SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended December 31, 1997 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

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

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

NONE

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

The aggregate market value of the Registrant's voting stock held by non- affiliates of the Registrant at March 16, 1998, was approximately $1,636,718,299 (based upon the closing sales price of such date, as reported by the Wall Street Journal).

At March 16, 1998, the Registrant had issued and outstanding an aggregate of 55,219,513 shares of its Common Stock.

Documents Incorporated by Reference

Proxy statement for the Annual Meeting of Stockholders of Registrant to be held on May 13, 1998 (only portions of which are incorporated by reference).


ITEM 1. BUSINESS

GENERAL

Mercury General Corporation ("Mercury General") and its subsidiaries (collectively, the Company) are engaged primarily in writing all risk classifications of automobile insurance in California, which in 1997 accounted for approximately 88% 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 the American Fidelity Insurance Group ("AFI"), which is headquartered in Oklahoma City, Oklahoma. In 1997, the name was changed to American Mercury Insurance Group (AMI). AMI is licensed in 36 states but writes predominantly in Texas, Oklahoma and Kansas. AMI's primary lines of insurance are private passenger and commercial automobile and automobile mechanical breakdown. The full year and one month of AMI's operations are included in the Company's 1997 and 1996 consolidated financial statements, respectively. During 1997, private passenger automobile insurance and commercial automobile insurance accounted for 90.5% and 4.3%, respectively, of the Company's direct premiums written. The Company also writes homeowners insurance, mechanical breakdown insurance, commercial and dwelling fire insurance and commercial property insurance. The non-automobile lines of insurance accounted for 5.2% of direct premiums written in 1997, of which approximately 60% was in commercial lines. During 1998, the Company began writing private passenger automobile coverage in Florida.

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 1997, A.M. Best & Co. ("A.M. Best") rated Mercury Casualty Company ("Mercury Casualty") and Mercury Insurance Company ("Mercury Insurance"), 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). AMI was rated A- (Excellent) in 1997 by A.M. Best.

The principal executive offices of Mercury General are located in Los Angeles, California. The home office of its California insurance subsidiaries and the Company's computer and operations center is located in Brea, California. The Company maintains branch offices in a number of locations in California as well as a branch office opened in Clearwater, Florida during 1997. The non- California subsidiaries maintain offices in Vernon Hills, Illinois, Atlanta, Georgia, Oklahoma City, Oklahoma and Cimarron, Kansas. The Company has approximately 2,100 employees.

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ORGANIZATION

Mercury General, an insurance holding company, is the parent of Mercury Casualty, a California automobile insurer founded in 1961 by George Joseph, its Chief Executive Officer. Its insurance operations in California are conducted through three California insurance company subsidiaries, Mercury Casualty, Mercury Insurance, 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 have been added to the group:
American Fidelity Insurance Company, domiciled in Oklahoma; Cimarron Insurance Company, domiciled in Kansas; and AFI Management Company, Inc., a Texas corporation which serves as the attorney-in-fact for American Fidelity Lloyds Insurance Company, a Texas insurer. Accordingly, their operations are included in the consolidated financial statements of the Company effective December 1, 1996. During 1997, the names of American Fidelity Insurance Company and American Fidelity Lloyds Insurance Company were changed to American Mercury Insurance Company ("AMIC") and American Mercury Lloyds Insurance Company ("AML"), respectively.

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

UNDERWRITING

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

On February 25, 1994, the California 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, April 15, 1996 and October 1, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview."

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

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Approximately 80% of the Company's new applications for automobile insurance in California during 1997 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, 1997, "good drivers" accounted for approximately 80% of all voluntary private passenger automobile policies in force in California, while the higher risk categories accounted for approximately 20%. The renewal rate in California (the rate of acceptance of offers to renew) averages approximately 95%.

AMI'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 1,600 independent agents, of which approximately 800 are located in California and approximately 650 others represent AMI 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 approximately 14%, 17% and 15% during 1997, 1996 and 1995, respectively, of the Company's total direct premiums written. 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 1997 total commissions and bonuses incurred averaged 16.2% of direct premiums written. The Company is not responsible for any of its agents' expenses.

Traditionally, any advertising 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 half of 1997 due to a large influx of new business. See "Regulation- California Financial Responsibility Law." The program was reinstated during the third quarter of 1997.

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.

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LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

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

The ultimate liability may be greater or lower than stated loss reserves. Reserves are closely monitored and are analyzed quarterly by the Company's actuarial consultants using new information on reported claims and a variety of statistical techniques. The Company does not discount to a present value that portion of its loss reserves expected to be paid in future periods. The Tax Reform Act of 1986 does, however, require the Company to discount loss reserves for Federal income tax purposes.

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

                                                                                Year ended December 31,
                                                                           ---------------------------------
                                                                             1997         1996        1995
                                                                           ---------   ---------   ---------
                                                                                 (Amounts in thousands)
Net reserves for losses and loss adjustment
 expenses,  beginning of year................................               $311,754     250,990    $223,392
 Reserves acquired from purchase of American
 Mercury Insurance Company...................................                     --      24,231          --
Incurred losses and loss adjustment expenses:
      Provision for insured events of the
         current year........................................                641,911     505,726     423,264
      Increase (decrease) in provision for
         Insured events of prior years.......................                 12,818      (3,868)     (6,708)
                                                                            --------     -------     -------
         Total incurred losses and loss adjustment
           expenses..........................................                654,729     501,858     416,556
                                                                            --------     -------     -------
Payments:
      Losses and loss adjustment expenses attribu-
        table to insured events of the current
        year.................................................                373,823      298,099     243,294
      Losses and loss adjustment expenses attribu-
        table to insured events of prior years...............                206,390      167,226     145,664
                                                                            --------     -------     -------

        Total payments.......................................                580,213      465,325     388,958
                                                                            --------     -------     -------
Net reserves for losses and loss adjustment
 expenses at the end of the period...........................                386,270      311,754     250,990
Reinsurance recoverable......................................                 22,791       24,931       2,556
                                                                            --------     -------     -------
Gross liability at end of year...............................               $409,061     $336,685    $253,546
                                                                            ========     ========    ========

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

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

                                                   December 31,
                                          -----------------------------
                                           1997      1996       1995
                                          --------  --------   --------
                                               (Amounts in thousands)
Reserves reported on a SAP basis......... $386,270  $311,754  $250,990
Reinsurance recoverable..................   22,791    24,931     2,556
                                          --------  --------  --------
Reserves reported on a GAAP basis........ $409,061  $336,685  $253,546
                                          ========  ========  ========

The following table represents the development of loss reserves for the period 1988 through 1997. 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, 1997.

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

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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,
                                      --------------------------------------------------------------------------------
                                           1988             1989            1990          1991             1992
                                           ----             ----            ----          ----             ----
                                                                     (Amounts in thousands)
Net reserves for
 losses and loss
 adjustment expenses................    $241,037          $291,408       $301,354       $280,157          $239,203
Paid (cumulative) as of:
  One year later....................     139,874           167,850        181,781        151,866           135,188
  Two years later...................     195,453           227,503        238,030        197,640           184,119
  Three years later.................     218,335           249,371        254,884        213,824           197,371
  Four years later..................     226,384           256,659        261,058        218,067           201,365
  Five years later..................     229,168           259,147        263,011        220,057           202,383
  Six years later...................     229,773           259,781        262,741        220,313
  Seven years later.................     229,815           259,769        262,770
  Eight years later.................     229,693           259,769
  Nine years later..................     229,793

Net reserves re-estimated as of:
  One year later....................     230,249           269,934        285,212        230,991           204,479
  Two years later...................     233,607           269,652        265,618        218,404           204,999
  Three years later.................     234,757           259,635        259,624        220,620           203,452
  Four years later..................     228,909           256,694        264,259        221,118           204,603
  Five years later..................     228,326           260,365        264,127        221,264           203,705
  Six years later...................     230,102           260,402        263,336        220,721
  Seven years later.................     229,998           260,098        263,045
  Eight years later.................     229,809           260,031
  Nine years later..................     229,882
Net Cumulative Redundancy
  (deficiency)......................      11,155            31,377        38,309          59,436            35,498

                                                                    As of December 31,
                                      --------------------------------------------------------------------------------
                                           1993             1994            1995          1996             1997
                                           ----             ----            ----          ----             ----
                                                                     (Amounts in thousands)
Net reserves for
 losses and loss
 adjustment expenses................    $214,525          $223,392       $250,990       $311,754          $386,270
Paid (cumulative) as of:
  One year later....................     143,272           145,664        167,226        206,390
  Two years later...................     187,641           198,967        225,158
  Three years later.................     204,606           214,403
  Four years later..................     207,704
  Five years later..................
  Six years later...................
  Seven years later.................
  Eight years later.................
  Nine years later..................

Net reserves re-estimated as of:
  One year later....................     204,451           216,684        247,122        324,572
  Two years later...................     207,089           222,861        254,920
  Three years later.................     210,838           221,744
  Four years later..................     210,890
  Five years later..................
  Six years later...................
  Seven years later.................
  Eight years later.................
  Nine years later..................
Net Cumulative Redundancy
  (deficiency)......................       3,635             1,648         (3,930)       (12,818)

                                                                    As of December 31,
                                      --------------------------------------------------------------------------------
                                           1988             1989            1990          1991             1992
                                           ----             ----            ----          ----             ----
                                                                     (Amounts in thousands)
Gross liability - end of year                                                                             240,183
Reinsurance recoverable                                                                                      (980)
                                                                                                          -------
Net liability - end of year                                                                               239,203
Gross re-estimated liability                                                                              =======
 - latest                                                                                                 209,107
Re-estimated recoverable -
 latest                                                                                                    (5,402)
Net re-estimated liability -                                                                              -------
 latest                                                                                                   203,705
Gross cumulative redundancy                                                                               =======
 (deficiency)                                                                                              31,076
                                                                                                          =======

                                                                    As of December 31,
                                      --------------------------------------------------------------------------------
                                           1993             1994            1995          1996             1997
                                           ----             ----            ----          ----             ----
                                                                     (Amounts in thousands)
Gross liability - end of year           215,301           227,499        253,546        336,685           409,061
Reinsurance recoverable                    (776)           (4,107)        (2,556)       (24,931)          (22,791)
                                        -------           -------        -------        -------           -------
Net liability - end of year             214,525           223,392        250,990        311,754           386,270
                                        =======           =======        =======        =======           =======
Gross re-estimated liability
 - latest                               217,333           233,462        263,084        350,435
Re-estimated recoverable -
 latest                                  (6,443)          (11,718)        (8,164)       (25,863)
Net re-estimated liability -            -------           -------        -------        -------
 latest                                 210,890           221,744        254,920        324,572
Gross cumulative redundancy             =======           =======        =======        =======
 (deficiency)                            (2,032)           (5,963)        (9,538)       (13,750)
                                        =======           =======        =======        =======

For the calendar years 1995 and 1996, the Company's previously estimated loss reserves produced minor deficiencies. These deficiencies relate to increases in the Company's ultimate estimates for loss adjustment expenses. The initial estimates were based principally on the Company's actual experience and did not fully reflect the increases in the legal expenses of defending the Company's insureds arising from the Company's policy of aggressively defending, including litigating, exaggerated bodily injury claims arising from minimal impact automobile accidents.

For the calendar years 1988 through 1994, the Company's previously estimated loss reserves produced redundancies. The Company attributes this favorable loss development to several factors. First, the Company had completed its development of a full complement of claims personnel early in this period. Second, during 1988, the California Supreme Court reversed what was known as the

7

"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 California 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.

OPERATING RATIOS

Loss and Expense Ratios

Loss and underwriting expense ratios are used to interpret the underwriting experience of property and casualty insurance companies. Losses and loss adjustment expenses, on a statutory basis, are stated as a percentage of premiums earned because losses occur over the life of a policy. Underwriting expenses on a statutory basis are stated as a percentage of premiums written rather than premiums earned because most underwriting expenses are incurred when policies are written and are not spread over the policy period. The statutory underwriting profit margin is the extent to which the combined loss and underwriting expense ratios are less than 100%. The Company's loss ratio, expense ratio and combined ratio, and the private passenger automobile industry combined ratio, on a statutory basis, are shown in the following table. The Company's ratios include lines of insurance other than private passenger automobile written by Mercury Casualty and AMI. 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,
                                        --------------------------------------------
                                         1997      1996      1995     1994     1993
                                        -------   -------   ------   ------   ------
Loss Ratio...........................     63.5%      66.6%   67.8%    68.4%    61.3%
Expense Ratio........................     24.7       24.0    24.0     24.6     24.8
                                          ----      -----   -----    -----     ----
Combined Ratio.......................     88.2%      90.6%   91.8%    93.0%    86.1%
                                          ====      =====   =====    =====    =====
 Industry combined ratio (all
  writers) (1).......................     98.0%(2)  101.0%  101.3%   101.3%   101.7%
Industry combined ratio (excluding
  direct writers) (1)................      N.A.     102.6%  102.0%   101.3%   103.2%


(1) Source: A.M. Best, Aggregates & Averages (1997), for all property and casualty insurance companies (private passenger automobile line only, after policyholder dividends).

(2) Source: A.M. Best, "Best's Review, January 1998," "Review Preview." (N.A.) Not available.

8

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,
                             -------------------------------------------------
                              1997      1996       1995       1994       1993
                              ----      ----       ----       ----       ----
                                   (Amounts in thousands, except ratios)
Net premiums written......$1,086,241  $795,873   $636,590   $550,838   $484,097
Policyholders' surplus... $  679,359  $594,799   $479,114   $411,898   $314,136
Ratio.....................  1.6 to 1  1.3 to 1   1.3 to 1   1.3 to 1   1.5 to 1

Risk-Based Capital Requirements

In December 1993, the NAIC adopted a risk-based capital formula for casualty insurance companies which establishes recommended minimum capital requirements for casualty companies. The formula has been designed to capture the widely varying elements of risks undertaken by writers of different lines of insurance having differing risk characteristics, as well as writers of similar lines where differences in risk may be related to corporate structure, investment policies, reinsurance arrangements and a number of other factors. Based on the formula adopted by the NAIC, the Company has estimated the Risk- Based Capital Requirements of each of its insurance subsidiaries as of December 31, 1997. 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 Investment Officer under the supervision of the Company's Board of Directors. The Company follows an investment policy which is regularly reviewed and revised. The Company's policy emphasizes investment grade, fixed income securities and maximization of after-tax yields. The Company does not invest with a view to achieving realized gains, 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 75% of the Company's portfolio, at market values, was invested in medium to long term, investment grade tax-exempt revenue and municipal bonds. The average Standard & Poor's rating of the Company's bond holdings was AA- at December 31, 1997.

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The nominal average maturity of the bond portfolio, was 16.5 years at December 31, 1997, but the call-adjusted average maturity of the portfolio is shorter, approximately 7.5 years, because holdings are heavily weighted with high coupon issues which are expected to be called prior to maturity. The modified duration of the bond portfolio reflecting anticipated early calls was 6.1 years at December 31, 1997. Duration is a measure of how long it takes, on average, to receive all the cash flows produced by a bond, including reinvestment of interest. Because of its sensitivity to interest rates, it is a proxy for a bond's price volatility. The longer the duration, the greater the price volatility in relation to changes in interest rates.

Holdings of lower than investment grade bonds constitute approximately 1% of total investments. Equity holdings consist primarily of perpetual preferred stocks and relatively high yielding electric utility common stocks on which dividend income is partially tax-sheltered by the 70% corporate dividend exclusion.

The following table summarizes the investment results of the Company for the five years ended December 31, 1997.

                                                                                  Year ended December 31,
                                                                   --------------------------------------------------
                                                                     1997(1)   1996(1)     1995      1994       1993
                                                                     ----      ----        ----      ----       ----
                                                                                   (Amounts in thousands)
Averaged invested assets (includes
 short-term cash investments).(2)......................          $1,262,925   $975,058   $827,861   $727,866  $683,874
Net investment income:
       Before income taxes.............................              86,812     70,180     62,964     54,586    54,121
       After income taxes..............................              77,917     63,371     57,035     49,787    48,223
Average annual return on investments:
       Before income taxes.............................                 6.9%       7.2%       7.6%       7.5%      7.9%
       After income taxes..............................                 6.2%       6.5%       6.9%       6.8%      7.1%
       Net realized investment gains
 (losses) after income taxes...........................               3,232     (2,062)       681     (6,485)    1,954
Net increase (decrease) in un-
 realized gains on all invest-
 ments after income taxes..............................          $   27,175   $ (6,271)  $ 37,960   $(36,503) $    556

(1) Includes AMI for the month of December 1996 and the full year 1997.
(2) Fixed maturities at cost, equities at market.

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

                                                                      December 31,
                                    ----------------------------------------------------------------------------
                                              1997                         1996                     1995
                                    ------------------------     -------------------------   -------------------
                                       Amortized    Market          Amortized     Market       Amortized Market
                                       Cost         Value           Cost          Value        Cost      Value
                                       ----         -----           ----          -----        ----      -----
                                                              (Amounts in thousands)
Taxable Bonds..................     $   50,096    $   50,662     $   76,494     $   76,113   $ 21,518   $ 22,539
Tax-Exempt State and
 Municipal Bonds...............      1,021,259     1,085,613        781,586        808,761    630,811    663,163
Sinking Fund Preferred
 Stocks........................         76,239        78,711         66,713         69,234     90,080     94,081
                                    ----------    ----------     ----------     ----------   --------   --------
   Total Fixed Maturity
    Investments................      1,147,594     1,214,986        924,793        954,108    742,409    779,783

Equity Investments incl.
 Perpetual Preferred
 Stocks........................        169,943       173,522        148,264        148,112    113,478    114,915
Short-term Cash Invest-
 ments.........................         59,740        59,740         66,067         66,067     28,496     28,496
                                    ----------    ----------     ----------     ----------   --------   --------
Total Investments..............     $1,377,277    $1,448,248     $1,139,124     $1,168,287   $884,383   $923,194
                                    ==========    ==========     ==========     ==========   ========   ========

At December 31, 1997, the Company had a net unrealized gain on all investments of $70,971,000 before income taxes.

COMPETITIVE CONDITIONS

The property and casualty insurance industry is highly competitive. The insurance industry consists of a large number of companies, many of which operate in more than one state, offering automobile, homeowners and commercial property insurance, as well as insurance coverage in other lines. Many of the Company's competitors have larger volumes of business and greater financial resources than the Company. Based on estimates taken from regularly published statistical compilations and other public filings, the Company in 1997 was the sixth largest writer of private passenger automobile insurance in California. All of the insurance companies having greater shares of the California market sell insurance either directly or through exclusive agents, rather than through independent agents.

The property and casualty insurance industry is highly cyclical, 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.

11

Price and reputation for service are the principal means by which the Company competes with other automobile insurers. The Company believes that it has a good reputation for service, and it has, historically, been among the lowest-priced insurers doing business in California according to surveys conducted by the California DOI. In 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 and the filings required under those regulations have been approved. See "Regulation - Automobile Insurance Rating Factor Regulations."

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

REINSURANCE

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

The Company maintains property reinsurance under a treaty which was effective April 1, 1995 with National Reinsurance Corporation, which is rated A+ by A.M. Best. 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 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

12

in excess of $25,000,000 in the second layer. This treaty was renewed October 1, 1997 with the same principal reinsurers and coverage limits.

ERC reinsures AMI 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, AMI is retaining the full exposure. AMI has other reinsurance treaties and facultative arrangements in place for various smaller lines of business.

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

REGULATION

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

The powers of the California DOI primarily include the prior approval of insurance rates and rating factors and the establishment of standards of solvency which must be met and maintained. The regulation and supervision by the California DOI are designed principally for the benefit of policyholders and not for insurance company shareholders. The California DOI conducts periodic examinations of the Company's insurance subsidiaries. The last examination conducted of the California Companies was as of December 31, 1994. The reports on the results of that examination recommended no adjustments to the statutory financial statements as filed by the Company.

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

In California, insurance rates have required prior approval since November 1989. Georgia 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 Illinois DOI conducted an examination of Mercury Insurance Company of Illinois and Mercury Indemnity Company of Illinois

13

as of December 31, 1995. The reports on that audit have recommended no changes to the statutory financial statements as filed. The states of Oklahoma, Kansas and Texas will also conduct periodic examinations of AMI.

The operations of the Company are dependent on the laws of the state in which it does business and changes in those laws can materially affect the revenue and expenses of the Company. The Company retains its own legislative advocates in California. The Company also makes financial contributions to officeholders and candidates. In 1997 and 1996, those contributions amounted to $96,000 and $548,000, respectively. The Company believes in supporting the political process and intends to continue to make such contributions in amounts which it determines are appropriate.

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 five years in those states either.

Holding Company Act

The California Companies are subject to regulation by the California DOI pursuant to the provisions of the California Insurance Holding Company System Regulatory Act (the "Holding Company Act"). Pursuant to the Holding Company Act, the California DOI may examine the affairs of each company at any time. The Holding Company Act requires disclosure of any material transactions by or among the companies. Certain transactions defined to be of an "extraordinary" type may not be effected without the prior approval of the California 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'

14

surplus as of the preceding December 31 or the insurance company's net income for the preceding calendar year. An insurance company is also required to notify the California DOI of any dividend after declaration, but prior to payment.

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

The insurance subsidiaries in Georgia, Illinois, Oklahoma, Kansas and Texas are subject to holding company acts in those states, the provisions of which are substantially similar to those of the Holding Company Act. Regulatory approval was obtained from California, Oklahoma, Kansas and Texas before the acquisition of AMI was completed.

Assigned Risks

Automobile liability insurers in California are required to sell bodily injury liability, property damage liability, medical expense and uninsured motorist coverage to a proportionate number (based on the insurer's share of the California automobile casualty insurance market) of those drivers applying for placement as "assigned risks." Drivers seek placement as assigned risks because their driving records or other relevant characteristics, as defined by Proposition 103, make them difficult to insure in the voluntary market. During the last five years, approximately 0.9% of the direct automobile insurance premium written by the Company was for assigned risk business. In 1997, assigned risks represented 0.9% 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 California DOI. In October 1990, more stringent rules for gaining entry into the plan were approved, resulting in a substantial reduction in the number of assigned risks insured by the Company since 1991. Effective January 1, 1994, the California Insurance Code requires that rates established for the plan be adequate to support the plan's losses and expenses. The last rate increase approved by the Commissioner approximated 4.8% and became effective June 1, 1995.

Automobile Insurance Rating Factor Regulations

Commencing November 8, 1989, Proposition 103 required that property and casualty insurance rates must be approved by the Insurance Commissioner prior to their use, and that no rate shall be approved which is excessive, inadequate,

15

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 Insurance 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. They required all automobile insurers in California to submit new rating plans complying with the regulations in early 1997. The Company submitted its new proposed rating plan on March 11, 1997.

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

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 one is stopped for a traffic violation. Media attention to the new law resulted in a surge of new business applications during the first half of 1997. The 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 suspended its advertising program for the first two quarters of 1997 while it worked 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 has helped in controlling loss costs, but its constitutionality is being challenged by an

16

association of attorneys. In the first appellate decision, an intermediate California appellate court held the law constitutional.

ITEM 2. PROPERTIES

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

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

In October 1992 the Company purchased a 158,000 square foot office building in Brea, California. The Company occupies approximately 59% 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 forth certain information concerning the executive officers of the Company as of March 16, 1998:

NAME                     AGE                    POSITION
----                     ---                    --------
George Joseph             76   Chairman of the Board and Chief Executive Officer
Michael D. Curtius        48   President and Chief Operating Officer
Cooper Blanton, Jr.       71   Executive Vice President
Keith L. Parker           70   Senior Vice President and Chief Investment Officer
Bruce E. Norman           49   Vice President in charge of Marketing
Joanna Y. Moore           42   Vice President and Chief Claims Officer
Kenneth G. Kitzmiller     51   Vice President in charge of Underwriting
Gabriel Tirador           33   Vice President and Chief Financial Officer
Judy A. Walters           51   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 the California Companies in May 1995 and elected to the Board of Directors of Mercury General and the California Companies in 1996. In December of 1996 he was appointed Vice Chairman of AMIC. Mr. Curtius has over 20 years of experience in the insurance industry.

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

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

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

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

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

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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. The quotations have been adjusted for a two-for-one stock split that was effective September 16, 1997.

                                                      High       Low
                                                      ----       ---
1996
          1st Quarter..........................     $ 26.000   $ 20.750
          2nd Quarter..........................     $ 23.875   $ 20.375
          3rd Quarter..........................     $ 23.875   $ 19.875
          4th Quarter..........................     $ 29.125   $ 23.500

                                                      High      Low
                                                      ----      ---
1997
          1st Quarter..........................     $ 32.750   $ 26.125
          2nd Quarter..........................     $ 38.094   $ 29.250
          3rd Quarter..........................     $ 45.875   $ 36.000
          4th Quarter..........................     $ 55.500   $ 40.750

1998
          1st Quarter (January 1 - March 16)...     $ 60.750   $ 45.688

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 6, 1998, the Board of Directors declared a $.175 quarterly dividend ($.70 annually) payable on March 31, 1998 to stockholders of record on March 16, 1998. The dividend rate has been increased fourteen times since dividends were initiated in January, 1986, at an annual rate of $0.05, adjusted for the two- for-one stock splits in September 1992 and September 1997. For financial statement purposes, the Company records dividends on the declaration date. The Company expects to continue the payment of quarterly dividends. The continued payment and amount of cash dividends will depend upon, among other factors, the Company's operating results, overall financial condition, capital requirements and general business conditions.

As a holding company, Mercury General is largely dependent upon dividends from its subsidiaries to pay dividends to its shareholders. These subsidiaries are subject to state laws that restrict their ability to distribute dividends. The state laws permit a casualty insurance company to pay dividends and advances within any 12-month period, without any prior regulatory approval, in an amount up to the greater of 10% of statutory earned surplus at the preceding December

20

31, or net income for the calendar year preceding the date the dividend is paid. Under this test, the direct insurance subsidiaries of the Company are entitled to pay dividends to Mercury General during 1998 of up to approximately $67 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 16, 1998 was 255. The approximate number of beneficial holders as of March 16, 1998 was 7,746 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,
                                                       -------------------------------------------------------
                                                         1997       1996        1995        1994        1993
                                                       --------   ---------   ---------   ---------   --------
                                                            (Amounts in thousands, except per share data)
INCOME DATA:
Premiums earned..................................... $1,031,280   $754,724     $616,326   $529,390    $474,093
Net investment income...............................     86,812     70,180       62,964     54,586      54,121

Realized investment gains(losses)                         4,973     (3,173)       1,048     (9,853)      3,006

Other...............................................      4,881      3,233        3,341      3,123       2,544
                                                     ----------   --------     --------   --------    --------
    Total Revenues..................................  1,127,946    824,964      683,679    577,246     533,764
                                                     ----------   --------     --------   --------    --------

Losses and loss adjustment
  expenses..........................................    654,729    501,858      416,556    360,557     289,208
Policy acquisition costs............................    224,883    160,019      128,743    112,682      99,738

Other operating expenses............................     33,579     24,493       22,017     20,566      18,564

Interest............................................      4,976      2,004        2,040      1,025         793
                                                     ----------   --------     --------   --------    --------
   Total Expenses...................................    918,167    688,374      569,356    494,830     408,303
                                                     ----------   --------     --------   --------    --------

Income before income taxes..........................    209,779    136,590      114,323     82,416     125,461
Income taxes........................................     53,473     30,826       24,022     16,121      29,252
                                                     ----------   --------     --------   --------    --------
   Net Income....................................... $  156,306   $105,764     $ 90,301   $ 66,295    $ 96,209
                                                     ==========   ========     ========   ========    ========

PER SHARE DATA:
Basic earnings per share *..........................      $2.84      $1.93     $   1.65   $   1.22    $   1.76
                                                     ==========   ========     ========   ========    ========
Diluted earnings per share *........................       2.82       1.92         1.65       1.21        1.75
                                                     ==========   ========     ========   ========    ========
Dividends paid *....................................       $.58       $.48     $    .40   $    .35    $    .30
                                                     ==========   ========     ========   ========    ========
                                                                            December 31,
                                                       -------------------------------------------------------
                                                         1997       1996         1995         1994       1993
                                                       --------   --------     --------     --------   -------
                                                            (Amounts in thousands, except per share data)
BALANCE SHEET DATA:
Total investments................................... $1,448,248 $1,168,287     $923,194   $751,614    $740,480
Premiums receivable.................................    104,216     83,748       58,902     48,741      38,227

Total assets........................................  1,725,532  1,419,927    1,081,656    911,693     863,962
Unpaid losses and loss adjust-
 ment expenses......................................    409,061    336,685      253,546    227,499     215,301
Unearned premiums...................................    309,376    260,878      168,404    148,654     128,828
Notes payable.......................................     75,000     75,000       25,000     25,000      15,000
Deferred income tax liability
  (asset)...........................................     19,722      6,349       10,158    (10,190)      8,758
Shareholders' equity................................    799,592    641,222      565,188    457,161     450,275
Book value per share *..............................      14.51      11.69        10.34       8.38        8.22

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

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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), now American Mercury Insurance Group (AMI), was acquired for cash. The 1996 results of operations of AMI for the month of December only are included in the Company's 1996 consolidated statement of income. The full year results of AMI for 1997 are included in the Company's 1997 consolidated statement of income. AMI writes automobile (approximately 57% of AMI'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 AMI in 1997 were $87.3 million. Total direct premiums written by AMI in 1996 were $90.4 million; of that amount $5.5 million of premiums were written in December and included in the results of operations of the Company in 1996. AMI is licensed in 36 states. In early 1998, the Company also commenced operations in Florida.

During 1997, approximately 90% of the Company's direct premiums written, including AMI, were derived from California.

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

In February 1994, the California Insurance Commissioner approved new rates which were designed to improve the Company's competitive position for new insureds. These rate changes, which became effective on May 1, 1994, provided for decreases in premium rates for new insureds. Further rate modifications were approved and made effective on October 15, 1995, April 15, 1996 and October 1, 1997. The rate changes made over the last several years have been substantially revenue-neutral overall, with physical damage rates being increased and bodily injury liability rates decreased. The rate 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 350,000 to 650,000 at December 31, 1997, an annual rate of increase of over 20%.

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

23

of driving experience, (3) miles driven per year and (4) whatever optional factors are determined by the Insurance Commissioner to have a substantial relationship to the risk of loss and adopted by regulation. The law further requires that each of the four factors be applied in decreasing order of importance.

The new permanent regulations replaced emergency regulations which had been in use since their issuance in 1989. The new regulations required all automobile insurers in California to submit new rating plans complying with the regulations in early 1997. The Company submitted its new proposed rating plan on March 11, 1997.

The Company's plan, and the new plans of most other California automobile insurers, were approved by the California DOI in October 1997. The Company's plan became effective November 1, 1997. Although the rate changes produced some minor dislocations, implementation of the new plan has not thus far had a material effect on the Company's overall competitive position or its profitability.

In February 1998, the Company filed new reduced rates with the California DOI. The overall rate reduction of approximately 7% will become effective on April 1, 1998.

RESULTS OF OPERATIONS

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Premiums earned in 1997 of $1,031.3 million (including $65.1 million contributed by AMI) increased 36.6%, primarily reflecting unit growth. Average premium per policy for the year declined slightly. Net premiums written in 1997 of $1,086.2 million (including $72.8 million contributed by AMI) increased 36.5% over a year earlier, continuing a growth trend which began in the second quarter of 1993. Growth in written premiums in California of 28.5% for all of 1997 was aided by a new California law that became effective January 1, 1997 which requires proof of insurance for the registration (new or renewal) of a motor vehicle. The greater part of the new business generated by the new law occurred in the first half of 1997, and provided for only the minimum liability coverage required by law. The average premium on this business was substantially less than that produced by full coverage policies, which constitute a majority of the Company's total premium volume.

The loss ratio in 1997 (loss and loss adjustment expenses related to premiums earned) was 63.5%, compared with 66.5% in 1996. The improvement in loss experience in 1997 is in large part related to the effectiveness of Proposition 213, an initiative passed by a large majority of California voters in November 1996 which prohibits recovery of non-economic losses by uninsured motorists or drunk drivers injured in automobile accidents. The 1997 loss ratio reflects deficiencies from unfavorable development on allocated loss adjustment expenses from prior periods. The initial estimates were based principally on the Company's actual experience and did not fully reflect the increases in the legal expenses of defending the Company's insureds arising from the Company's policy

24

of aggressively defending, including litigating, exaggerated bodily injury claims arising from minimal impact automobile accidents.

The expense ratio (policy acquisition costs and other operating expenses related to premiums earned) was 25.1% in 1997 and 24.5% 1996. The increase in the expense ratio in 1997 reflects increased provisions for profit-related bonuses to both agents and employees and the inclusion of the operating results of AMI for a full year.

Total losses and expenses in 1997, excluding interest expense of $5.0 million, were $913.2 million, resulting in an underwriting gain for the period of $118.1 million, compared with an underwriting gain of $68.4 million in 1996.

Investment income in 1997, including a contribution from AMI of $6.3 million, was $86.8 million, compared with $70.2 million in 1996. The after-tax yield on average investments of $1,262.9 million, including AMI, (fixed maturities at cost, equities at market) was 6.17%, compared with 6.50% on average investments of $975.1 million in 1996. The effective tax rate on investment income was 10.3% in 1997, compared with 9.7% in 1996. The effective tax rate was increased, and the effective after-tax yield was reduced slightly, by the inclusion of AMI for the full year 1997. The slightly higher tax rate on investment income in 1997 reflects an increase in the proportion of investment income derived from taxable bonds held by AMI and 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 1998. Bonds matured and called in 1997 totaled $54.0 million, compared with $72.9 million in 1996. Approximately $65.3 million of bonds are expected to mature or be called in 1998. Average yields being obtained during the first quarter of 1998 on new investments are 50 to 75 basis points lower than the average yield realized in 1997.

Realized investment gains in 1997 were $5.0 million, compared with realized losses of $3.2 million in 1996. The gains and losses in both years reflect principally income-enhancing swaps of both fixed maturities and equity securities, including perpetual preferred stocks. The losses realized in 1996 were designed to utilize expiring capital gains tax benefits.

The income tax provision of $53.5 million in 1997 represented an effective tax rate of 25.5%, compared with an effective rate of 22.6% in 1996. The increase in the rate is attributable to the increased proportion of realized gains and the increase in underwriting gains, both of which are taxed at the full corporate rate of 35%, in contrast to investment income which consists primarily of tax-exempt interest and tax sheltered dividend income.

Net income in 1997 was $156.3 million, or $2.84 per share, (basic), compared with $105.8 million, or $1.93 per share, (basic), in 1996. Basic share results are based on 55.0 million average shares in 1997 and 54.8 million average shares in 1996, adjusted for a two-for-one stock split effective September 16, 1997. Diluted per share results, calculated in accordance with new accounting standards, were $2.82 in 1997 and $1.92 in 1996.

25

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 AMI in December 1996) increased 22.5% over premiums earned in 1995, 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 AMI) increased 25.0% over a year earlier, continuing a growth trend which began in the second quarter of 1993.

The loss ratio in 1996 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 was 24.4% in 1996 and 1995. The consolidation of one month of operating results of AMI 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 AMI 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 AMI, 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 the inclusion of AMI for the month of December 1996. The effective tax rate on investment income in 1996, excluding AMI, 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. Bonds matured and called in 1996 totaled $72.9 million, compared with $71.0 million in 1995. Average yields obtained during 1997 on new investments were approximately 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.

26

Net income in 1996 was $105.8 million, or $1.93 per share (Basic), compared with $90.3 million, or $1.65 per share (Basic), in 1995. Basic per share results are based on 54.8 million average shares in 1996 and 54.6 million average shares in 1995 adjusted for a two-for-one stock split effective September 16, 1997. Diluted per share results, calculated in accordance with new accounting standards, were $1.92 in 1996 and $1.65 in 1995.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided from operating activities in 1997, was $268.2 million, while funds derived from the sale, redemption or maturity of investments was $734.0 million, of which approximately 80% was represented by the sale of equity securities. The amortized cost of fixed-maturity investments increased by $222.8 million during the year. Equity investments, including perpetual preferred stocks, increased by $21.7 million at cost, while short-term cash investments decreased by $6.3 million. The amortized cost of fixed-maturities available for sale that were sold, called or matured during the year was $142.4 million.

The market value of all investments held at market as "Available for Sale" exceeded the amortized cost of $1,377.3 million at December 31, 1997 by $71.0 million. That unrealized gain, reflected in shareholders' equity net of applicable tax effects, was $46.1 million at December 31, 1997 compared with an unrealized gain of $19.0 million at December 31, 1996. The increase in market values since December 31, 1996 reflects principally the substantial decline in intermediate and long term interest rates during 1997.

The Company's cash and short term investments totaled $62.8 million at December 31, 1997. 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, 1997 bond holdings rated below investment grade totaled $15.0 million at market (cost $14.0 million), or 1% of total investments. The average rating of the $1,071.4 million bond portfolio (at amortized cost) was AA-, while the average effective maturity, giving effect to anticipated early call, approximates 7.5 years. The modified duration of the bond portfolio at year-end was 6.1 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.

27

Holdings in the taxable sector consist largely of senior public utility issues. Fixed-maturity investments of $1,147.6 million (amortized cost), include $76.2 million (amortized cost) of sinking fund preferreds, principally utility issues. The market value of all fixed maturities exceeded cost by $67.4 million at December 31, 1997. 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 $173.5 million at market (cost $169.9 million), including perpetual preferred issues, are largely confined to the public utility and banking sectors and represent about 21.7% of total shareholders' equity.

The only significant debt of the Company at December 31, 1997 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 AMI, with the balance contributed to the Company's new insurance subsidiaries. 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 Rate (prime rate) or the Eurodollar London Interbank Rate (LIBOR). Based on the rates effective through November 23, 1998, LIBOR plus .50, the net interest cost on the loan approximates 6.125%.

In March 1994, the Company's Employee Stock Ownership Plan (the "Plan") purchased 322,000 shares of Mercury General's common stock in the open market at a price of $14.875 per share, adjusted for the two-for-one stock split effective September 16, 1997. The purchases were funded by a five year term bank loan of $5.0 million to the Plan which is guaranteed by the Company. The shares have been allocated to employees over the amortization period of the loan, with the initial allocation made in December 1994. The remaining balance of the loan of $2.0 million is being retired in March 1998 with the proceeds of contributions to the Plan by the Company for the year 1997, and the remaining unallocated shares were credited to employees' ESOP balances at December 31, 1997. A new $5.0 million ESOP loan is currently being arranged with an amortization period of not more than five years. The proceeds of that loan will be used to purchase the Company's shares in the open market, with the shares to be allocated to employees over the amortization period beginning in December 1998. Since dividends on unallocated shares held by the Plan are tax deductible if they are used for debt service, as are Company contributions to the Plan, the net, after- tax interest cost to the Company for the borrowed funds used for the Plan stock purchase is less than the nominal fixed rate of interest on the loan, which, in 1997, was 6.98%.

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

28

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, 1997. Each of the companies' policyholders' surplus exceeded the highest level of recommended capital requirements.

As of December 31, 1997, 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 $679.4 million at December 31, 1997, and net written premiums for the twelve months ended on that date of $1,086.2 million, the ratio of writings to surplus was approximately 1.6 to 1.

YEAR 2000

The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, or as no date. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities.

The Company is nearing completion of the modifications to its computer programs and systems to resolve the problems created by the impending year 2000. The conversion of the most critical systems should be completed within the first quarter of 1998. The cost of this conversion has been charged to current operations and will not have a material effect on the financial condition of the Company.

While the Year 2000 considerations are not expected to materially impact the Company's internal operations, they may have an effect on some of the Company's agents, suppliers and financial institutions with whom the Company conducts business, and thus indirectly affect the Company. It is not possible to quantify the aggregate cost to the Company with respect to external Year 2000 problems, although the Company does not anticipate it will have a material adverse impact on its business.

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 AMI, and

29

in expanding generally in states outside of California, 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 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 1997 and 1996 is as follows (in thousands except per share data):

                                                    Quarter Ended
                                     --------------------------------------------
                                      March 31     June 30    Sept. 30   Dec. 31
                                     -----------   --------   --------   --------
1997
----
Earned premiums..................... $235,579      $255,119   $267,212   $273,370
Income before income taxes.......... $ 39,870      $ 47,967   $ 55,198   $ 66,744
Net income.......................... $ 30,818      $ 35,893   $ 40,754   $ 48,841
Basic earnings per share............ $    .56      $    .65   $    .74   $    .89
Diluted earnings per share.......... $    .56      $    .65   $    .74   $    .88
Dividends declared per share........ $   .145      $   .145   $   .145   $   .145

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
Basic earnings per share..........   $    .40      $    .49   $    .53   $    .52
Diluted earnings per share.......... $    .40      $    .48   $    .53   $    .51
Dividends declared per share........ $    .12      $    .12   $    .12   $    .12

30

ITEM 8. FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                           PAGE
Independent Auditors' Report............................................    32
Consolidated Financial Statements:
      Consolidated Balance Sheets as of December 31, 1997 and 1996......    33
      Consolidated Statements of Income for Each of the Years in the
      Three-Year Period Ended December 31, 1997.........................    34
      Consolidated Statements of Shareholders' Equity for Each of the
       Years in the Three-Year Period Ended December 31, 1997...........    35
      Consolidated Statements of Cash Flows for Each of the Years in
      the Three-Year Period Ended December 31, 1997.....................    36
      Notes to Consolidated Financial Statements........................    38

31

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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles.

KPMG PEAT MARWICK LLP

Los Angeles, California
February 13, 1998

32

MERCURY GENERAL CORPORATION

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1997 AND 1996

AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT SHARE AMOUNTS

A S S E T S

                                                                  1997        1996
                                                               ----------  ----------
Investments:
   Fixed maturities available for sale (amortized cost
    $1,147,594 in 1997 and $924,793 in 1996)................   $1,214,986   $  954,108
   Equity securities available for sale (cost $169,943 in
    1997 and $148,264 in 1996)..............................      173,522      148,112
   Short-term cash investments, at cost, which approxi-
    mates market............................................       59,740       66,067
                                                               ----------   ----------
              Total investments.............................    1,448,248    1,168,287
Cash........................................................        3,011        3,605
Receivables:
   Premiums receivable......................................      104,216       83,748
   Premium notes............................................       13,562       12,395
   Accrued investment income................................       21,895       18,410
   Other....................................................       26,476       29,655
                                                               ----------   ----------
                                                                  166,149      144,208
Deferred policy acquisition costs...........................       57,264       46,783
Fixed assets, net...........................................       30,493       30,060
Other assets................................................       20,367       26,984
                                                               ----------   ----------
                                                               $1,725,532   $1,419,927
                                                               ==========   ==========


                      LIABILITIES AND SHAREHOLDERS' EQUITY

Losses and loss adjustment expenses........................    $  409,061   $  336,685
Unearned premiums..........................................       309,376      260,878
Notes payable..............................................        75,000       75,000
Loss drafts payable........................................        32,058       29,032
Accounts payable and accrued expenses......................        50,742       36,463
Current income taxes.......................................         3,317        1,590
Deferred income taxes......................................        19,722        6,349
Other liabilities..........................................        26,664       32,708
                                                               ----------   ----------
              Total liabilities............................       925,940      778,705
                                                               ----------   ----------
Shareholders' equity:
   Common stock without par value or stated value.
    Authorized 70,000,000 shares; issued and outstanding
     55,124,579 shares in 1997 and 55,007,850 in 1996......        47,412       42,644
   Net unrealized investment gains.........................        46,131       18,956
   Unearned ESOP compensation..............................            --       (2,000)
   Retained earnings.......................................       706,049      581,622
                                                               ----------   ----------
              Total shareholders' equity...................       799,592      641,222
                                                               ----------   ----------
   Commitments and contingencies...........................    $1,725,532   $1,419,927
                                                               ==========   ==========

See accompanying notes to consolidated financial statements.

33

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

THREE YEARS ENDED DECEMBER 31, 1997

AMOUNTS EXPRESSED IN THOUSANDS, EXCEPT PER SHARE DATA

                                                     1997         1996        1995
                                                  -----------   ---------   --------
Revenues:
  Earned premiums..............................    $1,031,280   $754,724    $616,326
  Net investment income........................        86,812     70,180      62,964
  Net realized investment gains (losses).......         4,973     (3,173)      1,048
  Other........................................         4,881      3,233       3,341
                                                   ----------   --------    --------

      Total revenues...........................     1,127,946    824,964     683,679
                                                   ----------   --------    --------

Expenses:
  Losses and loss adjustment expenses..........       654,729    501,858     416,556
  Policy acquisition costs.....................       224,883    160,019     128,743
  Other operating expenses.....................        33,579     24,493      22,017
  Interest.....................................         4,976      2,004       2,040
                                                   ----------   --------    --------

       Total expenses..........................       918,167    688,374     569,356
                                                   ----------   --------    --------

  Income before income taxes...................       209,779    136,590     114,323

Income taxes...................................        53,473     30,826      24,022
                                                   ----------   --------    --------

 Net income....................................    $  156,306   $105,764    $ 90,301
                                                   ==========   ========    ========

Basic earnings per share.......................    $    2.84    $   1.93    $   1.65
                                                   ==========   ========    ========

Diluted earnings per share.....................    $    2.82    $   1.92    $   1.65
                                                   ==========   ========    ========

See accompanying notes to consolidated financial statements.

34

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

THREE YEARS ENDED DECEMBER 31, 1997

AMOUNTS EXPRESSED IN THOUSANDS

                                                                                    1997        1996        1995
                                                                                 ---------   ---------   ---------

Common stock, beginning of year................................................. $ 42,644    $ 40,895    $ 40,250
Proceeds of stock options exercised.............................................      999       1,104         384
Tax benefit on sales of incentive stock
 options........................................................................      401         220          74
Release of common stock by the ESOP.............................................    3,368         425         187
                                                                                 --------    --------    --------
Common stock, end of year.......................................................   47,412      42,644      40,895
                                                                                 --------    --------    --------
 Net unrealized investment gains (losses) on
 securities, beginning of year..................................................   18,956      25,227     (12,733)
Net increase (decrease) in unrealized invest-
 ment gains (losses) on securities..............................................   27,175      (6,271)     37,960
                                                                                 --------    --------    --------
Net unrealized investment gains on
 securities, end of year........................................................   46,131      18,956      25,227
                                                                                 --------    --------    --------

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

Retained earnings, beginning of year............................................  581,622     502,150     433,686
Net income......................................................................  156,306     105,764      90,301
Dividends paid to shareholders..................................................  (31,879)    (26,292)    (21,837)
                                                                                 --------    --------    --------
Retained earnings, end of year..................................................  706,049     581,622     502,150
                                                                                 --------    --------    --------
       Total shareholders' equity............................................... $799,592    $641,222    $565,188
                                                                                 ========    ========    ========

See accompanying notes to consolidated financial statements.

35

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE YEARS ENDED DECEMBER 31, 1997
AMOUNTS EXPRESSED IN THOUSANDS

                                                               1997         1996         1995
                                                               ----         ----         ----
Cash flows from operating activities:
  Net income                                               $ 156,306     $ 105,764     $ 90,301
  Adjustments to reconcile net income to net cash
   provided from operating activities:
     Increase in unpaid losses and loss adjustment
      expenses                                                72,376        35,947       26,047
     Increase in unearned premiums                            48,498        42,276       19,750
     Increase in premium notes receivable                     (1,167)         (667)        (166)
     Increase in premiums receivable                         (20,468)      (15,460)     (10,161)
     Increase in deferred policy acquisition costs           (10,481)       (7,080)      (3,741)
     Increase in loss drafts payable                           3,026         5,179        2,292
     Increase in accrued income taxes,
      excluding deferred tax on change in unrealized
      gain                                                       469         1,016        4,995
     Increase in accounts payable and accrued
      expenses                                                14,279         8,385        3,487
     Depreciation                                              5,157         4,067        3,736
     Net realized investment (gains) losses                   (4,973)        3,173       (1,048)
     Bond amortization, net                                   (2,295)       (1,112)        (103)
     Other, net                                                7,479        15,136        1,169
                                                             -------       -------      -------
            Net cash provided from operating activities      268,206       196,624      136,558

Cash flows from investing activities:
      Fixed maturities available for sale:
        Purchases                                           (362,932)     (243,779)    (204,360)
        Sales                                                 71,313        41,353       47,824
        Calls or maturities                                   72,515        91,834       70,954
      Equity securities available for sale:
        Purchases                                           (608,260)     (437,128)    (386,343)
        Sales                                                590,155       398,306      365,696
      Purchase of AFI, less cash acquired                       --         (33,629)        --
      Decrease (increase) in short-term cash investments,
       net                                                     6,327       (32,077)      (5,801)
      Purchase of fixed assets                                (6,854)       (5,971)      (4,115)
      Sale of fixed assets                                     1,165           167          494
                                                           ---------     ---------    ---------
         Net cash used in investing activities             $(236,571)    $(220,924)   $(115,651)

(Continued)

36

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(CONTINUED)

                                                        1997        1996        1995
                                                      ---------   ---------   ---------
Cash flows from financing activities:
   Additions to notes payable                         $     --    $ 75,000    $    --
   Principal payments on notes payable                      --     (25,000)        --
   Payment of American Mercury Insurance Company
    indemnification holdback                            (1,750)         --         --
   Dividends paid to shareholders                      (31,879)    (26,291)    (21,837)
   Proceeds from stock options exercised                 1,400       1,324         458
                                                      --------    --------    --------
            Net cash provided by (used in)
             financing activities                      (32,229)     25,033     (21,379)
                                                      --------    --------    --------

Net increase (decrease) in cash                           (594)        733        (472)
Cash:
   Beginning of the year                                 3,605       2,872       3,344
                                                      --------    --------    --------
   End of the year                                    $  3,011    $  3,605    $  2,872
                                                      ========    ========    ========

See accompanying notes to consolidated financial statements.

37

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1997 AND 1996

(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 Mercury Insurance Company, Cimarron Insurance Company, Inc., AFI Management Company, Inc. (AFIMC), and American Mercury Lloyds Insurance Company (AML). AML is not owned by MGC, but is controlled by MGC through its attorney-in-fact, AFIMC. The acquisition is discussed further in Note 8. Collectively, the newly-acquired companies, including AML, are referred to as AMI. All of the subsidiaries as a group, including AML, 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.

38

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(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 carrying value of receivables, accounts payable and other liabilities is equivalent to the estimated fair value of those items. The estimated fair value of notes payable equals their carrying value, which was based on borrowing rates currently available to the Company for bank loans with similar terms and maturities. The terms of the notes are discussed in Note 5.

Premium Income Recognition

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

Net premiums written during 1997, 1996 and 1995 were $1,086,241,000, $795,873,000 and $636,590,000, respectively.

39

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(1) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

One agent produced direct premiums written of approximately 14%, 17% and 15% of the Company's total direct premiums written during 1997, 1996 and 1995, 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

40

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(1) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

settlement of the claim, the more variable the ultimate settlement amount can be. Accordingly, short-tail claims, such as property damage claims, tend to be more reasonably predictable than long-tail liability claims. Management believes that the liability for losses and loss adjustment expenses is adequate to cover the ultimate net cost of losses and loss adjustment expenses incurred to date. Since the provisions are necessarily based upon estimates, the ultimate liability may be more or less than such provisions.

Depreciation

Buildings and furniture and equipment are depreciated over 30-year and 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

During 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share", which requires presentation of basic and diluted earnings per share for all publicly traded companies effective for fiscal years ending after December 15, 1997. Note 14 contains the required disclosures which make up the calculation of basic and diluted earnings per share.

Recently Issued Accounting Standards

Statement of Financial Accounting Standards No. 130 (SFAS No. 130), "Reporting Comprehensive Income," and Statement of Financial Accounting Standards No. 131 (SFAS No. 131), "Disclosures about Segments of an Enterprise and Related Information," were issued in June 1997 and are effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for the reporting and display of comprehensive income, which includes net income and changes in equity except those resulting from investments by, or distributions to stockholders. SFAS No. 131 establishes standards for disclosures related to business operating segments. The Company is currently evaluating the impact that these statements will have on the consolidated financial statements.

Income Taxes

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

41

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(1) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 1997, 1996, and 1995 was $5,077,000, $1,882,000, and $1,970,000, respectively. Income taxes paid were $52,611,000 in 1997, $30,550,000 in 1996, and $18,954,000 in 1995.

The balance sheet of AMI at the 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.

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

Stock-Based Compensation

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.

42

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(1) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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)
                                                                             -----------------------------
                                                                              1997       1996       1995
                                                                             -------   --------   --------
Interest and dividends on fixed maturities................................  $67,948    $55,132    $50,099
Dividends on equity securities............................................   16,317     13,385     11,855
Interest on short-term cash investments...................................    3,321      2,126      1,456
                                                                            -------    -------    -------
     Total investment income..............................................   87,586     70,643     63,410
Investment expense........................................................      774        463        446
                                                                            -------    -------    -------
     Net investment income................................................  $86,812    $70,180    $62,964
                                                                            =======    =======    =======

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

                                                                                Year ended December 31,
                                                                                (Amounts in thousands)
                                                                             -----------------------------
                                                                              1997       1996       1995
                                                                             -------   --------   --------
Net realized investment gains (losses):
     Fixed maturities.....................................................   $1,400    $   963    $   (57)
     Equity securities....................................................    3,573     (4,136)     1,105
                                                                             ------    -------    -------
                                                                             $4,973    $(3,173)   $ 1,048
                                                                             ======    =======    =======

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

                                                                                Year ended December 31,
                                                                                (Amounts in thousands)
                                                                             -----------------------------
                                                                              1997       1996       1995
                                                                             -------   --------   --------
Fixed maturities available for sale:
     Gross realized gains.................................................   $   849   $   515    $   346
     Gross realized losses................................................      (389)   (1,237)      (822)
                                                                             -------   -------    -------
          Net.............................................................   $   460   $  (722)   $  (476)
                                                                             =======   =======    =======

Equity securities available for sale:
     Gross realized gains.................................................   $ 7,257   $ 2,925    $ 5,154
     Gross realized losses................................................    (3,565)   (7,115)    (4,049)
                                                                             -------   -------    -------
          Net.............................................................   $ 3,692   $(4,190)   $ 1,105
                                                                             =======   =======    =======

43

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(2) INVESTMENTS AND INVESTMENT INCOME (CONTINUED)

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

                                                                           Year ended December 31,
                                                                           (Amounts in thousands)
                                                                        -----------------------------
                                                                          1997       1996      1995
                                                                          ----       ----      ----
Net increase (decrease) in net unrealized
 investment gains and losses:
         Fixed maturities available for sale.........................   $38,077  $ (8,059)   $ 49,859
         Income tax expense (benefit)................................    13,327    (2,821)     17,451
                                                                        -------  --------    --------
                                                                        $24,750  $ (5,238)   $ 32,408
                                                                        =======  ========    ========

         Equity securities...........................................   $ 3,731  $ (1,589)   $  8,541
         Income tax expense (benefit)................................     1,306      (556)      2,989
                                                                        -------  --------    --------
                                                                        $ 2,425  $ (1,033)   $  5,552
                                                                        =======  ========    ========

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

                                                                                 December 31,
                                                                            (Amounts in thousands)
                                                                            ----------------------
                                                                               1997        1996
                                                                               ----        ----
Fixed maturities available for sale:
     Unrealized gains................................................       $ 68,718    $ 34,555
     Unrealized losses...............................................         (1,326)     (5,240)
     Tax effect......................................................        (23,587)    (10,260)
                                                                            --------    --------
                                                                            $ 43,805    $ 19,055
                                                                            --------    --------

Equity securities available for sale:
     Unrealized gains................................................       $  5,006    $  2,347
     Unrealized losses...............................................         (1,427)     (2,499)
     Tax effect......................................................         (1,253)         53
                                                                            --------    --------
                                                                            $  2,326    $    (99)
                                                                            --------    --------

       Net unrealized investment gains...............................       $ 46,131    $ 18,956
                                                                            ========    ========

44

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(2) INVESTMENTS AND INVESTMENT INCOME (CONTINUED)

The amortized costs and estimated market values of investments in fixed maturities available for sale as of December 31, 1997 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...........   $   19,700     $   123     $   16   $   19,807
Obligations of states and political
  subdivisions........................    1,021,259      64,908        554    1,085,613
Public utilities......................       11,383         151          5       11,529
Corporate securities..................       19,013         324         11       19,326
Redeemable preferred stock............       76,239       3,212        740       78,711
                                         ----------     -------     ------   ----------
     Totals...........................   $1,147,594     $68,718     $1,326   $1,214,986
                                         ==========     =======     ======   ==========

The amortized costs 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
                                                    ========         =======      ========       ========

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.

45

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(2) INVESTMENTS AND INVESTMENT INCOME (CONTINUED)

At December 31, 1997 bond holdings rated below investment grade totaled approximately 1.0% of total investments. The average Standard and Poor's rating of the bond portfolio is AA-.

The amortized cost and estimated market value of fixed maturities available for sale at December 31, 1997, 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 ....................     $   12,117   $   12,230
   Due after one year through five years.......         78,682       79,795
   Due after five years through ten years......         65,455       68,505
   Due after ten years.........................        991,340    1,054,456
                                                    ----------   ----------
                                                    $1,147,594   $1,214,986
                                                    ==========   ==========

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)
                                    -------------------------
                                      1997           1996
                                      ----           ----
Land.............................  $  6,084        $  6,128
Buildings........................    21,802          21,430
Furniture and equipment..........    27,819          23,287
Leasehold improvements...........       391           1,238
                                     ------         -------
                                     56,096          52,083
Less accumulated depreciation....   (25,603)        (22,023)
      Net fixed assets...........   -------         -------
                                   $ 30,493        $ 30,060
                                     ======         =======

46

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(4) DEFERRED POLICY ACQUISITION COSTS

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

                                             Years ended December 31,
                                              (Amounts in thousands)
                                         ---------------------------------
                                           1997        1996        1995
                                           ----        ----        ----
Balance, beginning of year.........      $  46,783   $  33,809   $  30,068
DAC acquired in purchase of AFI....             --       5,850          --
Costs deferred during the year.....        235,364     167,143     132,484
Amortization charged to expense....       (224,883)   (160,019)   (128,743)
                                         ---------   ---------   ---------
Balance, end of year...............      $  57,264   $  46,783   $  33,809
                                         =========   =========   =========

(5) NOTES PAYABLE

Notes payable at December 31, 1997 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, 2000. 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 November 23, 1998, the net interest cost on the loan at December 31, 1997 is approximately 6.125%.

The terms of the loan agreement include certain affirmative and negative covenants, all of which are met by the Company at December 31, 1997.

(6) INCOME TAXES

The Company and its subsidiaries file a consolidated Federal income tax return.

47

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(6) INCOME TAXES (CONTINUED)

The provision for income tax expense (benefit) consists of the following components:

                                        Year ended December 31,
                                         (Amounts in thousands)
                                     ------------------------------
                                       1997       1996       1995
                                     --------   --------   --------
Federal
    Current.......................   $54,447    $31,880    $24,016
    Deferred......................    (1,265)    (1,139)       (92)
                                     -------    -------    -------
                                     $53,182    $30,741    $23,924
                                     =======    =======    =======
State
    Current.......................   $   291    $    85    $    98
    Deferred......................        --         --         --
                                     -------    -------    -------
                                     $   291    $    85    $    98
                                     =======    =======    =======
Total
    Current.......................   $54,738    $31,965    $24,114
    Deferred......................    (1,265)    (1,139)       (92)
                                     -------    -------    -------
        Total.....................   $53,473    $30,826    $24,022
                                     =======    =======    =======

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)
                                                                           ---------------------------------
                                                                             1997         1996        1995
                                                                           ---------   ---------   ---------
Computed tax expense at 35% ........................................       $ 73,423    $ 47,807    $ 40,013
Tax-exempt interest income..........................................        (19,188)    (15,626)    (13,718)
Dividends received deduction........................................         (5,389)     (4,949)     (4,936)
Reduction of losses incurred deduction for 15% of
 income on securities purchased after August 7, 1986                          3,640       2,974       2,546
Other, net..........................................................            987         620         117
                                                                           --------    --------    --------
     Income tax expense ............................................       $ 53,473    $ 30,826    $ 24,022
                                                                           ========    ========    ========

48

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(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)
                                                    -------------------------------
                                                      1997       1996        1995
                                                    --------   ---------   --------
Deferred tax assets
    Discounting of loss reserves and salvage
     and subrogation recoverable for tax
     purposes....................................  $  6,930    $  6,123   $  5,030
    Other deferred tax assets....................     1,085       1,358        638
                                                   --------    --------   --------
      Total gross deferred tax assets............     8,015       7,481      5,668
       Less valuation allowance..................        --          --         --
                                                   --------    --------   --------
       Net deferred tax assets...................     8,015       7,481      5,668
                                                   --------    --------   --------

Deferred tax liabilities
    Tax liability on net unrealized gain on
     securities carried at market value..........   (24,840)    (10,207)   (13,584)
Tax depreciation in excess of book
     depreciation................................    (1,467)     (1,270)    (1,184)
    Accretion on bonds...........................    (1,061)       (784)      (742)
    Other deferred tax liabilities...............      (369)     (1,569)      (316)
                                                   --------    --------   --------
       Total gross deferred tax liabilities......   (27,737)    (13,830)   (15,826)
                                                   --------    --------   --------

      Net deferred tax liabilities...............  $(19,722)   $ (6,349)  $(10,158)
                                                   ========    ========   ========

49

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(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)
                                                    --------------------------
                                                    1997       1996       1995
                                                    ----       ----       ----
Gross reserves for losses and loss
 adjustment expenses at beginning of year.....   $336,685   $253,546   $227,499
  Less reinsurance recoverable................    (24,931)    (2,556)    (4,107)
                                                 --------   --------   --------
Net reserves, beginning of year...............    311,754    250,990    223,392

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

Incurred losses and loss adjustment expenses
  related to:
    Current year..............................    641,911    505,726    423,264
    Prior years...............................     12,818     (3,868)    (6,708)
                                                 --------   --------   --------
  Total incurred losses and loss adjustment
   expenses...................................    654,729    501,858    416,556
                                                 --------   --------   --------

Loss and loss adjustment expense payments
  related to:
    Current year..............................    373,823    298,099    243,294
    Prior years...............................    206,390    167,226    145,664
                                                 --------   --------   --------
Total payments................................    580,213    465,325    388,958
                                                 --------   --------   --------

Net reserves for losses and loss adjustment
 expenses at end of year......................    386,270    311,754    250,990
Reinsurance recoverable.......................     22,791     24,931      2,556
                                                 --------   --------   --------
Gross reserves, end of year...................    409,061   $336,685   $253,546
                                                 ========   ========   ========

Increases in incurred losses in 1997 relating to prior years reflects increases in the Company's estimates for loss adjustment expenses.

Decreases in incurred losses relating to 1996 and 1995 reflects the favorable loss experience during these years attributable to a number of combined factors which have produced favorable frequency and severity trends.

50

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(8) ACQUISITION OF AMERICAN FIDELITY INSURANCE COMPANY

Effective November 30, 1996 the Company acquired all of the issued and outstanding common stock of American Mercury 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 AMI. The acquisition was accounted for using the purchase method and resulted in a minimal amount of goodwill. The purchase agreement includes an indemnification by the seller on the loss and loss adjustment expense reserves of AMI at the acquisition date, excluding the mechanical breakdown line, to avoid any impact on the Company's financial statements from any future adverse development on the acquisition date loss reserves.

AMI 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 1996 and all of 1997 are included in the consolidated financial statements of the Company.

The following unaudited proforma consolidated results of operations for 1996 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
Basic earnings per share                        $   1.89    $   1.70
Diluted earnings per share                      $   1.88    $   1.69

(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 1998, the direct insurance subsidiaries of the Company are permitted to pay approximately $67.0 million in dividends to the Company without the prior

51

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(9) Dividend Restrictions (Continued)

approval of the Commissioner of Insurance of the state of domicile. The above statutory regulations may have the effect of indirectly limiting the ability of the Company to pay dividends.

(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, 1997, 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 $147,255,000, $97,979,000, and $86,210,000 for the years ended December 31, 1997, 1996 and 1995, respectively. The statutory policyholders' surplus of the Insurance Companies, as reported to regulatory authorities, as of December 31, 1997 and 1996 was $679,359,000 and $594,799,000, respectively.

The Company has estimated the Risk-Based Capital Requirements of each of its insurance subsidiaries as of December 31, 1997 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 $1,885,000, $1,583,000 and $1,461,000 for the years ended December 31, 1997, 1996 and 1995, respectively.

52

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(11) COMMITMENTS AND CONTINGENCIES (CONTINUED)

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

                          Rent        Rent
YEAR                    Expense      Income
----                    -------      ------
1998.................... $1,947      $ (330)
1999.................... $2,025      $ (263)
2000.................... $1,350      $  (91)
2001.................... $  856      $   --
2002.................... $  267      $   --
Thereafter.............. $  --       $   --

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 con- tributions 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, 1997, 1996 and 1995.

The Profit Sharing Plan also includes an option for employees to make salary deferrals under Section 401(k) of the Internal Revenue Code. Company matching contributions, at a rate set by the Board of Directors, totaled $1,349,000, $955,000, and $773,000 for the plan years ended December 31, 1997, 1996 and 1995.

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

53

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(12) PROFIT SHARING PLAN (CONTINUED)

service less dividends received by the ESOP. Dividends received by the ESOP on unallocated shares are used to pay debt service and the ESOP shares serve as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to employees, based on the proportion of debt service paid in the year. The Company accounts for its ESOP in accordance with Statement of Position 93-6. Accordingly, the debt of the ESOP, which was $2,000,000, $3,000,000 and $4,000,000 at December 31, 1997, 1996 and 1995, 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 $5,368,000, $1,509,000 and $1,145,000 in 1997, 1996 and 1995, respectively. The ESOP shares as of December 31 were as follows:

                                            1997        1996
                                          --------   ----------
Allocated shares                           193,200      128,800
Shares committed-to-be released            128,800       64,400
Unreleased shares                               --      128,800
                                          --------   ----------
Total ESOP shares                          322,000      322,000
                                          ========   ==========
Market value of unreleased shares at
 December 31,                             $     --   $3,381,000
                                          ========   ==========

(13) COMMON STOCK

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

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

In May 1995 the Company adopted The 1995 Equity Participation Plan (the "1995 Plan") which succeeds the Company's 1985 Plan. Under the 1995 Plan,

54

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(13) COMMON STOCK (CONTINUED)

5,400,000 shares of Common Stock are authorized for issuance upon exercise of options, stock appreciation rights and other awards, or upon vesting of restricted or deferred stock awards. During 1995, the Company granted incentive stock options under both the 1995 Plan and the 1985 Plan. The options granted during 1997, 1996 and 1995 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.

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 $363,000, $295,000 and $116,000 in 1997, 1996 and 1995, respectively, and earnings per share (basic and diluted) would have remained the same in 1997, been reduced by .01 (basic and diluted) in 1996 and diluted would have been reduced by .01 in 1995 and basic would have remained the same in 1995. 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 1997, 1996 and 1995: dividend yield of 2.0 percent for all years, expected volatility of 30 percent for all years and expected lives of 7 years for all years. The risk-free interest rates used were 6.4 percent for the options granted during 1997, 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, 1997, 1996 and 1995 and changes during the years ending on those dates is presented below:

                                              1997                  1996                  1995
                                      --------------------   --------------------   -------------------
                                                  Weighted               Weighted              Weighted
                                                  Average                Average               Average
                                                  Exercise               Exercise              Exercise
                                       Shares      Price      Shares      Price      Shares     Price
                                      ---------   --------   ---------   --------   --------   --------
Outstanding at beginning of year       723,350     $14.452    730,650     $12.117   475,850     $ 9.301
Granted during the year                 45,000      27.406    120,000      23.078   310,000      15.545
Exercised during the year             (116,729)      8.553   (122,500)      7.713   (55,200)      7.089
Canceled or expired                    (16,000)     21.750     (4,800)     13.500        --          --
                                                             --------               -------
Outstanding at end of year             635,621      16.269    723,350      14.452   730,650      12.115
                                      ========               ========               =======

Options exercisable at year-end        281,021                268,150               283,450
Weighted-average fair value of
 options granted during the year       $  9.91                 $ 8.11                 $5.75

55

MERCURY GENERAL CORPORATION
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1997 AND 1996

(13) COMMON STOCK (CONTINUED)

The following table summarizes information regarding the stock options outstanding at December 31, 1997:

                       Number       Weighted Avg.     Weighted Avg.     Number      Weighted Avg.
Range of             Outstanding      Remaining         Exercise      Exercisable     Exercise
Exercise Prices      at 12/31/97   Contractual Life       Price       at 12/31/97       Price
------------------   -----------   ----------------   -------------   -----------   -------------
$3.906 to 3.906         70,600        1.33 years        $ 3.906           70,600        $ 3.906
$15.00 to 15.9375      416,021        6.64               15.409          186,421         15.354
$21.75 to 27.4006      149,000        8.32               24.528           24,000         23.078
                       -------                                           -------
$3.906 to 27.406       635,621        6.44               16.269          281,021         13.138
                       =======                                           =======

(14) EARNINGS PER SHARE

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

                                                   1997                         1996                          1995
                                       -----------------------------   ----------------------------   -----------------------
                                        (000's)   (000's)               (000's)  (000's)              (000's)  (000's)
                                                 Weighted                        Weighted                      Weighted
                                         Income    Shares                 Income  Shares                Income  Shares
                                       (Numera-  (Denomi-  Per-Share    (Numera- (Denomi-  Per-Share  (Numera- (Denomi- Per-Share
                                         tor)     nator)    Amount        tor)    nator)    Amount      tor)    nator)   Amount
                                       --------  --------  ---------    -------- --------  ---------  -------- -------- --------
Basic EPS
---------
Income available to
 common stockholders                   $156,306   54,997     $2.84      $105,764   54,794      $1.93   $90,301  54,623     $1.65

Effect of dilutive
 securities
   Options                                  --       386                      --      304                   --     252

Diluted EPS
-----------
Income available to
 common stockholders
 after assumed
 conversions                           $156,306   55,383     $2.82      $105,764   55,098      $1.92   $90,301  54,875     $1.65
                                       ========   ======     =====      ========   ======      =====   =======  ======     =====

56

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding executive officers of the Company is included in Part
I. For this and other information called for by Items 10, 11, 12 and 13, reference is made to the Company's definitive proxy statement for its Annual Meeting of Shareholders, to be held on May 13, 1998, which will be filed with the Securities and Exchange Commission within 120 days after December 31, 1997, 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, 1997 are contained herein as listed in the Index to Consolidated Financial Statements on page 31.

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

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.

57

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     Amendment 1998-I to the Mercury General Corporation Profit Sharing Plan.
    10.12&    Revolving Credit Agreement by and among Mercury General
              Corporation, the Lenders Party Thereto and The Bank of New York, as Agent
              dated as of November 21, 1996.
    10.13**   Property Per Risk Excess of Loss Reinsurance Agreement between
              National Reinsurance Corporation and Mercury Casualty Company, effective April 1, 1995.
    10.14**   Endorsement No. 1 to the Property Per Risk Excess of Loss
              Agreement effective April 1, 1995.
    10.15@@   Endorsement No. 2 to the Property Per Risk Excess of Loss
              Agreement effective April 1, 1995.
    10.16@@   Endorsement No. 3 to the Property Per Risk Excess of Loss
              Agreement effective April 1, 1995.
    10.17     Property Excess Catastrophe Reinsurance Agreement effective
              September 1, 1996.
    10.18@@   Management Agreement effective January 1, 1995 between the
              Company and Mercury Insurance Company of Illinois.
    10.19@@   Management Agreement effective January 1, 1995 between the
              Company and Mercury Indemnity Company of Illinois.
    10.20@@   Management Agreement effective January 1, 1995 between the
              Company and Mercury Insurance Company of Georgia.
    10.21@@   Management Agreement effective January 1, 1995 between the
              Company and Mercury Indemnity Company of Georgia.
    10.22@    The 1995 Equity Participation Plan.

58

10.23&    Stock Purchase Agreement between Mercury General Corporation as
          Purchaser and AFC as Seller dated November 15, 1996.
10.24     Management Agreement effective January 1, 1997 between the Company
          and American Mercury Insurance Company, AFI Management Co., Inc. and
          Cimarron Insurance Company.
21.1      Subsidiaries of the Company.
23.1      Accountants' Consent.
27.1      Financial Data Schedule

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

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

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

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

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

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

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

(b) Reports on Form 8-K:
None

59

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

MERCURY GENERAL CORPORATION

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

March 18, 1998

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

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

                                Chief Executive Officer
                                        and
                                 Chairman of the Board
  /s/ GEORGE JOSEPH          (Principal Executive Officer)      March 18, 1998
--------------------------
      George Joseph

Senior Vice President

 /s/ KEITH L. PARKER           Chief Investment Officer         March 18, 1998
--------------------------
     Keith L. Parker

Vice President and Chief Financial Officer

 /s/ GABRIEL TIRADOR        (Principal Financial Officer)       March 18, 1998
--------------------------
     Gabriel Tirador


 /s/ NATHAN BESSIN                    Director                  March 18, 1998
--------------------------
     Nathan Bessin


 /s/ BRUCE A. BUNNER                  Director                  March 18, 1998
--------------------------
     Bruce A. Bunner


 /s/ MICHAEL D. CURTIUS               Director                  March 18, 1998
--------------------------
     Michael D. Curtius

60

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


 /s/ RICHARD E. GRAYSON                   Director               March 18, 1998
-------------------------
     Richard E. Grayson


 /s/ GLORIA JOSEPH                         Director              March 18, 1998
------------------------
     Gloria Joseph


 /s/ CHARLES MCCLUNG                       Director              March 18, 1998
------------------------
     Charles McClung


 /s/ DONALD P. NEWELL                      Director              March 18, 1998
------------------------
     Donald P. Newell


 /s/ DONALD R. SPUEHLER                    Director              March 18, 1998
-------------------------
     Donald R. Spuehler

61

AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES

The Board of Directors
Mercury General Corporation:

Under date of February 13, 1998, we reported on the consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 1997 and 1996, 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, 1997, as contained in the annual report on Form 10-K for the year 1997. 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 13, 1998

S-1

SCHEDULE I

MERCURY GENERAL CORPORATION

SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES

DECEMBER 31, 1997

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.........................   $   19,700   $   19,807      $   19,807
      States, Municipalities..................    1,021,259    1,085,614       1,085,614
      Public utilities........................       11,383       11,529          11,529
      All other corporate bonds...............       19,013       19,326          19,326
    Redeemable preferred stock................       76,239       78,710          78,710
                                                 ----------   ----------      ----------
      Total fixed maturities available for
        sale..................................    1,147,594    1,214,986       1,214,986
                                                 ----------   ----------      ----------
Equity securities:
    Common stocks:
      Public utilities........................       25,020       29,144          29,144
      Banks, trust and insurance companies....          567          552             552
      Industrial, Miscellaneous and
       all other..............................        1,962        1,980           1,980
    Nonredeemable preferred stocks............      142,394      141,846         141,846
                                                 ----------   ----------      ----------

      Total equity securities available for
        sale..................................      169,943      173,522         173,522
                                                 ----------   ----------      ----------

Short-term investments........................       59,740                       59,740
                                                 ----------                   ----------
     Total investments........................   $1,377,277                   $1,448,248
                                                 ==========                   ==========

S-2

SCHEDULE I, CONTINUED

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-3

SCHEDULE II
MERCURY GENERAL CORPORATION

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

BALANCE SHEETS

DECEMBER 31, 1997 AND 1996

AMOUNTS IN THOUSANDS

ASSETS

                                                             1997        1996
                                                           ---------   --------
Investments:
    Fixed maturities available for sale (amortized
        cost $2,914 in 1997 and $3,003 in 1996)..........   $  2,888   $  3,012
    Equity securities, available for sale (cost
        $28,398 in 1997 and $17,169 in 1996).............     28,555     16,877
      Short-term cash investments........................      6,705      8,090
      Investment in subsidiaries.........................    849,608    697,059
                                                            --------   --------
              Total investments..........................    887,756    725,038

Amounts due from affiliates..............................      5,452      5,014
Income taxes.............................................      3,144      1,988
Other assets.............................................      1,863      2,303
                                                            --------   --------
                                                            $898,215   $734,343
                                                            ========   ========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Notes payable............................................   $ 75,000   $ 75,000
Accounts payable and accrued expenses....................     18,594     12,311
Other liabilities........................................      5,029      5,807
                                                            --------   --------
       Total liabilities.................................     98,623     93,118
                                                            --------   --------

Shareholders' equity:
       Common stock......................................     47,412     42,644
       Net unrealized investment gains ..................     46,131     18,959
       Unearned ESOP compensation........................       --       (2,000)
       Retained earnings.................................    706,049    581,622
                                                            --------   --------
              Total shareholders' equity.................    799,592    641,225
                                                            --------   --------

                                                            $898,215   $734,343
                                                            ========   ========

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, 1997

AMOUNTS IN THOUSANDS

                                                                                  1997          1996       1995

Revenues:
  Net investment income........................................................ $  2,139        $ 1,489    $ 1,824
  Management fee income from subsidiaries......................................  162,352        118,657    101,823
  Other........................................................................       --              8         27
                                                                                --------        -------    -------

      Total revenues...........................................................  164,491        120,154    103,674

Expenses:
  Loss adjustment expenses.....................................................  102,889         79,934     68,048
  Policy acquisition costs.....................................................   31,543         20,345     17,087
  Other operating expenses.....................................................   28,454         19,336     16,627
  Interest.....................................................................    4,972          2,004      2,040
                                                                                --------        -------    -------


      Total expenses...........................................................  167,858        121,619    103,802

  Loss before income taxes and equity in net
   income of subsidiaries......................................................   (3,367)        (1,465)      (128)

Income tax benefit.............................................................     (528)          (536)      (386)
                                                                                --------        -------    -------


  Income (loss) before equity in net income
   of subsidiaries.............................................................   (2,839)          (929)       258

Equity in net income of subsidiaries...........................................  159,145        106,693     90,043
                                                                                --------        -------    -------


     Net income................................................................ $156,306       $105,764   $ 90,301
                                                                                ========       ========   ========

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, 1997

AMOUNTS IN THOUSANDS

                                                                     1997       1996        1995
                                                                    -------   ---------   ---------
Cash flows from operating activities:
  Net cash provided from operating activities.....................  $ 40,097    $ 32,510    $ 25,526

Cash flows from investing activities:
  Acquisition of American Mercury Insurance
   Company........................................................        --     (34,991)         --
  Capital contribution to subsidiaries............................        --     (15,000)       (500)
  Fixed maturities, at market:
    Purchases.....................................................    (3,556)       (807)     (1,051)
    Sales.........................................................     2,398         475         335
    Calls or maturities...........................................     1,234       1,072         349
  Equity securities:
    Purchases.....................................................   (71,446)    (47,597)    (49,390)
    Sales.........................................................    59,786      42,934      48,675
    Calls.........................................................       358         ---          --
  Increase in short term cash investments, net....................     1,385      (3,344)     (2,708)
  Other, net......................................................        --          --          --
                                                                     -------    --------    --------
      Net cash used in investing activities.......................    (9,841)    (57,258)     (4,290)

Cash flows from financing activities:
  Additions to notes payable......................................        --      75,000          --
  Principal payments on notes payable.............................        --     (25,000)         --
  Payment of AMI indemnification holdback.........................    (1,750)         --          --
  Dividends paid to shareholders..................................   (31,879)    (26,291)    (21,837)
  Stock options exercised.........................................     1,400       1,324         458
                                                                     -------    --------    --------
     Net cash used in financing activities........................   (32,229)     25,033     (21,379)

Net increase (decrease) in cash...................................    (1,973)        285        (143)
Cash:
  Beginning of the year...........................................    (1,056)     (1,340)     (1,197)
                                                                    --------    --------    --------
  End of the year ................................................  $ (3,029)   $ (1,055)   $ (1,340)
                                                                    =========   ========    ========

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, 1997 AND 1996

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

MANAGEMENT FEE INCOME

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

DIVIDENDS RECEIVED FROM SUBSIDIARIES

Dividends of $33,500,000, $27,700,000, and $24,500,000 were received by the Company from its wholly-owned subsidiaries in 1997, 1996 and 1995, respectively, and are recorded as a reduction to Investment in Subsidiaries.

CASH OVERDRAFT

At December 31, 1997 and 1996, the Company had cash overdrafts of $3,029,000 and $1,055,000, 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, 1997

AMOUNTS IN THOUSANDS

                                                   Ceded to
                                        Gross       other                  Net
                                       amount     companies   Assumed     amount
                                      ---------   ---------   -------   ----------
Property and Liability insurance
   1997............................  $1,055,114     $24,241      $407   $1,031,280
   1996............................  $  757,447     $ 3,138      $415   $  754,724
   1995............................  $  619,404     $ 3,444      $366   $  616,326

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    Amendment 1998-I to the Mercury General Corporation Profit
         Sharing Plan.
10.12&   Revolving Credit Agreement by and among Mercury General
         Corporation, the Lenders Party Thereto and The Bank of New
         York, as Agent dated as of November 21, 1996.
10.13**  Property Per Risk Excess of Loss Reinsurance Agreement between
         National Reinsurance Corporation and Mercury Casualty Company,
         effective April 1, 1995.
10.14**  Endorsement No. 1 to the Property Per Risk Excess of Loss
         Agreement effective April 1, 1995.
10.15@@  Endorsement No. 2 to the Property Per Risk Excess of Loss
         Agreement effective April 1, 1995.
10.16@@  Endorsement No. 3 to the Property Per Risk Excess of Loss
         Agreement effective April 1, 1995.
10.17    Property Excess Catastrophe Reinsurance Agreement effective
         September 1, 1996.
10.18@@  Management Agreement effective January 1, 1995 between the
         Company and Mercury Insurance Company of Illinois.
10.19@@  Management Agreement effective January 1, 1995 between the
         Company and Mercury Indemnity Company of Illinois.
10.20@@  Management Agreement effective January 1, 1995 between the
         Company and Mercury Insurance Company of Georgia.

70

10.21@@  Management Agreement effective January 1, 1995 between the
         Company and Mercury Indemnity Company of Georgia.
10.22@   The 1995 Equity Participation Plan.
10.23&   Stock Purchase Agreement between Mercury General Corporation as
         Purchaser and AFC as Seller dated November 15, 1996.
10.24    Management Agreement effective January 1, 1997 between the Company
         and American Mercury Insurance Company, AFI Management Co., Inc. and
         Cimarron Insurance Company.
21.1     Subsidiaries of the Company.
23.1     Accountants' Consent.
27.1     Financial Data Schedule.

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

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

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

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

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

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

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

(b) Reports on Form 8-K:
None

71

EXHIBIT 3.1

ARTICLES OF INCORPORATION
OF
CALIFORNIA GENERAL UNDERWRITERS

We, the undersigned, residents of the State of California, have this day voluntarily associated ourselves together for the purpose of forming a corporation under the laws of the State of California, and we do hereby certify:

ONE: The name of this corporation is

CALIFORNIA GENERAL UNDERWRITERS.

TWO: The specific business in which the corporation is primarily

to engage is the management of the underwriting department of a casualty insurance company, the issuing of insurance policies, and acting as consultants and advisers of insurance companies, both casualty and others.

THREE: The purposes for which this corporation is formed are:

(a) The primary business in which the corporation initially intends to engage is the consulting with and advising insurance companies, both casualty and others.

(b) To buy, sell, own, hold, exchange, mortgage, and otherwise deal in and with any and all kinds of real, personal or mixed property; to incur any indebtedness, and to execute any and all evidences of such indebtedness; to sign and deliver any and all kinds of notes, stocks, bonds, trust indentures, contracts and documents; to lend or borrow money, with or without security; to act as real estate broker; to act as agent for the making or procuring of loans, and to act as broker in connection with the purchase, sale or exchange of any and all kinds of real and personal property; to buy, purchase or otherwise acquire any patent or patents, process of processes, or trade-marks or copy- rights, to sell, lease or encumber or otherwise deal in any patent or patents, or any interest or interests in any patent or patents, process or processes, of trade-marks or copyrights; to merge or consolidate with any corporation in such manner as may be permitted by law.

1

(c) To manufacture, import, export, buy and sell and deal generally in any and all kinds of goods, wares and merchandise of any and all kinds and descriptions, and to carry on all other businesses incidental thereto; and to do anything which any person may do, establish and carry on that may be lawful under the laws of the State of California; to exercise all of the powers conferred by the laws of the State of California upon corporations formed under the laws pursuant to and under which this corporation is formed, as such laws are now in effect or may at any time hereafter be amended; and to enter into partnerships and joint ventures with natural persons or other corporations.

(d) To erect, construct, maintain, improve, rebuild, enlarge, alter, manage and control, directly or through ownership of stock in any corporation, any and all kinds of buildings, houses, stores, offices, shops, warehouses, factories, mills, machinery and plants, and any and all other structures and erections which may, in the judgment of the Board of Directors, at any time be necessary, useful or advantageous for the purposes of the corporation, and which can lawfully be done under the laws of the State of California.

(e) To carry on the business of warehousing in all of its branches; to receive on consignment or otherwise, to store, sell and distribute goods on commission or other basis; to export, import, and otherwise deal in goods, wares and merchandise of all classes and descriptions; to issue warehouse receipts, certificates and circulars, negotiable or otherwise, to persons warehousing goods, wares or merchandise with said corporation; to make advances on loans by way of mortgage, pledge or deposit on warehouse receipts, upon the security of goods, wares or merchandise stored with said corporation, or otherwise.

(f) To acquire, by purchase or otherwise, the good will, business, property rights, franchises and assets of every kind, with or without undertaking, either wholly or in part, the liabilities of any person, firm association or corporation; and to acquire any business as a going concern, or otherwise, (1) by purchase of the assets thereof, wholly or in party; (2) by acquisition of the shares, or any part thereof; or (3) in any other manner; and to pay for the same in cash or in the shares or bonds or other evidence of indebtedness of this corporation, or otherwise; to hold, maintain and operate, or in any other manner dispose of, the whole or any part of the good will, business rights and property so acquired, and to conduct in any lawful manner

2

the whole or any part of any business so acquired; and to exercise all of the powers necessary or convenient in and about the management of such business.

(g) To establish branch stores, offices, wholesale houses and factories for the conduct of the business of said corporation.

The foregoing statement of purposes, objects and powers shall be construed as a statement of both powers and purposes; and the purposes, objects and powers stated in each clause shall, except where otherwise expressed, be in nowise limited or restricted by reference to or inference from the terms or provisions of any other paragraph or clause but shall be regarded as independent powers, objects and powers.

The foregoing shall be construed as objects and powers, and the enumeration thereof shall not be held to limit or restrict in any manner the general powers now or thereafter conferred on this corporation by the laws of the State of California.

FOUR: That the principal office for the transaction of the

business of the corporation will be in the County of Los Angeles, State of California.

FIVE: That the term of existence of this corporation shall be the

maximum term allowed by the laws of the State of California.

SIX: That the number of directors of this corporation shall be

three (3); and the names and addresses of the persons so appointed to act as the first directors are:

GEORGE JOSEPH
1227 South LaBrea Avenue
Los Angeles 19, California

GEORGE McKAY
705 Plymouth Road
San Marino, California

RICHARD H. OSHMAN
3540 Wilshire Boulevard
Los Angeles 5, California

SEVEN: That the total number of shares which the corporation shall have the authority to issue is two thousand (2,000) shares of the par value of One Hundred ($100.00) Dollars each, and of the aggregate par value of Two Hundred Thousand ($200,000) Dollars.

3

EIGHT:    The stock of this corporation shall be non-assessable.
-----

NINTH:    After the initial application for a permit to issue stock
-----

has been made and approved by the California Corporation Commissioner and the said stock is sold and/or issued pursuant thereto, no additional applications may be made for the issuance of new common stock unless and until the Secretary of the corporation has obtained in writing the consent of the holders of at least 75% of the common stock outstanding at that time.

IN WITNESS WHEREOF, we have hereunto set our hands this 27th day of December, 1960.

/s/ George Joseph
----------------------
    George Joseph


/s/ George McKay
----------------------
    George McKay


/s/ Richard H. Oshman
----------------------
    Richard H. Oshman

4

STATE OF CALIFORNIA     )
                        )  ss.
COUNTY OF LOS ANGELES   )

On this 27th day of December, 1960, before me, a Notary Public in and for said County and State, personally appeared GEORGE JOSEPH, known to me to be the person whose name is subscribed to the within instrument, and acknowledged that he executed the same.

WITNESS my hand and official seal.

/s/ J.M. Barker
-----------------------------
Notary Public in and for said
   County and State
J. M. Barker

STATE OF CALIFORNIA    )
                       )  ss.
COUNTY OF LOS ANGELES  )

On this 27th day of December, 1960, before me, a Notary Public in and for said County and State, personally appeared GEORGE McKAY, known to me to be the person whose name is subscribed to the within instrument, and acknowledged that he executed the same.

WITNESS my hand and official seal.

/s/  J.M. Barker
-----------------------------
Notary Public in and for said
   County and State
J. M. Barker

5

STATE OF CALIFORNIA     )
                        )  ss.
COUNTY OF LOS ANGELES   )

On this 27th day of December, 1960, before me, a Notary Public in and for said County and State, personally appeared RICHARD A. OSHMAN, known to me to be the person whose name is subscribed to the within instrument, and acknowledged that he executed the same.

WITNESS my hand and official seal.

/s/  Manuel Seligman
-----------------------------
Notary Public in and for said
   County and State
Manuel Seligman

6

CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
CALIFORNIA GENERAL UNDERWRITERS

GEORGE JOSEPH and RICHARD H. OSHMAN certify:

1. That they are the President and Secretary, respectively, of CALIFORNIA GENERAL UNDERWRITERS, a California Corporation.

2. That at a meeting of the Board of Directors of said Corporation, duly held at Los Angeles, California, on the 18th of November, 1968, the following Resolution was adopted:

"RESOLVED, that Article ONE of the Articles of Incorporation of this corporation be amended to read as follows:

'ONE: The name of this corporation is

CALIFORNIA MANAGEMENT, INC.'"

3. That the Shareholder has adopted said amendment by written consent. That the wording of the amended Article, as set forth in the Shareholder's written consent, is the same as that set forth in the Directors' Resolution in Paragraph 2 above.

4. That the number of shares represented by written consent is fifty. That the total number of shares entitled to vote on or consent to the amendment is fifty.

/s/ George Joseph
----------------------------
George Joseph, President

/s/  Richard H. Oshman
----------------------------
Richard H. Oshman, Secretary

1

Each of the undersigned declares under penalty of perjury that the matters set forth in the foregoing Certificate are true and correct.

Executed at Los Angeles, California, on November 21, 1968.

/s/  George Joseph
----------------------------
George Joseph


/s/  Richard H. Oshman
----------------------------
Richard H. Oshman

2

CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
CALIFORNIA MANAGEMENT, INC.

GEORGE JOSEPH and RICHARD H. OSHMAN certify:

1. That they are the President and Secretary, respectively, of CALIFORNIA MANAGEMENT, INC., a California Corporation.

2. That at a meeting of the Board of Directors of said Corporation, duly held at Los Angeles, California, on June 2, 1969, the following Resolution was adopted:

"RESOLVED, that Article ONE of the Articles of Incorporation of this corporation be amended to read as follows:

'ONE: The name of this corporation is

CALIFORNIA GENERAL MANAGEMENT, INC.'"

3. That the Shareholder has adopted said amendment by written consent. That the wording of the amended Article, as set forth in the Shareholder's written consent, is the same as that set forth in the Directors' Resolution in Paragraph 2 above.

4. That the number of shares represented by written consent is fifty. That the total number of shares entitled to vote on or consent to the amendment is fifty.

/s/  George Joseph
----------------------------
George Joseph, President

/s/  Richard H. Oshman
----------------------------
Richard H. Oshman, Secretary

Each of the undersigned declares under penalty of perjury that the matters set forth in the foregoing Certificate are true and correct.

1

Executed at Los Angeles, California, on June 2, 1969.

/s/  George Joseph
----------------------------
George Joseph

/s/  Richard H. Oshman
----------------------------
Richard H. Oshman

2

AGREEMENT OF MERGER
BETWEEN
CALIFORNIA GENERAL MANAGEMENT, INC.
AND
GJA MERGER CORP.

This Agreement of Merger is entered into between CALIFORNIA GENERAL MANAGEMENT, INC., a California corporation (herein "Surviving Corporation") and GJA MERGER CORP., a California corporation (herein "Merging Corporation").

1. Merging Corporation shall be merged into Surviving Corporation.

2. Each outstanding share of Merging Corporation shall be converted to one share of Surviving Corporation.

3. The outstanding shares of Surviving Corporation shall remain outstanding and are not affected by the merger.

4. Merging Corporation shall from time to time, as and when requested by Surviving Corporation, execute and deliver all such documents and instruments and take all such action necessary or desirable to evidence or carry out this merger.

5. The effect of the merger and the effective date of the merger are as prescribed by law.

IN WITNESS WHEREOF the parties have executed this Agreement.

CALIFORNIA GENERAL MANAGEMENT, INC.

By /s/  George Joseph
   ----------------------------
   President

By /s/  Stepan Stepanian
   ----------------------------
   Secretary

1

GJA MERGER CORP.

By  /s/  George Joseph
  --------------------------
    President

By  /s/  Stepan Stepanian
  ---------------------------
    Secretary

2

CERTIFICATE OF APPROVAL
OF
AGREEMENT OF MERGER

GEORGE JOSEPH AND STEPAN STEPANIAN certify that:

1. They are the president and the secretary, respectively, of CALIFORNIA GENERAL MANAGEMENT, INC., a California corporation.

2. The Agreement of Merger in the form attached was duly approved by the board of directors and shareholders of the corporation.

3. The shareholder approval was by the holders of 100% of the outstanding shares of the corporation.

4. There is only one class of shares and the number of shares outstanding is 50.

/s/  George Joseph
-----------------------------
GEORGE JOSEPH, President

/s/  Stepan Stepanian
-----------------------------
STEPAN STEPANIAN, Secretary

The undersigned declare under penalty of perjury that the matters set forth in the foregoing certificate are true of their own knowledge. Executed at Los Angeles, California on October 30, 1978.

/s/  George Joseph
-----------------------------
GEORGE JOSEPH

/s/  Stepan Stepanian
-----------------------------
STEPAN STEPANIAN

1

CERTIFICATE OF APPROVAL
OF
AGREEMENT OF MERGER

GEORGE JOSEPH AND STEPAN STEPANIAN certify that:

1. They are the president and the secretary respectively, of GJA MERGER CORP., a California corporation.

2. The Agreement of Merger in the form attached was duly approved by the board of directors and shareholders of the corporation.

3. The shareholder approval was by the holders of 100% of the outstanding shares of the corporation.

4. There is only one class of shares and the number of shares outstanding is 9.

/s/  George Joseph
-----------------------------
GEORGE JOSEPH, President

/s/  Stepan Stepanian
-----------------------------
STEPAN STEPANIAN, Secretary

The undersigned declare under penalty of perjury that the matters set forth in the foregoing certificate are true of their own knowledge. Executed at Los Angeles, California on October 30, 1978.

/s/  George Joseph
-----------------------------
GEORGE JOSEPH

/s/  Stepan Stepanian
-----------------------------
STEPAN STEPANIAN

1

CERTIFICATE OF OWNERSHIP

GEORGE JOSEPH AND STEPAN STEPANIAN certify that:

1. They are the President and Secretary, respectively, of CALIFORNIA GENERAL MANAGEMENT, INC., a California corporation.

2. This corporation owns all the outstanding shares of MERCURY GENERAL CORPORATION, a California corporation.

3. The Board of Directors of this corporation duly adopted the following resolutions:

RESOLVED, that Mercury General Corporation, be merged into this corporation, and that all of the estate, property rights, privileges, powers and franchises of Mercury General Corporation be vested in and held and enjoyed by this corporation as fully and entirely and without change or diminution as the same were before held and enjoyed by Mercury General Corporation in its name.

RESOLVED, that this corporation assume all of the obligations of Mercury General Corporation pursuant to Section 1110 of the California Corporation Code.

RESOLVED, that this corporation shall cause to be executed and filed and/or recorded the documents prescribed by the laws of the State of California and by the laws of any other appropriate jurisdiction and will cause to be performed all necessary acts within the State of California and within any other appropriate jurisdiction.

RESOLVED, that this corporation's name shall continue to be California General Management, Inc.

RESOLVED, that the effective date of the Certificate of Ownership setting forth a copy of these resolutions, and the date upon which the merger therein provided for shall become effective, shall be the Filing Date.

/s/  George Joseph
-----------------------------
George Joseph, President

/s/  Stepan Stepanian
-----------------------------
Stepan Stepanian, Secretary

1

The undersigned declare under penalty of perjury that the matters set forth in the foregoing certificate are true of their own knowledge. Executed at Los Angeles, California on December 18, 1980.

/s/  George Joseph
-----------------------------
George Joseph


/s/  Stepan Stepanian
-----------------------------
Stepan Stepanian

2

CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION

George Joseph and Judy Walters certify that:

1. They are the President and Secretary, respectively, of California General Management, Inc., a California corporation;

2. Article ONE of the Articles of Incorporation of this corporation is amended to read as follows:

"ONE: The name of this corporation is Mercury General Corporation."

3. Article SEVEN of the Articles of Incorporation of this corporation is amended to read as follows:

"SEVEN: The corporation is authorized to issue only one class of shares to be designated "Common Stock." The total number of said shares which the corporation shall have authority to issue is Fifteen Million (15,000,000) shares; and, the shares shall be without par value. Upon the amendment of this Article to read as hereinabove set forth, each outstanding share of a par value of $100 is split up and converted into 219,047,619 shares of Common Stock, without par value."

4. Article NINTH of the Article of Incorporation of this corporation is amended to read as follows:

"NINTH: Any of the following actions shall require the prior approval (by vote or written consent) of the shareholders entitled to exercise not less than 66-2/3% of the voting power of the corporation, notwithstanding that applicable law would otherwise permit such actions with the approval of a lesser percentage: (a) any amendment of these Articles of Incorporation; or (b) merger or consolidation of the corporation with any other corporation, except the merger of wholly- owned subsidiary of this corporation; or (c) sale, lease, conveyance, exchange, transfer or other disposition of all or substantially all of the assets of this corporation."

1

5. The foregoing amendments of Articles of Incorporation have been duly approved by the board of directors.

6. The foregoing amendments of Articles of Incorporation have been duly approved by the required vote of shareholders in accordance with Section 902 of the Corporations Code. The total number of outstanding shares of the corporation is 52.5. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50%.

We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge.

Dated:  October 27, 1985


                    /s/  George Joseph
                    ------------------------------
                    George Joseph, President



                    /s/  Judy Walters
                    ------------------------------
                    Judy Walters, Secretary

2

CERTIFICATE OF CORRECTION
OF
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
MERCURY GENERAL CORPORATION

George Joseph and Judy Walters certify that:

1. They are the President and Secretary, respectively, of Mercury General Corporation.

2. The name of the corporation is Mercury General Corporation, and it is a California corporation.

3. The instrument being corrected is entitled "CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION", and said instrument was filed with the Secretary of State of the State of California on October 15, 1985.

4. Paragraph "3" of said Certificate of Amendment, as corrected, should read as follows:

Article SEVEN of the Articles of Incorporation of this corporation is amended to read as follows:

"SEVEN: The corporation is authorized to issue only one class of shares to be designated "Common Stock." The total number of said shares which the corporation shall have authority to issue is Fifteen Million (15,000,000) shares; and, the shares shall be without par value. Upon the amendment of this Article to read as hereinabove set forth, each outstanding share of a par value of $100 is split up and converted into 219,047,619 shares of Common Stock, without par value."

5. Said paragraph "3", as corrected, conforms the wording of the amended article to that adopted by the board of directors and shareholders.

1

We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge.

Date:  October 26, 1985

                              /s/  George Joseph
                              ------------------------------
                              George Joseph, President


                              /s/  Judy Walters
                              ------------------------------
                              Judy Walters, Secretary

2

CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
MERCURY GENERAL CORPORATION

George Joseph and Judy A. Walters certify that:

1. They are the President and the Secretary, respectively, of MERCURY GENERAL CORPORATION, a California corporation.

2. Articles TEN and ELEVEN of the Articles of Incorporation of this corporation are added to read in their entirety as follows:

"TEN: The liability of the directors of the corporation for

monetary damages shall be eliminated to the fullest extent permissible under California law.

"ELEVEN: The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the Corporations Code) for breach of duty to the corporation and its stockholders through bylaw provisions or through agreements with the agents, or both, in excess of the indemnification otherwise permitted by Section 317 of the Corporations Code, subject to the limits on such excess indemnification set forth in Section 204 of the Corporations Code."

3. The foregoing amendment of Articles of Incorporation has been duly approved by the Board of Directors.

4. The foregoing amendment of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the Corporations Code. The total number of outstanding shares of the corporation is 13,505,000. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 66 2/3%.

1

We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge.

Dated:  June 1, 1988

                              /s/  George Joseph
                              ------------------------------
                              George Joseph, President

                              /s/  Judy A. Walters
                              ------------------------------
                              Judy A. Walters, Secretary

2

CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION

Keith L. Parker and Judy A. Walters certify that:

1. They are the vice president and the secretary, respectively, of Mercury General Corporation, a California corporation.

2. Article SEVEN of the articles of incorporation of this corporation is amended to read as follows:

"SEVEN. The corporation is authorized to issue only one class of shares to be designated "Common Stock." The total number of said shares which the corporation shall have authority to issue is Thirty Million (30,000,000) shares; and, the shares shall be without par value. Upon the amendment of this Article to read as hereinabove set forth, each outstanding share is split up and converted into two shares of Common Stock."

3. The foregoing amendment of articles of incorporation has been duly approved by the board of directors.

4. Pursuant to Section 902(c) of the California Corporations Code, the vote of the shareholders of the corporation is not required to effect the foregoing amendment of articles of incorporation.

We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of my own knowledge.

Date:  August 25, 1992


                              /s/  Keith L. Parker
                              ---------------------------
                              Keith L. Parker
                              Vice President


                              /s/  Judy A. Walters
                              ---------------------------
                              Judy A. Walters
                              Secretary

1

CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF
MERCURY GENERAL CORPORATION

George Joseph and Judy Walters certify that:

1. They are the chairman of the board of directors and the secretary, respectively, of MERCURY GENERAL CORPORATION, a California corporation.

2. Article SEVEN of the articles of incorporation is amended to read:

"SEVEN: The corporation is authorized to issue only one class of shares to be designated "Common Stock." The total number of said shares which the corporation shall have the authority to issue is Thirty-Five Million (35,000,000) shares; and, the shares shall be without par value."

3. The amendment herein set forth has been duly approved by the board of directors.

4. The amendment herein set forth has been duly approved by the required vote of the shareholders in accordance with Section 902 of the Corporations Code. The corporation has only one class of shares and the number of outstanding shares is 27,531,425. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required for the approval of the amendment herein set forth was not less than 66-2/3% of the voting power of the corporation.

/s/  George Joseph
---------------------------
George Joseph, Chairman of
the Board of Directors


/s/  Judy Walters
---------------------------
Judy Walters, Secretary

The undersigned further declare under penalty of perjury under the laws of the State of California that they have read the foregoing certificate and know the contents thereof and that the same is true of their own knowledge.

Executed at Los Angeles, California on August 14, 1997.

/s/  George Joseph
---------------------------
George Joseph

/s/  Judy Walters
---------------------------
Judy Walters

1

CERTIFICATE OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF
MERCURY GENERAL CORPORATION

George Joseph and Judy Walters certify that:

1. They are the chairman of the board of directors and the secretary, respectively, of MERCURY GENERAL CORPORATION, a California corporation.

2. Article SEVEN of the articles of incorporation is amended to read:

"SEVEN: The corporation is authorized to issue only one class of shares to be designated "Common Stock." The total number of said shares which the corporation shall have authority to issue is Seventy Million (70,000,000) shares; and, the shares shall be without par value. Upon the amendment of this Article to read as hereinabove set forth, each outstanding share is split up and converted into two shares of Common Stock."

3. The amendment herein set forth has been duly approved by the board of directors.

4. Pursuant to Section 902(c) of the California Corporations Code, the vote of the shareholders of the corporation is not required to effect the foregoing amendment of articles of incorporation.

5. The corporation has only one class of shares outstanding and the amendment effects only a stock split and an increase in the authorized number of shares in proportion to the split.

/s/  George Joseph
---------------------------
George Joseph, Chairman of
the Board of Directors

/s/  Judy Walters
---------------------------
Judy Walters, Secretary

The undersigned further declare under penalty of perjury under the laws of the State of California that they have read the foregoing certificate and know the contents thereof and that the same is true of their own knowledge.

Executed at Los Angeles, California on August 27, 1997.

/s/  George Joseph
---------------------------
George Joseph

/s/  Judy Walters
---------------------------
Judy Walters

1

EXHIBIT 10.1

MERCURY INSURANCE GROUP

PRODUCERS CONTRACT

The undersigned producer and company(s), hereinafter called Producer and Company, agree that these provisions apply to the signatory company(s), and the producer:

1. Producer as designated in this agreement shall mean broker.

2. The territory within which the Producer may act shall be the State of California.

3. This contract shall become effective on the day it is signed by an officer the Company.

4. The Producer has authority to solicit applications for insurance for such classes of risks as the Company may authorize to collect, receive, and receipt for premiums on insurance tendered by the Producer to and accepted by the Company; and to receive commission on paid premiums as full compensation on business placed with the Company as stated in the attached commission schedules.

5. The Producer shall promptly forward applications and required premiums to the Company and may bind insurance in accordance with the Producer's Manual.

6. The Producer shall refund ratably to the Company, on business, heretofore or hereafter written, commissions on canceled insurance and on reduction in premiums at the same rate at which such commissions were originally paid.

7. If premiums are to be billed by the Producer, the Company will bill the Producer monthly. The balance therein shown to be due to the Company shall be paid within 15 days after the billing date, otherwise such policies shall be subject to cancellation 10 days thereafter. The Producer shall be responsible for and agrees to pay to the Company all premiums on policies written with the Company whether collected by the Producer or not. Premiums billed by the Company, direct to the Insured, shall be the responsibility of the Company. The producer is authorized to deposit in a Federally Insured savings account, term deposit account or time certificate of deposit (of any combination thereof) any part or all of the premium funds collected by the agent an behalf of the Company, and is entitled to retain any Interest which accrues on sold premium funds.

8. Commissions Statements for direct bill policies shall be rendered monthly, and any balance due the Company shall be paid within 15 days after the statement is mailed. Any balance due the Producer may be offset by any other amounts due the Company by the Producer.

9. The Producer has no authority to make, alter, vary, or discharge any policy contract to extend the time for payment of premiums except as authorized in writing by the Company to waive or extend any policy obligation or condition; to incur any liability in


behalf of the Company, or to engage in advertisement respecting the Company without the prior written consent of the Company.

10. The Company shall not be responsible for any producer expenses.

11. Any Company supplies furnished to the Producer by the Company shall remain the property of the Company and shall be returned to the Company or its representative promptly upon demand.

12. In the event of termination of this contract, provided the Producer shall pay amounts due the Company within thirty days of the billing date, the Producer's records, use and control of expirations shall remain his property and be left in his absolute possession. If the Producer does not pay the statements as provided above, title to the records and expirations shall transfer to the Company for its exclusive use and control. If premiums due the Company are disputed, the Producer shall nominate a national accounting firm to render an Independent accounting. The nomination must be made in writing within ten days after receipt of the monthly statement. If demand for an accounting is not made within ten days, future agreement to Independent accounting will be at the option of the Company. Premiums found due shall be paid within ten days of the date the accounting firm renders its opinion. Expenses of the Independent accounting will be shared equally by both parties.

13. This contract supersedes all previous contracts or agreements whether oral or written between the Company and the Producer and shall remain in effect until terminated by either party at any time upon written notice to the other.

14. The Producer shall not appoint sub agents to represent the Company without the written consent of the Company. The Producer is not to accept business for the Company from any other agent or broker.

15. The Producer will not transfer ownership of the policies written the Company, or allow another producer or broker to renew or service the policies without the prior written approval of the Company unless this contract has been terminated and all amounts due the Company have been paid.

16. If the Producer is a corporation, it is agreed that ownership of any stock may not be sold, transferred or additional stock issued without consent of the Company. This provision shall not apply if the Producer is a publicly held corporation under the Security Exchange Act of 1934.

17. It is agreed that the Producer shall not submit broker of record letters on existing Mercury polices or rewrite Mercury policies written through other producers of the company without the prior consent of the Company until the producer has written at least $500,000 in premiums with the Company.


18. The Company will allow the Producer an additional contingent commission on the Net Result of business produced by the Producer for the Company on the basis hereinafter set forth for each calendar year. The rate of said contingent commission to be as follows:

RATE                             NET EARNED PREMIUM
                                     OF AT LEAST:

15%                                   $ 50,000
20%                                    100,000
25%                                    150,000
30%                                    200,000

The net result shall be computed as follows:

INCOME

Net premium earned shall be gross premiums earned net of reinsurance cost to the Company, assessments for guarantee funds and loading for assigned risk plans, reinsurance facilities and joint underwriting authorities.

OUTGO

A flat deduction of 30% of net earned premiums.

A deduction equal to the average commission rate paid the producer on premiums earned during the calendar year.

Net Losses incurred shall be gross losses incurred less reinsurance recovered or recoverable.

Deficit, if any, from previous year's contingent account. (Deficit of any individual year to be carried forward one year only.)

The difference between the Income and Outgo shall constitute the Net Result, and contingent commission thereon at the rate as set out above will be paid to the Producer, but not before August 31st following the end of the contingent year.

The net results referred to above shall include premiums and losses resulting from all forms of Insurance written by the Producer for the Company.

It is a condition of this agreement remittances for all items and balances shall reach the Company within a period of time in accordance with the conditions and provisions in the Producer Contract. Otherwise, no contingent commission shall be payable.


If the Producer Contract is terminated by either the Company or the Producer, no contingent Commission shall be payable on business produced in the year in which termination occurs. This applies even if the business is transferred to another Producer of the Company.

19. The Producer agrees to reimburse the Company for any expense, attorney's fees, loss or damage sustained by the Company by reason of the Producer's violation of, or failure to conform to any of the provisions of this agreement.

IN WITNESS WHEREOF, the Company has caused this contract to be signed at the Home Office and the Producer has subscribed his name hereto this __________ day of _______________________.

By____________________________________      Title_____________________________
   MERCURY CASUALTY COMPANY
   MERCURY INSURANCE COMPANY
   CALIFORNIA AUTOMOBILE INSURANCE
   COMPANY


Producer______________________________      Title_____________________________


COMMISSION SCHEDULE

The Producer is authorized to represent the Companies below for the classes of risks indicated and receive commissions at the rate shown, except for commission rates on certain classes of risks designated in the producers manual.

PERSONAL LINES

Automobile: Mercury Casualty Company .......................................

Mercury Insurance Company & California Automobile Insurance Company.........................................................

Personal Protection Package (Automobile, Homeowners and Umbrella)............

Personal Umbrella Policy.....................................................

Homeowners...................................................................

Dwelling Fire................................................................

COMMERCIAL LINES

Automobile...................................................................

Commission rates for Mercury Insurance Company, Mercury Casualty Company, California Automobile Insurance Company, Personal Lines Automobile and Personal Protection Package policies are subject to the following adjustments:

1. The rate of commission shown in the commission schedule shall be the base commission rate. The maximum rate of commission payable shall be 20%.

2. The commission rate from the effective date of this agreement to the second June 30th following the first accounting period will be the base commission rate. The commission rate will be subject to modification for policies effective each twelve month period thereafter. The commission rate in effect during the previous twelve months may be increased or decreased by 1% of the premium.

3. The first accounting period for Mercury Insurance Company, California Automobile Insurance Company and Mercury Casualty Company private passenger auto policies, shall be the three year period ending December 31, in the year the producer has had a contract in effect with the company either as an agent and or broker for three or more years. Otherwise, the first accounting period begins with the effective date of this agreement and ends December 31st in the year this agreement has been in effect for three years.


4. The first Accounting Period for Personal Protection Package policies shall be the period beginning with the effective date of this agreement and ending December 3lst of the year in which it has been in effect for one year. The second Accounting Period shall be the period beginning with the effective date of this agreement and ending December 31st of the year in which it has been in effect for two years.

5. Subsequent accounting periods shall be successive three year periods ending twelve months following the previous accounting period,

6. Loss ratio means net losses incurred during the accounting period (developed for fifteen months following the accounting period) divided by net premiums earned during the accounting period. For Mercury Insurance Company and California Automobile Insurance Company the net earned premium and net incurred losses shall be combined and the commission rate adjusted together. The loss ratio for Mercury Casualty Company and the Personal Protection Package shall be calculated separately and the commission rates adjusted separately.

7. For private, passenger automobile net earned premiums and net incurred losses for Bodily Injury, Property Damage, Uninsured Motorist and Medical Payments Coverages shall be calculated by the Company based upon a net retention of $25,000 per occurrence. For Personal Protection Package the net earned premiums and net incurred losses for all coverages shall be calculated by the Company based upon a net retention of $25,000 per occurrence for all coverages. All earned premiums and incurred losses shall be net of reinsurance costs and recoveries, assessments for guarantee funds and loading for assigned risk plans reinsurance facilities and joint underwriting authorities.

8. The commission rate for Personal Protection Package and Mercury Casualty Company private passenger auto policies will be increased when the loss ratio for the latest accounting period is 55% or less, and decreased when the loss ratio is 60% or more.

9. The commission rate for Mercury Insurance Company and California Automobile Insurance Company will be increased when the loss ratio for the latest accounting period is 60% or less, and decreased when the loss ratio for the latest accounting period is 65% or more.


10. Any other change in commission rates are by mutual agreement between the Producer and Company.

Executed this day of At Los Angeles, California

By____________________________________ Title_________________________ Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company

Producer______________________________ Title_________________________


AMENDMENT 1998-1

MERCURY GENERAL CORPORATION
PROFIT SHARING PLAN

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

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

WHEREAS, the Company deems it advisable to clarify the eligibility provisions of the Plan, effective January 1, 1998; and

WHEREAS, the Company desires to make it clear that any participant in the Plan who was formerly employed by American Fidelity Insurance Company ("AFI") will be credited with vesting service under the Plan for his or her service with AFI prior to the acquisition of AFI by the Company; and

WHEREAS, the Company deems it advisable to require that a Participant be credited with 1,000 Hours of Service (and be a Participant on the Anniversary Date) in order to receive an allocation of the Company Contribution or ESOP Contribution; and

1

WHEREAS,the Company wishes to amend the provisions of Section 3.10 of the Plan to provide greater flexibility to the Committee in selecting Investment Funds;

NOW, THEREFORE, the Plan is hereby amended as follows, effective as of January 1, 1998, except as otherwise provided hereunder:

1. The definition of "Eligible Employee" in Section 1.2 of the Plan shall be amended to read as follows:

"`Eligible Employee' shall mean any Employee of the Company, except that there shall be excluded all leased employees described in Section 414(n) of the Code, all Employees who are compensated on an hourly basis (provided that, effective January 1, 1997 and thereafter, the exclusion of employees compensated on an hourly basis shall not apply to any Employee who was formerly employed by American Fidelity Insurance Company ("AFI")) and, effective January 1, 1998 and thereafter, the exclusion of employees compensated on an hourly basis shall not apply to any Employee classified by the Company as a permanent Employee), all Employees working on a piecework basis and those Employees covered by a collective bargaining agreement between the Company and any collective bargaining representative if retirement benefits were the subject of good faith bargaining between such representative and the Company, unless the Employee is a member of a group of employees to whom this Plan has been extended by

2

such a collective bargaining agreement, and Employees who are nonresident aliens and receive no United States source income."

2. The definition of "ESOP Allocation Period" in Section 1.2 of the Plan is amended, effective January 1, 1998, to read as follows:

"`ESOP Allocation Period' shall, effective January 1, 1998, mean each Plan Year beginning with the Plan Year commencing January 1, 1998. The ESOP Allocation Period may be changed at the direction of the Committee."

3. The definition of "Year of Vesting Service" under Section 1.2 shall be amended by adding the following at the end thereof:

"Additionally, any Participant in the Plan who was employed by American Fidelity Insurance Company ("AFI") on the date on which AFI was acquired by Mercury General Corporation (the "Acquisition"), shall be credited with a Year of Vesting Service for each pre-Acquisition year of vesting service credited to him or her under the American Fidelity Companies Employees Savings Plan."

4. The first sentence of Section 3.1(c) of the Plan shall be amended to read as follows:

3

"As of each Anniversary Date, there shall be allocated from the Company contribution under Section 3.1(a) for the Plan Year and any amount credited to a former Employee's Company Contribution Account as of the preceding Anniversary Date which has been forfeited (as set forth in Section 6.2), to the Company Contribution Account of each Participant who completed at least 1000 Hours of Service during the Plan Year and who is a Participant on the Anniversary Date, an amount equal to that portion of the total allocable amount that the Participant's Compensation bears to the total Compensation of all such Participants."

5. Section 3.10 is amended in its entirety to read as follows:

"3.10 - Investment Funds.

(a) Separate Investment Funds shall be established and maintained by the Committee under this Plan. The Committee may, in its discretion, terminate any Investment Fund. The Committee shall determine the number of Investment Funds and the Administrator, the Trustee or the Investment Manager shall determine the investments to be made under the Investment funds.

(b) Pursuant to rules established by the Committee and subject to the provisions of this Section, each Participant shall have the right and obligation to designate in which of the Investment Funds his Accounts will be invested, and to change such designation. The designation shall be on such forms as are

4

established by the Committee or pursuant to such other methods approved by the Committee (including telephonic transfers if authorized by the Committee). The Committee shall describe to the Participants the investments to be made under each Investment Fund in such detail as the Committee deems appropriate in its sole discretion. If a Participant does not make an election with respect to the investment of his Accounts, they will be invested in the fund selected by the Committee as announced to Participants. The Committee may establish other rules, regulations, and procedures regarding the Investment Funds as it deems appropriate in its sole discretion."

6. The first sentence of Subsection 4.3(f) shall be amended to read as follows, effective with respect to ESOP Allocation Periods beginning January 1, 1998 and thereafter:

"(f) As soon as practicable following each ESOP Allocation Period, all Leveraged Shares that have been released from the Loan Suspense Account as a result of loan amortization payments made during such ESOP Allocation period that have not and will not be allocated pursuant to Subsection (e) shall be allocated together with any amount credited to a former Employee's ESOP Account which has been forfeited (as set forth in Section 6.2) to the ESOP Account of each person who is credited with at least 1000 Hours of Service during the Plan Year and who is a Participant on the last day of the applicable ESOP Allocation Period, an amount equal to that portion of the total

5

allocable amount that the Participant's Compensation during the ESOP Allocation Period bears to the total Compensation of all such Participants during the ESOP Allocation Period."

IN WITNESS WHEREOF, this Amendment 1998-1 is hereby adopted this 6th day of February, 1998.

MERCURY GENERAL CORPORATION

By /s/ George Joseph
   ------------------------
Its C.E.O.

6

EXHIBIT 10.17

MERCURY CASUALTY COMPANY
LOS ANGELES, CALIFORNIA

THIRD AND FOURTH PROPERTY EXCESS
CATASTROPHE REINSURANCE CONTRACT

Originally Effective: September 1, 1996


THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

E. W. Blanch Co.

Reinsurance Services

3500 West 80th Street

Minneapolis, Minnesota 55431


THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

Third Excess Catastrophe Reinsurance

                      REINSURERS                                   PARTICIPATIONS
Allmerica Re, A Division of The Hanover Insurance Company                1.25%
AXA Reinsurance Company                                                  7.50
Cat Limited                                                             10.00
Continental Casualty Company                                             2.00
Everest Reinsurance Company                                             13.00
First Excess and Reinsurance Corporation                                 9.00
Nationwide Mutual Insurance Company                                      3.00
Patriot Re Corporation (for Various Lloyd's Underwriters)                2.00
Renaissance Reinsurance Ltd.                                             4.00
St. Paul Reinsurance Management Corporation
  (for St. Paul Fire and Marine Insurance Company)                       1.75
Security Insurance Company of Hartford                                    .40
Signet Star Reinsurance Company                                          2.00
Sydney Reinsurance Corporation                                           4.25
United Fire & Casualty Company                                           1.00
USF RE Insurance Company                                                 2.00
Vesta Fire Insurance Corporation                                        25.00
Winterthur Reinsurance Corporation of America                            3.25

THROUGH SWIRE BLANCH EUROPE
Europa Re                                                                 .75
Sirius International Insurance Corporation                               1.25


Third Excess Catastrophe Reinsurance (Continued)

                 REINSURERS                                        PARTICIPATIONS
Societe Parisienne de Souscription
 (for La Reunion Francaise)                                              1.50%
THROUGH MILLER REINSURANCE BROKERS NORTH AMERICA LTD.
Lloyd's Underwriters
 Per Signing Schedule                                                    5.10

TOTAL                                                                  100.00%

Fourth Excess Catastrophe Reinsurance

                         REINSURERS                                PARTICIPATIONS

Allmerica Re, A Division of The Hanover Insurance Company                1.50%
Cat Limited                                                             10.00
Continental Casualty Company                                             1.50
First Excess and Reinsurance Corporation                                10.00
Hartford Re Company
  (for Hartford Fire Insurance Company)                                  3.00
Nationwide Mutual Insurance Company                                      4.00
Renaissance Reinsurance Ltd.                                             4.00
St. Paul Reinsurance Management Corporation
  (for St. Paul Fire and Marine Insurance Company)                       2.00
San Francisco Reinsurance Company                                        5.25
Security Insurance Company of Hartford                                    .44
Signet Star Reinsurance Company                                          2.00
Sydney Reinsurance Corporation                                           3.50
USF RE Insurance Company                                                 3.00
Vesta Fire Insurance Corporation                                        25.00
Winterthur Reinsurance Corporation of America                            2.50

THROUGH SWIRE BLANCH EUROPE
Europa Re                                                                2.00
Mapfre Re Compania de Reaseguros, S.A.                                   2.50
Sirius International Insurance Corporation                               1.25
Societe Parisienne de Souscription
  (for La Reunion Francaise)                                             1.50


Fourth Excess Catastrophe Reinsurance (Continued)

                    REINSURERS                                     PARTICIPATIONS
Through Miller Reinsurance Brokers North America Ltd.
Lloyd's Underwriters and Companies
 Per Signing Schedule(s)                                                15.06%

TOTAL                                                                  100.00%

E. W. Blanch Co.

Reinsurance Services

3500 West 80th Street

Minneapolis, Minnesota 55431


TABLE OF CONTENTS

Article                                                    PAGE
       I    Classes of Business Reinsured                    1

      II    Term                                             1

     III    Territory                                        2

      IV    Exclusions                                       2

       V    Retention and Limit                              3

      VI    Reinstatement                                    3

     VII    Loss Occurrence (BRMA 27A)                       4

    VIII    Definitions                                      6

      IX    Loss Notices and Settlements                     7

       X    Salvage and Subrogation                          7

      XI    Reinsurance Premium                              7

     XII    Offset                                           8

    XIII    Inspection of Records                            9

     XIV    Net Retained Lines (BRMA 32B)                    9

      XV    Errors and Omissions (BRMA 14F)                  9

     XVI    Currency (BRMA 12A)                              9

    XVII    Taxes (BRMA 50B)                                10

   XVIII    Federal Excise Tax (BRMA 17A)                   10

     XIX    Unauthorized Reinsurers                         10

      XX    Insolvency                                      11

     XXI    Arbitration (BRMA 6J)                           12

    XXII    Service of Suit  (BRMA 49C)                     13

   XXIII    Assignments and Changes of Interest             14

    XXIV    Agency Agreement                                14

     XXV    Intermediary (BRMA 23A)                         14

            Schedule A


THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

ARTICLE I - CLASSES OF BUSINESS REINSURED

By this Contract the Reinsurer agrees to reinsure the excess liability which may accrue to the Company under its policies, contracts and binders of insurance or reinsurance (hereinafter called "policies") in force at the effective date hereof or issued or renewed on or after that date, and classified by the Company as Homeowners (Section I), Fire, Allied Lines, Commercial Multiple Peril (Section I), Automobile Physical Damage (Comprehensive only), Earthquake and Inland Marine, subject to the terms, conditions and limitations set forth herein and in Schedule A attached to and forming part of this Contract.

ARTICLE II - TERM

A. This Contract shall become effective on September 1, 1996, with respect to losses arising out of loss occurrences commencing on or after that date, and shall remain in force until August 31, 1997, both days inclusive. However, if the Reinsurer sustains no loss hereunder from loss occurrences commencing on or prior to June 30, 1997, this Contract shall, upon notice from the Company on June 30, 1997, expire on June 30, 1997.

B. Notwithstanding the provisions of paragraph A above, either party may terminate this Contract at any time, provided the Reinsurer has sustained no loss hereunder, by giving the other party not less than 90 days prior notice by certified mail.

C. If this Contract expires while a loss occurrence covered hereunder is in progress, the Reinsurer's liability hereunder shall, subject to the other terms and conditions of this


Contract, be determined as if the entire loss occurrence had occurred prior to the expiration of this Contract, provided that no part of such loss occurrence is claimed against any renewal or replacement of this Contract.

ARTICLE III - TERRITORY

This Contract shall apply to the territorial limits set forth in the Company's policies reinsured hereunder.

ARTICLE IV - EXCLUSIONS

This Contract does not apply to and specifically excludes the following:

1. All lines of business not included in Article I.

2. All excess of loss reinsurance assumed by the Company.

3. Reinsurance assumed by the Company under obligatory reinsurance agreements, except agency reinsurance where the policies involved are to be reunderwritten in accordance with the underwriting standards of the Company and reissued as Company policies at the next anniversary or expiration date.

4. Financial guarantee and insolvency.

5. All Accident and Health, Fidelity and Surety, Boiler and Machinery, Ocean Marine, Workers' Compensation and Credit business when written as such.

6. Flood when written as such.

7. Mortgage Impairment insurances and similar kinds of insurances, however styled.

8. Nuclear risks as defined in the "Nuclear Incident Exclusion Clause - Physical Damage - Reinsurance" attached to and forming part of this Contract.

9. Risks excluded under the provisions of the "Total Insured Value Exclusion Clause" attached to and forming part of this Contract.

10. Loss or damage caused by or resulting from war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law or confiscation by order of any government or public authority, but this exclusion shall not


apply to loss or damage covered under a standard policy with a standard War Exclusion Clause.

11. All liability of the Company arising by contract, operation of law, or otherwise, from its participation or membership, whether voluntary or involuntary, in any insolvency fund. "Insolvency fund" includes any guaranty fund, insolvency fund, plan, pool, association, fund or other arrangement, however denominated, established or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent, or which is otherwise deemed unable to meet any claim, debt, charge, fee or other obligation in whole or in part.

12. Loss or liability excluded under the provisions of the "Pools, Associations and Syndicates Exclusion Clause" attached to and forming part of this Contract.

13. Pollution and seepage coverages excluded under the provisions of the "Pollution and Seepage Exclusion Clause (BRMA 39A)" attached to and forming part of this Contract.

ARTICLE V - RETENTION AND LIMIT

A. As respects each excess layer of reinsurance coverage provided by this Contract, the Company shall retain and be liable for the first amount of ultimate net loss, shown as "Company's Retention" for that excess layer in Schedule A attached hereto, arising out of each loss occurrence. The Reinsurer shall then be liable, as respects each excess layer, for 95.0% of the amount by which such ultimate net loss exceeds the Company's applicable retention, but the liability of the Reinsurer under each excess layer shall not exceed 95.0% of the amount, shown as "Reinsurer's Per Occurrence Limit" for that excess layer in Schedule A attached hereto, as respects any one loss occurrence.

B. The Company shall retain, in addition to its initial retention on each loss occurrence, 5.0% of the excess ultimate net loss to which the excess layer applies.

C. The Company shall be permitted to carry excess per risk reinsurance, recoveries under which shall inure to the benefit of this Contract.

ARTICLE VI - REINSTATEMENT

A. In the event all or any portion of the reinsurance coverage provided by this Contract is exhausted by loss, the amount so exhausted shall be reinstated immediately from the time


the loss occurrence commences hereon. For each amount so reinstated the Company agrees to pay additional premium equal to the product of the following:

1. The percentage of the occurrence limit for the excess layer reinstated (based on the loss paid by the Reinsurer under that excess layer); times

2. The earned reinsurance premium for the excess layer reinstated for the term of this Contract (exclusive of reinstatement premium).

B. Whenever the Company requests payment by the Reinsurer of any loss under any excess layer hereunder, the Company shall submit a statement to the Reinsurer of reinstatement premium due the Reinsurer for that excess layer. If the earned reinsurance premium for any excess layer for the term of this Contract has not been finally determined as of the date of any such statement, the calculation of reinstatement premium due for that excess layer shall be based on the annual deposit premium for that excess layer and shall be readjusted when the earned reinsurance premium for that excess layer for the term of this Contract has been finally determined. Any reinstatement premium shown to be due the Reinsurer for any excess layer as reflected by any such statement (less prior payments, if any, for that excess layer) shall be payable by the Company concurrently with payment by the Reinsurer of the requested loss for that excess layer. Any return reinstatement premium shown to be due the Company shall be remitted by the Reinsurer within 60 days after receipt and verification of the Company's statement.

C. Notwithstanding anything stated herein, the liability of the Reinsurer provided by this Contract shall not exceed either of the following:

1. 95.0% of the amount, shown as "Reinsurer's Per Occurrence Limit" for that excess layer in Schedule A attached hereto, as respects loss or losses arising out of any one loss occurrence; or

2. 95.0% of the amount, shown as "Reinsurer's Term Limit" for that excess layer in Schedule A attached hereto, in all during the term of this Contract.

ARTICLE VII - LOSS OCCURRENCE (BRMA 27A)

A. The term "loss occurrence" shall mean the sum of all individual losses directly occasioned by any one disaster, accident or loss or series of disasters, accidents or losses arising out of one event which occurs within the area of one state of the United States or province of Canada and states or provinces contiguous thereto and to one another. However, the duration and extent of any one "loss occurrence" shall be limited to all individual losses sustained by the Company occurring during any period of 168 consecutive hours arising out


of and directly occasioned by the same event, except that the term "loss occurrence" shall be further defined as follows:

1. As regards windstorm, hail, tornado, hurricane, cyclone, including ensuing collapse and water damage, all individual losses sustained by the Company occurring during any period of 72 consecutive hours arising out of and directly occasioned by the same event. However, the event need not be limited to one state or province or states or provinces contiguous thereto.

2. As regards riot, riot attending a strike, civil commotion, vandalism and malicious mischief, all individual losses sustained by the Company occurring during any period of 72 consecutive hours within the area of one municipality or county and the municipalities or counties contiguous thereto arising out of and directly occasioned by the same event. The maximum duration of 72 consecutive hours may be extended in respect of individual losses which occur beyond such 72 consecutive hours during the continued occupation of an assured's premises by strikers, provided such occupation commenced during the aforesaid period.

3. As regards earthquake (the epicentre of which need not necessarily be within the territorial confines referred to in paragraph A of this Article) and fire following directly occasioned by the earthquake, only those individual fire losses which commence during the period of 168 consecutive hours may be included in the Company's "loss occurrence."

4. As regards "freeze," only individual losses directly occasioned by collapse, breakage of glass and water damage (caused by bursting frozen pipes and tanks) may be included in the Company's "loss occurrence."

B. Except for those "loss occurrences" referred to in subparagraphs 1 and 2 of paragraph A above, the Company may choose the date and time when any such period of consecutive hours commences, provided that it is not earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss, and provided that only one such period of 168 consecutive hours shall apply with respect to one event.

C. However, as respects those "loss occurrences" referred to in subparagraphs 1 and 2 of paragraph A above, if the disaster, accident or loss occasioned by the event is of greater duration than 72 consecutive hours, then the Company may divide that disaster, accident or loss into two or more "loss occurrences," provided that no two periods overlap and no individual loss is included in more than one such period, and provided that no period commences earlier than the date and time of the occurrence of the first recorded individual loss sustained by the Company arising out of that disaster, accident or loss.


D. No individual losses occasioned by an event that would be covered by 72 hours clauses may be included in any "loss occurrence" claimed under the 168 hours provision.

ARTICLE VIII - DEFINITIONS

A. "Ultimate net loss" as used herein is defined as the sum or sums (including interest on judgments, extra contractual obligations, loss resulting from the reformation or liberalization of policies, litigation expenses and all other loss adjustment expense, except office expenses and salaries of the Company's regular employees) paid or payable by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims, after deduction of all salvage, all recoveries and all claims on inuring insurance or reinsurance, whether collectible or not. Nothing herein shall be construed to mean that losses under this Contract are not recoverable until the Company's ultimate net loss has been ascertained.

B. "Extra contractual obligations" as used herein shall mean 90.0% of any punitive, exemplary, compensatory or consequential damages paid or payable by the Company as a result of an action against it by its insured or its insured's assignee, which action alleges negligence or bad faith on the part of the Company in handling a claim under a policy subject to this Contract. An extra contractual obligation shall be deemed to have occurred on the same date as the loss covered or alleged to be covered under the policy. Notwithstanding anything stated herein, this Contract shall not apply to any extra contractual obligation incurred by the Company as a result of any fraudulent and/or criminal act by any officer or director of the Company acting individually or collectively or in collusion with any individual or corporation or any other organization or party involved in the presentation, defense or settlement of any claim covered hereunder.

C. As respects amounts paid by the Company subject to this Contract for debris removal, including cleanup of pollutants, as respects business classified as commercial property, "loss" shall mean an amount not to exceed 30.0% of the direct physical loss or damage paid by the Company, for any one loss, any one location, any one insured. "Loss" is further restricted to include only such claims for debris removal, including cleanup of pollutants, reported to the Company not more than 180 days immediately following the direct physical loss or damage.

D. "Pollutant" as used herein shall mean any solid liquid, gaseous, or thermal irritant or contaminant, including, but not limited to smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes materials to be recycled, reconditioned or reclaimed.


ARTICLE IX - LOSS NOTICES AND SETTLEMENTS

A. Whenever a loss sustained by the Company appears likely to result in a claim hereunder, the Company shall notify the Reinsurer, and the Reinsurer shall have the right to participate in the adjustment of the loss at its own expense.

B. All loss settlements made by the Company, provided they are within the terms of this Contract, and either under the strict conditions of the Company's policies or by way of compromise, shall be unconditionally binding upon the Reinsurer, and the Reinsurer agrees to pay all amounts for which it may be liable upon receipt of reasonable evidence of the amount paid (or scheduled to be paid) by the Company.

C. All salvage and recoveries received subsequent to a loss settlement under this Contract shall be applied as if received prior to said loss settlement, and all necessary adjustment shall be made between the Company and the Reinsurer immediately following receipt by the Company of such salvage or recoveries.

ARTICLE X - SALVAGE AND SUBROGATION

The Reinsurer shall be credited with salvage (i.e., reimbursement obtained or recovery made by the Company, less the actual cost, excluding salaries of officials and employees of the Company and sums paid to attorneys as retainer, of obtaining such reimbursement or making such recovery) on account of claims and settlements involving reinsurance hereunder. Salvage thereon shall always be used to reimburse the excess carriers in the reverse order of their priority according to their participation before being used in any way to reimburse the Company for its primary loss. The Company hereby agrees to enforce its rights to salvage or subrogation relating to any loss, a part of which loss was sustained by the Reinsurer, and to prosecute all claims arising out of such rights.

ARTICLE XI - REINSURANCE PREMIUM

A. As premium for each excess layer of reinsurance coverage provided by this Contract, the Company shall pay the Reinsurer the greater of the following:

1. The amount, shown as "Annual Minimum Premium" for that excess layer in Schedule A attached hereto; or, in the event the early expiration provision outlined in paragraph A of Article II is exercised by the Company, the amount shown as "Early Expiration Minimum Premium" for that excess layer in Schedule A attached hereto. In the event that this Contract is terminated in accordance with the provisions of paragraph B of Article II, the annual minimum premium for each excess layer shall be a


pro rata portion of the "Annual Minimum Premium" for that excess layer in Schedule A attached hereto.

2. The percentage, shown as "Premium Rate" for that excess layer in Schedule A attached hereto, of the Company's net earned premium for the term of this Contract.

B. The Company shall pay the Reinsurer an annual deposit premium for each excess layer of an amount, shown as "Annual Deposit Premium" for that excess layer in Schedule A attached hereto, in four equal installments of an amount, shown as "Quarterly Deposit Premium" for that excess layer in Schedule A attached hereto, on September 1 and December 1, 1996, and March 1 and June 1, 1997. However, in the event that this Contract expires on June 30, 1997 in accordance with the provisions of paragraph A of Article II, the Reinsurer shall return to the Company a pro rata portion of the deposit premium for each excess layer payable on June 1, 1997. In the event that this Contract is terminated at any time, in accordance with the provisions of paragraph B of Article II, the Company shall pay a pro rata portion of the amount, shown as "Annual Deposit Premium," for that excess layer in Schedule A attached hereto.

C. Within 60 days after the expiration or termination of this Contract, the Company shall provide a report to the Reinsurer setting forth the premium due hereunder for each excess layer, computed in accordance with paragraph A, and any additional premium due the Reinsurer or return premium due the Company for each such excess layer shall be remitted promptly.

D. "Net earned premium" as used herein is defined as gross earned premium of the Company for the classes of business reinsured hereunder, less the earned portion of premiums ceded by the Company for reinsurance which inures to the benefit of this Contract. For purposes of calculating net earned premium, for multiple peril policies with indivisible premiums, if any, 80.0% of the total Homeowners basic policy premium and 70.0% of the total basic Commercial Multiple Peril policy premium shall be considered subject premium.

ARTICLE XII - OFFSET

The Company or the Reinsurer may offset any balance, whether on account of premiums, commissions, loss or claim expenses due from one party to the other under this Contract or under any other reinsurance contract heretofore or hereafter entered into between the Company and the Reinsurer, whether acting as assuming reinsurer or ceding company.


ARTICLE XIII - INSPECTION OF RECORDS

The Reinsurer may inspect the records of the Company pertaining to the risks reinsured hereunder.

ARTICLE XIV - NET RETAINED LINES (BRMA 32B)

A. This Contract applies only to that portion of any policy which the Company retains net for its own account, and in calculating the amount of any loss hereunder and also in computing the amount or amounts in excess of which this Contract attaches, only loss or losses in respect of that portion of any policy which the Company retains net for its own account shall be included.

B. The amount of the Reinsurer's liability hereunder in respect of any loss or losses shall not be increased by reason of the inability of the Company to collect from any other reinsurer(s), whether specific or general, any amounts which may have become due from such reinsurer(s), whether such inability arises from the insolvency of such other reinsurer(s) or otherwise.

ARTICLE XV - ERRORS AND OMISSIONS (BRMA 14F)

Inadvertent delays, errors or omissions made in connection with this Contract or any transaction hereunder shall not relieve either party from any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery.

ARTICLE XVI - CURRENCY (BRMA 12A)

A. Whenever the word "Dollars" or the "$" sign appears in this Contract, they shall be construed to mean United States Dollars and all transactions under this Contract shall be in United States Dollars.

B. Amounts paid or received by the Company in any other currency shall be converted to United States Dollars at the rate of exchange at the date such transaction is entered on the books of the Company.


ARTICLE XVII - TAXES (BRMA 50B)

In consideration of the terms under which this Contract is issued, the Company will not claim a deduction in respect of the premium hereon when making tax returns, other than income or profits tax returns, to any state or territory of the United States of America or the District of Columbia.

ARTICLE XVIII - FEDERAL EXCISE TAX (BRMA 17A)

(Applicable to those reinsurers, excepting Underwriters at Lloyd's London and other reinsurers exempt from Federal Excise Tax, who are domiciled outside the United States of America.)

A. The Reinsurer has agreed to allow for the purpose of paying the Federal Excise Tax the applicable percentage of the premium payable hereon as imposed under Section 4371 of the Internal Revenue Code to the extent such premium is subject to the Federal Excise Tax.

B. In the event of any return premium becoming due hereunder the Reinsurer will deduct the applicable percentage from the return premium payable hereon and the Company or its agent should take steps to recover the tax from the United States Government.

ARTICLE XIX - UNAUTHORIZED REINSURERS

A. If the Reinsurer is unauthorized in any state of the United States of America or the District of Columbia, the Reinsurer agrees to fund its share of the Company's ceded outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) by:

1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of letters of credit and acceptable to said insurance regulatory authorities; and/or

2. Escrow accounts for the benefit of the Company; and/or

3. Cash advances;

if, without such funding, a penalty would accrue to the Company on any financial statement it is required to file with the insurance regulatory authorities involved. The Reinsurer, at its sole option, may fund in other than cash if its method and form of funding are acceptable to the insurance regulatory authorities involved.

B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form acceptable to insurance regulatory authorities involved, will be


issued for a term of at least one year and will include an "evergreen clause," which automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree, notwithstanding anything to the contrary in this Contract, that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes:

1. To reimburse itself for the Reinsurer's share of losses and/or loss adjustment expense paid under the terms of policies reinsured hereunder, unless paid in cash by the Reinsurer;

2. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer;

3. To fund a cash account in an amount equal to the Reinsurer's share of any ceded outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves) funded by means of a letter of credit which is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date;

4. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of the Company's ceded outstanding loss and loss adjustment expense reserves (including incurred but not reported loss reserves), if so requested by the Reinsurer.

In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B(1) or B(3), or in the case of B(2), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn.

ARTICLE XX - INSOLVENCY

A. In the event of the insolvency of one or more of the reinsured companies, this reinsurance shall be payable directly to the company or to its liquidator, receiver, conservator or statutory successor immediately upon demand, with reasonable provision for verification, on the basis of the liability of the company without diminution because of the insolvency of the company or because the liquidator, receiver, conservator or statutory successor of the company has failed to pay all or a portion of any claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the company shall give written notice to the Reinsurer of the pendency of a claim against the company indicating the policy or bond reinsured which claim would involve a possible liability on the part of the Reinsurer within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in


the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the company solely as a result of the defense undertaken by the Reinsurer.

B. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of this Contract as though such expense had been incurred by the company.

C. It is further understood and agreed that, in the event of the insolvency of one or more of the reinsured companies, the reinsurance under this Contract shall be payable directly by the Reinsurer to the company or to its liquidator, receiver or statutory successor, except as provided by Section 4118(a) of the New York Insurance Law or except (1) where this Contract specifically provides another payee of such reinsurance in the event of the insolvency of the company or (2) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the company to such payees.

ARTICLE XXI - ARBITRATION (BRMA 6J)

A. As a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Contract, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of insurance or reinsurance companies or Lloyd's London Underwriters. In the event that either party should fail to choose an Arbiter within 30 days following a written request by the other party to do so, the requesting party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots.

B. Each party shall present its case to the Arbiters within 30 days following the date of appointment of the Umpire. The Arbiters shall consider this Contract as an honorable engagement rather than merely as a legal obligation and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The decision of the


Arbiters shall be final and binding on both parties; but failing to agree, they shall call in the Umpire and the decision of the majority shall be final and binding upon both parties. Judgment upon the final decision of the Arbiters may be entered in any court of competent jurisdiction.

C. If more than one reinsurer is involved in the same dispute, all such reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the reinsurers constituting one party, provided, however, that nothing herein shall impair the rights of such reinsurers to assert several, rather than joint, defenses or claims, nor be construed as changing the liability of the reinsurers participating under the terms of this Contract from several to joint.

D. Each party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two parties.

E. Any arbitration proceedings shall take place at a location mutually agreed upon by the parties to this Contract, but notwithstanding the location of the arbitration, all proceedings pursuant hereto shall be governed by the law of the state in which the Company has its principal office.

ARTICLE XXII - SERVICE OF SUIT (BRMA 49C)

(Applicable if the Reinsurer is not domiciled in the United States of America, and/or is not authorized in any State, Territory or District of the United States where authorization is required by insurance regulatory authorities)

A. It is agreed that in the event the Reinsurer fails to pay any amount claimed to be due hereunder, the Reinsurer, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States. Nothing in this Article constitutes or should be understood to constitute a waiver of the Reinsurer's rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as permitted by the laws of the United States or of any state in the United States.

B. Further, pursuant to any statute of any state, territory or district of the United States which makes provision therefor, the Reinsurer hereby designates the party named in its Interests and Liabilities Agreement, or if no party is named therein, the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Contract.


ARTICLE XXIII - ASSIGNMENTS AND CHANGES OF INTEREST

No assignment or change of the Company's interest hereunder, whether voluntary or involuntary and whether by merger or reinsurance of its entire business with another company or otherwise, shall be binding upon the Reinsurer.

ARTICLE XXIV - AGENCY AGREEMENT

If more than one reinsured company is named as a party to this Contract, the first named company shall be deemed the agent of the other reinsured companies for purposes of sending or receiving notices required by the terms and conditions of this Contract, and for purposes of remitting or receiving any monies due any party.

ARTICLE XXV - INTERMEDIARY (BRMA 23A)

E. W. Blanch Co. is hereby recognized as the Intermediary negotiating this Contract for all business hereunder. All communications (including but not limited to notices, statements, premium, return premium, commissions, taxes, losses, loss adjustment expense, salvages and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurer through E. W. Blanch Co., Reinsurance Services, 3500 West 80th Street, Minneapolis, Minnesota 55431. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to constitute payment to the Company only to the extent that such payments are actually received by the Company.

IN WITNESS WHEREOF, the Company by its duly authorized representative has executed this Contract as of the date undermentioned at:

Los Angeles, California, this _______ day of _________________________199__.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

SCHEDULE A

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. all of Los Angeles, California

                                                            THIRD          FOURTH
                                                            EXCESS         EXCESS

Company's Retention                                      $15,000,000    $25,000,000

Reinsurer's Per Occurrence Limit (95.0% of)              $10,000,000    $15,000,000

Reinsurer's Term Limit (95.0% of)                        $20,000,000    $30,000,000

Annual Minimum Premium                                   $   520,000    $   436,000

Early Expiration Minimum Premium                         $   432,900    $   362,970

Premium Rate
  Class of Business other than Auto Physical Damage           2.8457%        2.5046%
  Auto Physical Damage                                        0.3003%        0.2343%

Annual Deposit Premium                                   $   650,000    $   545,000

Quarterly Deposit Premium                                $   162,500    $   136,250


U.S.A.

NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE

1. This Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks.

2. Without in any way restricting the operation of paragraph (1) of this Clause, this Reinsurance does not cover any loss or liability accruing to the Reassured, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to:

I. Nuclear reactor power plants including all auxiliary property on the site, or
II. Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or
III. Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material," and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or
IV. Installations other than those listed in paragraph (2) III above using substantial quantities of radioactive isotopes or other products of nuclear fission.

3. Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate

(a) where Reassured does not have knowledge of such nuclear reactor power plant or nuclear installation, or
(b) where said insurance contains a provisions excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof.

4. Without in any way restricting the operations of paragraphs (1), (2) and
(3) hereof, this Reinsurance does not cover any loss or liability by radioactive contamination accruing to the Reassured, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against.

5. It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Reassured to be the primary hazard.

6. The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof.

7. Reassured to be sole judge of what constitutes:

(a) substantial quantities, and
(b) the extent of installation, plant or site.

Note.-Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that

(a) all policies issued by the Reassured on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.
(b) with respect to any risk located in Canada policies issued by the Reassured on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply.


TOTAL INSURED VALUE EXCLUSION CLAUSE

It is the mutual intention of the parties to exclude risks, other than Offices, Hotels, Apartments, Hospitals, Educational Establishments and Public Utilities (except Railroad Schedules), and Builders Risks on the above classes, where at the time of cession, the Total Insured Value over all interests exceeds $250,000,000. However, the Company shall be protected hereunder, subject to the other terms and conditions of this Contract, if subsequent to cession being made, the Company becomes acquainted with the true facts of the case and discovers that the mutual intention has been inadvertently breached; on condition that the Company shall at the first opportunity, and certainly by next anniversary of the original policy, exclude the risk in question.

It is agreed that this mutual intention does not apply to Contingent Business Interruption or to interests traditionally underwritten as Inland Marine or to Stock and/or Contents written on a blanket basis except where the Company is aware that the Total Insured Value of $250,000,000 is already exceeded for buildings, machinery, equipment and direct use and occupancy at the key location.

It is understood and agreed that this Clause shall not apply hereunder where the Company writes 100% of the risk.


POOLS, ASSOCIATIONS & SYNDICATES EXCLUSION CLAUSE

SECTION A:

Excluding:

(a) All business derived directly or indirectly from any Pool, Association or Syndicate which maintains its own reinsurance facilities.

(b) Any Pool or Scheme (whether voluntary or mandatory) formed after March 1, 1968 for the purpose of insuring property whether on a country-wide basis or in respect of designated areas. This exclusion shall not apply to so-called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage.

SECTION B:

It is agreed that business written by the Company for the same perils, which is known at the time to be insured by, or in excess of underlying amounts placed in the following Pools, Associations or Syndicates, whether by way of insurance or reinsurance, is excluded hereunder:

Industrial Risk Insurers,
Associated Factory Mutuals,
Improved Risk Mutuals,
Any Pool, Association or Syndicate formed for the purpose of writing Oil, Gas or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs, United States Aircraft Insurance Group, Canadian Aircraft Insurance Group,
Associated Aviation Underwriters,
American Aviation Underwriters.

Section B does not apply:

(a) Where The Total Insured Value over all interests of the risk in question is less than $250,000,000.

(b) To interests traditionally underwritten as Inland Marine or stock and/or contents written on a blanket basis.

(c) To Contingent Business Interruption, except when the Company is aware that the key location is known at the time to be insured in any Pool, Association or Syndicate named above, other than as provided for under
Section B(a).

(d) To risks as follows:

Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (other than railroad schedules) and builder's risks on the classes of risks specified in this subsection (d) only.


Where this clause attaches to Catastrophe Excesses, the following Section C is added:

SECTION C:

Nevertheless the Reinsurer specifically agrees that liability accruing to the Company from its participation in residual market mechanisms including but not limited to:

(1) The following so-called "Coastal Pools":

Alabama Insurance Underwriting Association Florida Windstorm Underwriting Association ("FWUA") Louisiana Insurance Underwriting Association Mississippi Windstorm Underwriting Association North Carolina Insurance Underwriting Association South Carolina Windstorm and Hail Underwriting Association Texas Catastrophe Property Insurance Association

AND

(2) All "Fair Plan" and "Rural Risk Plan" business

AND

(3) The Florida Property and Casualty Joint Underwriting Association ("FPCJUA"), the Florida Residential Property and Casualty Joint Underwriting Association ("RPCJUA") and the California Earthquake Authority (CEA)

for all perils otherwise protected hereunder shall not be excluded, except, however, that this reinsurance does not include any increase in such liability resulting from:

(i) The inability of any other participant in such "Coastal Pool" and/or "Fair Plan" and/or "Rural Risk Plan" and/or Residual Market Mechanisms to meet its liability.

(ii) Any claim against such "Coastal Pool" and/or "Fair Plan" and/or "Rural Risk Plan" and/or Residual Market Mechanisms, or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund (as defined in the Insolvency Fund Exclusion Clause incorporated in this Contract).

SECTION D:

(1) Notwithstanding Section C above, in respect of the CEA, where an assessment is made against the Company by the CEA, the Company may include in its Ultimate Net Loss only that assessment directly attributable to each separate loss occurrence covered hereunder. The Company's initial capital contribution to the CEA shall not be included in the Ultimate Net Loss.


(2) Notwithstanding Section C above, in respect of the FWUA, FPCJUA and RPCJUA, where an assessment is made against the Company by the FWUA, the FPCJUA, the RPCJUA, or any combination thereof, the maximum loss that the Company may include in the Ultimate Net Loss in respect of any loss occurrence hereunder shall not exceed the lesser of:

(a) The Company's assessment from the relevant entity (FWUA, FPCJUA and/or RPCJUA) for the accounting year in which the loss occurrence commenced, or

(b) The product of the following:

(i) The Company's percentage participation in the relevant entity for the accounting year in which the loss occurrence commenced; and

(ii) The relevant entity's total losses in such loss occurrence.

Any assessments for accounting years subsequent to that in which the loss occurrence commenced may not be included in the Ultimate Net Loss hereunder. Moreover, notwithstanding Section C above, in respect of the FWUA, the FPCJUA and/or the RPCJUA, the Ultimate Net Loss hereunder shall not include any monies expended to purchase or retire bonds as a consequence of being a member of the FWUA, the FPCJUA and/or the RPCJUA. For the purposes of this Contract, the Company may not include in the Ultimate Net Loss any assessment or any percentage assessment levied by the FWUA, the FPCJUA and/or the RPCJUA to meet the obligations of an insolvent insurer member or other party, or to meet any obligations arising from the deferment by the FWUA, the FPCJUA and/or the RPCJUA of the collection of monies.


NOTES: Wherever used herein the terms:

"Company"    shall be understood to mean "Company", "Reinsured",
             "Reassured" or whatever other term is used in the attached
             reinsurance document to designate the reinsured company or
             companies.

"Agreement"  shall be understood to mean "Agreement", "Contract",
             "Policy", or whatever other term is used to designate the
             attached reinsurance document.

"Reinsurers" shall be understood to mean "Reinsurers", "Underwriters" or whatever other term is used in the attached reinsurance document to designate the reinsurer or reinsurers.


POLLUTION AND SEEPAGE EXCLUSION CLAUSE

This Contract excludes loss and/or damage and/or costs and/or expenses arising from seepage and/or pollution and/or contamination, other than contamination from smoke. Nevertheless, this exclusion does not preclude payment of the cost of removing debris of property damaged by a loss otherwise covered hereunder, subject always to a limit of 25% of the Company's property loss under the applicable original policy.


INTERESTS AND LIABILITIES AGREEMENT

of

Allmerica Re
A Division of
The Hanover Insurance Company
Bedford, New Hampshire
(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

1.25% of the Third Excess Catastrophe Reinsurance 1.50% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Florham Park, New Jersey, this _______ day of_________________________199___.


Allmerica Re, A Division of The Hanover Insurance Company

INTERESTS AND LIABILITIES AGREEMENT

of

AXA Reinsurance Company
Wilmington, Delaware
(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

7.50% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

New York, New York, this _______ day of _______________________________199___.


AXA Reinsurance Company

INTERESTS AND LIABILITIES AGREEMENT

of

Cat Limited
Hamilton, Bermuda
(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

10.00% of the Third Excess Catastrophe Reinsurance 10.00% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Hamilton, Bermuda, this _______ day of_________________________________199___.


Cat Limited

INTERESTS AND LIABILITIES AGREEMENT

of

Continental Casualty Company
Chicago, Illinois
(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

2.00% of the Third Excess Catastrophe Reinsurance 1.50% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Chicago, Illinois, this _______ day of_________________________________199___.


Continental Casualty Company

INTERESTS AND LIABILITIES AGREEMENT

of

Everest Reinsurance Company
Dover, Delaware
(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

13.00% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Newark, New Jersey, this _______ day of _______________________________199___.


Everest Reinsurance Company

INTERESTS AND LIABILITIES AGREEMENT

of

First Excess and Reinsurance Corporation
Overland Park, Kansas
(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

9.00% of the Third Excess Catastrophe Reinsurance 10.00% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Kansas City, Missouri, this _______ day of____________________________199___.


First Excess and Reinsurance Corporation

INTERESTS AND LIABILITIES AGREEMENT

of

Hartford Fire Insurance Company
Hartford, Connecticut
by
Hartford Re Company
Hartford, Connecticut
(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

0% of the Third Excess Catastrophe Reinsurance 3.00% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


INTERESTS AND LIABILITIES AGREEMENT

of

Security Insurance Company of Hartford
Farmington, Connecticut
(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

0.40% of the Third Excess Catastrophe Reinsurance 0.44% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Farmington, Connecticut, this _______ day of ___________________________199___.


Security Insurance Company of Hartford

INTERESTS AND LIABILITIES AGREEMENT

of

Signet Star Reinsurance Company
Wilmington, Delaware
(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

2.00% of the Third Excess Catastrophe Reinsurance 2.00% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Florham Park, New Jersey, this _______ day of _________________________199___.


Signet Star Reinsurance Company

INTERESTS AND LIABILITIES AGREEMENT

of

Sydney Reinsurance Corporation
Philadelphia, Pennsylvania
(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

4.25% of the Third Excess Catastrophe Reinsurance 3.50% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

New York, New York, this _______ day of _______________________________199___.


Sydney Reinsurance Corporation

INTERESTS AND LIABILITIES AGREEMENT

of

United Fire & Casualty Company
Cedar Rapids, Iowa
(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

1.00% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Cedar Rapids, Iowa, this _______ day of________________________________199___.


United Fire & Casualty Company

INTERESTS AND LIABILITIES AGREEMENT

of

USF RE Insurance Company
Boston, Massachusetts
(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

2.00% of the Third Excess Catastrophe Reinsurance 3.00% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Costa Mesa, California, this _______ day of_____________________________199___.


USF RE Insurance Company

INTERESTS AND LIABILITIES AGREEMENT

of

Vesta Fire Insurance Corporation
Birmingham, Alabama
(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

25.00% of the Third Excess Catastrophe Reinsurance 25.00% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Birmingham, Alabama, this _______ day of_______________________________199___.


Vesta Fire Insurance Corporation

INTERESTS AND LIABILITIES AGREEMENT

of

Winterthur Reinsurance Corporation of America New York, New York


(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

3.25% of the Third Excess Catastrophe Reinsurance 2.50% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

New York, New York, this _______ day of _______________________________199___.


Winterthur Reinsurance Corporation of America

INTERESTS AND LIABILITIES AGREEMENT

of

Europa Re
Cologne, Germany
(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

0.75% of the Third Excess Catastrophe Reinsurance 2.00% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Cologne, Germany, this _______ day of ________________________________199___.


Europa Re

INTERESTS AND LIABILITIES AGREEMENT

of

Mapfre Re Compania de Reaseguros, S.A
Madrid, Spain
(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

0% of the Third Excess Catastrophe Reinsurance 2.50% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Madrid, Spain, this _______ day of ____________________________________199___.


Mapfre Re Compania de Reaseguros, S.A.

INTERESTS AND LIABILITIES AGREEMENT

of

Sirius International Insurance Corporation Stockholm, Sweden


(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

1.25% of the Third Excess Catastrophe Reinsurance 1.25% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Stockholm, Sweden, this _______ day of________________________________199___.


Sirius International Insurance Corporation

INTERESTS AND LIABILITIES AGREEMENT

of

La Reunion Francaise
Paris, France
by
Societe Parisienne de Souscription
Paris, France
(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

1.50% of the Third Excess Catastrophe Reinsurance 1.50% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Paris, France,  this _______ day of ____________________________________199___.

                _____________________________________________________
                Societe Parisienne de Souscription
                (for and on behalf of La Reunion Francaise)


INTERESTS AND LIABILITIES AGREEMENT

of

Certain Underwriting Members of Lloyd's

shown in the Signing Schedule attached hereto


(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

5.10% of the Third Excess Catastrophe Reinsurance 4.92% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

In any action, suit or proceeding to enforce the Subscribing Reinsurer's obligations under the attached Contract, service of process may be made upon Mendes & Mount, 750 Seventh Avenue, New York, New York 10019.

Signed for and on behalf of the Subscribing Reinsurer in the Signing Schedule attached hereto.


INTERESTS AND LIABILITIES AGREEMENT

of

Certain Insurance Companies

shown in the Signing Schedule(s) attached hereto


(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

0% of the Third Excess Catastrophe Reinsurance 10.14% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

In any action, suit or proceeding to enforce the Subscribing Reinsurer's obligations under the attached Contract, service of process may be made upon Mendes & Mount, 750 Seventh Avenue, New York, New York 10019.

The following Article shall apply to the Subscribing Reinsurer's share in the attached Contract, in lieu of the provisions of Article XIX - Unauthorized Reinsurers - of the Contract:

"Article XIX - Loss Reserves

(Applicable only if the Reinsurer cannot qualify for credit by any state or any other governmental authority having jurisdiction over the Company's loss reserves.)

A. As regards policies or bonds issued by the Company coming within the scope of this Contract, the Company agrees that, when it shall file with the Insurance Department or set up on its books reserves for losses covered hereunder which it shall be required by law to set up, it will forward to the Reinsurer a statement showing the proportion of such loss reserves which is applicable to the Reinsurer. The Reinsurer hereby agrees that it will apply for and secure delivery to the Company of a clean, irrevocable and unconditional Letter of Credit issued and confirmed, if confirmation is required by the regulatory authority(ies) having jurisdiction over the Company's loss reserves, by a bank or banks meeting the NAIC Securities Valuation Office credit standards for issuers of Letters of Credit and which is (are) acceptable to said regulatory authority(ies), in an amount equal to the Reinsurer's proportion of reserves in respect of known outstanding losses that have been reported to the Reinsurer and allocated loss expenses relating thereto as shown in the statement prepared by the Company. Under no circumstances shall any amount relating to reserves in respect of Incurred But Not Reported losses be included in the amount of the Letter of Credit.

B. The Letter of Credit shall be in a form acceptable to insurance regulatory authority(ies) having jurisdiction over the Company's loss reserves, shall be issued for a period of not less than one year, and shall be automatically extended for one year from its date of expiration or any future expiration date unless thirty (30) days prior to any expiration date the issuing bank shall notify the Company by registered mail that the issuing bank elects not to consider the Letter of Credit extended for any additional period. An issuing bank, not a member of the federal reserve system or not chartered in New York State, shall provide sixty (60) days notice to the Company prior to any expiration in the event of non-extension.

C. Notwithstanding any other provision of this Contract, the Company or its successors in interest may draw upon such credit at any time, without diminution because of the


insolvency of the Company or of the Reinsurer, for one or more of the following purposes only:

1. To pay the Reinsurer's share or to reimburse the Company for the Reinsurer's share of any loss reinsured by this Contract, the payment of which has been agreed by the Reinsurer and which has not been otherwise paid;

2. To make refund of any sum which is in excess of the actual amount required to pay the Reinsurer's share of any liability reinsured by this Contract;

3. In the event of expiration of the Letter of Credit as provided for above, to establish deposit of the Reinsurer's share of known and reported outstanding losses and allocated expenses relating thereto under this Contract. Such cash deposit shall be held in an interest bearing account separate from the Company's other assets, and interest thereon shall accrue to the benefit of the Reinsurer.

The issuing bank shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company.

D. At annual intervals, or more frequently as agreed but never more frequently than quarterly, the Company shall prepare a specific statement, for the sole purpose of amending the Letter of Credit, of the Reinsurer's share of known and reported outstanding losses and allocated expenses relating thereto. If the statement shows that the Reinsurer's share of such losses and allocated loss expenses exceeds the balance of credit as of the statement date, the Reinsurer shall, within thirty (30) days after receipt of notice of such excess, secure delivery to the Company of an amendment of the Letter of Credit increasing the amount of credit by the amount of such difference. If, however, the statement shows that the Reinsurer's share of known and reported outstanding losses plus allocated loss expenses relating thereto is less than the balance of credit as of the statement date, the Company shall, within thirty (30) days after receipt of written request from the Reinsurer, release such excess credit by agreeing to secure an amendment to the Letter of Credit reducing the amount of credit available by the amount of such excess credit."

Signed for and on behalf of the Subscribing Reinsurer in the Signing Schedule(s) attached hereto.


(Revised: July 1, 1997)

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
EFFECTIVE: SEPTEMBER 1, 1966

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

Third Excess Catastrophe Reinsurance

                      REINSURERS                                  PARTICIPATIONS

Allmerica Re, A Division of The Hanover Insurance Company                1.25%
AXA Reinsurance Company                                                  7.50
Cat Limited                                                             10.00
Continental Casualty Company                                             2.00
Everest Reinsurance Company                                             13.00
First Excess and Reinsurance Corporation                                 9.00
Nationwide Mutual Insurance Company                                      3.00
Patriot Re Corporation (for Various Lloyd's Underwriters)                2.00
Renaissance Reinsurance Ltd.                                             4.00
St. Paul Reinsurance Management Corporation
  (for St. Paul Fire and Marine Insurance Company)                       1.75
Signet Star Reinsurance Company                                          2.00
Sydney Reinsurance Corporation                                           4.25
United Fire & Casualty Company                                           1.00
USF RE Insurance Company                                                 2.00
Vesta Fire Insurance Corporation                                        25.00
Winterthur Reinsurance Corporation of America                            3.25

THROUGH SWIRE BLANCH EUROPE
Europa Re                                                                 .75
Sirius International Insurance Corporation                               1.25

Page 1 of 3

Third Excess Catastrophe Reinsurance (Continued)

                         REINSURERS                            PARTICIPATIONS
SPS Reasurrance                                                          1.50%

THROUGH MILLER REINSURANCE BROKERS NORTH AMERICA LTD.
Lloyd's Underwriters
 Per Signing Schedule                                                    5.10

TOTAL                                                                   99.60% part of
                                                                        100% share in the
                                                                        interests and liabilities
                                                                        of the "Reinsurer"

Fourth Excess Catastrophe Reinsurance

                         REINSURERS                            PARTICIPATIONS

Allmerica Re, A Division of The Hanover Insurance Company                1.50%
Cat Limited                                                             10.00
Continental Casualty Company                                             1.50
First Excess and Reinsurance Corporation                                10.00
Hartford Re Company
  (for Hartford Fire Insurance Company)                                  3.00
Nationwide Mutual Insurance Company                                      4.00
Renaissance Reinsurance Ltd.                                             4.00
St. Paul Reinsurance Management Corporation
  (for St. Paul Fire and Marine Insurance Company)                       2.00
Signet Star Reinsurance Company                                          2.00
Sydney Reinsurance Corporation                                           3.50
USF RE Insurance Company                                                 3.00
Vesta Fire Insurance Corporation                                        25.00
Winterthur Reinsurance Corporation of America                            2.50

THROUGH SWIRE BLANCH EUROPE
Europa Re                                                                2.00
Mapfre Re Compania de Reaseguros, S.A.                                   2.50
Sirius International Insurance Corporation                               1.25
SPS Reasurrance                                                          1.50

Page 2 of 3

Fourth Excess Catastrophe Reinsurance (Continued)

                    REINSURERS                              PARTICIPATIONS

THROUGH MILLER REINSURANCE BROKERS NORTH AMERICA LTD.
Lloyd's Underwriters and Companies
 Per Signing Schedule(s)                                       15.06%

TOTAL                                                          99.56% part of
                                                               100% share in the
                                                               interests and
                                                               liabilities
                                                               of the
                                                               "Reinsurer"

E. W. Blanch Co.

Reinsurance Services

3500 West 80th Street

Minneapolis, Minnesota 55431

Page 3 of 3

(Revised: September 1, 1997)

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
EFFECTIVE: SEPTEMBER 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

Third Excess Catastrophe Reinsurance

                         REINSURERS                            PARTICIPATIONS

Allmerica Re, A Division of The Hanover Insurance Company                1.25%
AXA Reinsurance Company                                                  7.50
Cat Limited                                                             10.00
Continental Casualty Company                                             2.00
Everest Reinsurance Company                                             13.00
First Excess and Reinsurance Corporation                                 9.00
Nationwide Mutual Insurance Company                                      3.00
Patriot Re Corporation (for Various Lloyd's Underwriters)                2.00
Renaissance Reinsurance Ltd.                                             4.00
St. Paul Reinsurance Management Corporation
  (for St. Paul Fire and Marine Insurance Company)                       1.75
Signet Star Reinsurance Company                                          2.00
Sydney Reinsurance Corporation                                           4.25
United Fire & Casualty Company                                           1.00
USF RE Insurance Company                                                 2.00
Vesta Fire Insurance Corporation                                        25.00
Winterthur Reinsurance Corporation of America                            3.25

THROUGH SWIRE BLANCH EUROPE
Europa Re                                                                 .75
Sirius International Insurance Corporation                               1.25

Page 1 of 3

Third Excess Catastrophe Reinsurance (Continued)

REINSURERS PARTICIPATIONS

SPS Reasurrance                                                     1.50%

THROUGH MILLER REINSURANCE BROKERS NORTH AMERICA LTD.
Lloyd's Underwriters
 Per Signing Schedule                                               5.10

TOTAL                                                              99.60% part
                                                                   of 100%
                                                                   share in the
                                                                   interests and
                                                                   liabilities
                                                                   of the
                                                                   "Reinsurer"

Fourth Excess Catastrophe Reinsurance

                         REINSURERS                            PARTICIPATIONS

Allmerica Re, A Division of The Hanover Insurance Company           1.50%
Cat Limited                                                        10.00
Continental Casualty Company                                        1.50
First Excess and Reinsurance Corporation                           10.00
Hartford Re Company
  (for Hartford Fire Insurance Company)                             8.25
Nationwide Mutual Insurance Company                                 4.00
Renaissance Reinsurance Ltd.                                        4.00
St. Paul Reinsurance Management Corporation
  (for St. Paul Fire and Marine Insurance Company)                  2.00
Signet Star Reinsurance Company                                     2.00
Sydney Reinsurance Corporation                                      3.50
USF RE Insurance Company                                            3.00
Vesta Fire Insurance Corporation                                   25.00
Winterthur Reinsurance Corporation of America                       2.50

THROUGH SWIRE BLANCH EUROPE
Europa Re                                                           2.00
Mapfre Re Compania de Reaseguros, S.A.                              2.50
Sirius International Insurance Corporation                          1.25
SPS Reasurrance                                                     1.50

Page 2 of 3

Fourth Excess Catastrophe Reinsurance (Continued)

                    REINSURERS                        PARTICIPATIONS

THROUGH MILLER REINSURANCE BROKERS NORTH AMERICA LTD.
Lloyd's Underwriters and Companies
 Per Signing Schedule(s)                              15.06%

TOTAL                                                 99.56% part of
                                                      100% share in the
                                                      interests and liabilities
                                                      of the "Reinsurer"

E. W. Blanch Co.

Reinsurance Services

3500 West 80th Street

Minneapolis, Minnesota 55431

Page 3 of 3

ADDENDUM NO. 1

to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. all of Los Angeles, California

IT IS HEREBY AGREED, effective August 31, 1997, that paragraph A of Article II - Term - shall be deleted and the following substituted therefor:

"A. This Contract shall become effective on September 1, 1996, with respect to losses arising out of loss occurrences commencing on or after that date, and shall remain in force until September 30, 1997, both days inclusive.

The provisions of this Contract shall remain otherwise unchanged.


ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

Allmerica Re
A Division of
The Hanover Insurance Company
Bedford, New Hampshire

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of _________________199___.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

Florham Park, New Jersey, this _______ day of ______________________199___.


Allmerica Re, A Division of The Hanover Insurance Company

ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

AXA Reinsurance Company
Wilmington, Delaware

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of ____________________199___.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

New York, New York, this _______ day of _________________________ 199___.


AXA Reinsurance Company

ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

Cat Limited
Hamilton, Bermuda

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of _________________199___.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

Hamilton, Bermuda, this _______ day of _______________________199___.


Cat Limited

ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

Continental Casualty Company
Chicago, Illinois

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of _______________________199___.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

Chicago, Illinois, this _______ day of _________________________199___.


Continental Casualty Company

ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

Everest Reinsurance Company
A Delaware Corporation

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of ____________________199___.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

Warren, New Jersey, this _______ day of ________________________ 199___.


Everest Reinsurance Company

ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

First Excess and Reinsurance Corporation
Overland Park, Kansas

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of ______________________199___.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

Kansas City, Missouri, this _______ day of _________________________199___.


First Excess and Reinsurance Corporation

ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

Hartford Fire Insurance Company
Hartford, Connecticut
by
Hartford Re Company
Hartford, Connecticut
(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IT IS ALSO AGREED, effective September 1, 1997, with respect to losses arising out of loss occurrences commencing on or after that date, that the Subscribing Reinsurer's percentage


shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above shall be increased as follows:

From 0.0% to 0.0% of the Third Excess Catastrophe Reinsurance From 3.00% to 8.25% of the Fourth Excess Catastrophe Reinsurance

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of _______________________199___.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

San Francisco, California, this _______ day of ________________________ 199___.


Hartford Re Company
(for and on behalf of Hartford Fire Insurance Company)

Addendum No. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

Nationwide Mutual Insurance Company
Columbus, Ohio

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of ______________________199___.

                _____________________________________________________
                Mercury Casualty Company
                Mercury Insurance Company
                California Automobile Insurance Company
                California General Underwriters Insurance Company, Inc.

Columbus, Ohio,  this _______ day of _____________________________199___.

                _____________________________________________________
                Nationwide Mutual Insurance Company


ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

Certain Underwriting Members of Lloyd's

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of _________________________199___.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

Skillman, New Jersey, this _______ day of ________________________199___.


Patriot Re Corporation
(for and on behalf of Underwriters at Lloyd's per Contract # __________)

ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

Renaissance Reinsurance Ltd.
Hamilton, Bermuda

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of _____________________199___.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

Hamilton, Bermuda, this _______ day of ___________________________199___.


Renaissance Reinsurance Ltd.

ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

St. Paul Fire and Marine Insurance Company St. Paul, Minnesota

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of ________________________199___.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

New York, New York, this _______ day of _______________________ 199___.


St. Paul Fire and Marine Insurance Company by St. Paul Re, Inc.

ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

Signet Star Reinsurance Company
Wilmington, Delaware

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of _________________________199___.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

Florham Park, New Jersey, this _______ day of _____________________ 199___.


Signet Star Reinsurance Company

ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

Sydney Reinsurance Corporation
Philadelphia, Pennsylvania

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of _____________________199___.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

New York, New York, this _______ day of _________________________ 199___.


Sydney Reinsurance Corporation

ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

United Fire & Casualty Company
Cedar Rapids, Iowa

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of ______________________ 199___.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

Cedar Rapids, Iowa, this _______ day of ___________________________ 199___.


United Fire & Casualty Company

ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

USF RE Insurance Company
Boston, Massachusetts

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of _______________________199___.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

Costa Mesa, California, this _______ day of _______________________199___.


USF RE Insurance Company

ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

Vesta Fire Insurance Corporation
Birmingham, Alabama

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of ______________________199___.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

Birmingham, Alabama, this _______ day of __________________________199___.


Vesta Fire Insurance Corporation

ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

Winterthur Reinsurance Corporation of America New York, New York

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of __________________________199___.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

New York, New York, this _______ day of _________________________ 199___.


Winterthur Reinsurance Corporation of America

ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

Europa Re
Cologne, Germany

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of ____________________ 199___


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

Cologne, Germany, this _______ day of __________________________ 199___.


Europa Re
Europa Ruckversicherung
Aktiengesellschaft

ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

Mapfre Re Compania de Reaseguros, S.A
Madrid, Spain

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of _______________________199___.

                _____________________________________________________
                Mercury Casualty Company
                Mercury Insurance Company
                California Automobile Insurance Company
                California General Underwriters Insurance Company, Inc.

Madrid, Spain,  this _______ day of ____________________________ 199___.

                _____________________________________________________
                Mapfre Re Compania de Reaseguros, S.A.


ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

Sirius International Insurance Corporation Stockholm, Sweden

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of ______________________ 199___.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

Stockholm, Sweden, this _______ day of ___________________________ 199___.


Sirius International Insurance Corporation

ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

La Reunion Francaise
Paris, France
by
Societe Parisienne de Souscription
Paris, France

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED, effective July 1, 1997, that all rights, interests, liabilities and obligations of the "Subscribing Reinsurer" under this Agreement shall be transferred from La Reunion Francaise, Paris, France, by Societe Parisienne de Souscription, Paris, France (hereinafter referred to as the "Assignor") to SPS Reassurance, Paris, France (hereinafter referred to as the "Assignee"). In accordance therewith, the Assignor shall assign, and the Assignee shall assume, all of the rights, interests, liabilities and obligations of the "Subscribing Reinsurer" under this Agreement. The Assignee shall then be subject to all of the terms and conditions hereof, and the term "Subscribing Reinsurer," wherever it is used herein, shall refer to SPS Reassurance, Paris, France.

IT IS UNDERSTOOD AND AGREED that the Company consents to the foregoing transfer of rights, interests, liabilities and obligations from the Assignor to the Assignee, and further releases the


Assignor from all unfulfilled liabilities and obligations which have arisen under this Agreement and all liabilities and obligations which may arise in the future under this Agreement.

IT IS ALSO AGREED that the "Novation Addendum," a copy of which is attached to and forms part of this Addendum, shall be recognized as part of this Agreement, effective July 1, 1997.

IT IS ALSO AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS ALSO AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of ________________________ 199___.

                _____________________________________________________
                Mercury Casualty Company
                Mercury Insurance Company
                California Automobile Insurance Company
                California General Underwriters Insurance Company, Inc.

Paris, France,  this _______ day of ___________________________________ 199___.

                _____________________________________________________
                La Reunion Francaise

Paris, France,  this _______ day of ________________________________ 199___.

                _____________________________________________________
                SPS Reassurance


ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

Certain Underwriting Members of Lloyd's

shown in the Signing Schedule attached hereto


(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the Company by its duly authorized representative has executed this Addendum as of the date undermentioned at:

Los Angeles, California, this _______ day of __________________ 199___.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

Signed for and on behalf of the Subscribing Reinsurer in the Signing Schedule attached hereto.


ADDENDUM NO. 1

to the

INTERESTS AND LIABILITIES AGREEMENT

of

Certain Insurance Companies

shown in the Signing Schedule(s) attached hereto


(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California

IT IS HEREBY AGREED that Addendum No. 1 to the Contract shall form part of the Contract, effective August 31, 1997.

IT IS FURTHER AGREED that, in lieu of the provisions of the second paragraph of the original Interests and Liabilities Agreement, this Agreement shall expire on September 30, 1997.

IN WITNESS WHEREOF, the Company by its duly authorized representative has executed this Addendum as of the date undermentioned at:

Los Angeles, California, this _______ day of _______________________ 199___.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

Signed for and on behalf of the Subscribing Reinsurer in the Signing Schedule(s) attached hereto.


TERMINATION ADDENDUM

to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. all of Los Angeles, California

and to the

INTERESTS AND LIABILITIES AGREEMENT

of

San Francisco Reinsurance Company
Novato, California
(hereinafter referred to as the "Subscribing Reinsurer")

attached thereto

IT IS HEREBY AGREED that this Contract, the Interests and Liabilities Agreement and the Subscribing Reinsurer's share(s), as listed below, in the interests and liabilities of the "Reinsurer" under the respective excess layers of reinsurance provided in this Contract shall be terminated on August 31, 1997, with respect to losses arising out of loss occurrences commencing after that date:

0.0% of the Third Excess Catastrophe Reinsurance 5.25% of the Fourth Excess Catastrophe Reinsurance

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of _______________________ 199___.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

Novato, California, this _______ day of __________________________ 199___.


San Francisco Reinsurance Company

TERMINATION ADDENDUM

to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. all of Los Angeles, California

and to the

INTERESTS AND LIABILITIES AGREEMENT

of

Security Insurance Company of Hartford
Farmington, Connecticut
(hereinafter referred to as the "Subscribing Reinsurer")

attached thereto

IT IS HEREBY AGREED that this Contract, the Interests and Liabilities Agreement and the Subscribing Reinsurer's share(s), as listed below, in the interests and liabilities of the "Reinsurer" under the respective excess layers of reinsurance provided in this Contract shall be terminated on August 31, 1997, with respect to losses arising out of loss occurrences commencing after that date:

0.40% of the Third Excess Catastrophe Reinsurance 0.44% of the Fourth Excess Catastrophe Reinsurance

IN WITNESS WHEREOF, the parties hereto by their respective duly authorized representatives have executed this Addendum as of the dates undermentioned at:

Los Angeles, California, this _______ day of ________________________ 199___.


Mercury Casualty Company Mercury Insurance Company California Automobile Insurance Company California General Underwriters Insurance Company, Inc.

Farmington, Connecticut, this _______ day of ______________________ 199___.


Security Insurance Company of Hartford

The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Hartford, Connecticut,  this _______ day of _____________________________199___.

                        _____________________________________________________
                        Hartford Re Company
                        (for and on behalf of Hartford Fire Insurance Company)


INTERESTS AND LIABILITIES AGREEMENT

of

Nationwide Mutual Insurance Company
Columbus, Ohio
(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

3.00% of the Third Excess Catastrophe Reinsurance 4.00% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Columbus, Ohio, this _______ day of ____________________________________199___.


Nationwide Mutual Insurance Company

INTERESTS AND LIABILITIES AGREEMENT

of

Certain Underwriting
Members of Lloyd's
(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

2.00% of the Third Excess Catastrophe Reinsurance 0% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Skillman, New Jersey,  this _______ day of______________________________199___.

                       _____________________________________________________
                       Patriot Re Corporation
                       (for and on behalf of Underwriters at Lloyd's
                       per Contract # ____________)


INTERESTS AND LIABILITIES AGREEMENT

of

Renaissance Reinsurance Ltd.
Hamilton, Bermuda
(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

4.00% of the Third Excess Catastrophe Reinsurance 4.00% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Hamilton, Bermuda, this _______ day of________________________199___.


Renaissance Reinsurance Ltd.

INTERESTS AND LIABILITIES AGREEMENT

of

St. Paul Fire and Marine Insurance Company St. Paul, Minnesota


(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

1.75% of the Third Excess Catastrophe Reinsurance 2.00% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

New York, New York, this _______ day of ___________________________________ 199___.


St. Paul Fire and Marine Insurance Company St. Paul Reinsurance Management Corporation, Reinsurance Managers

INTERESTS AND LIABILITIES AGREEMENT

of

San Francisco Reinsurance Company
Novato, California
(hereinafter referred to as the "Subscribing Reinsurer")

with respect to the

THIRD AND FOURTH
PROPERTY EXCESS CATASTROPHE
REINSURANCE CONTRACT
Effective: September 1, 1996

issued to and duly executed by

Mercury Casualty Company
Mercury Insurance Company
California Automobile Insurance Company
and

California General Underwriters Insurance Company, Inc. All of Los Angeles, California


(hereinafter collectively referred to as the "Company")

The Subscribing Reinsurer hereby accepts the following percentage shares in the interests and liabilities of the "Reinsurer" as set forth in the attached Contract captioned above:

0% of the Third Excess Catastrophe Reinsurance 5.25% of the Fourth Excess Catastrophe Reinsurance

This Agreement shall become effective on September 1, 1996, and shall continue in force until August 31, 1997, both days inclusive. However, if the "Reinsurer" under the attached Contract sustains no loss from loss occurrences commencing on or prior to May 31, 1997, this Agreement shall, upon notice from the Company prior to June 30, 1997, expire on June 30, 1997. This Agreement may also be terminated by the Company in accordance with paragraph B of Article II of the Contract.


The Subscribing Reinsurer's share in the attached Contract shall be separate and apart from the shares of the other reinsurers, and shall not be joint with the shares of the other reinsurers, it being understood that the Subscribing Reinsurer shall in no event participate in the interests and liabilities of the other reinsurers.

IN WITNESS WHEREOF, the Subscribing Reinsurer by its duly authorized representative has executed this Agreement as of the date undermentioned at:

Novato, California, this _______ day of ________________________________199___.


San Francisco Reinsurance Company


EXHIBIT 10.24

MANAGEMENT AGREEMENT

This Agreement is entered into on March 31, 1997, effective as of the 1st day of January 1997, between Cimarron Insurance Company, Inc. hereinafter referred to as Insurer, and Mercury General Corporation, hereinafter referred to as Manager.

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

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

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

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

A. To acquire, license and appoint sales agents and brokers for the production of the insurance business of and for the Insurer, provided

1

that the Insurer shall retain the right to refuse the appointment of any agent or broker and the right to terminate any agent or broker.

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

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

D. To pay on behalf of the Insurer all of their operating expenses, including but not limited to rent, supplies, salaries of all personnel, telephone, advertising costs, costs of settling and adjusting all insurance claims, legal defense costs, court costs, costs of loss analysis, accounting costs (other than auditing), premium collection costs; provided, however, the Insurer shall pay, and be responsible for, the costs of management fees, premium taxes, losses, reserves for unpaid losses, reserves for unpaid loss adjustment expense, audit fees, assigned risk or similar assessments, bureau fees, Fair Plan or similar assessments, directors' fees, agents' commissions, reinsurance premiums, investment counsel fees, assessments by the various state guarantee associations in the states in which Insurer is licensed, membership fees in the National Association of Independent Insurers, any assessments by that Association, political contributions, premiums paid for insurance policies in which the Insurer is the beneficiary and owner, such as fidelity bonds, taxes of all types and costs which may be levied on insurance companies by the governmental authorities having jurisdiction over the same and agents' bonuses (contingency commissions).

E. Such other operating functions as mutually agreed upon by the parties.

2

4. Manager shall be reimbursed monthly for all expenses incurred on behalf of the Insurer. The parties may mutually agree to an alternate reimbursement schedule, subject to the approval of the Kansas Insurance Department. Manager shall provide an annual report showing all expenses incurred and reimbursed during the prior years to enable Insurer to include such information on any necessary regulatory filings.

5. The ownership and legal title to the insurance policies, insurance policy records, data processing tapes, disks, programs and documentation, and account records of the Insurer, compiled on behalf of Insurer by Manager, shall remain in and with Insurer, however, Manager shall have access to such records at all times and shall permit Manager to examine and copy any data in Insurer's possession.

6. The term of this Agreement shall commence on January 1, 1997 and shall continue until terminated as provided herein. Either party may terminate this Agreement upon ninety (90) days prior written notice to the other party, and any necessary notice to any applicable state insurance department. Upon termination, Manager shall provide a final reimbursement invoice for the services provided prior to termination, and Insurer shall pay such invoice within thirty (30) days of receipt thereof.

This Agreement shall be governed by the laws of the State of Kansas.

This Agreement contains the entire agreement between the parties hereto and no other agreement or understanding, verbal or otherwise, exists between the parties except as expressly set forth herein.

The obligations of the Manager hereunder are not subject to assignment or delegation except with the prior consent of Insurer, and prior notification to the Kansas Commissioner of Insurance.

3

For the purposes of this Agreement, Manager shall be considered an independent contractor and not an agent or an employee of the Insurer.

IN WITNESS WHEREOF, we have set our hands and seals this 1st day of April 1997.

CIMARRON INSURANCE COMPANY, INC.      MERCURY GENERAL CORPORATION


   /s/ Stanley A. Dickey                 /s/ Michael D. Curtius
_____________________________         ___________________________
By:  Stanley A. Dickey                By:  Michael D. Curtius
     President                             President


   /s/ Patricia Mullendore               /s/ Judy Walters
_____________________________         ___________________________
By:  Patricia Mullendore              By:  Judy Walters
     Secretary                             Secretary

4

MANAGEMENT AGREEMENT

This Agreement is entered into on March 31, 1997, effective as of the 1st day of January 1997, between American Fidelity Insurance Company hereinafter referred to as Insurer, and Mercury General Corporation, hereinafter referred to as Manager.

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

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

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

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

A. To acquire, license and appoint sales agents and brokers for the production of the insurance business of and for the Insurer, provided

1

that the Insurer shall retain the right to refuse the appointment of any agent or broker and the right to terminate any agent or broker.

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

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

D. To pay on behalf of the Insurer all of their operating expenses, including but not limited to rent, supplies, salaries of all personnel, telephone, advertising costs, costs of settling and adjusting all insurance claims, legal defense costs, court costs, costs of loss analysis, accounting costs (other than auditing), premium collection costs; provided, however, the Insurer shall pay, and be responsible for, the costs of management fees, premium taxes, losses, reserves for unpaid losses, reserves for unpaid loss adjustment expense, audit fees, assigned risk or similar assessments, bureau fees, Fair Plan or similar assessments, directors' fees, agents' commissions, reinsurance premiums, investment counsel fees, assessments by the various state guarantee associations in the states in which Insurer is licensed, membership fees in the National Association of Independent Insurers, any assessments by that Association, political contributions, premiums paid for insurance policies in which the Insurer is the beneficiary and owner, such as fidelity bonds, taxes of all types and costs which may be levied on insurance companies by the governmental authorities having jurisdiction over the same and agents' bonuses (contingency commissions).

E. Such other operating functions as mutually agreed upon by the parties.

2

4. Manager shall be reimbursed monthly for all expenses incurred on behalf of the Insurer. The parties may mutually agree to an alternate reimbursement schedule. Manager shall provide an annual report showing all expenses incurred and reimbursed during the prior years to enable Insurer to include such information on any necessary regulatory filings.

5. The ownership and legal title to the insurance policies, insurance policy records, data processing tapes, disks, programs and documentation, and account records of the Insurer, compiled on behalf of Insurer by Manager, shall remain in and with Insurer, however, Manager shall have access to such records at all times and shall permit Manager to examine and copy any data in Insurer's possession.

6. The term of this Agreement shall commence on January 1, 1997 and shall continue until terminated as provided herein. Either party may terminate this Agreement upon ninety (90) days prior written notice to the other party, and any necessary notice to any applicable state insurance department. Upon termination, Manager shall provide a final reimbursement invoice for the services provided prior to termination, and Insurer shall pay such invoice within thirty (30) days of receipt thereof.

This Agreement shall be governed by the laws of the State of Oklahoma.

This Agreement contains the entire agreement between the parties hereto and no other agreement or understanding, verbal or otherwise, exists between the parties except as expressly set forth herein.

The obligations of the Manager hereunder are not subject to assignment or delegation except with the prior consent of Insurer.

For the purposes of this Agreement, Manager shall be considered an independent contractor and not an agent or an employee of the Insurer.

3

IN WITNESS WHEREOF, we have set our hands and seals this 1st day of April 1997.

AMERICAN FIDELITY
INSURANCE COMPANY                     MERCURY GENERAL CORPORATION


   /s/ Stanley A. Dickey                 /s/ Michael D. Curtius
_____________________________         ___________________________
By:  Stanley A. Dickey                By:  Michael D. Curtius
     President                             President


   /s/ Patricia Mullendore               /s/ Judy Walters
_____________________________         ___________________________
By:  Patricia Mullendore              By:  Judy Walters
     Secretary                             Secretary

                                       4

                                 MANAGEMENT AGREEMENT
                                 --------------------

This Agreement is entered into on March 31, 1997, effective as of the 1st day of January 1997, between AFI Management Company, Inc. hereinafter referred to as Company, and Mercury General Corporation, hereinafter referred to as Manager.

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

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

2. That Company promises and hereby delegates to the Manager all of the duties of management which they are allowed to so delegate by the laws of the State of Texas, including, but not limited to, defend lawsuits, establish and choose agents and brokers, determine agent commissions, prepare the records necessary for the conduct of its business, furnish all forms, supplies and other material necessary for the conduct of its business.

3. That Manager promises to perform all of the operating functions on behalf of the Company, including but not limited to the payment on behalf of the Company all of its operating expenses, including but not limited to rent, supplies, salaries of all personnel, telephone, advertising costs, legal defense costs, court costs, accounting costs (other than auditing), provided, however, the Company shall pay and be responsible for the costs of management fees, reserves for losses, audit fees, assessments due as the result of licensing of the Company, sales taxes, agent commissions, investment counsel fees, membership fees, political contributions, premiums paid for insurance policies in which the

1

Company is the beneficiary and owner, taxes of all types and costs.

4. Manager shall be reimbursed monthly for all expenses incurred on behalf of the Company. The parties may mutually agree to an alternate reimbursement schedule. Manager shall provide an annual report showing all expenses incurred and reimbursed during the prior years to enable Company to include such information on any necessary regulatory filings.

5. The ownership and legal title to the insurance policies, insurance policy records, data processing tapes, disks, programs and documentation, and account records of the Company, compiled on behalf of Company by Manager, shall remain in and with Company, however, Manager shall have access to such records at all times and shall permit Manager to examine and copy any data in Company's possession.

6. The term of this Agreement shall commence on January 1, 1997 and shall continue until terminated as provided herein. Either party may terminate this Agreement upon ninety (90) days prior written notice to the other party, and any necessary notice to any applicable state insurance department. Upon termination, Manager shall provide a final reimbursement invoice for the services provided prior to termination, and Company shall pay such invoice within thirty (30) days of receipt thereof.

This Agreement shall be governed by the laws of the State of Texas.

This Agreement contains the entire agreement between the parties hereto and no other agreement or understanding, verbal or otherwise, exists between the parties except as expressly set forth herein.

The obligations of the Manager hereunder are not subject to assignment or

2

delegation except with the prior consent of Company.

For the purposes of this Agreement, Manager shall be considered an independent contractor and not an agent or an employee of the Manager.

IN WITNESS WHEREOF, we have set our hands and seals this 1st day of April 1997.

AFI MANAGEMENT COMPANY                     MERCURY GENERAL CORPORATION


   /s/ Stanley A. Dickey                 /s/ Michael D. Curtius
_____________________________         ___________________________
By:  Stanley A. Dickey                By:  Michael D. Curtius
     President                             President


   /s/ Patricia Mullendore               /s/ Judy Walters
_____________________________         ___________________________
By:  Patricia Mullendore              By:  Judy Walters
     Secretary                             Secretary

3

Exhibit 21.1

SUBSIDIARIES - MERCURY GENERAL CORPORATION

Mercury Casualty Company (100% owned)
Mercury Insurance Company (100% owned by Mercury Casualty Company) California General Underwriters Insurance Company, Inc. (100% owned by Mercury Casualty Company)
California Automobile Insurance Company (100% owned) Mercury Insurance Company of Georgia (100% owned by California Automobile Insurance Company)
Mercury Indemnity Company of Georgia (100% owned) Mercury Insurance Company of Illinois (100% owned) Mercury Indemnity Company of Illinois (100% owned by Mercury Insurance Company of Illinois)
American Mercury Insurance Company (100% owned) Cimarron Insurance Company (100% owned by American Mercury Ins. Company) American Mercury Lloyds Insurance Company * AFI Management Company, Inc. (100% owned by American Fidelity Ins. Company) **

* Controlled by Mercury General Corporation through its attorney-in-fact, AFI Management Company, Inc.

** 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 13, 1998, relating to the consolidated balance sheets of Mercury General Corporation and subsidiaries as of December 31, 1997 and 1996, 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, 1997, which reports appear in the December 31, 1997 annual report on Form 10-K of Mercury General Corporation

KPMG PEAT MARWICK LLP

Los Angeles, California

MARCH 5, 1998


ARTICLE 7
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MERCURY GENERAL CORP. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENE TO SUCH FINANCIAL STATEMENTS.
MULTIPLIER: 1,000


PERIOD TYPE YEAR
FISCAL YEAR END DEC 31 1997
PERIOD START JAN 01 1997
PERIOD END DEC 31 1997
DEBT HELD FOR SALE 1,214,986
DEBT CARRYING VALUE 0
DEBT MARKET VALUE 0
EQUITIES 173,522
MORTGAGE 0
REAL ESTATE 0
TOTAL INVEST 1,448,248
CASH 3,011
RECOVER REINSURE 0
DEFERRED ACQUISITION 57,264
TOTAL ASSETS 1,725,532
POLICY LOSSES 409,061
UNEARNED PREMIUMS 309,376
POLICY OTHER 0
POLICY HOLDER FUNDS 0
NOTES PAYABLE 75,000
PREFERRED MANDATORY 0
PREFERRED 0
COMMON 47,412
OTHER SE 752,180
TOTAL LIABILITY AND EQUITY 1,725,532
PREMIUMS 1,031,280
INVESTMENT INCOME 86,812
INVESTMENT GAINS 4,973
OTHER INCOME 4,881
BENEFITS 654,729
UNDERWRITING AMORTIZATION 224,883
UNDERWRITING OTHER 33,579
INCOME PRETAX 209,779
INCOME TAX 53,473
INCOME CONTINUING 156,306
DISCONTINUED 0
EXTRAORDINARY 0
CHANGES 0
NET INCOME 156,306
EPS PRIMARY 2.84
EPS DILUTED 2.82
RESERVE OPEN 311,754
PROVISION CURRENT 641,911
PROVISION PRIOR 12,818
PAYMENTS CURRENT 373,823
PAYMENTS PRIOR 206,390
RESERVE CLOSE 386,270
CUMULATIVE DEFICIENCY (12,818)