multiemployer Plans, Pension Plans and Welfare Plans.

(iii) ERISA. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time.

(iv) ERISA Affiliate. "ERISA Affiliate" shall mean any entity which is (or at any relevant time was) a member of a "controlled group of corporations" with, under "common control" with, or a member of an "affiliated service group" with, the Company (including any of its Subsidiaries) as defined in Section 414(b), (c), (m) or (o) of the Code.

(v) Multiemployer Plan. "Multiemployer Plan" shall mean any "multiemployer plan," as defined in Section 4001(a)(3) of ERISA, (A) which the Company or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or, after September 25, 1980, maintained, administered, contributed to or was required to contribute to, or under which the Company or any ERISA Affiliate may incur any liability and (B) which covers any employee or former employee of the Company or any ERISA Affiliate (with respect to their relationship with such entities).

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(vi) Multiemployer Welfare Plan. "Multiemployer Welfare Plan" shall mean a Welfare Plan that is a "multiemployer plan," as defined in Section 3(37) of ERISA.

(vii) PBGC. "PBGC" shall mean the Pension Benefit Guaranty

Corporation.

(viii) Pension Plan. "Pension Plan" shall mean any "employee pension benefit plan" as defined in Section 3(2) of ERISA (other than a Multiemployer Plan) (A) which the Company or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or, within the six
(6) years prior to the Closing Date, maintained, administered, contributed to or was required to contribute to, or under which the Company or any ERISA Affiliate may incur any liability and (B) which covers any employee or former employee of the Company or any ERISA Affiliate (with respect to their relationship with such entities).

(ix) Welfare Plan. "Welfare Plan" shall mean any "employee welfare benefit plan" as defined in Section 3(1) of ERISA, (A) which the Company or any ERISA Affiliate maintains, administers, contributes to or is required to contribute to, or under which the Company or any ERISA Affiliate may incur any liability and (B) which covers any employee or former employee of the Company or any ERISA Affiliate (with respect to their relationship with such entities).

(b) Disclosure; Delivery of Copies of Relevant Documents and Other
Information. Schedule 4.20 contains a complete list of Employee Plans which cover or have covered employees of the Company or any of its Subsidiaries. True and complete copies of each of the following documents have been delivered by Seller to Purchaser: (i) each Welfare Plan, Pension Plan and Multiemployer Plan (and, if applicable, related trust agreements) and all amendments thereto, all written interpretations thereof and written descriptions thereof which have been distributed by the Company or any ERISA Affiliate to the employees of the Company or any ERISA Affiliate and all annuity contracts or other funding instruments, (ii) each Benefit Arrangement including written interpretations thereof and written descriptions thereof which have been distributed to the employees of the Company or any ERISA Affiliate and a complete description of any Employee Plan which is not in writing, (iii) the most recent determination or opinion letter, if any, issued by the Internal Revenue Service with respect to each Pension Plan and each Welfare Plan (other than a "multiemployer plan", as defined in Section 3(37) of ERISA), (iv) for the three most recent plan years, Annual Reports on Form 5500 Series required to be filed with any governmental agency for each Pension Plan, (v) all actuarial reports prepared for the last three plan years for each Pension Plan, (vi) a description of complete age, salary, service and related data as of the last plan year for employees and former employees of the Company, and (vii) a description setting forth the amount of any liability of the Company or any ERISA Affiliate as of the Closing Date for payments more than (30) days past due with respect to each Welfare Plan.

(c) Representations. Except as set forth in Schedule 4.20, Seller represents and warrants as follows:

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(i) Pension Plans

(A) Seller has no reason to believe that the funding method used in connection with each Pension Plan which is subject to the minimum funding requirements of ERISA is not acceptable and the actuarial assumptions used in connection with funding each such plan are unreasonable. No "accumulated funding deficiency" (for which an excise tax is due or would be due in the absence of a waiver) as defined in Section 12 or the Code or as defined in
Section 302(a)(2) of ERISA, whichever may apply, has been incurred with respect to any Pension Plan with respect to any plan year, whether or not waived. Neither the Company nor any ERISA Affiliate has failed to pay when due any "required installment," within the meaning of Section 412(m) of the Code and
Section 302(e) of ERISA, whichever may apply, with respect to any Pension Plan. Neither Seller nor any ERISA Affiliate is subject to any lien imposed under
Section 412(n) of the Code or Section 302f) of ERISA, whichever may apply, with respect to any Pension Plan. Neither the Company nor any ERISA Affiliate has any liability for unpaid contributions which are required to have been made with respect to any Pension Plan.

(B) Neither the Company nor any ERISA Affiliate is required to provide security to a Pension Plan under Section 401(a)(29) of the Code.

(C) Each Pension Plan and each related trust agreement, annuity contract or other funding instrument is qualified and tax-exempt under the provisions of Code Sections 401(a) (or 403(a), as appropriate) and 501(a) and has been so qualified during the period from its adoption to date.

(D) Each Pension Plan, each related trust agreement, annuity contract or other funding instrument presently complies and has been maintained in compliance with its terms in all material respects and, both as to form and in operation, in all material respects with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such plans, including without limitation ERISA and the Code.

(E) The Company and each ERISA Affiliate has paid all premiums (and interest charges and penalties for late payment, if applicable) due the PBGC with respect to each Pension Plan for each plan year thereof for which such premiums are required. Neither the Company nor any ERISA Affiliate has engaged in, or is a successor or parent corporation to an entity that has engaged in, a transaction described in Section 4069 of ERISA. There has been no "reportable event" (as defined in Section 4043(b) of ERISA and the PBGC regulations under such Section) with respect to any Pension Plan subject to Title IV of ERISA. No filing has been made by the Company or any ERISA Affiliate with the PBGC, and no proceeding has been commenced by the PBGC, to terminate any Pension Plan. No condition exists and no event has occurred that could constitute grounds for the termination of any Pension Plan by the PBGC. Neither the Company nor any ERISA Affiliate has, at any time, (1) ceased operations at a facility so as to become subject to the provisions of Section 4062(e) of ERISA, (2) withdrawn as a substantial employer so as to become subject to the provisions of Section 4063 of ERISA, or (3) ceased making contributions on or before the Closing Date to any Pension Plan subject to Section 4064(a) of ERISA to which the Company or any ERISA Affiliate made contributions during the six years prior to the Closing Date.

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(F) As of the Closing Date, neither the Company nor Purchaser shall have any liability with respect to any Pension Plan, including but not limited to the Retirement Plan of American Fidelity Group ("Plan"), the American Fidelity Companies Employee Savings Plan, and the Supplemental Retirement Income Plan for Employees of the American Fidelity Group.

(ii) Multiemployer Plans Neither the Company nor any ERISA Affiliate has, at any time, contributed to or had an obligation to contribute to either a Multiemployer Plan or a Multiemployer Welfare Plan.

(iii) Welfare Plans

(A) Each Welfare Plan, to the best of the Company's knowledge, has been maintained in compliance with its terms and, both as to form and operation, in all material respects, with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Welfare Plan, including without limitation ERISA and the Code.

(B) Except as set forth on Schedule 4.13, none of the Company, any ERISA Affiliate or any Welfare Plan has any present or future obligation to make any payment to, or with respect to any present or former employee of the Company or any ERISA Affiliate pursuant to, any retiree medical benefit plan, or other retiree Welfare Plan, and no condition exists which would prevent the Company from amending or terminating any such benefit plan or Welfare Plan.

(C) Each Welfare Plan which is a "group health plan," as defined in
Section 607(1) of ERISA, to the best of the Company's knowledge, has been operated in compliance in all material respects with provisions of Part 6 of Title I, Subtitle B of ERISA and Sections 162(k) and 4980B of the Code at all times.

(iv) Benefit Arrangements. Each Benefit Arrangement has been maintained in compliance with its terms in all materials respects and with the requirements prescribed by any and all statutes, orders, rules and regulations which are applicable to such Benefit Arrangement, including without limitation the Code. Subject to Section 6.10(e) hereof, as of the Closing Date, neither the Company nor the Purchaser shall have any liability with respect to any Benefit Arrangement (other than vacation and sick leave benefits), including but not limited to the American Fidelity Corporation Amended and Restated 1984 Stock Appreciation Plan, the American Fidelity Corporation 1988 Stock Units Plan, and the American Fidelity Insurance Companies, AFI Management Co., American Fidelity Credit Corp. Colleague Incentive Compensation Plan.

(v) At-Will Employment. Except as set forth on Schedule 4.13, and except as provided by applicable law, the employment of all persons presently employed or retained by the Company or any of its Subsidiaries is terminable at will.

(vi) Unrelated Business Taxable Income. No Employee Plan (or trust or other funding vehicle pursuant thereto) is subject to any tax under Code Section 511.

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(vii) Deductibility of Payments. Except as set forth in Schedule 4.13, there is no contract, agreement, plan or arrangement covering any employee or former employee of the Company or any of its Subsidiaries (with respect to their relationship with such entities) that, individually or collectively, provides for the payment by the Company of any amount (i) that is not deductible under
Section 162(a)(1) or 404 of the Code or (ii) that is an "excess parachute payment" pursuant to Section 280G of the Code.

(viii) Fiduciary Duties and Prohibited Transactions. Neither the Company nor any plan fiduciary of any Welfare Plan or Pension Plan has engaged in any transaction in violation of Sections 404 or 406 of ERISA or any "prohibited transaction," as defined in Section 4975(c)(1) of the Code, for which no exemption exists under Section 408 of ERISA or Section 4975(c)(2) or
(d) of the Code, or has otherwise violated the provisions of Part 4 of Title I, Subtitle B of ERISA. The Company has not knowingly participated in a violation of Part 4 of Title I, Subtitle B of ERISA by any plan fiduciary of any Welfare Plan or Pension Plan and has not been assessed any civil penalty under Section 502(l) of ERISA.

(ix) Validity and Enforceability. Each Welfare Plan, Pension Plan, related trust agreement, annuity contract or other funding instrument and Benefit Arrangement is legally valid and binding and in full force and effect.

(x) Litigation. There is no action, order, writ, injunction, judgment or decree outstanding or claim, suit, litigation, proceeding, arbitral action, governmental audit or investigation relating to or seeking benefits under any Employee Plan that is pending, or to the best of the Company's knowledge, threatened or anticipated against the Company, any ERISA Affiliate or any Employee Plan that could result in material liability to the Company, any ERISA Affiliate or any Employee Plan.

(xi) No Amendments. Neither the Company nor any ERISA Affiliate has any announced plan or legally binding commitment to create any additional Employee Plans or to amend or modify any existing Employee Plan.

(xii) No Other Material Liability. No event has occurred in connection with which the Company or any ERISA Affiliate or any Employee Plan, directly or indirectly, could be subject to any material liability (A) under any statute, regulation or governmental order relating to any Employee Plans or (B) pursuant to any obligation of the Company or any ERISA Affiliate to indemnify any person against liability incurred under any such statute, regulation or order as they relate to the Employee Plans.

(xiii) Unpaid Contributions. Neither the Company nor any ERISA Affiliate has any liability for unpaid contributions under Section 515 of ERISA with respect to any Pension Plan, Multiemployer Plan or Welfare Plan.

(xiv) Insurance Contracts. Neither the Company nor any Employee Plan holds as an asset of any Employee Plan any interest in any annuity contract, guaranteed investment contract or any other investment or insurance contract issued by an

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insurance company that is the subject of bankruptcy, conservatorship or rehabilitation proceedings.

(xv) No Acceleration or Creation of Rights. Neither the execution and delivery of this Agreement by Purchaser nor the consummation of the transactions contemplated hereby will result in the acceleration or creation of any rights of any person to benefits under any Employee Plan, except as specified in Section 6.12.

4.21 Tax Matters.

(a) Filing of Tax Returns. The Company and each of its Subsidiaries (and any affiliated group of which the Company or a Subsidiary is now or has been a member) has timely filed with the appropriate taxing authorities all returns (including without limitation information returns and other material information) in respect of Taxes required to be filed through the date hereof and will timely file any such returns required to be filed on or prior to the Closing Date. The returns and other information filed are complete and accurate in all respects. Except as specified in Schedule 4.21, neither the Company nor any of its Subsidiaries, nor any group of which the Company or any of its Subsidiaries now or was a member, has requested any extension of time within which to file returns (including without limitation information returns) in respect of any taxes. Seller has delivered to Purchaser complete and accurate copies of the federal tax returns of the Company and each of its Subsidiaries for the years 1995, 1994, 1993 and 1992.

(b) Payment of Taxes. Except as set forth on Schedule 4.21, all Taxes, in respect of periods ended before the Closing Date have been timely paid or will be timely paid, or an adequate reserve has been established therefor in the Financial Statements, and the Company and each of its Subsidiaries do not have any liabilities for Taxes in excess of the amounts so paid or reserves so established. With respect to the items set forth on Schedule 4.21, the Company and each of its Subsidiaries do not have any Liability for Taxes in excess of the amounts already paid or reserves so established except that any Losses and Expenses arising from the Texas premium tax audit shall be subject only to the provisions of Section 9.3(b)(ii). No deferred Taxes of any kind will be considered a reserve for these purposes. No reserves for Taxes are included in the Financial Statements other than estimates for 1996 Taxes.

(c) Audits, Investigations or Claims. The consolidated federal income tax returns of the Company and its Subsidiaries (or the affiliated group of which the Company and its Subsidiaries are members) for the tax years 1986 through 1993 have been examined by the Internal Revenue Service, and, except as set forth on Schedule 4.21, no deficiencies for Taxes have been claimed, proposed or assessed with respect to such years by any taxing or other governmental authority against the Company or any of its Subsidiaries. Except as set forth on Schedule 4.21, there are no pending or, to Seller's Knowledge, threatened audits, investigations or claims for or relating to any additional Liability in respect of Taxes, and, with respect to pending audits, there are no matters under discussion with any governmental authorities with respect to Taxes that in the reasonable judgment of Seller, or its counsel, is likely to result in an additional Liability for Taxes. Except as set forth on Schedule 4.21, no extension of a statute of limitations relating to Taxes is in effect with respect to the Company or any of its Subsidiaries.

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(d) Tax Elections

(i) All elections with respect to Taxes affecting the Company or any of its Subsidiaries as of the date hereof are set forth on Schedule 4.21.

(ii) Neither the Company nor any of its Subsidiaries has made an election or is required to treat any Asset of such company as owned by another person or as tax-exempt bond financed property or tax-exempt use property within the meaning of Section 168 of the Code or under any comparable state or local income tax or other tax provision.

(iii) Neither the Company nor any of its Subsidiaries is a party to or bound by any binding tax sharing, tax indemnity or tax allocation agreement or other similar arrangement with any other party, except as set forth on Schedule 4.21.

(iv) Neither the Company nor any of its Subsidiaries has filed a consent pursuant to the collapsible corporation provisions of Section 341(f) of the Code (or any corresponding provision of state or local law) or agreed to have Section 341(f)(2) of the Code (or any corresponding provision of state or local law) apply to any disposition of any asset owned by it.

(e) Additional Representations. Except as otherwise set forth on Schedule 4.21:

(i) There are no liens for Taxes (other than for current Taxes not yet due and payable) upon the Assets of the Company or any of its Subsidiaries.

(ii) Each of the Company and its Subsidiaries are members of an affiliated group of corporations, within the meaning of Section 1504 of the Code.

(iii) Neither the Company nor any of its Subsidiaries has agreed to make, or is required to make, any adjustment under Section 481(a) of the Code by reason of a change in accounting method or otherwise.

(iv) Neither the Company nor any of its Subsidiaries is a party to any agreement, contract, arrangement or plan that has resulted or would result, separately or in the aggregate, in the payment of any "excess parachute payments" within the meaning of Section 280G of the Code.

(v) Neither the Company nor any of its Subsidiaries is a party to any joint venture, partnership, or other arrangement or contract which could be treated as a partnership for federal income tax purposes.

(vi) The Company and each of its Subsidiaries has prepared and made available (or, in the case of a portion of a period ending on the Closing Date, will prepare and make available before the Closing) to Purchaser copies of books and working papers which demonstrate the income and activities of such corporation for any period or any portion of a period ending on the Closing Date.

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(vii) The Company and each of its Subsidiaries have timely provided copies of all information returns to all persons required to receive such returns, and such copies are complete and accurate in all respects. The Company and each of its Subsidiaries have complied in all respects with all applicable federal, state, and local requirements regarding information reporting and withholding, with respect to all lines and classes of insurance written by any of them.

(f) No Withholding. The transaction contemplated herein is not subject to the tax withholding provisions of Section 3406 of the Code, or of Subchapter A of Chapter 3 of the Code or of any other provision of law.

4.22 Insurance. Schedule 4.22 contains a materially complete and accurate list of all policies or binders of fire, liability, property, title, workers' compensation, business interruption, errors or omissions and other forms of insurance (showing as to each policy or binder the carrier, policy number, coverage limits, including without limitation, retentions and deductibles, expiration dates, annual premiums and a general description of the type of coverage provided) maintained by the Company or any of its Subsidiaries on its business, property or personnel. All of such policies are sufficient for compliance with all requirements of law and of all Contracts to which the Company or any of its Subsidiaries is a party. To Seller's Knowledge, neither the Company nor any Subsidiary has failed to give any notice or to present any claim under any such policy or binder in a due and timely fashion. There are no outstanding unpaid claims under any such policies or binders for which adequate reserves have not been established. Such policies and binders are in full force and effect on the date hereof and shall be kept in full force and effect by the Company through the Closing Date. All liability and workers' compensation insurance policies maintained by the Company or any of its Subsidiaries are occurrence policies and not claims-made policies.

4.23 Environmental Matters. Except as set forth on Schedule 4.23, all real property heretofore or currently owned or leased by the Company or any of its Subsidiaries and each office or other facility heretofore or currently maintained by the Company or any of its Subsidiaries has been maintained in compliance with all Environmental Laws, except where the failure to so comply would not have a material adverse effect on the Company or one of its Subsidiaries. No conditions exist with respect to the soil, surface waters, groundwaters, land, stream sediments, surface or subsurface strata, ambient air, and any environmental medium on or off the Properties, which could result in any damage, claim, or liability to or against the Company or any of its Subsidiaries by any third party (including without limitation, any government entity), including, without limitation, any condition resulting from the operation of the Company's or such Subsidiary's business and/or operation in the vicinity of any of the Properties and/or any activity or operation formerly conducted by any person or entity on the Properties. Neither the Company nor any of its Subsidiaries nor any other person or entity for whose conduct the Company or any of its Subsidiaries is or may be held responsible, has generated, manufactured, refined, transported, treated, stored, handled, disposed, transferred, produced, or processed any pollutant, hydrocarbon, or petroleum substances or petroleum products, including, without limitation, existing and future asbestos, polychlorinated biphenyls, radioactive or flammable materials, or any other hazardous or toxic waste, substance or material, as those terms may be defined in any and all Environmental Laws (collectively, "Hazardous Materials"). There are no existing notices of

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violation, administrative actions, or lawsuits against the Company or any of its Subsidiaries arising under Environmental Laws or relating to the use, handling, storage, treatment, recycling, generation, or release of Hazardous Materials by the Company at any of the Properties, nor has the Company received any notification of any allegation of any responsibility for any disposal, release, or threatened release at any location of any Hazardous Materials; there have been no spills or releases of Hazardous Materials at any of the Properties in excess of quantities reportable under Environmental Laws; and there are no consent decrees, consent orders, judgments, judicial or administrative orders, or liens by any governmental authority relating to any Environmental Law which regulate, obligate, or bind the Company or any of its Subsidiaries.

4.24 Officers. Schedule 4.24 contains a list of all officers, other employees and consultants under contract to the Company or any of its Subsidiaries whose current total annual compensation from the Company and its Subsidiaries is at the rate of Seventy-Five Thousand Dollars ($75,000) or more, together in each case with the current job title or relationship to the Company or the relevant Subsidiary and the aggregate remuneration rate for each such person.

4.25 Severance Arrangements. Neither the Company nor any of its Subsidiaries has entered into any severance or similar arrangement in respect of any present or former employees that will result in any obligation (absolute or contingent) of Purchaser, the Company or any of its Subsidiaries to make any payment to any present or former employee following termination of employment.

4.26 Bank Accounts. Schedule 4.26 contains a true and complete listing of all bank accounts or other depository accounts maintained by the Company or any of its Subsidiaries and the authorized signatories thereto.

4.27 Ocean Marine Program. The rights and obligations of the Company and its Subsidiaries under the Ocean Marine Program are contained in the Covenant Agreement, the Continental Agreement and those quota share and excess of loss reinsurance agreements identified on Schedule 4.13(a)(iii) under "AFI Program -- wet marine." Neither the Company nor any Subsidiary has any liability, obligation, commitment or arrangement, legal or otherwise, relating to the Ocean Marine Program, except as set forth in these agreements. All assets and liabilities existing on June 30, 1996, together with the revenues and expenses for the six months then ended, relating to the Ocean Marine Program have been recorded and separately identified in the Interim Financial Statements.

4.28 Services Agreements with Seller . Seller and its Affiliates provide services to the Company and its Subsidiaries only under (i) that Services Agreement dated September 11, 1992 between Seller and the Company and
(ii) that Services Agreement dated December 31, 1990 between Seller and Cimarron. Seller has waived and released the Company and its Subsidiaries from any amounts payable under these two (2) Services Agreements. Prior to the Closing, Seller shall pay to the Company all amounts paid to Seller and its Affiliates under such agreements since the Interim Balance Sheet Date, and no amounts will be payable under these agreements by the Company and its Subsidiaries to Seller or its Affiliates after the Closing Date.

4.29 No Brokers. Neither Seller, the Company nor any of its Subsidiaries nor any of their respective officers, directors, employees, shareholders or Affiliates has employed or

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made any agreement with any broker, finder or similar agent or any person or firm which will result in the obligation of the Company, any of its Subsidiaries or Purchaser or any of its Affiliates to pay any finder's fee, brokerage fees or commission or similar payment in connection with the transactions contemplated hereby, except Stephens, Inc., which is to be paid by Seller.

4.30 No Other Agreements to Sell the Shares or the Company. Neither Seller nor the Company has any legal obligation, absolute or contingent, to any other person or firm to sell any material portion of the Assets of the Company or any of its Subsidiaries, to sell the capital stock of the Company or any of its Subsidiaries, or to effect any merger, consolidation or other reorganization of the Company or any of its Subsidiaries or to enter into any agreement with respect thereto.

4.31 Material Misstatements Or Omissions. No representations or warranties by Seller in this Agreement, nor any document, exhibit, statement, certificate or schedule furnished to Purchaser by Seller pursuant hereto contains or will contain any untrue statement of a material fact, or omits or will omit to state any material fact necessary to make the statements or facts contained therein not misleading.

4.32 No Other Representations or Warranties. Seller shall not be deemed to have made to Purchaser any representation or warranty other than as made by the Seller in Sections 4.1 through 4.31 hereof. Seller expressly makes no representation or warranty regarding any projections, estimates or budgets heretofore delivered to or made available to Purchaser of future revenues, expenses or expenditures or future results of operations, or any other information or documents made available to Purchaser, or its Representatives with respect to the Company and its Subsidiaries, except as expressly covered by a representation and warranty contained in Sections 4.1 through 4.31 of this Agreement.

ARTICLE V

REPRESENTATIONS AND WARRANTIES OF PURCHASER

Purchaser hereby represents and warrants to Seller, which representations and warranties are, as of the date hereof, and will be, as of the Closing Date, true and correct, as follows:

5.1 Organization of Purchaser. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of California.

5.2 Authorization. Purchaser has all necessary corporate power and authority, and has taken all corporate action necessary, to execute and deliver this Agreement and the Ancillary Agreements, to consummate the transactions contemplated hereby and thereby and to perform its obligations hereunder and thereunder. The execution and delivery of this Agreement and the Ancillary Agreements by Purchaser and the consummation by Purchaser of the transactions contemplated hereby and thereby have been duly approved by the board of directors of Purchaser . No other corporate proceedings on the part of Purchaser are necessary to authorize this Agreement and the Ancillary Agreements and the transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by Purchaser and is a legal,

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valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, except as such enforceability may be limited by the Bankruptcy Exception.

5.3 No Conflict or Violation. Neither the execution, delivery or performance of this Agreement nor the consummation of the transactions contemplated hereby, will (a) violate or conflict with any provision of the Articles of Incorporation or Bylaws of Purchaser, (b) violate, conflict with, or result in or constitute a Default under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any Encumbrance upon any of Purchaser's Assets under any of the terms, conditions or provisions of any Contract, Permit, authorization, concession, or other instrument or obligation to which Purchaser is a party or by which Purchaser or its Assets or properties is bound, or (c) violate any Regulation or Court Order.

5.4 Consents and Approvals. Except as set forth on Schedule 5.4, and other than in connection with or in compliance with the provisions of the HSR Act, no notice to, declaration, filing or registration with, or authorization, consent or approval of, or permit from, any domestic or foreign governmental or regulatory body or authority, or any other person or entity, is required to be made or obtained by Purchaser in connection with the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby.

5.5 Investment Intent. Purchaser hereby represents and warrants to Seller that Purchaser is entering into this Agreement and acquiring the Shares pursuant to the terms hereof for investment purposes for its own account, and not with a view to the distribution thereof.

5.6 No Brokers.. Neither Purchaser nor any of its officers, directors, employees, shareholders or Affiliates has employed or made any agreement with any broker, finder or similar agent or any person or firm which will result in the obligation of Seller or any of its Affiliates to pay any finder's fee, brokerage fees or commission or similar payment in connection with the transactions contemplated hereby.

ARTICLE VI

COVENANTS OF SELLER AND PURCHASER

Seller and Purchaser covenant and agree with each other as follows:

6.1 Further Assurances. Upon the terms and subject to the conditions contained herein, the parties agree, both before and after the Closing, (i) to use all reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement, (ii) to execute any documents, instruments or conveyances of any kind which may be reasonably necessary or advisable to carry out any of the transactions contemplated hereunder, and (iii) to cooperate with each other in connection with the foregoing. Without limiting the foregoing, the parties agree to use their respective best efforts to obtain all necessary waivers, consents and approvals from other parties to the Contracts and Leases; provided, however, that Purchaser shall not be required to make any payments, commence litigation or

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agree to modifications of the terms thereof in order to obtain any such waivers, consents or approvals, to obtain all necessary Permits as are required to be obtained under any Regulations, to give all notices to, and make all registrations and filings with third parties, including, without limitation, submissions of information requested by governmental authorities, and to fulfill all conditions to this Agreement.

6.2 Certain Filings and Consents. Seller, the Company and Purchaser shall (i) as promptly as practicable make any required filings and submissions under the HSR Act and state insurance Regulations with respect to the purchase and sale of the Shares, (ii) cooperate with each other in determining whether any other filings are required to be made or consents, approvals, permits or authorizations are required to be obtained under any other federal, state, local or foreign Regulation or whether any consents, approvals or waivers are required to be obtained from other parties to Leases or other contracts in connection with the consummation of the purchase and sale of the Shares or the other transactions contemplated hereby, and (iii) actively assist each other in obtaining any consents, permits, authorizations, approvals or waivers which are required. Each party hereto shall promptly inform the other of any material communication between such party and the Federal Trade Commission, the Department of Justice or any other government or governmental authority regarding the transactions contemplated hereby. If any party receives a request for additional information or documentary material from any such government or governmental authority, then such party shall endeavor in good faith to make, or cause to be made, as soon as reasonably practicable and after consultation with the other party, an appropriate response to such request.

6.3 Access. Upon reasonable notice, Seller shall cause the Company and each of its Subsidiaries to afford Purchaser and its Representatives full access during normal business hours to all of the Company's and each of its Subsidiaries' officers, agents, Property, Contracts, Permits, Books and Records (including, but not limited to, separate tax returns, if any, of the Company and each of its Subsidiaries) and, during such period, the Company and each of its Subsidiaries shall furnish promptly to Purchaser and its Representatives all information concerning its Business and Property as Purchaser or its Representatives may reasonably request. In addition, upon reasonable notice, Seller shall cause the Company and each of its Subsidiaries to furnish to Purchaser and its Representatives the following information with respect to personnel of the Company and each of its Subsidiaries: name, address, positions held, date of hire and salary history. Purchaser shall (and shall use its best efforts to cause its Representatives to) hold all such nonpublic documents, work papers and other materials in confidence. In the event of the termination of this Agreement, Purchaser shall return promptly every confidential document furnished to Purchaser by Seller, the Company or any of its Subsidiaries in connection with the transactions contemplated hereby, and shall use its best efforts to cause its Representatives to return the same. No investigation pursuant to this Section 6.3 or otherwise shall affect the representations and warranties or indemnities of Seller herein or the conditions to Purchaser's obligation to consummate the transactions contemplated hereby or any indemnification obligation hereunder.

6.4 No Solicitation. From the date hereof through the Closing or the earlier termination of this Agreement, Seller shall not, and shall cause the Company and each of its Subsidiaries not to, directly or indirectly, enter into, solicit, initiate or continue any discussions or negotiations with, or encourage or respond to any inquiries or proposals by, or participate in any

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negotiations with, or provide any information to, or otherwise cooperate in any other way with, any corporation, partnership, person or other entity or group, other than Purchaser and its Representatives, concerning any sale of all or a portion of the Shares or any merger, consolidation, liquidation, dissolution or similar transaction involving the Company or any of its Subsidiaries. Seller shall not, directly or indirectly, through any officer, director or employee, solicit, initiate or encourage the submission of any proposal or offer from any person or entity or group relating to any such transaction or participate in any negotiations regarding, or furnish to any other person any information with respect to the Company or any of its Subsidiaries for the purposes of, or otherwise cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other person to seek or effect a such a transaction.

6.5 Notification of Certain Matters. From the date hereof through the Closing, each party shall give prompt notice to the other party of the occurrence, or failure to occur, of any event which occurrence or failure would be likely to cause any representation or warranty contained in this Agreement or in any exhibit or schedule hereto to be untrue or inaccurate in any respect, and any failure of such party, or any of its Affiliates or Representatives, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it under this Agreement or any exhibit or schedule hereto; provided, however, that such disclosure shall not be deemed to cure any breach of a representation, warranty, covenant or agreement or to satisfy any condition. Seller shall promptly notify Purchaser of any Default, the threat or commencement of any Action, or any development that occurs before the Closing that could in any way materially affect the Company or any of its Subsidiaries.

6.6 Conduct of Business. From the date hereof through the Closing, the Company shall, except as contemplated by this Agreement, or as consented to by Purchaser in writing, which consent shall not be unreasonably withheld, operate the Business in the ordinary course of business and in accordance with past practice and will not take any action inconsistent with this Agreement or with the consummation of the Closing. Without limiting the generality of the foregoing, the Company shall not, and the Company and Seller shall cause each of the Company's Subsidiaries not to, except as specifically contemplated by this Agreement or as consented to by Purchaser in writing, which consent shall not be unreasonably withheld:

(a) change or amend the Articles or Certificate of Incorporation or Bylaws of the Company or any of its Subsidiaries;

(b) enter into, extend, materially modify, terminate or renew any Contract or Lease, except in the ordinary course of business;

(c) sell, assign, transfer, convey, lease, mortgage, pledge or otherwise dispose of or encumber any of the Assets, or any interests therein, except in the ordinary course of business;

(d) incur any Liability for long-term interest bearing indebtedness, guarantee the obligations of others, indemnify others or, except in the ordinary course of business, incur any other Liability;

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(e) (i) take any action with respect to the grant of any bonus, severance or termination pay (otherwise than pursuant to policies or agreements of the Company or any of its Subsidiaries in effect on the date hereof) or with respect to any increase of benefits payable under its severance or termination pay policies or agreements in effect on the date hereof or increase in any manner the compensation or fringe benefits of any employee or pay any benefit not required by any existing Employee Plan or policy, except in the ordinary course of business;

(ii) make any change in the key management structure of the Company or any of its Subsidiaries, including, without limitation, the hiring of additional officers or the termination of existing officers, except for cause;

(iii) adopt, enter into or amend any Employee Plan, agreement (including, without limitation, any collective bargaining or employment agreement), trust, fund or other arrangement for the benefit or welfare of any employee, except for any such amendment as may be required to comply with applicable Regulations; or

(iv) fail to maintain all Employee Plans in accordance with applicable Regulations in all material respects;

(f) acquire by merger or consolidation with, or merge or consolidate with, or purchase substantially all of the assets of, or otherwise acquire any material assets or business of any corporation, partnership, association or other business organization or division thereof;

(g) declare, set aside, make or pay any dividend or other distribution in respect of the Company's capital stock;

(h) fail to expend funds for any budgeted capital expenditures or commitments disclosed on Schedule 4.11;

(i) willingly allow or permit to be done any act by which any of the Insurance Policies in which the Company or any of its Subsidiaries is the insured may be suspended, impaired or canceled;

(j) (i) fail to pay its accounts payable and any debts owed or obligations due by it, or pay or discharge when due any Liabilities, in the ordinary course of business; or

(ii) fail to use its best efforts to collect its premiums or other accounts receivable in the ordinary course of business;

(k) enter into, renew, modify or revise any agreement or transaction with Seller or any of its Affiliates;

(l) fail to maintain the Assets in substantially their current state of repair, excepting normal wear and tear, or fail to replace, consistent with Seller's past practice, inoperable, worn-out, obsolete or destroyed Assets;

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(m) make any loans or advances to any partnership, firm or corporation, or, except for expenses incurred in the ordinary course of business, any individual;

(n) make any income tax election or settlement or compromise with tax authorities;

(o) fail to comply in any material respect with all Regulations applicable to it, the Assets and the Business;

(p) intentionally do any other act which would cause any representation or warranty of Seller in this Agreement to be or become untrue in any material respect;

(q) issue, repurchase or redeem or commit to issue, repurchase or redeem, any shares of the Company's capital stock, any options or other rights to acquire such stock or any securities convertible into or exchangeable for such stock;

(r) fail to use its best efforts to (i) retain the employees of the Company and each of its Subsidiaries, (ii) maintain the Business so that such employees will remain available to Purchaser on and after the Closing Date,
(iii) maintain existing relationships with suppliers, customers and others having business dealings with the Company and any of its Subsidiaries, and (iv) otherwise to preserve the goodwill of the Business so that such relationships and goodwill will be preserved on and after the Closing Date; or

(s) enter into any agreement, or otherwise become obligated, to do any action prohibited hereunder.

6.7 Public Statements and Press Releases. Seller and Purchaser and any of their respective Affiliates shall not, and Seller shall cause the Company and each of its Subsidiaries not to, from and after the date hereof, make, issue or release any public announcement, press release, statement or acknowledgment of the existence of, or reveal publicly the terms, conditions and status of, the transactions provided for herein, without the prior written consent of the other parties as to the content and time of release of and the media in which such statement or announcement is to be made. Each party hereto agrees that it will not unreasonably withhold any such consent.

6.8 Financial Information. Seller shall deliver to Purchaser as soon as available all interim financial statements and other management reports generated in the ordinary course of business prepared by or for the Company and/or its Subsidiaries prior to the Closing. Seller has previously prepared and delivered to Purchaser the Financial Statements.

6.9 Employee Matters. Purchaser shall employ employees of the Company and each Subsidiary for such periods and with such compensation and employee benefits as Purchaser in its sole discretion shall determine. During the period between the date hereof and the Closing Date, Seller shall, and shall cause the Company and each of its Subsidiaries to, use its best efforts to keep available its current employees now employed with respect to the Business of the Company and its Subsidiaries.

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6.10 Employee Benefits

(a) Subject to prior approval by the Internal Revenue Service, Seller shall cause the employees of the Company and its Subsidiaries ("Company Employees") to become fully vested in the American Fidelity Companies Employee Savings Plan ("Savings Plan") and the Retirement Plan of American Fidelity Group ("Retirement Plan") as of the Closing Date.

(b) Subject to approval by the Internal Revenue Service and any other governmental agency whose approval may be required, Seller and the Company shall cause the Company's participation in the Retirement Plan to terminate as of the Closing Date and each Company Employee who is a participant therein shall be deemed to be one-hundred percent (100%) vested and hold a nonforfeitable interest in his benefits accrued as of the Closing Date. Following approval by the Internal Revenue Service with respect to any Plan amendment with respect to termination of the Company's participation in the Retirement Plan and the distribution for accrued benefits therefrom to Company Employees, and Seller's receipt of any other required governmental approvals, Seller shall make distributions to Company Employees who are participants in the Retirement Plan in accordance with the terms and provisions of the Retirement Plan.

(c) Subject to prior approval by the Internal Revenue Service and as soon as administratively practicable after the Closing Date (or, in the Seller's discretion, as soon as administratively practicable following Internal Revenue Service approval of such Plan amendment), Seller shall amend the Savings Plan to the extent necessary to permit a direct transfer of the accrued benefits for each Company Employee who does not have an outstanding loan under the Savings Plan as of the date of the direct transfer in the Savings Plan (including outstanding loan balances) to Purchaser's 401(k) Plan ("Purchaser's 401(k) Plan") and such benefits shall be thereafter held, administered and distributed

pursuant to the Purchaser's 401(k) Plan. Following such date of transfer, accrued benefits for any Company Employee, including loan balances, which are not transferred to Purchaser's 401(k) Plan shall be held and administered pursuant to the terms of the Savings Plan. Purchaser shall (a) provide to Seller current addresses, telephone numbers, date of termination of employment of Company Employees and all other information reasonably necessary to permit Seller to make all required distributions, provide necessary notices to Company Employees and otherwise administer the Savings Plan for the benefit of such employees.

(d) Seller shall apply for Internal Revenue Service and other necessary governmental approvals referred to above as promptly practicable following the execution of this Agreement. The request for approval by the Internal Revenue Service shall include submissions of appropriate amendments and a request for a determination letter.

(e) Seller shall comply with the applicable provisions of the Consolidated Omnibus Budget Reconciliation Act of 1984 ("COBRA") and Sections 601 through 608 of ERISA, and shall permit Company Employees (and their dependents) to continue their participation in the Company's health care coverage as available immediately prior to Closing for the applicable period of time in accordance with and as required under COBRA. Until

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Company Employees are eligible to participate under Purchaser's medical plan, Purchaser shall pay to Seller all COBRA premiums for providing health care coverage for Company Employees. COBRA premiums charged by Seller for Company Employees shall not exceed one-hundred percent (100%) of the Seller's cost of coverage, calculated on the aggregate basis of Seller and all of its Subsidiaries. The rights of any Company Employee (and his or her eligible dependents) under the American Fidelity Group Flexible Benefit Plan ("Flexible Benefit Plan") maintained pursuant to Section 125 of the Code by the Seller shall be determined under the terms of the Flexible Benefit Plan and applicable law, including Section 601 et seq. of ERISA. Company Employees and their

dependents shall continue to be covered under Seller's welfare plans which provide, on a fully insured basis, life insurance, disabilities benefits and accidental death and dismemberment benefits (other than the welfare plans set forth above in this clause (e)) through the last day of the month in which the Closing Date occurs.

(f) Company Employees shall be credited with employment service with the Company and any of its Subsidiaries for purposes of determining any period of eligibility to participate or to vest in benefits provided under Purchaser's
401(k) Plan, Purchaser's medical, disability and life insurance plan, and any other of Purchaser's employee benefit plans, programs or arrangements sponsored by Purchaser as of the Closing Date; provided, however, unless otherwise required by applicable law, Purchaser shall not be required to provide employee benefit plan coverage prior to the later of (i) January 1, 1997, or (ii) the date Purchaser can reasonably arrange for coverage. In any event, such employee benefit plan coverage shall be provided no later than March 1, 1997. Further, Purchaser shall also recognize employment service of each Company Employee with the Company and any of its Subsidiaries for purposes of accruing benefits pursuant to Purchaser's vacation and sick day policies.

(g) With respect to each Company Employee (and his or her eligible dependents) to be covered under Purchaser's medical plan from and after the Closing Date, Purchaser's medical plan shall, to the extent agreed to by the insurance carrier under Purchaser's medical plan, waive any preexisting conditions, exclusions or limitations. Purchaser shall use commercially reasonable efforts to attempt to obtain such waiver.

6.11 Modification of ERC Arrangements and Release. Seller shall cause the Company and its Subsidiaries to use their best efforts to renegotiate and amend that Liability Excess Reinsurance Agreement between Employers Reinsurance Corporation ("ERC") and the Company and certain of its Subsidiaries dated March

1, 1991, to (i) eliminate any requirement on the part of the Company and its Subsidiaries to make an annual cash payment of Thirty Two Thousand Nine Hundred Three Dollars ($32,903) for any year subsequent to the year ended December 31, 1995; and (ii) eliminate the Thirty Two Thousand Nine Hundred Three Dollars ($32,903) charge to annual profits, for purposes of determining the Company's contingent commission, for any accounting period subsequent to December 31, 1995. Seller shall also, at its sole cost and expense, obtain a release from ERC, in a form satisfactory to Purchaser, acknowledging and agreeing there are no liabilities, obligations, commitments, arrangements, legal or otherwise, on the part of the Company or any of its Subsidiaries to ERC, except under the written reinsurance treaties set forth on Schedule 4.13(a)(iii), as amended pursuant to the provisions of this Section 6.11, and that ERC will not allege or assert any such liability, obligation, commitment or arrangement, legal or otherwise, in connection with the negotiation of additional reinsurance agreements with the Company and its Subsidiaries, or otherwise. The

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release shall specifically acknowledge that Article XII of the Property Aggregate Excess of Loss Reinsurance Agreement dated January 1, 1995 between the Company and ERC was eliminated by amendment and that there is no liability, commitment, arrangement, legal or otherwise, on the part of the Company or any of its Subsidiaries, with respect to the provisions of Article XII.

6.12. Sale of AFCC Capital Stock. Seller shall cause the Company, prior to the Effective Date, to (i) sell and transfer to Seller, in exchange for cash consideration equal to the book value thereof as of October 31, 1996, all of the issued and outstanding shares of capital stock of AFCC, and (ii) terminate, upon terms reasonably satisfactory to Purchaser, all contractual and other business relationships between AFCC and the Company or one of its Subsidiaries and neither the Company nor any of its Subsidiaries shall have any liability or obligation to AFCC or with respect to the liabilities or obligations of AFCC. The sale of the AFCC capital stock and the termination of such relationships shall be on terms consistent with the adjustments set forth in the Pro Forma Interim Financial Statements.

6.13. Transfer of Mortgage Loans.. Seller shall cause the Company and its Subsidiaries to sell and transfer, prior to the Effective Date, all mortgage loans identified on Schedule 4.9. The sale shall be to Seller or one of its Affiliates and shall be in exchange for cash consideration equal to the book value of such mortgage loans as of October 31, 1996. Purchaser agrees to establish, as of the Closing Date, a payroll deduction arrangement, under which the monthly or other periodic payments due from employees, with respect to those mortgage loans under which an employee of the Company or a Subsidiary is obligor, so that payments required under such mortgage loans may be made directly by the Company or a Subsidiary to Seller or one of its Affiliates. Purchaser shall be obligated to establish such payroll deduction arrangements only for those employees who have entered into an agreement with the Company or a Subsidiary as of the Closing Date authorizing such deductions and payments to be made to Seller or one of its Affiliates.

6.14 Intercompany Accounts and Services Agreements. Seller and its Affiliates shall pay prior to the Closing all net amounts known to be due to the Company or any of its Subsidiaries so that no amounts are payable by Seller or any of its Affiliates to the Company or any of its Subsidiaries at the Closing Date. Any amounts that become payable by or to Seller or its Affiliates to or by the Company or its Subsidiaries after the Closing Date shall be promptly paid. Seller shall cause the Company and Cimarron, respectively, to terminate and cancel those Services Agreements with Seller identified in Section 4.28, without payment or other charge to the Company or its Subsidiaries, with such termination effective as of the Closing Date.

6.15 Section 338(h)(10) Election. Seller shall prepare and Seller and Purchaser shall each execute and Purchaser shall deliver to Seller an election pursuant to Section 338(h)(10) of the Code with respect to the Company and its Subsidiaries so that the Company shall be treated as a member of the selling consolidated group. Seller shall, and Purchaser shall authorize Seller to, cause such election to be filed with the Internal Revenue Service. For federal income tax purposes, all gains or losses attributable to the election pursuant to Section 338(h)(10) of the Code and resulting from the deemed sale of assets of the Company and its Subsidiaries by Seller shall be allocated to Seller.

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6.16 Ocean Marine. Seller shall cause the Company, prior to and conditioned on the Closing, to provide appropriate notice of termination with respect to each of the Covenant Agreement and the Continental Agreement, such termination to be effective August 31, 1998, and Seller shall obtain the acknowledgment and confirmation of Covenant Underwriters Ltd. and Continental Underwriters Ltd. to such termination date. Seller shall also obtain the agreement of Covenant Underwriters, Ltd. and Continental Underwriters, Ltd. that there shall be no more than a five percent (5%) increase in premiums written in the Ocean Marine Program in 1997, compared to 1996, and in 1998, compared to 1997, and that no policies will be issued under the Ocean Marine Program after August 31, 1998.

6.17 Pledged Securities. Seller shall, on or prior to the Closing Date, cause that Pledge and Security Agreement dated June 26, 1995 among First Fidelity Bank, N.A., Seller, the Company and American Fidelity Assurance Company to be amended without payment by the Company or its Subsidiaries, so that all obligations of the Company and its Subsidiaries are released and terminated, and shall cause the securities pledged by the Company pursuant to the terms of such agreement, to be released from the Security Agreement and returned to the Company free of restrictions.

6.18 Pennsylvania Fronting Arrangement. Seller shall cause the arrangement whereby the Company is issuing accident and health insurance in the state of Pennsylvania under a "fronting" arrangement with an Affiliate of Seller to be discontinued on or prior to the Closing Date, and all liabilities and obligations of the Company and its Subsidiaries shall be transferred to and assumed by Seller or an Affiliate of Seller on or prior to the Closing Date, or shall be reinsured by Seller or an Affiliate.

6.19 Bills of Sale. At the Closing, Seller shall cause Seller and Cameron Enterprises to sell the personal property listed in the Bills of Sale to the Company at the prices set forth therein.

ARTICLE VII

CONDITIONS TO SELLER'S OBLIGATIONS

The obligations of Seller to consummate the transactions provided for hereby are subject, in the discretion of Seller, to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Seller:

7.1 Representations, Warranties and Covenants. All representations and warranties of Purchaser contained in this Agreement shall be true and correct at and as of the date of this Agreement and at and as of the Closing Date, except as and to the extent that the facts and conditions upon which such representations and warranties are based are expressly required or permitted to be changed by the terms hereof, and Purchaser shall have performed and satisfied all agreements and covenants required hereby to be performed by it prior to or on the Closing Date.

7.2 Consents; Regulatory Compliance and Approval. All consents, approvals and waivers from governmental authorities and other parties necessary to permit Seller to transfer the Shares to Purchaser as contemplated hereby shall have been obtained. Seller shall be satisfied

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that all approvals required under any Regulations to carry out the transactions contemplated by this Agreement shall have been obtained. The applicable waiting period, including any extension thereof, under the HSR Act shall have expired.

7.3 No Actions or Court Orders. No Action by any governmental authority or other person shall have been instituted or threatened for the purpose of enjoining or preventing the transactions contemplated by this Agreement or that questions the validity or legality of the transactions contemplated hereby.

7.4 Opinion of Counsel. Purchaser shall have delivered to Seller an opinion of Latham & Watkins, counsel to Purchaser, dated as of the Closing Date, in form and substance reasonably satisfactory to Seller, to the effect that:

(a) Incorporation. Purchaser is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California;

(b) Corporate Power and Authority. Purchaser has the necessary corporate power and authority to enter into this Agreement and the Ancillary Agreements and to consummate the transactions contemplated hereby and thereby;

(c) Corporate Action and Enforceability. The execution, delivery and performance of this Agreement and the Ancillary Agreements by Purchaser have been duly authorized by all requisite corporate action of Purchaser, and this Agreement and the Ancillary Agreements have been duly executed and delivered by Purchaser and constitute legally valid and binding obligations of Purchaser, enforceable against Purchaser in accordance with their terms, except as limited by the Bankruptcy Exception.

(d) No Breach of Contracts. Neither the execution and delivery of this Agreement or the Ancillary Agreements by Purchaser nor the consummation of the transactions contemplated hereby or thereby will (i) violate the Articles of Incorporation or Bylaws of Purchaser, or (ii) cause a Default under any term or provision of any Contract known to such counsel to which Purchaser is a party or by which Purchaser or its Property is bound; and

(e) No Violation of Law. Neither the execution and performance of this Agreement or the Ancillary Agreements by Purchaser nor the consummation of the transactions contemplated hereby or thereby will violate or result in a failure to comply with any Regulation or Court Order applicable to Purchaser. No Permit of or filing with, any governmental authority or, to the knowledge of such counsel, any other person, is required for the execution and delivery of this Agreement or the Ancillary Agreements by Purchaser, or the consummation by Purchaser of the transactions contemplated hereby and thereby, except as set forth in this Agreement, the Ancillary Agreements or the Disclosure Schedule.

In rendering such opinions, such counsel may rely as it deems advisable (a) as to matters governed by the laws of jurisdictions other than states in which it maintains offices, upon opinions of local counsel satisfactory to counsel to Seller, and (b) as to factual matters, upon certificates and assurances of public officials and officers of Purchaser. In addition, such opinions

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may be subject to such additional qualifications and exceptions as are reasonably acceptable to counsel to Seller.

7.5 Certificates. Purchaser shall furnish Seller with such certificates of its officers and others to evidence compliance with the conditions set forth in this Article VII as may be reasonably requested by Seller.

7.6 Corporate Documents. Seller shall have received from Purchaser resolutions adopted by the board of directors of Purchaser approving this Agreement, the Ancillary Agreements and the transactions contemplated hereby or thereby, certified by Purchaser's corporate secretary.

7.7 Ancillary Agreements. Purchaser shall have executed and delivered the Ancillary Agreements to which Purchaser is a party.

7.8 Investment Representation. Purchaser shall provide to Seller a written document, executed by Purchaser, in form and substance satisfactory to Seller, that Purchaser is acquiring the Shares for investment for its own account and not with a view to the distribution thereof.

7.9 Mitsubishi Consent. Mitsubishi Motor Sales of America, Inc. ("Mitsubishi") shall have either given its consent to the sale of the Shares to Purchaser or shall have waived any right to approve such sale of Shares provided to it in the provision relating to the same contained in its agreement with the Company.

7.10 338(h)(10) Election. Purchaser shall have delivered to Seller the election pursuant to Section 338(h)(10) of the Code described in Section 6.15.

ARTICLE VIII

CONDITIONS TO PURCHASER'S OBLIGATIONS

The obligations of Purchaser to consummate the transactions provided for hereby are subject, in the discretion of Purchaser, to the satisfaction, on or prior to the Closing Date, of each of the following conditions, any of which may be waived by Purchaser:

8.1 Representations, Warranties and Covenants. All representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects at and as of the date of this Agreement and at and as of the Closing Date, except as and to the extent that the facts and conditions upon which such representations and warranties are based are expressly required or permitted to be changed by the terms hereof, and Seller shall have performed and satisfied all agreements and covenants required hereby to be performed by it prior to or on the Closing Date.

8.2 Consents; Regulatory Compliance and Approval. All consents, approvals and waivers from governmental authorities and other parties necessary to the consummation of the transactions contemplated hereby and for the operation of the Business by Purchaser shall

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have been obtained. Purchaser shall be satisfied that all approvals required under any Regulations to carry out the transactions contemplated by this Agreement shall have been obtained. The applicable waiting period, including any extension thereof, under the HSR Act shall have expired.

8.3 No Actions or Court Orders. No Action by any governmental authority or other person shall have been instituted or threatened for the purpose of enjoining or preventing the transactions contemplated by this Agreement or that questions the validity or legality of the transactions contemplated hereby.

8.4 Opinion of Counsel. Seller shall have delivered to Purchaser an opinion of McAfee & Taft A Professional Corporation, counsel to Seller, dated as of the Closing Date, in form and substance reasonably satisfactory to Purchaser, to the effect that:

(a) The Company. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Oklahoma. The Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction set forth on Schedule 4.2. The Company has the necessary corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby;

(b) Corporate Power and Authority. Seller is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Nevada and has the necessary corporate power and authority to enter into this Agreement and the Ancillary Agreements and to consummate the transactions contemplated hereby and thereby;

(c) Subsidiaries. Each of the Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation, and has all requisite corporate power and authority to transact its business and to own its properties; each Subsidiary is qualified in each jurisdiction set forth on Schedule 4.4. The capitalization of each Subsidiary is as set forth on Schedule 4.4. All of the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized, validly issued, fully paid and (except for director's qualifying shares of Cimarron) are nonassessable and are owned of record and, to the knowledge of such counsel, beneficially by the Company, free of any Encumbrance. To the knowledge of such counsel, there are no outstanding Warrants with respect to the capital stock of any Subsidiary;

(d) Corporate Action and Enforceability. The execution, delivery and performance of this Agreement and the Ancillary Agreements by Seller have been duly authorized by all necessary corporate action of Seller and this Agreement has been duly executed and delivered by Seller. The Ancillary Agreements have been duly executed and delivered by Seller. This Agreement and each Ancillary Agreement (other than the Agreement Not to Compete) constitutes a legally valid and binding obligation of Seller, enforceable against Seller in accordance with their terms, except as limited by (i) the Bankruptcy Exception, or (ii) other customary limitations reasonably satisfactory to counsel for Purchaser;

(e) Capitalization. The capitalization of the Company is as set forth in Section 4.3 of this Agreement. All of the Shares are duly authorized, validly issued, fully paid and are nonassessable. To the knowledge of such counsel, there are no outstanding Warrants with

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respect to any capital stock of the Company; Seller is the record owner and, to the knowledge of such counsel, the beneficial owner of such Shares. The Shares constitute all of the issued and outstanding capital stock of the Company. Seller has the full power to transfer the Shares to Purchaser without obtaining the consent or approval of any governmental authority or, to such counsel's knowledge, of any other person, except for those consents that have been obtained or waived. The certificates evidencing the Shares and the instruments of transfer relating thereto delivered to Purchaser at the Closing are sufficient to transfer to and vest in Purchaser title to the Shares, free and clear of all Encumbrances and, assuming Purchaser is acquiring the Shares in good faith without notice of any adverse claim, Purchaser will become the owner of the Shares, free and clear of any Encumbrances;

(f) No Breach of Contracts. Neither the execution and delivery of this Agreement nor the Ancillary Agreements by Seller nor the consummation of the transactions contemplated hereby or thereby will (i) violate the Certificate or Articles of Incorporation or Bylaws of Seller or the Company, or (ii) cause a Default under any term or provision of any Contract or material Lease disclosed in the Schedules to this Agreement to which the Company or any Subsidiary is a party or by which it is bound; and

(g) No Violation of Law. Neither the execution and performance of this Agreement by Seller or the Ancillary Agreements by Seller nor the consummation of the transactions contemplated hereby or thereby will violate or result in a failure to comply with any Regulation or Court Order known to such counsel applicable to the Business or operations of the Company or any of its Subsidiaries. No Permit of, or filing with, any governmental authority or, to the knowledge of such counsel, any other person, is required for the execution and delivery of this Agreement or the Ancillary Agreements by Seller or the consummation by Seller of the transactions contemplated hereby and thereby, except as set forth in this Agreement, the Disclosure Schedule, the exhibits hereto or the Ancillary Agreements.

In rendering such opinions, such counsel may rely as it deems advisable (a) as to matters governed by the laws of jurisdictions other than states in which it maintains offices, upon opinions of local counsel satisfactory to such counsel, and (b) as to factual matters, upon certificates and assurances of public officials and officers of Seller, the Company or any of its Subsidiaries. In addition, such opinions may be subject to such additional qualifications and exceptions as are reasonably acceptable to counsel to Purchaser. Such opinions with respect to the authorization, execution and delivery of the Agreement Not to Compete shall include Cameron Enterprises, as well as Seller, within the coverage of the opinion.

8.5 Certificates. Seller shall furnish Purchaser with such certificates of its officers and others to evidence compliance with the conditions set forth in this Article VIII as may be reasonably requested by Purchaser.

8.6 Material Changes. Since the Interim Balance Sheet Date, there shall not have been any material adverse change with respect to the Business of the Company or any of its Subsidiaries.

8.7 Corporate Documents. Purchaser shall have received from Seller resolutions adopted by the boards of directors of Seller approving this Agreement and the

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Ancillary Agreements, as the case may be, and the transactions contemplated hereby and thereby, certified by Seller's corporate secretary.

8.8 Conveyancing Documents; Release of Encumbrances. Seller shall have endorsed the Shares, or executed such other assignment documents, and delivered the Shares as described in Section 2.1 hereof so as to effect the transfer and assignment to Purchaser of all right, title and interest in and to the Shares, which documents shall be in a form reasonably satisfactory to Purchaser's counsel.

8.9 Ancillary Agreements. Seller shall have, and shall have caused each of the Company, its Subsidiaries and Cameron Enterprises to, deliver to Purchaser all of the Ancillary Agreements to which it is a party.

8.10 Consents. Any consents required as a consequence of the transactions contemplated by this Agreement with respect to all of the Permits and all of the Contracts shall have been obtained or granted, which consents shall not in any manner restrict the ability of Purchaser to conduct the Business of the Company and each of its Subsidiaries as previously conducted.

8.11 ERC Release. Purchaser shall have received the release from ERC specified in Section 6.11 and the reinsurance agreements with ERC specified in
Section 6.11 shall have been amended as set forth therein.

8.12 Intercompany Transfer. The transfers of capital stock of AFCC and the mortgage loans specified in Sections 6.12 and 6.13, respectively, shall have been completed.

8.13 Mitsubishi Consent. Mitsubishi Motor Sales of America, Inc. shall have given its consent to the sale of the Shares to Purchaser or shall have waived any right to approve such sale of Shares, upon such terms as may reasonably be acceptable to Purchaser.

8.14 Ocean Marine. Seller shall have caused the Company to deliver the notices of termination with respect to the Covenant Agreement and the Continental Agreement specified in Section 6.16.

8.15 Section 338(h)(10) Election. Seller shall have executed the election pursuant to Section 338(h)(10) of the Code described in Section 6.15.

8.16 Pledged Securities. The Pledge and Security Agreement identified in Section 6.17 shall have been amended as provided in Section 6.17, and the pledged securities shall have been released from the security interest under such agreement and delivered to the Company free of restrictions.

8.17 Pennsylvania Fronting Arrangement. The "fronting" arrangement whereby the Company has issued accident and health insurance in the state of Pennsylvania has been discontinued, and all liabilities and obligations of the Company and its Subsidiaries under such arrangement shall (i) have been transferred and assumed by Seller or an Affiliate of Seller and

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terminated on or prior to the Closing Date, or (ii) reinsured in their entirety by Seller or an Affiliate of Seller.

8.18 Certificate Regarding Reinsurance. Seller shall have delivered to Purchaser a certificate, signed by both the chief executive officer and the chief financial officer of the Company, to the effect that there are no liabilities, obligations, commitments or arrangements, relating to reinsurance treaties or agreements to which the Company or one of its Subsidiaries is a party, whether as reinsured or reinsurer, legal or otherwise, except as contained in the written agreements identified on Schedule 4.13(a)(iii), or entered into after the date of this Agreement and identified on a schedule attached thereto.

ARTICLE IX

ACTIONS AFTER THE CLOSING

9.1 Books and Records; Tax Matters.

(a) Books and Records. Each party agrees that it will cooperate with and make available to the other party, during normal business hours, all Books and Records, information and employees (without substantial disruption of employment) retained and remaining in existence after the Closing which are necessary or useful in connection with any tax inquiry, audit, investigation or dispute, any litigation or investigation or any other matter requiring any such Books and Records, information or employees for any reasonable business purpose. The party requesting any such Books and Records, information or employees shall bear all of the out-of-pocket costs and expenses (including without limitation attorneys' fees, but excluding reimbursement for salaries and employee benefits) reasonably incurred in connection with providing such Books and Records, information or employees.

(b) Cooperation and Records Retention. Seller and Purchaser shall (i) each provide the other with such assistance as may reasonably be requested by either of them in connection with the preparation of any return, audit, or other examination by any taxing authority or judicial or administrative proceedings relating to Liability for Taxes, (ii) each retain and provide the other with any records or other information that may be relevant to such return, audit or examination, proceeding or determination, and (iii) each provide the other with any final determination of any such audit or examination, proceeding, or determination that affects any amount required to be shown on any tax return of the other for any period. Without limiting the generality of the foregoing, Purchaser and Seller shall each retain, until the applicable statutes of limitations (including any extensions) have expired, copies of all tax returns, supporting work schedules, and other records or information that may be relevant to such returns for all tax periods or portions thereof ending on or before the Closing Date and shall not destroy or otherwise dispose of any such records without first providing the other party with a reasonable opportunity to review and copy the same.

9.2 Survival of Representations, Etc. All of the representations, warranties, covenants and agreements made by each party in this Agreement or in any attachment, exhibit, the Disclosure Schedule, certificate, document or list delivered by any such party pursuant hereto shall survive the Closing for a period of (and claims based upon or arising out of such

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representations, warranties, covenants and agreements may be asserted at any time before the date which shall be) two (2) years following the Closing (except with respect to those matters subject to the special indemnification provisions of Section 9.3(b) and those representations and warranties set forth in Sections
4.20 (Employee Benefit Plans), 4.21 (Tax Matters) and 4.23 (Environmental Matters), which shall survive until the expiration of the applicable statute of limitations (with permitted extensions) with respect to the matters addressed in such sections. Each party hereto shall be entitled to rely upon the representations and warranties of the other party set forth in this Agreement. The termination of the representations and warranties provided herein shall not affect the rights of a party in respect of any Indemnification Claim (as defined below) made by such party in a writing received by the other party prior to the expiration of the applicable survival period provided herein.

9.3 Indemnification.

(a) By Seller - General. Seller shall indemnify, save and hold harmless Purchaser and its Affiliates, including the Company and each of its Subsidiaries (collectively, the "Purchaser Indemnitees") from and against any and all Losses and Expenses arising out of, based upon or resulting from:

(i) the inaccuracy of any representation or warranty of Seller which is contained in or made pursuant to this Agreement; or

(ii) any breach by Seller of any of its agreements, covenants or obligations contained in or made pursuant to this Agreement;

subject to the terms and provisions of, and except as otherwise expressly provided for in, this Agreement. Except as set forth in Section 9.3(b), Seller shall be required to indemnify the Purchaser Indemnitees under this Section 9.3 only if and to the extent that the Losses and Expenses realized or incurred by the Purchaser Indemnitees and which are indemnified against under this Section 9.3 exceed an aggregate of Three Hundred Fifty Thousand Dollars ($350,000), and are less than Three Million Eight Hundred Fifty Thousand Dollars ($3,850,000) in the aggregate.

(b) By Seller -- Special Items. The following items of potential indemnification of the Purchaser Indemnitees by Seller shall not be subject to the dollar amount limitations set forth in Section 9.3(a), and shall not be included in the aggregate limits set forth in Section 9.3(a), and shall be indemnified as follows:

(i) In the event of a default in the payment of principal or interest relating to (x) the promissory note dated December 31, 1993 of Cimarron Crop Insurance Services, Inc. in favor of Cimarron, in the original principal amount of Six-Hundred Thirty-Five Thousand Dollars ($635,000), and (y) the promissory note dated December 31, 1993 of Cimarron Crop Insurance Services, Inc. in favor of the Company, in the original principal amount of Four-Hundred Eighty-Three Thousand Nine-Hundred Eighty-Two Dollars ($483,982), and if such default in the payment of principal or interest has not been cured after reasonable notice to the maker, endorsers and guarantors of the promissory note as to which such default exists, Seller, promptly and within thirty (30) days following written demand by Purchaser, will purchase such promissory note from the Company for a cash purchase price equal to the unpaid principal balance

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thereof plus interest upon such unpaid principal balance at the non-default rate stated in such promissory note which is accrued but unpaid at the date of purchase. Such promissory note and all collateral securing the payment thereof shall be assigned by the Company without recourse to the Seller; and

(ii) Seller shall indemnify, save and hold harmless the Purchaser Indemnitees from and against any and all Losses and Expenses relating to the premium tax audit by the Texas Comptroller of Public Accounts identified on Schedule 4.21; and

(iii) Seller shall indemnify, save and hold harmless the Purchaser Indemnitees with respect to those Accounts Receivable identified in Section 4.9(b) for eighty-five percent (85%) of the aggregate unpaid principal amount of such Accounts Receivable as set forth in Section 4.9(b); and

(iv) Seller shall indemnify, save and hold harmless the Purchaser Indemnitees from and against any and all Losses and Expenses arising out of, based upon or resulting from the Ocean Marine Program, including, without limitation, all Losses and Expenses relating to claims by or against Continental or Covenant in which the Company or one of its Subsidiaries becomes subject to such claims.

(v) Seller shall indemnify, save and hold harmless the Purchaser Indemnitees from and against any and all Losses and Expenses, in excess of any reinsurance recoverable from Seller or an Affiliate of Seller, relating to the arrangement whereby the Company is issuing accident and health insurance in the State of Pennsylvania under a "fronting arrangement" with an Affiliate of Seller described in Section 6.17.

(c) By Purchaser. Purchaser shall indemnify and save and hold harmless Seller and its respective Affiliates (collectively, the "Seller Indemnitees") from and against any and all Losses and Expenses incurred in connection with, arising out of, resulting from or incident to (i) any breach of any representation or warranty made by Purchaser in or pursuant to this Agreement, or (ii) any breach of any covenant or agreement made by Purchaser in or pursuant to this Agreement.

(d) Losses and Expenses. The terms "Losses" and "Expenses" as used in this Article IX are not limited to matters asserted by third parties against Seller or Purchaser, but include Losses and Expenses incurred or sustained by a Seller Indemnitee or a Purchaser Indemnitee in the absence of third party claims. Payments by a Purchaser Indemnitee of amounts for which such Purchaser Indemnitee is indemnified hereunder, and payments by a Seller Indemnitee of amounts for which such Seller Indemnitee is indemnified, shall not be a condition precedent to recovery. Seller's obligation to a indemnify a Purchaser Indemnitee, and Purchaser's obligation to indemnify a Seller Indemnitee, shall not limit any other rights, including, without limitation, rights of contribution which either party may have under statute or common law.

(e) Cooperation. The indemnified party shall cooperate in all reasonable respects with the indemnifying party and its attorneys in the investigation, trial and defense of such lawsuit or

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action and any appeal arising therefrom; provided, however, that the indemnified party may, at its own cost, participate in the investigation, trial and defense of such lawsuit or action and any appeal arising therefrom. The parties shall cooperate with each other in any notifications to insurers.

(f) Defense of Claims. If a claim for Losses and Expenses (an "Indemnification Claim") is to be made by a party entitled to indemnification hereunder against the indemnifying party, the party claiming such indemnification shall give written notice (an "Indemnification Claim Notice") to the indemnifying party as soon as practicable after the party entitled to indemnification becomes aware of any fact, condition or event which may give rise to Losses and Expenses for which indemnification may be sought under this
Section 9.3. If any lawsuit or enforcement action is filed against any party entitled to the benefit of indemnity hereunder, written notice thereof shall be given to the indemnifying party as promptly as practicable (and in any event within fifteen (15) calendar days after the service of the citation or summons). The failure of any indemnified party to give timely notice hereunder shall not affect rights to indemnification hereunder, except to the extent that the indemnifying party demonstrates actual damage caused by such failure. After such Indemnification Claim Notice, if the indemnifying party shall acknowledge in writing to the indemnified party that the indemnifying party shall be obligated under the terms of its indemnity hereunder in connection with such lawsuit or action, then the indemnifying party shall be entitled, if it so elects at its own cost, risk and expense, (i) to take control of the defense and investigation of such lawsuit or action, (ii) to employ and engage attorneys of its own choice to handle and defend the same unless the named parties to such action or proceeding include both the indemnifying party and the indemnified party and the indemnified party has been advised in writing by counsel that there may be one or more legal defenses available to such indemnified party that are different from or additional to those available to the indemnifying party, in which event the indemnified party shall be entitled, at the indemnifying party's cost, risk and expense, to separate counsel of its own choosing, and
(iii) to compromise or settle such claim, which compromise or settlement shall be made only with the written consent of the indemnified party, such consent not to be unreasonably withheld. If the indemnifying party fails to assume the defense of such claim within fifteen (15) calendar days after receipt of the Indemnification Claim Notice, the indemnified party against which such claim has been asserted will (upon delivering notice to such effect to the indemnifying party) have the right to undertake, at the indemnifying party's cost and expense, the defense, compromise or settlement of such claim on behalf of and for the account and risk of the indemnifying party. In the event the indemnified party assumes the defense of the claim, the indemnified party will keep the indemnifying party reasonably informed of the progress of any such defense, compromise or settlement. The indemnifying party shall be liable for any settlement of any action effected pursuant to and in accordance with this
Section 9.3 and for any final judgment (subject to any right of appeal), and the indemnifying party agrees to indemnify and hold harmless an indemnified party from and against any Losses and Expenses by reason of such settlement or judgment.

(g) Purchaser's Right of Offset. Anything in this Agreement to the contrary notwithstanding, Purchaser may withhold and set off against the Holdback Amount any amount as to which Seller is obligated to indemnify Purchaser pursuant to any provision of this Section 9.3.

(h) Brokers and Finders. Pursuant to the provisions of this Section 9.3, each of Purchaser and Seller shall indemnify, hold harmless and defend the other party from the payment of any and all broker's and finder's expenses, commissions, fees or other forms of compensation which may be due or payable from or by the indemnifying party, or may have been

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earned by any third party acting on behalf of the indemnifying party in connection with the negotiation and execution hereof and the consummation of the transactions contemplated hereby.

(i) Representatives. No individual Representative of any party shall be personally liable for any Losses and Expenses under the provisions contained in this Section 9.3. Nothing herein shall relieve either party of any Liability to make any payment expressly required to be made by such party pursuant to this Agreement.

9.4 Payment of Holdback Amount. Purchaser shall hold and pay the Holdback Amount pursuant to Article IX and this Section 9.4. If Purchaser has not delivered an Indemnification Claim Notice to Seller on or before the first anniversary of the Closing Date, all of the Holdback Amount shall be paid promptly to Seller with interest thereon at the rate of five percent (5%) per annum from the Closing Date through the date of payment of the Holdback Amount. If Purchaser has delivered one or more Indemnification Claim Notices to Seller on or before the first anniversary of the Closing Date and has exercised its right of offset pursuant to Section 9.3(g), or has not then determined the appropriate amount to be offset, the following shall apply:

(a) As promptly as practicable, but not later than ten (10) days following the first anniversary of the Closing Date, Purchaser shall prepare and deliver to Seller a written statement (the "Preliminary Holdback Accounting Report") in reasonable detail which reflects and identifies, on an item-by-item basis, (i) each Indemnification Claim paid by Purchaser and with respect to which Purchaser has exercised a right of offset against the Holdback Amount, and
(ii) each unresolved Indemnification Claim and the portion of the Holdback Amount reasonably estimated by Purchaser to be required to cover each such unresolved Indemnification Claim, and the calculation reflecting how such amount was determined.

(b) Seller may, within twenty (20) days after the date of its receipt of the Preliminary Holdback Accounting Report, deliver to Purchaser a certificate (signed by Seller) setting forth any objections to the portion(s) of the Holdback Amount which Purchaser estimates is required to cover any unresolved Indemnification Claim as set forth in the Preliminary Holdback Accounting Report, together with a summary of the reasons therefor and calculations which, in Seller's view, are necessary to eliminate such objections. With respect to any item included in the Preliminary Holdback Accounting Report to which Seller does not so object within such 20-day period, the Preliminary Holdback Accounting Report shall be final and binding as the "Final Holdback Accounting Report" with respect to such item(s) for purposes of this Agreement.

(c) With respect to any item included in the Preliminary Holdback Account Report to which Seller does object within such 20-day period, Purchaser and Seller shall use their respective reasonable best efforts to resolve within thirty (30) days by written agreement (the "Agreed Holdback Adjustment") any differences with respect to such item and, in the event Purchaser and Seller so resolve any such differences, the Preliminary Holdback Accounting Report with respect to such item, as further adjusted by the Agreed Holdback Adjustment, shall become the Final Holdback Accounting Report and shall be final and binding as to such items for purposes of this Agreement.

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(d) In the event any objection raised by Seller is not resolved by the Agreed Holdback Adjustment within the 30-day period referred to in subsection
(c), then Seller and Purchaser shall submit the unresolved objection to arbitration pursuant to Section 10.12, and the Preliminary Holdback Accounting Report, as adjusted to give effect to the resolution of such objections, shall be deemed the Final Holdback Accounting Report.

(e) The parties hereto shall make available to each other such books, records and other information (including work papers) as any of the foregoing may reasonably request to prepare or review the Preliminary Holdback Accounting Report.

Purchaser shall pay to Seller promptly after the first anniversary of the Closing Date an amount equal to the Holdback Amount as reflected in the Final Holdback Accounting Report. The parties agree that offset against the Holdback Amount shall not be Purchaser's exclusive method of receiving indemnification from Seller pursuant to this Article IX.

9.5. Post-Closing Claims Administration. From the Closing Date until and including December 31, 2004, Purchaser will or will cause the Company and each of its Subsidiaries to (i) administer, process, compromise and defend Claims (which include Late Claims) on a basis consistent with the practices, processes and procedures generally followed in the property and casualty insurance industry and (ii) use all reasonable efforts to settle and compromise Claims and Late Claims at their true value and make appropriate payments with respect to such Claims and Late Claims, consistent with customary practices in the property and casualty insurance industry in the geographic area in which the related Loss-Event occurred (the standards set forth in clauses (i) and (ii), collectively, the "Claims-Processing Standards"). If the Company or any of its Subsidiaries propose to make a Claim Payment prior to December 31, 2001, with respect to a Claim which is included in the Effective Date Insurance Reserves, and if the aggregate Claim Payments made and proposed to be made with respect to any such Claim exceed or, after giving effect to the proposed Claim Payment, will exceed, the sum of (i) the Company's retention amounts under all reinsurance treaties or agreements applicable to such Claim, plus (ii) the amount of reinsurance recoverable with respect to such Claim, up to the Company's reinsurance limit under all reinsurance treaties and agreements applicable to such Claim (whether or not such reinsurance is actually collectible), Purchaser shall, or shall cause the Company to, give Seller notice of such proposed Claim Payment, which notice shall, in reasonable detail, identify the insurance policy, the claimant, the Date of Loss, the amount of the Claim, the Company's analysis of the coverage and risk of loss with respect to such Claim and the basis for such Claim, and shall request Seller to approve such proposed Claim Payment within ten (10) days of Seller's receipt of such notice. If Seller shall not affirmatively approve the proposed Claim Payment within such ten-day period, then Purchaser and the Company or a Subsidiary, as the case may be, may elect to either settle such Claim and make the Claim Payment or continue to defend the Claim. If Purchaser (or the Company or such Subsidiary) shall elect to make such Claim Payment, such Claim Payment shall not be taken into account in the calculation of the Reserve Redundancy or Reserve Deficiency as provided in Section 2.4 to the extent that such Claim Payment is in excess of the Case Reserve for such Claim. If Purchaser (or the Company or a Subsidiary, as the case may be) shall elect to continue to defend such Claim, then (a) the entire amount of the ultimate Claim Payment, together with all costs and expenses of defense with respect to such Claim, and plus the amount of any extra-contractual judgment in excess of policy limits and exemplary or punitive damages with respect to such Claim shall be taken into account

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in the calculation of the Reserve Redundancy or Reserve Deficiency as provided in Section 2.4, and (b) Seller shall have the right to assume the defense of the Claim at Seller's expense, and (c) Seller shall be obligated to make reimbursement even though such Claim may be finally resolved after December 31, 2001 (or with respect to a Late Claim, finally resolved after December 31, 2004) and Seller shall pay to Purchaser (or the Company or a Subsidiary, as the case may be) all amounts due under clause (a) above to the extent such amounts are in excess of the Case Reserve for such Claim at December 31, 2001.

9.6. Post-Closing Inspection of Records. From the Closing Date until December 31, 2004, Seller or its Representatives shall have the right to review, on a basis no more frequently than quarterly with respect to each calendar year after the Closing Date, all books, records and files of the Company and its Subsidiaries with respect to Claims and Late Claims and Claim Payments actually made or agreed to be made by the Company and its Subsidiaries for such calendar year, and, with respect to the Company's Insurance Reserves, to determine that the Company's books and records properly reflect the Date of Loss, whether there has occurred a pattern of material departures from the Claims-Processing Standards set forth in Section 9.5, and, if so, whether, in Seller's opinion, there have been overpayments with respect to specific Claims and Late Claims. Such review shall be conducted at the offices of the Company and its Subsidiaries and shall be subject to the provisions of Section 10.10 hereof with respect to any Confidential Information received during such review by Seller and/or its Representatives. In addition, prior to the commencement of each such review, Seller shall familiarize all of its Representatives who will be involved in such review with the insider trading laws applicable to Purchaser, the Company and its Subsidiaries.

Within thirty (30) days following the completion of each review, Seller shall provide Purchaser with a written report of such review (each such report, a "Seller's Report") which shall reflect, among other things, a list of the books, records and files reviewed by Seller, and the conclusions reached by Seller. The Seller's Report shall specifically set forth the grounds, if any, for Seller's determination that the conduct of the Company and its Subsidiaries has shown a pattern of material departures from the Claims-Processing Standards, including, without limitation, a list of each of the Claims or Late Claims Seller believes were overpaid.

In the event Seller has reasonably determined that the Company or any of its Subsidiaries has shown a pattern of material departures from the Claims- Processing Standards, then, within thirty (30) days following receipt of Seller's Report, Purchaser shall give written notice to Seller which shall identify any of Seller's conclusions contained in Seller's Report which Purchaser disputes. The failure of Purchaser to give notice of dispute of any conclusion stated in a Seller's Report shall be deemed an irrevocable concurrence by Purchaser in any disputed conclusions. Such disputes shall be resolved in accordance with the procedures set forth in Section 10.12 of this Agreement. The arbitrator appointed to resolve such disputes shall make a preliminary determination whether, during the period of review covered by such Seller's Report, the Company or any of its Subsidiaries engaged in a pattern of material departures from the Claims-Processing Standards. If the arbitrator finds that no such pattern exists, there shall be no further inquiry by such arbitrator into the Claim Payments made by the Company and its Subsidiaries on or prior to the date of the Seller's Report in dispute, and such Claim Payments shall be deemed final, binding and conclusive upon the parties. In the event the arbitrator finds that such a pattern does exist, the arbitrator shall resolve the disputes between Purchaser and Seller outlined in the Seller's Report and Purchaser's response thereto on a Claim-by-

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Claim or Late Claim-by-Late Claim basis and shall issue a decision with respect to each disputed Claim or Late Claim. Under no circumstances shall the arbitrator use any method of extrapolation in determining the number of Claims or Late Claims overpaid by the Company and its Subsidiaries or the total amount overpaid by the Company and or any of its Subsidiaries with respect to Claim Payments. The final determination of such disputed items shall be considered in the determination of the Reserve Redundancy or Reserve Deficiency as provided in
Section 2.4.

9.7 Change of Name Promptly after the Closing, Purchaser shall cause the Company to commence proceedings to change its corporate name, the assumed name of AMC in Texas, and the name of the Lloyd's Plan, to eliminate the words "American Fidelity" and shall use its best efforts to expeditiously obtain all regulatory and other approvals necessary or appropriate to cease conducting business under the name "American Fidelity." The Company may continue to use the words "American Fidelity" in its name and advertising literature until such approvals are obtained and a new name is adopted. The Company shall cease conducting business under the "American Fidelity" name no later than one (1) year after the Closing Date. Immediately upon and following the Closing, the Company and each of its Subsidiaries and affiliates shall cease to identify themselves as members of the "American Fidelity Group." In addition, any insurance contracts entered into in the name of "American Fidelity Insurance Company" in effect on the Closing Date or entered into by the Company within one
(1) year following the Closing Date may refer to the Company as "American Fidelity Insurance Company" and such reference may continue for the remaining term of such insurance contract. AMC may continue to use "AFI" in its corporate name and in the conduct of its Business.

9.8 Ocean Marine Program.

(a) Maintenance of Ocean Marine Program. Purchaser agrees to maintain the Ocean Marine Program in effect until August 31, 1998, except that Purchaser may, at any time, terminate (i) the Covenant Agreement pursuant to Sections 6.2, 6.3 or 6.4 of such agreement, and (ii) the Continental Agreement pursuant to Sections 7.2, 7.3 or 7.4 of such agreement. Purchaser shall cause the Company to maintain separate accounts with respect to the operation of the Ocean Marine Program in such detail so that underwriting profits and losses are separately identified with respect to this operation. Purchaser shall not permit the Company to amend or otherwise modify the Covenant Agreement, Continental Agreement or any of the reinsurance agreements identified in Section 4.27, without the consent of Seller, which will not be unreasonably withheld. Purchaser and Seller shall use their respective best efforts to enter into the quota share and excess of loss reinsurance agreements through August 31, 1998, on substantially the same terms as presently in effect. Purchaser shall not be obligated to maintain the Ocean Marine Program in effect, unless such reinsurance arrangements can be consummated on substantially the same terms as presently in effect. Subject to the notices of termination sent by the Company pursuant to Section 6.16, following the Closing, Purchaser shall cause the Company to maintain its Ocean Marine Program consistent with the practices, processes and procedures generally followed by Covenant Underwriters, Ltd., Continental Underwriters, Ltd., and the Company prior to the Closing; provided, however, nothing in this Agreement shall be construed to restrict the Company's right to terminate the Covenant Agreement or the Continental Agreement for "cause" as such term is defined in such agreements.

(b) Ocean Marine Settlement Reports.

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(i) Not later than February 28, 1997, Purchaser shall deliver to Seller a certificate (each such certificate being referred to as an "Ocean Marine Settlement Report") setting forth Purchaser's determination of the "net program income" realized or the "net program loss" incurred by the Company and its Subsidiaries and attributable to the Ocean Marine Program between November 1, 1996, and January 31, 1997, and shall include Ocean Marine Case Reserves and Ocean Marine IBNR Reserves for all outstanding losses incurred under the program. Seller shall be entitled to receive, on or prior to March 31, 1997, an amount equal to the "net program income" realized by the Company and its Subsidiaries and attributable to the Ocean Marine Program, if any, set forth in such Ocean Marine Settlement Report. Purchaser, on the other hand, shall be entitled to receive from Seller, on or prior to March 31, 1997, an amount equal to the "net program loss" incurred by the Company and its Subsidiaries and attributable to the Ocean Marine Program, if any, set forth in such Ocean Marine Settlement Report. In the event there exists on March 31, 1997 a dispute which has not been resolved pursuant to Section 9.8(c), payment shall be made promptly, but in no event more than two (2) business days after the dispute has been resolved.

(ii) Not later than May 31, 1997, August 31, 1997, and November 30, 1997, and on February 28, May 31, August 31 and November 30 of each year thereafter (until there are no longer any outstanding losses incurred under the Ocean Marine Program that have not been finally resolved) Purchaser shall deliver to Seller an Ocean Marine Settlement Report setting forth Purchaser's determination of the "net program income" realized or the "net program loss" incurred by the Company and its Subsidiaries and attributable to the Ocean Marine Program for the preceding three (3) month periods ended January 31, April 30, July 31 and October 31, respectively, and shall include Ocean Marine Case Reserves and Ocean Marine IBNR Reserves as of the end of such three (3) month periods ended January 31, April 30, July 31 and October 31, respectively, for all outstanding losses incurred under the program. Seller shall be entitled to receive, on or prior to the date that is sixty (60) days after the end of each three (3) month period ended January 31, April 30, July 31 and October 31, respectively, an amount equal to the "net program income" realized by the Company and its Subsidiaries attributable to the Ocean Marine Program, if any, set forth in such Ocean Marine Settlement Report. Purchaser, on the other hand, shall be entitled to receive from Seller, on or prior to the date that is sixty
(60) days after the end of each three (3) month period ended January 31, April 30, July 31 and October 31, respectively, an amount equal to the "net program loss" incurred by the Company and its Subsidiaries and attributable to the Ocean Marine Program, if any, set forth in such Ocean Marine Settlement Report.

(iii) For purposes of this Section 9.8(b), the "net program income" realized or the "net program loss" incurred by the Company and its Subsidiaries and attributable to the Ocean Marine Program shall be determined in accordance with Exhibit G attached hereto. Net program income or loss shall be determined pursuant to the Covenant Agreement, the Continental Agreement and the reinsurance agreements that are part of the Ocean Marine Program pursuant to
Section 4.27 or 9.8(a), and shall also include as an expense of the program reasonable administrative and other costs incurred by the Company with respect to such program.

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(iv) In the event there exists on any date that is sixty (60) days after the end of each such three (3) month period described in Section 9.8(b)(ii) a dispute which has not been resolved pursuant to Section 9.8(c), payment shall be made promptly, but in no event more than two (2) business days, after the dispute has been resolved.

(c) Resolution of Disputes.

(i) Following receipt of each Ocean Marine Settlement Report, Seller may review the same and, within thirty (30) days after the date of such receipt, may deliver to Purchaser a certificate setting forth any objections to the determinations set forth in such Ocean Marine Settlement Report, together with a summary of the reasons therefor and calculations which, in Seller's view, are necessary to eliminate such objections, to the extent the information necessary to made such calculations is reasonably available to Seller. If Seller does not object within such 30-day period, the determinations set forth in the Ocean Marine Settlement Report shall be final and binding on Purchaser and Seller.

(ii) If Seller timely objects within such 30-day period, Purchaser and Seller shall use their respective reasonable best efforts to resolve within thirty (30) days after such timely objection by written agreement (the "Ocean Marine Agreed Changes") any differences as to the determinations set forth in the Ocean Marine Settlement Report. If Seller and Purchaser so resolve any such differences, the determinations set forth in the Ocean Marine Settlement Report shall be final and binding on Purchaser and Seller.

(iii) If any objections timely raised by Seller are not resolved by the Ocean Marine Agreed Changes within the 30-day period contemplated in this Subsection 9.8(c), then Purchaser and Seller shall submit the objections that are then unresolved to the Accounting Firm. The Accounting Firm shall be directed by Purchaser and Seller to seek to resolve the unresolved objections as promptly as reasonably practicable and to deliver written notice to each of Purchaser and Seller setting forth its resolution of the disputed matters. The determinations set forth in the Ocean Marine Settlement Report as adjusted by the Ocean Marine Agreed Changes and by the Accounting Firm's resolution of such objections shall be final and binding on the parties.

(iv) The parties hereto shall make available to Purchaser, Seller (and their respective Representatives) and, if applicable, the Accounting Firm, such books, records and other information (including work papers) as any of the foregoing may reasonably request to prepare to review any Ocean Marine Settlement Report or any matters submitted to the Accounting Firm pursuant to this Section 9.8.

(v) The reasonable fees and expenses of the Accounting Firm shall be paid fifty percent (50%) by Purchaser and fifty percent (50%) by Seller. Any fees and expenses payable by Seller pursuant to this Section 9.8(c), at the election of Purchaser, to the extent available, may be set-off from any amounts otherwise payable to Seller pursuant to this Section 9.8.

9.9 Effective Date Financial Statements. As promptly as practicable (but not later than thirty (30) days following the Closing Date), the accounting personnel of the

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Company, under the direction of Purchaser, shall prepare and deliver to Seller a balance sheet of the Company as of the Effective Date (the "Preliminary Effective Date Balance Sheet"), accompanied by the other statements contained in the Effective Date Financial Statements (collectively, the "Preliminary Accounting Report"). The Preliminary Effective Date Balance Sheet and the Effective Date Financial Statements shall fairly and accurately present the consolidated assets, liabilities (including reserves) and stockholder's equity of the Company and its Subsidiaries as of the Effective Date; provided, however, that in no event may the aggregate amount of the Effective Date Insurance Reserves exceed the aggregate amount of the Interim Balance Sheet Date Insurance Reserves, and in the event such excess might otherwise exist, the Effective Date Insurance Reserves shall be adjusted downward to the amount of the Interim Balance Sheet Date Insurance Reserves, and such adjusted amount shall constitute the amount of the Effective Date Insurance Reserves for purposes of Section 2.4. During the course of such preparation, Purchaser shall make available the books and records of the Company and its Subsidiaries and shall otherwise cooperate with Seller in the preparation of the Preliminary Effective Date Balance Sheet and the Effective Date Financial Statements.

(a) Seller may, within thirty (30) days after the date of the receipt of the Preliminary Accounting Report, deliver to Purchaser a certificate (signed by Seller) setting forth any objections to any of the matters included in the Preliminary Accounting Report, together with a summary of the reasons therefor and calculations which, in Seller's view, are necessary to eliminate such objections. In the event Seller does not so object within such 30-day period, the Preliminary Effective Date Balance Sheet set forth in the Preliminary Account Report shall be final and binding as the "Effective Date Balance Sheet" for purposes of this Agreement.

(b) In the event Seller so objects to the Preliminary Accounting Report within such 30-day period, Purchaser and Seller shall use their respective reasonable best efforts to resolve within thirty (30) days by written agreement (the "Agreed Adjustments") any differences with respect to any matters included in the Preliminary Accounting Report and, in the event Purchaser and Seller so resolve any such differences, the Preliminary Effective Date Balance Sheet set forth in the Preliminary Accounting Report, as further adjusted by the Agreed Adjustments, shall be final and binding as the Effective Date Balance Sheet for purposes of this Agreement.

(c) In the event any objections raised by Seller are not resolved by the Agreed Adjustments within the 30-day period referred to in subsection (c), then Seller and Purchaser shall (i) if the total amount in controversy is less than Fifteen Thousand Dollars ($15,000), submit the objections that are then unresolved to the Auditor, or (ii) if the total amount in controversy is equal to or greater than Fifteen Thousand Dollars ($15,000), the Accounting Firm shall resolve any remaining disagreements. The determination by the Auditor or the Accounting Firm, as the case may be, shall be final, binding and conclusive on the parties. Purchaser and Seller shall use their best efforts to cause the Auditor or the Accounting Firm, as the case may be, to make its determination within thirty (30) calendar days of submission of the items in controversy. The Preliminary Effective Date Balance Sheet, after giving effect to any Agreed Adjustments and to the resolution of disputed matters by the Auditor or the Accounting Firm, as the case may be, shall be final and binding as the Effective Date Balance Sheet for purposes of this Agreement. Unresolved objections not involving accounting issues shall be resolved by arbitration pursuant to Section 10.12.

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(d) The parties hereto shall make available to each other, the Auditor or the Accounting Firm, as the case may be, such books, records and other information (including work papers) as any of the foregoing may reasonably request to prepare or review the Preliminary Accounting Report or any matters submitted to the Auditor or the Accounting Firm, as the case may be. The reasonable fees and expenses of the Auditor or the Accounting Firm, as the case may be, hereunder shall be paid fifty percent (50%) by Purchaser and fifty percent (50%) by Seller.

(e) No determination or agreement with respect to the Effective Date Balance Sheet contemplated by this Section 9.9 shall limit the representations, warranties, covenants and agreements of the parties set forth elsewhere in this Agreement.

ARTICLE X

MISCELLANEOUS

10.1 Termination.

(a) Termination. This Agreement may be terminated at any time prior to Closing:

(i) By mutual written consent of Purchaser and Seller;

(ii) By Purchaser or Seller if the Closing shall not have occurred on or before January 31, 1997; provided, however, that this provision shall not be available to Purchaser if Seller has the right to terminate this Agreement under clause (iv) of this Section 10.1, and this provision shall not be available to Seller if Purchaser has the right to terminate this Agreement under clause (iii) of this Section 10.1;

(iii) By Purchaser if there is a material breach of any representation or warranty set forth in Article IV hereof or any covenant or agreement to be complied with or performed by Seller or the Company pursuant to the terms of this Agreement or the failure of a condition set forth in Article VIII to be satisfied (and such condition is not waived in writing by Purchaser) on or prior to the Closing Date, or the occurrence of any event which results or would result in the failure of a condition set forth in Article VIII to be satisfied on or prior to the Closing Date; provided that Purchaser may not terminate this Agreement prior to the Closing if Seller has not had an adequate opportunity to cure such failure; or

(iv) By Seller if there is a material breach of any representation or warranty set forth in Article V hereof or of any covenant or agreement to be complied with or performed by Purchaser pursuant to the terms of this Agreement or the failure of a condition set forth in Article VII to be satisfied (and such condition is not waived in writing by Seller) on or prior to the Closing Date, or the occurrence of any event which results or would result in the failure of a condition set forth in Article VII to be satisfied on or prior to the Closing Date; provided that Seller may not terminate this Agreement prior to the Closing Date if Purchaser has not has an adequate opportunity to cure such failure.

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(b) In the Event of Termination. In the event of termination of this Agreement:

(i) Each party will redeliver all documents, work papers and other material of any other party relating to the transactions contemplated hereby, whether so obtained before or after the execution hereof, to the party furnishing the same;

(ii) The provisions of Section 10.10 shall continue in full force and effect; and

(iii) No party hereto shall have any Liability to any other party to this Agreement, except as stated in subsections (i), (ii) and (iii) of this
Section 10.1(b), except for any willful breach of this Agreement occurring prior to the proper termination of this Agreement. The foregoing provisions shall not limit or restrict the availability of specific performance or other injunctive relief to the extent that specific performance or such other relief would otherwise be available to a party hereunder.

10.2 Assignment. Neither this Agreement nor any of the rights or obligations hereunder may be assigned by any party without the prior written consent of the other party; except that Purchaser may, without such consent, assign all such rights and obligations to a wholly-owned subsidiary or subsidiaries of Purchaser which shall assume all obligations and Liabilities of Purchaser under this Agreement, but such assignment and assumption shall not release or relieve Purchaser of its obligations and Liabilities to Seller under this Agreement. Subject to the foregoing, this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, and no other person shall have any right, benefit or obligation under this Agreement as a third party beneficiary or otherwise.

10.3 Notices. All notices, requests, demands and other communications which are required or may be given under this Agreement shall be in writing and shall be deemed to have been duly given when received if personally delivered; when transmitted if transmitted by telecopy, electronic or digital transmission method; the day after it is sent, if sent for next day delivery to a domestic address by recognized overnight delivery service (e.g., Federal Express); and

upon receipt, if sent by certified or registered mail, return receipt requested. In each case notice shall be sent to:

If to Seller, addressed to:

American Fidelity Corporation 2000 Classen Boulevard Suite 700-North
Oklahoma City, OK 73106 Attention: Kenneth D. Klehm Fax: (405) 523-5411

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With a copy to:

McAfee & Taft
Two Leadership Square 211 North Robinson
Suite 1000
Oklahoma City, OK 73102 Attention: Theodore M. Elam, Esq.

Fax: (405) 235-0439

If to Purchaser, addressed to:

Mercury General Corporation
4484 Wilshire Boulevard
Los Angeles, CA 90010
Attention: George Joseph
Fax: (213) 857-7116

and

Mercury General Corporation
555 W. Imperial Hwy.
Brea, CA 92621
Attention: Michael D. Curtius
Fax: (714) 671-7464

With a copy to:

Latham & Watkins
701 B Street, Ste. 2100 San Diego, CA 92101
Attention: Donald P. Newell, Esq.

Fax: (619) 696-7419

or to such other place and with such other copies as either party may designate as to itself by written notice to the others.

10.4 Choice of Law. This Agreement and the Escrow Agreement shall be construed, interpreted and the rights of the parties determined in accordance with the laws of the State of Oklahoma (without reference to the choice of law provisions of Oklahoma law), except with respect to matters of law concerning the internal corporate affairs of any corporate entity which is a party to or the subject of this Agreement, and as to those matters the law of the jurisdiction under which the respective entity derives its powers shall govern. The Agreement Not to Compete shall be construed, interpreted and the rights of the parties determined in accordance with the laws of the State of Oklahoma.

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10.5 Entire Agreement; Amendments and Waivers. This Agreement and the Ancillary Agreements, together with all schedules hereto and thereto (including the Disclosure Schedule), constitute the entire agreement among the parties pertaining to the subject matter hereof and supersede all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. No amendment, supplement, modification or waiver of this Agreement shall be binding unless executed in writing by the party to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided.

10.6 Multiple 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.

10.7 Expenses. Except as otherwise specified in this Agreement, each party hereto shall pay its own legal, accounting, out-of-pocket and other expenses incident to this Agreement and to any action taken by such party in preparation for carrying this Agreement into effect, except that Purchaser shall pay one-half (1/2) of the cost of the audit for the Year-End Financial Statements.

10.8 Invalidity. In the event that any one or more of the provisions contained in this Agreement or in any other instrument referred to herein, shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, then to the maximum extent permitted by law, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any other such instrument.

10.9 Titles; Gender. The titles, captions or headings of the Articles and Sections herein, and the use of a particular gender, are for convenience of reference only and are not intended to be a part of or to affect or restrict the meaning or interpretation of this Agreement.

10.10 Confidential Information.

(a) Confidentiality. In connection with the negotiation of this Agreement, the preparation for the consummation of the transactions contemplated hereby, and the performance of obligations hereunder (including the conduct of quarterly reviews by Seller pursuant to Section 9.6 hereof), each of Purchaser and Seller acknowledges that it will have access to confidential information relating to the other party, including technical, financial or marketing information, ideas, methods, developments, inventions, improvements, business plans, trade secrets, scientific or statistical data, diagrams, drawings, specifications or other proprietary information relating thereto, together with all analyses, compilations, studies or other documents, records or data prepared by Seller or Purchaser which contain or otherwise reflect or are generated from such information ("Confidential Information"). The term "Confidential Information" does not include information received by Purchaser or Seller in connection with the transactions contemplated hereby which (i) is or becomes generally available to the public other than as a result of a disclosure by the party to this Agreement which received the Confidential Information in connection herewith or its Representatives, (ii) was within such receiving party's

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possession prior to its being furnished to such party by or on behalf of the other party to this Agreement in connection with the transactions contemplated hereby, provided that the source of such information was not known by the receiving party, to be bound by a confidentiality agreement with or other contractual, legal or fiduciary obligation of confidentiality to the other party to this Agreement or any other person with respect to such information, or (iii) becomes available to Purchaser or Seller on a non-confidential basis from a source other than the other party to this Agreement or any of its Representatives, provided that such source is not bound by a confidentiality agreement with or other contractual, legal or fiduciary obligation of confidentiality to the other party to this Agreement or any other person with respect to such information.

(b) Preservation of Confidentiality. Each of Seller and Purchaser shall treat all Confidential Information as confidential, preserve the confidentiality thereof and not disclose any Confidential Information, except to its Representatives and Affiliates who need to know such Confidential Information in connection with the transactions contemplated hereby. Each of Seller and Purchaser shall use all reasonable efforts to cause its Representatives to treat all Confidential Information as confidential, preserve the confidentiality thereof and not disclose any Confidential Information. Each of Seller and Purchaser shall be responsible for any breach of this Agreement by any of its Representatives. If, however, Confidential Information is disclosed, Seller or Purchaser, as the case may be, shall immediately notify the other party in writing and take all reasonable steps required to prevent further disclosure.

(c) Ownership of Information. Until the Closing or the termination of this Agreement, all Confidential Information shall remain the property of the party who originally possessed such information. In the event of the termination of this Agreement for any reason whatsoever, Seller or Purchaser, as the case may be, shall, and shall cause its Representatives to, return to the other party all Confidential Information (including all copies, summaries and extracts thereof) furnished to it by such other party in connection with the transactions contemplated hereby.

10.11 Cumulative Remedies. All rights and remedies of either party hereto are cumulative of each other and of every other right or remedy such party may otherwise have at law or in equity, and the exercise of one or more rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of other rights or remedies.

10.12 Dispute Resolution; Arbitration. It is understood and agreed between the parties hereto that, except as otherwise provided in Sections 2.4, 9.8 and 9.9, any and all claims, grievances, demands, controversies, causes of action or disputes of any nature whatsoever (including, but not limited to, tort and contract claims, and claims upon any law, statute, order or regulation) (hereinafter "Disputes"), arising out of, in connection with, or in relation to
(i) the interpretation, performance or breach of this Agreement, (ii) the arbitrability of any Disputes under this Agreement, or (iii) any relationship before, at the time of entering, during the term of, upon or after the expiration or termination of this Agreement, by and among the parties, shall be resolved in accordance with a two-step dispute resolution process administered by the American Arbitration Association ("AAA") involving, first, mediation

before a retired judge from the AAA panel, followed, if necessary, by final and binding arbitration before the same, or if requested by either party, another AAA panelist. The parties confirm that by agreeing to this dispute resolution

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process, they intend to and do waive their right to have any dispute decided in court by a judge or jury.

(a) Mediation. In the event any Dispute is not resolved by an informal negotiation between the parties within thirty (30) days after either party receives written notice from the other party that a Dispute exists, the matter shall be referred to the Dallas, Texas, offices of AAA for an informal, non-binding mediation consisting of one or more conferences between the parties in which a retired judge will seek to guide the parties to a resolution of the Disputes. The parties shall select a mutually acceptable neutral from among the AAA panel of mediators. In the event the parties cannot agree on a mediator, the Administrator of AAA will appoint a mediator. The mediation process shall begin on a date mutually agreed upon by the parties and mediator or, in the event the parties cannot agree on a date, the mediator shall select a date. The mediation process shall continue until the earliest to occur of the following:
(i) the Disputes are resolved; (ii) the mediator makes a finding that there is no possibility of resolution through mediation; or (iii) thirty (30) days have elapsed since the Dispute was first scheduled for mediation.

(b) Arbitration. Should any Disputes remain after the completion of the mediation process described above, the parties agree to submit all remaining Disputes to final and binding arbitration in Dallas, Texas, administered by the AAA in accordance with the then-existing AAA Commercial Arbitration Rules. Neither party nor the arbitrator shall disclose the existence, content, or results of any arbitration hereunder without the prior written consent of all parties.

(i) Designation of Arbitrator. The arbitration shall be conducted before and by a single arbitrator who may be the same person who conducted the mediation, unless either party objects. If either party objects to the mediator conducting the arbitration, the arbitrator shall be selected by the AAA pursuant to the then current rules of that association.

(ii) Federal Arbitration Act to Apply. Except as provided herein, the Federal Arbitration Act shall govern the interpretation, enforcement and all proceedings pursuant to this subparagraph (b). All contractual and statutory periods of limitations which would otherwise be applicable shall apply to any arbitration proceeding hereunder. The parties agree that contractual indemnification periods shall supersede statutory periods of limitation.

(iii) Timing. The arbitrator shall take such steps as may be necessary to hold a private hearing within one-hundred twenty (120) days of the submission of the Disputes to arbitration and to conclude such hearing within three (3) days. The arbitrator shall render an award and a written, reasoned opinion in support thereof not later than fourteen (14) calendar days after the hearing. The parties have included these time limits in order to expedite the proceeding, but they are not jurisdictional, and the arbitrator may for good cause afford or permit reasonable extensions or delays, which shall not affect the validity of the award. The award shall be final and binding upon the parties, and judgment upon the award may be entered and enforced in any court having jurisdiction thereof.

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(iv) Discovery. The arbitrator shall authorize such discovery as may be shown to be necessary to ensure a fair hearing; provided that, except as needed for presentation in lieu of a live appearance, each party shall be limited to three (3) business days (9:00 a.m. to 5:00 p.m.) of depositions. This limitation shall apply to each separate arbitration that may be conducted pursuant to this Agreement. The parties shall be entitled to engage in document discovery by requesting production of documents. Responses or objections to such requests shall be served twenty (20) days after receipt of such a request. The arbitrator shall resolve any discovery disputes by such prehearing conference(s) as such arbitrator may deem necessary. The parties agree that the arbitrator and any counsel of record to the proceeding shall have the power of subpoena process as provided by law. The arbitrator shall not be bound by the rules of evidence or of civil procedure, but rather may consider such writings and oral presentations as such arbitrator or the parties may deem desirable or necessary. The parties intend to limit live testimony and cross examination to the extent necessary to ensure a fair hearing on material issues. Exhibit and witness lists shall be exchanged ten (10) days before the hearing.

(v) Dispositive Motions. There shall be no dispositive motion practice.

(c) Provisional Remedies. The arbitrator appointed pursuant to subparagraph 10.12(b) may award injunctive relief or any other remedy available from a judge, including the joinder of parties or consolidation of this arbitration with any other involving common issues of law or fact which may promote judicial economy. Adherence to this dispute resolution process shall not limit the parties' right to obtain any provisional remedy, including without limitation, injunctive or similar relief, from any court of competent jurisdiction as may be necessary to protect their rights and interests. Notwithstanding the foregoing sentence, this dispute resolution procedure is intended to be the exclusive method of resolving any Disputes arising out of, in connection with, or relating to this Agreement.

(d) Survival. The dispute resolution process set forth in this Section 10.12 shall survive the termination of this Agreement.

(e) Costs and Expenses. The cost of the mediator and arbitrator and all AAA-related fees shall be borne equally by the parties. Reasonable attorneys' fees shall be allocated and awarded by the arbitrator to the prevailing party on each dispute submitted.

(f) Confidentiality. Any and all matters related to the arbitration, including all discovery and all evidence presented at the arbitration hearing, shall be treated as strictly confidential by the parties and arbitrator. The award or decision of the arbitrator shall not be disclosed to any other party, except as may be required by law or as may be needed to confirm or enforce this award, or upon the written consent of all parties.

10.13 Waiver of Punitive Damages. Each of the parties hereto expressly and unequivocally agrees to waive its right to recover punitive or exemplary damages in connection with any claim arising out of, in connection with, or in relation to this Agreement, except that this waiver shall not apply to punitive or exemplary damages that may be awarded to a third party and subject to indemnification under, or other provision of, Article IX.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on their respective behalf, by their respective officers thereunto duly authorized, all as of the day and year first above written.

AMERICAN FIDELITY CORPORATION

By: _____________________________
William E. Durrett
Chairman of the Board

MERCURY GENERAL CORPORATION

By: ____________________________
Michael D. Curtius
Chief Operating Officer

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EXHIBIT 21.1

SUBSIDIARIES - MERCURY GENERAL CORPORATION

Mercury Casualty Company (100% owned)
Mercury Insurance Company (100% owned by Mercury Casualty Company) California General Underwriters Insurance Company, Inc. (100% owned by Mercury Casualty Company)
California Automobile Insurance Company (100% owned) Mercury Insurance Company of Georgia (100% owned by California Automobile Insurance Company)
Mercury Indemnity Company of Georgia (100% owned) Mercury Insurance Company of Illinois (100% owned) Mercury Indemnity Company of Illinois (100% owned by Mercury Insurance Company of Illinois)
American Fidelity Insurance Company (100% owned) Cimarron Insurance Company (100% owned by American Fidelity Ins. Company) AFI Management Company, Inc. (100% owned by American Fidelity Ins. Company) **

** Attorney-in-fact for American Fidelity Lloyds Insurance Co., whose results

are consolidated with Mercury General Corporation


EXHIBIT 23.1

The Board of Directors
Mercury General Corporation

We consent to incorporation by reference in the registration statement No. 333-01583 on Form S-8 of Mercury General Corporation of our report dated February 21, 1997, relating to the consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, and cash flows and related schedules for each of the years in the three-year period ended December 31, 1996, which reports appear in the December 31, 1996 annual report on Form 10-K of Mercury General Corporation

KPMG PEAT MARWICK LLP

Los Angeles, California

March 17, 1997


ARTICLE 7
MULTIPLIER: 1,000


PERIOD TYPE YEAR
FISCAL YEAR END DEC 31 1996
PERIOD START JAN 01 1996
PERIOD END DEC 31 1996
DEBT HELD FOR SALE 954,108
DEBT CARRYING VALUE 0
DEBT MARKET VALUE 0
EQUITIES 148,112
MORTGAGE 0
REAL ESTATE 0
TOTAL INVEST 1,168,287
CASH 3,605
RECOVER REINSURE 0
DEFERRED ACQUISITION 46,783
TOTAL ASSETS 1,419,927
POLICY LOSSES 336,685
UNEARNED PREMIUMS 260,878
POLICY OTHER 0
POLICY HOLDER FUNDS 0
NOTES PAYABLE 75,000
PREFERRED MANDATORY 0
PREFERRED 0
COMMON 42,644
OTHER SE 598,578
TOTAL LIABILITY AND EQUITY 1,419,927
PREMIUMS 754,724
INVESTMENT INCOME 70,180
INVESTMENT GAINS (3,173)
OTHER INCOME 3,233
BENEFITS 501,858
UNDERWRITING AMORTIZATION 160,019
UNDERWRITING OTHER 24,493
INCOME PRETAX 136,590
INCOME TAX 30,826
INCOME CONTINUING 105,764
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET INCOME 105,764
EPS PRIMARY 3.86
EPS DILUTED 0
RESERVE OPEN 250,990
PROVISION CURRENT 529,952
PROVISION PRIOR (3,868)
PAYMENTS CURRENT 298,099
PAYMENTS PRIOR 167,226
RESERVE CLOSE 311,754
CUMULATIVE DEFICIENCY 3,868