-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
 MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
 TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
 JzblnRj7GEgttPjh+GXPqkYK0HICVJ4BDZFFs5OK6aCrHdf21yXf4vd1LWMArZyV
 7Trm8zU+GZzu135oaBaNSg==

<SEC-DOCUMENT>0000898430-01-001052.txt : 20010329
<SEC-HEADER>0000898430-01-001052.hdr.sgml : 20010329
ACCESSION NUMBER:		0000898430-01-001052
CONFORMED SUBMISSION TYPE:	10-K
PUBLIC DOCUMENT COUNT:		10
CONFORMED PERIOD OF REPORT:	20001231
FILED AS OF DATE:		20010328

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			MERCURY GENERAL CORP
		CENTRAL INDEX KEY:			0000064996
		STANDARD INDUSTRIAL CLASSIFICATION:	FIRE, MARINE & CASUALTY INSURANCE [6331]
		IRS NUMBER:				952211612
		STATE OF INCORPORATION:			CA
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10-K
		SEC ACT:		
		SEC FILE NUMBER:	001-12257
		FILM NUMBER:		1580973

	BUSINESS ADDRESS:	
		STREET 1:		4484 WILSHIRE BOULEVARD
		CITY:			LOS ANGELES
		STATE:			CA
		ZIP:			90010
		BUSINESS PHONE:		2139371060

	MAIL ADDRESS:	
		STREET 1:		LOS ANGELES
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>0001.txt
<DESCRIPTION>FORM 10-K
<TEXT>

<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K

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


  For the Fiscal Year Ended December 31, 2000    Commission File No. 0-3681

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


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


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

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

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

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

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

                                     NONE

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X    No___
                                      ---

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

The aggregate market value of the Registrant's voting stock held by
non-affiliates of the Registrant at March 15, 2001, was approximately
$800,435,690 (based upon the closing sales price on the New York Stock Exchange
for such date, as reported by the Wall Street Journal).

At March 15, 2001, the Registrant had issued and outstanding an aggregate of
54,198,623 shares of its Common Stock.

                      Documents Incorporated by Reference

Portions of the definitive proxy statement for the Annual Meeting of
Shareholders of Registrant to be held on May 9, 2001 are incorporated herein by
reference into Part III hereof.
<PAGE>

Item 1.  Business
         --------

General

          Mercury General Corporation ("Mercury General") and its subsidiaries
(collectively, "the Company") are engaged primarily in writing all risk
classifications of automobile insurance in a number of states, principally
California. During 2000, private passenger automobile insurance and commercial
automobile insurance accounted for 90.2% and 3.7%, respectively, of the total
Company's gross premiums written. The percentage of gross automobile insurance
premiums written during 2000 by state was 90.0% in California, 3.3% in Texas,
3.2% in Florida, 1.5% in Oklahoma, 1.0% in Illinois and 1.0% in Georgia. The
Company also writes homeowners insurance, mechanical breakdown insurance,
commercial and dwelling fire insurance and commercial property insurance. The
non-automobile lines of insurance accounted for 6.1% of gross written premiums
in 2000, of which approximately 23% was in commercial lines.

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

          In 2000, A.M. Best & Co. ("A.M. Best") assigned a rating of A+
(Superior) to all of the Company's insurance subsidiaries except American
Mercury Insurance Company ("AMI"), American Mercury Lloyds Insurance Company
("AML") and Mercury County Mutual Insurance Company ("MCM"). This is the second
highest of the fifteen rating categories in the A.M. Best rating system, which
range from A++ (Superior) to F (In Liquidation). AMI and AML, which accounted
for approximately 5% of the Company's 2000 net written premiums, were rated A-
(Excellent) in 2000 by A.M. Best. MCM, which produced no premium for the Company
in 2000, was unrated by A.M. Best in 2000.

          The principal executive offices of Mercury General are located in Los
Angeles, California. The home office of its California insurance subsidiaries
and the Company's computer and operations center is located in Brea, California.
The Company maintains branch offices in a number of locations in California as
well as a branch office in Clearwater, Florida. The non-California insurance
subsidiaries maintain offices in Vernon Hills, Illinois, Atlanta, Georgia and
Oklahoma City, Oklahoma. During 2000, the Company opened branch offices in
Richmond, Virginia and Latham, New York. The Company also maintains offices in
Austin, Dallas, Fort Worth, Houston and San Antonio Texas, for a Texas insurance
agency that it controls (See Organization). The Company has approximately 2,600
employees.

Organization

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

                                       2
<PAGE>

Georgia and Mercury Insurance Company of Illinois, received authority in late
1989 to write automobile insurance in those two states. In 1992, Mercury
Indemnity Company of Georgia and Mercury Indemnity Company of Illinois were
formed to write preferred risk automobile insurance in those two states. Through
an acquisition in December 1996, three additional subsidiaries were added to the
group: American Fidelity Insurance Company, domiciled in Oklahoma; Cimarron
Insurance Company, domiciled in Kansas; and AFI Management Company, Inc.
("AFIMC"), a Texas corporation which serves as the attorney-in-fact for American
Fidelity Lloyds Insurance Company, a Texas insurer. Accordingly, their
operations are included in the consolidated financial statements of the Company
effective December 1, 1996. During 1997, the names of American Fidelity
Insurance Company and American Fidelity Lloyds Insurance Company were changed to
American Mercury Insurance Company and American Mercury Lloyds Insurance
Company, respectively. In June 1998, Cimarron Insurance Company was sold for
cash. Cimarron's results, which are not material to the Company's operations,
are included in the Company's 1998 operating results up to the sale date.In
December 1999, the Company completed a transaction that, in effect transferred
control of Concord Insurance Services, Inc. ("Concord"), a Texas insurance
agency headquartered in Houston, Texas, to the Company. Concord's results of
operations are included in the consolidated financial statements of the Company
effective October 31, 1999.

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

         Prior to January 1, 2001, Mercury General furnished management services
to its California, Georgia, Illinois and Oklahoma subsidiaries. Following
December 31, 2000, these management services are provided by a subsidiary of
Mercury Casualty Company. Mercury General, its subsidiaries, AML, Concord and
MCM, are referred to as the "Company" unless the context indicates otherwise.
Mercury General Corporation individually is referred to as "Mercury General."
All of the subsidiaries as a group, including AML and MCM, but excluding AFIMC
and Concord, are referred to as the "Insurance Companies." The term "California
Companies" refers to Mercury Casualty, Mercury Insurance and California
Automobile Insurance Company.

Underwriting

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

         At December 31, 2000, "good drivers" (as defined by the California
Insurance Code) accounted for approximately 75% of all voluntary private
passenger automobile policies in force in California, while the higher risk
categories accounted for approximately 25%. The renewal rate in California (the
rate of acceptance of offers to renew) averages approximately 96%.

                                       3
<PAGE>

         In October 1998, the Company began offering a monthly pay policy
through its California Automobile Insurance Company subsidiary targeted at
higher risk drivers who do not fall into existing risk classifications. This
business accounts for approximately 4% of the total voluntary private passenger
automobile policies in-force in California.

         The Company's Oklahoma and Texas private passenger automobile business
in force, underwritten through AMI, is primarily standard and preferred risks.
AMI began offering a non- standard policy during 1998 in Texas. The amount of
non-standard policies in force, written by AMI, was insignificant at December
31, 2000.

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

         The Company's Florida private passenger automobile business in force,
underwritten by Mercury Casualty Company, is primarily standard and preferred
risks. In December 1999, the Company began offering homeowners insurance to
Florida residents. The amount of Florida homeowners policies in force at
December 31, 2000 was not significant.

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

Production and Servicing of Business

         The Company sells its policies through more than 2,000 independent
agents, of which approximately 900 are located in California, approximately 300
are located in Florida and approximately 550 others represent AMI in Oklahoma
and Texas. The remainder are located in Georgia and Illinois. Approximately half
of the agents in California have represented the Company for more than ten
years. The agents, most of whom also represent one or more competing insurance
companies, are independent contractors selected and appointed by the Company.

         One agency produced approximately 18%, 19% and 19% during 2000, 1999
and 1998, respectively, of the Company's total direct premiums written. This
agency was sold during 1998 to a large national broker. No other agent accounted
for more than 2% of direct premiums written.

         The Company believes that its agents' compensation is higher than the
industry average. During 2000, total commissions and bonuses incurred were 16.4%
of net premiums written.

         The Company has had in place since the fourth quarter of 1995 a
newspaper and direct mail advertising program. In April 1998, the advertising
program was expanded to include radio and billboard advertising. While the
majority of the advertising costs are borne by the Company, a portion of these
costs are borne by the Company's agents based upon the number of account leads
generated by the advertising. During 2000 the Company began television
advertising and discontinued advertising on the radio. The Company intends to
continue the current level of advertising during the year 2001. The Company
believes that its advertising program is important to create brand awareness and
to remain competitive in the current insurance climate (See Competitive
Conditions).

                                       4
<PAGE>

Claims

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

Loss and Loss Adjustment Expense Reserves

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

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

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


<TABLE>
<CAPTION>
                                                       Year ended December 31,
                                                       ------------------------
                                                        2000    1999     1998
                                                        ----    ----     ----
                                                        (Amounts in thousands)
<S>                                                 <C>       <C>       <C>
Net reserves for losses and loss adjustment
 expenses, beginning of year.....................   $418,800  $385,816  $386,270
Incurred losses and loss adjustment expenses:
      Provision for insured events of the
         current year............................    878,144   781,316   693,877
       Increase (decrease) in provision for
         insured events of prior years...........     23,637     7,787    (9,409)
                                                    --------  --------  --------
         Total incurred losses and loss adjustment
           expenses..............................    901,781   789,103   684,468
                                                    --------  --------  --------

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

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

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

                                       5
<PAGE>

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

         The decrease in the provision for insured events of prior years in 1998
largely relates to effect of Proposition 213, a California initiative passed in
November 1996 that prevents uninsured motorists, drunk drivers and fleeing
felons from collecting awards for "pain and suffering." - See Regulations -
California Financial Responsibility Law. This new law produced an overall
reduction in bodily injury loss severity for calendar year 1997. In addition, a
new law, effective January 1, 1997 requiring proof of insurance before
registration of a motor vehicle resulted in a much smaller pool of uninsured
motorists, thereby decreasing the frequency of uninsured motorists claims. See
Regulations-California Financial Responsibility Law.

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

         Losses incurred through 2000 include approximately $1 million of
adverse development related to acquisition date loss reserves of AMI. As per
guidance provided by Financial Accounting Standards Board (FASB) release EITF
D-54, the Company has recorded the effects of the reserve guarantee separately
rather than netting the effect directly against the loss reserve and loss
expense accounts.

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

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

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

         The following table represents the development of loss reserves for the
period 1990 through 2000. The top line of the table shows the reserves at the
balance sheet date net of reinsurance recoverable for each of the indicated
years. This represents the estimated amount of losses and loss adjustment
expenses for claims arising in all prior years that are unpaid at the balance
sheet date, including losses that had been incurred but not yet reported to the
Company. The upper portion of the table shows the cumulative amounts paid as of
successive years with respect to that reserve liability. The middle portion of
the table shows the re- estimated amount of the previously recorded reserves
based on experience as of the end of each succeeding year, including cumulative
payments made since the end of the respective year. The

                                       6
<PAGE>

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

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


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

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

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

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

                                       7
<PAGE>

         For the calendar year 1997, the Company's previously estimated loss
reserves produced a small redundancy. The Company attributes the favorable loss
development primarily to the effect of Proposition 213, a California initiative
passed in November 1996 that prevents uninsured motorists, drunk drivers and
fleeing felons from collecting awards for "pain and suffering." See
Regulations - California Financial Responsibility Law. This new law produced an
overall reduction in bodily injury loss severity for calendar year 1997. In
addition, a new law, effective January 1, 1997 requiring proof of insurance
before registration of a motor vehicle resulted in a much smaller pool of
uninsured motorists, thereby decreasing the frequency of uninsured motorists
claims. See Regulations-California Financial Responsibility Law.

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

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

Operating Ratios

     Loss and Expense Ratios
     -----------------------

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

                                       8
<PAGE>

<TABLE>
<CAPTION>
                                                 Year ended December 31,
                                      --------------------------------------------
                                       2000      1999      1998     1997     1996
                                       ----      ----      ----     ----     ----
<S>                                   <C>       <C>       <C>      <C>      <C>
Loss Ratio......................       72.2%     66.5%     61.1%    63.5%    66.6%
Expense Ratio...................       26.4      26.5      26.3     24.7     24.0
                                       ----      ----      ----     ----     ----
Combined Ratio..................       98.6%     93.0%     87.4%    88.2%    90.6%
                                       ====      ====      ====     ====     ====
Industry combined ratio (all
  writers) (1)..................      108.7%(2) 102.6%    100.1%    99.5%   101.0%
Industry combined ratio (excluding
  direct writers) (1)...........        N.A.    102.3%     99.1%   100.1%   102.6%
</TABLE>

__________________

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

(N.A.)  Not available.

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

<TABLE>
<CAPTION>
                                                            Year ended December 31,
                                              ------------------------------------------------
                                               2000       1999       1998      1997       1996
                                               ----       ----       ----      ----       ----
<S>                                           <C>       <C>        <C>        <C>        <C>
Loss Ratio                                     72.2%      66.4%      61.0%     63.5%      66.5%
Expense Ratio                                  26.3       26.8       26.6      25.1       24.4
                                               ----       ----       ----      ----       ----
Combined Ratio                                 98.5%      93.2%      87.6%     88.6%      90.9%
                                               ====       ====       ====      ====       ====
</TABLE>

  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.

<TABLE>
<CAPTION>
                                                             Year ended December 31,
                                             ---------------------------------------------------
                                             2000        1999         1998       1997       1996
                                             ----        ----         ----       ----       ----
                                                 (Amounts in thousands, except ratios)
<S>                                      <C>         <C>          <C>        <C>         <C>
Net premiums written.....                $1,272,447  $1,206,171   $1,144,051 $1,086,241  $795,873
Policyholders' surplus...                $  954,753  $  853,794   $  767,223 $  679,359  $594,799
Ratio....................                  1.3 to 1    1.4 to 1     1.5 to 1   1.6 to 1  1.3 to 1
</TABLE>

   Risk Based Capital
   ------------------

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

                                       9
<PAGE>

companies which establishes recommended minimum capital requirements for
casualty companies. The formula has been designed to capture the widely varying
elements of risks undertaken by writers of different lines of insurance having
differing risk characteristics, as well as writers of similar lines where
differences in risk may be related to corporate structure, investment policies,
reinsurance arrangements and a number of other factors. Based on the formula
adopted by the NAIC, the Company has estimated the Risk-Based Capital
Requirements of each of its insurance subsidiaries as of December 31, 2000. Each
of the companies exceeded the highest level of minimum required capital.

   Statutory Accounting Principles
   -------------------------------

         The Insurance Companies prepare their statutory financial statements in
accordance with accounting practices prescribed or permitted by the various
state insurance departments. Prescribed statutory accounting practices include a
variety of publications of the NAIC,as well as state laws, regulations, and
general administrative rules. Permitted statutory accounting practices encompass
all accounting practices not so prescribed. As of December 31, 2000, there were
no material permitted statutory accounting practices utilized by the Insurance
Companies.

         During 1998, the NAIC approved the codification of statutory accounting
practices. Codification became effective January 1, 2001. Certain state laws may
differ from codification. The Company estimates that it would realize a surplus
increase of approximately $33 million at December 31, 2000 under codification.
This increase primarily relates to the establishment of a net deferred tax asset
and does not include any adjustment for the elimination of the reserve for the
excess of statutory reserves over statement reserves for the California
domiciled companies. For its California domiciled companies, the Company is not
able to recognize a surplus increase of $9 million for the elimination of the
excess of statutory reserves over statement reserves prescribed by codification
because California law requires the establishment of a statutory reserve.

Investments and Investment Results

         The investments of the Company are made by the Company's Chief
Investment Officer under the supervision of the Company's Board of Directors.
The Company follows an investment policy which is regularly reviewed and
revised. The Company's policy emphasizes investment grade, fixed income
securities and maximization of after-tax yields. The Company does not invest
with a view to achieving realized gains. However, sales of securities are
undertaken, with resulting gains or losses, in order to enhance after-tax yield
and keep the portfolio in line with current market conditions. Tax
considerations are important in portfolio management, and have been made more so
since 1986 when the alternative minimum tax ("AMT") was imposed on casualty
companies. Changes in loss experience, growth rates and profitability produce
significant changes in the Company's exposure to AMT liability, requiring
appropriate shifts in the investment asset mix between taxable bonds, tax-exempt
bonds and equities in order to maximize after-tax yield. The optimum asset mix
is subject to continuous review. Due to AMT considerations, the Company has
recently begun to purchase a greater percentage of taxable securities. At
year-end, approximately 74% of the Company's portfolio, at market values, was
invested in medium to long term, investment grade tax-exempt revenue and
municipal bonds. The average Standard & Poor's rating of the Company's bond
holdings was AA- at December 31, 2000.

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

                                       10
<PAGE>

but the call-adjusted average maturity of the portfolio is shorter,
approximately 9.4 years, because holdings are heavily weighted with high coupon
issues which are expected to be called prior to maturity. The modified duration
of the bond portfolio reflecting anticipated early calls was 6.8 years at
December 31, 2000. Duration is a measure of how long it takes, on average, to
receive all the cash flows produced by a bond, including reinvestment of
interest. Because of its sensitivity to interest rates, it is a proxy for a
bond's price volatility. The longer the duration, the greater the price
volatility in relation to changes in interest rates.

         Holdings of lower than investment grade bonds constitute approximately
1% of total investments. The Company continually evaluates the recoverability of
its investment holdings. When a decline in value of fixed maturities or equity
securities is considered other than temporary, a loss is recognized in the
Consolidated Statement of Income. During 1999, the Company realized a loss of
approximately $6.0 million on one equity security where the decline in market
value was considered other than temporary. As the result of a liquidating
dividend, the Company realized a gain of $347,000 on the same equity security in
2000. Equity holdings consist primarily of perpetual preferred stocks and
dividend bearing common stocks on which dividend income is partially
tax-sheltered by the 70% corporate dividend exclusion.

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

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

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

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

                                       11
<PAGE>

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

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

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

At December 31, 2000, the Company had a net unrealized gain on all investments
of $47,494,000 before income taxes.

Competitive Conditions

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

         The property and casualty insurance industry is highly cyclical,
characterized by periods of high premium rates and shortages of underwriting
capacity followed by periods of severe price competition and excess capacity. In
the Company's view, the overall profitability of the California marketplace
during the 1996 through 1998 time period created a favorable environment for
automobile insurance writers. Many major automobile insurers attempted to
capitalize on the favorable climate by increasing their marketing efforts and
reducing rates in attempts to capture more business. These industry wide rate
reductions and increased severity trends on collision and physical damage
coverages contributed to the deterioration of industry loss ratios in 1999 and
2000 (See Operating Ratios - Loss and Expense). Most competitors have recently
filed for and implemented rate increases. Consequently, the Company believes
that the industry is now entering a period of rising premium rates and reduced
underwriting capacity.

                                       12
<PAGE>

         Price and reputation for service are the principal means by which the
Company competes with other automobile insurers. The Company believes that it
has a good reputation for service, and it has, historically, been among the
lowest-priced insurers doing business in California according to surveys
conducted by the California DOI. In addition to good service and competitive
pricing, for those insurers dealing through independent agents, as the Company
does, the marketing efforts of agents is a means of competition. According to a
recent study released by the California DOI, the combined results for the
Company's California subsidiaries included in the study, tied the Company for
best among the largest seven automobile insurers in California when measured by
consumer complaints. The Company's California subsidiaries included in the study
had 1.3 million earned cars, as defined by the California Department of
Insurance, in 1999 and only 24 justified complaints, a ratio of 1.8 for every
100,000 cars. The Company had no justified complaints on its homeowners
business.

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

         The Company encounters similar competition in each state and other
lines of business in which it operates outside California.

Reinsurance

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

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

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

         The Company had in place a treaty reinsurance agreement with Swiss Re,
effective October 1, 1998, where risks written under personal umbrella policies
are ceded to Swiss Re on a 100% quota share basis. The maximum coverage was $5
million per risk. This treaty was revised effective October 1, 2000. The revised
treaty provides $4 million coverage in excess of $1 million for each risk.

                                       13
<PAGE>

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

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

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

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

Regulation

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

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

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

         In California, insurance rates have required prior approval since
November 1989.

                                       14
<PAGE>

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

         The Georgia DOI conducted an examination of Mercury Insurance Company
of Georgia and Mercury Indemnity Company of Georgia as of December 31, 1997. The
reports on the results of that examination recommended no adjustments to the
statutory financial statements as filed by the Company. The Illinois DOI
conducted an examination of Mercury Insurance Company of Illinois and Mercury
Indemnity Company of Illinois as of December 31, 1995. The reports on that audit
have recommended no changes to the statutory financial statements as filed. The
Oklahoma DOI conducted an examination of AMI as of December 31, 1998. The exam
resulted in no material findings or recommendations. The state of Texas will
also conduct periodic examinations of AMI and MCM.

         The operations of the Company are dependent on the laws of the state in
which it does business and changes in those laws can materially affect the
revenue and expenses of the Company. The Company retains its own legislative
advocates in California. The Company also makes financial contributions to
officeholders and candidates. In 2000 and 1999, those contributions amounted to
$579,800 and $528,000, respectively. The Company believes in supporting the
political process and intends to continue to make such contributions in amounts
which it determines to be appropriate.

  Insurance Guarantee Association
  -------------------------------

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

  Holding Company Act
  -------------------

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

                                       15
<PAGE>

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

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

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

  Assigned Risks
  --------------

         Automobile liability insurers in California are required to sell bodily
injury liability, property damage liability, medical expense and uninsured
motorist coverage to a proportionate number (based on the insurer's share of the
California automobile casualty insurance market) of those drivers applying for
placement as "assigned risks." Drivers seek placement as assigned risks because
their driving records or other relevant characteristics, as defined by
Proposition 103, make them difficult to insure in the voluntary market. During
the last five years, approximately 0.5% of the direct automobile insurance
premium written by the Company was for assigned risk business. In 2000, assigned
risks represented 0.2% of total automobile direct premiums written and 0.2% of
total automobile direct premium earned. Premium rates for assigned risk business
are set by the California DOI. In October 1990, more stringent rules for gaining
entry into the plan were approved, resulting in a substantial reduction in the
number of assigned risks insured by the Company since 1991. Effective January 1,
1994, the California Insurance Code requires that rates established for the plan
be adequate to support the plan's losses and expenses. The last rate increase
approved by the Commissioner approximated 4.8% and became effective June 1,
1995. The Commissioner approved a rate decrease of 28.3% effective February 1,
1999. Even with the rate decrease, the number of assignments decreased in 1999
and again in 2000. The Company attributes these decreases to the competitive
voluntary market.

  California Automobile Insurance Low Cost Program
  ------------------------------------------------

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

                                       16
<PAGE>

         The LCP is administered by the California Automobile Assigned Risk Plan
("CAARP") which is the same entity that administers the assigned risk program
for California. LCP policies are assigned to insurance companies in proportion
to each insurer's share of the California private passenger automobile insurance
market. The volume and profitability of the program, including the annual
assessment, are insignificant to the consolidated financial results of the
Company. The LCP will expire on January 1, 2004, unless reenacted by the
California legislature.

  Automobile Insurance Rating Factor Regulations
  ----------------------------------------------

         Since 1989, California Proposition 103 has required that property and
casualty insurance rates be approved by the Insurance Commissioner prior to
their use, and that no rate be approved which is excessive, inadequate, unfairly
discriminatory or otherwise in violation of the provisions of the initiative.
The proposition specified four statutory factors required to be applied in
"decreasing order of importance" in determining rates for private passenger
automobile insurance: (1) the insured's driving safety record, (2) the number of
miles the insured drives annually, (3) the number of years of driving experience
of the insured and (4) whatever optional factors are determined by the Insurance
Commissioner to have a substantial relationship to risk of loss and adopted by
regulation. The statute further provided that insurers are required to give at
least a 20% discount to "good drivers," as defined, from rates that would
otherwise be charged to such drivers and that no insurer may refuse to insure a
"good driver."

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

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

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

  California Financial Responsibility Law
  ---------------------------------------

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

         In November 1996 an initiative sponsored by the California Insurance
Commissioner was overwhelmingly approved by the California voters. It provides
that uninsured drivers who are

                                       17
<PAGE>

injured in an automobile accident are able to recover only actual, out-of-pocket
medical expenses and lost wages and are not entitled to receive awards for
general damages, i.e., "pain and suffering." This restriction also applies to
drunk drivers and fleeing felons. The law has helped in controlling loss costs.

  Third Party "Bad Faith" Legislation
  -----------------------------------

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

  California Earthquake Authority
  -------------------------------

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

         Upon the occurrence of a major seismic event, the CEA has the ability
to assess participating companies for losses. These assessments are made after
CEA capital has been expended and are based upon each company's participation
percentage multiplied by the amount of the total assessment. Based upon the most
recent information provided by the CEA, the Company's maximum total exposure to
CEA assessments at April 30, 2000, is approximately $14.6 million.

Item 2.  Properties
         ----------

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

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

         In October 1992, the Company purchased a 158,000 square foot office
building in Brea, California. The Company occupies the entire facility.

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

Item 3.  Legal Proceedings
         -----------------

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

                                       18
<PAGE>

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

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

                       EXECUTIVE OFFICERS OF THE COMPANY

         The following table sets forth certain information concerning the
executive officers of the Company as of March 16, 2001:

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

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

         Mr. Blanton, Executive Vice President, joined the Company in 1966 and
supervised its underwriting activities from 1967 until September 1995. He was
appointed Executive Vice President of Mercury Casualty and Mercury Insurance in
1983 and was named Executive Vice President of Mercury General in 1985. In May
1995 he was named President of the Georgia and Illinois insurance company
subsidiaries and in February 1996 he was elected to the Board of Directors of
those companies. In January 1999 he was named Chairman of the Board of AMIC and
President in April 2000. Mr. Blanton has over 40 years of experience in
underwriting and other aspects of the property and casualty insurance business.

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

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

         Mr. Kitzmiller, Vice President in charge of Underwriting, has been
employed by the Company in the underwriting department since 1972. In August
1991 he was appointed Vice

                                       19
<PAGE>

President of Underwriting of Mercury General and has supervised the underwriting
activities of the Company since early 1996.

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

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

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

                                    PART II

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

Price Range of Common Stock

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

         1999                                                 High        Low
                                                              ----        ---

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

         2000                                                 High        Low
                                                              ----        ---

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

         2001                                                 High        Low
                                                              ----        ---

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

Dividends

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

                                       20
<PAGE>

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

         As a holding company, Mercury General is largely dependent upon
dividends from its subsidiaries to pay dividends to its shareholders. These
subsidiaries are subject to state laws that restrict their ability to distribute
dividends. The state laws permit a casualty insurance company to pay dividends
and advances within any 12-month period, without any prior regulatory approval,
in an amount up to the greater of 10% of statutory earned surplus at the
preceding December 31, or net income for the calendar year preceding the date
the dividend is paid. Under this test, the direct insurance subsidiaries of the
Company are entitled to pay dividends to Mercury General during 2001 of up to
approximately $94 million. See Note 11 of Notes to Consolidated Financial
Statements and "Business -- Regulation -- Holding Company Act."

Shareholders of Record

         The approximate number of holders of record of the Company's common
stock as of March 15, 2001 was 262. The approximate number of beneficial holders
as of March 15, 2001 was 7,500 according to the Bank of New York, the Company's
transfer agent.

                                       21
<PAGE>

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

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

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

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

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

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

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

                                       22
<PAGE>

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

Overview
- --------

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

          The Company operates primarily in the state of California, which was
the only state it produced business in prior to 1990. The Company expanded its
operations into Georgia and Illinois in 1990. With the acquisition of American
Fidelity Insurance Group ("AFI")in December 1996, now American Mercury Insurance
Group ("AMI"), the Company expanded into the states of Oklahoma and Texas. The
Company further expanded its operations into the state of Florida during 1998.
Further expansion into Texas occurred with the Concord Insurance Services, Inc.
transaction in December 1999 and the Mercury County Mutual Insurance Company
("MCM") transaction in September 2000.

          During 2000, approximately 91% of the Company's direct premiums
written were derived from California.

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

          In February 1994, the California Insurance Commissioner approved new
rates which were designed to improve the Company's competitive position for new
insureds. These rate changes, which became effective on May 1, 1994, provided
for decreases in premium rates for new insureds. Several rate modifications were
approved and made effective subsequent to May 1, 1994. A rate change made April
1, 1998, reduced rates by approximately 7% and was primarily made to improve
Mercury's competitive position in the marketplace. Except for the April 1, 1998
rate change, the rate changes made over the last several years have been
substantially revenue-neutral. The rate change made effective May 1, 1994
resulted in a substantial increase in new business being submitted to the
Company. Since March 31, 1994, Private Passenger Automobile ("PPA") policies in
force in California have increased from approximately 300,000 to 771,000 at
December 31, 2000, an annual rate of increase of approximately 15%. Policy count
growth for the year 2000 was down negligibly from 1999 reflecting increased
competition in the marketplace.

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

          The Company submitted a proposed rating plan in response to these
regulations in March

                                       23
<PAGE>

1997. The Company's plan was approved by the California DOI and became effective
October 1, 1997. Although the rate changes produced some minor dislocations,
implementation of the new plan has not materially changed the Company's overall
competitive position or its profitability.

Results of Operations

         Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
         ---------------------------------------------------------------------

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

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

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

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

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

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

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

                                       24
<PAGE>

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

         The income tax provision of $19.2 million in 2000 represented an
effective rate of 14.9%, compared with an effective rate of 20.7% in 1999. The
lower rate in 2000 is primarily attributable to the increased proportion of
investment income which consists primarily of tax-exempt interest and tax
sheltered dividend income in contrast to underwriting income which is taxed at
the full corporate rate of 35%.

         Net income in 2000 was $109.4 million or $2.02 per share (diluted),
compared with $133.7 or $2.44 per share (diluted), in 1999. Diluted per share
results are based on 54.3 million average shares in 2000 and 54.8 million shares
in 1999. Basic per share results were $2.02 in 2000 and $2.45 in 1999.

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

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

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

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

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

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

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


         The effective tax rate on investment income was 9.8% in 1999, compared
to 9.3% in 1998.

                                       25
<PAGE>

The higher tax rate in 1999 reflects a modest shift in the mix of the Company's
equity investments from non-taxable to taxable issues. The redemption of bonds
acquired during higher interest periods has been a negative influence on
realized yields in each of the last several years. Bonds matured and called in
1999 totaled $49.2 million, compared to $65.3 million in 1998.

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

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

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

Liquidity and Capital Resources

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

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

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

         As of December 31, 2000, the average rating of the $1,444.0 million
bond portfolio (at amortized cost) was AA-, while the average effective
maturity, giving effect to anticipated early call provisions, approximates 9.4
years. The modified duration of the bond portfolio at year-end was 6.8 years.
Duration measures the length of time it takes to receive all cash flows produced
by a bond, including reinvestment of interest income. Because it measures four
factors (maturity, coupon rate, yield and call terms) which determine
sensitivity to changes in interest rates, modified duration is considered a much
better indicator of price volatility than simple

                                       26
<PAGE>

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

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

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

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

         The Company had outstanding debt at December 31, 2000 of $108 million.
Of this amount, $75 million has been borrowed under a three year revolving
credit bank loan and is due November 21, 2001. The loan agreement requires the
Company to meet numerous affirmative and negative covenants. The proceeds of the
loan were used to repay a prior loan and to acquire AMI, with the balance
contributed as capital to AMI. The loan agreement may be extended annually for
additional periods of one year each to maintain the three year maturity date.
Due to an increase in interest rate spreads in the loan syndication market
during 1999 and 2000, the Company did not extend the maturity for an additional
one year period. The Company will reevaluate refinancing or extending the
current 2001 maturity date of this loan during 2001. The interest rate is
variable and is optionally related to the Federal Funds rate, Bank of New York
rate (prime rate) or the Eurodollar London Interbank rate (LIBOR). Based on
rates effective at December 31, 2000, the net interest cost on the loan
approximates 6.96%.

         The Company also maintains a $30 million line of credit, of which $27
million was drawn at December 31, 2000 and is due October 26, 2001. The line of
credit may be used to fund the Company's stock repurchase program authorized by
the Board of Directors in August 1998 as well as for general corporate purposes.
The interest rate is variable and is optionally related to the Federal Funds
rate or the Eurodollar London Interbank rate (LIBOR). Based on rates effective
at December 31, 2000, the net interest cost on the loan approximates 7.51%. The
loan covenants are similar to the Company's $75 million loan discussed above.

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

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

         Under the stock repurchase program, the Company may purchase over a
one-year period up to $200 million of Mercury General's common stock. The
purchases may be made from time to time in the open market at the discretion of
management. The program will be funded by the sale of

                                       27
<PAGE>

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

         In March 1994, the Company's Employee Stock Ownership Plan ("the Plan")
purchased 322,000 shares of Mercury General's common stock in the open market at
a price of $14.875 per share, adjusted for the two-for-one stock split effective
September 16, 1997. The purchases were funded by a five year term bank loan of
$5.0 million to the Plan which is guaranteed by the Company. The shares have
been allocated to employees over the amortization period of the loan, with the
initial allocation made in December 1994. The remaining balance of the loan of
$2.0 million was retired in March 1998 with the proceeds of contributions to the
Plan by the Company for the year 1997, and the remaining unallocated shares were
credited to employees' ESOP balances at December 31, 1997. In August 1998, the
Plan purchased 115,000 shares of Mercury General's common stock in the open
market at a price of $43.05 per share. The purchases were funded by a five year
term bank loan of $5 million to the Plan which is guaranteed by the Company. The
shares are being allocated to the employees over a five-year period, with the
initial allocation made in December 1998. Since dividends on unallocated shares
held by the Plan are tax deductible if they are used for debt service, as are
Company contributions to the Plan, the net, after-tax interest cost to the
Company for the borrowed funds used for the Plan stock purchase is less than the
effective rate of interest on the loan, which, in 2000, was 6.72%.

         In December 1993, the NAIC adopted a risk-based capital formula for
casualty insurance companies which establishes recommended minimum capital
requirements for casualty companies. The formula has been designed to capture
the widely varying elements of risks undertaken by writers of different lines of
insurance having differing risk characteristics, as well as writers of similar
lines where differences in risk may be related to corporate structure,
investment policies, reinsurance arrangements and a number of other factors. The
Company has estimated the Risk-Based Capital Requirements of each of its
insurance subsidiaries as of December 31, 2000. Each of the Companies'
policyholders' surplus exceeded the highest level of minimum required capital.

         As of December 31, 2000, the Company had no material commitments for
capital expenditures.

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

         Upon the occurrence of a major seismic event, the CEA has the ability
to assess participating companies for losses. These assessments are made after
CEA capital has been expended and are based upon each company's participation
percentage multiplied by the amount of the total assessment. Based upon the most
current information provided by the CEA, the Company's maximum total exposure to
CEA assessments at April 30,2000, is approximately $14.6 million.

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

                                       28
<PAGE>

insurer's annual net premiums written to statutory policyholders' surplus should
not exceed 3.0 to 1. Based on the combined surplus of all of the Insurance
Companies of $954.8 million at December 31, 2000, and net written premiums for
the twelve months ended on that date of $1,272.4 million, the ratio of writings
to surplus was approximately 1.3 to 1.

         Statement of Financial Accounting Standards No. 133 (SFAS NO. 133)
"Accounting for Derivative Instruments and Hedging Activities" became effective
for fiscal years beginning after June 15, 1999. Statement of Financial
Accounting Standards No. 137 (SFAS No. 137) "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133" defers the effective date of SFAS 133 to fiscal years
beginning after June 15, 2000. This standard, adopted by the Company on January
1, 2001 will have no impact on the Consolidated Financial Statements.


Item 7A. Quantitative and Qualitative Disclosures about Market Risks
         -----------------------------------------------------------

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

         The Company invests its assets primarily in fixed maturity investments,
which at December 31, 2000 comprised 84% of total investments at market value.
Tax-exempt bonds represent 89% of the fixed maturity investments with the
remaining amount consisting of sinking fund preferred stocks and taxable bonds.
Equity securities, consisting primarily of preferred stocks, account for 14% of
total investments at market. The remaining 2% of the investment portfolio
consists of highly liquid short-term investments which are primarily U.S.
Treasury backed overnight repurchase agreements and short-term money market
funds.

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

         The Company has historically invested in fixed maturity investments
with a goal towards maximizing after-tax yields and holding assets to the
maturity or call date. Since assets with longer maturity dates tend to produce
higher current yields, the Company's investment philosophy has resulted in a
portfolio with a moderate duration. During 2000, interest rates declined, which
increased the value of the Company's fixed income investments, resulting in a
total pretax unrealized gain of $45.6 million on the fixed maturity holdings.

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

         At December 31, 2000, the Company's strategy for equity investments is
a buy and hold strategy which focuses primarily on current income with a
secondary focus on capital appreciation. The value of the equity investments
consists of $94.6 million in common stocks and $157.9 million in non-sinking
fund preferred stocks. The common stock equity assets are

                                       29
<PAGE>

typically valued for future economic prospects as perceived by the market. The
non-sinking fund preferred stocks are typically valued using credit spreads to
U. S. Treasury benchmarks. This causes them to be comparable to fixed income
securities in terms of interest rate risk.

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

         The remainder of the equity portfolio, representing 5% of total
investments at market value, consists primarily of public utility common stocks.
These assets are defensive in nature and therefore have low volatility to
changes in market price as measured by their Beta. Beta is a measure of a
security's systematic (non-diversifiable) risk, which is the percentage change
in an individual security's return for a 1% change in the return of the market.
The average Beta for the Company's common stock holdings was 0.46. Based on a
hypothetical 20% reduction in the overall value of the stock market, the fair
value of the common stock portfolio would decrease by approximately $8.7
million.

Forward-looking statements

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

                                       30
<PAGE>

Quarterly Data

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

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

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

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

                                       31
<PAGE>

Item 8.  Financial Statements
         --------------------

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                          Page

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

                                       32
<PAGE>

                         INDEPENDENT AUDITORS' REPORT


The Board of Directors
Mercury General Corporation:


         We have audited the accompanying consolidated balance sheets of Mercury
General Corporation and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, comprehensive income, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mercury
General Corporation and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.



KPMG LLP



Los Angeles, California
February 2, 2001

                                       33
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                          DECEMBER 31, 2000 AND 1999

             AMOUNTS EXPRESSED IN THOUSANDS, except share amounts

<TABLE>
<CAPTION>

                                    ASSETS

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

                     LIABILITIES AND SHAREHOLDERS' EQUITY


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

  See accompanying notes to consolidated financial statements.

                                       34
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME

                      Three years ended December 31, 2000

             Amounts expressed in thousands, except per share data


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

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

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

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

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

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

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

Diluted earnings per share......................    $     2.02         2.44  $     3.21
                                                     =========    =========   =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       35
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                      Three Years ended December 31, 2000

                        Amounts expressed in thousands

<TABLE>
<CAPTION>
                                                            2000         1999       1998
                                                            ----         ----       ----
<S>                                                        <C>         <C>        <C>
Net income..............................................   $109,366    $133,709   $177,526

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

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

Comprehensive income, net of tax........................   $179,708    $ 43,042   $182,591
                                                            =======     =======    =======
</TABLE>

See accompanying notes to consolidated financial statements

                                       36
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

                      Three years ended December 31, 2000

                        Amounts expressed in thousands

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

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

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

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

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

       Total shareholders' equity.............. $1,032,905  $909,591  $917,375
                                                 =========   =======   =======
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       37
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                      Three Years Ended December 31, 2000

                        Amounts expressed in thousands

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

                                  (Continued)

                                       38
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                      Three Years Ended December 31, 2000

                        Amounts expressed in thousands


                                  (Continued)

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

  See accompanying notes to consolidated financial statements.

                                       39
<PAGE>

                           MERCURY GENERAL CORPORATION
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2000 and 1999


(1)  Significant Accounting Policies

  Principles of Consolidation and Presentation

     The Company is primarily engaged in the underwriting of private passenger
automobile insurance in the state of California. In 2000 and 1999 over 90% of
the net written premiums were from California.

     The consolidated financial statements include the accounts of Mercury
General Corporation (the Company or MGC) and its wholly-owned subsidiaries,
Mercury Casualty Company, Mercury Insurance Company, California Automobile
Insurance Company, California General Underwriters Insurance Company, Inc.,
Mercury Insurance Company of Georgia, Mercury Insurance Company of Illinois,
Mercury Indemnity Company of Georgia, Mercury Indemnity Company of Illinois,
American Mercury Insurance Company (AMIC), Cimarron Insurance Company, Inc., AFI
Management Company, Inc. (AFIMC), American Mercury Lloyds Insurance Company
(AML) and Mercury County Mutual Insurance Company (MCM). AML is not owned by
MGC, but is controlled by MGC through its attorney-in-fact, AFIMC. MCM is not
owned by the Company but is controlled through a management contract. American
Mercury MGA, Inc. (AMMGA),is a wholly owned subsidiary of AMIC. The 1998
financial statements include the results of Cimarron Insurance Company through
June 5, 1998, the date it was sold to an unrelated party. This sale is discussed
further in Note 10. Effective October 31, 1999 the financial statements also
include Concord Insurance Services, Inc., (Concord) a Texas insurance agency
controlled by MGC. Concord is discussed further in Note 8. The results of MCM
are included in the financial statements effective September 30, 2000. MCM is
discussed further in Note 9. All of the subsidiaries as a group, including AML
and MCM, but excluding AFIMC, AMMGA, and Concord, are referred to as the
Insurance Companies. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP) which differ in
some respects from those filed in reports to insurance regulatory authorities.
All significant intercompany balances and transactions have been eliminated.

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

                                       40
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                          December 31, 2000 and 1999

(1)  Significant Accounting Policies (Continued)

  Investments

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

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

     Temporary unrealized investment gains and losses on securities available
for sale are credited or charged directly to shareholders' equity as accumulated
other comprehensive income, net of applicable tax effects. When a decline in
value of fixed maturities or equity securities is considered other than
temporary, a loss is recognized in the consolidated statements of income.
Realized gains and losses are included in the consolidated statements of income
based upon the specific identification method. Included in realized losses for
1999 is a $6.0 million write-down of a preferred stock investment that became
other than temporarily impaired during the third quarter of 1999. As the result
of a liquidating dividend, the Company realized a gain of $347,000 on the same
equity security in 2000.

  Fair Value of Financial Instruments

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

                                       41
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                          December 31, 2000 and 1999

(1)  Significant Accounting Policies (Continued)

  Premium Income Recognition

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

     Net premiums written during 2000, 1999 and 1998 were $1,272,447,000,
$1,206,171,000 and $1,144,051,000, respectively.

     One agent produced direct premiums written of approximately 18%, 19% and
19% of the Company's total direct premiums written during 2000, 1999 and 1998,
respectively. The owner of this agency sold it during 1998 to a large national
broker. No other agent accounted for more than 2% of direct premiums written.

  Premium Notes

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

  Deferred Policy Acquisition Costs

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

                                       42
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                          December 31, 2000 and 1999

(1)  Significant Accounting Policies (Continued)

  Losses and Loss Adjustment Expenses

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

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

  Depreciation

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

  Earnings per Share

     During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share", which requires
presentation of basic and diluted earnings per share for all publicly traded
companies effective for fiscal years ending after December 15, 1997. Note 16
contains the required disclosures which make up the calculation of basic and
diluted earnings per share.

                                       43
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                          December 31, 2000 and 1999

(1)  Significant Accounting Policies (Continued)

  Comprehensive Income

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

  Segment Reporting

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

  Recently Issued Accounting Standards

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

     Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" is effective for
financial statements beginning after December 15, 1998. SOP 98-1 requires that
the cost of internally developed computer software be capitalized. Implemented
in 1999, SOP 98-1 provided less than a $.01 contribution to diluted earnings per
share in both 2000 and 1999.

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

                                       44
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                          December 31, 2000 and 1999

(1)  Significant Accounting Policies (Continued)

Consolidated Financial Statements.

  Income Taxes

     Deferred income taxes result from temporary differences in the recognition
of income and expense for tax and financial reporting purposes. The Company
accounts for income taxes in accordance with Statement of Financial Accounting
Standards No. 109 (SFAS No. 109),"Accounting for Income Taxes".

  Reinsurance

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

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

  Statements of Cash Flows

     At December 31, 2000, the cash balance includes $3,000,000 of restricted
cash related to the Concord transaction (See Note 8).

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

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

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

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

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

                                       45
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                          December 31, 3000 and 1999

(1)  Significant Accounting Policies (Continued)

  Stock-Based Compensation

     The Company accounts for stock-based compensation under the accounting
methods prescribed by Accounting Principles Board (APB) Opinion No. 25, as
allowed by Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation"(SFAS No. 123). Disclosure of stock-based compensation
determined in accordance with SFAS No. 123 is presented in Note 15.

 Reclassifications

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

(2)  Investments and Investment Income

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

<TABLE>
<CAPTION>
                                                       Year ended December 31,
                                                       (Amounts in thousands)
                                                    -----------------------------
                                                       2000       1999      1998
                                                       ----       ----      ----
<S>                                                 <C>        <C>        <C>
Interest and dividends on fixed maturities........  $ 86,644  $  78,559   $75,602
Dividends on equity securities....................    17,136     18,885    18,027
Interest on short-term cash investments...........     3,380      2,840     3,460
                                                     -------    -------    ------
       Total investment income....................   107,160    100,284    97,089
Investment expense................................       694        910       920
                                                     -------   --------    ------
       Net investment income......................  $106,466  $  99,374   $96,169
                                                     =======   ========    ======

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


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

                                       46
<PAGE>

                          MERCURY GENERAL CORPORATION

                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                          December 31, 2000 and 1999

(2)  Investments and Investment Income (Continued)

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

<TABLE>
<CAPTION>
                                                        Year ended December 31,
                                                        (Amounts in thousands)
                                                    ------------------------------
                                                       2000       1999      1998
                                                       ----       ----      ----
<S>                                                 <C>       <C>         <C>
Fixed maturities available for sale:
       Gross realized gains......................   $ 1,740   $    865    $   394
       Gross realized losses.....................      (908)      (259)      (370)
                                                    -------   --------    -------
             Net.................................   $   832   $    606    $    24
                                                    =======   ========    =======

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

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

<CAPTION>
                                                       Year ended December 31,
                                                        (Amounts in thousands)
                                                    -----------------------------
                                                       2000       1999      1998
                                                       ----       ----      ----
<S>                                                 <C>       <C>         <C>
Net increase (decrease) in net unrealized
investment gains and losses:
       Fixed maturities available for sale........  $77,288   $(111,179)  $12,076
       Income tax expense (benefit)...............   27,051     (38,912)    4,227
                                                     ------     -------    ------
                                                    $50,237   $ (72,267)  $ 7,849
                                                     ======     =======    ======

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

                                       47
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                          December 31, 2000 and 1999

(2)      Investments and Investment Income (Continued)

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

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

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

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

The amortized costs and estimated market values of investments in fixed
maturities available for sale as of December 31, 2000 are as follows:


<TABLE>
<CAPTION>
                                                             Gross       Gross    Estimated
                                              Amortized   Unrealized  Unrealized   Market
                                                Cost        Gains       Losses     Value
                                              ---------   ----------  ----------  --------
                                                          (Amounts in thousands)
<S>                                        <C>           <C>         <C>       <C>
U.S. Treasury securities and
  obligations of U.S. government
  corporations and agencies..............  $    7,897    $    187    $    16   $    8,068
Obligations of states and political
  subdivisions...........................   1,315,024      57,686     13,318    1,359,392
Corporate securities.....................     121,071       1,838      1,110      121,799
Redeemable preferred stock...............      19,905         607        297       20,215
                                           ----------    --------    -------   ----------
    Totals...............................  $1,463,897    $ 60,318    $14,741   $1,509,474
                                           ==========    ========    =======   ==========
</TABLE>

                                       48
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                          December 31, 2000 and 1999

(2)    Investments and Investment Income (Continued)

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


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

       At December 31, 2000, bond holdings rated below investment grade totaled
approximately 1% of total investments. The average Standard and Poor's rating of
the bond portfolio is AA-. The amortized cost and estimated market value of
fixed maturities available for sale at December 31, 2000 by contractual
maturity, are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.

                                                                     Estimated
                                                         Amortized    Market
                                                           Cost       Value
                                                        ---------    -------
                                                        (Amounts in thousands)
                                                        ---------------------
Fixed maturities available for sale:
   Due in one year or less ........................  $     6,478   $     6,530
   Due after one year through five years...........       90,899        92,324
   Due after five years through ten years..........      157,491       160,819
   Due after ten years.............................    1,209,029     1,249,801
                                                     -----------   -----------
                                                     $ 1,463,897   $ 1,509,474
                                                     ===========   ===========

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

                                       49
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                          December 31, 2000 and 1999

(3)    Fixed Assets

  A summary of fixed assets follows:

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

(4)    Deferred Policy Acquisition Costs

       Policy acquisition costs incurred and amortized are as follows:

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

(5)    Notes Payable

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

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

                                       50
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                          December 31, 2000 and 1999

(5)   Notes Payable (Continued)

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

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

(6)   Income Taxes

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

                                                      Year ended December 31,
                                                      (Amounts in thousands)
                                                    --------------------------
                                                    2000      1999       1998
                                                    ----      ----       ----
       Federal
             Current...........................  $ 20,270   $ 36,535   $ 57,237
             Deferred..........................    (1,236)    (2,123)       190
                                                 --------   --------   --------
                                                 $ 19,034   $ 34,412   $ 57,427
                                                 ========   ========   ========
       State
             Current...........................  $    155   $    418   $    327
             Deferred..........................        --         --         --
                                                 --------   --------   --------
                                                 $    155   $    418   $    327
                                                 ========   ========   ========
       Total
             Current...........................  $ 20,425   $ 36,953   $ 57,564
             Deferred..........................    (1,236)    (2,123)       190
                                                 --------   --------   --------
                  Total........................  $ 19,189   $ 34,830   $ 57,754
                                                 ========   ========   ========

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

                                                        Year ended December 31,
                                                        (Amounts in thousands)
                                                      ------------------------
                                                      2000      1999      1998
                                                      ----      ----      ----
Computed tax expense at 35% .....................  $ 44,994  $ 58,989   $82,348
Tax-exempt interest income.......................   (27,295)  (25,398)  (23,496)
Dividends received deduction.....................    (3,152)   (3,953)   (5,437)
Reduction of losses incurred deduction for 15% of
 income on securities purchased after
 August 7, 1986                                       4,496     4,348     4,245
Other, net.......................................       146       844        94
                                                   --------  --------   -------
     Income tax expense .........................  $ 19,189  $ 34,830   $57,754
                                                   ========  ========   =======

                                       51
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                          December 31, 2000 and 1999

(6)    Income Taxes (Continued)

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

                                                           December 31,
                                                      (Amounts in thousands)
                                                      ----------------------
                                                         2000        1999
                                                         ----        ----
Deferred tax assets
       20% of net unearned premium..................   $ 25,920     24,264
       Tax asset on net unrealized loss on
        securities carried at market value..........         --     21,253
       Discounting of loss reserves and salvage
        and subrogation recoverable for tax
        purposes....................................      9,445      8,383
       Other deferred tax assets....................      5,966      3,288
                                                       --------   --------
         Total gross deferred tax assets............     41,331     57,188
          Less valuation allowance..................         --         --
                                                       --------   --------
          Net deferred tax assets...................     41,331     57,188
                                                       --------   --------

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

                                       52
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                          December 31, 2000 and 1999

(7) Reserves for Losses and Loss Adjustment Expenses

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

                                                      Year ended December 31,
                                                      (Amounts in thousands)
                                                    -------------------------
                                                    2000       1999       1998
                                                    ----       ----       ----
    Gross reserves for losses and loss
     adjustment expenses at beginning of year..  $434,843   $405,976   $409,061
    Less reinsurance recoverable...............   (16,043)   (20,160)   (22,791)
                                                 --------   --------   --------
    Net reserves, beginning of year............   418,800    385,816    386,270

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

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

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

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

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

                                       53
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                          December 31, 2000 and 1999

(8) Concord Transaction

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

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

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

(9)    Elm County Mutual Insurance Company Transaction

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

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

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

(10)   Sale of Subsidiary

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

                                       54
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                          December 31, 2000 and 1999

(10)   Sale of Subsidiary (Continued)

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

(11)   Dividend Restrictions

       The Insurance Companies are subject to the financial capacity guidelines
established by the Office of the Commissioner of Insurance of their domiciliary
states. The payment of dividends from statutory unassigned surplus of the
Insurance Companies is restricted, subject to certain statutory limitations. For
the year 2001, the direct insurance subsidiaries of the Company are permitted to
pay approximately $94 million in dividends to the Company without the prior
approval of the Commissioner of Insurance of the state of domicile. The above
statutory regulations may have the effect of indirectly limiting the ability of
the Company to pay dividends. During 2000 and 1999, the Insurance Companies paid
dividends to Mercury General Corporation of $62.5 million and $61 million,
respectively.

(12)   Statutory Balances and Accounting Practices

       The Insurance Companies prepare their statutory financial statements in
accordance with accounting practices prescribed or permitted by the various
state insurance departments. Prescribed statutory accounting practices include a
variety of publications of the National Association of Insurance Commissioners
(NAIC), as well as state laws, regulations, and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices not
so prescribed. As of December 31, 2000, there were no material permitted
statutory accounting practices utilized by the Insurance Companies.

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

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

  Codification

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

                                       55
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                          December 31, 2000 and 1999

(12)   Statutory Balances and Accounting Practices (Continued)

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

(13)   Commitments and Contingencies

       The Company is obligated under various noncancellable lease agreements
providing for office space and equipment rental that expire at various dates
through the year 2008. Total rent expense under these lease agreements, all of
which are operating leases, was $4,138,000, $3,320,000 and $2,074,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.

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

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

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

(14)   Profit Sharing Plan

       The Company, at the option of the Board of Directors, may make annual
contributions to an employee profit sharing plan. The contributions are not to
exceed the greater of the Company's net income for the plan year or its retained
earnings at that date. In addition, the annual contributions may not exceed an
amount equal to 15% of the compensation paid or accrued during the year to all
participants under the plan. The annual contribution was $1,100,000 for each
plan year ended December 31, 2000, 1999 and 1998.

       The Profit Sharing Plan also includes an option for employees to make
salary deferrals under Section 401(k) of the Internal Revenue Code. Company
matching contributions, at a rate set by the Board of Directors, totaled
$1,805,000, $1,878,000, and $1,648,000 for the plan years ended December 31,
2000, 1999 and 1998.

                                       56
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                          December 31, 2000 and 1999

(14) Profit Sharing Plan (Continued)

     Effective March 11, 1994 the Profit Sharing Plan also includes a leveraged
employee stock ownership plan ("ESOP") that covers substantially all employees.
The Company makes annual contributions to the ESOP equal to the ESOP's debt
service less dividends received by the ESOP. Dividends received by the ESOP on
unallocated shares are used to pay debt service and the ESOP shares serve as
collateral for its debt. As the debt is repaid, shares are released from
collateral and allocated to employees, based on the proportion of debt service
paid in the year. The Company accounts for its ESOP in accordance with Statement
of Position 93-6.

     Accordingly, the debt of the ESOP, which was $3,000,000, $4,000,000, and
$5,000,000 at December 31, 2000, 1999 and 1998, respectively, is recorded in the
balance sheet as other liabilities. The shares pledged as collateral are
reported as unearned ESOP compensation in the shareholders' equity section of
the balance sheet. As shares are committed to be released from collateral, the
Company reports compensation expense equal to the market price of the shares,
and reduces unearned ESOP compensation by the original cost of the shares. The
difference between the market price and cost of the shares is charged to common
stock. As shares are committed to be released from collateral, the shares become
outstanding for earnings-per-share computations. Dividends on allocated ESOP
shares are recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of accrued interest. ESOP
compensation expense was $642,000, $746,000, and $970,000 in 2000, 1999 and
1998, respectively.

     The ESOP shares as of December 31 were as follows:

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

(15) Common Stock

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

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

     In May 1995 the Company adopted The 1995 Equity Participation Plan (the
"1995 Plan") which succeeds the 1985 Plan. Under the 1995 Plan, 5,400,000 shares
of Common Stock are

                                       57
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                          December 31, 2000 and 1999

(15)   Common Stock (Continued)

authorized for issuance upon exercise of options, stock appreciation rights and
other awards, or upon vesting of restricted or deferred stock awards. During
1995, the Company granted incentive stock options under both the 1995 Plan and
the 1985 Plan. The options granted become exercisable 20% per year beginning one
year from the date granted and were granted at the market price on the date of
the grant. The options expire in 10 years. At December 31, 2000 no awards other
than options have been granted.

       As explained in Note 1, the Company applies APB Opinion No. 25 in
accounting for its stock option plan. Accordingly, no compensation cost has been
recognized in the Consolidated Statements of Income. Had compensation cost for
the Company's Plans been determined based on the fair value at the grant dates
consistent with the method of SFAS No. 123, the Company's net income would have
been reduced by $395,000, $542,000 and $454,000 in 2000, 1999 and 1998,
respectively, and earnings per share (basic and diluted) would have been reduced
by $.01 in 2000, 1999 and 1998. Calculations of the fair value under the method
prescribed by SFAS No. 123 were made using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants in 2000,
1999 and 1998: dividend yield of 2.2 percent for 2000, 3.8 percent for 1999 and
2.0 percent for 1998, expected volatility of 33.4 percent in 2000, 31.6 percent
in 1999 and 32.7 percent for 1998 and expected lives of 7 years for all years.
The risk-free interest rates used were 6.4 percent for the options granted
during 2000, 5.6 percent for the options granted during 1999 and 5.4 percent for
the options granted during 1998.

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

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

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

                                       58
<PAGE>

                          MERCURY GENERAL CORPORATION
                               AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)

                          December 31, 2000 and 1999

(15)   Common Stock (Continued)

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


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

(16)   Earnings Per Share

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

<TABLE>
<CAPTION>
                                2000                             1999                        1998
                    -----------------------------   -----------------------------  ----------------------------
                      (000's)     (000's)              (000's)   (000's)              (000's)   (000's)
                                  Weighted                       Weighted                       Weighted
                      Income      Shares               Income    Shares               Income     Shares
                      (Numera-    (Denomi- Per-Share   (Numera-  (Denomi-   Per-Share (Numera- (Denomi-   Per-Share
                        tor)       nator)    Amount      tor)     nator)     Amount     tor)     nator)     Amount
                      ---------  --------- ---------  --------- ----------  -------- --------- ---------- ---------
<S>                 <C>          <C>       <C>        <C>       <C>         <C>      <C>       <C>        <C>
Basic EPS
- ---------
Income available to
 common stockholders  $ 109,366    54,100    $2.02    $133,709    54,596     $2.45    $177,526    55,003    $3.23

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

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

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

                                       59
<PAGE>

Item 9.    Changes in and Disagreements with Accountants on Accounting and
           ---------------------------------------------------------------
           Financial Disclosure
           --------------------

       None.

                                   PART III

Item 10.     Directors and Executive Officers of the Registrant
             --------------------------------------------------

Item 11.     Executive Compensation
             ----------------------

Item 12.     Security ownership of Certain Beneficial Owners and Management
             --------------------------------------------------------------

Item 13.     Certain Relationships and Related Transactions
             ----------------------------------------------

       Information regarding executive officers of the Company is included in
Part I. For this and other information called for by Items 10, 11, 12 and 13,
reference is made to the Company's definitive proxy statement for its Annual
Meeting of Shareholders, to be held on May 9, 2001, which will be filed with the
Securities and Exchange Commission within 120 days after December 31, 2000, and
which is incorporated herein by reference.

                                    PART IV

Item 14.     Exhibits, Financial Statement Schedules and Reports on Form 8-K
             ---------------------------------------------------------------

       (a)   The following documents are filed as a part of this report:

       1.  Financial Statements: The Consolidated Financial Statements for the
year ended December 31, 2000 are contained herein as listed in the Index to
Consolidated Financial Statements on page 32.

       2.  Financial Statement Schedules:

                                     Title
                                     -----

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

       Schedule IV -- Reinsurance

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

                                       60
<PAGE>

   3.    Exhibits:

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

                                       61
<PAGE>

       10.32###    Multiple Line Excess of Loss Reinsurance Agreement between
                   Swiss Reinsurance America Corporation and Mercury Casualty
                   Company, effective January 1, 1999.
       10.33###    Multiple Line Excess of Loss Reinsurance Agreement between
                   Swiss Reinsurance America Corporation and American Mercury
                   Insurance Company, effective January 1, 2000.
       10.34       Credit agreement dated as of October 27, 2000 between Mercury
                   General Corporation and Bank of America, N.A.
       10.35       Management Agreement effective January 1, 2001 between
                   Mercury Insurance Services LLC and Mercury Casualty Company,
                   Mercury Insurance Company, California Automobile Insurance
                   Company and California General Underwriters Insurance
                   Company.
       10.36       Management Agreement effective January 1, 2001 between
                   Mercury Insurance Services LLC and American Mercury Insurance
                   Company.
       10.37       Management Agreement effective January 1, 2001 between
                   Mercury Insurance Services LLC and Mercury Insurance Company
                   of Georgia.
       10.38       Management Agreement effective January 1, 2001 between
                   Mercury Insurance Services LLC and Mercury Indemnity Company
                   of Georgia.
       10.39       Management Agreement effective January 1, 2001 between
                   Mercury Insurance Services LLC and Mercury Insurance Company
                   of Illinois.
       10.40       Management Agreement effective January 1, 2001 between
                   Mercury Insurance Services LLC and Mercury Indemnity Company
                   of Illinois.
       21.1  Subsidiaries of the Company.
       23.1  Accountants' Consent.
       27.1  Financial Data Schedule.

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

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

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

###  This document was filed as an exhibit to Registrant's Form 10-K for the
     fiscal year ended December 31, 1999 and is incorporated herein by this
     reference.

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

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

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

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

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

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

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

     (b)   Reports on Form 8-K:
           None

                                       62
<PAGE>

                                  SIGNATURES

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

                                         MERCURY GENERAL CORPORATION



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

March 16, 2001

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

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

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

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

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

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

                                       63
<PAGE>

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


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

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

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

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

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

                                       64
<PAGE>

         INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES



The Board of Directors
Mercury General Corporation:


       Under date of February 2, 2001, we reported on the consolidated balance
sheets of Mercury General Corporation and subsidiaries as of December 31, 2000
and 1999, and the related consolidated statements of income, comprehensive
income, shareholders' equity and cash flows for each of the years in the
three-year period ended December 31, 2000, as contained in the annual report on
Form 10-K for the year 2000. In connection with our audits of the aforementioned
consolidated financial statements, we also have audited the related financial
statement schedules as listed under Item 14(a)2. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statement schedules based on our
audits.

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








KPMG LLP





Los Angeles, California
February 2, 2001

                                       S-1
<PAGE>

                                                               SCHEDULE I

                          MERCURY GENERAL CORPORATION

                            SUMMARY OF INVESTMENTS
                   OTHER THAN INVESTMENTS IN RELATED PARTIES

                               December 31, 2000

                              Amounts in Thousands

<TABLE>
<CAPTION>
                                                                       Amount at
                                                                      which shown
                                                                        in the
Type of Investment                                Cost      Value    balance sheet
- ------------------                                ----      -----    -------------
<S>                                              <C>       <C>      <C>
Fixed maturities available for sale
    Bonds:
      U.S. Government.......................  $    7,897  $    8,068    $    8,068
      States, municipalities................   1,315,024   1,359,392     1,359,392
      All other corporate bonds.............     121,071     121,799       121,799
    Redeemable preferred stock..............      19,905      20,215        20,215
                                               ---------   ---------     ---------

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

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

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

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

      Total investments.....................  $1,747,467                $1,794,961
                                               =========                 =========
</TABLE>

                                      S-2
<PAGE>

                                                                  SCHEDULE I

                           MERCURY GENERAL CORPORATION

                             SUMMARY OF INVESTMENTS
                    OTHER THAN INVESTMENTS IN RELATED PARTIES

                                December 31, 1999

                              Amounts in Thousands

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

      Total fixed maturities available for
        sale................................   1,353,765   1,322,054     1,322,054
                                               ---------   ---------     ---------

Equity securities:
    Common stocks:
      Public utilities......................      55,551      49,184        49,184
      Banks, trust and insurance companies..           9           9             9
      Industrial, miscellaneous and
       all other............................         190         219           219
    Nonredeemable preferred stocks..........     183,106     160,431       160,431
                                               ---------   ---------     ---------

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

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

      Total investments.....................  $1,636,189                $1,575,465
                                               =========                 =========
</TABLE>

                                       S-3
<PAGE>

                                                                  SCHEDULE II
                           MERCURY GENERAL CORPORATION

                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                                 BALANCE SHEETS

                           December 31, 2000 and 1999

                              Amounts in thousands

                                     ASSETS


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

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

                      LIABILITIES AND SHAREHOLDERS' EQUITY

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

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

                                                          $1,162,605     $1,026,534
                                                           =========      =========
</TABLE>
                  See notes to condensed financial information

                                       S-4
<PAGE>

                                                        SCHEDULE II, Continued

                           MERCURY GENERAL CORPORATION

                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                              STATEMENTS OF INCOME

                       Three years ended December 31, 2000

                              Amounts in thousands

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

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

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

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

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

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

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

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

      Net income................................ $109,366       $133,709      $ 177,526
                                                  =======        =======        =======
</TABLE>

                 See notes to condensed financial information.

                                       S-5
<PAGE>

                                                          SCHEDULE II, Continued

                          MERCURY GENERAL CORPORATION

                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                           STATEMENTS OF CASH FLOWS

                      Three Years ended December 31, 2000

                             Amounts in thousands


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

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

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

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

                 See notes to condensed financial information.

                                       S-6
<PAGE>

                                                         SCHEDULE II, Continued

                           MERCURY GENERAL CORPORATION

                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                    NOTES TO CONDENSED FINANCIAL INFORMATION

                           December 31, 2000 and 1999

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

Management Fee Income

       Under a management agreement, the Company performs management services
which include all underwriting and claims servicing functions for its
subsidiaries. The Company is compensated by monthly reimbursement of expenses
incurred. Effective January 1, 2001 these management services are provided by a
subsidiary of Mercury Casualty Company.

Dividends Received From Subsidiaries

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

Cash Overdraft

       At December 31, 2000 and 1999, the Company had cash overdrafts of
$5,392,000 and $2,484,000 respectively which are classified in "other
liabilities" in the accompanying condensed balance sheet.

                                       S-7
<PAGE>

                                                                     SCHEDULE IV

                           MERCURY GENERAL CORPORATION

                                   REINSURANCE

                       Three years ended December 31, 2000

                              Amounts in thousands

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

                                       S-8
<PAGE>

                                 EXHIBIT INDEX

 3.1&&         Articles of Incorporation of the Company, as amended to date.

 3.2@@@        By-laws of the Company, as amended to date.

 4.1*          Shareholders' Agreement dated as of October 7, 1985 among the
               Company, George Joseph and Gloria Joseph.

10.1&&         Form of Agency Contract.

10.2#          Management Agreement, as amended, effective July 1, 1992, among
               the Company, Mercury Casualty Company, Mercury Insurance Company
               and California Automobile Insurance Company.

10.3##         Profit Sharing Plan, as Amended and Restated as of March 11,
               1994.

10.7**         Amendment 1994-I to the Mercury General Corporation Profit
               Sharing Plan.

10.8**         Amendment 1994-II to the Mercury General Corporation Profit
               Sharing Plan.

10.9&          Amendment 1996-I to the Mercury General Corporation Profit
               Sharing Plan.

10.10&         Amendment 1997-I to the Mercury General Corporation Profit
               Sharing Plan.

10.11&&        Amendment 1998-I to the Mercury General Corporation Profit
               Sharing Plan.

10.12&         Revolving Credit Agreement by and among Mercury General
               Corporation, the Lenders Party Thereto and The Bank of New York,
               as Agent dated as of November 21, 1996.

10.18@@        Management Agreement effective January 1, 1995 between the
               Company and Mercury Insurance Company of Illinois.

10.19@@        Management Agreement effective January 1, 1995 between the
               Company and Mercury Indemnity Company of Illinois.

10.20@@        Management Agreement effective January 1, 1995 between the
               Company and Mercury Insurance Company of Georgia.

10.21@@        Management Agreement effective January 1, 1995 between the
               Company and Mercury Indemnity Company of Georgia.

10.22@         The 1995 Equity Participation Plan.

10.23&         Stock Purchase Agreement between Mercury General Corporation as
               Purchaser and AFC as Seller dated November 15, 1996.

10.24&&        Management Agreement effective January 1, 1997 between the
               Company and American Mercury Insurance Company, AFI Management
               Co., Inc. and Cimarron Insurance Company.

10.25&&&       Amendment to Revolving Credit Agreement by and among Mercury
               General Corporation, the Lender Party thereto and The Bank of New
               York, as Agent, dated as of November 21, 1996.

10.26&&&       Revolving Credit Agreement by and among Mercury General
               Corporation, the Lender Party thereto and The Bank of New York,
               as Agent, dated as of October 30, 1998.

10.27###       ESOP Master Trust Agreement between the Company and BNY Western
               Trust Company, as Trustee, effective January 1, 1998.

10.28###       ESOP Loan Agreement between Union Bank and BNY Western Trust
               Company, as Trustee, of the Mercury General Corporation ESOP
               Master Trust dated as of September 29, 1998.

10.29###       Continuing Guaranty, dated as of August 29, 1998, executed by
               Mercury General Corporation in favor of Union Bank.

10.30###       Amendment 1999-I and Amendment 1999-II to the Mercury General
               Corporation Profit Sharing Plan.

10.31###       Amendment and Restatement to and of Revolving Credit Agreement by
               and among Mercury General Corporation, the Lender's Party hereto
               and The Bank of New York, as Agent, dated as of October 29, 1999.

10.32###       Multiple Line Excess of Loss Reinsurance Agreement between Swiss
               Reinsurance America Corporation and Mercury Casualty Company,
               effective
<PAGE>

                    January 1, 1999.


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

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

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

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

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

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

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

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

          21.1      Subsidiaries of the Company.


          23.1      Accountants' Consent.

          27.1      Financial Data Schedule.

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

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

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

###  This document was filed as an exhibit to Registrant's Form 10-K for the
     fiscal year ended December 31, 1999 and is incorporated herein by this
     reference.

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

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

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

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

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

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

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

     (b)  Reports on Form 8-K:
          None
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.34
<SEQUENCE>2
<FILENAME>0002.txt
<DESCRIPTION>CREDIT AGREEMENT DATED OCTOBER 27, 2000
<TEXT>

<PAGE>

                                                                   EXHIBIT 10.34

                               CREDIT AGREEMENT

                         Dated as of October 27, 2000

                                    between

                          MERCURY GENERAL CORPORATION

                                      and

                             BANK OF AMERICA, N.A.
<PAGE>

                               TABLE OF CONTENTS
                               -----------------

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

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

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

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

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

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

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

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

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

ARTICLE IX.MISCELLANEOUS...................................................................................    33
                       9.01      Amendments; Etc...........................................................    33
</TABLE>
                                     (ii)
<PAGE>

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

SCHEDULES
- ---------

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

EXHIBITS
- --------
               Form of

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


                                     (iv)
<PAGE>

                               CREDIT AGREEMENT
                               ----------------


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

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

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

                                  ARTICLE 1.
                       DEFINITIONS AND ACCOUNTING TERMS
                       --------------------------------

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

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

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

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

     "Agreement" means this Credit Agreement.

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

                                       2
<PAGE>

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

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

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

     "Code" means the Internal Revenue Code of 1986.

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

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

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

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

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

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

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

                                       3
<PAGE>

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

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

     "EBITDA" means, for any period, Net Income of the Borrower and its
Non-Insurance Subsidiaries for such period, determined on a consolidated basis
in accordance with GAAP, plus the sum of, without duplication, (i) Interest
                         ----
Expense, (ii) provision for income taxes of the Borrower and its Non-Insurance
Subsidiaries and (iii) depreciation, amortization and other non-cash charges of
the Borrower and its Non-Insurance Subsidiaries, each to the extent deducted in
determining such Net Income for such period.

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

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

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

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

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

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

                  Eurodollar Rate =             Eurodollar Base Rate
                                        -------------------------------
                                        1.00 - Eurodollar Reserve Percentage

          Where,

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

                                       4
<PAGE>

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

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

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

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

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

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

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

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

                                       5
<PAGE>

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

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

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

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

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

                                       6
<PAGE>

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

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

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

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

     "Interest Coverage Ratio" means, at any date of determination, the ratio of
(i) the sum of (x) EBITDA of the Borrower and its Non-Insurance Subsidiaries for
the immediately preceding four fiscal quarters of the Borrower plus (y) the
                                                               ----
greater of (1) 10% of Statutory Surplus of the Insurance Subsidiaries at such
date of determination and (2) Statutory Net Income of the Insurance Subsidiaries
for the immediately preceding four fiscal quarters of the Borrower to (ii)
Interest Expense for the immediately preceding four fiscal quarters of the
Borrower.

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

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

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

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

                                       7
<PAGE>

          (ii)  any Interest Period that begins on the last Business Day of a
     calendar month (or on a day for which there is no numerically corresponding
     day in the calendar month at the end of such Interest Period) shall end on
     the last Business Day of the calendar month at the end of such Interest
     Period; and

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

     "IRS" means the United States Internal Revenue Service.

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

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

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

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

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

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

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

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

                                       8
<PAGE>

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

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

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

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

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

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

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

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

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

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

          "PBGC" means the Pension Benefit Guaranty Corporation.

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

                                       9
<PAGE>

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

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

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

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

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

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

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

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

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

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

                                      10
<PAGE>

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

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

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

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

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

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

          1.02  Other Interpretive Provisions.

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

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

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

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

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

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

                                      11
<PAGE>

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

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

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

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

                                  ARTICLE II.
                            THE COMMITMENT AND LOAN
                            -----------------------

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

      2.02   Borrowings, Conversions and Continuations of Loans.

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

                                      12
<PAGE>

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

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

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

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

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

     2.03  Prepayments.

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

                                      13
<PAGE>

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

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

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

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

     2.06  Interest.

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

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

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

                                      14
<PAGE>

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

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

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

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

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

     2.10  Payments Generally.

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

                                      15
<PAGE>

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

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

     2.11  Extension of Maturity Date.

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

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

                                 ARTICLE III.
                    TAXES, YIELD PROTECTION AND ILLEGALITY
                    --------------------------------------

     3.01  Taxes.

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

                                      16
<PAGE>

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

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

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

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

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

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

                                      17
<PAGE>

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

     3.04  Increased Cost and Reduced Return; Capital Adequacy.

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

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

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

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

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

                                      18
<PAGE>

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

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

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



                                  ARTICLE IV.
                         CONDITIONS PRECEDENT TO LOANS
                         -----------------------------

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

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

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

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

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

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

                                      19
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

                                      20
<PAGE>

                                  ARTICLE V.
                        REPRESENTATIONS AND WARRANTIES
                        ------------------------------

     The Borrower represents and warrants to the Lender that:

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

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

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

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

     5.05  Financial Statements; No Material Adverse Effect.

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

                                      21
<PAGE>

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

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

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

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

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

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

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

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

                                      22
<PAGE>

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

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

     5.12  ERISA Compliance.

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

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

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

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

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

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

                                      23
<PAGE>

           (b)  None of the Borrower, any Person controlling the Borrower, or
     any Subsidiary (i) is a "holding company," or a "subsidiary company" of a
     "holding company," or an "affiliate" of a "holding company" or of a
     "subsidiary company" of a "holding company," within the meaning of the
     Public Utility Holding Company Act of 1935, or (ii) is or is required to be
     registered as an "investment company" under the Investment Company Act of
     1940.

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

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

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

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

                                  ARTICLE VI.
                             AFFIRMATIVE COVENANTS
                             ---------------------

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

                                      24
<PAGE>

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

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

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

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


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

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

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

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

                                      25
<PAGE>

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

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

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

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

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

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

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

          (e)  of the occurrence of any ERISA Event;

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

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

                                      26
<PAGE>

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

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

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

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

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

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

                                      27
<PAGE>

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

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

                                 ARTICLE VII.
                              NEGATIVE COVENANTS
                              ------------------

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

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

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

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

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

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

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

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

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

                                      28
<PAGE>

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

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

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

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

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

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

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

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

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

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

                                      29
<PAGE>

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

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

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

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

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

                                      30
<PAGE>

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

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

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

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

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

    7.13  Financial Covenants.

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

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

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

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


                                 ARTICLE VIII.
                         EVENTS OF DEFAULT AND REMEDIES
                         ------------------------------

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

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

                                      31
<PAGE>

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

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

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

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

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

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

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

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

                                      32
<PAGE>

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

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

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

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

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


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

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

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

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

                                  ARTICLE IX.
                                 MISCELLANEOUS
                                 -------------

                                      33
<PAGE>

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

     9.02   Notices and Other Communications; Facsimile Copies.

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

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

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

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

                                      34
<PAGE>

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

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

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

                                      35
<PAGE>

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

          9.07   Successors and Assigns.

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

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

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

                                      36
<PAGE>

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

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

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

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

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

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

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

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

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

                                      37
<PAGE>

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

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

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

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

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

                                      38
<PAGE>

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

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

     9.14 Severability. Any provision of this Agreement and the other Loan
Documents to which the Borrower is a party that is prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without invalidating the remaining
provisions thereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.

     9.15 Governing Law.

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

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

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

                                      39
<PAGE>

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

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

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

                                      40
<PAGE>

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

                              BANK OF AMERICA, N.A.


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


                              MERCURY GENERAL CORPORATION


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


                      Signature Page To Credit Agreement
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.35
<SEQUENCE>3
<FILENAME>0003.txt
<DESCRIPTION>MANAGEMENT AGREEMENT 10.35
<TEXT>

<PAGE>

                                                                   EXHIBIT 10.35

                             MANAGEMENT AGREEMENT

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

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

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

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

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

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

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

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

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

                                       1
<PAGE>

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

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

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

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

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

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

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

                           [Signature Page Follows]

                                       2
<PAGE>

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

MERCURY CASUALTY COMPANY                MERCURY INSURANCE COMPANY

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

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

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


MERCURY INSURANCE SERVICES, LLC

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

                                       3
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.36
<SEQUENCE>4
<FILENAME>0004.txt
<DESCRIPTION>MANAGEMENT AGREEMENT 10.36
<TEXT>

<PAGE>

                                                                   EXHIBIT 10.36

                 EXPENSE REIMBURSEMENT AND SERVICES AGREEMENT

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

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

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

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


                                   ARTICLE I
                                EFFECTIVE DATE
                                --------------

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


                                  ARTICLE II
                             EXPENSE REIMBURSEMENT
                             ---------------------

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

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

                                       1
<PAGE>

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

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

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


                                  ARTICLE III
                               SERVICES TO AMIC
                               ----------------

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

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


                                  ARTICLE IV
                PROVISIONS APPLICABLE TO EXPENSES AND SERVICES
                ----------------------------------------------

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

                                       2
<PAGE>

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

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

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

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

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


                                   ARTICLE V
                                  TERMINATION
                                  -----------

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


                                  ARTICLE VI
                           MISCELLANEOUS PROVISIONS
                           ------------------------

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

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

                                       3
<PAGE>

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

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

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

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

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

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

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

     To AMIC:                           To MIS:

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

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

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

                                       4
<PAGE>

AMERICAN MERCURY INSURANCE              MERCURY INSURANCE SERVICES,
     COMPANY                                LLC


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

                                       5
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.37
<SEQUENCE>5
<FILENAME>0005.txt
<DESCRIPTION>MANAGEMENT AGREEMENT 10.37
<TEXT>

<PAGE>

                                                                   EXHIBIT 10.37

                             MANAGEMENT AGREEMENT

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

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

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

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

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

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

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

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

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

                                       1
<PAGE>

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

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

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

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

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

MERCURY INSURANCE COMPANY OF                 MERCURY INSURANCE
     GEORGIA                                   SERVICES, LLC

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

                                       2
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.38
<SEQUENCE>6
<FILENAME>0006.txt
<DESCRIPTION>MANAGEMENT AGREEMENT 10.38
<TEXT>

<PAGE>

                                                                   EXHIBIT 10.38

                             MANAGEMENT AGREEMENT

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

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

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

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

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

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

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

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

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

                                       1
<PAGE>

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

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

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

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

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

MERCURY INSURANCE COMPANY OF                 MERCURY INSURANCE
     GEORGIA                                    SERVICES, LLC

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

                                       2
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.39
<SEQUENCE>7
<FILENAME>0007.txt
<DESCRIPTION>MANAGEMENT AGREEMENT 10.39
<TEXT>

<PAGE>

                                                                   EXHIBIT 10.39

                             MANAGEMENT AGREEMENT
                             --------------------

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

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

                                   SECTION I

                                EFFECTIVE DATE
                                --------------

This Agreement shall become effective January 1, 2001.

                                  SECTION II

                          CONDITIONS OF EFFECTIVENESS
                          ---------------------------

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

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

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

                                  SECTION III

                            SERVICES AND FACILITIES
                            -----------------------

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

                                       1
<PAGE>

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

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

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

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

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

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

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

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

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

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

                                       2
<PAGE>

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

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

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

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

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

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

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

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

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

                                       3
<PAGE>

                                  SECTION IV

                         INVESTMENT ADVISORY SERVICES
                         ----------------------------

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

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

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

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

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

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

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

                                       4
<PAGE>

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

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

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

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

                                   SECTION V

                                 COMPENSATION
                                 ------------

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

                                  SECTION VI

                             OWNERSHIP OF RECORDS
                             --------------------

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

                                  SECTION VII

                               TERM OF AGREEMENT
                               -----------------

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

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

                                       5
<PAGE>

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

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

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

         (2)  The Insurer is dissolved or determined insolvent.

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

MERCURY INSURANCE COMPANY               MERCURY INSURANCE SERVICES,
   OF ILLINOIS                              LLC

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

                                       6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.40
<SEQUENCE>8
<FILENAME>0008.txt
<DESCRIPTION>MANAGEMENT AGREEMENT 10.40
<TEXT>

<PAGE>

                                                                   EXHIBIT 10.40

                             MANAGEMENT AGREEMENT
                             --------------------

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

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

                                   SECTION I

                                EFFECTIVE DATE
                                --------------

This Agreement shall become effective January 1, 2001.

                                  SECTION II

                          CONDITIONS OF EFFECTIVENESS
                          ---------------------------

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

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

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

                                  SECTION III

                            SERVICES AND FACILITIES
                            -----------------------

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

                                       1
<PAGE>

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

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

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

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

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

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

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

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

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

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

                                       2
<PAGE>

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

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

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

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

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

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

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

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

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

                                       3
<PAGE>

                                  SECTION IV

                         INVESTMENT ADVISORY SERVICES
                         ----------------------------

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

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

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

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

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

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

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

                                       4
<PAGE>

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

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

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

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

                                   SECTION V

                                 COMPENSATION
                                 ------------

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

                                  SECTION VI

                             OWNERSHIP OF RECORDS
                             --------------------

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

                                  SECTION VII

                               TERM OF AGREEMENT
                               -----------------

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

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

                                       5
<PAGE>

         (1)  The Manager shall have defaulted in the performance of any
         obligation under this Agreement and shall have failed to remedy within
         30 days of receipt of written notice thereof from the Insurer asserting
         such default as grounds for termination of this Agreement; or

     C.  The Manager may terminate its obligations to the Insurer under this
     Agreement immediately in the event that:

         (1)  The Insurer shall have defaulted in the performance of any
         obligation under this Agreement and shall have failed to remedy such
         default within 30 days of receipt of written notice thereof from the
         Manager asserting such default as grounds for termination of this
         Agreement: or

         (2)  The Insurer is dissolved or determined insolvent.

IN WITNESS WHEREOF, we have set our hands and seals this 10th day of January,
2001.

MERCURY INDEMNITY COMPANY               MERCURY INSURANCE SERVICES,
   OF ILLINOIS                              LLC


By: /s/ Cooper Blanton                  By: /s/ George Joseph
   ------------------------------          -----------------------------
     Cooper Blanton, President               George Joseph, President

                                       6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.1
<SEQUENCE>9
<FILENAME>0009.txt
<DESCRIPTION>SUBSIDARIES OF THE COMPANY
<TEXT>

<PAGE>

21.1  Subsidiaries of the Company

Mercury Casualty Company
Mercury Insurance Company
Mercury Insurance Company of Illinois
Mercury Indemnity Company of Illinois
Mercury Insurance Company of Georgia
Mercury Indemnity Company of Georgia
Mercury Insurance Services LLC
Mercury County Mutual Insurance Company*
California Automobile Insurance Company
California General Underwriters Insurance Company, Inc.
Concord Insurance Services, Inc. *
American Mercury Insurance Company
American Mercury Lloyds Insurance Company*
AFI Management Company, Inc.
American Mercury MGA, Inc.

* Controlled by Mercury General Corporation
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>10
<FILENAME>0010.txt
<DESCRIPTION>ACCOUNTANT'S CONSENT
<TEXT>

<PAGE>

The Board of Directors
Mercury General Corporation:

We consent to incorporation by reference in the registration statement (No.333-
01583) on Form S-8 of Mercury General Corporation of our reports dated February
2, 2001, relating to the consolidated balance sheets of Mercury General
Corporation and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of income, comprehensive income, shareholders' equity,
and cash flows for each of the years in the three year period ended December 31,
2000, and all related schedules, which report appears in the December 31, 2000,
annual report on Form 10-K of Mercury General Corporation.

/s/ KPMG LLP

Los Angeles, California
March 28, 2001

</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----
